If you want something new, you have to stop doing something old or if you do what you did you get what you got.
—Peter Drucker
In this chapter, we describe service innovation and what sets it apart from new product development focused on goods or hardware. We will show that service innovation involves a wider and more holistic approach to innovation, comprising process, experience, social aspects, and behavioral and business models or in essence what creates value for customers.
What service do you think of when hearing the term “service innovation”? Many people find this question very difficult and we do receive replies like the concept of “lean” or Internet banking. If you were asked about innovations in physical products many possibilities such as smart phones, mobile devices, mountain bikes, or electric cars would likely come to mind. Why does it seem easier to think of product innovations than service innovations? When we informally asked colleagues they tended to recall branded services such as McDonald’s, Ikea, Starbucks, Southwest Air, Google, or Facebook. The question then is service innovation synonymous with a brand? What are the characteristics of service innovation?
This chapter covers these questions and more in the context of describing service innovation and how it differs from the innovation of physical products. We review and categorize different types of service innovations and illustrate them with examples including Ikea and Skype.
Preview of Action Questions
Each chapter of this book concludes with a list of “action questions” for the service innovator. The authors believe that it may be helpful to the reader to preview a couple of selected questions to consider while reading the chapter:
What other products and services do your customers use along with your offerings to do their “job” or create value?
What is your customer experience: how do users feel when they use your product to create value?
Can you envision a “business model innovation” or alternative revenue model in the market your organization serves?
A New Outlook on Value
Viewing services—not physical products—as a platform for innovation leads to a focus on value-creating processes for customers (see Figure 2.1).
We call this service logic: Goods and services are valued for providing the prerequisites for value creation during usage. From this viewpoint, the term “service” becomes a perspective of value and not simply a category of offerings. Thus, the service is the value that arises from using various offerings. The customer contributes the knowledge, skills, and activities that facilitate the realization of value using the prerequisites. A customer often uses goods and services in combination to create value. A mobile phone is supposed to be used in a particular way depending on the subscription plan—the number of free text messages or the number of gigabytes of data allows shape one’s communication with family, friends, and colleagues. It is not constructive to regard goods or services as separate entities since they are, quite simply, resources the customer uses to create value. Some companies believe that their products alone create value. However, user resources for value creation in addition to goods and services also include knowledge, skills, and activities. Customers also know the type of solution that makes best sense for them in their context.
Figure 2.1 The value of “being in nature” is facilitated by purchasing running shoes
Service logic is based on understanding how our resources in the form of products, activities, and interactions lead to customer value during use in a certain context. The notion that value arises during use requires companies to adjust their way of thinking and their actions to create business models in which value creation can be facilitated, as early as in the development process. Let us look at a few brief examples. The value of ice cream is not realized until it is eaten. Resources required for value creation are, aside from the ice cream itself, a wafer and perhaps a park bench to sit on and a newspaper to read. All these resources affect the experience. If it starts to rain while sitting on the park bench, the experienced value of the ice cream will be affected. A narrow focus on the physical product may miss a key factor in a customer experience or opportunities. If you are narrowly focused on the ice cream you may miss the chance to create PinkBerry! PinkBerry builds a concept that includes frozen yoghurt and fresh fruit.
The fact that a product’s value is created during use, and not in the manufacturing process or the store where it is perhaps sold, shifts the focus from the traditional product attributes to the customers’ activities and experiences using the product. A car provides the means for transportation. Instead of having companies concentrate on the average fuel consumption and various features, focus can be shifted to designing “the right-sized car for the most added value.” Transport solutions are thus perceived differently and the user’s values and needs shape this decision as opposed to objective product attributes. Some customers value traveling in a quiet vehicle highly while others prioritize low cost or ecofriendliness. Maybe, a car is the best solution for part of the transportation need while other means (e.g., train or airplane) are better for other parts.
