Services innovation

The service imperative
Innovation as the core The increasing importance and growth of
competency of a service services as a major global industry Shugan,
organisation: the role of 1994) have been of interest to academics and
practitioners alike. There is a consensus that
technology, knowledge economic growth, a higher disposable income
and networks and technological advances have contributed
to the rapid growth of service-sector
enterprises Mattsson, 1995; Patterson,
Jay Kandampully 1995), and have substantially increased their
The author economic importance. According to
Gronroos 2000), today firms compete on the
¨
Jay Kandampully is Associate Professor at the UQ Business
basis of services, and not on the basis of
School, The University of Queensland, Ipswich, Australia.
physical products. The competitive advantage
of services has become increasingly evident, as
Keywords there is little to differentiate competing
Service, Core competences, Innovation, Networks products from the customer’ s perspective.
For example, to a customer, there is no
Abstract apparent difference between a Sony television
and a JVC television; it is the service offered
Services lie at the very hub of the economic activity of all
by the retail store that manifests true value.
societies, and interlink closely with all other sectors of the
The global dissemination of knowledge
economy. The exponential growth of services
through information technology IT) has
internationally has not only intensified competition, but has
limited benefit with regard to product
also simultaneously posed a challenge and an opportunity
differentiation. Advances in IT have reduced
for the managers of services. This study examines the
the life-cycle of products and, in addition,
factors underlying the growth of services, and emerging
have revolutionised the way in which business
views on what constitutes a ’’resource’’ for service
is conducted in the new economy. Billions of
organisations. To this end, the roles of technology,
people worldwide are currently connected to
knowledge and networks are examined as interdependen t
the Internet, and exponential growth in this
factors. It is argued here that today’s ’’resources’’ are the
international network means that millions
culmination of various advances in knowledge. Technology
facilitates the maintenanc e of networks with customers
more are being connected annually. The
and partners inside and outside the firm. The network of
Internet enables customers to engage in a
relationships renders the firm’s capabilities ’’amorphous’’ in
higher degree of self-service Hallowell,
nature. This study suggests that this amorphous knowledge
2001). Moreover, the nature of business
represent s the true ’’resource’’ in a service firm, and
today demands that firms interact with their
ultimately provides the creative potential for ’’innovation’’ ± customers and business partners using
the so-called ’’core competency’’. However, innovation per technology to provide services
se does not benefit the firm unless it manifests superior instantaneously across international borders.
value in the customer-driven marketplace. Moreover, this Essentially therefore, service encounters relate
study argues that service innovation results only when a to ’’ high-touch’’ traditional face-to-face
firm is able to focus its entire energies to think on behalf of interaction) and ’’ high-tech’’ those
the customer. encounters that take place over a long
distance via a technology interface). Thus
advances in technology have meant that the
Electronic access
provision of services has become the business
The research register for this journal is available at imperative in today’ s competitive
http://www.emeraldinsight.com/researchregisters marketplace.
The current issue and full text archive of this journal is Moreover, services have become the
available at uncompromisable core component of
http://www.emeraldinsight.com/1460-1060.htm business and, from a management
perspective, they have evolved to assume a
European Journal of Innovation Management
strategic function. A firm’ s service function
Volume 5 . Number 1 . 2002 . pp. 18±26
# MCB UP Limited . ISSN 1460-1060 concerns and interacts with almost every
DOI 10.1108/14601060210415144 activity or component of the firm. These
18

Innovation as the core competency of a service organisation European Journal of Innovation Management
Jay Kandampully Volume 5 . Number 1 . 2002 . 18±26

include people, process, or physical evidence ultimately improve its efficiency and
both tangible and intangible evidence effectiveness.
