Service Innovation for SMEs
by Dr. Katalin Eibel-Spanyi and Andrew Spanyi

The founder of a small to mid-sized enterprise typically spends many waking hours trying to come up with a great new product idea. This time might be better spent focusing on service innovations.

While new product development is exciting, introducing new products is hard work and the chances of success are slim. AC Nielsen and other researchers have reported that more than two thirds of product launches fail to succeed in the marketplace. Given the forces of globalization and commoditization, even if you do develop a great new product, there is the risk that it will soon be copied offshore and manufactured at much lower costs.

In searching for ways to drive profitable growth, the odds of success may be greater through service innovation. The lions' share of gross domestic product (GDP) in western industrialized nations is now attributed to services. Indeed, the Organization for Economic Co-operation and Development (OECD) estimates that services now account for around 70% of GDP and employment in developed countries. The opportunities for service innovation now also encompass innovations in business models, delivery channels, and the overall customer experience. Service innovation enables competitive advantage via better market position and greater responsiveness to customer requirements.

While the scope of opportunity for service innovation is vast, capitalizing on its potential is not easy. There is a long standing bias in the business community, and particularly in the SME segment, towards 'product' innovation. Many business leaders confuse invention and innovation, yet the two are quite different. Inventions are most frequently related to novel ideas and objects. These can often be patented. Innovations are not just related to new products, but also include services, often cannot be patented, and emphasize the concept of commercial value.

In order to take advantage of service innovation opportunities, it is important to define innovation in a sufficiently broad context. Arguably, one of the more cogent definitions of innovation was coined by Theodore Levitt. According to Levitt, "To be innovative, an idea must be creative and it must be implemented." A broad definition of innovation facilitates looking beyond 'product' considerations to creative, value adding ideas in areas such as business models, delivery channels, operational processes, brand and the entire customer experience.

What is involved in making service innovation an operational priority? Leadership, viewing the business from the customer's point of view, cross-functional collaboration, leverage enabling technology, education and empowerment are just a few of the critical success factors in service innovation. Leaders cannot mandate innovation. You can't just command people to do it. Instead, leaders need to speak candidly and frequently on the importance of innovation to profitable growth and articulate a compelling vision. You need to create an environment in which innovation is encouraged. This involves providing resources for education, encouraging others to view the business from the customer's point of view, and empowering people to take action. These leadership behaviors will not come easily to those SME founders who believe that they have a monopoly on new ideas and practice a 'command and control' style.

Viewing the business from the customer's point of view is possibly the single most important component in establishing the foundation for service innovation. So many people continue to view the business solely from their own organization's perspective. They think only about the products/services offered and their own policies and rules. To test this out, simply ask yourself whether you have taken the time and effort to build a picture or map of the entire order cycle from the customer's point of view or whether you view business mainly from the company's point of view. Table 1 below outlines the difference.

Inquire about product or service Respond to inquiry
Receive information Provide information
Compare alternatives Wait - continue to promote
Make purchasing decision Order entry
Wait Scheduling
Receive product or service Fulfillment
Pay Billing/Collection
Use Wait - solicit feedback
Ask for service Provide service

Table 1: Two Sides of the Order Cycle

When you can view the complete order cycle from the customer's perspective you will be able to see the entire customer experience and begin to identify areas of opportunity for service innovation in operational processes, delivery channels, and brand. You will then be able to identify innovative ways to provide information to customers, novel approaches to channels of distribution, ground-breaking methods to compress cycle time in order processing and fulfillment and fresh approaches to reinforcing the power of your brand in the marketplace.

Consider the following examples of service innovation. While Dell Inc. may have had recent challenges, over a decade ago Dell transformed the PC market business model by creating the means for customers to customize the specifications of their own PC's (while getting them to pay for it up front) and crafting a flawless supply chain and assembly process that allowed Dell to deliver the custom designed product in 5 to 10 business days. Can you more intimately involve your customers in tailoring the specifications of your product? Will they pay for it up front? Can you transform your supply chain to execute flawlessly at 21st century speed?

Amazon, Netflix and NikeTown are all examples of successful channel innovation. Who would have imagined just 10 years ago the volume of books and DVDs sold/rented over the Internet today and delivered promptly by USPS? NikeTown works for Nike because of the unique design of the stores, which expresses the essence of the Nike brand and the distinctive customer experience it provides. Can you deliver your products via a new and exciting channel? Can you provide the means for a novel in-store customer experience? How can you make your 'brand' a household name?

In theory, SMEs are more agile and nimble than large corporations. To capitalize on the potential of agility and speed, SMEs need to leverage the power of enabling technology. The good news is that it is now relatively inexpensive and fast to use the Internet and the World Wide Web for service innovation. An Ontario based, Canadian manufacturer of heavy equipment used to take weeks to respond to customer inquiries for custom designed valves. Then, they created a secure Intranet site with the designs of the most frequently requested valves and the capability for customers to make minor modifications of these designs on their own. This allowed the company to compress the cycle time for valve designs from several weeks to just a couple of days. Imagine the impact on revenues and customer satisfaction. That's service innovation.

Don't be led astray by dwelling on creating a 'culture of innovation.' Of course, the right culture is important, but the best way to create the right culture is to identify and implement a few creative ideas on serving customers better and differently. Competence drives confidence. And remember this - some of the best ideas will come from the people closest to your customers. While it's always important to involve engineering in any examination of innovation, you should make sure that representatives from customer touching departments are also involved.

Is this easy? Not by a long shot. But if you don't do it, your competitors may!

Dr. Katalin Eibel-Spanyi is an Associate Professor of Marketing at Eastern Connecticut State University [ECSU]. Previously, she taught marketing courses at Ryerson University, Toronto, Ontario, Canada and was an Associate Professor of Marketing at the Budapest University of Economics. She is a member of the American Marketing Association and a former Director of the AMA's Toronto Chapter. She can be contacted at .

Andrew Spanyi is the author of the book More for Less: The Power of Process Management and the popular business novel 'Business Process Management is a Team Sport, Play It to Win!' He is the Managing Director of Spanyi International Inc. Contact Andrew at .

Many more articles in Creativity & Innovation in The CEO Refresher Archives


Copyright 2007 by Katalin Eibel-Spanyi and Andrew Spanyi. All rights reserved.

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