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International Business Machines

Mark Lennihan

Karl Moore: This is Karl Moore of the Desautels Faculty of Management at McGill University, Talking Management for The Globe and Mail. Today I am speaking to Henry Chesbrough who is a professor at the Hass School of Business, UC Berkeley.

Henry Chesbrough: Good morning.

KM: Henry, one of the things that you are thinking about is innovation and services. What are some of the things that you have come to, thinking about that?

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HC: I was led to the idea about innovation and services from a couple of very simple observations. One is that in countries like Canada, the United States, the OECD countries, each economy is now majority services activity. Meaning that services comprise the most of the economic activity, and depending on the source - in Canada or the United States - it is 70 or 80 per cent of the GDP of each country, is coming not from agriculture, not from manufacturing, but from something called services.

That was the first starting point. The second starting point is that we know an awful lot more about how to innovate new products and technologies in agriculture and manufacturing than we do about how to innovate new services. Yet, if our economies are majority services-based, it really becomes very important that we understand this much, much better than we do for our own well-being and prosperity going into the future. So that is how I got interested in this topic.

KM: What are some of the things that you have learned about it that you could suggest to managers in the services business that they consider as they try to drive innovation?

HC: One thing that I have learned in looking at this very carefully is that the role of the customer is very different in a services business. In the product, in the manufacturing business, you can give a customer something fixed and tangible to them, as a product. They can weigh it, they can measure it, they can look at it and they can specify what they want, you can give them the object and they can say, 'Oh yes, that is what I asked for, that meets my specifications, job done, congratulations.'

In a service business, it is very difficult to define and specify what it is that you want. You may have some things that you are asking for from me and you explain some of that to me. I may have some ability to do things that I try to explain to you, but you cannot fully explain what you want. I cannot fully explain what I can do. We do not have anything tangible between us to help us figure this out.

What often happens is that the customer is much more of a co-creator in a services innovation context. So, as opposed to being a passive consumer that just takes what is given to them by the manufacturer and then we go and use it or consume it in some way, in a services business we actively participate in not only defining and requesting what we want, but in then what we do with it as well. We are much more actively involved. That I think is an interesting starting point in this services domain.

KM: How do you get the customers involved? What are some of the things that you have seen that are helpful in practices?

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HC: One company that I thought had a really fascinating journey on this is IBM, which used to be a box company selling companies and associated stuff that came in boxes like disc drives and so on. Today, most of IBM's revenues come from services. One of the things that IBM has done in its practices, is that some of its own R&D staff in its research laboratories are going out of the laboratories to the customer's premises and actually locating on the customer's premises to work next to the bench with the customer to understand new challenges, new problems that the customer is having that IBM can help them with.

It is a very interesting thing to see. If you have ever been in one of these IBM labs, they are up on a hill, far away from everybody else to keep ideas from leaking out. In this new model we have IBM researchers at a city group for example, next to these other people, trying to get ideas to come in, right next door. It is a fascinating transition in terms of those kinds of practices. Even the R&D staff are much more engaged with customers as a particular example of the kind of practice that I am seeing with service innovation.

KM: Is there a concern about intellectual property in that context? If you are co-creating it, then they have added the I.P. as well. Or is that simply not a concern on this issue?

HC: It is absolutely a concern. What do you have and what do you own? What do I have and what do I own? When we share, exchange with each other, who owns the results of that? These are very important challenges that have to be overcome. I.P. I think, is one of the areas that need more attention with regard to innovation. It is not something that you think about at the end of process of 'we have something great here, now how much do you get? How much do I get?'

I.P. figures throughout the process, not only between us, but if you want to go use this with others, if I want to go use this in other activities. What rights do we have to do this? Those are very important things to understand from the beginning of an interaction.

KM: I worked for IBM for a number of years, in the '70s and '80s and know them well. As you create that intellectual property, if I am a consultant what you want to go and do is go and sell it to every customer that I can because that is how I make money. On the other hand, you are saying no, because if you do, my competitive advantage goes away after a while. For a little while I have an advantage. It seems like I would want an exclusive on this.

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HC: You are right that those are exactly some of the points on the discussion. Some of the rejoinders to that are if you get something that is truly exclusive to you, to sustain it, to maintain it, to improve it, you bear the full costs of all of that and you get no benefits of economies of scale from others as well. You get no benefits of learning from other companies, and the improvements that they discover as well.

You probably do not want to pay that, unless it is a really compelling advantage. In some cases, you might, in which case it would be an exclusive arrangement. What I tend to see more often is what you were saying a moment ago, perhaps a one-year or perhaps two-year lead time advantage.

Another thing that is sometimes negotiated is a field of use. If you were a bank, I cannot take this to another bank, but I might be able to use it, for example, in an insurance industry or something like that. I get the rights as your supplier to use it in other businesses that do not threaten your competitive advantage, but give me more economies of scale and reduce my cost of supporting and serving you into the future.

KM: This has been Karl Moore Talking Management for The Globe and Mail. Today I have been speaking with Henry Chesbrough who is a professor at the Hass School, University of California, Berkeley.

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