1. Service Innovation and Competitive Advantage
Michael Abramson
Eevie Amina
Brett Carter
Joe Hamilton
Bryce Kropf
Richard Swanson
MKTG 463
December 3rd, 2014
Dr. Robert Harmon

2. Abstract
Service and service companies have not only become the largest industry and most successful business
model in the whole world, but has also become the place to be for product companies as well, based on the idea of
service transition and ultimately service transformation. Here, businesses seek to develop service offerings that are
tailored to the needs of the customers, instead of simply developing services and hoping that the service elements
satisfy the needs of the customers. This may be a hard concept for traditional product companies to grasp, however,
given the fact that product companies are used to the demand of their products being driven by the customers and
their perceptions of the product (product design, product features, the tangibles). Even fo r product companies, there
are better ways: by developing a service transition model, product companies can develop service offerings, or
develop service offerings that support the customer and thus reap the competitive advantages and benefits that
service companies do.

3. Introduction
Our research project will focus on the aspects of service innovation that will lead to competitive advantages
for product focused companies. Much of the paper will focus on manufacturing and technology as this market
vertical is still heavily focused on products as the driver of their business, despite the existence of a service
dominant culture.
It has become increasingly important for product -based companies to focus on services as most
manufactured products have slight or very few differences. Consequently, there are very few options to create
differentiation, other than massive expenditures on R&D to create innovative products which can be cost prohibitive
and difficult to maintain for many companies. Service innovation creates a new field of value for products that
normally do not have many noticeable differentiators. (Lin, Lin, 2013)
Service innovation is able to create a differentiation because it allows the addition of intrinsic v alue for the
brand and the company, which has nothing to do with the product itself. By creating better services around a
product, the product itself becomes more valuable to customers as it is no longer just a widget, but rather has an on -
going value from purchase to the end of its life. This value is achieved through advancements in interactions with
the customers, suppliers, competitors and will be furthered by continual study of the environments in which the
product and its services interact. (Lin, Lin, 2013)
Service innovation is considered a relatively new system or method of achieving new value and
differentiation. It has become such an important part of the value equation in recent years that the measure of a new
product’s success can be somewhat dependent on its related service. An example of this is software: a product that
constantly changes requires a great deal of on-going support to integrate those changes, and to create a positive or
valuable experience for the software users. (Lin, Lin, 2013)
This creates a tandem effect for innovation in which software or product innovations can’t surpass service
innovations, otherwise the competitive advantage gained from the product innovation will be null because the
service is unable to keep up with integrating these changes with the customers and suppliers. (Lin, Lin, 2013)
Another important aspect of service innovation’s use in product companies is due to the new understanding
of how customers asses value. According to A. Parasuraman, the customer assesses the value of products in several
stages. The most important stage for continued purchasing and longer term relationships with that customer is the
post-purchase stage. In the post-purchase stage the customer completely reassesses the products value now that time
and money have gone into the purchase. If in this post -purchase stage the customer does not feel satisfied with the
service they receive, it will detract from the value and may ultimately lead to a lost customer despite the product’s
own value. (2014)
Service innovation, if done correctly, can greatly influence a company's competitive advantage so it is very
important that Firms continuously innovate their services and products to be competitive. This is where service and
manufacturing firms usually differ; when it comes to their innovation. It is important to learn the differences
between service innovation and manufacturing innovation to create a process that will further the development of
service innovation as a competitive advantage for product companies.
One type of innovation that companies can strive for is open innovation, which is the idea that firms can,
and should, use external ideas as well as internal ideas, and internal and external paths to market (Chesbrough,
2001).
One way firms can move towards open innovation for services is to work closely with customers to develop
new solutions. Firms who specialize in products usually have a harder time moving to service innovation because of
the organizational structure. Firms who have this traditional value chain have a stronger emphasis on products.
Under this model, services are only used as a tool to get a sale and keep a products working after a purchase , like a
warranty for example.

4. For most product-dominant companies, service innovation creates opportunities to improve customer
relationship and separate themselves from their competitors in terms of adding more value to their products. Lance
Bettencourt suggests that there are three ways customers define value: create new ways to h elp the customer get the
job done, discover new ways to get a particular job done better with enhanced services, or provide new ways to help
the customers with jobs related to product usage. Lance goes on by stating that customers desire to have the job
done, regardless of the task being used to complete it. Firms that focus on any of these areas are usually more
creative and are more likely to expose service innovation possibilities (2013).
Firms today compete more on the basis of services, rather than the basis of products. “The competitive
advantage of services has become increasingly evident, as there is little to differentiate competing products from a
customer’s perspective.” Furthermore, advances in technology have reduced the life -cycle of products. It has
become crucial that firms not only excel in its products, but also in its service in order to maintain a competitive
advantage.
From a business perspective, services have become core components to many companies. As Kandampully
mentions, a firm’s service function interacts with almost every activity of the firm ranging from consumers to
business partners. The relationship the firm builds with these components can determine the success of that firm. A
firm can build its competitive advantage by building and maintaining strong relationships with its consumers.
One tactic that firms have used in the past in order to keep their customers engaged is to introduce a
product far in advance. This keeps the customer excited about the specific product. It also reminds consumers that
the firm (that introduced the product) is keeping up-to-date with cutting edge technology. When a customer feels
that a firm is up-to-date with the latest technology, they feel a sense of security with the introduced product.
Kandampully mentions that it is important that firms “think for the customer” by creating services that drive the
marketplace. When firms can offer value to the customer, it strengthens the relationship between business and
consumer (2002).
This report will be a full analysis of the information above, as we apply a 4 stage framework to product
companies looking to make the service transition into more service offerings. Below is a list of research questions
we will be answering throughout the duration of the report:
● Catalysts of service innovation?
● What resources and capabilities does a product company need to optimize and maximize their hybrid
offerings?
● What are some good examples of service transition and transformation?
● How can a product company use service innovation as a source of competitive advantage? (Main Question)
These questions will be in a similar order throughout the paper. First, the paper will go through an analysis
of the general trend that has become known as service dominant logic and the move away from goods dominant
logic. Next a model will be presented that represents a solid service transformation model, that moves from product
life cycle services (PLS), all the way to process delegation services (PDS). After that some examples will be
presented that show traditional product companies moving from stage to stage of the service transformation life
cycle. Finally, the paper will be concluded by bringing all the information together; this is where specific
competitive advantages will be talked about that are a direct result of service transformation.
History of Market Transformation
Period of Discovery:
Marketing has been around since the beginning of the twentieth century. Between 1900 and 1910
expression was given to ideas which then became incorporated into the body of the “marketing thought” concept.
Before the 1900’s, marketing was thought of as the study of management practice, but still unconcerned with
distribution. Competition was not a concern in most markets and demand and supply were farther removed from

5. each other. New interpretations of activities involved in economics were needed, which helped lead to the discovery
of marketing as we know it today (Bartels, 2001).
Until the idea was conceived and the term “marketing” was applied, the practice was called “trade”,
“distribution”, or “exchange.” Early studies were called “Distribution of Products ” (Bartels, 2001). Only until after
the turn of the century was the term “marketing” used. In 1905 at the University of Pennsylvania and again in 1909
at the University of Pittsburgh the term began showing up in course titles. The growing interest in trade and the idea
of the new meaning in distribution was not singled out to just one person but rather widespread. Among one of th e
first to articulate the concept of marketing was Ralph Starr Butler. He explained that by using the term “marketing”
he meant everything that the promoter of a product does prior to the actual sale (Bartels, 2001). This was one of the
first times marketing was thought of as separate from selling and advertising.
No writings before 1910 were concerned with sales management, wholesaling, marketing research or
retailing. Because of the need to stimulate the economy as buyer’s markets began to replace selle rs markets,
advertising become a big interest to the business world. The idea was to find out what motivates consumers. Both
businessmen and psychologists helped put together the literature in this time period; they believed psychology to be
a stable foundation to the theory of advertising. With advertising becoming more and more popular, it led to the
development of personal selling – new products, new markets and new forms of competition were emerging. These
new ideas were still thought of as psychological and more of an “art” rather than a “science” (Bartels, 2001).
Period of Conceptualization:
From 1910 to 1920, concepts on the structure of marketing were slowly being built. During this decade the
economy of the United States began to grow. Urbanization and industrialization were on the rise, new products were
being launched and industries needed more sales effort with improved quality. As these industries developed the
establishment of the Federal Trade Commission was born, and Labor unions were approa ching management for
representation of their employees.
Three categories were developed on the study of marketing. Functional, institutional and commodity were
the approaches that were now being closely examined (Bartels, 2001). The functional approach looked at
“elements” of marketing which were identified as selling, buying, transporting and storing of products. The
institutional approach during this time saw merchants as specialists that handled commodities t hrough different
stages of distribution. They saw economic specialists as contributing to the reduction of distribution costs. Paul H.
Nystrom wrote an operating manual called “The Economics of Retailing”, which contained the structural elements
of operating principles. This manual recounted the history of retailing in comparison with American and foreign
companies. The commodity approach was mainly focusing on agricultural products and manufactured goods. This
dealt with practical questions as to the economic contribution of marketing (Bartels, 2001).
Some additional concepts were developing during this time, including economic utility creation, time and
place utilities and possession utility. These are all marketing activities, which resulted in exch ange, and
consummation of the market. These were thought of as key concepts in the economic rationalization at that time.
Psychologists continued to interpret marketing in terms of advertising applications and how it invokes
memory. However the idea of marketing, journalism or advertising agencies was never brought up. By 1915
different points of view were being examined, and were involving not only psychologists but writers and sales
managers. This was noted as a “great change”, as advertising was now more than just psychological applications,
they were taking place in the business practice as well. These new ideas of advertising were directed toward ultimate
consumers, and still little attention was given to the selling of industrial or business customers (Bartels, 2001).
The theory of personal selling emphasized merchandising, store keeping and techniques that involved
informing and selling the retail customer. This helped develop the responsibilities of the salesman, and in particular
the traveling salesman. The personal and impersonal development of the selling force was steadily increasing in the
business world. Personal selling was successful because it resulted in a sale. The idea that consumer’s had to be
careful of the seller taking advantage of them was not even a question at this time. However in 1920 the interests of
buyers and sellers began to be recognized. Norris A. Brisco wrote several books which in turn helped develop
policies for salesmen that suggested they were not to try and force the customer to buy which reduced the haggling

