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As product complexity and diversity increase, it can take more time and consume more resources to search for, obtain, install, maintain, upgrade and dispose of products than production itself. This offers many opportunities for service innovation on its two change categories, that may be applied to service systems.

Service innovation is the output of applied research and development activities that have one or more of the following goals (National Science Foundation's definition):

  • Pursue a planned search for new knowledge, regardless of whether or not the search points to a specific application.
  • Apply existing knowledge to problems related to the creation of a new service or process, including work to evaluate feasibility.
  • Apply existing knowledge to problems related to improving a current service or process

Service innovation can impact customer - provider interactions and improve the experience of finding, obtaining, installing, maintaining, upgrading and disposing of products. Service innovation can enhance the capabilities of organisations to create value with stakeholders. Service innovation can deliver better self services, eliminating waiting and allowing 24/7 access via modern devices such as mobile phones, web browsers and kiosks.

Service innovation is strongly related to customer value co-creation, i.e. integrating the provider's resources (knowledge, skills, technologies and assets) with the customer's resources.

There have been identified four global trends entailing service innovation: 1) Demographic trends and sustainability concerns; 2) Trends in business and technology; 3) Trends in Internet collaboration and web-based service; 4) Trends in organisational innovation.

Service innovation is a combination of technology innovation, business model innovation, social-organisational innovation and demand innovation with the objective to improve existing service systems (incremental innovation), create new value propositions (offerings) or create new service systems (radical innovation). Often radical service innovation will create a large population of new customers (public education – students; patent system – inventors; money markets – small investors). Service innovation can also result from novel combinations of existing service elements.

A comprehensive definition of service innovation was proposed by Van Ark et al. (2003). Service Innovation can be defined as "a new or considerably changed service concept, client interaction channel, service delivery system or technological concept that individually, but most likely in combination, leads to one or more (re)new(ed) service functions that are new to the firm and do change the service/good offered on the market and do require structurally new technological, human or organizational capabilities of the service organization." This definition covers the notions of technological and non-technological innovation. Non-technological innovations in services mainly arise from investment in intangible inputs.

According to service-dominant logic, service science aims to combine fundamental science and engineering theories, models and applications with facets of management in order to enhance and advance service innovation. However, service innovation has been poorly understood and its impact has been neglected. In the past, service innovation was merely seen as a subset of technology innovation or similar to innovation in manufacturing. Recently, many researchers agree that innovation in services involves non-technological as well as technological characteristics.

Many researchers suggest models and frameworks for service innovation: Hertog proposes the four dimensions of the service innovation process, Liu and Chen propose the service innovation mechanism on customer-employee interaction, and Chen et al. represents "3V (value proposition, value deployment, value appropriation)", "3D ((service) delivery, design, development)" for an integrated service framework.

As the field of service innovation studies has expanded, two significant results have emerged: (1) First, it recognizes that the customer is not merely a passive recipient; rather, he is a co-creator of value; (2) Second, it emphasizes the collaborative relationship with all participants for interconnected resources. Hence, service innovation is a customer-oriented term and demands interactive activities in service networks based on service-dominant logic, in a 2-dimension value creation logic: the degree of co-creation and the degree of networked collaboration.

Sustainable Innovation represents, together with quality, productivity and compliance the four primary types of service measures. These measures enable designers and managers to identify specific elements that require upgrading. In relational systems, qualitative evaluations, oriented to relationship implementation and relationships viability, need to be measured. Each of these measures corresponds to a stakeholder perspective: customers evaluate quality, providers evaluate productivity, authorities evaluate compliance, and, in a very real sense, competitors evaluate sustainable innovation. Without competitors there is very little drive or incentive to innovate.

We must develop our knowledge about: (1) how to invest in service systems to sustainably improve key performance indicators (e.g. revenue, margin, growth, customer satisfaction, productivity, innovation, quality of life, social responsibility, environmental sustainability, and regulatory compliance), and (2) how to develop new service offerings, together with creative value propositions and improved business models.

The typology of service innovation helps identifying how firms proceed with service innovation, and is based on a framework that defines four categories of service innovation based on the degree of co-creation and the networked collaboration: (1) Conventional innovation; (2) Collaboration-based innovation; (3) Customer-oriented innovation, and; (4) Service-dominant innovation.

