Service innovation development and knowledge integration practices

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MASTER’S THESIS

COMPARATIVE CASE STUDY ON KIBS SECTOR

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ABSTRACT

Author: Hurnonen, Salla

Title: Service innovation development and knowledge inte‐

gration practices Faculty: LUT, School of Business

Masters program: Master´s Degree in Knowledge Management

Year: 2012

Master´s Thesis: Lappeenranta University of Technology 94 pages, 10 figures, 14 tables and 1 appendix Examiners: Prof. Hanna‐Kaisa Ellonen,

Associate Prof. Ville Ojanen

Keywords: Service innovation, service development, knowledge work, knowledge management, knowledge integra‐

tion, KIBS

Academic research on services and innovations on services has significantly grown during recent years. So far research concerning management of knowledge intensive work on service development activities is very limited. The objective of this study was to examine knowledge integration practices that sup‐

port service innovation development and to the best of knowledge such studies have not been previously published in academic literature.

In the theoretical part of the study a review of state‐of‐the‐art literature was conducted, research gap was indicated and a framework for analysis was built. In the empirical part an explorative comparative multi‐case study was carried out in KIBS sector. Four companies were selected and four service development pro‐

jects were inspected. The service development activities and knowledge integra‐

tion practices were identified. The cases were carefully compared and results formed.

The empirical results indicated that service innovation development is partly lin‐

ear and partly incremental flow of activities where knowledge integration prac‐

tices have important role supporting the planning and execution of tasks.

Knowledge integration practices supporting planning and workshops are close interaction, interpretation, project planning and sequencing of work tasks. The identified knowledge integration practices supporting building service solution were careful role and competence management, routines and common knowledge. The main implication is that to manage knowledge intensive service innovation development a firm should carefully develop and choose relevant knowledge integration practices to support the service development activities.

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TIIVISTELMÄ

Tekijä: Hurnonen, Salla

Tutkielman nimi: Palveluinnovaatioiden kehittäminen ja tiedon yhdis‐

täminen

Tiedekunta: LUT, Kauppatieteellinen tiedekunta Maisteriohjelma: Tietojohtaminen

Vuosi: 2012

Pro‐gradu tutkielma: Lappeenrannan teknillinen yliopisto 94 sivua, 10 kuvaa, 14 taulukkoa ja 1 liite Tarkastajat: Prof. Hanna‐Kaisa Ellonen,

Tutkijaopettaja Ville Ojanen

Avainsanat: Palveluinnovaatio, palvelukehitys, tietotyö, tietojoh‐

taminen, tiedon yhdistäminen, KIBS

Palveluiden ja palveluinnovaatioiden akateeminen tutkimus on kasvanut viime vuosina merkittävästi. Tähänastinen tutkimus koskien palveluiden kehittämisen tietointensiivistä työtä on vähäistä. Tämän tutkimuksen tarkoitus oli tutkia palve‐

luinnovaatioiden kehitystä tukevia tiedon yhdistämisen käytänteitä. Parhaimman tiedon mukaan aiheesta ei ole aiemmin julkaistu tutkimusta.

Tutkimuksen teoreettisessa osiossa esiteltiin aihe‐alueiden viimeisin tutkimustie‐

to, paikannettiin tutkimusaukko ja muodostettiin teoreettinen viitekehys analyy‐

siä varten. Tutkimuksen empiirinen osuus toteutettiin eksploratiivisella tutki‐

musotteella vertailevana useamman tapauksen tutkimuksena. Tutkimuksen koh‐

teena oli KIBS toimiala ja tutkimuksen yksikkönä palveluinnovaation kehityspro‐

jekti. Neljä yritystä valittiin ja neljä palveluinnovaation kehitysprojektia tutkittiin.

Palvelukehityksen aktiviteetit ja tiedon yhdistämisen käytänteet tunnistettiin.

Vastaukset tutkimuskysymyksiin muodostettiin tapauksien huolellisen vertailun tuloksena.

Empiiriset tulokset osoittivat, että palveluinnovaatioiden kehitys muodostuu osittain lineaarisesta ja osittain inkrementaalisista aktiviteettien virroista. Näissä aktiviteeteissa tiedon yhdistämisen käytänteillä on merkittävä rooli tehtävien suunnittelun ja täytäntöönpanon tukijana. Tiedon yhdistämisen käytänteet suunnittelun tukemiseksi ovat tiivis vuorovaikutus, tulkkaus, projektisuunnittelu ja työtehtävien jaksottaminen. Tiedon yhdistämisen käytänteet palvelusuunni‐

telman toimeenpanemiseksi ovat huolellinen roolien ja osaamisen johtaminen, rutiinit ja yhteinen tieto. Tutkimuksen implikaationa esitettiin, että yritysten tulisi harkiten kehittää tarkoituksenmukaisia tiedon yhdistämisen käytänteitä tukeak‐

seen tietointensiivistä työtä palveluinnovaatioiden kehityksessä.

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ACKNOWLEDGEMENTS

For years I have been waiting for this moment when I finally can say: “It is ready”. This master thesis has been a real piece of work, but the amount of work has not diminished the joy it has given me! This process of learning has been a real challenge and there has been days of failures and days of success. This study would have not been possible without you all that have helped in the process.

First I want to thank the companies and the persons who were interviewed for the study. Without your support this study would have not been possible. I defi‐

nitely want to say hundred thanks to my supervisors Hanna‐Kaisa Ellonen and Ville Ojanen. Thank you so much for the inspiring conversations and guiding me thorough this process. Especially I want to thank Hanna‐Kaisa for the great en‐

couragement for to do my best. I have been real lucky have you as supervisor.

