CHAPTER 3

Extend

Chapter Objectives

• To identify the importance of innovation to the company and its staff
• To identify how innovation can add excellence for the ­customer
• To appreciate the importance of the external environment, especially technology in delivering service excellence
• Explore sources of change at various levels that can act as a driver for change
• To ensure existing services continue to meet customer ­expectations
• To identify strategies to help innovation and service ­development
• To define an effective process for developing and delivering new services
• To explore how innovation can be delivered in organizational settings
• To introduce design thinking principles
• To consider the role of service-dominant logic

Chapter Profile

This chapter covers the need to innovate within services for the future survival of the organization. It explores the process of innovation within a service environment, and some of the complexities caused by the differences of services versus products. It discusses the design and delivery of new services, as well as the integration of new services alongside existing services, showing how management can manage expectations of both simultaneously. The introduction of services is facilitated or hindered by environmental conditions, which play a part in determining strategy for innovation. It also discusses some of the new technologies emerging to deliver services in innovative ways.

Why Innovation Matters

Marketing is the management process that identifies, anticipates and satisfies customer requirements profitably.

—The Chartered Institute of Marketing

The elements of this are:

• Identifying customer needs (research and relationship ­building)
• Satisfying them (short-term)
• Anticipating future needs (long-term retention).

This provides ample justification for organizations whether product or service targeted for innovation, both short-term and long-term, in order to provide customer satisfaction and excitement.

What Is Innovation?

Definition

Innovation is a product, service, or idea that is perceived by consumers as new. There are differing magnitudes of innovation. Adding bran to an established brand of breakfast cereal is considered a continuous innovation in that it constitutes a small change to an existing product with little market impact, as opposed to discontinuous innovations like the personal computer, which caused great societal impact. The public outcry against the “new” Coca-Cola belied the relatively small continuous innovation that it was. An innovative strategy uses both forms of innovation to stay one step ahead of the competition.

(http://allbusiness.com/glossaries/innovation/4953136-1.html)

In the context of service excellence, innovation is critical to the long-term health of the organization. It can be prompted by changes in demand, sociology, or technology, and is strongest and most likely to succeed when all three coincide (Freeman 1987). The fax machine was developed many decades before the telephone, but no application became apparent until a telephone network was in place, and people were comfortable using it. Technology alone cannot drive innovation; other factors need to support it.

As the definition suggests, innovation happens to varying degrees, in services as well as in products, and the bulk of innovation is low-level incremental.

Innovation should not be the province of the marketing department alone, nor the Research and Development department, although it is often driven by marketing or R&D. Innovation can occur in any area of the business and have a dramatic effect on business fortunes.

Service characteristics tend to make innovation rather more challenging than in products, although there are a number of steps that can be taken to enhance the success rate.

What Drives Innovation in Services?

Innovation is driven by the need to gain a competitive edge, to offer something new and different to draw new business to the organization. In services, more often than in product marketing, innovation is driven by customer needs. Because services have such an extensive customer interface, the organization has the opportunity to listen to what customers say in a variety of ways, feed it back, and use it as the basis of innovation. This does demand that the organization has a culture and structure that ready it for learning. Learning organizations have become a hot management topic in recent years, and a service organization is best equipped to embed this in the culture. It is a key facet of service excellence because it involves listening to customers and consulting staff. The table below shows companies in the service sector and their innovations with the drivers behind them. It also shows the diversity of the service sector.

Table 3.1 Innovative companies taken from CBI report

Case study company	Examples of innovation highlighted by company	Innovation drivers
Arup	Development of the Dongtan ecocity concept in China	Foresight and long-established company culture, which balances public good with “reasonable prosperity”
Aviva—­Norwich Union	Developed telematics insurance product for individual customers and fleets	Need to respond to rapid change in insurance market, strategic decision to seek out organic growth, “inevitability” of telematics provided opportunity
Benoy	Internal business ­reorganization	In response to rapid company growth and need to free up key staff to focus on core architecture work
BT Wholesale	New ways of bundling services and providing software (rather than hardware) solutions	Declining opportunity in core market and strategic decision to grow, rather than have a managed retreat
Clarks	Development and introduction of 3D foot scanning technology	To replace existing foot measurement equipment at the end of its useful life, to reduce costs and ­determination to create a leading retail experience
Fujitsu ­Services	Moving from technological solutions to business-based outcome services	Company culture and strategy, foresight—looking for trends and “tipping points,” to reduce costs, requests for innovation from clients, to differentiate themselves from the competition
HSBC	Sharia-compliant banking, green banking, self-service banking in branches and borderless banking	To improve customer experience, meet demands of new markets while reducing costs and environmental impact
KPMG	Developing a new ­internal innovation framework ­incorporating skills, behavior, and process	To help them keep ahead of a rapidly changing business environment where some traditional services have become commoditized and clients are more demanding
Legal and General	Starting underwriters’ academy in collaboration with Cardiff University	To gain advantage over ­competitors with better training, thus ­raising standards, brand image, and ­reputation while reducing costs, and offering better career ­progression opportunities to retain the best staff
Loch Lomond Seaplanes	Bringing seaplanes as a mode of transport to the west of Scotland	Company culture, identified a gap and sought to create a new market
Steria	Business process improvement for Norwich City Council and black cab scheduling system for BAA	To stay ahead in competitive sector where intellectual property is difficult to protect; responding to the changing market where managed services are now seen as a commodity and customers are more demanding
Magic Lantern	Providing a bridge between traditional and digital media with a focus on participative engagement	Company culture, proactively identifying audience needs that seem underserved, to grow by focusing on their areas of expertise in new technology, innovation, and creativity
Muckle	Complete organizational culture Change internally	Changing market environment becoming more competitive, desire to differentiate themselves on service delivery, and need to retain staff
Newcastle International Airport	Increase “dwell time” in key parts of the airport	To improve overall customer experience while also maximizing revenue opportunities and meeting changing regulatory demands on security, etc.
Nike	Unique brand experience from social networking to a service allowing customers to design their own footwear—process of mass customization	Company culture, which promotes innovation as one of four core values. To create a brand that enhances the customer experience and grows Nike’s market-leading position
Texperts	On-demand expert answers to customer questions by text service	Company culture, to grow the business, reduce costs, and stay ahead of fast-moving competition

Source: Adapted from http://cbi.org.uk/pdf/Excellenceinserviceinnovation.pdf

Service-Dominant Logic

One driver for innovation is to create more profit while at the same time delivering superior meaningful value for the customer. This requires a coordinated understanding of the purpose and nature of organizations, markets, and society—a true piece of “outside-in thinking.” The origins of this go back to the mid-19th century, and many marketing gurus have added their voices to the conversation, including Philip Kotler, Evert Gummesson, and Christian Grönroos. The work of Vargo and Lusch in 2004 brought together the thinking of many scholars in the field to produce a concept of the mindset shift required to deliver enhanced benefits to buyers, sellers, and society simultaneously.

The cornerstone of service-dominant logic is that organizations, ­markets, and society are essentially focused on exchange of service—using their combination of competences to the benefit of another party: effectively, recognizing the need for reciprocity, exchanging one service for another; making all firms service organizations; centering all markets on service exchange, placing service at the heart of all economies and societies. This shifts marketing thinking and practice away from goods marketing into service logic, principles, and theories.

Whereas service marketing was historically seen as a progression from goods marketing, and a sort of subdiscipline, the whole focus of marketing is shifting from its goods-dominant (G-D) logic toward service dominant (S-D) logic. This new paradigm embraces value-in-use and co-creation of value rather than the embedded-value concepts of G-D logic. Instead of seeing buyers and sellers on opposite sides of the fence, co-creation of value means that they work together, with possibly other partners in the firm’s value network to achieve an overall enhanced value. This creates a new orientation for businesses, moving them beyond seeing service as an add-on to a product to viewing value creation as the key achievement.

