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The use of Open Innovation in the Service

Industry: an Exploratory Case Study

MSc BA Master Thesis Strategy & Innovation

University of Groningen Faculty of Economics and Business

MSc of Business Administration Strategy and Innovation

Author: Ruben de Boer 1st Supervisor: Rene van Eijk 2nd Supervisor: Killean McCarthy

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Executive Summary

The purpose of this Thesis is to gain insight in how the open innovation principles can contribute in improving the innovation process within service providing organizations. For service innovations it becomes more and more important to cooperate with the external environment to successfully develop new services, while at the same time the open innovation strategies provides new business models for (service) innovation. The problem statement of this Thesis is: How do organizations use the theories and models of open innovation when conducting service innovations? In this Thesis, an exploratory case study has been selected to analyze the data. This means that data collection is used for defining and answering the research questions and hypotheses. Open interviews were conducted in order to gain insight to which degree and how organizations use the open innovation principles in the service innovation process.

Within this Thesis three types of open innovation strategies have been distinguished, each with their own characteristics of how organizations can and do use the principles of open innovation. These open innovation strategies are: the total, the focused and the cautioned open innovations strategy. The total open innovation strategy can be defined as a strategy in which organizations have a high willingness to cooperate with external partners and do not restrict or obstruct themselves when cooperating with external partners in the service innovation process. The focused open innovation strategy is a strategy in which organizations are highly willing to cooperate with external partners in the service innovation and at the same time are more focused on the risks and threats that cooperation have on organizational results. Finally the cautioned open innovation strategy is a strategy in which organizations are less willing to cooperate with external partners and do restrict themselves when cooperating with external partners in the service innovation process.

How service organizations use the principles of open innovation in their service innovation depends on the willingness to cooperate with (different types of) external partners; on the level of success criteria that have been formulated; on the level of threats the organization faces; and on the internal/external resources the organization wants to share with external partners during the service innovation process.

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Table of Contents

1 Introduction p 5

2 Theoretical Framework - Service Innovation p 7

2.1 Introduction of service innovation p 7

2.2 Definition of service innovation p 7

2.3 Characteristics of services p 7

2.4 Service innovation versus product innovation p 11

2.4.1 Similarities between NSD and NPD p 11

2.4.2 Differences between NSD and NPD p 11

2.5 The service (innovation) model p 13

2.6 Summary of service innovation p 14

3 Theoretical Framework - Open Innovation p 15

3.1 Overview of the principles of open innovation p 15

3.2 Closed versus Open innovation p 15

3.2.1 Closed Innovation Model p 16

3.2.2 Open Innovation Model p 16

3.3 Types of Open Innovation Strategy p 18

3.3.1 Outside-in processes p 18

3.3.2 Inside-Out processes p 19

3.3.3 Coupled processes p 20

3.4 Open Innovation and Value Creation p 20

3.4.1 Value creation p 21

3.4.1.1 Individualize immediate feedback p 22

3.4.1.2 New cooperation structures p 23

3.4.1.3 New organizational logic p 23

3.4.1.4 Conclusion p 24

3.5 Threats of cooperating with external partners p 25

3.6 Summary of open innovation p 26

4 Theoretical Framework - Propositions p 27

4.1 Proposition 1 p 27 4.2 Proposition 2 p 27 4.3 Proposition 3 p 28 4.4 Proposition 4 p 28 4.5 Proposition 5 p 29 5 Research Methodology p 30

5.1 Motivation for a case study p 30

5.2 Case design p 30

5.3 Research design p 30

5.4 Data collection p 31

5.5 Data measures p 32

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6 Empirical Research - Case studies p 35

6.1 Talant p 35

6.2 The Gelre Ziekenhuizen p 37

6.3 De Nacht van Kunst en Wetenschap p 40

6.4 Het Groninger Forum p 42

6.5 Gastransport Services p 44

6.6 Dutch insurance Company p 46

6.7 CAP p 49

6.8 Buro Maak er wat van p 51

7 Empirical Research - Data Analysis p 53

7.1 Overall results of the case studies p 53

7.1.1 Service innovation strategy p 53

7.1.2 Cooperation with external partner(s) p 54

7.1.3 Success criteria for cooperation p 55

7.1.4 Main threats of cooperation p 56

7.1.5 Results of the cooperation p 57

7.1.6 Overall results of the case studies p 58

7.2 Analyzing the constructs p 60

7.2.1 Results of the tested constructs p 60

7.2.2 Overall findings of the results of the tested constructs p 64

7.3 Open innovations strategies p 65

7.3.1 Total open innovation strategy (TOIS) p 65

7.3.2 Cautioned open innovation strategy (COIS) p 66

7.3.3 Focused open innovation strategy (COIS) p 68

7.3.4 Overall comparison of TOIS, FOIS AND COIS p 70

7.4 Propositions p 71

8 Conclusion p 74

8.1 Conclusion p 74

8.2 Implications for theory and practice p 75

8.3 Future research p 76

8.4 Limitations p 76

9 References p 77

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1. Introduction

According to Jana (2007) service innovation has been described as being the “next big thing” in the economy of industrialized countries. For example, in the United States service has accounted for 80% of the GDP (Song and Song, 2009). Yet, the problem is that most academic articles are all about product innovation and forget to describe how the situation is within service innovation. Fortunately the situation has changed thanks to the academic studies of Miles (2001) and Sundbo and Gallouj (2002), who demonstrated that services are unique and that there are important innovative activities in services, which are different from product innovations. Although many academic studies still try to attempt the inferior characteristics of the service industry compared to the product industry, the study of Vence and Trigo (2009) have showed that: "innovation in specific service activities may actually be considered higher than the manufacturing average". Thus, service innovation is starting to play an important in the overall innovativeness of industries and differs from product innovations by its characteristics. In this Thesis the basic characteristics of services and service innovation will be discussed and compared to the characteristics of product innovation.

