Open Innovation Strategies
Institution Netflix Uses an Outside-in Open Innovation Strategy
The American company, Netflix, embraced a publicly open innovation strategy to handle some of their complex problems and encourage the development of its products and services. Netflix Prize is the process innovation challenge that Netflix used to encourage the general public to compete in the generation of a suitable filtering algorithm that would improve user series or movie suggestions by about 10 percent. Precisely, the competition was open for every person other than those professionally linked with Netflix. Accordingly, Netflix would offer a grand prize of one million USD for the winner.
In less than two years, more than 40, 000 teams from at least 186 nations had participated in the competition. Subsequently, Netflix found the most effective solution within three years after the participation of 51,051 contestants. Besides, two teams provided suitable solutions, but only one won the prize. However, Netflix opted to utilize an alternative solution that attracted, and improvement rate of 8.43 percent since adoption of the algorithm of the grand-prize winner was too costly. Therefore, Netflix emerged victorious by using talented programmers from a wide pool of individuals in the public domain.
Even so, the participants in the project embraced the use of teams to facilitate better creativity and innovation. Professional programmers gained synergy for developing and refining their algorithms by working in teams. Luckily, the relatively large number of contestants suggests that the public open innovation strategy enjoys contributions from a wide array of professionals. Besides, Netflix managed to acquire an appropriate solution on time because contestants had the freedom to choose their most preferred partners.
Serko is a New Zealand firm that relies on inside-out intercompany open innovation strategy to facilitate the development and resolution of problems. In July 2019, Serko sought support and contributions from FaceMe to develop a digital travel assistant. The two companies teamed up to develop a better solution for handling travel services. Luckily, each firm made vital contributions following its expertise and competence in their different areas of specialization. Serko strives to develop the most appropriate solutions for handling corporate travel and management of expenditures. On the other hand, FaceMe focuses on digital human technology. Consequently, the team created a digital, visual representation of a human assistant.
Serko used its original online travel booking platform called Zeno as the baseline for the new development. Accordingly, the innovation would effectively work with the existing infrastructure. Fortunately, the digital human assistant communicates and interacts with travelers in a human-like version. Specifically, FaceMe’s Intelligent Digital Human platform powers and improves Zeno’s functionality. Thus, the team emerged victorious by developing the first digital human travel assistant that offer personalized booking services.
Hence, it could be impossible for either Serko or FaceMe to develop a working digital human travel assistant since each firm has unique capabilities. The innovation demanded contributions from a firm with advanced skills and knowledge in Artificial Intelligence (FaceMe) as well as in the tours and travel industry (Serko). Accordingly, Serko offers Zeno, a next-generation online booking tool that processes over 20,000 bookings per day with lots of efficiency and accuracy.
Effectiveness of Netflix’s Publicly Open Innovation Strategy
Netflix realized its target goal of developing a suitable algorithm for filtering recommendations by its clients. Moreover, the company reached out to numerous persons, thus expanding its popularity. Therefore, the publicly open strategy (outside-in) could serve as a marketing tool for firms that target the general public. However, Netflix is not a hundred percent successful because it (Netflix) chose an algorithm that compromises the privacy of customers.
Effectiveness of Serko’s Intercompany Innovation Strategy
Serko’s intercompany inside-out innovation strategy is highly effective because it resulted in the development of a digital human travel assistant that integrates well with its existing online booking platform. Besides, Serko’s corporate clients are enjoying seamless booking services and better interactions and communications. Likewise, FaceMe enjoys an improved reputation following its contributions on matters about Artificial Intelligence. Moreover, each firm finds hidden expertise in their partners. Serko could probably not understand and appreciate FaceMe’s expertise in AI, if not for the engagement. Similarly, FaceMe could perhaps not apprehend and acknowledge Serko’s expertise in online booking systems if not for the joined venture. Fortunately, the two companies gain synergy by exploring their collective knowledge.
Netflix financial result based on its innovation strategy
Very little can be attributed to Netflix's finances in regards to its outside-in public open innovation strategy. It can also be notable that Netflix had planned to hold the innovation challenge annually. However, Netflix's prize was canceled after a multi-million dollar suit was brought against them in California for privacy invasion. This lawsuit came as a result of them embracing an outside-in open innovation strategy where they lacked an in-house team who knew what to do within the limits of the law. It is therefore advisable for any organization to use inside-out innovation strategy as they use their research and development department that is well aware of the full effect of the law.
