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11 differences you need to be aware of between service-dominant and product-dominant innovation to fix our innovation problem

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Our economies are increasingly services dominant. Yet we typically perform service innovation using product innovation approaches. This raises two questions. Firstly, are service and product innovation the same? Secondly, should, or even can, we apply product-dominant innovation thinking in our service-dominant economies?

Should / can we apply product-dominant innovation thinking in a service-dominant economy? That 94% of executives are unhappy with innovation performance suggests we at least need to discuss. Here are 11 differences service… Click To Tweet

That McKinsey’s recently found 94% of executives are not happy with the outcome of innovation performance suggests we have an innovation problem that needs addressing.

I believe part of the solution is to move away from using product-dominant innovation thinking towards a more service-dominant thinking. Here are 11 areas where service-dominant innovation differs from its sister, product-dominant innovation.

The Key Differences

  • Service innovation has a different mindset
    • where value can be co-created…
    • …in-use (sometimes in-context) rather than in-exchange
    • and in how we measure success
  • It is similar to product innovation, yet has additional aspects to address such as:
    • Customer Resistance
    • Customer experience from other industries/markets
    • Ecosystem
    • Inheriting responsibility
    • Continuous nature
  • Implementation needs to consider changes to:
      • customer interface
        internal systems, people, processes
        the extend marketing mix

#1 Service innovation requires a different mindset

Services have us thinking differently than we do with products, including about innovation. We have to move from what we call product dominant logic (PDL) to service logic (SL). And, here is why.

How we often think…

Firms manufacture products. In doing so, they create value, which is baked into the end product. For example, a car is more valuable than the component parts. As customers, we see that value, and buy those products through exchange transactions. Those transactions enrich the firms and transfer ownership of product (and the baked in value). As we use the product we use-up/destroy the baked in value. At some point there is no value left and we seek out the next purchase.

To understand product success, we typically measure two things. First, how many products are sold. And secondly, what price do we get/margin we make for each sale. The latter being a measure of the baked in value and the former a measure of demand.

We call the above product-dominant logic. And, it drives how we think about the innovation process, customer adoption, and innovation success.

How we need to think

We have (need) a different way of thinking about services, a service logic, so to say. Not least i) the roles of firms, customers and resources, ii) value, and iii) measurement of success (see Figure 2) are different.

Figure 2: Key differences between product and service logics

Instead of value-in-exchange, we think in terms of value-in-use. Take a hairdresser. It is in the use of that service by a customer that value is created. As such, there is no value created, or baked in, by the hairdresser when they designed and implemented their service. Further, the hairdresser and customer can be seen as the co-creator (or co-producer) of value as they interact to discuss the type of service to be provided. Success of the firm is measured both financially, but also by growth in customers and number of repeat customers.

The need to think of value-in-use (and sometimes in-context), co-value generation and how we measure success drive us to think of innovation in services differently.

#2 Value is created in-use/in-context

Think of the self service checkout in your supermarket. The one where you scan the items yourself and swipe your card to pay. It is perhaps clearer in this example that there is no value-in-exchange. Creating the self-service checkout service and having it sit there generates no value for the supermarket. In fact it has costs in terms of equipment (and perhaps some cost savings in pre-emptive reduction of staff). It only offers the customer a possibility to generate value, if they user it. But, if no-one uses the self-service checkouts, then queues get bigger at the remaining manual checkouts, customer experience deteriorates and the store losses customers.

If the customer uses the offered service, then value is potentially generated. As a customer we probably get through the checkout quicker. The store owner generates financial value through reduced staffing costs; and potentially reputation for quick service. This is value-in-use.

Value-in-context

Actually, this self checkout is also a good example of the related value-in-context. If I have two items at lunchtime rush I might use the self service checkout. Whereas if I am doing my weekly shop I would use the manual checkout. My use of the service is contextual. But, not everyone has the same context. My friend would swear by using the self service all the time. of services is contextual. Another friend of mine refuses to use self service check outs at all (that’s an example of customer resistance that we cover shortly).

