Innovation on Services
Systemic approximation to the innovation in services, learning, knowledge and institutional frames.
Introduction
When inquiring about innovation processes, it’s nowadays essential to address the issue with a systemic approach in which the different parties, actors, trajectories and concepts that these processes involve can be taken into consideration. This invites us to think about innovation systems based on their cumulative (path dependence) and interactive nature, and on the consequences and interdependencies that the system has with other social and/or economic activities, both inside and outside of it, in interaction with the context: both national and global (Johnson and Lundvall, 1994). So, by relating these aforementioned aspects of innovation processes and systems with the capacities and needs to make decisions about nation-state policies, it is necessary to have both adequate mechanisms and tools to measure innovation activities, as well as to have with a quasi-universal conceptualization and clear classifications.
From the foregoing, we consider that one of the points of discussion that remains open is around the importance of adapting significant changes in the way in which activities and processes of the innovation services are measured, conceptualized, estimated and manifested. Likewise, an integration that is extremely enriching both for pragmatic analysis and for academic contributions, and that we intend to address synthetically in this work, is related on the one hand based on innovations in services driven by the arise and boom of knowledge economies, and on the other in the institutional innovations required to carry out those new combinations of knowledge, all this within innovation systems that somehow support them.
With this, the purpose of this work will be to contribute dialogue, reflections and arguments to the discussion on the importance given to innovation in services and the debates around its measurement and conceptualization, from a perspective focused on the role it plays, both knowledge and learning, and the importance that these innovations must be supported by changes, adaptations and innovations also carried out in the institutional framework, so that innovative capacities are defined in this way.
From the proposed scenario, the following research questions appear: is innovation in services an opportunity to develop competitive advantages, by differentiating itself from the competition, and thereby achieve extraordinary income? What is the impact and how are both knowledge and learning combined in these innovations? How do institutional innovation and adaptation present themselves in the framework of the new paradigm under today’s most advanced production practice, understood as the knowledge economy?
In the following report we will give some approximations to the aforementioned questions, beginning by presenting a brief detail about the new paradigm shift that has been taking place since the early 2000s. Then, the different approaches proposed by the authors Rubalcaba, Pavitt, Coombs , Gallouj and Miles, and Schumpeter on the considerations that must be taken into account when analyzing and measuring innovations in services. Additionally, we will expose two cases of companies in which the relevance and the trend that has arisen in recent years to innovate in services is evident. In the following section, an approach to the proposal of national innovation systems will be briefly presented. In the last section, the work will be closed with a synthesis of the debate raised and the information presented, the final conclusions will be presented in relation to the questions raised and the points that remain outside the scope will be pointed out, but which are of interest. It is extremely important to include them in future works and analyzes to enrich the literature on the subject.
Historical context: New paradigm
Between the ’50s and ’60s, innovation generated technological unemployment in the primary sector, and benefited sectors that did not incorporate innovation. This produced great volatility when viewing prices, which had few linkages. Another characteristic of the primary sector is the low technological intensity of this type of production. Starting in the 1970s, a new techno-economic paradigm appeared, ICTs (information and communication technologies), which enabled processes of global fragmentation of production, but which also have the characteristic of being, all of them, transversal technologies to any productive structure that has an impact on the increase in productivity and possibilities of differentiating products in all sectors. And the natural resource-intensive sector is no exception.
In order to advance in increasingly efficient production processes, technological and productive capacities must be complemented, based on knowledge of the agricultural sector and digital technology. Starting from a natural advantage, a new competitive advantage can be created, and get out of the logic of the duality of agriculture and industry.
In the last fifteen or twenty years there have been changes in the global economy, in the form of Organization of production, which comes from the hand of a greater weight of services in global economies. The window of opportunity for Latin America to diversify based on manufacturing production is closed, that is, there are countries that use models that would not be adaptable in Latin America, since they do not have the same abundance of low-cost labor, and the international context is different, where the room for political maneuvering at the national level is reduced.
Additionally, the spread of the techno-economic paradigm made services that were traditionally considered a non-tradable sector become a tradable sector (distance education, health, design, professional services such as a law firm, etc.). It also generated an increase in services in employment, value added and world trade. It also reduced costs and time required to generate, process, store and transmit information. During the last decades, services have become one of the most relevant economic activities worldwide, both in developed economies and in developing countries. This dynamic is evident from the significant increase in the participation of services in employment and trade in most countries. Currently, services represent around 66% of global value added, reaching 75% in developed countries.