Innovation has two strands, first the process of creating something new and second the outcome of that process, maybe an improvement or a modification to an existing service. Service innovations may be radical or incremental; radical innovations are new to the world, while incremental innovations are adaptations of existing and much more common services. The new service development process divides also into planning and implementation. Planning focuses on development and analysis while execution phase moves into design and launch. The service design creates a blueprint connecting customers with employees and creating a shared understanding of what will be given and what will be received. Design thinking approaches are valuable in this regard, as they bring together all the stakeholders with an interest in the problem, so that any proposed solution is informed by all perspectives. Tier one suppliers increasingly co-create throughout their supply chain to ensure better end-to-end solutions, and more robust outcomes. An example of this is seen in the UK water industry, where large players such as Northumbria Water Group engage their smaller partners and the local communities to design solutions. This has the further advantage that whilst Northumbria Water is too large to be able to access any government funds, its supply chain members are mostly able to draw on these.

Co-creation requires comprehensive communication with a wide variety of audiences; early proponents of SD logic, and even its champions, Vargo and Lusch in 2004 did not have the advantage of an all-pervasive communications network to make reaching all stakeholder groups a relatively quick and easy process. The last decade has seen a huge spread in terms of social media, which now offers both a technology and a methodology that can effectively utilize service-dominant logic. Social media gives scale; companies can focus well on a single customer, but struggle to replicate this globally, when many customers are on the other side of the world. Social media not only enables conversations with millions of people at the touch of a button, but also creates a resource of searchable data. Businesses can track trends in online discussions and anticipate potential issues early. Interaction, collaboration, and co-creation are fundamental to service-dominant logic. Social media provides an effective infrastructure for this interactive communication and collaboration, enabling SD logic to compete with low-price value derived from centralized manufacturing and scale benefits seen in goods-dominant logic.

Dell, previously available directly only, increased production because of online demand for its Linux laptop. Dell adjusted its value proposal based on customer collaboration through social media to co-create a successful product. Social media driving traffic to the Dell IdeaStorm website gave the opportunity for Dell to gather the information needed for the product launch offering customers the value they desired. Using an online “suggestion box,” collecting some 1,800 new product and service ideas from users, Dell has taken ideas forward to create a new line of certified, user-ready Linux-loaded desktop and laptop computers.

Vargo and Lusch (2004, p. 13) predicted a shift in market communications from one-way communication to dialog:

Historically, most communication with the market can be characterized as one-way, mass communication that flows from the offering firm to the market or to segments of markets. A service-centered view of exchange suggests that individual customers increasingly specialize and turn to their domesticated market relationships for services outside of their own competences. Therefore, promotion will need to become a communication process characterized by dialogue, asking and answering questions.

Their work also highlighted how the entire organization can cement customer relationships:

Relationship building with customers becomes intrinsic not only to marketing but also to the enterprise as a whole. All employees are identified as service providers, with the ultimate goal of satisfying the customer.

Online collaboration augments partnering attempts; no longer are conversations limited by room size, since online chat rooms can accommodate any number of stakeholders. Conversation is held with the entire market, opening interactions with customers and other stakeholders not previously accessible. For a global company, this change is even more notable. As all employees build relations and take part in the conversation, the conversation happens across all levels, and gains authenticity.

As more organizations adopt service-dominated culture they will create networks of supporting suppliers facilitating stronger solutions for customers. Co-creation of value requires an alignment of the organization’s offer with the lives of their customers, rather than just an invitation to collaborate.

Customer Reaction to Change and Innovation

Although customers may openly claim to want innovation, in practice, they are often somewhat resistant to try new things, especially until they feel they have been tested. This applies more strongly in services because the customer is so involved with the process of service delivery, and many services are personal. In general, people adopt new services based on five criteria:

• Relative advantage
• Compatibility
• Communicability
• Divisibility
• Complexity.

That means that a service that is clearly better than others fits in with existing behavioral norms, can be explained, is straightforward, and that can be tried as a sample without a full commitment will be more readily accepted than one that falls short in any of these areas.

Services are harder to explain in a communication, or offer as samples. They are usually more complex, and, increasingly, as they become technology based, less compatible. They are unique to each buyer, and even between visits; medical, legal, and accountancy services are especially hard to offer as taster sessions. Gyms and sports clubs often give vouchers to members to invite their friends to free sessions, offering benefit at little cost as the facilities are there anyway.

Compatibility with customers’ existing values and behaviors is an important part of acceptability. Women may find it acceptable to have someone to clean the house, but are more likely to resist having someone to prepare family meals, because they feel this is part of their homemaker role, and a mechanism for expressing love. In introducing new services, organizations should appreciate all these aspects of innovation diffusion to compensate for them, and assess demand levels as the service is launched.

Changes to Customers

The customer base is not a static entity, but moves through various phases, so the last few decades have seen the emergence of new groups, with new purchasing preferences, and also new work preferences.

Figure 3.1 The benefits to the customer from innovation

Table 3.2 Categories of the population

Term	Data
The Baby Boomers	Born: 1946–1954 Coming of Age: 1963–1972 Age in 2004: 50–58 Current Population: 33 million
Boomers II or Generation Jones	Born: 1955–1965 Coming of Age: 1973–1983 Age in 2004: 39–49 Current Population: 49 million
Generation X	Born: 1966–1976 Coming of Age: 1988–1994 Age in 2004: 28 to 38 Current Population: 41 million
Generation Y, Echo Boomers, or Millennials	Born: 1977–1994 Coming of Age: 1998–2006 Age in 2004: 10–22 Current Population: 71 million
Generation Z	Born: 1995–2012 Coming of Age: 2013–2020 Age in 2004: 0–9 Current Population: 23 million and growing rapidly

The most marked differences in attitude to purchasing come from what is known as Generation Y, shown in the table below. We don’t know much about Gen Z yet, but we do know a lot about their adolescent environment. This highly diverse environment will make the schools of the next generation the most diverse ever. Higher levels of technology will enable customized instruction, data mining of student histories will enable diagnostics, remediation, or accelerated achievement opportunities. Gen Z shoppers will be more Internet savvy and expert than their Gen Y forerunners.

Figure 3.2 Changing tastes: eight things Gen Y won’t buy

This demonstration of purchasing preferences indicates some of the changes in direction required of organizations if they are to meet, and especially anticipate the needs of this new customer group, and the Gen Zs that follow them.

Benefits to Organizations from Innovation

Innovation is a costly and time-consuming activity, so there must also be significant benefits to the organization from undertaking it. The table below summarizes some of these.

Figure 3.3 Benefits to the company from innovation

External Drivers for Change

Change, and hence the need for innovation within an organization and its product or service range, can be initiated from many sources within the external environment, using the acronym STEEPLE; these are identified as, which includes the generation shifts described in Figure 3.2.

Table 3.3 The meaning of the acronym STEEPLE

Change driver	Description
Sociocultural	Social factors include demographics, lifestyle, age groups, and education levels, as well as the generation shifts described in Figure 3.2. Shifts in culture resulting from immigration or other population shifts also play a part.
Technological	Factors include the state of the technological advancement and trends in technology
Economic	GDP growth rate, inflation rates, interest rates set up by the central bank
Environmental	Weather and climate of the region, the flora and fauna of the region
Political	The type of government that exists and its ideology exhibited by the various tariffs imposed, incentives given, and the stability of the government
Legal	Covers the laws of the land, for example, competition law, minority protection act.
Ethical	The general code of ethics followed by most of the people in the region, and the tendency of the people to be ethical

Figure 3.4 Conditions in which innovation is most likely to succeed (adapted from Freeman 1987)

Across all domains of the external environment, innovation is most likely to succeed when three elements combine. Figure 3.4 demonstrates that when sociology and technology change simultaneously to ­produce a level of demand for something, successful innovation is most likely to happen. The classic example of this was during the Industrial Revolution in the United Kingdom, when factories attracted workers from the country to the town, and at the same time, steam rail travel became available; demand came from ambitious workers moving to maximize their income, but also wishing to stay in touch with families. This, and the need to transport the manufactured goods to their markets was the basis of the success of the railways.

