Introduction to service innovation

429 Service Innovation

Introduction to Service Innovation

Per Egil PedersenCenter for Service Innovation (CSI)Norges handelshøyskole

Outline

1. The interest in services – why?2. Services – definitions, characteristics and

perspectives3. Service innovation – challenges and characteristics4. Innovation management implications

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1. Background and recent interest• Fundamentals

– Service industries represent about 60-70% of gross domestic product and 70-80% of employment in most western countries/economies

– In addition, services in manufacturing industries should be added

– Service industries receive only about 30% of financial government support of innovation… why is that?

• Potential– Demand for services grows faster that the demand for

manufactured goods (Government proposition on Innovation, p. 82)

– Productivity growth in European service industries is low. In US almost all productivity growth can be explained by the productivity growth in the service sector

– KIBS among the most innovative industries of all (self reported)

– In open programs, service innovation projects represent app. 50% of projects (not funding)

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Recent interest in these issues…

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Outline



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2.1 Services and service – different meanings• Service and services – definitions:

– Economics … A service is the intangible equivalent of an economic good. Service provision is often an economic activity where the buyer does not generally, except by exclusive contract, obtain exclusive ownership of the thing purchased.

– Grønroos (1990): A service is an activity or a series of activities of a more or less intangible nature that normally, but not necessarily, take place in interaction between the customer and service employees and/or physical resources or goods and/or systems of the services provider, which are provided as solutions to customer problems.

• Service and services- services first:– Services as service industries – the traditional meaning focused in

service marketing and in service studies in the 90’s– Services as knowledge intensive services – the late-90’s interpretation

of “important” service providers focused in the KIBS and KISA literature– Services as value added services – the interpretation of services as

value added services and service encapsulation used in studies of manufacturing industries. Renewed interest in 20’s

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Services as service industries 1

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Services as service industries 2• Service industries are represented by all industries with NACE-codes above 45 (Norway),

that is ”wholesale trade and up”…– Consumer services: Services to domestic consumers (banking, insurance, travel and

tourism, leisure, telecommunications, etc…)– Industrial services: Services to business customers (including some of the above if

serving both segments, but also business services)– Business services: Services provided by specialized firms to other firms (e.g.

accounting, legal, design, maintenance, personnell)– Market vs. non-market services:

Services produced for sale on themarket at a price vs. provided to the community as a whole free of charge

– Public services: services provided by government to its citizens, either directly (through the public sector) or by financing private provision of services

• Why the interest in this sector, the traditional figure (Copyright IBM):

• Norway….8

Categorizing services in research 1 – service characteristics

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Categorizing services in research 2 – service industry characteristics• Soete and Miozzo (from Pavitt, 2001):

– Supplier dominated (e.g. public and personal services)

– Scale intensive physical networks (e.g. transport)

– Network services (e.g. telecoms and banks)

– Specialized services (e.g. KIBS)

• In a study in 2005, Pedersen and Nysveen (2005) identified at least 40 different industry classifications applied in services

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Think – Example, when does an industry become a service industry?

• In previous NACE categories J58 waspart of C18 Printing

• What about the other sectors that will be transformed by digitization? Will they also gradually be Information and communication services?

• How about manufacturing sectors? Are they already, e.g. oil and gas?

