Open Innovation in Managing Innovation in the Service Sectors - Essay Example

Open Innovation in Managing Innovation in the Service Sectors Introduction Open innovation was introduced by Chesbrough and Schewartz as a use for the purposive outflows and inflows of knowledge that helps in accelerating the internal innovation and consequently leads to the expansion of the market for the use of this innovation. In the past internal research and development was considered as a valuable strategic asset by the firms and as a formidable barrier for the competitors to enter into the market. For instance, AT&T, DuPont and IBM can compete in their respective industries by making significant advancement in their research and development, which will further lead to their profits (Tambouris, Macintosh and Bruijn, 2011). The competitors or the rivals who want to win over the competition and succeed in the market gathers considerable resources creating their own powerhouses and make considerable advancement. However, the scenarios are different now and newcomers face enough competition for entering into the market. Thus, they often do not conduct enough research and commits mistake in adapting new ideas. Open innovation is an opportunity to them in which the companies can commercialize both their innovations as well as their own ideas from other firms and from within their own firms to the market using channels that provide pathways out of their current business. This report focuses on the use of open innovation in the services sector. Significance of open innovation in service sector Open innovation has taken a significant place in the world of business and competition. Today more than hundreds of companies are seen to have executives who are assigned the title Manager of Open Innovation. There are also dozen of software companies and their intermediaries who provide consultation regarding services or product open innovation. Open Innovation is suggested to provide businesses a more profitable way to innovate as it creates new revenue channels for the company, amplify differentiation in the market, reduces cost and accelerates the time for which the business operates in the market. The innovation in capabilities and its management is industry or sector specific and not specific to any firm. Innovation of intangible product and services are hard to measure. Therefore, it should be remembered that innovation related to the product is quite different from innovation in services. Services are intangible and the customers need to feel them. This makes it mandatory for the organization to place the customers to a most crucial position, access tacit knowledge regarding the requirements and the demands of the customers and finally innovate their services in ways that it caters to their needs. For instance, innovation in the financial service sector has occupied an important place. Financial innovation is not only restricted to design, distribution and development of financial services and product but also modifying and altering the role of financial institution. Financial innovation are done address the issues of tax and regulations. Over the past few years the banks that are an integral part in the financial sector have done some major innovations such as automated teller machine, credit cards and internet banking. Internet banking has not only changed the consumer’s behavior but also way they conduct their business. In case of the business and financial service sector technology has become the key driver of innovation. An important and crucial transition has come in this sector through integration of data, data analysis and technology (Chesbrough, 2011; Open Innovation Community, 2013; Institute of Directors, 2013). The integration of technology has brought changes in the innovation platform of the financial service sector such as the shift from the use of paper money to plastic money and mobile wallet. “Pingit” a digital consumer-banking application developed by Barclays as a consumer mobile banking app, provides the evidence that that disruptive forces has played a critical role in this sector (Vladi, 2013; Anderson, n.d.; Barclays, 2013). Moreover, the economic crisis has put more stress for focusing on innovation in the financial service sector since now the financial companies required to give more focus on the need of the customers. However, in case of the innovation that the financial service sector is look at for catering to the changing demands of the customers are subjected to challenges arising from the regulations, hierarchical and highly structured organization and low risk taking capability especially in case of the consumer banking. The innovation initiatives taken by the business and the financial service organizations are driven by teams of smaller size that are led by innovation leaders who are constantly busy in identifying and selecting the new ideas both externally and internally. In United States high importance is given to the service sector since accounts to almost 80 percent of the economic activity in US. Moreover, innovation in the service sector contributes heavily towards the enhancement in the living standards and productivity. The research and development program launched by the Federal government pays high emphasis on the enhancement of value in the service sector and little attention towards the research and development with an exception to the software section (Fasnacht, 2009; OECD, 2012). Possibilities for open innovation strategies in services sectors In formulating business strategies Michael Porter has a powerful influence. Value chain is one of the core ideas provided by him, which provides a set of activities responsible