21 July 2016

Harnessing the power of innovation through living labs

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.

14 April 2016

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 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.

23 January 2016

Enabling the 4th industrial revolution - "industrie 4.0" or the "internet of things"?

I've been struck recently by the range of people talking about new digital and data developments in manufacturing. Of particular interest has been the apparent explosion of discussion about industrie 4.0 (which is extremely popular in Germany), internet plus (which is being pushed by China) and the industrial internet (being promoted by GE among others).

Managers, consultants, policy makers and academics are all getting very excited about the potential of connected devices. The basic idea is that increasingly things (of all types) will be stuffed with sensors and connected to the internet. They will stream data back to the original equipment manufacturers who in turn will use sophisticated analytics to analyse and interpret the data. There are loads of examples. Caterpillar streams data back from mining and construction equipment, using this both to monitor the health of individual machines and also to identify ways in which productivity and efficiency might be increased. Rolls Royce monitors aero engines in flight, using sensors to track vibrations in fan blades, which allows them to predict whether or not maintenance is required. In the consumer world - wearable devices (e.g. Nike's fitbit or Garmin's forerunner) track and record exercise levels with the data being uploaded to the internet for benchmarking and comparison purposes.

One thing that I find interesting is the rate at which some of these ideas are developing and the level of interest there is in them. A good way of looking at this is to explore Google Trends, which basically tracks the popularity of search terms and plots these over time. Figure 1 shows a comparison of "industrie 4.0" and the "industrial internet". It neatly shows how effective the German Government and large industrial firms (including Bosch and Siemens) have been at promoting their vision of the future - industrie 4.0 - with a rapid rise of interest in industrie 4.0 since 2012.

Figure 1: Google Trends - Popularity of Search Terms "Industrie 4.0" and "Industrial Internet".

One could argue that industrie 4.0 is not a new vision. As Figure 1 also shows there has been interest in the industrial internet for at least a decade and indeed my colleagues at Cambridge IfM, most notably in DIAL (the Distributed Information and Automation Laboratory led by Professor Duncan McFarlane) have been getting our students to build demonstrators and simulations of intelligent factories for years. However, the recent excitement is a testament to the growing maturity of the technology and underlying data infrastructures that will enable a wider adoption of industrie 4.0 and this excitement has driven significant Government and policy interest, as well as research and development investment.

So is industrie 4.0 the answer? Are smart factories where materials and machines seamlessly collaborate to drive productivity and efficiency the future? I think the answer is "yes" and "no".  Much of the discussion about industrie 4.0 is still very internally focused - its a factory view of the world. A recent YouTube video illustrates the point. The video talks about a vision of tomorrow - the factory of the future - where machines and materials will use wireless data infrastructures to communicate and coordinate their activities. Yet the examples I started with are ones where the product has left the factory - manufacturers are worrying about how they can track their products once they go out into the field and are used in mines and quarries, on the wings of plans, or in our houses and cars. Here I would argue there is scope for a bigger and more impactful industrial revolution. The fourth industrial revolution will not just be about what happens inside factories, but it will encompass the entire value chain. It will involve remotely monitoring products as they are used in the field. Data will be collected and streamed back to original equipment manufacturers who will use these data to assess the health of assets, to determine whether any maintenance is required, to predict potential product breakdowns and failures. They'll use the data to improve the next generation of design, learning from experience. They'll use the data to look at how the customer's operation might be optimised. By gathering data from multiple machines in a quarry its possible to build a system model of the quarry and identify where bottlenecks lie and hence how productivity can be improved.

This extended view of the fourth industrial revolution won't just be enabled by industrie 4.0, but by the "internet of things" and that's why when you add "internet of things" to the Google Trends data a rather different picture emerges. Its clear that industrie 4.0 and the industrial internet are important component parts, but the real key to driving future success in manufacturing lies beyond the factory walls and this will be enabled by the internet of things.

Figure 2: Google Trends - Popularity of Search Terms Including "Internet of Things".

