Barriers to Service Innovation

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Barriers to Service Innovation - Perspectives from Research and Practice 1

Lorenz, R 1, Burger, T. 2, and Hottum, P. 3.

Technische Universität Berlin, Berlin, Germany ([email protected]) Fraunhofer Institute for Industrial Engineering (IAO), Stuttgart, Germany ([email protected]) 3 Karlsruhe Institute of Technology, Karlsruhe, Germany ([email protected])

2

Abstract This paper reviews the barriers to service innovation and builds a new framework to cluster them. It identifies new areas of interest as it compares the range of barriers from the perspective of research and practice. Therefore we collected empirical data about barriers from industry and research representatives and reflected them by the ones cited in literature. This analysis results in outlining conflicting views, lack of scientific research about barriers in service innovations and service specific barriers like service orientated thinking. Furthermore, results suggest industry dependency of barriers and underlie visible limitations. Keywords – service innovation, barriers, literature review, challenge, obstacle, service industry

I. INTRODUCTION The service sector continues to grow worldwide, not only in the developed economies [1]. As a new field in innovation, research services gained great interest from scholars during the last [2,3]. The advantage of introducing new services for companies lies e.g. in generating higher profits and sales and gaining competitive advantage in the market. Despite the overall increase in studies in the service innovation field and emergence of the service sector [4, 5], many studies focus on grasping the decisive success factors [e.g. 6,7,8]; yet, researchers did not pay much attention to understand service-specific innovation barriers. However, from the companies’ point of view it is necessary to understand failures of new service development projects in order to find the appropriate solutions how to overcome them. General barriers can therefore be transferred to specific success factors. Depending on the industry some factors may be more relevant than others. If we compare the finance industry, where information technology is decisive for the companies’ performance, the information technology plays a minor role in the education field. Coming from practice to research, both sides have conflicting views which barriers in service innovations are more relevant. The best way to analyze the difference is to compare these two sides in an objective and quantitative way by counting the number of barriers for practice and research. Therefore, this study is structured as followed. First, we review the literature of the last 17 years and identify relevant studies about barriers in service innovations. In a next step we collect service specific barriers from practitioners and company leaders through workshops.

Then we try to establish a common categorization framework for the numberless amount of barriers in order to compare the view of researchers and practitioners and identify research gaps between both sides. To complement the findings from the general barrier analysis, we propose an industry dependent view of barriers using the findings from practitioner workshops and conclude with limitations of this field and advise of new avenues for upcoming research. II. RESEARCH CONTEXT Much research about barriers has been devoted to the classical field of product innovation [e.g. 9,10,11]. The way that service firms innovate differs substantially from manufacturing firms [12]; so does their strategic orientation [13]. Research renders the view that new services have a lower novelty than new products [14], which discloses the latent innovation potential of service companies and the need to analyze the associated barriers. Mainly, financial services such as banking and insurance, as well as R&D services are reported to be innovative among services [15]. This finding calls for a separate view of services and industry dependent barrier analysis necessary. A barrier is defined as any factor influencing an innovation phase that inhibits, modifies, or delays an innovation [17]. We see the need for companies to increase awareness of innovation barriers if they want to increase innovation success. Innovators compared to non-innovators conduct more innovation activities [16] and have a steeper learning curve to overcome barriers. Barriers might depend on four moderators as literature suggests, which are company size [15,16], innovativeness [16,18], company location [16,19], and industry affiliation [14]. Among these four dependent factors we want to highlight industry dependent barriers in our later analysis. From interviews we obtained evidence that in highly regulated markets like health care, regulation barriers are more decisive for the success of service innovations than in other industries. The companies in our sample confirm that they see themselves competing in a specific industry and face industry specific barriers. III. METHODOLOGY The literature search about service innovation barriers together with the framework serves as the basis of this study. The additional information from researchers and