representative of the firm from the customer’ s Hence, it can be argued that the value of a
perspective); internal and external customers; resource is dependent on present information
and the various networks, alliances and or knowledge. The important words here are
partners. External relationship networks have ’’ present knowledge’’ , as new knowledge has
become an essential prerequisite if a firm is to the ability to transform anything in this world
achieve the capabilities and knowledge including humans) into a resource. This also
required to serve the holistic needs of implies that resources deemed valuable today
customers. might have limited value tomorrow if new
Service leaders successfully introduce knowledge develops a superior substitute. In
products and services to the market far in the past, Ohmae 1989, p. 153) points out,
advance of customer expectation. Moreover, there were gross inefficiencies some
in the customer’ s mind, a firm maintains its purposeful, some not in the flow of
market leadership position by continuing to information around the world. For example,
operate at the cutting-edge and by extending although the Chinese developed the
conventional parameters. Service firms today knowledge of looming in the thirteenth
are expected to delight customers with their century, it was the British who built that
creativity and innovation. Thus, in knowledge into a commercial business in the
operational terms, innovation can be eighteenth century. However, with the
translated as a firm’ s foresight to ’’ think for increase in knowledge, its global
the customer’’ by creating services that dissemination through networks and
’’ drive’’ the marketplace offer superior value non-restrictive media such as the Internet),
to the customer). The ongoing dominance of and its creative adaptation, many existing
services in the developed and developing resources will diminish in value. For example,
economies around the world has raised a the value of natural rubber decreased in the
challenging question for service enterprises world market following the invention of
as to what constitutes ’’ resource’’ . This is a synthetic rubber made from crude oil.
fundamental issue, which will invariably affect Similarly, the production of semi-conductors
strategic decisions and subsequent high knowledge component product) was
management activities in service previously the economic strength of
organisations. computing science in Taiwan and Korea.
Today semi-conductors represent just
another mass-production item.
’’Resource’’ in the new millennium Moreover, in this age of technology, Porter
1985, p. 166) argues that a firm is actually a
The study of resources has been a focus of collection of technologies, and it is the
interest to economists for many years. A technologies embodied in a firm’ s knowledge,
firm’ s or a nation’ s resources have manifested as product or service, that proffer
consistently been recognised as important, a potential competitive advantage. It is
and many studies have been conducted to therefore the knowledge that has the potential
determine ways of rendering them more to add value to the offer of a product or
effective Andrews, 1971). However, the service by a firm. The true focus has thus
conceptual definition as to what constitutes a shifted from natural resources physical) to
firm’ s or a country’ s ’’ resources’’ has changed knowledge resources mental). There are
dramatically with the advent of technology. numerous factors that have contributed to
Today it incorporates a spectrum of this paradigm shift, one of the most important
components never previously considered in of which is IT. The advent of computers in
economic or management theory Pilzer, the workplace dates back to the early 1950s.
1990). Moreover, Barney 1991, p. 101) However, because computers were
expands the common notion of a firm’ s predominantly utilised to hasten paper-based
resources to encompass ’’ all assets, processing, they failed to effect any
capabilities, organisational processes, firm fundamental changes in the business process.
attributes, information, knowledge, etc.’’ , and It was not until the 1990s with the coming
indicates how such resources enable the firm together of low-cost computers and IT in the
to conceive of, and implement, strategies that form of a universally accessible phenomenon
19


Internet) that computers had a example, the automobile industry. Fifteen
transforming impact Mendelowitz, 1999). years ago, we were able to attend to minor
It is, indeed, the advance of technology engine problems in our cars: adjusting the
through mechanisation and mass production carburettor, for example. Today’ s technology
that has given rise to the economic prosperity has replaced carburettors with fuel-injectors,
of Western countries following the and we are obliged to take our cars to
technological revolution in industry in the mechanics for tuning we no longer have a
early part of the twentieth century. In choice. Similarly, when we buy a washing-
economic terms, technology directly cuts machine or dishwasher, our concerns now
costs; more importantly, however, its most extend to the various support services
radical impact has been on conceptual provided by the seller in the event of
thinking, in terms of the designation of something going wrong. The service
’’ resources’’ by a firm or country. This can be component not only has become an integral
likened to the hunter-gatherers of the past, for part of most manufactured products but also
whom land did not manifest itself as a has become the source of sustainable and
resource until the human mind developed the strategic competitive advantage Gronroos,
¨
methods and the know-how technology) of 2000, p. 6). In this hyper-competitive
farming Pilzer, 1990). environment, it is imperative that firms
The creative utilisation of distance and understand the values that customers
time, referred to as the ’’ death of distance’’ attribute to the service package a combined
through the impact of technology, possibly product and service offering Kandampully
constitutes the single most-important and Duddy, 1999a, p. 54).
