We find that international competition fosters R&d intensity, especially for high-tech firms. Firm size, R&d intensity,
along with investment in equipment enhances the likelihood of having both process and product innovation. Both these kinds of innovation have a positive impact on firm's productivity, especially process innovation.
Bronwyn H. Hall Dept. of Economics 549 Evans Hall UC Berkeley Berkeley, CA 94720-3880 and NBER bhhall@nber. org Francesca Lotti
Or, more precisely, is it a consequence of the exhaustion of the so-called capital deepening phase that supported labor productivity growth during the Eighties (as documented by Pianta and Vaona, 2007?
Alternatively, is it simply due to input reallocation following a change in the relative price of labor with respect to capital after the labor market reforms of the early 1990s (Brandolini et al.
) Or does the explanation lie in the evergreen motto that Italian firms exhibit insufficient R&d investment (European commission, 2006?
the size distribution on Italian firms could help to explain why Italy is lagging behind in terms of aggregate R&d investment.
But at the same time, innovation in small and medium enterprises exhibits some peculiar features that most traditional indicators of innovation activity would not capture,
one should look at the results of R&d investment: training, technology adoption, sales of products new to the market or the firm.
while the likelihood of having process innovation is linked directly to firm's investment in fixed capital.
or missing investment. 5 We adopt the OECD definition for high-and low-tech industries. High-tech industries:
Concerning competition, more than 42%of the firms in the sample have national competitors, while 18%and 14%have European and international competitors, respectively.
Italian firms display a significantly lower R&d intensity but roughly comparable investment intensities. These figures can be explained partially by the different firm size distribution within each country:
Given the low volatility of R&d investment over time, the results were very similar to those reported below. 7 7
and R&d investment at the firm level, see Cohen and Klepper, 1996). 3. 2. The knowledge production function In the second step,
The only exception is the investment rate, which is assumed to be related to process innovation but not to product innovation.
investment in research is fundamental for product innovation, but at the same time, it increases firm's ability to absorb
We also note that investment intensity is associated positively with process innovation in both high and low tech firms.
We defer a fuller discussion of the issues associated with the presence of investment in these equations until after we present the productivity results. 3. 3. The productivity equation In the third and final step of the model,
and with labor, capital, and knowledge inputs: i 1 i 2 i 3 i i y=p k+p PROD+p PROC+v (4) 13 where yi is labor productivity (sales per employee, in logs),
ki is investment intensity, our proxy for physical capital, PRODI and PROCI are knowledge inputs, proxied by product and process innovation indicators respectively.
whether or not it is accompanied by process innovation. 11 Results are reported in Table 5 for specifications with and without investment as a proxy for capital;
Our preferred specifications (1a, 2a, 3a) include investment intensity. When investment is included not in the regression, process innovation displays a sizeable and positive impact on productivity for all the categories of firms under exam, column (1),
(2) and (3). Process innovators have a productivity level approximately two and one half times that of non-innovators, ceteris paribus.
On the contrary, when investment is included, the coefficients of process innovation are not significant, because the same investment variable was included in the previous step in order to predict process innovation.
Thus the coefficient of process innovation in the productivity equation already encompasses the effect of investment in new machinery and equipment However,
because the investment rate is a better measure than the process innovation dummy, when both are included,
it tends to dominate. Product innovation enhances productivity considerably, although to a lesser extent than process innovation. The impact is slightly stronger for high-tech firms.
Table A3 in the appendix also shows that the contribution of product innovation to productivity is much more robust to the inclusion of investment intensity
whether or not investment intensity is used included in the second step. 11 The first is estimated probability of process and not product from the bivariate probit model in Table 4,
For high-tech firms only, age impacts productivity negatively. 3. 4. Investment and innovation In our preferred specification in Table 4, we assumed that capital investment
In fact, we found a small marginal impact of investment on process innovation that was approximately the same for high and low-tech industries (0. 05.
Because the assumption that investment is associated with process and not with product innovation may be somewhat arbitrary,
whether investment is devoted to process innovation only (column 1), to product innovation only (column 2),
In the bottom panel of the table, we report an alternative specification of the productivity equation without investment.
column (3) suggests that physical investment has a small (0. 02) positive impact on product innovation as well.
it can be noted that the inclusion of investment wipes out the significance of process innovation,
since investment is one of its main determinants, but not of product innovation, which is more dependent on R&d investment.
Excluding investment from the productivity equation reveals that the process innovation associated with investment is more relevant for productivity than predicted product innovation (compare the process innovation coefficients for step 3 in columns 1 and 3). 3
. 5. Further robustness checks The estimation method used in the body of the paper is sequential, with three steps:
Table A4 also shows the results of another experiment--in this paper we chose to proxy capital intensity by investment intensity,
However, in our data we also have a measure of capital available, constructed from investment using the usual declining balance method with a depreciation rate of 5 per cent
and an initial stock from the balance sheet of the firm in 1995 or the year it entered the survey.
Column (3) simply replaces investment 12 The sample size in this table is reduced 9, 014 from 9,
674 in the main tables of the paper due to the absence of lagged capital (beginning of year capital) for some of the observations. 16 with capital stock,
while column (4) uses investment as an instrument for process innovation, but capital in the production function.
Column (5) includes both investment and capital in both equations. The results are somewhat encouraging:
capital stock is preferred clearly in the production function. In fact, when it is included, investment enters only via its impact on process innovation.
On the other hand, investment is a better predictor of process innovation, although capital still plays a role.
However, recall that innovation is measured over the preceding three years, so that some of the investment associated with process innovation is likely to be included already in beginning of year capital.
Our conclusion is that there is a strong association of process innovation with capital investment, and that such process innovation has a large impact on productivity. 3. 6. Comparison to Griffith et al. 2006 The results shown in the previous section can help in shedding some light on the R&d innovation productivity relationship in Italian
firms. Interesting insights can be gained from the differential impact of R&d on process and product innovation,
as well as their different impact on productivity. Nevertheless, at this point, it is worth asking a further question:
Investment intensity is somewhat more strongly related to process innovation than in the other countries. Also noteworthy is that for Italy,
In the productivity equation, only investment intensity enters, although product innovation has a large but insignificant impact, larger than that for any of the other countries.
International (including European) competition fosters R&d intensity, especially in high-tech firms. Also, R&d has a strong and sizeable impact on firm's ability to produce process innovation,
Investment in new equipment and machinery matters more for process innovation than for product innovation.
Cohen and Levinthal (1989) show that R&d investments develop the firm's ability to identify,
assimilate, and exploit knowledge from the environment. In other words, a minimum level of R&d activity is a necessary condition to benefit from spillovers and to appropriate public knowledge.
but process innovation exerts the largest effect, via the associated investment. Moreover, larger and older firms seem to be, to a certain extent, less productive, ceteris paribus.
In general, underinvestment relative to others may be due to demand factors (perceived market size consumer tastes, etc.
and the regulatory environment). Stepping outside 19 traditional economic analysis, factors such as having goals other than profit maximization, limited information about opportunities,
or even social and cultural norms can also influence investment in innovation. Choosing among these alternatives definitively is beyond the scope of this paper,
but we offer a few thoughts on the supply side here. There is limited evidence that lower rates of R&d investment in larger Italian firms is due to the fact that they face a higher cost of capital than other firms in continental Europe.
In a comparative analysis, Hall and Oriani (2006) find high marginal stock market values for Italian R&d investment in large firms that do not have a majority shareholder
which suggests a high required rate of return and therefore a high cost of capital. However for the other firms (closely held), R&d is not valued at all,
which carries the implication that investment in these firms may not be profit driven. These conclusions suggests that a bank-centered capital market system,
and/or to have goals other than profit-maximization. But this is to some extent speculative, and we hope to explore the question further in the future using these data.