practitioners complements the findings and leads us to new insights about service specific and industry dependent innovation barriers A. Literature search Selection criteria for empirically articles are defined first. The aim is to identify barriers that influence the service development process within service companies. This is why we excluded studies looking at external barriers like studies about adoption or diffusion barriers in services, or studies that analyzed innovation barriers on industry or country level. In summary, studies had to meet the following criteria for inclusion: (1) Empirical quantitative studies due to greater data objectivity; (2) sample is focused on services in the service sector, or offered services that were analyzed separately apart from product innovations; (3) articles that reported a set of barriers from the introduction of a new service product for consumers; and (4) studies that did use the company or project as the level of analyses. In order to identify relevant articles about barriers in service innovation, we used a systematic two-stage approach. First, we used a top-down approach and restricted the number of journals to those with an impact factor greater than one, based on the Journal Citation Report 2008 data. We used the terms ‘service’ and ‘innovation’, ‘service development’, ‘service engineering’, ‘new service’, and ‘service design’; and screened titles, subject terms, and abstracts of 46,054 articles in 63 journals. This broad search terms led to 453 potentially relevant articles published in the time period from 1995-2012. After a detailed review of titles and abstracts regarding the relevance of the topic, and follow-up content review, three articles met all of the inclusion criteria. A second search approach was adapted due to few search results. We extended the search base to the entire EBSCO database and used not only synonyms for ‘innovation’ and ‘services’ but synonyms for the word barrier. We retrieved 591 potentially relevant articles out of 52,710 screened articles. After a detailed review of the abstracts and a final content check, we found 12 highly relevant articles. The two-stage approach had an output of 15 articles about service innovation barriers.

they already summarized and proved the existence of different categories. As an initial basis, we use the four categories developed by [21]: environment, strategy, organization, and processes. Yet, the market will be represented in a separate category and not subsumed under the environment category. This stresses the importance of customers during the service innovation process [22,23,24,25]. Cultural aspects are hierarchy in a separate cluster, as literature suggests [24,26]; this also refers to communication as an extra cluster. Further, two new categories are value networks in services [27,28,29] and resources, which among human resources play a decisive role in developing new services [30]. The nine barrier categories are outlined in Table 1 and will be discussed in detail in the next section. TABLE 1 BARRIER CATEGORIES Category

Resources

Barriers that are linked to financial, human, and technological resources within the company and related time pressure. Innovation culture Barriers that deal with rigidity and resistance, (Innov. culture) leadership, motivation, empowerment, risk perception, norms and values, and mindset within the company. Organization Barriers that hinder cross functional integration structure due to ambidextrous organizations or company (Org. structure) size. Innovation Barriers that are strongly related to (missing or Strategy inconsistent) innovation strategies, lack of a (Innov. strategy) strategic fit or the used business mode. Communication Barriers related to internal or external communication and interaction practices, routines, and values. Processes Barriers induced by formalized (innovation) processes, missing customer integration, or relating to project management and projectrelated activities. External factors Environment Market

Value network

B. Expert workshops Within a project of the German Federal Ministry of Education and Research, five workshops were conducted with internationally-known researchers, managers from leading industrial companies, and representatives of public and private institutions in order to identify barriers to service innovations [20]. In total, 71 participants took part in the five workshops and insights about 248 barriers were collected through workshop sessions. C. Clustering In order to form distinct categories, we build on the evidence of existing meta-analytical studies because

Category description

Internal factors

Barriers evoked by legal constraints, competition, or intellectual property rights issues. Barriers occurring from market demand and requirements resulting in adoption and diffusion needs. Barriers that are linked to the establishment and management of intra- and interorganizational networks.

The framework evolved from the literature review has proven its usefulness by applying it to the workshop findings. In the following the barriers from literature were coded according to the nine framework clusters that separate internal from external barriers. D. Results of literature search The results of the literature search are 15 articles about 146 barriers to service innovations [14,15,16,18,31,32,33,34,35,38,39,44,45,47,58]. Primary research of barriers in services show larger samples of investigation and quantitative methods for

analysis [e.g. 18,14,15]. Following these quantitative studies, research shifted to qualitative industry-specific research [31,32] and came back to cross-industry data and quantitative research methods later on [34,16,35]. IV. CONFLICTING AND COMPLEMENTARY FINDINGS When comparing the results between literature and workshop analysis, we found indicators to believe, that there is a misperception about the importance of some barriers between research and practice. Barriers that are discussed extensively in literature (e.g. resources) seem to have little importance in the view of practioners and the other way around (e.g. value networks). TABLE 2 COMPARISON OF BARRIER COUNTS IN LITERATURE AND EMPIRICAL DATA Category

