How Amazon turned their Services into a Platform

How Amazon turned their Services into a Platform

It is not safe to rely on only excellent service to sustain your competitive advantage as a services provider because competitors will learn from you. A more robust approach to turn your service into a platform for others to build on. If you can successfully do this, you will attract others to work with your services. Some will use them in their own offerings, and others will build on them and extend your services into new areas. Partners will complement your services with their offerings, making yours more valuable in the process.

Amazon is a great example of a services provider that has truly innovated its offerings. It started as a book store but its business activities today involve selling an increasingly wide variety of items, even to the point of reselling its own capabilities as an online retailer, using its Web sites and servers as platforms. Amazon also resells its infrastructure to other companies to use for hosting their Internet activities. Now it is creating device platforms like its Kindle, complete with e-books and other media, and attractive pricing to stimulate purchase of it.

Amazon received the customer’s order and the customer’s money at the beginning of its process. This allowed it to finance much of its growth directly from its customers, and what seemed like slim margins to many become more attractive once the cash flows were factored in. Once these processes were up and running and beginning to achieve significant economies of scale, Amazon began looking for new sources of growth. It saw a potential future as a provider of wide range of products and services, and made a $800 million investment in computer infrastructure to get there. Amazon aspired to be a platform.

Amazon was quick to figure out ways to let its customers co-create with them. Amazon prominently featured reviews written by readers on its site. Amazon also decided to open up its powerful online reselling Web site to other merchants for them to list their own merchandise. This openness unleashed powerful economies of scope for the company, attracting hundreds of other suppliers to Amazon as a place to sell their own wares, a platform for reselling, allowing it to build economies of scope.

For more information, see Ch. 8 Open Services Innovation by Henry Chesbrough

Co-creation, a Powerful Innovative Force Across Industries

Co-creation, a Powerful Innovative Force Across Industries


In the world of products, suppliers develop specifications to describe the product to potential customers. Customers can compare specifications of alternative product options to find the right product for their needs. Suppliers need not know exactly what the customer intends to do with the product, so long as those products meet the specs. In many cases, the resulting spec is one that averages out the input from a variety of different customers, such that no one customer is offered exactly what he or she asked for, but instead must be content with those specs that are common to other customers as well. In the world of services, it is much harder to develop specifications than it is in the world of products. Suppliers in turn can no longer dedicate themselves to long production runs and one-size-fits-all thinking to serve these customers. Instead they have to figure out how to give the customer what the customer needs, while also figuring out a way to do this profitably for themselves.

When customers tell you, rather than everyone else, their tacit needs, you have a unique insight that can help you differentiate yourself in the market. When customers use your systems in ways that they don’t use other systems, you have the opportunity to learn from what your customers do that can confer advantage on your business as well. Companies can do more to involve customers in their innovation processes than simply watch them. Some companies, like Lego, headquartered in Denmark, have had great success in letting customers create designs that they would like Lego to produce. Another way for services companies to focus on customers is to create a visualization of the customer’s experience. This visualization makes it much easier to spot the root causes of problems and identify way to improve the service.

For more information, see Ch. 1 Open Services Innovation by Henry Chesbrough

Escaping the Commodity Trap

Escaping the Commodity Trap

The amount of time a product lasts in the market before a new and improved one takes its place is shrinking. As a result, even successful products can expect to enjoy an advantage in the market for a shorter time than in the past. Companies need services to grow and develop competitive advantage, if they want to avoid the commodity trap.

However, to do this, businesses not only will have to think of their businesses as services businesses, but also to co-create with customers. Instead of treating customers as passive consumers, many companies are now involving customers in the innovation process. Opening up your innovation process can greatly advance your innovation capability. But you can go further if you open up your business model as well. Many successful services innovators have found that they need to overcome this inertia and adapt their business models in an effort to create new services offerings.
This is the way out of the commodity trap. It requires a new way of thinking about innovation, services, and business models. The winners in this new economic environment will be those firms that develop strong internal capabilities in a few areas and leverage those capabilities by enlisting the efforts of many others in support of their business. Since the world is moving to a services economy, it is time to move innovation into the services context as well. The world is ready for Open Services Innovation.

For more information, see Ch. 1 Open Services Innovation by Henry Chesbrough

A Dynamic Business Model Framework

A Dynamic Business Model Framework

Under an open innovation model, the business model of the firm will be the key driver to determine internal and external innovation activities by the firm. The table below will be helpful to identify an organization’s current business model and to guide how it can improve innovation and IP management practices to transition successfully towards a more open innovation strategy.

Examples of commodity-like, type 1 business models include “mom and pop” restaurants, many family farmers, and other entry-level services establishments such as independent bookstores, cafes, etc. Type 2 business models include organizations such as newly entering companies differentiated based on higher performance – often one-hit wonder startups or organizations. Type 3 business models are illustrated in companies with good product and process technologies such as startups that successfully distributed multiple products and have roadmaps for innovation and expansion, or old-line industrial firms who are still trying to do it all themselves. Type 4 business models start to open up towards the external environment and these include organizations with established corporate R&D activities, working with both internal and external technology. These organizations include some drug companies and financial institutions that proactively assess market demand and generate products around that.