13 September 2015

Creating Customer Value Through Services

In the Cambridge Service Alliance we have long talked about the importance of focusing on outcomes - understanding deeply and intimately what it is that your customer or even your customer’s customer values and exploring how you can deliver this. One of the most powerful consequences of thinking this way is that it encourages you to change the way you think about the boundaries of your business.

Take, for example, Caterpillar - what is it that their customer’s customer values? Imagine, for example a mining operation or a quarry. Clearly the customer wants a safe working environment. Clearly they want equipment that is reliable and productive. Clearly they want minimum disruption to their operations and production schedules. But ultimately what they want is to be able to extract minerals in the volumes they need at the lowest cost. If lowest cost per tonne is what the customer wants, what can Caterpillar do to help their customer achieve this?

Well the first thing is they can recognize that the mine or quarry is a system - to achieve lowest cost per tonne you have to optimize the system and get all of the people and equipment working in harmony together. It is not enough for Caterpillar to be able to guarantee that their equipment has the lowest operating cost or even lowest total lifetime cost. Unless Caterpillar’s equipment works in harmony with the rest of the quarry the customer won’t achieve lowest cost per tonne.

Working in harmony requires coordination - coordination across mixed fleets of assets and equipment. One of the services Caterpillar and their Dealers now offer are quarry optimization services. They use the data coming back off their equipment to help the customer identify production inefficiencies and lost time. Trucks, for example, have sensors in their beds. As the truck is loaded with material, the sensors record the weight of material in the bed of the truck. So Caterpillar knows when trucks are fully loaded. They also track location, through GPS data, so if your data shows a truck is fully loaded, but its GPS position is not changing then its not moving. That’s lost time - once the truck is loaded it should be moving off up the haul road en route to dump its load in the crusher.

There are loads of similar examples. Bose thinks of itself not as a speaker manufacturer but as providing sound distribution systems. Pharmaceutical firms are reinventing themselves as healthcare solutions provides - seeking to find a new way to complete as the development cost of drugs increases and more and more drugs come off patent.

At this year’s Cambridge Service Alliance conference - creating value through customer services - scheduled for the 6th October - we’ll be hearing from three leading providers of services and solutions - ABB, Rolls Royce and Zoetis. Each of them will be explaining how they have managed to develop business models - often enabled by data and analytics - to create value for customers by focusing on the outcomes their customers and their customer’s customers really want.

12 August 2015

The Productivity Paradox: Is There a Measurement Problem?

There's been much debate in recent months about the productivity paradox - put simply there's a long standing concern that technology, particularly information technology, does not seem to deliver the productivity gains that might be expected. This concern has resurfaced in the UK, with the Government raising questions about why the UK's productivity has not grown as much as other countries. In fact George Osborne recently called the UK's low productivity growth "the challenge of our time".

This same topic came up in a recent email discussion with colleagues from ISSIP - the International Society for Service Innovation Professionals. This time prompted by an article in the Wall Street Journal entitled "Silicon Valley Doesn't Believe US Productivity is Down". In essence the Wall Street Journal argument was that developments in technology are not captured in the Government's productivity figures - apps that help people find restaurants more quickly or hail cabs from their phones clearly improve the efficiency with which we can do things. Doing more with less is a classic definition of productivity - so these apps must be improving productivity argues the Wall Street Journal (and those it quotes - including Hal Varian, Google's Chief Economist).

While I accept the argument that apps and associated technologies allow us to do more with less, I think there's a need to unpack the relationship between these developments and measures of productivity more carefully. Traditionally governments have measured labour productivity - in terms of GDP per hour worked. As technology replaces labour, GDP stays the same or increases, while labour hours go down - hence productivity increases.

However, there's an interesting new phenomenon which complicates the picture. Take, for example, Uber. I'm a fan of Uber - the app is great. Its convenient. I've never had a bad service from an Uber driver. I love the fact that I can rate drivers and they can rate customers at the end of journeys. I love the fact that the cost of the ride gets charged to my credit card and the receipt automatically emailed to me. But I also love Uber because it is cheaper - I pay less for a Uber car than I do for a black cab in London. Better service, pleasant drivers, lower prices - what's not to like. Other firms have similar business models - think Amazon or Airbnb. Still others provide me a service for free - Google and TripAdvisor - don't charge me for the information they provide, instead making their money through third parties.