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mean/median*4. 99/4. 94 4. 94/4. 85 Investment intensity: mean/median*7. 90/4. 05 6. 92/4. 01 Public support (in%)45.49 50.51 Regional competitors (in%)16.84 14.87 National competitors (in%)42.24 41.37 European
mean/median*4. 93/4. 89 5. 02/4. 96 Investment intensity: mean/median*6. 22/3. 36 8. 62/4. 38 Public support (in%)46.27 45.16 Regional competitors (in%)12.30 18.75 National competitors (in%)36.45 44.68 European
) Investment per employee 0. 125***0. 050 0. 120***0. 047 0. 129***0. 051 (in logs)( 0. 011)( 0. 021)( 0
. 083)( 0. 093)( 0. 149)( 0. 200)( 0. 118)( 0. 122) Investment per employee 0. 099***0. 073***0. 109***in logs
8, 377 Process innovation equation R&d intensity 0. 303***0. 260***0. 281***0. 161***0. 146***0. 192***Investment
equation Investment intensity 0. 130***0. 109***0. 061***0. 059***0. 129 0. 109***Process Innovation 0. 069**0.
Census of Manufacturing and Services (2001) for the size distribution. Community innovation survey (CIS) for the presence of innovation activity (2002-2004). 95.0 4. 5 0 0. 5 0. 1 33 55 72 0
Investment intensity: investment in machinery per employee, in logs. Public support: dummy variable that takes value 1
if the firm has received a subsidy during the three years of the survey. Regional National European International (non EU) competitors:
137.7 143.4 173.8 187.1 Investment per employee (mean) 6. 0 8. 3 8. 3 6. 3 8.
045)( 0. 045)( 0. 045) Investment intensity 0. 125***0. 050-0. 137***0. 055-(0. 011)( 0. 011) Step
***0. 252 (0. 045)( 0. 046)( 0. 046)( 0. 045) Investment intensity-0. 021*0. 008 0. 055***0. 020
-(0. 011)( 0. 011) Step 3-Productivity including investment in the equation Predicted process inno 0.
***0. 554***0. 599***0. 538***0. 093)( 0. 087)( 0. 095)( 0. 086) Investment intensity 0. 099***0. 099
***0. 093***0. 105***0. 010)( 0. 006)( 0. 009)( 0. 006) Step 3-Productivity without investment in the equation Predicted process inno
Specifications (1)-(4) encompass alternative assumptions for investment, whether it is devoted to process or product innovation, neither,
or both. 36 Table A4-Robustness check using lagged capital and ML estimation (9014 observations)( 1)( 2)( 3)( 4)( 5) with investment with investment with capital investment
in process, capital in productivity with both Method of estimation: Sequential pooled ML pooled ML pooled ML pooled ML Step 2-Process Innovation Predicted R&d intensity 0. 440***0. 400***0. 416***0. 399
***0. 389***0. 048)( 0. 074)( 0. 078)( 0. 073)( 0. 075) Log investment 0. 131***0. 142***0. 145
)( 0. 314)( 0. 370) Log investment 0. 081***0. 072***0. 018 per employee (0. 011)( 0. 017)( 0. 015) Log
-26,979. 0-26,908. 5-26,901. 3 Capital measured at the beginning of the period. The method of estimation in the last three columns is pooled maximum likelihood applied to the 3 steps
Product and Service Innovation in Small and Medium-Sized Enterprises Sponsored Research Prepared for: United states Department of commerce The National Institute of Standards and Technology Manufacturing Extension Partnership RFP 05-480-5824 Contract No.
4 2. 0 INNOVATION STRATEGIES FOR SMALL AND MEDIUM-SIZED ENTERPRISES...5 2. 1 Generalizations about SMES and Innovation are Difficult to Make...
13 3. 2 Why Add Services?..13 3. 3 Definition of Services...14 3. 4 Types of Product-Related Services...
14 3. 5 Mini-Cases...18 3. 6 Differences between Products and Services...21 3. 7 Innovation in Product-Based Services...
22 3. 8 Role of Information technology (IT) in Product-Related Service Innovation...24 3. 9 Do Manufacturing
and Service firms Innovate Differently?..28 3. 10 The Customers'Role in Product and Service Development...
28 4. 0 INNOVATION MODEL AND TOOLS FOR TOTAL SOLUTION DEVELOPMENT...32 4. 1 Models for New Product Development and New Service Development...
32 4. 2 A Model for Total Solution Development...35 4. 3 Tools to Implement Total Solution Development...
Services Embedded in Product Sale...43 5. 2 Phase II: Services Provided to the Installed Base...
48 5. 3 Phase III: Services Based on Customer Relationship...49 6. 0 RECOMMENDATIONS FOR THE MEP NETWORK...
52 6. 1 Introduction...52 6. 2 Current Skills within the MEP Network...52 6. 3 Statement of the Key Problems...
60 3 LIST OF TABLES Table 3. 1 Service Opportunities for Manufacturers...16 Table 3. 2 Comparison of NPD, NSD and TSD Processes...
42 Table 5. 2 Cultural Attributes of Successful Innovative Enterprises...45 LIST OF FIGURES Figure 3. 1 Share of Service Sales/Spending Volume by Type...
17 Figure 3. 2 Market Penetration of Services...17 Figure 3. 3 Comparison of NPD, NSD and TSD Processes...
23 Figure 3. 4 Chemstation's Business model...26 Figure 3. 5 Evolution of New Product-Service Development...
and medium-sized enterprises (SMES) develop new products and services. Our team extensively reviewed the literature for concepts and research on new product and service development.
SMES face unrelenting pressure from powerful customers and competitors to lower prices and accept shrinking margins on sales.
SMES are starting to seek revenue growth from new products and services. They must offer their customers something different than their competitors offer
in order to avoid the same low-margin trap that they now face. This report suggests that a powerful way for SMES to do this is to offer customers new products
and services that allow more efficient and effective use of the products that they currently sell.
These new products may complement existing products and require new manufacturing and design skills, but offering new services is uncharted territory for most SMES.
Their service experience is limited often to offering customers free or below-cost installation, training, and maintenance.
They must learn to offer services that can make their products yield greater total return over their useful life than can a competitor's products.
These services include customization of products to specific customer uses, training for optimal performance, product disposal,
and even taking over customer operations that pertain to the use of the product. The above mentioned services require SMES to form deep and trusting relationships with their customers
so that they can co-discover ways to make the best use of their products, and learn new ways to develop
and implement ideas for new services. Our literature review led us to propose a total solution development model that synthesizes existing new product
and their stakeholders as well as the complex problem-solving required in such endeavors. We also identified five mini-cases of SMES that developed compelling new business models that were accompanied by the creative use of information technology
and proprietary databases to help customers use their products more effectively. Changes in organization structure and culture are required almost always to do this effectively.
We offer guidance to SMES that want to transition from a product-centered to a service-centered business.
AND MEDIUM-SIZED ENTERPRISES The purpose of this report is to explore how small and medium-sized enterprises (SMES) can enhance their competitiveness with innovation strategies that leverage their strengths
and minimize their weaknesses relative to larger enterprises. These strategies can involve partnering with large enterprises rather than competing against them.
To achieve our purpose, we must first recognize that a single set of recommendations is not appropriate for all SMES
because their attributes and environments vary considerably. Second, there is a wide range of innovation options that can serve different purposes at different times.
or services of varying type and degree can be appropriate for different SMES in different industry sectors or product life cycle stages.
we can't discuss innovation for SMES without recognizing that they differ significantly from large enterprises,
or productrelated services that complement the sale of a firm's current products. 2. 1 Generalizations about SMES and Innovation are Difficult to Make SMES vary in their interest and approach to innovation because of differences in their sources of capital.
Public stockholders focus mainly on return on invested capital, which narrows senior management's range of acceptable strategies (including innovation).
Private capital providers (personal, family, friends, and local banks) do not have limited a similarly focus,
These firms are headed by entrepreneurs who are motivated primarily by opportunities for growth and profitability through innovation in new products, processes, and markets.
These entrepreneurs are already seeking opportunities wherever they can find them. 6 They don't need our help to stimulate their interest in innovation,
thereby making SMES in these industries very cautious about innovations that require large capital investments.
