Adam Smith and Henry Chesbrough predict OI in services

Henry Chesbrough returned to PARC last week, to deliver the penultimate talk in the OPEN series of the PARC Forum speaker program at PARC headquarters in Palo Alto.

The title of his talk was “Open Services Innovation,” from his book of the same name that is forthcoming in January 2011 from Jossey-Bass. This is the most full I've seen the auditorium, with more than 150 people present for the free talk.

The talk marked his triumphal return to PARC, which formed the basis of so much of his work of the past decade (that in turn led to his seminal 2003 open innovation book). He noted the records of the Xerox spinoffs and licensing deals (used in these papers and this book) are now in the PARC corporate library, headed by Katherine Jarvis who was there at the talk.

He also apologized for not broadcasting the talk on YouTube. Being cognizant that the Internet never forgets, he worried about having this early talk live on in perpetuity. Apparently the Aug. 26 talk was his first public discussion of the forthcoming book: “like many experiments, there are going to be some failures.”

It’s hard to summarize an entire book in an hourlong talk, and I was handicapped by having to leave early to make it home to provide childcare coverage. However, I think OI blog readers would be interested in a few of the core ideas of the book.

He paraphrased (but formally acknowledged) the definition of Hill (1977: 318) for services:

A service may be defined as a change in the condition of a person, or of a good belonging to some economic unit, which is brought about as the result of the activity of some other economic unit, with the prior agreement of the former person or economic unit.

He talked about the growth of the services economy, using standard statistics offered by services experts. (I haven’t had a chance to talk to him as to whether these statistics make the common mistake of conflating information goods with actual services, but this is explicitly rejected by Hill, who emphasized: “Although services are often dismissed as immaterial goods, they are not special kinds of goods and belong in a quite different logical category from goods.”)

In many way, Chesbrough argues that researchers have been led astray in how they think about services by the “value chain” concept introduced by Porter (1985: 37). In the famous Porter diagram, services are ancillary to the value creation process, which focuses on the transformation of inputs into outputs across a supply chain.

Instead, Chesbrough argued for a more customer-focused perspective: services are the efforts of the firm to more precisely meet the needs of customers, rather than [to use my terms] peddle mass-market common products to everyone. Or, he noted, as  Ted Levitt used to say: “People don't want to buy a quarter-inch drill. They want a quarter-inch hole!” Chesbrough’s conclusion: the way to be this customer-centric is to create a feedback loop that incorporates the customer into the services creation process.

I’m not a services guy — in part because my work tends to focus on mass-produced information goods which the services people (as noted above) mistakenly claim as their turf. However, to me this emphasis on the role of services and co-creation seems a more fundamental insight into the business of services, beyond just the application of open innovation to services.

Like Hill, Chesbrough’s conception of services starts with Adam Smith. In fact, the core idea of the talk seemed to be the linkage of Adam Smith to Nobelists Oliver Williamson and George Stigler to innovation in services. These three theories were linked in virtuous positive feedback cycle that reinforces a successful services strategy:

• More specialization of labor reduces transaction costs.
• Lower transaction costs grows the market.
• Larger markets enable more division of labor.

He presented examples of the automobile being transformed from a product to a higher-utilization, more capital-efficient services via the taxi, local rental car, or ZipCar®. Other examples looked at UPS Transportation Management and the Amazon Marketplace.

The point of these last examples is that if firms ask outsiders to provide these missing parts of the value proposition, that’s an example of an open innovation strategy. I wasn’t able to stay for the whole talk due to family commitments; if I had time to stay, I would have asked how the insights of open innovation (or the new book) help firms understand how to use these outside sources of innovation more effectively than (say) the existing platform literature.

Still, this seems to be (sight unseen) the most significant departure by Chesbrough since his original 2003 book. The two books in between are, in some ways, extensions of the 2003 book: Open Business Models is a translation of the 2003 book for non-R&D managers while our 2006 book adapts it (and extends it with outside perspectives) in a form more relevant to academics. Open Services Innovation plants the OI flag on a new and sizable hill.

References

Hill, T.P., “On Goods and Services,” Review of Income and Wealth, 23 (1977): 315-338; doi: 10.1111/j.1475-4991.1977.tb00021.x

Porter, Michael E., Competitive Advantage, New York: Free Press, 1985.