Harnessing the power of innovation through living labs

By Katharina Greve

Engaging with customers in the creation of new products and services is now of paramount importance for firms. Such a revolutionary approach can shorten the time to market and ensure a better fit between a company’s offer and market needs, two of today’s strategic imperatives to survive in progressively more competitive environments. In order to derive insights from customers, firms are experimenting with innovative organisational solutions: amongst them the use of living labs is increasingly capturing the interest of managers.

Success stories of co-creation are emerging across various industries, and involve both small and large firms. Organisations that are embracing this approach outperform the market, develop better products and place them faster onto shelves, provide superior service, and build deeper, more loyal relationships with their customers. For example, LEGO employs co-creation to successfully engage many of their adult customers in the design process of new products. Peter Espersen, head of global community co-creation at Lego explains “We have learned some big lessons. First, that creativity has almost no boundaries; people can do amazing things. Second, we can’t always predict what consumers want. [..] When you combine the idea of Lego with another strong community, and a fun one, that is rocket fuel in the engine - it really works.”

In spite of the term co-creation being now widely used, all co-creation is not the same. The catch-all term has meant that everything from crowd-sourced marketing ideas to general collaboration has been labelled as co-creation. This led many organisations to believe that they have practiced co-creation, when they actually have experienced a tactical (and often far less value adding) interpretation of the practice. Co-creation is not a tactical marketing method, nor is it just a synonym for collaboration. It is a way of innovating that can truly revolutionise how organisations work and address customers’ unmet needs. So what is co-creation exactly? Co-creation refers to collective creativity that results in something that is not known in advance. In essence it is the idea that organisations can be more successful by innovating with customer rather than for customer. In its purest form, co-creation suggests that customers are no longer at the end of the value chain, but take up a key role in the process of value creation.

In order to engage with customers in the co-creation process, the use of living labs has emerged as a new way to sustain competitive advantage. Living labs are open innovation platforms that enable systematic customer co-creation whilst integrating research and innovation processes in real life settings. One example is JOSEPHS – a living lab located in the town centre of Nuremberg in Germany. JOSEPHS offers an open innovation space where five companies display their product and service innovations for three months under one theme. This space is open to the public. JOSEPHS as facilitator encourages customers to try out products and services and then give feedback.

However, the understanding of how the co-creation process can be best facilitated is limited. To support managers pursuing this strategy and engage in a vibrant and growing academic debate, we conducted a study to identify factors that are critical to successful co-creation in living labs. The case JOSEPHS has been chosen for this study due to its set-up as a continuous platform for interactive innovation. The outcomes of this research are available through our webinar or monthly Cambridge Service Alliance paper, and as a podcast.

Supplying Innovation: unlocking innovation in the supply chain

Leading companies invest a lot on innovation and constantly ask themselves 'am I innovative enough to secure my leading position?' They have loads of internal innovation programs, covering a wide range of subjects from technology innovation to business model innovation. But these programs, in many cases, fail to generate expected value. Some of them start to think about the possibility of innovating together with other players in the supply chain. One obvious benefit of doing so would be the integration of capabilities and skills. But the contractual approaches make it almost impossible for large scales of integration. Just think, as a client, how can I share my knowledge, capabilities, data and information with my direct suppliers without any concerns?

Apart from limited innovation, the consequences of locking innovation internally in the companies are obvious. Knowledge and information are not integrated from companies in the supply chain, so that the services and solutions delivered to end customers may not be the best ones. Also, traditionally in the supply chain, it is output-focused instead of outcome-focused. Suppliers are only incentivised to deliver outputs based on service level agreements. They seldom focus on the value delivered to end customers. On the other hand, if innovation can’t be unlocked in the supply chain, the supply chain is not efficient. The stakeholders such as suppliers, contractors and clients, have to discuss back and forth several times before the final decisions.

In some industries in the UK, such as the utility industry, the regulator has triggered the change to unlock innovation in the supply chain. The regulator starts to direct the industry to be outcome focused and customer focused. Customer satisfaction and customer experience have been paid unprecedented emphasis. Companies are incentivised to explore new models to engage suppliers for innovation. One innovative trial is to form a strategic alliance, where suppliers / contractors, and the client companies can work together within one organization, and to jointly deliver services and solutions to end customers. Suppliers are contracted on outcomes instead of on outputs, so that they are incentivised to include end customers as key stakeholders.