economic force that will shape society and the Technology has similarly augmented the
service industry in the first half of this century knowledge required in almost every type of
The Economist, 1995). Services today are all- labour in industry. Knowledge through
pervasive, and we are dependent on those training has become a prerequisite for
services to maintain our lives. For example, success in the job market. For example,
services such as: telephone, television, radio, secretaries who were once required to type
taxi, bus, electricity, water, sewerage, and answer the telephone are now expected to
security, restaurant, library, gym, bank, demonstrate equal proficiency in various
grocer, post, hairdressing, health care, and so computer programs, and to possess the
on, are required by almost every citizen. In aptitude to learn new programs when these
fact, technology and its capacity to affect are introduced. Moreover, the increasing use
every aspect of our lives have always been and incessant update) of technology in
major determinants of human progress almost every field has added a knowledge
Pilzer, 1990). component to every manual job, and has
It is proposed here that, on a macro level, required firms to seek employees who are
the ’’ resources’’ of the service organisation can willing and able to update their knowledge on
be attributed to three interrelated factors of an ongoing basis. In addition, technology
modern business, namely: technology, displaces low-skilled labour from the
knowledge, and networks. The following traditional workplace and offers new
sections will discuss these three factors opportunities for skilled labour with higher
individually and will examine how they levels of knowledge. Within this new
contribute to ’’ service innovation’’ the core technology paradigm, experience is of limited
competency of any firm. value because new knowledge is essential to
make oneself productive with the adoption of
new technology. Thus, knowledge and the
Impact of technology on services increasing service component have significant
implications for both the labour market in
Advances in technology have directly terms of ongoing learning) and for the
influenced the growth and importance of industry in terms of continuous upskilling).
services, in terms of independent service- In the past, labour represented, and was
offerings, and as components of product and considered by management to be, the
service packages. Service has become a inevitable cost incurred in the production of
business essential in manufacturing Zeithaml goods and services. However, under the
and Bitner, 1996, p. 10). Consider, for present extended definition of ’’ resources’’ ,
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labour is valued not in terms of physical As the foundation of economies shifts from
assistance, but in terms of mental natural resources to intellectual assets,
contribution. The labour within an managers will be compelled to examine not
organisation or country is no longer a only the knowledge underlying their
designated cost but a valuable resource. The organisation’ s success and competitive
true economic value of a person is primarily advantage but also, more importantly, the
attributed to his or her knowledge and management of this knowledge Hansen et al.,
creative skills. This view is highlighted by 1999). Moreover, in an age in which business
Moody 1991) in the New York Times operates within networks and alliances,
Magazine with his assertion that ’’ Microsoft’ s international boundaries pose no real
only factory asset is the human imagination’’ . limitation.
Hamel and Prahalad 1989, p. 67) suggest Historically, many countries and industries
that managers nurture and develop prohibited the emigration of skilled workers
competitive intelligence at every level of the for example, carpet-weavers in Persia, paper
organisation in order to build the firm’ s and pottery craftsmen in China, silk-weavers
competitive advantage. A similar view is held in India). In those days, a worker’ s skill in a
by SONY’ s chairman, Morita 1988), who particular trade or craft represented specialist
indicated that it is not the manual labour of knowledge, capability and competence.
employees that allows a company to dominate Today, however, even if a particular worker’ s
the global market, but the contributions of the knowledge is deemed valuable to the
employees’ minds. company, it is seldom accorded the status
More recently, it has been recognised that accorded to a physical asset in the firm’ s book
the contribution of the human mind of accounts. Moreover, in the present ever-
knowledge) will play a major role in changing world of global business,
tomorrow’ s service industries Peters, 1994). technology, competence, and capability, each,
Indeed, talent-based enterprises have become in its own way, is a manifestation of a firm’ s
commonplace in the innovative world of knowledge assets operating at different levels
business. Business success will depend on an of the organisation Boisot, 1998, p. 4).
organisation’ s ability to imagine and/or create According to Drucker 1993, p. 38),
a need Pilzer, 1990). Thus, it can be argued knowledge represents a key personal and
that innovation in services reflects the primary economic resource. He argues that
creativity of the human mind knowledge). It traditional factors of production such as
is, indeed, progress into the unknown land, labour and capital have become
through new knowledge that will enable an secondary. He asserts that ’’ knowledge is the
organisation to attain wealth and the all- only meaningful resource today’’ . Hence, a
important competitive advantage Kelley, worker with knowledge commands a leading
1997). It is the people within a service role and status, as his or her knowledge
organisation that create and innovate an represents the firm’ s single greatest asset.