) Similarly, customers in food, textiles, and furniture tend to be conservative, thereby leading firms to be cautious about their innovation initiatives (March-Chorda et al.,
which means higher and more continuous investment in incremental innovation (March-Chorda et al. 2002). ) Wright et al.
2005) suggest that the hostility of the environment influences innovativeness. Firms operating in highly competitive (hostile) markets are likely to be more successful innovators by increasing the number of new product introductions through incremental innovation in order to meet customer needs.
The study suggests that the resources of firms embedded in highly competitive markets would be spent better on incremental innovations rather than radical ones because of the cutthroat nature of the environment.
) Government plays a much more prominent role in the economies of most European and Asian countries.
The type of customers that SMES serve also influences the type of innovation they undertake.
SMES that sell consumer products generally serve a larger number of customers directly or through distributors than do SMES that sell products or services directly to other businesses.
They also must devote more time and attention to market research and advertising and generally have more difficulty getting timely and accurate feedback from their customers.
SMES that sell products to other firms, such as equipment components, or instrumentation, generally have fewer customers than those that sell consumer products.
Pavitt (1984) referred to such firms as specialized equipment suppliers. This type of firm is the main focus of this report.
Their customers tend to be large scale-intensive firms in industries such as food, metal manufacturing, shipbuilding, automobiles, glass and cement.
Thus, they may be receptive to outsourcing their in-house technical services, if convinced that a supplier can do a better job,
and manufacturing that they deploy quickly to meet their customers'needs. Small customers are candidates for services too.
Ashton et al. 2003) advise SMES to consider segmenting their markets to identify small customers that lack the technical resources needed to effectively install,
use, or maintain operations that are essential to their business. Also, high-end specialty customers may value the SMES services more than low-end customers. 2. 2 Types of Innovation that SMES Undertake SMES can introduce process innovation to enhance the capability of their production processes
or their supply chain operations (e g.,, increase reliability or reduce cost. These innovations are developed for their own use;
or pulled by customers. In the former case products may differ significantly from the firm's or its competitors'existing products (Salavou, 2005.
There is the risk that technical staff will push too far ahead of customers and lead to a product failure.
Products with pushed technology may require customers to change behavior or perception significantly before they are accepted and used.
when using input from customers as they can only suggest innovative ideas from what they've experienced.
It is more important for firms to ask customers what outcomes they value instead of just looking for solutions (Ulwick, 2002.
2004). 8 Business model innovation involves creation of a value proposition that offers to satisfy the same
The value proposition may be targeted to a select set of customers whose needs are met best by the product or service.
or service that is better suited to the needs of a set of customers that a larger company overlooks.
because their existing customers don't value them or the emerging market is too small to interest them.
Chesbrough and Rosenbloom (2002) indicate that business model innovation, besides a new value proposition and targeted customers,
also requires articulation of a value chain to produce the new product or service, and a plan to establish
We return to the topic of business model innovation in section 3 where it relates directly to adding new services that complement existing products.
He also suggests that business model innovation is useful after mainstream products have commoditized. SMES can offer customers customized products perhaps supplemented with services.
The same SME is unlikely to be nimble enough to modify its strategy to match the evolution of life cycle stages
This tends to make them more cautious about innovation than larger enterprises. There is a 9 strong correlation between R&d expenditure and innovation success in SMES.
because investments are less in R and more in D, such as in design and engineering tools (CAD), prototypes, customization, etc.
Further, SMES often have an inadequate knowledge of their competitors and their products. They need to scan their environment regularly to learn what their competitors are doing (Woodcock et al.
2000; Camp, 1989; Frost, 2003. They also need to compensate for their lack of resources by partnering
or networking with customers, suppliers or even competitors (Freel, forthcoming; Vossen, 1998. A firm with strong marketing skills and weak technical skills can partner with a firm with a reverse set of strengths and weaknesses (Huang et al.
Lindman (2002) suggests that SMES that have close relationships with a limited number of customers may be able to forgo marketing steps
SMES in the Finnish metal working industry (most with less than ten customers) do market research and learn about their customer's needs by working closely with them.
2005), but they may be able to form cross-functional teams more easily than large enterprises
They are influenced more by being in direct contact with people (suppliers, customers) whom they know well and trust (Lindman, 2002).
and emergent requisite skills to be developed to meet new opportunities. The dynamic capabilities of particular concern are those that accelerate internal learning (e g.,
and the customers they serve (Mosey, 2005). 2. 4 What Innovation Strategies Should SMES Pursue?
Product customization and customer intimacy are ways to do this, especially in delivery of industrial services.
SMES should cultivate relationships with a small number of captive customers (Lindman, 2002. Intimacy helps make up for lack of resources for market research.
) It is suggested even that firms can outsource innovation to customers by giving them tools to articulate their needs,
however, in that firms that work closely with only a few customers begin to depend mainly on their own internal 11 resources for ideas rather than seek new information from the outside.
Nevertheless, this level of customer intimacy is especially appropriate for SMES that pursue industrial services to complement the sale of their products.
Moore (2004) also suggests that business model innovation is a very effective strategy in mature markets with products in late life cycle stages.
SMES in mature niche markets should pursue price inelastic customers who still want products that larger companies have dropped
They can add new customers in their current market by offering them variations of existing products,
or seek new revenue opportunities from existing customers by offering them a more complete solution to their needs (Simon, 1996).
For example, Flinchbaugh Engineering, a small employee-owned company in Pennsylvania, now operates transfer lines for customers such as Caterpillar, SKF and Siemens that previously owned these lines (Anonymous, 2006.
It has mastered lean manufacturing practices so well that it can operate these lines more efficiently than its customers.
These companies now have much more leverage over their customers, the automobile companies. Few SMES have the resources to pursue such an acquisition strategy,
Another option for SMES is to perform industrial services that their customers currently perform or propose new services that will help them operate more efficiently.
The most well known industrial services are maintenance and provision of spare parts. We will provide a much longer list of such services in the next section of the report.
If SMES are allowed to work closely with their customers, they might be able to propose new services to perform by observing points of pain (Gustafsson and Johnson,
2003) that perplex and frustrate their customers when they use their product or other firm's products.
Lastly, new service revenue opportunities can be generated by thinking beyond the sale of the product and about its installation, operation and 12 disposal.
Gustafsson and Johnson (2003) suggest viewing products as services waiting to happen. The next section develops these themes further by exploring in depth one potentially attractive innovation path for SMES
namely the addition of services to product offerings. 13 3. 0 SERVICE INNOVATION IN MANUFACTURING COMPANIES 3. 1 Background The period from approximately 1985 to 2000 saw U s. manufacturers
responding to the competitive challenges arising primarily from Japanese firms. Focus was on improving productivity
and quality using such techniques as TQM, six sigma and lean manufacturing practices. However most of the firms that have sustained their operations in this period have implemented such programs successfully and,
in line with the manufacturing sector in general, are again looking for organic growth to enhance both revenues and profits.
This requires innovation skills and new innovative business models as outlined in our previous report (Warren and Susman,
2004). ) One way that SMES can achieve such growth is by adding services to or around their products and this section reports on such new opportunities.
Also in this section, we include five mini-cases that illustrate how these opportunities can be realized.
In section 5, we discuss details of the challenges posed by the transition to service-centered manufacturing,
and indeed a different organizational structure and culture both within the management of SMES and the consultants that can help them. 3. 2 Why Add Services?
There are many reasons why the addition of services can provide significant growth opportunities, greater stability,
and meeting these demands by improving productivity has nearly run its course. Adding or substituting service revenue can mitigate against some or all of these factors.
These same pressures on SME customers on the other hand, are forcing them to focus on their core competencies
Adding services can help consolidate and protect the core product businesses of an SME. Services can differentiate a company from competitors
and establish closer relationships with customers. It is relatively easy for a competitor to provide a better and/or lower cost product,
but much more difficult to replace an intimate and trusting relationship between suppliers and customers.