for transforming the inputs into outputs that is from raw material to the final product served to the customers. Porter considered product as the star and suggested that the companies need to compete on the basis of niche, differentiation and cost. However, the spread of ERP, prototyping, Six Sigma and supply chain management has made it difficult for the organizations to sustain through differentiation of product. Porter in his Value Chain has included service but at the final stage when the product is ready for being delivered to the customers. For a business that focuses mainly on the changes in the service places the customers at the central position throughout the entire process of innovation. Innovations in the services are needed to be done openly as in the case of the product innovation. The companies cannot provide all the things that are required by the customers, yet the customers require a complete set of solutions. Therefore, in case of service innovation it is important that connecting with other and working together with them is considered important. While doing the innovation the business model that the organization follows may change that can be used by other firms to build and connect. Therefore, the organizations should concentrate on how they can build, manage and develop new platform so that they can sustain in service innovation over time. The organization does not require identifying the needs of the customers at the very beginning and using them throughout the rest of the process. Instead the organization should focus on creating the services that offers an invitation to the customers to participate in the process and work in a collaborative and iterative manner so that the outcome of the innovation can be achieved. A good example in this context is the mobile phone. Motorola Razr was launched in the year 2004. At that time it was the slimmest mobile phone available in the market with its cool design that attracted the attention of the customers. About over 50 million sets were sold immediately. A follow-on product that was launched after three years failed to attract the interest and the company fell from its first rank to seventh. It appeared as if Motorola has been punished by the market for not launching any innovative product followed after the success of Razr. However, this was not the original reason. The main reason for the failure was that Motorola mainly looked at product-focused innovation. Motorola only thought of coming up with another innovative product for the customers and ignored the customer’s experience regarding the product and other services that they can provide with the device, which can deliver superior service experience for the customers. Nokia is another cell phone producer who is leading the market but faces challenges from the Microsoft, Google, Apple or other eco-system companies. Therefore, Nokia should concentrate their innovation effort towards the services and applications that will enrich the experiences of the customers. iPhone was introduced by Apple in 2007, which captured the attention of the public. iPhone had a sleek design, excellent touch screen and elegant interface for the users. Moreover, the union of AppsStore and iTunes has evolved as a system that can attract various third party services as well as users of these services. Thus, Apple was successful in providing a wide range of experiences to their customers on a single device. iPhone does not require fearing like Motorola regarding being copied by the competitors (InnovationManagement, 2013; Köhler, Sofka and Grimpe, n.d; Golightly, 2012). The potential risks of using an open innovation approach While responding to the demand of open innovation the organization required to quit the pre-existing traditional business models, which in turn can pose significant amount of risk to the revenues and margins. Setting aside the core products, sharing the future direction of product development with the independent community and relinquishing IP rights are considered to be risky actions as far as the contemplation of the organization is concerned. Though the open innovation provides a large number of advantages such as offering potentials for establishing long term relationship with the customers, faster becomes the product cycle and lowers the cost of product innovation; however the organization cannot ignore the unforeseeable risk that they can experience due to the departure from the well-established business model (Herzog, 2011; Chesbrough, 2006; Bingham and Spradlin, 2011; Huff, Möslein and Reichwald, 2013; Doepfer, 2012). Though there is a growing concern regarding the risk of open innovation; however, protecting the knowledge along with the practicing open innovation has also gained enough attention. There are rise of some key issues regarding the real values brought by the open innovation within the organization. While the organizations use open innovation in order to gain resource capabilities and economic value; lack of attention and interest towards the protection of organizational knowledge outflow can make the organization vulnerable to various risk related to open innovation. This can even impact the ability of the organization to compete. Apart from this it can also have a negative impact on the long term sustainability and competitive advantage. It has been argued by various research scholars that knowledge sharing to the external market can expose the core competencies of the organization to the rival companies. Hence, open innovation involving knowledge sharing can be a potential risk as it makes the organization to lose its competitive edge over the competitors. Additionally, sufficient amount of knowledge