Thank you also Ville for sharing your ideas and expertise on service innovations!

For the most I want to thank you both for the flexibility and great service I have had during all stages of this process.

I also want to thank Mari Holopainen for interesting conversations and the ser‐

vice research group of Aalto University for arranging interesting seminars on ser‐

vice innovations. These seminars have introduced me plenty of fresh thoughts!

Thank you all my friends for encouraging and supporting me in many ways during the process. A wholehearted thanks to you all! Special thanks Terhi, for helping me with the language issues of the study.

Most of all I want to thank my loving children that always make me remember to think “outside the box”

Helsinki, 27.11.2012

Salla Hurnonen

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LIST OF FIGURES AND TABLES FIGURES

Figure 1 ‐ Structure of the study ... 7

Figure 2 ‐ Approaches to service innovation ... 10

Figure 3 ‐ Service development cycle ... 17

Figure 4 ‐ Four dimensions of knowledge ... 21

Figure 5 ‐ Definition of service innovation ... 36

Figure 6 ‐ Service development activities and knowledge integration practices . 38 Figure 7 ‐ Service development activities ‐ Knowledge integration activities ... 39

Figure 8 ‐ Final assumption of interrelation of the concept of the study ... 40

Figure 9 ‐ Technology vs. service orientation ... 75

Figure 10 ‐ Service development activities ... 77

TABLES

Table 1 ‐ Types of service innovations ... 14

Table 2 – Leading studies of knowledge integration ... 27

Table 3 ‐ Knowledge management and innovations ... 35

Table 4 ‐ Phases of case analysis ... 45

Table 5 ‐ Case study validity and realibility ... 47

Table 6 ‐ Background information of the selected firms ... 48

Table 7 – Service development activities case Alpha ... 51

Table 8 ‐ Service development activities case Beta ... 58

Table 9 ‐ Service development activities case Gamma ... 63

Table 10 ‐ Service development activities case Delta ... 71

Table 11 ‐ Service innovations in the case firms ... 73

Table 12 ‐ Novelty of service innovation ... 74

Table 13 ‐ Service development activities ... 76

Table 14 ‐ Knowledge integration practices in service development ... 79

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1. INTRODUCTION

Services have lately been noted as one of the key drivers of growth and employ‐

ment in modern economies. The share of services in terms of employment or GDP in Finland is approximately 70 % according to Confederation of Finnish In‐

dustries Report (EK, 2008). As the importance of developing competitive services has gained considerable attention economically and socially, the methods to achieve innovation on services have become an important issue (Howells, 2010).

Debates on service innovation influence, not only the service companies, but also the traditional manufacturing firms, which have increasingly started to note the role of services as a possibility to differentiate their products and gain com‐

petitive advantage. Consequently, developing services have become a new strat‐

egy for firms across different industries and innovative services have become the tactics to achieve sustainable competitive advantage.

Great part of service innovation studies of last decade concentrate on conceptu‐

al contributions, which distinguish on technological and non‐technological as‐

pects to service innovation, emphasizing or excluding the role of technology (Coombs & Miles, 2000; Drejer, 2004). However, based on the previous catego‐

ries and the theoretical foundation of Schumpeter (1934), the characteristics and nature of service innovation (Gallouj & Weinstein, 1997; Gallouj, 2002; Gallouj &

Toivonen, 2011), degree of novelty (Johannessen et al., 2001; van der Have et al., 2008; Toivonen & Tuominen, 2009) and categories of innovation (Gadrey et al., 1995) have been discussed in a sufficient manner.

There are numerous overviews of the conceptualization and theoretical devel‐

opment in the fragmented field and various research gaps have been recognized.

Howells (2010) states that there is a lack of adequate description and measure‐

ment of the processes, flows and transactions associated with service innova‐

tion. This includes interactions throughout the innovation cycle, covering not only the idea generation phase, but also activities of co‐working during the pro‐

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cess of developing the innovation and up to the final outcome of the innovation itself (Howells, 2010).

As innovation process may be considered a cycle or a flow of activities as Howells (2010) previously states the central challenge in new service development (NSD) consequently is; how to manage this flow of activities? Highly specialized experts with different backgrounds and knowledge bases are involved in the fuzzy NSD processes. Accordingly the main question of management of the NSD towards the outcome of service innovations is thus how to integrate and co‐ordinate the‐

se specialists knowledge and competences of the participants. There clearly ex‐

ists a motive to examine the patterns of work in the service innovation develop‐

ment cycle through the lens of knowledge management practices, especially the knowledge integration practices.

On the other hand, the literature on service innovations and knowledge man‐

agement has great focus on creation of new knowledge (Nonaka, 1994) and there is also some discussion of organizational knowledge types (Leiponen, 2003;

2005; 2006). Also the literature on knowledge management in all different con‐

texts dismisses in‐depth discussions of knowledge integration. Compared to the voluminous literature on knowledge creation, knowledge sharing and collective learning the concept of knowledge integration has attained relatively little atten‐

tion and the concept on knowledge integration remains underdeveloped (Huang, 2000)

In conclusion there is a lack of discussion about the mechanisms or practices of how service innovation development process can be managed by managing ac‐

tivities of integrating existing knowledge. This study aims to provide insight into practices of integrating knowledge to support service innovations development.

