The service innovation triangle: a tool for exploring value creation through service innovation

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1 Int. J. Technology Marketing, Vol. 8, No. 2, The service innovation triangle: a tool for exploring value creation through service innovation Peder Inge Furseth* Department of Innovation and Economic Organisation, BI Norwegian Business School, Nydalsveien 37, 0442 Oslo, Norway peder.i.furseth@bi.no *Corresponding author Richard Cuthbertson Saïd Business School, University of Oxford, OX1 1HP, UK richard.cuthbertson@sbs.ox.ac.uk Abstract: This paper provides a new framework for service innovation based on an extensive literature review, semi-structured interviews with some of the best known thinkers and practitioners in the field of innovation, as well as supported through case study analysis, in order to identify the components of service innovation and their interrelationships, especially with respect to creating value through the innovative management of business models, service systems and the resulting customer experiences. The result of this research is the service innovation triangle, a simple but rich model, consisting of nine integrated elements in three layers. The service innovation triangle can be used by firms to explore innovation opportunities for themselves, customers, and suppliers, as well as providing a foundation for future research in the area of service innovation. Keywords: service innovation; tool; value; business model; service system; customer experiences; people; technology; core assets; marketing. Reference to this paper should be made as follows: Furseth, P.I. and Cuthbertson, R. (2013) The service innovation triangle: a tool for exploring value creation through service innovation, Int. J. Technology Marketing, Vol. 8, No. 2, pp Biographical notes: Peder Inge Furseth is an Associate Professor at the Department of Innovation and Economic Organisation at the Norwegian Business School in Oslo. He has spent more than 15 years identifying innovative value and differentiation in markets. In particular, his innovation work focuses on business models, organisational cultures, multichannel services and value creation. He has presented innovation seminars and workshops for over ten years in Oslo, Oxford and the San Francisco Bay Area. He is also responsible for the content at and the VDSI activities on LinkedIn and YouTube. Copyright 2013 Inderscience Enterprises Ltd.

2 160 P.I. Furseth and R. Cuthbertson Richard Cuthbertson is the Research Director of the Oxford Institute of Retail Management at the Saïd Business School, University of Oxford, where he is a Senior Research Fellow. His research interests focus on how the society, economy and the environment are influenced and changed by service providers. In particular, his research has focused on the extent to which service innovation and customisation through information and new technologies can be efficiently leveraged in a mass market, leading to improved customer experiences. This paper is a revised and expanded version of a paper entitled The service innovation triangle: a tool to create value through innovation presented at XXIV ISPIM Conference in Barcelona, Spain on June Introduction When a service company innovates, it will not be long before others copy. When a product company innovates, it will take a while and then someone is sued. Service innovations are not protected in the same way that product innovations are protected. The only protection for a service company is to keep on moving, to embed innovation as an integral part of the management process. This paper aims to identify the key business components that need to be managed accordingly. While some business models do exist, these tend to be incoherent, incomplete or inconsistent. There is no single integrated tool that covers all of the key aspects of service innovation. This paper aims to identify the components of a model for service innovation and their interrelationships. 2 Approach There has been a considerable growth in developing service innovation theory in the last decade. Some examples of this are Vargo and Lusch (2004), Vence and Trigo (2009), Gallouj and Djellal (2010), and Ostrom et al. (2010). However, researchers still start from the absence of an agreed model of service innovation (Howells, 2000), and have struggled to explain practical developments. Hence, our main research question: What are the commonly agreed elements that contribute to successful service innovation? Furthermore, how do those elements interrelate? One of the challenges of the service innovation field is the multi- and inter-disciplinary nature, hence, the need to draw on a wide variety of rich sources. This early stage research is based on three qualitative comparative studies. The first comparative study reviews the literature on existing models of the firm for innovation. The aim is to discuss the common elements and differences in order to identify key elements. The second study is a small comparative study to confirm the findings of the literature review, as well as compare and contrast theory and practice. This primary research considers the views of distinguished academics and practitioners of service innovation. The third comparative study of case studies aims to explore the key relationships between the agreed elements. The first comparative analysis comprises a literature review that aims to identify commonalities and differences in the theoretical business models employed in the field of service innovation. This provides a starting point for the subsequent analysis. While the