Dr. Christensen and his colleagues provided insight into innovation driven by understanding the “job” of the offering, when studying milkshake consumption at a fast food chain.1 From detailed observation the researchers found two distinct jobs for milk shakes in the morning and in the evening: (1) early morning commuters found milk shakes comforting on their morning journey and enjoyed consuming for the entire trip, and (2) parents rewarded (or bribed) their children with milk shakes in the evening—same product but different jobs. The jobs suggested different innovations. For the morning commuters, who want the shake to last the whole commute and add interest to the journey: “Make the shake even thicker, so it would last longer, and swirl in tiny chunks of fruit ... [to] ... make the commute more interesting ... adding a dimension of unpredictability and anticipation to their monotonous morning routine” (p. 39). In contrast, for the evening consumption by children, it might make sense to make the shakes sweeter and thinner, so that the parents do not have to wait around the restaurant so long for the kids to finish!
Focusing on service logic and value creation changes the perception of innovation. An innovation is traditionally regarded as new technology or attributes connected to a product. Service innovation, based on service logic and value creation, encompasses not only the development of new and “improved” services or outcomes, but also the knowledge of how the customer interacts with and uses the service to realize new (or improved) value-creating processes.
An unused innovation is more or less worthless. Companies regard it as unused expense-only inventory item. It is also interesting to note that the original definition of innovation in the academic literature is based on whether or not the innovation is used in a market (making the distinction to invention). This definition fits well with service logic and service innovation.
Service Innovation—A Changing Concept
Traditionally, innovations in the service sector have been regarded as a special type of technical innovation leading to the view of service innovation as something different or even odd. One reason is that it is regarded as different is that service innovations are seldom based on technical progress and patents (see Figure 2.2). They may encompass the process in which a company develops offerings containing aftermarket services, for example, repairs or maintenance of a certain type of machine, staff training, or financing. This has been done in the automotive industry by companies like Volvo, Caterpillar, and Scania. Service innovation has therefore been regarded as a so-called add-on, whose sole purpose is to maximize product performance without regard to the situation in which the customer operates. This outlook is based on viewing the product as the core component that creates value intrinsically. Services are launched to enable companies to improve the product further and thus make more money. One consequence of this outlook is the notion that it is a positive sign if a product is not working as it should, as the manufacturer will be able to sell more services (e.g., maintenance and repair). Companies that unwittingly work in this way will be faced with a very complicated relationship with quality and value. Furthermore, in developed countries, it is in reality the service part of the economy that is growing.
Figure 2.2 A perspective of service innovation
“Service with a smile” was a service innovation of the 1960s and 1970s as it became part of the script. The smiling service worker clearly enhanced the delivery experience in fast-food restaurants and hotel chains. Today flight attendants at Southwest Air have fun with customer recitations of safety warnings. In the 1990s, online banking was launched as a service to retail customers. Automated teller machines (ATMs) were a clear departure from friendly smiling personal bankers, but were fast, efficient, and available 24/7.
A step in the 1990s was the transition from developing service innovations within one single company to developing them by integrating resources of multiple companies. It led to companies offering complete solutions to the customers’ problems as opposed to single services only. These solutions were created by combining different competencies or offerings into one solution. Instead of selling a product in the form of a machine and adding maintenance in the form of a service afterwards, companies started to offer solutions including maintenance of critical processes to the customer. These efforts facilitated the customer’s value-creating process. Instead of, for instance, selling a saw to a customer, along with different types of associated maintenance services, the companies were now able to sell an offering consisting of taking responsibility for a certain amount of cutting lumber. Such an offer obviously included a machine (in this case a saw) and services; yet the unique aspects of this service innovation were based on the act of selling not only separate parts, but also the value-creating process the customer valued.
Servitization is discussed in the final chapter of this book, but it is worth noting here that “selling the job” is well established; IBM sells data processing power and computation time as an alternative to owning and managing a computer facility; IBM and Amazon offer businesses software and computing power in the cloud; GE sells hours of thrust, for example, “power by the hour,” as an alternative to buying a jet engine (in truth this is an old concept from Rolls-Royce). Some roofers buy and then lease functioning roofs on business buildings! Pharmacies move in and take over inventories in hospitals to make sure that medication is not wasted and patient safety is not in danger. Although widespread, this approach is still far from universal.
Recently, there seems to be an increased focus on innovation of the service experience. In “The New Frontier of Experience Innovation” the authors call for service innovation that “allows individual customers to actively co-construct their own consumption experiences.”2 Brian Solis argues that “Customer experience is the new competitive advantage.”3
In many traditional industries such as trade and catering, experiences were created via networks of companies that jointly generated value constellations for a particular experience. One example is Starbucks, which by viewing itself to be in the “experience business” has managed to change the practice of coffee drinking. This has been achieved via value networks covering the entire traditional value chain in which café employees address customers by their first name and deliver a good customer experience. For Starbucks, the brand and meaning of the brand becomes central in the value perception.