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J - Information and communication J58 - Publishing activities J58.1 - Publishing of books, periodicals and other publishing activities J58.1.1 - Book publishing J58.1.2 - Publishing of directories and mailing lists J58.1.3 - Publishing of newspapers J58.1.4 - Publishing of journals and periodicals J58.1.9 - Other publishing activities J58.2 - Software publishing J58.2.1 - Publishing of computer games J58.2.9 - Other software publishing J59 - Motion picture, video and television programme production, sound recording and music publishing activities J59.1 - Motion picture, video and television programme activities J59.1.1 - Motion picture, video and television programme production activities J59.1.2 - Motion picture, video and television programme post-production activities J59.1.3 - Motion picture, video and television programme distribution activities J59.1.4 - Motion picture projection activities J59.2 - Sound recording and music publishing activities J59.2.0 - Sound recording and music publishing activities J60 - Programming and broadcasting activities J60.1 - Radio broadcasting J60.1.0 - Radio broadcasting J60.2 - Television programming and broadcasting activities J60.2.0 - Television programming and broadcasting activities J61 - Telecommunications J61.1 - Wired telecommunications activities J61.1.0 - Wired telecommunications activities J61.2 - Wireless telecommunications activities J61.2.0 - Wireless telecommunications activities J61.3 - Satellite telecommunications activities J61.3.0 - Satellite telecommunications activities J61.9 - Other telecommunications activities J61.9.0 - Other telecommunications activities J62 - Computer programming, consultancy and related activities J62.0 - Computer programming, consultancy and related activities J62.0.1 - Computer programming activities J62.0.2 - Computer consultancy activities J62.0.3 - Computer facilities management activities J62.0.9 - Other information technology and computer service activities J63 - Information service activities J63.1 - Data processing, hosting and related activities; web portals J63.1.1 - Data processing, hosting and related activities J63.1.2 - Web portals J63.9 - Other information service activities J63.9.1 - News agency activities J63.9.9 - Other information service activities n.e.c.

Service industry characteristics - employment

12Source SSB

Employment, share of persons employed

PrimaryManufacturingServices

Gross domestic product

13Source SSB

GDP (fixed proces mill NOK)


Productivity

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Source SSB

Accumulated change in GDP pr. hour (1970=100)

Baumol’sdisease still relevant?


Maroto and Rubalcaba (2008)• Baumol: In some sectors work is the ends

(required in the offering not to produce the offering), and demand in many such sectors is less affected by prices – increasing labour and low productivity growth

• Productivity paradox: Low productivity growth despite investments in technology

• Large differences between services, some contribute negatively (e.g. hotels, personal services, business services… ends and low technology…) to productivity growth, some positively (communications, financial, public … means and high technology….)

• Large cross sectoral productivity effecs of services (e.g. outsourcing, business services)

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Industries differ…..

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Retail tradePost and telecomFinancial servicesKIBSManufacturing

Development- US versus Europe

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Source Van Ark et al, 2008

Cause(van Ark et al, 2008):

Much stronger growth in

service productivity inUS than in EU since 1995

… it is possible…

… with innovation …

Innovation costs …

18Source SSB

Share of costs for and public funding of innovation (FoU/R&D, RDI)

Costs manufacturingPublic funding (man.)Costs servicesPublic funding (serv)

Services as knowledge intensive services 1• KIBS – Knowledge intensive business services: Research in late 90’s

suggested that some services where unique:– With respect to growth– With respect to their innovativeness– With respect to their importance to innovation

(in other sectors)– These were termed KIBS - Wikipedia: knowledge-intensive support for

the business processes of other organizations. T-KIBS, (those with high use of scientific and technological knowledge - R&D services, engineering services, computer services, etc.), and P-KIBS, who are more traditional professional services - legal, accountancy, and many management consultancy and marketing services.

– Aslesen and Isaksen (2007): it is a paradox that the large, supposed importance of KIBS does not show up more explicitly in quantitative innovation studies…

• KISA – Knowledge intensive service activities

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Industries differ…..

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Retail tradePost and telecomFinancial servicesKIBSManufacturing

Maroto and Rubalcaba (2008)• Baumol: In some sectors work is the ends

(required in the offering not to produce the offering), and demand in many such sectors is less affected by prices – increasing labour and low productivity growth

• Productivity paradox: Low productivity growth despite investments in technology

• Large differences between services, some contribute negatively (e.g. hotels, personal services, business services… ends and low technology…) to productivity growth, some positively (communications, financial, public … means and high technology….)