6. and pressure selling that at the time went hand and hand with retailing. Later when it was recognized that the art of
selling could be taught and learned, it was understood that a good salesmen had to have better human qualities
including courtesy, intelligence and the general interest in others (Bartels, 2001).
With the increase of selling after World War I, there was a demand for greater proficiency. This called for a
new type of management talent, the management of the selling function. There had been nothing written up to this
point with any managerial aspects of this process. The line of thought that was to develop into marketing
management theory was born and writing began to pour out concerning the management of selling. Several concepts
were developed, including some from Frederick W. Taylor. His theories of management led business saw
management as “supervisory” behavior, as they were responsible for their own systemization and organization.
Selling was now a function closely related to the evolving use of the term “marketing ” (Bartels, 2001). Sales
management was now part of the total marketing activity and related directly to the entire business enterprise.
The Period of Integration:
Wholesaling and Marketing research appeared in the late 1920’s. This was known as the “coming of age”
for the discipline of marketing. The concept as a whole was now termed the “principles of marketing”. This term
first appeared in the writings of Paul W. Ivey, Fred E. Clark and Theodore N. Beckman. This idea of “principles”
came with the notion that the marketing experience had become well defined and now rules of thumb could be
designed as guides to action. Marketing was now thought of as an economic activity, affected by the social
conditions of the market and involved the performance of basic functions of distribution of products. This slightly
altered the definition of marketing to “all of those activities involved in the distribution of goods from producers to
consumers and the transfer of title”. Some concepts that become recognized during this time frame were things like
convenience, shopping and specialty classes of consumer products, and the marketing channel (Bartels, 2001).
These all show the level of thought that was being put into the concept of marketing, understanding that is was no
longer just buying, selling and distribution that made up the function of the marketing concept.
Aside from just the general marketing thought being further developed was a huge advancement in retailing
thought. A number of New York merchants and professors at New York University wrote a series of books called
“The Retailing Series” (Bartels, 2001). These explained the scientific method to the solution of retail problems. The
series included works on subjects of buying, credit, and store organization. It also included things such as
management, merchandising, personal relations, and salesmanship.
As mentioned previously, wholesaling appeared in the late 1920’s. This is where it received its first
scientific analysis and was given a description that showed the practical and theoretical differences between retailing
and wholesaling. Theodore N. Beckman put together a study that helped make the distinct ion between the two and
through successive revisions of his work, wholesaling itself was depicted as an institution (Bartels, 2001).
This was just about the time when credit became a subject more closely related to marketing. New
agencies, new credit instruments and new terms of sale were introduced into the retail and wholesale markets. The
Federal Reserve System, along with credit bureaus provided credit assistance to promote a stimulus in the sales
industry. With the introduction of automobiles, installment credit was introduced and became a big promotional
tool.
In the 1920’s the most significant trend was that of salesmanship, which led to new measures of integration
of salesmen’s work. Selling became more than just an exchange between a seller and a buyer; it became regarded as
a full time occupation that required skill and responsibility. It required the salesman to know pricing, policies,
advertising programs, distribution channels and most important, the customers’ needs. Management of salesmen
became a key role in business.
In this same timeframe advertising moved to a higher level of importance. Otto Kleppner formed a link
between advertising and marketing when he developed the conception of three stages in advertising a product:
pioneering, competitive, and retentive. This was known as the “advertising spiral” (Bartels, 2001). This idea unified
the advertising thought process, of which other marketing actions and decisions could be organized.

7. Marketing research was also new to the marketing thought at this time. Prior to the 1920’s, scientific study
was conducted merely on the interest of findings rather than any sort of methodology. George J. Frederick and
Virgil D. Reed began to write formal writings specifically about the systematic and scientific research methods they
linked directly to marketing (Bartels, 2001). At this time research turned from psychological to consisting largely of
analysis of operating figures, and the attention shifted to questionnaires which sup plied a new technique for
analyzing markets and marketing.
Period of Development:
Some major influences on marketing from 1930 to 1940 had a big impact on how we see it today. There
were both social and economic conditions that played a big role. This was the time of economic depression, big
growth in population from urban to suburban areas, regulations of business activity, and intense competition in
distribution because of new marketing concepts and techniques (Bartels, 2001).
Even with these influences, marketing continued to be viewed as a functional management area and a form
of economic production. Prior to the 1930’s marketing had been dealt with as a separate functional area where
decisions were not integrated within the business and their distributive system. Marketing was becoming viewed as a
process broader than just economic behavior. Ralph G. Breyer began to write about some concepts of marketing that
were slowly gaining traction. He broke free of the conventional ideas of the subject , and viewed marketing as the
activity involved in fulfilling certain tasks rather than as a list of activities or functions themselves. He identified
these tasks as negotiations, storage, quality, packaging transportation and payment. Channels were not th ought of as
series of stages in which separate operations occurred in a row but as events that can take place in opposite
directions, meaning flows of information can be communicated back and forth throughout the channels.
Marketing thought became more quantitative rather than qualitative during the 1930’s. Most of the
judgments that were formed in prior years now had factual support with evidence collected in the increasing
numbers of surveys. These surveys were now more than just simple opinions; they were replaced with complex
questionnaires that focused on market studies and different kinds of marketing problems. Studies of sales quotas and
distribution cost analysis were being used more often, and statistics became a big portion of the marketing function
(Bartels, 2001).
There were also significant changes in the use of consumer credit. Economic conditions began to improve
and personal loan credit grew because of the different types of agencies like commercial banks that were now
offering this type of service. New ideas in technical thought also emerged in advertising through psychological
discoveries and media studies. Economic analyses were designed to measure the effectiveness of advertising during
this era of depression.
Period of Reappraisal:
The period of the 1940’s to the 1950’s did not have as much significant changes as year’s prior. Industrial
and academic functions were disrupted by World War II, which created opportunity for new technologies and thus
new ideas to develop. The emphases of functional and institutional concepts were revised to reinforce the
generalizations that were thought of as inherent in the knowledge of marketing. The idea that marketing thought was
more of a science than anything else was scrutinized.
In 1940 there was a shift to a more “managerial” approach. The planning of research and marketing
received more attention and were now thought of as managerial marketing functions rather than just marketing
functions. After the war E.A. Duddy and D. A. Revzan came up with a new concept entitled “Marketing, an
Institutional Approach” (Bartels, 2001). This concept had a holistic interpretation of marketing in our economy.
They described the marketing structure as “an organic whole made up of interrelated p arts”. These parts are subject
to growth and change depending on economic and social forces. This differed from traditional approaches as it
viewed the operation of the whole “marketing mechanism” rather than any one particular segment. This idea
introduced government as more of a participant in business as opposed to just a regulator of business.
Period of Reconceptualization:
Prior to the 1950’s there was little evidence to support the fact that there was different approaches to
marketing thought, and was considered to be monolithic (Bartels, 2001). By the mid 1950’s large groups with