Knowledge as an attractor of innovations
With the advancement of the new techno-economic paradigm centered on communication and information technologies, both knowledge and organizational and institutional learning emerge as key resources to drive innovation processes both in services and in the new generation of manufacturing industries transfigured into services. In this way, new pieces of knowledge come together and/or are reconfigured to generate innovations; the learning process turns out to be a key activity in the generations of this new knowledge, both for its deterministic trajectory (path dependence) and for its irreversible accumulation in innovation processes.
From this point of view, in the highly competitive and disruptive environments in which organizations find themselves today, we believe that knowledge is the most important source of competitive advantage. While the ability to absorb knowledge is crucial for developing and increasing an organization’s ability to learn -and therefore to innovate-, the dissemination of knowledge is essential for the productivity of companies.
Thus, the knowledge economy has become the most advanced production practice today. With this, it is now more accurate to say that the growth of knowledge becomes the axis of economic activity. New products or assets and new ways of designing and manufacturing them are simply the embodiment, in goods and services, of our guesses and experiments.
Initially, two questions arise regarding the absorption of knowledge and learning. In the first place, in relation to the structural and institutional framework and the way in which these are, can or should be adapted. On the other hand, the question of whether the knowledge economy, the now most advanced production practice, is only confined to the most advanced fringes within world capitalism, or can be extended to developing regions. Although we believe that these issues should be covered by future work and research, since they turn out to be valid and of imperative importance, it is outside the scope of this essay to give arguments or try to elucidate these two questions raised in this section.
Innovation in services
In recent years, innovation in services has begun to have great relevance for large companies such as IBM, Oracle and others, which have come together to create the Center for Research and Innovation in Services (SRI, for its acronym in English), to take the lead in the development of tools and methodologies to innovate in services.
This type of innovation in services emerged in the 2000s, seeking to innovate in activities or benefits that are intangible, such as car maintenance, appliance warranty, medicinal coverage for medical care, etc. Innovating in services then means improving the experience that a customer has with a company or a brand, and how to design that service to make it more tangible in the eyes of the customer.
At a global level, it is the same context that makes services, and in particular some knowledge-intensive services, have significantly increased their share of added value. Services are made up of a set of activities whose output cannot be stocked (personal services, health, education), which are co-produced with demand (services provided to companies), or which are consumed while they are offered (transport). In Latin America, the share of services is significantly higher than in other developing economies. In particular, in those countries where their main economic activity is tourism and services are the main activity of their economies, as is the case of the Caribbean, they depend heavily on the gains in competitiveness that activities linked to this sector can develop and, therefore, of the possibility of generating innovation processes.
Characteristics of innovation in services
Next, we mention some of the main characteristics of innovation in services.
- Key role of human capital
- Intangible nature of capital that makes it difficult to finance innovative activities
- Fewer economies of scale
- Key role of non-technological innovations
- Innovation activities as cost of service and not as investments (underestimation of innovation efforts based on traditional indicators)
The differences within the manufacturing and service industries are, in many cases, more marked than the differences between the manufacturing and service industries as a whole when considered in aggregate (Coombs and Miles, 2000; Gallouj, 1998). Technological dynamism is associated with the branch of activity rather than with large sectors. This leads to a blurred line between product and service, because there are companies that do both:
- Services on the goods (post-sale and maintenance)
- Complementary goods services (such as insurance and software)
- Services that create the goods (car rental)
Three approaches of innovation in services
At the beginning of the 2000s, studies on innovation in various segments of the service sector helped analyze the development of the information society and its impact on new forms of services, the growing importance of outsourcing and offshoring processes in supply chains global value chains commanded by multinational companies, and the significant changes in collaborative research. Some authors take into account 3 dimensions when analyzing innovation in services: the assimilationist approach, the demarcation approach and the synthesis approach.
Assimilationist approach
From this point of view, it is argued that innovation in services must be approached in the same way as in manufacturing, at least until there is greater conceptual consensus regarding their differences. This approach conceptualizes service innovation following the same criteria used to define product innovation. In this way, it is considered that the concepts and tools developed to study innovation in manufacturing can be transferred and adapted to the analysis of services, understanding innovation as a new or improved service.
According to Rubalcaba (2013), this approach represents a technological vision of innovation in services by assuming that they behave in a similar way to products. Thus, this perspective grants a less important role to services in the innovation process, and derives from a vision deeply rooted in the origins of the classical economic tradition, according to which services did not generate any value. For Pavitt (1984), services are mainly receivers of innovations developed in other sectors of activity, that is, services would be categorized as sectors “dominated by providers”.