• Large cross sectoral productivity effecs of services (e.g. outsourcing, business services)

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Services as knowledge intensive services 2• KISA – Knowledge intensive service activities

– Activities that can be carried out by external, specialized KIBS (Knowledge-Intensive Business Service firms) or in-house by employees of the firms using the KISA in question. They are all “knowledge-intensive” in terms of various indicators (Jones and Miles, 2008)

– Differences (Aslesen and Isaksen, 2007):

• Wider set of players • Market and non-market

exchange• Co-production of knowledge

(between provider and client)

– Seem to play a significant role in innovation, but difficult to manage due to a combination of internal and external knowledge sources and various forms of exchange (e.g. innovation policy)

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Think – Outsourcing KISA in manufacturing• Examples:

– Accounting– Personnel services /HR– Payroll– Cleaning services– Property management and maintenance– Customer support services– IT services

• Why are they outsourced?• How does it affect effectivity?• How does it affect productivity?

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Services as value added services

• Maintenance…. but….

• GPS correction signal• Tractor software• JDOffice Agricultural Accounting• Stellar support education• John Deere Credit Company• John Deere Health• FoodOrigins (food tracking services) • Etc…

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Servitization (Oliva and Kallenberg, 2003) and product-service systems

• A Product-Service System is an integrated product and service offering that delivers value in use (to be explained later).

• Typical steps (for all goods producing firms):– Consolidating product-related services (internal efficiency)– Entering the installed base service market (define profit opportunity in services

market itself)– Expanding to relationship-based services (co-production of client services)

• or

– Expanding to process-centered services (consulting, cover al brands etc.)– Taking over end-users operations (from paint producer to OEM paintline

operations paid pr. car painted, Rolls-Royce’s “Power By The Hour”)

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Examples• Rolls-Royce’s “Power By The Hour”:

– Extensions:– Mission Ready Management Solutions (MRMS ®)– MissionCare™– TotalCare®– Etc…

• From paint producer topaint service provider

– Incentives to reducespill and minimize useof dangerous chemicals

– Servicizing/servitization it is argued is a means to sustainability

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From value added services to service logic• Value added

services:

• Service logic:

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The product becomesa platform for capturingvalue from service co-creation

2.2 Characteristics of services• Ref… definition in previous slides….• A service is the non-ownership equivalent of a good. Service

provision has been defined as an economic activity that does not result in ownership and is claimed to be a process that creates benefits by facilitating either a change in customers, a change in their physical possessions, or a change in their intangible assets.

• Typically characterized by the following (Zeithaml, Parasuraman and Berry, 1985):

– Intangibility– Heterogeneity– Inseparability– Perishability

– The IHIP characteristics…

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Characteristics 1 (From the Service Science initiative - Copyright IBM, Almaden)

•Intangibility Services are ideas and concepts that are part of a process The client typically relies on the service providers’ reputation and the

trust they have with them to help predict quality-of-service and make service choices

Regulations and governance are means to assuring some acceptable level of quality-of-service

– Consideration: Do most services processes involve some goods?

•Heterogeneity From the client’s perspective, there is typically a wide variation in

service offerings Personalization of services increases their heterogeneous nature Perceived quality-of-service varies from one client to the next– Consideration: Can a homogeneous perception of quality due to

customer preference idiosyncrasies (or due to customization) also benefit the goods manufacturer?

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Characteristics 2 (Copyright IBM, Almaden)

•Inseparability Services are created and consumed at the same time Services cannot be inventoried Demand fluctuations cannot be solved by inventory processes Quality control cannot be achieved before consumption– Consideration: Does the ability to tailor and customize goods to the

customers’ demands and preferences mean that these goods also have an inseparability characteristic?

•Perishability Any service capacity that goes unused is perished Services cannot be stored so that when not used to maximum capacity the

service provider is losing opportunities Service capability estimation and planning are key aspects for service

management– Consideration: Do clients who participate in some service process acquire

knowledge which represents some form of “stored service”? What might the impact be?

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Critique (Lovelock and Gummesson, 2004)

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IHIP of some service brands…• We use Brand Finance (Interbrand more product oriented)…• http://www.brandfinance.com/images/upload/

top_100_global_brands_2011_results.pdf – Google– Apple?– Microsoft?– IBM?– WalMart– Vodafone– AT&T– HSBC– WellsFargo– Band of America– Verizon– Santander

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IHIP

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Intangible Heterogeneity Inseparability Perishability

GoogleOnline Service

Apple?PS-system

MicrosoftSoftware

IBMBus.Services

WalMartRetail Trade

Vodafone ++Telecom

HSBC++Finan. services

Tangibility a prerequisite for brand value and brand experience?• Brand experience dimensions (Brakus, Schmitt +++)• Sense, Feel, Think, Act, Relate• Intangibility…. Sense

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Telecom now Telecom new

See

Hear

Smell

Taste

Touch

Lack of characteristics …. continued …… ownership• A service is the intangible equivalent of an economic good. Service provision is often

an economic activity where the buyer does not generally, except by exclusive contract, obtain exclusive ownership of the thing purchased.