The shift from output based model to outcome based model and the formation of a strategic alliance to engage suppliers and clients can bring benefits for key stakeholders. For customers, when suppliers are contracted on outcomes and get rewards when customer experience is improved, they will pay attention to end customers, so that customers are expected to get better services. For client companies, in outcome-based contracts, they can transfer some of the responsibilities and related risks to suppliers, and risks and rewards are shared with suppliers. And for suppliers, since they are contracted on outcomes, they will have certain flexibility to choose among possible solutions. In this situation, they are incentivised to innovate and to come up with more efficient and effective solutions.

However, the challenges and barriers are enormous. Partners in the alliance have different business models, and conflicts can arise when they are brought in under the same outcome-based model. Also, partner companies have very diversified backgrounds. Some of them may be competitors outside the strategic alliance, and some of them may not have smooth relationships previously. If trust and collaboration in the alliance are limited, failure can come very soon. When the whole industry is still output focused, extended suppliers may not have capabilities nor confidence to be contracted on outcomes. And if the atmosphere in the whole industry is not collaborative, it is challenging to form collaborative and trusting relationships.

I observed this new model closely and worked together with people from industry, aiming to unveil key points that can ensure the success of an outcome-based model with a strategic alliance approach where suppliers and clients partner with each other to deliver services and solutions to end customers.

What comes out of the research is that there are three areas that partners in the strategic alliance should work on. These three areas are commercial solutions, collaboration and operational design. A commercial solution that is accepted by all partners lays the foundations of working together. Collaboration ensures that partners start to integrate their skills and capabilities, and design and deliver solutions collaboratively. Process design aims to ensure the smooth operations of the strategic alliance.

Commercial Solutions

Since partners are measured against outcomes, an applicable commercial solution should address the risk and reward sharing mechanism and the benefit realization framework. The risk and reward sharing mechanism needs to solve these problems: how benefits and rewards are shared among partners based on contributions, how risks are shared among partners based on accountability, and to what extent the alliance should be measured against end customers’ outcomes. The benefit realization framework needs to solve the following problems: How to decide on the final solutions among many possible capital solutions and operational solutions; How to solve conflicts between return on investments and customer outcomes; and How to solve conflicts among partners regarding their preferences on solutions, etc.

Collaboration

Collaboration should be built from four aspects: strategic objectives, organizational culture, trust and communications. With shared strategic objectives, partners can work towards the same direction. A collaborative and innovative organization culture needs to be formed within the strategic alliance, collecting the best parts of partners’ organizational cultures. Trust can ensure that partners are willing to share data, knowledge and information, and trust other partners’ decisions. Consistent and efficient communication rules need to be followed, and educational communications will be helpful to deliver the concepts of outcomes and collaboration to every employee.

Operational Design

Operational design includes continuing education, information platforms, process design and metrics and measurements. Continuing education is important to ensure that employees understand the strategic objectives of the alliance and that everyone talks on the same tune. Information platforms help to integrate knowledge and capabilities from partners, and that data and information can flow efficiently. Also, data security needs to be addressed. Process design such as decision-making process, risk management process, culture change process, etc. can facilitate the smooth operations of the alliance. Metrics and measurements that measure the contributions of partners, behaviours of individuals, financial status and the achievements of outcomes also needs paying attention to in everyday operations.

The following figure summarises the key elements for successful alliance delivery of outcome-based projects. Firms that would like to engage suppliers for innovation can consider forming a strategic alliance, combining suppliers and client companies, while focusing on delivering outcomes to end customers. However, they should be fully aware of the challenges and barriers in this model, and carefully make decisions to ensure the success.

To find out more about this research and download the report and listen to a Podcast with the author click here.

Servitization and Service Innovation in China: Reflections from Shanghai

I’ve just spent a week in China, visiting the Southern China University of Technology (Guangzhou) and Ceibs, the international business school in Shanghai. While at Ceibs I participated in the first seminar on “Servitization and Service Innovation”. Attended by around 100 people, industrial speakers at the seminar included eCoal (an online coal purchasing platform), HP, Sevalo (a construction and mining equipment services business) and SKF. While Professors Marjorie Lyles (Indiana University), Chris Voss (Warwick Business School), Xiande Zhao (Ceibs) and I delivered academic presentations. It was a great trip, fascinating in so many ways, but I thought I might write a short blog about some of the themes that came out for me at the seminar. These include:

1.     The importance of technology to China - all the speakers talked about the way technology is changing China’s approach to business. They talked about all the traditional topics - cloud computing, big data, mobile, the need for better security. But they also talked about internet plus, China’s equivalent to Germany’s industrie 4.0 and the rest of the world’s internet of things. They recognise that as more and more devices are connected to the net, ever greater volumes of data will be created and these data can potentially deliver new and valuable business insights if analysed and interpreted correctly.

