CHAPTER 1

Service as the Key Driver of Growth

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

—Philip Kotler¹

All marketing is service marketing.

—Vargo and Lusch²

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

—Thomas Edison

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

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

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

Service and Goods

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

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

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

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

Table 1.1 Direct and indirect service

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

The Experience Matters ... a Lot

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

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

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

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

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

• Buying a box of coffee from the local convenience store to brew at home. Price: $0.10 per cup. (K-cup $0.50 to $0.70)

• Takeout coffee for a subway or train. Price: $1.50.

• Having a coffee with a friend in an urban café or a ubiquitous Starbucks. Price: $3 or more.

• An espresso in the Piazza Duomo square in the center of Milan, Italy. Price: $15.

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

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

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

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

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

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

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

Figure 1.1 Service continuum

The Active Customer or User

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

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

In traditional scenarios, the customer passively receives something in the exchange process. In the shoe shop, the customer receives a pair of shoes and makes a payment in exchange. The customer goes to the pharmacy with a prescription from a doctor and is given medicine. In a church, the customer receives a blessing and (perhaps) pays via the collection plate or a church pledge. Imagine a theater where customers have paid and are sitting down passively receiving entertainment service while the actors represent the activity in the form of production. In this traditional view, the customer receives a prepackaged value.

This book makes a case that this logic, of passive customers and active companies, is usually erroneous. Customers act in specific contexts and use the offerings supplied to them by one or more companies. The company is tasked with supporting them in the process and should regard them as active partners working together to create value. The passive view is usually connected to which party is in control of all the events. If a company controls, such as is common in theaters, the process, the customer tends to be more passive. Value is created via the customer’s activities and, customers extract what they wish from the use of different offerings.

Products represent platforms that customers use to meet their needs. A washing machine, for instance, has no value unless the customer is able to place the laundry in the machine and start it correctly. Its value can even be forfeited if clothes are washed at the wrong temperature setting or are mixed with clothes of a different color. The customers may not even need the washing machine if the job done can be solved in some other way.

Figure 1.2 is representative of the complex customer view of a service. The value of a flight is not realized at the moment of the purchase or even during the delivery of the service (the flight); in this case what the customer wanted from the service was to meet her family. The journey could start as the customer orders the journey and looks forward to meeting friends and family. If the actual trip is pleasant or even memorable it is an added bonus that adds to the customer experience. Customers can add value to their trip by bringing their own head phones, neck pillow, and bringing a good book to read during the trip. Other customers can effect the experience: if the traveler wanted to be productive, a talkative neighbor may result in a less useful experience; at other times a nice chat with another passenger may make the journey more enjoyable.

Figure 1.2 The customer experience

Source: https://medium.com/tech-doodles/latest by Kiki Schirr

Value creation is much more than a good or predetermined service produced in advance. Companies clearly must communicate and work together with their customers during the development of new service.

What Does the Term “Service” Really Mean?

The term “service” has changed during the past century. For a long time, service was treated as a residual entry in a country’s financial accounts (found in a “miscellaneous” column also referred to as unproductive labor) and regarded as a less valuable entity since it was not exportable. Today, however, service is the backbone of a modern economy. Goods have become commodities and service is the key product differentiator.

Let’s contrast three different perspectives of service that are in use today. The first perspective is that service comprises offerings from a special group of companies and organizations, or defined subsidiaries. In this perspective, service output is to the sum of the output created by firms and organizations in defined service sectors including for instance travel, finance, and insurance. Service sectors are defined using classification codes from organizations including NACE—codes used for economic activities in the European Union, the United Nations (UN), the Organization for Economic Co-operation, and Development (OECD), as well as the CIA figures cited earlier.

This classification perspective is useful to compare economies or track changes over time, but does not add much insight at the micro or individual level of analysis. If 50 percent or more of Volvo Trucks’, Ericsson’s, or GE’s revenue consists of service, are they still product firms? The answer may be “yes” according to this traditional perspective. If a staff canteen run by a goods firm is sold off to someone outside the firm, the goods firm becomes more productive in that the firm uses less staff to produce more. This shows that the traditional perspective is a very crude way to measure.

The second service perspective is based on the features contained in an offering. If it is intangible and produced at the same time as it is consumed, this perspective regards it as a service, while it is regarded as a product if it can be inventoried and standardized. One could say, somewhat facetiously, that dropping a service on one’s foot does not hurt, as opposed to products. This service perspective is based on the so-called intangibility, heterogeneity, inseparability, and perishability or IHIP criteria (see Table 1.2). IHIP works well in a theoretical or an educational setting, but one quickly encounters situations in which it does not correspond well with reality.

