Service Innovation and Competitive AdvantageMichael Abramson

Eevie AminaBrett Carter

Joe HamiltonBryce Kropf

Richard Swanson

MKTG 463

December 3rd, 2014

Dr. Robert Harmon

Abstract

Service and service companies have not only become the largest industry and most successful business model in the whole world, but has also become the place to be for product companies as well, based on the idea of service transition and ultimately service transformation. Here, businesses seek to develop service offerings that are tailored to the needs of the customers, instead of simply developing services and hoping that the service elements satisfy the needs of the customers. This may be a hard concept for traditional product companies to grasp, however, given the fact that product companies are used to the demand of their products being driven by the customers and their perceptions of the product (product design, product features, the tangibles). Even for product companies, there are better ways: by developing a service transition model, product companies can develop service offerings, or develop service offerings that support the customer and thus reap the competitive advantages and benefits that service companies do.

Introduction

Our research project will focus on the aspects of service innovation that will lead to competitive advantages for product focused companies. Much of the paper will focus on manufacturing and technology as this market vertical is still heavily focused on products as the driver of their business, despite the existence of a service dominant culture.

It has become increasingly important for product-based companies to focus on services as most manufactured products have slight or very few differences. Consequently, there are very few options to create differentiation, other than massive expenditures on R&D to create innovative products which can be cost prohibitive and difficult to maintain for many companies. Service innovation creates a new field of value for products that normally do not have many noticeable differentiators. (Lin, Lin, 2013)

Service innovation is able to create a differentiation because it allows the addition of intrinsic value for the brand and the company, which has nothing to do with the product itself. By creating better services around a product, the product itself becomes more valuable to customers as it is no longer just a widget, but rather has an on-going value from purchase to the end of its life. This value is achieved through advancements in interactions with the customers, suppliers, competitors and will be furthered by continual study of the environments in which the product and its services interact. (Lin, Lin, 2013)

Service innovation is considered a relatively new system or method of achieving new value and differentiation. It has become such an important part of the value equation in recent years that the measure of a new product’s success can be somewhat dependent on its related service. An example of this is software: a product that constantly changes requires a great deal of on-going support to integrate those changes, and to create a positive or valuable experience for the software users. (Lin, Lin, 2013)

This creates a tandem effect for innovation in which software or product innovations can’t surpass service innovations, otherwise the competitive advantage gained from the product innovation will be null because the service is unable to keep up with integrating these changes with the customers and suppliers. (Lin, Lin, 2013)

Another important aspect of service innovation’s use in product companies is due to the new understanding of how customers asses value. According to A. Parasuraman, the customer assesses the value of products in several stages. The most important stage for continued purchasing and longer term relationships with that customer is the post-purchase stage. In the post-purchase stage the customer completely reassesses the products value now that time and money have gone into the purchase. If in this post-purchase stage the customer does not feel satisfied with the service they receive, it will detract from the value and may ultimately lead to a lost customer despite the product’s own value. (2014)

Service innovation, if done correctly, can greatly influence a company's competitive advantage so it is very important that Firms continuously innovate their services and products to be competitive. This is where service and manufacturing firms usually differ; when it comes to their innovation. It is important to learn the differences between service innovation and manufacturing innovation to create a process that will further the development of service innovation as a competitive advantage for product companies.

One type of innovation that companies can strive for is open innovation, which is the idea that firms can, and should, use external ideas as well as internal ideas, and internal and external paths to market (Chesbrough, 2001).

One way firms can move towards open innovation for services is to work closely with customers to develop new solutions. Firms who specialize in products usually have a harder time moving to service innovation because of the organizational structure. Firms who have this traditional value chain have a stronger emphasis on products. Under this model, services are only used as a tool to get a sale and keep a products working after a purchase, like a warranty for example.

For most product-dominant companies, service innovation creates opportunities to improve customer relationship and separate themselves from their competitors in terms of adding more value to their products. Lance Bettencourt suggests that there are three ways customers define value: create new ways to help the customer get the job done, discover new ways to get a particular job done better with enhanced services, or provide new ways to help the customers with jobs related to product usage. Lance goes on by stating that customers desire to have the job done, regardless of the task being used to complete it. Firms that focus on any of these areas are usually more creative and are more likely to expose service innovation possibilities (2013).

Firms today compete more on the basis of services, rather than the basis of products. “The competitive advantage of services has become increasingly evident, as there is little to differentiate competing products from a customer’s perspective.” Furthermore, advances in technology have reduced the life-cycle of products. It has become crucial that firms not only excel in its products, but also in its service in order to maintain a competitive advantage.

From a business perspective, services have become core components to many companies. As Kandampully mentions, a firm’s service function interacts with almost every activity of the firm ranging from consumers to business partners. The relationship the firm builds with these components can determine the success of that firm. A firm can build its competitive advantage by building and maintaining strong relationships with its consumers.

One tactic that firms have used in the past in order to keep their customers engaged is to introduce a product far in advance. This keeps the customer excited about the specific product. It also reminds consumers that the firm (that introduced the product) is keeping up-to-date with cutting edge technology. When a customer feels that a firm is up-to-date with the latest technology, they feel a sense of security with the introduced product. Kandampully mentions that it is important that firms “think for the customer” by creating services that drive the marketplace. When firms can offer value to the customer, it strengthens the relationship between business and consumer (2002).

This report will be a full analysis of the information above, as we apply a 4 stage framework to product companies looking to make the service transition into more service offerings. Below is a list of research questions we will be answering throughout the duration of the report:

● Catalysts of service innovation?

● What resources and capabilities does a product company need to optimize and maximize their hybrid offerings?

● What are some good examples of service transition and transformation?

● How can a product company use service innovation as a source of competitive advantage? (Main Question)

These questions will be in a similar order throughout the paper. First, the paper will go through an analysis of the general trend that has become known as service dominant logic and the move away from goods dominant logic. Next a model will be presented that represents a solid service transformation model, that moves from product life cycle services (PLS), all the way to process delegation services (PDS). After that some examples will be presented that show traditional product companies moving from stage to stage of the service transformation life cycle. Finally, the paper will be concluded by bringing all the information together; this is where specific competitive advantages will be talked about that are a direct result of service transformation.

History of Market Transformation

Period of Discovery: Marketing has been around since the beginning of the twentieth century. Between 1900 and 1910

expression was given to ideas which then became incorporated into the body of the “marketing thought” concept. Before the 1900’s, marketing was thought of as the study of management practice, but still unconcerned with distribution. Competition was not a concern in most markets and demand and supply were farther removed from

each other. New interpretations of activities involved in economics were needed, which helped lead to the discovery of marketing as we know it today (Bartels, 2001).

Until the idea was conceived and the term “marketing” was applied, the practice was called “trade”, “distribution”, or “exchange.” Early studies were called “Distribution of Products” (Bartels, 2001). Only until after the turn of the century was the term “marketing” used. In 1905 at the University of Pennsylvania and again in 1909 at the University of Pittsburgh the term began showing up in course titles. The growing interest in trade and the idea of the new meaning in distribution was not singled out to just one person but rather widespread. Among one of the first to articulate the concept of marketing was Ralph Starr Butler. He explained that by using the term “marketing” he meant everything that the promoter of a product does prior to the actual sale (Bartels, 2001). This was one of the first times marketing was thought of as separate from selling and advertising.

No writings before 1910 were concerned with sales management, wholesaling, marketing research or retailing. Because of the need to stimulate the economy as buyer’s markets began to replace sellers markets, advertising become a big interest to the business world. The idea was to find out what motivates consumers. Both businessmen and psychologists helped put together the literature in this time period; they believed psychology to be a stable foundation to the theory of advertising. With advertising becoming more and more popular, it led to the development of personal selling – new products, new markets and new forms of competition were emerging. These new ideas were still thought of as psychological and more of an “art” rather than a “science” (Bartels, 2001).

Period of Conceptualization:From 1910 to 1920, concepts on the structure of marketing were slowly being built. During this decade the

economy of the United States began to grow. Urbanization and industrialization were on the rise, new products were being launched and industries needed more sales effort with improved quality. As these industries developed the establishment of the Federal Trade Commission was born, and Labor unions were approaching management for representation of their employees.

Three categories were developed on the study of marketing. Functional, institutional and commodity were the approaches that were now being closely examined (Bartels, 2001). The functional approach looked at “elements” of marketing which were identified as selling, buying, transporting and storing of products. The institutional approach during this time saw merchants as specialists that handled commodities through different stages of distribution. They saw economic specialists as contributing to the reduction of distribution costs. Paul H. Nystrom wrote an operating manual called “The Economics of Retailing”, which contained the structural elements of operating principles. This manual recounted the history of retailing in comparison with American and foreign companies. The commodity approach was mainly focusing on agricultural products and manufactured goods. This dealt with practical questions as to the economic contribution of marketing (Bartels, 2001).

Some additional concepts were developing during this time, including economic utility creation, time and place utilities and possession utility. These are all marketing activities, which resulted in exchange, and consummation of the market. These were thought of as key concepts in the economic rationalization at that time.

Psychologists continued to interpret marketing in terms of advertising applications and how it invokes memory. However the idea of marketing, journalism or advertising agencies was never brought up. By 1915 different points of view were being examined, and were involving not only psychologists but writers and sales managers. This was noted as a “great change”, as advertising was now more than just psychological applications, they were taking place in the business practice as well. These new ideas of advertising were directed toward ultimate consumers, and still little attention was given to the selling of industrial or business customers (Bartels, 2001).

The theory of personal selling emphasized merchandising, store keeping and techniques that involved informing and selling the retail customer. This helped develop the responsibilities of the salesman, and in particular the traveling salesman. The personal and impersonal development of the selling force was steadily increasing in the business world. Personal selling was successful because it resulted in a sale. The idea that consumer’s had to be careful of the seller taking advantage of them was not even a question at this time. However in 1920 the interests of buyers and sellers began to be recognized. Norris A. Brisco wrote several books which in turn helped develop policies for salesmen that suggested they were not to try and force the customer to buy which reduced the haggling

and pressure selling that at the time went hand and hand with retailing. Later when it was recognized that the art of selling could be taught and learned, it was understood that a good salesmen had to have better human qualities including courtesy, intelligence and the general interest in others (Bartels, 2001).