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1.1 Research questions

The main focus of this study is to increase knowledge on how to manage knowledge intensive work in service innovation development. The subject of matter is approached by seeking an answer to the following research question:

How to support service innovation development with knowledge integration practices?

The main research question is solved by answering following sub questions:

1. How are service innovations defined?

2. How are service innovations developed?

3. What knowledge integration practices there are in service innovation de‐

velopment?

The answer to the first sub question is formed based on the theoretical back‐

ground presented in Chapter 4. The answers to sub questions two and three are provided empirically and the results are presented in Chapter 7. The main ques‐

tion is answered in Chapter 8.

1.2 Research design

Neither management of knowledge flows nor knowledge integration practices have been studied before in service innovation context (Gallouj & Savona, 2010).

According to Saunders et al. (2009), an exploratory approach is useful when there is only limited preliminary understanding of the situation that will be stud‐

ied.

As there is no previous research in this area a well‐grounded approach is an ex‐

plorative study, which is qualitative by nature. According to Hirsjärvi et al. (2000), qualitative method seeks answers to “why” or “how” questions. Saunders et al.

(2009) admit that particularly a case study has considerable ability to provide answers to these questions. Yin (2003) admits that “what” question can be an‐

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swered qualitatively in exploratory case studies. Case studies are defined as an investigation of a temporary empirical phenomenon within its real context (Ei‐

senhardt, 1989; Yin, 2003). In this study, development of service innovation is the phenomenon to be investigated. The unit of analysis, a case, is a service in‐

novation development process. This study is a comparative case study and con‐

sequently multiple service innovation development cases are investigated in firms from the sector of knowledge‐intensive business service (KIBS) companies.

KIBS are firms that serve other companies when they intend to design, produce, offer and sell complicated service and product combinations (von Nordenflycht, 2010). KIBS firms play a significant role in designing and re‐designing services and are argued to have manifold roles in the innovation process as knowledge reser‐

voirs and knowledge providers of latest methods to achieve innovativeness and use the latest enabling technologies (Ojanen et al., 2009). KIBS firms are charac‐

terized as firms whose primary value adding activities consist of knowledge pro‐

cesses of accumulation, creation or dissemination of knowledge, with main ob‐

jective to develop and provide a customized service or product solution to their clients (Bettencourt et al., 2002).

The companies are carefully selected and the cases are compared in order to gain valid suggestions as the outcome of the analysis. The knowledge integration practices in service innovation development processes of the selected firms are reviewed and analyzed. The main interest of the empirical part of the study is to provide information on knowledge integration practices to support of service innovations development. The research design, data collection and analysis methods are discussed in depth in Chapter 5.

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1.3 Exclusions and limitations

Service research has lately taken steps towards more customer focused service development and co‐creation in service development has gained a significant amount of interest (Grönroos, 2008). Although it is surely confessed that KIBS in the development activities of service innovation are in close interaction with the clients especially in the planning phase (Alam, 2002), this study is limited to in‐

vestigation of the KIBS activities as main planners of the service innovation. The focal point of investigation is, however, the knowledge that already exists in KIBS firms knowledge reservoirs embedded in the specialized workforce and organiza‐

tional routines. The focus is on how to integrate this existing knowledge to pro‐

vide innovative services for the clients. Therefore the interaction and knowledge integration practices with the clients and partners are excluded.

1.4 Structure of the study

The structure of this study follows a basic research presentation format (see Fig‐

ure 1). The theoretical part of the study begins by reviewing service innovation to gain understanding of what the desired output of the development process is.

The chapter first provides an insight to the nature of services and proceeds to service innovation research tradition and the characterizations of service innova‐

tions. The chapter then introduces models of service development activities and patterns of service innovations.

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Figure 1 ‐ Structure of the study

Chapter three leads to management of knowledge intensive work by reviewing knowledge management approach to strategic management. The chapter fur‐

ther sheds light on typologies of knowledge and organizational knowledge activi‐

ties and finishes in a state‐of‐the‐art presentation of knowledge integration prac‐

tices. Thereafter, in chapter four, the latest research contributions on service innovations and knowledge management are gathered together and a summary of the theoretical discussions is provided. As a result, the fourth chapter suggests a framework that is used in the empirical part of the study.

Chapter five outlines the research design and tactics and chapter six presents the data and findings with‐in cases. The analysis follows in chapter seven, where the cross‐case analysis and the results are presented. Finally, in chapter eight, the main question is answered and conclusions are presented.

REVIEWOFLITERATURE

2.SERVICEINNOVATIONS ANDSERVICE

DEVELOPMENT

3.KNOWLEDGE MANAGEMENTAND KNOWLEDGEINTEGRATION

4.RESEARCHGAPAND THEORETICALFRAMEWORK 1.INTRODUCTION

5.RESEARCHDESIGN 6.FINDINGSWITH‐INCASES 7.CROSS‐CASEANALYSIS 8.CONCLUSIONS

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2. SERVICE INNOVATIONS AND SERVICE DEVELOPMENT

Service components are often intangible combinations of processes, people skills and materials. Innovations on services are therefore outcome of complex pat‐

terns of careful integration and combination of different actors knowledge to result a planned or designed service. (Goldstein et al., 2002)

The research on innovations on services has gained attention in the recent years and grown in several theoretical paths. It has also been noted as a multidimen‐

sional phenomenon (den Hertog et al., 2010). Distinctive paths and discussions on the field cover a variety of typologies and classifications. This chapter aims to shed light on the research of service innovations and service development. First, with an introduction to nature of services and explanation of the service innova‐

tion background theories to form an understanding of the different fashions and classifications to define service innovations. Second, the process of the service innovations development is assessed according to a few models that are sug‐

gested by latest research.

