Service Innovation: A Review of the Literature

Abstract

Services are fast overtaking manufacturing to form a dominant proportion of the world economy. Service innovation is increasingly seen as a vector of sustainable growth and competitive advantage at the firm-, industry- and economy-level. Innovation started evolving as a key discipline of research over the twentieth century. Initially, innovation research was predominantly focused on science and technology and the new product development approach for commercializing ideas and inventions mainly in the manufacturing industry. With the increasing growth of services in today’s organizations and economy, the importance of understanding service innovation concepts and practices has been on the rise. Over the last two decades, researchers have hence been directing attention to innovation in the context of services. Today, service innovation has evolved into a vast field encompassing the study of intangible processes and dynamic interactions among technological and human systems that lead to managerial and organizational change in services. The literature on service innovation is expanding into a diverse and cross-disciplinary body of knowledge scattered across economics, marketing, organizational science, and management perspectives. The purpose of this chapter is to cut through this complexity and diversity in the streams of extant service innovation literature, and provide a holistic overview of the literature in this rapidly growing field. Organized across three broad themes: Overview of Service Innovation, The Dynamic and Systemic Process of Service Innovation, and Management of Service Innovation; this chapter presents a consolidated guide to the service innovation concepts and practices.

Full text

Service Innovation: A Review of the
Literature
Krithika Randhawa and Moira Scerri
Abstract Services are fast overtaking manufacturing to form a dominant propor-
tion of the world economy. Service innovation is increasingly seen as a vector of
sustainable growth and competitive advantage at the firm-, industry- and economy-
level. Innovation started evolving as a key discipline of research over the twentieth
century. Initially, innovation research was predominantly focused on science and
technology and the new product development approach for commercializing ideas
and inventions mainly in the manufacturing industry. With the increasing growth of
services in today’s organizations and economy, the importance of understanding
service innovation concepts and practices has been on the rise. Over the last two
decades, researchers have hence been directing attention to innovation in the
context of services. Today, service innovation has evolved into a vast field
encompassing the study of intangible processes and dynamic interactions among
technological and human systems that lead to managerial and organizational change
in services. The literature on service innovation is expanding into a diverse and
cross-disciplinary body of knowledge scattered across economics, marketing,
organizational science, and management perspectives. The purpose of this chapter
is to cut through this complexity and diversity in the streams of extant service
innovation literature, and provide a holistic overview of the literature in this rapidly
growing field. Organized across three broad themes: Overview of Service Inno-
vation, The Dynamic and Systemic Process of Service Innovation, and Manage-
ment of Service Innovation; this chapter presents a consolidated guide to the service
innovation concepts and practices.
Keywords Service innovation Dynamic and systemic process Value co-creation 
Servitization New service delivery Service value networks Innovation diffusion 
Dynamic capabilities
K. Randhawa (&)M. Scerri
University of Technology Sydney, UTS Business School, Ultimo, NSW 2007, Australia
e-mail: krithika.randhawa@uts.edu.au
M. Scerri
e-mail: moira.scerri@student.uts.edu.au
©Springer-Verlag London 2015
R. Agarwal et al. (eds.), The Handbook of Service Innovation,
DOI 10.1007/978-1-4471-6590-3_2
27

1 Background
Services are increasingly dominating the world economy, contributing over 70 % of
employment in OECD countries and 58 % of worldwide gross national product
(Baltacioglu et al. 2007). The move from agriculture- and manufacturing-based to
service- and knowledge-based economies has been pronounced in nations, and all
future forecasts show no signs of this trend abating (McCredie et al. 2010).
Activities of successful companies also reflect this shift from manufacturing to
services. Examples include International Business Machines (IBM), General
Electric, and Hewlett Packard all of which have transformed themselves from being
predominantly manufacturing organizations to service-based organizations (Mills
and Snyder 2010). Historically, the concept of value has been associated with
economic productivity gained through the production and delivery of tangible
goods. The transition toward a service-based economy, however, calls for a revised
understanding of value creation within organizations (Pitelis 2009).
Value in service-based organizations is created through the integration of intan-
gible resources and capabilities such as knowledge, competences, cognitive-centric
workforce, and customer collaboration (Vargo and Lusch 2008; Michel et al. 2008;
Lusch et al. 2009; Agarwal and Selen 2009,2014). Service employees are increas-
ingly required to understand complex ideas and process large volumes of information
in generating novel solutions to customer priorities (Mills and Snyder 2010), and this
calls for interaction with customers and other knowledge workers across a network of
stakeholders (Leonard-Barton 1995; Sampson and Froehle 2006; Chesbrough 2006,
2011; Moeller et al. 2008). This process of value co-creation provides organizations
with an enhanced opportunity and ability to deliver elevated service offerings
resulting in service innovation (Agarwal and Selen 2011a).
Innovation is seen as a persuasive avenue for organizations to create value and
competitive advantage (Pitelis 2009). Widely recognized as an engine of economic
and social progress, innovation started evolving as a key discipline of research over
the twentieth century. Initially, innovation was a topic of interest among economics
scholars and researchers interested in technological change; therefore early inno-
vation research predominantly focused on science and technology and its link with
economic productivity, and the new product development approach for commer-
cialising ideas and inventions (Schumpeter 1942; Griliches 1998; Cainelli et al.
2004). The common theme of these bodies of innovation research is their focus on
the manufacturing sector. The study of technical change in the service sector was
largely neglected as services were viewed as low technology users (Cainelli et al.
2004; Ferreira Lopes and Godinho 2005).
With the growth of services in organizations and economy, attention has been
focussed on innovation in the context of services over the last two decades (Chan
et al. 1998; den Hertog 2000; Castellaci 2008; Miles 1993,2005; Spohrer and
Maglio 2008). Today, service innovation is evolving into a vast field encompassing
the study of dynamic interactions among technological and human systems driving
managerial and organizational change in services. The literature on service
28 K. Randhawa and M. Scerri