With the increase of selling after World War I, there was a demand for greater proficiency. This called for a new type of management talent, the management of the selling function. There had been nothing written up to this point with any managerial aspects of this process. The line of thought that was to develop into marketing management theory was born and writing began to pour out concerning the management of selling. Several concepts were developed, including some from Frederick W. Taylor. His theories of management led business saw management as “supervisory” behavior, as they were responsible for their own systemization and organization. Selling was now a function closely related to the evolving use of the term “marketing” (Bartels, 2001). Sales management was now part of the total marketing activity and related directly to the entire business enterprise.

The Period of Integration: Wholesaling and Marketing research appeared in the late 1920’s. This was known as the “coming of age” for the discipline of marketing. The concept as a whole was now termed the “principles of marketing”. This term first appeared in the writings of Paul W. Ivey, Fred E. Clark and Theodore N. Beckman. This idea of “principles” came with the notion that the marketing experience had become well defined and now rules of thumb could be designed as guides to action. Marketing was now thought of as an economic activity, affected by the social conditions of the market and involved the performance of basic functions of distribution of products. This slightly altered the definition of marketing to “all of those activities involved in the distribution of goods from producers to consumers and the transfer of title”. Some concepts that become recognized during this time frame were things like convenience, shopping and specialty classes of consumer products, and the marketing channel (Bartels, 2001). These all show the level of thought that was being put into the concept of marketing, understanding that is was no longer just buying, selling and distribution that made up the function of the marketing concept.

Aside from just the general marketing thought being further developed was a huge advancement in retailing thought. A number of New York merchants and professors at New York University wrote a series of books called “The Retailing Series” (Bartels, 2001). These explained the scientific method to the solution of retail problems. The series included works on subjects of buying, credit, and store organization. It also included things such as management, merchandising, personal relations, and salesmanship.

As mentioned previously, wholesaling appeared in the late 1920’s. This is where it received its first scientific analysis and was given a description that showed the practical and theoretical differences between retailing and wholesaling. Theodore N. Beckman put together a study that helped make the distinction between the two and through successive revisions of his work, wholesaling itself was depicted as an institution (Bartels, 2001).

This was just about the time when credit became a subject more closely related to marketing. New agencies, new credit instruments and new terms of sale were introduced into the retail and wholesale markets. The Federal Reserve System, along with credit bureaus provided credit assistance to promote a stimulus in the sales industry. With the introduction of automobiles, installment credit was introduced and became a big promotional tool.

In the 1920’s the most significant trend was that of salesmanship, which led to new measures of integration of salesmen’s work. Selling became more than just an exchange between a seller and a buyer; it became regarded as a full time occupation that required skill and responsibility. It required the salesman to know pricing, policies, advertising programs, distribution channels and most important, the customers’ needs. Management of salesmen became a key role in business.

In this same timeframe advertising moved to a higher level of importance. Otto Kleppner formed a link between advertising and marketing when he developed the conception of three stages in advertising a product: pioneering, competitive, and retentive. This was known as the “advertising spiral” (Bartels, 2001). This idea unified the advertising thought process, of which other marketing actions and decisions could be organized.

Marketing research was also new to the marketing thought at this time. Prior to the 1920’s, scientific study was conducted merely on the interest of findings rather than any sort of methodology. George J. Frederick and Virgil D. Reed began to write formal writings specifically about the systematic and scientific research methods they linked directly to marketing (Bartels, 2001). At this time research turned from psychological to consisting largely of analysis of operating figures, and the attention shifted to questionnaires which supplied a new technique for analyzing markets and marketing.

Period of Development: Some major influences on marketing from 1930 to 1940 had a big impact on how we see it today. There were both social and economic conditions that played a big role. This was the time of economic depression, big growth in population from urban to suburban areas, regulations of business activity, and intense competition in distribution because of new marketing concepts and techniques (Bartels, 2001).

Even with these influences, marketing continued to be viewed as a functional management area and a form of economic production. Prior to the 1930’s marketing had been dealt with as a separate functional area where decisions were not integrated within the business and their distributive system. Marketing was becoming viewed as a process broader than just economic behavior. Ralph G. Breyer began to write about some concepts of marketing that were slowly gaining traction. He broke free of the conventional ideas of the subject, and viewed marketing as the activity involved in fulfilling certain tasks rather than as a list of activities or functions themselves. He identified these tasks as negotiations, storage, quality, packaging transportation and payment. Channels were not thought of as series of stages in which separate operations occurred in a row but as events that can take place in opposite directions, meaning flows of information can be communicated back and forth throughout the channels.

Marketing thought became more quantitative rather than qualitative during the 1930’s. Most of the judgments that were formed in prior years now had factual support with evidence collected in the increasing numbers of surveys. These surveys were now more than just simple opinions; they were replaced with complex questionnaires that focused on market studies and different kinds of marketing problems. Studies of sales quotas and distribution cost analysis were being used more often, and statistics became a big portion of the marketing function (Bartels, 2001).

There were also significant changes in the use of consumer credit. Economic conditions began to improve and personal loan credit grew because of the different types of agencies like commercial banks that were now offering this type of service. New ideas in technical thought also emerged in advertising through psychological discoveries and media studies. Economic analyses were designed to measure the effectiveness of advertising during this era of depression.

Period of Reappraisal: The period of the 1940’s to the 1950’s did not have as much significant changes as year’s prior. Industrial and academic functions were disrupted by World War II, which created opportunity for new technologies and thus new ideas to develop. The emphases of functional and institutional concepts were revised to reinforce the generalizations that were thought of as inherent in the knowledge of marketing. The idea that marketing thought was more of a science than anything else was scrutinized.

In 1940 there was a shift to a more “managerial” approach. The planning of research and marketing received more attention and were now thought of as managerial marketing functions rather than just marketing functions. After the war E.A. Duddy and D. A. Revzan came up with a new concept entitled “Marketing, an Institutional Approach” (Bartels, 2001). This concept had a holistic interpretation of marketing in our economy. They described the marketing structure as “an organic whole made up of interrelated parts”. These parts are subject to growth and change depending on economic and social forces. This differed from traditional approaches as it viewed the operation of the whole “marketing mechanism” rather than any one particular segment. This idea introduced government as more of a participant in business as opposed to just a regulator of business.

Period of Reconceptualization: Prior to the 1950’s there was little evidence to support the fact that there was different approaches to marketing thought, and was considered to be monolithic (Bartels, 2001). By the mid 1950’s large groups with

different opinions about marketing thought and education began to speak out. This is the time period that marketing was “reconceived”, and new terms were introduced to convey these ideas. In this stage it was difficult to determine what direction further development of marketing thought would take, but there was now a clear difference between the traditional concept of marketing and the conception of marketing in broader terms. The concept of “marketing mix” came into play with the use of predetermined objectives and manipulation of variables (Bartels, 2001). This means the focus was on figuring out what the customer wants, and marketing to match their findings, rather than designing products and services they “think” the customer wants. John A. Howard viewed marketing management as the “making of decisions concerning products, channels, price, promotion and locations” (Bartels, 2001).

The idea of using the customer’s viewpoint emerged during this time. Today we call this the “voice of the customer”. This was the starting point of all marketing planning. After 1950 this form of marketing thought had become a key concept that would become increasingly important in years ahead. This also helped jump start the idea of the social interpretation of marketing, which uses marketing analysis of research methods that were devised from other social sciences. Marketing managers realized that the consumer market not only deals with economic and psychological factors, but also social and environmental factors as well. The social concept of marketing is where society meets its own consumption needs, rather than business meeting the needs of consumers.

Marketing’s Evolving Identity: The next 50 years of the evolution of marketing can be best explained by using a more abstract view. Robert F. Lusch characterized marketing thought and practice into three categories; “to market”, “marketing to”, and “marketing with” (Lusch, 2007). The general idea behind “to market” is exactly that, to take things to market. “Marketing to” is the idea of identifying customers and marketing to them. “Marketing with” is taking it a step further by collaborating with customers to co-create value.

To Market: With ongoing shortages of supply, early marketing thought was to introduce products into the market. Supply and productive capability were scarce so the role of marketing was to simply help society get these allocated resources. These resources were tangible materials. These tangibles were used in production and were sourced and transported before production began. The end result was excess inventory that had to be stored, so it was during this period that marketing focused on how to close the gaps between production and consumption.

During this time the American Marketing Association defined marketing as “business activities involved in the flow of goods and services from production to consumption” (Lusch, 2007). The thought behind this was that the tangibles had value because products possessed utility. The idea that marketing began when the manufacturing

process ends was of popular belief. Marketing was thought of as wasteful unless it could be shown to add the utilities of time, place and possession. The public was concerned that marketing cost too much, but they did not take into consideration how marketing innovations made the industrial revolution possible.

Marketing To: In the 1960’s distribution and production had grown significantly. There was no longer a lack of supply, but rather a shortage of customers. Organizations realized they now had to be more customer oriented. The concept of making the business do what best fits the customer, rather than making the customer do what best fits the business was the turning point from “To Market” to “Marketing To”. Getting the product to market was no longer the issue; it was actually marketing the product to get the consumers to purchase them by generating demand. The decision making on products, the channels used, price, advertising and location were all now part of the marketing concept (Lusch, 2007). These all played a part in getting the customer to purchase and more importantly, to be satisfied.

It was during this time that the AMA definition of marketing was changed to reflect this concept. E.J. McCarthy modified this definition to “marketing is the performance of business activities that direct the flow of goods and services from producer to consumer” (Lusch, 2007). Marketing was now viewed as part of the entire process from manufacturing to selling to the end user. McCarthy believed that marketing should be involved with the production, pricing, distribution and the promotion of goods, with the intention to satisfy the customer.

