Inf Syst E-Bus Manage (2011) 9:223–245 DOI 10.1007/s10257-010-0144-2 ORIGINAL ARTICLE
Opening up innovation: the impact of contextual factors on the co-creation of IT-enabled value adding services within the manufacturing industry Ulrika H. Westergren
Received: 15 December 2009 / Revised: 1 June 2010 / Accepted: 18 October 2010 / Published online: 3 November 2010 Springer-Verlag 2010
Abstract This paper examines the contextual factors that influenced an open innovation project failure. To this end the paper adds to the discussion on open innovation in non high-tech settings and highlights the importance of contextual factors as determinants of success or failure within the open innovation paradigm. It is based on a case study performed at PowerDrive, a manufacturer of hydraulic drive systems, and three of its customers, and follows their attempt to co-create new value-adding services through the innovative use of information technology in the form of a remote monitoring system. The study shows that open innovation project success cannot be measured only in terms of coherence with set targets of quality, time, and costs, but also has to include the creation of mutual value and the development of trust and strong inter-organizational relationships. Furthermore, the role and character of information technology has to be considered and accounted for and the social context made explicit. By managing the value creation process, the value proposal stands a better chance of indeed providing value. Keywords Value adding services Open innovation Remote monitoring systems Contextual factors
1 Introduction As firms try to meet the demands of increased globalization, integrate and make use of new information technology, and handle the pressure to be on-line, flexible, and efficient, they are being forced to rethink and reshape their original forms. Under such conditions it has been shown that firms actively seek cooperation and co-dependency in the pursuit of mutually beneficial behavior and added business U. H. Westergren (&) Department of Informatics, Umea University, 90187 Umea, Sweden e-mail:
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value (Gallivan 2001; Van de Ven 2005). Joint ventures can provide firms with access to new products and specialist technologies and alliances among firms can foster innovation and lead to the development of new products and services (Arora et al. 2001a). Such a behavior resonates well with the open innovation paradigm, which embraces the purposive flow of internal and external ideas in order to accelerate innovation and expand markets (Chesbrough 2006a). As firms move toward openness it is expected that more ideas will come to market and that joint efforts will produce a win–win situation for all involved parties. Open innovation started out mainly as a phenomenon within high-technology settings, and there is a need for more research within other non-traditional settings (Chesbrough and Kardon Crowther 2006). Furthermore, the literature provides us with a multitude of positive accounts of successful open innovation projects, but says very little about when open innovation fails or is an inappropriate route to take. This paper attempts to address this gap in the literature by examining PowerDrive, a Swedish manufacturer of hydraulic drive systems, who is attempting to create new business value by incorporating new technology into its after-market service offers. Having developed a remote monitoring system (RMS) and attached it to its drive systems, PowerDrive are hoping to create new business as services can be created around data analysis. Earlier calls for being specific about information technology (IT) imply that a certain technology has specific characteristics that need to be considered and examined in order to fully understand their impact (Monteiro and Hanseth 1996; Orlikowski and Iacono 2001). A RMS is placed locally with a customer, but can be monitored from a distance by the service provider, who logs and analyzes machine data through the system. In order to explore the full potential of the service innovation made possible by the RMS, PowerDrive sought close collaboration with some of its key customers in an open innovation project context. However, despite willpower and ambition, this particular open innovation project failed. This paper examines the contextual factors that influenced that failure and explores why open innovation did not work within this context. To this end the paper adds to the discussion on open innovation in non high-tech settings and highlights the importance of contextual factors as determinants of success or failure within the open innovation paradigm. The paper unfolds as such: In the following section we delve deeper into the concept of service development and explore the literature on open innovation. The next section describes the research methodology. This is followed by a closer presentation and analysis of the case study and the empirical data. The paper is concluded with findings and suggestions for further research.
2 Related research In this section we discuss the concept of service systems and value creation and place RMS within this framework. We also focus on previous research done within the context of open innovation in order to present a clearer picture of this paradigm.
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2.1 Industrial transformation, value creation, and successful innovation With the increasingly global economy and the rise of high-tech, low wage nations, the Swedish manufacturing industry is under a lot of pressure to find ways of reinventing itself. Traditionally heavily dependent on exports, and having had an excellent product as its main source of competition, manufacturers now see themselves surpassed by countries where products of comparable quality are produced at a much lower cost (Berggren and Bergkvist 2006; Bjorvatn et al. 2008). This pushes firms to seek new alternatives for innovation and for gaining competitive advantage. As products/goods can be readily copied but inherent knowledge cannot, industrial firms are seeking to use their specialist knowledge in combination with new IT in order to create value-adding services that will allow for continuous and close relationships with customers (Ibid.). Although these new services may largely be based on the use of new IT, it is the mix of technology and knowledge that is expected to attract customers (Berggren and Bergkvist 2006; Jonsson et al. 2008). This shift towards service creation resonates well with the global trend of viewing knowledge as the critical resource of firms in the post industrial economy (Tallman and Phene 2007). Following the definition by Vargo and Lusch (2004), service is ‘‘the application of competences such as knowledge and skills by one party for the benefit of another’’. A service system represents ‘‘any value-cocreation configuration of people, technology, value propositions connecting internal and external service systems, and shared information (e.g., language, laws, and measures)’’ (Maglio and Spohrer 2008; Vargo et al. 2008). By turning the focus toward service, firms can be said to move from a goods-dominant (G-D) logic where value is determined in exchange to a service-dominant (S-D) logic where value is determined in use (Vargo et al. 2008). Following G-D logic, value creation is tied to production where goods are produced and distributed on the market in exchange for money and/or goods. Producers and consumers have distinct and separate roles and value creation often occurs in a linear fashion, step by step (Vargo and Lusch 2004). S-D logic on the other hand, states that value is co-created in interactions between producer and consumer, blurring roles and demanding reciprocity (Vargo and Lusch 2008; Vargo et al. 2008). The concept of S-D logic is fundamental to service science and the service system its basic theoretical construct (Maglio and Spohrer 2008). In innovation literature, Research and Development (R&D) project success is often measured in terms of how small the deviations are from set targets of quality, cost and time (Elmquist and Le Masson 2009). However, when developing valueadding services, success is measured in terms of the value created. The development of value-adding services tied to a product also opens the door for a shift in relationship status, from vendor and customer to business partners, and indicates a movement from a relatively closed to a more open and networked environment (Westergren and Holmstrom 2008). This networked level is inherent to the concept of the value system as described by Porter (1985), where value creation is seen as a larger stream of activities that create and deliver value. Traditionally, however, value creation is viewed solely from the perspective of the innovating firm. In a service system, on the other hand, value is always co-created and must be