A clear understanding of STEEPLE is an invaluable tool for organizations to predict and anticipate customer needs. If an organization uses innovation as its differentiating factor, then it must always have what ­management guru Rosabeth Moss Kanter describes as “the 15-minute advantage” to keep it one step ahead. That means not simply being responsive to customer requests, but working to predict them, and developing services to meet them, so that customers feel the organization really understands them.

Forward thinking organizations use extensive scenario planning, based on environmental scanning, to understand change drivers and how they combine to create new service opportunities.

Changing Business Practices

The business world is also constantly evolving in response to environmental change, so maintaining parity with the competition is an imperative for organizations, or better still, gaining what has been described as a 15-minute advantage over the competition, can keep the business at the forefront of its industry. The table below shows some of the changes that have taken place in recent years in the business to business community.

Example

Eight years ago, we managed real estate and rooms where the value of the properties drove the value of the company, now, what we own are brands, which means that the primary asset to be managed is the customer relationship, which drives the value of the company.
—Jeff Diskin, Senior VP for brand marketing at Hilton Hotels

• The website, Hilton.com, provides information for customers who want to know whether there is a room available on a particular night at a particular place at a given rate.
• Hiltonjourneys.com enables consumers to explore the deeper meaning of travel.
• By using online to offer both the practical and philosophical aspects of travel, customers are exposed to Hilton’s branding message in multiple contexts.
• Hilton has built harmonized websites that attempt to connect the practical (“I need a room”) to the aspirational (“I want to experience something unique”).

Pause for Thought Think about the way in which environmental changes have brought about the demise of some services, and the rise of others, and what the environmental drivers have been. Was there an existing service, replaced by a new one? Have traditional service companies managed to survive, and what has facilitated this? Rington’s sells tea on a monthly round, fish vans offering a monthly service to rural villages, and library vans survive. How have they adapted? A couple of examples are given; think about others. Change driver Old service New service/Adaptation Rising car ownership Village shop Good public transport Superstore Mobile car repairs Work–life balance and clogged transport systems Mass commuting to cities Home working

Table 3.4 Changes to workplace practices

Old paradigm	New paradigm	Implications
Cost focus	Customer focus	Businesses need to make the customer central to their operations
Production orientation	Marketing orientation	Businesses need to present the benefits of their product or service, rather than the features
Deliberate planning	Emergent planning	Emergent planning means that all staff in the organization needs to have an understanding of the business strategy in order to be able to spot opportunities and respond to them
Autocratic management	Participative management	Service excellence takes this one step further, moving into the concept of servant leadership, where frontline staff are empowered to make their own decisions.
Many levels of organization	Flat structure	This also encourages the development of a servant leadership based approach.
Office based	Telecommuting	This will result in a need for smaller offices, and greater use of mobile technologies.
Stable state	Fast-paced change	This means that staff need to be flexible, adaptable, creative in their approach.
Top-down leadership	Grassroots leadership	This makes it more important than ever to recruit for attitude, rather than skills, and to recruit people who have high levels of creativity.
Work–life balance	Stressed workers and unemployment	Caring organizations have the opportunity by adopting ethical HR procedures to secure and retain the best staff and gain a competitive edge by enhancing their employer brand.

Results from Innovative Service Organizations

The 10 industries with the most dramatic salary growth are all in this service-providing sector, ranging from employment services to education to health care. In contrast, employment in the manufacturing sector is expected to drop 5 percent by 2014, and goods-producing industries will decline to 13 percent of total American employment in the decade 2004–14, down from 15 percent in 1994–2004. And the trend is global: service workers now outnumber farmers for the first time, according to the ­January 2007 issue of Global Employment Trends, a newsletter published by the International Labour Office.

Companies engaged in the services sector enjoy significant growth in revenue and profits, although the recession has curtailed that. ­Service innovation is the new direction, and in combination with a service excellence approach represents a robust strategy offering long-term survival. Services excellence delivers increased revenues in the short term as well.

Strategies to Help Innovation and Service Development

Strategic Management of Service Development

The types of new service that are appropriate depend on the objectives of the organization, its capabilities, vision, and growth plans. Each organization needs to define a strategy for the development of new services that identifies the type of service, type of market, and timeframes.

Strategies to Help Innovation

Any organization with aspirations about market leadership needs to continually improve existing products and develop new ones. Achieving innovation especially in the core service is costly and time-consuming, and often demands huge research commitment. More mature business sectors struggle to be innovative.

Figure 3.5 Service elements and competitive leverage: adapted from Services Marketing: A European Perspective, Lovelock, Van der Merwee 1996

Major innovation is relatively rare; most occurs within supporting aspects of service, and it is here that organizations have the best opportunity to increase customer perceptions of value. Performing the core task is seen as a given; if the organization fails here, it will go out of business. Innovation in the surrounding services can help organizations differentiate. Supporting services can be divided into hygiene and enhancing ­factors with a further division of the latter into parity and superiority.

Hygiene Factors

Although not part of the core service, these are things that customers take for granted, and a shortfall can lead to dissatisfaction. Strategically, they are “do or decline” factors. They include clear billing, effective order taking, and so on. Failure in these makes the organization look incompetent.

Enhancing Factors

Other aspects can be seen as optional extras, which can help create satisfaction but are not prerequisites for satisfaction. When matching competitors, they are parity factors, and when used for competitive advantage, they are superiority factors. The creation of new enhancing factors is where organizations seek to differentiate, for example a bank giving free travel insurance with a current account.

Enhancing factors are soon adopted by other players and become parity factors. The Open University MBAs stood out from the competition because they were done through distance learning, now, most business schools offer this route. Managers have to decide between distinctive additions and enhancing core service performance.

Strategies for Market Development—Ansoff’s Matrix

Ansoff’s matrix, originally developed as a framework for identifying strategic direction for products, can be applied to services. The matrix also indicates risk factors for each strategy, shown in the table below. Just being in business, working to build share carries a risk factor of one, offering the same service to a new group of customers is twice as risky because of investment in getting to know the new group and its needs. Developing new services is twice as risky again, because the organization has to invest money in development, which is wasted if the new service proves unpopular. Diversification is the riskiest because neither the target market nor the service are known quantities so much research is required.

The service excellence approach minimizes risks associated with developing new services and new markets. Consultation, collaboration, stepping into the customer’s activity cycle help the organization identify service enhancements, or even completely new services that would make a material difference to the customer, and are likely to be well received. In B2B contexts this may mean joint development. Service excellence can help open new markets, as the organization works with existing loyal customers to help open doors in new areas, either geographic, or sectorial.

Table 3.5 Ansoff’s matrix showing risk factors and service application

Offerings	Markets
	Current customers	New customers
Existing services	Share Building (1)	Market development (2)
New Services	Service Development (4)	Diversification (16)

The matrix can also be used as a catalyst to generate potential ideas for services by focusing management’s attention on it.

Location of NPD in the Organization

It is important that new product development (NPD) is located strategically in the organization if it is to be seen as an integral and valued activity. It should report directly to senior management, and should be a discrete activity, rather than merely an adjunct. Better still, it should be the province of all members of staff, who should feel able to contribute ideas for innovation across the board. Organizations, which operate a matrix structure, struggle with NPD, because it is the province of product managers so NPD tends to be limited to incremental improvements, such as new colors, flavors, sizes, or packaging and the organization misses out on real innovation.