This concept of focusing on the customer and be purely market oriented often did not work. In 1962 President John F. Kennedy delivered an address to congress. He explained how more often than not the views of the consumer were being ignored. He asked that the Federal Government have more involvement to help increase the consumer’s interest. He explained how this was to be initiated by giving consumers four rights: The right to safety, the right to be informed, the right to choose and the right to be heard. This helped marketing transform into a broader role, which is to serve not only businesses but also the goals of society. Marketing doesn’t end after the transaction; it extends well beyond the exchange.

“Marketing To” lasted several decades but began to lose traction in the 1990’s. The reason behind this was due to market saturation. Consumers were being bombarded with advertising and saw this as intrusive. When customers are overwhelmed with advertising, they tend to avoid it or ignore the message all together, making it ineffective. An alternative of marketing was needed, one that can account for the relationships that play such an important part and yet was not being recognized. Firms were still focused on a dominant logic that dealt with manufacturing goods in large quantities in order to keep costs down. They realized employees and managers were never interacting with the customer. They needed to be reminded of the importance of customer satisfaction.

Marketing With: Unlike the “To Market” and “Marketing To” philosophies which considered customers as exogenous or outside the marketing role, “Marketing With” philosophy views the customer as a partner in the co-creation of value. The new dominant logic for marketing has become known as the service-dominant logic (S-D). This logic recognizes operand and operant resources as being different. Operand resources are tangible. Operant resources are ones that produce effects and are most often intangible. In previous concepts, customers where thought of as operand resources. They were segmented, targeted, and convinced to buy. Under the new logic of “Marketing With”, customers play an active role in the exchange process. Under this new idea, the role of the customer is crucial because they are now thought of as a “co-creator” of value. Marketing is now thought of as a process of interacting with the customer. Value is perceived as “value in use”, meaning the value is derived from the use of the product or service rather than just the product or service itself (Lusch, 2007).

There is a clear distinction between co-producer and co-creator. A co-producer involves actually helping produce the core product or offering, and studies have shown the customer does not normally want to co- produce. The co-creation is something that always occurs. This concept argues that value can only be created by the use of the product or service, otherwise known as “value in use”.

The “Marketing With” philosophy suggests that this is an adaptive process where firms focus on the customer and collaborate with them to create, deliver and sustain value. Competitive advantage moving forward will be closely linked to co-creating value with customers.

Changing From Goods Focused to Service Focused

There are two dominating logics which rule the business world, good dominant and service dominant logic. Business has traditionally been focused on manufacturing and producing output in order to make a profit. But scholars and leading edge businesses are advocating for a change from goods dominant logic to one of service logic. These logics can be seen in both business to consumer and business to business, even in entire industries like software. A lot of companies are shifting from goods to services because that is how the economy is changing in developed countries. The new idea is that virtually all economies are creating and exchanging more services than goods. With this change companies need to also make a change and start paying attention to the services which they offer.

The logic behind changing with economies is so simple its almost becoming a truism. The logic traditionally comes from marketing fundamentals. It is only a logic, and there are some questions about if it’s the right logic or if it will transition from B2B and B2C. It is clear that a shift needs to happen to accommodate the shifting economies and service is the right shift.

There are two types of perspectives on services they can offer; they are goods as tangible output that has value as the primary exchange by having a restricted type of good, or an add-on that enhances the value of a good. This is primarily thought of as goods dominant logic as opposed to service dominant logic. The definition of service is a process of doing something for another party, on its own without the presence of a good and it identifies the service as the exchange activity. In service dominant logic goods still play a very important role; they are just not the only thing which satisfies an exchange. As the name explains goods dominant logic is focused around goods or the products. This included both the tangible product and the intangible (services).

Subdividing and Breaking Free from G-D Logic:The article ‘Service transition: finding the right position on the goods-to-services continuum’, by Gebauer,

H. et al (2012) argues that with the advent of many sub disciplines in the marketing industry like business to business and services marketing was to supplement the lack of logic behind goods based logic. Goods dominant logic was so focused on the good or product that marketers had to expand to more general issues of creating value and facilitating an exchange. The authors believe that the advent of B2B marketing was due to an inability for goods based marketing to work in a business to business setting. The thoughts behind how businesses marketing began changing from an interactivity diagram to a relationship based diagram. B2B marketing is where firms developed collaboration and partnerships with customers.

There is a very important distinction between goods based logic and service based logic and it is found in the concept of service. Service dominant logic is defined as the application of competences for the benefit of another person. The definition uses the term service, as opposed to services plural which is typically used in goods based logic. The use of services represents a change of thinking about value in terms of operand resources to operant resources. Goods based logic sees a service as units of output, service based logic sees service as a process doing something for another party. The value creation turns from producing to collaborating and co creation between parties. This process of providing service for another party in order to obtain services in return is the purpose for exchange, which is service exchange for service. Goods are not left out of the equation completely they are just used as complements for service. Goods are still important in service dominant logic, however service is the most important.

Service dominant logic represents a shift in logic of exchange and not just a shift in a type of product offered. This logic provides a more solid foundation for a transition from a manufacturing model to a service provider model. The authors state that service dominant logic is more of a mindset and an organizing framework rather than a theory. The article lists 6 ways to transition from product focus to a service focus; they are:

1. From thinking about the purpose of firm activity as making something (goods or services) to a process of assisting customers in their own value-creation process.,

2. From thinking about value as something produced and sold to thinking about value as something co- created with customers and other value creating partners.

3. From thinking of customers as isolated entities to understanding them in context of their own networks.4. From thinking of firm resources primarily as operand to operant.5. From thinking of customers as targets to thinking of customers as resources.6. From making efficiency primary to increasing efficiency through effectiveness.

Key Concepts of Service Innovation

It’s no secret: business has moved to a model that is orientated towards providing services to customers, rather than being orientated towards creating products that the customer wants. This shift from a goods-dominant logic to a service-dominant logic has made companies completely change their business models; now the focus is on things like value co-creation (with all kinds of customers), creating a lasting impression on the customer that goes beyond the product they received, being able to monitor, evaluate, and change customer perceptions, and many more ideas that all go much further than simply selling a product to a customer.

With this being said, it is no surprise that the service industry is completely dominating the economy in terms of growth, profitability, reliability, and overall success. And although the success of the service industry may be true, service innovation can be a tough concept to grasp, so this section is designed to explain some of the key service innovation concepts that may help to explain why moving one’s company from product to service focused is a good idea.

● Innovation: This is basically the ability to change operations in order to improve them. Thus, allowing a business to create a better customer experience, positive word-of-mouth, increased customer retention and loyalty, higher revenues, etc.

● Value Co-Creation: Value co-creation is all about the collaboration of different members in a supply chain (manufacturers, retailers, wholesalers, producers, customers, etc.) in order to increase the value of a product or service, in order to provide a better customer experience.

● Service Dominant Logic: Service dominant logic is the new wave of thinking for companies. In this sense, companies are supposed to see themselves as a provider of service and should always be looking for ways to improve their service.

● Goods Dominant Logic: Goods dominant logic is the old way of thinking for companies. Years ago, many companies’ focus was on creating as many goods as possible, without much of a focus on quality or providing customers with a service. This meant higher error rates and lower customer satisfaction, retention, and loyalty for product-based companies.

● Customer Loyalty and Retention: Customer loyalty and retention is all about creating a lasting impression that goes beyond the immediate, transaction-based, interaction between company and customer. This eventually becomes customers returning back to business because they know they will receive a favorable service experience, thus a substantial Return on Investment.

● Technology as a Service: Technology as a service acknowledges the ability of a company to leverage its technology in order to fill a need and service for a customer. With the increase in computing power and computing dependence, using technology as a service can provide substantial growth opportunities.

● Software as a Service: Software as a service is exactly what it sounds like: a company providing a service to customers in the form of software that they may use and is centrally hosted. This means the potential to have a highly interactive experience with customers to facilitate a better transaction.

● Competitive Advantage: Competitive advantage is all about the ability of a business to leverage its strengths, opportunities, available resources, etc. in order to create an advantage over their competition that can last. The point of a company’s competitive advantage is to separate one business from the other so that customers will recognize that business and only that business when they realize their need/needs.

● Customer Value and Expectations: Customer value is about the business understanding what the customer expects, values, and wants from their service experience. This is important to manage for companies because not understanding customer expectations can lead to an overall dissatisfied customer. This means that the customer comes in to their service experience with a mental bias that will ruin it before it even begins.

These key concepts and the idea of service innovation as a whole are both absolutely necessary terms for businesses to understand and practice constantly if they want to be competitive in the industry they operate in, and put themselves on a completely different level that is separate from their competitors. No longer is it about how many products a company can sell or how many items a company can make. Now, it is about which company can make a lasting impression on their customers by viewing the product they offer as more than a simple product, and by creating a relationship with the customer that goes beyond the good itself. Later we will discuss case studies done by ourselves and others that reinforce the idea of service innovation, and show how it can be used as a competitive advantage for firms that not only understand the idea of service dominant logic, but practice it through their business decisions.

Pim den Hertog and the Dimensions of Service Innovation

In all instances of service innovation, it has become diverse and an important area for knowledge-intensive businesses (KIBS) and service entrepreneurs to develop new services and service innovation policies. Pim den Hertog from the University of Amsterdam composed that service innovation is created into six dimensions: service concept, customer, service system and delivery in people and organizations, service system and delivery in technology and processes, new revenue model, and new business model.

The first dimension is service concept. Though we see products as visible and tangible materials, services are highly intangible. Although service may have some tangible characteristics such as software and car insurance, the features of the service is more powerful than its material representation (Hertog and Aa, 1998). This is how organizations can develop innovative services with new ideas and service policies for expansion.

The second dimension is customer interaction. Interaction between the service provider and the customer is taken place for service innovation. Many businesses, such as IT companies, combine and analyze data of their prospective and current clients through data warehouses and data mining of complaints and problems to be solved. This creates a better relationship between the client and the service provider while co-creating other forms of service innovation (Hertog and Aa, 1998).