Using experiences as the goal of service innovation is not unique to the consumer industry—in the industrial sector, time management and increased competitiveness are important experiences resulting from service innovation. This process consists of generating value-creating processes by combining products and services, integrating them with the customer’s business by, for instance, ensuring that they are adapted to the client company’s employees, machines, and so on.
Some recent service innovation involves changing distribution channels or the nature of interaction with the customer. Services, along with tools for innovation, are offered on different platforms or arenas, such as Amazon or Android as well as other open markets. Android’s case in particular involves providing open networks to enable other companies to develop and sell apps. This type of service innovation can offer a platform allowing other companies to either create service innovations directly or in collaboration with other actors. Service innovation by providing platforms for other companies’ service innovations is of course not new and does not necessarily have to consist of information technology (IT), apps, or social media—for years, cooperative grocery distributors such as IGA in the United States and ICA in Sweden have allowed owners or retailers to adapt to their local market. This adoption could be to bring in unique catering offerings or food (e.g., truffles, olive oil, or mozzarella cheese from regions in Italy) or create special events even outside the store.
These noted changes in innovation are consistent with a shift from product logic to service logic. Focus has shifted from products to how companies and organizations jointly create value with the customer. Moving from a perspective based on products to one based on facilitating value-creating processes represents a paradigm shift given the move away from the organization or company—an inward–outward paradigm—to viewing them as external parties reflecting on what resources may support the processes the customers are interested in achieving, an outward– inward paradigm.
The key components of a switch to an external focus on service innovation show that service innovation may come about in several different ways:
Changing the role of the customer. Give the customers a more active role! View customers as important resources in their own value-creating processes as opposed to passive recipients. Advice from staff and do-it-yourself (DIY) seminars are popular at stores such as Home Depot. Similarly, DIY videos are popular content on the websites of Advance Auto and other automobile supply retailers.
Change processes. Numerous companies have based value-creating processes on their own resources and opportunities to charge customers, but what happens when the customers’ value-creating processes become the center of attention? For instance, instead of providing customers with a predetermined amount of one-size-fits-all or a limited number of packages of mobile services, smartphone customers can download whatever apps they need from a virtual market (the App Store) and in the process tailor the offering in accordance with their own needs.
Fill an unsatisfied need. Customers are good at stating their needs; however, all needs cannot be expressed. Some things are obviously difficult to describe—consider how hard it is to, for instance, describe how to dance or why it is so much fun. By the same token, customers might have unexpressed, latent, or emergent needs they are not able to describe. As such, keep in mind that not all of the customers’ needs can be expressed clearly and in simple terms. However, being able to meet needs—both explicit and implicit—will indeed result in very satisfied and loyal customers. Providing customizations tools, even as simple as Coke’s mix-your-own-flavors vending machines, can tap into tacit or contextual needs.
Break the value chain. Are there new ways of providing value and concurrently increase the customer’s options? Given the new service logic, the traditional value chains, in which products are refined in a multistage process, will soon be obsolete. An increasing number of companies are forming new value constellations to provide better value-creating processes. As an example, Ikea started collaborating with construction companies like Skanska and selling Whirlpool’s kitchen appliances and TV sets or even apartments. All of this involves offering complete solutions to customers who would otherwise have been forced to spend a considerable amount of time matching kitchens with house layouts or TV sets with stereo furniture.
New business models. As noted, a number of companies are experimenting charging for the value-creating processes the customer actually experiences. A good example is GE’s aircraft engines: Instead of charging for each individual aircraft engine, GE charges for the amount of time it is used or the thrust provided to the airline. The customer’s value-creating processes do not begin until the aircraft is used. The customer’s experience, which is a product of the value-creating processes, will result in GE being regarded as an important partner that helps them achieve the desired results. It is likely that there will be a greater focus on the service components of the business.