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determined in use, from the point of view of the customer (Vargo et al. 2008). Following that logic, a firm cannot create and deliver value on its own; it can only offer value propositions. In doing so, a clear concept of value creation becomes more central to the innovating firm. In order for them to succeed in building relationships they have to be able to specify what the intended particular added value of a certain service is and how value is created (Jonsson et al. 2008). Value is created when said value proposal is accepted (Vargo and Lusch 2008). Jonsson et al. (2008) draw upon previous research (Normann and Ramirez 1993; Kothandaraman and Wilson 2001; Stanoevska-Slabeva and Heitmann 2003) and make a distinction between the value creation process and the value proposal, where the first contains the relationships and roles of the actors involved in the value creation process as well as key activities, resources and capabilities, whereas the value proposal focuses on the business offer in terms of products and services and the customer value that comes from using the said product or service. The value creation process and the value proposal thus includes both the service provider and the customer view, which helps us gain an understanding for the specific ways in which value is created in a networked environment and say something about the success or failure of such a project. In their call for establishing a science of services, Chesbrough and Spohrer (2006) point to the massive and rapid development of IT as the prime enabler of such an endeavour. Advances in sensor—and communications technology has rapidly lead to data being collected and transmitted and subsequently transformed into knowledge that is both transferable and reusable (Ibid. 2007). A remote monitoring system (RMS) is an example of such a technological innovation that incorporates sensors and data transmitters into a system that is attached to existent products and used to create remote monitoring services. The sensors can detect current status, unusual use, and signs of equipment failure through continuous real time data logging, which is passed on for subsequent analysis (Han and Yang 2006; Lee et al. 2006). The development of RMS makes it possible to monitor products from a distance, and to create services based on the analysis of the data collected, and its expected outcome for the customer is an increase in machine up-time through a reduced number of unplanned production stops and a more efficient production process (Westergren 2007a). In addition, the service provider can draw on the RMS to gather data from products in use, and thus further their own understanding and knowledge of specific products (Jonsson et al. 2008). The peril of using RMS is the surveillance aspect that is embedded, as the technology makes it possible to monitor users without their knowledge and/or approval (Jonsson 2006). The use of RMS is steadily increasing within industrial firms, and has been shown to have relevance for discussions on value creation (Jonsson et al. 2008), keeping internal competence while making use of external (Westergren 2007b; Westergren and Holmstrom 2008), and on the strategic management of inter-organizational relations (Westergren 2007a). Technologies can be both drivers and enablers of enterprise transformation (Rouse and Baba 2006). RMS is the enabler of service innovation in that it allows for a manufacturing firm to become a service provider, through data logging and analysis, thereby staying in touch with its products after they have left the factory
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grounds. The collected data can be used to create services that increase the customers’ knowledge about their own processes, by real time monitoring of specific machine components. By turning to service, the literature tells us, the firm is looking to co-create value (Vargo and Lusch 2008; Maglio and Spohrer 2008). Cocreation of value requires openness as it is in the reciprocity of the relationship that a win–win situation is created (Ibid.). Openness is the key theme in open innovation, and we therefore turn to this theory in order to further our understanding of value co-creation and service innovation. 2.2 Opening up innovation Knowledge and skills are at the heart of service, and increasing competence is the key to improvement and innovation (Maglio and Spohrer 2008). The acquisition of knowledge from external sources is crucial to continuing innovation by firms (Tallman and Phene 2007). A firm’s ability to capitalize on external knowledge is related to its prior knowledge and prior R&D investment, and crucial to its innovative capabilities (Cohen and Levinthal 1990). By making use of external sources and thus spanning boundaries, firms may swiftly react to change and make use of context information. As firms seek new forms of creating business value, there is also a need for new business models that take into account the possibilities and limitations of such attempts (Chesbrough and Rosenbloom 2002). The open innovation model as proposed by Chesbrough (2003, 2006a, b) presupposes purposive inflows and outflows of knowledge in order to accelerate internal innovation and expand markets for external use of innovation. It seems that open innovation and the development of services may go hand in hand. Traditionally, innovation has stemmed from within the firm, being the result of hard work from committed in-house R&D (Arora et al. 2001b; Pisano 1990). Chesbrough (2003, 2006a, b) argues that innovation processes are changing and proposes the open innovation model, which assumes that ‘‘firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as they look to advance their technology’’ (2006:1). The open innovation model draws upon previous research done within the innovation area. There is ample work done on strategic alliances (Gulati 2006), open source software (Von Hippel and Von Krogh 2003), and on the impact of geographic location for knowledge exchange between firms (Jaffe et al. 1993). Much of the existing discussion on innovation examines static individual or organizational characteristics, and many existing process models are linear in nature (Rogers 1995; Van de Ven et al. 1999). Additionally, many authors focus on one specific type of innovation such as administrative, technological, product, or process innovation (Barrett and Walsham 1995). However, Van de Ven et al. (1999) proposed a model that presents innovation as a complex, non-linear, dynamic process and the open innovation model is in many ways a continuation of this dynamic model with its focus on direction, purpose, and knowledge exchange (Chesbrough 2006a). Co-creation is central to open innovation, and co-development partnerships that entail creating and delivering a new product, technology or service can be used as an effective way of innovating the business model and improving innovation effectiveness (Chesbrough
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and Schwartz 2007). Information technology has often been at the core of open innovation projects, either as the product of innovation as is the case with open source software (Fleming and Waguespack 2007) or as the enabler of innovation where it for instance is combined with specialist knowledge to create new services or enable the exchange of distribute sources of information (Chesbrough 2003, 2006a, b; Dodgson et al. 2006; Vanhaverbeke 2006). Open innovation entails creating value networks. By co-creating value with customers, the innovating firm may open up the innovation process and insource ideas from the network and thus benefit from external knowledge while developing internally (Vanhaverbeke et al. 2008). For example, a service open innovation network could be formed between a service provider and its customers, where value propositions are made and considered, and value created reciprocally. The changing boundaries and the process of creating and maintaining partnership relations over time thus have to be amply managed in order to maximize potential value and decrease potential risks (Vanhaverbeke 2006). However, open innovation has mostly been analyzed from the perspective of the innovating firm, whereby the network point of view is at worst neglected, and at best, implicit (Ibid.). In order to further our understanding of open innovation, the network level needs to be further explored and the different points of view made explicit. By focusing on the network level, we also bring up the issue of control. Who is responsible for the network, its outcomes, its success and/or failure? What happens when the innovating firm opens up its processes to others; is it possible to prevent knowledge leakage or are the potential knowledge gains so great that they balance out potential losses? Dahlander and Gann (2007) state that: ‘‘The success of open innovation can differ across technologies and industries. It is therefore critical to attend to the barriers and limits that can be identified, to bring credible insights to practitioners.’’ One way of doing so is to examine when open innovation fails and why.