3 The service innovation triangle 161 analysis does not claim to be exhaustive it does highlight the current lack of a common framework for service innovation. Table 1 Semi-structured interview questions Personal questions Interviewer says: We will start with asking you some questions that reflect your personal view and thinking about innovation. PQ1: Please tell us what you currently work with, and how this is related to innovation. PQ2: How do you define innovation? PQ3: How do you define value? PQ4: What is your strongest contribution to the field or practice of innovation? PQ5: How does this help change people s lives? General questions Interviewer: We will now proceed with some questions that are about innovation in general. GQ1: What is most important for innovation to succeed? GQ2: Which failure is most serious in innovation? GQ3: Which have been the three most innovative companies globally the last 3 years? GQ4: Who have been most influential in your thinking about innovation? Statements Interviewer: Please rate the following 11 statements in terms of importance for companies today. Then we will talk about those three or four statements that you find the most important. ST1: Successful innovation is driven by the value created. (Furseth et al., 2011) ST2: All businesses are service businesses. (Vargo and Lusch, 2004) ST3: A better business model often will beat a better idea or technology. (Chesbrough, 2007) ST4: Involve design thinkers at the very start of the innovation process. (Brown, 2008) ST5: Ultimately, it is the customers who define the value of innovation. (Furseth et al., 2011) ST6: Both customer and competitor orientation can be successfully used to develop innovative products and services. (Grinstein, 2008) ST7: Through innovation and growth, firms can do untold good for society. (Ahlstrom, 2010) ST8: The strategic role of the supplier is to support the customer s value creating processes. (Ballantyne and Varey, 2008) ST9: Service innovation starts with culture. (Berry et al., 2006) ST10: The success of an innovation depends on your ability to mobilize your network. (Hargadon, 2002) ST11: When an established logic for satisfying consumer needs is overturned, the business model must change too. (Teece, 2010a) The second comparative study comprises semi-structured interviews with both academics and practitioners. The aim of this analysis is to validate the common elements identified in the literature review, as well to identify any missing elements. This analysis may also point towards differences of opinion the two distinct viewpoints of theory and practice. This primary research compares the thoughts of leading academics in the field, notably: David Teece, Director of the Institute for Business Innovation, Professor of Business Administration, and holder of the Thomas W. Tusher Chair in Global Business, Haas

4 162 P.I. Furseth and R. Cuthbertson School of Business, University of California, Berkeley; Stephen Vargo, Professor of Marketing, Shidler College Distinguished Professor, University of Hawai i at Manoa; and Henry Chesbrough, Executive Director, Garwood Center for Corporate Innovation, Adjunct Professor, Haas School of Business, University of California, Berkeley, with leading practitioners in the field, notably: Jose Avalos, Director of Visual Retail, Intel; Jon Pittman, Vice President Corporate Strategy, Autodesk; and Erik Kiaer, Specialist Leader, Monitor Deloitte. The questions are listed in Table 1 and are based on the literature review. The interviews are segmented into three sections. The first section asks some personal questions to relax the interviewee and understand their definition of core concepts such as innovation and value. The second section covers general questions on the success and failure of service innovations and example companies. The final section plays back statements from the literature review in an attempt to further validate the different elements identified in the literature review comparative study. The case studies in the final comparative analysis comprise a longitudinal analysis of pairs of successful and failing (or failed) cases within the same or similar sectors, thus allowing for a deeper analysis of the complex interrelationships (Eisenhardt, 1989; Weick, 2007; Yin, 1994). This analysis is based on secondary data, and supported through primary research to confirm the analysis. The pairs of case studies are: Apple and Nokia mobile phones; Tesco and Sainsbury s supermarkets; Xerox and Kodak technology products and services; Amazon and Borders book retailing; Facebook and MySpace social networks. Two of the paired case studies are portrayed in more depth to highlight the main conclusions. The case study analysis includes a variety of sectors based around a different product-service utility focus in a range of physical-digital distribution settings, as illustrated in Figure 1. Figure 1 Sector focus of comparative case studies (see online version for colours) Note that some of the cases may be considered product rather than service firms. However, Vargo and Lusch (2004) argue further that goods are now dominated by the service elements. This service centred view implies that marketing is a continuous series of social and economic processes that is largely focused on operant resources with which the firm is constantly striving to create better value propositions than its competitors. Overall, this qualitative and comparative approach to the research is adopted in order to reflect the complexity of service innovation, as well as the rich variety of potential