innovation is burgeoning into a diverse and multidisciplinary body of knowledge
spanning economics, marketing, organizational science, and management per-
spectives (Rubalcaba et al. 2012; Ostrom et al. 2010; Miles 2005,2010).
With this backdrop, the purpose of this chapter is to cut through the complexity
and diversity in the streams of extant service innovation literature and provide a
holistic overview of the literature in this rapidly expanding field. This chapter aims
to present a consolidated guide to service innovation concepts and practices, and is
organized across three broad themes: Overview of Service Innovation; The
Dynamic and Systemic Process of Service Innovation; and Management of Service
Innovation.
2 Service Innovation: An Overview
2.1 Service Innovation and Its Characteristics
The service sector encompasses a wide variety of activities and markets ranging
from consumer services such as hotels and banks to business services such as IT
and legal, and large-scale public sector services such as health and education. The
usage of technology is equally diverse; personal services like hairdressing involve
basic technologies, while financial services are more knowledge-intensive and use
advanced information technologies. As a result of this diversity, innovation in
services involves transformation in a variety of aspects ranging from how the
service is designed and developed to how it is delivered and managed (Miles 2005,
2010; Trott 2012). Service innovation can be said to be an amalgamation of product
innovation, that is, “the introduction of a new product, or a significant qualitative
change in an existing product,”and process innovation, that is, “the introduction of
a new process for making or delivering goods and services”(Greenhalgh and
Rogers 2007, p. 4). Innovation in services is an interplay of service concepts,
service delivery systems, client interfaces, and technologies (den Hertog 2000), and
often entails new ways in which customers view and use the service. Agarwal and
Selen (2011a, p. 1172) conceptualize service innovation as an “elevated service
offering”that is made up of “new client interface/customer encounter; new service
delivery system; new organizational architecture or marketing proposition; and/or
improvements in productivity and performance through human resource manage-
ment”, further highlighting its multidimensional aspects.
Innovation in services is different from innovation in manufacturing essentially
because services are characterized by intangibility, heterogeneity, perishability,
increased customer interactivity, and simultaneity between production and con-
sumption (Sampson 2001,2007; Sampson and Spring 2012). The intangibility of
services makes service innovation relatively more difficult to make inimitable
through patent protection (Trott 2012; Miles 2005) and to measure as its performance
is mostly evaluated on the basis of user perception (Bessant and Tidd 2007). As a
result, a new service innovation is generally tested in the actual market rather than in
Service Innovation: A Review of the Literature 29

R&D laboratories (Easingwood 1986; Tidd and Hull 2003). The heterogeneity in
services means that innovative activities need to be tailored to different service
contexts calling for a more dynamic approach to organizing innovation in services as
compared to manufacturing. Some service firms such as fast food restaurants have
used innovations around application of technology at the customer interface to reduce
heterogeneity and achieve standardization of processes. As services are perishable,
that is, they cannot be stored and resold as tangible products can, service innovation
also entails technology and processes to better manage demand and plan capacity
(Trott 2012). Research has shown that both heterogeneity and perishability of ser-
vices have a positive impact on service innovation (Jaw et al. 2010).
Services are produced, delivered, and consumed simultaneously making it harder
to distinguish between service product innovation (what is produced, delivered, and
consumed), and service process innovation (how it is produced, delivered, and
consumed) (Bessant and Tidd 2007; Trott 2012). The service innovation process
involves a high degree of interactivity between the service supplier and customer
(Zeithaml and Bitner 2003). This implies that service innovations can focus as much
on these interactions as on the actual service product or process, and this is termed as
“servuction”in the service innovation literature (Miles 2005). There is a scope to
innovate across a variety of service interactions ranging from those that involve the
exchange of intangibles like information as in education and consultancy services, to
tangible elements as in transportation and logistics services. The customer inputs
into the simultaneous creation of services, referred to as Customer–Supplier Duality
(Sampson 2001; Sampson and Froehle 2006) makes service innovation complex and
multidimensional in nature (Goldstein et al. 2002; Voss and Zomerdijk 2007;
Agarwal and Selen 2011a). For example, the extent of customer interaction in the
service innovation process results in a high degree of customization in services that
in turn increase their heterogeneity. The intangible nature of services, relative to
products, makes these open and collaborative customer–supplier exchanges even
more challenging to manage. The emerging Service Science research (Spohrer and
Maglio 2008; Gruhl et al. 2007;Hefley and Murphy 2008) focuses on these net-
worked and interactive aspects of innovation in services by studying service sys-
tems-value-co-creation configurations of people, technology, shared information
and value propositions—as the basis for systematic service innovation. The service-
dominant (S-D) logic (Vargo and Lusch 2004,2008,2011; Vargo et al. 2008),
premised on the notions of service centricity and value co-creation among an
interrelated network of suppliers and customers, is viewed as a useful perspective in
understanding service innovation across service systems (Chandler and Wieland
2010; Gummesson 2008; Gummesson and Mele 2010; Vargo et al. 2012).
Innovation in manufacturing is more product and technology-oriented and relies
on technical expertise and professional capabilities, while the role of cultural
capabilities (Ettlie and Rosenthal 2012) and human capital capabilities such as
person-to-person skills (Johne and Storey 1988) and customer interface and com-
munication skills (Baines et al. 2010) is more significant in service innovation.
Also, manufacturing innovation tends to involve a high degree of expenditure on
R&D activities around product and technology (Artz et al. 2010; Enkel et al. 2009).
30 K. Randhawa and M. Scerri