These days, a new trend in innovation theory describes that: "not all good ideas come from inside the firm; neither need all good ideas emerging within the particular firm be commercialized by that same firm (Jana, 2007)". Chesbrough (2003) has defined this new trend as “open innovation” and states that open innovation is: “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation (Chesbrough 2003).” The basic idea behind open innovation is that organizations should use internal as well as external knowledge and internal and external paths to market when the organization seeks to maximize returns from new service and product development. The open innovation principles can play a major role in finding and developing of new services.

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business models based on invention and coordination undertaken within a community of innovators. Therefore the goal of this research is as follows:

Problem Statement

How do organizations use the theories and models of open innovation when conducting service innovations?

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2 Theoretical Framework - Service Innovation

The theoretical framework will subdivide into three chapters. In the first chapter the characteristics of service innovations and how they are different from product innovation will be described. In the second chapter the principles of open innovations will be discussed. And in the third chapter the propositions and model about how the principles of open innovations within service innovation will be presented.

2.1 Introduction of service innovation

According to Jana (2007) service innovation has been described as being the “next big thing” in the economy of industrialized countries. In this chapter the definition of service innovation and the characteristics of service will be described. Furthermore, a distinction will be made between service innovation and product innovation and finally a existing model of Moeller (2010) and Menor et al. (2002) will be presented about the stages of service innovation.

2.2 Definition of service innovation

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but most likely in combination, leads to make core product services more attractive to consumers or the market.

2.3 Characteristics of services

In order to describe new service developments, or NSD, it is important to know what the main characteristics of services are. In the next part a literature overview will be given about the characteristics of services. First of all, a table will be presented about characteristics that have been given in the scientific literature. After that, I will define the main characteristics of services that will be used within this paper.

Table 1 Main characteristic of services according to the academic literature

Author Characteristic Explanation

Moeller (2010) 1.Intangibility "Not being palpable or material"

2.Heterogeneity "Difficulty in standardizing services, because each customers may perceive the service differently"

3.Inseparability "Production and consumption occur simultaneously"

4.Perishability "The unavailable option of storing or stockpiling services"

De Charnatony 1.Intangibility "Services are untouchable"

and Segal-Horn 2.Heterogeneity "There are difficulties in standardizing services" (2001) 3.Inseparability "The production and consumption take place

simultaneously"

4.Perishability "Services cannot be stored"

Junarsin (2010) 1. Intangibility "Services normally do not have components that can be perceived by touch"

2. Customer contact "The level of contact can be divided in to: (1) interpersonal service, (2) remote service, and (3) self-service"

3. Inhomogeneity "The service output is frequently variable, depending on the employees and customers engaged in the services"

4. Perishability "Services cannot be stored"

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Nature delivering them may define the overall perceived quality of the services"

Sichtmann, et. al. (2011)

1. Intangibility "The notion that services cannot be seen, touched, or tasted"

2. Customer co- production

"Involves the participation and integration of customer resources in the core offering itself" 3. Heterogeneity "No one service performance is identical to

another"

4. Standardization "Customers perceptions of service"

When we examine the scientific literature, it can be concluded that there are four main characteristics of services. These four main characteristics are: 1. intangibility; 2. inseparability (also customer contact and or customer co-production); 3. heterogeneity (or inhomogeneity); and 4. perishability. Now the four main characteristics will be described and which effect they have on innovation management.

1. Intangibility

Services are intangible, which means that they cannot be physically touched, tasted or seen. According to Junarsin (2010), the intangibility of services means that the perception of the quality is mainly based on subjectivity rather than objectivity. This subjective perception makes it harder to model a service blueprint or concept, because the service (quality) will be experienced differently between each user of the service, compared to a tangible product (Junarsin, 2010). To overcome this problem, it is important that a company is presenting a clear corporate identity in order to evoke clear emotional and functional values (De Charnatony and Segal-Horn, 2001)

2. Inseparability

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self-service. The level of customer contact has been based on the closeness between the service provider and the customer. The amount of contact between the service provider and the customer is the highest at the first level (interpersonal service), while in the third level (self-service) the amount of contact is the lowest (Junarsin, 2010). When there is a high level of contact between the organization and the customer (interpersonal service), it is easier for an organization to involve the customer in the service (innovation) process then when there is hardly any contact (self-service). Therefore, it is essential for an organization to define the appropriate degree of customer contact and in which degree it wants to use customer’s resources to help them produce the service (Goffin, 2005). The level and nature of customer contact may shift after implementing new or improved services. The organization thus needs to recognize that it may needs to retrain its staff, in order to participate on the new level and nature of customer contact and the coproduction in the service (innovation) of customers.

3. Heterogeneity (Inhomogeneity)

As mentioned before (see table 1), is hard for organizations to standardize the service that is provided towards the customer. The reason is that the level of services provided by a service provider may be delivered unequal towards the customer. This unequal transfer of services towards customers is caused by the fact that different customers may perceive the same service differently (Moeller, 2010). Another reason why the service is heterogeneous is caused by the different level of contact among customers; some customers need more customer contact than others (Junarsin, 2010). When managing service innovations, the organization should keep in mind that the expectations and perceptions need to be managed. Therefore it is important for service providers to train their employees that they maintain an accepted level of service and that they know how to cultivate a level of rapport with customers. Furthermore, it is important that there is a good cross-functional interaction between the front- and back-office staff in order to managing service quality. All this can have a positive impact on the perceived quality overall.

4. Perishability

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manner that it has some flexibility to overcome fluctuation in demand and deliver the service on time to the customer.

2.4 Service innovation versus product innovation

According to Junarsin (2010): "the purpose of managing service innovation is the same as product innovation, namely to create valuable and new services for the organization". In the first paragraph the main characteristics of service has been described. Within this paragraph the similarities and differences between service and product innovation will be mentioned.