Internal/ #counts #counts Share of Share2 of External in in #counts #counts barriers literature empirical in in data literature empirical data

Delta of empiric data – literature (Rank)

Value network Processes

External Internal

1 20

27 51

1% 14%

11% 21%

10% 7%

Communication Innov. Strategy Environment Org. structure Market Innov.culture Resources

Internal Internal External Internal External Internal Internal

4 4 18 6 12 36 45

21 18 31 7 11 43 35

3% 3% 12% 4% 8% 25% 31%

9% 7% 13% 3% 5% 18% 14%

6% 4% 1% -1% -3% -7% -17%

146

244

100%

100%

#counts total

Drawing on the quantitative results, the next nine subchapters (A. to I.) are arranged according to the range delta shown in Table 2. We will present each barrier category, including data from literature and empirical findings. This section has four goals: 1) to present the contents of each category; 2) to show findings from literature; 3) to compare these findings with empirical data and highlight industry specific barriers; and finally 4) to identify research gaps. A. Value network In services, value networks are often crucial to provide offers. The idea of co-creation between “service systems” focuses on exchange via resource integration and value co-creation. They represent networks of at least three companies between different levels of the value-added process [36]. In literature especially the barriers about finding a partner [16] and managing its hierarchies [37] were mentioned. Though, practitioners noticed problems of the network complexity and interconnectedness of partners. Workshop participants found a proper network moderation or cross-sector cooperation missing to deal with conflicting interests and goals, especially when the network is in operation, communication problems persist. Furthermore, they reported difficulties to

integrate all relevant stakeholders, in particular regional stakeholders like city governments or relevant citizen groups. Often, knowledge is not shared among partners, which limits the innovation potential of the network. There exists a risk to depend on partners, which inhibits a company to move on and exploit its innovation capability. In a given setting of network partners another challenge is the regional coverage. Service delivery is in many cases restricted to a geographical area where the service can be offered. Smaller target groups in remote areas, which demand a service, cannot be offered due to high service provision costs and resource limitations of the service provider. In literature the area of different levels of the valueadded processes between the involved partners as well as the idea of co-creation within service value networks was only rarely pursued. B. Processes The category processes includes aspects concerning the process itself, its process activities, and the underlying project management and project metrics. The process itself is described by [34] as a “continue[d] and interactive process” (p.184), where little involvement of employees forms an obstacle [38]. Furthermore, [34] claim that many service companies lack a formalized innovation process. At that, the complexity of the service development process makes it even impossible to have a formalized process [39], which contradicts the prevailing notion among scholars that the absence of a formalized process poses a barrier to innovation. Practitioners moan about the prevalence of a common development process for products and services and ask for a separation of these activities. The innovation process covers many process activities that are critical to develop new services. From the perspective of managers, issues during the front-end process with idea assessment, value capturing, and service design arise. New service ideas or improvements cannot only be evaluated by pure financial criteria like productivity or profitability gains. Companies however, report this prevailing practice and sketch difficulty to balance new service ideas and the valuation of the service. In further detail, scholars point out problems during customer interaction; which is expressed by the inability to get feedback from customers [32,15]. Evidences from companies match to this factor, which deal with problems to change the customer’s role into a codeveloper, customer co-learning, and to overtake the customer perspective during the development process. They also argue missing differentiated market analysis, which is already mentioned by [39] in terms of insufficient market research and market tests. The simulation and testing of services seems to be more challenging [40] than testing a physical product.