Demarcation approach
From this perspective, it is pointed out that the non-technological dimensions of innovation are particularly relevant in services, and that this requires the development of a new specific approach for this sector (Coombs and Miles, 2000). Thus, service innovation shows certain distinctive features of product innovation, which require a new way of thinking about the way in which this process takes place. Under this conception, the characteristics that define the services are:
- Its intangible nature.
- Their difficulties in storing them, transporting them and protecting them through traditional intellectual property mechanisms.
- High degree of interaction with clients (even, in many cases, the service is co-produced with the client) that requires its production.
Synthesis approach
On the side of the synthesis approach, similarities and differences between industry and services are recognized. However, it states that the differences between sectors, within the manufacturing and services industry, are in many cases more marked than the differences between the manufacturing and services industry as a whole when considered in aggregate form (Coombs and Miles, 2000; Gallouj, 1998). These authors point out that the activity dimension of any economic sector, including manufacturing and agriculture, always includes various service activities, which blurs the conventional boundary between product and services.
Innovation in services is present in companies that provide services and also in other economic sectors, which makes them very important. This phenomenon of convergence between sectors, based on the transversality of services, which is called servitization, can be identified in various situations. For example, in firms that provide services on goods or raw materials (post-sales and maintenance services), in firms that offer services complementary to goods (insurance and software), and in firms that offer a service that the goods create (car rental), among others (Barletta, Sárez and Yoguel, p-64).
In many cases, the production process of the manufacturing industry became more similar to the logics of production and organization of services with the passage from mass production to flexible production, where the customization of products requires a strong interaction with customers. customers and can also take the form of co-production.
From this perspective of synthesis, it is proposed to adapt the indicators to improve the understanding of the innovation process throughout the entire economy and to be able to capture both the service activities of manufacturing companies and the production of goods that can take place in services companies.
Cases of companies that innovated in services
Netflix
Netflix is an on-demand media content company that has redefined the experience of renting a movie to watch at home. The company was born after seeing the frustration felt by customers of the famous video rental company Blockbuster, when they had to pay the fines for the late delivery of a movie. Netflix knew that most of Blockbuster’s revenue came from late-delivery fees, rather than from movie rentals themselves. Netflix designed a digital content rental service that eliminates late delivery fees and allows customers to watch movies as long as they want without additional charges. The company offers a significantly higher variety of movies through a digital platform than that offered by its competitors, and in exchange charges a fixed monthly membership for said service. Netflix has made Blockbuster’s traditional rental model obsolete and is beating Blockbuster in results even though the company doesn’t have any physical movie stores.
Amazon
Amazon began as an online bookstore, Jeff Bezos saw very clearly that the Internet was going to change the consumption habits of the general public. In the first two months, Amazon was already selling $20,000 a week and doing so in all 50 states in the United States and in more than 45 different countries. Evidently, the CEO of Amazon found a way to innovate in services, which made the public to whom it was intended benefited, quickly generating benefits for the company. In those years, there was no potential online competition, however, there were great offline rivals, such as Barnes & Noble, which had (and has) one of the largest bookstore networks in the world. This firm had been operating since 1873, but the big problem was that its business model had hardly changed. This situation clearly left the way open for a company like Amazon to have unprecedented growth, because in addition to books, it continued to innovate in services such as:
- Music platforms (Amazon Prime Music).
- Software and video games.
- Streaming platforms (Twitch).
- Platforms for Series and Movies (Prime video).
- Shipments of a wide variety of products to all parts of the world.
- Web Services (Amazon Web Service)
What happens in the case of both Netflix and Amazon is that both are companies that decided to innovate, but not as other companies did in the early 2000s -in products-, rather they observed that there was a potential market in the innovation of the services that were provided to people, which would increase the valuation of the good that was sold and/or the service that was provided. All the profits that Netflix and Amazon receive come from the side of digital services, since they do not have physical stores.
In the case of Netflix, each movie or series it makes is innovating in the way users receive this service, and that is not having to go to a cinema or the old video store, and being able to consume the service from where the user you are, at the time you want.
The same thing happens with Amazon, the user no longer has to go to a store to buy whatever they need, but instead orders it online and stays in the comfort of their home to wait for what they bought to arrive.