As shown in Table 1.2, the IHIP model suffers from a number of uncertainties. It needs revamping in order to provide knowledge and insight of optimal service handling in an organization. In addition to the issues outlined in the table—leasing a car, for instance, would be considered a service, although most would probably regard the car itself as a good. A car, however, can also be customized according to preferences on purchase, which, according to IHIP, is a service characteristic.

Table 1.2 IHIP—a traditional service perspective

IHIP	Definition	Our comments—A new way of thinking
Intangibility	Service is intellectual and intangible, for example, a mortgage loan.	A service (e.g., a mortgage loan) often carries a material consequence (e.g., a house). A material purchase is also often made for its intangible value (e.g., living somewhere). Whether something is tangible or not is also relatively insignificant since the customer is looking for value and does not care if the offering is tangible or not.
Heterogeneity	Service varies from time to time, for example, a hotel stay.	The way in which value is perceived from one point to another also applies to products and does not thereby distinguish service from physical products. If heterogeneity is the definition of service, it is possible to view homogeneity as the definition of products. This implies that standardization is the goal of production; however, the actual goal, which applies to both products and service, should be personalization.
Inseparability	Production and consumption of service is indistinguishable.	The most important aspect to take into account is that the customer (the user) always takes part in production (of value). Everything else implies an “inward outward” paradigm. Maximizing the potential and assisting the customer in personally customizing the value creation should be the goal of every organization.
Perishability	Physical products are tangible while intellectual service cannot be stored.	Whether or not offerings disappear over time shifts the focus from the important issue, which is how long the generated value survives. Focus should lie on the latter. Warehousing and inventory are hardly a financial advantage to companies.

One of the most important values of a product (e.g., Apple’s) is its brand—specifically a service according to IHIP—and in this scenario, a service defines the price of a product. The topic concerning the difficulty in standardizing service (the “H” in IHIP) brings the concept of lending rates into discussion, which should be one of the more standardized offerings on a market, while the qualities of two equivalent cars sometimes vary considerably.

The aforementioned example illustrates the difficulty in defining service. In order to help organizations provide competitive offerings, a new outlook is required, which is an important theme in this book. As previously mentioned, the focal point is the value created by the customer in use. Therefore, the third and final service perspective, stipulates that the value-creating processes, often a combination of several goods and service providers, define the provided service. It is a value-creation perspective and focus lies on what facilitates value cocreated by the customer.

From the value-creation perspective, every product is a service, direct or indirect, since it creates opportunities for value-creating processes! A service refers to providing help to someone to achieve a certain goal; hence, every product can be regarded as a service. In the words of Clayton Christensen, a customer “hires” a good or service to do a job.⁵

A hotel stay is the direct service of providing a comfortable place to sleep and reside. A TV provides the indirect service of entertainment or information on what is happening in the world. A mechanical robot provides us with the indirect service of carrying out technical and difficult tasks in a cost-effective manner. The service itself is the value-creating process that appears on use.

Value-Creating Processes, Customer Experience, and Context

We consider value-creating processes to be the golden goal of service innovation. We would like to introduce additional key terms—value, customer experience, and context—needed to understand what value-creating processes really are.

Value refers to fulfilling the goals a customer wants to achieve in exchange for a reasonable amount of resources. Value is created when the goals are achieved via activities that take place between the customer and the company in some kind of interaction. The customer usually performs the majority of the actual activities, while the company supplies the resources. For example, the company produces the lawn mower but the customer puts it into use when cutting the grass.

Customer or user activities are a key part of the value-creating processes. A resource (washing machine, the detergent, and the knowledge of how to start it) has no value without customer activities; no clothes will be washed without a customer placing the clothes in the washing machine. Value can, however, be created without company participation if the customer, for instance, buys a used washing machine from another person; goes to a drycleaner; borrows the neighbors’ washing machine; or washes the clothes in the sink. In this case, value is not produced by firm activities, but solely by customers. Firms and organizations provide propositions for value creation but from how companies are marketing their products, one often gets the feeling that they perceive value as something that is produced in their manufacturing process.

Customer experience refers to the feelings and thoughts that occur in connection with, or after, the execution of activities. For instance, a coffee shop could also be described as a social icebreaker, a tool that enables social interaction and creates experiences both during the chat and afterwards. In the previously mentioned washing machine example, experience most likely occurs after the activities, when one is putting on newly washed clothes, feeling clean and invigorated. The value-creating processes are immediate and the experience is represented by the feelings that occur within the individual.

