Dear Students,
Today’s lecture illustrated how organizations had leveraged Open Innovation in creating and capturing value. From the lecture please share at least two specific use cases that could be applied in Building of Smart Cities. Please be specific of the use case employed in your application to smart cities.
The first use case I will be discussing is IBM’s story. IBM had to adopt to an unusual and risky solution out of pure necessity. When IBM’s original business model stopped being an effective method to expanding its company, IBM executives and employees understood that there had to be a change in the business model. Subsequently, the business model was changed to increase the inflow of knowledge by working with universities. Additionally, IBM began implementing its increase in outflow of knowledge by measuring, sensing and seeing practically everything, by interconnecting and connecting people. IBM also decided that it needed to be able to adapt and change quickly with the market. IBM’s case study can be directly applied to smart cities in the sense that when cities begin dying, they too can be flipped around like IBM. Cities can turn back from failing by changing their business models, specifically by understanding their economies of scale. To increase the inflow of knowledge, cities could set up case challenges and competitions to invite outside education leaders to collaborate with a city to find the best business model and solutions to maximize a city’s smartness. Additionally, if a city faces areas of improvement, there could be an increase outflow of knowledge through measuring how many people live in the city, the amount of resources needed to continue sustainable growth, and the specific data required to understand how the people in a city operate.
The second case study I will be discussing is VMWare’s business model. VMWare focuses first on exchanging and fosters sharing. This can be applied to a smart city in the sense that governments, education institutions, and businesses all collaborate with one another to build their smart cities. Next, VMWare focuses on experimentation which grants the permission to experiment and fail. This is extremely important when building smart cities because solving issues in cities requires creativity. However, creativity is only effectively utilized when there is a safe space to experiment and risk to try the solution. If smart cities implemented experimentation into their business models, there would be a positive stream of creative solutions to various problems. Continuing, enablement is one of VMWare’s principles which exemplifies the importance of providing the training and tools to execute projects. Smart cities require enablement to maximize their potential economy in the sense that businesses need the resources to innovate and manufacture goods. Also, employees in a smart city need to be trained to the most up-to-date technology to operate best in this global economy. Following, empowerment is a defining principle of VMWare’s culture. By granting authority to employees, people internalize projects as their own and work considerably harder on them. Applying this concept to smart cities, citizens, businesses, and government agencies must feel empowered to create the change they see fit in their cities. Lastly, encouragement is a fundamental pillar in VMWare’s culture ecosystem. By recognizing people’s accomplishments, people are far more likely to work hard on projects because they feel that their efforts are noticed. Empowerment can be employed in smart cities through citizen recognition and business recognition by government agencies. There could be galas and other specific events to recognize outstanding individuals and enterprises which work hard to improve and better cities.
Professor Darwin’s stories about companies who pivoted their business plans toward new ways to innovate made an interesting case for open innovation. Companies such as IBM were able to switch to more collaborative methods by taking advantage of knowledge from other students, companies, and startups to become more efficient in the ways they are bringing new products to market. It is interesting how when information is made available, it fuels open innovation because everyone is privy to the same information and has access to an equal playing field. The open culture of companies such as VMWare fosters sharing and provides tools, training, and permission to enable employees and others to improve themselves, hone their ideas, and work independently.
Another example of how open innovation can create value the example of the airline industry. When rethinking the ecosystem to change the airline business model, it is interesting to see how new sources of revenue (in addition to passengers) include food, other in-plane services, airport funds from hotels, shopping and food, and parking to allow airlines such as Ryanair to offer tickets at very low prices. This has made for an extremely cost effective model, leading to a better opportunity for people to afford the ability to travel.
One thing that I found particularly interesting was Professor Darwin’s idea of breaking down silos to become more open. This may be very important as we approach smart cities, because there are so many moving parts and separate organizations responsible for different aspects of the city planning and maintenance. By thinking in terms of decreasing silos and expanding innovation, we will have the ability to increase the absolute size of the pie, making value more available to all rather than fighting over slices of a small pie. Partnerships across product lines may also have this effect, as it decreases risk and enables more efficient processes.
In today’s class, we started by having each group present on a city outside of the U.S. that is becoming “smarter.” Specifically, how the cities are innovating their collaboration, infrastructure, and economy and how this is compared to population and economic growth. These presentations transitioned into Professor Darwin’s lecture on how organizations can leverage the process of open innovation. Professor Darwin’s presentation provided multiple use cases than be applied to building smart cities. Two of those use cases are explained below in the context of smart cities.
