Service Innovation

Service Innovation
Anders Gustafsson, Per Kristensson,
Gary R. Schirr, and Lars Witell

Service Innovation
Copyright Business Expert Press, LLC, 2016.
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form or by any
meanselectronic, mechanical, photocopy, recording, or any other
except for brief quotations, not to exceed 400 words, without the prior
permission of the publisher.
The Center for Services Leadership (CSL) is a research center within
the W. P. Carey School of Business at Arizona State University (ASU)
and an outreach arm from ASU to the business community and the
global academic community. The CSL has established itself as a globally
recognized authority on how to compete strategically through the
profitable use of services.
The Service Research Center, CTF ([Link]) is a research center at
Karlstad University, Sweden. CTF is one of the worlds leading research
centers with a focus on value creation through service.
First published in 2016 by
Business Expert Press, LLC
222 East 46th Street, New York, NY 10017
[Link]
ISBN-13: 978-1-63157-495-5 (paperback)
ISBN-13: 978-1-63157-496-2 (e-book)
Business Expert Press Service Systems and Innovations in Business
and Society Collection
Collection ISSN: 2326-2664 (print)
Collection ISSN: 2326-2699 (electronic)
Cover and interior design by Exeter Premedia Services Private Ltd.,
Chennai, India
First edition: 2016
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Printed in the United States of America.

Abstract
The world is being shaped by service. All the worlds most advanced
economies are dominated by service, with many countries having more
than 70 percent of their gross domestic product (GDP) generated by it.
The service sector also employs the largest number of people and it is the
fastest growing sector, both in number of companies and employees. The
questions posed in this book are: (1) How is the service sector growing;
(2)what is service innovation; (3) what are the drivers of service innovation; and (4)how can organizations innovate service in a structured way?
The book views service as the value creating activity that customers
perform in their own context: The role of a company is to provide the
resources and knowledge to enable value creation. Based on this view, we
develop a model of service innovation. Service innovation is a multifaceted concept dependent on the purpose of the innovation. These purposes
could be to: differentiate, finance, help, experience, and streamline the
process or offering. In turn, these result in: brand innovation, business
model innovation, social innovation, experience innovation, process innovation, and behavioral innovation, respectively. In this book, we develop
guidelines for what is required from the organizational perspective, how
should an organization view its customers in order to be successful, what
does a service development process look like, and how to transform an
organization that is goods-centric to become service or solution provider.
Despite the heightened focus on service in many business sectors,
most models and theories of innovation are based on a goods perspective,
assuming that the norm is a physical good. We believe that the norm is
actually experiential and service based. This book addresses this mismatch
of theory and practice for the benefit of those who are seeking to understand, teach, and practice service innovation.

Keywords
business, cocreation, company, creativity, customer, experience, innovation, organization, process, product, research, service, user, value creation

Contents
Prefaceix
Acknowledgmentsxi
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7

Service as the Key Driver of Growth1

What Is Service Innovation?31
Value Creation Drives Service Innovation55
Developing Service Innovations79
Customers as Cocreators in Service Innovation101
Service Innovation in Goods-Centric Firms127
The Service InnovatorTying It All Together159

Index165

Preface
... the business enterprise has twoand only twobasic functions:
marketing and innovation.
Peter Drucker
Even by out-of-date traditional measures, over 70 percent of the gross
domestic product (GDP) of the European Union (EU) and Sweden and
over 80 percent of the GDP of the United States is service. Yet, most of
the models and theories of service innovation are based on new product
development for goods. This book seeks to address this mismatch of
theory and practice for the benefit of those who are researching, teaching,
or practicing service innovation.
This book is targeted to:
Professionals involved in service innovation;
Executives who manage those professionals;
Executives of traditional goods firms who wish to increase
service sales;
Professionals or students seeking involvement in innovation;
Researchers at universities or consulting firms; and
Anyone else interested in service innovation!
The four authors of this book are university professors conducting
research and teaching innovation and service marketing. Three of us
are a part of the Service Research Center, CTF at Karlstad University
(Sweden), a multidisciplinary center devoted to understanding service.
All four of us conduct research on service innovation, read and critique
current research, and teach the principles of innovation and service marketing. In addition, the four of us have been involved in service innovation as observers, consultants, and participants. We draw on both research
and practice in writing this guide. We draw on evolving theory and best

x PREFACE

ractice. Our goal is a book that is useful for businesspeople, consultants,

p
researchers, and educators.
We believe that the following chapters contain guidance to the service
innovator who is iterating and trying to find the right innovation process
for their organization. We hope it is also useful as an indicator to consultants and researchers on topics that need further study.
Due to advances in research and innovation in practice, keeping this
guide up to date will be an ongoing effort! Please feel free to contact the
authors with suggestions, questions, or comments via the websites and
online contacts listed in the book to aid us in this quest.