Another example used to further clarify what we mean by customer experience is gardening activities—grass cutting (an activity) is performed with the help of a lawn mower (a resource offered by an organization) driven by gasoline (another resource). Value is created when the lawn mower is running and being used, and afterwards, when sitting on the porch looking at the children running around on the newly mowed lawn. Feelings content follow the scent of newly cut grass and the look of a tended garden.

Customer experiences are very much governed by previous experiences and expectations. Recall how it felt when acquiring a new complex skill, for example, learning to drive, compared to how it feels after having acquired it. Experience is a double-edged sword in a development process—knowing how something works enables quick acquisition of knowledge, but the same knowledge will also limit creativity. This since we know how things are done! Even a review of a service by a trusted friend can frame how a service is perceived. The reason for these differences is that our brains work on a different script when we are learning something new compared with the routine behavior we display after we master something.

Finally, context or environment is the core component in the assessment of value and perception of how good or bad the resulting experience is. The previous coffee example illustrated the impact the environment has: a cup of coffee in Milan is perceived (and valued) differently from the same cup somewhere else. In a humorous experiment by The Washington Post, world-famous violinist Joshua Bell played incognito in the underground station L’Enfant Plaza in Washington, DC. It was filmed using hidden cameras and is now available on YouTube. In total, almost 1,100 people passed by as Bell was playing, yet only seven stopped to listen to him. Of these seven, only one recognized him. Bell was given $32 for his near 45-minute-long performance (excluding $20 from the one who recognized him). Compare this to the night before, when he made considerably more money playing the exact same repertoire in a sold-out and well-established concert hall.

Resources, Knowledge, and Skills

From this discussion, we can identify the main components of a service. The first is resources, which comprises offerings from companies and organizations, as well as knowledge and activities carried out by the customer. These resources typically need to be integrated in some fashion. Imagine hosting a party—resources are available in the form of a barbeque grill, furniture, music, beer, wine and crisps, and so on. One may know the best way to cook the food and arrange the party. As a result, value creation occurs, for example, enjoyment, when all these resources are integrated both during and after the party. The last part of the service regards the experiences that occur, which is a result of the value-creating process. Schematically creating a model that delineates the main components of a service may look like Figure 1.3.

Every value-creating process includes customers experience—sometimes significant and sometimes so minute that it is not given any thought. The experiences span the entire human emotional spectrum and may therefore range from well-being, joy, security, and relaxation to sadness, irritation, stress, and aggression.

Value-creation processes vary by industry. The financial industry is concerned with growth and security, the hotel and restaurant industry with customer treatment, and the industrial sector with competitiveness and productivity. The consumer markets’ value-creating processes often embody cost and time saving, learning, security, well-being, entertainment, experiences, socializing, or autonomy (being able to independently maintain order). In business markets, the processes are even more driven by cost and time savings, competitiveness, or production capacity, although this sector also contains experience elements. A brand may be perceived as more reliable, more efficient and service-oriented, more fun, or more socially conscious than the competitor.

Figure 1.3 Resources create opportunities for value creating processes that result in experiences

The value-creating processes require resources, including product offerings. Also, the ever-important but oft-forgotten knowledge and skills are required by the customer in order to use products and service the right way. Spaghetti that is boiled for half an hour does not taste too good, and a computer feature that is not used because the customer does not understand it is not very beneficial. Knowledge and abilities found among employees also represent important resources. A pint of beer often tastes better in combination with, for instance, peanuts or crisps, and a festival organizer relies on nearby hotel chains to provide an attractive overall experience.

Customers do not purchase goods and service because they are interested in ownership—rather, customers purchase products because they are prerequisites for value-creating processes. Service leads to service and goods lead to service. A customer does not go to the hospital to see a doctor, but, rather, to get well. A customer or student does not go to university to listen to a professor, but to get relevant education for an interesting job. Getting well is a service that most likely entails experiences of health, and getting an interesting job entails experiences in the form of self-esteem, meaningfulness, and skillsets.

The Book’s Terms, Concepts, and Content

As noted earlier, the word customer is used as an umbrella term for every potentially innovation user. A customer could be a company, consumer, museum visitor, parent, and so on. Another commonly used term is offering or products, which refers to the goods and service offered on a market by a company or organization. These are often combined by the customer with other goods and service—a good, for example, a mobile phone, is not used in isolation and does not generate any value until it is used together with the SIM card service, which enables connecting to an operator, a network, and so on.