Study customer processes. Customers sometimes come up with their own solutions to a problem, by modifying an existing service or good or by creating their own. This often happens when none of the existing services on the market is adequate to advance the customer’s value-creating processes. In the 1970s, Professor Eric von Hippel identified a “customer active paradigm” of innovation where driven customers, even in B2B markets, made modifications to existing offerings.4 When the Tribune Company launched the RedEye tabloid it planned for a rapid change in response to user feedback: daily reader interviews and surveys fed into overnight changes in layout. Within a week the tabloid was significantly changed; in two months, it was a dramatically different publication. Game companies and software companies invite users to post customizations to their company websites. Service innovation is enhanced by observing, embracing, and facilitating customer innovation.
Radical, Incremental, and Recombinative Service Innovation
A traditional service innovation perspective is based on the notion that innovation takes place via changes in service attributes. Said service attributes are, in turn, represented by the provider’s attributes, the customer’s attributes, and the offering’s attributes. Such a change can be radical, incremental, or take place by combining different kinds of offerings or attributes. The latter is actually one of the most frequent forms of service innovation.
Innovation by changing the customer’s attributes can be illustrated by Millstores, a U.S. retailer that offers unfinished wood furniture that customers can finish or paint to their wishes and the Swedish home-improvement chain Byggmax, where customers themselves select and cut the lumber they wish to buy. The service prerequisites in this case are based on activities carried out by the customers themselves (in this case, the new service consists of a more affordable offer to the customer and the experience of participation more actively in the solution).
Finally, innovation can also occur by changing attributes of the offering, as illustrated by the coffee company Löfbergs. The value is not only derived from enjoying a warm cup of coffee—it is just as much a social lubricant. Value can be extracted from the fact that the coffee may have been harvested in a fair and ecological way. Perhaps, you can feel that you are a better or more concerned person than someone who buys his or her coffee from a standard coffee shop. For Löfbergs the coffee is what is key and for them it is important that you buy the right coffee based on your own taste. Consequently, they arrange coffee tasting and allow you to pick beans and roasting that are right for you.
A radical innovation involves extensive underlying change in attributes. The entire service system is often modified, leading to profound changes in most or all service attributes. The tabloid newspapers Metro and RedEye, which were described in Chapter 1, are considered examples of a radical innovation since they brought about a change in the entire traditional newspaper distribution and financing system. (The Metro and RedEye tabloid newspapers may also be considered “disruptive innovations,” as they meet the Christensen criteria of originating as cheaper and lower quality competitors overlooked by established participants.5)
An incremental innovation only entails minor changes in the service system. Ironically, a company may have to engage in a series of incremental innovations to facilitate absorption of radical changes by customers. Incremental innovation is often an efficiency improvement from both the customer’s and the company’s points of view. For example, to facilitate the flow of customers, Ikea is currently redesigning the outline and navigation of its stores to mimic the design of airports. By this means that it should be easier to find a faster way through the store.
Most innovations are “recombinative” innovation that consists of the development of a service by combining one or more existing offerings or solutions or changing the current combination of offerings in the service. Recombinative innovation consists of changes in the underlying technique or a bundling of existing solutions. They can also be created by unbundling an existing solution into several different ones. Recombinative innovation may be the most common type of service innovation. The process is based on companies merging an established solution with either a completely new one or one that has been part of a previous offering.
A newspaper subscription containing both a printed copy and an electronic version is an example of recombinative innovation. Travel magazines have existed for a long time as a separate offering, this can also be added to the newspaper which again is a recombination. Swedish Linas matkasse (Lina’s grocery bag) is another exciting example. For a long time, trials were carried out in which grocery bags were customized and delivered to customers after they had placed their orders. This concept suffered from problems in the form of expensive and complicated logistics. By streamlining orders so that grocery bags contained the same kind of items, planning routes for each delivery, and combining the delivery of food with recipes, Linas matkasse was able to create a successful service innovation. Again, this is in essence not really new if we look at the separate components, what is unique is the combination.
