Open Service Innovation at KLM:
Engagement, Organization, and Valorization
Master thesis, MSc Business Studies
Anttila, Kari M., 5931916 Supervisors:
Dr. Wietze van der Aa and Dr. Carolien de Blok
Amsterdam Business school, University of Amsterdam
Roetersstraat 11, 1018 WB Amsterdam, the Netherlands
Abstract
Innovations drive growth. A service provider being able to renew its service offering creates
competitive advantage over the other service providers. Regardless of the importance of services in today’s economy, service innovations research has remained rather scattered. Whereas the
innovation process used to take place within the boundaries of a single organization, increasingly organizations are opening up their boundaries to bring ideas in from outside, to develop those in collaboration with external parties, and to commercialize those through unconventional paths to the markets. This ‘open innovation’ phenomenon described by Chesbrough (2003) has been studied in the technology driven industries and increasingly in the service industries (see for example Chesbrough, 2011).
In this thesis, a framework for open service innovation is developed and case study research is conducted at KLM Royal Dutch Airlines to shed the light on issues relating to engagement,
organization and valorization of open service innovation.
Service development of KLM is argued to be different from the development of new technologies. It is much more outward focused and skewed towards the commercialization stage. This has implications for how the innovation is integrated into the KLM business and how it is further commercialized. The service development process of KLM is found to consist of ideation,
conceptualization and collaboration. Importantly, internal and external concepts and business models were found and the open service innovation was the synthesis of the internal and external
perceptions of partners. To make innovation work, this synthesis has to be mutually benefiting the partners to create a win-win situation.
To maximize the valorization of innovation, business integration and commercialization took place. Radical innovations were translated into integrable parts enabling business integration of service-process and service-product innovations. Further commercialization within aviation and cross industries was supported and the efforts of KLM were enchashed through ownership or other
mechanisms. Interpersonal relationships and trust were found to be essential for collaboration and in order to create something new, complementariness was embraced – on the project group as well as on the partner level.
The nature of open service innovation as multifaceted phenomenon with internal and external perceptions challenges both the practitioners who aim to manage it and the scholars who aim to study it. Acknowledgement that open (service) innovation cannot be approach by monism, but by dualism (or pluralism), where contradictions and complementariness can co-exists, is essential.
The conclusions chapter provides a summary of the literature reviewed and addresses the suggestions to scholars and the implications for managers based on the findings at KLM.
Foreword and acknowledgements
“I know that I know nothing” Socrates
This thesis is a part of the Master of Science in Business studies programme studied at the University of Amsterdam and it is written for the Amsterdam Centre for Service Innovation AMSI studying the open service innovation phenomenon in the Netherlands. This thesis contributes to a case KLM Royal Dutch Airlines, lead by postdoctoral researcher, Doctor Carolien de Blok.
I am grateful to Doctor Wietze van der Aa, the director of AMSI, and for Doctor Pim den Hertog, the research coordinator of AMSI, for inspiring me to study innovation, giving me the
opportunity to do this research for the AMSI, and for their advices and feedback during the research. For Carolien de Blok I owe my deepest gratitude of her support, advices, guidance, and of the
numerous hours which she has devoted to guide me and my fellow master student Georgios
Pantazis. The shared work done with Carolien and Georgios during the data collection and interviews is gratefully acknowledged.
Further on, I would like to thank all the practitioners at KLM and on the other sites visited, who have devoted their time to give interviews. Especially I would like to thank Ignaas Caryn, the director of KLM Corporate Venturing, for inviting us to have a closer look on their various innovation projects changing the future of aviation. Of the generous financial support for this master
programme and this thesis I am grateful to Kela the Social Insurance Institution of Finland,
Peräseinäjoen asukaslautakunta the Citizen Committee of Peräseinäjoki, and Liikesivistysrahasto the
Foundation for Economic Education. For my family and friends I address my gratitude of their unconditional support.
The views and opinions expressed herein in this thesis are those of the author and do not necessarily reflect the views of KLM, its subsidiaries and partners.
In Amsterdam on 21st of March 2010,
Table of content
Abstract ... 1
Foreword and acknowledgements ... 2
Table of content ... 3 Table of figures ... 6 Table of tables ... 6 1. INTRODUCTION ... 7 2. LITERATURE REVIEW ... 9 2.1. Innovation ... 9
Innovation as process on nested levels ... 9
Innovation and the role of a business model ... 10
Innovation as outcome ... 10 2.2. Closed innovation ... 12 2.3. Open innovation ... 13 Inbound options ... 14 Outbound options ... 15 Cobounds options ... 16 Degree of openness ... 19 2.4. Service innovation ... 21
Intangibility and interactivity of services ... 21
Approaches to service innovation ... 22
Tradability of service innovation ... 22
Six dimensional service innovation ... 23
3. CONCEPTUAL FRAMEWORK FOR OPEN SERVICE INNOVATION ... 26
3.1. Engaging in open service innovation ... 28
Innovating services ... 28
Size of a company ... 28
Context ... 29
3.2. Development of open service innovation ... 29
Assimilation ... 29
Demarcation... 30
Synthesis... 30
Implementation and business integration ... 30
Commercialization and encashment ... 31
Value generation methods ... 31
Tradability of service innovation ... 31
3.4. Perceived risk and control ... 32
Open innovation options ... 32
Radicality of innovation ... 32
3.5. Creating and maintaining equilibrium between the partners ... 32
4. METHODOLOGY ... 34
4.1. Case study design ... 35
4.2. Data collection ... 35 Documents ... 35 Interviews ... 36 4.3 Analysis ... 36 4.4. Reporting ... 37 4.5. Realization of research ... 37
5. CASE KLM ROYAL DUTCH AIRLINES ... 39
5.1. History of KLM ... 39
5.2. Airline industry ... 39
5.3. Industry trends ... 40
5.4. Current innovation projects at KLM ... 40
SkyNRG ... 41
Waste to energy ... 41
YourAirportTransfer ... 41
6. RESULTS ... 42
6.1. KLM engaging in (open) service innovation ... 42
Innovating services ... 42
Size of a company ... 43
Context ... 44
6.2. Development of (open) service innovation at KLM ... 45
Ideation ... 45
Conceptualization ... 46
Collaboration ... 48
Implementation and business integration ... 52
Commercialization and encashment ... 54
Value generation methods ... 54
6.4. Perceived risk and control ... 57
Radicality of innovation ... 57
Translating radical innovations into incremental innovations ... 58
6.5. Relation and trust building at KLM ... 58
Complementary people and partners ... 59
Believing in the innovation ... 59
Formalization of relation ... 59
Size of a partner and commitment ... 60
7. DISCUSSION ... 62
7.1. KLM engaging in open service innovation ... 62
Innovating services ... 62
Size of a company ... 63
Context ... 64
7.2. Development of open service innovation in synthesis ... 65
7.3. Integration of the open service innovation through valorization ... 68
Business integration ... 68
Commercialization ... 69
Value generation methods ... 69
Tradability of service innovation ... 70
7.4. Organization influencing on perceived risk and control ... 71
7.5. Maintaining the equilibrium between the partners ... 72
8. CONCLUSIONS ... 74
8.1. Summary of innovation theory ... 74