Innovation in services typically results in increased customer satisfaction and loyalty. Both are concerned with the direct attributes of the service offering
and because of recommendations to other potential customers. 3. 3 Definition of Services There are several different definitions of service found in the research literature.
Often, where customers and employees are in relatively constant contact, interpersonal experiences are critical to the delivery of service products (Tidd and Hull, 2002).
2003). 3. 4 Types of Product-Related Services Servicing the Installed Base. In describing the service elements provided by manufacturing firms
industrial services, service strategy in manufacturing, product-related services, product-services, or after-sales services.
SMES are motivated to develop these services in order to complement their existing product base as well as to enhance revenues.
This is done by showing customers the importance of services during the life of a product.
In the past, many services have been offered as add-ons in order to make a sale, but the product was the main source of revenue.
Servicing the installed base requires firms to make services a higher priority. A firm's installed base (IB) refers to its products that are currently in use.
For example one of Hewlett-packard's installed bases is printers. Although Hewlett-packard's servicing is in terms of a product (i e.,
IB services include all services 15 that are needed to keep the product functioning properly throughout its life-cycle.
Focusing on servicing an IB is one way that a firm can develop new services for its existing market
and has reduced costs associated with acquiring new customers. The OEM has inherent product knowledge and requires less cost to acquire any additional knowledge about the requirements of service over the product's life.
Once the profit opportunity within the service arena is identified, the firm must set up the structures
We discuss later in this report the major cultural changes that must occur to shift the firm's understanding of the tremendous potential of the service opportunity.
The firm must collectively learn to value services and how to manage the service process.
The optimal agreement for the service provider is fixed a-price contract, covering all services over an agreed period.
This transfers the risk of equipment failure to the service provider and focuses on relationship-based services centered around the product and operational availability and response time in case of failure.
It is now pertinent to list the different classes of services that can be added around a product sale.
and are transactional onetime services. They may in fact be of considerable value to customers yet are bundled in free of-charge because of perceived or actual competitive pressures.
Clearly, this does not add to revenue and profits. More complex service additions that involve a closer relationship with the customer
and leverage the OEM's advantages have greater potential to contribute significantly to financial performance. 16 Following Oliva and Kallenberg (2003),
we arranged these services into four clusters (see Table 3. 1). These authors suggest that firms must master product-based services first before graduating to comprehensive and relationship-based services.
Firms that don't do this usually fail at transitioning to services. Two of these clusters involve migrating from a transactional to relationship-based approach with customers (vertical path)
and the other two involve migrating from selling services focused on single products to selling comprehensive services in
which the firm's products and ancillary products and services are embedded (horizontal path). As firms seek to increase their service offerings
and gain access deeper into their customer's value chain to offer more complete solutions,
Figure 3. 1 provides perspective as to where the largest portions of customers'spending and providers'sales are taking place in the industrial service sector.
Table 3. 1 Service Opportunities for Manufacturers 17 Figure 3. 1 Share of Service Sales/Spending Volume by Type Figure 3. 2 Market
Penetration of Services 18 3. 5 Mini-Cases The first mini-case illustrates how a supplier of a commodity product changed its business model to provide a complete service thereby satisfying previously unmet, indeed unvoiced, needs of its existing customers.
Additionally the data accumulated from having a greater knowledge of customers'behavior enables the company to continually add value
An internal entrepreneur decided to listen carefully to customers. He saw there were unmet needs and new sources of value to be accessed.
Customers did not want to buy and own steel drums, they wanted to move toxic chemicals efficiently and safely;
To meet its customers'actual needs, Greif converted its business model to being a trip leasing company for specialty chemicals the Fedex of problem chemicals.
Now Greif solves the total trip problem for its customers drum supply, cleaning, refurbishing, regulatory compliance, transportation, and tracking.
It built a new web application and became an (Internet-enabled company. Although Greif subcontracts out most support functions,
it buys support services in volume, and its database of trip costing enables the company to accurately quote on trips
The business model also builds barriers against competitors. Source: Warren and Susman, 2004. Additionally, services can help to establish customer lock in.
Customers, by foregoing certain tasks, increase their dependence on their suppliers. Switching costs therefore are increased.
The second mini-case illustrates how special skills can be used to capture and retain customers for later delivery of products and services.
Mini-Case Example#2: General Fasteners, a supplier of components to the major automotive companies, had been squeezed more and more on price as the global competition in this sector became increasingly tough.
Even if a supplier has some proprietary technology, the power of the large buyers such as GM and Ford are such that they insist that their suppliers share their unique know-how
Faced with these daunting pressures on 19 profits General Fasteners (GF), a manufacturer of bolts and other metal fasteners for the automotive industry looked for an innovative business model to change its competitive status. It started by participating in the engineering design of new car platforms
, taking responsibility for how major sub-assemblies, such as frame, interiors, engine, and transmission of the car will be fastened reliably together.
GF is lockedin to its customers both in design and operations making it difficult for competitors to displace them.
It provides both products and services. In addition, by taking over the front-end skilled design work, GF's customers have need no to retain these expensive skills in-house for occasional use
and therefore become more dependent on their supplier when it comes time to design a new family of cars.
Providing a service component to existing customers builds on past relationships and increases revenue and profits from the installed customer base.
This reduces cost of sales, while adding revenues and profits. In many cases, the addition of complementary services such as scheduled maintenance, remote monitoring of performance, benchmarking,
etc. can also increase sales of physical product and take market share away from competitors.
Services demand closer relationships with customers, sometimes requiring regular on-site engagement. These interactions can uncover unmet needs,
or possible future demands for products and services that would not normally be encountered with a more arms-length product-sale relationship.
The company may also innovate entirely new services. The latest information technology standards and infrastructure can be used to provide services that were conceived not even by customers until their providers innovate.
For example, using advanced data collection and data mining tools, coupled with real-time data collection over the Internet may provide a whole new level of product and service reliability.
The third mini-case provides an example. Mini-Case Example#3: Taprogge Gmbh,(www. taprogge. com) a family owned business headquartered in Germany,
Recently the company has moved towards a total service business model starting with the installation of the plant and taking responsibility for its operation.
therefore highly by customers who are willing to pay for the reliability and security that the company provides.
This is now enhanced by its on-line monitoring systems that give it real-time access to customers'systems.
and environments (water is not just water), b) design new products, systems and services more effectively,
Again we see the power of using information technology innovatively to create added-value for customers while building barriers to competitors.
The service business model improves customer relationships. As mentioned above the company prides itself on reputation and reliability.
It now embodies customer contact on a regular basis by using remote monitoring that gives a basis for preemptive actions and regular interaction with all customers either from the local office or from the German HQ.
Customers initiated most of the new products by coming to the company with an unrelated water problem,
With all of these potential financial and strategic benefits available, we might expect that SMES would be readily adding services to their product portfolios.
However relatively few manufacturing companies have introduced services to their product offerings. There are some noticeable exceptions, such as IBM and GE of course.
and services and how innovation practices differ substantially between the two. As we shall see
when a company attempts a hybrid model of products plus services, where the organizational, cultural,
and Services As SMES are used to thinking in terms of physical products, it is useful to compare them with services.
Services are in fact inherently different from products in a number of key attributes (de Jong and Vermeulen, 2003;
de Jong et al. 2003): ) Intangibility: this characteristic best differentiates products from services. Services are intangible and often,
but not necessarily manifest themselves together with the customer. On the other hand, products are a) more often shipped to the customer,
b) are developed with limited customer input, and even then, at the formative stage of development, c) the supplier may have limited knowledge of how the customer actually uses the product
services tend to be heterogeneous; that is they are customized to the specific needs of the recipient.
Services are perishable and are created usually as they are used, whereas products can be made ahead of time and held in inventory or within a distribution supply chain.
Imitatability and opportunities for bundling: Services can be combined more readily into customized packages compared with product features.
This differentiates products from services and makes them more difficult to imitate by competitors, thus increasing competitive advantage.
When we categorize different classes of services, it is seen clearly that, in many instances, they may be combined flexibly to meet the specific needs of a customer.
