Open Innovation Enables Service Platforms

Source: MIT Technology Review, May 2016

how innovation plays out in service businesses. Most of the top 40 economies in the Organization for Economic Cooperation and Development (OECD) get half or more of their gross domestic product (GDP) from that sector, and many companies are witnessing a shift to services as well.

More generally for services, innovation must negotiate a tension between standardization and customization. The former allows activities to be repeated many times with great efficiency, spreading the fixed costs of those activities over many transactions. The latter allows each customer to get what he or she wants for high personal satisfaction. The problem is that standardization denies customers much of what they prefer, while customization undermines the efficiencies available from standardization.

The resolution to this dichotomy is to construct service platforms, which invite others to build on top of your own platform offering. This allows economies to emerge from the standardization of the platform, and it creates customization through the addition of many others to the platform.

A fundamental premise of open innovation is that “not all the smart people work for you.” That means that there’s more value in creating the architecture that connects technologies in useful ways to solve real problems than there is in creating yet another technological building block. System architecture, the system integration skill to combine pieces in useful ways, becomes even more valuable in a world where there are so many building blocks that can be brought together for any particular purpose.

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