Synopsis: Entrepreneurship:

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

Dept. of Economics 549 Evans Hall UC Berkeley Berkeley, CA 94720-3880 and NBER bhhall@nber. org

with respect to capital after the labor market reforms of the early 1990s (Brandolini et al.,, 2007? Or does the explanation lie in the evergreen motto that Italian firms exhibit

insufficient R&d investment (European commission, 2006 The latter aspect has been explained largely by the unquestionable fragmentation of the

of aggregate R&d investment Nevertheless, many scholars have argued that small firms are the engines of

and medium enterprises exhibits some peculiar features that most traditional indicators of innovation activity would not capture,

variables, one should look at the results of R&d investment: training, technology adoption, sales of products new to the market or the firm.

process innovation is linked directly to firm†s investment in fixed capital. In comparing those results from the ones we obtain in this paper,

investment 5 We adopt the OECD definition for high-and low-tech industries. High-tech industries encompasses high and medium-high technology industries (chemicals;

competition, more than 42%of the firms in the sample have national competitors, while 18%and 14%have European and international competitors, respectively.

firms display a significantly lower R&d intensity but roughly comparable investment intensities. These figures can be explained partially by the different firm size

volatility of R&d investment over time, the results were very similar to those reported below. 7

investment at the firm level, see Cohen and Klepper, 1996 3. 2. The knowledge production function

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.

with the presence of investment in these equations until after we present the productivity results

and with labor, capital, and knowledge inputs 1 2 3i i i i iy k PROD PROC vpi pi pi=++4

ki is investment intensity our proxy for physical capital, PRODI and PROCI are knowledge inputs, proxied by

product and process innovation indicators respectively. In order to address the possible endogeneity issue concerning the knowledge inputs,

investment as a proxy for capital; as before, estimates are reported separately for all firms, high-and low-tech industries.

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.

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

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

3. 4. Investment and innovation In our preferred specification in Table 4, we assumed that capital investment †which

to a great extent means the purchase of new equipment †should contribute significantly to process innovation, but not to product innovation.

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,

investment is devoted to process innovation only (column 1), to product innovation only (column 2), to both (column 3) or to none (column 4). In the same columns we

without investment. Although column (1) still represents our preferred specification column (3) suggests that physical investment has a small (0. 02) positive impact on

product innovation as well. Turning to the productivity equation, 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:

1 the R&d intensity equation estimated only on firms that report doing R&d continuously; 2) A bivariate probit for process and product innovation that contains

proxy capital intensity by investment intensity, in order to be comparable to the results in Griffith et al. 2006.

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

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&dâ€

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

Investment intensity is somewhat more strongly related to process innovation than in the other countries. Also noteworthy is

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

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, and a

Investment in new equipment and machinery matters more for process innovation than for product innovation

fact, 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

the associated investment. Moreover, larger and older firms seem to be, to a certain extent, less productive, ceteris paribus

In general, â€oeunderinvestment†relative to others may be due to demand factors perceived market size, consumer tastes, etc.

supply factors (high costs of capital or other inputs, availability of inputs, 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

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 â€oebank-centered†capital market system, such as the Italian one, with a shortage of specialized suppliers like venture capitalists (Rajan and

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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Investment intensity: mean/median*7. 90/4. 05 6. 92/4. 01 Public support (in%)45.49 50.51

Investment intensity: mean/median*6. 22/3. 36 8. 62/4. 38 Public support (in%)46.27 45.16

Investment per employee 0. 125***0. 050 0. 120***0. 047 0. 129***0. 051

Investment per employee 0. 099***0. 073***0. 109 ***in logs)( 0. 010)( 0. 015)( 0. 015

***Investment intensity†0. 023***0. 022***0. 029***0. 037***0. 054***0. 049 ***Pseudo R-squared 0. 213 0. 202 0. 225 0. 184 0. 050 0. 091

Investment intensity†0. 130***0. 109***0. 061***0. 059***0. 129 0. 109 ***Process Innovation 0. 069**0. 022-0. 038 0. 029-0. 874 0. 011

Census of Manufacturing and Services (2001) for the size distribution. Community innovation survey (CIS) for the presence of innovation activity (2002-2004

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:

Investment per employee (mean) †6. 0 8. 3 8. 3 6. 3 8. 0 7. 9

Investment intensity 0. 125***0. 050-0. 137***0. 055 -0. 011)( 0. 011 Step 2-Product Innovation

