Introduction to service innovation

10.04.23Per Egil Pedersen, [email protected]

Service innovation – the Cinderella of innovations?

Service innovations – the Cinderella of innovation?

1. Services and service innovation, why the recent interest?

2. Services and service

1. Services and service – different meanings1. Services as service industries

2. Services as knowledge intensive services

3. Services as value added services

2. Characteristics of services

3. Service dominant logic

3. Service innovation

1. Service innovation as innovations in service industries

2. Service innovation as innovation in knowledge intensive services,

3. Service innovation in goods producing industries

4. Characteristics and service dominant logic – implications for service innovation

4. Summary and conclusions

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 manufactirung 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 amont the most invovative industires all– In SkatteFunn service innovation projects represent

48% of projects (not funding)

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Recent interest in these issues…

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2. Services and service

1. Services and service – different meanings1. Services as service industries2. Services as knowledge intensive services3. Services as value added services

2. Characteristics of services3. Service dominant logic

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2.1 Services and service – different meanings• 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• Service industries are represented by all industries with NACE-codes above 45, 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 the above if

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

accounting, legal, design, maintenance, personell)– 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):

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

– Activities that can be carried out by external, specialised 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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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)

• 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…

• John Deere Rental Parks– Rental Parks buy 250 tractors

from JD with service contracts– Farmers rent these from Jan.

to Nov.– Rental Parks sell them outside

UK with a “gentleman’sagreement” with JD in Nov.

– On we go next year…

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2.2 Characteristics of services• 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 (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 part of the stored service’s value? What might the impact be?

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Critique (Lovelock and Gummesson, 2004)

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2.3 Service dominant logic• Introduced by Vargo and Lush in 2004 with 10 principles, where we

focus six:– Service is the fundamental basis of exchange (service, not services)– Goods are distribution mechanisms for service provision (value in

use, not in exchange)– Operant resources are the fundamental source of competitive

advantage (operant , not operand) (e.g. knowledge and expertise not machinery and tools)

– The customer is always a co-creator (of value)– The enterprise cannot deliver value, only value propositions

(business model)– Value is always uniquely determined by the beneficiary (subjective

value)

• Service dominant logic rejects IHIP and represents an alternative way to synthesizing service innovation research…

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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 industries4. Characteristics and service dominant logic – implications for service innovation

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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.

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

2006)• 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 CIS2006

– The innovation processes of the service sector have traditionally been different from the manufacturing sector, but this is no longer consistent in CIS 2006

– 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 CIS2006

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

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

version of the CIS3/CIS2006 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 CIS2006– 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”

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Service innovation as innovation in knowledge intensive services

• Tends to focus more on the suggested role of these services to innovation in general than on innovation and innovation processes in these industries….

• Role of KIS to innovation:– Difficult to prove the role of KIBS in innovation in general (what

about service innovation, different KIBS)– Qualitative studies of the importance of KISA in innovation

• Innovation in KIS:– Innovation in KIBS, :

• KIBS invest in R&D, but not in external R&D sources (Prest, 2006)• Deep relationship with customer main source of innovation• Generalization a major issue in innovation (Haugstad, 2006)

– Innovation in KISA, much less studied

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Service innovation in goods producing industries

• The Oliva and Kallenberg (2003) study suggests a pathway of service innovation in manufacturing firms

• Servitization involves new incentives for innovation, e.g. OEM paint line services (incentives for reducing paint use rather than the opposite (waste incentives))

• A recent study by Aas and Pedersen, 2009 suggests manufacturing firms focusing service innovations improve their financial performance whereas the same is not supported for service firms

• Explanation…. Heterogeneity? Management control?….22

Financial growth Focusing Not focusing Significant diff

Costs 0,18 mill pr emp 0,30 mill pr emp Yes

Sales 0,22 mill pr emp 0,14 mill pr emp Yes

Results 0,027 mill pr emp 0,016 mill pr emp No

Financial growth Focusing Not focusing Significant diff

Kostnadsvekst 0,16 mill pr emp 0,14 mill pr emp No

Salgsvekst 0,19 mill pr emp 0,15 mill pr emp Yes

Resultatvekst 0,028 mill pr emp 0,020 mill pr emp Yes

Services

Manu-facturing

Example, product / service 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…

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

Characteristics of service innovation – a framework

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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

Conditions characteristics• Research suggests the service innovations conditions differ from

other forms of innovation:– Less driven by &D– More driven by customers– Climate a more important condition– People and multiple competences a more important determinant– 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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Process characteristics• Research suggests the service innovations processes differ from other forms

of innovation:– Less formal– Less stage-gated and more parallell – More trial and error– Blurring boundaries between search and implementation

• Challenge – how do you manage and control such processes, e.g. open innovation…

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Just for fun…

Seriousbusiness…

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

forms of innovation:– Does not fit the product/process typology– More often

simultaneously involves organizational innovations

– Incremental rather than radical

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

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Example- Immaterial services

• ”… I made a comprehensive application with an illustrated overview of a number of actions that would make Englegaard a better experience to our customers and that would represent a holistic service concept…”

• ”…the day after the local newspapermade fun of the granting of NOK 80 000 to Englegaard for designinga waffle iron with angle-wing patterns….

• The situation is not unique…

• In RC’s most important program for service related research only 11 of 205 projects may be characterized as service innovation projects

• What about the capital market?30

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

• 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

Service dominant logic and innovation• While service dominant logic is difficult to apply to model

development and empirical research in service management, it is much easier to apply to service innovation…

• An example, Michel, Brown and Gallan (2008):

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Summary and conclusions• Service innovation is the Cinderella of innovations• It involves service as well as services but is still founded on

services as different from goods• Three perspectives on services• New perspectives on service and service dominant logic• Different interpretations of service innovation• Characteristics of service innovation (conditions, process, types,

effects)• Service dominant logic represents new perspectives on both

service innovation and innovation in general

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