5 The service innovation triangle 163 explanations for success or failure. The research presented here is clearly limited by this approach in that it can only begin to describe this complexity and so move us towards a better understanding of service innovation. This research does not seek to explain such complexity but instead aims to provide a broad framework for future analysis. 3 Service innovation business models A literature review highlights that there are many authors that discuss business models in relation to service innovation, including: Johnson et al. (2008), Baden-Fuller and Morgan (2010), Casadesus-Masanell and Ricart (2010), Chesbrough (2010, 2011), Johnson (2010), McGrath (2010), Osterwalder and Pigneur (2010), Teece (2010a, 2010b), and Zott and Amit (2010). However, definitions of a business model are varied and often all encompassing, leaving the manager with little idea as to how to embed innovation within this context. The essence of a business model is that it defines the manner by which the business enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit. [Teece, (2010a), p.172] The business model is a useful framework to link ideas and technologies to economic outcomes At its heart, a business model performs two important functions: value creation and value capture. [Chesbrough et al., (2006), p.108] Whereas innovation is more typically seen in the form of a new product or service offering, a business model innovation refers to the creation, or reinvention, of a business itself. A business model innovation results in an entirely different type of company. (Johnson, 2010) A business model describes the rationale of how an organisation creates, delivers, and captures value. This could be economic, social or other forms of value. [Osterwalder and Pigneur, (2010), p.14] Regardless of the author, common to these definitions is a focus on value: delivering, creating, and capturing. Even if definitions of business models vary, there is some commonality of elements but also some differences. Through an analysis of the business model frameworks, it is possible to identify the comparisons and contrasts. An analysis of the four most comprehensive business models are shown in Table 2. All of the business model frameworks consider value to be the key driver of service innovation. The value of any innovation lies in the value created. However, value is a complex concept. Even in simple terms, for example, where a commercial organisation pursues only economic goals, values may still vary. For some organisations, the value is in market share; for other organisations, the value is in profit; for others, turnover is the key metric and so on. The successful service firm delivers the relevant value. While these frameworks generally focus on value in commercial terms, all discuss value in other forms. This implies that the same model could be used in non-commercial situations where value may have a greater social or environmental rather than economic utility. With knowledge, both individuals and firms will trade-off such values. For example, does a customer choose a cheaper service in preference to a more socially inclusive service?

6 164 P.I. Furseth and R. Cuthbertson Table 2 Comparison of business model frameworks Elements of the framework Author Chesbrough Teece Johnson Osterwalder Value Value proposition Determine benefit to the customer from using/consuming the product/service Commercial or business model Cost structure and profit potential value network/ecosystem linking suppliers and customers Confirm available revenue streams Customer value proposition Profit formula, consisting of revenue model, margin model, resource velocity. Value propositions Revenue streams and cost structure Customer Identify a market Identify market Customer value Customer experiences segment segments to be targeted proposition segments customer relationships Service system Value chain to create and distribute the offering Design mechanisms to capture value Technology Select technologies and features to be embedded in the product/service Key resources and strategic capacity Competitive strategy to gain advantage Key processes that allows the company to deliver value in a repeatable way Channels and key partners Key resources Key resources

7 The service innovation triangle 165 In any event, in both commercial and non-commercial situations, there may also be a difference between the payer and the user. So, in a supermarket the shopper pays while the shopper s family might consume. Similarly, in the healthcare sector, a patient may use services paid for by government. In most cases, the service tends to focus on the point of direct contact, i.e., the paying customer or the user of the service. Ultimately, value is dependent upon the perspective of each actor involved. One supplier may value entry into new markets while another supplier values volume to build economies of scale. Similarly, one service firm may value revenue generation, while another firm values profits above all else. Likewise, one customer may value the speed of service, and another customer may value the minimal environmental impact of the service. So, a wide range of potentially disconnected values may exist. It is the commercial business model that attempts to align these potentially disparate values to create the overall value proposition. While value creation is the ultimate goal of the firm, sustainable value creation requires that value is created for everyone involved: the customer, the service provider, the supplier, all the stakeholders. In the frameworks under consideration, all imply that service innovations require all stakeholders to gain over the long-term for the interrelationships to be sustainable. However, the customer tends to be the initial focal point for driving value, especially in the business models provided by Johnson (2010) and Teece (2010a). Therefore, it is assumed that successful innovation depends upon the ability to provide added value through a relevant customer experience. The customer experience represents all of the outcomes necessary for customers to feel the desired effects of innovation. Note that there will be many customer experiences as this is dependent upon the differing perceptions of individual customers. In a mass market, the total market is segmented into similar groups of customers and their relevant experiences, as made clear by Osterwalder and Pigneur (2010), Teece (2010a) and Chesbrough (2010). The service system represents all the activities necessary to deliver an innovation. This will typically include existing as well as some new activities. Note that the service system is singular. In order to gain economies of scale, a single service system needs to deliver a variety of customer experiences to different segments of the mass market. Moreover, as Johnson (2010) stresses, this service system needs to deliver consistently, time and time again. While all the frameworks for innovation under consideration make reference to technology, Teece (2010a) in particular emphasises the embedded nature of technology in the overall product or service. The importance of this role is likely to increase as the technology, including information systems and data, of customers as well as suppliers interacts with the service firm. For example, a customer may use their mobile phone while in a store to obtain a virtual coupon for a discounted price. All the frameworks also make reference to key resources. These may include capital, people, stores, transport, warehouses, and inventory. It is worth noting that larger resources, while providing greater potential for innovation and hence greater innovation capacity do not equate to greater innovation ability. For example, the small, local organisation will often find it easier to innovate than the large multi-national corporation. Chesbrough (2010) emphasises the need to have a clear innovation strategy in order to gain competitive advantage.