Acknowledgments
This book was supported by a grant from the Swedish Knowledge and
Competence Foundation (KK-stiftelsen). We would also like to thank
colleagues and friends at the Service Research Center, CTF and the
Center for service leadership (CSL) for their contributions of advise and
fantastic research.
In particular, we would like to thank Jim Spohrer and Haluk D
emirkan
for the opportunity to publish our book in the Business and Society
Collection. We are also grateful to Mary Jo Bitner for her thoughtful
comments and support in writing our book.

CHAPTER 1

Service as the Key Driver

ofGrowth
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 worlds gross domestic product (GDP) and
over 70 percent of the GDP of affluent nations are service related, as
defined by a traditionaland we would argue restrictivedefinition 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.
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. 117; 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. [Link]/
library/publications/the-world-factbook/fields/[Link]
1

SERVICE INNOVATION

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 e conomies 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 Kotlers quote at the b eginning
of the chapter. A product is a service or good offered to satisfy a c ustomers
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 serviceproduct will
always include service, unless identified as physical or tangible.
We will show that a tangible good can be viewed as a service. A goodscentric 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

Tidd, J., and F. Hull. 2003. Service Innovation: Organizational Responses to

Technological Opportunities & Market Imperatives, ix. World Scientific Publishing
Company.
4

Service as the Key Driver ofGrowth 3

a fundamental shift in focusthe 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 v alue-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,
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

SERVICE INNOVATION

public transportation, car repairs, and so on. We refer to other products

as indirect service.
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 Jukkasjrvi 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 coffees 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 persons 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 caf 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 customers own experience, which, perhaps, in turn, prompts them to tell their
friends about their experience.

Service as the Key Driver ofGrowth 5

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 caf 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 scenarioshot 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 customers willingness to
pay increases if service results in unique experiences. Howard Schultz,
founder of S tarbucks, has stated repeatedly that Were not in the coffee
businesswere 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 cookinghow would they otherwise know that the oven
really did its job? Consumers chose the microwave ovens with rotating
plates, forcing the p
roducers to include rotation in most of their offerings. The experience during value creation affects a customers perceived
value of a s ervice. Customers experience a value creating service, despite
purchasing a p
hysical product! Organizations everywhere are undergoing a radical p
rocess of change resulting from a shift of focus from physical products to experiences generated for customer service.
A jogging enthusiasts ultimate running experience involves a
number of products, which includes jogging shoes, transportation to

SERVICE INNOVATION

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 goodsan automobile and a box of sea salt.
From left to right, the first three categories of the continuum are clearly
servicethat 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
coauthors purchase was a 10-year, 100,000-mile warrantya 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
Service
product

Use of
goods

Custom
experiential
Service

Massage
Credit card Flights
Whitewater Software
Rental car

Figure 1.1 Service continuum

Tangible
good
New car
Sea salt

Goods

Service as the Key Driver ofGrowth 7

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.
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 customers 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 c ompany
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

SERVICE INNOVATION

more passive. Value is created via the customers 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: [Link] by Kiki Schirr

Service as the Key Driver ofGrowth 9

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 countrys 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.
Lets 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 subsidiar
ies. 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 NACEcodes 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,
Ericssons, or GEs 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 c onsumed,
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 ones foot does not hurt, as opposed to
products. This service perspective is based on the so-called intangibility,

10

SERVICE INNOVATION

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
Table 1.2 IHIPa traditional service perspective
IHIP

Definition

Our commentsA new way

ofthinking

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.