2.     Platforms were also a major theme - many of the firms that spoke, including many of those in the audience, were looking to create platforms, often to combine buying power and/or to utilize spare capacity. eCoal, for example, has created a coal buying platform which allows it to drive significant cost savings by pooling purchasing across multiple organisations. HP claimed to be the world’s biggest retailer of paper. With their print on demand services, where you pay per page rather than for the printer, HP is forced to buy large volumes of paper. But with large volumes comes the opportunity to negotiate discounts for bulk purchasing.

3.     One reason so many firms were interested in platforms was the massive success of China’s three stars of eBusiness - Baidu, Alibaba and Tencent (the Chinese refer to them as BAT). These three firms dominate China’s discussion of eBusiness and have all successfully created platforms, which in turn create multi-sided markets. Tencent, for example, offers users access to free online games, sells the eyeballs to advertisers, but also sells the players of games equipment upgrades. A dominant question underlying many of the comments at the forum, was how do we create platforms that will allows us to capture multiple, complementary sources of revenue for our businesses.

4.     We also talked about challenges of servitizing - the fact that having a strong product heritage or brand sometimes makes it more difficult to offer services. Interestingly a number of the speakers referred back to the roots of their organisations, obviously product of their firm’s history, but I wondered whether history also constrained their thinking about the future. SKF asked some fantastic questions about servitization. How do we persuade our customers to buy solutions from us before we have proved their value? Who buys services and solutions? Procurement is typically not structured that way. It thinks about products and categories, yet services and solutions often cross multiple products and categories.

5.     And finally we talked about enablers of servitization - what would make the transition to services easier. Through the course of the seminar I heard five key themes: (i) get inside the mind of your customer’s customer. Understand what is value to them, so you can better help your customer create value for their customer; (ii) to understand you need deep relationships - ask yourself are we really close enough to our customers; (iii) seek to balance control and collaboration in the ecosystem - not everyone needs to control or create a ecosystem. Sometimes you have to accept you are part of one and the best you can do is seek to influence it. Think about creating win-win-win across the ecosystem to drive change; (iv) learn from your experience, codify it and share it; and (v) think about solutions - SKF has created solutions factories where they can work with customers to solve their problems. Using your own ideas and technology collaboratively with the customer is a great way of getting inside their minds and building a deep relationship with them.

One of the great privileges of life as an academic is the opportunity to travel, to experience different countries and cultures. I never fail to be inspired when I go somewhere different and meet someone new. My latest trip to China was no exception.

Rethinking Competition and Collaboration in Ecosystems: Who Should You Work With?

One of the themes that keeps emerging in the work of the Cambridge Service Alliance is the importance of the ecosystem. We define an ecosystem as the wider network of firms and organisations that can or could influence the way the focal firm creates and captures value through the provision of its products and services. Members of this wider network might include, but are not limited to: collaborators, regulators, clients, customers and consumers, their stakeholders, suppliers and competitors.

Why does an ecosystem perspective matter? The first reason is that thinking about ecosystems encourages executives to take a broader view on the opportunities they face. This argument was first made by Moore in his Harvard Business Review article - "Predators and Prey: A New Ecology of Competition". As the boundaries between traditional industrial sectors break down organisations change the way the create value for their customers. Take a simple example - airlines. Are they in the travel business? After all their primary function is to transport people from A to B? Are they in the entertainment and catering business - they feed and entertain people while on their planes. Are they in the holiday business? Witness the emergence of BA and Virgin holidays. Are they in the telecoms business - think about in flight telecoms and wireless services. Even more extreme examples are seen in electronics and telecommunications. Phone companies now double as internet service providers. They offer on demand TV and video services. They are debating what else they can do given the cables they have running into your house. Utilities companies in general are blurring - water companies will provide gas and electricity. Gas companies will reduce the price you pay if you buy electricity from them as well. An even more radical example is provided by electric vehicles - some are exploring how they might be used as energy storage devices when not being driven. Boundaries between sectors are blurring and disappearing. As they do new opportunities emerge. Being constrained by a logic which says "we are an automotive firm" or "we are a pharmaceutical firm" simply limits innovation and creativity.