8.2. Summary of empirical findings... 75
8.3. Suggestions to scholars ... 76
8.4. Suggestions to practitioners... 77
8.4. Limitations ... 78
REFERENCES ... 79 APPENDIX 1: Open innovation options and tradability of service
Table of figures
Figure 1. Closed innovation. ... 13
Figure 2. Open innovation. ... 14
Figure 3. Coupled innovation in dyadic. ... 18
Figure 4. Innovation in networks. ... 18
Figure 5. Open innovation options. ... 20
Figure 6. Six dimensional service innovation. ... 24
Figure 7. Open service innovation. ... 27
Figure 8. Skewed innovation process. ... 63
Figure 9. Open service innovation at KLM. ... 67
Table of tables
Table 1. Inbound, outbound, and cobounds options. ... 17Table 2. Descriptions of interviews. ... 38
Table 3. Business environment. ... 45
Table 4. Ideation of innovations. ... 46
Table 5. Co-production of innovations. ... 49
Table 6. Conceptualization of innovations. ... 51
Table 7. Translating innovation for KLM. ... 55
Table 8. Business integration. ... 55
Table 9. Commercialization. ... 56
Table 10. Value generation from innovations. ... 56
Table 11. Relation and trust building in innovations. ... 61
Table 12. Open service innovation phases. ... 68
Table 13. Contradicting perspectives. ... 73 Table 14. Managing innovations. ... Appendix 2
1. INTRODUCTION
Innovation is increasingly the growth driver of economic growth (OECD, 2008, p. 15). In addition, services, contrasted to goods, constitute an increasingly important part in the economies of developed countries (Chesbrough & Spohrer, 2006, p. 35). Therefore it is remarkable that service innovations have not sought more research, resulting that scientific understanding of the service innovations has remained rather scattered (2006, p. 35). To enable the economies to capitalize and exploit advanced service innovations in the future, academic knowledge has to be further developed as interdisciplinary study including business, technology and socio-organizational aspects
(Chesbrough & Spohrer, 2006, p. 36; I. Miles, 2008; Spohrer & Riecken, 2006, p. 31).
Among the innovation scholars there is an ongoing debate about the issues as should
organizations continue to organize their innovation activities through vertical integration within their organizational boundaries, or should organizations open up their boundaries and make use of the resources and knowledge what can be found outside of the organization to (co-)initiate, (co-)develop and (co-)commercialize innovation in the ‘open innovation’ fashion (Chesbrough, 2003, 2006;
Chesbrough & Crowther, 2006; Chesbrough & Garman, 2009; Chesbrough, Vanhaverbeke, & West, 2006; Dahlander & Gann, 2010; Enkel, Gassmann, & Chesbrough, 2009; Gassmann, 2006; Gassmann & Enkel, 2004; Keupp & Gassmann, 2009; Pisano & Verganti, 2008; West & Gallagher, 2006).
To make these matters more complicated, scholars disagree whether the innovation theories tested in technology driven industries apply in the services or whether distinct theories are needed (Droege, Hildebrand, & Heras Forcade, 2009; Gallouj & Weinstein, 1997), because in service innovations, the technology is only one aspect to be considered among other more socio-organizational aspects (den Hertog, van der Aa, & de Jong, 2010; van der Aa & Elfring, 2002).
It is unclear whether the open innovation theory applies to the service innovations or do services yield distinct ‘open service innovation’ theory. To address this problem, research about service companies engaging in, organizing, and utilizing open innovation practices should be conducted. This would increase the understanding of scholars about the applicability of the open innovation theory in the service innovations as well as increase the mindfulness of managerial decisions in service companies whether open innovations practices recognized from technology driven industries can be applied in the service context.
The following research questions are addressed to gain comprehensive multilevel understanding about the phenomenon of open service innovation:
1. Why does a service provider engage in open service innovation? 2. How is a new open service innovation developed?
3. How is a new open service innovation integrated and commercialized, and how is value realized? 4. How risk and control of open service innovation are perceived by service provider?
To answer the research questions, case study research is conducted. Case study research is the most suitable research strategy to study the ongoing open service innovation phenomenon in its natural context. By using embedded single case study design, overall conclusions can be drawn on the organizational level from a few particular open service innovation projects. Evidence is triangulated from multiple data sources including documentation, and semi-structured interviews to provide strong evidence. Results are given answering the research questions and further elaborated in the discussion chapter.
The case company is KLM Royal Dutch Airlines, an airline company based in the Netherlands. KLM has had pioneering role in airline industry in terms of intercontinental and transatlantic flights, frequent flyer programs and alliance building with other airlines to name some. Green aviation, connectivity and mobility, ancillary services, and seamless travel are seen the focal future domains to pursue innovativeness. In this thesis, a closer look is taken on three open service innovation projects, namely SkyNRG and Waste to energy contributing to green aviation, and YourAirportTransfer service enabling seamless travelling.
This thesis is structured in the following way. This (1) introduction is followed by (2) a literature review starting by reviewing innovation as general phenomenon and how scholars recommendations how to organize and manage it have evolved over time. Subsequently attention is drawn on service innovations and the applicability of reviewed innovation literature on services is discussed. The literature review chapter is followed by development of (3) conceptual framework for open service innovation together with the research questions. Thereafter (4) the methodological choices made are discussed, including the justification of embedded single case study design choice to study the phenomenon. (5) The case KLM is described prior to the findings based on the publicly available data collected and analyzed. (6) Findings are based on several interviews conducted at KLM and among its partners. This thesis ends with (7) discussion and (8) conclusions. Conclusions are written in a
manner giving comprehend summary of the thesis and including suggestions for practitioners and scholars.
2. LITERATURE REVIEW
In this literature review chapter, the terminology is defined first. Innovation is argued to be a process consisting of three stages starting from idea generation, converging into development further on to be implemented and commercialized. Whereas the innovation process used to take place within the boundaries of a single organization, increasingly organizations are opening up their boundaries to bring ideas in from outside, to develop those in collaboration with external parties, and to commercialize those through unconventional paths to the market. This open innovation phenomenon has been researched in technology driven industries and it is postulated to have explanatory power in technology driven service innovations as well. However, the tenability of the model has to be further tested in services which are not technology driven. It is postulated that the type of service innovation and the possibility to make it tradable has impact on whether and how, open innovation practices can be utilized, not to mention other contingent factors.
2.1. Innovation
To be able to analyze innovation, some basic terminology is defined first. This is done by approaching innovation from different vertical levels of analysis as well as from horizontal process perspective identifying sequential stages in innovating. This approach is recommended by Crossan & Apaydin (2010, p. 1166) to gain a comprehensive understanding of the innovation phenomenon.