First, GE rethought how it delivered value to airplane manufacturers and changed its business model. Previously, GE would sell its multi-million dollar plane engines to airplane manufacturers. However, GE found difficulty competing in the market. It then changed its business model to meet customer needs and focus on a long-term client relationship. Instead of selling the engines outright, GE changed its business model to only collect money when the plane was flying. Thus, GE posted service technicians in around the world and provided out-of-hanger service whenever an engine had an issue. This minimized airplane downtime and motivated GE to deliver high quality engines and service – both GE and their clients were invested in the longevity of the product. In regards to smart cities, city governance can use such partnerships to incentivize productivity. For example, San Francisco can work with CalTrans/BART and the new BART train manufacturers and other such systems to ensure that the trains continue to run and minimize breakdowns. Essentially, BART, SF, and the train manufacturers only make money when they all work cohesively together to deliver value.
Second, Car2Go seeks to maximize asset utilization rates. Currently, the average American family has 2.5 cars which are only used 4 percent of the time. Car2Go car-sharing uses fuel-efficient and small Smart Cars to minimize emissions and allow for ease of parking (in the long term, smaller cars means smaller parking spaces, leading to more efficient land allocation). In the context of making itself a smart city, San Francisco can seek to maximize asset utilization rates with bicycles, homes, cars, and more. Pending legislation on AirBnB, Uber, Lyft, etc. will determine if we move forward in better utilizing our assets in our efforts to become “smarter.
Overall, becoming “smarter” is dependent on the ability to cultivate and sustain long-term relationships with all stakeholders.
I would like to reemphasize the importance of Jordan’s last point about breaking down silos to become more open in developing smart brownfield cities. As Professor Darwin mentioned in lecture, corporate innovation in America has been classified as “closed innovation” since the past 100 years. Only recently, in a high technology age in which secrets are virtually nonexistent, companies and individuals alike have resorted to open economies and open innovation in which everything is everyones.
In terms of smart cities, I think the ultimate question boils down to how we can reevaluate our existing decision making processes between energy and power providers, safety systems, recreational/maintenance authorities, and foster collaboration within the multiple municipal decision making authorities that run a city. In my opinion, sharing open technology platforms that track the performance of a network of smart cities is a possible solution to the problem.
Lets say we were to develop a Bay Area Smart Cities Initiative in which each city would be equipped with sensor technology to track and analyze its performance on the metrics of resource usage, traffic, crime, etc. This collaborative would not only encourage information sharing between neighboring cities, but it would also open up opportunities to collaborate and solve each other’s problems. In addition, it would loop in citizens and encourage social responsibility within communities. Overall, the smart cities dream can’t be accomplished with out city teamwork and open innovation.
Use Case #1 – Leveraging Coopetition
The partnership between Stratasys, Autodesk, and Walmart enabled customers, who wanted to buy 3D printed cars, to easily pick up their cars at the nearest Walmart. Autodesk provided the software, Stratasys provided the 3D printing technology, and Walmart provided its diverse distribution channels. Because these three qualities came together, each company benefitted. Other than incremental revenues from fees or contracts, Walmart gained customer traffic, Autodesk landed a new client, and Stratasys sold its cars for a fraction of the cost.
This same model could be applied in a city setting. With the increase in the number of hybrid and electric cars, there is a need for charging stations in a city like San Francisco. Instead of building new stations in plazas or malls, the charging station making companies could partner with the city to build stations directly into parking meters. This way, the company can reduce costs and usage of space for installing new charging stations by leveraging the plethora of parking meters around the city. This will allow drivers to charge wherever they park, instead of having to search particular locations that offer the service.
Use Case #2 – Leveraging “Partnership Across Product Lines”
The partnership between Cisco, EMC, and VMWare allowed businesses to easily get access to the cloud. Cisco provided its expertise in building network infrastructure, EMC provided storage, VMware provided servers. This enabled the three companies to offer an extensive cloud service product to businesses of all sizes at a fraction of the cost.
This same model could be applied in developing public wifi. With only few telecommunications companies controlling the market, the price of 3G and 4G data connectivity is shooting through the roof. To solve this problem, residential buildings and internet communication companies could work together to broaden the reach of residential wifi to a level that people walking in the streets could connect to that wifi. Doing so will reduce people’s dependence on 4G networks, and decrease the amount that they pay for data every month.