8 166 P.I. Furseth and R. Cuthbertson While this comparative analysis of the relevant literature does not claim to be exhaustive, it does highlight the current lack of a common framework for service innovation. Furthermore, it points towards the commonly agreed elements that contribute to successful service innovation, namely: an attractive value proposition for all stakeholders, a clear business (or commercial) model, a single service system delivering a variety of customer experiences, supported by technology and information systems, alongside other key resources, such as capital, people, land, buildings, transport, and inventory. 4 Expert views The second comparative study validates the commonly agreed elements identified in the previous section, including validation by two of the key authors referenced. Moreover, this analysis provided the potential for some contrasting views by carrying out the same semi-structured interviews with both academics and practitioners. The identified elements quickly validated by this analysis are: value, business model, customer experiences, service system, and technology (where technology includes associated appliances, information systems, software, and data). One of the many interesting issues highlighted in the interviews is that the speed of service innovation through technological means is not always quick, neither is it always radical. Infrastructure takes time to change but often supports a step-change in service; software is more flexible; while new uses of information and data may change very quickly but will tend to support incremental rather than radical innovations. The identified elements that are clarified through this analysis are a plain division of key resources between people, tangibles assets (such as land, buildings, transport, and inventory), and financial assets (access to capital). The discussion around people, culture and organisation is particularly strong. All interviewees though that humans are a critical resource in making service innovation happen. People are a hugely important resource in any firm but their contribution to innovation capacity may vary enormously. Though generally more flexible than technology, there are still aspects of people that are more difficult to change. Some people are great enablers of innovation, while others may be more constraining. This variety of contribution not only reflects individual personalities but also reflects roles and responsibilities within the organisation. For example, the role of the quality control clerk is focused on consistency rather than change. Tangible assets cover both fixed assets and current assets, and so include machinery, offices, shops, warehouses, land, and inventory. These are an important identifiable element of corporate balance sheets, or audited public accounts, even though they may not be immediately apparent to the customer. Financial assets include all forms of cash and credit. The amount of finance available to an organisation is usually dependent upon a mix of current assets and current financial performance. However, innovation knows no such constraints! Innovative ideas and practices attract the availability of finance. This is the basis of entrepreneurial start-up companies. Hence, successful innovation is not usually thwarted by a lack of cash. Indeed, a lack of cash can be a generator of innovation rather than an inhibitor by encouraging people to think about doing things in different ways using the same resources.

