We know that services are a major and increasing part of our economies. And that innovation is a driving force of growth. But, what is innovation in the service economy? An economy where we embrace service-dominant logic – which means goods are a means of delivering services.
First, we find a lot written about innovation in products. But is service innovation the same as product innovation? The short answer is they are similar. Although there are additional factors in service innovation to take care of. And, it appears those factors are less important, perhaps not important at all, in product innovation.
Secondly, how do we discover service innovations? What changes are needed in the elements that deliver a service to implement the innovation? How do we categorise the innovation – is it radical, or incremental, or…? And it is these questions we set out to answer in this article.
- We Emerge new and Enhance or Expand existing services
- We can use service characteristics model to understand and explore services innovation. This models a service as four aspects:
- External characteristics – the end user experience
- Technical characteristics – the product, processes and ways of working etc used to deliver the service
- Provider competences – the skills the provider of service brings
- End user competences – the skills the end user has that are used in the service co-delivery
- Using the service characteristics model we find service innovation can be explained as:
- Emerge – where all service external charateristics are new
- Enhance (improvement) – where technical characteristics and/or typically provider competances are increased to improve one or more external charateristics
- Enhance (incremental) – where additional external charateristics are introduced, or existing ones swapped for new
- Expand (include) – where technical charateristics previously provided by a third party are now provided by yourself
- Expand (ally) – where you ally to increase your service reach/availability
- Expand (split) – splitting a service into 2 or more parts that can live alone
- The innovation can be new to a firm, a market, an industry or the world
- Can also look for new competences customers are gaining in other markets/industries – can they drive innovation for you?
- Customers expect to do in your firm/market/industry what they can do elsewhere
- we say we carry an innovation from one market/industry to another – and those that do it are carriers
What triggers us to innovate in a service-dominant economy?
Remember how we looked at what causes the apparent shift to service economy ? And we saw that there were a number of reasons.
We can actively leverage these reasons as innovation triggers. For example, how does the changing notion of ownership open innovation doors for us? Or, can we spot an exogenous demand shock that we can take advantage of? Even better still, can we predict a forthcoming exogenous demand shock. Feeding off that, what data can we collect to drive innovation? And so on.
How we innovate in a service-dominant economy
Toivonen & Tuominen (2009) listed these five ways (in increasing formality) of how innovation occurs in service firms:
- improving internal processes without a specific project (these can be unintentional or incremental innovations, often by the person providing the service to simplify their work)
- improving a process/service deliberately through an internal innovation project
- innovation projects that test new ideas with pilot customers
- innovation projects tailored for a particular customer problem
- externally funded innovation projects (for example research)
But, what is innovation in a service economy?
What is innovation in Service economy? Emerging, enhancing and Expanding
I have observed that we discover service innovations as follows: emerging, enhancing or expanding.
First, we can emerge new services. This includes creating new services and adding services to a product. As well as ad-hoc innovation. Secondly, we can enhance existing service. In this case, we are usually creating incremental or improvement innovations. And finally, we can expand an existing service. By expanding I mean two things. We can bring another part of a service into our scope. Or, we can take an existing service and split into two or more new services.
But, before we dig into these I want to support our exploration with a model we can appeal to. So here it comes.
What is a service, if not a set of service characteristics?
We’ll attempt to both explain and categorise service innovations in terms of the changes the customer sees. Though of course changes visible to the customer will probably require changes in other “bits” involved in the service delivery.
So that we can get our heads around “bits of the service” we need a common view of what a service is. And what it is made up of. Luckily, the difficult work has already been done for us! Gallouj & Weinstein created the model you see in Figure 1 in their Innovation in Services paper.
I explain this model in detail over here, but let’s try and unpack this in a short way. The main thing we need to know is that our customer experiences the service as the set of external characteristics. Which the model lists as the Y = (Y1 Y2 … Ym). There they are, over on the far right. The user experiences these through a combination of the other three aspects working together. And that is easiest to explain through a few examples.