Use Case #1: Bus Shelter Company
One of the use cases that applies to smart cities is the example of the Bus Shelter Company that received its funding from the local government and used this money to pay for the manufacturing, installation, and design of its bus shelter infrastructure. Although the shelters could be improved, the company was unable to justify spending $10 million for this purpose. However, an ad agency offered to not only redesign the bus shelters, but to pay $5 million for the opportunity to do so. The investment benefited the ad agency by encouraging businesses to pay for hanging ads within the shelters, the bus shelter company by providing a new revenue source, and residents by offering improved waiting areas. This example illustrates how innovation within smart cities does not have to begin with the government, but rather with businesses that understand the long-term returns they can generate through seemingly costly partnerships with cities. We saw examples of this model in India, where the public-private partnership model is relatively costly for businesses but also presents new long-term revenue opportunities and access to valuable market information. By pursuing unique partnerships with businesses, cities will be able to offer additional value to residents and businesses without needing to utilize city funding to cover the expensive upfront investment costs.
Use Case #2: P&G and Clorox
The second use case is the partnership between P&G and Clorox after the purchase of Glad from First Brands. P&G had plastic technologies but no path to market, and Clorox had great distribution but lacked R&D. By creating a joint venture, these two companies were able to leverage each other’s unique strengths to overcome their weaknesses. Within the Bay Area, there are many opportunities to emulate this type of partnership between cities. One example of this model being extended to cities is the success of City CarShare, a non-profit organization that started in San Francisco in 2001 and then expanded into Berkeley, Oakland, and 7 other cities. As a small non-profit, City CarShare began in San Francisco since this city offers the largest customer base and market density. The organization’s quick success enabled it to expand to nearby cities within just a couple years, and this demonstrates how pilot programs can originate in a city offering optimal resources and market conditions but then also succeed in other cities. Each year, cities within the Bay Area launch numerous pilot programs related to transportation, waste management, and other key areas, and sharing the insights gleaned from these programs can accelerate innovation within all the partner cities.
One of the points that struck me in the Open Business Model is #2: Shifts from Market Places to Market Spaces. In the Philips Research example, we saw a literal demonstration of this principle with their 2003 choice to break down the walls of their research fortress. There are now 75 companies and 7,000 people working at their high-tech campus, and because of them Phillips has saved itself from irrelevancy. The new perspective toward R & D is that it is okay to take ideas from the more than 2 million scientists and engineers in the world through:
1. Investments in innovation intermediaries
2. Technology scouts
3.IP partnering
All three of these points have nothing to do with the old “market place” model where there are finite research centers, buyers and sellers meet, and there is a face to face interface. Rather, to stay relevant and innovative, companies must accept the new “market space” model in which not only customers, but ideas, are virtual, anywhere, everywhere, and changing 24/7.
The mobile phone industry is a great example of the shift from market place to market space:
Companies like RIM died because their business model was insular and based on the “market place” model of R&D from within the company and failed to take note of the rapidly changing desires of consumers in the market space. Nokia, on the other hand, took advantage of the misstep on RIM’s part and became the world’s largest mobile phone manufacturer. Samsung, however, soon surpassed Nokia using a “long tail” strategy in their product line. While Nokia was simply “operating” on their frontier, Samsung was strategizing where they could take advantage of the gaps in other phone companies’ models — and their model has worked to this day.
There were three key takeaways from our third lecture, and all three are fundamental to understanding how cities can become smarter by leveraging Open Innovation:
(1) Not all smart people work for you
(2) External R&D can create significant value
(3) Internal R&D is needed to claim a portion of the value
There are also three use cases that correspond with these takeaways and that can be applied in the building of smart cities. Read below for analysis:
(1) General Electric and “Rethinking Delivering the Value”
San Jose has invested a significant amount of money in their physical assets: 70% of their assets are infrastructure and 25% are buildings. This means that 95% of their total assets are large capital investments that would be costly for San Jose to maintain alone and also costly for another city to set up—which creates a mutually beneficial relationship if San Jose shares its infrastructure and vacant building spaces for the use of other city residents and businesses. The City of San Jose would be able to generate revenue from leasing spaces and driving traffic to their city at reduced rates and reduce costs through economies of scale by increasing the use of these public goods. Similarly, the partnering cities benefit from the collaboration, because they would not need to accumulate debt and invest heavily in setting up the infrastructure or buildings themselves, assuming that San Jose’s infrastructure has not reached maximum utilization. They would only pay by use and incur very small variable costs compared to the large capital investments already made by San Jose.