2.4.1 Similarities between NSD and NPD

First of all, there are a lot of similarities between successful New Product developments (NPD) and New Service Developments (NSD) as mentioned with the statement of Junarsin (2010). Successful NSD and NPD have a strong management commitment towards innovation and they allocate their resources to the innovation efforts (Tidd & Bodley, 2002). According to Nijssen et. al. (2006) successful NSD and NPD firms share four main characteristics. First of all, these companies have high top management involvement towards the innovation process and therefore the main strategic aim is to focus not only on the short-term success, but also on the medium and long-short-term successes (Nijssen et. al., 2006). The employees of these organizations know what products or services the organization is aiming for. Secondly, the processes are arranged in such a manner that they strive towards maximum support of the innovation effort (De Brentani, 2001). Thirdly, successful NSD and NPD programs tend to be better structured, proactive, and more formalized than those of less successful NSD and NPD programs (Johne, 1993). Finally, these organizations can be characterized as having high quality development staff which complements the organizations capability of inventing new products and services (Johne, 1993).

2.4.2 Differences between NSD and NPD

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innovation tend to convert novelty in success, which means they have a significant short beta testing process compared to product development, and “are exploiting internally sourced ideas for new services as an alternative to formal innovation structures (Ettlie and Rosenthal, 2011)”. On the other hand, product innovation tends to rely more on the need of new strategies and structures when the product is new to the industry or new to the firm. As mentioned before, the main reason why services differ from products is due to the reason that services have different characteristics then products. First of all, services cannot be stored and therefore they are produced real-time, which means that modification of the service (or new service development) occur during the delivery process. This also means that the skills of the front office employees are very important, because they are the ones that deliver the service to the consumers. Therefore, it can be concluded that there is a strong interaction and relationship between new service development and the delivery process (Takikonda and Zeithaml, 2001). While in new product development this relationship between the delivery process and the R&D process is not that strong (Takikonda and Zeithaml, 2001). Thus it can be concluded that because of the perishability of services, the delivery process has a great emphasis in coming up with new or adjusted services, in comparison, the delivery process in NPD of manufacturing goods does not have a great impact on coming up with new or improved products.

A second difference between NSD and NPD are caused by the fact that NSD requires a more perfect fit between new services and the existing business activities, compared to NPD.

(Johne & Storey, 1998). Within NSD, the front and back office need to cooperate to overcome differences in strategic objectives and time management, while in NPD the front and back office often work independent (Ettlie and Rosenthal, 2011). This tension is caused, because of the way the front- and back office are organized within the organization. The front office is designed to satisfy customer needs, while the back office wants to optimize organizational efficiency and affectivity (Menor et al., 2002). According to Ettlie and Rosenthal (2011), organizational inertia plays a greater role in new services than in new products or goods. When conducting new service development, communication and coordination within the organization is critical for the organizational wellbeing to reduce organizational conflicts and struggle of power to overcome this organizational inertia (Ettlie and Rosenthal, 2011).

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strongly associated with successful new product development rather than with new service development. Successful NPD companies are thus being associated with having large R&D departments to come up with new core technologies, while on the contrary successful NSD do not have large R&D departments, but rather create new procedures and concepts during the production process (Brouwer and Kleinknecht, 1996). The main reason is the intangible and inhomogeneous nature of services, which causes that each consumer may perceive the service differently. This makes it harder for service companies to come up with services that are completely new to the industry or market and therefore most service companies are oriented in developing services during the production phase in order to offer services that have the highest perceived value of consumers (Ettlie and Rosenthal, 2011).

2.5 The service (innovation) model

These days, the most successful innovative companies are the ones that are developing services by a set of planned stages. According to Menor et al. (2002) the service innovation model consist of six steps, these are: “clear objectives, concept development, service design, prototyping, service launch, and customer feedback” (see figure 1). The most important factor in the service innovation model is that the organization understands how the customer is involved within service design. The organization need to know what the customer expectation, need and outcomes are. If the organization understands the role of the customer within the innovation process, it can launch services which fulfill customer needs and expectation and therefore can differentiate it from competitors and can increase the perceived overall quality of the new service. The most service quality problems occur, because of a poor service design in which customer’s participation is low.

Figure 1 The planned stages of service innovation (Menor et al., 2002)

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for organizations to train their employees (provider resources) so that they maintain an accepted level of service and that they know how to cultivate a level of rapport with customers.

Figure 2 Customer integration approach to characterize services (Moeller, 2010)

2.6 Summary of service innovation

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3 Theoretical Framework - Open Innovation

In this chapter the principles of open innovation will be discussed. First of all the definition of open innovation will be given. Secondly open innovation will be compared with closed innovation and the differences and similarities will be discussed. Thirdly, the three types of open innovation will be presented and finally a model will be presented in why open innovation will lead to value creation.

3.1 Overview of the principles of open innovation

In the past, most companies largely conducted their innovation activities within the own organization. These days there is a new trend in the innovation theory, which mentions that not all good ideas come from inside the own organization, but can also be found outside the organization. Chesbrough (2003) defines open innovation as: “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively. Open Innovation is a paradigm that assumes that companies can and should use external ideas as well as internal ideas, and internal and external paths to market, as the companies look to advance their technology”.

Although “open innovation” is a new concept, the fundamental ideas are off course not new at all. Cooperating with the external environment is as old as invention itself. However, according to Grönlund et. Al. (2010) the open innovation concept is a broader concept of “leveraging external sources of knowledge to drive internal growth”. It gives a framework which managers can use to configure their internal processes so they can be used to manage an external oriented innovation process.

3.2 Closed versus Open innovation

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external resources are being used within service innovation process, while within closed innovation only internal resources are used for this process. (Chesbrough, 2003).

3.2.1 Closed Innovation Model

As mentioned before, closed innovation can be characterized as using only internal resources for NPD or NSD. Chesbrough (2003) defines the philosophy of closed innovation as: “Successful innovation requires control, which means that organizations create their own ideas, have their own production plants and marketing departments and have their own distribution channels” (See figure 3). For decades the general business idea was that if you want to do things right, you have to do it yourself. In order to implement this business idea, organizations were investing heavily on R&D and hired the best and smartest staff available in order to come up with new ideas and get their products on the market first before the competitors. Furthermore, organizations with a closed innovation strategy are protecting their products and service with intellectual property rights (IPR), in order to fully benefit from their innovations and prevent competitors from exploiting their innovation (Chesbrough, 2003). The profits made by the innovation were directly invested into the R&D department, in order to come up with even newer products/services.