• Revenue models, value creation, value capture and ownership:

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Value of ownership versusburden of ownership?

Lawson (2011) citations….

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Outline



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3. Service innovation

1. Service innovation as innovations in service industries2. Service innovation as innovation in knowledge intensive services 3. Service innovation in goods producing industries

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• Approaches to service innovation and innovation in services/service:

• Transfer – assimilation (Sampson, 2004):• Product and service innovation share so many characteristics that theories, models and

empirical results may be transferred from product innovation to service innovation.

• Demarcation (Menor et al, 2002):• Product and service characteristics differ so much in their characteristics that it is also

likely that innovation processes will differ too significantly for knowledge transfer to occur. Thus, specific theories, models and studies of service innovation are required.

• Synthesis (Drejer, 2004; Coombs and Miles, 2000):• The blurring of products and services has come so far that even though products and

services differ, it will be more fruitful to develop synthesized approaches to product and service innovation that both product and service innovation processes may profit from. Thus, synthesis theories, models and studies of innovation are required.

3.1 Service innovation as innovations in service industries• Some results from analysis of data from Statistics Norway (CIS

Survey)• Comparing service industries to manufacturing industries:

– The service sector as a whole has traditionally been less innovative than the manufacturing sector, but this is no longer consistent in latest CIS

– The innovation processes of the service sector have traditionally been different from the manufacturing sector, but this is no longer consistent in latest CIS

– The conditions for innovation in the service sector have traditionally been different from those of the manufacturing sector, but this is no longer consistent in CIS

– The effects of innovations in the service sector still differs from those in the manufacturing sector (typically more qualitative and more customer oriented)

– Differences exist but seem to diminish ….

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Service innovation as innovations in service industries, cont…• Comparing different services using data from the Norwegian

version of recent CIS indicates:– The service sector is a heterogenous collection of industries when it

comes to innovation intensity/ degree of innovation (trade as the second lowest in innovation intensity and KIBS as the second highest)

– These differences are even greater in most recent CIS– For indicators of innovation processes, conditions etc., statistics are

somewhat incomplete and also, some parts of the service sector are not included in the statistics

– Over- and underreporting of innovation is a bigger problem in service sectors:

• Low innovation intensity, e.g. trade: ”We don’t innovate, we develop and change”

• High innovation intensity, e.g. programming: ”All the time I use on programming/coding is reported as R&D”

– Intra sector differences grater than inter-sector…, do we have to look for the differences at the firm level…..?

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3.2 Characteristics of services – implications for innovation

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Service characteristics Impact on organization of innovation process

Intangibility Need for intensive communication between people involved in innovation, because new product cannot be felt or touched. Creating shared understanding is of highest importance

Simultaneous production and consumption Close involvement of front and back office personnel is needed, largely due to simultaneous development of production process

Heterogeneity No impact; physical products may also be heterogeneous

Perishability No impact; new services can be developed in advance

Challenges – service characteristics 1

• Intangible – immaterial:– Ex. Underinvestments in SI due to

lack of protection (IPR)?– Ex. Underinvestments in SI due to

difficulties in describing andmeasuring effects?

• Heterogeneity– customization:– Ex. Underinvestment in SI that

scales well because it conflicts with customization?

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vs

How can you combine heterogeneity and scale?• Personalization?• Dematerialization?• Lets take a look at one example…:

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Challenges – service characteristics 2

• Inseparable– co-produced/co-created with provider and customer:– Ex. Are SI’s created by customers more than

by providers? – Ex. Is demand side economies of scale a

precondition for successful SI?