Innovation as process on nested levels
Invention stands for creating a new idea or practice in a particular context, but to become an innovation invention has to be adopted by a larger community (Denning, 2004, p. 15; Denning & Dunham, 2006, p. 48). Innovation includes invention, but invention is not innovation alone. Often inventor and innovator are even different persons (Denning & Dunham, 2006, p. 48). The inventor recognizes an opportunity and develops it into an idea or practice, but the innovator brings the invention to life in the community (2006, p. 49).
Parallel to the coupled role of inventor and innovator on the dyadic level, Kolb (1984) and Basadur, Pringle, Speranzini, & Bacot (2000, pp. 61-62) argue on the group level that whether the case is learning or problem solving, heterogeneity of a group enhances the overall performance. Kolb (1984) argues that individuals make use of different learning styles: whereas one is creative diverger, other one is assimilator, third converges and fourth one accommodates. Basadur, et al. (2000, pp. 61-62) apply a corresponding framework in problem solving and argue that problem solving starts from generating and conceptualizing ideas and developing those through optimization further into the implementation stage. Thus problems are better solved at group levels where different learning styles augment on each other. This implies that innovation needs multiple actors to succeed.
Innovation on the level of an organization can be seen as an aggregated outcome of the efforts of individuals and groups. Hansen & Birkinshaw (2007) argue that innovating in organizations can be conceptualized as a value chain starting from idea generation leading to conversion and finally to diffusion of the innovation. Chesbrough (2003, p. xxx) argues that whereas research and
development in firms are well acknowledged, less attention has been drawn to the diffusion and commercialization stage. He argues that it is the business model which ultimately determines the value of an invention and turns it into implemented innovation adopted by the community.
To sum up, the different levels of analysis introduced above have similar kind of phases starting from a stimulus, going through an evaluation and development phase ending with the implementation, diffusion, dissemination and/or commercialization phase. Individual and group level outputs serve as inputs for the organizational level of innovation in an aggregated fashion.
Innovation and the role of a business model
Above it was argued that invention becomes innovation when it is brought to the markets. According to Chesbrough (2003, p. 63), the commercialization takes place through a business model which determines how a technology or invention is converted into economic value. Frei (2008), in contrary, approaches the business model from the service literature arguing that a service model is the offering consisting of the funding mechanism, delivery employees and well articulated customer role which meets the need of a customer. In addition, Frei (2008) argues that a company should drive a couple of service models abreast as complements to each other to cover the selected market segments, instead of only focusing on one segment or trying to cover all segments. This implies that instead of one business model, organization might need several business models simultaneously to reach markets.
It should be further on recognized that the funder of the offering might differ from the actual buyer and the final user (Michel, Brown, & Gallan, 2008), making business models even more
complex. A business model and commercialization should not therefore only be considered pushed by the technology, but also pulled by the markets and needs of customers. This line of reasoning aligns with Crossan & Apaydin (2010, p. 1165) that innovation is not only matter of internal technology, but also about external sources of innovation including the needs of the markets.
Keupp & Gassmann (2009, p. 332) argue that some organizations seem to be better in
commercializing innovation whereas others are better in research and development. Generally in this thesis the resources based view (Barney, 1986, 1991) is being applied to explain why organizations do differ from each other and why one outperforms other. It is argued that organizations make use of their unique and immobile organizational skills and capabilities, which are imperfectly possessed in markets, in their product market strategies (Barney, 1986). This is to say that organizations differ from each other in terms of their valuable, rare, imperfectly imitable and non-substitutable resources which they held (Barney, 1991).
Innovation as outcome
Besides the process of innovation, the outcomes of innovation can be analyzed and categorized. Good starting point is to review the exploration versus exploitation dictomy introduced by March (1991). Exploration refers to a search of new alternatives and is characterized by uncertainty, whereas exploitation refers to utilization of what is already known and existing and therefore outcomes of exploitation are more certain and predictable. March argues that in order to
organizations to stay competitive, organizations need to exploit what they already have, but also explore new innovations. It is not, however, possible to excel the both simultaneously and organizations face constant trade offs between exploring and exploiting.
Other commonly applied categorization to differentiate innovation outcome types is presented by Gallouj & Weinstein (1997), refined and tested by de Vries (2006). These innovation outcome types include radical, incremental, ad hoc and architectural innovation. Radical innovations change the whole system whilst incremental innovations are more or less improvents (de Vries, 2006, p. 1042). Ad hoc innovation takes place through recognizing new innovation opportunities whilst architectural innovations recombine known dimensions (de Vries, 2006, p. 1042). It is worth of noticing, that all these innovation types are by definition explorative. This argument stems from the reasoning of Crossan & Apaydin (2010, p. 1165) that exploitation follows innovation which is always to some extent explorative.
Moreover, theoretical distiction is made between (service-)product and (service-)process innovations. Whereas a product innovation refers to bringing innovation to the market, a process innovation is referred to an innovation within an organizational process increasing effectiviness and efficiency of operations, but not necessarily visible to the customers. However, the distinction has been found empirically difficult to perceive (Droege, et al., 2009; Sirilli & Evangelista, 1998).
This differentiation between product and process innovation is argued to be most difficult in services (Sirilli & Evangelista, 1998). However, the distiction can be made from the agency theory perspective (see example Eisenhardt, 1989a). Assuming that resources of the organization are owned by a principal who appropriates rents, both a process and a product innovation benefit the principal, but the mechanism differs. In process innovation through improved effectiveness and efficiency the costs are lower, contrasted to product innovation where new sales and market shares yield higher earnings. The principal is better off in both situations motivating and legitimizing the engagement of agent with the innovation.
Similarly the different motivations for incremental and radical innovation can be answered from the agency theory perspective. In radical innovation, the expected returns are higher but so are the risks, contrasted to the incremental innovation where the risks are lower but so are the earnings as well. For agent working for principal who is paid based on the behavior it is better to avoid risky radical innovation, whereas outcome based contracts enhance the risk taking of the agent.
Therefore, the agency theory could be used to explain the different risk taking behavior between companies: large companies pay based on behavior, whereas small entrepreneurs pay based on outcome. This could explain the difference identified by Chesbrough (2003, pp. 18-19) between the incumbent large companies whom are better playing chess with their incremental innovations, whereas an entrepreneur driven start-ups play risky poker with their radical innovations.
Besides the shareholders, other stakeholders motivate organizations to innovate as well. Local communities, governments and other institutions pose their agendas which organizations have to comply in order to legitimize their operations. This line of argumentation, that organizations are embedded in a context which influences their decisions can be verified for example from
determinants how governance and resource allocation subsequently take place on a firm level. Other line of inquiry arises from Whitley’s (1992) business system theory which argues that the
effectiveness of particular way of doing business depends on the particular business system which firm is part of. More precisely, Whitley (2000) argues that the business system, the type of firm and the institutional environment are connected to the innovation strategies complied. This is not to endorse determinism, but to recognize that innovations can be motivated by many players and constrained by the context.
