Here is the introduction to an interview of Henry Chesbrough conducted by Ron Norton for strategy+business magazine, published by Booz & Company. To read the complete article, check out other sources, sign up for email alerts, and obtain subscription information, please click here.

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To escape the commodity trap — and to compete effectively in a knowledge-based economy — business leaders of all kinds need to reinvent themselves as innovators in services.

Economists debate whether a service-based economy can be truly robust — or whether prosperity depends on having enough of a manufacturing base to support service businesses. But what if this turned out to be a false dichotomy? That’s the question raised by innovation expert Henry Chesbrough. All successful manufacturers, in Chesbrough’s view, need to come to terms with a fundamental change: the accelerating flows of knowledge and information that are shortening product cycles and commoditizing their products. They can do this, he says, only by reinventing themselves, not as pure manufacturers or service providers, but as hybrid product–service companies that design their business models around creating more meaningful experiences for their customers.

Of course, many manufacturers are already doing this. General Motors does it with its OnStar system; General Electric does it with its infrastructure financing; Ikea, Apple, Inditex (Zara), and many others do it with their own retail outlets; and Taiwan Semiconductor Manufacturing Company does it with its co-creation model for helping customers design computer chips, which it then manufactures to order. On the other side, service companies such as Barnes & Noble, Starbucks, and (most famously, with its Kindle) Amazon have found that they must enter the realm of manufacturing to thrive. Chesbrough goes one step further. He argues that successful product–service hybrids embrace a new kind of innovation, combining “open innovation” (moving outside the organization’s own boundaries) and services. Hence the title of his new book: Open Services Innovation: Rethinking Your Business to Grow and Compete in a New Era(Jossey-Bass, 2011).

Chesbrough, professor and executive director of the Program for Open Innovation at the Haas School of Business at the University of California at Berkeley, established himself as a leading voice with an earlier book, Open Innovation: The New Imperative for Creating and Profiting from Technology (Harvard Business School Press, 2003). He was the first major academic champion of the open innovation idea, which has made a great difference at Procter & Gamble, Unilever, and many other companies. Open innovation can be defined as revitalizing a company’s future by tearing down the walls between its R&D organization and outside companies and innovators. Chesbrough recalls that when he first considered the book title in 2003, he Googled the phrase and got only a couple of hundred links, most of them to articles on topics such as the opening of new innovation facilities. “There was no real usage of the term open innovation at that time,” he says. “When I did that same search last summer, I got 13 million responses, and most of them were really about this new model of innovation.”

Now Chesbrough argues that the fortunes of advanced companies — and of economies as a whole — will depend on how well they rethink services. His analysis began several years ago as he considered the fact that service-based industries were rapidly supplanting manufacturing-based industries — in developed economies in general, and in the U.S. economy in particular. Today, he points out, services account for roughly 60 percent of economic activity in the top 40 world economies, and fully 80 percent in the United States.

Services, in this context, doesn’t mean such small-scale activities as providing haircuts or washing cars — or even conventional large-scale services such as accounting and retail businesses. Instead, Chesbrough has a vision of knowledge-intensive infrastructure and product lines that evolve into “the engine of growth for the entire developed world.” Breaking out of the old manufacturing-based, product-centric mold, Chesbrough says, will be challenging for business leaders, because it requires them to think of their customers not as purchasers of goods, but as co-creating partners in an evolving relationship. Companies that master new service innovation models and build or add the requisite new capabilities, he promises, will be able “to reach levels of success they have never before experienced in their market or their industry.”

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To read the complete article, please click here.

Henry Chesbrough is best known as the “father of open innovation” according to Wikipedia. He authored the book Open Innovation back in 2003, before that term came into general use. Today, there are more than 13 million entries for “open innovation”, documenting the rapid rise of this new model of industrial innovation. Open Services Innovation is his latest book, which extends the idea of open innovation into the services sector. Whether you make a product or a service, open innovation can accelerate your time to market, share risks, and boost growth for your business.
Professor Chesbrough teaches at the Haas School of Business at UC Berkeley, and runs the Center for Open Innovation there. You can find out the latest information about open innovation at www.openinnovation.net. You can find out more about Professor Chesbrough at http://www2.haas.berkeley.edu/Faculty/chesbrough_henry.aspx.

To read my first interview of Henry, please click here.

Henry Chesbrough, First Interview: By Bob Morris

To read my second interview of Henry, please click here.

Rob Norton is executive editor of strategy+business.