This theme of innovation and creativity is a second reason why ecosystems thinking is so important. Firms define often themselves in terms of their markets, customers and competitors. Yet one thing we have seen in our work is the increasingly complex nature of inter-organisational relationships. It is common to see firms competing for some contracts, while collaborating on others. IBM, for example, competes with software vendors such as Oracle and SAP, yet also installs Oracle and SAP systems when their customers want them to. BAE Systems partners with Babcock to deliver services at Portsmouth Naval Base, yet competes with Babcock for other MoD contracts. This complex and nested set of relationships raises some interesting questions. If you define another organisation solely as your competitor there's a danger you miss opportunities for innovation and collaboration. The car industry provides an excellent example. Many car manufacturers have close relationships with (or in some cases own) Dealer networks. They see the Dealer as the primary route to market and the obvious choice for all after-sales service and support. Yet there are loads of small, independent garages that offer vehicle service and support. Often customers prefer these independent garages - they are cheaper, operate with lower overheads and only use genuine original equipment spares when needed. Traditionally the automotive manufacturers have seen these independent garages as the enemy. They take work from the Dealer network, build direct relationships with the end customer and generally disrupt the industry.

But if you draw a broader circle and include these "annoying independent garages" in your ecosystem, you could - as an original equipment manufacturer - start to ask how might we collaborate with these independent garages? Should we offer to manage their spare parts inventories through consignment stocks? Should we provide them specialist tooling and equipment, creating a larger market for proprietary technologies? As the use of telematics and remote monitoring increases, should we - the original equipment manufacturer - sell the engine diagnostic data to independent garages to help them provide better service to their customers? Perhaps the original equipment manufacturer can create a more seamless, integrated and lower cost service for their customers by collaborating with their traditional competitors.

Its only when you start to challenges the assumptions that you hold about how your industry operates and where the boundaries lie that you start to think creatively about the opportunities that are open to you. Taking an ecosystem perspective and broadening your horizon is a great way of thinking about how you might innovate your business model.

GE, The Industrial Internet and the Battle to Come

During Cambridge Service Week this year we heard from Stefan Bungart, Leader of GE Software Europe. Stefan talked about GE's development of a new services platform - Predix. Think of the iStore, but for the industrial internet. GE's position is that it wants Predix to become an openly available platform that can host apps developed by others - apps that are used to remotely monitor and manage machines and equipment, indeed any device connected to the internet - hence the industrial internet.

You could argue that Apple, Facebook and Google have largely sewn up the business to consumer internet - they are the dominant platforms. Other platforms may emerge, but they face an uphill battle to overcome the incumbent players. The industrial internet, however, is still wide open. We don't yet have any dominant players and they may never emerge. However, manufacturing firms across all sectors recognise the way the world is moving. More and more devices are being connected to the internet. These devices are feeding data back to central control hubs and the best of these are using the data to make predictions about product performance and how this can be optimized, as well as using the data to inform future generations of product design. The question - hence the battle to come - is which firms will dominate the industrial internet.

GE has already declared its intent - in 2015 the Predix platform will be made publicly available. Jeff Immelt, Chairman and CEO of GE is quoted as saying "the more we can connect, monitor, and manage the world’s machines, the more insight and visibility we can give our customers to reduce unplanned downtime and increase predictability. By opening up Predix to the world, companies of any size and in any industry can benefit from the investments GE has made by eliminating the barrier to entry". What he doesn't say is what happens to the data that all of these devices generate as it passes through the GE platform. GE is reported to use 10 million sensors to monitor daily 50 million data points across $1 trillion of managed assets. The businesses order backlog is around $180 billion - a number that continues to grow as the installed base of GE assets and those that GE helps monitor increases in size. Will GE be the equivalent of Apple, Facebook and Google for the industrial internet or will someone else seize this market? Potential competitors from the software, applications and consulting industry might include IBM, Microsoft or Tata. From an industrial perspective the smart money might be on Hitachi, Samsung or Siemens. How about Apple, Google or Facebook? Can and will they make the transition to the industrial internet?

The jury's out on how this opportunity will develop, but one thing is clear. The battle for the industrial internet will heat up in the next few years. The potential for innovation and greater efficiency in product and service design, as well as operation and maintenance is too great. The winners of this race will have access to unparalleled data that if used insightfully will drive significant service efficiency and innovation. Firms will still have to deliver great service - they'll have to get the basics right - but they'll do so from a rich and data-informed position that will put them ahead of the rest of the pack and so confer significant competitive advantage.

Innovating Your Service Business Model: The Capabilities to Succeed

One of the themes we have been exploring in the Cambridge Service Alliance is the question of how organisations best innovate their service business models. In some of our early work, Ivanka Visnjic and I, developed a framework of 12 capabilities that underpin successful service business model innovation. Since then we have been developing and iterating this framework, creating a maturity model that firms can used to assess the maturity of their capabilities for innovating their service business models. It seemed to me that it would a good idea to write a series of blogs on this framework and the twelve capabilities that underpin it - so here's the first one - explaining the framework.