3 Method The paper is based on a qualitative research approach in the form of a case study (Klein and Myers 1999; Walsham 1993) conducted at Power Drive, a Swedish hydraulic drive systems’ manufacturer, and a select number of their customers within the process industry. PowerDrive was at the time part of a larger project where the innovative use of IT in the form of RMS’s in manufacturing companies and the resulting value-adding services were studied. Qualitative research is characteristically exploratory, fluid and flexible, data-driven, and context-sensitive, and the decisions about design and strategy are ongoing and grounded in the practice, process and context of the research itself (Mason 2002). By using this methodology we gained access to people’s experiences and thoughts, something that we considered important in detecting contextual factors. The three customer firms, Alpha, Beta and Gamma, which took part of this study, were the ones that had been active during the development and testing of PowerDrive’s new RMS and had contributed with time and knowledge to the project. To prevent a loss of integrity all
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company names have been fictionalized. The customer companies that partook in the innovation process are all large companies within the process industry: •
•
•
Alpha is a large mining company with a recent interest in machine monitoring. They use PowerDrive hydraulic drive systems in their process line, to drive machines that mine, process, transport and deliver iron ore products. Beta is a pulp-and-paper company with 20 years of experience in preventive maintenance. They use PowerDrive hydraulic drive systems in their process line, to drive machines that produce high-quality uncoated and coated fine paper and bleached market pulp. Gamma is a supplier to the pulp-and-paper industry. They sell process lines, and use PowerDrive engines as components in their systems. Gamma is also developing its own remote monitoring system, based on some of the same premises as the PowerDrive RMS.
All data collection was conducted by the author and a fellow researcher. We used semi-structured interviews and document reviews as the main ways of collecting data (Yin 2003). The overarching themes that we used to guide our interviews were: technological frames (relationship to RMS, knowledge about RMS, thoughts about IT and IT usage, expected value), possibilities and threats (strategic decisions, hopes, worries), and barriers to RMS adoption (what marks success and failure). We interviewed 20 people from four different companies. Four interviews were held at PowerDrive, five at Alpha, six at Beta and five at Gamma. The people interviewed from each firm are shown in Table 1. The interviews lasted between 45 and 90 min, with an average of about 60 min. The interviewees ranged from technical staff to service personnel and after market executives to provide as broad a picture as possible. All of those interviewed had some prior experience of PowerDrive’s RMS and were chosen in consultation with a contact person from each firm. All interviews were performed on site, which gave us a chance to tour each company and obtain a sense of the work environment. The interviews were audio recorded and then transcribed to facilitate the analysis. The data analysis was performed in three stages. In the first stage of the analysis, the interview transcriptions were read through and patterns in the data and statements that could be grouped together were coded into categories relevant for our purposes. Based on our empirical material we saw three major industry trends
Table 1 Interview respondents Firm
Respondents
PowerDrive
After-market director, Service director, R&D director, Electronics engineer
Alpha
Service director, Project manager, Maintenance worker 1 and 2, Leader of alpha’s hydraulics group
Beta
Director of preventive maintenance, Hydraulics technician, Preventive maintenance technicians 1 and 2, Maintenance director, Automation engineer
Gamma
Service director, Developer, Remote diagnostics, Director of new installations, Sales director, Engineer
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regarding IT and service innovation: (1) a move towards preventive maintenance, (2) an increase in the use of RMS in order to perform that maintenance, and (3) extended service offers based on the technology in use. With these three trends identified, we went back to the material and coded the challenges associated with embracing a RMS in an open innovation project context. At this point we used the theoretical concepts common to both S-D logic and open innovation and sought to find how they were related to RMS. Co-creation of value (coded as value creation and co-operation) is the basic premise for both S-D logic and open innovation networks. Knowledge and skills (coded as competence) are the corner stones of service innovation and the basis of exchange in open innovation. By engaging in a network, the level of complexity increases as the number of actors goes up and without clear network management, process control becomes an issue. These five concepts are all context dependent in that their meanings vary depending on point of view (for example across firms and across actors within firms). They were therefore coded as contextual factors. This resulted in the five contextual factors and challenges associated with RMS as described in the Table 2. This second stage of the analysis sought to find similarities and differences in views through a cross-analysis of the interviews, where we could compare people with different responsibilities and possibilities of influencing the process; for example a technician’s view could be compared with a senior manager’s view. This secures certain validity as the interpretation is compiled through multiple sources. The second stage of the analysis provided us with general themes that were common across individuals, and singled out what were specific views, pertaining to certain individuals. The five contextual factors were compared across firms, in order to provide a sense of how a particular contextual factor was regarded differently by the client and the three customers. In this paper the firm is considered the level of analysis, and not the individual respondent, although quotes from individuals are used to highlight certain issues (which are seen as representative for the view of that firm). The findings from the second stage of the analysis are shown in Table 3. The third and final stage of the analysis sought to answer the question of how these five contextual factors influenced the perceptions of project success or failure.