There is an extensive research literature on how companies can base their strategies on the perspectives of the customers and focus on value-creating processes. The key realization in this chapter is fairly simple and can be summarized with Professor Theodore Levitt’s famous statement:

People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!⁶

Companies usually agree with this sentiment; yet markets are still segmented into the type of drill and price, and the market share assessment is based on drills but not on holes! Comparisons between competitors are based on drills and new functions are developed based on what is technically possible but not on demand, in the belief that it leads to better prices and larger market shares. It is indeed easy to improve the products in a way that leads to better technical performance, although it is often irrelevant to the customers. Segmenting markets according to the type of customer is not much better either. We can speak in terms of business customers consisting of small, average, and large companies, or pigeonhole consumers into age, sex, or lifestyle. Companies then try to identify customer needs in said segments and try to develop products that meet those needs.

The market structure, from the customer’s perspective, is very simple: They just need to get things done, just as Theodore Levitt stated. Taking his position even further, however, proves that even he was not entirely correct: people probably do not want a hole either—perhaps they just want to put a painting on the wall that they can enjoy! When people need to get a job done, they will find one or more products that either in isolation or integration is able to meet this need.

A company’s objective is therefore to understand what jobs the customer needs to perform and reflect on what part the firm plays in order to make life easier for the customer. This is specifically the objective if working at a company or in a public sector organization: the way in which you may support the customer’s process.

The authors believe that all products are service. In the words of Dr. Christensen, consumers hire products to get a job done. If you cannot fully accept this view that all products are service, you might still acknowledge that this approach may be “close enough.” In an economy that is 70 to 80 percent service even by traditional definition, with many of the remaining goods having a large service component, is it not far more logical to focus on innovation from the service perspective than the traditional way? If nothing else, it can provide a fresh perspective on how your firm develops its offerings.

In the following sections we aim to cover some of the underlying principles in this book.

Innovation in Cocreated Service

Most of the models and processes for new product development are based on production of goods. Similarly, most of the research on theories and models of “new product development” in leading academic journals of marketing, management, and innovation focuses on innovation of goods.⁷ Service is just a special case that these product based models are applied to and that may not always work well.

This book focuses on the principles, theories, and practices of service innovation. In the discussion all products are service, we have pointed out that (1) customers hire service and goods to perform a job, (2) users cocreate service when performing the job, and (3) the experience of the service is a key part of the value-creating process. Research on service innovation must therefore identify the customer job, focus on the process of value cocreation, and achieve an understanding of the customer experience.

Service innovation and service entrepreneurship are a huge force in a world economy dominated by service. How have companies such as YouTube, Facebook, Instagram, Snapchat, Skype, and Spotify become worth several billion dollars within only a few years? They have achieved valuations that took traditional goods-based companies such as General Electric, Philips, IBM, and Ford decades to obtain.⁸

The goal of this book is to advance the understanding of service innovation. Key questions that this book addresses include:

• How is new service created?

• Are there different types of service innovations?

• How does service innovation differ from traditional new product development processes based on goods?

• How can organizations develop better service in the future?

Answers to these questions constitute the body of knowledge of this book, which outlines how to work with service innovation in your company or organization in a structured manner.

Service Innovation—The Value Experienced by the Customer

Service innovation refers to a new value experienced by a user (i.e., a customer, patient, user, client, etc.) via a new or improved process in which the user is a cocreator. Online and social service such as Spotify and Facebook have increased the availability of music anywhere at any time, the opportunities for communication with friends and associates, and the ease of acquiring new knowledge. In hindsight, it is not surprising that these three service firms have grown into very large enterprises in a short time. Service innovations have focused on improving life for users by offering faster, better and, in some cases, more environmentally friendly ways of transporting groceries from the store to one’s home, running bank errands, cleaning the house, or doing gardening activities.

Service innovation may consist of new ways of coordinating value creation. For some jobs, customers use resources from multiple companies in order to meet their needs. Taking a holiday trip, for instance, may require contacting: travel agencies, hotels, transport companies, stores, restaurants, and so on. Helping a user coordinate these choices makes the decisions easier and likely produces a more enjoyable experience. There have been a number of service innovations from companies collaborating with other actors in establishing systems to solve customers’ problems and simplify the process for them.