In accordance with workshop results, the measurement of how successful the project has been faces difficulties [33]. Yet, there exists a wide range of references on how output of service innovations is measured [e.g.41, 42]. One possibility is the measurement of the service quality [43]. On the one side this helps to measure the sustainable implementation of the new service, on the other side it challenges companies to cope with delivering a consistent service quality. Many innovation projects fail because of improper project management, which comprehends resource planning, cost control, clear responsibilities, task management, documentation, and tools. Reference [39] report shortcomings in project management like unclear lines of command, lack of information about goals, and incomplete project documentation. Also lack of coordination among groups within the company can hamper the innovation process [32]. Workshop participants added the lack of suitable methods for the service implementation as well as tools to increase process efficiency. The lack of autonomy to allocate resources is a problem faced during the implementation process, which is not sufficiently acknowledged by researchers. C. Communication Communication is a key point for service interactions. But not only is the communication between providers and consumers important for a successful provision, also the internal communication within the providing organization has influence on performance. The main concerns of researchers are internal communication problems between organizational members, which affect horizontal communication [44; 39], vertical communication [38], and knowledge access [32]. Not only the immateriality of the service causes difficulties in communication, but specific cultures and languages of different departments or functions cause communication problems [45]. During the workshops this aspect was described as not being able to grasp a service; a high abstraction level which causes problems in information exchange. Furthermore, the missing of internal marketing as a method to convey the additional value of the service for the company in order to gain support from others was suggested to be a barrier. Besides intra-organizational problems, workshop results show clear evidence of barriers, which affect external parties. Due to services immateriality, companies face problems transferring the value description to customers or other stakeholders as well. A gap between the already developed and suitable methodical approaches and the need of practitioners to apply in their daily work is obvious.

D. Innovation strategy For organizations it is very important to make aware of a corporate innovation strategy. An innovation strategy or a corporate strategy that incorporates innovation is a renowned success factor in NPD literature [46]. Reference [33] pointed out that an innovation strategy is often absent in service companies, which can be interpreted as a potential barrier to innovation in service organizations. The findings of [47] support this notion while they point out an unfocused strategy to be the major barrier. Even if a strategy exists, the gap between expectations from management and employees [44] reveals disparities in alignment of employees and management. Though, strategic aspects were seldom mentioned in literature, practitioners in the workshop quoted many shortcomings that go beyond the theoretical results. Innovation projects about new services should fit to the existing strategy and project portfolio as well as proof familiarity to the existing resources according to [48]. Especially the threat of cannibalization of the existing business model came up as a hindrance to proceed with the development of new service ideas, which seems to be a bigger problem in service companies than in manufacturing firms [49]. During the workshops this was frequently proclaimed by practitioners to be a main problem. Most quoted barriers were “which values to deliver” and “how to make customers pay in order to become profitable”. These problem areas correspond with the formulation of the value proposition and the financial streams of a business model according to [50]. The results of the workshops pointed out several gaps concerning innovation strategies: Difficulties in aligning services and products within the existing corporate strategy as well as the development of suitable business models. These aspects are disregarded in service research although some of the aspects could be found in NPD research. E. Environment The environment subsumes three major aspects: economy, legal and competition. Economic downturns impact the demand for new services. This first point was mentioned by [47] as a relevant barrier to innovation. The second aspect achieved most attention of scholars, which is about regulation [14], legislation [35], and lack of governmental support [34]. Among other things, companies complain about the bureaucracy and hesitations of the government to approve training qualifications from other countries, which would help companies to resolve their staff shortages. With the third aspect we understand barriers concerning competition, which is in the sense of the market domination of incumbents [16], the risk of

imitation [18,15], and the impossibility to protect service innovations [33]. Intellectural Property (IP) protection is not easy for services as it is for physical products and formal IP rights are not applicable to services [51]. An increasing degree of standardizations makes IP protection more necessary [35]. Reference [39] suggests companies to accelerate their development time to counteract an increased speed of imitation and the threat of new competition. In highly regulated markets, like healthcare, our workshop results suggest a lack of competition about the best quality services and missing standardizations to achieve interoperability between technologies. F. Organization structure In service organizations one can assume that flat hierarchies and organic structures are more common than in manufacturing. Hints from literature advise subsisting barriers regarding the organization structure [35]. The absence of heavy weight cross-functional teams [52,32] and the decoupling of technology with the service development team [34] are reported and divergent discussed [53] barriers. These barriers stem from the traditional NPD literature and apply correspondingly to service development. The minor involvement of technology within the development team shows the existence of a stronger market-driven innovation process in services. Input from workshop participants broadens the view on organizational barriers. They pointed out interface problems between departments and functions, challenges to build an ambidextrous organization [54], and the company size. The latter aspect aims at the small sizes of companies, which include the lack of slack resources for a formalized service development approach, which is detrimental to innovation [55]. Surprisingly, besides a focus on hierarchies, innovative aspects are rarely cited in the context of organizational structures. G. Market The customer as a central consumer of a service opens up three main barrier fields. First there are market barriers like the size of demand or market risks. On the one side, the lack of demand, uncertain demand [16], or low economies of scale [34] lead often to a failure of new services. On the other side, a lack of demand could have several reasons; for example, the target group is too small or the service does not meet customer needs. However, in the latter case the reason for a lack of demand is not a barrier in the narrower sense, but may be a proof that the service development failed in other areas. Small markets that can’t be served due to the lack of profitability may be interpreted as a barrier to offer a new service (e.g. health services for rare diseases in rural areas). In