organisation’ s service offer. According to Moreover, the aptitude of the worker and the
Peters and Austin 1994, p. 98), irrespective firm to seek new and up-to-date knowledge
of where technology leads, service the concept of the ’’ learning organisation’’ ) is
differentiation comes from people and their the only means of sustaining the value of the
contribution to the infinite field of knowledge. firm’ s knowledge resource. However, this new
primacy of knowledge requires managers to
rethink the fundamental practices of
Contribution of knowledge management. Webber 1993) asserts that
managers not only must invest in the
Developing, using and leveraging knowledge necessary information tools to support and
are essential for all organisations and/or enhance the productivity of the knowledge
countries to sustain economic progress. workers), but also need to nurture a
’’ Knowledge is indisputably the primary basis partnering relationship with them. In essence,
for value-added in today’ s companies’’ , claims a firm’ s strategy for knowledge management
management consultant Peters 1994). It has should reflect its competitive strategy
become an accepted fact that, in the new Hansen et al., 1999). In this competitive
millennium, we will encounter advances in environment, knowledge is progressively
technology-information-knowledge services. being perceived as the core driver of
21


competitiveness; more importantly, benefit of the customer by creating strategic
knowledge extends beyond individuals, alliances both horizontally and vertically
groups, or corporations to mutually internal and external relationships) with
supporting groups Gummesson, 1999, individuals and firms Peppers and Rogers,
p. 132). It is this extended network of 1997).
relationships that, Gummesson argues, will Horizontal strategy, according to Porter
reap the creative potential of knowledge. 1985, p. 319), is the essence of corporate
Products and services offered in the strategy as it seeks to gain competitive
marketplace today have become increasingly advantage by creating links among distinct
complex, with most organisations offering not but interrelated businesses. It is suggested
one product or service, but a collection of here that the core competency of the firm as
products and services Albrecht and Zemke, valued by the customer) is creatively
1985). Hence, most companies are nothing developed by the firm’ s ability to nurture
but a ’’ chain of services’’ Quinn et al., 1990). enduring relationships with various parties
It is the firm’ s service package that augments inside and outside the organisation. The
the value of both product and service offerings collective competency of the firm is thus
Chase and Garvin, 1990). Moreover, it is the derived from the various networks of
specific configuration of the different stakeholders of the firm for example:
components in the firm’ s service package customer, employee, retailer, supplier, and
competence) that communicates added shareholder see Figure 1, Kandampully and
value to the customer. Management literature Duddy, 1999b). Although various other
attributes a firm’ s competitive advantage to stakeholders can be included in the network,
the firm’ s capabilities or core competencies the above five stakeholders partners)
Prahalad and Hamel, 1990; Stalk et al., constitute those participants that are essential
1992; Teece and Piscano, 1994). A firm’ s to a service firm’ s basic operation. Through
core competency is dependent on its capacity network partners, the firm essentially aims to
to combine core skills creatively Prahalad, enhance the value of its offerings to the
1993), from both within and outside the benefit of customer, firm and stakeholder
organisation. However, ’’ what matters is the simultaneously.
creative bundling’’ of a firm’ s core Developed as networks, the various
competency Prahalad, 1993) and, thus, the relationships that the firm nurtures and
need for a focus on the factors that signal maintains frequently constitute the life source
value to the customer. for many leading-edge firms Kandampully
and Duddy, 1999a); indeed, most large and
small projects invariably involve numerous
Contribution of networks of alliances and partners. This is particularly
relationships
Figure 1 Service relationships
In this competitive global market, customer
focus requires a firm to gain a comprehensive
understanding of the buyer’ s entire value
chain holistic needs), not only as it is of
today, but also as it will evolve over time
Slater and Narver, 1994, p. 22). Moreover,
in most cases, customers’ holistic
requirements frequently extend beyond that
capable of being effectively fulfilled by a single
firm’ s product or service Kandampully and
Duddy, 1999b). Thus, firms which
understand customers’ holistic needs will be
able to mix and match various products and
services commensurate with customers’
specific needs. If customers require products
or services that are not within the realm of a
firm’ s core competency, the firm should find
ways to procure those competencies for the
22


pertinent to services, as networks are endemic Figure 2 Core competency in services
to most service businesses Heskett et al.,
1990, p. 160). The competitive advantage of
Federal Express over its competition was
attributed to advanced technology networks
that offered customers the means of
’’ tracking’’ their package during transit.