Similarly, service providers may innovate by realizing that the scarcest resource of many customers is time. Some kitchen renovation companies now schedule remodeling to be completed while the customer is on a family holiday. Some airports allow car owners to hand in their cars at check-in for cleaning, servicing, or both, which are completed by the time the owner returns. Such solutions emphasizing convenience require collaboration in order to jointly offer the new value creating service innovation. Such collaboration or partnering between service providers is a recurrent theme of service innovation.

Another example of service innovation is innovation in the cocreation experience—innovation seeking to create unique or enjoyable experiences. As noted earlier, consumers pay to jump of bridges (bungee), fly in balloons, and stay in very rustic accommodations. Additional examples of this type of service innovation of experience are cooking a meal with star chefs. The cooking participant pays far more for the privilege of assisting with the meal preparation than the cost of sipping wine in the restaurant awaiting the same meal to be served.

Even branding can be considered a service innovation: Customers may feel trendier and more at ease doing boring spreadsheet manipulations in a high-end coffee shop if they are using an Apple computer than on a Lenovo or Dell. “Cult brands” such as Nike, Apple, Adidas, Harley Davidson, Ikea, and MINI affect the user experience and even the self-identity of the loyal customers.

Service innovations do not take place only in the consumer or B2C organizations—B2B firms are also working on service innovation. The abbreviation B2C is short for business to consumer and consequently B2B indicates business to business. Coping with foreign competition and “commoditization” of goods forces a focus on service. Returning to a key concept from the Introduction: customers do not want to own 100 computers in a computing center; they want to use a specified amount of computing power. B2B firms focus on service innovation to assist the customer in cost savings and sales increases.

Another example of innovation in cocreation or coproduction is the effort by health care providers to promote more patient involvement in their treatment. Social innovations—that is, innovations in the nonprofit sector with the purpose of helping others—also necessarily focus on the experience of clients being served.

Industrial companies speak in terms of delivering solutions that range from overtaking factory operations and maintaining intermediate warehouses to performing preventive maintenance operations. Some industrial companies have taken this concept so far that the term “servitization,” “service infusion” or “solution selling”—a process we will discuss in detail in Chapter 6—has appeared on the agenda.

Service innovation involves far more actors than just the organization’s formal development or product management staff. Service innovation often happens outside the research and development (R&D) lab. Organizational leaders, marketers, product owners, salespeople, frontline staff, and logistics—almost every resource in an organization works with service innovation. Actors external to the organization, such as designers, start-up incubators, company advisers, consulting companies, and definitely customers, may all be involved in service innovation.

The ideas and processes discussed in this book should be useful to all of the participants and stakeholders in service innovation. We believe that many individuals currently involved in service innovation will benefit from this discussion of practices, procedures, and theories of service innovation.

Identifying Customer Needs

Service innovation begins by identifying user needs. This shift in focus from what is technically possible to what the customer needs leads to a number of consequences in terms of how a development project in an organization is carried out. Development may move from the laboratory to where the customer operates. Multiple departments—again including R&D, customer service, business development, marketing, and logistics—are involved in service innovation. Other companies that can contribute to value creation for the customer may be asked to participate. In this “outside-in” or “open” approach, the customer and his or her activities serve as the starting point for service innovation.

What job does the customer want to be done? In a service economy, the focus of innovation should not be to invent a new mousetrap, but on developing the most effective procedure to control rodents in a household; not on adding chrome to a car, but on more efficient and safer transportation solutions for the customer. This suggests a total-solution or service innovation approach to making a company more competitive.

The company Tetra Pak actually refers to a type of customer efficiency improvement that could be achieved by removing a part of the customers’ hardware to allow them to focus more directly on the production process. This implies a solution that perhaps does not consist of increased machinery investments, but of what actually takes place in the value-creating processes.

Dr. Philip Kotler established planning and thought processes for launching new products. He noted, as shown in the introduction to this chapter, already in 1977 that:

The importance of physical products lies not so much in owning them as obtaining the service they render.⁹

Service innovation involves developing value-creating processes, improving value-creating processes, or both. So, while product innovation involves developing a new offering, typically a physical good, service innovation involves developing resources that, when being used, render the customer value creation. The difference in terms of semantics might not sound as particularly large, but as discussed at length in the Introduction, requires a new mindset about service and correspondingly about service innovation.

Many companies now face the challenge of constant innovation in order to compete in the marketplace. They may be hindered by using strategies, processes, methods, and guidelines developed for new product development of goods. This book is built on a body of knowledge acquired from working with companies involved in service innovation and in research on the courses of action that companies around the world have used for successful service innovation.