9 The service innovation triangle 167 Finally, an extra element also became apparent, intangible assets (such as brand and intellectual property rights). While such issues had been noted in the literature review, the semi-structured interviews brought this element out much more clearly. Jon Pittman, Autodesk brought out this issue in explaining the support required for successful innovative customer experiences. The customer has to have trust in the brand in order to try the new experience. Nike and Virgin were two companies identified that are able to innovate on this basis. Erik Kiaer mentions Jaguar in a similar way in his interview, while Henry Chesbrough spoke similarly with reference to suppliers rather than customers, and specifically referenced Bosch. Intangible assets cover a wide variety of difficult to value assets, such as patents, trademarks, copyrights, goodwill and brand recognition, as well as potentially including customer contact details, and even unique process design within the firm. Note that in service environments, there is often a lack of intellectual property rights, which are the mainstay of the manufacturing firm. New products can be protected in law via intellectual property rights, while new services cannot be protected in the same way. An innovative new product cannot be copied directly, but an innovative new service is usually open to duplication immediately. Historically, this lack of copyright for service innovation has obscured the real activity within this area, while government surveys can easily count the number of new product patents to understand innovation activity within manufacturing industry. Like all assets, brand may enable and constrain innovation capacity. Brand assets may enable innovation capacity by providing trust, and therefore a willingness for the customer to experiment with new services with the knowledge that the brand is behind them. On the other hand, brand assets may constrain innovation capacity through the limits of brand stretch. For example, would a discount retail company be trusted to provide high quality legal services? This recognition of the importance of intangible assets chimes with the Vargo and Lusch (2004) service-dominant logic (SDL), which highlights the importance of intangibles, such as brand value and tacit ways of doing things. Apart from clarifying the common elements of a service innovation framework, this small expert analysis suggests that there is no obvious gap between theory and practice in practitioners and academics identifying the same core elements of service innovation. 5 Case studies Having identified the commonly agreed elements of service innovation, the comparative case study analysis aims to begin to explain how these elements interrelate. To illustrate these relationships, four contrasting cases studies are outlined here to reflect the ubiquitous and all encompassing nature of service innovation. The final synthesis results from an analysis of all the case studies outlined in the methodology, and their interrelationships between the common elements of a service innovation framework. Firstly, consider the low-tech grocery industry in the UK. In the 1970s and 1980s, Sainsbury s was the number one grocer in the UK, and famed for its continual radical innovation, especially in supply chain management and integrated information technology systems. Sainsbury s was the first UK grocery retailer to recognise that they could manage their distribution and supply networks better if they integrated them. Their distribution network became the standard for all their competitors to try to match. From a

10 168 P.I. Furseth and R. Cuthbertson value driven service innovation perspective, Sainsbury s focused on their network to restructure their organisation and so provide much better service systems for their stores and hence their paying customers, with higher availability, lower out-of-stocks and less stock lost, damaged or out-of-date. Tesco, the UK retailer, has similarly developed a competitive advantage through its online grocery service in the UK. In 12 years, Tesco has gone from zero to around $3 billion annual sales online of grocery products, providing a profit of almost $200 million per annum. 850,000 active customers place more than 300,000 online grocery orders each week. This radical innovation came about through the simple organisation of managing grocery orders through the extension of adding vans to the existing store infrastructure and supporting supply chain network. Once implemented, several iterations of incremental innovation have grown the service, for example, economically through the provision of more accurate stocking systems, and socially through greener deliveries using more environmentally friendly transport and bagless deliveries. Tesco now have sufficient scale within the London area to radically innovate again and reduce the impact on busy stores by centralising the picking system by moving to a central warehouse rather than an individual store environment. Innovation as a function of time can be emphasised in three areas. In the pre-launch phase, there are issues relating to idea generation (e.g., origin of ideas, quality of ideas, number of ideas, filtering of ideas). At launch, issues relating to the process of innovation are paramount. In the post-launch phase, there is a continuing focus on improving and innovating to offset competition and extend the service lifecycle. While the pre-launch phase may lead to disruptive or incremental innovations the post launch phase is a process of incremental innovations. Sainsbury s, like Nokia for example in the contrasting mobile telecoms industry, continued to be productive in the pre-launch phase, generating new concepts, but not productive in the launch phase, actually realising those new concepts. Similarly, they continued to innovate post-launch, incrementally improving the existing products and services but never radically. Like Nokia, Sainsbury s ended up creating lots of new ideas internally but became cautious about innovating until crisis however they are now innovating in an effective way. As a comparison in terms of innovation but a contrast in terms of sector, back in 1992, Jorma Ollila became CEO of Nokia. At that time, Nokia was suffering from internal disputes and was heading towards a financial crisis. The mobile phones market was in its infancy and Ollila created a radical strategy that restructured the organisation and focused away from the current mobiles users of that time (business people) and towards a younger consumer, providing them with an alternative to their parents landlines. The phones produced focused on brand image, with a lot of customerisation possible, extra functionality, and a robust product that could withstand being in someone s back pocket in a Finnish nightclub. There was little emphasis on price. This was a radical step at the time away from the conventional niche business user towards a mainstream culture with the result that Nokia s share price soared and grew 2300% during the first 8 years with Ollila as CEO. From a value driven service perspective, by identifying a potential new market (the mainstream consumer), Ollila restructured the organisation around both the broad services marketing required to build the brand and connection with the consumer, as well as the operational platform required to build in the mass customerisation of the product. The supporting network followed the increase in