On the other hand, such R&D expenditure is relatively lesser when innovating
services (Ettlie and Rosenthal 2011). While service innovation is no doubt distinct
from innovation in manufacturing, the service sector has also applied manufac-
turing practices in undertaking innovation. Many years ago, Levitt (1972) called for
the “industrialization”of service through the adoption of standardized, technology-
intensive processes as found in manufacturing. The “modularization”of services,
that is, the breaking down of services into various modules, for example, has
allowed mass customization to go hand-in-hand with standardization by recom-
bining service modules in many ways (Miles 2005; Seite et al. 2010; Tuunanen and
Cassab 2011). This has resulted in a variety of service innovations as seen in fast
food chains and call centers emanating from productization of services. At the same
time, the “servitization”of manufacturing, that is, manufacturers offering services to
customers, is also on the rise adding a new dimension to service innovation
(Santamaria et al. 2012).
Technology plays a key role in enabling service innovations; for example
refrigeration technology has driven innovations in food retail as has genetic engi-
neering in biotechnology and medical services (Miles 2005). However, among all
technologies, information technology (IT) has been said to be the most significant
enabler of service innovation. Barras (1986,1990) perceives the IT revolution to be
the core of the industrialization of services with the application of IT enabling mass
improvements in quality and efficiency in services. Miles (2005) further likens the
pervasiveness of IT-based service innovation to the power of energy-based tech-
nology such as steam engine or electric power to manufacturing innovation. His-
torically, however, the service sector has been slow to adopt IT and other technology
as compared to manufacturing. This may be attributed to the greater heterogeneity
and dynamism in services as a result of which service innovation cannot be orga-
nized as a standardized R&D model as in manufacturing (Trott 2012; Ozyilmaz and
Berg 2009). A generic technology needs to be reconfigured and tailored before
applying for innovation across the service sector, which is particularly challenging
given the intangible and dynamic nature of services. This has led to the rise of the
knowledge-intensive business services (KIBS) in recent years that provide specialist
technical services to enterprises to ensure they are equipped to keep up with the rapid
growth of IT and other technology (den Hertog 2000; Shunzhong 2009). Despite the
increasing role of technology in service innovation, the extant literature has largely
overlooked addressing this aspect (Menor et al. 2002; Boone 2000).
2.2 Classification of Service Innovation
The current understanding of service innovation has evolved through diverse dis-
ciplines such as services marketing (Grönroos 2007; Lovelock and Wirtz 2007),
service management (Heskett et al. 1997; Quinn et al. 1994) and operations man-
agement (Cook et al. 1999; Johnston and Clark 2005). The varied foci of these
disciplines have led to different dimensions of service innovation including user
Service Innovation: A Review of the Literature 31

involvement and collaboration (Magnusson 2003; Matthing et al. 2004), technol-
ogy- and service-oriented innovation styles (Gallouj and Savona 2009), bundling
service innovations in manufacturing (Normann 2002), service-logic innovation
(Lusch and Nambisan 2012; Vargo et al. 2008), and service design model inno-
vation (Teixeira et al. 2012). The four key dimensions of service innovation
identified by den Hertog (2000)—Service Concept, Client Interface, Service
Delivery System and Technological options—provides a useful frame work to
classify different types of service innovation. The concept of creating customer
experience or service solution forming a core dimension of service innovation is
widely discussed in the literature (den Hertog et al. 2010; Goldstein et al. 2002;
Grönroos 2007). Accordingly, studies have classified service innovation on the
basis of their extent of standardization versus specialization to specific customers
(Hipp et al. 2000,2003). Schmenner’s(1986) characterization of services on the
basis of degree of labour intensity versus degree of customer interaction or cus-
tomization also provides a basis for identifying the dimensions for innovation in
services. In similar vein, Johnston and Clark’s(2005) classification of service
processes on the basis of volume versus variety also provides a framework
for understanding the scope of service innovation. For example, innovation in
high-volume, low-variety services such as fast-food restaurants tends to focus on
efficiency and standardization. On the other hand, innovation in low-volume, high-
variety, capability-based services such as management consultancies tends to
revolve around client-based customization and specialization (Trott 2012).
Service innovation can also be classified based on the type of service that is
innovated—physical services, human services, and information services (Miles
1993). Innovation in physical services such as transportation and restaurants
involve physical transformation often through the adoption of new technologies, for
example, radio-frequency identification (RFID) and refrigeration equipment.
Innovation in human services takes the form of improvements in administrative
data processing in public sector services and customized IT systems in medical
services. Information services are mainly characterised by innovations in IT such as
online banking in financial services and interactive digital media in entertainment
(Miles 2005). Innovation in services is often differentiated based on whether
changes occur in what is offered, that is, product innovation, or how these offerings
are produced and delivered, that is, process innovation. In addition, the type of
service innovation also differs based on their level of newness or the degree of
change, ranging from major service innovations for radically new markets, to rel-
atively minor innovations such as service line extensions and improvements to
existing services (Francis and Bessant 2005; Lovelock 1984). Another distinctive
aspect of service innovation is that it has the potential to create new business
models that can revolutionize an industry sector, and this can also form a basis for
classifying different types of innovation in services. For example, the online auction
concept like eBay introduced a radically new way of buying and selling, while
internet search engine companies like Google revolutionized the way to search for
information. The contemporary phenomenon of crowdsourcing (Howe 2006;
Surowiecki 2004) where a firm’s innovative activities are outsourced to a large
32 K. Randhawa and M. Scerri