When talking about productivity - or the lack of productivity - we need to think about the economic impact of these cheaper and/or free services. Lower prices to consumers must mean lower GDP. The efficiency gains are there, but they are not being captured in productivity gains because the benefits are being passed on to consumers in the form of lower prices, rather than captured in the official GDP statistics. Maybe a more nuanced discussion about productivity is needed - where we look at both sides of the equation - increases in value and hence GDP - and increases in efficiency reflected in lower costs to consumers.

24 June 2015

A capability-based view of service transitions

by Ornella Benedettini

Exploiting service opportunities often requires manufacturing firms to shift to new service-centric business models, logics, processes, values – in other terms to transition into what sometimes is a very different organisational setting. This transition must be supported by appropriate firm-level capabilities, this meaning that the firm has to possess the abilities, skills, knowledge and resources that underpin the development and delivery of the services that it decides to offer. While some capabilities can be leveraged from the product domain (which is a substantial advantage of manufacturing over pure service firms), others are service-specific, and hence need to be developed or acquired on purpose. It is therefore particularly important for manufacturers to have a clear understanding of what service-related capabilities they need in order to generate value and performance from their service strategy efforts.

Despite this background, the issue of capabilities has been rarely addressed directly in existing academic and practitioner studies of service transitions. For this reason, we decided to conduct a research project that analyses the service-relevant capabilities of a sample of servitized companies on the basis of the types of services that they offer and the financial performance that they achieve. In practice, with this project we would like to show three things: (i) how manufacturers orchestrate service-relevant capabilities in practice, (ii) how different services require different capabilities, (iii) how/if greater service capabilities lead to greater firm performance. The study is based on the cases of 138 companies from the aerospace and defence sector. We map the levels and sets of capabilities of these companies using the Alliance ‘Service Capability Audit’ tool. Developed by Alliance Director Andy Neely through case studies and in-depth interviews with senior managers at 12 leading servitized firms, the tool identifies 12 bundles and over 70 individual capabilities along 4 key categories: value proposition, ecosystem awareness, value delivery, and accountability spread. We draw the information regarding service capabilities from the companies’ annual report narratives using the content analysis technique and Wordstat software. We further consider 15 categories of services that aerospace and defence companies may offer and content analyse the Capital IQ long business descriptions searching for evidence of these service categories.

The study is currently in progress. The data collected so far suggest that different companies have different levels and sets of service-relevant capabilities. Intriguingly, while the literature tends to assume that all service-relevant capabilities are equally important, our empirical investigation reveals a difference in emphasis among categories and bundles of capabilities. For example, within the value delivery category, we found rich evidence of internal capabilities that enable the delivery of the value proposition but much less evidence of capabilities related to the coordination of multi-party delivery, suggesting that perhaps the sample companies tend to rely on an internal delivery system rather than on a networked one. Similarly, evidence related to the accountability spread category is focused on acknowledging that the companies are aware of business risks rather than that they have mechanisms in place to control, share or mitigate such risks. Although we haven’t yet examined the relationship between capabilities and performance, some performance differences have already emerged among the sample companies that can be potentially explained by nature and extent of the shift to services. Notably, we found an inverse U-shaped relationship between number of services offered and both firm profitability and market value. Specifically, more services mean better performance, but only until when the companies offer 8-9 services, i.e. there is a limit to the amount of service diversification that can be proficiently engaged.

The aim of the project is to contribute to the research stream of the service infusion in manufacturing, furthering the understanding of the capabilities that influence the ability to transition to services for different companies. Nevertheless, from a managerial standpoint, we seek to develop practical insights on how manufacturers could align the configuration of service strategy and organisational capabilities. For more information on this research please read this paper

1 May 2015

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.