#3 Value can be co-created

Consider these two alternatives. First, you hire a painter to paint a room for you with your choice of paint. Alternatively, you hire an interior decorator to design a paint scheme and get it painted.

Both are services. But the level of value co-creation is different. It is low in the first. Typically you will agree a mutual agreeable time, duration and cost with the painter and the job gets done. In the second, there will be several chats to blend the your desires and the interior decorator’s vision. Both working together to co-produce value.

There is one school of service thinking that sees every service as being an act of co-creating value. A second, that it is not always the case the customer is a co-creator, but in certain circumstances the provider gets the opportunity to be a co-creator of value.

Either way, co-creation of value is something that sets services apart from products. (though you could argue some co-creation of value takes place during product development cycles).

This co-created value may not be visible at the same moment in time – especially in today’s digital world and data collection. Take Netflix as an example. It collects lots of data about what you watch. It then uses that later to present recommendations. In a sense watching something co-creates value that you benefit from at a later point in time.

Does this mean that service-dominant innovation is completely different to product-dominant innovation? That is something we will look at next.

#4 Measurement of success

How we measure success is different between product-dominant and service-dominant logics. This affects both our thinking and behaviors.

A product-dominant mindset leads to obsession with sales volumes, costs of goods sold and margins. We act in terms of a singular exchange transaction. This is not unreasonable. Remember in product dominant logic it is all about increasing the wealth of the firm through value-in-exchange.

We are still interested in margins in a service dominant mindset. After all, there is no point having a financially falling firm. But we are even more interested in number of customers (or users) and revenue/cost/margin per customer.

We know we may still have products as party of our service as there is the product-service continuum. But the headline financials and company strategy is less about those. This can be hard for our product-dominant world thinking. Just look at how analysts and shareholders reacted when Apple decided to stop releasing iphone sales figures. The world was ending! But Apple knew it was now a service company and products were “just” the gateway to those services. It wants to focus on value-in-use, in this case the growing number of subscribers to its services, rather than products sold.

Don't leave value on the table by not realising you are a service company (rather than product). Look how analysts wrongly reacted to Apple when it made the shift! Click To Tweet

At some point in studying business every student will come across Theodore Levitt’s paper on Marketing Myopia…

#5 service innovation requires us to address additional aspects

If service-dominant logic differs from product-dominant logic, can we use product-dominant innovation thinking is service-dominant economies? There are three views when it comes to whether product-dominant innovation thinking is applicable to service innovation. These are the assimilation, demarcation and synthesis views as I show in Figure 1. I discuss them in more detail, and why I believe the synthesis view is the best view, in this article.

Figure 1: Are product-dominated innovation approaches applicable to service innovation? There are three views – assimilation, demarcation and synthesis.

The assimilation view sees service and product innovation as the same. Whereas the demarcation view sees them as completely different. The synthesis view sees them as essentially the same yet service innovation has additional aspects that are less important or not relevant in product-dominant innovation. I have not yet seen a description why “less relevant”, but I feel it relates to the product-service continuum as I show in Figure X.

Figure X:

Researchers have long studied product innovation. And they have developed theories and approaches that are sufficient to capture the very left of the continuum. In comparison, pure service innovation on the far right of the continuum is much less studied (so far). But we do have a set of additional aspects to address. When we are somewhere else on the continuum, we find some of these additional attributes are relevant and some are less important or not relevant at all.

So, what are these additional aspects? Well, research is still ongoing, but I can present 5 that are shining as strong aspects.

#6 Customer Resistance

Let’s jump back to our self-service checkouts at supermarkets example. I observe quite often that the self service areas are pretty empty compared to the now longer queues waiting for manual check-out.

Figure X:

Customer are resisting the service innovation.

This is different to slow customer adoption. Customer resistance is where customers purposely do not use the innovation.