The third dimension of service innovation is service delivery system in people and organization. Although the customer concept involves a link between the service provider and the client, the service delivery system involves internal organizational arrangements to develop new and innovative services. Companies implement newer systems for interpersonal capabilities and skill, where employees are trained to leave room for innovations (Hertog, Aa, 2010).

The fourth dimension is service delivery system in technology and processes. Much of this dimension is up for debate because service innovation can take without technological innovation. However, all services are dependent on some sort of technology to allow greater efficiency and effectiveness in information-processing tasks (Hertog, Aa, 2010).

The fifth dimension is the new revenue model. In this dimension, the previous four dimensions can be used individually or in combination for service innovation to take place; however, in order for service innovation to be successful a proper model for distribution in costs and revenues must be in place (Hertog, Aa, 2010). Most organizations have transitioned from their product-based revenue models to a service-based revenue model. In other words, rather than having to pay per hour of service or goods production, companies can pay for the solution to the problem they are solving.

The sixth dimension is integrating a new business model. These dimensions, combined with the five previous dimensions, are presented under as one strategy. Rather than implementing service innovation in various parts of the organization, they can structure a business model that layers service innovation altogether (Hertog, Aa, 2010).

Service Transformation: A Model

In order for manufacturing companies to successfully transform from goods-dominant logic to service-dominant logic, they must understand how to use goods and the service they provide to create a successful hybrid offering. According to Ulaga and Reinartz, service transformation consists of two dimensions and four hybrid combinations. The first dimension determines whether the services are concentrated on supporting the product or supporting the customer. The second dimension is directed towards supplier’s value proposition of promising to perform an act or promising to achieve performance. The four goods-services combinations that manufacturers can use to transform their businesses are product life cycle services, asset efficiency services, process support services, and process delegation services (Ulaga, Reinartz, 2011).

1. Product life cycle services (PLS): These are services that operate on the customer’s access to the supplier’s goods while maintaining proper functioning in all stages of the product life cycle. Since customers are in direct use of the manufacturer’s goods, manufacturers aim their value propositions in promising to perform an act as they provide services that support the product. For manufacturers to succeed in this category, they must use highly standardized services that are cost efficient and meet the basic needs of the customer (Ulaga, Reinartz, 2011). This may include redesigning equipment to minimize production and deliver cost.

2. Asset Efficiency Services (AES): These are services where manufacturers focus on increasing the productivity of assets invested by customers. Manufacturers concentrate their value proposition on promising to achieve performance while also providing these services to support the product. Unlike Product life cycle services, Asset Efficiency Services are less standardized, therefore, allowing suppliers to differentiate from competition. In order to succeed in this range of services, suppliers need to administer the risks of products failing by a set of resources and capabilities that can predict failure rates (Ulaga, Reinartz, 2011).

3. Process Support Services (PSS): These are services assisting customers in improving their business processes. Manufacturers direct their value proposition in promising to perform an act and their services help to support the customer. Services such as consulting are specific process-oriented actions taken by suppliers to help customer without taking responsibility of the customer’s processes. In this category, customers were willing to pay a high price since this is tailored to the customer context and needs. In order to succeed in this category, manufacturers must gain knowledge of customer processes, analyze them, and then create recommendations to provide the customer with in order to achieve the improvements that were recommended. To further grow in this category, suppliers should aim from relying on channel intermediaries to improving sales approach that help to reach different people in the customer’s organization.

4. Process Delegation Services (PDS): These are services of the supplier performing processes in favor of the customer. For this service, any combination of all four resources and all five capabilities help to launch it. Suppliers gear their value propositions on promising to achieve a performance that purely supports the customer. Unlike PSS, PDS is aimed at the customer’s specific requirements using complex hybrid offerings that involve the customer involvement. In order for manufacturers to succeed in this category, they must be proficient in utilizing a complete set of capabilities and resources that can be used in any combination that tailors to the customer’s needs.

Service Transformation Model

Services Paradoxes

Almost 60 percent of American manufacturing firms are incorporating service into their core business offerings. With tougher competition and narrowing margins manufacturing companies have started to shift away from goods dominant logic and have moved into the service industry. Manufacturers are moving to service because of the economic benefits which they can achieve from being more customer centric and strengthening relationships with their customers. Service is an industry buzzword right now and it is expected to bring growth and profit to companies which incorporate it. Because of this firms have been making the change and trying to integrate service into their core value proposition.

Not all companies are seeing this growth and economic benefit which they were expecting. Some companies are seeing a “service paradox” because of the difficulties in making the transition (Kastalli, et al. 2013). Large scale case studies examining the switch from goods to service dominant logic on the financials of these companies adds to this service paradox. This paradox is revolving around the difficulty that corporations are having changing from their old direction and value propositions. The negative results on the financials might be caused by old metrics used to measure performance for the old way of thinking with this new theory on service.

Steering Manufacturing Firms Toward Service Business Model Innovation by Visnjic Kastalli, I., B. Van Looy and A. Neely discuss new performance metric which would better measure the change for manufacturing firms making the switch from goods to service. These new performance metric should be service specific and measure the importance of service quality, customer satisfaction, and loyalty, and the overall relationship with the customer. Customer satisfaction is the new metric which companies should measure with when dealing with service. Having metrics so different from goods manufacturers it is very hard to measure goods and service at the same time. This is part of the problem that firms are having when making the transition into service, they are measuring with the wrong performance metrics. The decision for which metrics to use for product-service companies are even harder because they can be complementary or substitutes. If a firm is too focused on products they might give away services to facilitate more product sales.

This case study on Atlas Copco revealed some very important information for companies looking to make a switch. They found that future product-service companies should complement their product measures of market performance with measures that actually depict the success of service. The findings of the study lead the authors to recommend that adequate implementation requires an integrated set of marketing performance indicators for products and services as well as for the relationship between them. Finding the right balance and combining these metrics is important for a successful transition.

This article talks a lot about measurements and metrics for these companies and the importance of performance measurement systems (PMS). These performance measurements are important for both products and services and can be used for a lot of different activities from, formulating, communicating and implementing strategy throughout the organization. PMS is a great tool for setting goals and measuring against those goals. Current product-service companies are facing a gap in measurement for market performance which is important to know due to the threat of a service paradox.

Considering this case followed Atlas Copco for three years evaluating their transition there was a lot of information gathered from the study. One of the most important pieces of information was what Atlas Copco used for their service goals. The first was to establish an ongoing contact with each of its customers and secondly to develop a more elaborate and customized service offering for each customer. These goals were developed from the top of the organization and were steered by the PMS. This was an approach at becoming more customer centric and exploiting long lasting relationships to capitalize on lifetime customer value.

Along with the potential for a service paradox in manufacturing companies from not focusing on service there can also be too much emphasis on service offering. This phenomenon was documented when to Atlas Copco subsidiaries focused on high end service only tailoring to their top tier customers. Soon the basic services seemed less lucrative and the companies neglected to go the extra mile for basic customer needs. Because of this type of attitude towards certain customers these subsidiaries lost out on building relationships with customers to create lasting value. It is better to start basic and then build your service offerings up from there.

The transition for Atlas Copco opened their eyes to being customer centric. The changed which they applied changing from a goods dominant logic to a service dominant logic showed them they needed to be customer oriented and have open innovation. The company started to focus more on the customers and the relationships they were managing with their customers and notice an upswing in performance and profits.

The article concludes by stating that service-related market effectiveness represents a critical performance aspect for a couple reasons. One reason is for service to be accepted as a business and to merit subsequent investment rather than be treated as a support function, they need to demonstrate value potential. Secondly there is a possible conflict in objectives between products and service offerings and it requires management practices including performance measurement systems to capture the interdependencies between the two activities (Kastalli, et al. 2013).

The Atlas Copco case is a fantastic learning tool for what happens when a firm notices a need for a change and takes the correct steps, but not all companies can do that. For example, one product company that is no longer in business because it did not make the transition to service fast enough is Blockbuster. Blockbuster was one of the top companies in the home movie rental market along with Hollywood Video, and both of these companies failed to make the switch to service. In the end Netflix came into the market with a service for movie rental which consumers liked more and quickly changed their habits, putting Blockbuster and Hollywood Video out of business. Both of these companies failed to be customer centric and pay attention to what their customers wanted. They got complacent in their roles and failed to continuously innovate and make themselves obsolete.

Both Blockbuster and Hollywood Video could have made a transition into the service industry had they been customer centric and known what their customers wanted. These companies really missed out on co creation of value with their customers. The article Competing Through Service: Insights from Service Dominant Logic by Robert Lusch, Stephen Vargo, and Matthew O’Brien talks about the difference between service dominant logic and goods dominant logic. The article states that competitive advantages can be enhanced through service. This competitive advantage from service links to superior performance for companies. The article argues that competing through service is about more than adding value to products, which is a good dominant logic. Blockbuster and Hollywood Video were both centered on goods dominant logic and any service they had was an add-on to the product. If they had been more service oriented they would understand that services provision the product and not the other way around.

These two companies are perfect examples of what can happen if you do not pay attention to the voice of the customer and get complacent in your industry. With a customer centric approach and an asymmetric business

approach companies can successfully make the transition from goods based logic to service based logic just like Atlas Copco did. Listening to what your customers want is a huge clue to where your business should move and more companies are learning that the hard way. It is clear that service paradoxes exist but can be overcome thanks to increasing information from scholars on the topic.

The article discussing “service paradox” is a great lead into two of our research questions. The first research question it relates to is what resources and capabilities does a product company need to optimize and maximize their hybrid offerings, and the second question is all about which KPI’s are important. From the article Steering Manufacturing Firms Towards Service Business Model Innovation you learn that most product companies have the resources and the capabilities to move to offering service, they just lack direction and determination. It is easy for companies to say they want to make the switch, just like manufacturing companies can make “me too” products to stay relevant in the market. But the switch to service is an organizational transition and not just a temporary fix for something. Companies have to be willing to go all in and truly invest in a new way of thinking about products provisioning service and not services as a value add.