Table 2 Challenges with adopting RMS Contextual factor
Why and how is this a challenge?
Value creation
The RMS has to create added value for both customer and service provider
Co-operation
As value is created reciprocally, the need for mutual understanding and co-operation increases
Competence
The use of RMS supposes skills in data analysis, which requires a different competence than present within the average maintenance worker. How can knowledge be exchanged between firms in order to create a win–win situation?
Complexity
Customers see an onslaught of different systems for measuring and control. Where does the PowerDrive RMS fit in?
Control
By turning to RMS, customers face the risk of losing hands-on knowledge and thus control over their maintenance processes
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Alpha
Firms
Co-operation
Gamma
Value comes from adding new knowledge Value is money to existing ‘‘You have to come up with something the customer wants to pay for.’’ (Service ‘‘They [PowerDrive] provide us with no director) added value. We are already there today. […] Value would be if they could ‘‘Value to me is what is value to the calculate engine life-expectancy. That is customer.’’ (Director new installations) new.’’ (Director preventive Maintenance (PM))
Beta
‘‘We have a functioning system, we just don’t know how to create customer value from it.’’ (After-market director)
‘‘R&D is problem driven; we identify problems and try to solve them. I would like the process to be more free, to work with different people […] universities and customers’’ (Director R&D)
Value in networks, sharing knowledge
‘‘I think a good customer relationship is like a marriage. We both have to feel we work well together’’. (Service director)
Value in strong customer relationships
PowerDrive
We are only going to be experts at our Are not keen on co-operation. Believe we Will co-operate if we can hold the reins We would like to co-operate with our core business. The rest we would like to know best. ‘‘Best practice, most customers in order to expand our ‘‘As soon as you start to cooperate, you co-operate with someone else experience’’ business model and improve our have responsibility issues’’ (Developer services ‘‘We strive for co-operation […] ‘‘They really don’t know that much, but remote diagnostics) PowerDrive have the special they very much want to get their hands ‘‘I would like to think of PowerDrive as a ‘‘We don’t know how engines are used competence needed to make this work, on our information’’ (Director PM) unless we monitor them in use, in the partner. They contribute with their so we co-operate.’’ (Hydraulics group customer plants’’ (Director R&D) ‘‘In this kind of relationship, there has to expert knowledge.’’ (Service director) leader) be a win–win situation’’ (Director PM) ‘‘By educating our customers, we make ‘‘We prefer to buy solutions and adjust sure we speak the same language. This them to us’’ [As opposed to in-house also helps us in our service processes’’ development] (Project manager) (Service director)
‘‘The only way we can create value is through focus, and getting good partners’’ (Service director)
Value creation Value in networks, in sharing knowledge
Contextual factor
Table 3 Contextual frameworks across firms
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What happens to hands-on knowledge when everything is controlled by computers?’’ (Maintenance worker 1)
‘‘Sometimes we let suppliers in where we don’t have sufficient knowledge. But they have to come here and show us what they do’’. (Maintenance director)
‘‘I’m not worried about PowerDrive taking our jobs. Their products hardly ever break down. If they did, now that would be a different story’’ (Hydraulics technician 1)
‘‘I think we have to realize that we have to ‘‘If we don’t have our own people, we trust [our partners]’’ (Service director) might lose competence to suppliers’’ (Director PM) ‘‘I am a bit sceptical [of new technology].
As long as we keep the competence in-house, we keep control. A RMS can give us better control of our process
‘‘I would never force a service agreement upon anyone. That would cause more damage than create potential value’’. (Service director)
factories]. Our part in a delivery might ‘‘We have no secrets. We do not keep any be 30%. The remaining 70% we buy information to ourselves that we won’t from other suppliers. But we take 100% share with the customer if he wishes it’’ responsibility. (Sales director) (Service director)
We are in control. And we are not letting We want control over RMS. Will not sell go of it the system, only services attached to it. However, data is free. If we can collect Our customers are increasingly asking us it, we can share it to deliver whole solutions [complete
We are not letting go of control, but we have to trust, both technology and partners
Gamma
Control
Beta
We are experts on our own processes. We We are practically self-sufficient, if you We believe knowledge is the key and that We take great pride in our knowledge. Our believe that we can benefit from others have something to teach us, it must be education is essential machines are specific high tech competence too pretty special ‘‘We have a lot of products, and require specialized ‘‘Your have to constantly develop new competence. I don’t know anyone who knowledge ‘‘By sending our people to PowerDrive for knowledge, participate in new projects, has more people working with this than education, we can increase our own ‘‘We could focus on the product and keep and stay ahead of your customers’’ we do If we were smaller, we would competence’’ (Hydraulics group leader) making the engines smaller… [but]We (Director new installations) have been happy to have a supplier help have built a strong knowledge base ‘‘We need to be good at our own ‘‘We might be experts in theory, but not us’’ (Director PM) when it comes to using our machines. I processes. Everything else, we will seek necessarily in practice’’ (Engineer) An iron rod doesn’t have that much would like to use that to develop help from those with expert functionality [in response to applications’’ (Director R&D) knowledge.’’ (Service director) PowerDrive’s claim that they have ‘‘Some customers do their own monitoring ‘‘I think that we have learned a whole lot expert knowledge of their engines] and measure some of the same things we [since installing the RMS]’’ (Hydraulics technician 1) do. But they don’t have our expert (Maintenance worker 1) knowledge. We are the only ones who can do the proper analysis.’’ (Service director)
Alpha
Firms
Competence
Contextual factor
Table 3 continued
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Complexity
Contextual factor Beta
Gamma
a lot of measurements we don’t use. But if you don’t measure, the data is lost forever’’ (Service director) (Automation engineer)
When things get complex, we handle it by Things have gotten increasingly complex As an OEM dependent on putting parts focusing on the core together into a whole, we handle ‘‘As data is collected and analyzed, things complexity every day ‘‘We have to constantly raise the level of have gotten more complex’’ education to keep up’’ (Project manager) (Maintenance director) ‘‘Earlier we sold a machine, now we develop solutions’’ (Director of new ‘‘The problem with all these machines is We have a hard time keeping up. The installations) that there is so much data. […] We have technological development is very fast.