In short, innovation is reviewed here to consist of the initial idea, its development and
commercialization (Chesbrough, 2003; Hansen & Birkinshaw, 2007). To master all of these phases, multiple actors with complementary skills are needed (Basadur, et al., 2000; Kolb, 1984). Different types of innovation can be categorized according to how radical or incremental innovation is, whether innovation consists of a mix of new or unknown dimensions, and whether innovation is implemented in the internal processes or brought to the market (de Vries, 2006; Gallouj & Weinstein, 1997; Sirilli & Evangelista, 1998). Innovating is motivated by expected increased efficiency and effectiveness of operations, higher earnings from markets (derived from Eisenhardt, 1989a) or institutional environment (Whitley, 1992, 2000; Williamson, 2000). The higher the expected gains of innovation, the higher the risks are to bear (Chesbrough, 2003). Organizations differ from each other in terms of the different resources they posses (Barney, 1986, 1991), and this can explain the
variation among the companies in excelling different stages of the innovation process.
Hereinafter in this thesis the attention is drawn on how organizations used to innovate through vertically integrated research and development departments. It is identified that whilst this model has worked well in the past, organizations increasingly open up and bring ideas from outside to inside of the organization as well as place internal projects outside of the organization to be commercialized by others to enhance the innovativeness of organizations (Chesbrough, 2003).
2.2. Closed innovation
Chesbrough (2003) argues that each of the innovation activities used to happen in a closed fashion, that is, innovation activities took place within the boundaries of a firm and only internal resources were embraced. This is what Chesbrough (2003) calls the ‘closed innovation’ model. Closed
innovation refers to the firms which have vertically integrated their innovation activities (2003, p. xx). Firms do create their own ideas, develop those and market them by themselves subsequently (2003, p. xx).
Historically firms have been highly inwardly focused (Chesbrough, 2003, p. 21) and this vertical integration relates to the fundamental question whether the use of hierarchy and vertical integration is better than the use of transaction based market mechanism, dating back to the Adam Smith’s (1776) theory of division of labor. Coase (1937) answers this question by arguing that coordination can take place either through market or through hierarchy. There are transaction costs using market as finding out the relevant prices and drawing out the contracts, and in some cases
market contracts cannot even be written in ex ante due to the uncertainties. To legitimize the existence of vertically integrated research and development departments, the reasoning of Coase (1937) applies, that is, hierarchy was seen the most cost effective and powerful mean to co-ordinate innovation. Chesbrough (2003, pp. xx, 23) argues that generally hold assumptions about the
superiority of the internal vertical integration to realize innovation lead firms to create their own centralized research and development departments. The stages of closed innovation are depicted in figure 1. As can be seen, ideas are generated within the firm boundaries embracing internal
resources. Those ideas then converge into the development pipe. Only few of the developments are finally commercialized within the scope of the current business model of the company.
Figure 1. Closed innovation.
The described innovation model is often described as a funnel, starting from left with wide ranging research activities, creating ideas further to be selected for development and marketed through the current business model of the firm (Chesbrough, 2003, p. 30). This closed innovation model has worked rather well in the past as highlighted by the various technological breakthroughs. However, there have been fundamental changes in the economy which have eroded the foundation of closed innovation including better availability and mobility of educated workers, new diverse ways to commercialize inventions, presence of venture capital, knowledgeable suppliers and globalization (2003, pp. 34-40). In similar vein Gassmann (2006, p. 224) argues that globalization and economies of scale cannot be properly addressed by the closed innovation model (2006, p. 224). Further on, Gassmann (2006, p. 224) argues that technology intensity makes it hard for one player to master all advancements and at the same time technology fusion diminishes traditional Porterian industry borders (see Porter, 1979, about competive forces determining profitability of industry) and creates new ones (see for example the blue ocean strategy from Kim, 2004). New business models are created and new ways of leveraging knowledge are introduced in the world where one player cannot have all control (2006, p. 224). These changes yield for a more open innovation model, which
embraces besides internal resources also external resources.
2.3. Open innovation
Internal research and development have been the foundation of innovation and growth, but it does not hold in the new conditions of economy (Gassmann, 2006, p. 223). All knowledge needed no longer is located within the boundaries of a single organization, but is increasingly found from
outside as well (2006, p. 223). The locus of knowledge creation does not therefore always equal the locus of innovation (Gassmann & Enkel, 2004, p. 1). According to Chesbrough (2003, p. xxiv), ‘open
innovation’, contrasted to closed innovation reviewed above, stands for internalizing external ideas
and externalizing internal developments and using inside as well as outside paths to market. Chesbrough further argues that the value of technology is only realized through a business model which brings technology to market and feasible business model can differ from the one being currently used (2003, pp. xxiv-xxx). Opening up the boundaries of a firm to place external projects inside of the organization, to move internal projects outside of the organization or to co-develop projects, creates three different possibilities to open up and interact with the environment.
Whereas in closed innovation input for innovation came from inside of the organization, in open innovation the scan for ideas and research goes beyond the boundaries. In similar vein the development phase in open innovation embraces the co-development of innovation with external partners. Finally, whereas the output of the process in the closed innovation model was
commercialized within the current business model, in the open innovation model the
commercialization can take place through new business models and markets. These three open innovation options, inbound, cobound and outbound, are presented in figure 2. In this figure ideas are generated inside and outside of the organization, developed internally as well as in collaboration with external parties and brought to the market utilizing multiple channels.
Figure 2. Open innovation.
Inbound options
The concepts of inbound, cobound, and outbound are elaborated next. Opening up the firm’s borders to place project from outside to inside of the firm is called ‘outside-in open innovation’ (Chesbrough & Garman, 2009, p. 70), or ‘inbound open innovation’ (Chesbrough & Crowther, 2006, p. 229). Chesbrough (2003, pp. xxiv, 40) identifies sources of knowledge other than internal research laboratories, which lay outside of the boundaries of a company, including other companies, customers, suppliers, universities, national laboratories, consortiums, start-up companies and consultants. Enkel, et al. (2009, p. 6) highlight in-licensed patents and regional innovation hubs in addition. Especially customers have served a lot of research attention, including lead-users (von Hippel, 1986, 1994, 2001, 2006), crowdsourcing (Howe, 2008) or generally the mass collaboration (Tapscott & Williams, 2008). Plentiful sources to tap in outside of the organizations can be
Dahlander & Gann (2010) argue that inbound options can be divided in two groups, namely sourcing and acquiring, based on the criterion of pecuniary, that is, whether money is involved or not. However, in this thesis more fine-tuned categorization is applied based on the market versus hierarchy dichotomy of Coase’s (1937) discussed earlier. All the possible options are elaborated in table 1. A similar kind of distinction of ‘buy’ from market or ‘do’ by using hierarchy is tackled by Lichtenthaler & Lichtenthaler (2009, p. 1318), whom argue that knowledge can be either bought from outside or created inside. Unfortunately they do not develop their ‘make-or-buy’
argumentation further.