With firms needing to make an organizational transition in thinking this brings us to our next research question regarding KPI’s. Which key performance indicator will a product company use to measure service, most likely one that has been used to measure how well products are doing. Part of the organizational transition that firms are making should also evaluate the metrics they use to measure performance. the article states that adequate implementation requires an integrated set of market performance indicators for products and services as well as for the relationship between them; combining and balancing different indicators is instrumental for the gradual, well-paced implementation of the services business (Kastalli, et al. 2013).

Valve: From Products to Services

Through our research we found many cases of how manufacturing can use service innovation to gain amazing competitive advantages but one case stands out. Valve Corp, headquartered in Bellevue Washington, started out in the early nineties developing and selling video games to the masses through traditional means. Video games (at the time) were a product focused industry, thought to be just another toy video games were distributed using physical discs that contained all the content. If the developer wanted to add more content to an existing game they would have to create a new product add-on known as an expansion pack. They would then produce and distribute this add-on as another transactional item but it was dependent on the customers having already decided to purchase the original (or core) version of the game. (Dunn)

As internet speeds and availability became more prominent throughout the nineties the video game industry was able to release updates and patches to their products, (fixes and changes made to the original software to correct errors not found in quality assurance testing before release). The internet opened a new medium for content and delivery industry-wide. This was also the advent of massive online multiplayer games in which customers were engaging with each other sometimes on a daily basis and co-creating much of the value for certain games where the focus was competition and interaction rather than an adventure or puzzle taken on by an individual. Furthermore, customers began to create their own content for the games and releasing them for free to the public, often there were entire communities dedicated to certain modifications and additions that were completely customer generated. This customer generated content was enabled by valve who released their development tools completely free to customers in order to encourage higher value being received by those who desired easy access to modifications and additions. (Dunn)

One user generated addition that got a lot of attention was a game called Counter-Strike. Counter-Strike was a modification of Valve’s headlining game Half-life’s multiplayer portion and created a separate universe in which the players would play for either a terrorist or counter-terrorist organization. This addition was so popular that valve hired some of the developers who created it and began working on a full separate counter strike game. Already Valve was utilizing co-creation of value to gain insights on what types of games their customers wanted to play. After its release counter-strike became the #1 competitive first person shooter in the world and players around the world would participate in competitions and tournaments for prizes and money treating it much like a competitive sport. As a result Valve decided it needed an easy way to update the game as well as to prevent piracy which had become a huge problem with the advent of faster internet and a lack of tools for fighting piracy. (Dunn)

The solution was Steam. Steam was conceptualized as a platform for players to register their games and

receive updates and it quickly developed into a means for preventing piracy as well. Once Valve transitioned to Steam it became a required piece of software and you could no longer play Valve games unless you had an account. That account would then contain all of the unique cd-keys in our possession and give you access to updates from valve. In order to increase adoption Valve turned it into a social platform where players had their friends list and they could add anyone they played with in a given game just by knowing their screen name or handle. As the game environment was now multiplayer and multi-customer interactive this proved to be a service players had desired but it had never existed before. Players could now find new friends or add people they already knew who played the same games and then easily join them in an online session, and they now had a reason not to pirate the games as they would not be able to use the online portion or steam, rendering the game almost pointless. (Dunn)

As a result they were able to increase the value of using their service even more by creating an even wider value gap or removing potential value gained through piracy. Now they have an entire economy of in-game items and content that is often customer generated, when the customer generates an item (let’s say a custom color for a gun in a game) they release it to the community of players to vote on whether it should be added to the market if it gains enough popularity it is added and Valve gives the player a small cut of the profits if players buy and sell the item (Sivak).

To summarize, Valve has created a system in which a majority of content creation for their service is done by the customer, as a result they have amazing engagement with their service. Also, this allows them to offer unparalleled value with minimal effort in continuing content creation.

Valve became a thought leader of their industry as they started turning industry issues upside down. Using SD- logic they were able to solve issues like piracy that plagued the entire industry all while creating even more value for their customers and increasing engagement.

Now Valve has many game titles but they release them only every few years as their primary focus has become their service model. Their service with customers is only about half of it. Because they have gained such a competitive advantage over other game developers in finding ways to engage video gamer market they have also become a B2B service company. They now sell the Steam platform to other game developers so the game developers get access to the benefits of Steam and Valve has become the premier digital distribution and customer engagement service for software developers around the world.

Valve continues to find new ways to engage with its customers and create more value. They are currently developing their own operating system and testing concepts for their own game console. However they have made it clear that the core of their business is now the steam service platform and that will continue to be focus of development and innovation, as products will only be a delivery mechanism of the service. (Dunn)

Applying Pim den Hertog Framework to Valve:

Dimensions Description Valve’s Application

Service Concept Service innovation is intangible and provides solutions to a problem.

Valve’s Steam platform is unique in its design, implementation and its asymmetric utilization of customer behavior data. The service provided is of such high quality that users no longer pirate their software.

Customer Developing a relationship with customers and client while co-creating value in service innovation

Valve has effectively built value co-creation into its steam platform for direct consumers as well as for the software

publishers that utilize their distribution and engagement services.

Service Delivery System in People and Organizations

Integrating new internal organizational systems to provide employees of a company to leave room for innovative service.

Valve has a created an extremely unique work environment where employees are allowed to work on the projects that interest them with a unified mission. Understand the customer and what will drive them to co-create the most value and create a superior service experience.

Service Delivery System in Technology and Processes

Implementing advanced technology to go hand-in-hand with service innovation.

Utilizing data centers, Valve created a central platform to hold massive amounts of consumer data as well as means for distributing games, a previously tangible product.

New Revenue Model Design a new revenue model around the service innovation.

Valve has developed two new revenue models: flat service solution fees for distribution and engagement, micro transaction fees for customer or Valve created content for games.

New Business Model This dimension combines with the five previous dimensions to present under one strategy.

Valve utilizes its distribution platform in order to leverage positive trusting relationships with its customers and distribution partners. The platform provides Valve with real time data that is then utilized to discover buying trends and experiment with pricing and promotions while focusing on creating the most positive experience possible.

Indicators of Success: There are several ways to indicate and recognize the success of Valve’s innovations and their competitive

advantage in the market place.

1.) Financially: Valve has realized a great deal of success for a software company, or any company for that matter. Because Valve is a privately held company their financials are not public knowledge and the most recent estimates of its value are from a few years ago. According to majority shareholder and founder Gabe Newell “on a per-employee basis, Valve is more profitable than tech giants like Google and Apple. Google made an average $350,000 in profits per employee in 2010. That means Valve sees profits of around $87.5 million at least.” (Chiang, 2011)

2.) Industry advantages: Gabe Newell explains how they solved an industry wide issue of piracy in Russia “In general, we think there is a fundamental misconception about piracy. Piracy is almost always a service problem and not a pricing problem. For example, if a pirate offers a product anywhere in the world, 24 x 7,

purchasable from the convenience of your personal computer, and the legal provider says the product is region-locked, will come to your country 3 months after the US release, and can only be purchased at a brick and mortar store, then the pirate's service is more valuable. Most DRM solutions diminish the value of the product by either directly restricting a customer's use or by creating uncertainty. Our goal is to create greater service value than pirates, and this has been successful enough for us that piracy is basically a non-issue for our company. For example, prior to entering the Russian market, we were told that Russia was a waste of time because everyone would pirate our products. Russia is now about to become our largest market in Europe (in dollars of revenue).” (Tufnell, 2011)

Pim den Hertog Supporting Framework for Service Innovation:Valve was extremely successful in the Service Concept dimension. The Steam program was originally

designed to create a simplified way to update the content and build of their game software. Valve initially tested the software to see what type of information they could retrieve and send easily to their customers. During the initial tests they discovered that they would have to provide an incentive for people to register their games for updates as many may have pirated the games and would now have to pay for their license. As such, they began to build in a social platform, something that was previously only available to gamers through third party apps that were poorly designed and often limited because they were external to the game itself. Thus they were able to create an incentive as well as a new opportunity for co-created value by adding a community focused social platform and giving players access to automatically installed updates and additional content if they had actually purchased the game.

The most important factor of the Steam platform’s development and success was the customer-centric strategies used by Valve. Before they began to force players to utilize the platform if they wanted to play their games, they made it an optional beta and made many revisions to it as they were able to pursue real time feedback from customers and their PC’s. The mantra of Gabe Newell and thus Valve became customer centricity, focusing not on the development of the product itself, but rather the experience it brought to the user. This focus allowed Valve to create an effective platform to engage customers and solve the piracy issue that had plagued the entire software industry.

There are multiple pieces of the Steam platform that are intangible and unique to Valve, but the one that stands out is their corporate structure. Valve has remained a private, employee owned company since its creation. This has allowed them to focus on their customer centric values for decision making. This philosophy has proven time and time again to give them a competitive advantage in understanding the how’s and whys of the users’ experiences. This is emphasized by their unique decision to not have a marketing department. Gabe Newell explains “It [Valve] has no marketing department. Doug Lombardi, the vice president of marketing for Valve, has no employees working under him for the express purposes of marketing. He wasn't given the title for the company's sake, Newell explained, but to assuage the confusion of press and outside observers.” This was to improve productivity and prevent confusion, as the entire company was meant to be listening to the voice of the customer (Mcelroy, 2013). Little did they know at the time, that this unique strategy of utilizing all departments in co-creation and market research would prove to be invaluable, as it helped drive their company into a service model long before their competitors.

Since, Steam has become such as massive success for valve multiple companies have tried to repeat the service model, with very little success. One such company is software publishing behemoth Electronic Arts. In 2011 EA released Origin as a way to enjoy their games separate from the steam platform without giving up the social interactivity. (Katkin, 2011) However this proved to be an inept competitive move as it focused on the product rather than the customer. So far Electronic Arts has yet to back down from the competition but it has suffered several service launch failures and lacks any trust with their consumers, who only see them as a necessary evil to get to some of the products they want and may even pirate them as a result. (Sasaki, 2013)Even though competitors have yet to even come close to catching up with Valve, it remains their mission to continue innovating and maintain their competitive advantage by adding new features that were either thought of internally, by the gaming community, or a combination of the two.