Integration of an external factor: this means that during the preparation of a service, an external factor, an object or a subject will be involved in the process, e g.,
Customers may participate in production because the service preparation and the service delivery are identical (e g.,
, at the hair dresser)( Kupper, 2001). 22 The distinction between products and services is often unclear.
and manufacturers increasingly offer products that are accompanied by services, such as repair and maintenance (de Jong et al.,
) Products and services can be viewed as a continuum because many products have embedded services in them and vice versa (Johne and Storey, 1998).
At one end of the continuum are physical products that are exchanged for payment. The relationship between buyer and seller starts and ends with the sale.
At the other end of the continuum are services that consist of dialogues between service providers and clients, e g.,
Services such as banking and insurance are further along the continuum because the client receives a product, e g.,
Services such as transportation, telecommunications and courier mail require systems that are designed developed, and optimized for performance
or delivery of the service. 3. 7 Innovation in Product-Based Services We have seen that services have a number of attributes that are inherently different from products.
Due to the labor intensive nature of services, typically service innovations require much less capital investment.
and need less investment on patents and licenses for the development of new services (Brouwer and Kleinknecht, 1997).
Technology is also less important for the development in new service as many times the face-to-face relationship building component becomes more important.
Though capital investment may be low, organizational aspects play a larger role in the success of service innovation.
which can have a larger influence on the success of new services than on new manufactured products.
However, despite the fact that there has been a major shift in the GDP of developed nations from product-based to service-based economies, research agendas have not kept pace. 23 Indeed,
Holland and Switzerland rather than in the U s. Research on hybrid innovation models combining services with products is limited extremely,
particularly when embedded within a manufacturing enterprise. We will return to this issue in the recommendation section.
1998) An offering not previously available to a firm's customers, resulting from additions to or changes in the service concept (Menor et al.,
2002) Encompassing ideas, practices or objects which are new to the organization and to the relevant environment,
and, to a lesser extent, General Fasteners, that IT was integrated an part of their service business model, and not used
Increasingly, IT can become a powerful weapon for SMES to create greater value for their customers.
Start-up companies can now harvest information technology to provide their customers with greater value and to create subtle barriers to competition.
Indeed, this new low-cost digital freedom may even provide smaller companies advantages over larger firms which are encumbered by legacy data systems
and cultures freezing them in outdated business models. It was, after all, Amazon and ebay that created on-line bookstores
and auctions rather than Barnes & noble and Sotheby's. Here are some categories for use of IT in business model innovations.
and using it to create unique services or products can be a powerful way of adding value and keeping out competitors.
The power of the Netflix business model comes not only from the convenience but the ability to mine the data obtained by combining information from ALL customers nationwide.
This enables the company to make suggestions on what someone might like to rent based on not only past rentals but by matching behavior with others who have a similar taste.
by getting instant feedback from their database (customers provide long lists of future wants and rate past rents),
Netflix is able to provide its customers with a convenient personalized service, as it continually optimizes its supply chain.
the two brothers provide services in vegetation management to businesses rather than homeowners. DBI Services (www. dbi. com) learned by listening carefully to customers that businesses have greater and more complex needs than homeowners.
For example, Class I railroads are regulated by the federal government on the amount of vegetation that may grow on their rights of way.
DBI realized that the value proposition for these customers was focused not on low cost but on the reliability and speed with
Understanding the customers'true needs has enabled DBI to build a dominant position in this sector by designing
DBI's business model is based on the principle of providing customers with reliable and customized services supported with proprietary information systems.
Source: Warren and Susman, 2004. Customer Lock in: Information can be shared between customers and suppliers so that each is locked closely into the other as business partners.
A business model based on information sharing can provide high barriers against competitors as the costs involved in integrating compatible data
and computer systems can be prohibitive. On the other hand, the SME must be aware of becoming too dependent on one supplier
A sound business model using data lock in will have multiple partners so that the dependence on one partner is reduced.
The General Fasteners case above is a good example of so-called customer lock in. 26 IT enabled innovative business models:
and mining to lock in customers, suppliers and partners. The fifth mini-case provides an interesting and illustrative example of a company supplying commodity chemicals yet providing greater value to customers, and partners.
Mini-Case Example#5: Chemstation was founded by George Homan (www. chemstation. com) in 1983 after he had spent some years as a distributor of industrial cleaning chemicals.
His close contact to customers led him to recognize that businesses do not want to handle bulky containers of cleaning chemicals
and George saw an opportunity to provide a better service by offering custom formulated, environmentally friendly industrial cleaning and process chemicals delivered to proprietary refillable containers that are placed free of charge at customer facilities.
Chemstation has used a franchise business model to expand rapidly nationally without the need for the founding entrepreneur to raise any external capital.
Chemstation's elegant business model is depicted in Figure 3. 4. Figure 3. 4 Chemstation's Business model 27 The franchisor's headquarters,
serves some local customers and uses its buying power to purchase cleaning chemicals at a lower price than can small competitors.
funds the local marketing, sales and delivery services after paying an entry fee of about $1 million to Chemstation.
In exchange, the franchisee gets access to the database on demand when a customer need is defined.
In this way the franchisee can provide customers with an immediate proven solution to their cleaning problems.
The database also builds barriers against competition. For example, Chemstation solved a cleaning problem at a Harley davidson plant within its shock absorbers manufacturing division
Such captured knowledge helps to lock in customers and prevents competitors gaining the account. Since its founding, Chemstation captured, in less than ten years,
around 25%of the $300 million U s. industrial cleaner market by providing customized cleaning solutions in an innovative business model that includes elements of franchising, data-mining of customer information,
In addition to using information technology (IT) to enable creative business models, SMES can, of course, derive benefits from the use of IT in their operations.
Also, the use of teams for NSD directly contributes to the overall effectiveness of developing new services.
) Thus, investments in process-enabling IT can yield multiple benefits, increasing the generation of new ideas,
accelerating the development of new services based on those ideas, and generally supporting the firm's goal of rapidly bringing new service offerings to market. 3. 9 Do Manufacturing
This shouldn't be surprising based on the specific attributes of services that were mentioned earlier (see section 3. 6), such as intangibility and imitatability.
This is because it is natural for service firms to incrementally improve their services based on customer feedback, etc.
New service ideas come from a close interaction between customers and employees. Thus, although product and service innovation are thought often of as the same,
and require different procedures. 3. 10 The Customers'Role in Product and Service Development In order to develop services that customers find valuable,
it is important to have customer input. Although this will be discussed in greater detail in section 4,
firms should observe customers and their points of pain (Gustafsson and Johnson, 2003), frustrations or unmet needs with existing products and/or services.
Once these unmet needs are uncovered the firm and its customers should work together in order to generate ideas to solve the problem.
Often this can be a daunting task, as customers are prone to changing their minds about their desires (Takeuchi and Quelch, 1983).
Thus, firms must be able to handle a vast amount of customer input, and use it to build new products
and/or services that are valuable to the customer. It is critical that the firm realizes that regardless of how valuable the firm thinks the innovation might be,
Customers will not buy products or services that they don't find valuable for their firm. New products and/or services must be developed to add value to the customer.
Gordon et al. 1993) 29 Figure 3. 5 below is adopted from Gustafsson and Johnson (2003) and links the evolving relationship between the firm
and its customers (y-axis) to shifts in the firm's strategic focus as reflected in the value proposition it offers to its customers (x-axis).
) The space between curves represents regions where firms are located strategically. Firms in the lower left region of the figure offer stand-alone products to customers and sell products in arms-length single transactions.
The new product development (NPD) process for this region involves very little interaction between the firm and its customers
other than input from focus groups and needs surveys. The NPD process is structured and focuses heavily on managing risk,
Firms in the middle region of the figure offer discrete services usually on a fee-per-event basis (e g.,
Interaction between the firm and its customers during new service development (NSD) may be greater than for NPD,
but the customers'role is still essentially passive, i e.,, respond when asked questions or observed unobtrusively.
when customers experience frustration with using the firm's products and the firm offers solutions that reduce the frustration.