Today’ s service organisations traverse
conventional boundaries. Firms that seek
assistance and enter into alliances with
various individuals and suppliers do so, not as
a cost-saving exercise, but to seek out
specialist know-how to extend their core
competency. In modern business, the term
’’ out-sourcing’’ has been accorded a new
meaning and has subsequently been replaced
with ’’ out-partnering’’ Peters, 1994).
The experts inside and outside the firm can
therefore essentially be deemed the firm’ s
’’ competency-contributing partners’’ , because
it is with their assistance that the design and
delivery of the service are realised. Most
often, the experts inside and outside the firm
undertake projects that require them to work firms such as General Electric and British
in very close relationships. It is technology Airways set up their call centres in India to
that renders it possible for these amorphous handle a daily barrage of customer enquiries
networks of expertise to come together in that originate in North America and Europe
cyberspace and work in very close Landler, 2001). Thus resourcing services
relationships, although they might be through networks beyond national boundaries
thousands of miles apart physically. has become a common feature in the global
Technology thus acts as an unparalleled tool marketplace. Moreover, the ongoing
that makes it possible for service firms to dependence on network relationships, and the
extend their core capacity competency or effective maintenance of such networks, will
capability) and to forge networks of dictate the core survival strategy of
relationships across the globe Figure 2). tomorrow’ s service firms.
Thus the firm’ s core competency is Furthermore, the ability of a service firm to
represented by the knowledge base, realised interact with its customer, and the ability to
through the effective use of internal and maintain an ongoing relationship with that
external partnerships utilising technology. It customer, have become increasingly
is argued here that it is this continuously important strategies. This relationship
updated ’’ amorphous knowledge resource’’ , imperative, referred to as ’’ relationship
resulting from the network of partners, that marketing’’ in marketing literature, has gained
represents the firm’ s core competency. widespread acceptance with practitioners and
Moreover, it is the firm’ s subsequent ability to academics alike. One of the many benefits
remain at the forefront that nurtures the associated with the adoption of relationship
firm’ s image as a service leader, and that marketing is its potential to gain timely
provides the feature that differentiates the information on the changing needs,
firm from its competition. The recognition of expectations and spending patterns of
the non-conforming amorphous) nature of customers. Customer information thus plays
knowledge provides firms with the mindset to a significant role in the amorphous structure
seek for sources of knowledge beyond the of the firm’ s knowledge resource. For
obvious. Peters 1994) argues that example, booking 355,000 hotel rooms across
corporations are becoming amorphous as they the planet gives Marriott the opportunity to
expand their resource base to people and collect the world’ s most extensive store of
firms around the world. For example, call information about the characteristics, habits
centres are a booming business in India, as and preferences of people who travel Wired,
23


2000). This in-depth customer information industry. For example, the displacement of
proves invaluable for the firm to ’’ think for the the multimillion-dollar music records
customer’’ and to create products and services industry by the introduction of CDs stands as
that manifest superior value to the customer, testimony to this phenomenon. Moreover,
thus gaining ultimate advantage in the innovated products and services indirectly
marketplace. destroy the demand for the old, as the latter
The growing importance of relationships prove less valuable to the customer.
and alliances can be attributed to the global Innovation or creativity per se are of limited
accessibility of the IT digital networks that significance in today’ s evolving business
link individuals and organisations around the continuum, as it is the value of the innovation
world. The collective impact of various as perceived by the customer that renders an
factors including the availability of low-cost advantage to a product or service. Service
computers, recent advances in digital innovation results when a firm is able to focus
communications, applications of the easy-to- its entire energies to think on behalf of the
use graphical-interface Web-browsers and the customer for an outcome that surpasses
evolution of the Internet as a universally customers’ present expectation of superior
accessible phenomenon has enhanced the value. Innovation, however small, has a
accessibility and exchange of knowledge. compounding cumulative) strength that is
From a global perspective, it is the capable of creating the new and of distorting
accessibility of knowledge, and how that the old.