Active Customers, Innovative Customers

It is essential to view users and customers as actively involved in the coproduction or cocreation of a service. Viewing the customer as an active partner leads to a number of new service innovation opportunities for companies and organizations. Making the service offered by an organization transparent and sufficiently compatible with other products and service will allow the customer to customize the organization’s offers to further meet specific needs. For example, Coca-Cola™ has developed new vending machines that allow users to customize flavor combinations in their soft drinks. Coca-Cola has also obtained ideas for new soft drinks by observing the combinations that users create in those customizable vending machines.

Consider Apple’s products: customers customize their iPhone or iPad experience with their selection of apps and may even develop their own apps. A customer is motivated to buy other Apple products in part to share the customization and apps already installed in the Apple product owned. Another example is clothing articles where the customers may choose colors to match their personal style and combine them with other articles of clothing they already own, happening at stores like Uniqlo, which is popular with young consumers in Europe and the United States.

Value creation is much more than a good or predetermined service produced in advance. Companies clearly must communicate and work together with their customers during the development of new service offerings.

Cases of Service Innovation

The purpose of this book is to help organizations succeed in service innovation. It is intended to provide you with tools for success in service innovation by contributing with the following:

• Descriptions of different types of service innovations and their effects.

• Examples of successful and unsuccessful service innovations.

• Identification of critical mechanisms in the innovation process that organizations have to manage.

• Summaries of important research on service innovation.

A service innovation denotes new value-creating processes that occur on the customer’s behalf upon use (or shortly thereafter), which result in enhanced experiences. This is a very important foundational concept since it means that companies and organizations are able to create service innovations in many more ways than by simply launching a new type of offering. Innovation can mean new, improved, or simply different.

An interesting example of innovation in an old, and actually declining, business is the free tabloid newspapers Metro, distributed throughout Sweden, and RedEye, in Chicago, Illinois—their service innovation breaks the oft-cited prerequisites for successful product development, as by most measures it would be hard to describe the products as new, better, or targeting a growing market:

• Newspapers have existed for more than 200 years, in standard or tabloid format.

• Neither Metro nor RedEye was the first to conceive the idea of handing out a newspaper at central public transportation hubs (The Swiss newspaper 20 minuten was ahead of Metro in Europe and RedEye was created a decade after Metro).

• Nor was the business model of either publication based on launching a newspaper that was “better” or higher in perceived quality than others (Swedish papers Dagens Nyheter and Svenska Dagbladet rate far higher than Metro in terms of quality, as do the two existing Chicago daily newspapers compared to RedEye).

So what did these two free newspapers do well? These publications provide customers with important service innovations and experiences:

• They are free newspapers, providing daily news to those who do not subscribe to other papers and an alternative for those who do.

• The newspapers are small and easy to read in cramped spaces on mass transit rides.

• The newspapers offer the value-creating process of reading where one would otherwise just be sitting down waiting at a transit spot or riding a train or bus—offering reading as a means of passing time.

• Advertisements and subscriptions are generally a newspaper’s main revenue source. The problem with subscriptions is that the distribution costs are enormous. Handing out newspapers at central locations such as subway entrances for free lowers the distribution cost dramatically while simultaneously increasing the number of readers and advertising revenue.

(A former executive of The Tribune, who was involved in the RedEye launch, told one of the authors that the “paper became profitable the day we stopped charging for it.”)

Another interesting innovation example from a nonglamorous industry is the company Off2off, which received the 2013 award for best service innovation in Sweden. Off2off helps large organizations manage and distribute functional surpluses, taking care of things that are too good to throw away. Off2off collects office furniture and supplies to sell to other offices. Off2off tries to match access, need, and demand by acquiring assets that are no longer needed in the public sector (e.g., visitor chairs at a municipal administration) and selling them to other public administrations where a need exists (e.g., county councils). The value-creating processes that occur do not just lead to effectiveness for both parties (one party purchases products at a low price and the other gets paid for something that would otherwise be thrown away or stored), but also to ecofriendly values in terms of reduced consumption and recycling, energy emissions upon transportation, and material consumption. Off2off also generates value in the form of reduced purchase needs and more efficient delivery (since the product an organization wants to buy has already been produced). The main problem with the innovation is that it is a process type innovation rather than a brand innovation; it makes the process of reuse easier. Process innovations are generally easy to copy.

Metro, RedEye, and Off2off may be regarded as radical or possibly disruptive innovations (more information on this topic, as well as other types of innovations, is available in Chapter 2). The reason why most people seldom know of several different service innovations is because the innovations are seldom radical but, rather, incremental, that is, they consist of smaller changes in a system, for example, combining existing offerings in a new way. Incremental improvements seem faster and easier in service innovation. The cumulative effect of multiple incremental innovations can be radical.