8. different opinions about marketing thought and education began to speak out. This is the time period that marketing
was “reconceived”, and new terms were introduced to convey these ideas. In this stage it was difficult to determine
what direction further development of marketing thought would take, but there was now a clear difference between
the traditional concept of marketing and the conception of marketing in broader terms. The concept of “marketing
mix” came into play with the use of predetermined objectives and manipulation of variables (Bartels, 2001). This
means the focus was on figuring out what the customer wants, and marketing to match their findings, rather than
designing products and services they “think” the customer wants. John A. Howard viewed marketing management
as the “making of decisions concerning products, channels, p rice, promotion and locations” (Bartels, 2001).
The idea of using the customer’s viewpoint emerged during this time. Today we call this the “voice of the
customer”. This was the starting point of all marketing planning. After 1950 this form of marketing thought had
become a key concept that would become increasingly important in years ahead. This also helped jump start the
idea of the social interpretation of marketing, which uses marketing analysis of research methods that were devised
from other social sciences. Marketing managers realized that the consumer market not only deals with economic
and psychological factors, but also social and environmental factors as well. The social concept of marketing is
where society meets its own consumption needs, rather than business meeting the needs of consumers.
Marketing’s Evolving Identity:
The next 50 years of the evolution of marketing can be best explained by using a more abstract view.
Robert F. Lusch characterized marketing thought and practice into three categories; “to market”, “marke ting to”, and
“marketing with” (Lusch, 2007). The general idea behind “to market” is exactly that, to take things to market.
“Marketing to” is the idea of identifying customers and marketing to them. “Marketing with” is taking it a step
further by collaborating with customers to co-create value.
To Market:
With ongoing shortages of supply, early marketing thought was to introduce products into the market.
Supply and productive capability were scarce so the role of marketing was to simply help society get these allocated
resources. These resources were tangible materials. These tangibles were used in production and were sourced and
transported before production began. The end result was excess inventory that had to be stored, so it was during this
period that marketing focused on how to clos e the gaps between production and consumption.
During this time the American Marketing Association defined marketing as “business activities involved in
the flow of goods and services from production to consumption” (Lusch, 2007). The thought behind this was that
the tangibles had value because products possessed utility. The idea that marketing began when the manufacturing
process ends was of popular belief. Marketing was thought of as wasteful unless it could be shown to add the

9. utilities of time, place and possession. The public was concerned that marketing cost too much, but they did not take
into consideration how marketing innovations made the industrial revolution possible.
Marketing To:
In the 1960’s distribution and production had grown significantly. There was no longer a lack of supply,
but rather a shortage of customers. Organizations realized they now had to be more customer oriented. The concept
of making the business do what best fits the customer, rather than making the customer do what best fits the business
was the turning point from “To Market” to “Marketing To”. Getting the product to market was no longer the issue;
it was actually marketing the product to get the consumers to purchase them by generating demand. The decision
making on products, the channels used, price, advertising and location were all now part of the marketing concept
(Lusch, 2007). These all played a part in getting the customer to purchase and more import antly, to be satisfied.
It was during this time that the AMA definition of marketing was changed to reflect this concept. E.J.
McCarthy modified this definition to “marketing is the performance of business activities that direct the flow of
goods and services from producer to consumer” (Lusch, 2007). Marketing was now viewed as part of the entire
process from manufacturing to selling to the end user. McCarthy believed that marketing should be involved with
the production, pricing, distribution and the promotion of goods, with the intention to satisfy the customer.
This concept of focusing on the customer and be purely market oriented often did not work. In 1962
President John F. Kennedy delivered an address to congress. He explained how more often than not the views of the
consumer were being ignored. He asked that the Federal Government have more involvement to help increase the
consumer’s interest. He explained how this was to be initiated by giving consumers four rights: The right to safety,
the right to be informed, the right to choose and the right to be heard. This helped marketing transform into a
broader role, which is to serve not only businesses but also the goals of society. Marketing doesn’t end after the
transaction; it extends well beyond the exchange.
“Marketing To” lasted several decades but began to lose traction in the 1990’s. The reason behind this was
due to market saturation. Consumers were being bombarded with advertising and saw this as intrusive. When
customers are overwhelmed with advertising, they tend to avoid it or ignore the message a ll together, making it
ineffective. An alternative of marketing was needed, one that can account for the relationships that play such an
important part and yet was not being recognized. Firms were still focused on a dominant logic that dealt with
manufacturing goods in large quantities in order to keep costs down. They realized employees and managers were
never interacting with the customer. They needed to be reminded of the importance of customer satisfaction.
Marketing With:
Unlike the “To Market” and “Marketing To” philosophies which considered customers as exogenous or
outside the marketing role, “Marketing With” philosophy views the customer as a partner in the co -creation of value.
The new dominant logic for marketing has become known as the service-dominant logic (S-D). This logic
recognizes operand and operant resources as being different. Operand resources are tangible. Operant resources are
ones that produce effects and are most often intangible. In previous concepts, customers where though t of as
operand resources. They were segmented, targeted, and convinced to buy. Under the new logic of “Marketing
With”, customers play an active role in the exchange process. Under this new idea, the role of the customer is crucial
because they are now thought of as a “co-creator” of value. Marketing is now thought of as a process of interacting
with the customer. Value is perceived as “value in use”, meaning the value is derived from the use of the product or
service rather than just the product or service itself (Lusch, 2007).
There is a clear distinction between co-producer and co-creator. A co-producer involves actually helping
produce the core product or offering, and studies have shown the customer does not normally want to co - produce.
The co-creation is something that always occurs. This concept argues that value can only be created by the use of the
product or service, otherwise known as “value in use”.
The “Marketing With” philosophy suggests that this is an adaptive process where firms focus on the
customer and collaborate with them to create, deliver and sustain value. Competitive advantage moving forward
will be closely linked to co-creating value with customers.

10. Changing From Goods Focused to Service Focused
There are two dominating logics which rule the business world, good dominant and service dominant logic.
Business has traditionally been focused on manufacturing and producing output in order to make a profit. But
scholars and leading edge businesses are advocating for a change from goods dominant logic to one of service logic.
These logics can be seen in both business to consumer and business to business, even in entire industries like
software. A lot of companies are shifting from goods to services because that is how the eco nomy is changing in
developed countries. The new idea is that virtually all economies are creating and exchanging more services than
goods. With this change companies need to also make a change and start paying attention to the services which they
offer.
The logic behind changing with economies is so simple its almost becoming a truism. The logic
traditionally comes from marketing fundamentals. It is only a logic, and there are some questions about if it’s the
right logic or if it will transition from B2B and B2C. It is clear that a shift needs to happen to accommodate the
shifting economies and service is the right shift.
There are two types of perspectives on services they can offer; they are goods as tangible output that has
value as the primary exchange by having a restricted type of good, or an add-on that enhances the value of a good.
This is primarily thought of as goods dominant logic as opposed to service dominant logic. The definition of service
is a process of doing something for another party, on its own without the presence of a good and it identifies the
service as the exchange activity. In service dominant logic goods still play a very important role; they are just not the
only thing which satisfies an exchange. As the name explains goods dominant logic is focused around goods or the
products. This included both the tangible product and the intangible (services).
Subdividing and Breaking Free from G-D Logic:
The article ‘Service transition: finding the right position on the goods-to-services continuum’, by Gebauer,
H. et al (2012) argues that with the advent of many sub disciplines in the marketing industry like business to
business and services marketing was to supplement the lack of logic behind goods based logic. Goods dominant
logic was so focused on the good or product that marketers had to expand to more general issues of creating value
and facilitating an exchange. The authors believe that the advent of B2B marketing was due to an inability for goods
based marketing to work in a business to business setting. The thoughts behind how businesses marketing began
changing from an interactivity diagram to a relationship based diagram. B2B marketing is where firms developed
collaboration and partnerships with customers.
There is a very important distinction between goods based logic and service based logic and it is found in
the concept of service. Service dominant logic is defined as the application of competences for the benefit of another
person. The definition uses the term service, as opposed to services plural which is typically used in goods based
logic. The use of services represents a change of thinking about value in terms of operand resources to operant
resources. Goods based logic sees a service as units of output, service based logic sees service as a process doing
something for another party. The value creation turns from producing to collaborating and co creation between
parties. This process of providing service for another party in order to obtain services in return is the purpose for
exchange, which is service exchange for service. Goods are not left out of the equation completely they are just used
as complements for service. Goods are still important in service dominant logic, however service is the most
important.
Service dominant logic represents a shift in logic of exchange and not just a shift in a type of product
offered. This logic provides a more solid foundation for a transition from a manufacturing model to a service
provider model. The authors state that service dominant logic is more of a mindset and an organizing framework
rather than a theory. The article lists 6 ways to transition from product focus to a service focus; they are:
1. From thinking about the purpose of firm activity as making something (goods or services) to a process of
assisting customers in their own value-creation process.,
2. From thinking about value as something produced and sold to thinking about value as something co -
created with customers and other value creating partners.
3. From thinking of customers as isolated entities to understanding them in context of their own networks.