2.1 Nature of services

Different authors have suggested distinct definitions and emphasized different modes and contents of services. Services are, however, usually characterized by intangibility, heterogeneity, inseparability, and perishability – so‐called IHIP ‐ characteristics (Lovelock & Gummerson, 2004). Miles et al. (2005) describe in‐

tangibility of services as exchange of information combined with a set of physical operations that affect the state of person or a good. Heterogeneity means that each service provisioning process is different from the previous one and Perisha‐

bility that the service does not exist beforehand and it is provided in a unique process.

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Gallouj (2002) stresses the uniqueness and inseparability of a service transaction by stating;

“Each service transaction is unique since it is produced interactively with clients, in response to particular (non‐standardisable) problems they have and in an environment that is always different.” (p.142)

Edvardsson & Olsson (1996) present that a service consists of three components:

service concept, service system and service process. The service concept is the detailed description of service contents and structure (Edvardsson & Olsson, 1996). The more extensive study on service concepts of Goldstein et al. (2002) admits that service concept includes the service strategy of what to deliver and how the service delivery system is designed. Furthermore, they present that ser‐

vice concept is the core element of service design, since it ensures integration between strategy and customer needs, as well as it works as a mediator between customer needs and strategic intents of the organization.

Service system embodies the structure of the system that generates the service, namely the organization and the environment (Edvardsson & Olsson, 1996). Ser‐

vice system contains the roles of the people (providing the service), technology, physical facilities, equipment, and the processes by which the service is created and delivered (Heskett, 1987; Chase & Bowen, 1991; Ref. Goldstein et al., 2002).

The service process is a description of the process and activities of how the ser‐

vice is produced and the roles of the provider and client (Edvardsson & Olsson, 1996).

Gadrey et al. (1995) suggest that:

“To produce a service is to organize a solution to a problem (a treatment, an operation), which does not principally involve supplying a good. It is to place a bundle of capabilities and competences (human, technological, organizational) at the disposal of a client and to organize a solution, which may be given to varying degrees of precision.” (p. 5‐6)

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2.2 Assumptions in the background of service innovation theories

In service innovation studies the prime background focus seems to reside in dis‐

cussing how innovations on services differ from innovations in manufacturing (i.e. Coombs & Miles, 2000; Drejer, 2004) and in distinguishing the role of “tech‐

nology ‐ or not” as a part of a service innovation (Toivonen & Tuominen, 2009).

Coombs and Miles (2000) and later also Drejer (2004) have categorized these approaches into three groups. First, Assimilation/technological approach, which emphasize the role of technology in services and treats service innovations simi‐

lar to manufacturing innovations. Second, Demarcation/services oriented ap‐

proach, which argue that service innovation is distinctively different from innova‐

tion in manufacturing, and the focus on pure services excluding technology, and last, synthesis approach, which accepts and integrates both technology and ser‐

vice oriented approaches (see Figure 2).

Figure 2 ‐ Approaches to service innovation

Early theories on service innovations follow the assimilation approach and em‐

phasize the role of technological achievement as a main driver in the innovation process. Number of studies on this track have emerged from Barras’ (1986) thought of a “reverse innovation cycle”, in which the main idea was that a prod‐

uct innovation is antecedent to process innovation. Moreover one idea of Barras’

Technology orienta on (technology driver)

Service orienta on (non‐tech driver) Combina on

Assimila on approach Synthesis Demarca on approach

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was that service firms adopt new technologies to increase efficiency and the out‐

come is a service innovation. Assimilation approach has nonetheless been ar‐

gued to be too narrow for the understanding of the dynamics on services and manufacturing (Drejer, 2004). Gallouj & Weinstein (1997) have also argued Bar‐

ras’ theory to cover only the diffusion of technology to service sector.

The background demarcation/services oriented studies, in turn, rely on Schum‐

peters’ (1934) broader definition of innovations and do not include a technologi‐

cal element as a necessary part of service innovation (i.e. Gallouj & Weinstein, 1997; Toivonen & Tuominen, 2009; van der Have et al., 2008).

The majority of service innovation studies seem to follow the synthesis ap‐

proach, which is also based in Schumperters’ ideas but does not exclude the role technology or stress service orientation in the sense that both technological and non‐technological forms of innovations are taken into account (Gallouj & Wein‐

stein, 1997). Latest service innovation theories remark the idea of service inno‐

vation as a reiterative process that requires cross‐functional activities (Toivonen

& Tuominen, 2009). To conclude Gallouj & Savona (2010) state that: Innovation in services or in service functions represents multidimensional characteristics, which involve both technological and non‐technological dimensions.

In this study the definition of service innovation follows Toivonen & Tuominen’s (2009, 14) definition that originates from Sundbo (1997, p. 437‐440):

“Service innovation is a new service or such renewal of an existing service which is put into practice and which provides benefit to the organization that has developed it; the benefit usually derives from the added value that the renewal provides to the customers.

In addition, to be an innovation the renewal must be new not only to its developer, but in a broader context, and it must involve some element that can be repeated in new situations, i.e. it must show some generalisa‐

ble feature(s). A service innovation process is the process through which the renewals described are achieved.”

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The following sections will clarify the type and nature of renewal, and the impact of the novelty to provide framework for evaluation of service innova‐

tion.