Applicability of the inbound options has received attention from researchers. Historically small and medium size firms have acted as knowledge creators and brokers having more inbound activities, but large firms are catching up (Gassmann & Enkel, 2004, p. 10). Generally all kinds of technology driven industries can enhance their knowledge base by tapping in outside knowledge (2004, p. 10). Modularity further increases the likelihood of using inbound options (2004, p. 10). In the low technology industry the motivation lays in the ability to differentiate offerings with loyal suppliers and customers to maintain competitiveness (2004, p. 9). These inbound options have sought most of the attention of scholars (Enkel, et al., 2009, p. 311), compared to outbound and cobound options introduced next.
Outbound options
Opening up the boundaries of a firm to place projects outside of the boundaries of firm is called
‘inside-out open innovation’ (Chesbrough & Garman, 2009, p. 70), or ‘outbound open innovation’
(Chesbrough & Crowther, 2006, p. 229). Chesbrough (2003, p. xxiv) argues that for internal ideas, external paths to market can be found, utilizing even different business models, profiting the
company. Chesbrough (2003, pp. 63-64) argues that technology does not have any value itself, if not combined with an efficient business model. Gassmann & Enkel (2004, p. 10) continue that the use of external paths to markets contrasted to internal paths is also faster. Outbound options are used to generate different ways of profiting from internal knowledge, including selling intellectual property (Enkel, et al., 2009, p. 8). Chesbrough, et al. (2006) includes licensing out, spinning-out and divesting as examples. Other options include brand leveraging, cross-industrial exploitation and establishment of technological standard through revealing information to the public domain (Gassmann & Enkel, 2004, pp. 11-12).
As in the inbound options, three groups are created to categorize the outbound options. This is more fine-grained categorization than the initial one from Dahlander & Gann (2010, p. 702), which only identified selling and revealing categories based on the criterion of pecuniary (see table 1). Similar to what was discussed about inbounds, Lichtenthaler & Lichtenthaler (2009, p. 1318) identify that firms make ‘keep-or-sell’ decisions about their knowledge, where ‘keep’ refers to the internal commercialization of knowledge and ‘sell’ stands for the external exploitation of knowledge in open innovation fashion. However, as identified in table 1, multiple oubound options exist besides selling.
Firms engaged in intensive research and development operations can outsource some internal parts to outside vendors, motivated by the sharing of the cost of research and development
with other firms (Gassmann & Enkel, 2004, p. 11). Use of outbounds have sought lesser research attention compared to use of inbound options (Enkel, et al., 2009, p. 311).
Cobounds options
Besides inbounds and outbounds, Gassmann & Enkel (2004) and Enkel, et al. (2009) acknowledge that there are coupled processes, which stand for combining inbound and outbound processes to enable co-creation of innovation activities. These cobound options are used to partner with allies to mutually gain access to complementary knowledge needed (Enkel, et al., 2009, p. 313). These cobounds relate to collaboration and joint development in open innovation processes (Gassmann & Enkel, 2004, p. 12) or as Chesbrough & Schwartz (2007, p. 56) state: “co-development can increase
the return from internal R&D by leveraging a partner’s capabilities”. Gassmann & Enkel (2004, p. 12)
argue that important determinant of the success of cobound is the balance in in-sourcing and out-sourcing, or as they state “integrating external knowledge and competencies and externalizing own
knowledge and competencies” (p. 13). This refers to Chesbrough & Schwartz (2007, pp. 57-58)
argument that in order for the cobounds to be successful, the business models of partners need to align creating win-win situation. On intensive levels of collaboration, learning takes place (Gassmann & Enkel, 2004, p. 12).
Cobounds can take different forms; including alliances and joint ventures and different kind of consortia (Enkel, et al., 2009, p. 313; Gassmann & Enkel, 2004, p. 12). Different parties include peers, consumers, lead users, universities or research organizations and partners form other industries (Enkel, et al., 2009, p. 313). Similar to the discussion of pecuniary of Dahlander & Gann (2010), Pisano & Verganti (2008, p. 6) argue that designing incentives to engage players is important. These range from intrinsic non-pecuniary incentives as recognition and visibility to extrinsic
incentives as pecuniary monetary rewards.
In this thesis, co-bound options are differentiated on several levels (table 1). The first distinction is whether co-development includes a few or many players, that is, two or a few players stand for dyadic relationship whereas more players create a network. The second distinction is based on the categorization of non-pecuniary, transactional, contractual and hierarchical options.
Contractual option is a new category applied here to characterize those options which are long term, but cannot be directly be bought from the market nor are vertically possible to integrate. Alliances and joint ventures and are typical examples of dyadic cobound options where a few player are involved (see graphical presentation in figure 3). If many players are involved, other options to manage collaboration are available (see figure 4). The term ‘hierarchy’ refers here to the vertical (dis)integration of activity and not to the power of one player over the other in the option chosen.
The use of cobound options is motivated by learning aspects and industrial standard setting and accessing complementary resources (Gassmann & Enkel, 2004, pp. 12-13). De Faria, Lima, & Santos (2010) find that companies which collaborate more are often from technology driven industries, able to manage inbounds and appropriate knowledge from outside of their boundaries, engaging in innovation within their industry and with their suppliers.