crowd of people is also an example of a radical service business model innovation.
Crowdsourcing is being increasingly applied by a variety of firms both in B-C
(Threadless, Dell, Starbucks) as well as B-B contexts (InnoCentive, Quirky) (Roser
and DeFillippi 2013). Technology, and in particular IT, has been both a key driver
and component of such service business model innovations. Some other revolu-
tionary IT-based service innovations include e-commerce through online retailers
(Amazon), and innovation in entertainment services, through gaming (Xbox),
online music (iTunes), online videos (YouTube) and social networking (Facebook).
3 The Dynamic and Systemic Process of Service Innovation
3.1 Service Design and New Service Development
Service innovation is delivered through the process of new service development
(NSD) that encompasses stages from idea generation to market launch of new
service offerings (Goldstein et al. 2002). In developing a new service, attention
needs to be paid not only to designing the core service features and attributes, but
also to the service delivery processes that augment the value for its consumers
(Papastathopoulou et al. 2001; Trott 2012). It is whilst services are being delivered
that opportunities for collaboration arise giving employees the chance to learn,
innovate and co-create value with customers (Agarwal and Selen 2011a,b; Voss
and Zomerdijk 2007). Customer interface and technological options has been rec-
ognized as significant factors to service design and delivery (Sampson and Spring
2012; Sampson and Froehle 2006; den Hertog et al. 2010). Synergy between all
these elements is critical to successful service innovation. For example, a mere
technology adoption approach to service design fails to identify key service ele-
ments and attributes (Venkatesh and Davis 1996). In the past, the design approach
has failed to give consideration to quality as defined by the customer, resulting in
poor design, user dissatisfaction, poor take-up rates and low levels of usage
(Venkatesh et al. 2010). This furthers the call for behavioral science to be used to
learn from customers and co-design services, and thus improve service design and
user experience (Cook et al. 2002; Stewart and Tax 2004). According to Venkatesh
et al. (2010), service providers can exploit customer differences rather than con-
tinually focusing on customer similarities in seeking a variety of ideas and inputs
for service innovation. Customers providing input into the service design and
delivery process extend the notion of co-production to co-creation of services
(Lusch et al. 2009; Sampson and Chase 2010). As the focus of business models
move from transactional ownership exchange to relational service-in-use, firms are
looking to engage the customer in processes pre-, during and post-service delivery,
and extend the time the customer spends at each encounter. This allows firms to
respond better to changes in customer behavior with innovative services. Sampson
and Froehle’s(2006) Unified Service Theory elaborates on this process of exchange
between customers and service providers.
Service Innovation: A Review of the Literature 33

Service organizations also make decisions on whether to reduce or accommodate
customer-related variability. Given that service delivery and consumption occur
simultaneously in services, reducing variability is not always possible as customers
may disrupt core operations with their unpredictable behavior. This has significant
implications for the service design and the NSD process, which must consider
appropriate strategies to minimize variability without trading-off efficiency or
quality of the customer experience (Frei 2006). Technology has been used in the
past to reduce customer variability. For example, quality assurance checks at the
point of online data entry “force customers”to enter correctly formatted informa-
tion before being able to proceed to the next stage of service delivery (Boyer et al.
2002). On the other hand, technology has also enabled organizations to accom-
modate customer variability and offer a wider range of customized services that
meet the needs of individual customers. Exploring new ways of determining how
services can be tailored (involve customers from all backgrounds), delivered
equitably (treat customers fairly) and personalized (provide customers with a
choice) present opportunities for innovation.
To date, NSD models have been mainly derived from new product development
(NPD) models that were intended for the manufacturing sector (Fitzsimmons and
Fitzsimmons 2000). Researchers have argued that the sequential NPD approach
(Booz and Hamilton 1982) and stage-gate NPD models (Cooper 1990; Stevens and
Dimitriadis 2005) that have informed NSD models in the past do not fully capture
the dynamic and iterative processes of customer-supplier interactions that are
characteristic to service innovation (Tidd and Hull 2003; Menor et al. 2002). Some
efforts have been made to overcome this limitation. For example, Johnson et al.
(2000) developed a spiral or interactive model that accounts for the iterative pro-
cesses of NSD, providing more opportunity to incorporate feedback loops (Bullinger
et al. 2003). Concurrent service development models have also been suggested that
are more flexible and efficient than the sequential models (Vermeulen and Dankbaar
2002). There is further scope to tailor NSD processes that steer away from linear
NPD models and better incorporate characteristics that distinguish services from
products.
3.2 Open and Collaborative Processes of Service Innovation
Theorists such as Porter (1985) have previously viewed services as occurring at the
end of a linear value chain considering them to be a support function for products.
Today’s service-led and dynamic environment has evoked a revised understanding
of value creation through services; shifting value chains from being linear to hybrid
(Rabelo et al. 2007; Sabat 2002) comprising of a network of stakeholders such as
suppliers, customers, partners and intermediaries (Lusch et al. 2009; Vargo et al.
2008; Norman and Ramirez 1993). This transition has led to the development of the
concept of open innovation which views innovation as the outcome of interactive
and iterative processes across the value network where customers and other
34 K. Randhawa and M. Scerri