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. 193-0. 395 0. 010-0. 432 0. 267)( 0. 275)( 0. 255)( 0. 277

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 2. 624***1. 318***2. 286***0. 171

Specifications (1)-(4) encompass alternative assumptions for investment, whether it is devoted to process or product innovation, neither, or both

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

Log investment 0. 131***0. 142***0. 145***0. 120 ***per employee (0. 011)( 0. 013)( 0. 011)( 0. 013

Log capital stock†0. 098***0. 041 ***per employee (0. 013)( 0. 014 Step 2-Product Innovation

Log investment 0. 081***0. 072***0. 018 per employee (0. 011)( 0. 017)( 0. 015

Log capital stock†0. 108***0. 111***0. 101 ***per employee (0. 016)( 0. 007)( 0. 010

†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,

Enterprises Sponsored Research Prepared for United states Department of commerce The National Institute of Standards and Technology Manufacturing Extension Partnership

ENTERPRISES...5 2. 1 Generalizations about SMES and Innovation are Difficult to Make...5 2. 2 Types of Innovation that SMES Undertake...

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...

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...

Table 3. 1 Service Opportunities for Manufacturers...16 Table 3. 2 Comparison of NPD, NSD and TSD Processes...

Table 5. 2 Cultural Attributes of Successful Innovative Enterprises...45 LIST OF FIGURES Figure 3. 1 Share of Service Sales/Spending Volume by Type...

Figure 3. 2 Market Penetration of Services...17 Figure 3. 3 Comparison of NPD, NSD and TSD Processes...

Figure 3. 4 Chemstation†s Business model...26 Figure 3. 5 Evolution of New Product-Service Development...

how small 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

SMES face unrelenting pressure from powerful customers and competitors to lower prices and accept shrinking margins on sales.

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 â€oetotal solution development†model that synthesizes existing new product and new service development models

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 almost always required to do this effectively We offer guidance to SMES that want to transition from a product-centered to a service-centered

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.

enterprises, and most of the existing research on innovation was developed from studying the latter. Lastly, given all of the above qualifiers, we explore SME innovation strategies that

-related services that complement the sale of a firm†s current products 2. 1 Generalizations about SMES and Innovation are Difficult to Make

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,

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, although they might benefit

require large capital investments. Thus, it is understandable that half of the innovation in the

) Similarly, customers in food, textiles, and furniture tend to be conservative, thereby leading firms to be cautious about

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

than radical ones because of the cutthroat nature of the environment. In contrast, Khan and Mattapichetwattana (1989) found that environmental hostility lessened SME innovativeness

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.

Poor operating performance, especially down -time, is very costly for them. Thus, they may be receptive to outsourcing their in-house technical

services, if convinced that a supplier can do a better job, and thereby allow them to concentrate

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.,

Innovative technology can be â€oepushed†by technical staff or â€oepulled†by customers. In the former case, products may differ significantly from the firm†s or its competitors†existing

customers and lead to a product failure. Products with â€oepushed†technology may require customers to change behavior

or perception significantly before they are accepted and used. In the case of technology â€oepullâ€, â€oelead-users†can be a significant source of innovative ideas (von

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.

Business model innovation involves creation of a value proposition that offers to satisfy the same or different customer needs in new ways by performing a function,

proposition may be targeted to a select set of customers whose needs are met best by the product

is suited better to the needs of a set of customers that a larger company overlooks.

they call â€oedisruptiveâ€) because their existing customers don†t value them or the emerging market

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 Moore (2004) suggests that different types of innovation are important at different points in a

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, especially at its

opposite ends. SMES at the front-end of the life cycle are likely to be based science firms

This tends to make them more cautious about innovation than larger enterprises. There is a 9

because investments are less in â€oer†and more in â€oedâ€, 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

or networking with customers, suppliers or even competitors (Freel forthcoming; Vossen, 1998. A firm with strong marketing skills and weak technical skills can

with a limited number of customers may be able to forgo marketing steps because there is less

customers) do market research and learn about their customer†s needs by working closely with them.

form cross-functional teams more easily than large enterprises because their professional specialization is less complete.

being in direct contact with people (suppliers, customers) whom they know well and trust Lindman, 2002.

