Service Innovation – the basics

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Please note: this article is under development - it may change (improve ) between visits

I believe that product innovation approaches are not, on their own, sufficient for innovation in services. But before we get to that, it is good to look at what I mean by service innovation – the whats, whys and hows.

In my next article I explore whether service innovation is the same as product innovation. And, we see how the answer to that question explains some of the innovation problem.

Key take-aways

  • We innovate to create (emerge) new services, or to enhance/expand existing ones (vertically or horizontally)
  • The innovation can be new to a firm, an industry/market or the world
  • Service innovation is a continuous journey, and can include moving along the product-service continuum
  • Customers drive service innovation, they:
    • expect to use functionality your competitors are successfully offering
    • expect to use aspects familiar in one market/industry in yours
    • have changing desires – what they expect today will be different tomorrow
  • You will be part of an ecosystem of services, either using our being used
  • Digital native challengers, such as fintech, proptech, medtech, etc., are experts at applying and executing service-dominant innovation thinking

I find it strange that when our economies are so service dominated, there has been limited reserch focus on service innovation . However, that is also exciting news as we have an open sea ahead of us (I hesitate to say blue ocean ahead but as well see that is appropriate). Of the areas researching service innovation, we find them here.

3 ways we innovate in services – emerge, enhance, expand.

There are many definitions of what a service is (just look in my previous article). For our purpose, let’s say it is essentially an offering by a supplier to get a particular job done for a customer. When the customer uses the service, value is co-created.

Therefore, we can see service innovation as either i) introducing a new offering that customers can use to co-create value, or ii) improving an existing service so that the customer co-create even more value.

Just like we saw with product innovation, we can create new services or improve existing ones. I will call creating a new service, emerging. Doing so better reflects how a new service emerges out of a (continuous) cycle of offerings and co-value generation with customers. Additionally, when it comes to improving services, I will split this into two distinct actions: enhancing and expanding.

With this convenient naming of 3Es – emerging, enhancing and expanding – let’s take a look at each in turn.

Emerging a new service

Emerging a new service starts with a provider creating a new offering and making it available to customers. It continues with customers using the offering. They will either create value or not, or might find value using the service in a way you did not think of. Additional cycles of tweaking and re-offering will happen as a reaction to the customers. At a point a new service will either emerge or cease to exist. After this, the service will enter a continuous cycle of enhancements and/or expansions.

But what do we mean by new? Well, our definition is quite broad (and sometimes referred to as novel).

Novel / New-ness

An innovation can be new to the firm, new to the industry, new to the market, or new to the world. (see Figure 2).

Figure 2: Newness of innovation (Edison, bin Ali and Torkar (2013)

This definition might seem wide to you. And, for the readers of classic innovation papers, it is certainly wider than Schumpeter‘s view when he defined innovation as one of the 4 features of economic development.

However, for service innovation these four hold nicely.  Although new to firm can be seen as the firm playing catch up with its peers, it still entails similar levels of change management and implementation complexity as the others.

One final point on this. The definition of novelty we use also hints at how we can discover new service innovations. Firstly we can find them by looking at our competitors. Secondly, we can look at what is going on in other markets (regions of the world, for example) and other industries that we can use? New to the world innovations are, naturally, harder to find.

A new service needs to be discoverable by customers

Enhancing an existing service

We enhance a service by increasing various attributes of an existing service that the customer finds valuable.

Figure 3:

What are these attributes? Well, they might be cost, convenience, speed of delivery; they might be By that I mean you might make the service quicker, easier to use, cheaper, more environmentally friendly in its delivery, or probably a combination of those and more. Different markets, industries and customers will value attributes differently.

Moving along the product-service continuum – adding a service to a product

Let’s not forget that our service innovation might come from moving along the product-service continuum by turning a product into a service. You could argue this is a new service. But I will call it an enhancement, aligning with the concept of service dominant logic.

Fundin, Witell and Gebaur (2012) is an interesting read on how firms can move (profitably) across the continuum. It has a nice summary of positions on the continuum a firm can take, as seen by various researchers. I show 4 of those researchers’ views in Figure 9.

(more on this in a later article).

Extending an existing service

Often several jobs to be done (services) need to be strung together to fulfil the complete job the customer is trying to achieve. Sometimes it is the customer that co-ordinates those services.  Often it is the main service provider who packages together various services.