Services innovation incorporates both innovation in service industries and innovation achieved through services (in any organisation/business sector).

  • Innovation in services industries – where innovation is either applied to an industry regarded as service-based, or results in a new-service based industry (such as water monitoring services, internet service providers and consultancy for works in agriculture); and
  • Innovation through services (in any organisation/business) – where the application of a service as a mobile phone network) results in innovation in an industry generally not classified as services, such as fisheries.

Innovation in the service sector is closely related to the services sector productivity growth.

Services innovations can and need to be supported at four different service innovation levels and by different instruments: (1) at activity level; (2) at firm level: (3) at sectoral level; (4) at market level; this can be done by companies through that service innovation framework which is best suited to the firm's specific.

There is a wide scope for innovation not only in service concepts as such (i.e. new or improved service products) but also as service process innovation, service infrastructure innovation, customer process innovation, business model innovation, commercialisation innovation (sales, marketing, delivery), and hybrid forms of innovation serving several user groups in different ways simultaneously, and service productivity innovation.

Because there was a growing consensus that much of innovation in service sectors is not adequately captured by the technological product and process innovation concept, it was decided to include marketing and organisational innovation as new types of innovation in the third edition (published in 2005) of the Oslo Manual - the most used international source of guidelines for a standardized collection and use of data of innovation activities.

The Oslo Manual recognises four ways that firms can innovate: through (1) product, (2) process innovation, (3) organisational and (4) marketing innovation. The Community Innovation Survey (CIS - the most comprehensive European-wide approach to measure innovation based on surveys) identifies such different innovation types through surveys addressed to enterprises. Based on the most recently available data from the CIS, the following trends have been observed:

  • A lower percentage of all sector enterprises as opposed to manufacturing firms are "technical innovators";
  • There are no substantial differences in the percentage of all industrial and service sector enterprises that introduced non-technological innovation: either organisational or marketing innovation;
  • Service enterprises, generally, do not innovate less than manufacturing enterprises, but great differences exist between knowledge-intensive and other services (continuous process consisting of a series of incremental changes), contrary to innovation in manufacturing (which is often more radical);
  • Knowledge Intensive Business Services (KIBS) enterprises show similar innovation patterns to those of manufacturing enterprises, because the R&D intensity of this type of services is above the average of manufacturing enterprises;
  • A "more entrepreneurial" and radical approach in innovation management drives the long-term success, not only in manufacturing but also in the KIS sector

Servitization - a new concept from service science - involves the innovation of an organisation's capabilities and processes so that it can better create mutual value through a shift from selling products to selling product-service systems. Studies published by the European Commission demonstrate the importance of innovative business models for sustainable product-service systems.

Knowledge Intensive Services (KIS), play a non-negligible part in overall services sector innovation, and in its contribution to aggregate productivity growth.

R&D and innovation programs need to be better aligned with the specific requirements of service innovation. Innovation in services is less driven by technological research projects than by organisational innovation and new business models. This should be better reflected in service research priorities, as well as by developing new forms of knowledge transfer from research to the business community.

Measuring innovation performance in services at national level is based on the Service Sector Innovation Index (SSII) - an attempt to define an aggregate index of the innovation performance in the service sector. Using a selection of 12 indicators of the 29 innovation indicators used in the 2008 European Innovation Scoreboard (EIS), a separate composite indicator measuring innovation performance for services and industry was constructed and tested.

The rising demand for service innovation has huge implications for skills and knowledge base that underpins them. People are needed who can understand and marshal diverse, and increasingly global, resources to create value. Quite often, these resources are accessed using advanced ICT and new global-spanning business models. The people with such skills are known as adaptive innovators - those who identify and realise a continuous stream of innovation in service systems.

Service innovation is technology-enabled but human-centred and process-oriented. The strategic management for innovation success assumes:

  1. End-to-end (strategic and operational) alignment:
  • Service strategy to business model to customer needs
  • Framework of design practices
  • Customer process, encounter process and provider process to assure superior customer experience (value-in-use)
  1. Balancing exploratory innovation with exploitative innovation, i.e. combine mature services with an emergent service.

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