11. 4. From thinking of firm resources primarily as operand to operant.
5. From thinking of customers as targets to thinking of customers as resources.
6. From making efficiency primary to increasing efficiency through effectiveness.
Key Concepts of Service Innovation
It’s no secret: business has moved to a model that is orientated towards providing services to customers,
rather than being orientated towards creating products that the customer wants. This shift from a goods -dominant
logic to a service-dominant logic has made companies completely change their business models; now the focus is on
things like value co-creation (with all kinds of customers), creating a lasting impression on the customer that goes
beyond the product they received, being able to monitor, evaluate, and change customer perceptions, and many more
ideas that all go much further than simply selling a product to a customer.
With this being said, it is no surprise that the service industry is completely dominating the economy in
terms of growth, profitability, reliability, and overall success. And although the success of the service industry may
be true, service innovation can be a tough concept to grasp, so this section is designed to explain some of the key
service innovation concepts that may help to explain why moving one’s company from product to service focused is
a good idea.
● Innovation: This is basically the ability to change operations in order to improve them. Thus, allowing a
business to create a better customer experience, positive word-of-mouth, increased customer retention and
loyalty, higher revenues, etc.
● Value Co-Creation: Value co-creation is all about the collaboration of different members in a supply chain
(manufacturers, retailers, wholesalers, producers, customers, etc.) in order to increase the value of a product
or service, in order to provide a better customer experience.
● Service Dominant Logic: Service dominant logic is the new wave of thinking for companies. In this sense,
companies are supposed to see themselves as a provider of service and should always be looking for ways
to improve their service.
● Goods Dominant Logic: Goods dominant logic is the old way of thinking for companies. Years ago, many
companies’ focus was on creating as many goods as possible, without much of a focus on quality or
providing customers with a service. This meant higher error rates and lower customer satisfaction,
retention, and loyalty for product-based companies.
● Customer Loyalty and Retention: Customer loyalty and retention is all about creating a lasting impression
that goes beyond the immediate, transaction-based, interaction between company and customer. This
eventually becomes customers returning back to business because they know they will receive a favorable
service experience, thus a substantial Return on Investment.
● Technology as a Service: Technology as a service acknowledges the ability of a company to leverage its
technology in order to fill a need and service for a customer. With the increase in computing power and
computing dependence, using technology as a service can provide substantial growth opportunities.
● Software as a Service: Software as a service is exactly what it sounds like: a company providing a service
to customers in the form of software that they may use and is centrally hosted. This means the potential to
have a highly interactive experience with customers to facilitate a better transaction.
● Competitive Advantage: Competitive advantage is all about the ability of a business to leverage its
strengths, opportunities, available resources, etc. in order to create an advantage over their competition that
can last. The point of a company’s competitive advantage is to separate one business from the other so that
customers will recognize that business and only that business when they realize their need/needs.
● Customer Value and Expectations: Customer value is about the business understanding what the customer
expects, values, and wants from their service experience. This is important to manage for companies
because not understanding customer expectations can lead to an overall dissatisfied customer. This means
that the customer comes in to their service experience with a mental bias that will ruin it before it even
begins.
These key concepts and the idea of service innovation as a whole are both absolutely necessary terms for
businesses to understand and practice constantly if they want to be competitive in the industry they operate in, and

12. put themselves on a completely different level that is separate from their competitors. No longer is it about how
many products a company can sell or how many items a company can make. Now, it is about which company can
make a lasting impression on their customers by viewing the product they offer as more than a simple product, and
by creating a relationship with the customer that goes beyond the good itself. Later we will discuss case studies done
by ourselves and others that reinforce the idea of service innovation, and show how it can be used as a competitive
advantage for firms that not only understand the idea of service dominant logic, but practice it through their business
decisions.
Pim den Hertog and the Dimensions of Service Innovation
In all instances of service innovation, it has become diverse and an important area for knowledge -intensive
businesses (KIBS) and service entrepreneurs to develop new services and service innovation policies. Pim den
Hertog from the University of Amsterdam composed that service innovation is created into six dimensions: service
concept, customer, service system and delivery in people and organizations, service system and delivery in
technology and processes, new revenue model, and new business model.
The first dimension is service concept. Though we see products as visible and tangible materials, services
are highly intangible. Although service may have some tangible characteristics such as software and car insurance,
the features of the service is more powerful than its material representation (Hertog and Aa, 1998). This is how
organizations can develop innovative services with new ideas and service policies for expansion.
The second dimension is customer interaction. Interaction between the service provider and the customer is
taken place for service innovation. Many businesses, such as IT companies, combine and analyze data of their
prospective and current clients through data warehouses and data mining of complaints and pro blems to be solved.
This creates a better relationship between the client and the service provider while co-creating other forms of service
innovation (Hertog and Aa, 1998).
The third dimension of service innovation is service delivery system in people an d organization. Although
the customer concept involves a link between the service provider and the client, the service delivery system
involves internal organizational arrangements to develop new and innovative services. Companies implement newer
systems for interpersonal capabilities and skill, where employees are trained to leave room for innovations (Hertog,
Aa, 2010).
The fourth dimension is service delivery system in technology and processes. Much of this dimension is up
for debate because service innovation can take without technological innovation. However, all services are
dependent on some sort of technology to allow greater efficiency and effectiveness in information -processing tasks
(Hertog, Aa, 2010).
The fifth dimension is the new revenue model. In this dimension, the previous four dimensions can be used
individually or in combination for service innovation to take place; however, in order for service innovation to be
successful a proper model for distribution in costs and revenues must be in place (Hertog, Aa, 2010). Most
organizations have transitioned from their product -based revenue models to a service-based revenue model. In other
words, rather than having to pay per hour of service or goods production, companies can pay for the solution to the
problem they are solving.
The sixth dimension is integrating a new business model. These dimensions, combined with the five
previous dimensions, are presented under as one strategy. Rather than implementing service innovation in various
parts of the organization, they can structure a business model that layers service innovation altogether (Hertog, Aa,
2010).
Service Transformation: A Model
In order for manufacturing companies to successfully transform from goods -dominant logic to service-dominant
logic, they must understand how to use goods and the service they provide to create a successful hybrid

13. offering. According to Ulaga and Reinartz, service transformation consists of two dimensions and four hybrid
combinations. The first dimension determines whether the services are concentrated on supporting the product or
supporting the customer. The second dimension is directed towards supplier’s value proposition of promising t o
perform an act or promising to achieve performance. The four goods -services combinations that manufacturers can
use to transform their businesses are product life cycle services, asset efficiency services, process support services,
and process delegation services (Ulaga, Reinartz, 2011).
1. Product life cycle services (PLS): These are services that operate on the customer’s access to the
supplier’s goods while maintaining proper functioning in all stages of the product life cycle. Since
customers are in direct use of the manufacturer’s goods, manufacturers aim their value pro positions in
promising to perform an act as they provide services that support the product. For manufacturers to
succeed in this category, they must use highly standardized services that are cost efficient and meet the
basic needs of the customer (Ulaga, Reinartz, 2011). This may include redesigning equipment to minimize
production and deliver cost.
2. Asset Efficiency Services (AES): These are services where manufacturers focus on increasing the
productivity of assets invested by customers. Manufacturers concentrate their value proposition on
promising to achieve performance while also providing these services to support the product. Unlike
Product life cycle services, Asset Efficiency Services are less standardized, therefore, allowing suppliers to
differentiate from competition. In order to succeed in this range of services, suppliers need to administer
the risks of products failing by a set of resources and capabilities that can predict failure rates (Ulaga,
Reinartz, 2011).
3. Process Support Services (PSS): These are services assisting customers in improving their business
processes. Manufacturers direct their value proposition in promising to perform an act and their services
help to support the customer. Services such as consulting are specific process -oriented actions taken by
suppliers to help customer without taking responsibility of the customer’s processes. In this category,
customers were willing to pay a high price since this is tailored to the customer context and needs. In order
to succeed in this category, manufacturers must gain knowledge of customer processes, analyze them, and
then create recommendations to provide the customer with in order to achieve the improvements that were
recommended. To further grow in this category, suppliers should aim from relying on channel
intermediaries to improving sales approach that help to reach different people in the customer’s
organization.
4. Process Delegation Services (PDS): These are services of the supplier performing processes in favor of
the customer. For this service, any combination of all four resources and all five capabilities help to launch
it. Suppliers gear their value propositions on promising to achieve a performance that purely supports the
customer. Unlike PSS, PDS is aimed at the customer’s specific requirements using complex hybrid
offerings that involve the customer involvement. In order for manufacturers to succeed in this category,
they must be proficient in utilizing a complete set of capabilities and resources that can be used in any
combination that tailors to the customer’s needs.
Service Transformat ion Model