11 The service innovation triangle 169 sales and grew accordingly. Nokia became the world s largest mobile phone supplier and still is today. However, that share is now declining. Having innovated radically once, Nokia then retreated to a more comfortable state, developing new products on the same basis but not radical new products and services until forced to do so as a response to the competition. There was a large degree of structural and cultural inertia in Nokia. In contrast, Apple revolutionised the consumer world through the ipod, then through the iphone, then through the ipad. However, Apple did more than develop a good product, it developed a good service through the ecosystems of itunes and iapps, similar to another great business model innovation of Gillette (Johnson, 2010). The Apple story contrasts with the story of Nokia in continuing the trail of radical innovation. By focusing on radical as well as incremental innovation Apple avoided structural and cultural inertia. It is also worth emphasising that Nokia and Sainsbury s often had greater innovation capacity than their competitors but did not have the innovation ability required to turn capacity into value. Thus, such competitors, despite their large resources and strong positioning, end up chasing the market rather than leading it because they were unable or unwilling to develop the necessary service systems to deliver the greater value to both customer and suppliers. The analysis of case studies highlights that many firms are and have been successful for a time, the key challenge is whether a firm can continue to innovate in their service provision. The case studies appear to show that service innovation can start anywhere, but must continue everywhere. Moreover, any framework for service innovation needs to provide a more integrated view of value creation through innovation than currently exists, encompassing multiple perspectives, and not limiting service innovation to linear development. To deliver the relevant value, an organisation must have the resources necessary for successful innovation in the form of tangible, financial and intangible assets, as well as people and technology. Within innovation capacity lie the foundations of service innovation success. These financial, tangible and intangible assets are the solid foundations of any service firm, and are difficult to change in the short-term, while people and technology may provide more flexible resources, being capable of changing more easily. The pairs of case studies chosen highlight the difference between innovation capacity and innovation ability. Successful service innovation is usually the result of the various qualities of people, technology and other resources, rather than the quantity of those resources. Even if companies have the resources or the capability to innovate, they may lack the ability to innovate, and so may fail. This is supported in the literature review by authors such as Tushman and O Reilly (1996) who emphasise that larger and older organisations tend to have more cultural inertia. Such organisations are usually only capable of incremental innovation, and may even fail at that. The focus is on the development of the branded experience to build current and future demand. However, in mass markets, different customer segments will have different requirements, expectations and desires. Thus, the customer experiences need to be multiple to accommodate such differences and so tend to be built around the flexible innovation capabilities of people, finance and intangible assets, forming an innovation

12 170 P.I. Furseth and R. Cuthbertson demand-based triangle, as presented in Figure 2. However, this still requires the right mix of technology and tangible assets to support this activity. Figure 2 Demand-based triangle (see online version for colours) Figure 3 Supply-based triangle (see online version for colours) The initial focus of a single service system is to ensure that the innovation is delivered as planned. Over time, the management of a service system will tend towards a focus on

13 The service innovation triangle 171 productivity, cost and consistency. Thus, a service system tends to be built around the structured innovation capabilities of technology, tangible and financial assets, forming an innovation supply-based triangle, as presented in Figure 3. However, this still requires the right mix of people and intangible assets to be successful. The service system is linked to the customer experiences through the business model. This provides the system for all parties to give and receive value in all its forms, whether it is economic value, social value, or any other form of value that is important to any of the parties involved: a customer, the firm, a supplier, or any other stakeholder. Hence, management requires the innovation ability to deliver services through relevant customer experiences delivered by a relevant service system, united by a relevant business model. This can be described as the realisation triangle with the resulting value representing the outcome of the innovation, as presented in Figure 4. Figure 4 Realisation triangle (see online version for colours) So, the outcome of any service innovation is dependent on the value created, for all involved: the firm, the firm s customers, and the firm s suppliers. Any sustainable innovation should create value for all these parties over the long-term. However, this value is only realised if the firm has the ability to deliver the required service in the appropriate way at an acceptable price or cost for all the parties concerned: firm, customers, and suppliers. Moreover, this ability is only relevant if the firm has a sufficient capacity of resources to succeed. Thus, any service innovation comprises of three simple levels, driven by the value created: innovation capacity: the potential for innovation innovation ability: the practice of innovation innovation outcomes: the result of innovation.

