# Understanding Innovation – through service characteristics

characteristics competences customer extend emerge enhancing servitization existing external improvement innovation model product provider service

### The Big Picture

Understanding innovation is key to systematically hunting for it. Let’s harness some of the power we find when we define service as characteristics. Not only can we define service, as we have seen, but we can also explain what innovation means. Both in a general way. And for various types of innovation – incremental, radical, partner/ecosystem etc.

I’ve defined innovation as creating a new value proposition that helps a beneficiary make progress (functional and non-functional) better than they currently can.

And, in the service as characteristics model, that means introducing, deleting and/or reconfiguring characteristics. As well as adding/swapping ecosystem partners (who can be seen as modular characteristics in my updated characteristics model).

For example, above is an improvement innovation. An external characteristic (progress offered to help make) is improved by improving a technical characteristic and/or an other actor competence.

#### Implications

Descriptions of different types of innovation are many. But we now get to be a little more formal in our understanding. And formality helps us become more systematic in hunting for innovation.

Additionally, we base our thinking on service-dominant logic. And there, we consider goods as distribution mechanisms for service. That is to say there’s no need for distinction between service and goods innovation. Which gives us a natural way of understanding servitization (wrapping goods with service if we were to use old school goods-dominant logic).

And importantly, we can turn this around. For example, we can hunt for improvements in external characteristics, using blue ocean strategy canvas perhaps, and then identify what characteristics changes are required to deliver that.

## The Idea

all innovation is the result of recombining existing resources

W.B. Arthur (2011) “The Nature of Technology: What It Is and How It Evolves

Arthur’s quote is exactly what we will be discussing. Using Gallouj & Weinstein’s model of service as characteristics (or better, my updates as we will here) we can clearly define what a service is (see Figure 1).

And we will use this structure to understand what innovation means. And if we can do that, then we can move towards a more systematic way of hunting innovations.

Our first step is to review what do we mean by innovation in a descriptive way. And I do that in my article “Evolving the definition of innovation“. Where the main output is the definition you can see in Figure 2.

Now, the link between Figure 1 and 2 is that the value proposition in the definition of innovation is captured as the external characteristic in the model.

### Innovation in a service characteristics model

So, in terms of our service as characteristics model, innovation means:

• upgrading the functional and/or non-functional progress offered
• improving the existing functional and/or non.functional progress offered

And the first is achieved by altering the external characteristics. Whereas the second is achieved by altering the other characteristics. A better system, physical resource or goods could be provided. Or we could find better employees. Or we skill up the beneficiary/make use of some skill they have learnt elsewhere.

The foundation of this article is Gallouj & Weinstein’s “Innovation in Services” paper. Which introduced both the service as characteristics model. As well as how it could be used to understand innovation.

In our daily world we often talk about different types of innovation. Such as incremental, radical, ecosystem, business model, science-push etc.

Let’s see how we can visualise these in our model. And we’ll start with improvement innovations

## Improvement Innovation

Lets start with the easiest to understand type of innovation: improving existing aspects of a service. That is to say we take one or more of the existing external characteristics and improve them. We might, say, take a service where fast and secure are important aspects of progress to be made, and make it faster and more secure.

We can visualise improvement innovation as shown in Figure 3.

### The mechanism

Let’s unpack Figure 3. What we are saying is that one, or more, external characteristics – let’s call them $Y_i$ – are improved to $Y^*_i$. Fast becomes faster, for example. And this happens when we make some improvement to provider competence $X_i$ and/or technical characteristic $C_i$ that originally led to $Y_i$. In our improved system we have $X^*_i$ and $C^*_i$.

Galouj & Wienstien noted that beneficiary competences don’t generally change in improvement innovations. But I think we can argue that in our more modern world they may change. Faster, for example, could involve moving towards the self-service end of the service-service continuum. And we know that that relies more heavily on beneficiaries competences.

### Things to watch out for

Most naturally it is aspects of non-functional progress we are improving. It makes less sense to improve the functional progress. Take functional progress of “transfer some money from my account to a friend”. We can make that faster or more secure (if they are external characteristics). But it is hard to improve that functional aspect. Now, this depends a little on your view of improvement versus incremental innovation. Of course, we can make the functional progress “transfer some money from my account to a friend or a business”. I would argue this is incremental innovation.

### Improvement by reducing

We shouldn’t forget that improvement can occur when we un-improve an aspect of progress. Perhaps our original value proposition is too confusing and aims for too much. Or maybe we are looking for blue oceans.

Finally, we should note that expanding the progress to be made – even if we might think that is improving the service – we would see as incremental innovation. And that takes us nicely into our next section.

## Incremental Innovation

Sometimes we might blur the lines between improvement and incremental innovation. But for us, I want to make clear that incremental innovation is adding or substituting an external characteristic. The quick example of above of going from making payments to friends, to one of making payments to friends or business is an incremental innovation. Whether you see it is substitution or addition is a matter of taste.

I’ve been a little lazy in the figure as substitution and addition will require substitutions and additions to he other characteristics. As well as perhaps deleting some of them that are no longer needed. But the diagram becomes a little messy showing all that.

### The Mechanism

Whereas improvement innovation was about increasing or decreasing some aspect of external characteristics, incremental innovation is about adding and/or substituting. As shown in Figure 4.

We can substitute one or more external characteristics with characteristics that we believe offer better value to the beneficiary in the progress they are trying to make. Or we might identify that beneficiaries are not trying to make the progress we are offering, but something else. Then we can pivot our offering.

Similarly, we might identify that beneficiaries are looking to make more progress than we are offering. It could be we misunderstood progress being sought. Or it could be that now beneficiaries are using out service they are seeking to make progress elsewhere in a similar way. Our example of moving from just customer to customer and business payments above is something I would see as an addition.

### Innovation by deleting external characteristics

Additionally, we can delete characteristics.

### Servitisation

In the goods-dominant world, there is often talk about servitisation. That is to say, wrapping goods with service to gain better value. We can see that this is naturally accommodated in our service-dominant logic perspective.

### The mechanism

Rolls Royce engines is an oft quoted example. Where Rolls Royce have gone from selling you an airplane engine to selling power by the hour. So let’s play with that.

The original model of selling an engine can be modelled as one or more technical characteristics producing one or more external characteristics. It is a goods and the output is thrust, getting a plane into the sky. As an airline, you then need to think about maintenance and parts logistics.

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.

There is the possibility of using digital twin technology to further increase uptime and reduce costs. If you’re interested in more detail on this Rolls-Royce example, I can recommend this paper.

• 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)

## Disruptive Innovation

….discuss first what this really means. Then we can see that it is firstly the inverse of improvement innovation on non-functional progress, followed by a series of improvement innovations.

## Ecosystem Innovation

### Swap / Add

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.

## Combinatory Innovation

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.

## Innovation by division

Not to be forgotten is innovation by division – what we might be more familiar with calling “spinning out”.

## Ten types of Innovation

Dolbin’s ten types of innovation all fit into this model. So we can use that framework as a way to systematically hunt for innovation and understand the impact. I think though, it would be generous to claim that these innovation types fall out of the model.

I go into it more in this article, though you can see the summary of how each of the types is reflected in the model in the gallery below.

## Wrapping Up

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