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

intimacy are ways to do this, especially in delivery of industrial services. Scale should be sought by geographical expansion to similar (â€oenarrow but deepâ€) product markets, not by product-line

SMES should cultivate relationships with a small number of captive customers (Lindman, 2002 Intimacy helps make up for lack of resources for market research.

that firms can â€oeoutsource†innovation to customers by giving them tools to articulate their needs

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.

of customer intimacy is especially appropriate for SMES that pursue industrial services to complement the sale of their products

business model innovation is a very effective strategy in mature markets with products in late life

pursue price inelastic customers who still want products that larger companies have dropped or ignore Pavitt (1984) indicated that the specialized equipment suppliers he studied tended not to

They can add new customers in their current market by offering them variations of existing products, take market share from competitors,

opportunities from existing customers by offering them a more complete solution to their needs Simon, 1996.

employee-owned company in Pennsylvania, now operates transfer lines for customers such as Caterpillar, SKF and Siemens that previously owned these lines (Anonymous, 2006.

its customers. Fine (1998) discusses how Johnson Controls and Lear continued to acquire suppliers that first made up car seats

These companies now have much more leverage over their customers, the automobile companies. Few SMES have the resources to pursue such an acquisition strategy, but

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 â€oepoints 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 â€oeproducts 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

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 â€oemini-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, which demand different skills 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 higher profit margins to SMES (Reinartz and Ulaga, 2006 Among these reasons are •Improving predictability of sales and cash flow.

Many industries suffer from cyclical variations, e g.,, seasonal for the building sector, economic for the automotive sector, etc.

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 and turn to outsourcing to provide many of the functions that were

•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 â€oeintimate 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,

of recommendations to other potential customers 3. 3 Definition of Services There are several different definitions of service found in the research literature.

Among the most useful are •To place a bundle of capabilities and competences (human, technological, organizational

Often, where customers and employees are in relatively constant contact interpersonal experiences are critical to the delivery of service products (Tidd and Hull

3. 4 Types of Product-Related Services Servicing the Installed Base. In describing the service elements provided by manufacturing

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.,

, the ink cartridge), the model still stands. The company sells a product that is its main source of revenue (i e.,

IB services include all services 15 that are needed to keep the product functioning properly throughout its life-cycle.

firm can develop new services for its existing market, and it is also less risky than other

and has reduced costs associated with acquiring new customers The OEM has inherent product knowledge and requires less cost to acquire any additional

Once the profit opportunity within the service arena is identified, the firm must set up the structures and processes to exploit it.

opportunity. The firm must collectively learn to value services and how to manage the service

process. In order for a successful expansion of the IB service offering to take place, the firm

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

onetime services. They may in fact be of considerable value to customers yet are bundled in â€oefree-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

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, it is critical for them to understand both their

individual customer needs as well as the overall market potential for their service offerings Figure 3. 1 provides perspective as to where the largest portions of customers†spending and

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 â€oemini-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

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;

its customers†actual needs, Greif converted its business model to being a â€oetrip leasing†company for specialty chemicals †the Fedexâ of problem chemicals

Now Greif solves the total trip problem for its customers †drum supply, cleaning refurbishing, regulatory compliance, transportation, and tracking.

Moreover, it buys support services in volume, and its database of trip costing enables the company to accurately quote

The business model also builds barriers against competitors Source: Warren and Susman, 2004 Additionally, services can help to establish â€oecustomer lock-inâ€.

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

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 â€oeplatformsâ€, taking responsibility for how major sub-assemblies, such as frame

-in†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

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 â€oearms-lengthâ€

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 â€oemini-case†provides an example Mini-Case Example#3:

Taprogge Gmbh,(www. taprogge. com) a family owned business headquartered in Germany, has over 90%of the worldwide

market for cleaning condensers and heat-exchangers in power plants. The company has a strong patent position covering its unique invention of using

therefore highly by customers who are willing to pay for the reliability and security that the company provides.

environments (â€oewater is not just waterâ€), b) design new products, systems and services more effectively, c) provide fast turn-around service or even on-line help

that reduces service time and costs. This strategy is particularly important when the product is customized.

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, and

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. But even these large companies have

report examines the differences between products and services and how innovation practices differ substantially between the two.

complicated when a company attempts a hybrid model of products plus services, where the organizational, cultural,

3. 6 Differences between Products and Services As SMES are used to thinking in terms of physical products,

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

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

•Imitatability and opportunities for â€oebundlingâ€: Services can be more readily combined 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 clearly seen that, in many instances,

they may be combined flexibly to meet the specific needs of a customer •Integration of an external factor:

Customers may participate in production because the service preparation and the service delivery are identical (e g.,

The distinction between products and services is often unclear. For example, software service providers may offer homogeneous products that are produced not

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

continuum are services that consist of dialogues between service providers and clients, e g consultation or therapy.