stakeholders are often invited to co-innovate (Chesbrough 2003,2006,2011; Enkel
et al. 2009; Gassmann et al. 2006,2010). This process of open collaboration
encompasses dynamic knowledge exchange across all value network entities to
synergise internal and external resources for innovation (Prahalad and Ramaswamy
2004; von Hippel 2005; Lusch et al. 2007). Russo-Spena and Mele (2012) develop
a process of five ‘Co-s’: co-ideation, co-valuation, co-design, co-test and co-launch,
through which the network lead users, customers, partners and intermediaries co-
innovate. Chesbrough (2011) refers to two types of openness in the open service
innovation model: ‘outside in’, where firms incorporate external ideas and tech-
nologies within their business, and ‘inside out’, where firms open their ideas and
technologies for other business to use. For example, Amazon displays ‘outside in’
openness whilst engaging customer feedback for creating new services, and ‘inside
out’openness when allowing a third party to use Amazon as a channel to sell
products (Chesbrough 2011).
The collaborative and distributed processes of open service innovation that
combine ideas, knowledge, and resources among a network of actors can be
challenging as it calls for a balance between multiple aspects such as: (1) identi-
fication of the rationale for co-innovation; (2) coordination of the processes and
mechanisms of co-innovation; (3) maintenance of policies to deal with conflicts
between collaborating entities; and (4) maintenance of service quality and consis-
tency (Bughin et al. 2008). Chesbrough (2011) suggests that placing customers as
the core of the value network, and working closely with all stakeholders to develop
new solutions that focus on utility rather than product features are core strategies to
foster open service innovation within organizations. Facilitating the necessary
knowledge exchange and collaborative learning processes across the value network
is the key to co-innovate offerings in the most efficient and effective manner.
One effective way of embracing the open and collaborative processes of service
innovation is through the approach of design thinking. Comprising of overlapping
phases of inspiration, ideation, prototyping and implementation, design thinking is
a creative and integrated process of problem-solving that is inherently human-
centered resulting in the development of new service offerings that intuitively fit
with user needs (Brown 2008; Leavy 2010). Design thinking, primarily based on
the principles, tools and models that have long served the design function, are being
increasingly used by businesses and institutions to find radically new solutions to
complex service issues such as the provision of low-cost healthcare services
(Bessant and Maher 2009).
3.3 Customer as a Co-creator of Service Innovation
Service innovation is centered on dynamic and relational interactions between
suppliers and customers, with customers being regarded as co-creators of innova-
tion through these interactions (Chesbrough 2011; Moeller et al. 2008; Edvardsson
et al. 2010). From this perspective, the role of customers is extended to that of
Service Innovation: A Review of the Literature 35

innovators, value chain collaborators and resource integrators (Edvardsson et al.
2011; Vargo et al. 2008). Services with higher proximity and interactivity with its
customers are said to present more opportunities for service innovation (Mathieu
2001) as the enhanced knowledge-sharing and learning processes feed into the
discovery, development and delivery of new service offerings (Hipp and Grupp
2005; Kale and Singh 2007; Fuller 2010). With the focus increasingly shifting from
“selling”toward “helping”customers (Prahalad and Ramaswamy 2000), customer
feedback and involvement is critical for co-design and co-development of services
(Franke and Shah 2003; Piller et al. 2004). Nambisan (2002) suggests that cus-
tomers can be involved in the innovation process in three different ways—as a
resource, as co-producers and as users. Allam and Perry (2002) extend this by
elaborating the various roles and activities that customers can perform in providing
inputs across all stages of the service innovation process. These inputs range from
strategic planning and idea generation to service testing and commercialization.
Scholars have also focussed on leveraging the social wisdom of communal plat-
forms (Nambisan and Nambisan 2008; Nambisan and Baron 2009,2010) to interact
with their customers and generate ideas for service innovation (Surowiecki 2004;
Howe 2008).
Effectively engaging customers in the service innovation process is, however,
not easy (Trott 2001; Hamel and Prahalad 1994). The insights gained through
customer involvement are sometimes not useful as customers are unable to artic-
ulate their needs in a way that can be applied (von Hippel 1986). In recent years,
firms have found a novel means to overcome this limitation, and are engaging
customers in the innovation process through ‘user toolkits’that provide customers
the freedom to design and develop their own customized product or service (von
Hippel 2001; Franke and Piller 2004). This is particularly valuable in markets
where customers are increasingly seeking personalized offerings (Thomke and von
Hippel 2002; Franke and Piller 2004). Customers also play active roles as users of
new service offerings. Software firms such as Microsoft have leveraged online user
communities for testing prototypes of new software and seeking inputs to refine
them. Cisco provides its customers open source access to its systems through an
online forum (Trott 2012). Bessant and Tidd (2007) indicate that it is more
advantageous to involve customers, and in particular lead users, in the innovation
process of high-novelty services rather than low-novelty ones. It is also important to
engage lead users across all stages of service innovation rather than just at the end
of the process (Athanassopoulou and Johne 2004).
3.4 Systemic Diffusion of Innovation Through Service Value
Networks
Service innovation in today’s networked world is highly interactive and systemic in
nature. Organizations are embedded in service value networks that comprise of a
system of entities which include suppliers, intermediaries, customers and partners
36 K. Randhawa and M. Scerri