Alpha
Firms
Table 3 continued
‘‘We are creating increasingly complex systems, which demand better tools for error detection’’ (Engineer, electronics)
RMS increases complexity
PowerDrive
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In this stage of the analysis, we drew upon the previous research done on value creation and on the open innovation literature and used the empirical material to illustrate why open innovation did not work within this particular context. When combining our empirical data with the theoretical background, three critical themes emerged: the movement from a closed to a more open innovation environment, creating a service system, and value co-creation. As recommended by Miles and Huberman (1994) a preliminary copy of the results was presented to and circulated among the interview respondents to ensure credibility and authenticity of the research.
4 Product innovation and service creation PowerDrive is a Swedish manufacturer of different hydraulic drive systems. Their drive systems are used in many different business areas such as the chemical-, rubber-, pulp and paper-, and mining industries. In addition to emergency repairs and selling of spare parts, the firm’s service concept includes service contracts and preventive maintenance. A majority of the services offered by PowerDrive today involve fieldwork, where the service technician visits the customers on site. This is an expensive and sometimes inefficient way of performing service, and the aftermarket executives at PowerDrive have been looking to innovate their service processes in order to make service better for both them and their customers. The result of the first innovation process was a RMS which made it possible to obtain data from engines in use. The RMS uses sensors installed in the hydraulic motor to collect data about its performance and condition. The sensors can measure different kinds of pressure, temperature, speed, oil quality and flow. A measuring station is placed locally, close to the hydraulic drive system at the customer site and connected to the sensors via cables. The RMS is programmed to register sensor data every 30s. The collected data is first sent to temporary storage in the measuring station where it can be stored for a maximum of 3 days, and then sent via a regular modem to a server located at PowerDrive where it is analyzed. The data transfer takes place once a day and it is the PowerDrive server that initiates the transfer. The actual product innovation, that is creating a RMS that could be attached to their drive system, was done by PowerDrive in collaboration with two other firms; the data analysis software creator and the sensor supplier. However, in order to explore the full potential of the service innovation made possible through the RMS, PowerDrive decided to collaborate with three of its long time valued customers. Alpha, Beta, and Gamma all allowed PowerDrive to install the RMS into their plants, and subsequently let the PowerDrive service technicians do regular checkups and on site visits to test the system. On site testing has been used before when PowerDrive has been trying out a new product innovation. However, with the RMS, the idea was not only to try out the system in a real setting, but to get feedback as to the potential value created by the system, and develop services based on perceived customer needs. Of specific interest was the customers’ experience with the RMS and how it could be used to support the customers’ own business processes and create value beyond facilitating ordinary service and maintenance.
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4.1 From closed to open Traditionally R&D has been an internal process at PowerDrive, involving people from the hydraulic motor department, the systems development department and the electronics department. By engaging the customers in the innovation process, PowerDrive are making a conscious shift from a closed to a more open innovation paradigm. Throughout the innovation process, PowerDrive has struggled to shift focus from producing a good for consumption to co-creating a service system. The RMS is in itself the product of innovation, a technological artifact based on sensorand information technology. However, the services that can be created with and around this system are what lie at the heart of the real innovation as they have the potential to change the way both PowerDrive and their customers do business. By providing remote monitoring services, PowerDrive service technicians will no longer have to make on site visits for every engine problem that arises. By monitoring separate engine components, they will be able to perform service based on actual instead of perceived needs and better plan their efforts, thereby creating a more structured and efficient service process. Incorporating RMS into the service process also means placing a lot of faith in information technology and data analysis. This could lead to a change in the competence level for service technicians, as they must be equipped with good analytical skills in order to correctly interpret and make use of data. The RMS gives PowerDrive a unique opportunity to study their drive systems in use. Since data is collected continuously, there is also the possibility to build a historical database to see engine statistics over time. This can be valuable to PowerDrive in their own product development, but also provides them with an opportunity to better understand their customers and how they operate. From a customer point of view, a RMS could be used to prevent machine breakdowns, by detecting and reporting problems and alerting the service organization before an actual breakdown has occurred (for instance by monitoring temperature and signaling that it has been steadily increasing for some time, which could be indicative of a larger problem). It can also be used after a breakdown has occurred to analyze sensor data, locate the problem, and hasten machine recovery. By combining their intimate machine knowledge with real time data, PowerDrive are hoping to provide their customers with new and added value. Neither the intended value creation process, nor the value proposal was however, clearly communicated to the customers. Alpha, Beta, and Gamma all express at some level confusion as to their roles in this innovation process. While PowerDrive expected them to help in identifying value-adding services, the customers would like an already made service offer in order to assess the potential value of the RMS. Simply put, they are looking for a value proposition from PowerDrive in order to determine whether there is a chance value will be created or not. PowerDrive on the other hand believe that by placing the RMS on the customer sites and trying out the system, there will be an inflow of ideas that they can use to formulate their value proposition, and in that way co-create value. There seems to have been some confusion of roles and responsibility that started off this project, and that made it difficult to build a strong network.