This “pay-by-use” concept of “dead assets” is perfectly illustrated by the use case with General Electric. Each time the company builds a single airplane, the airplane becomes a dead asset if it is not used. As a result, the company tried to give excess airplanes for free to more cost-efficient airlines such as Air India, but often times they would refuse to rely on the generosity of other companies and decline to take the airplanes. General Electric then thought of an innovative business model in which they will lease the airplanes to companies for free without taking any upfront payments and only collect money as the airline collects money from their passengers, calculated by flight hours. This creates a synergistic relationship between General Electric and airline companies, because GE makes use of assets that would have otherwise been wasted and the airlines can buy products fundamental to their service at a reduced rate.
(2) Amazon and the “Platform Business Model”
Similar to the aforementioned idea of “platform sharing” of large assets, San Jose can investigate the possibility of building an ecosystem of people who use their vacant services. Amazon most effectively demonstrates this “platform business model.” The company take a small percentage of the sale of each item sold through its website, but in addition to this revenue stream, the company also allows other people to use their vacant servers and available back office functions. As more people joined this platform, economies of scale began to take place with increased sellers and products—not just for Amazon, but also everyone else using the system. As a result, Amazon’s server and back office costs decreased and incremental revenue increased from alternative revenue streams. Even more importantly, as more sellers and buyers become increasingly dependent on Amazon’s platform, they become advocates of the system and a backbone in case the platform attracts opposition in the future.
Cities can learn from this model, because it creates an ecosystem that people thrive within and cannot live without. Since cities benefit from a positive brand perception, growing tourism, and satisfied citizens, the “platform business model” for a city—which may take the form of an increase in citizen participation in business activities—achieves all these objectives while optimizing costs and increasing revenue for the municipal government. It will be very exciting to brainstorm creative partnerships and alternative funding sources for the city of San Jose.
(3) Cisco-EMC-VMWare and their “Partnership Across Product Lines”
To add onto the “platform sharing” concept of the two use cases above, the Cisco-EMC-VMWare partnership across product lines demonstrates another way to share a single platform—to divide and conquer. To take over the cloud storage industry from HP and IBM, the 4 critical components of the cloud infrastructure were all provided by different companies: Cisco provided network infrastructure, EMC offered storage capabilities, VMWare managed the server technology and orchestration software, and Intel stepped in with their VCE chips. With the combination of each of their expertise and existing investment in different technologies, they were all able to capitalize on a share of the market, minimize costs and increase efficiency compared to if each of them did not collaborate and attempted to monopolize all services alone.
This partnership structure has also taken place among other industries such as 3D printing. Stratasys, Autodesk, Walmart, and Urbee each provided the technology, talent, sales channels, and materials required to produce a 3D-printed vehicle. The collaboration reduced each of their investment, lowered the risk of the venture, created a greater ecosystem and thus generated greater revenue, brought in professional expertise from diverse businesses, and increased customer satisfaction from knowing that many parties are involved in the building of the product, including safety precautions and multiple trial runs from different perspectives. What cities can learn from these two examples is the opportunity to outsource certain functions to other cities or organizations.
The City of San Jose already indicates that they are moving in the right direction. The city recognizes its existing capabilities in the technology sector and does not attempt to compete with manufacturing-centric cities such as Detroit or financial services hubs like San Francisco and New York. Given its niche role, its citizens often specialize in that particular field and are therefore very productive in their day-to-day work. In addition, with the operations of public programs such as Child and Family Services, they seek help from nonprofits and third-party organizations to best deliver value to their citizens. This reflects a level of maturity and development that the San Jose municipal government has that enables it to maximize utility from other people’s talents and capabilities without adding to payroll or overhead costs. The key benefit to these “platform sharing” cases is that the organizations involved can accumulate more brainpower from the public without adding payroll, can expand the market or category, and facilitate faster progress.
In class on Thursday, Professor Darwin’s lecture covered the concept of leveraging open innovation in order to capture value. The presentation covered several cases of corporations reshaping their infrastructure and business models to survive in times of changing market conditions. The lessons we learned from these cases will serve as great guidelines that can be applied throughout the semester as we work in our respective cities.