14. Services Paradoxes
Almost 60 percent of American manufacturing firms are incorporating service into their core business
offerings. With tougher competition and narrowing margins manufacturing companies have started to shift away
from goods dominant logic and have moved into the service industry. Manufacturers are moving to service because
of the economic benefits which they can achieve from being more customer centric and strengthening relationships
with their customers. Service is an industry buzzword right now and it is expected to bring growth and pro fit to
companies which incorporate it. Because of this firms have been making the change and trying to integrate service
into their core value proposition.
Not all companies are seeing this growth and economic benefit which they were expecting. Some
companies are seeing a “service paradox” because of the difficulties in making the transition (Kastalli, et al. 2013).
Large scale case studies examining the switch from goods to service dominant logic on the financials of these
companies adds to this service paradox. This paradox is revolving around the difficulty that corporations are having
changing from their old direction and value propositions. The negative results on the financials might be caused by
old metrics used to measure performance for the old way of thinking with this new theory on service.
Steering Manufacturing Firms Toward Service Business Model Innovation by Visnjic Kastalli, I., B. Van
Looy and A. Neely discuss new performance metric which would better measure the change for manufacturing firms
making the switch from goods to service. These new performance metric should be service specific and measure the
importance of service quality, customer satisfaction, and loyalty, and the overall relationship with the customer.
Customer satisfaction is the new metric which companies should measure with when dealing with service. Having
metrics so different from goods manufacturers it is very hard to measure goods and service at the same time. This is
part of the problem that firms are having when making the transition into service, they are measuring with the wrong
performance metrics. The decision for which metrics to use for product -service companies are even harder because
they can be complementary or substitutes. If a firm is too focused on product s they might give away services to
facilitate more product sales.
This case study on Atlas Copco revealed some very important information for companies looking to make a
switch. They found that future product-service companies should complement their product measures of market
performance with measures that actually depict the success of service. The findings of the study lead the authors to
recommend that adequate implementation requires an integrated set of marketing performance indicators for
products and services as well as for the relationship between them. Finding the right balance and combining these
metrics is important for a successful transition.
This article talks a lot about measurements and metrics for these companies and the importance of
performance measurement systems (PMS). These performance measurements are important for both products and
services and can be used for a lot of different activities from, formulating, communicating and implementing
strategy throughout the organization. PMS is a great tool for setting goals and measuring against those goals.
Current product-service companies are facing a gap in measurement for market performance which is important to
know due to the threat of a service paradox.
Considering this case followed Atlas Copco for three years evaluating their transition there was a lot of
information gathered from the study. One of the most important pieces of information was what Atlas Copco used
for their service goals. The first was to establish an ongoing contact with each of its customers and secondly to
develop a more elaborate and customized service offering for each customer. These goals were developed from the
top of the organization and were steered by the PMS. This was an approach at becoming more cus tomer centric and
exploiting long lasting relationships to capitalize on lifetime customer value.
Along with the potential for a service paradox in manufacturing companies from not focusing on service
there can also be too much emphasis on service offering. This phenomenon was documented when to Atlas Copco
subsidiaries focused on high end service only tailoring to their top tier customers. Soon the basic services seemed
less lucrative and the companies neglected to go the extra mile for basic customer needs. Because of this type of

15. attitude towards certain customers these subsidiaries lost out on building relationships with customers to create
lasting value. It is better to start basic and then build your service offerings up from there.
The transition for Atlas Copco opened their eyes to being customer centric. The changed which they
applied changing from a goods dominant logic to a service dominant logic showed them they needed to be customer
oriented and have open innovation. The company started to focus more on the customers and the relationships they
were managing with their customers and notice an upswing in performance and profits.
The article concludes by stating that service-related market effectiveness represents a critical performance
aspect for a couple reasons. One reason is for service to be accepted as a business and to merit subseque nt
investment rather than be treated as a support function, they need to demonstrate value potential. Secondly there is a
possible conflict in objectives between products and service offerings and it requires management practices
including performance measurement systems to capture the interdependencies between the two activities (Kastalli,
et al. 2013).
The Atlas Copco case is a fantastic learning tool for what happens when a firm notices a need for a change
and takes the correct steps, but not all companies can do that. For example, one product company that is no longer in
business because it did not make the transition to service fast enough is Blockbuster. Blockbuster was one of the top
companies in the home movie rental market along with Hollywood Video, and both of these companies failed to
make the switch to service. In the end Netflix came into the market with a service for movie rental which consumers
liked more and quickly changed their habits, putting Blockbuster and Hollywood Video out of busines s. Both of
these companies failed to be customer centric and pay attention to what their customers wanted. They got
complacent in their roles and failed to continuously innovate and make themselves obsolete.
Both Blockbuster and Hollywood Video could have made a transition into the service industry had they
been customer centric and known what their customers wanted. These companies really missed out on co creation of
value with their customers. The article Competing Through Service: Insights from Service Dominant Logic by
Robert Lusch, Stephen Vargo, and Matthew O’Brien talks about the difference between service dominant logic and
goods dominant logic. The article states that competitive advantages can be enhanced through service. This
competitive advantage from service links to superior performance for companies. The article argues that competing
through service is about more than adding value to products, which is a good dominant logic. Blockbuster and
Hollywood Video were both centered on goods dominant logic and any service they had was an add-on to the
product. If they had been more service oriented they would understand that services provision the product and not
the other way around.
These two companies are perfect examples of what can happen if you do not pay attention to the voice of
the customer and get complacent in your industry. With a customer centric approach and an asymmetric business
approach companies can successfully make the transition from goods based logic to service based logic just like
Atlas Copco did. Listening to what your customers want is a huge clue to where your business should move and
more companies are learning that the hard way. It is clear that service paradoxes exist but can be overcome thanks to
increasing information from scholars on the topic.
The article discussing “service paradox” is a great lead into two of our research questions. The first
research question it relates to is what resources and capabilities does a product company need to optimize and
maximize their hybrid offerings, and the second question is all about which KPI’s are important. From the article
Steering Manufacturing Firms Towards Service Business Model Innovation you learn that most product companies
have the resources and the capabilities to move to offering service, they just lack direction and determination. It is
easy for companies to say they want to make the switch, just like manufacturing companies can make “me too”
products to stay relevant in the market. But the switch to service is an organizational transition and not just a
temporary fix for something. Companies have to be willing to go all in and truly invest in a new way of thinking
about products provisioning service and not services as a value add.
With firms needing to make an organizational transition in thinking this brings us to our next research
question regarding KPI’s. Which key performance indicator will a product company use to measure service, most
likely one that has been used to measure how well products are doing. Part of the organizational transition that firms

16. are making should also evaluate the metrics they use to measure performance. the article states that adequate
implementation requires an integrated set of market performance indicators for products and services a s well as for
the relationship between them; combining and balancing different indicators is instrumental for the gradual, well-paced
implementation of the services business (Kastalli, et al. 2013).
Valve: From Products to Services
Through our research we found many cases of how manufacturing can use service innovation to gain
amazing competitive advantages but one case stands out. Valve Corp, headquartered in Bellevue Washington,
started out in the early nineties developing and selling video games to the masses through traditional means. Video
games (at the time) were a product focused industry, thought to be just another toy video games were distributed
using physical discs that contained all the content. If the developer wanted to add more content to an existing game
they would have to create a new product add-on known as an expansion pack. They would then produce and
distribute this add-on as another transactional item but it was dependent on the customers having already decided to
purchase the original (or core) version of the game. (Dunn)
As internet speeds and availability became more prominent throughout the nineties the video game industry
was able to release updates and patches to their products, (fixes and changes made to the original software to correct
errors not found in quality assurance testing before release). The internet opened a new medium for content and
delivery industry-wide. This was also the advent of massive online multiplayer games in which customers were
engaging with each other sometimes on a daily basis and co-creating much of the value for certain games where the
focus was competition and interaction rather than an adventure or puzzle taken on by an individual. Furthermore,
customers began to create their own content for the games and releasing them for free to the pu blic, often there were
entire communities dedicated to certain modifications and additions that were completely customer generated. This
customer generated content was enabled by valve who released their development tools completely free to
customers in order to encourage higher value being received by those who desired easy access to modifications and
additions. (Dunn)
One user generated addition that got a lot of attention was a game called Counter-Strike. Counter-Strike
was a modification of Valve’s headlining game Half-life’s multiplayer portion and created a separate universe in
which the players would play for either a terrorist or counter-terrorist organization. This addition was so popular that
valve hired some of the developers who created it and began working on a full separate counter strike game. Already
Valve was utilizing co-creation of value to gain insights on what types of games their customers wanted to play.
After its release counter-strike became the #1 competitive first person shooter in the world and players around the
world would participate in competitions and tournaments for prizes and money treating it much like a competitive
sport. As a result Valve decided it needed an easy way to update the game as well as to prevent piracy which had
become a huge problem with the advent of faster internet and a lack of tools for fighting piracy. (Dunn)
The solution was Steam. Steam was conceptualized as a platform for players to register their games and
receive updates and it quickly developed into a means for preventing piracy as well. Once Valve transitioned to
Steam it became a required piece of software and you could no longer play Valve games unless you had an account.
That account would then contain all of the unique cd-keys in our possession and give you access to updates from
valve. In order to increase adoption Valve turned it into a social platform where players had their friends list and
they could add anyone they played with in a given game just by knowing their screen name or handle. As the game
environment was now multiplayer and multi-customer interactive this proved to be a service players had desired but
it had never existed before. Players could now find new friends or add people they already knew who played the
same games and then easily join them in an online session, and they now had a reason not to pirate the games as
they would not be able to use the online portion or steam, rendering the game almost pointless. (Dunn)
As a result they were able to increase the value of using their service even more by creating an even wider
value gap or removing potential value gained through piracy. Now they have an entire economy of in -game items
and content that is often customer generated, when the customer generates an item (let’s say a custom color for a
gun in a game) they release it to the community of players to vote on whether it should be added to the market if it
gains enough popularity it is added and Valve gives the player a small cut of the profits if players buy and sell the
item (Sivak).