Service as the Key Driver ofGrowth 11

the issues outlined in the tableleasing 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.
One of the most important values of a product (e.g., Apples) is its
brandspecifically a service according to IHIPand in this scenario, a
service defines the price of a product. The topic concerning the d
ifficulty
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 s ometimes
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.
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. 3849.
5

12

SERVICE INNOVATION

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 termsvalue,
customer experience, and contextneeded 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 p
erforms
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 w
ashing 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 activitiesgrass cutting (an activity) is performed

Service as the Key Driver ofGrowth 13

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 h
aving acquired it. Experience is a double-edged sword in
a development p
rocessknowing 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 d
ifferences 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 a ssessment
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 LEnfant 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 s ervice.
The first is resources, which comprises offerings from companies and

14

SERVICE INNOVATION

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 partyresources are available in the form of a b arbeque
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 c omponents of a
service may look like Figure 1.3.
Every value-creating process includes customers experiencesometimes 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 p
roduction capacity, although
this sector also contains experience elements. A brand may be perceived

RESOURCES
Products,
services and
activities
offered by
organizations
Knowledge and
activities carried
out by customers

CREATION OF VALUE

Value-creation
processes created
collectively by
customer and
organization upon
use

EXPERIENCES

Experiences

Figure 1.3 Resources create opportunities for value creating processes

that result in experiences

Service as the Key Driver ofGrowth 15

as more reliable, more efficient and service-oriented, more fun, or more

socially conscious than the competitor.
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 ownershiprather, customers purchase products because
they are prerequisites for value-creating processes. Service leads to s ervice
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 Books 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 servicea 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 valuecreating processes. The key realization in this chapter is fairly simple and
can be summarized with Professor Theodore Levitts famous statement:

16

SERVICE INNOVATION

People dont 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 customers 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 eitherperhaps 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 companys 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 customers 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
Christensen, C.M., S. Cook, and T. Hall. 2005. Marketing Malpractice.
Harvard Business Review 83, no. 12, pp. 7483.
6

Service as the Key Driver ofGrowth 17

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
Page, A.L., and G.R. Schirr. 2008. Growth and Development of a Body of
Knowledge: 16 Years of New Product Development Research, 19892004.
Journal of Product Innovation Management 25, no. 3, pp. 23348.
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.
7

18

SERVICE INNOVATION

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 InnovationThe Value Experienced

bytheCustomer
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 ones
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.

Service as the Key Driver ofGrowth 19

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
experienceinnovation 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
organizationsB2B 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 innovationsthat is, innovations in the nonprofit
sector with the purpose of helping othersalso necessarily focus on the
experience of clients being served.

20

SERVICE INNOVATION

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 sellinga process we will
discuss in detail in Chapter 6has appeared on the agenda.
Service innovation involves far more actors than just the organizations
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 logisticsalmost 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 b enefit
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 departmentsagain including
R&D, customer service, business development, marketing, and logisticsare 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

Service as the Key Driver ofGrowth 21

total-solution or service innovation approach to making a company

more competitive.
The company Tetra Pak actually refers to a type of customer e fficiency
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 i nnovation
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
Kotler, P. 1977. Marketing Management: Analysis, Planning, Implementation,
and Control, 8. 3rd ed. Upper Saddle River, NJ: Prentice Hall. Emphasis added.
9

22

SERVICE INNOVATION

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 organizations offers
to further meet specific needs. For example, Coca-ColaTM 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 Apples 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 customers behalf upon use (or shortly thereafter), which result

Service as the Key Driver ofGrowth 23

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, Illinoistheir 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 busoffering reading as a
means of passing time.

24

SERVICE INNOVATION

Advertisements and subscriptions are generally a newspapers

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 m
aterial
consumption.
Off2off also generates value in the form of reduced purchase needs and
more efficient delivery (since the product an o rganization 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

Service as the Key Driver ofGrowth 25

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, Spotifys
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 InnovationA 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.
Ikeas 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 i nnovations 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

26

SERVICE INNOVATION

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 (Apples former chief executive officer) once
said: Youve got to start with the customer experience and work back to
the technologynot 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. Apples success over the years
is proof that this strategy can workbut 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.

Kristensson, P. 2012. New Forms of Support for Open and User-Driven

Innovation Management, 36. Pro Inno Europe.
10

Service as the Key Driver ofGrowth 27

Table 1.3 Differences between goods innovation and service

innovation
Process

Goods innovation

Service innovation

Initiation of the innovation New usage of an existing

process
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 articlesinstead 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 s ingle
cases or experiences from a particular managerial position. Our book

28

SERVICE INNOVATION

istinguishes itself by basing its content on experiences and k nowledge

d
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?

