[Case Summary] Service-Logic Innovations: How to Innovate Customers, Not Products

Altering value as it is defined and used by the customer, not in production and exchange, defines innovations. Innovative products enable customers to find new ways to service their personal needs. Customers do not indeed seek products, they seek satisfaction.

When a consumer buy a product, value is realized not released, because value is not for exchange but rather in use: the value creating process is truly the co-creation of value among providers and customers. Customers alter their role, improve their capabilities, and contribute their own resources to the process of creating value. For example, Apple Macintosh computers allow users to produce high quality graphic publication without the help of a design company. Thus, customers are involved for value co-creation to occur, and value is not defined by a firm alone.

Managers should seek new opportunities in two ways: their proposed solution to an actual need is superior to existing options or they discover a new way to fulfill an unrecognized need. Managers need anyway a far more detailed customer-side perspective of innovation, and focus on innovating the customers’ role. Moreover, value creation should not be seen as an exchange anymore but through an interaction perspective.

a. Smart offerings

Smart offerings are products and services that contain more frozen knowledge. They are not necessarily traditional service innovations (according to traditional service definition, i.e. intangible) but they are service-logic innovation because they enable customers to create value very differently. Embedding know-how and skills into products and applications can significantly change customers’ value co-creation especially when these customers need fewer skills to get the job done.

An example are the data mining software applications that help managers make better decisions on the basis off actual information about customers, combined with model-based algorithms that turn data into information and then into knowledge.

b. Changing the Integration of Value

Another way to innovate is to change the value integration, specifically by changing the firm’s and the customer’s integrating roles. Value integration can include everything from customers who are completely self-sufficient (integrate all resources) to customers who outsources everything possible (let firms integrate resources for them). The question is therefore not whether to integrate but who integrates what.

A good example is provided by IKEA. Consumers pay less for furniture but have to assume transport and assembly by themselves. IKEA is more and less integrative. More because they provide a data-rich catalog with the description of all their furniture, which changes the buyer role. Less because there are no automatical consulting transportation or assembly services, which changes the user role.

Service-logic innovation often includes reconfiguring the value-configuration, i.e. the interplay among multiple actors and resources to co-create value, beyond the traditional, linear concept of value chain. Innovations triggered changes in a value constellation extend past a new product exchanged between one firm and its customers. Market exchange is indeed not restricted to two parties but rather open to many actors, which are parts of the value constellation.

YouTube.com has created a service-logicinnovation because their users evolve from simply sharing home videos, taskthat once were perceived as arduous and limited to family, to producing anddisseminating short videos which can be marketed virally. The paying processhas evolved: the user doesn’t pay anymore, advertising do. The valueconstellation has thus shifted radically.

3. How to change Customers?

Service-logic innovations changes at least one of customers' roles as users, payers and buyers. To understand the differences between the three roles, we can show the following example: a mother (the buyer) buys a shirt for her son (the user) with the money her grandmother (the payer) gave him for his birthday.

a. Change the role of the User

Firmscan only make value proposition; the customer must interpret and co-create that value. Therefore an outside-in service-logic innovation proposes new ways for customers to solve their problems. For example, in the University of Phoenix students can earn a degree at a pace they define (rather than the university) from anywhere in the world that offers online access.

Managers have two options for changing the role of the payer:

· Change what customers pay for (the challenge is to find price metrics that allow prices to vary automatically with value delivered, which keeps all customers within the "price equivalent value" range).

· Or change the payer altogether (that option requires managers to move from an isolated firm-customer relationship toward a value constellation perspective)

c. Change the Role of the Buyer

Service logic innovation can improve or reconfigure the buying process. Web-based platform like Expedia and Travelocity have radically changed how travelers buy travel services. Managers can also innovate the buying process by eliminating waste in the supply chain. The role of the buyer might be innovated by saving customers' time and eliminating redundant information.

4. How to change a firm's value creation: Inside-Out Innovations

Firms can develop inside-out service-logic innovations focus on changing their own value creation through smart offerings, value integration and value constellations by three ways:

Smart offerings can innovate theuser's role, the buyer's role, and even the payer's role and make the customerssmarter. For example, the Web pages established by some retailers assist withthe buyer's role, because they show the customer the nearest locations of the store.

b. Integrate to Relieve or Enable Customer

Offerings relieve customers from or enable them to do something, customers can create more customized value for themselves.For instance, customers can now buy individual songs on iTunes or compile their own playlists.

c. Reconfigure Value Constellations Around Customers

Managers should study threateningand opportunistic trends in their value constellation and search for ways toprofit from these trends through inside-out service-logic innovations.


5. Conclusion

We argue that all innovation is service-logic innovation. According to this view, any innovation changes the way customers co-create value with the firm, there is an artificial distinction between products and service innovations and it facilitates a more customer-centric view of innovation rather than the traditional and limiting product-centric view. This produced a managerial framework, by looking outside-in managers change customers' roles as users, buyers, and payers. By working inside-out, managers help customers became smarter through smarter offerings, by relieving or enabling them of certain co-creating activities, and by reconfiguring value constellations.