Ideas for services may be offered to customers on a fixed-term contract basis. Customers are active participants in the NSD process and in service delivery.
The relationship between product/service providers and customers shifts from one-way static information exchanges in NPD to two-way overlapped information exchanges in NSD to dynamic and interactive information flows in TSD.
whereby several stakeholders participate in parallel in an ongoing dynamic relationship to provide a total valuable solution to all parties Information flow ranging from one-way on an irregular basis to two-way on a continuous basis Operational issues, i e.,
We will see that TSD demands significant shifts in culture management methods, behaviors, etc. Section 5 of this report will deal with the challenges of transitioning from a product-centered firm
and/or NSD processes to a firm that engages collaboratively in TSD with its customers,
requires greater flexibility and often co-creation of new ideas during close interaction with customers.
In addition, new services may not have defined as clearly yardsticks, as new products do, against which a fixed gate could be associated.
and its customers (see insert in Figure 4. 1). Customer inputs are incorporated in this type of paradigm,
In contrast to new product development, most new services are developed in an ad hoc fashion (de Jong et al.
for example,(1) new services can be imitated by competitors, and thus require a quick response and less formal process,(2) no natural milestones for review, unlike for new products.
instead, a key gate is included between idea generation and design/prototype solution. This gate, in essence, is a gate of idea screening and selection.
They call this stage Immerse Yourself in Customers. In addition, the model shows a closer relationship between the service provider and customers.
It posits that service is driven by unmet customer needs, customers are listened to and information flows primarily from the customer to the SME (see insert in Figure 4. 2)
. Despite these modifications to Cooper's original concepts, there is little mention of a continuous discourse and interaction between the supplier and customer,
and new service development models is that the TSD model generally starts with an established base of products and customers (such as a SME),
but it does not limit its future innovation to either products or services; instead it posits that a firm should let customer needs dictate the type of innovation the firm should develop,
and have a dynamic rather than static interaction with customers. Some companies go as far as having a full-time relationship person on-site to ensure this continual interaction with the customer.
Capability and competition are added as part of this gate, but mostly for new product or new product/service combination ideas.
or a new product added to a service already provided to existing customers. Many SMES likely already have established products,
and they could certainly explore how to add new services to these products to address customer needs that products alone cannot address.
and customers (see insert in Figure 4. 3). Unlike the static relationship in stage-gate and quasi-static relationship in Gustafsson and Johnson,
TSD suggests intimate collaboration with customers with continuous exchange of bidirectional information. External parties, other than customers, are incorporated explicitly into the entire process of innovation.
They include potential partners, supply chain members, and competitors. Furthermore, TSD suggests the specific interactions between the firm and various external parties during different stages of innovation development.
For the design and prototype solution 36 Figure 4. 3 A Total Solution Development (TSD) Model (Diamonds indicate gates) 37 stage
for example, TSD recommends that the firm work closely with potential customers, potential partners, and supply chain members--customers will help assure the new solution does indeed address their needs,
partners will help address challenges in developing such solutions (e g.,, IT), and supply chain members will help ensure the new solution is in a form that could be delivered to customers in an efficient manner.
TSD dictates innovation should be an iterative and adaptive process; two specific arrows exemplify this process.
One arrow goes from the post development review gate back to the design/prototype solutions stage,
and the other arrow goes from the pre-commercial business analysis gate back to the design/prototype solution.
Unlike products, many services are delivered by individual employees and the quality of service can vary greatly depending on the training and experience of employees.
and suggest some common tools that can be used for each of the stages proposed in the TSD model (Figure 4. 3). 38 Immerse Yourself in Customers (needs identification,
it is essential that a firm understands the needs of its customers and ensures that the new solution addresses their needs.
(or a third party) to tag along with the current users of current products (or potential customers),
or customer sort (ask customers to sort the needs). The objective here is to reduce hundreds of needs statements to 10-20 major dimensions of needs (see Ulrich and Eppinger, 2004 for a very accessible discussion.
The second step is to understand how important these needs are to the firm's (current or potential) customers.
More than likely, the customers'preferences of various needs are heterogeneous. Segmentation allows a firm to do at least two things:(
and (2) avoid direct competition. Segmentation can be done qualitatively or quantitatively. Qualitative segmentation usually requires managers to brainstorm,
patent search, new use of existing products/services, competitors, upstream and/or downstream channel members) or collaboration (e g.,
and then try to come up with new ideas for each component (sometimes borrowing from existing products/services that target a component,
or externally (by focus groups of potential customers or lead users). Screening Ideas. In most cases, managers will end up with more ideas than they can implement.
Design and Prototype Solution. Unlike product design, service design usually involves intensive customer participation; it also must address perishability, intangibility,
and other characteristics of services. A solution involving product and service combinations should also take this into consideration.
There are many different tools that can be used for test marketing. 41 Pseudo-sale involves providing the new product/service to a selected few customers,
but the products/services are delivered through (some) regular channels/contacts. This could include direct marketing, minimarket,
The full scale test marketing involves delivering a new product/service to a representative segment/location of potential customers,
For example, if a SME wants to test which of two different segments of customers it should target
it should include a large enough sample (customers) from both segments, and ideally, at geographically separate locations.
This is particularly true in new services, as they are much easier to imitate and subject to less legal protection.
Due to the nature of services, managers should be prepared to scale up quickly to preempt potential competitors
and realize maximum profit. Standard operation management skills can be used, and various external parties should be involved (e g.,
This section suggests potential paths that SMES may take to increase revenue from selling services. We will start by assuming that SMES have little initial experience with selling services,
so that we can discuss the entire journey that these firms may have to take. SMES with moderate experience in selling services can start the journey at their current level of capability
and take potential paths from that point forward. In all cases top management motivation and leadership are essential to decide on the path to take,
I Services embedded in product sale Phase II Services provided to the installed base Phase III Services based on customer relationship Path from Product-Centered to Service-Centered Business Transition Issues
Add product-centered services Consolidate services into a single unit Staff and train service sales force Develop incentives,
measures, rewards for selling services Build a servicedcentered culture Base business model on quick response and customization Shift downtime risk from customer to service supplier Transition from transactional to relational selling Base business model on low cost and convenience over product life Extend customer relationship deep
into value chain Develop TSD skills Table 5. 1 Path from Product-Centered to Service-Centered Business Level of difficulty 43 5. 1 Phase I:
Services Embedded in Product Sale The journey from product-centered to service-centered offerings usually starts by adding product-centered services to the sale of existing products, e g.,
Experience in offering such services allows the firm to develop response capability, reputation and image with customers.
It also gives the firm experience in working with customers between sales which can be a prelude to a shift from transactional to relational selling.
In order to assure that services receive the attention they deserve, firms should consolidate all services into a single department,
and give its manager profit and loss responsibility (Gebauer et al.,2005; Oliva and Kallenberg, 2003. Consolidation allows the firm to concentrate on developing a service-centered culture that emphasizes the firm's new values
Employees in this unit will need to be motivated to relate to customers differently than those in manufacturing units.
Dialogue is essential for success. These employees may need to be trained to relate to customers
Similarly, a service-centered firm believes in adding value to its customers. Values, norms and beliefs shape the firm and drive employee behavior.
Interestingly, many of these had moved from a pure product-centered business model to one where service components played an increasing role.
therefore to recall the attributes that we associated 44 with such companies as they provide a guideline for SME managers that wish to add services to their business model.
but challenging number of services per month as a revenue goal, or socializing with x number of customers x times per month as a customer relationship building goal.
Whatever goals the firm decides to implement it is important that the affected people are included in the goal setting decision process.
This means, that a service-centered firm's reward structure should focus on services and customer relationships.
resulting from understanding the benefits and results of pursuing services. Although employeepush might be sufficient initially,
we recognize and reward loyalty Communication The degree to which there is planned and random interaction between functions
we have excellent formal channels of communications; we use best practice knowledge transfer between departments;
Table 5. 2 Cultural Attributes of Successful Innovative Enterprises 46 to get employees involved. Internal marketing is one way that firms sell the service concept to their employees
High expertise refers to the availability of knowledge about the firm's basic technologies, customers and delivery processes.