Let’s take a very simple example. You have a core service that customers use to purchase products to be delivered to their door. Not uncommon, right? In such a case, you own the core process, and probably offer a couple of ways of paying – PayPal and, credit card, for example – via their service. Finally, to get the products deliver you use a delivery services, let’s say FedEx.

You may choose to extend your service by performing some of your networks/ecosystems services yourself. And you can do that by vertically moving up or down the services chain; or horizontally by taking on supplementary services.

For example, Amazon extended vertically by creating their own last mile delivery service; in the future it is likely to be self flying drones or teleportation.

A horizontal extension could be supplementing the payment methods with an in-house loyalty point exchange

Extension innovations will typically be driven by an interpretation of classic transactional economics. In simplistic terms, you want to minimise the opportunity of your firm being held to ransom by suppliers by determining is it better for you to make yourself, or buy from or ally with others to get components you need. I say an interpretation as classically we talk about components in a manufacturing process. In services we may have this (see my example of digital content and Spotify, Apple and Netflix). But we also need to think of reputation, brand image and customer experience.

Making alliances to extend a service

Most services will require/create synergies with other services or perhaps even products.  For example, if you are selling something, you will invariably make use of a payment service (credit cards, PayPal, Klarna etc).  Clothing giant H&M invested $20M in payment service Klarna in 2018 to build omni channel payment sit-in across physical sites and online presence.

To entice customers to use your service you may team up with other services to reduce your perceived risk in the eyes of customers.   There are several grocery delivery services in Sweden which enhanced their offering to delivery direct to your refrigerator.  A challenge to overcome was how to deliver inside a house when most people are at work.

Many solved this by teaming up with digital smart lock service, Glue.  Glue provide a service enabling digital keys to unlock doors.  The delivery can now be made into the house by the delivery driver using a single-use electronic key.  The home owner is also informed the door has been unlocked and can check the door is locked again afterwards.

To further minimise the risk of letting someone into your house whilst you are not there the partnership offers two additional aspects.  The delivery is videoed, and you get insurance against theft and damage, for free.

Offering a services can lead to new services (by yourself, or others)

And, even more.  Services can spawn new unthought of (or maybe rethought) services.  Teriflix, for example, is a service providing mini-cinema spaces complete with equipment for you and your friends/family to watch Netflix or Amazon Prime content.  They tag themselves as “your social hangout theater“.

Why do we innovate in services?

Firstly, Customers have expectations. If they can do something in a service with your competitor or in a different market or industry, they will likely expect to do it with you. Why can’t I use payment method X? In Australia I can do Z, why can’t I do it in Europe? I can track my parcel as a B2C customer, why can’t I track my airline baggage the same way?

Customer expectations from other firms/markets/industries drive your service innovation. Why can't I use payment method X with your service like I can in your competitors? In Australia it works this way and is valuable to me, why… Click To Tweet

Secondly, you may come up with an entirely new service not seen by anyone yet.

[Detail the continuous nature here]

[Note on McKinsey’s Innovation in a digital world, i.e.: institutionalise service innvoation; personalise the experience; Simplify the delivery https://www.mckinsey.com/business-functions/operations/our-insights/service-innovation-in-a-digital-world

and Higher customer expectations; rise of mobile internet; rise of IoT; Big data and analytics]

[+ Chesbrough (2013) sums up why he believes services are growing.  We are:

  • making use of under-utilised assets
  • enhancing the offerings
  • creating platforms]

How does service innovation usually happen?

Toivonen & Tuominen (2009) listed these five ways (in increasing formality):

  • improving an 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 tests new ideas with pilot customers
  • innovation projects tailored for a particular customer problem
  • externally funded innovation projects (for example research)

Wrapping Up

[Update now I’ve split of why service & product innovation differs]

Now we’ve looked at services innovation, we need to look at how it differs from product innovation. In doing so, we will see part of the solution to today’s innovation problem.

Link to the den Hertog’s service innovation model and my update for 2019


I can also identify two areas that benefit from service-dominant thinking:

  • Digital native startups – FinTech, MedTech etc – these simply and effectively apply service-dominant innovation thinking to successfully challenge incumbents; and incumbents struggling to react by clinging to product-dominant thinking.
  • Digitisation / digital transformation – the successful application of (technology heavy) service-dominated innovation thinking.


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