service innovation @ service innovation seminar
TRANSCRIPT
New Service Development in the banking sector
Sequence and Openness of New Service Development Processes
Dr. Anne-Laure Mention, Head of Research Unit
Context
• Exponential increase of financial innovations owing to the deregulation in US, Europe and Asia
• Market fragmentation and emergence of digital technologies• Fast nature of changes in ICT-enabled banks to serve their
customers in new ways• Emergence of crowd-funding business models and the
introduction of payment services by firms originating from other sectors have contributed to the alteration of the landscape of financial services industry
->>> All these developments force incumbent financial services firms to innovate and reconsider the way they do business nowadays
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Context
• As a consequence, it is not surprising that the phenomenon of innovation in financial services and the way that the innovation process is organised have been attracting research attention from both practitioners and scholars
• The latter aspect is rooted into the stream of publications on new service development (NSD) and is addressed in numerous academic studies (e.g. Papastathopoulou and Hultink, 2012)
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Innovation and its typology (1/2)
• Innovation is “the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations” (OECD, 2005, p. 46)
• This definition implies the delineation among product (good and service), process, marketing, and organisational innovations
• In terms of the degree of novelty, innovations are usually divided between new-to-the-market (radical) and new-to-the-firm (incremental)
• Innovations can be new not only to a market and a firm but also to the world, industry, scientific community, and customer (Garcia and Calantone, 2002)
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• In terms of the degree of formality and collaboration pattern, Toivonen and Tuominen (2009) studied real estate and construction firms and derived the following types of innovation projects: • Internal processes without a specific project (i.e. an unintentional
innovation positioned between innovation and continuous adaptation)
• Internal innovation projects (i.e. developed without the involvement of external partners)
• Innovation projects with a pilot customer (i.e. an idea originates from the innovating firm that seeks for a pilot customer thereafter)
• Innovation projects tailored for a customer (i.e. a project is initiated by a customer who seeks for a solution to a specific problem)
• Externally funded innovation projects (i.e. the formal inter-firm research-oriented project that can benefit the whole cluster)
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Innovation and its typology (2/2)
Typologies of innovation in financial services (1/2)
• Frame and White (2004) posit that financial innovations are represented by:
• “new products” (e.g. a possibility to adjust mortgage rates)• “new services” (e.g. online banking)• “new production processes” (credit-scoring systems)• “new organisational forms” (novel approaches to electronic exchange)
• Tufano (2003) alludes to the following types of financial innovations:
• the ones designed for “inherently incomplete markets”• innovations to address the principal-agent problem and the asymmetry of
information• innovations to decrease transactions, search, and marketing costs• regulation and taxes-induced innovations• innovations stimulated by globalisation, volatility, and risk• innovations fostered by technological progress
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Typologies of innovation in financial services (2/2)
• Admitting the influence of economic forces on innovation process, Llewellyn (1992) identified four types of financial innovation:
• “Defensive”, introduced in response to regulatory policy• “Aggressive”, brought to market with explicit profitability intentions• “Responsive”, developed to meet customer needs• “Protective”, designed for overcoming existing portfolio constraints
• In terms of the degree of novelty, Avlonitis et al. (2001) unveiled six types of innovation in financial services:
• “new to the market services”• “new to the company services”• “new delivery processes”• “service modifications”• “service line extensions”• “service repositionings”
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Innovation process
• Earliest glimpses into the process of financial innovation and the importance of its respective stages were addressed in the domain of literature on new service development
• NSD process is usually composed of several stages such as:• idea generation and screening, • business analysis, • technical development, • testing, and• market launch (Avlonitis et al., 2001) • and refers to the development of services which are novel