Still, Netflix's choice of process innovation as the type of innovation strategy did little to reduce the cost of operations. The team that won the Netflix prize provided a complex inapplicable model that prove challenging to implement in real life. So in a way, the organization spent money that they probably would not recover.
It is also arguable that since the competition was open to the public, there were several entries which had very little to do with the competition hence a lot of operational costs incurred by judges who either accept or rejects entries.
Serko financial result based on its innovation strategy
Serko has been able to reap benefits from its inside-out approach. Its financial resources have been used to enhance the simple online booking system; hence most of their clients have benefited. Moreover, Serko enjoys high-financial prosperity with operating revenue growth of 28 percent. By the end of 2019, Serko was working with operating revenue of $23.4M, which attributes to their intercompany strategy. With success on the human digital online booking system, Serko has been able to manage 20,000 bookings accumulating over 4.5 billion dollars annually, with total estimated operating revenue at the end of March 2020 expected to have risen by 20%.
Serko has also seen an upward shift in its share price from $4.44 to $5.23 in four days in December 2019. A clear indication of excellent quality performance possibly derived from using its resources and competence to develop Zeno.
Comparison between Serko and Netflix
Serko (Inside-out, product innovation intercompany strategy) Netflix (outside-in, process innovation public strategy)
The development team has several resources at its disposal. Since the development team is from members of the public, it will be hard to find enough finances to use in product development.
Mainly not customer-centered. Since members of the public are engaged, they try to adopt the publics’ idea.
Easy to adapt to changes as the organization quickly adopt the critical changes with speed, as of late implementation result in loss of opportunities Very difficult to embrace changes as the product developed has to be tested and piloted to see if its application is economical to the organization.
Beliefs that customers don’t know what they want and try to provide any want that the consumer may wish to. Beliefs that every consumer knows what they want, and can provide a clear view of the same.
Enhance well-established distribution channels. Expect growth and development of new distribution channels.
A well-established product by the company’s effort result in significant profit for the firm. An in-depth analysis of the market needs and wants the result to reasonable profit for the firm.
Well improved product. A well-improved method of production.
An organization should embrace a balanced combination of inside-out and outside-in approach as when the two are effectively utilized, and they result in maximum yields. The reason is because of outside-in figures out what consumer wants, the value each consumer derives from the product, and the consumers’ cultural demographics. Whereas an inside-in approach mainly uses organization resources, competencies, and talents to the attainment of a new or improved product, services, delivery method, marketing styles, and designs. The two ways of open innovation are essential and provide the best output when using hand in hand.
In regards to the type of innovation, it is crucial to use the product innovation method as it concerns improving the product that the customers consume. An improved product tends to get a broader market compared to a normal product despite changing the process of innovation. Like in the case of Serko, Serko was able to achieve high profit and are likely to continue with the intercompany open innovation strategy because they were focusing on product enhancement. Netflix, on the other hand, through its Netflix Prize, was only able to get a new way of selecting optional programs for their customer. As that is just a delivery concept and not the product or service, it is hard to get any reasonable financial gain from it.
The use of intercompany strategy also provided Serko with high capital (in terms of money and even machinery), competency (relevant skills and know-how), and personnel that Serko might have lacked in respect to FaceMe digital Human Interface. So it is therefore advisable for companies to try and embrace a model that allows it to have access to enough funds, skilled workforce and the right technology. Still, there is a specialization that leads to comparative advantage enabling Serko to produce in large quantities what it is known for and expected to provide.
Bell, R.and Koren, Y. (2007). Lessons from the Netflix prize challenge. ACM SIGKDD Explorations Newsletter, 9(2), p.75.
Business Travel Executive | News. (2020). Business Travel Executive | News. [online] Available at: https://www.businesstravelexecutive.com/news/serko-and-faceme-to-unveil-digital-human-for-corporate-travel [Accessed 19 Feb. 2020].
Eriksson Lundström, J., Wiberg, M., Hrastinski, S., Edenius, M. and Ȧgerfalk, P. (2013). Managing Open Innovation Technologies. Berlin, Heidelberg: Springer.
The Netflix Prize: Crowdsourcing to Improve DVD Recommendations – Digital Eriksson Lundström, J., Wiberg, M., Hrastinski, S., Edenius, M. and Ȧgerfalk, P. (2013). Managing Open Innovation Technologies. Berlin, Heidelberg: Springer.