Figure 3 The Closed Innovation Model (Chesbrough, 2003)

3.2.2 Open Innovation Model

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partners. As Chesbrough (2003) stated in his book: "Not all the smart people work for us. We need to work with smart people inside and outside our company". The main benefits of open innovation is that a company can benefit from the know-how of external parties and therefore can come up with new products and services which else would not have been possible given the internal staff know-how (Grönlund et. Al. 2010). Another benefit is that it reduces innovation costs, because the organization is also using the resources of external parties, for which it often does not have to pay for, to come up with new innovative services (Grönlund et. Al. 2010). Koschatzky (2001) found out in his study that: "firms which do not cooperate and which do not exchange knowledge reduce their knowledge base on a long-term basis and lose the ability to enter into exchange relations with other firms and organizations". Therefore, organizations should deal with open innovation as cooperating with the external parties should be the core business in order to increase innovativeness and reduce costs and time to market. Organizations should find ways to commercialize internal as well as external ideas. Companies can do this by distributing internal ideas through outside channels or distributing outside ideas through internal channels (see figure 4 and paragraph 2.2.3) (Chesbrough, 2003). In conclusion, within the Open Innovation model the boundaries between the organization and its external environment is becoming blurry, which enables innovation to move easily between them (see figure 3).

Figure 3 The Open Innovation Model (Chesbrough, 2003)

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Table 2, Overview of the contrast between Closed and Open Innovation (Chesbrough, 2003)

Open Innovation Closed innovation

Not all of the smart people work for us, so we must find and tap into the knowledge and expertise of bright individuals outside our company.

The smartest people in the field work for us

External R&D can create significant value: Internal R&D is needed to claim some portion of that value

To profit from R&D, we must discover, develop and ship it ourselves

We don’t have to originate the research to profit from it

If we discover it ourselves, we will get it to market first.

Building a better business model is better than getting to market first

If we are the first to commercialize an innovation, we will win.

If we make the best use of internal and external ideas, we will win

If we create the most and best ideas in the Industry, we will win.

We should profit from others' use of our IP, and we should buy others'

IP whenever it advances our own business model.

We should control our intellectual property (IP) so that our competitors don't profit from our ideas.

3.3 Types of Open Innovation Strategy

When looking at the organizational process perspective, several key characteristics of open innovation processes can be identified. According to Gassmann (2006) open innovation can be characterized in three core process, these are: 1. outside-in processes, 2. inside-out process, and 3. coupled process. These three perspectives will be discussed in the text mentioned below.

3.3.1 Outside-in processes

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companies); 3. suppliers (61% of the companies); 4. competitors (49% of the companies); and 5. commercial and public research institutions (21% of the companies). Companies do tend to enlarge their source of knowledge by cooperating with everybody, from parties within and outside the own company branch. Organizations are becoming more and more aware that they should invest in innovation networks and therefore they are aware that they need to cooperate with everyone that can help them increase their knowledge source in order to conduct new product or service development (Chesbrough et. Al., 2009).

Figure 4 Outside-In Process

3.3.2 Inside-Out processes

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out process is that companies will have higher overall revenue from the innovation by directly selling the invention or idea to the external market (Gassmann and Enkel, 2004). Companies with an inside-out strategy can be characterize by investing in corporate venturing activities; new business models, like creating joint ventures and spin-offs; and cross-industry innovation by commercializing its own technologies into new industries (Chesbrough et. Al., 2009).

Figure 5 Inside-Out Process

3.3.3 Coupled processes

The final process of open innovation is the coupled process. The coupled process combines the inside-out (bring inventions to the market) and the outside-in (gathering external knowledge) process (Chesbrough et. Al., 2009). Coupled process has therefore also been called co-creation in the scientific literature. By combing both previous mentioned processes, a company develops and commercializes innovations at the same time with external parties. Co-creation derives from the open source perspective, which means that the organization wants to innovate by using peer production through combining the knowledge and resources of consumers, lead users, communities, and other companies (in- and outside the own industry) (Chesbrough et. Al., 2009).

Companies can thus implement three types of open innovation strategies (outside-in, inside-out and coupled strategy). Which open innovation strategy a company chooses, depends on how the organization wants to perform their open innovation strategy.

3.4 Open Innovation and Value Creation

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organizations can create value from innovation and why organizations fail to successfully implement an open innovation strategy.

3.4.1 Value creation

These days the economy has changed from an industrial economy towards a knowledge economy. The main reason for this shift is the increasing globalization, deregulation, liberalization, and radical ICT innovations (Johannessen and Olsen, 2010). Organizations have to change their way of thinking and need to know how they can create and capture value within the new knowledge economy. Within the academic literature a distinction has been made between value capture and value creation. Priem (2007) defines value capture as: “The appropriation and retention by the firm of payment made by customers in expectation of future value from consumption”, whereas value creation: ”Involves innovation that establishes or increases the consumer’s valuation of the benefit of consumption”. Johannessen and Olsen (2010) have simplified the definition of both terms: “value capture means that you want to receive the biggest cut of the pie (market), whereas value creation is to increase the pie (market) itself and not just the cut of the pie”.

Chesbrough (2003) and Von Hippel (2005) argue that information, knowledge and competences need to be found outside as well as inside the organizational borders. They argue that the traditional model of product-centric view (all innovation occur within the own organizational border) of value creation should be replaced by a customer-centric view. Von Hippel (2005) defines the customer-centric view of value creation as “creating value by customer co-creation and use the customers as the basis of value-in-use, rather than being embedded in predefined output”.