Internal Innovation Strategies

These usually develop and nurture the attributes of innovative corporations, such as prioritizing and encouraging innovation. The figure below are some strategies from highly successful corporations.

Market-based Strategies

The most common market-based innovation strategies include:

• the leader,
• quick follow, and
• slow follow (or no follow) strategies

A leadership strategy means being the first to introduce the innovation to the market. The risk is that the product or service will be rejected by the marketplace, possibly undermining the brand through failure and wasting costly resources.

The benefits of this approach include:

• Companies often introduce an innovation to an existing product or service, calling it “new” or “improved,” to breathe new life into it.
• An improved product may discourage the competition from trying to steal market share, or to “leapfrog” their ­competitors.
• For completely new products or ideas, the innovation may try to establish market dominance and attain leadership status.

Figure 3.6 Internal innovation strategies

Figure 3.7 Northumbria water’s innovation festival reproduced with kind permission from Northumbria Water Group

Northumbria Water in 2017 launched a Festival of Innovation, bringing together companies from across the utilities sector to explore common problems, and in doing so, positioned themselves as thought leaders in the entire infrastructure sector, not just water. In 2018, this became more ambitious, covering more areas, and attracting a wider, worldwide audience.

The quick-follow strategy is often used by established market leaders to avoid the risk of leadership strategy, allowing a competitor to introduce an innovation, then following with a substitute or improvement. Quick followers are confident in their ability to crush the competition with their established reputation and marketing and distribution channels. They risk being unseated by a hugely successful introduction or losing reputation as an innovator. This may include smaller competitors trying to keep up with the competition. They may try to target select market niches, offering a cheaper version of a new innovation to lure buyers who can’t afford the leader’s product or service.

Car manufacturers often adapt the best qualities from each other by changing the style of the vehicle. Technology adapters include Dell and Sony who have products in the laptop market but adapt from their closest competition. Adapters can soon become leaders as well because they can learn and make a better product than the higher competition. Japanese camera companies built much of their market success on emulating ­German camera products back in the 1960s and 1970s.

A slow- or no-follow strategy may result because competitive pressures or slow market growth make an investment unappealing. Or, the company may realize it lacks the resources or technology to compete with the new innovation.

Some companies refuse to introduce or adopt an innovation because they know existing customers have made large capital investments in its existing product line and will be hesitant to buy new equipment. Other companies are so strong in marketing or manufacturing that product innovation is simply not a chief concern—they would prefer to wait until the new innovation is accepted by the market before they follow.

Strategies for Profit Growth

Profit growth can be achieved through a number of means: increasing revenue, decreasing costs, spreading overheads across a wider range of ­services will all increase profitability. When service first emerged as a key differentiator, it was almost a matter of trust that it would deliver improved financial success. Companies of the standing of FedEx and Xerox made the commitment to service before documentary evidence could prove them right and were rewarded by leaping ahead of their competitors. Recession puts organizations under pressure, and there has been a temptation for organizations to look at lowering service levels to reduce costs. Tools to measure effectiveness of service excellence have been developed, and forward-thinking organizations no longer put services into the cost category but see them as major contributors to profits.

In the same way as it is hard to attribute increased sales to advertising, the exact contribution of service to the bottom line is disputable. Results build slowly; it is one of a number of variables, along with ­pricing, communications, and efficiency that combine to raise profits. Above all, spending on service alone delivers nothing if the core service fails to satisfy.

Organizations have used fairly constant measures of profitability throughout history, profit, and return on investment. Modern organizations now see the value of measuring other factors as the ­weather-vanes of organizational health. The approach is called the balanced performance scorecard and takes into account customer perceptions and operational indicators such as core skills and competencies. Triple bottom line businesses focus on profits, people, and the planet—not just profits as some companies do. These include Patagonia, climbing equipment, ­Better Books, and Namaste Solar, all of whom have a social or environmental purpose in addition to making money.

Corporate entrepreneurship or intrapreneurship is entrepreneurship within an established organization. Growth is essential to all organizations, but very few have a process to support and maintain growth overtime, and a supportive framework is essential.

Corporate entrepreneurship takes a systems perspective of the collective resources, processes, and environment that can nurture and engage all members of staff in entrepreneurial thinking and action.

A strong entrepreneurial orientation enables better performance, enhancing productivity, innovation, growth, and ultimately, financial returns.

Many organizations are wary because it challenges traditional organizational practices.

Three components combine to enable corporate entrepreneurship: people, process, and place.

• People—leaders with action focused skills and behaviors
• Process—to support entrepreneurial approaches
• Place—a collaborative environment to encourage entrepreneurship, learning, and growth

These elements combine to enable the success of corporate entrepreneurship over time. The organization adopts a mindset that encompasses failure by seeing it as a source of learning, rather than a condemnation of the people or processes involved. Corporate entrepreneurship enables organizations to accelerate new business growth, whilst at the same time, making the work environment a more rewarding and exciting place for employees, and helping deliver greater relevance and freshness for customers. Continual collaboration also avoids the risk of marketing myopia as organizations are continually refreshing their offering in line with changing market trends.

New Service Development Process

The development of new services stems from the organization’s mission statement in the first place. Some organizations desire market leadership, and use innovation as the means of achieving it, others are happy to let them take the lead (and incur the risks and costs). The development of new services is most likely to be successful when a logical process is ­followed. The diagram below indicates a possible process.

Figure 3.8 Idea generation process: Adapted from Booz-Allen Hamilton

Idea Generation

This stage should be very open, and all ideas should be allowed. It can begin with a brainstorming session, maybe using a framework to focus ideas on market extension, product extension, etc. Often in companies working closely with customers, ideas are generated as a result of cooperating on client processes, talking to operators, or observation of end-user experience. Customer feedback forms, complaint forms, customer focus groups, and other forms of eliciting customer opinion also form valuable sources of new product ideas. Only once there is a group of new service ideas should they be put through the filter of the organization’s goals for service development. Does the idea fit with the objectives in terms of new services, new markets, and diversification? Does it match the values of the organization and its clients?

Concept Development

Once a potential service is deemed a good fit, it can be developed into a blueprint, outlining the sequence of what happens. Costs can be determined, and views of staff who would deliver the service gathered. The ­service moves from idea to a realizable entity. The prerequisites and hygiene and enhanced factors must be clearly identified for the service at this stage. Table 3.6 shows a blueprint for an arranged parcel delivery through a courier company for a nonaccount customer.

Table 3.6 Blueprint for a parcel delivery service

Physical evidence	Courier company H/W and S/W	Van and Courier livery, handheld terminal	Warehouses	Van and courier, waybill and parcel	Receipt
Customer activity	Telephone or online booking	Hands over parcel		Parcel delivered to recipient	Receive and pay bill
Frontline staff	Office staff answer and organize collection	Courier collects parcel	Courier delivers parcel to warehouse hub	Courier delivers parcel and receives signature	Office staff resolve any queries
Back office staff	Call requirements routed to dispatch		Handling customs and data entry	Billing customer freight charges and customs charges	Take payment
Invisible Supporting system	Booking system	Parcel tracking system	Mechanized sorting and tracking system	Billing system	Payment system

Business Analysis

After favorable evaluation, the service is analyzed with a view to its profitability and profit implications. Demand forecasts, revenue, and cost ­projections are done, and the concept is graded against profit criteria.

Service Development and Testing

Services can’t be prototyped in the same way as products, but they do need testing. This involves everyone who has a stake in the product, including customers, staff, and third parties, representatives from marketing, operations, and HR. The blueprint is amended according to outcomes of this stage.