Services Added:

● Steam Community Hubs: The community hubs were designed to create a more simplified and interactive social media experience. Hubs are centered around different subgroups including: games themselves, self-selecting groups of customers who want particular content, friends on the steam platform, and activity in the community and games. Using these groups Steam sends each customer a custom page of the most relevant gaming news, community news, and media in order to create the most beneficial experience based on that customer’s preferences and activity data. This has proven to be a great mechanism for value co-creation with little to no work (from Valve) on the actual content being viewed by the customer, because it is community created. (See Appendix B)

● Steam Greenlight: Steam Greenlight is somewhat like a kick starter that is focused on the desires of the Steam community and is funded by Valve. Here’s how it works, first an indie studio submits their idea to the Steam community. The community then votes on their favorite game ideas and at a certain point Valve works on a publishing deal with the indie studio and provides full distribution for the game to help get it completed and in return Valve gets a cut of the game’s profits but does not require exclusivity rights or any fees other than an initiation fee of $100. (See Appendix C)

● Steam Workshop: As described earlier as an “in-game economy” Steam workshop allows users to create and submit items to be added into the games they play. Currently only about 9 games support full pay economy functionality which requires an in game lottery system and dollar investments from the community. However, there are hundreds of titles that utilize the Steam workshop as a massive co-creation model where players build more value into games without the actual game maker having to lift a finger. This also provides the game makers and Valve with insights into customer’s desires and a community aspect that creates loyalty around the platform and the game maker. (See Appendix D)

Evaluating Valve’s Transition from Products to Services

To focus in on the important factors that lead Valve to such success with service innovation we can follow the Hybrid Service Model for Service Transformation. This model provides a framework for evaluating the service transition itself as well as a good example of a high level roadmap for demonstrating the potential that product companies have to servitize their business. (Ulaga, Reinartz, 2011)

Valve started with a Product Life Cycle Services strategy. They would create a game release it to the public through traditional transactional methods and only interacted with the customer if they had problems with the physical product which were CDs. It is important to note that the CDs were only providing access to software for playing a game. This allowed for no value co-creation and Valve was leaving money on the table.

As the internet became more extensive and available to more consumers Valve saw it as having the potential to further improve their methods of supporting the product. They entered into the stage of Asset Efficiency Services, this created cost reduction as they began to distribute their own games digitally over the internet. This gave them better access and capability to support the product more efficiently and effectively. They still offered their products in stores through standard distribution as they began to transition to a more digital focused distribution method.

Valve starts selling their distribution capabilities to other software distributors as they became the premier offering for a social gaming platform for customer engagement. This was advanced by their community and customer centric strategy of platform based gaming. Through the social aspects of their platform such as, community hubs, and friends lists for joining friends game universes. This is the Process Support Services stage as Valve began to take over the distribution as a means for software developers to get access to Steam’s customer base and have an efficient cloud based platform for distributing their software.

Finally, Valve successfully transitioned into Process Delegation Services. This was achieved through utilizing their most valuable asset, the customer. By engaging the customer through service offerings like Steam Workshop (customer created content) Valve was able to continue establishing themselves as a thought leader in understanding the way consumers view their gaming experience and had gone beyond that to create a “Social

Gaming Platform” in which customers freely give out data to Valve on their preferences and buying patterns in the gaming industry servicescape. Now Valve offers a complete process take over for selling software. This includes finding optimal pricing, promotions, and community engagement to maximize the profitability of each product by turning it into a service through their platform. Essentially, they have created a platform for service innovation and if you are the gaming industry the quickest way to gain a competitive advantage is to hand over your software to Valve and rely on their expertise to improve your software sales.

Valve was very successful in utilizing a Hybrid Offering for service transition. Some may argue that they were in the right place at the right time and as a result have gained a competitive advantage. However, it is clear that they have an intangible advantage as many larger software companies have attempted to servitize in much the same manner and have failed. It seems that one large factor maybe the organizational structure. Valve is the only company among its competitors to have remained an independent employee owned company and as a result they have been allowed room to focus on the customer and innovation rather than stockholders and accountants. That is not to say their decisions aren’t calculated, quite the opposite, they were some of the first to discover that service innovation and asymmetric strategies are more influential than stock prices and thrifty cost cutting and as such have focused all their efforts to this end. Valve is a prime example of success through service transition and has developed into a service transformation.

Taxonomy of Valve’s Process of Service Transformation:

Type of Offering Description Valve’s Application

Product life cycle services (PLS)Services that Support the Product (SSP)

Ensuring proper functioning of the manufacturer’s goods during all stages of its life cycle.

Valve began in the (PLS) with a manufacturing approach to game development and distribution. A supply chain with brick and mortar stores and a hotline to replace broken defective CD’s and ensure the product worked as intended.

Asset Efficiency Services (AES)Services that Support the Product (SSP)

Services to acquire increased productivity from assets invested by customers.

Valve created Steam as a way to repair parts of the code of the games themselves with feedback provided by customers. They also began using it to prevent piracy of their own games and distribute them in a digital fashion that was more efficient for purchasing.

Process Support Services (PSS)Services that Support the Customer(SSC)

Process Support Services (PSS) - This is where services assisting customers in improving their businesses.

Valve starts selling their distribution capabilities to other software developers as they became the premier offering for social gaming platform for customer engagement. This was advanced by their community and customer centric strategy of platform based gaming. At this stage Valve was still just providing access to their customer base and space on their platform.

Process Delegation Services (PDS)Services that Support the Customer(SSC)

Performing processes in favor of the customer.

Valve enters (PDS) with advanced real time data that has been collected and analyzed over the past several years. They now take over pricing, distribution, and promotions of the game creators products. This platform has become the primary focus of Valve as they have become a model of success in the gaming industry and can perform better service on behalf of their customers.

Nike: From Products to Services

Nike, From Products to Services: Nike, headquartered in Beaverton, Oregon, was founded by Phil Knight and Bill Bowerman. In the past, Nike has been known to be a product-centric company via apparel and shoes. Historically Nike has promoted its product by simply endorsing the most popular athlete. Michael Jordan, the second athlete signed by Nike but the first to make a real impact on Nike, is a prime example of this. Another way Nike would keep its shoe competitive was to see what its competitors are doing. In the late eighties Nike was still behind Reebok for the top slot in the athletic shoe market. Nike found that the reason for this was because it had not reached out to the women market. Today, Nike has endorsed many different athletes and has created a shoe for both men and women, but so have all the other companies in the athletic shoe market. Nike has found that in order to differentiate its product with its competition, Nike must turn to its services to gain a competitive advantage (ReferenceofBusiness).

During the World Cup in 2006 Nike, in partnership with Google, set up a social networking site called Joga.com. The purpose of the site was to have individuals showcase and upload their soccer skills and have the network community comment and share the user-generated content. Joga.com also encouraged users to create a profile to socially network with other users. The site proved successful with over one million fans participating. The success of the site allowed Nike to gain insights directly from the customers (Ramaswamy 2008).

In addition to Joga.com, Nike “sponsored street soccer competitions, created a website that would connect fans with their favorite professional athletes, and also sponsored conventional Internet marketing programs”. For example, a video of Ronaldinho was downloaded 32 million times which again allows Nike to gain insight on what the customer finds appealing at the moment. Also, on the “Nike ID” website Nike invited twenty sneaker enthusiasts to compete in designing in a new shoe for Nike. Nike asked the internet community to vote on the designed they found most appealing. This would give Nike further insight to its customer wants. Aside from the competition, every fan was allowed to go to the Nike ID site and personalize their shoes. The designs varied from style to color, including the option of putting the flags of the countries they wanted to support on their shoes (Ramaswamy 2008).

Through these initiatives, Nike was able to connect with millions of soccer fans around the world. This opportunity gave Nike the chance to build and promote engagement through internet platform in order to establish strong customer relationships. Being a product-centric company, Nike initially found that managing these new initiatives to be a challenge but would soon recognize that the competitive advantage in the sneaker market has shifted from creating value through products to creating value through service (Ramaswamy 2008).

The results of the World Cup initiative were clearly positive. Charlie Denson, president of the Nike brand, said that the market reaction to these initiatives helped persuade the company to sustain Joga.com in an effort to build and retain customer relationships, something the company had failed to do in the past (Ramaswamy 2008). Nike incorporates The DART Model: After the success of the 2006 World cup value co-creation, Nike decided to look for a model that could further its co-creation of value with its consumers. The model the decided upon is the DART model. DART stands for dialogue, access, risk-return, and transparency. The goal of this model is to achieve value co-creation between the customer and the company. Dialogue is the idea of interacting with and engaging the customers. Dialogue is focused on shared communications between the customer and company. It helps maintain a loyal community Access is giving the customer the tools to be engaged with the company. In order to gain an understanding of complex dialogue, the firm must give the customer appropriate tools to stay engaged. Risk-return is as defined, it’s the risk/benefit proposition for both the company and the customer. What is the risk if the consumer chooses to engage with the specific product? What is the benefit? From the company’s perspective, what is the risk if the company chooses the launch its idea? What is the benefit? Transparency can be described as shared information. It’s the idea of both sides communicating their thoughts and ideas to one another (Prahalad 2004). Application of the DART Model: In 2008 Nike and Apple collaborated and created a Nike+iPod (or Nike+) platform that encouraged customers to engagement. The platform consist of an Apple iPod music player, a wireless device to connect the music player to running shoes, a pair of Nike shoes with a special pocket to accept the wireless device, and membership in the iTunes and Nike + online communities. The platform encouraged engagement between:

The runner and Nike The runner/listener and Apple The runner and other runners The runner and running experts

In terms of the DART model the dialogue involves the parties described above. Through the Nike+ platform runners can engage in nearly real-time conversation online Groups of runners can challenge, encourage, as well as keep track of their friend’s progress (Ramaswamy, 2008). The Nike+ platform allows the runner to create a goal for the world to see. The user can then enter email addresses of people they would like as a support group – family, friends, etc. Each time the user goes for a run, it syncs up the data and lets the support group know that they are that much closer to completing their goal (McClusky, 2009). This type of dialogue is to motivate runners to achieve their goal, but more importantly it allows Nike to gather information on the different runners.Access is simply provided by Nike and Apple. Nike gives the customers the tools through the Nike+ website along with iPod/Sport Kit device (Ramaswamy, 2008).

