Faculty of Computing, Engineering and Technology

Module – Service Science(CE00822-3)

Innovation is the key for competitiveness in organizations. Discuss how we can promote service innovation.

For the attention of Professor Lorna Uden

Student number: TU 007321Date of Submission: 05. 01. 2010

ContentsAbstract..........................................................................................................................31.0 The meaning of service and service system.............................................................32.0 Service economy......................................................................................................43.0 Service competition..................................................................................................54.0 The meaning of innovation......................................................................................5

4.1 Service Innovation...............................................................................................54.2Factors affecting service Innovation.....................................................................6

4.2.1 Service-value chain.......................................................................................64.2.2 Service Culture..............................................................................................6

5.0 Promoting service innovation..................................................................................85.1 Value Creation.....................................................................................................8

5.1.1 Value creating through client-driven modes.................................................95.1.2 Value creation from the Service Provider Perspective...............................105.1.3 Balanced modes of Value Co-Creation.......................................................10

5.2 2-D of innovation model....................................................................................105.2.1 New Service Design....................................................................................115.2.2 New Service Delivery.................................................................................11

5.3 Knowledge management for service innovation capability...............................115.3.1 Managing knowledge for customers...........................................................125.3.2 Extracting the customer knowledge............................................................125.3.3 Co-Create Knowledge with the customer...................................................12

6.0 Discussion on how service innovation can be promoted.......................................138.0 Conclusion..............................................................................................................149.0 References..............................................................................................................14

AbstractIn the modern economy, service is about building a collaboration relationship between

the supplier and the customer, in which the creation of value occurs between both

parties. Thus, both customer and supplier play an important role in a service system.

The value created in a service system is the co-creation value, where the key

characteristic is to differentiate service system from a traditional economic transaction

where the client work as a co-producer in the value chain of service innovation. This

reports examine the differentiation of a service system from a traditional economic to

a transaction system, and the value chain of the service system is then break into three

components such as supplier, employee, and customer. Thus, identify the areas of

potential of innovation through a new service development framework. Finally, is to

determine how service innovation can be promoted through strategy business models,

customer’s experiential services, and technologies.

1.0 The meaning of service and service systemService is defined as the application of competences (knowledge and skills) for the

benefit of another party (Vargo and Lusch, 2006). Service involves at least two

entities, on one hand in applying competence and another integrating the applied

competences with other resources which form a value-coceration in the value chain

network and determining benefit. These interacting entities are known as service

systems. A service system can be defined as a dynamic value-cocreation configuration

of resources, including people organizations, shared information (language, laws,

measures, methods), and technology, all connected internally and externally to other

service systems by value proposition (Spohrer et al, 2007). In a service system,

customer play a key role where the service system is dominated by the relationship

between organization, supplier and client. In the service supply chain model, the

stakeholders interact with each other to create value. From the aspect of systems,

service systems include both systematic parts such as clients, suppliers, and

employees ( ). The key characteristics of a service system is the interaction with the

clients as participants in the service process, not pure value transformation active ( )

as shown in Figure 1 and 2.

Figure 1. Traditional transaction system model

Figure 2. Service transaction system model

2.0 Service economyIn the competitive market today, firms and industrial who innovate by service acumen

plays a significant role in improving the aggregate economy attributes and values. The

service economy is designed in a structural way where different sector offer different

services to the public and businesses. Thus, service systems are growing rapidly and

have become an ever greater part of value creation in modern economies. As

discussed earlier on, large firms and manufacturing industrial should change their

traditional views of value creation into a service value creation chain. Microsoft for

example, they were offering Window Office to the customer as a product, which

rather than co-creating value by the customer and this has caused them to lose their

potential customer in the changing service market against their rival such as Open

Source Software like Linux. However, in improving the supply chain of the

Microsoft, the management has reconfigure their traditional supply chain by

integrating customer ideas for developing new service product, thus offering various

product such as Window 7 Home & Professional.

From the observation above, it can be stated that the demand for service innovation in

the economy is highly needed to impact the service economy. Therefore, it is

important that organization study their business process and management which

Supplier inputManufacturing process output

customer

Supplier inputManufacturing process output

customer

Customer feedback

emphasis on the potential strength of the business structure will be taken into full

consideration. For example, by producing an innovative strategy with value

proposition, innovative business model and a well structural service culture in the

organization. In the article of “Innovation in the Service Economy” written by Gallouj

(2002), he describes that:

“.. modern economies are both service economies and economies of innovation.

