This document discusses strategies for promoting service innovation. It defines key concepts like service, service systems, and innovation. It explores factors that affect service innovation like the service value chain and service culture. It also outlines specific strategies organizations can use to promote service innovation, such as creating a collaborative environment for value co-creation, focusing on new service design and delivery, and managing customer knowledge to enhance innovation capabilities. Education and developing a culture of innovation are also presented as ways to promote service innovation.

1. Faculty of Computing, Engineering
and Technology
Module – Service Science
(CE00822-3)
Innovation is the key for competitiveness in organizations. Discuss
how we can promote service innovation.
For the attention of Professor Lorna Uden

2. Student number: TU 007321
Date of Submission: 05. 01. 2010

3. Contents
Abstract..........................................................................................................................4
1.0 The meaning of service and service system.............................................................4
2.0 Service economy......................................................................................................5
3.0 Service competition..................................................................................................6
4.0 The meaning of innovation......................................................................................6
4.1 Service Innovation................................................................................................6
4.2Factors affecting service Innovation.....................................................................7
4.2.1 Service-value chain.......................................................................................7
4.2.2 Service Culture..............................................................................................7
5.0 Strategic for service innovation................................................................................9
5.1 Value Creation......................................................................................................9
5.1.1 Value creating through client-driven modes...............................................10
5.1.2 Value creation from the Service Provider Perspective................................11
5.1.3 Balanced modes of Value Co-Creation.......................................................11
5.2 2-D of innovation model ...................................................................................11
5.2.1 New Service Design....................................................................................12
5.2.2 New Service Delivery.................................................................................12
5.3 Knowledge management for service innovation capability...............................12
5.3.1 Managing knowledge for customers..........................................................13
5.3.2 Extracting the customer knowledge............................................................13
5.3.3 Co-Create Knowledge with the customer...................................................13
6.0 Discussion on how service innovation can be promoted.......................................14
6.1 Education............................................................................................................14
6.2 Business..............................................................................................................15
6.2.1 Creating T-Shape professional culture .......................................................15
6.2.2 Relooking at previous system and propose a new service design...............15
6.2.3 Develop a collaborative for value creation..................................................15
6.2.4 Creating a roadmap of service innovation...................................................16
7.0 Conclusion..............................................................................................................16
9.0 References..............................................................................................................16

4. Abstract
In the modern economy, service is about building a collaboration relationship between
the supplier and the customer, in which the creation of value occurs between both
parties. Thus, both customer and supplier play an important role in a service system.
The value created in a service system is the co-creation value, where the key
characteristic is to differentiate service system from a traditional economic transaction
where the client work as a co-producer in the value chain of service innovation. This
reports examine the differentiation of a service system from a traditional economic to
a transaction system, and the value chain of the service system is then break into three
components such as supplier, employee, and customer. Thus, identify the areas of
potential of innovation through a new service development framework. Finally, is to
determine how service innovation can be promoted through strategy business models,
customer’s experiential services, and technologies.
1.0 The meaning of service and service system
Service is defined as the application of competences (knowledge and skills) for the
benefit of another party (Vargo and Lusch, 2006). Service involves at least two
entities, on one hand in applying competence and another integrating the applied
competences with other resources which form a value-coceration in the value chain
network and determining benefit. These interacting entities are known as service
systems. A service system can be defined as a dynamic value-cocreation configuration
of resources, including people organizations, shared information (language, laws,
measures, methods), and technology, all connected internally and externally to other
service systems by value proposition (Spohrer et al, 2007). In a service system,
customer play a key role where the service system is dominated by the relationship
between organization, supplier and client. In the service supply chain model, the
stakeholders interact with each other to create value. From the aspect of systems,
service systems include both systematic parts such as clients, suppliers, and
employees ( ). The key characteristics of a service system is the interaction with the
clients as participants in the service process, not pure value transformation active ( )
as shown in Figure 1 and 2.