contrary, market or technical risks [14] are present and may be reduced during the development process. Difficulties in the acceptance of a service as conservative customers are reluctant to buy new services [35] may also be an argument for an inadequate development process. But managers see more problems of acceptance that can be derived from the characteristics of a service. Especially health services lack a transparency of service and costs, which is due to the high regulation of the health market. Outsourcing services face barriers like “contractual obligations” [34], which limit the freedom of the company to adapt its offer to new customer needs. Comparing the state of the scientific knowledge concerning markets opportunities and their bearing on service innovation processes a need of further investigation on the customers experience is needed. The need of explanation of their value proposition challenges companies to market their services. H. Innovation culture As “innovation is a people-centered process” [56, p.36], innovation culture is all about people, because it focuses on fortifying behaviors and actions [57]. Besides resources, most barriers cited in literature accumulate in this category. Eminently rigidity [31] and resistance [15] were propagated to be main problems for change and innovation in service companies. Rigidity becomes visible in formal or bureaucratic structures [38,47], rules and processes [18,32,45], as well as inflexible resource allocation and routines [58]. Resistance, on the other side, is reflected by power structures of line divisions [39] and organizational conservatism [38]. Additional to the factors from literature, managers recognized barriers of rigidity concerning an inflexible IT-system and established practices. They reported obstacles of resistance like the “not-invented-here”syndrom or the “not-sold-here”-syndrom. Leadership [38] and top management support [47,33] displays another subcategory of innovation culture. Through their leadership style managers influence employees innovation behavior [59], this can be adversely detrimental to innovation projects. Top management support is an often cited success factor in new product development (NPD) literature [e.g. 24] and has unfavorable effects if it is missing. In particular, management of manufacturing companies often proclaims the importance of service development in front of their staff, but in the end not really commit to it. On the top of that, workshop participants quoted the missing support of third parties as a hindrance. Pertaining to this aspect, [60] already showed some evidence how to overcome the missing support with the help of the promoter concept. Notably in services, the upfront workers with

customer contact are important sources for service quality improvement [61] and should be endowed with rights to pursue their ideas for service improvements. Consistent evidence from research and practitioners refer to risk avoidance [44] and high perception of risk [15]. The same finding accounts for lack of motivation [34], lack of incentives [44], and lack of interest by others within the organization [32]. These factors all act as barriers, because of their counteracting function against new service development projects. Norms and values as guidance for behaviors are another base of innovation culture and impact the employee’s behavior for organizational changes [38]. The lack of innovation legacy [33] and the company and customer mindset [34] were mentioned in literature. Surprisingly, these barriers are not service specific, but account for the lack of service oriented thinking by managers and employees in companies. Representatives from manufacturing companies often report that people have a product-centric thinking, which impedes them being aware of services. Especially in environments, like information-based industries, where people are familiar with tools for cross-cultural communication, providers should allow their use. With a clear focus on people within and outside power structures an astonishing finding is that the lack of empowerment of employees was perceived by practitioners as barrier, but researches did not pick up this aspect adequately in their studies. I. Resources The resource category has four dimensions including financial resources, human resources, technological resources, and time barriers. The lack of financial and human resources gain the strongest attention of scholars compared to other categories. Despite the lower investments needed for innovating services [39], financial aspects are still the main barrier. Either the costs are too high or the innovation project lacks funding [16,32,47]. Concerns about the profitability with long pay-off periods may extinct new service ideas [15]. The literature findings on that completely match the view of practitioners. Barriers in human resources range from lack of skills or qualified personnel [32,16,15,18,14], over lack of knowledge concerning innovation processes, technical, and market information [34]; to poor human resource development not searching for talented graduates [32]. Learning abilities, skills and competences are relevant for service innovations, because they account for technical and organizational change [38]. Managers acknowledge the prevailing inability of imagination of their employees in regards to new services. Employees thought patterns in aspects of innovation are totally focused on developing new products. Technological obstacles on the contrary, are only