17. To summarize, Valve has created a system in which a majority of content creation for their service is done
by the customer, as a result they have amazing engagement with their service. Also, this allows them to offer
unparalleled value with minimal effort in continuing content creation.
Valve became a thought leader of their industry as they started turning industry issues upside down. Using
SD- logic they were able to solve issues like piracy that plagued the entire industry all while crea ting even more
value for their customers and increasing engagement.
Now Valve has many game titles but they release them only every few years as their primary focus has
become their service model. Their service with customers is only about half of it. Because they have gained such a
competitive advantage over other game developers in finding ways to engage video gamer market they have also
become a B2B service company. They now sell the Steam platform to other game developers so the game
developers get access to the benefits of Steam and Valve has become the premier digital distribution and customer
engagement service for software developers around the world.
Valve continues to find new ways to engage with its customers and create more value. They are cu rrently
developing their own operating system and testing concepts for their own game console. However they have made it
clear that the core of their business is now the steam service platform and that will continue to be focus of
development and innovation, as products will only be a delivery mechanism of the service. (Dunn)
Applying Pim den Hertog Framework to Valve:
Dimensions Description Valve’s Application
Service Concept Service innovation is intangible and
provides solutions to a problem.
Valve’s Steam platform is unique
in its design, implementation and
its asymmetric utilization of
customer behavior data. The
service provided is of such high
quality that users no longer pirate
their software.
Customer Developing a relationship with
customers and client while co-creating
value in service innovation
Valve has effectively built value
co-creation into its steam
platform for direct consumers as
well as for the software
publishers that utilize their
distribution and engagement
services.
Service Delivery System in People
and Organizations
Integrating new internal organizational
systems to provide employees of a
company to leave room for innovative
service.
Valve has a created an extremely
unique work environment where
employees are allowed to work
on the projects that interest them
with a unified mission.
Understand the customer and
what will drive them to co-create
the most value and create a
superior service experience.
Service Delivery System in
Technology and Processes
Implementing advanced technology to
go hand-in-hand with service
innovation.
Utilizing data centers, Valve
created a central platform to hold
massive amounts of consumer
data as well as means for

18. distributing games, a previously
tangible product.
New Revenue Model Design a new revenue model around
the service innovation.
Valve has developed two new
revenue models: flat service
solution fees for distribution and
engagement, micro transaction
fees for customer or Valve
created content for games.
New Business Model This dimension combines with the five
previous dimensions to present under
one strategy.
Valve utilizes its distribution
platform in order to leverage
positive trusting relationships
with its customers and
distribution partners. The
platform provides Valve with
real time data that is then utilized
to discover buying trends and
experiment with pricing and
promotions while focusing on
creating the most positive
experience possible.
Indicators of Success:
There are several ways to indicate and recognize the success of Valve’s innovations and their competitive
advantage in the market place.
1.) Financially: Valve has realized a great deal of success for a software company, or any company for that
matter. Because Valve is a privately held company their financials are not public knowledge and the most
recent estimates of its value are from a few years ago. According to majority shareholder and founder Gabe
Newell “on a per-employee basis, Valve is more profitable than tech giants like Google and Apple. Google
made an average $350,000 in profits per employee in 2010. That means Valve sees profits of around $87.5
million at least.” (Chiang, 2011)
2.) Industry advantages: Gabe Newell explains how they solved an industry wide issue of piracy in Russia “In
general, we think there is a fundamental misconception about piracy. Piracy is almost always a service
problem and not a pricing problem. For example, if a pirate offers a product anywhere in the world, 24 x 7,
purchasable from the convenience of your personal computer, and the legal provider says the product is
region-locked, will come to your country 3 months after the US release, and can only be purchased at a
brick and mortar store, then the pirate's service is more valuable. Most DRM solutions diminish the value
of the product by either directly restricting a customer's use or by creating uncertainty. Our goal is to create
greater service value than pirates, and this has been successful enough for us that piracy is basically a non -
issue for our company. For example, prior to entering the Russian market, we were told that Russia was a
waste of time because everyone would pirate our products. Russ ia is now about to become our largest
market in Europe (in dollars of revenue).” (Tufnell, 2011)
Pim den Hertog Supporting Framework for Service Innovation:
Valve was extremely successful in the Service Concept dimension. The Steam program was originally
designed to create a simplified way to update the content and build of their game software. Valve initially tested the
software to see what type of information they could retrieve and send easily to their customers. During the initial
tests they discovered that they would have to provide an incentive for people to register their games for updates as
many may have pirated the games and would now have to pay for their license. As such, they began to build in a
social platform, something that was previously only available to gamers through third party apps that were poorly
designed and often limited because they were external to the game itself. Thus they were able to create an incentive

19. as well as a new opportunity for co-created value by adding a community focused social platform and giving players
access to automatically installed updates and additional content if they had actually purchased the game.
The most important factor of the Steam platform’s development and success was the customer-centric
strategies used by Valve. Before they began to force players to utilize the platform if they wanted to play their
games, they made it an optional beta and made many revisions to it as they were able to pursue real time feedback
from customers and their PC’s. The mantra of Gabe Newell and thus Valve became customer centricity, focusing
not on the development of the product itself, but rather the experience it brought to the user. This focus allowed
Valve to create an effective platform to engage customers and solve the piracy issue that had plagued the entire
software industry.
There are multiple pieces of the Steam platform that are intangible and unique to Valve, but the one that
stands out is their corporate structure. Valve has remained a private, employee owned company since its creation.
This has allowed them to focus on their customer centric values for decision making. This philosophy has proven
time and time again to give them a competitive advantage in understanding the how’s and whys of the users’
experiences. This is emphasized by their unique decision to not have a marketing department. Gabe Newell explains
“It [Valve] has no marketing department. Doug Lombardi, the vice president of marketing for Valve, has no
employees working under him for the express purposes of marketing. He wasn't given the title for the company's
sake, Newell explained, but to assuage the confusion of press and outside observers.” This was to improve
productivity and prevent confusion, as the entire company was meant to be listening to the voice of the customer
(Mcelroy, 2013). Little did they know at the time, that this unique strategy of utilizing all departments in co-creation
and market research would prove to be invaluable, as it helped drive their company into a service model long before
their competitors.
Since, Steam has become such as massive success for valve multiple companies have tried to repeat the
service model, with very little success. One such company is software publishing behemoth Electronic Arts. In 2011
EA released Origin as a way to enjoy their games separate from the steam platform without giving up the social
interactivity. (Katkin, 2011) However this proved to be an inept competitive move as it focused on the product
rather than the customer. So far Electronic Arts has yet to back down from the competition but it has suffe red
several service launch failures and lacks any trust with their consumers, who only see them as a necessary evil to get
to some of the products they want and may even pirate them as a result . (Sasaki, 2013)
Even though competitors have yet to even come close to catching up with Valve, it remains their mission to continue
innovating and maintain their competitive advantage by adding new features that were either thought of internally,
by the gaming community, or a combination of the two.
Services Added:
● Steam Community Hubs: The community hubs were designed to create a more simplified and interactive
social media experience. Hubs are centered around different subgroups including: games themselves, self -
selecting groups of customers who want particular content, friends on the steam platform, and activity in
the community and games. Using these groups Steam sends each customer a custom page of the most
relevant gaming news, community news, and media in order to create the most beneficial experience based
on that customer’s preferences and activity data. This has proven to be a great mechanism for value co -
creation with little to no work (from Valve) on the actual content being viewed by the customer, because it
is community created. (See Appendix B)
● Steam Greenlight: Steam Greenlight is somewhat like a kick starter that is focused on the desires of the
Steam community and is funded by Valve. Here’s how it works, first an indie studio submits their idea to
the Steam community. The community then votes on their favorite game ideas and at a certain point Valve
works on a publishing deal with the indie studio and provides full distribution for the game to help get it
completed and in return Valve gets a cut of the game’s profits but does not require exclusivity r ights or any
fees other than an initiation fee of $100. (See Appendix C)
● Steam Workshop: As described earlier as an “in-game economy” Steam workshop allows users to create
and submit items to be added into the games they play. Currently only about 9 games support full pay