A simple knowledge-based service
When you see a lawyer for legal advice, for example, the service uses just the lawyer’s legal knowledge. That knowledge is the lawyer’s competences, C = (C1, C2,…Cp).
But knowledge-based services such as the lawyer are a small percentage of the service world. So let’s crank up to the next example.
Competence plus technical characteristics
Seeing a Doctor has a more involved service delivery. You still use the Doctor’s competence. But the Doctor may also use some medical equipment to check you over. Or at a regular check-up, the Doctor will go through a standard set of checks. Both the equipment and the checklist are examples of technical characteristics. Other examples are processes and ways of workings.
In general, they are things that are used internally to deliver the service. And we show in the model as the X = (X1, X2,…Xn).
Further examples, which may not be so obvious, are the digital – computer, mobile app, etc – and telephone – the “press 1 to…” type – interfaces.
Let’s take one final example, where all 3 aspects are working together.
Everything working together
In Figure 2 I describe a payment solution in Sweden called Swish. Using Swish I can send money instantly to friends and businesses. All by using phone numbers as proxies to bank accounts. It is also a good example of seeing all the three aspects of our model working together to provide the user’s experience.
I, as a customer, get an instant payment service, for no fee. It requires me to use both the Swish and the standard Swedish identity proving mobile applications. And the banks need to have the competence to check I have enough money for my request. From a technical perspective, there is the Swish mobile app to be provided. Additionally, the banks need to be able to move money instantly as well as map mobile phone numbers to bank accounts.
So how does this relate to innovation?
Now we can make our grand statement. Service innovation is “simply” the changing or adding of:
- external characteristics in a way that brings new/added value to the customer
- technical characteristics in a way that brings new/added value to the customer, provider, or both
- provider competences in a way that brings new/added value to the customer, provider, or both
And there is a fourth case to be aware of:
- taking advantage of customer competences that have been enhanced from somewhere else (other markets, industry etc)
Additionally, be aware that some service innovations require your customer to gain new competences. This increases the chance of innovation resistance. Unless you have a cunning plan to help the customer. Or you are segmenting the roll-out to customers in a way to minimise this.
OK. With that in mind, let’s get back to exploring service innovation.
Emerging, enhancing, expanding – the 3 ways we innovate in services, Part 2
Now let’s look at how we really innovate in services. That is to say, how do we translate Figure 3 into common approaches we discussed of emerge, enhance and expand.
Let’s take a look at each of these three categories, in turn, starting with emerge.
1a. Emerging a new service
There are several ways to emerge a new service. First, we can create a brand new service. Now by a new service I mean something our customer hasn’t seen before. And, yes we do need a better definition of new. But we’ll come to that shortly. One thing a new service is not is an existing service with improvements. That is an enhancement.
We can use our model to define this in a stronger way. Take a look at Figure 5.
In short, an emerged service has external characteristics (Y*) that have not been achievable previously. As a consequence, we, as the provider) might need to develop new competences (C*). And the customer may have to gain new competences (C’*). Additionally, we may have to introduce new internal characteristics (X*). Where all (Y*, X*, C*, C’*) have nothing in common with what already exists, the (Y*, X*, C*, C’*), then Gallouj & Weinstein say it is a radical innovation.
Now let’s jump back to this question of what I mean by new?
What is the Novel-ness / New-ness of an innovation
So we’ve just said that a service innovation emerges if at least all the external characteristics are new. But, new to who? Tacitly we mean new to your existing customers. However, we also want to use innovation to grow, i.e. get new customers. Let’s turn to the work of Edison, bin Ali and Torkar who give us a helpful classification. In their paper, they identified an innovation can be new to the firm, to the industry, to the market, or to the world.
The usefulness of this thinking is twofold. First, it can help set some confidence in future success. A new to the world innovation is going to be riskier than, say, an innovation already in use in Australia that you want to introduce to Europe.