Paradoxically, there are not regarded as economies of innovation in services that is as

economies in which service firms’ innovation efforts are proportionate to their

contribution from the major economies aggregate.

3.0 Service competitionIn the book of “The Future of Competition”, Prahalad and Ramaswanmy (2004) focus

on co-creating unique value together with customers and argue that ‘value is now

centred in the experience of consumers’ (p. 137) and not just embedded in products

and services. Customer delight and customer perceived value are linked to memorable

and favourable customer experiences (Pine and Gilmore 1999; Johnson and

Gustafson; Berry et al. 2002).

4.0 The meaning of innovationInnovation can be defined as the creation and implementation of new process,

products, sources, and method of delivery, which results in significant improvement

in outcome, efficiency, effectiveness, and quality (Mulgan. G & Albury, D, 2003).

While other definitions are innovation is the successful exploitation of new ideas

(Innovation unit, department of trade & industry, 2004). Innovation can be defined as

a new ways of co-solving customer problems, whether they are fully recognized or

completely latent to the customer (Michel; Brown; Gallan, 2008).

4.1 Service InnovationService innovation refers to new or considerably changed service concepts or service

delivery process that deliver added value to the client by means of new or improved

solutions to a problem (Tidd, Hull, 2003). Thus, service innovation is a methods of

improving performance to obtain a desire opportunity for consumption or consumer

services. Based on the key dimensions of services that summarized by XinHui (2008),

Figure 3 illustrate the four dimensional model of innovation in service adapted from

Den Hortog (2000).

4.2Factors affecting service Innovation

4.2.1 Service-value chainAuthors such as Heskett (1994), presented the service-value chain, where the

characteristics of value chain is to analyzing the collaboration between two

organization for achieving value, Customer Loyalty, Customer Satisfaction, and the

value that perceived by customer based on the service offering. In the basic market, to

manage a service, an organizations need to know how to lock-in their customer

through offering satisfaction service which is influenced by service value. These

satisfactions may be originated from IT investment, training and knowledge

exchange.

Figure X: The service value chain model

4.2.2 Service CultureIn the service firms, service culture is the main driver for organization improvement

than in the manufacturing industry. According to Lyons (2007), the differences

between product and service innovation expresses the importance of fostering a

service innovation culture which is consistent, coherent, and comprehensive presence

of values and norms that promote creative ideas and implementation. Another authors

such as Shouming & Yang Zhang (2009) stated that service culture is based on value-

centric and aim for promoting the core competitiveness of the enterprise and creating

the loyalty of the customer. As traditional service move to service-oriented culture,

different aspects in service culture, promote innovation in technology, business,

organization and demand. These innovation are mutual influenced and interacted, all

build up the main body of service innovation. The shape of service innovation

management, will absolutely impact the company service value. To understand how

service culture and service-value chain impact on service innovation, figure x

illustrate the model of it

Figure 2: The impact of service culture on service innovation

5.0 Strategic for service innovation

5.1 Value CreationAt the beginning of 2007, IBM’s Jim Spohrer announced, “Service is value co-

creation”. (Spohrer, 2007). The purpose of value co-creation is to stimulate change.

Value creation occurs when there is a strategic agreement between the client and the

service provider. This agreement exist when both the client and the service provider

have sufficiently related service innovation strategies.

Most service provision requires a high degree of interaction between the client and

service provider, especially in knowledge-intensive fields such as the information

service business (Bettercourt et al, 2002). According to the research done by Moller;

Rajala; and Westerlund (2008), their research show that providers who have either a

strong technology orientation or who wish to create high value-added services are the

most willing to enter into close-relationship with their clients. Through their study,

they also noticed that provider who focused on operational efficiency, aim at value

creation though more distant, transactional customer relationship. In order for an

organization to be competitive in the market, it is crucial that they develop a

successful innovations in client-provider relationship by recognizing each other’s

value-creating strategies. These value-creating is separate into three strategies

ranging from establish service to incremental and radical service innovation

development, as illustrated in Figure X which is adapted from (Moller et al; 2008).

Figure X. Basic Interaction Modes in Service Co-Creation

The service co-creation framework is used to analyzed service development, focusing

on the client-provider interaction modes in service innovation (Moller et al; 2008).