2.3 Service innovation types and nature of renewal

Drawing back to the origin and Schumpeters theories, according to Toivonen &

Tuominen’s (2009) summary, Schumpeter, the pioneer in innovation research, identified five different forms of innovations:

1) Introduction of a new good or new quality of good

2) Introduction of a new method of production, including a new way of handling a commodity commercially

3) Opening of a new market

4) Discovering a new source of raw material 5) Establishment of a new organization

Schumpeter also emphasized the role of entrepreneurs in innovation activities.

One of the earliest well‐known typologies of service innovations is formed by Gadrey et al. (1995), who discuss and compare the differences of product inno‐

vations and service innovation characteristics and what modifications service sector requires to the classic typologies of innovations. They suggest that the classic innovation typologies concerning products could be modified to five cate‐

gories of innovations in service sector. They first present a division to modifica‐

tions in service product, architectural innovations, which bundle or unbundle existing service products and innovations concerning processes and organization of the production of service. Furthermore they provide a modification of Schum‐

peter’s categories towards five categories of service innovation. Product innova‐

tion, a new formula of methods and competences to manage and produce a ser‐

vice. Process innovation, new or streamlined process to exploit service. Organi‐

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zational innovation, which affects the quality of service process. Market innova‐

tion, as opening up a new market, and finally ad hoc innovation, which refers to an innovation produced suddenly when producing a consultancy service.

A few years later Gallouj & Weinstein (1997) introduce a characteristics‐based service innovation model and innovation typology. Their idea follows the synthe‐

sis approach and the model is broadly acknowledged. The characteristic‐based model is further discussed in several publications i.e. Gallouj & Toivonen (2011).

However, Gallouj & Weinstein (1997) suggest that services basically consist of different characteristics that can be divided into three different types. The types of characteristics are competence, technical (including tangible and intangible) the final service characteristics. The tangible technical characteristics refer to technologies and techniques used in the service and the intangible characteris‐

tics the expertise and methods. The competence characteristics refer to the competences of combining the tangible and intangible characteristics. In the model each technical characteristic mobilizes one competence. Gallouj & Wein‐

stein (1997) conclude that innovation occurs when any change to the character‐

istics of the final service is made.

The typology Gallouj & Weinstein (1997) suggests different innovation types that are: Radical innovation, a totally new way to connect the different characteris‐

tics. Improvement innovation is a result of improving certain characteristics without changing the system. In Incremental innovation the service system is changed marginally by adding new elements. Formalization innovations takes place by clarifying the different characteristics, enhance the visibility and finally the concreteness of a service. Recombinative or architectural innovation occurs when existing services are bundled or unbundled in a new way. And finally they suggest Ad Hoc innovation, which refers to a tailor‐made solution to one cus‐

tomer, parts of which can be formalized later. (Gallouj & Weinstein, 1997; Gal‐

louj & Toivonen, 2011)

In contrast to the characteristics‐based innovation typology, den Hertog (2000) developed a four‐dimensional model to analyze service innovation. Her model

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suggests that innovation in a service is result of one or more changes in four di‐

mensions, which are; New service concept, new client interface, new service delivery system and technological options. den Hertog (2000) does not present specific types of innovations but instead argues that innovations are combina‐

tions of these dimensions. den Hertog et al. (2010) define service innovation as follows:

“A service innovation is a new service experience or service solution, that consists of one or several of the following dimensions: new service con‐

cept, new customer interaction, new value system/business partners, new revenue model, new organizational or technological service delivery (p.

494)”

Table 1 ‐ Types of service innovations beneath illustrates the total of different definitions of service innovations types presented. The most cited authors seem to agree on several issues. First, they all make a distinction between services and tangible products.

Table 1 ‐ Types of service innovations

Author Focus Definition Service innovation types

Gadrey et al. (1995) New modes of innovation

Product innovation Process innovation Organizational innovation Market innovation Ad hoc innovation

Gallouj & Weinstein (1997)

Characteristics‐

based model

Innovation occurs when any change to the characteristics of the final service is made

Radical innovation Improvement innovation Incremental innovation Formalization innovation Recombinative or architectural Ad Hoc innovation

den Hertog (2000) Dimension based model

Innovation in a service is result of one or more changes in the four dimensions of a service

New service concept New client interface New service delivery system New technological options

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Second, they all accept technology as a possible but not obligatory part of the service. Third, innovation on services requires some change in the service or de‐

signing of a totally new service. The types of innovations classified by the authors have emphasis on different levels of service innovations and the categorizations have overlapping definitions. To conclude, the service innovation type can be examined assessing the type of change in the service characteristics (Gadrey, 1995; Gallouj & Weinstein, 1997) and through evaluation of the dimension that the change impacts (den Hertog, 2000). In this study the typology for defining service innovation is following Gallouj & Weinsten’s (1997) contribution for the unquestionable reason that it is the most well grounded and most commonly used in service innovation research. Furthermore, the dimensional model of den Hertog (2000) is accepted and used for the following reasons: Firstly it is un‐

doubtedly inevitable that a change or renewal does not only touch one specific part of service and the outcome classified due the characteristic is quite narrow as the renewal type might impact a total dimension of a service or even few.

Secondly, the dimensional model has gained considerable attention and confir‐

mation as new different fashion to examine service innovation.

2.4 Novelty of innovation

It is claimed that the main part of service innovations are more incremental than radical, which follows the fact that services more often developed by small changes and adjustments (Ojanen et al., 2007). Consequently there are discus‐

sions on whether these changes should be referred to as inventions rather than real innovations.

