Innovating in a Service-Driven Economy

Insights, Application, and Practice

Richard Cuthbertson, Peder Inge Furseth, Stephen J. Ezell

• Publisher: Palgrave Macmillan
• Year: 2015
• ISBN:
  9781137409034
• Topic: Business
• Subtopic: Strategia di business
• Index: Business

The global digital revolution has changed consumer society, service expectations, and funding models forever. Value Driven Service Innovation explores these changes from the perspectives of leading thinkers and practitioners in the field of innovation today.

Part I

Innovating in the Amazon Economy: Proposing a New Model

This book is about innovating in an economy as we see some new dominant trends: globalization, digitization, and the dominance of services over products in creating value. Most models of innovation are based on an understanding of the manufacturing economy and on the innovation of physical products. We argue that this knowledge needs to be complemented with an understanding of service innovation in an advanced consumer society. While there have been many calls for more focus on the service economy and innovation within such an economy, there is a lack of perspectives and models to handle this, both for the private and public sectors.

The need for perspectives and models to understand innovation in the service economy is perhaps best illustrated by Ostrom and colleagues (2010: 24): “Little is known about how to manage cocreated services because the underlying mechanisms that link customers and organizations are not well understood.” While we do not set out to identify all these mechanisms, we introduce a new model and obtain a systematic review of its elements from leading thinkers and practitioners as well as demonstrate the application of the model to some of the world’s best-known companies, some of which are successes while others are failures.

This book is split into four parts. The first section illuminates what we call an Amazon economy, a label that encompasses five connected trends of the new economy developing in the 21st century, as follows:

(1)value creation has increasingly shifted from products to services;

(2)value creation in services are driven by a competence across sectors rather than a knowledge of one sector;

(3)social networks drive scale in service value creation in both mass and niche markets;

(4)in a socially connected world, ideas must be quickly turned into action; and

(5)high risk aversion kills companies.

Given these trends, there is a need for a new model of innovation.

We present the Service Innovation Triangle (SIT), a model that we have developed and first fully presented in Furseth and Cuthbertson’s Innovation in a Consumer Society (2016). We think this model complements other important models in the innovation literature and is readily accessible to the practitioner wanting to innovate successfully.

The failure rate in innovation is high. While there are lots of lessons from failed innovation projects, they also represent wasted time and money. We argue that the failure rate may be somewhat smaller if corporations apply the model we advocate: the Service Innovation Triangle. A core question is what is most important for innovation to succeed. We present a threefold answer, one in each of Parts II, III, and IV of the book.

Part IIprovides insights from leading thinkers and practitioners on what is most important for innovation to succeed. We present responses from six thinkers and practitioners not only to what is most important for innovation to succeed, but also to topics like how to define innovation and value, which failure is most serious in innovation, and so on. The quotes in Part II suggest that firms need to broaden their view when it comes to innovation and growth, viewing themselves more in terms of service competence than product focus.

Part III develops insights about the three layers of the SIT model, based on responses from the same six thinkers and practitioners, on innovation capacity, innovation ability, and innovation commercialization and value creation. The thinkers and practitioners respond to statements closely tied to the Service Innovation Triangle. There is at least one statement from the literature for each of the nine subtriangles in the SIT model; for example, “Involve design thinkers at the very start of the innovation process” (Brown, 2008)¹, “All businesses are service businesses” (Vargo and Lusch, 2004)², and “Service innovation starts with culture” (Berry et al, 2006)³. The responses from the thinkers and practitioners to the statements tie in with their understanding of what innovation and value are, and what is most important for innovation to succeed, as presented in Part II.

Part IV then demonstrates how the SIT model is applied to ten varied corporate case studies: Xerox, Kodak, Tesco, Sainsbury’s, Amazon, Borders, Facebook, MySpace, Apple, and Nokia. We present the case studies in pairs, for example, Xerox v. Kodak, Facebook v. MySpace, and so on. Each of the five pairs is tied in with one of the five trends we think characterize the Amazon economy. The aim with the case analysis is to highlight both success and failure in service innovation across a wide range of sectors and so explain how the Service Innovation Triangle can be applied to any firm.