Secondly, it gives us some sources for ideas. We should look for ideas from our competitors, from other markets, and from other industries. The process of bringing an innovation from one market/industry to another can be referred to as carrying. And if you are working with a consultancy firm you should expect them to be a carrier of innovation to/for you.
Next in our approaches to emerging service innovations is something that is increasing in popularity. We can also emerge a new service from a product by moving along the perceived product-services continuum .
1b. Moving along the goods-services continuum – servitization
Remember our good-service continuum? It’s in Figure 6 if you need a quick refresh.
What can you do if you have a complete tangible product (a goods)? Well, you can add services. Perhaps you jump to being a tangible product with supporting service. Or, maybe you change your business model to become a major service with supporting products. Vandemerwe and Rada termed this process servitization in their paper “Servitization of Business: Adding Value by Adding Services“.
You might wonder why you would do this. It is mainly for four reasons. Firstly, our economies are becoming predominantly service based. And, customers increasingly expect and require services. Secondly, it has good strategic positioning basis. Thirdly we are shifting from just selling to building relationships. Services help that relational approach. And finally, it forces us to think about what business we are in. That opens up more room for innovation. And helps us avoid the dreaded marketing myopia. Additionally, customers can shift CAPEX to OPEX.
Servitization – an example
And this servitization is really not as new as we might think.
Rolls Royce introduced the concept of Power by the Hour back in the 1960s. Which offered a “complete engine and accessory replacement service was offered on a fixed-cost-per-flying-hour basis”.
Jump forward to today, this service has transformed to TotalCare. Where now engine health is monitored remotely through the internet of things technology. And the power of big data is used to pre-empt maintenance and problems/issues. The customer benefits not only from having the engines in the air more with less downtime. Additionally, they swap the large irregular CAPEX investments in engines for a smooth lower regular OPEX cost.
How does servitization look in our model?
From our model perspective, servitization is quite intuitive. Firstly, a product only has product-related technical and external characteristics. Let’s call these X and Y respectively. And you can see them on the left side of Figure 7.
Then, servitization just adds the necessary characteristics and competences. That is to say, we have four things to do:
- add external characteristics related to the service(s)
- add the new technical characteristics (processes, client interfaces etc)
- identify the new competences the provider needs
- identify any new competences the customer will need to gain (and how that will happen)
The last way a service innovation can emerge is an ad-hoc innovation.
1c. Emerging an Ad-hoc innovation
Additionally, something we recognise as ad-hoc innovation can emerge when end-user and provider competences interact. This is innovation that occurs spontaneously as part of the act of working together. For example the discovery of a new method of doing something. And it may not even be recognised as innovation until after the event.
So that is the 3 ways a service innovation can emerge. Now we’ll turn our attention to innovations from enhancing an existing service.
2. Enhancing an existing service – general
We enhance a service by increasing various attributes of an existing service that the customer finds valuable.
What are these attributes? Well, they might be cost, convenience, speed of delivery etc. You’ll be unsurprised to spot that these are the external characteristics of our model. And that enhancement consists of either improving existing external characteristics or adding new ones. Let’s start with improving things.
2a. Enhancing through Improvement Innovation
We can enhance our service in two ways. Firstly by improving some aspect of the customer’s experience. For example, we might be making our service faster or updating our mobile app menu layout.
Secondly, we can enhance the service by changing something internal to the service for the benefit of the provider. Which may have a benefit to the customer, but that is not necessarily the intention. For example, implementing an organisational innovation or changing how we process credit card payments, etc.
In the terminology of the model, we are updating one or more internal characteristics and/or provider competences. And in the first case, we are improving one or more external characteristics. As we see in the example shown in Figure 9.
Usually, there are no, or limited changes required for the customer competences.
The other type of enhancement we can drive is through incremental innovation.
2b. Enhancing through Incremental Innovation
Unlike improvement innovation, in incremental innovation we are changing the customer’s experience of the service. For example, we could be introducing a new payment method.