One reason for the incremental nature of service innovation is that it takes time to implement or spread the innovations. For instance, Spotify’s founders describe how they, for several years, were working on solving the copyright issue with record companies. If a service innovation is too radical, it may cause too great an increase in adoption time and the customers may perceive the innovation itself as too complex. Since the focus of service innovation lies on new value-creating processes, it often becomes counterproductive and problematic if the innovation leads to excessive transitional demand.

Service Innovation—A New Logic

When people talk of recent innovations, they generally focus on “goods” such as the Apple iPad or iPhone, and do not necessarily focus on the integration with other services that actually make the Apple products special. One might wonder why companies like Snapchat, Ikea, Skype, or H&M are less frequently mentioned when talking about innovation, as they are also wonderfully successful and are a part of our lives. Somehow pure service innovation does not seem to attract as much attention.

Ikea’s service innovation is based on offering designer furniture at a low price. It is able to do this by letting the customer prepare his or her purchase by browsing their catalog and website, after which the customer visits the store and acts as an employee at the warehouse (fetching the product), as a carrier (bringing the product home), and also as a fitter (assembling the product). Skype is a service innovation that enables lowcost, and sometimes even free, calls all over the world without even having to know a telephone number. H&M has invented a model that entails low production costs and recognized design. The service innovations of all companies mentioned are based on the same concept: They are built on a profound understanding of what the customer wants, for example, cost saving, design, availability, time saving, and user-friendliness.

Traditional innovation processes start inside a company or organization. It consists of a new product-development process framework and employees and resources committed to innovation. We refer to this as an inside-out approach or “technology push.” There is no guarantee that an inside-out or technology push innovation becomes a market success. According to the so-called performance indicator “idea attrition rate,” only one in 15 launched ideas ever become financial successes for a company. Steve Jobs (Apple’s former chief executive officer) once said: “You’ve got to start with the customer experience and work back to the technology—not the other way round.”¹⁰ In the case of development processes, however, it is easy to become overly concerned with technical possibilities and consequently forget the value-creating process the user is interested in given the context. Steve Jobs is sometimes mentioned as an excuse for not involving the customers. Apple’s success over the years is proof that this strategy can work—but the process requires the customer understanding exhibited by Steve Jobs. Often a company acquires knowledge of the customers’ value-creating processes by collaborating with them.

A service innovation process is characterized by being organized as an outside-in approach, that is, the reverse logic. The differences between the most critical components of the production and service innovation process are shown in Table 1.3.

As shown in the table, ideas of new value-creating processes are the backbone of service innovations, in contrast to new product-development processes of goods, which often refer to new technology or a new way of using resources. Key assets in terms of product innovation are, as a consequence of the previously mentioned components, often patents, while the equivalent components for service innovations instead pertain to knowledge of needs that have not yet been met. While patents lead to secrecy and closed innovation processes, the service innovation processes are more open. This is required in order to eventually be able to invite customers and other requisite partners to allow the service innovation to become a value-creating process.

Table 1.3 Differences between goods innovation and service innovation

Process	Goods innovation	Service innovation
Initiation of the innovation process	New usage of an existing resource, new technology	An idea of a value-generating process that is not realized (either at all or well enough)
Key asset	Patent	Knowledge of latent needs (that are not met)
Degree of transparency in the development processes	Closed	Open
View of need	Needs are noncomplex. They can be created via campaigns.	Needs are complex and difficult to communicate. They are often latent.
View of resources	Resources primarily consist of tangible assets that the organization has control over	Resources are primarily represented by knowledge and human ability both in and outside the organization
Participants in the development process	Primarily the R&D and cross-functional teams	Partners and customers. Participants from different functions across the organization
Marketing	Persuasion, push	Dialog, pull
End result	New product or service	New value-generating process (which is a service)

The Remainder of This Book

This book is based on experiences and knowledge gathered from scientific studies carried out both by our colleagues and us. For readability, we have chosen not to use inline references as is customary in scientific reports or journal articles—instead we have included them at the end of each chapter. References to direct quotes, however, are denoted with a footnote. We believe that this increases readability and our understanding is that those interested in this book are primarily looking for knowledge related to the results of different studies and not so much in how a certain study was carried out.

Several published management books have been based solely on single cases or experiences from a particular managerial position. Our book distinguishes itself by basing its content on experiences and knowledge from numerous projects run by market-leading companies, both in Sweden and the United States.