Table 1. Inbound, outbound, and cobounds options. Co b o u n d s N et wo rk ( m an y) Non -p e cuni ar y sou rci ng opt ion s ar e t he o pe n co llab o ra ti o n m o de ls o f i nn o va ti o n m al l o r i nn o vat io n co m m un it y a s ide nt if ie d by P isa no & Ve rg an ti ( 2008) . W he re as b o th we lc o m e a ll the p o ss ib le p ar ti es to jo in, inn o vat io n m al l i s ho st ed an d su pe rv ise d by ini ti at ing co m pa ny e xe rc isi ng a ut ho ri ty wh er ea s in inn o vat io n co m m un it y t he c o nt ro l a nd p o we r is sh ar ed equ al ly am o ng t he c o llab o rat o rs. The se o pe n s o ur ci ng o pt io ns a re e sp ec ial ly u se ful , i f i t is n o t k no wn who co ul d po ss es the n ee d ed kno wl edg e (P isa no & Ve rg an ti , 2008, p . 3) . C ont ract ual opt ions ar e t he c lo se d co llab o rat io n m o de ls o f e lit e c ir cl e a nd c o ns o rt ium a s ide nt if ie d by P isa no & Ve rg an ti ( 2008) . P ar ti ci pa ti o n is no t o p en to al l, b ut m em be rs ar e r at he r inv it ed to jo in. In e lit e ci rc le o ne p o ss es a ut ho ri ty a nd t he re fo re t h e p o we r am o ng t he m em be rs is un equ al ly d iv ide d, whe re as in co ns o rt ium s the g o ve rna nc e i s fl at a n d po we r i s sh ar ed am o ng t he p ar ti ci pa n t. S el ec ti ng c lo se d m o de l te nd s to inv o lv e f ewe r p lay er s an d as su m es tha t i t i s kno wn whe re t he n e ede d kno wl edg e r esi de s (P isa no & Ve rg an ti , 2008 , p . 3) . T he se a re e xpl ic it ly r e fe rr ed to be c o nt rac tua l o p ti o ns , b ec au se u si ng t he se y ie lds lo ng t er m a gr ee m ent a bo ut wh at is ai m ed to a chi ev e. D yad ic ( a fe w) C ont ract ual opt ions inc lud e a lli an ce s, whi ch ar e lo ng t er m c o llab o ra ti o n ag re em ent b et we en pr im ar ily t wo p ar ti es. Thi s co llab o ra ti o n is hi ghl ig ht ed in fi gur e b el o w. Al lian ce s ar e hy po the si ze d to be b et te r o ff if c le ar g o al s can b e se t. T hi s is to sa y t ha t a c o nt ra ct c an be d rawn whe re a c o m m o n go al is ide nt if ie d an d the re sp o ns ibi lit ie s ho w t o a chi ev e it a re , a nd c an b e, ar ti cul at ed. H ie rarchi cal opt ions inc lud e jo int v en tur es, whi ch st an d fo r a n est ab lish ed o wn le gal e n ti ti e s whe re m ut ua lly a gr ee d re so ur ce s ar e b ei ng p lac es un de r sh ar ed co nt ro l. J o int v en tur e c an a cc o m pa ny it s o wn inn o vat io n p ro ce ss , i n co rpo ra ti n g o wn ide a ge ne rat io n, d ev el o pm ent a nd c o m m er ci al iz at io n . It is po st u lat ed in t hi s the si s tha t i nn o vat io n pr o je ct c ha rac te ri ze d b y vag ue ne ss a nd un ce rt ai n ty is b et te r to a dd re ss ed th ro ug h est ab lish m ent o f jo int v ent ur e. A jo in t v ent ur e ha s it s o wn ent it y a nd o wne rs can e xe rc ise o ng o ing c o nt ro l o n the d ir ec ti o n o f th e v ent ur e de pe nd ing o n the ir s ha re o f o wne rsh ip. Ou tb o u n d s Non -p e cuni ar y re ve al ing opt ions st an d fo r u n ve ili ng inf o rm at io n to p ub lic do m ai n fo r f re e. H o we ve r, thi s can b e a s tr at eg ic de ci si o n, whe n a co m pa ny ai m s to a dv an ce f o r exam pl e f av o rab le st an da rd se tt ing . Trans act ional opt ions us ing m ar ke ts inc lud e se lli ng it se lf , a nd li ce ns ing -o ut , b ran d le ve rag ing a nd cr o ss -i nd us tr ia l co m m er ci al iz at io n thr o ug h co nt rac ts. H ie rarchi cal opt ions inc lud e t h e f un da m ent al ve rt ic al d isi n te gr at io n de ci si o ns a s sp inn ing -o ut o r di ve st ing p ar t o f a co m pa ny . In b o u n d s Non -p e cuni ar y sou rci ng opt ion s m ak e us e o f c us to m er s, su pp lie rs, u ni ve rsi ti es, r eg io na l inn o vat io n h ub s an d co m pe ti to rs. The se o p ti o ns can no t b e s im pl y b o ug ht in fr o m the m ar ke t o r int eg rat ed ve rt ic al ly in to h ie rar chy , a nd the re fo re o rg an iz at io ns h av e t o fi nd o the r way s to t ap int o t he se so ur ce s. Trans act ional opt ions r ef er t o as su m pt io ns t ha t i d eas c an b e bo ug ht f ro m t he m ar ke t a nd br o ug ht ins ide o f t he o rg an iz at io ns u si ng li ce ns ing -i n, kno wl edg e b ro ke rs o r co ns ul tan ts, tha t i s, a co n tr ac t can b e m ad e a nd a p ri ce s e t f o r the u se o f o pt io n. H ie rarchi cal opt ions im pl y ve rt ic al int eg rat io n o f t he t wo o rg an iz at io ns . Acq ui ri ng a nd sp in -i ns f al l i nt o t hi s cat eg o ry , be cau se o f the u se o f t he se o pt io ns a ss um e i nc o rpo rat io n o f o ut si de o rg an iz at io n int o o wn int er na l h ie rar chy . No n -p ec u n ia ry so u rci n g a n d revea lin g o p ti o n s Tr a n sa cti o n a l and con tr a ct u a l o p ti o n s H ier a rch ica l o p ti o n s
Figure 3. Coupled innovation in dyadic.
To summarize, cobounds enable co-creation of innovation and can involve either two or more parties. Alliances are characterized as ‘contractual options’ whereas establishment of own entity as joint ventures is ‘hierarchical option’. Innovation systems where multiple players are engaged can be described in terms of how open the system is and whether one exercises authority over other players.
Degree of openness
The literature reviewed has showed various forms of how open innovation appears in technology driven industries. These are presented together in figure 5 and summarized hereinafter.
To enable organizations to enrich their innovativeness, in addition to the internal idea generation organizations source ideas from customers, suppliers, universities, regional innovation hubs and from competitors. Further on companies are able to license-in and buy ideas from knowledge brokers and consultants, or lastly incorporate outside organizations in their internal organization by acquiring and spinning in start-up companies.
On the other side multiple channels to commercialize inventions can be identified besides bringing those on the conventional market of the firm. Some inventions are better off to reveal in order to advance standard setting. Through transactional means firm can sell, license out, or use cross-industrial commercialization to maximize revenues. In some cases part of the organization is better as spin-out a start-up company where equity stake is maintained or lastly better off as totally divested.
On the collaboration side the amount of the players enables and constrains different forms to emerge. Hierarchical joint ventures enable joint investments to develop innovation in interest of both parties whereas alliances are more described as long term contractual agreements. Depending whether one has control over others and control over who are in the network, multiple divergent forms of collaboration can be identified. Options to select from to enhance innovation are abundant.
However, the suitability of open innovation model is not absolute. To make matters worse, some scholars have identified negative implications as well, resulting from the adoption of open innovation model. For example West & Gallagher (2006, p. 329) hypothesize that the coordination costs of integrating internal and external options can be higher than internalizing activities in the first place. This is further confirmed by Keupp & Gassmann (2009, p. 338), who argue that too much open innovation can actually not be feasible due to the higher search and transaction costs, protecting intellectual property from the appropriation of externals hinders the applicability of open innovation practices, and it is a managerial challenge to reconfigure the search activities of the firm. In the words of Dahlander & Gann (2010, p. 705): “While there may be an initial positive effect on openness,
firms can over-search or come to rely too heavily on external sources of innovation.” Open
innovation can therefore result lost in knowledge, introduce higher coordination costs, result loss of control and create higher complexity to generally manage (Enkel, et al., 2009, p. 312). Companies engaging with open innovation because of the other companies have benefit from openness in the
past, runs also with the risk of blindly praising a management fashion or fad (Abrahamson, 1991) which might bear for a particular company more risks than returns. The open innovation model appears to be more complex than initial inquiries have proposed and the question of Dahlander & Gann (2010, p. 706), “why do some companies profit more from openness than others?”, becomes very relevant.