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. Based on these findings, we now examine the similarities and differences in the innovation processes needed for each type

Due to the labor intensive nature of services typically service innovations require much less capital investment.

Service innovations usually require less R&d, require less in fixed assets, 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 Because less of a financial and technological commitment is needed for service than

investment may be low, organizational aspects play a larger role in the success of service innovation.

success of new services than on new manufactured products We start by reporting on the research literature covering both product and service innovation

nations from product-based to service-based economies, research agendas have not kept pace 23 Indeed, the research literature on innovation divides strongly into two separate areas of

•Research on â€oehybrid†innovation models combining services with products is extremely limited, again led primarily by European teams.

innovation, particularly when embedded within a manufacturing enterprise. We will return to this issue in the recommendation section

An offering not previously available to a firm†s customers, resulting from additions to or

relevant environment, that is to say to the reference groups of that innovator (Van der Aa and Elfring, 2002

Fasteners, that IT was integrated an part of their service business model, and not used just as a set of tools to help them manage the operations of their business.

powerful weapon for SMES to create greater value for their customers The fall in the price of computers and data storage devices, coupled with the rise of the

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 â€oelegacy†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. They are illustrative and not intended to be a complete list

create unique services or products can be a powerful way of adding value and keeping out

Netflix business model comes not only from the convenience but the ability to â€oemine 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

customers provide long lists of future wants and rate past rents), Netflix is able to balance its

its customers with a convenient personalized service, as it continually optimizes its supply chain The following â€oemini-case†shows how, in a business-to-business market, acquisition of data

services in â€oevegetation 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, â€oeclass I†railroads are regulated by the federal government on the

DBI realized that the value proposition for these customers was focused not on low cost but on the reliability and speed with which a service

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.

IT enabled innovative business models: Entirely new forms of business can be created by employing data acquisition

and mining to lock in customers, suppliers and partners. The fifth â€oemini-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

Chemstation has used a franchise business model to expand rapidly nationally without the need for the founding entrepreneur to raise any

external capital. Chemstation has used its franchisee network very effectively to get tremendous reach within the U s. market.

elegant business model is depicted in Figure 3. 4 Figure 3. 4 Chemstation†s Business model 27 The franchisor†s headquarters,

which is based in Ohio, serves some local customers and uses its buying power to purchase cleaning chemicals at a lower price than

can small competitors. The HQ also holds the secure and coded database of proprietary cleaning formulas for specific customer needs,

region to service, funds the local marketing, sales and delivery services after paying an entry fee of about $1 million to Chemstation.

franchisee gets access to the database on demand when a customer need is defined. This provides the formula for the optimum cleaner components

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

customers, and prevents competitors gaining the account. Since its founding Chemstation captured, in less than ten years, around 25%of the $300 million

innovative business model that includes elements of franchising, data-mining of customer information, and customer lock in. Source:

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.

the overall effectiveness of developing new services. Teams appear to enhance the firm†s NSD

) 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

surprising based on the specific attributes of services that were mentioned earlier (see section 3. 6), such as intangibility and imitatability

their services based on customer feedback, etc. Product innovations are made also in gradual and incremental forms,

service ideas come from a close interaction between customers and employees. Thus, although product and service innovation are thought often of as â€oethe sameâ€,

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 â€oepoints 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,

build new products and/or services that are valuable to the customer. It is critical that the firm

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

figure offer stand-alone products to customers and sell products in â€oearms-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.

Firms in the middle region of the figure offer discrete services usually on a fee-per-event basis

Interaction between the firm and its customers during new service development (NSD) may be greater than for NPD,

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

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

whereby several stakeholders participate in parallel in an ongoing dynamic relationship to provide a total valuable solution to all

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

collaboratively in TSD with its customers, and most likely with alliance or network partners 31

customers. In addition, new services may not have defined as clearly yardsticks, as new products do, against which a fixed gate could be associated

A defining feature of an innovation paradigm is how it posits the relationship between the firm

between a firm (SME in this case) and its customers (see insert in Figure 4. 1). Customer inputs

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.

idea generation and design/prototype solution. This gate, in essence, is a gate of idea screening

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 â€oelistened to†and information flows primarily from the customer to the SME (see insert in Figure 4. 2). Despite

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

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

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. TSD espouses a strong and dynamic relationship between the firm 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

For the design and prototype solution 36 Figure 4. 3 A Total Solution Development (TSD) Model

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;

design/prototype solutions stage, and the other arrow goes from the pre-commercial business analysis gate back to the design/prototype solution.