14 172 P.I. Furseth and R. Cuthbertson 6 Synthesis Putting all of the analysis together, the outcome of this research is the service innovation triangle (SIT), a simple but rich model, consisting of nine integrated elements in three layers. Figure 5 Service innovation triangle (see online version for colours) This SIT can be used by practitioners, as in the case studies, to explore service innovation opportunities for their firm, their customers, and suppliers. Academics may also use the framework for teaching the key elements of service innovation as well as a basis for further research in the area of service innovation. The SIT provides an integrated view of value creation through service innovation, encompassing multiple perspectives (their firm, their customers, and suppliers) across the key elements, and does not limit innovation to linear development. An elaboration of this view is presented in Furseth and Cuthbertson (2014). Of course, the SIT may represent any service firm regardless of their level of innovation. All firms aim to have a business model that creates value through a customer experience, delivered by service systems that are built on their resources of people and technology exploiting their assets: financial, tangible and intangible. However, any service firm is subject to a changing context: social, technological, economic, environmental, political and so on. This changing context means that the relevant value to stakeholders will also change. Service innovation provides the means to

15 The service innovation triangle 173 lead the search for greater value, however it is defined, such as cheaper, quicker, or cleaner; whoever is involved: customers, the firm, or suppliers. Hence, value sits at the top of the SIT, and the three sides of the triangle represent the main parties involved. Figure 6 SIT: unsuccessful firm in disarray (see online version for colours) If the service firm does not innovate then the value equation will still change and customers start to move away. The firm will then race to catch up with a new business model, through changing service systems to provide a new customer experience. But while financial assets may be more reactive, it takes time to change technology and people, and even more time to change tangible and intangible assets, leaving the unsuccessful firm in disarray rather than a solid SIT. Hence, successful service firms have innovation integrated into their daily strategy and operations in order to adapt to a changing context, and so keep the SIT integrated and moving as a whole rather than break up into individual elements. The case studies described illustrate just two of the many routes through the SIT, or two innovation journeys. Apple and Sainsbury s started out by considering how the supply-side could add value by becoming more integrated, suppliers in the case of Sainsbury s and developers in the case of Apple. That led to a change in the supply-side triangle, which in turn changed the business model, lower costs in the case of Sainsbury s and higher revenue in the case of Apple. The change in the business model led to new products and services, and changes to the demand-side triangle, leading to the supremacy of supermarkets over traditional markets, and smart phones over regular mobile phones, respectively.

16 174 P.I. Furseth and R. Cuthbertson On the other hand, Nokia and Tesco started their innovations on the demand-side with customer segments that were not previously well served, young customers in the case of Nokia and online customers in the case of Tesco. The business model was then developed to justify the supply-side triangle required to deliver to the consumers. Then, the customer experience helps create the new market as people start buying these new products/services. The existing suppliers and competitors see the growth, and so respond to change the overall context. 7 Conclusions Value driven service innovation provides new or better services motivated by value creation for the organisation, its customers, suppliers and partners, which is based on the organisation s innovation potential and realised through the management innovation ability. The SIT can be applied by businesses to develop value for their customers, as well as providing a foundation for academic research in the area of service innovation. By considering the context of innovation, it is possible to see why there are major differences between various sectors. For example, in the competitive market of grocery retailing, the products may often be similar emphasising the need to drive competitive advantage through innovative service systems, while in the mobile service provider market, the customer experience of the product may be the key innovation device, as demonstrated by the Apple iphone example. On the other hand, there may not be a competitive marketplace, for example in national health provision, but different customer segments still have very different value-creating needs. Within each of these different sectors, the key driver of value driven service innovation may be very different. Hence, it is necessary to test any generic model of service innovation against a range of different service scenarios. The SIT model provides a focus for questions to be asked to promote service innovation: What are the plausible futures for your market sector? Who are your future customers? What do they want of their customer experience tomorrow? How will you provide the necessary service systems? How will you make the new business model create value for all? How will you innovate to achieve success? Do you have the required innovation capacity? Do you have the required innovation ability? Do you have an innovation process for creating new value? This paper is useful for both thinkers and practitioners in innovation. This paper provides a new framework for academic analysis, as well as a tool for executives to implement innovation within the firm.