Market Testing

This stage establishes whether the new service will be well received, so it might be trialed in a number of areas, with perhaps, different emphasis on the various elements of the marketing mix. A prototype test is often run with staff, or with a group of loyal customers who have perhaps been involved all the way through.

Commercialization

This is the point at which the service goes live and is launched. The key objectives are to

• build awareness and acceptance of the new service and
• monitor aspects of the service during introduction, and throughout the service cycle. If the service lasts over several months, then so should the monitoring.

Postintroduction Evaluation

Information gathered during the commercialization phase is reviewed, and adjustments made to aspects of staffing, the marketing mix, operations etc. The service blueprint should be amended to reflect these changes.

Strategies for New Service Sectors or NPD

When an organization opens up a new service sector, it needs to reduce the perceived risk the customer feels as a result of the unknown.

Relevant strategies include an education program, creating awareness of the benefits offered by the new service. When the Internet first emerged, few business managers were aware that it existed, much less how powerful it was to become. Web designers held free education seminars to create awareness of the capabilities and the approaches before securing clients. Service trial is another approach that helps break down resistance, because customers experience the benefits without the risk of financial commitment. When a gym or health club opens, it offers free sessions for people to see the quality of the facilities and equipment before signing up.

Design thinking is a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.

— Tim Brown, CEO of IDEO

This approach can short circuit development of products, services, processes, and strategy. it unites what is desirable from a human point of view with what is technologically possible and economically advantageous. Everyone is able to use creative tools to address a vast range of challenges without specialist training. This approach can reduce the time to market by ruling out ideas without stakeholder appeal early in the process, creating simple prototypes and getting early feedback without the usual level of investment.

A successful brand name is a huge advantage for opening up a new service sector. Existing loyal customers can be used to spearhead trial of the new service, and act as ambassadors. The organization’s reputation, based on a history in the marketplace can create credibility and open doors. Some organizations take advantage of these assets when launching new services, but some elect not to, in case the new service is a failure and might risk damaging the existing brand by association. They might develop an entirely new brand for the new service. Alternatively, they may opt for a half-way house using a group brand to give them security but a new sub-brand as part of the family to provide some distance in the event of failure.

Combined Strategies

Where an organization is going for new service development as well as opening up a new market, this is diversification and the riskiest strategy of all. Effectively, this is what every new business does, and accounts for the high failure rate of new businesses.

This may be the only possible option, but ideally organizations identify areas of knowledge and strength they can build on to minimize the risks. They may have worked with the customer base as employees of a larger organization and be offering something new to them but will still benefit from trust built up in the previous relationship. Many universities run incubator units for new high-tech businesses, and organizations in these locations benefit from an extended contact network, increased business support advice. Universities now also subcontract organizations to offer specialized business services, helping to minimize the risk of new business startups. The universities are extending their understanding of business into providing practical support and getting rental money at the same time.

Developing and Delivering New Services

Technology has made a phenomenal contribution to the ways in which companies do business with their customers, not to mention automation of behind-the-scenes processes. The Internet has created all sorts of opportunities both to enhance communication with customers, and to deliver aspects of the service. Even small organizations have a website, so are no longer limited geographically unless they choose to be. Some companies, such as eBay have developed as a result of the new opportunities created by the Internet.

Customers need to be educated on how to use new technologies and given an appreciation of the benefits they can gain from them, and this is a continuing challenge for marketers. Technology has the means to enhance the efficiency of existing services and to deliver radically new service concepts.

Technology to Design and Deliver New Services

eBay did not exist before the World Wide Web made it possible, but auctions existed. eBay cleverly used new technology to extend and vastly update an accepted approach to selling. It did not require customers to step outside their norms, except in computerizing the service, but the majority of the population had become computer literate through work. Its big selling point for purchasers was that it offered goods at very competitive prices, and also created some of the drama lost from the retail experience through the auction method of purchasing. Amazon also offers a traditional service using the Internet as a communication and in place of a conventional retail outlet. Rolling these two together has the dual advantage of providing a service to the customer in the home, and at the same time, reducing overheads of the operation.

The Internet abounds with a range of services previously ­delivered only in an immediate locale, but which are now available around the globe. These include everything from business advice, to fortune telling.

Some services only emerged as a result of new technologies. Computer games software advanced dramatically with the arrival of virtual reality software that allowed the graphics to resemble real places, or make imaginary ones appear convincingly real.

Remote control technology has made keyhole surgery possible, so patients no longer have the extended stay in hospital that followed many AI and robotics can now mean that surgery is done remotely, ­supervised from another country procedures. Satellite technology has vastly improved weather forecasting services, as well as beaming a multiplicity of TV programs around the world.

One of the tenets of innovation has always been that organizations could gain first-mover advantage by being the first to adopt new technologies. Research into the mobile phone industry suggests that

Just being first, you don’t get anything. Being first brings the possibility that you will be able to pre-empt scarce resources if there are any, and to build technology leadership, if there is any to be had. If you cannot leverage these mechanisms, to matter much less whether you come first, second or third into the market.

(Lanzolla 2010, quoted in Wray 2010, “Get in first for a lead that lasts,” Cass Alumni magazine.) Lanzolla goes on to cite O2, which tied up the rights to sell the iPhone with Apple, as an example of a first mover grabbing a scarce resource.

Design Thinking

Design thinking is an iterative process which involves users, challenges assumptions, redefines problems, and creates prototyped and tested solutions. The method comprises five phases—empathize, define, ideate, prototype, and test; it comes into its own when problems that are ill-defined or unknown need solution.

In an increasingly dynamic world created by VUCA (variable, uncertain, complex, ambiguous) factors, organizations need skills to understand and act on rapid changes. By capitalizing upon complexity and interconnectedness design thinking offers a human-centric way of meeting this change head on.

Poorly defined or unknown problems (otherwise known as wicked problems) reframes problems in human-centric ways, focusing on what matters to users. Design thinking short-circuits traditional design processes which involve before customer testing and acceptance by involving end users in the design process.

Design thinking has gained popularity in recent decades because many high performing global organizations including Google, Apple, and Airbnb see it as fundamental to their success. It opens up revolutionary ways of thinking and a completely new mindset, and is now widely taught in universities around the world. A key feature is the willingness to accept failure early in the process so that the end result is as good as it can be, and there are no costly product or service launches that ultimately fail.

Pause for Thought Think of as many new services as you can that have been enabled by the following technologies: Remote control Laser Satellite Internet Refrigeration Laser scanner Holograms Virtual reality Mobile communications Voice over Internet Protocol (VOIP)

Technology to Facilitate Service Management

Technology has affected many areas of the service sector by enhancing services provided to the customer and improving management information gathering without inconveniencing the customer. New service concepts have altered the landscape of service in service organizations, and in product-based organizations, which now widely use service as a means of ­differentiation. Mobile phones, text messaging, and e-mail have speeded up communications with customers as new delivery methods for existing services and information about them. Mobile phone technology combined with GPS technology enables social media services such as Four Square to alert customers to the presence of associates in local coffee bars, creating more footfall for participating venues.

Entertainment venues use ticketing systems that capture data about customers. Hotels use similar systems for checking guests in. The information generated allows them to tailor their services to particular segments, to make price offers to select targets.

Retail technology has enabled service enhancements over the last several decades. The introduction of product barcodes and the scanning point of sale terminals that read them revolutionized stock control, as well as allowing retailers to identify their most profitable lines, or slow-movers that do not justify shelf space. Piggybacking on this technology, retailers developed loyalty programs, which, like the Tesco Clubcard enabled them to create customer-specific special offers. Customers receive rewards and choose how they take them; the retailer builds a database of shoppers, with a personal profile, and a pattern of shopping habits that form the basis of marketing campaigns, for store products and financial services such as car and home insurance.