In Part V, we end the book by presenting the findings in a simple innovation process and checklist for everyday innovation.

1

Explaining the Amazon Economy and the Need for a New Model in Innovation

Globalization and digitization are important concepts in business today. These expansionist trends increase the focus on innovation. At the same time, many countries are moving to a service economy. In most advanced economies, services make up about 75 percent of Gross Domestic Products (GDP).

Some of the most successful firms today are relatively young, such as Amazon (founded in 1994), Netflix (1997), and Google (1998). A lot of older firms, and even some industries, have gone out of business lately, such as record stores, video stores, photo shops and bookstores. We believe the successful firms excel in innovation capacity and innovation ability, and hence in value creation, or the commercialization of innovation. These three topics form the three basic layers of the Service Innovation Triangle (SIT) model, as we will explain in Chapter 2.

The successes of the three firms mentioned above, as well as many others, have happened in a challenging economic climate, where services play a greater and greater role. For example, as we learn in the study named “The Atlantic Century II,” from the Information Technology and Innovation Foundation in Washington, DC, the corporate tax rate in the United States is the highest among countries in the Organization for Economic Cooperation and Development (OECD). The rate of improvement in innovation capacity for 1999–2011 in the United States is among the poorest in the OECD – under 5 percent – in contrast to China, which is at the top at over 20 percent improvement in innovation capacity during the same period of time.¹

However, innovation is far from over in the United States, as Netflix, Google, and, particularly, Amazon prove to us. Globally, innovation resources are more available than ever. For example, about 92 percent of all scientists and engineers in world history are alive today. The “App economy” as Michael Mandel describes it, has created several hundred thousand jobs since 2007. Globally, there are over 100 million downloads per day of mobile applications, meaning more than 36 billion per year. US mobile-applications development generated $25 billion in revenues in 2013.

Until late October 1994, Amazon was called Cadabra. As CEO Jeff Bezos read through the “A” section of a dictionary, he had an epiphany when he reached the word “Amazon,” the Earth’s largest river. He registered the new URL on November 1, 1994. “This is not only the largest river in the world, it’s many times larger than the next biggest river. It blows all other rivers away,” Bezos said.²

Bezos wanted not only to make the largest bookstore in the world but also to create the world’s largest store. Amazon has become a game-changer in retailing and in business in general. Amazon continues to grow, and many companies need to think again about creating value based on new ideas.

As Brad Stone points out:

Amazon cleared $61 billion is sales in 2012, its seventeenth year of operation, and will likely be the fastest retailer in history to surpass $100 billion. It is loved by many of its customers, and it is feared just as fervently by its many competitors. Even the name has informally entered the business lexicon, and not in an altogether favorable way. To be Amazoned means “to watch helplessly as the online upstart from Seattle vacuums up the customers and profits of your traditional brick-and-mortar business.”³

Jeff Bezos wanted Amazon to offer limitless selection and great convenience at low prices – to become “the everything store,” as Stone labels it. This ambition points directly to one of the five trends we identify: service competence across all sectors rather than knowledge of one sector.

When combining Amazon’s development with economic and business developments more generally, we see the contours of a new economy that we label “an Amazon economy.” This economy has five characteristics:

•value creation is driven by services;

•services are driven by a competence;

•social networks drive scale;

•ideas must be quickly turned into action; and

•high risk aversion kills companies.

We see elements of all these five trends in Amazon and can explain them further by referencing contrasting pairs of companies. We apply a new model of innovation in this book: the Service Innovation Triangle (SIT). We apply the model to pairs of companies that highlight each of these trends and believe that the new SIT model captures the core concepts for analyzing and stimulating innovation in a firm in an advanced consumer economy. Each pair of companies is carefully selected to illustrate the importance of innovation for their success, existence, or failure. Here is a brief presentation of the companies in each pair and their focus for the proposed model:

•Apple and Nokia: the transformation from products to services

•Amazon and Borders: from sector focus to competence focus

•Facebook and MySpace: the importance of social networks

•Tesco and Sainsbury’s: the need to turn ideas into action

•Xerox and Kodak: how risk aversion kills innovation and eventually kills the company

Let us re...