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Figure 6 Factors that are enhancing innovation and value creation within the knowledge-economy

3.4.1.1 Individualize immediate feedback

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platform for customers on whom they can tell their needs and give feedback on products or services. For organizations, the knowledge economy has thus created big opportunities to be directly connected to customer needs and therefore for enhancing innovation and value creation (Johannessen and Olsen, 2010).

3.4.1.2 New cooperation structures

These days the world is changing in a global market, and ICT developments made it possible that organization can gather knowledge and competence from all over the world. Organizations need to find new ways to gather these global knowledge and competences by implementing new cooperation structures. Organizations should focus on value creation by cooperating with new external partners through the use of ICT solutions and thereby increase the market on which the organization is operating (Priem, 2007).

3.4.1.3 New organizational logic

Globalization and ICT innovations have led to a new way organizations need to think. Johannessen and Olsen (2010) have called this new way thinking new organizational logic. This new organizational logic consists of four elements: modular flexibility, first-line focus, meeting individualism with technology, and Connect & Provide. In the next part, the four elements of new organizational logic will be explained and also an explanation will be given about how they are influencing value creation within the (open) innovation process.

1. Modular flexibility

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Employees in the front office of the organization are the ones that have direct contact with the customers. According to Hamel and Breen (2007) the increase in individualism and immediate feedback has made it necessary for organization to give front office employees more responsible and decision-making authority in order to meet the customer expectation, and to improve the transfer of knowledge and resources between the firm and the customers. If the organization succeed in meeting the customer’s expectation and be able to transfer useful resources between the firm and the customer, it will improve its innovative capacity and be able to increase its value towards the customer.

3. Meeting individualism with technology

As mentioned before, customers are more and more demanding for personalized products or services. Even if the number of customers and the variations in their demands increase, as they surely will, powerful new technology, connecting global resource suppliers in global networks, makes it possible to individualize relations to each customer, or at least give every appearance of doing so. It starts with each customer determining his or her own profile (contact information, preferences, wishes, etc.). Technology then creates and changes the customer’s profile, based on the customer’s purchase- or self-design process, such that customer satisfaction can be monitored constantly. This way, the customer gets the impression that the product is tailor-made for him or her.

4. Connect and provide

Connect & Provide (C&P) means that the organization is working together with its competitor in an integrated network in order to provide the best possible solution to the customer (or the meet the customers need) (Johannessen and Olsen, 2010). Organizations are thus no longer trying to maximize profits and create everything themselves, but rather are creating networks for cooperating with everyone in its business and beyond to improve customer satisfaction and expectation. Value creation can be obtained by trying to provide the customer the best product or service available.

3.4.1.3 Conclusion

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an internal perspective toward an combined internal and external perspective and keep in mind that customers are becoming more individualistic and have access to collectivistic platforms to in which they can communicate with the organization (Grönlund et. Al. 2010). Furthermore, organization should focus on providing the best possible product or service to the customer, and therefore they need to cooperate and create networks with the external environment. They can achieve this by cooperating within a network with supplies, customers, competitors, and others.

3.5 Threats of cooperating with external partners

When examining the scientific literature, it seems that there are only benefits of having an open innovation strategy. Therefore, you could ask yourself: if companies with an open strategy are successful, why do not all companies want to have an open innovation strategy? One of the main difficulties of implementing an open innovation strategy is that organization is struggling to sustain internal commitment to realize the benefits of having such a strategy (Grönlund, et. al., 2010). In order to fully benefit from an open innovation strategy, a company needs to modify its existing innovation processes, roles, systems, and responsibilities (Grönlund, et. al., 2010). A lot of companies fail to radically change their organizational structure and strategy and therefore fail to gain profits from having an open innovation strategy. The main reason for this is that companies are afraid of transferring internal knowledge to the external world and fear the risk that they will lose control over their innovation process. Losing control means that organizations fear the risk that external parties will determine the innovation process and that the company itself will not come up with new ideas or inventions (Christensen et. al., 2005). Furthermore, according to the study of Christensen et. al. (2005), another reason why organizations do not implement an open strategy is the coordination costs. Organizations view coordination costs, mainly caused by the fact that you have to negotiate with external partners, as being one of the main risks. Christensen et. al. (2005) also found out that organizations are having difficulty in finding the right partner to cooperate with. If you cannot find the right partner for cooperation, your open innovation strategy will fail and you won’t be able to benefit from the open innovation strategy.

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26 3.6 Summary of open innovation

In this chapter the theory of open innovation has been discussed. Open innovation has been defined by Chesbrough (2003) as: “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively. Open Innovation is a paradigm that assumes that companies can and should use external ideas as well as internal ideas, and internal and external paths to market, as the companies look to advance their technology”.

Chesbrough has defined several differences with closed innovation. The most important difference is that organizations with an open innovation strategy are using internal and external resources when conducting service innovation, while close innovation organizations are only using internal resources in their new service development process.

Three key characteristics of open innovation processes can be identified, these are Outside-In process (only gather external resources from the external environment), Inside-Out (only share internal resources with the external environment), and Coupled process (which is a combination of the Outside-In and Inside-Out process).

Within their model Johannessen and Olsen (2010) make a distinction between three factors that influences innovation and value creation within knowledge economies, these are: Individualize immediate feedback; New cooperation structures; and New organizational logic. Grönlund, et. al (2010) and Christensen et. al. (2005) have formulated 4 areas of difficulties when cooperating with external partners. These areas of difficulties are: 1.Transaction Costs, 2. Finding the right partner, 3. Losing control of the innovation process and 4. Trust.

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4 Theoretical Framework - Propositions and model

In this chapter the principles of open innovation will be linked to service innovation by formulating five propositions. These five propositions will be tested in the empirical research chapters and will form the basis for the conclusion.