17 The service innovation triangle 175 Acknowledgements This article is a publication from the research project named Value driven service innovation (VDSI). The authors gratefully acknowledge the financial support from the Research Council of Norway Grant , Borg Innovation, and Accenture Norway. References Ahlstrom, D. (2010) Innovation and growth: how business contributes to society, Academy of Management Perspectives, Vol. 24, No. 3, pp Baden-Fuller, C. and Morgan, M.S. (2010) Business models as models, Long Range Planning, Vol. 43, Nos. 2 3, pp Ballantyne, D. and Varey, R.J. (2008) The service-dominant logic and the future of marketing, Journal of the Academy of Marketing Science, Vol. 36, No. 1, pp Berry, L.L., Shankar, V., Parish, J.T., Cadwallader, S. and Dotzel, T. (2006) Creating new markets through service innovation, MIT Sloan Management Review, Vol. 47, No. 2, pp Brown, T. (2008) Design thinking, Harvard Business Review, June, Vol. 86, No. 6, pp Casadesus-Masanell, R. and Ricart, J.E. (2010) From strategy to business models and onto tactics, Long Range Planning, Vol. 43, Nos. 2 3, pp Chesbrough, H. (2007) Business model innovation: it s not just about technology anymore, Strategy & Leadership, Vol. 35, No. 6, pp Chesbrough, H. (2010) Business model innovation: opportunities and barriers, Long Range Planning, Vol. 43, Nos. 2 3, pp Chesbrough, H. (2011) Open Services Business Models: Rethinking your Business to Grow and Compete in a New Era, Jossey Bass, San Francisco. Chesbrough, H., Vanhaverbeke, W. and West, J. (2006) Open Innovation: Researching a New Paradigm, Oxford University Press, Oxford. Eisenhardt, K.M. (1989) Building theories from case study research, Academy of Management Review, Vol. 14, No. 4, pp Furseth, P.I. and Cuthbertson, R. (2014) Innovation in a Consumer Society, forthcoming on Oxford University Press, Oxford. Furseth, P-I., Cuthbertson, R.W. and Reynolds, J. (2011) Value driven service innovation: a framework for identifying the potential drivers of innovation, XX1st International RESER Conference, European Association for Research on Services, Hamburg, Germany, 7 10 September. Gallouj, F. and Djellal, F. (Eds.) (2010) The Handbook of Innovation and Services, Edward Elgar, Cheltenham. Grinstein, A. (2008) The effect of market orientation and its components on innovation consequences: a meta-analysis, Journal of the Academy of Marketing Science, Vol. 36, No. 2, pp Hargadon, A.B. (2002) Brokering knowledge: linking learning and innovation, Research in Organizational Behavior, Vol. 24, pp Howells, J. (2000) Understanding the new service economy, in Andersen, B. (Ed.): Knowledge and Innovation in the New Service Economy, Edward Elgar, Northampton, MA. Johnson, M.W. (2010) Seizing the White Space. Business Model Innovation for Transformative Growth and Renewal, Harvard Business Press, Harvard. Johnson, M.W., Christensen, C. and Kagermann, H. (2008) Reinventing your business model, Harvard Business Review, Vol. 86, No. 12, pp

18 176 P.I. Furseth and R. Cuthbertson McGrath, R.G. (2010) Business models: a discovery drives approach, Long Range Planning, Vol. 43, Nos. 2 3, pp Osterwalder, A. and Pigneur, Y. (2010) Business Model Generation. A Handbook for Visionaries, Game Changers, and Challengers, John Wiley & Sons, Hoboken, NJ. Ostrom, A., Bitner, M., Brown, S., Burkhard, K., Goul, M., Smith-Daniels, V., Demirkan, H. and Rabinovich, E. (2010) Moving forward and making a difference: research priorities for the science of service, Journal of Service Research, Vol. 13, No. 1, pp Teece, D. (2010a) Business models, business strategy and innovation, Long Range Planning, Vol. 43, Nos. 2 3, pp Teece, D. (2010b) Dynamic Capabilities and Strategic Management. Organising for Innovation and Growth, Oxford University Press, Oxford. Tushman, M. and O Reilly, C.A (1996) The ambidextrous organisation: managing evolutionary and revolutionary change, California Management Review, Vol. 38, No. 4, pp Vargo, S.L. and Lusch, R.F. (2004) Evolving to a new dominant logic for marketing, Journal of Marketing, Vol. 68, No. 1, pp Vence, X. and Trigo, A. (2009) Diversity of innovation patterns in services, The Service Industries Journal, Vol. 29, No. 12, pp Weick, K.E. (2007) The generative properties of richness, Academy of Management Journal, Vol. 50, No. 1, pp Yin, R.K. (1994) Case Study Research: Design and Methods, 2nd ed., Sage, Thousand Oaks, California. Zott, C. and Amit, R. (2010) Business model design: an activity system perspective, Long Range Planning, Vol. 43, Nos. 2 3, pp

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