Fast pace developments in technology and the explosion of mobile technologies shortened product life spans. Thanks to the new information technologies, reaching information
26 became extremely easy and this led the emergence of new entrants in various industries.
Because of the high competition, companies are developing tailor made products in shorter periods. Even the most famous companies are struggling in competition and fulfilling customer demands. They try to find new ways to change this situation (Chesbrough, 2010).
According to Chesbrough (2010), distributed knowledge and manufacturing, very low cost transportation of manufactured goods around the world, the reduction in time for a product to stay in the market create a commodity trap for product focused companies. Once a company produces a competitive product, it is easy for others to learn how to develop a similar one. This situation forces companies to change their product focused strategies (Chesbrough, 2010).
Open service innovation is a beneficial way to break this commodity trap. It consists of four steps. Firstly, companies should assess their products or services as open businesses for creating differentiation. This view requires a change in organizations. Innovation process can be separated as innovation in back-end processes and innovation in front-offices (Silva, 2014). Some companies are separating their front-end and back-end organizations since they require execution of different strategies. While front-end organizations are facing with customers and require customized solutions, back-end systems are more cost and efficiency focused. Secondly, they should include their customers for the creation process. Thirdly, companies should employ Open Innovation methods for enhancing service innovation. This can reduce the required time and costs for transformation. Lastly, creating a platform will make it possible to benefit innovations developed by other organizations (Chesbrough, 2010).
There are two important terms for companies to expand their businesses and increase their revenues. These are economies of scale and economies of scope. Economies of scale refers to the reduction of costs as the volume of production increases. On the other hand, economies of scope reflects the increase in efficiency when various products and services are offered to customers from a single source. This decreases the costs for additional offerings. For instance, cross-selling banking services are examples for economies of scope. This has great importance for open service innovations since customers play critical roles in services. Economies of scope also relies on the specialization of companies in different fields. In this sense, Chesbrough (2010) brings up modern farming. In contrast to traditional farming, modern farmers give importance to specialization and they focus on one or very few crops since different crops require different machinery and production methods. Platforms which aggregate these specialized producers offer best products and services to their customers.
Chesbrough (2010) brings up changing automobile ownership through service platforms.
According to his example, customers can be freed from ownership of a vehicle and wide-variety types of vehicles can be provided through platforms. This disruptive model can enhance customer satisfaction since customers won’t be limited with ownership of a car and providers can expand their business models with collaboration and creation of different services. Instead of assessing the car as a transaction, new approach see it as a delivery
27 method for services. In addition, smartphone-based vehicle sharing systems reflects that there is such a transition in automobile industry (Alli et al., 2012).
iTunes is also another good example for developing a service platform. Apple succeeded in offering value added services through its iTunes platform by attracting contribution of third parties. Initially, the company developed the platform for offering wide-range of music for iPod users. It became a one stop shop for listeners. Users have access to books, games, movies and many other things through the platform. It is also open to many types of contributors including resellers, partners and commentators. As company’s technology advances and its flagship product iPhone is shaping markets, Apple App Store became the most important platform for engaging third party developers and customers (Chesbrough, 2010).
Biggest change in open services value chain occurs in internal support functions. Although inputs, outputs and processes remain the same, there is no interaction of internal support functions. In contrast, their interaction with customers and third party actors in co-creation is enhanced. The services are presented to the market in a wide platform instead of a single point by combining offerings of different third parties. Open Innovation underpins platform-based model (Chesbrough, 2010).
Platform business model changes the traditional view towards value chains. When it comes to mobile service delivery, there are various types of platforms to offer services. Telco-centric model, device-Telco-centric model, aggregator-Telco-centric model and service-Telco-centric model are the leading platform-based business models in mobile service delivery. Telco-centric model is used widely in mobile industry and telecom companies performs as service aggregators, platform operators, portal providers and network operators.
Figure 3. Open services value chain (Chesbrough, 2010, p.35)
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Device centric model is tied to mobile devices and iPhone based services exemplify well this model. In aggregator-centric model, services are combined in a single service portal, but a service aggregator which is independent of mobile network operator takes responsibility. Facebook Mobile Platform is a good example for aggregator-centric model (Ballon et al., 2008).
A service based model is based on open APIs and exploits also social network applications. The service portal aggregates and facilitates the access for the services. There are various specific sub-platforms for different service providers. It can be possible for developers to access and contribute to services through a meta-platform. Services can be delivered directly to end users as well as through a platform. Anyone can contribute to service creation and this expands the businesses enormously (Ballon et al., 2008).
Figure 4. Service-centric model (Ballon et al., 2008, p.4)
Changing business model for a company entails to overcome many roadblocks. One of these roadblocks is business model inertia. Factors such as organizational structure, mindset of managers, investors of the company, traditional business mindset can create inertia and hamper the change. Especially incumbent organizations which execute their
29 successful models without changes for many years are struggling in changing towards service-focused companies. Changing business models require many experiments and analysing the results. However, this is quite challenging for large traditional organizations.
In this sense, they can use start-ups as case companies and benefit from their experiences since they are more eager and tolerable to changes (Chesbrough, 2010).
Open Innovation methods implemented in services are important for Fintech space since financial sector is a part of service economy. It can contribute to understand Open Innovations in financial services better.