One successful case of leveraging open innovation was with one of today’s largest technology and consulting corporation: IBM. In the 1960s and 1970s, IBM became one of the most dominant companies in its industry. For years, the company utilized a closed innovation model, ensuring that its patents, technology, and information remained guarded with secrecy. However, as the 1990s emerged, the closed innovation model became less applicable. As the world opened up and information became free flowing, IBM began to creak under the weight of massive losses. To mitigate this loss, the executives of IBM knew that they would have to alter their company framework and model. To mitigate consequences arising from the changing market, IBM began to outsource much of their processes to foreign countries with cheaper labor such as to workers in China. Outsourcing, at that time, was a novel concept not commonly used amongst many companies. In addition, out of necessity, IBM adopted considerably more unusual and risky solutions. For example, IBM began to offer its semiconductor technology to other companies and reduced the amount of resource allocation to research and development. It also increased the amount of revenue through licensing, quickly becoming not just a producer of cutting-edge but also knowledge broker. For example, IBM began to provide its knowledge to other businesses and entities such as the government institutions allowing for an outflow of information. To a certain extent, cities can follow IBM’s strategy to increase overall efficiency. As mentioned in India, cities, rather than working in silos, can work in conjunction with other cities to create value. For example, if a city like San Jose is looking to increase its overall sustainability efforts, it could work closely with other cities such as San Francisco and Portland known for their exceptional sustainability efforts allowing for an inflow of information. On the other hand, San Jose can leverage its own strengths by sharing its best practices for its excellent public safety program. Like IBM, cities can create a network for information outflow and inflow to further improve areas such as infrastructure, sustainability, education, and much more.
Another case of leveraging open innovation that Professor Darwin covered in class was a case study with P&G and Clorox. P&G and Clorox often found themselves competing. However, rather than engaging in fierce competition, the two companies found a way to leverage both their strengths to ultimately create remarkable results. P&G had created two plastic technologies that wanted to distribute to the broad market particularly in Asia. However, this was difficult for P&G because it lacked the proper distribution network that would allow it to penetrate into international markets. On the other hand, Clorox lacked an R&D pipeline but did indeed have greater access to markets overseas. As a result, the two companies created a joint venture in which P&G would provide share its technologies and Clorox would offer its distribution channel allowing them to leverage each of their strengths to increase overall profitability for both companies. This sort of strategy can also be applied to cities as well. This type of partnership, in the case for cities, can come in the form of public-private partnerships. In India, we saw that public private partnerships are commonly used to jumpstart and complete initiatives. For San Jose, the city can also foster partnerships with certain private corporations that will allow both groups to leverage their strengths. One of the many goals in San Jose is to citywide Wi-Fi that is accessible and fast for its residents. San Jose can partner with a private corporation that provides wide-range networks. While this company can provide San Jose with the technology to implement a city-wide Wi-Fi network, San Jose can help to subsidize the costs with the equipment and technologies needed for the system. This is only one example that mimics the Competition Model that P&G and Clorox utilized. There are many other possibilities that cities can use that takes after this particular model.
In our second lecture of the semester, Professor Darwin discussed how organizations leverage open innovation. This subject was a seamless a transition from our first lecture concerning the importance of innovation. We had previously established that open innovation is critical for the building of smart cities and now Professor Darwin broke down exactly how organizations use open innovation to facilitate growth and change.
The two cases I found to be particularly applicable to smart cities are the “IBM Story” and the “Coopetition Model.” In the story of IBM, Professor Darwin explained that IBM adopted an unusual and risky solution out of necessity: IBM offered its semiconductor technology to others, which increased licensing revenue and opened up its IP. Furthermore, this decision decreased R&D through alliances. Within an open innovation model we know that there is both an outflow and an inflow of knowledge. In this instance, IBM’s outflow of knowledge is to provide information to businesses and governments to build a smarter planet. IBM’s inflow of knowledge is to work with 5,000 universities worldwide and to identify entrepreneurs. Applying this example to smart cities, we can see that IBM’s decision to innovate openly resulted in laying the foundation for a smarter planet. Should more companies commit to open innovation, we would see smarter cities as all stakeholders gain access to the same information and can progress more quickly.
The second case is the Coopetition Model. As seen with the P&G and Clorox example, it is possible to convert your enemy into a friend. Although the two companies have been historically fierce competitors, they created a joint venture. The venture ended up being not only beneficial to customers, but to both companies. This is yet another way in which open innovation can spur improvements for all stakeholders. This model can also be applied to smart cities if competitors are willing to collaborate in order to advance their own interests as well as the common goal of creating more efficient cities.
