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International Journal of Innovation and Technology ManagementVol. 7, No. 2 (2010) 109–127c© World Scientific Publishing CompanyDOI: 10.1142/S0219877010001866

INNOVATION: IMPLICATIONS FOR GOODSAND SERVICES

VINCENT K. OMACHONU∗

Department of Industrial EngineeringUniversity of Miami, Coral Gables

Florida 33124 [email protected]

NORMAN G. EINSPRUCH

Department of Electrical and Computer EngineeringUniversity of Miami, Coral Gables

Florida 33124 [email protected]

Received 13 November 2008Revised 6 April 2009

Accepted 13 June 2009

The concepts of goods and services innovation have been discussed extensively in the aca-demic literature. The research has been both selective (dealing with specific attributessuch as R&D, process innovation, measurement of innovation, and use of informationtechnology) and specific (dealing with specific industries such as banking, insurance,biotechnology, nanotechnology). This paper examines the concept of innovation in thecontext of “goods” and “services.” The comparisons made between the two sectors

are based on three distinct areas — definition, process, measurement. This paper alsopresents a conceptual framework showing the interactions among the various variablesinherent in some of the distinct areas. Previous papers have highlighted the differences ininnovation between goods and services. What is missing is how the intervening variablesinvoked in the discussions are themselves related to one another. While this paper rein-forces the conclusions reached by other studies with regard to innovation, it specificallyhighlights on an aggregate scale, the areas in which goods and services differ. Futureresearch should take these distinctions into account, not as single items but collectively.It is critical to consider how these innovation variables interact with one another in thecontext of goods and services. Perhaps the most significant contribution of this paperis in its presentation of the framework for understanding the innovation process as itrelates to the goods and services sectors.

Keywords: Innovation; goods sector; services sector.

1. Introduction

Innovation continues to be a driving force in the success of most organizations. It isconsidered to be a critical component of business productivity and competitive sur-vival [Zaltman et al. (1973)]. Technological innovations present vast opportunities

∗Corresponding author.

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http://dx.doi.org/10.1142/S0219877010001866

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110 V. K. Omachonu & N. G. Einspruch

for (1) product innovation — the introduction of new types of goods and servicesfor the external market and (2) process innovation — enhancement of internal pro-duction processes for goods and services [Perri 6 (1993)]. Product innovations areessential to the life of any organization since they provide the most obvious meansfor generating incremental revenues [Johne (1999)]. Similarly, process innovationis concerned with improving internal capabilities [Johne and Davies (2000); Johne(1999)] and safeguarding and improving quality [Johne (1999)].

Tien and Berg [2003] have used a Bureau of Labor Statistics partitioning tocharacterize the Services Sector as including Wholesale and Retail, Business andProfessional, Education, Government, Finance, among others; the Goods Sectorincludes Manufacturing, Construction, Agriculture and Extraction. It is importantto note that the Services Sector comprises approximately eighty percent of domesticemployment in the US, and the Goods Sector represents the remaining twentypercent, with Manufacturing being the largest component of the Goods Sector atapproximately thirteen percent of the total domestic employment. The growingshift to service as an economic driver is both significant and dramatic. The 2007report by the International Labor Organization indicates that, for the first timein human history, worldwide service jobs (42%) outnumbered jobs in agriculture(36.1%) and manufacturing (21.9%). While developed economies are dominated bythe Services Sector, developing countries are also starting to assess their role in theservice economy.

In 2005, industryweek.com did a study about the effects of innovation on a com-pany and they found that, “overall revenue growth (78%), customer satisfaction(76%), growth in revenue from new products or services (74%), increased produc-tivity (71%), and earnings/profit margins (68%)” were a result of the impact ofinnovation efforts. [Jusko (2008)].

This paper examines the subject of innovation in the context of goods andservices. The comparison is based on three key areas — definition, process andmeasurement.

