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Open innovation and the impact it has on services.

This in depth analysis (beware it is longer than some of my previous articles) was part of a study i recently conducted at University which discusses the gaps in open innovation, which is typically used to innovate new products, implement new processes, develop new technologies, and how overtime, open innovation has also become a useful pathway on how companies can innovate not only products but in services too. Outlined within, is what barriers companies may face and how they may address them.

Not only should companies be open to obtaining external knowledge and ideas, but they should also consider sharing their internal knowledge. Understandably, there are complexities, such as, the resist to shift strategy, the changes in pricing of products and services, how it is communicated internally and externally, the effect it may have on EBITDA metrics and any compensation plans that may be associated with the new strategy. The article also theories that companies and in fact entire countries are facing challenges with justifying the shift of focus from product innovation to service innovation, even though large percentages of business revenues are coming from services offered.

This article argues that despite the barriers and complexities, in general, that using open innovation to improve services and products is the right shift for innovation today, although this is not evident in all situations, nor with all types of businesses.  Furthermore, it is contended that the main driver for innovation success appears to be tacit knowledge as well as customer involvement and considering that most service-based industries do not have an internal R&D department, they rely mostly on external factors to innovate growth and obtain greater points of difference in their business. With technology today and the ever evolving market, open innovation has become largely significant in both practice and theory.

Open Innovation Process

Open innovation is a process companies use to advance their technology and respectively market their products and services. Often applied in three processes:

(1) Outside Knowledge: where knowledge is obtained from external parties such as suppliers to help enrich existing products, services and strategy or develop new products.

(2) Inside Knowledge: where companies share their knowledge and technology with external parties with the goal to reach new markets, audiences and expand product range and services.

(3) A Combination: using both outside knowledge and inside knowledge to form key business alliances, share knowledge and technologies which complement each other in business all with a common goal of growth and business improvement.

Academic studies demonstrate that sourcing information internally and externally is a vital new tool for companies to quickly obtain a competitive advantage in their industry.

Tacit knowledge and Customer Involvement

One of the key drivers of information for open innovation is known as Tacit Knowledge. Tacit knowledge can be defined as a skill, an experience or idea that a person may have but may not easily be able to express. People are often not aware of the information or knowledge they possess or how it can be best utilised for others. Usually a high-level amount of engagement is required with the relevant parties involved to build trust and share knowledge before they become any value to the business. Tacit knowledge can generally only be used in a particular context and during the innovation process it is crucial to an administer to know how internal and external knowledge can be transferred to become high level knowledge of use.

Companies must manage information obtained via open innovation to maintain or increase their volume of innovation. Reports also suggests that for the innovation process, companies should not just depend on on their internal knowledge sources, but available external knowledge sources too. According to Chesbrough it is important to determine what information is useful and what is not and in order to do this, companies can cross check and plan processes as outlined in some of the available customer value chains such as Michael Porter or Peter Drucker.

Customer Value Chain

Services are about the interactions that you have with your consumer, they are intangible, perishable and usually consumed at the time of delivery. Based on consumer engagement, service innovation is more personalized which is often found appealing to the customer. The article, ‘bringing open innovation to services’ by Henry Chesbrough, highlights the additional gaps identified with open innovation, particularly within the service industry and how aspects of the customer engagement process (service element) is often left until last on the value chain if you follow Michael Porter’s system as illustrated within the original article. Michael Porter’s value chain is more product focused whereas professor Theodore Levitt and Peter Drucker believe that you should always think of your business as a service and analyse the experience that your customer will receive from using the products. Consequently, there is controversy around which customer value chain to follow in order to suit your service offering. The customer value chain should interlink with an open innovation strategy to assist and overcome the barriers companies face. There is no simple linear process, instead, there is an interative process which begins with effective consumer engagement.

Consumer Engagement

Marketing Science Institute (MSI) studies consumer engagement as a key area of marketing that merits substantial scholarly consideration. Researchers have identified strong evidence on how customer engagement and loyalty are two main elements that drive marketing efforts and result in sales. Noting, this can be achieved without even selling a product or a service, yet by simply providing great customer value and experience. There has always been a strong marketing focus to create the customer and then retain them, whereas others state the order should be reversed when it comes to relationship marketing, stating your long-term strategy should pay more focus to customer retention and to work backwards through the other stages of the value chain. In other words, focusing on what value each customer has to your business, follow their customer experience journey, engage closely with them along the way, obtaining knowledge and feedback where possible to help develop new services, solutions and products resulting in great customer experience and service innovation.

Fostering service innovation can have its complexities but researchers have identified many benefits of open innovation and its impact to not only high-tech environments and multinational enterprises but also for small to medium enterprises (SMEs). Not only is open innovation a more profitable way to innovate, it can reduce costs, accelerate time to market, increase differentiation in the market, and create new revenue streams. Even though SMEs are usually more flexible, less formalized and not as restricted when making decisions, their budget allocation for research and development internally, are quite limiting. SMEs are often left out of academe literature discussing innovation as they simply can’t produce enough evidence to scale investment in services even though they are growing in the role of innovation. One of the advantages a small business has, is they can work closely with their customers, to develop solutions and new services. To have success in services you need to invest in New Services. The term ‘New’ being something outside the scope of what you already offer.

In Summary

In marketing terms, an offering is your total offer to your customer. It is more than a product itself and incorporates elements that represent added value such as availability, flexible delivery, technical support or quality of service. Innovating services, like innovating products, based on all the findings above, needs to be done more openly with the consumers. What this analysis shows is that without customer engagement and tacit knowledge exchange, companies cannot provide all that their customers desire. This day and age, customers want a complete solution to their needs and they want it done fast. While the question remains at large in the academe world whether or not service innovation is a powerful as service innovation, it is determined that connecting and collaborating with your consumer is extremely important for success of innovation overall. In order to relieve any pressures and overcome some of the barriers outlined within this essay, companies need to liaise and work closely with their networks to make relevant changes to the business model and strategy for open innovation to become a tool to build upon and sustain over time. The value chain by Peter Duckett more aligns with the service innovation strategy, having a stronger focus on services, the customer and the complexities companies may face when trying to incorporate both product and service innovation. As research indicates, service innovation is having quite an impact on both large and small enterprises and quickly becoming part of the company growth strategy.