1. COOPETITION MODEL
Professor Darwin presented a P&G and Clorox case study – in which P&G had plastic technologies but did not have the resources to go to market. And Clorox did not have R&D but has great distribution channels. Given that the weaknesses and strengths are complimentary, then instead of viewing each other as competition they decided to cooperate with one another in a joint venture to take a great product to market. In doing so, they found a way to no longer compete with one another, as they specialized in certain areas of the supply chain.
Perhaps Oakland could partner up with Berkeley, San Francisco, and San Jose to create a coopetition model. Since resources are scarce and each city has different needs, then it would be advisable to do a SWOT analysis to see what are the key areas where each group can form a joint venture. For instance, Oakland spends more than half their budget on the police force to try to reduce crime and ensure public safety. San Francisco has a lot of resources and capital especially within tech and finance industry – it would be beneficial for the tech sector to work with the police department to help try to come up with smart tools to respond to emergencies. There are many other examples but it’s difficult to come up with specific and highly detailed ones – as everything is so political and integrated. But overall, it would be good to see other cities work together to funnel resources from some cities to other cities that are economically weak.
2. RETHINKING DELIVERING THE VALUE
This is one of my favorite examples in class – it’s a case study on the airlines and GE aviation. Basically, GE agree that they would not charge money when the planes are not flying / in the shop – but rather, they will only charge for the miles that are flown. In this way, the incentives of both companies are aligned, in that they both will earn money when the plane is working efficiently and transporting people from point a to point b. This is rethinking how each group is capturing value, and then modeling their behavior to capture the most value.
So in regards to our projects – we can rethink how certain federal services are run to try to align incentives with efficient behavior. For instance, going back to the police department a lot of the money goes to an increase in salaries to adjust for standard of living (~2% increase for every employee). At the same time, the media and many neighborhoods are critical with the services provided indicating that they are not receiving the optimal value given spending…perhaps the payment of police officers should be based on the quality of work/improvement to the neighborhood. I know, this sounds like a quota system but perhaps we can define stricter guidelines to illustrate which activities improves communities (i.e: community meetings and check-ins as opposed to giving recognition to officers based on number of tickets given out.)
Oh also, here is a recent article about the closer relations between America and India. And India’s more active role in Asia: http://www.economist.com/news/asia/21641295-closer-relations-america-will-make-india-more-active-asia-bit-more-player?zid=306&ah=1b164dbd43b0cb27ba0d4c3b12a5e227
In class today, we discussed current smart city initiatives in cities around the world, followed by Professor Darwin’s lecture on case studies about the value creation and capture enabled by open innovation. Two specific cases in particular stuck out to me that can be applied to our own smart city business models.
The idea of asset-light models challenges the notion that we need many assets in order to reach efficiency and profit maximization. Professor Darwin gave the example of the airline industry, where airline companies lease airplanes instead of owning their own. Rather than having each individual airline company own their own planes, the airplane manufacturers can achieve better economies of scale that bring better profit margins for both airplane manufacturers and airline companies. This model can be applied in our smart city design via asset-sharing initiatives. We area already seeing this type of initiative with services such as Airbnb, Uber, etc. where existing assets can be shared.
Another use case that stuck out to me was the online platform business model. The online space has so much potential to break down silos (as a few classmates have also discussed) and support open innovation. This is something we already see in current smart city initiatives, such as the Smart Citizen Kit in Amsterdam, where information can be collected in the cloud from a variety of industries. For instance, the Smart Citizen Kit collects information about noise, air pollution, sunshine, etc. Different industries can pay to have access to such information. This model also compliments the asset-light model.