A New Model of Service Innovation
Service innovation should be based on the needs of customers and their value-creating processes. It is therefore rare that service innovations encompass only part of a company’s or organization’s business—rather, they involve many different components, often the customers themselves, especially in the case of radical service innovation. Instead of the traditional approach we have chosen to divide service innovation into six categories based on the purpose they are designated to fulfill (see Figure 2.4):
Process innovation
Business model innovation
Brand innovation
Experience innovation
Social innovation
Behavioral innovation
We should point out the potential for overlap between different categories—a process innovation can, for instance, be combined with a business model innovation. However, all innovations do have a starting point; where a company wants to have an impact with their innovation. The main focus could be to target a more efficient process (process innovation) and this may affect the brand. We hope this categorization of service innovation makes the planning and execution of new service development projects easier.
Let us begin with the axes that are illustrated in Figure 2.3. One often requested value-creating process is reducing the costs of offerings. This causes many service innovations to revolve around streamlining the process and several such examples have already been mentioned. Retailers such as Home Depot and Advance Auto for instance serve the DIY segment, allowing customers to save money. The term lean is closely related to what companies want to accomplish in this category and do remember that lean can be a term for both production and consumption.
Another important value-creating process is differentiation, which is represented by the other end of the horizontal axis in Figure 2.3. Differentiation refers to a new kind of service (based on a number of resources) with distinguishing characteristics. If a company combines enough characteristics it makes the offering difficult to copy. Starbucks is an example here; in essence, Starbucks is another coffee shop but it does have a number of innovations that make it unique. They have their own beans, they sell music, their delivery process entails learning your first name, the constantly renew their offerings. Another coffee company may copy one of the characteristics but the complete offering is difficult to mimic.
In Figure 2.3, streamline and differentiate are represented as two end points of a continuum, which, with an additional axis representing “experience” and “help,” aid us to define six different types of service innovations in Figure 2.4. The value-creating process, experience, addresses the customers’ need to be exposed to different kinds of unique experiences. Such experiences result in emotions and most examples in the research literature, relate to traveling (e.g., rafting), music concerts, or spa treatments. Experiences, could just as well relate to feelings occurring after a desirable outcome, for example, when medicine starts to work and symptoms are relieved, or in B2B contexts when customers contact a company after seeing their latest marketing campaign. The creation of the Apple stores is another good example where the experience was a central component.
Figure 2.3 Two axes to understand different types of service innovation
On the opposite side of the axis, we find the value-creating process, help. This encompasses community involvement where customers simply want to contribute to the well-being of other people or to the world or environment. There are numerous examples of this increasingly popular type of social innovation—the company RelayRides allows you to rent a neighbor’s car, thereby saving money on a car rental and contributing to reduced resource use; Tom’s Shoes donates shoes to poor children for every purchase; and a Swedish company with the clever name Bee Urban rents out beehives to companies and thereby contributes to a more ecological and sustainable society.
Another interesting feature of these aspects is how easy it is to replicate the innovations. The innovations targeted at differentiation or experience are generally designed to be difficult to replicate by competitors; these innovations should truly set the company apart from the competitors. This while the innovations focused on cost reductions or streamlining are generally easier to replicate and the help innovations are something that is meant to be replicated by other organizations.
Let us now look at what is covered by the two axes and their four end points. Since financing, for example, creating new business models, has proved to be important for the four value-creating processes just mentioned, we have designated financing as the model’s midpoint. Also, the other examples mentioned, in the form of new markets, fit this type of service innovation. As such, we do not only have four extremes on two axes, but also a midpoint in our service innovation business model. We have placed the other six innovation categories around this midpoint. The basic value-creating processes we have described earlier—the two axes in Figure 2.3—are summarized in Figure 2.4.
Figure 2.4 Six categories of service innovation
Process innovations refer to service innovations that provide a higher efficiency or assistance to the customer. An example of a process innovation is a self-service feature, having customers do part of the work themselves. Self-service may create value by lowering cost, saving time, increasing hours of availability, or even increasing customer satisfaction. If customers fetch goods at the warehouse and solve various problems via the Internet, technical devices, or open warehouses, staff will be freed to carry out other tasks in the company. This also makes the customers feel that the value they are interested can be achieved in a more efficient manner—they do not need to conform to specific times, wait in line, and then explain their errand to an employee. The down side is that by not meeting employees the customers get distanced from the company and do not build relationships in the same way making a firm easier to be replaced by a competitor.