Tracking cameras show the routes customers take through the store, which guides store design and merchandise layout. Piped smells of freshly baked bread and ground coffee entice the customer into spending ever more money. Piped music slows progress around the store ensuring that more products are seen, and the café offers respite to weary customers.

Distance learning was a process involving dispatch of course materials and receipt of assignments. Now, although students still like to have printed materials, resources and marking are online. Students participate in various learning activities, facilitated by the Internet; webinars, online seminars, and podcasts allow students to choose their preferred learning medium. The process has become much easier as a result of Internet technology.

Courier firms, led by FedEx, developed real-time systems, allowing customers to track shipments anywhere in the world, and in the system. This is now seen as important as the physical logistics of moving the parcel around the world. Improvements have been made in booking deliveries and payment. These enable continual improvement in service standards. Centralization of many support functions has further reduced costs.

Virtual reality has greatly enhanced services such as plastic surgery, kitchen and bedroom design, and interior design consultancy, by enabling customers to see what the finished product will look like with various permutations of design, so that prior to purchase, they have a good idea what they will receive.

Changing Nature of Technology in Delivering Service Excellence

Manufacturing industries emerged during the Industrial Revolution as the result of new technologies—steam engines, the Spinning Jenny, and other means of automating manual tasks. Services are now undergoing a similar, though less radical revolution. The bank teller is supported by computer technology, the car mechanic uses computer diagnostics, and the lecturer uses PowerPoint slides to explain, and so on.

Some applications of technology enhance presentation, rather than change the actual service. A training or education session uses PowerPoint to replace blackboards, whiteboards, and flipcharts, but the learning content is much the same. (Some recorded videos of training sessions now go back to the dynamism of a facilitator writing on flipchart paper.) Others though, actually manage the process—the banking and parcels delivery services really struggle in the event of computer failure as so much is now driven by computer.

Manufacturing identified key measurements to enable an automated process to control the quality of system inputs and outputs, using statistical process control (SPC) for example, to measure the mix of ingredients in beer production. In a similar way, services have sought, using a variety of measures to control service quality. There has long been recognition that financial and numeric measures feel short of what was needed, and the balanced scorecard approach and later, Servqual based on the RATER model discussed in Chapter 3 of the first volume emerged to help monitor services performance.

Ensuring Old Services Meet Expectations

Innovation can also be used to keep existing services up-to-date and able to meet new expectations.

Service Expectations with Old Services

Although people value some aspects of traditional service provision, they still expect to see things delivered in a smooth manner, taking the best that technology can offer while retaining good old-fashioned standards. Used wisely, technology takes the drudgery out of many tasks through automation and frees up frontline staff to spend time offering a personal touch to customers. This perhaps also changes the nature of job roles, and alters the type of skills required by businesses, so education needs to adapt to meet these changes in work by focusing more on soft skills, empathy, and creativity.

The banking industry has continually updated its services to overcome escalating costs and take advantage of new technologies. The driver has been largely cost, so although some facilities do benefit customers, such as Internet banking, and “hole in the wall” automated teller machines, many do not. Many customers depended on the period it took for a cheque to clear, whereas debit cards immediately take the money from the account. Online payments and direct debits have taken the place of cheques for items such as household bills, tradesmens’ payments, etc., but many ­people, especially elderly people, prefer the control of having a cheque book. From a cost perspective, the banks were keen to move to full electronic payments, and technically this was feasible 35 years ago. That it did not happen was down to the power of the consumer, and the banks’ need to manage the demise of the cheque service.

Service Expectation Through the Product Life Cycle (PLC)

Service providers use the life cycle concept to manage service expectations and price in a similar manner to product manufacturers. The life cycle concept presupposes that products and services have a lifecycle, starting with birth, and ending in death. The skill of the marketer is to take the product/service quickly through introduction and growth, capturing maximum market share, and establishing position as market leader, and then to prolong the maturity phase. Maturity for products can be prolonged by developing color, flavor, scent variants, by strong branding, and other devices. Marketers have to determine where on the graph the product in question falls, and what strategy is appropriate.

The life cycle concept can be used in a variety of ways:

• To assess when sales of a new service are likely to begin to take off, when they are likely to plateau, when decline, and when profit is likely to accrue. This helps forecasting.
• To plan the portfolio of services by understanding the PLC of each and ensuring that new ones are available to replace dying ones.
• To assess whether a given category is attractive, based on where other services in the category are on the PLC.

Services adopt a similar approach to products, and some of the same strategies: early entry into the market place can help secure market share, especially if the organization can tie up scarce resources. Strong branding and well planned marketing communications prolong the maturity phase. Technology can manage the life cycle for services too—when the mobile phone industry first emerged, there were few options in terms of service packages, and handsets themselves. Over time, both have become ever more sophisticated, but there are still basic contracts, pay-as-you-go, and basic handsets. These are sold to segments of the market less sophisticated in their communication needs, and more price conscious than early adopters who crave the latest technology regardless of price. They are also sold in markets that lag behind Western markets in terms of technological sophistication.

Because technology moves so quickly in certain fields, it may be a matter of only months before a service becomes obsolete—as with computer games. Whilst a service provider has to capitalize on sales of the new service, there remains the opportunity to discount former services to segments of the market which are less image conscious or more price conscious. The costs of developing the service have been incurred, so any additional sales are mostly delivering profit, and spreading development costs further. In cable TV and broadband communications, the basic service is in the mature phase of the life cycle, but service providers are adding facilities such as the option to catch up with missed programs without having to record them. The basic service acts as a cash cow, generating revenues to support newer services as they emerge. The customer database allows the organization the opportunity of persuading customers to “trade up.”

Product Management

Product management sits between engineering/production and product marketing, strategically translating market requirements into product plans for development. They feed information to the product marketing group to support product launches.

A key part of the role is to introduce new products and manage the portfolio. An additional, often overlooked is the management of product end-of-life. Products have a full product life cycle. There are multiple publications about how to identify a market opportunity, concept and prototype a product, outline a roadmap for development, and launch into the market but few on the phasing out process when a product is no ­longer needed or newer products have made it obsolete.

As businesses grow, this part of the process becomes a requirement. For early-stage companies without official documented customer support plans, end-of-life may be that it is no longer sold, a new product offered to existing customers, offer discounts for upgrades or updates.

For larger businesses, the situation becomes much more complicated. Often, customers make regular repeat purchases of items that play a role in their operations. Customers will be critical of businesses that cannot smoothly manage the transition from older products to new versions. Areas for consideration would include the following:

1. When to discontinue guaranteed maintenance or warranty terms
2. Providing an upgrade or update path
3. How to phase out old terms and conditions, rules, benefits, etc.
4. Directions for customers to use old and new products together, if applicable
5. Documentation of historical release path (for software/hardware technical products)
6. Obsolescence of product accessories

This is far from an exhaustive list, but enough to give an idea of the challenge. Basically, you cannot simply let customers down when your product is a key part of their operations without some negative reaction. In order to grow a product portfolio, it is essential to usher customers along from to product version, release to release, etc.

For customers who will not upgrade, clear communications about when and what is being eliminated can smooth relationships. Providing ample time for customers to upgrade or find another solution makes your organization look caring end of life (EOL).

The concept of an EOL product has been around for a while, symbolizing the last stage of a product’s life cycle. The rapid emergence of technology and other factors have led to bigger issues surrounding EOL products, so manufacturers and vendors must anticipate the consequences of designating an EOL product. Disposal is a key concern. Defunct hardware devices require physical disposal and installation of newer versions. Software systems involve “weaning” legacy systems or migrating applications to newer platforms in order to replace old systems.

Microsoft Windows operating systems are regularly managed by ­Microsoft. Often users have systems that rely on certain Windows versions to support all sorts of processes, including security protocols, municipal or government agency programs, business processes, and individual PC systems. When software is phased out, all of this must change.

