Chesbrough discussed the background and implications of his work with strategy+business at his office in Berkeley in February 2011.
S+B: How did your idea of open services innovation evolve?
CHESBROUGH: It began with thinking about the idea of the commodity trap. Richard D’Aveni at Dartmouth wrote an excellent book about the phenomenon [Beating the Commodity Trap: How to Maximize Your Competitive Position and Increase Your Pricing Power, Harvard Business Press, 2010]. He captures something important: the difficulty — given the globalization of manufacturing and, increasingly, the globalization of innovation itself — of sustaining a competitive advantage. If you are focused on making a better product that you drop in a box and ship, and it’s up to the customer to figure it out from there, I think you have a very, very hard time staying ahead of your competitors for very long in today’s environment. That was the motivation.
I trace the evolution of the cell phone in some detail in the book as one illustration. Commoditization is why Motorola had difficulties earlier on and Nokia is having them today. Today you have handsets coming from companies like HTC in Taiwan, and Samsung and LG in Korea, and many others, and you can imagine there will be handsets coming out of China and other places. Everybody understands how to do total quality management, enterprise resource planning, and all the methodologies of Six Sigma, so the things that let companies differentiate themselves and make better products have now become very widely distributed. It makes it harder and harder to sustain a good margin if you’re not simultaneously providing opportunities to wrap experiences around the products that you’re making. And these don’t have to be your own services, either; they can be others’.
If you look at the iPhone, iTunes, iPad — the whole “i” empire that Apple has built — they haven’t done it alone. They’ve done it with hundreds or thousands of apps makers alongside them, much as Microsoft did with Windows in the 1980s and ’90s, when they had, at one point, something like 75,000 independent software vendors working on Windows.
That’s the way products become platforms, and I think that’s where companies of all kinds need to end up, so that they’re not just making a product or a providing a simple service. The right way to think about it is, “How do I turn what I have into a platform?” And a platform, on the one hand, attracts others to build alongside and on top of what you’re doing, but on the other hand allows you to provide a much wider set of experiences. I go into some detail in the book about both the economies of scope and the economies of scale that a company can gain from being more open in services innovation. I think this is where you can continue to make money and escape that commodity trap.
S+B: In the early days of the Macintosh, Apple was famous for restricting innovation to a system it tightly controlled — and thereby limiting the market for its computers. What they’re doing now with the “iFamily” seems like quite a change.
CHESBROUGH: The earlier history of Windows and the Mac is instructive. There were some lessons learned by Steve [Jobs] and others: that as good as you are, there are too many other smart people out there, and by cutting yourself off from them you really shoot yourself in the foot. But I don’t think they truly anticipated just how explosive the “iStore” apps sector was going to be, because really, there was nothing like it out there prior to this. To give Apple credit, they were able to keep up with the explosion. Their models opened up to accommodate the demand. By the time they launched the iPad in 2010, one of the things they were banking on was that because there were so many apps out there, the iPad could hit the ground running. And they were right; I think they sold 3 million units in the first 90 days after its introduction.