The Next Frontier in Innovation: Services Innovation

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By almost all accounts, the economic future lies in services. Services represent a growing proportion of the world economy and account for a huge chunk of the U.S. GDP-by some measures, as much as 80 percent. At the same time, as Nicholas Donofrio noted in his address at IRI's 2010 Annual Meeting, technological innovation is becoming ever more diffi cult to sustain. (An edited version of Nick's address appeared in the November/December 2010 edition of RTM under the title "Exact Change.") We seem to be approaching a frontier, a point at which technical innovation will be still possible, but the rapid pace of commoditization will make it much more challenging.

At that point, Donofrio argues-and he's not alone-companies that intend to survive will be forced to turn to innovation in services. That may mean wrapping services around a product, as Apple has done with iTunes and the iPod and with the App Store and the iPhone. Or reimagining a product as a service, as cloud-based software-as-aservice fi rms have done, transforming one-time software sales into ongoing service contracts. Or creating entirely new service models, as ZipCar has done for the rental car business. Even companies that don't think of themselves as service providers will have to explore services to feed future growth. As the cover copy for Lance Bettencourt's Service Innovation: How to Go From Customer Needs to Breakthrough Innovations (2010) puts it, "businesses don't succeed by inventing a better mousetrap; they succeed by fi nding the best, most cost-effective way to get rid of their customers' mice." Increasingly, successful businesses won't sell mousetraps; they'll provide rodent relocation services.

Henry Chesbrough, a leader in the fi eld of open innovation, agrees. His January 2010 release, Open Services Innovation: Rethinking Your Business to Grow and Compete in a New Era, explores the intersection of open innovation and services innovation. (Chesbrough discusses open innovation and services in the interview with RTM Editor-in- Chief Jim Euchner presented earlier in this issue.) For Chesbrough, the continuing shift to a service-based economy means that even manufacturers will have to shift from product-centric to service-centric approaches to innovation. Only services can sustain differentiation in a competitive environment that commoditizes products almost as fast as they emerge. Chesbrough offers as an example the cellphone industry, where Motorola's RAZR fell to new entrants from Nokia, Samsung, and HTC-who were in turn displaced by consumers' growing demands for phones that provide experiences, in the form of additional services, such as GPS navigation, and countless applications to satisfy almost any need or whim. While they can also be subject to commoditization-one wonders if apps aren't themselves becoming a kind of commodity -services can offer a potent source of differentiation, Chesbrough argues, as customers come to value experiences over products.

Perhaps unsurprisingly, Chesbrough sees a key role for openness in this new frontier of innovation. Successful service innovations, says Chesbrough, will engage customers, partners, and third parties in co-creating innovations that deliver value for all. In a November 2010 webcast interview with Gary Hamel of the Management Information Exchange (the MIX Lab, online at http://www.managementexchange. com/), Chesbrough described his vision of a "services value web" that connects partners and third parties around the central goal of a complete customer experience.

Bettencourt shares Chesbrough's focus on the customer. Drawing both on Clayton Christensen's work and on Tony Ulwick's What Customers Want: Using Outcome-Driven Innovation to Create Breakthrough Products and Services (2005), Bettencourt also places the customer at the center of the innovation effort, suggesting that service innovators should focus not on the solution they intend to deliver, or even the solution customers say they want, but on what the customer wants to accomplish, the job to be done. …