Type 5 business models go beyond this external awareness to integrate both outside-in and inside-out sources of technology, such as IBM, P&G, Kraft, and Masterfoods. The final type of business model is type 6 which offers a platform for others to invest in and build upon the innovations of the firm. Companies in this category include organizations such as Apple, IBM and P&G.
Using the questions in the Dynamic Business Model Framework, a manager will not only be able to assess their group’s innovation strategy but also perform a diagnosis about how it can specialize towards a strategy that creates immense value through the open innovation model!

Matrix of Business Models Framework

Type Business Model Innovation Process IP Management
1 undifferentiated None NA
2 Differentiated Ad hoc Reactive
3 Segmented Planned Defensive
4 Externally Aware Externally Supportive Enabling Asset
5 Integrated Connected to Business Model Financial Asset
6 Platform Leading Identifies New Business Models Strategic Asset


Dynamic Business Model Framework

Description Type 1 Type 2 Type 3 Type 4 Type 5 Type 6
Title Undifferentiated Differentiated Segmented Externally Aware Integrated with Business Model Platform Player Shapes Markets
Examples Mom and pop restaurants Startup technology companies Technology push companies Mature industrial R&D firms Leading financial firms Intel – Pentium

Walmart, Dell

Diagnostic Questions Is there anything that differentiates this business from its competitors?

Why do customers buy from us?  Why do customers leave us?

What control do we have over the future direction of our business?

Do we earn a price premium for our product or service?

Can we sustain our differentiation over time?  For how long?

Are we likely to develop a second successful offering?  When?

Are we an engineering-driven company?

Have we created new market segments, or did our customers find us?

Can we further segment our markets?  Can we extend our markets?

Do we look outside on a regular basis for new ideas and technologies?

Do our key customers and suppliers know about our future roadmaps?

Is marketing an equal partner in the innovation process?

Is our business model widely understood within our company?

Do our key customers and suppliers share their roadmaps with us?

Is innovation managed as a business or as. a technology function?

Can we direct the future evolution of our markets?

Will customers and suppliers fit their business models to our own?

Do other companies routinely invest in projects that require our technology as a platform?


How Different from Previous Type NA 1) there is now innovative work being done within the Type 1 firm, 2)  some differentiation is achieved by the company through its innovations and perhaps through its business model; 3) some IP is being generated and defended. 1) innovation is now a planned organizational process; 2) innovation now is treated as an investment in the company’s future; 3) the company now segments its markets and serves multiple segments; 4) functions beyond engineering or R&D are now a part of the innovation process; 5) IP management now coordinated inside the firm as someone’s responsibility. 1) the Type 3 company looks outside for innovations; 2) there is a role for suppliers and customers in the innovation process; 3) the business model can be extended to adjacent markets for new growth; 4) Innovation becomes a cross-functional activity; 5)  IP now managed as a corporate asset, with occasional outlicensing of under-used internal technologies 1) the company’s internal and external R&D activities are now integrated through the company’s widely understood business model; 2) the company’s innovation roadmaps are widely shared, and access is reciprocated by those parties; 3) the company’s business model is now focused on new markets and new businesses, as well as current business, and the company is able to align its business model with customers and suppliers; 4) innovation is now a business function; 5) IP now is managed as another kind of financial asset. 1) The company’s business model is interconnected with the business models of its key suppliers and customers; 2) Innovating the company’s business model, itself is now part of the company’s innovation task; 3) External partners now share technical and financial risks and rewards with the company in the innovation process; 4) IP is managed as a strategic asset, helping the company enter new businesses and exit existing businesses.


For more information, see Ch. 5 Open Business Models by Henry Chesbrough

Positioning Yourself to Exploit Secondary Markets

Positioning Yourself to Exploit Secondary Markets

While it is too soon to say that secondary innovation markets have arrived in most industries in most advanced economies, it is not too soon to plan for the emergence of secondary markets in your industry.  In industries like semiconductors, biotechnology, consumer products, chemicals, and mortgage banking, secondary markets have had powerful impacts upon industries when they do emerge. How can you assess whether and when secondary innovation markets are likely to impact your industry?  Here are a few questions to explore to guide your assessment:

  • Have any important technologies been introduced in your industry where one firm handed off the technology to another firm (via a license, JV, asset sale or spin out) at some point in the innovation process?  How often did this occur last year?
  • Did any university research projects turn into innovative new product or service offerings in your industry last year?
  • How many patents were reassigned last year in the patent classes that are closest to your core technologies?
  • How many times were you contacted last year with offers to license in someone else’s technology?  How many times are you contacted about licensing your technology?  How long does it take you to respond?
  • Did any companies in your industry go bankrupt last year?  What happened to their technologies, and the IP associated with those technologies?
  • How many sales and transfers of patents were you and/or your outside law firm involved with last year?  How many sales and transfers are they aware of in your industry?
  • Are any new firms entering your industry with IP-based business models?  (These are discussed in Chapter 7).
  • Are any innovation intermediaries (see Chapter 6) working for you or any of your major competitors?
  • How many of your internal R&D projects were shelved or cancelled last year, without any licensing or spin out activity resulting from it?

These questions should be the beginning of an internal process to determine the stage at which your innovation practices have opened and leveraged external resources. Based on the answers to these questions, it would be relevant to start assessing the new practices and strategies to pursue.

For more information, see Ch. 3 Open Business Models by Henry Chesbrough