• Perishable– cannot be stored:– Ex. Is it possible to apply

traditional principles for product innovation to SI? Do their application lead to dysfunctional SI’s?

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Perishability, tangibility and ownership• Products are manufactured (work as means) and value is

transferred through transfer of ownership– Powerful model– Stored and be easily available – Single point of value transfer– Separation of responsibility for customer value

• Wrong incentives for services?

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3.3 Challenges from service industry characteristics 1• Service industry heterogeneity:

– Difficult to design innovationpolicy addressing the diversity ofchallenges in different SI’s?

• Strict regulation:– Does regulation approproately

address innovation ?

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Innovativeness

Productivity

Challenges from service industry characteristics 2• Infrastructure:

– Do service innovation requireaccess to infrastructures?

– Does the entrepreneurship model break down?

• Size and scale:– Are service innovations rather a

question of implementation and organizational change?

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Challenges from service industry characteristics 3

• Not cluster organized and mobile:– Do the principles for understanding

and facilitation regional innovation applyto services (at all)?

– Are large urban regions a precondition for SI?– Is the innovation system completely different?

• Other sources of innovation:– Are technology and research driven innovation-

systems less relevant for SI’`s? – Does research fit the innovation needs of

service firms?

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A traditional view of the innovation system…

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Market and systemic failures in service innovation• The basic argument for innovation policy is market and systemic failures• Some of these are represented in previous challenges (e.g. immobility, IPR

and network effects)• Additional challenges:

– Market power in service markets, Lack of common service markets (EU)– Many services are offered ”common goods”, e.g. transportation,

information and financial infrastructure• But systemic failures:

– Soft institutional failure (Lack of SI understanding in institutions)– Strong network failures (Too strong

social networks and too coherent thinking in some services)

– Weak network failures (Difficult to create knowledge clusters in some services)

– Capabilities’ failure (Low innovation, low competition service industries, see Richard Florida on Economist conference a coupe of months ago)

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3.4 Challenges in servitization• Challenges at the industry level• Firm level challenges

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Industry level challenges - product / service systems/ecologies

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• Lower consumption pr. km…

• The product is treated in isolation• Users and services are unaltered

• Products may be treated as parts of prod. / serv. ecologies

• Requires simultaneous change in products, services and user behavior

• Great challenge…

Firm level challenges in servitization

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Neely, 2009

Madshus or Madhouse?

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Source: Pine and Gilmore (1998)

Mindset and businessmodel challenge

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Outline



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4. Managing service innovation at the firm level

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Service- innovation process •Search

•Implementation

Service innovation: •Service concept

•Client interface

•Delivery system

•Technology

Effects : •Financial benefits

•Customer value

•Strategic success

Process-conditions: •People

•Structure

•Resources

•Networking

Climate-related conditions: •Culture

•Strategy

•Company characteristics

External conditions: •Market

•Knowledge

•Government policy

Only partly affected by firm levelmanagement

Affected by firm levelmanagement

Examples

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Process conditions• e.g. People• e.g. Networking• e.g. Organization

Climate conditions• e.g. Culture• e.g. Strategy

External conditions• e.g. Market• e.g. Government policy

Innovation prosess• Search• Implementation

Innovations• Innovation type

...• Source of value creation

Innovation effects• e.g. Financial benefit• e.g. Customer value

Firm level control

Only partly firm level control

Customer co-creation

Partner networking Business modelinnovation

Brand strategy

Measurementand KPI’s

Innovation culture

Soft regulation

‘Living the brand’

Conditions characteristics• Research suggests the service innovations conditions differ from other

forms of innovation:– Less driven by R&D– More driven by customers– Climate a more important condition– People and multiple competences a more important

determinant, knowledge driven – heterogeneity of the industry?– Much service innovation driven by structural/

infrastructural regulation?

• Example, explanations of the US/EU productivity differences:– Productivity difference explained by US service sector productivity– Biggest explanatory factor ”multifactor productivity” in

market services (e.g. trade, transportation, financial, business services, hotels, restaurants, personal services)

– “complex interactions between productivity, investment, and regulations.” (van Ark et al., 2008)

– E.g. regulation of retail trade (superstores etc.), liberalization of service trade, cultural differences (cultural heritage) etc.