Service as the Key Driver ofGrowth 29

What jobs do your customers use your offerings for in order

to create value? Or what is your organizations 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. 117.
Grnroos, 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. 13350.
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. 3849.
Meyer, C., and S. Andre. 2007. Understanding Customer Experience. Harvard Business Review 85, no. 2, pp. 11626.
Kim, W.C., and R. Mauborgne. 2004. Value Innovation: The Strategic Logic of High Growth. Harvard Business Review 82, no. 78,
pp. 17280.

Index
Abercrombie & Fitch, 48
Active customers, 2122
Amazon, 36, 37, 93
Antiphon, 144
Bank offerings, 128
Bee Urban, 44
Behavioral innovation, 50, 51,
9799
Brand innovation, 4647, 51, 9395
Business model innovation, 51
business canvas, 153154
business model change, 154155
capital-intensive machine selling,
152153
cost-plus pricing view, 152
internet, 9596
organizations external/internal
environment changes, 4849
physical product selling, 152
pricing paradoxes, 153
Caterpillar, 35, 131
Center pivot irrigation systems,
107108
Cisco company, 129, 131
Coca-Cola company, 22
Cocreation. See Customer
involvement
Collaborative economy, 5152
Context, 13
CRM systems, 82
Cummins Engine, 131
Customer, 79
Customer experience
business experience, 5
exchange process, 7
experience-promoting service, 45
gardening activities, 1213
previous experiences and
expectations, 13

service continuum, 57
social interaction, 12
value creation, 9
Customer involvement
customer selection, 105
development process, 104
early involvement, 105106
ethnographic studies
air travelers experiences, 117,
119121
in-depth qualitative research,
117118
mobile phone usage, 118119
factors facilitating, 121123
lead users
center pivot irrigation systems,
107109
Eric von Hippels research,
109112
financial trading business, 109
health-care service, 115116
knowledge and skills, 112113
online trading software company,
116
open source software, 109
problem-solving skills, 106107
products and service
improvement, 110111
service development, 114
telephone communication
company, 113
value-creation and potential
solutions, 114115
operational prototype, 103104
satisfaction surveys, 104
service user information and
knowledge, 104
telecommunication services,
104105
travel industry, 105
Customer-oriented service activities,
7071

166 Index

Design thinking innovation, 148

Do-it-yourself (DIY) seminars, 38
Effectuation innovation, 148
Electrolux, 131
EMC, 129
Entrepreneurial innovation process,
146, 150
Ericsson, 9, 49, 90, 123, 129, 131
Eric von Hippels research, 109112
Ethnographic studies
air travelers experiences, 117,
119121
in-depth qualitative research,
117118
mobile phone usage, 118119
Experience innovation, 4748, 51,
9697
Facebook, 17, 31
Focusunderstandbuild model
build phase
orchestrate phase, 8790
standardize phase, 9091
test phase, 90
focus step, 8384
understand phase
involving customers, 85
learning, 8587
Ford, 17
Formal service innovation process, 80
French bank, 123
GE aircraft, 39, 49, 129, 131, 132
Goods, 3
Goods-centric firms
business model
business canvas, 153154
business model change, 154155
capital-intensive machine selling,
152153
cost-plus pricing view, 152
physical product selling, 152
pricing paradoxes, 153
offerings as services, 129
products offerings, 128
service innovation

components needed, 144

development and market
introduction, 150152
development process, 145146
market validation, 146150
network, 144
service infusion (see Service
infusion)
technology, 145
Goods innovation, 2527
Google, 31, 96
Gross domestic product (GDP), 1
IBM, 17, 36, 49, 89, 90, 129, 131,
160
Ikea, 25, 31, 41, 46, 48, 94, 95
Incremental innovation, 41
Incremental service innovation, 8081
Indirect service, 4
innovation
Innovative customers, 22
Inside-out approach, 2526
Instagram, 17
Intangibility, heterogeneity,
Inseparability, Perishability
(IHIP) criteria, 1011
ISS, 142
Lancme and Este Lauder, 143
Lean start-up innovation, 147
Lfberg, 4041
Market-driven service innovation, 59
Market validation, 146147
customer collaboration, 149150
design thinking innovation, 148,
149
effectuation innovation, 148, 149
entrepreneurial innovation, 146,
150
lean start-up innovation, 147149
McDonalds, 31
Metro, 23, 24, 41, 49
Microsoft, 134135, 143
Minimum viable product (MVP), 147
Nintendo, 96