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4.2 Creating a service system A service system is a value co-creation configuration of people, technology, value propositions connecting internal and external service systems, and shared information (Maglio and Spohrer 2008). By opening up its innovation process and trying to co-create value-adding services, PowerDrive depends heavily on the strong relationships it has formed with its three customers. They are known for providing high quality products and good service to their customers, and believe that by creating services, they can tie the customers even closer to themselves in a mutually beneficial service system. However, the customers have slightly different views as to what that relationship consists of and how they would like it to develop. As can be seen in Table 3, Alpha is the most positive toward building a strong relationship with PowerDrive. They believe that the firms can help each other: We strive for collaboration. That is our ambition. Since they [PowerDrive] have specialist knowledge, and we have to make the system work, we have to collaborate. […] We also think it is important we have our own competence so that we know our own company. […] This can also give PowerDrive some good information, so that we can have a dialogue, solve problems, and see possible future developments together (Alpha, hydraulics group leader). The leader of the hydraulics group (who are the ones who are in most direct contact with the PowerDrive systems) further states that PowerDrive is a very attractive partner for Alpha in that their specialist knowledge is sought after. He has sent several of his technicians down to PowerDrive to partake in the courses they offer. He sees this as a way to ‘‘be part of the game’’, to enhance their own competence and to have a sense of the latest developments. Beta has a long tradition of remote monitoring. They started out in the 1980s and have built their preventive maintenance unit around such services. This has been a deliberate strategy at Beta, in order to keep the competence within the firm. Beta’s maintenance director says: We want the competence to stay here. If you leave the decisions to a supplier, you have resigned your knowledge. However, they also recognize that the heightened level of system complexity is making it difficult for them to be their own experts, and they have therefore started to increase their number of service agreements with external partners. Beta has experienced that a lot of suppliers are interested in collaborations, but they are not able to specify what benefits and value the collaboration would give to Beta. Due to this the people at Beta have the feeling that the suppliers want access to their knowledge without giving something back. At Beta they claim they have not received any feedback from PowerDrive from the RMS test period. Gamma has the perspective of being both the customer and operating as a supplier. They buy PowerDrive’s products in order to put them into their own, before selling them. In addition they are developing their own RMS with attached services to be used on their products, which are entire pulp—and paper process
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lines. The director of new installations at Gamma takes a supplier’s view and considers the reciprocity of the relationship with a customer in stating: Added-value for the customer is added-value for me. You need a win– win situation. […] If only one part gains from the collaboration, it is hard to evoke any enthusiasm from the other part. PowerDrive is known to have great knowledge about their products, and Gamma would not mind having access to that knowledge. However, they believe that this can be done by mutual meetings and courses; they don’t see the need for PowerDrive developing knowledge-based services. In part this is due to the stability and reliability of the PowerDrive drive systems, they rarely break down. Partly it is due to Gamma’s position as a supplier of solutions, where PowerDrive is just a small part of the whole, and a separate RMS for just the engines is not desirable when there can be one for all machines involved in the process line. PowerDrive believes they approached their three customers in the same way, but the result was very varied. This can largely be attributed to the different contextual frameworks present within the three customer firms. Alpha actively sought both cooperation and competence exchange, while Beta was keen on protecting competence and keeping it in-house. Gamma were fairly neutral, they welcomed the PowerDrive expertise, but did not want it in the form of services. In addition, Gamma and Beta were both afraid of losing control by letting someone else in. This becomes even more apparent when we look at perceptions of value and value creation. 4.3 Co-creation of value All the customers get a lot of offers from different suppliers about maintenance, production and services. Due to this they are skeptical to just buy a new system before they are convinced of its benefits. Beta who has experience of remote monitoring does not initially see any added value with PowerDrive’s RMS; they think they could do the same on their own without involving PowerDrive at all. The director of preventive maintenance says: We have gotten far [with preventive maintenance] and we are not too keen on letting our suppliers have access to our systems. They don’t know all that much but they really want access to the information. […] PowerDrive tells us to sign a service agreement where they will monitor our machines, make sure that the oil is clean and that everything works smoothly. I am sure they could do that, but we already do that today. It does not provide us with any added value. Gamma, who is developing their own RMS with attached monitoring services, stresses the necessity of being able to prove the added value of this kind of services, but also acknowledge the difficulty in doing so. The Gamma director of new installations points out:
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It is all about money. I have learned that that is the only thing that people will understand and than one can use to point to savings, because it can be measured. […] If we look at service it is probable that we can improve availability if we provide service on our own equipment. The customer will have fewer stops. Then we are talking about enormous sums of money. […] Whenever the consequences are that something will cost money, it becomes very important. If you find something good for the customer, but cannot translate it into money and are prepared to guarantee savings, then it becomes worthless. To convince the customer and make them aware of the benefits with the system it seems necessary to have concrete examples of how it will create value for the customer, a clear value proposition. It is also important that the system is used in a way that creates more value than the customers can do themselves. One example of added value that the customer would appreciate would be if PowerDrive could calculate the drive system’s remaining lifetime. Having functioning technology is not enough; the added value of installing and using the system has to be made explicit. Beta’s preventive maintenance director says: We haven’t made up our minds. It all depends on how they sugarcoat their offer. If they say that they will add some sensors and take part of our information… well you understand what our answer would be. They haven’t offered us anything good today. They have offered to install their RMS, and to collect our data, but that does not provide us with any added value. Not really. Again, while looking at Alpha, Beta, and Gamma, they are all concerned with the potential value created by the RMS and its attached services. Alpha is convinced that value can be created. They have no interest in developing their own RMS, they want to buy the best the market has to offer and profit from the knowledge of their suppliers. However, they also think that PowerDrive might be too small to be operating on their own, and would like to see them co-operate with others to move from machine to process monitoring. Again Beta contains the skeptics; having vast experience of their own, they think that PowerDrive has little to offer them. What they would like to see is some kind of statement, where PowerDrive for instance guarantees service life on the basis of being able to monitor the equipment. Gamma is well aware of the obstacles involved in trying to sell RMS. As a customer, they think PowerDrive is too small to handle having their own RMS, and see little value in what PowerDrive can offer them. By examining this multi-dimensional view of value and value creation, we see that PowerDrive failed to make a clear value proposition, thereby creating confusion as to how value should be regarded in this project context.
