1. The Information and Services Economy a.k.a. Business Architecture and Services Science IS210, Week 7.5 Profs Bob Glushko & Anno Saxenian UC Berkeley School of Information Fall 2006

2. Today’s agenda 1.Why innovate? 2.What is innovation? 3.What is innovation in services? 4.Organizing for innovation Open innovation Democratizing innovation Creation nets

3. Why innovate? Because the world is flat... & competition is inevitable, sooner or later. => shorter product cycles, more innovators, more knowledgeable customers, much greater access to information

4. This is globalization 3.0 Globalization 1.0 1492-1800 Nations globalize for resources & imperial conquest Globalization 2.0 1800-2000 Companies globalize for markets & labor Globalization 3.0 2000-?? Individuals & small groups globalize: connecting all of the world’s knowledge pools together Thomas Friedman The World is Flat: A Brief History of the Twenty-First Century NY: 2005: Farrar, Straus and Giroux

5. The ten forces that flattened the world 1.8/9/95- Yahoo! IPO 2.Work flow software 3.Open-sourcing 4.Outsourcing 5.Offshoring 6.Supply-chaining 7.Insourcing 8.In-forming 9.11/9/89- fall of Berlin wall 10.The steroids

6. The triple convergence The net result: creation of a global, web-enabled playing field that allows for multiple forms of collaboration—the sharing of knowledge and work—in real time, without regard for geography, distance, or, in the near future, even language We have “new players, a new global playing field, and new processes and habits for horizontal collaboration”

7. What is innovation? Innovate (L. innovatus) to make changes, to do something in a new way; first use as transitive verb in English, 1548. Three steps to innovation: 1. Invention 2. Adoption 3. Implementation

8. What is innovation? “Real innovation is about more than the simple launching creation and launching of new products. It is also about..” Samuel J. Palmisano, 2006 How services are delivered How business processes are integrated How companies and institutions are managed How knowledge is transferred How public policies are formulated etc.

9. Services innovation Two kinds of services innovation: 1.Improve services productivity 2.Develop new service models Service productivity lags behind manufacturing productivity In 2003 (Indexed to 100 in 1997) manufacturing productivity: 219 grocery retail, wholesale, merchandise stores: 141 commercial banking: 102

10. Improving services productivity Eliminate or raise efficiency of labor 1.Self-service 2.Interactive voice response 3.Automatic provisioning 4.Converged networks (distribution channels) 5.Wireless communications

11. New Service Models Create new services or deliver services in new places 1.Remote delivery (e.g. telemedicine) 2.Service-enhanced products 3.Coproduction of value

12. Organizing for industrial innovation Closed innovation: successful innovation requires control, internally-focused R&D with clear firm boundaries, virtuous cycles of reinvestment e.g. Bell Labs, GE lab, etc. Open innovation: combines external and internal R&D into architectures and systems whose requirements are defined by a business model, blurs boundaries of firm research e.g. Silicon Valley, Hollywood, P&G

13. Comparing closed v. open innovation Closed innovation All smart people in the field work for us To profit from R&D must discover, develop & ship We can get to market first if we innovate First company to market with innovation will win If we create most and best ideas in industry, we’ll win We must control our IP Open innovation There are smart people outside & inside External R&D can create value alongside internal We need not originate research to benefit from it Building better business model more important than first to market We win if we make best use of internal & external We can profit from others’ use of our IP and benefit from theirs when appropriate

14. Democratizing innovation User-centered innovation offers great advantages over traditional manufacturer-centered innovation (concentrates innovation support resources on just a few pre-selected potential innovators) Users can develop exactly what they want, enhances motivation Users need not develop everything they need; they can benefit from innovations developed and freely shared with others Why are users’ abilities to develop high-quality new products and services themselves increasing so fast?

15. Toward democratization of design New, increasingly capable and steadily cheaper tools for innovation that require less skill and training to use => increased design capability Improving tools for communication make it easier for user-innovators to gain access to rich libraries of modifiable innovations and components that have been placed in the public domain =>enhances design possibilities Today users design sophisticated new products, services, music and art Open source software movement as key example

16. User-centered v. mfg-centric innovation Manufacturing-centric innovation: economies of scale User-centered innovation: economies of scope (due to heterogeneous information and resources in user communities) Manufacturers must integrate themselves into user- centric innovation model  Provide custom production or “foundry” services to users: faster, better, cheaper;  produce user-developed innovations commercially;  they can sell product-development platforms or sell other complementary products For information products, no manufacturer is required & general distribution occurs mainly through communities

17. Creation nets “Networks of creation” in which hundreds or thousands of participants from diverse institutions collaborate to create new knowledge, learn from one another, and appropriate and build on one another’s work—under guidance of a network organizer.  Rather than protecting and hoarding knowledge, offer to others to gain access to broader knowledge flows.  Opportunity to jointly create new knowledge and deliver innovations to market by collaborating closely with diverse people/institutions  Not joint ventures or arms-length technology licensing, but long-term, interactive relationships with networks of suppliers, customers, specialists, even amateurs

18. A process creation net e.g. Taiwan’s original-design manufacturers (ODM) relationships: laptops or cell phones involve myriad highly specialized component and subsystem vendors from different business ecosystems (disk drives in S’pore, lens designers in Japan, semiconductor designers in Taiwan, software engineers in Bangalore.) Network organizer as gatekeeper, selects partners, defines informal participation protocols (dispute resolution, performance measurement) and defines clear performance milestones yet allows joint learning

19. Coordination challenges Three primary challenges in creation process: 1.Accessing and developing highly distributed talent 2.Providing appropriate contexts for participants to come together and collaborate to experiment, tinker, and innovate (least actively managed) 3.Effectively integrating the creations of diverse participants into shared releases (most actively managed) Central importance of performance requirements and feedback loops to insure continuous improvement

20. Product development An iterative problem-solving (trial and error) process DESIGN BUILD RUN ANALYZE

21. Product development in new era 1.Rapid movement from concept to prototype (rapid prototyping) 2.Define early and frequent rounds of performance tests to learn quickly and adapt designs 3.Establish broad-based communications mechanisms to share performance data “Managers must move their focus beyond narrow efficiency gains …and embrace the possibilites that uncertainty creates.” J.S. Brown & J. Hagel (2006)