In product-centered firms, sales people view products as the main source of revenue and services as add-ons that are obligatory
in a service-centered environment, sales people must view services as the main source of revenue;
services can no longer be performed for free, but must be priced according to the value they add to the customer (Oliva and Kallenberg, 2003).
Thus, sales people need to be trained to eagerly sell services, not just products (Johne and Storey, 1998.
External and interactive marketing are strategies that can help employees to sell services. External marketing is about portraying the firm's image to customers,
but before employees can make that portrayal they must be sure of its existence, a 47 belief that relates back to the firm's internal marketing.
which includes making promises to customers (Gebauer et al. 2005). ) Interactive marketing is the how the firm sells its value proposition to customers
and begins the transition from transactional to relational selling. The first stage in the transition from transactional to relational selling includes marketing activities,
which commonly don't include any personal interaction between the firm and its customers. If the firm is just beginning the transition,
One of the most prevalent reasons for failure among firms focusing on developing new services is an inadequate assessment of customer needs and problems (de Brentani 1995).
) An inadequate assessment of customer needs can stem from a lack of attention paid to understanding customers
New services cannot be developed effectively in isolation of customers. Front-line employees, the ones who commonly work the most closely with customers,
need to be in-tune with customer needs, wants and frustrations, and should be encouraged to have frequent contact with them
Cultural attributes that foster a supportive culture for idea generation include openness, management support, autonomy, information sharing, tolerance of mistakes and communication.
stimulate communication within the organization, and provide leadership to motivate employees (Johne and Storey, 1998).
However, because of the inseparable nature of services, front-line employees shape the quality of a customer relationship. de Brentani (2001) concludes that having a highly trained workforce that has an intimate knowledge of the customer plays an important role in the success of new services.
and ensuring communication among the different functional areas (e g.,, 48 production, process design, IT, service delivery and marketing) to drive service innovation (de Brentani, 1995.
they feel less constrained to explore opportunities and to generate ideas. Innovative new services can result from this.
Similarly, information sharing among employees should be encouraged so as to generate more ideas to satisfy unmet customer needs (de Jong and Vermeulen, 2003).
) As always, management needs to ensure that there are open channels for communication, both vertically and horizontally (Susman et al.
which communications must pass. Flat structures also encourage an open door policy where employees have easy access to top management.
Services Provided to the Installed Base The next step is to extend services from the sale of existing products to providing services to the firm's installed base or even to its competitors'products.
if competitors do not offer such services or offer inferior service. Potential service revenue from one's own and competitors'installed bases depends on how many generations of product are in it 49 (the older the product,
and inhibits feedback and learning opportunities from the field. It is better to overstaff inhouse personnel than risk ineffective response (Gebauer et al.
) The firm also can start to offer services where its installed base is most dense,
but supplement these services elsewhere with a 24/7 help desk and self-diagnostic software where applicable.
Up to this point, the firm's business model need not shift dramatically, but further steps will require a more dramatic shift.
The value proposition underlying the Phase II business model is to offer the customer equipment availability, operational uptime,
The move to Phase III should not be made until the firm has mastered thoroughly selling services with current sales
Firms can move from transactional to relational selling by offering their customers a fixed-term contract for services.
In addition, regular contact with customers via opportunities such as newsletters, users'clubs, chat rooms, etc. will help make the transition easier.
The value proposition to customers is equipment availability or up-time. The firm's responsiveness and problem-solving capability underlie its ability to deliver on this proposition.
The firm might also consider offering consultation services to help its customers develop their own diagnostic and response capabilities. 5. 3 Phase III:
Services Based on Customer Relationship The next step is to shift from sale of individual products to sale of services embedded in products, comprehensive services or integrated solutions (Wise and Baumgartner, 1999.
which services that the customer previously performed are embedded now in the product or at the interface between simpler and previously isolated product components.
The second and third options require understanding the product's context of use and need for ancillary services,
and require a more radical transformation in the business model. The firm now offers the customer total solutions to problems that relate to consumption or use of its products.
and its customers deal with problems that emerge over the course of their relationship. Smaller customers may lack the knowledge
or resources that larger customers possess to solve their operational problems or pay for infrastructure and ancillary services that relate to the effective use of their products.
This presents an opportunity for market segmentation and focus on customers with the greatest need for the firm's services.
Firms can recognize the need for new services by studying how the customer uses or consumes the firm's current product
and suggesting that they can perform these activities better than the customer can. It can do this by focusing on mastering these skills.
The firm now needs an effective product or service development process with which to generate ideas
and transform them into new services (replaces or creates activities up and down the value chain). Firms that already have an effective NPD process in place can make the transition to NSD more easily,
and less attention is given to prototype test and launch. We propose going a step beyond NPD
or NSD because of the nature of the type of services that firms and their customers will co-develop
Firms should encourage employees who are in regular contact with customers to share ideas with other employees concerning optimal use of the product,
and frustration that customers experience in using the product. These ideas and observations, if captured, may help create a proprietary database that can give the firm a competitive advantage over its rivals.
2003), or frustrations that customers have with existing offerings, and generate ideas for new solutions.
What can we learn about the development of new services from the five mini-cases discussed in section 3?
What are they offering of value to customers beyond the sale of a basic product (e g.,
Greif Packaging and General Fasteners observed how customers used or consumed their product and believed that they could do this better by specializing in activities that customers currently perform
but don't have the skill, time or interest in mastering to the same degree. Taprogge specializes in providing maintenance activities and spare parts.
These are traditional services, but a natural offering for a company that sells such sophisticated equipment.
All five cases required 51 their work force to be trained extensively in activities that their customers could not do as well as they could.
In all cases, once a firm establishes a foothold inside the customers'operations, they are privileged in a position to offer new ideas to progressively take over more of their customers'current activities
or suggest new ones to perform. 52 6. 0 RECOMMENDATIONS FOR THE MEP NETWORK 6. 1 Introduction This report has reviewed the literature on innovation for creating SME growth.
In particular, we have researched one specific major growth opportunity for such companies, namely the addition of complementary services around manufactured products.
However, the transition to new service-centered business models does not come easy. The admittedly limited research on so-called hybrid business models indicates that the value systems, customer interfaces,
incentives and innovation processes must be substantially different from purely product-centered firms. Thus the move to these more complex yet more robust business models requires confronting the need for change management.
As we have seen, SMES may have inbuilt cultures and governance methods that make such changes difficult to execute.
They need support in initial analysis of their current and potential business models development of a transition strategy for changes in operations and structures needed to succeed,
All these stories were divided into four broad categories based on the type of consulting services provided by MEP Operational, Marketing, Funding,
restructuring, change in business models 4. Funding anything related to finance Figure 6. 1 shows the breakdown of the stories by category.
Within this 7%(or 45 assignments) MEP had helped the SMES change their business model only in about 20 assignments
The interviewees varied greatly in their opinion about the role of MEP in the economy.
As a result, national customers usually have to work with many centers and fail to get the desired quality
new business models, change management and revenue enhancement through service additions. We have seen also that the addition of services around manufacturing products can have major benefits in terms of increased revenues
profits and creating barriers to competitors. Yet, although adding services may seem, at first, a rather easy expansion of current business,
many companies have experienced great difficulties in managing these changes. Questions of innovation processes, compensation structures, customer interfaces, management of intellectual property, sales force management etc. all require major changes first in understanding the cultural issues
and then adapting the organization shifts that are demanded. Figure 6. 1 Consultancy Provided 54 Our assessment of the current resources
and business model innovation that we are addressing here. It is therefore unlikely that, at least on a local or regional basis
and managers of the potential of changing their business model to include services and all that it entails;
we need to instigate a scalable initiative that meets a number of new demands including:
Maximizing the use of the scarce consulting resources available to help SMES Adding new skills via focused training of those local consultants who have the propensity to provide outreach services in the field of change management
and provision of a training program for existing MEP linked consultants to provide them with the skills to excite MEP targeted SMES in the opportunities for growth,
to analyze the existing firm positioning and possible new opportunities, and to guide the client through the change process.