 Index 167

Off2off company, 24
Open innovation, 160
Outside-in approach, 26
Philips, 17
Process innovation, 24, 4546, 51, 93
Product, 1
Radical innovation, 2425, 41, 8182
Recombinative innovation, 41
RelayRides, 44
Research methods
customer information strategy, 63,
64
focus groups and questionnaires,
63, 64
group dynamics, 6465
in-depth interviews, 65, 67
internet-based system, 6566
proactive methods, 68
Samsung, 143
Scania, 35
Self-service, 4546
Service, 1
classification perspective, 9
direct service, 3
IHIP model, 911
indirect service, 4
resources, 1315
value-creation perspective, 11
Service continuum, 6
Service infusion
brand development, 143144
competing offers differentiation,
129130
competitive advantage, 130
customer service strategy
advanced service offers, 141
development partner, 142
outsourcing partner, 142
firms service strategy
external factors, 139
internal factors, 139
offering and value, 140
organizational challenge, 129
process

firm revenue, 136137

goods and service-centricity, 134
new offering deployment, 138
organization and accounting
system, 136
package offering, 138
phase innovation, 138139
productivity gains, 135136
resources and skills, 135
service identification, 137138
service pricing, 135
standardized service solutions,
139
service provision, 130
technological innovation
cleaning firm, 133134
customer value, 131132
goods logic, 133
installed base, 131
physical product, 132133
purchasing cost, 131
services supporting product and
customer, 132
technical characteristics changes,
132133
value creation, 130
Western firms, 129
Service innovation. See also
Value-creation process
active customers, 2122
behavioral innovation, 50, 51,
9799
branding, 19
brand innovation, 4647, 9395
business model innovations, 4849,
9596
categories of, 51
change process, 38
cocreated service, 1718
cocreation experience, 19
collaborative economy, 5152
customer active paradigm, 3940
customer and user research, 82
customer communication, 81
customer involvement (see
Customer involvement)
customer needs identification,
2021, 162

168 Index

customer role changing, 38

design thinking, 161
development process
design thinking, 82
focus-understand-build model
(see Focusunderstandbuild
model)
Stage-Gate approach, 82, 83
development time, 161
experience business, 37
experience innovation, 4748,
9697
formal service innovation process,
80
goods-centric firms (see
Goods-centric firms)
vs. goods innovation, 2527
implementation, 9192, 161
incremental development, 8081
incremental innovation, 41
innovative customers, 22
more innovative, 81
new business models, 39
online and social service, 18
perspective of, 35
process innovation, 24, 4546, 93
radical innovation, 2425, 41,
8182
recombinative innovation, 41
service experience, 3637
service platforms, 3738
short messaging service, 80
smiling service worker, 36
social innovations, 48, 96
tabloid newspapers, 2324
value chain breaking, 39
Service logic, 160161
Skanska, 39
SKF, 75, 129, 131, 138, 139
Skype, 17, 25
Snapchat, 17, 25
Social innovations, 48, 51, 96
Sony, 143
Southwest Air, 31
Spotify, 17
Starbucks, 31, 37, 43
Swedish company SK, 75

Technological innovation
cleaning firm, 133134
customer value, 131132
goods logic, 133
installed base, 131
physical product, 132133
purchasing cost, 131
services supporting product and
customer, 132
technical characteristics changes,
132133
Technology push, 2526
TeliaSonera, 123
Tetra Pak, 21, 131, 133, 138, 139
Traditional innovation processes,
2526
Tribune Company, 24, 40, 150
Uddeholm, 97
Value-creation process, 160161.
Seealso Service innovation
customer orientation, 7071
customer-oriented companies,
7375
customers experience, 1415
digital cameras vs. built-in cameras,
56
fancy acronyms/technical jargon,
58
fast-food milk shakes, 56
habitual patterns breaking, 7173
laboratory/internal development
process, 60
market competence, 6870
market-driven service innovation,
59
market structure, 16
product details, 5758
product offerings, 15
research methods
customer information strategy,
63, 64
focus groups and questionnaires,
63, 64
group dynamics, 6465
in-depth interviews, 65, 67

 Index 169

internet-based system, 6566

proactive methods, 68
service logic, 3234
stickiness, 58
user activities, 12
user interview methodology, 5859
user needs and product
development
customer information, 62
outwardinward paradigm, 62

sticky information, 6162

for teenagers, 6061
user research, 58
Volvo, 9, 35, 49, 72, 85, 87, 91, 129,
131, 141, 160
Whirlpool, 123
YouTube, 17