Technology driven open innovation enthusiasm, seen as in terms of a case evidence of scholars reported mainly from technology based firms, has to be further on placed in its context. Technology is not the only one building block of innovation, but one among other building blocks including skills and knowledge, managerial system and not to mention values and norms as
recognized by Leonard-Barton (1992, p. 114). Also Gopalakrishnan & Damanpour (1997, p. 19) find in their innovation review that besides technical innovations, there are also administrative innovations relating to more social aspects of innovation. Where technology is absent and other aspects
dominate, the reliability of the open innovation model can be questioned.
Closed innovation and open innovation are then better to be seen as a continuum than a dichotomy. Chesbrough (2003, p. xxvii) argues that the preferred extent of openness depends on a particular industry. Pisano & Verganti (2008, p. 7) continue reasoning that the best collaboration mode evolves as strategy evolves. Preferred extent of openness therefore depends on the industry as well as on a particular strategy pursuit. On the continuum of openness and closeness, it is better thereby to avoid the very extremes (Enkel, et al., 2009, p. 312).
The reviewed open innovation literature has shown various options to tap into external sources of knowledge and how companies are better off using multiple ways to appropriate from their innovations. The applicability of the open innovation model is argued to depend on a particular industry and on the company strategy. Too much openness can also backfire. Keeping these constrains in mind, hereafter the applicability of open innovation model in services is outlined in order to conceptualize an open service innovation model.
2.4. Service innovation
The focus of reviewed innovation literature above has been mainly technology and partly knowledge driven and the basic question of how to commercialize new technological breakthroughs whether internally or externally invented has implicitly driven the analysis. However, this analysis becomes incomplete if applied in the context of services. Despite that information and communication technologies have become tightly interwoven to the fabric of organizations (Zammuto, Griffith, Majchrzak, Dougherty, & Faraj, 2007, p. 760), and even though some scholars argue that the growth of the service sector is driven by the service innovations enabled by the very ICT (I. Miles, 2008, p. 123), it is acknowledged in this thesis that in services, technology is only one dimension among other dimensions of service innovation building on the research of den Hertog (2000), van der Aa & Elfring (2002) and den Hertog, van der Aa, & de Jong (2010).
In the following section services are first defined followed by the review of different schools of thoughts about service innovation. It becomes apparent that the tenability of the service
innovation theories is determined by how services are defined in the first place. Hence, the factors influencing on the service innovation are identified here. It is argued that whether service
innovations can be marketed and traded like goods is important factor affecting how applicable the previously reviewed innovation framework is, especially in terms of open innovation.
Intangibility and interactivity of services
There are plentiful ways to define services. Useful starting point is, however, to define what services are not. I. Miles (2008, p. 116) refers to the fact that services used to be in the United State based national classification system the residual class for all the industries which did not produce or
manufacture something tangible. Services are therefore characterized by intangibility referring to the transformation in the state of entity including goods and people (2008, p. 116). Another criterion identified by I. Miles (2008, p. 116) is the interactivity referring to the nature of service delivery often taking place in close interaction with the customer shaping the outcome of service. The interactivity is also captured by Frei (2006, 2008), arguing that if the heterogeneous customers are an integral part of the service offering serving as input for the service delivery process, then services can only be delivered in interaction with these customers to accommodate that variability introduced by them to the delivery process.
Listing service characteristics reveals unique service dimensions in terms of intangibility and interactivity, distinct from goods. Service character lists of Chesbrough & Spohrer (2006, p. 37), de Jong & Vermeulen (2003, p. 845), Fisk, Brown, & Bitner (1993, p. 68), Gallouj & Weinstein (1997, pp.
540-541) and I. Miles (2008, p. 117) to review some, include somewhat same aspects: services need to be produced close to the customer characterized by inseparability, cannot be stored due to the intangible nature and usually have to be consumed same time as produced and are therefore perishable yielding further on decentralized organization structure. Information and knowledge play a huge part in the process in terms of prior knowledge held by customer and supplier and how through the interaction and exchange, knowledge is being transformed or newly created. Knowledge is being applied to change and transform the state of physical artifacts, people or symbols. Due to the knowledge intensity, applications of information and communication technology can be highly valuable. Some services are tailored and heterogeneous, whereas others are standardized and homogenous. Whether public or private provider and whether offered to individuals, businesses or governments further distinguishes different service provisions. The question arises whether it is even purposeful to develop uniform definition to describe services, because services by definition vary so much.
Approaches to service innovation
How are services innovated and do earlier reviewed innovation models apply in services is a relevant inquiry taken the diverse nature of the services. Droege, Hildebrand, & Heras Forcade (2009) review the work of Gallouj & Weinstein (1997) about the four distinct schools of service innovation research.
(i) Technologists argue that technology, especially information and communication technology, plays
critical role in the service innovation (Droege, et al., 2009, pp. 133-134). This view, seemingly plausible in terms of knowledge intensity in services, has been criticized not to acknowledge other non-technological innovation (2009, pp. 133-134). (ii) Assimilation school argues in similar vein with technologists that innovation theories from manufacturing simply apply to services (2009, p. 134). These two schools are often therefore treated together. (iii) Demarcation school of thought, in contrast to the two previous ones, hypothesizes that services are by definition different from goods and distinct service innovation theories are therefore needed (2009, pp. 134-135). (iv) Lastly, scholars in favor for synthesis approach try to knit the service and manufacturing approaches together and represent convergence school of thought, where goods increasingly have service characteristics and vice versa (2009, p. 135).
Tradability of service innovation
In this thesis a contingency approach is applied following the research stream of Storey & Hull (2010) acknoledging that whether similar or different theories apply from products to services, it is highly dependent on the type of services being analyzed in the first place. Hereafter it is argued that what is called ‘tradability of service innovation’ is important factor in analysis whether assimilation,
demarcation or syntesis approach fits the particular service innovation.
Storey & Hull (2010) argue that employing either personalization or codification strategy evokes different kind of organizational design in services. Personalization strategy is characterized by the use of tacit knowledge in highly interactive service delivery processes where standard solutions are not available (2010, p. 142). Codification strategy, on the other hand, makes use of explicit knowledge and standardized processes (2010, p. 142). The challenge to codificate is well articulated
in concepts as sticky information (von Hippel, 1994) and replication as strategy (Winter & Szulanski, 2001), that is, some knowledge resists codification and only resides in tacit form. According to Storey & Hull (2010, p. 143), codification strategies make often use of information technologies.