A stage is meant not to be visited only once during the TSD process. Even idea generation may be revisited

Unlike products, many services are delivered by individual employees and the quality of service can vary greatly depending on the training and

Immerse Yourself in Customers (needs identification, segmentation, and selection Regardless of the source of new solution ideas (inside or outside of the firm), it is essential that a

firm understands the needs of its customers and ensures that the new solution addresses their

current users of current products (or potential customers), and observe how they initiate and complete various relevant tasks,

customer sort (ask customers to sort the needs. The objective here is to reduce hundreds of

potential) customers. This understanding will help the cross-functional team to select the needs that it will target.

and (2) avoid direct competition. Segmentation can be done qualitatively or quantitatively. Qualitative segmentation usually requires managers to

, patent search, new use of existing products/services, competitors, upstream and/or downstream channel members) or collaboration (e g.,

each component (sometimes borrowing from existing products/services that target a component but in a different context),

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

Pseudo-sale involves providing the new product/service to a selected few customers observing whether they are willing to spend money purchasing the new product/service, and

but the products/services are delivered through (some) regular channels/contacts. This could include direct marketing, mini

segment/location of potential customers, and utilizing all marketing arrangements that are planned for use in scaling up

customers it should target, it should include a large enough sample (customers) from both segments, and ideally, at geographically separate locations

When considering various test marketing, managers should keep in mind the cost of such testing as well as information leaking to potential competitors.

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.,

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

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 serviced -centered 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

L ev el o f d iff ic ul ty 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.,, maintenance, spare parts installation and training.

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. At the end of a year warranty

single or multi-year service contracts can be proposed to the customer 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 and goals such as

Employees in this unit will need to be motivated to relate to customers differently than those in manufacturing units.

to relate to customers or selected according to certain criteria. Similarly, it is probable that there

value to its customers. Values, norms and beliefs shape the firm and drive employee behavior

had moved from a pure product-centered business model to one where service components played an increasing role.

with such companies as they provide a guideline for SME managers that wish to add services

to their business model. These cultural attributes are explained in Table 5. 2 In addition to culture, the goals of a service-centered firm will also be different than those of a

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,

services and customer relationships. Rewards can be tangible in the form of monetary bonuses or they can be less tangible in the form of recognition, promotions or empowerment.

resulting from understanding the benefits and results of pursuing services. Although employee -push might be sufficient initially,

Communication The degree to which there is planned and random interaction between functions and divisions at all levels

channels of communications; we use best practice knowledge transfer between departments; we actively manage our

Table 5. 2 Cultural Attributes of Successful Innovative Enterprises 46 to get employees involved. Internal marketing is one way that firms â€oesell†the service concept to

availability of knowledge about the firm†s basic technologies, customers and delivery processes High expertise determines the success of innovative service concepts.

sales people view products as the main source of revenue and services as add-ons that are

However, 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 Firms also may need to hire new personnel to staff the new service department. If the firm

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. Once the employees are assured that

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

include any personal interaction between the firm and its customers. If the firm is just beginning

One of the most prevalent reasons for failure among firms focusing on developing new services

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 in order to build relationships (de Jong and Vermeulen, 2003.

support, autonomy, information sharing, tolerance of mistakes and communication. Senior managers play a key role in stimulating an open culture.

ideas with employees, stimulate communication within the organization, and provide leadership to motivate employees (Johne and Storey, 1998.

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

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. Additionally, task-rotation (i e

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 â€oeopen door policy†where employees have easy access to top

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. The latter is especially opportune if

competitors do not offer such services or offer inferior service. Potential service revenue from one†s own

risks and inhibits feedback and learning opportunities from the field. It is better to overstaff in

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,

and do it better and/or cheaper than the customer can. The skills of the firm†s employees now must extend beyond accurate

Phase III should not be made until the firm has mastered thoroughly selling services with current sales or to its installed base.

their customers a fixed-term contract for services. Customer interaction in this phase should include employees creating a friendly and helpful atmosphere for the customer.