Before addressing how innovation affects goods and services, it is important tounderstand the meaning of the terms services and innovation. Services are deeds,processes, and performances, [Zeithaml and Bitner (1996)]. “A service consists ofan activity or series of activities of an intangible nature that may take place ininteractions between customer and service employees and/or physical resources orgoods and/or systems of the service provider, and aimed at solving customers’ prob-lems [Gronroos (1990)]. There is a strong consensus among researchers [Quinn et al.(1987), Fitzsimmons and Fitzsimmons (2008)] that the Services Sector includes alleconomic activities whose output is not a physical product or construction, is gener-ally consumed at the time it is produced, and provides added value in forms (such asconvenience, amusement, timeliness, comfort, or health) that are essentially intangi-ble concerns of its first purchaser. According to Lovelock and Wright [2007], servicesare economic activities offered by one party to another, most commonly employingtime-based performances to bring about desired results in recipients themselves orin objects or other assets for which purchasers have responsibility. In exchange fortheir money, time, and effort, service customers expect to obtain value from access

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Fig. 1. The innovation management process.

to goods, labor, professional skills, facilities, networks, and systems; but they donot normally take ownership of any of the physical elements involved. A service is atime-perishable, intangible experience performed for a customer acting in the roleof co-producer. [Fitzsimmons and Fitzsimmons (2008)].

This paper begins with an attempt to clarify the meaning of innovation; thendiscusses the process of innovation as it relates to goods and services (while explain-ing the role of R&D); and ends with a discussion on how to measure innovation. Themanagement of innovation in goods and services must address all three elementsdescribed in the Fig. 1 as the innovation management process.

In order to understand the management of innovation for Goods and Services, itis vital to first describe how researchers have defined innovation, then, explain howthe process of innovation is carried out, and lastly, discuss the evidence researcherswould accept for the claim of innovation. Figure 1 illustrates the connection amongall three components.

2. Definitions of Innovation

The Advisory Committee on Measuring Innovation in the 21st Century Economydefines innovation as “the design, invention, development and/or implementation ofnew or altered products, services, processes, systems, organizational structures, orbusiness models for the purpose of creating new value for customers and financialreturns for the firm.”

West and Farr [1990] define organizational innovation as the intentional intro-duction and application (within a group or organization) of ideas, processes, prod-ucts or procedures, new to the relevant unit of adoption, designed to significantlybenefit the individual, the group, organization or wider society. There have beenseveral attempts to classify innovation into categories.

Innovation is the implementation of a new or significantly improved prod-uct (good or service), or process, a new marketing method, or a new organiza-tional method in business practices, workplace organization or external relations(UNESCO Institute for Statistics). UNESCO makes the distinction among the fourtypes of innovation as follows:

Product innovation: introduction of a good or service that is new or signifi-cantly improved with respect to its characteristics or intended uses. This includessignificant improvements in technical specifications, components and materials,incorporated software, user friendliness or other functional characteristics.

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Process innovation: implementation of a new or significantly improved produc-tion or delivery method. This includes significant changes in techniques, equip-ment and/or software.Marketing innovation: implementation of a new marketing method involvingsignificant changes in product design or packaging, product placement, productpromotion or pricing.Organizational innovation: implementation of a new organizational methodin the firm’s business practices, workplace organization or external relations.

An innovation may be generated by scientific research resulting in new technol-ogy, by individual entrepreneurship, or by a strategic decision and further devel-opment of the innovation throughout the entire company [Sundbo (1997)]. Thesethree causal patterns have been the basis for the development of three fundamen-tally different theories of innovation in manufacturing [Sundbo (1992a,b, 1995)].

In 1993 an investigation of innovation in services firms was undertaken in Franceas part of a project for the Ministry of Education and Research [Gadrey et al.(1993)]. It included the banking, insurance, electronic information services and man-agement consultancy industries and concluded that innovation was taking place inall of them. [Naslund (1986)] has compared financial innovations with those inmanufacturing. He found that banks innovate, but under different conditions thanmanufacturing firms. Bank innovations are much easier to imitate by competitorsthan those in manufacturing because they are relatively simple to replicate. Man-ufacturing innovations often have a complex technological construct that is ratherdifficult to imitate. This fact has been suggested as a reason for the low number ofinnovations in banks [Naslund (1986)]. A bank that innovates will not receive muchof the profit from the process because competitors quickly imitate the new product.As Naslund points out, a patent system such as that in manufacturing has no trueequivalent in services.