With regards to the building of smart cities, Professor Darwin raised a very thought-provoking and interesting point about open innovation at the beginning of lecture that should be considered by all executives in their corporate decision-making processes: Not all smart people work for a specific company, and they need to find ways to tap into the global brain and seek knowledge from others. The Proctor & Gamble story was a direct representation of this important point, as they were forced to look beyond the company to acquire 50% of their innovations from outside P&G in order to counter the sudden drop in company performance by 31% in a day. As we have observed through our corporate visits in India, open innovation is all about sharing information to combine the best mix of resources in the creation of value, which in turns leads to the capturing of value thereafter. Firms need to understand their strategic value and positioning in the building of smart cities, so that they can realize how to best work with other parties in order to optimize this knowledge and make better decisions. Once P&G realized this and worked with external sources, they became a much more flexible model in their product development, and thus restored their resulting share price successfully. Furthermore, this also ties in with the competition model, in which the partnership between P&G and Clorox proved to be much more effective because of their respective competitive advantages in various areas that the other lacked. (research and development versus distribution channels)
Expanding along the importance of sharing resources and incremental mutual benefit through the implementation of an open business model, Amazon’s approach using the platform business model emphasizes this. From Amazon’s previous business of only selling books, it shifted to an effective eCommerce model that comprises of taking a small percentage of the sale of each item through its website. The sharing of its service space spread operating costs across all of its vendors and consequently maximized economies of scale for the benefit of all parties. While Amazon continues to grow rapidly with an increasing number of vendors, it flexibly adapts to disruptive market forces. This mutually beneficial relationship it has established with its vendors breaks down silos (both externally and internally within the company) and thus creates a sustainable platform in which its vendors are becoming increasingly reliant upon and loyal towards.
Innovations, whether originating in tradition or using modern awareness, are evolved by communities as well as by individuals. Innovations in technological, cultural or institutional subsets often remain isolated and unconnected despite an otherwise reasonably robust informal knowledge network in existence. An extensive knowledge network that connects innovation, enterprise and investments in an institutional context is what appears to be the most viable approach for sustainable development in future. Similar to that of the Honey Bee Network, which we first learned about from Professor Anil Gupta of IIM Ahmedabad, the use cases of companies such as IBM and Nike highlight the unbounded potential of open innovation and open sourcing in leading to growth.
(1) IBM shifted its closed business model to a more open model as a result of massive losses. The shift brought about significant results that went beyond recovering the losses – $90 billion in revenue came from new businesses that didn’t exist prior. IBM used its expertise to provide knowledge and offered its semiconductor technology to businesses and governments to build a “smarter planet.” Additionally, an unofficial network was created to link businesses with ideas and individuals, fostering collaboration between multiple parties. R&D costs were also then mitigated through these partnerships and alliances.
(2) Nike, in 2010, created a new web-based market place called GreenXchange, which laid out 400 patents for eco-friendly materials and technologies. The underlying principle behind the open sourcing of the patents relies on the hope or notion that others will build upon and improve the patents and ideas presented in the exchange. As a result, Nike has formed a giant think tank for corporate sustainability, which has led to new sustainability business models and innovations. As corporations finally realize that sustainability is a key driver in the coming decades, forefront companies such as Nike are creating networks where others can join in to succeed or fail together.
In building smart cities, innovation will involve interactions between numerous firms and organizations through a distributed or networked innovation process. Just as the use cases listed above illustrate, open source networks can easily foster these interactions.
#1 The new airline business model: A fixed asset that isn’t put to use is a dead asset. General Electric had built many fuel-efficient and technologically advanced airplane engines but could not sell them at the onset of the Great Recession. Meanwhile, it incurred large costs to store the engines in warehouses and the possibility that newer technology would be developed that could render the new engines obsolete. It offered to give the engines for free to Air India, but the airline refused over concerns that it wouldn’t make sense for them to pay the engines’ maintenance expenses if they are only able to fly a few passengers. GE then offered to give the engines to Air India and a pay-by-use pricing structure where the airline would pay maintenance expenses according to flight hours per passenger logged. GE benefits by putting a dead asset to productive use and Air India gets modernized engines that it only pays for if it’s able to sell tickets. Smart cities will benefit from rethinking traditional business models in an ever-changing world.
#2: The Platform Sharing Business Model: Amazon.com is among the word’s most visited sites and one of top ecommerce companies. As a result, it has developed a sophisticated infrastructure that efficiently handles every step of processing the order starting from the moment the visitor gets suggestions on what to buy to packing the products. There is a lot of excess capacity because Amazon can handle much more orders than what’s demanded. This unused capacity would be wasted if Amazon did not allow anyone, no matter how large or small their business is, to sell their items through Amazon.com and use the website’s vacant servers and other available administrative functions in exchange for paying Amazon a fee for every item sold. Sellers can even hand off their goods to Amazon’s distribution centers to take advantage of the company’s fast order fulfillment systems, and customers can even have these items shipped quickly via Prime. The smart cities of the future can be efficient with their spending by sharing their resources so that fixed assets are utilized as much as possible.