Research also shows that there are segments of customers who appreciate not having to interact with employees and who choose self-service if offered.6 Self-service in large supermarkets has become a popular and appreciated feature. At Ikea, customers get products themselves at the warehouse, transport it home themselves, and assemble them when they get home. Tasks carried out by a carpenter in the traditional value chain are now carried out by the consumer, leading to a collective cost-saving benefit. The customers’ own efforts do not only save time and money but may also make it easier for them to reach key goals. Just to emphasize the ease of coping for streamlining, one of Ikea’s main innovation has been the flat packages for their furnitures. Instead of transporting air Ikea can optimize their logistics and really pack their trucks full. Now look what all other companies are doing in this industry.
In health care, the patients’ own efforts are a prerequisite for successful treatment of certain illnesses. Home monitoring may become as common as having consumers brush their own teeth for dental hygiene. In a health care project involving several of the authors, researchers found that the treatment time for a particular type of illness could be shortened to five days if radiological examinations, diagnosis, and surgery were carried out when it fitted the patient instead of fitting with the organization. In current practice, it took 105 days for the patient to reach the last treatment stage. Shifting the focus to the patients’ perspective could help us to design a process innovation with benefits for both the patient and society. Another example of streamlining with a focus on lean.
Brand innovation aims to find ways to differentiate offerings from those of competitors. The goal is to form a new bundle of solutions (think bundle of services) that improves value to customers who thereby perceive the offering as particularly important. The brand and what it is related to can be an important part of the product experience; so brand innovation can facilitate value creation. In order to succeed in brand innovation, companies need to take into account the basic service offering, the strategy and direction it is aiming for, and what the new service is supposed to create. For example, an affordable travel solution would bundle low-cost airplane seats with affordable accommodation offerings—not a selection of five-star hotels.
To succeed in brand innovation, the service innovation also needs to fit in with the existing company or organization. It would likely be detrimental for Tag Heuer or Rolex to start selling their watches more cheaply on the Internet. Understanding customers, how they view the brand, and how a brand innovation would affect their use and experience of a service, is a prerequisite for success.
In our research we have measured how long it will take to assimilate and start using new solutions, which we refer to as technology readiness among organizations and customers. The technology readiness of older customers (or patients) of health care and social organizations is generally below average. The health and social care organizations we have encountered have to build a brand of personal services and meetings. Trying to develop value-creating processes aimed at efficiency or self-service IT solutions would not help the customers (patients) at all, even if it saved the existing organization money in the short term. However, for certain types of patients self-service IT solutions can aid in value creation, and then freed resources can be used for other patients.
All service innovations are based on experiences; so feelings arise when value is created. A patient who has been relieved of elbow pain via physiotherapy probably experiences feelings of relief and joy. Sometimes the emotional impact of the experience is the focus of a service. Recall the examples of experience innovation from Chapter 1 including wildlife adventures or hiring a star chef.
Another variant of experience innovation focuses on the “servicescape,” where experience landscapes are represented by a store, restaurant, theme park, or some other location in which customers may interact with staff. The purpose of such changes is not only to augment the customers’ brand experience but also to encourage a different type of behavior. Experiments in servicescape have been carried out in Swedish retailer Telia’s stores where some of the employees have acted as hosts rather than salespersons with the purpose of letting customers experience Telia as a company that takes care of its customers as opposed to focusing solely on sales. The results of adding a host-like salesperson show that with a host the customers’ feels like that have waited less time and that they explore the store more. Abercrombie & Fitch is famous for its novel in-store experiences offered to customers, with live models in the entrance or transition zone into their stores. Ikea created stores entire families go to without any prior plans of buying anything. A trip to Ikea can be regarded as a viable alternative to a café visit or a day at the zoo and therefore represents a true experience innovation. Disney has worked to create a positive experience in the lines waiting to ride attractions in its theme parks, that is, turning waiting time into play time.
Some service innovations aim to contribute to a better world. This is usually referred to as social innovation and encompasses innovative ideas aimed at improving something missing or not working in society. Microlenders or microcredits firms such as Opportunity International or Grameen Bank fight poverty through small loans to very small businesses, often owned by women. Another example is Khan Academy, which actively works with increasing children’s and young people’s knowledge and interest in mathematics, science, and other key subjects. Free self-paced online educational services and instruction are available to students in grades K–12.