exposure could lead to the loss of competitive edge over the competitors. If the rivals gain access to the knowledge and gain sufficient amount of market share then they can they can achieve added advantage in comparison to the original organization (University of Pennsylvania, 2012; Islam, 2012; Euchner, 2013). This vulnerability makes knowledge sharing an area of concern. Because of this reason many of the organizations do not implement open innovation all at once as they fear that it might lead to losing of control from their proprietary knowledge. Hence, it is seen that the organizations are under a constant conflict between their willingness to share their knowledge with the external world and their inclination to make their intellectual property rights or proprietary innovation secure from being duplicated. Mitigation of risk arising from open Innovation Open innovation has gained huge popularity but the companies are concerned about protecting their knowledge. In this context the strategy of Proctor & Gamble (P&G) provides a huge example. The knowledge sharing mechanism of P&G is InnovationNet, which looks at sharing innovation knowledge with a large number of resources. It is a complex knowledge sharing system that comprises of external, internal and other sources of their innovation system. The external sources are external to the organization that are used by P&G to gain and share innovation knowledge. This external source is exposed to thousands of innovators present all around the world. P&G even provides the access of InnovationNet to all their employees (Islam, 2012). This open innovation tool is used by the organization to use innovation knowledge in order to create new product and enhance their existing products. The example of P&G provides the best strategy that can be adopted to mitigate the risk arising from the open innovation. The approaches adopted by the management are as follows: Use of technology entrepreneurs: From the perspective of P&G technology entrepreneur is an internal subject matter in which the expert posses complete knowledge about the business units need and technologies and acts as an internet gatekeeper. The organization through this technique sort out the innovation ideas those are already not patent by anyone else. Using the Master Collaboration Agreement: This agreement is used by the organization in a collaborative venture involving all the parties. This agreement addresses all the preparatory and legal rights. This helps in setting up rules and standards regarding the role that each partner is playing in the venture (Islam, 2012). Using patent strategy based on Licensing: In order to accommodate the open innovation knowledge sharing P&G has changed their closed door approach to an open door approach of licensing. This was implemented by the organization to encourage the open innovation approach through which the organization will be focusing on the sharing of knowledge with the outside world and easing their licensing needs. Use of new partnership techniques for the educational institutions: The knowledge sharing partnership of P&G is with the educational institutions and the partnership mainly focuses on the leading-edge technologies that concentrate on open innovation. The research staffs of the organization is send to the university lab in order to gain knowledge so that they can implement the same while developing product and services for the company. By following this academic and business collaborative approach, P&G adheres to the requirement of open innovation since they allow the flow of information between the external and the internal sources. Technology Expos: The technology shows such as the technology expos are adding sufficiently to the open innovation knowledge sharing. These technology fairs provide huge opportunities to the organization in gaining knowledge from the outsiders and incorporate diverse innovation and at the same time sharing internal knowledge with them (Islam, 2012). Therefore using the P&G case, the above discussed methods can be used to mitigate the risk. Conclusion The whole discussion suggests that in the open innovation process of the organization key role is played by the internal environment of the organization, the external environment of the organization and it’s open or collaborative knowledge sharing environment. The paradigm of open innovation implies co-developing partnerships that is mutual working relationships and utilization of external sources of knowledge. These partnerships can look towards development of new products, services or technology, reduce the cost incurred towards research and development, increase the innovation output and its subsequent impact. Though the organization has certain risk but proper implementation of strategies can lead to risk mitigation and growth in the future. Reference List Anderson, R., n.d. Risk and Privacy Implications of Consumer Payment Innovation [pdf] University of Cambridge. Available at: < http://www.cl.cam.ac.uk/~rja14/Papers/anderson-frb-kansas-mar27.pdf> [Accessed 23 December 2013]. Barclays, 2013. Barclays Pingit for corporate [online] Available at: < http://www.barclayscorporate.com/products-and-solutions/cash-management/barclays-pingit-for-corporates.html> [Accessed 23 December 2013]. Bingham, A. and Spradlin, D., 2011. 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Available at :< https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&ved=0CFAQFjAE&url=http%3A%2F%2Fojs.journals.cz%2Findex.php%2FCBUConference2013%2Farticle%2Fdownload%2F16%2F18&ei=OBC4Uo2tIY3Q7Ab4rICwCg&usg=AFQjCNFxXJP7V60_7ydwrzheCP4t7yYo1g&sig2=d6gp2Qrlze3HgSu_qWuylQ&bvm=bv.58187178,d.d2k> [Accessed 23 December 2013]. Read More