Service Innovation

Anders Gustafsson, Per Kristensson, Gary R. Schirr, Lars Witell

• Publisher: Business Expert Press
• Year: 2016
• ISBN:
  9781631574962
• Topic: Negocios y empresa
• Subtopic: Sector de servicios

All the world's most advanced economies are dominated by service. The service sector also employs the largest number of people and it is the fastest growing sector, both in number of companies and employees. The questions posed in the book are: (1) How is it growing; (2) what are these new service innovations; (3) what are the drivers; and (4) how can organizations work with service innovations in a structured way? The book views service as the value-creating activity that customers perform in their own context. The role of a company is to provide the resources and knowledge to enable value creation. Based on this view, we develop a model of service innovation and develop guidelines for what is required from the organizational perspective; how should an organization view its customers in order to be successful, what does a service development process look like, and how to transform an organization that has a product focus to a service or solution provider.

CHAPTER 1

Service as the Key Driver of Growth

The importance of physical products lies not so much in owning them as obtaining the service they render.

—Philip Kotler¹

All marketing is service marketing.

—Vargo and Lusch²

There is only one boss, the customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.

—Thomas Edison

Odds are that you, the reader of this book, live and work in a service economy. Over half of the world’s gross domestic product (GDP) and over 70 percent of the GDP of affluent nations are service related, as defined by a traditional—and we would argue restrictive—definition of service. According to the CIA Factbook,³ the share of the service sector is nearly 80 percent of the GDP of the United States, United Kingdom, and France, and just over 70 percent of the GDP of most other wealthy nations, including Japan, Germany, and Sweden.

In this introduction, we review the definition of service, taking a careful look at the narrowing difference between goods and service. We prefer to use the term “service” versus “services” throughout this discussion, although at times we will use the latter term. We present the argument that all products are service.

The subjects of service innovation and service itself are both vital and understudied. If we understand service differently, it will influence both what we believe an innovation is and how it is created. We will advance the understanding of service innovation for academics and researchers but also for the men and women engaged in service innovation in organizations and their customers, working with them in cocreation. We believe that: although it is true that “in the most advanced service economies such as the USA and UK, services create up to three-quarters of the wealth and 85% of the employment ... we know little about managing innovation in this sector.”⁴ Service should not be treated as a special case of goods, service truly is the norm.

Service and Goods

Notice the phrase “physical products” in Kotler’s quote at the beginning of the chapter. A product is a service or good offered to satisfy a customer’s need or desire. Sometimes the phrase “product” is used to refer to a good or standardized service, leading people to contrast products versus services. Services are products and are, as noted, a high and growing part of gross domestic product in most economies. In this book, we will contrast goods and service and standardized service with custom service—“product” will always include service, unless identified as physical or tangible.

We will show that a tangible good can be viewed as a service. A goods-centric view, in which goods represent the products consumed by users and the ownership of goods is a goal in itself, may make service innovation difficult to understand; more importantly it may make it hard to service customer needs. To understand our modern service economy, we recommend a fundamental shift in focus—the answer lies not in what the product is but what it does. For example a car is primarily useful for transporting one from one point to another when needed, not for its form weight or color.

Goods or hardware remain an important part of the economy. However, if service comprises 70 to 80 percent or more of GDP in the richest countries, the production of goods is less than 30 percent of total output. In addition, goods producers increasingly package goods together with service to differentiate their offerings and create a higher value for their customers. Goods producers find that competing solely on the features of goods often leads to commoditization and basic price competition. The only remedy in this situation is an extreme innovation effort in order to keep up prices. So even products generally classified as goods become a blend of goods and service.

This book uses a modern view of service, focusing on value-creating processes rather than a type of offering. In this view, service may range from completely intangible activities, for example, a concert, to the integration of physical products, which leads to value-creating processes. We distinguish between direct and indirect service. When a physical product, such as a camera, is used, value is created for the customer through its use; hence, it is considered an indirect service, or service “waiting to happen.” Direct service refer to what is usually classified as service, while physical goods or products only become service in a more modern perspective that focuses on the value-creating process itself by the customer (see Table 1.1). Direct service includes insurance, massage, public transportation, car repairs, and so on. We refer to other products as “indirect service.”

Table 1.1 Direct and indirect service

	Direct service	Indirect service
Definition	Value-creating process carried out on behalf of a customer The service is produced and consumed at the same time	Service created when a user via ability and knowledge uses something The means to the service is produced on beforehand
Example	Haircut	A ladder (a physical good) that enables a house owner to reach the roof
When is value created?	Immediately when interacting with the company	After interacting with the company and not until product is used

The Experience Matters ... a Lot

Consumers crave unique experiences: why else would they bungee jump, fly in a hot air balloon, go on holiday, or pay the equivalent of $450 per night for a cold hotel room with no shower and toilet (as in the case of the Jukkasjärvi Ice Hotel in northern Sweden)? Consumers pay for experiencing service, not just the end result. This means that smart organizations need to track the total customer experience.