The book is structured as follows:

• Chapter 1 is an introduction to the concept of service.

• Chapter 2 presents a background on innovation in service and introduces a new model for service innovation.

• Chapter 3 outlines the service innovation-driven organization and describes mindsets and methods needed in organizations that are trying to understand value creation.

• Chapter 4 describes the service innovation processes and their various phases.

• Chapter 5 outlines different ways that customers can participate in developing service innovations; it also discusses lead users and other methods used for customer involvement.

• Chapter 6 focuses on what is popularly referred to as servitization or service infusion and outlines how goods firms may follow a service logic.

• Chapter 7, which is the final chapter, summarizes the book and re-emphasizes what we believe are key activities in successful service innovation.

Action questions are listed at the end of each chapter to encourage the reader to reflect on various issues connected to the business they work in (or wish to work in). We believe the connection between theory and practice is key to understanding what service innovation is and how we can create organizations that develop service innovations of the future. The key ingredient in these organizations consists of individuals who are creative and have the knowledge and skills to think about service.

Action questions for the service innovator:

• What service(s) does your organization offer?

• What service innovations is your organization currently working on?

• What “jobs” do your customers use your offerings for in order to create value? Or what is your organization’s role in the customer value-creation process?

• In your opinion, what values are created (to the customer or user) as a result of the service offered by your organization?

Sources of inspiration for this chapter include two of the most influential studies in the field:

Vargo, S.L., and R.F. Lusch. 2004. “Evolving to a New Dominant Logic for Marketing.” Journal of Marketing 68, no. 1, pp. 1–17.

Grönroos, C., and P. Voima. 2013. “Critical Service Logic: Making Sense of Value Creation and Co-creation.” Journal of the Academy of Marketing Science 41, no. 2, pp. 133–50.

The following are important sources of inspiration in terms of subject matter articles related to the actual development process of value creation:

Christensen, C.M., S.D. Anthony, G. Berstell, and D. Nitterhouse. 2007. “Finding the Right Job for Your Product.” MIT Sloan Management Review 48, no. 3, pp. 38–49.

Meyer, C., and S. Andre. 2007. “Understanding Customer Experience.” Harvard Business Review 85, no. 2, pp. 116–26.

Kim, W.C., and R. Mauborgne. 2004. “Value Innovation: The Strategic Logic of High Growth.” Harvard Business Review 82, no. 7–8, pp. 172–80.

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¹ Kotler, P. 1977. Marketing Management: Analysis, Planning, Implementation, and Control, 8. 3rd ed. Upper Saddle River, NJ: Prentice Hall. Emphasis added.

² Vargo, S.L., and R.F. Lusch. January 2004. “Evolving to a New Dominant Logic for Marketing.” Journal of Marketing 68, no. 1, pp. 1–17; Lusch, R.F., and S.L. Vargo. 2014. The Service-dominant Logic of Marketing: Dialog, Debate, and Directions. USA: Routledge.

³ CIA (Central Intelligence Agency). n.d. The World Factbook. www.cia.gov/library/publications/the-world-factbook/fields/2012.html

⁴ Tidd, J., and F. Hull. 2003. Service Innovation: Organizational Responses to Technological Opportunities & Market Imperatives, ix. World Scientific Publishing Company.

⁵ Christensen, C.M., S.D. Anthony, G. Berstell, and D. Nitterhouse. 2007. “Finding the Right Job for Your Product.” MIT Sloan Management Review 48, no. 3, pp. 38–49.

⁶ Christensen, C.M., S. Cook, and T. Hall. 2005. “Marketing Malpractice.” Harvard Business Review 83, no. 12, pp. 74–83.

⁷ Page, A.L., and G.R. Schirr. 2008. “Growth and Development of a Body of Knowledge: 16 Years of New Product Development Research, 1989–2004.” Journal of Product Innovation Management 25, no. 3, pp. 233–48.

⁸ This book uses the terms “company” and “organization” interchangeably. Most of the time, the content is applicable to both companies and nonprofit or governmental organizations. In Chapter 6, we refer specifically to companies and therefore use that term exclusively.

⁹ Kotler, P. 1977. Marketing Management: Analysis, Planning, Implementation, and Control, 8. 3rd ed. Upper Saddle River, NJ: Prentice Hall. Emphasis added.

¹⁰ Kristensson, P. 2012. New Forms of Support for Open and User-Driven Innovation Management, 36. Pro Inno Europe.