Business Management
4 min read

Service Innovation: Embracing design thinking in business model innovation

 

This is the challenging backdrop against which companies are turning to service innovation to set themselves apart from the crowd. Even if companies are able to tame the complexities of service provision, simply developing a new product-service bundle is no longer enough. Today’s market requires services to be thoughtful and human-centered. Rethinking their business models gives companies the chance to take a step back from how things have been done so far and embrace the principles of design thinking to shape their future.

 

The challenges of service provision and service innovation

Compared with product-based businesses, those that rely more heavily upon service provision face a unique array of challenges. Without claim to exhaustiveness, these challenges can be boiled down to:

  • Intangibility

In the absence of any palpable or tactile property of service deliveries, the assessment of a service’s value is more challenging compared to product offerings. In that sense, services are evaluated on the basis of their performance rather than product characteristics. Consequently, customers must be given confidence in a service to be feel encouraged to engage in a service purchase.

  • Simultaneity

Service provision and consumption occupy the same timeframe. This means that it is impossible to split up supply and consumption, with the service provider inseparably bound to the customer at that very moment. This not only increases the onus on staff (or, as the case may be, the technological interface) to represent the company well, as well makes the customer an integral part to the service concept and delivery.

  • Perishability

Services are available during a pre-defined window of time, after which the prerequisite resources, processes and systems may no longer be available. Think rail travel: once the train has left the station, that connection is no longer an option for would-be travelers to consume. When it comes to service provision, you only get one opportunity to make a good impression.

  • Variability

Even if a customer was to request the exact same service he or she enjoyed the previous week, this week’s service would be slightly different due to unavoidable variations in peripheral factors. Against this backdrop, businesses must strive to provide excellent service at all times. They may even embrace this lack of absolute replicability by offering customized services.

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Avoiding common pitfalls

These challenges are exacerbated by the difficulty in accurately and appealingly describing services to potential customers. Special care must be taken to avoid common pitfalls, such as not properly conveying the level of complexity of a service, failing to give a comprehensive overview of what a service entails and struggling to overcome bias, both in the choice of descriptive words and understanding how these will be interpreted by the target audience.

Add to this the extra layer of attempting to usher in innovation, and new questions arise: Will service innovation harmonize with the existing operational environment or require a more fundamental rethink? Is this innovative service compatible with the marketplaces on which we currently do business? Are we willing and able to take the risks involved in pursuing service innovation?

Embracing innovation in service therefore requires a methodical, structured approach: service business model innovation.

 

Taming the beast through service business model innovation

Prof. Nicole Hinrichs, who teaches Service Innovation by Design in the EHL Graduate School, reminds us that business model innovation can be instrumental to any business, whether services have long since been in their area of expertise or they are undergoing servitization.

 

 

 

What is business model innovation and how does it work?

If we consider a business model to be “a company’s core strategy for profitably doing business”, business model innovation must go hand in hand with far-reaching change. This is the case to differing degrees. Business model innovation essentially dissects the way an organization creates, delivers and captures value and puts the pieces back together in a novel way by either altering all or some of them. This reorientation seeks to produce greater value for customers and the business alike.

To make this change in a structured, well-considered manner, Harvard Business Review recommends carefully weighing up “what your offerings will be, when decisions are made, who makes them, and why”.

Meanwhile, Boston Consulting Group advises that business model innovation can be approached from different angles depending on the circumstances and the scale of the required change:

  1. The reinventor approach, applicable in the event of uncertain growth prospects, which sees a company “reinvent its customer-value proposition and realign its operations to profitably deliver on the new superior offering”.
  2. The adaptor approach, exploring adjacent businesses or markets through experimentation and innovation in the face of fundamental disruption.
  3. The maverick approach, whereby a successful core business is scaled up, revolutionizing the industry and setting new standards. Growth here relies upon continuous evolution to maintain the competitive edge.
  4. The adventurer approach, aggressively expanding a business’s footprint into new or related territories.

Service business model innovation enhanced by design thinking

Successfully addressing intangibility, simultaneity, perishability and variability requires a nuanced approach to business model innovation enriched with service design thinking. With this in mind, any changes should be firmly rooted in customer needs, always thinking of the user and focusing on the end experience. Service business model innovation should take a human-centric approach down to the very last detail.

As part of this holistic undertaking, during the front-end planning stage, carefully consider whether your ideas are compatible with your company’s strategic mission and vision. Take stock of any existing services and reflect on the market segment they occupy. Be very clear on what you want to achieve, how long this is likely to take and what implications it might have on both your bottom line and brand continuity. Take care to assess feasibility and costs.

Do not shy away from expanding your team with the right talent to ensure design thinking is embraced during your business model innovation efforts. You might be able to “expand [your] innovation ecosystem by looking for opportunities to co-create with customers and consumers [or] exploit Web 2.0 networks to enlarge the effective scale of your innovation team” (see Design Thinking by Tim Brown, featured in HBR’s 10 Must Reads on Design Thinking). In the same vein, do not forget to take a closer look at what your competitors are up to and how their efforts are resonating with consumers.

Continue to apply the principles of service design thinking during the implementation stage, testing the waters as regards consumer acceptance. Cut through the complexity with “integrative thinking”, using a “service blueprint” to help ensure all your staff are on the same page and identify any weak links in the emerging ecosystem. A pilot study can help smooth out any initial bumps in delivery.

Beware of resting on your laurels. Once commercialization is complete, give the post-introduction evaluation stage your full attention and make any amendments required to service delivery, staffing or marketing based on the market response.

 

Business model innovation examples

What does business model innovation look like in practice? Take Rolls Royce, for example: The British aircraft turbine manufacturer transitioned from selling engines to selling thrust hours to the airlines, building on the faith its customers already had in its engines (to overcome any reluctance linked to intangibility). This enabled the company to retain ownership of the engines (perishability) and offer maintenance and repair, extending the timeframe during which it was being of service to its customers (simultaneity).

As for variability, this can be overcome to a significant degree by turning one-off purchases into subscriptions, changing the way customers are granted access to largely unchanged products: Software as a Service (SaaS) and Infrastructure as a Service (IaaS), for instance. Another way to tackle variability is to provide customers with reassurance in the form of ratings information, as is done by platforms of the likes of Airbnb and Uber. These few examples are but the tip of the iceberg. Combine business model innovation with design thinking and discover the hidden depths of potential.

Written by

Associate Professor of Entrepreneurship and Strategic Management at EHL

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“No matter what sector you are in, no matter what kind of company you have, services are more and more important, but they are messy”.

Prof. Christopher Tucci - Digital Strategy and Innovation, Imperial College London

More on this topic: How a Design Thinking Course Can Develop Your Leadership Skills

“A business model innovation approach can not only help veteran service providers to augment or improve their service, but it also allows somebody coming from the product side to learn how to develop a product-service bundle or even move into a fully-fledged service offering.”

Dr Nicole Hinrichs - Associate Professor of Entrepreneurship and Strategic Management at EHL

More on this topic: What is servitization - from product to people-centricity