To address the challenges of EOL products, businesses create detailed EOL support policies to clarify what happens after a product reaches the end of its life. Such policies outline available user support and provide advice on migrating systems, avoid loss, and mitigate vulnerability as a result of EOL situations and loss of support.

Importance of Meeting Customer Needs

A customer whose needs are not met by the service purchased is unlikely to remain a customer for long—they will simply find a provider that can meet their needs. In terms of managing services excellence, the reasons for meeting customer needs center on the wish to delight the customer, rather than simply satisfy, the need to contain costs by “getting it right first time, every time” and the hope that delighted customers will blossom into ambassadors generating positive word of mouth for the organization. A dissatisfied customer, apart from transferring loyalties will tell at least 10 other people, becoming a walking bad advert. Innovative products must meet customer needs or they will wither.

Customer Acceptance of Innovations

Customers do not all accept innovation with equal readiness; the diagram below shows the spread of perspectives of customers’ acceptance. Understanding this, and building strategies around it, winning the hearts and minds of the innovator and early adopter group can facilitate the speedy acceptance of a new product or service launch. Convincing opinion formers can you help spread the word about the value of the service quickly.

Figure 3.9 The diffusion of Innovation curve (Rogers 1962)

Technology Acceptance Model (TAM)

TAM focuses on perceived usefulness and perceived ease of use determine someone’s intention to adopt something new; intention to use acts as a mediator of actual system use. Perceived usefulness is directly impacted by perceived ease of use. TAM assumes that when someone forms an intention to act, they will be free to act without limitation. In practice, action is limited by limited ability, time, environmental or organizational limits, and unconscious habits. The elements of this that are relevant to service excellence are the particular aspects of perceived usefulness and perceived ease-of-use. When introducing a new service, clearly the organization needs to demonstrate to potential customers the benefits of the service, and to convey its ease of use.

Figure 3.10 Technology acceptance model adapted from Venkatesh et al. (2003)

Organizational Culture and Its Contribution to Innovation

Boston Consulting Group (BCG) regularly conducts a survey of innovative companies. According to BCG’s research, successfully innovating companies approach innovation as a system rooted in experimentation; like all adaptive systems, it evolves over time as the external environment and internal needs change.

Adaptability and Innovation Culture

Global research suggests corporate culture is a more important driver of radical innovation than labor, capital, government, or national culture. Adaptability appears to be the most critical pillar of successful organization cultures. Adaptive cultures encourage:

• risk-taking
• willingness to experiment
• innovation
• personal initiative
• fast decision-making and execution
• ability to spot unique opportunities

Corporate entrepreneurship is one example of an adaptive culture. Adaptive cultures also minimize some behaviors usually seen as advantageous, such as being careful, predictable, avoiding conflict, and making your numbers. An adaptive culture, emphasizing experimentation, is the most advantageous for innovation.

Startups tend to place all their hopes on a single invention but established companies have to secure their previous success. They can draw on resources to conduct market research alongside their existing business. In some instances, organizations simulate the startup model, thus avoiding exposure for the main brand, and gaining some of the benefits of lean operations.

IBM’s Emerging Business Opportunity (EBO) initiative, set up in 2002, set out to include exploration experiments in their portfolio. Like actual startups, some failed, but from seven at the start, enough survived that in the first five years alone, the EBOs added $15.2 billion to IBM’s top line, or more than twice as much as acquisitions.

Balancing exploration and exploitation activities enables companies to thrive on the short- and long term. Including collaborating with external partners, for example, teaming up.

Multinational companies with SMEs give the greatest adaptability to changing environmental conditions, as it provides multiple options to address any emerging challenges.

Organizations that focus heavily on standardizing their systems risk driving out creativity and experimentation; often, the best ­inventions come from nonstandard situations and the flexibility required to cope with that. Experimentation is one of the key sources for innovation. As many industries move into periods of dynamic change, there is extensive demand for experimentation to generate new services to address changing market needs. An organization that is surrounded by change, and unable to respond to it is likely to get left behind.

Although adaptive culture has a strong link to organizational survival and performance, many companies struggle to establish a culture of exploration, experimentation, and variability.

Organizational Barriers to Innovation Culture

Organizational culture rewards behaviors congruent with organizational values, producing a collective mindset, referred to as a “social contract” or set of values that guides people’s organizational life. In many organizations, there is a tension between opposing social contracts one based on exploitation, predictability, and efficiency, and the other based on exploration, uncertainty, and variance. This tension results in a clash of approach as outlined below:

• Break rules and dream vs. excel at your job
• Open doors and listen vs. be loyal to your team
• Trust and be trusted vs. work with those you can depend on
• Experiment and iterate together vs. do the job right the first time
• Err, fail, and persist vs. strive for perfection
• Pay it forward vs. return favors

Companies need to learn how to capitalize upon the creativity generated by this tension, and yet, for an organization to develop a collective mindset, it needs to present congruent rather than conflicting messages. A common approach is to create an integrative culture that places an explorative culture on top of an (existing) exploitative one. This may be done by introducing a “x percent rule,” allowing staff to dedicate a ­portion of time to explorative projects beside their “core business,” to generate ideas and develop them up to a certain stage. Generally, this leads to misaligned and inefficient incubation, making any innovations hard to scale.

A more robust approach may be to shape distinct cultures with dedicated values, requirements and people, and encourage each group to behave as though the future of the organization rests on their shoulders. Google, for example famously allowed staff 20% of their working week to focus on a project of their own, resulting in some of the company’s most successful products such as Gmail, AdSense and Google Talk. The cultures are separated, but with some overlapping “touchpoints” where capabilities, ideas, and knowledge are exchanged in order to avoid isolation and to achieve mutual benefit. Examples for touch points can be idea management platforms, portfolio management boards, corporate strategy teams, or company-wide events and communication platforms. These touch points are to be staffed with adaptable people—the T shaped people discussed in the first chapter of this volume, capable of ­integrating both world views.

Many energy providers and electric utilities are undergoing this organizational and cultural tension. Having operated an entrenched, monopolistic, and highly predictable business model with a “production-­centered mindset” for decades, they are now being forced to transform into ­customer-oriented service providers. They are seeking novel, customer-­centered business models and exploring emerging markets. This need for innovation is driven by overturning value sets that made the companies ­successful, as they no longer serve the organization well. Such transformation processes risk leaving staff disorientated and demotivated without careful management.

Become a Learning Organization

The best chance to succeed and thrive is to become a learning organization, defined by Peter Senge as:

Organizations where people continually expand their capacity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are continually learning how to learn together.

To promote a learning organization environment takes time, commitment, and resources, but the following act as starting points.

Systems Thinking

The basic structure and connected components of our work systems, shape much of the behavior of the individuals within the work system.

Dr. W. Edwards Deming suggested that when something goes wrong, rather than laying blame, it is productive to explore what about the work system caused that individual to fail. This is further reflected in the concepts of design thinking, where failure is viewed as a necessary part of innovation and progress, and the source of much valuable new knowledge and insight.

Personal Mastery

Personal mastery is the discipline of continually clarifying our personal vision, of focusing our energies, of developing patience, and of seeing reality objectively.

An organization’s learning can only be as great as the sum of its individual members. Personal mastery and the desire for continuous learning deep in each person’s belief system can give competitive advantage in the future.

Mental Models

These are the deeply held pictures each of us holds in our mind about how the world, work, our families, and so on—work. Mental models influence our vision of how things happen at work, why things happen at work, and what we are able to do about them.

Building a Shared Vision

Shared vision refers to a process in which the original vision for an ­organization, probably determined by the leader, is translated into shared pictures around which the rest of the organization finds meaning, direction, and reasons for existing.