that combine core capabilities to co-create service offerings for the consumer.
According to Hacklin et al. (2005), networks are multi-layered which enhances
opportunities to co-innovate and create systemic value in operations through hor-
izontal, vertical, diagonal and complementary networks. Connections through the
networks may be human to human, technical to technical or human to technical;
highlighting the importance of both human-centricity and technology in service
innovation. Service innovation across value networks are thus far from being a
linear transactional process; rather they are a multidimensional systemic phenom-
enon involving relational interactions between the network entities that result in the
co-creation of innovation.
Systemic diffusion of innovation, characterized by the spread and adoption of
new ideas and knowledge (Cohen and Levinthal 1990), is critical to the success of
any innovation including service innovation. The diffusion of innovation literature
has studied the phenomenon of how new products, services and processes spread
(Rogers 1962). Based on McGuire’s (1989) ‘Hierarchy of effects’and Prochaska’s
(1992) ‘Stages of change’models, a five-stage process has been derived to
understand how innovation diffuses:
Stage 1 Knowledge stage—comprehension of knowledge or skill for effective
adoption of innovation;
Stage 2 Persuasion stage—contemplation on new behavior required for adopting
innovation;
Stage 3 Decision stage—preparation to try the innovation;
Stage 4 Implementation stage—action required for continued use of innovation;
and
Stage 5 Confirmation stage—maintenance of the benefits resulting from innova-
tion through integration into ongoing routines.
Major and Cordey-Hayes (2000) categorize the models of innovation diffusion
into two streams; a node model which describes nodes and discrete steps that occur
throughout the diffusion process, and the process model which describes diffusion
as separate processes that are deliberately undertaken in a certain pattern. The
economics and management literature examine the productivity and business
benefits of the diffusion of innovation. Marshall (1890) claims that geographic
proximity aids agglomeration and the diffusion process resulting in productivity
gains to the speed in which new ideas become known and adopted. Porter (1985,
2000) also places importance on locational factors claiming that clustering of firms
affect the competiveness of a firm and region; first, by increasing productivity;
second, by driving innovation in a particular field; and third, by stimulating new
businesses in the field. Potts (2009), on the other hand, attributes innovation
through a community to the creative process rather than geography and conse-
quently stresses the importance of creative industries to the diffusion of ideas.
A variety of systemic frameworks of innovation have emerged that encompass
technological, institutional, infrastructural and economic drivers that support dif-
fusion of innovation to occur on a sectoral, regional and national scale (Malerba
2005; Edquist 2005). This has led to the concept of “systems of innovation”where
Service Innovation: A Review of the Literature 37

firms such as suppliers, customers, competitors; and non-firm entities consisting of
universities, schools and government institutions collaborate to create and sustain
innovation. National systems of innovations involve the collaboration within the
network of institutions in both public and private sectors for development, diffusion
and use of innovation (Freeman 1987), and include wider economic, social,
political and institutional factors (Edquist 1997). In the context of the increasing
role of services in today’s economy, studying service value network as a system
that promotes diffusion of service innovation in services is indeed topical. Often,
the entities in a service value network belong to different industries that come
together to create value through supplier-intermediary-customer relationships. The
systemic and relational nature of service innovation implies that innovation within
one industry diffuses and flows across to other industries through the open and
interactive exchange occurring between organizations in the value network. These
interactions that span industries connecting two or more network nodes lead to
cross-industry innovation.
4 Management of Service Innovation
4.1 Dynamic Capability Building for Service Innovation
In their seminal paper, Teece et al. (1997, p. 515) define dynamic capabilities as
“the capacity to renew competences so as to achieve congruence with the changing
business environment”. This calls for organizations to focus on aligning internal
structures with their capabilities, while also seeking a fit between their dynamic
capabilities and the external environment (Wilden et al. 2013). Teece (2007)
identifies organizational decision rules, knowledge management practices and
governance mechanisms to manage assets and resources as some of the micro-
foundations of dynamic capabilities. Dynamic capability building is critical for
implementing service innovation, and invokes the organization’s ability to sense,
seize and shape opportunities, and to create and reconfigure its resource base (Teece
2007,2007; Helfat 2007) in developing and delivering new service offerings.
The dynamic capabilities required to sustain service innovation has been an area of
recent research. Kandampully (2002) identifies the creation of business networks,
technological capability, customer engagement and knowledge management as the
building blocks of service innovation. Pavlou and Sawy (2011) outline the impor-
tance of intra-organizational communication between teams across different orga-
nizational units as being critical to service innovation. Agarwal and Selen (2009,
2014) provide empirical evidence that innovation in services is made possible not
only through technical capabilities; rather it is the contribution of soft skills such as
collaboration and relationship management that enable the realization of such
innovation. In addition, dynamic capabilities such as entrepreneurial alertness, co-
evolutionary learning, collaborative agility, collaborative innovative capacity and
customer engagement contribute to a firm’s ability to deliver elevated service
38 K. Randhawa and M. Scerri

