Sometimes, what makes small businesses popular is their uniqueness, or the specific way in which they differentiate from others. However, this often really relies on the fact that sometimes, these businesses understand their customers and communities very well. They offer them something that is attractive to them and even those beyond the community.
However, although this knowledge may currently be associated with small businesses, large organizations have access to more data about customers’ behaviors, preferred products, and can even predict a customer’s lifestyle. As such, there is a vast array of information held by large organizations that consolidate the bulk of needs/behaviors/activities performed by a customer. Organizations have in the past failed to leverage this information beyond selling it to advertisers. Many rising startups have demonstrated that their service/product can become a pivotal part of a customer’s life such as Apple’s Macintosh computers, or Amazon Prime, or a Netflix subscription. People love these products and they are generating immense amounts of revenue for the companies that created them.
Companies need to use data about their customers and to interact with them to create products they love so they can ideate services around those. It is not sufficient to design the next best computer – it is pivotal that the service understands customers look for efficiency, and comfort, and feel comfortable asking for help. Companies should continuously invest in addressing the needs of customers and solving pain points that will accelerate demand and fuel growth of new business lines. Already possessing economies of scale, established companies should aggressively pursue investments to better understand customers to attain economies of scope.
For more information, see Ch. 3 Open Services Innovation by Henry Chesbrough
Platforms that connect individuals and organizations in a value chain where an organization has expertise, brand equity, or close partnerships is a great way to explore service-based innovation. Usually, these platforms give access to a breadth of data and interactions that allow the platform-controlling organization to profit from transactions, needs, and even advertising or third-party revenue.
However, creating a platform is challenging especially in manufacturing-heavy industries where suppliers and the final consumer are so distant. Incorporating the customer in the process to attempt to accomplish this is one way in which organizations can become closer and deepen ties with customer-bases in different regions. These interactions can result in actionable insights about how the supplier can be connected to the customer and the ways in which a company can create an open business as a result of that connection.
A platform is not necessarily about control or access but more so about enabling partners to add value to each other and capturing some of that value in the process. It is fundamental for the company to think about the long-term and short-term impacts of how stakeholder relationships are more collaborative since these ideas can be replicated. A first-mover advantage (with a strong budget) and important existing relationships are some of the differentiators that established companies have that could support its role in innovating.
For more information, see Ch.5 Open Services Innovation (pg. 107) by Henry Chesbrough
The commodity trap is a phenomenon that increasingly affects not only developing economies, but even the most advanced companies in a specific industry. As organizations realize it is almost impossible to successfully compete in a race to the bottom, it is important that they redesign their business model around services and experiences that align with customer demand.
Startups have achieved growth and scale at uprecedented levels because executives and investors are obsessed with validating ideas in the market. Established companies that approach their customers or desired customers and validate through an iterative, cheap, and quick process can leverage technological trends and stop fearing them.
As they release products around a service, companies should be able to prioritize parts of a service that customers want with the product and parts that can be sacrificed or automated to maintain economies of scale as the organization improves its ability to have economies of scope. Doing all these things is obviously not easy but it all starts with a mindset of leveraging internal and external technology to fulfill customers’ needs and an efficient go-to-market.
For more information, see Ch. 1 Open Services Innovation (pg 25) by Henry Chesbrough
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
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
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