In terms of the model, we are substituting or introducing new external characteristics. And that can require the user to gain new competences. Which we need to help with. Changing external characteristics is likely to require adding or substituting technical and/or organisational competences.
The last way we discover service innovations is by extending the service.
3. Extending a service
When we look at a service from a users perspective, it can be made up of several services strung together.
As an example, take buying a physical book from Amazon. There is a minimum of 4 services involved. As we see in Figure 11. First, there is the internet service you use to access amazon.com. Second, Amazon is an e-commerce service you use to find and buy the book. The third is the credit card processing service you use to pay for the book. And finally, there is the delivery service that moves the book from amazon’s warehouse to your door.
So one form of service innovation is to incorporate services you depend upon into your core. Just as Amazon is doing with deliveries. Similar to this you might make alliances with other services to minimise barriers to your service. We’ll look at how supermarket delivery to your fridge has done this. And finally, you may extend your service by splitting it and spinning it off.
3a. Extend by incorporating services
We can expand out from our core service to incorporate other services involved. This is what Amazon has done by building its own delivery capability.
When we do this we are removing an internal characteristic that currently delivers an external characteristic. We replace it with a new set of internal characteristic(s). As well as adding new provider competences. The base intention is these achieve the existing external characteristic.
Sometimes we extend our service by making alliances.
3b. Extending a service through Making alliances
Sometimes we need to make alliances to accelerate the take-up of our service. Or to overcome blockers to using our service.
For example, a growing service (at least here in Sweden) is the delivery of groceries from the store into your fridge. We know that customers can be resistant to innovation when they perceive risks. And certainly letting someone into your home when you are not there is a risk. So is trusting them to lock up properly afterwards. To minimise this risk, some services teamed up with digital lock service Glue.
Glue provides a product that enables a service which can provide digital keys to unlock doors. Sign up for grocery delivery and you get a free Glue lock. Now the delivery can now be made into your house by the delivery driver using a single-use electronic key. You are also informed the door has been unlocked and can check the door is locked again afterwards.
To further minimise the perceived risk of letting someone into your house the alliance offers two additional aspects. First, the delivery is videoed so you have evidence of the service (and evidence of no bad behaviour). Second, you get insurance against theft and damage, for free.
Our final extending example is where we divide a service!
3b. Extending by dividing
It’s also possible to break out services. Why might you do this? Well, let’s say you servitized a product. And now you discover that the service you created could be resold to others. Now you might want to break out that service as a stand-alone.
From our model perspective, you simply are dividing up the characteristics and competences. As in Figure 13
A final word on extensions
Your choice to extend into non-core services or to divide will be driven by an interpretation of classic transactional economics. In simplistic terms, you want to minimise the opportunity of your organisation being held to ransom by other suppliers. You need to decide if you should make yourself, or buy from or ally with others to get you non-core services. Additionally, we need to think of reputation, brand image and customer experience.
And we’re done.
We’ve seen that services innovation comes from emerging, enhancing and extending. And that we can explain all types of services innovations using Gallouj and Wienstien’s service characteristics model. Including the servitisation of products, radical, and incremental innovation.
Not only can we use that model to describe services and service innovation, but we can also use it to systematically search for service innovation opportunities. Additionally, the model helps us understand the impact of service innovations on our customers. As well as highlighting innovation may require our customer to gain new competences. And we may have to help them gain those competences. Otherwise, we quickly head down the path of innovation resistance and failure.
Additionally, we saw that innovation doesn’t have to be new to the world. It can be new to the industry, market and even firm. This strongly hints that we can find ideas in different markets/industries that become the basis of innovation on our own. In fact, in knowledge-intensive based services, such as consulting, this is known as carrying innovation. And as a customer of a consultancy, you should expect this carrying to happen.
Last, but not least, technological break-throughs in other industries could also open up innovation opportunities in our own. Particularly if the other industry/market gives customers the competences needed. We may even find that customers start expecting to be able to do what they do in other markets/industries in ours.