In essence our research suggests there are four categories of capability that really matter when it comes to innovating the service business model. These are: (i) the ecosystem; (ii) the value proposition; (iii) the value delivery system and (iv) accountability spread. Let me explain these in turn.

The first set of capabilities are concerned with the ecosystem - increasingly competition is taking place at the level of the ecosystem, not the individual firm. In today's interconnected economy, what matters is the way the ecosystem is configured and how your firm is positioned to capture value from it. Apple and HP illustrate the point. If you ask the question - "of the $1,000 someone pays for an Apple or HP machine, who gets the money" - you find that Apple keep 60-70%, while HP keep only 30%. Why the difference? Because Apple use their own proprietary operating system (they don't cede money to Microsoft), they use their own chip (they don't cede money to Intel) and they have created their own distribution infrastructure (they don't cede money to the retailers).

So what can HP do? It is too late for them to develop their own operating system or get into chip manufacturing. Both technologies are too well established, with large incumbent players and high barriers to entry. The cost of establishing a retail infrastructure, certainly a high street retail infrastructure, is prohibitive. But what they can do is invest in Linux. If HP help Linux become a more dominant operating system then Linux reduces Microsoft's power in the marketplace and hence their ability to appropriate value, leaving more of the money on the table for HP. And in fact, it is in the interests of all of HP's traditional competitors to increase the power of Linux. So if HP collaborates with other laptop manufacturers, then collectively they can try to shape the ecosystem and their ability to capture value.

It is not just the ecosystem perspective that matters. The second theme that we saw in our research was the importance of innovating the value proposition - really understanding what the customer valued and the outcomes they were looking for. There's an old Theodore Levitt quote - "customers don't want quarter inch drills, they want quarter inch holes".  We don't think this is right. Customers don't even want quarter inch holes. When innovating your value proposition you have to understand why the customer wants the quarter inch hole. If it is to hang a picture, then how else might the picture be hung - you could glue it to the wall. You could invite an artist in to paint the picture on the wall. The key to innovating you value proposition is to understand deeply what your customers really value.

Beyond the value proposition, the third category of capabilities centred on the value delivery system. Here we are shifting into the question of how do we configure the resources and activities required to deliver the value proposition. What should we do? What should we ask others to do? Many of the services firms deliver today require networks of organisations to pool their capabilities. Understanding the right network structure and identifying the right partners is essential when innovating the service business model.

Finally, we shift to capabilities concerned with accountability spread. Here the idea is that by taking on responsibility for the outcomes your customers want - you increase your risk and exposure. By innovating the value delivery system - either through technology or partnering with others - you may decrease the control you have over the ecosystem. Hence you have increased your accountability, but potentially reduced your control - hence you may have increased your risk or accountability spread. Understanding the implications of this and how the risk will therefore be managed is paramount if the service business model is to be sustainable.

These four categories of capability - ecosystem, value proposition, value delivery system and accountability spread - form the highest level of our framework for understanding business model innovation. In future blogs I'll unpack each of these categories in turn and explain the capabilities that underpin them.

Professor Andy Neely

Director Cambridge Service Alliance 

Innovation Festivals: A Source of Ideas

Last weekend was the global service jam - billed as 48 hours to change the world. Teams from 40 countries created 350 new service ideas across the course of a weekend - all themed on Hidden Treasure. Its an interesting concept - 48 hours to form - first a team (bear in mind participants have not necessarily met before and therefore can hardly be called a team at the start) - and second a new service idea. And the idea has to be documented and demonstrated. What a great way of engaging people in innovation.


I saw a linked piece in the UK's Guardian travel supplement recently. This time focusing on the innovation festivals that are sprouting up all over the world. Clearly the best known innovation event is TED (Technology, Entertainment and Design), but TED has sprouted a load of local TEDx events (independently organised TED events). I liked the Guardian article because it introduced a range of other innovation festivals, including Wisdom 2.0 in California, South by South West in Austin Texas, The Do lectures in Wales, 99% Conference in New York, Future Everything in Manchester, Likeminds in Devon, Vivid Sydney in Australia, North by North East in Toronto Canada and the unsubtly named World Domination Summit in Portland.


Its fascinating that social media, coupled with networking events are bringing people together simply to enjoy one another's company as they create new service ideas. Where does that leave service deign in organisations? If you have armies of volunteers offering their time and thoughts freely to one another, how do organisations compete with the collective wisdom of the crowd? In fact one could ask whether organisations should compete - maybe the time for open service innovation is upon us.

Andy Neely