Team Learning

Teams not individuals are the fundamental learning unit in modern ­organizations. The dialog among team members results in stretching the ability of the organization to grow and develop.

The Role of the Leaders

The behavior and contribution of leaders the starting point for creating a learning organization. It is then possible to bring in everyone else in the organization to support their actions. There are four critical contributions needed from the leader to develop a learning organization.

• To provide the initial vision of why the organisation exists, and where it is going
• To clearly communicate their vision, and their belief that continuous growth, learning, improvement will accomplish the vision
• To build consensus and ownership around the vision and incorporate views of others in the organization
• To model the actions, they want to develop in others

Leaders who want a learning organization continually learn themselves. They read books and articles, attend training sessions and conferences, and share the learning with the rest of the organization.

They foster an environment in which people are empowered to make decisions about their work, where intelligent risk-taking is the norm. They ensure that all information people need to make good decisions is available. They promote an organizational environment that supports learning and personal mastery.

Interfunctional Coordination

Interfunctional coordination is the other area that can help an ­organization become more robust and more adaptable to the changing environment. It is the cooperation of the various internal business functions to achieve the overall goals of the firm and ensure its responsiveness to environmental changes. To achieve an acceptable degree of interaction and collaboration among the specialized functions of the firm, Mintzberg proposed six basic coordinating functions:

• Mutual adjustment: the process of informal communication in which people interact with one another to coordinate.
• Direct supervision: one person coordinates by giving orders to others.
• Standardization of work processes: direct specification of the content of the work, and the procedures to be followed in order to tightly control different people.
• Standardization of outputs: specification of what is to be done (i.e., the results of the coordination) so that interfaces between jobs are predetermined.
• Standardization of skills: loose coordination of people through education on a common body of knowledge and a set of skills that are subsequently applied to work.
• Standardization of norms: coordination of people through a common set of beliefs.

In conjunction with the principles of becoming a learning organization, functional integration can help manage the essential tension between the two conflicting mindsets described above. Effectively done, the tension itself can become a source of great creativity and innovative ideas.

Quotations/Interviews from Key Practitioners/Leaders of Excellence Businesses

Do not follow where the path may lead. Go, instead, where there is no path and leave a trail.

—Ralph Waldo Emerson

Organisations, by their very nature are designed to promote order and routine. They are inhospitable environments for innovation.

—T. Levitt

What we’ve done to encourage innovation is make it ordinary.

—C. Wynett, Procter and Gamble

Case Study Analyzing Good and Weak Aspects

Norwich Union is the largest provider of insurance services industry and is part of Aviva, the world’s fifth largest insurance group. Their core ­business is about risk and claims resolution constitutes the bulk of the costs of running the business.

In the 1990s traditional insurance business models started to evolve rapidly. Companies like Direct Line altered the insurance market for good, while the broker market also changed with the likes of Web-based moneysupermarket.com enabling customers to compare quotes from hundreds of insurers online, very rapidly.

Norwich Union quickly realized that it had to change. Throughout the 1990s they had grown the business through acquisition and now realized it should focus investment on innovation. It was recognized that detailed analysis of data trends using the latest technology could transform the underwriting business, providing them with a real competitive advantage, and so they set about developing and protecting innovative algorithms to analyze data.

At about the same time, car manufacturers were focusing on technologies to improve car safety. Telematics was one such technology, which involves capturing and analyzing data from vehicles. It seemed to offer great potential for insurers and Norwich Union discovered that other insurers internationally were already trying it out. Following the ­success of Direct Line, Norwich Union understood the importance of first-mover advantage and provided an R&D budget for the development of a pay-as-you-drive telematics product for the UK insurance market. The telematics offering was initially piloted with 5,000 volunteers from its own customer base and the trial proved a great success. It also attracted far more interest from customers than they could possibly imagine. In 2006, the first pay-as-you-drive product, aimed at “young drivers” (aged 18–23), was launched to great media interest. A package for other drivers then followed.

Norwich Union has now used this expertise to create a telematics product for the commercial fleet insurance market. Managing risk is a key part of any insurance business and this responsibility extends to ­customers, with increasing focus being given to Duty of Care. Fleetwise Care, Norwich Union’s Telematics-enabled fleet product, is targeted at this. The system presents information on journeys such as duration and speed, road types covered, and claims information. This enables an assessment to be made on such things as driver fatigue and the exact timing and location of any incident involving that vehicle. Fleet managers can also look back at historical driver data to try to understand more about journey and driver behavior or why a driver may have had several accidents. The fleet-side system also has a sensor fitted, which can provide an immediate alert if the vehicle has been in a serious accident. Norwich Union believes that, in the future, telematics boxes will be built into all cars as standard and that this will help to reduce accident rates. Recent changes in health and safety policy associated vehicles, and also changes in corporate manslaughter legislation, increase the focus that businesses need to place on duty of care. Telematics technology is an enabling technology to help.

Enchantment Example

GE leads the way in implementing different open innovation models. Their GE Open Innovation message highlights their keenness to address world problems through implementing crowdsourcing innovation. Their Open Innovation Manifesto promotes collaboration between experts and entrepreneurs worldwide to share ideas and passionately solve problems. Their Ecomagination project addresses environmental challenges through innovative solutions.

One of GE’s projects is the First Build a co-create collaboration ­platform, which connects designers, engineers, and thinkers to share ideas with each other. First Build focuses on solving problems and ­creating new home appliances products. Winning ideas are made available for ­purchase. The manufacturing of the ideas is done through GE’s micro ­factory places where members can get access to machines and tools required to turn their ideas into real products.

First Build employs a co-create collaborative model, which is one of the open innovation models that provides a platform for external and internal individuals to collaborate in ideas sharing and manufacturing to reach innovative ideas for products and services.

End of Chapter Summary

This chapter has explored the way in which service innovation can ensure that the organization continues to meet the needs and expectations of its customers with its service offering. It looks at the way that expectations evolve throughout a customer relationship, and at some of the ­customer behavior around innovations that organizations can use to guide their strategy.

It considers the way in which technology can promote innovation in services, and some of the impacts this may have on the organization and its customers. Various approaches to innovation are discussed, together with organizational conditions likely to foster successful innovation within an organization.

End of Chapter Review Questions

Organization Culture	Mark where you are
Fast to change						Slow and methodical
Entrepreneurial						Stable, steady
Reactive						Proactive
Management style ­empowering						Management style control
Dictatorial						Democratic
Secretive						Open
Creative						Traditional

How good are you at learning?				Very		High		Very	Low
Is there a learning culture in your organization?
Is your organization committed to continuous improvement?
Do all staff members have a development ­program?
Is time allocated to staff and team development?
Does your organization attach a high value to knowledge?
Is there encouragement of knowledge sharing within the organization?
Is there an external vision to learn from the ­environment in which the business operates?

Based on Slater and Narver (1995, pp. 63–74).

References

Davis, F.D., R.P. Bagozzi, and P.R. Warshaw. 1989. “User Acceptance of Computer Technology: A Comparison of Two Theoretical Models.” Management Science 35, no. 8, pp. 982–1003.

Eyal, N. 2014. Hooked: How to Build Habit-Forming Products. Penguin.

Lovelock, Van der Merwee, S. 1996. Services Marketing; A European Perspective. Prentice Hall.

Narver, J.C., and S.F. Slater. 1990. “The Effect of a Market Orientation on Business Profitability.” Journal of Marketing, pp. 20–35.

Senge, P. 1990. The Fifth Discipline: The Art and Practice of the Learning Organisational Learning. New York, NY.

Slater, S.F., and J.C. Narver. 1995. “Market Orientation and the Learning Organisation.” Journal of Marketing 59, no. 3, pp. 63–74.

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http://businessmodelalchemist.com

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