4.1 Proposition 1

Due to the characteristics of services (intangibility, inseparability, heterogeneity and perishability) it is almost impossible not to cooperate with external partners in the service innovation process of service organizations. Organizations in the service industry must communicate and cooperate with external partners in order to satisfy customer needs (As made clear in the model of Moeller in chapter 2.5). Therefore, if organizations want to satisfy customer needs they must implement an open innovation strategy. In this strategy organizations structure their company in such a way that is promotes cooperation and increases the sharing of resources with the external environment.

Proposition 1 The characteristics of services forces service organizations to implement an open innovation strategy for new service innovations.

4.2 Proposition 2

As mentioned in chapter 3.2.3.1, organizations can cooperate with a variety of different external partners. The study of Enkel and Gassmann (2008) reveals that the networks of external parties with whom organizations can cooperate are: customers; Partners from other industries or non-customer, or non–supplier; suppliers; competitors; and commercial and public research institutions. When organizations have a high willingness and "open attitude" towards cooperation with the external environment, they are likely to cooperate with a larger network of different types of external partners. On the other hand organizations with low willingness and a more "closed attitude" towards cooperation with external partners, tend to have a smaller and less diverse network of external partners.

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28 4.3 Proposition 3

In their article, Johannessen and Olsen (2010) have formulated eight success criteria which need to be fulfilled when cooperating with external partners. These eight success criteria are: Can it be integrated into existing systems; Will it be cost-effective to implement?; Does its implementation present any risk/uncertainty to ongoing operations?; Are there measurable cost saving?; Does it result in measurable revenue increases?; Does it create measurable efficiencies in operations/marketing?; Did the development of the innovation lead to better internal processes?; and Will staff learn and or benefit from the experience? Organizations should recognize the importance of the success criteria when cooperating with external partners in the service innovation process (Johannessen and Olsen, 2010). Johannessen and Olsen (2010) state that if organizations do not use these success criteria when cooperating with external partners, they will lose track and there is a high change that the organization fails to fully benefit from the cooperation. In this Thesis I want to research if this statement (of Johannessen and Olsen, 2010) is really true. In my opinion organizations with an open innovation strategy will not have a high emphasis on formulating these success criteria and it seems to me that organization with a closed innovation strategy will use these success criteria not to cooperate with external partners.

Proposition 3 Organizations with an open innovation strategy will use the success criteria presented in the study of Johannessen and Olsen (2010) when cooperating with external partners.

4.4 Proposition 4

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Proposition 4 Organizations with an open innovation strategy are not obstructed by threats or can easily overcome these threats when cooperating with external partners in the service innovation process.

4.5 Proposition 5

As mentioned in chapter 3.2.3, three key characteristics of open innovation processes can be identified, these are: 1. outside-in process, 2. inside-out process, and 3. coupled process. In the academic literate nothing has been written about which process is best suited for an open and a closed innovation strategy. In order for both the organization and the external partner to fully benefit from cooperation, organizations with an open innovation strategy are more willing to share internal resources and gather external ones. Therefore these organizations will use the coupled process when cooperating with external partners. On the other hand organizations with a "closed attitude" towards cooperation with external parties are more eager to only gather external resources and are less likely to share internal resources with the external environment. Their main objective is that their organization is benefitting from the cooperation with external partners and therefore they will be more likely to have an outside-in process when conducting new service development.

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5 Research Methodology

Within this chapter, the research methodology of this Thesis will be described. The goal of this chapter is to provide a structure for linking the empirical data to the research question, which will lead to the recommendations and conclusion. This chapter consists of six parts. First of all, the motivation for the case study will be described and after that the case and research design will be given. Furthermore, a description will be given about how the data is collected and how it is measured. Finally the validity and reliability of the measured data will be explained.

5.1 Motivation for a case study

The purpose of this Thesis is to gain insight in how the Open Innovation Methods can contribute in improving the innovation process within new service development. The way of how the open innovation theory has been described in the academic literature, makes it suitable to use an exploratory approach in order to conduct research. Therefore I have chosen to conduct eight case studies in order to give an answer to my research question.

5.2 Case design

While many academic studies only focuse on conduct research on a single case, I have chosen to conduct a multiple-case study. The benefits of a multiple-case study is that it provides the researcher a tool to achieve a deep understanding of a specific phenomenon, in this study the Open Innovation Principles. In a multiple-case study, "a literal and theoretical replication strategy is used to identify consistent patterns of behavior and to uncover new and or divergent themes" (Zach, 2006).

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31 5.3 Research design

Case studies can be used by researchers to give an answer to ‘how’ or ‘why’ questions and are often used for qualitative research design. The advantage of a case study is that a broader range of data collection tools, for instance interviews or observation, can be used in order to gather information. In this paper, eight cases studies are investigated by the means of open interviews, in order to draw a clear picture of how the interviewed organizations are conducting service innovation.

According to Yin (2003), there are three types of case study research: explanatory, descriptive, and exploratory case studies. The right type of research design needs to be selected in order to usefully analyze the case studies. In this paper, the exploratory case study has been selected to analyze the data. This means that data collection is used for defining and answering the research questions and hypotheses (Tellis, 1997).

5.4 Data collection

In the academic literature not a lot of research had been done, about how the open innovation principles are used and practiced in a real business environment. Therefore it is important to gather information from several organizations and examine in which degree they cooperate with external parties and gathering external resources to improve and strengthen their service innovation process. The best way to gather information is to have an open interview with the one that is responsible for the service innovation process within the organization that has been examined in this paper. All information within the case studies has been gathered, by doing an open interview with the person who is responsible for the service innovation process within its own organization and by reading the internet website of the examined organization.

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Table 3 List of organizations and people that have been interviewed.