Innovations within corporations are critical for the sustainability of a brand and company in a market with changing customer preferences.
The professor touched on several traditional concepts of corporate innovations which include hybridizing products, or shifting from fixed assets to leased assets. These strategies have not only streamlined business operations, but have also created synergies across brands and businesses.
The Nike example demonstrates the business adaptation to paradigm shifts. One of the most recent paradigm shifts, which is also reflective of the open innovation concept stems from git hub and open sourced software. This is definitely something that should be incorporated into smart city models. It is very necessary due to the in-feasibility of cities to build smart platforms in-house, and so that they can have access to best practice projects.
Another use case which I have recently been a part of concerns open innovation across citizen groups through the common core standards in school. High Schools in Richmond have implemented consulting projects which partner students with city representatives and the private urban planning sector. It provides a platform for open innovation and education, in a closed feedback system where the value created by the innovations of students is channeled back to the executor, the policy makers, businesses, etc. This concept should be yet another paradigm shift, an active stakeholder engagement model which is better at capturing the value of shared information.
Use Case #1- Nike
In 2010, Nike put out 400 patents to the public that ranged from like eco-friendly materials and new technology. They built a web-based market place called Green Exchange in hope that others can improve and add upon their patents. This was brilliant because it created an ecosystem of sharing, where companies from non-competitive fields could apply Nike’s patents to their products. This created value for Nike without added payroll because through the open sourced platform, people were sharing ideas collaboratively. Tesla did the same thing with their patents; they kept it open because Tesla hopes that other vehicle manufacturers will convert to electric vehicles. Ultimately, Tesla has a bigger vision of profiting off an electric vehicle infrastructure, rather than just the electric vehicle.
The same can be applied to smart city planning. An SDK (service development kit) can be specific to cities, where developers, corporations, and the general public can harmonize API’s (application programming interfaces) across cities and industries to make cities more interoperable. By making these open source, new services and applications can be rapidly developed, scaled, and reused through providing a range of tools and information for both cities and developers. A “CitySDK” helps cities captures innovation potential and the expertise of the local and global community, diminishes the risk related to rapidly changing technology trends, and provides citizens with an option to choose from wider selection of services.
Use Case #2- IBM
IBM currently works with 5000 universities worldwide to bring in new ideas and identify young talent. This has created a lot of value for IBM because even the most talented engineers and businesspeople fall prey to redundancy and bureaucracy within large corporations. To mitigate this, IBM holds “SmartCamps” in Healthcare and Smart City Planning for university students. This is beneficial to IBM because it increases knowledge and usership of IBM platforms, it also serves as an opportunity for young minds to contribute fresh ideas to improve upon these technologies, and it gives them early access to potential future IBM employees.
Cities can leverage university talent by hosting “hackathons” or case competitions. The city can pose a question or problem, and teams of university students can submit their cases and present to city officials. This is a cost effective way to garner new ideas and improve cities because students are willing to participate for free if the outcome results in an internship, letter of recommendation, or small monetary prize. It also promotes public participation and increases transparency between government and the public.
Lecture 3:
Professor Darwin’s lecture consisted of how various organizations (companies) leverages Open Innovation to create and capture value. More specifically I would like to focus on two companies use cases: Nike and Amazon whose business models could be applied in the building of smart cities.
In 2010, Nike created a new web-based market place called GreenXchange, which put out 400 patents for eco-friendly materials and technologies. This shift in open sourcing of the patents relied on the hope that others would continue to build upon (and improve) the patents and its ideals. Much like the HoneyBee Network we learned in Ahmedabad, India, Nike is trying to form a huge thinking incubator for corporate social sustainability. Now more than ever, corporations are realizing that sustainability is a key driver to create and capture value. Forefront companies like Nike are creating networks where others can join in and create something together.
Amazon.com is arguably one of the most visited sites to date, hailing as a top-of-the-notch ecommerce company. This is because Amazon.com’s business model is unlike any other company. As a result, such a comprehensive business model infrastructure allows every step of the transaction to be efficiently handled. I learned, through professor’s lecture, that the key to Amazon’s success is derived from the fact that sellers can sell their items through Amazon.com. Sellers have the option to hand off their goods to Amazon’s distribution centers or send it off themselves. I believe this at of sharing resources are key as we began to consult for our respective bay area cities.