Social innovations can originate with individuals. “Paused coffee” at a café involves buying an extra cup that “rests” until someone, unknown to the benefactor, shows up and wants a cup of coffee but cannot afford it. As December 25 approaches, some Walmart and Kmart customers, referred to as “layaway angels,” pay the remaining amount outstanding on children’s gifts being held for strangers in the layaway section, in order to make sure that the children will have gifts to open on Christmas day. In Norway, some landowners have developed a practice called Epleslang, where people with apple trees allow others to “steal” apples from them. The apples are then handed in to stores that press apple juice from them and donate the revenue to those in need. City Harvest (New York) and similar “food rescue” organizations throughout the world collect food that would otherwise be thrown away and distribute it to those in need. The underlying assumption of these service innovations is that they should be easy to replicate rather than a money making machine.
Business model innovation is a diverse category in which innovations are often formed via multiple categories of service innovation. The key event in business model innovation is a change in the manner (model) a company makes its money, leading to improved value-creating processes for the customer. The organization’s external or internal environment changes in such a way that revenue streams can be redirected to enable win–win situations for several parties. One example already mentioned is the tabloid newspapers RedEye (Chicago) and Metro (Sweden). By changing the distribution system and pricing, customers could read a newspaper for free (business model, cost saving, and efficiency), while the organization benefited from increased advertising revenue. Aside from a clever search algorithm, Google’s search engine owes its success to the value network built around the service. The customer does not pay for the service—advertisers instead pay Google to show advertisements to the customer. Google then employed that same free-service-with-advertising model to make Android a dominant smartphone platform.
A number of business model innovations let customers pay on a peruse basis for a service instead of buying physical products. One example of this is the bicycles you as a visitor can rent in different cities around the world, you just check them out using your credit card and return them at your leasure. Such business models are appealing because the customer’s payment is directly connected to its value-creating processes. Another example is building a platform that facilitates customer meetings and subsequently charging for business activities that take place on it. The most successful and interesting business models are often based on charging for results (i.e., value-creating process) of what is offered. For instance, increasing customer productivity would make it advantageous to charge for the increase in productivity rather than charging for the amount of time spent carrying out the work that induced the increase.
As soon as actors in a market launch new business models, other (competing) organizations are often forced to follow. One example is the change currently taking place in traditional manufacturing industries, where companies are increasingly shifting their focus away from making money on the product to generating increasingly higher revenue from services. Since the service is often more closely connected to the value-creating process, common business acumen suggests that it is more beneficial to make money on the service rather than on the product. The product then becomes a platform for the service, which enables a new business model for the customer and increased revenue for the provider. Noted companies such as IBM, Volvo, GE Aircraft, and Ericsson are attempting to increase the sales of services through offerings.
The last category of service innovation is behavioral innovation, which focuses on bringing about a change in the customer’s behavior. All service innovations involve change in customer behavior since the customer always plays an active part in the value creation, but we feel that this category is important and interesting enough to be highlighted in its own right (which it is why it is displayed at the bottom or as the platform of Figure 2.4). One example of behavior innovation occurs when companies and public organizations want to help customers change their behavior for the public good. For instance, what could encourage us to ride the bus more often, use less energy during peak hours, eat more ecological food, or make decisions that benefit our environment or our own health? Some energy utilities have found it helpful to let homeowners know if they seem to be using more energy than their neighbors—people seem to want to be as green as their neighbors. The health care industry focuses on getting patients to take prescribed medicine in a safe manner and both the health and fitness industries focus on getting people to exercise.
There are numerous behavior innovations that do not originate from organizations but from customers who begin to use products or services in an unintended way. One striking example is the explosion of short messaging service (SMS) traffic beginning in 1999 that led to a radical change in behavior (in a way that surprised telecommunication operators). Another example of behavior innovation can be found in social media, where users in a large number of areas share clever applications, as well as ways of using offerings that companies probably would not have thought of. A new social network, Slack, was designed for internal business use but is being used by individuals as another social network for groups. Such use spreads fast and can be quickly organized via blogs.
Table 2.1 illustrates the six innovation categories. One might ask whether we have been able to cover all types of service innovations in this model. The answer is hopefully (!), “no,” since creative and entrepreneurial companies and organizations come up with new ways of developing their ability to facilitate value-creating processes for customers. New innovations will undoubtedly appear over time and the categories we have used may then prove to be incapable of describing the process at hand. However, overall value creating goals, such as streamline, differentiate, experience, and help, will always be important to the customer.