The previously presented Gallouj & Weinstein (1997) characteristic‐based service innovation model considers the difference/dissimilarity interpretation of radical‐

ness of a service innovation. This view compares the new service produced in the innovation process with the starting point of the process. Another approach to interpret the degree of radicalness is to ask for whom is the renewal is new?

Hence the extent of situational context (new to firm, new to market or new to

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region?) may define the radicalness of the innovation (Have et al., 2008; Johan‐

nessen et al., 2001). Nonetheless this is also strongly linked with the invention‐

innovation discussion, which argues that in a company incremental innovations should be considered mainly implementations or inventions if not brought to the markets (Toivonen & Tuominen, 2009). However, many studies that consider the radicalness of innovations seem to focus only on whether the application of the innovation is new to markets and ignore the “new to firm” perspective (van der Have et al., 2008; Toivonen & Tuominen, 2009) This leads further to considera‐

tion if the change of characteristics as Gallouj & Weinstein (1997) defined or evolving dimensions according to den Hertog (2000) in a new service is a suffi‐

cient level of evaluation to define an emergence of service innovation.

Toivonen & Tuominen (2009) point out, that in recent studies the authors do not specifically determine whether they study the innovation process or the innova‐

tion as outcome of that process. They further state that studies from both per‐

spectives are utmost important. However, when innovation is explored as inno‐

vation process the development starting from firm internal service development may further lead to concept that is further applied to markets (Nählinder, 2002).

Therefore it is not obvious, which future level of radicalness a service innovation will at last achieve, and whether a service development process from an inven‐

tion to market implementation will succeed.

However, in this study a broad perspective to service innovations is taken, where service development to an innovation is reviewed as an ongoing development process the output of which is one or more service innovations. The current state of innovative achievement is assessed and evaluated according to the character‐

istics and dimensions‐based approaches thus comprehending that factual radi‐

calness may be inspected only after the output is achieved.

Next the service development activities and patterns in development are de‐

scribed according to current state of understanding of where and how the ser‐

vice innovations are formed.

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2.5 New service development activities

The research on how new services are developed (NSD) is fragmented and there is limited number of relevant studies and discussions of models in service devel‐

opment (Stevens & Dimitriadis, 2005). There are a few studies that aim to clarify the activities for developing new services. Stevens & Dimitriadis (2005) divide the models to sequential models and developmental models. Their sequential model approach underlines procedural stage‐by‐stage development activities, whereas developmental models highlight the organizational factors that would, as per, their suggestion determine the development activities.

Johnson et al. (2000) suggest an idea of non‐linear and iterative service devel‐

opment model. According to Steven & Dimitriadis (2005) the Johnson et al.

(2000) model would, however, belong to sequential models. Despite non‐

linearity the model has named steps that are repeated incrementally. Neverthe‐

less, the first two activities of the model design and analysis present the planning phase of the NSD process cycle and the final two activities, development and launch, represent the execution phase (Figure 3).

Figure 3 ‐ Service development cycle

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In the execution phase, the authors claim that service delivery system design, use of enablers, and cross‐functional development efforts are critical managerial issues but later in the same discussion it is mentioned that all stages or phases of the NSD process are not critical. However, the criticality is explained to depend on the specific type of innovation. Radical or technology based service innova‐

tions would in their sense require greater competence during the planning and incremental innovations in the execution phase (Johnson et al., 2000). This leads eminently to a question of in what basis the model suggests that incremental innovations would postulate greater managerial challenges.

According Stevens & Dimitriadis (2005) the developmental models cover the or‐

ganization structure, for instance an autonomous team that is supportive for service development. They further present that organizational features, com‐

munication flows and informal structures contribute to innovativeness of a firm.

Their empirical research finally provide a model where occurrence of a cognitive conflict leads to interpretation of the risen problems and proceeds to building and re‐defining the initial ideas for the service until the final solution output is achieved, where the expertise of the total extend of the people included in the process is integrated, and the final result is shared by the organization. Their final conclusion is that development process results in organizational learning. They also refer to Garel (1999 Ref: Stevens & Dimitriadis, 2005) in notion that fast de‐

velopment, which is characterized by strong uncertainty the structures should support strong integration between different functions and enable fast decision making

Toivonen & Tuominen (2009) studied empirically fifteen service firms and found five different innovation processes. They suggest that the process type may change during the lifecycle of an innovation from one to another. Their sugges‐

tion for innovation processes is:

1) Internal processes without a specific project. These processes include the innovations that emerge unexpectedly often as a consequence of trans‐

formative management.

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2) Internal innovation projects. These include planned innovation projects.

3) Innovation projects with a pilot customer. In these projects the idea usu‐

ally originates within the innovating company and a pilot customer is sought afterwards. The customers act as critical evaluators

4) Innovation projects tailored for a customer. These projects often start from customer, who desires a solution to a specific problem. The innova‐

tion here is ad hoc by its nature.

5) Externally funded innovation projects. These projects are usually funded research projects that do not always produce direct business benefits.

Summarizing previous discussions, Toivonen & Tuominen (2009) suggestion pre‐

sents that service innovation processes differ from each other and the process type may change during the project. Johnson et al. (2000) provided a cycle con‐

sisting of activities that are divided to two phases. In addition, Stevens & Dimitri‐

adis (2005) studied the interaction activities perspective in the process, however concentrating on the organizational capability of interpretation, building ideas and communicating that in their view determines the innovation process capabil‐

ity.