5 Discussion ‘‘It is vital for business managers to create mechanisms to expose technologies to external companies and to imbue technology developers with greater understanding
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and empathy for the social context in which their ideas will ultimately be applied’’ (Chesbrough 2006b:89) This case study is an illustration of an industrial firm’s attempt at changing both its innovation process, from closed to open, and its innovation outcome, from product to service, by means of using RMS. In doing so, it also highlights issues of value creation and relationship building, and explores the contextual factors that eventually led to this project’s failure. 5.1 The open innovation environment PowerDrive set out to open up its innovation process and co-create services together with three of its longtime customers. Having created a new technological product, the RMS, and considering knowledge their most important asset while acknowledging the importance of using external knowledge for internal benefit, the stage was set for open innovation. As the firm had stable relationships and a good reputation with their customers, the multi-dimensional flow of knowledge once the project was launched was presupposed. Yet this project was considered a failure, both by PowerDrive and their customers. After the initial test phase, the customers chose not to install the RMS and buy the attached services, and PowerDrive did not push the project any further. This clearly shows that in order to understand the challenges of the open innovation paradigm, we must do more than examine the prerequisites for its establishment; instead we must acknowledge the technological and social structures that emerge over time, and thus identify the contextual factors that promote success or failure. This study shows that open innovation requires a strategy for how to go about relationship building. An open innovation process is dependent on the flow of ideas, something that has the potential to maximize value, but also the potential to put the participating firms at risk as they expose themselves in ways they have not done before (Vanhaverbeke 2006). In such a situation, there is a need for a higher degree of trust than there is in an ordinary sales situation. It is not possible to simply transfer previous goodwill; instead the open innovation relationship should be treated as a new relationship, where the trust-building process has to be carefully orchestrated. This includes a certain degree of transparency, being clear about one’s motives, and having a clear-cut division of roles and responsibilities. Open innovation must entail the creation of a trustful environment where participating firms share a belief in the innovation process; believing, but not knowing for sure that it will create value for all in the end. This trust is embedded in the people, who become guarantors for their firm’s trustworthiness, and reinforced through openness pertaining to the process. In an open innovation project all participants are expected to gain from the relationship. In the case of PowerDrive, some of the customers were left feeling PowerDrive was more interested in the inflow of knowledge than in the outflow, and as soon as there is the suspicion of hidden agendas or withholding of information, doors close and the chance of having a successful open innovation project diminishes greatly. This places a lot of responsibility on the innovating firm to amply manage their relations with the other participating firms and to be clear about roles and expectations. Failure to build trust will lead to failed open innovation.
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5.2 Open innovation and value creation In innovation literature, R&D project success is often measured in terms of how small the deviations are from set targets of quality, cost and time (Elmquist and Le Masson 2009). However, when discussing open innovation projects, these measures of success are not sufficient. Open innovation presupposes the purposive flow of internal and external ideas (Chesbrough 2003, 2006a, b). In doing so, it entails the creation of inter-organizational relationships that co-develop innovation projects for mutual benefit. Open innovation by necessity then, needs to be able to create value for all the affected parties and not just for the innovating firm. The quality, cost and time measures are all internal measures of success. Since open innovation includes both internal and external knowledge, it also has to consider external measures of success such as the value created. According to S-D logic, a firm cannot create value on its own, it can only a value proposition and it is up to the customer to determine whether value is created or not (Vargo et al. 2008). By examining both the value creation process and the value proposal, we can gain an understanding for the specific ways in which value is created in a networked environment (Jonsson et al. 2008). When studying PowerDrive and their three customers, it is clear that the different firms have different opinions as to what constitutes the value creation process, and what the resulting value proposal should contain. PowerDrive sees value in networks, in sharing knowledge, and in building strong customer relationships. Alpha also perceives knowledge sharing as the basic premise for value creation, while Beta considers the creation of new knowledge value. To Gamma, value equates money. Since the perceptions of value are so varied, it is hard, if not impossible for PowerDrive to come up with one value proposition that fits all three customers. Trying to collaborate in an open innovation setting with someone who embraces a closed innovation paradigm as Beta does is not only futile, it is directly counterproductive as it can change a functioning seller-buyer business relationship into one of unclear roles and expectations, bad-will and dissatisfaction. In this innovation project, Beta did not understand the value creation process, nor did they agree with PowerDrive on the value proposal and were therefore very negative towards not only the RMS but also ended up questioning PowerDrive and their motives. Alpha on the other hand, had an idea of the value creation process and the value proposal that partly coincided with that of PowerDrive, but also created their own space for value. They were very positive towards the innovation project and toward PowerDrive. Gamma stayed fairly neutral, using PowerDrive’s products as components in their own systems, however, their perception of what value PowerDrive can possibly add to their organization is fairly low, and hampers the whole collaborative effort. The literature on open innovation and on service systems strongly suggests that co-creation of value is at the heart of a successful collaboration (for example Chesbrough 2003, 2006b; Maglio and Spohrer 2008;Vargo and Lusch 2008; Vargo et al. 2008). This study shows that in order to actually create that value, the innovating firm has to take into account the context dependent mindsets present within each firm in the service system. Although the term co-creation would imply input from both supplier and customer, this is in