The modes are classified into three categories which is balance, provider-driven and

implausible.

5.1.1 Value creating through client-driven modesIn these modes, it is concern about the collaboration of knowledge exchange between

the client and the provider. As the demand of customers need increase, service

provider may hard to met the customer expectation and provide competencies that can

met their satisfaction. Having a strong relationship with the client, it will help the

provider to produce an innovative service packages for their client. Thus, it may

reduce the risk of client going for other service provider which offers different types

of service offering or packages.

In the case of creation of new service innovations, it is sometimes difficult to

differentiate the roles of “customer” and “service provider”. For example, Facebook

often add new features and contents to their Social Web-Based channel which is

grounded on client’s request. While Facebook original solutions could be

characterized as provider-driven, its drive to also cover the needs of customer

involvement in its service strategy. By inputting rich content into the social network,

Facebook developer adds service modules to the Facebook.com in accordance with

clients’ requests by offering rich applications and information for the client.

According to Moller; Rajala; and Westerlund (2008), successful client-driven

innovation is derived from the client’s ability to demand services and the service

provider’s ability to meet these requirements in incremental but continuous

development.

5.1.2 Value creation from the Service Provider PerspectiveWell known and large service provider such as P&G, Google, Microsoft and Nokia

shares a common goal in value creation by creating a business model that are typically

focused on the service co-creation. Authors such as Flint, Woodruff and Fisher (2002)

argued that when service providers design new service, they have to realize that it is

the benefits that customer device from the service, not the offering as such, which add

perceived value for the clients. For example, Microsoft create new operating system

which the innovation activity does not create extra value for the clients. However, in

redesign their service offering, they providing alternative version of its Window

operating system package, such as the Window 7 Home and Professional Editions.

5.1.3 Balanced modes of Value Co-Creation

5.2 2-D of innovation model At the firm level business system, the key processes for developing customer-oriented

innovative services are new service design, deployment, and delivery (i.e, the 3D). As

service provider have create the value proposition for the customer, the next stage is

to identify ways to differentiate their servicer offerings. In the traditional economy,

new service development often used on “product development”. But on the

transactional service system, it is more service oriented where it focus more of

collaborative. So, firms develop new service concepts according to customer

preferences and customer value propositions. Next, linking the newly developed

service concepts to the market segment to gain which market has a pontential

customer. The final step is the efficiency of the service offering by analyzing the

quality of the service and the experience that perceived by the customer.

5.2.1 New Service DesignHaving new design will help organization to achieve competitive advantage in term of

differentiation of service offering. A new way of generating the revenue can be

created when the new service design involve customer as the co-producer and co-

creator in the new service development process. However, this raised an issues as

seen below:

1. What is the value and services that customer want?

2. Is the value concept consistent with the value proposition?

3. How to identify customer value and propose a scope of offerings?

The new service design process include as following:

1. Generating the ideas based on customer input

2. Identify the market segment

3. Developing new business model through market analysis and customer

involvement

4. Positioning the new service offering by having customer participate in the service

design process

5.2.2 New Service Delivery

5.3 Knowledge management for service innovation capabilityKnowledge management is part of value creation process in achieving service

innovation. In the modern economy, especially those firms using technology often

provides potential technology to manage customer knowledge to make customer

knowledge leading to innovation, and enhance service innovation capability. In

service innovation process, customer collaborate with the service provider for

exchange of knowledge for innovation capability. As mentioned by Sampson (),

customer always the co-producer in a service process, where they indentify and

demand for innovation change. Thus, as customer participate in this service process,

they also influence the quality of the innovation service. There are three ways how

organization can manage the customer knowledge.

5.3.1 Managing knowledge for customersAccording to Michael Gibbert (2002), he proposed that the customer knowledge

management is about the management of innovation and the growing demand of it.

By managing knowledge for the customer, organization would be able to point out the

quality of their service. Thus, helping them to make decision easily by understanding

customer needs. For example like Amazon.com , they have a intelligent knowledge

system tools such as customer tracking which used to collects information from

registered user during their visit to the web site. In order for them to promote new

service innovation, Amazon offers new service by helping the users to search through

a book without any delay, as the system has a database tracking on the current user

preference. Thus having this system, it will also offer new knowledge to the new

customer on what current customer have bought, and their review on the

books(Layton ,2009).

