openinnovation.pdf - OPEN INNOVATION Bringing Open Innovation to Services THE LEADING QUESTION How does open innovation apply to service businesses

OPEN INNOVATION Bringing Open Innovation to Services In recent years, open innovation has been changing the way many companies think about developing products. But open innovation can - and should - apply to services, too. BY HENRY CHESBROUGH BACK IN 2004, I sat in Paul Horn's office at IBM. Horn was at the time IBM's senior vice presi- dent of research, in charge of IBM's 3,000 research staff. We had a wonderful conversation about in- novation, and the many successes IBM had obtained from its research activities. At the end of our time, I asked Horn a final question: What is your biggest problem today? Horn told me that his biggest problem was that his research activities were geared to support a company that made products: computer systems, servers, mainframes and software. But most of IBM's revenues were coming from services, not from its products. "I can't sustain a significant re- search activity at IBM if our research is not relevant to more than half of the company's revenues going forward," Horn stated. The challenge Horn articulated in that conversa- tion was not unique to IBM. In fact, the challenge of how to innovate in services is one that faces not just S individual companies but also entire countries. The s t c world's developed economies are increasingly ori- ented around services: Services comprise more than a ml uigLGS to eac 70% of aggregate gross domestic product and em- ployment in the Organization for Economic Cooperation and Development countries.' In coun- tries such as the United States, products represent a smaller and smaller share of the economic pie - THE LEADING QUESTION How does open innova- tion apply to service busi- nesses? FINDINGS IWMany open innova- tion concepts apply readily to services. NoOne way companies can move toward open innovation in "services is by work- ing closely with customers to de- velop new solutions. loProduct-oriented companies face organizational chal- lenges in moving to a greater emphasis on services. WINTER 2011 MITSLOAN MANAGEMENT REVIEW 85 REUTERS PICTURES

OPEN INNOVATION particularly as China and other lower-wage countries rise in manufacturing. An important problem for advanced economies is that we know much less about how to innovate in services than about how to develop new products and technologies. Rethinking Business - From a Service Perspective Consider the classic formulation of a business as a value chain of economic activities that add value to a product. Michael Porter's well-known book Compet- itiveAdvantage includes an illustration of this type of value chain. 2 In Porter's depiction of a value chain, inputs enter the business and are transformed into outputs through a series of processes. Some of the processes are core manufacturing activities (inbound logistics, operations, outbound logistics), while oth- ers are activities supporting manufacturing (human resources, technology development, procurement).