20. economy functionality which requires an in game lottery system and dollar investments from the
community. However, there are hundreds of titles that utilize the Steam workshop as a massive co -creation
model where players build more value into games without the actual game maker having to lift a finger.
This also provides the game makers and Valve with insights into customer’s desires and a community
aspect that creates loyalty around the platform and the game maker. (See Appendix D)
Evaluating Valve’s Transition from Products to Services
To focus in on the important factors that lead Valve to such success with service innovation we can follow
the Hybrid Service Model for Service Transformation. This model provides a framework for evaluat ing the service
transition itself as well as a good example of a high level roadmap for demonstrating the potential that product
companies have to servitize their business. (Ulaga, Reinartz, 2011)
Valve started with a Product Life Cycle Services strategy. They would create a game release it to the public
through traditional transactional methods and only interacted with the customer if they had problems with the
physical product which were CDs. It is important to note that the CDs were only providing access to software for
playing a game. This allowed for no value co-creation and Valve was leaving money on the table.
As the internet became more extensive and available to more consumers Valve saw it as having the
potential to further improve their methods of supporting the product. They entered into the stage of Asset Efficiency
Services, this created cost reduction as they began to distribute their own games digitally over the internet. This gave
them better access and capability to support the product more efficiently and effectively. They still offered their
products in stores through standard distribution as they began to transition to a more digital focused distribution
method.
Valve starts selling their distribution capabilities to other software distributors as they became the premier
offering for a social gaming platform for customer engagement. This was advanced by their community and
customer centric strategy of platform bas ed gaming. Through the social aspects of their platform such as,
community hubs, and friends lists for joining friends game universes. This is the Process Support Services stage as
Valve began to take over the distribution as a means for software developers to get access to Steam’s customer base
and have an efficient cloud based platform for distributing their software.
Finally, Valve successfully transitioned into Process Delegation Services. This was achieved through
utilizing their most valuable asset, the customer. By engaging the customer through service offerings like Steam
Workshop (customer created content) Valve was able to continue establishing themselves as a thought leader in
understanding the way consumers view their gaming experience and had gone beyond that to create a “Social
Gaming Platform” in which customers freely give out data to Valve on their preferences and buying patterns in the
gaming industry servicescape. Now Valve offers a complete process take over for selling software. This inc ludes
finding optimal pricing, promotions, and community engagement to maximize the profitability of each product by
turning it into a service through their platform. Essentially, they have created a platform for service innovation and if
you are the gaming industry the quickest way to gain a competitive advantage is to hand over your software to Valve
and rely on their expertise to improve your software sales.
Valve was very successful in utilizing a Hybrid Offering for service transition. Some may argue that they
were in the right place at the right time and as a result have gained a competitive advantage. However, it is clear that
they have an intangible advantage as many larger software companies have attempted to servitize in much the same
manner and have failed. It seems that one large factor maybe the organizational structure. Valve is the only company
among its competitors to have remained an independent employee owned company and as a result they have been
allowed room to focus on the customer and innovation rather than stockholders and accountants. That is not to say
their decisions aren’t calculated, quite the opposite, they were some of the first to discover that service innovation
and asymmetric strategies are more influential than stock prices and thrifty cost cutting and as such have focused all
their efforts to this end. Valve is a prime example of success through service transition and has developed into a
service transformation.

21. Taxonomy of Valve’s Process of Service Transformation:
Type of Offering Description Valve’s Application
Product life cycle services (PLS)
Services that Support the Product
(SSP)
Ensuring proper functioning of the
manufacturer’s goods during all stages
of its life cycle.
Valve began in the (PLS) with a
manufacturing approach to game
development and distribution. A
supply chain with brick and
mortar stores and a hotline to
replace broken defective CD’s
and ensure the product worked as
intended.
Asset Efficiency Services (AES)
Services that Support the Product
(SSP)
Services to acquire increased
productivity from assets invested by
customers.
Valve created Steam as a way to
repair parts of the code of the
games themselves with feedback
provided by customers. They also
began using it to prevent piracy
of their own games and distribute
them in a digital fashion that was
more efficient for purchasing.
Process Support Services (PSS)
Services that Support the
Customer
(SSC)
Process Support Services (PSS) - This
is where services assisting customers
in improving their businesses.
Valve starts selling their
distribution capabilities to other
software developers as they
became the premier offering for
social gaming platform for
customer engagement. This was
advanced by their community
and customer centric strategy of
platform based gaming. At this
stage Valve was still just
providing access to their
customer base and space on their
platform.
Process Delegation Services (PDS)
Services that Support the
Customer
(SSC)
Performing processes in favor of the
customer.
Valve enters (PDS) with
advanced real time data that has
been collected and analyzed over
the past several years. They now
take over pricing, distribution,
and promotions of the game
creators products. This platform
has become the primary focus of
Valve as they have become a
model of success in the gaming
industry and can perform better
service on behalf of their
customers.

22. Nike: From Products to Services
Nike, From Products to Services:
Nike, headquartered in Beaverton, Oregon, was founded by Phil Knight and Bill Bowerman. In the past,
Nike has been known to be a product-centric company via apparel and shoes. Historically Nike has promoted its
product by simply endorsing the most popular athlete. Michael Jordan, the second athlete signed by Nike but the
first to make a real impact on Nike, is a prime example of this. Another way Nike would keep its shoe competitive
was to see what its competitors are doing. In the late eighties Nike was still behind Reebok for the top slot in the
athletic shoe market. Nike found that the reason for this was because it had not reached out to the women market.
Today, Nike has endorsed many different athletes and has created a shoe for both men and women, but so have all
the other companies in the athletic shoe market. Nike has found that in order to differentiate its product with its
competition, Nike must turn to its services to gain a competitive advantage (ReferenceofBusiness).
During the World Cup in 2006 Nike, in partnership with Google, set up a social networking site called
Joga.com. The purpose of the site was to have individuals showcase and upload their soccer skills and have the
network community comment and share the user-generated content. Joga.com also encouraged users to create a
profile to socially network with other users. The site proved successful with over one million fans participating. The
success of the site allowed Nike to gain insights directly from the customers (Ramaswamy 2008).
In addition to Joga.com, Nike “sponsored street soccer competitions, created a website that would connect
fans with their favorite professional athletes, and also sponsored conventional Internet marketing programs”. For
example, a video of Ronaldinho was downloaded 32 million times which again allows Nike to gain insight on what
the customer finds appealing at the moment. Also, on the “Nike ID” website Nike invited twenty sneaker enthusiasts
to compete in designing in a new shoe for Nike. Nike asked the internet community to vote on the designed they
found most appealing. This would give Nike further insight to its customer wants. Aside from the competition, every
fan was allowed to go to the Nike ID site and personalize their shoes. The designs varied from style to color,
including the option of putting the flags of the countries they wanted to support on their shoes (Ramaswamy 2008).
Through these initiatives, Nike was able to connect with millions of soccer fans around the world. This
opportunity gave Nike the chance to build and promote engagement through internet platform in order to establish
strong customer relationships. Being a product-centric company, Nike initially found that managing these new
initiatives to be a challenge but would soon recognize that the competitive ad vantage in the sneaker market has
shifted from creating value through products to creating value through service (Ramaswamy 2008).
The results of the World Cup initiative were clearly positive. Charlie Denson, president of the Nike brand,
said that the market reaction to these initiatives helped persuade the company to sustain Joga.com in an effort to
build and retain customer relationships, something the company had failed to do in the past (Ramaswamy 2008).
Nike incorporates The DART Model:
After the success of the 2006 World cup value co-creation, Nike decided to look for a model that could
further its co-creation of value with its consumers. The model the decided upon is the DART model. DART stands
for dialogue, access, risk-return, and transparency. The goal of this model is to achieve value co-creation between
the customer and the company. Dialogue is the idea of interacting with and engaging the customers. Dialogue is
focused on shared communications between the customer and company. It helps maintain a loyal community Access
is giving the customer the tools to be engaged with the company. In order to gain an understanding of complex
dialogue, the firm must give the customer appropriate tools to stay engaged. Risk-return is as defined, it’s the
risk/benefit proposition for both the company and the customer. What is the risk if the consumer chooses to engage
with the specific product? What is the benefit? From the company’s perspective, what is the risk if the company
chooses the launch its idea? What is the benefit? Transparency can be described as shared information. It’s the idea
of both sides communicating their thoughts and ideas to one another (Prahalad 2004).
Application of the DART Model:
In 2008 Nike and Apple collaborated and created a Nike+iPod (or Nike+) platform that encouraged
customers to engagement. The platform consist of an Apple iPod music player, a wireless device to connect the