5.3.2 Extracting the customer knowledgeKnowledge extraction is crucial in obtaining customer experience in a service process.

Every opinions and suggestions that given by the customer will help to evaluate the

value that they perceived from the service provider. From the case of Reebok, getting

the information that manage customers relative information and knowledge from

customer can improve service innovation’s efficiency and amount. So, in product or

service innovation, idea generation, even product or service development, customer

should be encourage to participate in service innovation process, and use knowledge

from customers to improve company’s service innovation capability.

5.3.3 Co-Create Knowledge with the customerCo-create knowledge with the customer mean the process of involving customer into

the innovation process which often based from the perspective of customer

experience. Organization who exchange knowledge with their customer, will able to

deliver new service offering, thus able to differentiate their total service packages

different from their rivals. Google for example, exchange their knowledge with the

internet users for new service development such as Google Map, Gmail, Spam

solutions and etc. So, having customer interact in the service process, and their

innovative knowledge and creative ideas will help to promote new service

development that organization need to provide.

To summarize the above analyses, Figure X shows a relationship between the

customer knowledge management and service innovation capability (Hongqi &

Ruoyu, 2008).

Figure X: Relationship between customer knowledge management and service

innovation capability

6.0 Discussion on how service innovation can be promoted

After analyzing the factors and strategy of achieving service innovation, now the next

steps is how to promote the service innovation to the customer. To understand how

service innovation can be promoted, it is important to look on the different sector in

the service market.

6.1 EducationIn order to promote service innovation as an education, it can be achieved by adding

SSME qualification to an existing deep home discipline of study. Staffordshire

University for example, previously they was focusing on the subjects of computer

science rather than service science. Moreover, all the University that has establish the

field of service science was from top elite university. However, as competition rise in

the education industry, some of the professors and researcher in the Staffordshire

University has develop a SSME programme by collaborating with IBM to offers the

SSME programme to student. So, as student is being innovate with service mindset,

they will able to work effectively in innovating ideas, designing complex system and

thus prepared to succeed in the 21st century service-driven globally integrated

economy.

6.2 Business

6.2.1 Creating T-Shape professional culture Businesses should define career paths for T-Shape professionals and indicate their

preference for SSME qualifications in recruitment. This would demonstrate the

demand for academic programmes and encourage the formation of interdisciplinary

Service Science communities. Furthermore, organization should emphasize a T-Shape

working culture, where employees are always able to generate ideas for new service

innovation. Such culture can be taken from the example of Google, where the workers

was given a priviledge to find problems from a service system range from service

industry to manufacturing industries.

6.2.2 Relooking at previous system and propose a new service designBuilding a new service design will require the businesses to participate in a complex

service system. For example, (a) how to make optimal investment for service

innovation, (b) how to scale up margins as service revenue increase, (c) how to

systematically reduce the complexity of service systems, and (d) how to devise

measurements system that can be used internally and share externally to protect

privacy and preserve competitive advantage (IFM; IBM, 2008).

6.2.3 Develop a collaborative for value creationSmall and Medium Enterprise can collaborate with the IBM in learning the

fundamental of Service Science and the latest research and tools use to develop a

service system that can impact the businesses. For example, NHS collaborated with

CSC consulting group for service innovation. Through the collaboration, CSC

consultants gather the clients need and participate in the service development process

of NHS. Here, it can be stated that there is an exchange of knowledge for value

creation, which can help businesses to stimulate rapid progress.

6.2.4 Creating a roadmap of service innovationAs sustainability becomes an increasingly urgent global concern, businesses should

take the opportunity to expand the definition of stakeholder value to include new

measures. More emphasis should be placed on the balance between efficiency,

effectiveness and sustainability. Roadmaps for service innovation should include

update performance measures and adjust mechanism of measurement.

7.0 ConclusionAlthough there are many ways that service innovation can be promote, it is important

that a service innovation should be looks in perspective of service dominant logic

where collaborative and value-creating is about. Furthermore, it is important that new

service development should focus on a service-oriented process. This means that

customer should be involved in the ideas generation process not just the suppliers.

Finally, service innovation can be promoted through the customer knowledge and

theirs word of mouths. As customer consume a service product, he/she is experiencing

the service and therefore able to pass the new knowledge to another customer. In

another words, it is a source of advertising which cost can be reduced rather than

using heavy media application to advertise.

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