Consumers, companies, and organizations purchase service today at an increasing rate. Consumers purchase theater tickets and digital music with their mobile phones; order household service; and subscribe to innumerable other service such as home alarms, grocery delivery, and so on. Personal trainers and unique travel experiences have become a priority of many customers.

When customers purchase coffee, they experience multiple types of service. The coffee’s scent or aroma can brighten up a dark December morning. The coffee carton contains information on how the coffee beans were harvested (ecologically, fair-trade, etc.), which is a valuable element of the total experience for some customers. Drinking coffee is also often described as relaxing, pleasing, energizing, and an opportunity for social interaction. Even the cup that the coffee is consumed in will influence the taste and thus the experience.

Offering other products, for example, a flavored scone, together with the coffee, may increase the taste experience even further. Research shows that taste and scent experiences are linked to a person’s memory, which means that a combination of coffee, sweets, and maybe a particular song has the ability to mentally transport the customer experience of sitting at a café in Rome or San Francisco. Perhaps, the staff gives advice to the customer on how to store the coffee to better preserve its freshness to allow a repeat of the aforementioned experience. The actual interaction with the coffee shop staff creates an experience that may enhance the customer’s own experience, which, perhaps, in turn, prompts them to tell their friends about their experience.

The following scenarios, continuing the coffee example, illustrates why experience-promoting service is more important for the value-creating process than the product itself:

• Buying a box of coffee from the local convenience store to brew at home. Price: $0.10 per cup. (K-cup $0.50 to $0.70)
• Takeout coffee for a subway or train. Price: $1.50.
• Having a coffee with a friend in an urban café or a ubiquitous Starbucks. Price: $3 or more.
• An espresso in the Piazza Duomo square in the center of Milan, Italy. Price: $15.

The same product is purchased in all scenarios—hot coffee to drink. However, as signaled by the price, the value creating experience in each scenario varies greatly. The service is often more important to the customer than the core product and the customer’s willingness to pay increases if service results in unique experiences. Howard Schultz, founder of Starbucks, has stated repeatedly that “We’re not in the coffee business—we’re in the experience business ...”

Even producers of products such as ventilation equipment, washing machines, or microwave ovens are in the experience business. For instance, the rotating plate in a microwave oven is really there to enhance the customer experience. An even distribution of heat can be generated without mechanical movement in the oven but some producers discovered that consumers wanted something to happen as their meal was cooking—how would they otherwise know that the oven really did its job? Consumers chose the microwave ovens with rotating plates, forcing the producers to include rotation in most of their offerings. The experience during value creation affects a customer’s perceived value of a service. Customers experience a value creating service, despite purchasing a physical product! Organizations everywhere are undergoing a radical process of change resulting from a shift of focus from physical products to experiences generated for customer service.

A jogging enthusiast’s ultimate running experience involves a number of products, which includes jogging shoes, transportation to the track, music, apparel, a specific training program, or information from a weather app. A service like Spotify gives a user a customized musical experience that adjusts to the pace of the run. After the run, an app like RunKeeper gives the customer the opportunity to analyze the effort with the purpose of improving performance. The same principle applies to all user experiences. Therefore, greater emphasis should be placed on experiences and on offering a solution even if the company is able to deliver only a part of it. Hardware is used to help the customer extract the intended value of a service.

In Figure 1.1, we show a continuum of service from “pure” custom and experiential service such as massages and whitewater adventure tours, to standardized packaged service such as credit cards and software, to goods used as a service such as rental cars and airline flights to what would normally be considered tangible goods—an automobile and a box of sea salt.

From left to right, the first three categories of the continuum are clearly service—that is why service constitutes such a high percentage of the economy. However, there is service everywhere in the continuum of Figure 1.1— Take a look at the “tangible goods” that some might label as “pure goods.”

One of the authors recently purchased a new car, a Hyundai AWD SUV, to commute through the mountains of southwest Virginia. “Goods” features such as the all-wheel drive and five-person seating were essential, but the “service” features such as blind-spot warnings, email updates on the condition of the engine (sent by the engine computer to the owner), and a free six-month subscription to digital radio made the offering more attractive. In fact, the deciding factor for the coauthor’s purchase was a 10-year, 100,000-mile warranty—a service promise.

Even the most basic “commodity” on the continuum, coarse sea salt, is purchased for the service it provides: The salt adheres nicely to steaks as they are seared over an open fire or Weber grill. Furthermore, if you look for it we are sure that the producer of salt also wants to connect to you as a customer and in this process build a relationship.

Figure 1.1 Service continuum

The Active Customer or User

The customer plays a central part in service innovation. As will be discussed in Chapter 3, actual value-creating processes rely on active interaction between the customer and the supplier. Company offerings should be aimed at supporting the customer’s own value creation.

“Customer” is an umbrella term to describe the targets of value-creating processes. The reader may replace or complement “customer” with “user” when someone other than the person using the offering is actually paying for the product or service, for example, an employer. Thus “ customer” may also be interpreted as “patient” (in health care); “client” (in law or consulting); “consumer”; “member” (of an association, e.g., a trade union); “citizen” (if the supplier is a governmental agency); “pupil” or “parent” (in school), “student,” “visitor”; or even “a surrounding community.” This book uses “customer” ...