to the focal firm (Johne and Storey, 1998)
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Sequence of NSD process in financial services (1/3)
• Publications that categorised innovation development processes in terms of composition and sequence of its respective stages are scarce
• Toivonen and Tuominen (2009) analysed nine innovation projects in Finnish (KIBS) firms and derived the following types of innovation processes in terms of sequence of its three core stages:
• “the R&D model” (emergence of an idea – development of the idea – market applications)
• “the model of rapid application” (emergence of an idea – market applications – further development)
• “the practice-driven model” (a change in the service practice – finding the idea – further development)
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Sequence of NSD process in financial services (2/3)
• Empirical evidence of the innovation process in financial services remains contradictory
• One group of scholars argue that NSD in financial services is mainly informal and takes a form of ad hoc initiatives (Menor and Roth, 2008; Vermeulen et al., 2007)
• Other researchers point out a higher degree of complexity of NSD process (Akamavi, 2005; Cooper and Edgett, 1996; Johne and Harborne, 2003)
• Some scholars suggest that the innovation process in financial services consists of a relatively small number of stages (Athanassopoulou and Johne, 2004)
• Other researchers observed more sophisticated and complex NSD processes, which may contain up to 15 steps (Alam and Perry, 2002)
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Sequence of NSD process in financial services (3/3)
• Apart from these disputes, empirical findings show that financial institutions, in fact, have both formal and informal NSD processes (Kelly and Storey, 2000; Vermeulen and Dankbaar, 2002)
• Van de Ven (1995), as cited by Vermeulen (2004), argues that financial institutions in fact have no simple linear sequence of innovation process
• In summary, the unveiled contradictory empirical evidence of the composition and sequence of NSD processes in financial services represents a research issue of a promising academic and practitioner value. More precisely:
• RQ1 - Are there any patterns of new service development process in financial services?
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Openness of NSD process in financial services (1/3)• The literature on innovation processes in financial services can
be divided into two groups: • the first one considers NSD process as a purely internal initiative with
minimum interactions with external business environment (e.g. De Brentani, 1993)
• While the second group points out contributions to innovation process from other entities, for example, customers, suppliers, competitors, and consultants (e.g. Athanassopoulou and Johne 2004; Fasnacht, 2009; Menor and Roth, 2008)
• The latter perspective has attracted attention from both scholars and practitioners, especially, after the emergence of so called open innovation concept more than a decade ago
• Open innovation is defined as “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and to expand the markets for external use of innovation, respectively” (Chesbrough et al., 2006, p. 1)
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Openness of NSD process in financial services (2/3)
• Except a limited number of cases relevant to outbound open innovation, most of the research evidence available in existing literature revolves around the fact that financial institutions tend to rely on the inflow rather than the outflow of knowledge
• Financial services firms can benefit from customers contributing to the following NSD stages (Cheng and Krumwiede, 2012; Lievens et al., 1999; Menor and Roth, 2008): “concept development”, “service design and testing”, “marketing program design and testing”, “service testing and pilot run”, and “test marketing”
• In addition to clients, financial institutions can take advantage of the inputs coming from their competitors (Cheng and Krumwiede, 2012; Lievens et al., 1999)
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Openness of NSD process in financial services (3/3)
• Few studies shed light on the role of other sources of external contributors to the NSD in financial services such as consultants, suppliers, and universities (e.g. Lerner, 2006; Vermeulen and Dankbaar, 2002)
• In summary, the openness aspect of NSD process remains fragmented and underexplored in the existing literature. The openness nature of entire NSD process in financial services has not been duly addressed. Specifically:
• RQ2 - What stages of the NSD process in financial services are the most/least opened to the inputs coming from external partners?
