Service innovation

The Information and Service EconomyOctober 29 2007

Bob Glushko and Anno Saxenian

Classic linear model of innovation

Powerful, simple conceptualization; useful but not the whole story

Science base=> basic research=> applied research=> invention=> prototype=> development=> commercialization=> diffusion=> technical progress=> econ growth

Example of new drug

Basic research: microbiology Applied research: screening

compounds, testing on animals Invention: lab success Development: clinical trials Commercialization: package, market Diffusion: spreads to doctors and

patient populations

Linear model of innovation Science base=> basic research=> applied

research=> invention=> prototype=> development=> commercialization=> diffusion=> technical progress=> econ growth

Which segments are “innovation”? What purposes served by this model? How exogenous is science?

Limits of linear model Feedback loops & backward linkages

Applied research/innovation=> science Commercialization=> new innovation Invention/innovation=> science base via

improvements in instrumentation “Learning by doing” in manufacturing

Chemicals, airframes, semiconductors “Learning by using” user feedback

Software, skateboards

Uncertainty and chance

Many examples in history of technology of innovations under-appreciated at the time Laser, radio, computer

Laser (Light Amplification by Stimulated Emission of Radiation) Invented at Bell Labs circa 1960 Lawyers didn’t apply for patents, not useful Now used in fiber-optic cables as well as

navigation, CDs, surgery, navigation etc.

Linear model and organization

Linear model => Closed industrial model of innovation: Focused internal R&D, clear firm boundaries, IP rights, virtuous cycles of reinvestment

Examples: AT&T Bell Labs, Xerox PARC

Open innovation

Open innovation: combine external and internal R&D into architectures and systems whose requirements are defined by a business model; blurs boundaries of firm R&D

Examples: Silicon Valley, Hollywood, P&G

Closed v. open innovation All smart people in the

field work for us To profit from R&D

must discover, develop & ship

We can get to market first if we innovate

First company to market will win

If we create most and best ideas, we’ll win

We must control our IP

There are smart people outside & inside

External R&D can add value alongside internal

We need not originate research to benefit

Building better business model more important than first to market

We win if we make best use internal & external

We can profit from others’ use of our IP and benefit from theirs when appropriate

Democratizing innovation

User-centered innovation offers advantages over traditional producer-centered innovation, which concentrates innovation support resources on just a few pre-selected potential innovators

Users can develop what they want, enhances motivation

Users need not develop everything they need; they can benefit from innovations developed and freely shared with others

User and producer-centered Economies of scale v. economies of scope

(heterogeneous info & resources among users) Producers integrate themselves into user-

centric innovation model Provide custom production or “foundry”

services to users: faster, better, cheaper; Produce user-developed innovations

commercially; Sell product-development platforms or sell

other complementary products For information products, no manufacturer is

required & general distribution occurs mainly through communities

Democratization of design Why now? Increasingly capable & cheaper tools that

require less skill and training to use Tools for communication make it easier for

user-innovators to gain access to rich libraries of modifiable innovations and components that have been placed in the public domain Today users design sophisticated new products,

services, music and art Open source software movement as key example Web 2.0 explicitly recognizes users add value

Service innovation: new markets

Market-creating service innovations v. incrementally improved services

Examples: Cirque du Soleil, University of Phoenix

Service v. product innovation1. Service providers part of innovation2. Local delivery capacity required for in-

person services3. No physical product to brand

Market-creating service innovations

1. Flexible solutions FedEx eBay CNN

2. Controllable convenience Google Netflix Skype

Market-creating service innovations

3. Comfortable gains Starbucks Cirque du Soleil Barnes & Noble

4. Respectful access Ball Memorial Hospital Southwest Airlines Hertz #1 Club Gold

Typology of service innovation

1. Business model innovation:Substantial change how revenues and profits earned (business model); often accompanied by organizational changes

2. Process/system innovation:Changes in how information exchanged between customer and service provider, bus processes

3. Service product innovation:Introduction of entirely new services

In reality all 3 are interrelated; an iterative process

Creation networks “Networks of creation:” hundreds or thousands

of participants from diverse institutions collaborate to create new knowledge, learn from one another, and appropriate and build on one another’s work—under guidance of a network organizer. Rather than protecting and hoarding

knowledge, offer to others to gain access to broader knowledge flows.

Opportunity to jointly create new knowledge and deliver innovations to market by collaborating closely; long-term, interactive relationships with networks of suppliers, customers, specialists, even amateurs

Coordination challenges

Three primary challenges in creation process:1. Access and develop highly distributed talent2. Provide appropriate contexts for participants

to come together, collaborate to experiment, tinker, and innovate (least actively managed)

3. Effectively integrate the creations of diverse participants into shared releases (most actively managed)

Central importance of performance requirements and feedback loops to insure continuous improvement

Product development

An iterative problem-solving (trial and error) process

DESIGN

BUILD

RUN

ANALYZE

Product development in new era

1. Rapid movement from concept to prototype (rapid prototyping)

2. Define early and frequent rounds of performance tests to learn quickly and adapt designs

3. Establish broad-based communications mechanisms to share performance data

“Managers must move their focus beyond narrow efficiency gains …and embrace the possibilities that uncertainty creates.” J.S. Brown & J. Hagel (2006)

What is Web 2.0? (Tim O’Reilly) Strategic positioning

The web as a platform (Google v. Netscape) User positioning

You control your own data (Data is the next Intel Inside)

Core competencies Services, not packaged software Architecture of participation (RSS) Cost-effective scalability Re-mixable data source and transformations Software above level of single device (iPod/iTunes) Collective intelligence (hyperlinks, users as co

developers)