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reality a very unequal relationship where the innovating firm bears full responsibility for managing the process and coming up with a satisfactory value proposition. This is rarely discussed in open innovation, where it appears that once the network is set up, knowledge starts flowing, and value will automatically be created. This study shows that this is not the case. Role confusion hampers innovation success, and network management is clearly of the essence. It is therefore important that the innovating firm pays attention to the importance of defining the value creation process as this is as crucial to a successful open innovation project as coming up with an acceptable value proposal. 5.3 Open innovation and the role of IT With the increasing number of different IT artifacts and information systems, IT is often seen as the bearer of knowledge and the driver and enabler of innovation (Rouse and Baba 2006). Industrial firms are combining specialist knowledge with new IT in order to create value-adding services. This highlights the importance of paying specific attention to the role and character of technology in order to understand its potential impact. RMS’s are a specific type of technology that combines the use of sensors for data collection with possibilities for data communication and analysis. They are in themselves the results of product innovation, but act as enablers for service innovation as they make possible new services based on data analysis (Jonsson et al. 2008). By being specific about the role of technology, it is also possible to say something about the expected result of the innovation process. If the RMS had been sold as a separate information system this would be a case of pure product innovation and technology development, an area where the industry is facing heavy competition, and lead to an expectation of a clear cut seller-buyer relationship between the innovating firm and its customers. However, when offered as a service innovation in the form of technology with attached services, the RMS has potential to change the business processes of both PowerDrive and its customers and brings with it expectations of mutual value creation and lasting relationships. In the case of PowerDrive, they were not able to clearly distinguish between the different roles of IT, which led to reservations as to what the system was intended for, how it was to be used, and why it would create added value, thus creating the perception of project failure. The PowerDrive project also shows the importance of being aware of the technological potential and the ethical issues that may arise, as they are crucial factors in creating a trustful environment. A RMS provides the possibility to monitor users without their knowledge and/or approval (Jonsson 2006). This is a highly sensitive issue that should not be neglected or treated lightly. Both Beta and Gamma saw this as a question of competence and control, where they were afraid that PowerDrive could use the RMS to learn about the customers’ processes and in the end take over some of their knowledge, making the customers’ own maintenance workers redundant. Such a scenario made them feel that the RMS could lead to them losing control over their own processes. Since an RMS is placed locally, but accessed from a distance, it enhanced the feeling that knowledge was leaking out and beyond customer control. Being aware of the specific characteristics
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of the technology and paying attention to how it is perceived by the members of the network would have helped in creating trust. The incorporation of RMS into the service process also raises the issue of competence, as service technicians need more analytical skills in order to correctly interpret data. This is an internal issue at PowerDrive, but also discussed by all their customers, who find it increasingly hard to keep up with the technological development, and are troubled by the heightened complexity. The way this is handled by PowerDrive is that they give their customers access to all data they had collected from them, but only if the customers ask for it. Although the data is considered free, PowerDrive would not go as far as giving their customers access to their data analysis software, as this is considered a competitive advantage. As knowledge is seen as the basis for exchange in an open innovation context, having a technology such as the RMS that changes the premises for what that knowledge is and should be handled can put a strain on the network relations. The role of technology in changing perceptions and prerequisites for knowledge creation should thus be considered and dealt with. So was the PowerDrive innovation project doomed to fail? If we look at the five contextual factors and how they played out, we can also detect what might have been done differently. At a first glance, the first two factors, value creation and cooperation, seem fairly straightforward. Since PowerDrive did not deliver any clear value proposition, value could not be co-created. A way to resolve that problem would be for PowerDrive to revise their business model and clearly present to their customers what value the RMS had the potential to add. This value proposal could then have served as a basis for discussion and be negotiated in the network. However, this paper shows that there is more to value creation than a well thought out value proposition. Although value is determined by the customer, the responsibility for value creation lies with the innovating firm as it initiates value co-creation. This calls for astute network management with clear participant roles, which is easier said than done, as service systems are fluid, reciprocal and context dependent. This again shows the importance of paying attention to context and to the value creation process. By being aware of the contextual factors that played out during the RMS project, PowerDrive could have avoided some of the pitfalls. Instead of being regarded as a product of innovation and as a potential for knowledge formation and value creation, the RMS raised issues of fear of losing competence and control, and fear of being left behind as technology moves forward and increases complexity, in two of the three customer firms. If PowerDrive had recognized the highly symbolic value the RMS carried, they could have spent more time building trust and allaying fears, thereby increasing their chances of project success.
6 Conclusions and suggestions for further research Open innovation has so far mostly been analyzed from the perspective of the innovating firm. This paper focuses on the value network and makes explicit the different points of view present therein, thereby providing new insights into
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the innovation process. In this paper we examine a failed open innovation project. We show how open innovation R&D project success or failure can neither be attributed solely to the coherence with set targets of quality, time and costs, nor to a set list of prerequisites, but how such projects need to take into account the promise of value creation, the strength of the ties in the value network, and the character and potential of the technology in use. Based on the literature on service systems and open innovation, five contextual factors were identified and examined at the network level, from the perspectives of the participating firms. The five factors were value creation, co-operation, competence, complexity and control. PowerDrive’s failure to address these in a satisfactory manner led to the RMS project failure, although the technology per se could deliver as promised. While the customer firms mainly focused on the potential value created and the strength of the interorganizational relationship, the issues of competence, complexity and control and the uncertainty connected to the role of IT were recurrent concerns that ended up playing major roles in their perceptions of success or failure. This study thus shows that although the technology was put in place, the social structures did not foster acceptance. The issue of technological and social structures is not new within the IS field (Markus and Robey 1998) albeit far from resolved (see for example the recent discussion in MISQ between Jones and Karsten 2009 and Poole 2009). This highlights the importance of paying close attention to the role and character of IT. To this end, the paper also shows that the concept of openness is a necessary, but not sufficient precondition for an open innovation project and that there needs to be a perception of mutual value creation, the establishment of trustful relations, and a thorough understanding of social context in order for a project to be deemed successful. The value creation process needs to be made explicit in order for a value proposal to indeed provide value. As industrial firms shift focus from product to service innovation there will be ample opportunity to further examine the premises for open innovation and the contextual factors surrounding it.
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