Organization Name Function Purpose of interview Date

1. Talant Wietze de Boer Manager Gain insights in the NSD of healthcare institutions

09-07-2011

2. Gelre Hospital Jeroen van Suijlen

Director of the EDC

Gain insights in the NSD of healthcare institutions

27-07-2011

3. Nacht van Kunst en Wetenschap

Bianca Pander Projectleader Gain insights in the NSD in the cultural sector 18-07-2011 4. Groninger Forum Pernille Claessen Head Marketing and communication

Gain insights in the NSD in the cultural sector

15-08-2011

5. Gas Transport Service

Floris Gräper Manager Product Development & Market Research

Gain insights in the NSD of a Dutch Multinational

22-07-2011

6. Large Dutch insurance company

Unknown Manager Gain insights in the

NSD of a Dutch Multinational

12-08-2011

7. CAP Thomas de Boer Consultant/Partner Gain insights in the NSD of a consultancy agency

13-07-2011

8. Buro Maak Er Wat Van

Frits Overbeek Consultant/Owner Gain insights in the NSD of a consultancy agency

04-08-2011

5.5 Data measures

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this way, it can be tested if the information acquired from the academic literature is correct and useful or that it needs to be adjusted according to the gathered data from the case studies. As mentioned before if similar and consistent results can be found, the case studies will have a high level of validity and reliability

In this Thesis six constructs will be examined and tested during the interviews in the case studies (chapter 6) and the data analysis (chapter 7). These constructs have been based on the propositions formulated in chapter 4. The following constructs have been formulated and will be tested in the data analysis: 1. open innovation, 2. cooperation partners, 3. formulated success criteria, 4. threats, 5. sharing internal resources, and 6. gathering external resources. A distinction has been made between sharing and gathering resources, because I want to examine if there are differences between the types of open innovation process. Each construct will be measured by examining the statements of the interviewees about the construct. During the interview multiple questions will be asked about the individual construct. Furthermore, the outcomes of the interviews will be checked and controlled by comparing the statements of the interviewees with the annual report and the website of the examined organization. In the next part the definition of the constructs and the type of variable will be presented.

1. Open innovation

The open innovation construct can be defined as the organizational service innovation strategy that an organization has implemented. This means that it will be tested if the organization has an open or a closed innovation strategy. This construct is an independent variable, which means that this variable is the predictor and presumed cause of the other five constructs.

2. Cooperation partners

In this construct the degree of different types of cooperation partners will be tested, in order to examine if there are differences in types of external partners the examined organizations are cooperating with. This construct is a dependent variable, because this construct is a presumed outcome of having an open innovation strategy.

3. Formulated success criteria

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34 4. Threat

The threat construct can be defined as the degree in which organizations view threats as an obstruction to cooperating with external partners in the service innovation process. Also this construct is dependent variable, because it is a presumed effect of the organizational willingness to cooperate with external partners.

5. Sharing internal resources

In this construct the organizational willingness to share internal resources with external partners in the service innovation process is tested. This construct is a dependent variable, because it is the result of having an open innovation strategy and cooperating with external partners in the service innovation process.

6. Gathering external resources

The construct gathering external resources can be defined as the organizational willingness to gather external resources with external partners in the service innovation process is tested. This construct is a dependent variable, because it is the result of having an open innovation strategy and cooperating with external partners in the service innovation process.

5.6 Validity and reliability of the case studies

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6 Empirical Research – Case Studies

In this chapter the eight case studies will be presented. The results of each of the case study will be presented separately. The case study itself will be subdivided into five parts, these are: Service innovation strategy; Cooperation with external partner(s); Success criteria for cooperation; Main threats of cooperation; and Type of open innovation process. In the next chapter an analyses will be performed on the results of the case studies.

6.1 Talant

Talant is a healthcare institution for intellectual restricted people in the Dutch province Friesland. Talant was formed on 1 January 2002 and on that date the fusion of Maartenswouden, D.A.G. Friesland en Heechhout Kaai was a fact (www.talant.nl). The history of the fusion partners returns much further and all three organizations were established in the sixties of the previous century

1. Service innovation strategy

When asked if Talant has a specific strategy concerning service innovation and or cooperating with external partners, Wietze de Boer states: "Talant does not have a specific strategy for the service innovation process and cooperating with external partners". The mission of Talant is to offer a long term care and support to people with a large degree of vulnerability. Their ambition is to imply a partnership between the clients (customer) and Talant, in order to give the customer the desired care and support. Furthermore, their mission states that they are trying to establish a relation between customer and employee, based on reciprocal respect. Their vision is that intellectual restricted people need to participate within the society, but also to involve the society in helping them take care of intellectual restricted people (www.talant.nl). For example, Talant is setting up several independent living areas in district and villages, in which intellectual restricted people take care of themselves and are part of the society. There might not be a specific strategy for service innovation; however it could be argued that the mission and vision of Talant is about providing the best care available to its clients by cooperating with the society (or external partners).

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that year. Therefore innovation is an important issue for Talant and it is surprising to conclude that they do not have a clearly formulated service innovation strategy. However, when examining the mission and vision and the fact that Talant is cooperating with external partners during the service innovation process it can be concluded that they are using the open innovation principles.

2 Cooperation with external partner(s)

Talant is cooperating with a lot of different types of external partners in their service innovation process. The main partner with whom they are cooperating, are their clients (or customers). Talant is offering a long term care and support to people with a large degree of vulnerability and want to make them part of the society. In order to offer the best care and support, Talant needs to know which needs and demands their clients have, and adjust their services to these needs and demands. Furthermore, Talant is also cooperating with non-customers. In order to successfully integrate their clients in society, they need to cooperate with member of the society (Non-Customers) to come up with new ideas in how the integration process of clients can be improved. Also Talant is cooperating with competitors and Commercial and public research institutions, in order to share information and knowledge and improve the provided services to the clients. Finally, Wietze de Boer also stated that: "Talant is also cooperating with non-competitors, mainly with organizations in the profit sector, to set up businesses or create jobs for clients. The main reason for cooperating with non-competitors is that they want to create a normal job for clients, and that this will increase their role in society".