To draw a conclusion for the focal approach in this study the service develop‐

ment activities in innovative service development are defined as: A flow of activi‐

ties of planning and execution that are performed in the patterns of organiza‐

tional communication activities. A development process of an innovation begins from several triggers that are interaction internally, interaction with customer and external funded projects, which is in line with the suggestion of Toivonen &

Tuominen (2009).

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3. KNOWLEDGE WORK MANAGEMENT AND KNOWLEDGE INTEGRATION

“If services are problem‐solvers as is so often suggested, then they are clearly

operating on the basis of some sort of knowledge of problems and solutions, and service innovation implies changes in this knowledge.” Miles (2003, 84)

Knowledge intensity of work has gently caused a move towards a change in the underlying assumptions of strategic management and organizational structures (Nonaka et al., 2000) in the past decades. Value of knowledge and managing knowledge work has fruited a multitude of academic discussions and knowledge management has been suggested to have significant impact on productivity and sustainable competitive advantage (Grant, 1996a).

This chapter first provides a preview of the nature of knowledge by outlining a few well‐known typologies and classifications. Next the broad lines of theories explaining strategic value of knowledge and underlining the importance of man‐

agement of knowledge work related activities are explained. In line with the knowledge‐based view and knowledge management, the actual knowledge re‐

lated activities are subsequently discussed and finally the last section concen‐

trates on the latest research on knowledge integration mechanisms and reviews state‐of‐the‐art literature.

To conclude, the background for knowledge management and the nature of knowledge are introduced to understand the importance of the topic. The knowledge activities are presented to comprehend the entirety of the knowledge work management. Knowledge integration is the main interest in this study but as will be shown, it cannot entirely be separated from the other activities and therefore all knowledge activities are be reviewed.

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3.1 Nature of knowledge

There are several knowledge taxonomies and typologies that aim to explain the nature of knowledge. Most commonly cited typology is Polanyi’s (1966) theory of tacit and explicit dimensions of knowledge. Nonaka et al. (2000) have further contributed to the discussion and their suggestion is that explicit knowledge can be expressed in formal language and shared in the form of data. Explicit knowledge also can be processed, transferred and stored easily. Tacit knowledge in contrast is rooted into action, routines, values and emotions (Nonaka et al., 2000). Tacit knowledge includes two elements: technical and cognitive. The technical element covers the know‐how and skills, while the cognitive element can be understood as person’s mental models that reflect the paradigms, beliefs and experience one holds. (Nonaka, 1994)

Spender (1996) in turn presents that the distinction between tacit and explicit dimensions of knowledge can be further evaluated at organizational level and he admits collective and individual dimensions to his typology. He argues that there are four types of knowledge: conscious, automatic, objectified, and collective (Figure 4). The first two types are individual forms and the latter two are social forms of knowledge.

Figure 4 ‐ Four dimensions of knowledge (Spender, 1996, p.70)

According to Spender (1996) the most valuable knowledge is collective knowledge because it is embedded in the tacit routines and coordination of an organization. For that reason collective knowledge is hard to identify, costly to replicate and, when managed carefully, it provides the most prominent strategic possibility to gain sustainable competitive advantage (Spender, 1996).

Individual Social

Explicit Conscious Objectified

Tacit Automatic Collective

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3.2 Assumptions and backgrounds of the knowledge management approach

Management of knowledge in economic tradition has its origins in strategic management research. It includes theories of firm that are grounded on both economics and organization theory; its primary goals are to explain firm perfor‐

mance and further support strategic choices (Grant, 1996a; 1996b). It is argued that the fundamental question in the field of strategic management is how firms achieve and sustain competitive advantage (Teece et al., 2007). Firm’s competi‐

tive advantage and growth are explained to result form several sources and roots of these theories emphasize different explanations.

A well‐known explanation to succeeding in promoting and sustaining competitive advantage is the resource‐based theory (RBV), which was originally promoted by Penrose (1956) and further expanded by others (Barney, 1996; Wernerfelt, 1984). RBV perceives a firm as a unique bundle of idiosyncratic resources, which should contain so‐called VRIN attributes: valuable, rare, in‐imitable, non‐

substitutable resources. The theory explicates that possession of VRIN resources would increase possibility to gain competitive advantage. (Barney, 1996).

Knowledge‐based view (KBV) of firm expands the theory of RBV with emphasis on the strategic and managerial importance of knowledge embedded in firm‐

specific capabilities (Grant, 1996a; Grant & Baden‐Fuller, 2004).

Knowledge management indicates that knowledge should be handled as a main factor of production and therefore managed carefully (Grant, 1996a). Demsetz (1991) argues that an economic organization, or firm, must reflect the fact that knowledge is costly to produce, maintain, and use.

When knowledge management is approached with emphasis on organizational level the discussions moves towards management of organizational competen‐

cies, which is a consequence of ideas that knowledge is tightly embedded in the members and structures of organization, which are accordingly understood as capabilities or competences of an organization. Knowledge management is therefore somewhat closely related also to competence management (Hong &

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Ståhle, 2005). Hong & Ståhle (2005) define organizational competence as firm’s ability to integrate and manage its available resources or firm‐specific assets.

However, a few concepts that are close related to both competence and knowledge management, particularly knowledge integration are:

 The dynamic capability view (DCV), which argues that the key to competi‐

tive advantage is rooted in ability to integrate, build and reconfigure in‐

ternal and external competencies to access rapidly changing markets (Teece et al., 1997).