Table 2.1 Different categories of service innovation
Category |
Explanation or a streamlining |
Process innovation |
An efficiency-improving service innovation on the customer’s part. One example could be a self-service that makes it easier for the customer to create value. |
Brand innovation |
A service innovation that differentiates the offering to the customer, thereby creating value. One example could be expensive watches that add free cleaning and maintenance once a year. |
Experience innovation |
All service innovations lead to experiences. However, service innovation often refers to a service that facilitates new experiences for the customer. One possible example could be a new type of holidays or hotels. |
Social innovation |
A service innovation that quite simply contributes to a better world. This could be innovations that help people that need help, like distributing food or get people in work that are far from the job market. |
Business model innovation |
The service innovation that leads to a change in how the service provider makes money. When this change occurs, positive value-creating processes are created even for the customer. Charging for news articles on the Internet, which is a standard procedure for a lot of newspapers, is one example of a modified business model in the media industry. |
Behavior innovation |
A service innovation that leads to a change in customer behavior. In essence, all service innovations involve changing customer behavior, although some lead to greater changes than others. The introduction of smartphones paved the way for an entire array of new behavior innovations. |
A Note on Collaborative Economy
One phenomenon connected to service innovation that seems to be booming at the moment is the collaborative economy or sharing economy. A definition of collaborative economy is to use a platform connected to the Internet in order to efficiently match people’s wants with people’s haves. We all have our favorite examples of this, such as Airbnb, which enables people to rent out their homes or unused spare rooms, or Uber that connects people in need of a ride with people who have a car. The list of examples of areas that the collaborative ideas are applied to can be made very long, for example, Peer-to-Peer Lending, Crowdfunding, Apartment or House Renting, Ridesharing and Carsharing, Coworking, Reselling and Trading, Knowledge and Talent-Sharing, and Niche Services. The systems can be seen to innovate different types of market behaviors such as renting, lending, swapping, sharing, bartering, and gifting in new ways and at a scale that was not possible before the Internet.
Summary and Additional Reading
This chapter covered categories of service innovation. Service logic dictates that everything can be regarded as a service in the sense that it is a perspective on value creation. It is important to think in these terms and understand what your company actually provides. Substantial efforts are required before such a philosophy can be applied in practice. Service innovation logic is different from new product development.
We focus on the goals of service innovation. We associate brand innovation with differentiate, business model innovation with finance, process innovation with streamline, experience innovation with positive experiences, social innovation with helping, and behavior innovation with behavioral change. There is, of course, a certain degree of overlap between the different types of service innovations, but an overall focus helps point out a general direction that might lead to the fulfillment of other purposes. Financing or the business model, for instance, is a component found in all other innovations: How would you make money on your next innovation in a smart way that also is beneficial for the customer and potential partners?
Action questions for the service innovator:
What other products and services do your customers use with your offerings to do their “job” or create value?
What knowledge and activities are required in order for the customer to create value with a proposed service innovation?
Is there a way to make it easier for the customers to combine needed services and knowledge to do the “job” they want done? Has someone attempted to make such coordination possible? Are you working on such a solution?
Review recent service innovations in your organization. Which service innovation categories (see Figure 2.3 or Table 2.1) have been undertaken? Which categories have seemed more successful for your organization? Which categories have been neglected?
Can you envision a business model innovation in the market your organization serves?
The main sources of inspiration for this chapter are:
Gallouj, F., and O. Weinstein. 1997. “Innovation in Services.” Research Policy 26, no. 4, pp. 537–56.
Michel, S., S.W. Brown, and A.S. Gallan. 2008. “Service-Logic Innovations: How to Innovate Customers, Not Products.” California Management Review 50, no. 3, pp. 49–65.
Sawhney, M., S. Balasubramanian, and V.V. Krishnan. 2003. “Creating Growth with Services.” MIT Sloan Management Review 45, no. 2, pp. 34–44.
Ulwick, A. 2005. What Customers Want: Using Outcome-Driven Innovation to Find High-Growth Opportunities, Create Breakthrough Products and Services. New York: McGraw-Hill.
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