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Managing SI conditions

• Process conditions – example actions…– Design cross disciplinary teams– Allow less formal structures– Value intangible resources (knowledge)– Stimulate open networking, control?

• Climate conditions – example actions…

– Facilitate customer oriented culture – Use brand strategy as the ”mother

of all strategies”

• External conditions – example actions…– Engage in public/private cooperation influencing

regulation

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Process-conditions: •People

•Structure

•Resources

•Networking

Climate-related conditions: •Culture

•Strategy

•Company characteristics

External conditions: •Market

•Knowledge

•Government policy

Process characteristics• Research suggests the service innovations processes differ from other

forms of innovation:– Less formal (are less formal or should be less formal?)– Less stage-gated and more parallel – More trial and error– Blurring boundaries between search and implementation

• More open and customer driven…

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Just for fun…

Seriousbusiness…

Managing SI processes

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Service- innovation process

•Search

•Implementation

• Search – example actions:– Use creativity

techniques that fit service characteristics, e.g. jobs instead of functionalities

– Involve customers in search – co-creation, and customer involvement

– Use more experimental methodologies

• Implementation -example actions:

– Modify NPD-processes to enable less stage gating and less formalization of steps (e.g. initiate and observe, e.g. mobilstart.telenor.se))

– Use more experimentation at the commercialization stage (e.g. no discrete launch)

Service design methodology and experimentation

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ServLab a ”theatre” environment at Fraunhofer for service design

Mobilstart an open mobile service platform for all (in Swedish)

Innovation type characterstics• Research suggests the service innovations types differ from other

forms of innovation:– Does not fit the traditional product/process typology (product,

process, organizational)– More often

simultaneously involves organizational innovations

– Incremental rather than radical (alternative types, see Alam, 2006)

• Alternative typologies (e.g. den Hertog, 2000, modified by deJong, 2003):

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Example, path of innovation for a service innovation–Aker Well Service

Product

• Standardize the technology for economies of scale

• Establish production units (network)• Sell products and establish simple

support services (free?)

• Further developments?– Capital intensive– Grow, control, capitalize, exit– Innovation in new technology leaps

– Easy to copy (reverse engineering)?

Service

• Specialize production for service performance (scope?)

• Establish service units (knowledge intensive?)

• Sell only services in a relational perspective

• Further developments?– Labor intensive (KI)– Continues growth, stay?– Innovation driven by service personnel (we control

the source of innovation))– Difficult to copy knowledge?

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Managing SI types

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Service innovation:•Service concept

•Client interface

•Delivery system

•Technology

• Traditional management of:– Service concept innovations (by

innovations in value propositions)– Client interface innovations (by

innovations in self-service channels)– Delivery system innovations (by

understanding dematerialization and digitalization)

• Managing innovation types not covered by this typology

– Product-service system innovations

– Customer innovations (more later)– Business model innovations– Combined product, service,

organization innovations

vs

Business model innovations as an innovation type

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Results/effects characteristics• Research suggests the effects of service innovations differ from other

forms of innovation:– More qualitative– Longer term effects– More oriented towards the customer– Less focused on (short term) financial effects– But still much focus on cost/productivity

• No systematic review of potential effects until Aas and Pedersen, 2009:

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Service innovationprocess

Business process effects

Capability effects

Relationship effects

External effects

Financial performance

effects

Competitiveness effects

Managing SI effects

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Effects : •Financial benefits

•Customer value

•Strategic success

• Measuring– Financial benefits– Customer value– Strategic success

• Manage both ex ante and ex post measurement

• Apply more complex ex ante value assessment methods

• Apply more qualitativeex post value essessment methods

Service innovationprocess

Business process effects

Capability effects

Relationship effects

External effects

Financial performance

effects

Competitiveness effects

Summary

1. The interest in services – why?2. Services – definitions, characteristics and perspectives3. Service innovation – challenges and characteristics4. Innovation management implications

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Introduction to service innovation

Business

services services

services definitions

interpretation of services

consumer services

industrial services

services provider

services providedby

service studies