addressed by researchers, who aver lack of technological opportunities [15], lack of technical equipment [62] and support [35], lack of IT [15,16], or interdependence of technologies [39]. These obstacles can be crucial for the survival of a company, because in future technology becomes strategically important [15]. There exists consensus between scholars and managers about time constraints or the lack of time as a hindrance factor for new service development. Decision makers have limited time to dedicate on service innovation projects additionally to their daily work. V. CONCLUSION In this review, we summarized the body of knowledge about barriers in service innovations from 1995 to 2012. This review synthesized the results of empirical research on barriers in service innovations. Due to the manageable number of studies in this field, we were able to arrange the 146 cited barriers into a comprehensive and sophisticated framework. We categorized barriers into nine categories. Furthermore, for each barrier cluster, we outlined findings from literature and compared these with our empirical data from workshops. Therewith, we identified in the following several research gaps. A. Findings Scientific research focused mainly on cultural, resource, and process-related aspects. The white spots in research are barriers that occur in connection with the establishment and operation of high complex value networks. Furthermore, there is clear evidence that service-specific barriers are not fully addressed. This refers, for example, to the evaluation of service ideas, the cannibalization of existing business, the simulation and testing of services, the persistence of a productcentric culture, the development of new business models, and the capability to imagine the service value with its immaterial character and communicate it to others. The workshop results prove the voids in research and suggest taking new barriers into consideration. The research area of barriers in service innovations has not received much attention so far. The small number of studies and limitations in research make it necessary to conduct more quantitative studies in service research [45]. The findings of our analysis show that this situation did not change in the last 15 years, when [39] stated this shortcoming. Reference [32] called for empirical data of multiple respondent surveys that are underlined by supplemental interview data. They show the limitations of cross-industry surveys by stressing the high variety within an organization. Reference [3] shows in their literature review the deficiency of research in the field of service innovation. From the analysis it can be seen that major differences in the range of barriers exist regarding value network

and resources between researcher literature and practitioners. On one hand, researchers pay more attention to resources than do practitioners. Even if practitioners repeatedly claim they do not have sufficient resources, the original reason may be found somewhere else. From the practitioners’ point of view, processes and culture pose the greatest impediments. It is not necessarily the provision of resources, but how innovation projects are managed and how employees and management deal with new ideas. On the other hand, practitioners put more stress on the range of networks compared to findings in literature. One key network challenge according to practitioners is to find, select, and integrate potential partners and establish suitable structures and processes for improving (innovation) collaboration. The aim is to master complexity and to solve the many conflicts of interest that exist among different participants. Network barriers will be even higher if converging markets and technologies force partners from different industries and experiential backgrounds to work together. Other areas like organization and environment show nearly no differences. In general organizational aspects rarely are addressed. Cultural barriers are in the top ranks of literature and practitioners, which shows its high relevance in service innovations. As [63] suggests, service firms incorporate a dual structure, in which the empowerment of all organizational members defines a merely diffuse innovation process. B. Limitations of research A limitation of current research is the missing differentiation between reasons and problems. Problems in the project team might stem from a lack of communication, which leads to a low level of information sharing. The evidence of such a low level of information sharing may have several reasons, such as a high degree of task differentiation [38] or a consequence of intra-personal conflicts. An unclear distinction among different levels of analysis is another point of critique. When individuals report about barriers, they might see personal, project, firm, industry, or national barriers. Mostly, this problem is caused by factors like communication, culture, leadership, or knowledge. These factors stem from the social system, which is a main origin of barriers [38], and affect different levels of analysis. A reported factor includes several barriers, which makes a distinction of the importance of single factors impossible. Barriers also might be interdependent and reinforce each other [16]. Reference [31] cited ‘high costs and risks’ as one main barrier. In this case, it is not clear if the high costs or the high risks might cause the problem, or which of them aggravates the situation more. Furthermore, one problem may cause several barriers. For example, the lack of staff motivation may

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