5. Manufacturing
input process output customer
Supplier
Figure 1. Traditional transaction system model
Customer feedback
Manufacturing
input process output customer
Supplier
Figure 2. Service transaction system model
2.0 Service economy
In the competitive market today, firms and industrial who innovate by service acumen
plays a significant role in improving the aggregate economy attributes and values. The
service economy is designed in a structural way where different sector offer different
services to the public and businesses. Thus, service systems are growing rapidly and
have become an ever greater part of value creation in modern economies. As
discussed earlier on, large firms and manufacturing industrial should change their
traditional views of value creation into a service value creation chain. Microsoft for
example, they were offering Window Office to the customer as a product, which
rather than co-creating value by the customer and this has caused them to lose their
potential customer in the changing service market against their rival such as Open
Source Software like Linux. However, in improving the supply chain of the
Microsoft, the management has reconfigure their traditional supply chain by
integrating customer ideas for developing new service product, thus offering various
product such as Window 7 Home & Professional.
From the observation above, it can be stated that the demand for service innovation in
the economy is highly needed to impact the service economy. Therefore, it is
important that organization study their business process and management which

6. emphasis on the potential strength of the business structure will be taken into full
consideration. For example, by producing an innovative strategy with value
proposition, innovative business model and a well structural service culture in the
organization. In the article of “Innovation in the Service Economy” written by Gallouj
(2002), he describes that:
“.. modern economies are both service economies and economies of innovation.
Paradoxically, there are not regarded as economies of innovation in services that is as
economies in which service firms’ innovation efforts are proportionate to their
contribution from the major economies aggregate.
3.0 Service competition
In the book of “The Future of Competition”, Prahalad and Ramaswanmy (2004) focus
on co-creating unique value together with customers and argue that ‘value is now
centred in the experience of consumers’ (p. 137) and not just embedded in products
and services. Customer delight and customer perceived value are linked to memorable
and favourable customer experiences (Pine and Gilmore 1999; Johnson and
Gustafson; Berry et al. 2002).
4.0 The meaning of innovation
Innovation can be defined as the creation and implementation of new process,
products, sources, and method of delivery, which results in significant improvement
in outcome, efficiency, effectiveness, and quality (Mulgan. G & Albury, D, 2003).
While other definitions are innovation is the successful exploitation of new ideas
(Innovation unit, department of trade & industry, 2004). Innovation can be defined as
a new ways of co-solving customer problems, whether they are fully recognized or
completely latent to the customer (Michel; Brown; Gallan, 2008).
4.1 Service Innovation
Service innovation refers to new or considerably changed service concepts or service
delivery process that deliver added value to the client by means of new or improved
solutions to a problem (Tidd, Hull, 2003). Thus, service innovation is a methods of
improving performance to obtain a desire opportunity for consumption or consumer

7. services. Based on the key dimensions of services that summarized by XinHui (2008),
Figure 3 illustrate the four dimensional model of innovation in service adapted from
Den Hortog (2000).
4.2Factors affecting service Innovation
4.2.1 Service-value chain
Authors such as Heskett (1994), presented the service-value chain, where the
characteristics of value chain is to analyzing the collaboration between two
organization for achieving value, Customer Loyalty, Customer Satisfaction, and the
value that perceived by customer based on the service offering. In the basic market, to
manage a service, an organizations need to know how to lock-in their customer
through offering satisfaction service which is influenced by service value. These
satisfactions may be originated from IT investment, training and knowledge
exchange.
Figure X: The service value chain model
4.2.2 Service Culture
In the service firms, service culture is the main driver for organization improvement
than in the manufacturing industry. According to Lyons (2007), the differences
between product and service innovation expresses the importance of fostering a
service innovation culture which is consistent, coherent, and comprehensive presence
of values and norms that promote creative ideas and implementation. Another authors
such as Shouming & Yang Zhang (2009) stated that service culture is based on value-

8. centric and aim for promoting the core competitiveness of the enterprise and creating
the loyalty of the customer. As traditional service move to service-oriented culture,
different aspects in service culture, promote innovation in technology, business,
organization and demand. These innovation are mutual influenced and interacted, all
build up the main body of service innovation. The shape of service innovation
management, will absolutely impact the company service value. To understand how
service culture and service-value chain impact on service innovation, figure x
illustrate the model of it
Figure 2: The impact of service culture on service innovation

9. 5.0 Strategic for service innovation
5.1 Value Creation
At the beginning of 2007, IBM’s Jim Spohrer announced, “Service is value co-
creation”. (Spohrer, 2007). The purpose of value co-creation is to stimulate change.
Value creation occurs when there is a strategic agreement between the client and the
service provider. This agreement exist when both the client and the service provider
have sufficiently related service innovation strategies.
Most service provision requires a high degree of interaction between the client and
service provider, especially in knowledge-intensive fields such as the information
service business (Bettercourt et al, 2002). According to the research done by Moller;
Rajala; and Westerlund (2008), their research show that providers who have either a
strong technology orientation or who wish to create high value-added services are the
most willing to enter into close-relationship with their clients. Through their study,
they also noticed that provider who focused on operational efficiency, aim at value
creation though more distant, transactional customer relationship. In order for an
organization to be competitive in the market, it is crucial that they develop a
successful innovations in client-provider relationship by recognizing each other’s
value-creating strategies. These value-creating is separate into three strategies
ranging from establish service to incremental and radical service innovation
development, as illustrated in Figure X which is adapted from (Moller et al; 2008).