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

The firm might also consider offering consultation services to help its customers develop their own diagnostic and response capabilities

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. The first option is primarily an engineering solution in 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 value proposition is that technology can substitute for the customer†s current service personnel.

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.

discovery as the firm and its customers deal with problems that emerge over the course of their

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

and transform them into new services replaces or creates activities up and down the value chain. Firms that already have an effective

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 and the intensive interaction required to develop them

We described this advanced step as â€oetotal Solution Development†in section 3, and offered more

customers to share ideas with other employees concerning optimal use of the product, and observe points of pain

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

or frustrations that customers have with existing offerings, and generate ideas for new solutions. Since the employees are very close

What can we learn about the development of new services from the five mini-cases discussed in

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

These are traditional services, but a natural offering for a company that sells such sophisticated

their work force to be trained extensively in activities that their customers could not do as well as they could.

have researched one specific major growth opportunity for such companies, namely the addition of complementary services around manufactured products.

This strategy can provide higher operating margins, greater revenue stability and, most importantly, heightened barriers against

However, the transition to new service-centered business models does not come easy. The admittedly limited research on so-called â€oehybrid business models†indicates that the value

business models requires confronting the need for change management. As we have seen, SMES may have inbuilt cultures

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, and hand

consulting services provided by MEP †Operational, Marketing, Funding, and Business Planning. Each story was put into one of the categories based on the following criteria

3. Business Planning †organizational restructuring, change in business models 4. Funding †anything related to finance

Within this 7%(or 45 assignments) MEP had helped the SMES change their business model only in about 20 assignments, less than 3%of the total support activities

The interviewees varied greatly in their opinion about the role of MEP in the economy

result, national customers usually have to work with many centers and fail to get the desired

the MEP affiliated offices that address the issues of innovation, 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

and application to affect the sorts of change management and business model innovation that we are addressing here

the potential of changing their business model to include services and all that it entails; and even

a scalable initiative that meets a number of new demands including •Maximizing the use of the scarce consulting resources available to help SMES

to provide outreach services in the field of change management and service addition •Providing tools to this community

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

U s. economic activity in the private sector based on service revenues exceeds 82%(Rae, 2005 Moreover the research is largely European in content.

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 and

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

considering changes in its business model •Techniques for judging the cultural attributes (see section 5) that can help determine how

•Access to â€oestories†that illustrate clear cases that show how moving into services has

and engages with a company seeking to change its business model, for example, the â€oechallenge†will be compiled in a standard format on the portal.

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.

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

"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

Competition and cooperation: Italian SMES go international, CIRPET -University of Turin Discusses internationalization, and specifically the weaknesses of SMES

"Innovative versus incremental new business services: Different keys for achieving success."The Journal of Product Innovation Management 18 (3): 169-187

for new service ventures de Brentani, U. 1995.""New Industrial Service Development: Scenarios for Success Failure

Policy Research, SMES and Entrepreneurship, Netherlands Ministry of Economic Affairs: 1-73 Discusses service innovation

Small and Medium-Sized Enterprises and the Global economy. G. I. Susman. Northampton Edward Elgar Describes small firm collaboration and networking

"The use of strategic tools by small and medium-sized enterprises: An Australasian study.""Strategic Change 12 (1): 49-62

overcome when offering services Gordon, G. L p. F. Kaminski, R. J. Catalone C a. di Benedetto.

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.

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

Business Economics 6 (5): 327-347 Describes small businesses compared to large ones on the basis of strengths and

"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

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

-sized enterprises.""R & D Management 21 (2): 125-137 SMES have some advantages (flexibility) and disadvantages (unable to spread risk across

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

development process of small and medium enterprises (SMES) in China, Hong kong and Taiwan.""Industrial Marketing Management 35 (3): 323-335

Discusses factors that lead to effective communication between design and manufacturing personnel Susman, G. I.,K. Jansen,

Tether, B. S. 2005) â€oedo services innovate (differently? Insights from the European Innobarometer Surveyâ€, Industry and Innovation, 12,2), 153-184

"Customers as innovators: A new way to create value "Harvard Business Review 80 (4): 74-81

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 Urban, G. L. and J. R. Hauser (1993.

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."

performance in hostile and benign environments.""Journal of Small Business Strategy 15 (2): 33 -44

small businesses in a hostile external environment Yap, C.-M.,K-H. Chai, P. Lemaire (2005."

services

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