knowledge is creatively transformed and Innovation, therefore, nurtures a culture in
marketed, that provides an individual firm or which there are fewer hindrances to the
a country with its competitive advantage. The creation of a synergy of thoughts and actions
Internet offers access to the global on behalf of the customer. This, of course, is
marketplace, in which border and time pose conceptually and philosophically alien from
no limitations for the amorphous extension of conventional business wisdom. Entertaining
the firm’ s competency the only limitation the old mindset) inevitably affects the
being human imagination. present and future actions of a firm, and
hence it is imperative to eradicate the old
simultaneously with the introduction of the
Service innovation: the core new. As Peters 1997) suggests, it is essential
competency to destroy the old so as to give way to new
thoughts and subsequent new action.
Success stories of firms and individuals in Moreover, every enterprise should
various parts of the world are often featured in systematically undertake the tasks of creation,
business magazines and books. In most cases, preservation and destruction of their
their advances in their chosen fields have not philosophy, systems and processes.
been the result of hard work, but can be This new mindset also recognises the fact
assigned to their capacity to utilise creatively that the firm’ s extrinsic requirement
the benefits of advances in technology, new enhancement of customer value) is the all-
knowledge, and networks of relationships. important factor in the firm’ s intrinsic
Technology thus serves firms as they create preferences. The firm might thus choose to
and maintain networks of relationships in the use various technologies and to forge
pursuit of new knowledge. Thus the incessant networks of relationships to extend its
focus of firms will be on knowledge the competency knowledge) base, and to offer
’’ resource’’ that, with its creative potential for higher value to the customer. The focus on
innovation, offers the firm its core customer-perceived value might require the
competency. firm to forgo their intrinsic ego and to seek
Service leaders have not only developed competencies outside the firm. A firm might
new services as collective packages but, in the thus join in partnership with other enterprises
process, have created new markets often including those they might previously have
initiating the growth of a new industry. viewed as competitors. The 13-partner ’’ Star
Today’ s managers are not concerned about Alliance Network’’ in the airline industry, for
the challenges caused by the short life-cycle of example, illustrates the numerous benefits to
products and services but, rather, by the be gained by competing airlines, and by their
possibility of the disappearance of an entire customers, as a result of operating within a
24


network. Star Alliance Network partners challenges previously posed by distance and
enjoy the facilities to serve their customers time, and to convert them into potential
with more than 815 destinations in more than opportunities. Time differences can be
130 countries in a reputable and customer- creatively utilised to serve internal and
service-led environment. This unparalleled external customers around the clock. Many
world-class service would have been an US firms strategically locate their support
impossible dream for any one airline services across international borders with
operating alone. the aim of providing support services during
off-business hours. For example, India is
being recognised as the ’’ back office’’ of the
Conclusion and discussion world Landler, 2001). Marquee businesses
such as Nordstrom, Visa, Xerox, General
Firms undertake a myriad projects. However, Electric, Reebok, AT&T, Motorola, Cisco,
creative innovation necessitates that these Thomas Cook, and British Airways provide
projects and actions be synchronised to their firm’ s support services such as
produce value-enhancement for the customer
computer help-desks, accountants, call
the firm’ s ultimate goal. In the competitive
centres, transcribers, and so on) from India.
marketplace, it is those factors that render
This conceptual shift in recognising the
greater value to customers that command
value of people and their knowledge as a
demand. Hence, customer-focused firms are
resource thus broadens the global
amenable to new and better ways of doing
opportunity for individuals, firms and
things for the benefit of their customers.
countries, and has major implications for
Technology, knowledge and networks thus
gaining success in the marketplace. This
represent a unique set of factors that can fuel
innovation in service organisations. It is the quantum shift in the attitude of firms
combined effect of technology, knowledge demands that they reassess what constitutes
and network that gives a firm the ability to ’’ resource’’ for them, and demands that they
focus its amorphous resource on the future reassess what has to be done to attract,
as yet unexpressed) needs of customers the nurture and manage the ever-changing
true innovative feature. knowledge-resource pool. In fact, it is this
Customers today expect firms to delight knowledge-resource pool that will be
them with creativity. Hence, continuous and attractive to both internal and external
creative innovation undertaken by a firm on customers.
behalf of the customer is, indeed, the only
strategy that can sustain the long-term success
of the firm. However, service innovation References
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