10. Figure X. Basic Interaction Modes in Service Co-Creation
The service co-creation framework is used to analyzed service development, focusing
on the client-provider interaction modes in service innovation (Moller et al; 2008).
The modes are classified into three categories which is balance, provider-driven and
implausible.
5.1.1 Value creating through client-driven modes
In these modes, it is concern about the collaboration of knowledge exchange between
the client and the provider. As the demand of customers need increase, service
provider may hard to met the customer expectation and provide competencies that can
met their satisfaction. Having a strong relationship with the client, it will help the
provider to produce an innovative service packages for their client. Thus, it may
reduce the risk of client going for other service provider which offers different types
of service offering or packages.
In the case of creation of new service innovations, it is sometimes difficult to
differentiate the roles of “customer” and “service provider”. For example, Facebook
often add new features and contents to their Social Web-Based channel which is
grounded on client’s request. While Facebook original solutions could be
characterized as provider-driven, its drive to also cover the needs of customer
involvement in its service strategy. By inputting rich content into the social network,
Facebook developer adds service modules to the Facebook.com in accordance with

11. clients’ requests by offering rich applications and information for the client.
According to Moller; Rajala; and Westerlund (2008), successful client-driven
innovation is derived from the client’s ability to demand services and the service
provider’s ability to meet these requirements in incremental but continuous
development.
5.1.2 Value creation from the Service Provider Perspective
Well known and large service provider such as P&G, Google, Microsoft and Nokia
shares a common goal in value creation by creating a business model that are typically
focused on the service co-creation. Authors such as Flint, Woodruff and Fisher (2002)
argued that when service providers design new service, they have to realize that it is
the benefits that customer device from the service, not the offering as such, which add
perceived value for the clients. For example, Microsoft create new operating system
which the innovation activity does not create extra value for the clients. However, in
redesign their service offering, they providing alternative version of its Window
operating system package, such as the Window 7 Home and Professional Editions.
5.1.3 Balanced modes of Value Co-Creation
5.2 2-D of innovation model
At the firm level business system, the key processes for developing customer-oriented
innovative services are new service design, deployment, and delivery (i.e, the 3D). As
service provider have create the value proposition for the customer, the next stage is
to identify ways to differentiate their servicer offerings. In the traditional economy,
new service development often used on “product development”. But on the
transactional service system, it is more service oriented where it focus more of
collaborative. So, firms develop new service concepts according to customer
preferences and customer value propositions. Next, linking the newly developed
service concepts to the market segment to gain which market has a pontential
customer. The final step is the efficiency of the service offering by analyzing the
quality of the service and the experience that perceived by the customer.

12. 5.2.1 New Service Design
Having new design will help organization to achieve competitive advantage in term of
differentiation of service offering. A new way of generating the revenue can be
created when the new service design involve customer as the co-producer and co-
creator in the new service development process. However, this raised an issues as
seen below:
1. What is the value and services that customer want?
2. Is the value concept consistent with the value proposition?
3. How to identify customer value and propose a scope of offerings?
The new service design process include as following:
1. Generating the ideas based on customer input
2. Identify the market segment
3. Developing new business model through market analysis and customer
involvement
4. Positioning the new service offering by having customer participate in the service
design process
5.2.2 New Service Delivery
5.3 Knowledge management for service innovation capability
Knowledge management is part of value creation process in achieving service
innovation. In the modern economy, especially those firms using technology often
provides potential technology to manage customer knowledge to make customer
knowledge leading to innovation, and enhance service innovation capability. In
service innovation process, customer collaborate with the service provider for
exchange of knowledge for innovation capability. As mentioned by Sampson (),
customer always the co-producer in a service process, where they indentify and
demand for innovation change. Thus, as customer participate in this service process,
they also influence the quality of the innovation service. There are three ways how
organization can manage the customer knowledge.