In short, what lies behind this type of innovation in services, what we currently know as on-demand, is its transversality throughout the same sector and outside of it; that is to say, the innovation led by Netflix and Amazon in the way services are consumed digitally transcended the borders of the sector itself, and its massive nature led other companies to get involved in this wave, through an imitative movement, in order to continue to compete in the market. Lastly, until then it is only those organizations that lead the market, in terms of efficiency and competitive advantages derived from these service innovations, that are and will benefit from these virtuous processes of learning and innovation, and at least for a while they may count on extraordinary income derived from these.
Systemic approach of innovations
From the perspective that Johnson and Lundvall propose about national innovation systems, two central dimensions are referred to in their thesis:
- The first related to the fact that the production structure functions as the framework for the learning derived from the routine that takes place in the system. In the words of the authors “these learning processes tend to reinforce the current production structure; it follows that innovation systems will tend to specialize rather than diversify” (Johnson and Lundvall, 1994);
- and on the other hand, the institutional organization framework, understood as “the structure of routines, norms, rules and laws that govern behavior and determine personal relationships, has a strong impact on the way in which interactive learning is carried out, and therefore, in the pace and direction of innovation. Hence, each innovation system has its own modalities and performances” (Johnson and Lundvall, 1994).
Now, what emerges from this point of view is that, on the one hand, we have learning and technical and technological innovations, which in the current context should be adapted to new forms of production and new production inputs that, as already we mentioned, they are based primarily on knowledge and are tending to a metamorphosis of service production vertically and horizontally in the industrial framework. On the other hand -the most enriching approach-, it realizes that for these adaptations, learning and innovations, both technical and technological, to develop in the most fruitful and efficient way, they must be thought of systemically in conjunction with institutional adaptation, institutional innovation and institutional learning processes that configures and provides the appropriate institutional structure for the system.
From the foregoing, the question arises as to which would be the most appropriate institutional frameworks, based on the new techno-economic paradigm, that promote and encourage innovations in services in the best possible way, articulating learning and knowledge, as a basis for both the establishment of a competitive advantage, such as for national socio-economic development. We will leave this question open, since it does not conform to the scope of this work, but we consider it important to bring it up for debate and leave it raised at least.
Conclusions
In conclusion, if we take Schumpeter’s (1934) definition that the economic competition that determines the difference in the market is the one that incorporates innovations, whether in processes and/or products, now it could also be added that any company that stands out for being innovative in processes, products and services, endangers the survival of the incumbents (companies already established for years). From the cases that we gave as examples, it can be observed both this behavior of sectoral imbalance caused by an innovation, as well as that innovation in services has a positive projection, not only in the short term, but in the long term.
The cases analyzed are only two real examples of the way in which sectoral integration converges in servitization. They show that the importance of innovation in services is really beneficial, and it is foreseen for the future, not only near but also distant, that the importance of services in the economy of our countries will surely continue to grow. Unlike manufacturing innovation, service innovation is easier to implement, since there is less infrastructure to replace, since customers are more open to accepting the changes brought about by the innovation. It is worth mentioning, from the theory of quality management and its customer focus, that the experience that the customer has of a brand or a company is almost as important as the product or service itself. This conception is gaining strength in large companies such as IBM, Oracle and others, which have come together to create a center for research and Innovation in Services. For this reason, today, innovating and providing good customer service is an element that gives a company a competitive advantage.
On the other hand, in relation to our second question about the way in which knowledge and learning are combined in service innovation processes, we emphasize that knowledge is an extremely important factor for developing and increasing the learning capabilities of an organization, which leads to developing capacities to innovate. We also argue that the knowledge economy has become the most advanced model of production, whether of services or products, today, and that it is correct to say that this knowledge becomes the central axis of economic activity in the present. With this, we conclude in the same way that both the learning processes and the accumulation of new and old knowledge are the basis for the development of innovation processes, both in services and in the industrial sectors transfigured to services.
Finally, we briefly explored certain features of the institutionalist and structuralist systems approach to development, in relation to knowledge and learning. With this, we believe that it is essential to think about economic development in interdependent terms of innovation, learning, both for technological changes and for the institutional framework that frames the social relations of an economy. These must be innovated and adapted to the new paradigms, under a new structural configuration at the global level of production centered on knowledge and skills. However, an integrative analysis related to the new structure of world trade dimensioned as global value chains will remain for a future approach. An integrating analysis of the roles and efforts that should be directed both at service innovations and knowledge generation, as well as institutional learning, will also be necessary in order to achieve a strategic role that supports economic development in its broadest and most systemic scope.
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