3 Success criteria for cooperation

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37 4 Main threats of cooperation

According to Wietze de Boer: "The main threats when cooperating with external partners is trust. You have to rely on others for new service development. This means that you have to share your resources (mainly knowledge and money) with others, but also the external partner must share their resources with you. In short you have to find a balance in transferring and gathering resources and there must be a mutual benefit for both parties in order to successfully cooperate and build up a long term relationship with each other in the service innovation process". During the interview it was stated by Wietze de Boer that: "Talant does not have difficulties finding the right partner, because it's a large organization in the relatively 'small' region Friesland, and therefore most organizations in this region tend to have a high willingness to cooperate with Talant, because of its resources". Furthermore, Talant has a positive attitude towards cooperation with external partners, and therefore does not fear losing control of the innovation process.

5 Type of open innovation process

Talant mainly cooperates with external partners to not only enlarge its own knowledge base but also help others to increase their knowledge on mentally disabled people. During the interviews is made clear by Wietze de Boer that Talant is transferring ideas, knowledge and competences to the external environment. Talant is thus not only gathering knowledge and competences, but is also sharing information with the external. Talant thus has a coupled process towards cooperating with the external environment.

6.2 The Gelre Ziekenhuizen

The Gelre Ziekenhuizen is large hospital chain in the Dutch region of Apeldoorn and Zutphen. The Gelre Ziekenhuizen was formed in October 1999 from a fusion of the hospital of Apeldoorn and the region hospital the Spittaal at Zutphen.

1. Service innovation strategy

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others. The mission of the Gelre Ziekenhuizen is quite general and does not say anything about how innovation is performed and if the hospital is cooperating with external partners. When asked to Jeroen van Suijlen if there is a strategy concerning service innovation and or cooperation with external partners in the service innovation process, Van Suijlen stated: “We do not have a clear formulated strategy concerning service innovation. The top management decides which innovations will be implemented, because they are the ones that are responsible for the strategic choices that need to be made”.

The Gelre Ziekenhuizen is depending on care insurance companies for getting its funds. Health care in the Netherlands has become very expensive and therefore care insurance demand that hospitals are becoming more cost efficient. The care insurances companies demand that hospitals are cooperating with other hospitals, in order to create scale and scope advantages. Hospitals are thus forced to innovate in order to keep the price of the delivered care as low as possible. Also in this case, like Talant, it is surprising to conclude that there has not been formulated a clear service innovation strategy in order to respond on the changing demands of the care insurance companies. However, also in this case the organization is actively cooperating with external partners in their service innovation process and therefore it can be concluded that the Gelre Ziekenhuizen is applying the principles of open innovation.

2 Cooperation with external partner(s)

The Gelre Ziekenhuizen is mainly cooperating with competitors (or other hospitals) in their service innovation process. The main reason is that care insurance company’s demand that hospitals are cooperating with each other, in order to fully benefit from scale and scope advantages and that this will lead to measurable cost savings. Furthermore, the Gelre Ziekenhuizen is cooperating with customers, by performing surveys among them. The results of the surveys are being used to improve existing service and to develop new ones. Finally, the Gelre Ziekenhuizen is also cooperating with suppliers, because they understand the ins and outs of the organization and therefore can contribute to improve overall organizational efficiency.

3 Success criteria for cooperation

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the service innovation process are that the cooperation must be able to be integrated into existing systems and thereby must lead to an improvement of internal processes and efficiency of operations; are cost effective to implement; and must lead to measurable cost savings. Van Suijlen states that: “Organizations should prevent that the risks of cooperating with external partners are too high and therefore can lead to enormous costs when the cooperation fails to achieve its goals. Hospitals are non-profit organizations and therefore we do not strive to increase revenues“.

4 Main threats of cooperation

As mentioned before, the Gelre Ziekenhuizen is mainly cooperating with external partners in the service innovation process, when they can strengthen the hospitals own core business. Jeroen van Suijlen states that: "The Gelre Ziekenhuizen should prevent high cooperation costs and losing grip of the innovation process when cooperating with external partners during new service development". Also trust plays an important role in cooperating with external partners. The customers of the hospital are vulnerable patients and therefore the hospital needs be sure that the external partner is dealing with patients on an ethical and proper way. Trust is thus important; because the Gelre Ziekenhuizen needs to be sure that the external partner is not misusing the acquired information from the patients.

5 Type of open innovation process

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40 6.3 De Nacht van Kunst en Wetenschap (NvK&W)

De nacht van Kunst en Wetenschap (the night of Art & Science) has in the first place started as a festival of the celebration of the 395-one year old existence of the University of Groningen. The initial idea behind the night was a small Groninger alternative for the national museum night with a scientific quarrel. The visitors could visit readings, workshops, exhibitions, debates, scientific experiments, music and unique shows where art and science met each other. The first edition was on 13 June 2009 and was organized by het Akkoord van Groningen (Agreement of Groningen). Het Akkoord van Groningen is a strategic alliance of the University of Groningen, Hanzehogeschool Groningen, the UMCG and the municipal of Groningen. The nacht van Kunst en Wetenschap was a huge success and therefore it was decided that the night would become an annual event in which Groningen wants to promote itself as being a city of talent.

1. Service innovation strategy

De nacht van Kunst en Wetenschap is thus organized by het Akkoord van Groningen. Therefore the strategy, vision and mission of het Akkoord van Groningen will be examined, in order to understand why de nacht van Kunst en Wetenschap has been organized.

The mission of het Akkoord van Groningen is to extend the position of the city of Groningen as being an international knowledge gateway and center in which innovation can flurries. They want to achieve this by cooperating with strategic external partners in order to improve excellence. The main goal is to use the in-house knowledge of the University of Groningen, and provide a meaningful contribution in solving social questions and become a competitive region in a global world by creating jobs for high educated people (http://www.cityoftalent.nl/nl/content/city-of-talent/akkoord-van-groningen).

According to Bianca Panders, there a two reasons why de nacht van Kunst en Wetenschap has been organized. The first reason is that het Akkoord van Groningen wants to build up relationships and form alliances with the cultural sector in the city of Groningen and the second reason is that it wants to increase its awareness of the Akkoord of Groningen among the citizens of Groningen.

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