13. 5.3.1 Managing knowledge for customers
According to Michael Gibbert (2002), he proposed that the customer knowledge
management is about the management of innovation and the growing demand of it.
By managing knowledge for the customer, organization would be able to point out the
quality of their service. Thus, helping them to make decision easily by understanding
customer needs. For example like Amazon.com , they have a intelligent knowledge
system tools such as customer tracking which used to collects information from
registered user during their visit to the web site. In order for them to promote new
service innovation, Amazon offers new service by helping the users to search through
a book without any delay, as the system has a database tracking on the current user
preference. Thus having this system, it will also offer new knowledge to the new
customer on what current customer have bought, and their review on the
books(Layton ,2009).
5.3.2 Extracting the customer knowledge
Knowledge extraction is crucial in obtaining customer experience in a service process.
Every opinions and suggestions that given by the customer will help to evaluate the
value that they perceived from the service provider. From the case of Reebok, getting
the information that manage customers relative information and knowledge from
customer can improve service innovation’s efficiency and amount. So, in product or
service innovation, idea generation, even product or service development, customer
should be encourage to participate in service innovation process, and use knowledge
from customers to improve company’s service innovation capability.
5.3.3 Co-Create Knowledge with the customer
Co-create knowledge with the customer mean the process of involving customer into
the innovation process which often based from the perspective of customer
experience. Organization who exchange knowledge with their customer, will able to
deliver new service offering, thus able to differentiate their total service packages
different from their rivals. Google for example, exchange their knowledge with the
internet users for new service development such as Google Map, Gmail, Spam
solutions and etc. So, having customer interact in the service process, and their
innovative knowledge and creative ideas will help to promote new service
development that organization need to provide.

14. To summarize the above analyses, Figure X shows a relationship between the
customer knowledge management and service innovation capability (Hongqi &
Ruoyu, 2008).
Figure X: Relationship between customer knowledge management and service
innovation capability
6.0 Discussion on how service innovation can be
promoted
After analyzing the factors and strategy of achieving service innovation, now the next
steps is how to promote the service innovation to the customer. To understand how
service innovation can be promoted, it is important to look on the different sector in
the service market.
6.1 Education
In order to promote service innovation as an education, it can be achieved by adding
SSME qualification to an existing deep home discipline of study. Staffordshire
University for example, previously they was focusing on the subjects of computer
science rather than service science. Moreover, all the University that has establish the
field of service science was from top elite university. However, as competition rise in
the education industry, some of the professors and researcher in the Staffordshire
University has develop a SSME programme by collaborating with IBM to offers the

15. SSME programme to student. So, as student is being innovate with service mindset,
they will able to work effectively in innovating ideas, designing complex system and
thus prepared to succeed in the 21st century service-driven globally integrated
economy.
6.2 Business
6.2.1 Creating T-Shape professional culture
Businesses should define career paths for T-Shape professionals and indicate their
preference for SSME qualifications in recruitment. This would demonstrate the
demand for academic programmes and encourage the formation of interdisciplinary
Service Science communities. Furthermore, organization should emphasize a T-Shape
working culture, where employees are always able to generate ideas for new service
innovation. Such culture can be taken from the example of Google, where the workers
was given a priviledge to find problems from a service system range from service
industry to manufacturing industries.
6.2.2 Relooking at previous system and propose a new service
design
Building a new service design will require the businesses to participate in a complex
service system. For example, (a) how to make optimal investment for service
innovation, (b) how to scale up margins as service revenue increase, (c) how to
systematically reduce the complexity of service systems, and (d) how to devise
measurements system that can be used internally and share externally to protect
privacy and preserve competitive advantage (IFM; IBM, 2008).
6.2.3 Develop a collaborative for value creation
Small and Medium Enterprise can collaborate with the IBM in learning the
fundamental of Service Science and the latest research and tools use to develop a
service system that can impact the businesses. For example, NHS collaborated with
CSC consulting group for service innovation. Through the collaboration, CSC
consultants gather the clients need and participate in the service development process
of NHS. Here, it can be stated that there is an exchange of knowledge for value
creation, which can help businesses to stimulate rapid progress.

16. 6.2.4 Creating a roadmap of service innovation
As sustainability becomes an increasingly urgent global concern, businesses should
take the opportunity to expand the definition of stakeholder value to include new
measures. More emphasis should be placed on the balance between efficiency,
effectiveness and sustainability. Roadmaps for service innovation should include
update performance measures and adjust mechanism of measurement.
7.0 Conclusion
Although there are many ways that service innovation can be promote, it is important
that a service innovation should be looks in perspective of service dominant logic
where collaborative and value-creating is about. Furthermore, it is important that new
service development should focus on a service-oriented process. This means that
customer should be involved in the ideas generation process not just the suppliers.
Finally, service innovation can be promoted through the customer knowledge and
theirs word of mouths. As customer consume a service product, he/she is experiencing
the service and therefore able to pass the new knowledge to another customer. In
another words, it is a source of advertising which cost can be reduced rather than
using heavy media application to advertise.
9.0 References
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