The risk-return proposition applies to both the company and the customer. For example Nike+ enhances the economic value of participation for runners by reducing risk to injury. According to an article titled, Co-creating Value through Customers’ Experiences: The Nike Case, many of the conversations on the Nike+ website are about “proper training methods to avoid getting hurt: why overtraining is dangerous, how to monitor your heartbeat, or whether you should limit your running because of certain recent surgeries.” In summary the risk-return for the runner is to reduce or avoid injury altogether while still enjoying their daily run. From the firm’s perspective, Nike’s main risk is losing its relationship with the customer. Nike+ reduces that risk because runners are frequently interacting with the product through the Nike+ platform (Ramaswamy 2008).

Transparency is the shared information from both the runner and the company. Nike provides the runner insights on how it thinks runners should train and what routes they should run. Nike even suggests what types of shoes it thinks the runner should wear based on their locational needs. Nike provides a wide range of information By logging into the Nike+ website, runners can look up the most popular routes, they can look at other runners’ progress, as well as look at their own progress and compare their with other is they so choose too. From the firm’s perspective, Nike+ allows Nike to gain a lot of information on the individual runners. If the runners are dedicated enough, they are most likely to set goals, record their progress, record the courses they ran, the partners they ran with, and even their opinions about running. Nike gathers all this information and it allows them to narrow down

their target market which would ultimately lead to more effective spending and profit. The information gather can also be a “goldmine” of ideas that could lead to Nike’s next innovative product (Ramaswamy, 2008).

The DART Model:

Dialogue Access

Shared communications between the consumer and the company

The tools provided by the company to encourage consumer engagement with the product

Risk-Return Transparency

The risk-benefit proposition for both the consumer and the company

Ideas and thoughts shared between the consumer and company

The DART Model applied via the Nike+ Platform:

Dialogue Access

The platform encouraged engagement between: The runner and Nike The runner/listener and Apple The runner and other runners The runner and running experts

Nike provides access to its customers through the Nike+ website along with iPod/Sport Kit device

Risk-Return Transparency

The risk-return for the runner is to reduce or avoid injury altogether by receiving information from the Nike+ web site. For the company, Nike+ reduces that risk of losing customers because runners are frequently interacting with the product through the Nike+ platform

Nike shares different aspects of running including routes, how to train, and the ability to compare progress. In return, Nike learns a lot about its consumer

Pim den Hertog Supporting Framework for Service Innovation:Nike was successful in 5 of the 6 Hertog dimensions. With the help of Apple, Nike created a great Service

Concept platform that highly encourages customer engagement. With just an iPod, a pair of Nike+ shoes, and an innovative idea, Nike was able to include service into its product-centric company. Nike co-created value through the experience of running. Whenever a runner went out for a run, Nike would gain insights on that individual runner. With these insights Nike also tried to benefit the runner (via routes, how to train) to try to keep the platform more symmetric.

Also, through this platform, Nike does a great job with engaging its customers. Nike+ highly encourages dialogue between the runner and the company, and the runner and other runners. Nike would share with the runners various amounts of information about running including how to avoid injury, what routes are best on certain days, and even what shoes they might want to look into buying. In return, the runners would also share their thoughts on running with Nike. In terms of dialogue between the runner and other runners, the Nike+ platform allows runners to

set and share goals with one another. Runners would compare their progress with other runners and also motivate runners to achieve their goals. Through the dialogue from all parties, Nike is able to co-create value in service, build relationships, and also gain customer insights.

In terms of ‘Service Delivery System in People and Organizations,’ Nike is aware of the success service has had on its company and has made an effort to incorporate service in future products. For example, Nike teamed up with Dime magazine and Facebook and created an application called Ballers Network that allows basketball players to organize real-world games on manage their team online (McClusky).

For the fourth dimension of the Hertog model, Service Delivery System in Technology and Processes, Nike was able to implement technology to go hand-in-hand with service innovation. With the help of Apple, the two companies came up with an idea to create a service using the Apple iPod and the Nike+ running shoes. The service created was the ability to interact and engage with the two companies, along with other runners. This engagement created value co-creation between all parties.

The fifth dimension is where Nike could improve. Nike has only touched the surface of a new revenue model. Nike was able to gain revenue of $56 million just solely on the Nike+ platform in 2008. The total revenue in 2008 was $19 billion which indicates that most of its revenue came from its products rather than its service. Nike is still in the transition phase from goods-dominant logic to service-dominant logic. When all was said and done, Nike was able to come up with a new business platform. The Nike+ platform allowed Nike to build relationships with its customers which is something that it has never really done in the past. The Nike+ platform was also very information asymmetric. Any information shared on the Nike+ platform was stored by Nike in order to give what Nike thinks its customers what they want. Nike tried to make the platform more symmetric by giving information to the customer but the information the customer provides is far more valuable than any information Nike can provide. In the end, Nike wants to utilize on the idea of service in order to maintain its competitive advantage.

Applying the Pim den Hertog Framework to evaluate Nike’s strategy:Dimensions Description Nike’s ApplicationService Concept Service innovation is intangible and

provides solutions to a problem.The Nike+ Platform allows Nike to gain information on individual runners that was previously opaque to the firm. Nike can then use the information to launch new innovative ideas to maintain its competitive advantage

Customer Developing a relationship with customers and client while co-creating value in service innovation

Nike+ co-creates value by highly encouraging is consumers to not only engage with the company but other Nike+ users as well

Service Delivery System in People and Organizations

Integrating new internal organizational systems to provide employees of a company to leave room for innovative service.

Nike is aware of the success of the Nike+ platform. Nike realizes that it could replicate the success of the Nike+ innovations through other categories

Service Delivery System in Technology and Processes

Implementing advanced technology to go hand-in-hand with service innovation.

Nike teamed up with Apple to incorporate technology into its products. The Nike+ platform uses an iPod along with a sensor inside the shoe. The iPod encourages the dialogue between all parties while the sensor acts like a supplement to the platform allowing users to keep track and compare their progress with other users.

New Revenue Model Design a new revenue Nike still primarily gains its revenue

from its products, but it is transitioning. $56 million of the $19 billion came from Nike+ Service Platform in 2008

New Business Model This dimension combines with the five previous dimensions to present under one strategy.

Nike utilizes its Nike+ platform in order to build strong relationships with its customers. The platform is also information asymmetric in favor of Nike which allows the company to give its customers what they want while also continuing to gain insights and trends of its customers.

Evaluating Nike’s Transition from Products to Services using a Hybrid Service Model:Nike excelled in the Product Life Cycle Services strategy. Nike would create a shoe, have an athlete

endorse it, and sell the shoe until revenues of that shoe began to decline. The reduction in revenue would be the indicator that tells Nike the consumer is tired of this shoe and it’s time to create a new shoe. Nike, as well as is competitors, exercised this strategy for years but Nike knew it was time for a change. Nike, while at the top of the charts, figured that it could further its competitive advantage by stirring away from the Product Life Cycle strategy. Nike noticed that technology began to become more dominant and entered the Asset Efficiency Services stage. It launched its e-commerce site which would support the consumers has well as Nike products. Nike predominately focused by giving its consumers what they want by allowing its consumers to customize their shoes through the use of technology and Nike ID. The Nike ID platform would reach a broad population of Nike consumers but still proved Nike the challenge to gain meaningful insights as Nike ID really proved to limited in terms of co-creating value.

Nike reached the Process Support Services stage when it teamed up with Apple and created the Nike+ platform. This was Nike first real attempt at co-creating value with its consumers. The platform allowed the running community to engage in real-time conversations with multiple parties which would: (1) give Nike insights and (2) add to the experience running for the consumers. Unlike the Nike ID platform, this platform allowed for meaningful insights due to the dialogue encouraged within this platform. The Nike+ platform was also something consumers were willing to pay a high price for as the platform was trying to tailor to consumer needs.

It is true that Nike has begun to tailor to consumer needs but they have not yet fully achieved the Process Delegation Services stage. Nike has only tested the waters by creating a platform that allows value co-creation through real-time conversation. Nike created a platform that would allow it to gain meaningful insights on its consumers which would ultimately help Nike cater to consumer needs. That gap within this platform is that it is only targeted towards runners. It is not safe to assume that everyone in Nike’s audience all participate in the activity of running. This runner-focused platform would leave a large population out of the picture. Nike must connect with the entire Nike audience to achieve this stage of the Hybrid process. Taxonomy of Nike’s Service Transformation Process:

Type of Offering Description Nike’s Application

Product life cycle services (PLS)Services that Support the Product (SSP)

Ensuring proper functioning of the manufacturer’s goods during all stages of its life cycle.

Nike began with a manufacturing approach to customer satisfaction. It would simply meet the target markets of targets that have not yet been reached. This led to Nike hitting targets of all ages and genders.

Asset Efficiency Services (AES)Services that Support the

Services to acquire increased productivity from

Nike created a Nike ID platform which allowed its consumers to customized shoes to their liking. The incorporation of technology into Nike’s products would also

Product (SSP) assets invested by customers.

allow for further consumer engagement; something that Nike had not done in the past.

Process Support Services (PSS)Services that Support the Customer(SSC)

Process Support Services (PSS) - This is where services assisting customers in improving their businesses.