I. Miles (2008, p. 115) argues that technology driven service industries converge towards technology driven manufacturing industries in means of formalized and centralized research and development departments, however, the rest of the services are structured differently, not fitting in this technologist innovation model.
It is here postulated that more fundamental distinction can be applied in services covering the both aspects of codification from Storey & Hull (2010) and technology depency from Miles (2008), that is, whether service innovation can be made tradable or not. This stems from Araujo & Spring (2006) fundamental reasoning that if services are ‘objectified and bounded entitities’ , those are tradable on the markets like goods. This implies that a service innovation can be tradeable, if possible to codify and objectify into own entity prior to the transaction. Naturally services exploiting technology has had to be codified prior to the use of the technology. Whether service innovations can be codified, objectivied and traded, contrasted to interactive, intangible and sticky personalized service innovations, depends on the degree of tradability. This degree of tradability is argued to mediate the applicability of open innovation options reviewed, that is, higher the tradability more likely the usage of transactional options are, contrasted to for example to the use of more hierarhical options in less tradable service innovations. Next, the service innovation dimensions, the trajectories where innovation can occure in services, are identified.
Six dimensional service innovation
Droege, et al. (2009, p. 137) argue that there is no consistent classification system for service innovations. They review different classifications developed by scholars over the years and conclude that there is no unified view. The underlying difficulty of classifying seems to stem from the (service-)process versus (service-)product innovation dichotomy and whether service innovations take place in process, product or both dimensions (2009). Empirical relevance of many of the conceptual models remains to be seen (2009, p. 141). What can be agreed, however, is that service innovations tend to take place in different service innovation dimensions (2009, p. 137). This provides useful viewpoint to approach service innovation.
Gallouj & Weinstein (1997) together with de Vries (2006) provide a good starting point to analyse service innovations with their their vectoral model. This formal representation enables to argue that service characteristics which are the outcome of the service, are the result of utilization of and interaction between competencies and technologies of service provider and its network partners in combination with the competencies and technologies held by customer. Thereby, to enable successfull services, the service provider has to be competent and utilize its technology, possibly together with partners who posses different competencies and technologies. Due to the interactive nature of services, also the customer has to be a competent user of that particular service and more often has to posses technology and skills to make use of a channel through which service is being provided. Gallouj & Weinstein (1997) and de Vries (2006) make a good synthesis, but the explanatory
power of model diminishes if services are not technology driven. A more applicable approach is needed.
Droege, et al. (2009, p. 137) and I. Miles (2008, p. 122) identify the work of den Hertog (2000) from the demarcation school. Den Hertog (2000) finds four service innovation dimensions where innovation can take place either in individual dimension or in a combinatory fashion of dimensions. This analysis is further on advanced into its current six dimensional form building on the work of van der Aa & Elfring (2002) and others. In the latest conceptual paper, den Hertog, et al. (2010) identify altogether six different dimensions where service innovation can take place (inner circle in figure 6):
(1) New service concept defines the solutions to a problem. (2) New customer interaction refers to
the customer or client as co-producer and co-developer of service innovation. (3) New business partner or new value system highlights the importance of other players in the network due
innovating and providing services often engages multiple players. (4) Service innovation often needs a new business model in order to be successful and particularly in networks, allocating costs and profits to different actors rightfully is crucial. Anew delivery system consists of (5) organizational delivery system including personnel, organization and culture and of (6) technological delivery system incorporating information and communication technology as enabler and enhancer of new service offerings. Service innovation is then “a new service experience or service solution that consists
of one or several of the […] dimensions” (den Hertog, et al., 2010, p. 494). Authors further on argue
that in order to realize these dimensions, dynamic service innovation capabilities are needed (outer circle in figure 6). In this thesis these are simply referred as service innovation processes.
Figure 6. Six dimensional service innovation.
In this chapter, multiple ways to approach services and service innovation have been identified. Intangibility and interactivity were throughout the literature identified to characterize the nature of services: intangible services are provided on the moment of delivery shaped by the interaction with
customer. Further on, whether service innovation lends itself for codification and replication resulting tradable service innovation, is another distinct character.
The explanatory power of innovation theories from different disciplines seems to be determined by the very definition of services. If services are defined technology driven and are tradable, innovation literature from manufacturing industries has a say. However, if technology is absent, the former analysis can turn out to be incomplete. Applicability of open innovation model in services yields further research to come to the solid conclusion.
Whereas no uniform definition fits the whole spectrum of services, contingency theory seems most plausible. In this line of inquiry, the six dimensional service innovation model, where innovation can take place in some or all of the dimensions, seems to provide valid foundation for prior classification of a particular service innovation. The following chapter synthesizes reviewed literature from the open innovation and from the service innovation and conceptual model for open service innovation is developed.
3. CONCEPTUAL FRAMEWORK FOR OPEN SERVICE INNOVATION
In the literature review innovation has been identified to be a complex phenomenon. In this chapter the open service innovation framework is postulated and outlined. In the above literature review the change from closed innovation model praising vertically integrated research and development departments towards exploration and exploitation of external resources in the open innovation fashion was identified taking place in manufacturing and technology driven industries. In the open innovation the idea generation stage can be enhanced by tapping into external knowledge through inbound options, development can take a collaboration stance to complement resources, and lastly commercialization does not only have to happen through conventional business models but through various outbound options. Four categories of options were identified, namely non-pecuniary
sourcing and revealing, transactional buy and sell, contractual long term alliances, and lastly hierarchical options including investment, divestment and establishment of joint ventures. The extent of openness is argued to depend on particular industry and company strategy, and careful balancing of different options is needed not to surpass the benefits of openness with higher search and coordination costs. Services, contrasted to goods, were characterized by interactivity and intangibility which hinder codification and tradability. Depending on how services are described, innovation theories from manufacturing and goods either apply or not. Thus, if service innovation is technology driven, immediate convergence can be postulated with the open innovation, where as in other service innovations the convergence is less evident due to the lack of available insights from current literature.
In this chapter a model for an open service innovation is outlined. As identified, the reasons to engage with open innovation have to be well grounded in order to innovation to be successful and mutually benefiting. The service provider is therefore postulated to balance between push and pull factors to organize innovation in an open fashion.
Push factors include motivation of shareholders, employees, and other stakeholders of the institutional environment to innovate and the service provider’s assumptions about the best way of organizing particular innovation project through a closed or more open model. Pull factors include the assumptions of how innovation project benefits the service provider and how innovation is integrated back to its operation. How easy this integration is, is postulated to depend on how much control the service provider has over the open service innovation project. Control and risk are often connected, and sharing risk with others can result that the locus of innovation drifts farther from the organization and becomes harder to control.
Further on, organizing open innovation is not only a question of what form suits the service provider the best, but what suits the particular open service innovation project best and do other parties agree on how open service innovation should be organized. In other words, to keep all parties involved, the open innovation has to be seen beneficial by all the parties involved creating a win-win situation.