23. music player to running shoes, a pair of Nike shoes with a special pocket to accept the wireless device, and
membership in the iTunes and Nike + online communities. The platform encouraged engagement between:
 The runner and Nike
 The runner/listener and Apple
 The runner and other runners
 The runner and running experts
In terms of the DART model the dialogue involves the parties described above. Through the Nike+
platform runners can engage in nearly real-time conversation online Groups of runners can challenge, encourage, as
well as keep track of their friend’s progress (Ramaswamy, 2008). The Nike+ platform allows the runner to create a
goal for the world to see. The user can then enter email addresses of people they would like as a support group –
family, friends, etc. Each time the user goes for a run, it syncs up the data and lets the support group know that they
are that much closer to completing their goal (McClusky, 2009). This type of dialogue is to motivate runners to
achieve their goal, but more importantly it allows Nike to gather information on the different runners.
Access is simply provided by Nike and Apple. Nike gives the customers the tools through the Nike+ website along
with iPod/Sport Kit device (Ramaswamy, 2008).
The risk-return proposition applies to both the company and the customer. For example Nike+ enhances the
economic value of participation for runners by reducing risk to injury. According to an article titled, Co-creating
Value through Customers’ Experiences: The Nike Case, many of the conversations on the Nike+ website are about
“proper training methods to avoid getting hurt: why overtraining is dangerous, how to monitor your heartbeat, or
whether you should limit your running because of certain recent surgeries.” In summary the risk-return for the
runner is to reduce or avoid injury altogether while still enjoying their daily run. From the firm’s perspective, Nike’s
main risk is losing its relationship with the customer. Nike+ reduces that risk because runners are frequently
interacting with the product through the Nike+ platform (Ramaswamy 2008).
Transparency is the shared information from both the runner and the company. Nike provides the runner
insights on how it thinks runners should train and what routes they should run. Nike even suggests what types of
shoes it thinks the runner should wear based on their locational needs. Nike provides a wide range of information By
logging into the Nike+ website, runners can look up the most popular routes, they can look at other runners’
progress, as well as look at their own progress and compare their with other is they so choose too. From the firm’s
perspective, Nike+ allows Nike to gain a lot of information on the individual runners. If the runners are dedicated
enough, they are most likely to set goals, record their progress, record the courses they ran, the partners they ran
with, and even their opinions about running. Nike gathers all this information and it allows them to narrow down
their target market which would ultimately lead to more effective spending and profit. The informat ion gather can
also be a “goldmine” of ideas that could lead to Nike’s next innovative product (Ramaswamy, 2008).
The DART Model:
Dialogue Access
Shared communications between the consumer and
the company
The tools provided by the company to encourage
consumer engagement with the product
Risk-Return Transparency
The risk-benefit proposition for both the consumer
and the company
Ideas and thoughts shared between the consumer and
company

24. The DART Model applied via the Nike+ Platform:
Dialogue Access
The platform encouraged engagement between:
 The runner and Nike
 The runner/listener and Apple
 The runner and other runners
 The runner and running experts
Nike provides access to its customers through the
Nike+ website along with iPod/Sport Kit device
Risk-Return Transparency
The risk-return for the runner is to reduce or avoid
injury altogether by receiving information from the
Nike+ web site. For the company, Nike+ reduces
that risk of losing customers because runners are
frequently interacting with the product through the
Nike+ platform
Nike shares different aspects of running including
routes, how to train, and the ability to compare
progress. In return, Nike learns a lot about its
consumer
Pim den Hertog Supporting Framework for Service Innovation:
Nike was successful in 5 of the 6 Hertog dimensions. With the help of Apple, Nike created a great Service
Concept platform that highly encourages customer engagement. With just an iPod, a pair of Nike+ shoes, an d an
innovative idea, Nike was able to include service into its product -centric company. Nike co-created value through
the experience of running. Whenever a runner went out for a run, Nike would gain insights on that individual runner.
With these insights Nike also tried to benefit the runner (via routes, how to train) to try to keep the platform more
symmetric.
Also, through this platform, Nike does a great job with engaging its customers. Nike+ highly encourages
dialogue between the runner and the company, and the runner and other runners. Nike would share with the runners
various amounts of information about running including how to avoid injury, what routes are best on certain days,
and even what shoes they might want to look into buying. In return, the runners would also share their thoughts on
running with Nike. In terms of dialogue between the runner and other runners, the Nike+ platform allows runners to
set and share goals with one another. Runners would compare their progress with other runners and also motivate
runners to achieve their goals. Through the dialogue from all parties, Nike is able to co -create value in service, build
relationships, and also gain customer insights.
In terms of ‘Service Delivery System in People and Organizations,’ Nike is aware of the success service
has had on its company and has made an effort to incorporate service in future products. For example, Nike teamed
up with Dime magazine and Facebook and created an application called Ballers Network that allows basketball
players to organize real-world games on manage their team online (McClusky).
For the fourth dimension of the Hertog model, Service Delivery System in Technology and Processes, Nike
was able to implement technology to go hand-in-hand with service innovation. With the help of Apple, the two
companies came up with an idea to create a service using the Apple iPod and the Nike+ running shoes. The service
created was the ability to interact and engage with the two companies, along with other runners. This engagement
created value co-creation between all parties.
The fifth dimension is where Nike could improve. Nike has only touched the surface of a new revenue
model. Nike was able to gain revenue of $56 million just solely on the Nike+ platform in 2008. The total revenue in
2008 was $19 billion which indicates that most of its revenue came from its products rather than its service. Nike is
still in the transition phase from goods -dominant logic to service-dominant logic.

25. When all was said and done, Nike was able to come up with a new business platform. The Nike+ platform
allowed Nike to build relationships with its customers which is something that it has never really done in the past.
The Nike+ platform was also very information asymmetric. Any information shared on the Nike+ platform was
stored by Nike in order to give what Nike thinks its customers what they want. Nike tried to make the platform more
symmetric by giving information to the customer but the information the customer provides is far more valuable
than any information Nike can provide. In the end, Nike wants to utilize on the idea of service in order to maintain
its competitive advantage.
Applying the Pim den Hertog Framework to evaluate Nike’s strategy:
Dimensions Description Nike’s Application
Service Concept Service innovation is intangible and
provides solutions to a problem.
The Nike+ Platform allows Nike to
gain information on individual runners
that was previously opaque to the firm.
Nike can then use the information to
launch new innovative ideas to
maintain its competitive advantage
Customer Developing a relationship with customers
and client while co-creating value in
service innovation
Nike+ co-creates value by highly
encouraging is consumers to not only
engage with the company but other
Nike+ users as well
Service Delivery System
in People and
Organizations
Integrating new internal organizational
systems to provide employees of a
company to leave room for innovative
service.
Nike is aware of the success of the
Nike+ platform. Nike realizes that it
could replicate the success of the
Nike+ innovations through other
categories
Service Delivery System
in Technology and
Processes
Implementing advanced technology to go
hand-in-hand with service innovation.
Nike teamed up with Apple to
incorporate technology into its
products. The Nike+ platform uses an
iPod along with a sensor inside the
shoe. The iPod encourages the
dialogue between all parties while the
sensor acts like a supplement to the
platform allowing users to keep track
and compare their progress with other
users.
New Revenue Model Design a new revenue Nike still primarily gains its revenue
from its products, but it is
transitioning. $56 million of the $19
billion came from Nike+ Service
Platform in 2008
New Business Model This dimension combines with the five
previous dimensions to present under one
strategy.
Nike utilizes its Nike+ platform in
order to build strong relationships with
its customers. The platform is also
information asymmetric in favor of
Nike which allows the company to
give its customers what they want
while also continuing to gain insights
and trends of its customers.
Evaluati ng Nike’s Transition from Products to Services using a Hybrid Service Model:
Nike excelled in the Product Life Cycle Services strategy. Nike would create a shoe, have an athlete
endorse it, and sell the shoe until revenues of that shoe began to decline. The reduction in revenue would be the
indicator that tells Nike the consumer is tired of this shoe and it’s time to create a new shoe. Nike, as well as is
competitors, exercised this strategy for years but Nike knew it was time for a change.