Nike teamed up with Apple to create a platform that allowed consumers to co-create value. This platform provided services that were both beneficial to the company and to the consumer. Nike was able to gain insights of its consumers, while the consumers were able to gain information about the different aspects of running provided by Nike.

Process Delegation Services (PDS)Services that Support the Customer(SSC)

Performing processes in favor of the customer.

By creating the Nike+ platform with Apple, .Nike has begun to test the waters of PDS. Allowing its consumers to engage in real-time dialogue allowed Nike to use the insights gathered to give its customers exactly what they want. However, Nike still has not yet fully achieved PDS as the Nike+ platform only targets runners. There are still other markets in which Nike didn’t reach with this platform. .

Nike+ Results: In conclusion, Nike has yet transformed from a good-dominant to service-dominant but it is transitioning. Nike has done very well in utilizing the Hybrid offering for service transition but there is room for improvement. Through the idea of the Nike+ platform, Nike was able to co-create value, benefitting the company as well as the consumer. The consumers gained value through the Nike+ engagement experiences. They could track their runs, store data, engage with other runners, receive tips, etc. The company, Nike, was able to gain a competitive advantage by building deeper relationships with the community of runners that were involved with the Nike+ platform. Nike was able to gain further insights on its customers (Critando et al.). For example, “Nike learned that in the winter, people in the US run more often than those in Europe and Africa, but for shorter distances. The average duration of a run worldwide is 35 minutes, and the most popular song runners listened to was “Pump it” by the Black Eyed Peas” (McClusky 2009). The information Nike gathers will prove to be beneficial as they can now use the data gather to create another innovative idea. This would only strengthen the competitive advantage Nike currently has.

As far as hard numbers go, end year of 2008, Nike was able to garner $56 million from its Nike+ products. More importantly, Nike+ renewed the popularity of Nike running shoes. Nike post a 13% increase in U.S. running shoe sales from 48% in 2006 to 61% in 2008 (Critando et al.).

Service Innovation Competitive Advantages

The cases above give examples of specific ways companies have been able to create competitive advantages through the use of service innovation concepts throughout the business model. The idea of a competitive advantage is based on a company being able to differentiate themselves from their competitors in order to be seen as a more attractive option to any given consumer. Additionally, companies should seek out a sense of sustainability when understanding their own competitive advantage. Too often, companies seek out and act on competitive advantages that may be advantageous in-and-of themselves but are not sustainable, or they are not advantages that last when put up against different challenges the company may face. The goal here is to find a competitive advantage that a company can confidently understand and leverage in order to facilitate a better service experience for the customer that cannot be easily copied by a competitor.

Another distinction to make is that these competitive advantages apply to service companies, or, more specifically, a product company’s service offering (see above case studies). Not considered are competitive advantages that traditional product companies may utilize; like innovative products, original design and structure in products, limited opportunity to copy product design, etc. These sort of competitive advantages are rapidly

becoming obsolete. In the past, a traditional product company would have no problem with a competitive advantage based solely on the core product offering. However, today, traditional product companies need to understand the value of service offerings because that is where the marketplace is moving. And with that, product companies need to understand the various sustainable competitive advantages that rely on innovative service offerings instead of innovative product offerings, listed and describe below.

● Enhanced Customer Loyalty: For a product company, developing services allows for more opportunities to connect and interact with the customer because the success service launches are clearly dependent on the interaction with the customer, with every interaction being an opportunity to innovate and improve services. Ultimately the customer is the person who has the power to decide what does work and what does not work when it comes to specific elements of the different services. And when a company has strategic measures in place to understand a customer’s expected service experience, they will be able to use this information to make one-of-a-kind service experiences that the customer will want to come back to. Thus enhancing customer loyalty.

● Increased Knowledge of Customers: As stated previously, being able to keep service offerings competitive and valuable, to the customer, depends on a company’s use of customer insights to improve the service offering. One of the main ways companies can do this is through the use of field workers. Field workers obviously have constant interactions with customers, and if they are trained to hear and understand customer’s complaints and/or suggestions, the service innovation process can begin right after the service is performed. The best way to use this idea is to change the field worker’s performance based on each customer’s needs and wants. Or, field workers can allow customers to voice their opinions to them and then give that information about the customer to managers who can then change the way the service is done or offered.

● Enhanced Value Constellation: By leveraging the information gained from the field worker, and ultimately the customer, product companies can use this information to create an even better experience for the customer by telling other members of the supply network about the information as well. With that being said, customers are not the only ones participating in the value co-creation process. Now, customers, suppliers, and other members of a supply network are able to contribute to the value co-creation process to even further enhance the service experience for the customer. By doing things like changing order delivery times, order delivery options, or any other possibility, product companies can create services that are seen as even more valuable to the customer because they have more than just the parent company that are concerned with their service experience.

● More Successful Service Launches: A model proposed by Kowalkowski and Lindstrom takes service innovation elements and applies them to an entire business model to reflect the changes that take place when a manufacturing company utilizes services, including strategy, structure, culture, revenue model, offering, etc. (2014). One of the elements specifically has to do with the development process itself, where companies are using customers to co-create the service offering through each step (sensing, developing, selling, and delivery). So by using this improved new service development model, companies will be able to constantly innovate their services based on any new information that becomes available as the service offering goes through each step in the new service development model (Kowalkowski, Lindstrom, 2009).

● Reduced Imitability: Manufacturing companies have trouble differentiating themselves from their competitors because products can be easily copied. For example, an electronics company can put out a specific kind of television that is really a strategic combination of smaller parts. This ultimately means that another electronics company can have the same parts but design the product slightly different, which could end up being more successful than the other company’s product offerings. However, service offerings are much different than product offerings. Service offerings offer a sense of reduced imitability because service offerings are much more complex than a product offering, which means that a competing firm has to take many considerations into account if they plan on imitating the initial service offering. This can cost a competing firm a lot of time valuable resources for something that may have limited success, especially if there is another firm that is currently offering what is essentially the same thing. Here, the idea is basically that product offerings can be easily copied by competing firms, but service offerings cannot because of the complexity of them.

● Enhanced Value Proposition: Usually, a customer’s decision to buy one company’s service offering over another is based on the competing firms’ value proposition. This competitive advantage is where the service needs to be understood as services that support the customer, SSC, instead of services that support the product, SSP (Harmon, Laird, 2012). Once a product company understands its service as something that

is separate from the products it produces, they are able to convey this message to its current and prospective customers. Further, by making the customer the main contributor to the success of the service offering, the customer will feel more important and cared about and are thus more responsive to that company’s value proposition. This is all, thus, a result of service innovation.

Below is a taxonomy of how the companies previously evaluated have realized one, or more, of these competitive advantages by including service offerings in addition to their product offerings. Across the top will be what the company did, what competitive advantages it created, an evaluation of the competitive advantage, and an analysis of any possible continued success, and going down will be the companies evaluated: Valve, and Nike.

Company Description of Offering

Competitive Advantage(s)

Evaluation of Advantage(s)

Continuing Success?

Valve Developing a platform that allows gamers to be a part of the game creation experience, thus allowing them to tailor a service to their own needs and wants.

- Increased knowledge of customers.- Reduced imitability.- Enhanced customer loyalty.- More successful service launches.

Valve has increased the size and loyalty of its customer base by creating a service that no other competitor can match. And from here on out, Valve will be able to see success in most, if not all, of their new service launches.

Valve will constantly have the opportunity to innovate with the customer in the co-creation process because Video Games are always changing and new ones are always coming out.

Nike Allowed customers to create in the process of developing their own shoes, with their home country’s flag. This creates a personalized service experience that customers can appreciate and possibly come back to.

- Enhanced value proposition.- Enhanced value constellation.- Enhanced customer loyalty.- Reduced imitability.

Nike already has an incredibly loyal and customer base already, but by allowing customers to decide first-hand how their shoes should look, Nike has only increased this number. If competitors try to copy this sort of service, customers will know and will choose not to go with a competitor. This creates an increased sense of value on behalf of the customer.

Customers buying athletic apparel always seek an opportunity to find themselves the “perfect pair of something”. Nike, by providing this customized service experience, has given its customers the opportunity to always have a part in designing the clothes they buy, so that they can have the “perfect pair of something”, designed by themselves.

One can make the argument that when a company works through the process of a service transition, and ultimately a service transformation, they will be reaping the benefits of all six of the previously mentioned competitive advantages. For Nike specifically, they may see that they will be able to have more successful service

launches in the future by developing a new service development model, based on their service transformation, that will allow them to see more success in future service launches and offerings that are much more sustainable. Also, Nike will be able to better understand their customers by including more service offerings along with their product offerings. They will be able to understand the customers’ value drivers, what can influence them, and how to better appeal to them, using service and service innovation. Overall, both companies have done a good job transitioning into more services while being able to keep their product offerings competitive and thriving.

Conclusion

All and all, traditional product companies are going to be blown away by the competition if they wait to act on service transition and service transformation. Clearly, using Valve and Nike as prime examples, it is in the best interest of companies to, maybe not get rid of product lines completely, but rather be putting some more time towards research and development, in order to develop services that support the customer instead of services that support the product. Instead of simply adding a warranty to an existing product, product companies should be moving towards offering services that allow the customer to participate in the process of value co-creation. Thus, by incorporating service in a product companies’ offering, they will be able to reap particular benefits that will ultimately end up separating them from their competition. A couple examples include an enhanced level of customer loyalty, and an increased knowledge of customers’ needs, wants, value drivers and many more. This, however, is just the beginning.

In terms of the future of the topic, more and more companies are taking the plunge into service transition and service transformation. Essentially, the companies that wait too long will be forced to make the transition in order to stay relevant in their respective fields and industries. An intuitive model is going to be needed in order to make the service transition go smoothly and efficiently. With that being said, one of the models offered thus far, the one proposed and used in this paper, will provide traditional product companies the correct framework for moving offerings more towards service.

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Appendices:

Appendix A: Literature Review Table

Appendix B: Valve Service Offering

Appendix C: Valve Service Offering

Appendix D: Valve Service Offering