offerings. Tsekouras et al. (2011) reiterate the importance of inter-organizational
collaboration and knowledge-sharing to build dynamic capabilities for service
innovation. According to de Brentani (2001), other than service-design and delivery
factors, the strategic alignment between organizational resources and capabilities and
the new service offerings is a critical aspect of service innovation strategy.
den Hertog et al. (2010) adopt a dynamic capability view to develop a six-
dimensional framework for service innovation strategy:
1. signalling user needs and promising technological options—identifying unmet
user needs, dominant trends and new technology configurations;
2. conceptualizing—codifying the fuzzy types of service innovations by creating
service blueprints;
3. (un-)bundling capability—making smart service combinations;
4. co-producing and orchestrating—organizing and acting in open service systems;
5. scaling and stretching—diffusing service innovation through branding and
communicating service offerings; and
6. learning—adapting service innovation processes.
In a similar vein, Agarwal and Selen (2011b) use Mathews (2006) RARE
strategic framework (Resources, Activities and Routines configured and reconfig-
ured through Entrepreneurial actions) to unravel the complexity of strategic deci-
sion making in service networks. Through collaboration between customers,
suppliers, and other stakeholders that aids a co-evolutionary process of organiza-
tional learning and dynamic capability building, organizations can launch a variety
of competitive actions to innovate services. Matching internal structures and
dynamic capabilities across organizations in the service network in response to a
dynamic business environment is an effective strategy to enable enhanced perfor-
mance through service innovation (Wilden et al. 2013).
4.2 Managing Organizational Knowledge and Learning
for Service Innovation
Managing organizational knowledge is viewed as a key driving force behind
innovation of any kind (von Hippel 1978; Nelson and Winter 1982; Malerba 2005).
Organizational learning achieved through learning-by-doing (Nonaka 1991; Nonaka
and Toyama 2005), experimentation (Schrange 2000; Thomke 2003), knowledge
sharing (Lin and Wu 2010; Otto 2012), codification of knowledge (Zollo and Winter
2002; Nonaka and Takeuchi 1995), and absorptive capacity (Cohen and Levinthal
1990) is critical to knowledge creation, which in turn drives innovation. The highly
networked and interactive nature of service innovation demands different approaches
to managing the knowledge exchange and dynamic learning processes. While the
importance of knowledge and learning in the context of services is widely discussed
(Khatibian and Jafari 2010; Lee et al. 2011; Matthing et al. 2004), research focusing
Service Innovation: A Review of the Literature 39

on the processes of organizational knowledge and learning for service innovation is
relatively scarce. A recent work in this space by Storey and Kahn (2010)finds that
firms that manage knowledge by combining the strategy of codification exemplified
by processes of documentation, with the strategy of personalization through inter-
personal communication mechanisms are best able to build a sustainable competitive
advantage through service innovation.
Organizations need to develop systems and processes for managing the knowledge
exchange between the human and non-human entities, integrating knowledge from
past innovation projects to current knowledge (De Luca and Atuahene-Gima 2007;
Zahra and Nielsen 2002), and co-evolving their knowledge base toward generating
new ideas on an ongoing basis (Lam 2005; Storey and Kahn 2010). The collaborative
learning processes that ensue provide opportunities for service innovation (Agarwal
and Selen 2009,2014). To enable this, service innovation is usually developed and
deployed through project management teams that cater for flexible and collaborative
knowledge exchange (Subramaniam and Venkatraman 2001) rather than the stan-
dardized linear R&D model applied in manufacturing. Successful service innovation
calls for structures to promote better inter-organizational collaboration to stimulate
knowledge sharing and knowledge recombination processes across the entities
involved (Chesbrough 2003; Delbridge and Mariotti 2009). Miles (2005) further
indicates that better coordination is required to allow for transfer of knowledge across
the service sector so as to replicate or leverage the innovations in other project
networks.
It is difficult to overlook the role of knowledge-intensive business services
(KIBS) in managing organizational knowledge and learning for service innovation.
KIBS—businesses that apply specialized knowledge ranging from technical, mar-
ket and institutional knowledge to specific requirements of enterprises—are said to
form core knowledge sources and intermediaries in the innovation system (Miles
2005; Paallysaho and Kuusisto 2008). KIBS enable organizational innovation by
providing inputs to other organizations through their knowledge exchange and
learning processes (Kautonen 2001; Miles 1999). The literature also highlights
some of the knowledge-related risks associated with the involvement of KIBS. The
potential of leakage of commercially sensitive information to competitors acts as a
trade-off to gaining access to cutting edge knowledge and expertise through KIBS
(Hoechst and Trott 2006). To control this risk, there is a need for organizations to
go beyond traditional legal contracting approaches, and develop social control
mechanisms, in particular, trust between the collaborating parties.
4.3 Creating an Organizational Culture for Service
Innovation
The role of organizational culture as a driver of service innovation is being
increasingly recognized (Boedker et al. 2011; Alam 2010). Service innovation
encompasses novel ways for businesses to create new service concepts or
40 K. Randhawa and M. Scerri

experiences, and in most cases this is achieved through collaboration with cus-
tomers and other stakeholders in the value network. Thus, service innovation is
affected by the socio-cultural dynamics such as norms, values and ethical standards
of all actors that form part of the innovation system (Edvardsson et al. 2011), and
the co-evolutionary social and political interactions that occur between them.
Researchers are acknowledging that the dynamic and complex nature of service
innovation warrants a culture that fosters collaborative routines and co-evolutionary
learning mechanisms resulting from customer involvement across the service
innovation cycle (Simutupang and Sridharan 2005; Bitner and Brown 2008). An
innovative culture fosters creativity among employees within and across organi-
zations through informal communication, positive work environment and collab-
orative working arrangements that promote knowledge sharing and learning
required to generate new ideas on an ongoing basis (Hipp and Grupp 2005;
Simpson et al. 2004,2006). Such a culture is imperative to maintain an ecosystem
that supports and sustains service innovation.
Tidd and Hull (2005) present four types of structures that create a culture that
supports service innovation: client-project orientation, mechanistic customization,
hybrid knowledge-sharing, and integrated innovative. The client-project orientation
takes a project management approach delivering an agile and flexible setting for
service innovation to meet dynamic customer requirements. On the other hand,
mechanistic customization is underpinned by standardization and cost reduction
through the involvement of customers and suppliers in the service innovation
processes. Hybrid knowledge-sharing achieves collaborative group identity, team
work and knowledge exchange practices to balance service innovation with effi-
ciency. Integrated innovative organizations foster service innovation through
organic cross-functional teams and a flat hierarchy that facilitate communication
and collaboration although at increased costs and time. Given the heterogeneity of
services, the most ideal structure among these four is contingent on the type and
context of the service organization. Irrespective, all the four configurations promote
service innovation by fostering a culture of dynamism and flexibility, collaboration
and knowledge-sharing, as well as customer involvement and engagement (Tidd
et al. 2005; Tidd and Hull 2005). A culture suited to service innovation promotes
R&D investment for both service product and process innovation, with an equal
focus on achieving effectiveness through identifying customer target markets and
efficiency by streamlining the supplier base (Bessant and Tidd 2007).
4.4 Measurement of Service Innovation and Its Outcomes
Measurement of service innovation is critical for its effective management. Inno-
vation in manufacturing and services differ. Therefore, the way innovation is
measured should also be different. The extant innovation literature predominantly
covers the expenditure on R&D activities (Barreto and Kypreos 2004; Cassiman
2006; Enkel et al. 2009) as well as the number of patents (Artz et al. 2010; Hidalgo
Service Innovation: A Review of the Literature 41