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Research design (1/2)
• Method of data collection:• Dedicated survey with a questionnaire on composition,
sequence, and openness of innovation process composed of 7 generic stages:
• Definition of problems (collection and understanding of problems)
• Idea generation (collection/generation of ideas/requirements)
• Idea screening (evaluation, selection of viable ideas)
• Development of service concept (development of marketing and technical details)
• Testing (test a service in typical usage situations)
• Business analysis (estimation of price, sales volume and profitability)
• Introduction to a market (launch a service, advertisement, distribution)
• Profile of the sample:• Banks located in Luxembourg• Banks which are the ABBL members (103 banks)
Research design (2/2)
• Interviewees:• CEOs, their deputies, executives responsible for
innovation, business development, new service development, marketing, organisation and quality
• Time frame of data collection:• July-November 2012
• Response rate: • 24.3%
• Method of data analysis:• Explorative statistics
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Findings
• Examples of innovations developed and introduced by the surveyed banks in Luxembourg vary and represent different types of innovation:• mobile banking• gesture recognition suites for information corners in bank branches• remote financial advices provided via modern communication channels by a
dedicated financial expert• an online appointment tool to book a meeting slot directly into the agenda of
branch employee• a collaborative idea management system that guarantees review of innovative ideas
by a group of relevant experts• a multichannel professional lending process that uses a new credit scoring system
and guarantees a decision within 48 hours• a proactive contract-based portfolio advice service based on client’s investor
profile• dedicated education and engagement programs aimed at young clients• and other example of innovations in core, facilitating and enhancing banking
services as well as in the modes of their delivery
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Degree of complexity of new financial service development process
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Stages of new financial service development process: frequency of non-usage
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Cooperation with external partners during new financial service development process
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Frequency distribution of stages on which financial institutions cooperate with external organisations for new service development
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Four main patterns of new financial service development process (1/4)
1. Problem-driven pattern: Innovation process is triggered by some concerns; it starts from the definition of problems (9 cases): two sub-patterns
• Frugal problem-driven sub-pattern: the business analysis stage appears in the middle of innovation process (6 cases)
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• Consecutive problem-driven sub-pattern: the business analysis stage appears in the second part of innovation process (3 cases)
Four main patterns of new financial service development process (2/4)
2. Proactivity-driven pattern: Innovation process is initiated internally without an explicit reason and starts from the idea generation stage (5 cases)
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3. Market-driven pattern: Innovation process is led by profit and market rationales; it starts from the business analysis stage (2 cases)
Four main patterns of new financial service development process (3/4)
4. Strategy-driven pattern: The front end of innovation process appears to be framed by the scope of bank strategy; the idea generation stage starts after a service concept is defined (1 case)
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Four main patterns of new financial service development process (4/4)
• Unveiling the patterns of NSD processes in financial innovation : contribution to literature on the types of innovation in financial services
• We used the term “driver” in order to delineate four main patterns of NSD processes. In this sense, our approach is similar to one adopted by Llewellyn (1992) and Tufano (2003)
• Meanwhile, our study is a step forward as it drills down to the way innovation process is designed by financial services firms
• “The R&D model” process (Toivonen and Tuominen, 2009) appears to be similar to the “proactivity-driven” pattern of NSD processes as it also starts with the emergence of ideas and proceeds further to its development and market application
• Contrary to earlier studies (Thomke, 2003) in financial services, we have not found the support to “the model of rapid application” and “the practice-driven model” (Toivonen and Tuominen, 2009)
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Summary (1/2)
• The literature review has suggested mixed evidence of the sequence of NSD processes in financial services
• The analysis of NSD process sequences has revealed the following four patterns of innovation process in financial services:
• problem-driven (composed of the frugal problem-driven and consecutive problem-driven sub-patterns),
• proactivity-driven, • market-driven, and • strategy-driven patterns
• We have found that banks tend to have rather complex NSD processes characterised with a relatively large number of stages
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Summary (2/2)
• NSD process appears to be rather open to inputs from external partners
• A relatively higher propensity to cooperation is observed on the stage of “service concept development”, while “introduction to market” is usually run in a more closed manner
• Majority of banks tend to have four stages of NSD process open to inputs originating from external partners
• Only a limited number of financial services firms opts for rather ‘closed’ (1 stage open to external inputs) or entirely ‘opened’ innovation process (7 stages).
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