Ram and Sheth identified 5 main barriers that cause customer resistance, along with some marketing strategies to overcome them.

Figure X:

Functionally there is a usage barrier, i.e. the innovation doesn’t fit in with the current way of doing things. There is also a value barrier in that the innovation just might not offer enough value or that “costs” outweigh benefits. The final functional barrier is the risk barrier, covering physical, economic, functional and social risks. Additionally there are psychological barriers of tradition and image.

As always, the product-service continuum tells us that resistance is not just a service innovation aspect. You can find more on this in my article here [to come].

#7 Customer expectations from other markets/industries

We can easily track a parcel delivery from initial packaging to arriving at your door. Yet why can’t we track airline baggage from when you hand it over at the airport check-in until it hopefully arrives at the same destination and time as you do.

Customers start asking why they can’t do things they can in one market/industry in yours. Those questions become expectations.

Back to our example. In 2018 only 16% of airlines offered real-time baggage tracking to customers, yet 68% plan to do so by 2021 (source: SITA Air Transport IT Insights 2018)

But this aspect of service innovation is a positive thing. It offers a ready source of innovative ideas for those firms ready to be market-oriented as well as casting a wide eye in the world. And these ideas are already partially de-risked. This aspect should also be the one you push consultancies you work with. They should have that wider visibility across markets and industries that can be leveraged for you.

If you (IT) consultancy can't bring you service ideas from other markets/industries, it is time to change to one that can. Click To Tweet

#8 Ecosystem / Network of systems

#9 Inheriting responsibility from ecosystem

JustEat, a food delivery service, ran into PR trouble in the UK for delivering food from restaurants that had poor hygiene standards. But, are JustEat – whose service is to pick up food cooked in a restaurant and deliver to a customer – really responsible for that? Not legally. However, as the interaction point for the customer, they risk inheriting that responsibility.

Should a food delivery service be responsible for showing hygiene standards of restaurants it delivers from? As the interaction point to a customer you risk inheriting responsibility for services you integrate/link together. Click To Tweet

Of course, there is always room for entrepreneurial services to pop up, like this one that adds hygiene inspection ratings to JustEat’s web site (and similar services such as Deliveroo). That is also a good example of how (digital) services are scalable but hard to protect.

#10 Continuous nature

Remember when taking a flight used to be a real long customer journey? You would have to go to a travel agents to find and book flights; and go back to pick up your paper tickets. Then you would need to get to the airport early to stand in a long queue to get a good seat. After that, you would keep showing your paper ticket at security and when boarding the plane.

Now it is a breeze. You fire up your mobile phone, do a quick search, book your flight and get the ticket on your phone pretty instantly. 24 or more hours before your flight you use the phone app to check-in and select your seat. At the airport you just scan your mobile ticket to get through security and boarding.

To get from the old-day to the new-day has surprisingly not been architected by any one person! It is the result of continuous innovation across several industries – mobile phones, mobile wallets, QR codes, scanners, on-line flight comparison sites, eTickets etc. Valuable innovations have survived, less valuable ones have fallen by the way (but may have informed future innovations). It is like Darwin for the modern world.

Figure X:

My point is that service innovation is continuous. Always needed to react to customer co-value generation; to customers’ changing habits and desires. Reacting to competitors innovations. Scanning the markets and other industries for services components that can being a new edge and competitiveness. It is an exciting world!

#11 Implementation considerations (service marketing triangle)

Wrapping up

My view is that a move to service-dominant innovation thinking is a large step towards fixing that innovation problem.

Firstly, whilst service innovation is similar to product innovation there are additional aspects to address. Secondly, services require a different mindset compared to products. By not considering both of those points, we set innovation up for failure from the start. Furthermore, given that we are in service economies, by sticking to product-dominant innovation thinking leads to further failure.

It is time we apply and expand our knowledge of service innovation thinking to solve our innovation problem.

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