and Molero 2009) as the key measures of innovation. This is pertinent for the
manufacturing sector, as innovation here mainly revolves around product and
technology (Coombs and Bierly 2006). This measurement approach, however, may
skew results while assessing innovations within the service sector as the proportion
of R&D and patent-related activity is far less in service innovation (Hipp and Grupp
2005). Innovation in services is mainly reliant on novelty created through intangible
resources and processes such as knowledge and learning. Therefore, new approa-
ches are required for evaluating and measuring these intangible innovation-related
activities in services. Trademarks and copyrights are newly identified tools to
protect intangible assets such as brand and intellectual property (IP) involved in
sustaining service innovation (Gotsch and Hipp 2012). Recently, progression has
been made to develop more measures that reflect the intangible aspects of service
innovation. Agarwal and Selen (2011a) develop a multidimensional framework to
measure service innovation, and particularly identify the need to measure relational
capital that drives network collaboration as a key lead indicator of service inno-
vation. External forces linked with institutional, regulatory and market competition
dimensions are also key aspects to be included in the measurement of service
innovation (Lee et al. 2009).
Service innovation is gaining prominence as a key contributor to service pro-
ductivity and performance (Miles 2010). Innovation is recognized as one of the five
key drivers of firm-level productivity along with investment, skills, enterprise, and
competition (Camus 2007). Firm-level innovation on aggregate is seen as the driver
for economic growth and prosperity at a regional and national level. Measuring the
effects that innovative activities have on productivity and growth is an area of active
research (Hall et al. 2009; Tether and Howells 2007). However, due to the variability
and uncertainty inherent in innovation, determining the magnitude of the effect
remains elusive. Studies by Van Leeuwen and Klomp (2006), Janz et al. (2004) and
Parisi et al. (2006) use R&D as a proxy for innovation and show positive effects on
productivity. Majority of other studies use a production function approach with
R&D or other innovation measures as an input into production. The result in an
underestimation of the impact innovation has on productivity largely because
innovation occurs through channels other than R&D that are not captured. Studies
have since moved to examining innovation activities as outputs. For example R&D
investment, training, technology adoption and sales of products to new markets are
seen as the successful outcomes from innovative efforts (Hall et al. 2009). Studies
linking innovation, in particular service innovation, to firm-level and economic
productivity and growth is currently sparse. The lack of appropriate indicators and
measures have been a key factor limiting studies in measuring the impact of service
innovation on performance and productivity (Cainelli et al. 2004; Ferreira et al.
2005). Complexity is also introduced where dynamic human-to-human interactions
take place between customers, employees and suppliers, as they provide input
and share resources to deploy service innovation. These interactions in turn are
determining factors of service productivity and performance. Studying the linkage
between service innovation and firm-and economy-level growth and productivity
therefore remains a topical and fertile area of future research.
42 K. Randhawa and M. Scerri

5 Conclusion
Services are fast overtaking manufacturing to form a dominant proportion of the
world economy. Service innovation is increasingly seen as a vector of sustainable
growth and competitive advantage at the firm-, industry- and economy-level. With
the increasing growth of services in today’s organizations and economy, the
importance of understanding the service innovation concepts and practices is also
on the rise. As a result, the literature on service innovation is expanding into a
scattered body of knowledge. This chapter aims to integrate the many streams of
service innovation literature and provide a synthesized view of this rapidly growing
field.
To provide a structured account, this chapter is organized across three broad
themes: Overview of Service Innovation; The Dynamic and Systemic Process of
Service Innovation; and Management of Service Innovation. Through these themes,
this chapter presents the distinguishing characteristics and dimensions of service
innovation. The key concept of service design and NSD is reviewed, as are the
complex and dynamic routines involved in collaborating with customers and other
stakeholders for service innovation. A systemic perspective of service innovation is
used to study systems of innovation in the service economy, and how innovation
diffuses across service value networks. This chapter also explores the alignment of
appropriate strategies and capabilities to sustain service innovation; and the aspect
of managing organizational knowledge, learning and culture for service innovation.
The different approaches to measure service innovation and its impact on firm-level
productivity and performance, as well as economy-wide growth and prosperity are
also reviewed. In all, this chapter presents an aerial view of the service innovation
literature by bringing together its complex and diverse aspects emanating from a
multidisciplinary body of knowledge.
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