 Absorptive capacity theory, which presents that firm innovativeness, competiveness and strategic flexibility is dependent on absorptive capaci‐

ty, which is by definition the ability of a firm to recognize the value of new, external information, assimilate it, apply it to commercial ends. It is largely a function of the firm’s level of prior related knowledge and ex‐

ternal knowledge sourcing (Cohen & Levinthal, 1990).

The above theories are introduced here to exemplify that integration of knowledge, and the competences that knowledge is embedded in, are consid‐

ered to be of utmost importance across different approaches. The DCV theory is relevant since knowledge integration practices are particularly dynamic by na‐

ture. According to the definition of DCV, the reconfiguration and integration of competencies are mobilized through knowledge integration. Absorptive capacity, on the other hand, stresses the assimilation of information and knowledge as key to success, which is also achieved through knowledge integration activities.

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3.3 Knowledge activities

This section aims to provide an understanding of the different organizational knowledge activities – or knowledge flows (Becker, 2002). As stated in the be‐

ginning of the chapter, knowledge integration cannot be handled as a separate function as there is always interaction between different knowledge activities (Becker, 2002; Grant, 1996a).

Knowledge creation is an activity where knowledge is created through a process by which knowledge is shared and conversed between tacit and explicit.

Knowledge creation model (SECI) has first been introduced by Nonaka (1994).

The process includes four different modes: socialization, externalization, inter‐

nalization and combination. The continuous process starts from socialization mode where tacit knowledge meets tacit knowledge. This typically occurs in close interaction, in informal social meetings, and in shared experiences. Exter‐

nalization mode converses the previously shared tacit knowledge into explicit and as a result, the knowledge changes to codified mode, and therefore turns easier to share. Combination thereafter is a phase where the new explicit knowledge is combined with the old explicit knowledge and further delivered to other members of team or organization. Finally, in internalization phase the ex‐

plicit knowledge is conversed to individuals’ new tacit knowledge. (Nonaka 1994;

Nonaka et al., 2000.)

Knowledge transfer or sharing is an activity where one unit (individual, team, department, or division) is affected by the experience of another (Argote & In‐

gram, 2000). According to Argote & Ingram (2000), organizational knowledge is embedded in knowledge reservoirs, which reside in networks formed of organi‐

zation members, tools, or tasks. Knowledge can be transferred by moving one reservoir to another or modifying the knowledge reservoir. Knowledge transfer occurs in all phases of the aforementioned knowledge creation process and also between all different knowledge activities (Alavi & Leidner, 2001).

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Knowledge storage and retrieval is an activity of knowledge storage that explains knowledge storing in memory of individuals or organizations. Knowledge in ex‐

plicit forms may as well be stored with the help of technological solutions. (Alavi

& Leidner, 2001) Knowledge storage discussions are often related to the techno‐

logical perspective and tools studies. Knowledge storage is, however, complex and important particularly when concerning tacit knowledge on organizational levels, which is claimed to be stored in routines. Not to be diminished by noting that collective tacit knowledge is the most important source of value and hardest to manage and copy (Spender, 1996; Grant, 1996a; Becker, 2002).

Unlike other processes, Knowledge application or integration by other name, is an activity where the main focus is on usage and combination of existing knowledge, with specific practices that aim at minimizing the role of learning or creating new knowledge (Grant, 1996a). Knowledge integration is discussed more deeply in the following section.

3.4 Knowledge integration

To form a well rooted review to knowledge integration practices the leading studies found concerning knowledge integration in the research field of knowledge management are collected and summarized to Table 2 (p. 27). A total of three conceptual studies and five empirical studies were found. The empirical studies were all qualitative case studies covering different industries. The differ‐

ent definitions suggested, relations to other knowledge activities and the actual integration practices covered in the literature are discussed next.

All of the studies were somehow based in Grant’s (1996a, 1996b) original ideas that the primary role of firm is the application of existing knowledge to produce goods and services. Accordingly this production requires wide range of different knowledge, which leads to emphasis of specialization among individuals. A firm then, aiming to gain benefits from specialized workforce, should notice that the fundamental task of an organization is to coordinate the inputs of different spe‐

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cialists (Grant, 1996a). This leads to the assumption that when production of a good or service requires the integration of many people's specialist knowledge, the key to efficiency is to achieve effective integration while minimizing knowledge transfer through cross‐learning by members of the organization.

Becker (2002) similarly suggests that knowledge integration is an activity for solv‐

ing tasks such as producing a complex solution where a number of different bod‐

ies of specialized knowledge have to be drawn on. Still following Grant (1996a), Becker (2002) assumes that knowledge integration refers to practices of how the different actors carrying specialized knowledge can be organized and coordinat‐

ed. Yet finally he concludes that knowledge integration includes transferring knowledge and coordination.

The other studies also take advantage of the relations of the different knowledge activities. Munkvold (2006), for example, is in line with Becker (2002) about knowledge integration by transferring knowledge, but emphasizes that knowledge is integrated by transferring knowledge to someone who is able to combine it with his or her own work practice. Whereas according to Grant (1996a) knowledge transfer is costly and problematic. The suggested reason is that knowledge transfer increases the amount of knowledge one possesses and under assumption of limited cognitive capacity of the recipient (Simon, 1991) it causes problems. Becker (2002) agrees with Grant (1996a) that the possibility of integrating knowledge in this way will is limited.

Service innovation development and knowledge integration practices - a comparative case study on KIBS sector

MASTER’S THESIS