This is despite the fact that current U s. economic activity in the private sector based on service revenues exceeds 82%(Rae, 2005.
In Figure 6. 2, the shifting market value of enterprises largely from tangible to intangible assets (Hand and Lev, 2003) leads us to believe that knowledge,
Explicit-to-tacit is typified with a learning environment particularly where students are required to experiment with published information
Dynamic knowledge management. Many large enterprises have invested millions in creating knowledge management systems based on attempts to catalog knowledge to be searched
It is accepted now generally that these investments have been largely unsuccessful. There are several reasons for this.
Competition can be a disincentive, with participants believing that their personal promotion, status, raises, etc. may be lost
The environment is collaborative, active, dynamic, and innovative. Portal Features and Operation. Based on the above concepts, we propose a secure knowledge management portal for the MEP network.
and accepting for considering changes in its business model. Techniques for judging the cultural attributes (see section 5) that can help determine how open the company may be to change.
Access to stories that illustrate clear cases that show how moving into services has been accomplished not only the successful parts but also the difficulties encountered.
and engages with a company seeking to change its business model, for example, the challenge will be compiled in a standard format on the portal.
"The Journal of Services Marketing 16 (6): 515-534. Discusses stages in new service development and the use of customer input.
Discusses focusing on your business in order to profit from unrealized value. Basu, R. and S g. Green (1997."
"Designing services with function analysis."Hospitality Research Journal 20 (1): 73-100. Discusses the use of functional analysis in new service development.
Compares US large enterprises (LES) vs. US and Canadian SMES on 14 sources of innovation.
SMES rated customers, co-workers, marketing and professional journals as more important. 61 Booz, Allen, and Hamilton (1982.
"Developing new services for hospitals: A suggested model.""Journal of Health care Marketing 7 (2): 35-44.
"Developing New Services: Improving the Process Makes It Better.""The Journal of Services Marketing 3 (1): 15.
Discusses the new service development process in banks, hospitals and insurance companies. Branzei, O. and I. Vertinsky (2006."
Describes how firms can benchmark and scan their environment to find best practices. Carland, J. W.,F. Hoy, W. R. Boulton, J. C. Carland (1984."
"Differentiating entrepreneurs from small business owners: A conceptualization.""The Academy of Management Review 9 (2): 354-359.
"The role of the business model in capturing value from innovation: Evidence from Xerox Corporation's technology spin-off companies."
Discusses using a business model to successfully determine the value of technology. 62 Christensen, C. M. and J. L. Bower (1996."
"Customer power, strategic investment, and the failure of leading firms.""Strategic Management Journal 17 (3): 197-218.
Discusses how customer demands shape the allocation of resources in innovation. Also discusses innovation differences in innovating to meet existing customer needs vs. innovation in new markets.
Competition and cooperation: Italian SMES go international, CIRPETUNIVERSITY of Turin. Discusses internationalization, and specifically the weaknesses of SMES. de Brentani, U. 2001)."
"Innovative versus incremental new business services: Different keys for achieving success."The Journal of Product Innovation Management 18 (3): 169-187.
Discusses the differences and similarities in NPD and NSD and outlines success factors for new service ventures. de Brentani, U. 1995."
EIM Business and Policy Research, EIM Business & Policy Research, SMES and Entrepreneurship, Netherlands Ministry of Economic Affairs:
Small and Medium-Sized Enterprises and the Global economy. G. I. Susman. Northampton: Edward Elgar. Describes small firm collaboration
"The use of strategic tools by small and medium-sized enterprises: An Australasian study.""Strategic Change 12 (1): 49-62.
when offering services. Gordon, G. L p. F. Kaminski, R. J. Catalone C a. di Benedetto. 1993)."
and market services that create customer value. Gray, C. 2002.""Entrepreneurship, resistance to change and growth in small firms."
"Journal of Small Business and Enterprise Development 9 (1): 61-72. Discusses small firms and their attitudes towards change.
Griffin, A. 1997.""PDMA research on new product development practices: Updating trends and benchmarking best practices."
Competing in a Service Economy: How to Create a Competitive Advantage Through Service Development and Innovation.
"New product development processes in small and medium-sized enterprises: Some Australian evidence.""Journal of Small Business Management 40 (1): 27-42.
"Services innovation: Successful versus unsuccessful firms.""International Journal of Service industry Management 4 (1): 49-65.
Industrial services strategies: The quest for faster growth and higher margins. Provides an in depth discussion of industrial services.
Moore, G. 2004.""Darwin and the demon: Innovating within established enterprises.""Harvard Business Review 82 (7/8): 86-91.
Discusses choosing between radical and incremental innovation on the basis of market life-span. Mosey, S. 2005."
Discusses applying NPD to new customers using existing technologies. There is a need to empower cross-functional teams
"Small Business Economics 6 (5): 327-347. Describes small businesses compared to large ones on the basis of strengths and weaknesses.
"Managing the transition from products to services.""International Journal of Service industry Management 14 (2): 160-172.
Describes the extent of integration that is desirable for products and services. Also discusses implementation issues in transitioning from a product-only to a product/service firm.
Customer oriented industrial services, Helsinki University of Technology, BIT Research Centre. Discusses the creation of industrial service innovations that add value to the customer.
Services-based strategy.""Harvard Business Review 68 (2): 58-64. Discusses the need for services as well as strategy.
There needs to be a change in mindset from just manufacturing to manufacturing and services.
Quinn, J. B. and T. L. Doorley (1988.""Key policy issues posed by services.""Technological Forecasting and Social Change 34: 405-423.
Describes the issues relating to services and policy formation. Rae, J. M. 2005. Analysis of data from the U s. Bureau of Economic Analysis. A. Warren, Personal Correspondence.
Ratio of 82.5 is taken at Q1 in 2005. The 50%tipping point was 1987. Reinartz, W. and W. Ulaga (2006."
London Business school, University of North carolina and University of southern california Research Monograph. Discusses progress towards global service leadership in the US service industry.
"External linkages and innovation in small and mediumsized enterprises.""R & D Management 21 (2): 125-137.
Found that innovation is based on product newness to customers and product uniqueness. Found that technology-focused firms are likely to introduce products that are new and unique to their customers.
Scheuing, E. E. and E. M. Johnson (1989.""New product development and management in financial institutions."
"Designing services that deliver.""Harvard Business Review 62 (1): 133-139. Discusses characteristics of services.
The reason that services fail is that there is a lack of systematic method for design and control.
Simon, H. 1992.""Lessons from Germany's midsize giants.""Harvard Business Review 70 (2): 115-123.
"An institutional analysis of the new product development process of small and medium enterprises (SMES) in China, Hong kong and Taiwan."
Discusses factors that lead to effective communication between design and manufacturing personnel. Susman, G. I.,K. Jansen,
Tether, B. S. 2005) Do services innovate (differently? Insights from the European Innobarometer Survey, Industry and Innovation, 12,2), 153-184.
"Customers as innovators: A new way to create value.""Harvard Business Review 80 (4): 74-81.
"Harvard Business Review 80 (1): 5-11.70 Ask customers for desired outcomes, not solutions; use ideas for innovation.
There are dangers in listening to customers. Presents 5 steps and a mathematical formula for deciding what innovations are most promising.
The new profit imperative in manufacturing.""Harvard Business Review 77 (5): 133-141. Discusses innovation via going deeper into your customer's value chain
and going downstream to make more sustainable profits via servicing a high installed base. Woodcock, D. J.,S. P. Mosey, T b. W. Wood (2000."
"Types of product innovations and small business performance in hostile and benign environments.""Journal of Small Business Strategy 15 (2): 33-44.
Based on small firm surveys, found that the strategy of innovation through development of more new product lines may be preferable to developing dramatic innovations for small businesses in a hostile external environment.
Discusses TRIZ (the theory of inventive problem solving) and its use in developing new services
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