According to the Cambridge Symposium Report [IfM and IBM (2008)], ser-vices innovation is a combination of technology innovation, business model innova-tion, social-organizational innovation and demand innovation with the objective toimprove existing services systems (incremental innovation), create new value propo-sitions (offerings) or create new services systems (radical innovation). Often radicalservices innovation will create a large population of new customers (public educa-tion — students; patent system — inventors; money markets — small investors).Services innovation can also result from novel combinations of existing service ele-ments. Examples of services innovation include: on-line tax returns, e-commerce,helpdesk outsourcing, music download, loyalty programs, home medical test kits,mobile phones, money market funds, ATMs and ticket kiosks, bar code, credit cards,binding arbitration, franchise chains, installment payment plans, leasing, patent sys-tem, public education and compound interest saving accounts.

There are more dimensions to services innovation than there are to productinnovation. Services innovation can be a new service concept, it can be a new wayto interact with customers, a new way of service delivery or a technology innovationsupporting any one of the three (concept, interaction or delivery).

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Sometimes, the act of doing things a whole lot differently and better representsservices innovation. The following examples from Beckwith, [1997] illustrate thepoint:

• McDonald’s decided to take a radical, incredibly process-driven approach to deliv-ering good quality at great speed for a remarkably low price.

• FedEx did more than refine mail delivery when it invented a radical and logis-tically brilliant and well-executed method for delivering packages over great dis-tances at enormous speeds.

• Citibank did more than revolutionize American banking when it pioneered theuse of automated teller machines; became the first bank to aggressively marketcredit cards; became the first company to utilize fully electronic funds transferand the first to introduce floating rate notes; and perhaps most significantly,essentially invented negotiable certificates of deposit.

• And H&R Block, Charles Schwab, money market mutual funds, overnight com-puter delivery, Hyatt Legal Services, and dozens of other incredibly successfulservices did not simply improve incrementally on existing ideas. They made rad-ical departures.

3. The Process of Innovation

There are at least three stages to the maturing of a services industry. First, itcreates a service that the market needs. Then it improves the service to meet whatthe market wants and demands. [Beckwith (1997)]. According to Beckwith, this isusually the stage where most services companies assume they have reached the goal.But some rare companies move beyond stage two, they innovate and devise servicesthat would never even occur to a customer to ask for. They create “the possibleservice.” This kind of service can not be created by asking the question “what domy customers want?” but rather “what would they love?” This underscores the ideathat services innovation is not always driven by customer input. Figure 2 representsa conceptual framework for the services innovation process.

Much has been written about innovation in the manufacturing sector. The inno-vation process in the Goods Sector typically involves the use of prototypes derivedfrom R&D. There are essentially no detailed studies dealing with the use of pro-totyping models in connection with service development [Bullinger et al. (2003)].Many services providers are however hindered by the fact that their present corpo-rate structures and processes are not designed to enable services to be efficientlydeveloped and launched. Difficulties are frequently encountered because the newservices created by firms are not clearly defined and lack an adequate descriptionof the services, processes and necessary resources. As a result, efficient and success-ful implementation of these new services is considerably impeded by an absence oftransparency as well as by interface and quality problems [Edvardsson et al. (1995);Fahnrich et al. (1999), Meiren (1999), and Bullinger et al. (2003)].

Figure 2 represents an attempt to document the process of innovation in the Ser-vices Sector. The catalyst for innovation in the Services Sector can come from a num-ber of sources including feedback from the field Sales Representatives, intelligence

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Fig. 2. A conceptual framework for services innovation process.

gathered from competitors, and feedback from customers. Although there are typ-ically no formal research and development departments, the “R&D” activities areinformed by knowledge of the social sciences and humanities. These disciplines arenecessary in order to understand consumer behavior, expectations, perceptions,needs, and wants. The process typically begins (as shown in Fig. 2) when a ser-vice organization convenes a team of process owners or a task force to study itsservices, and to find ways of improving the customers’ experience. The first stageof the process is aimed at creating a service that the market needs. The secondstage involves taking it to the next level by improving the service to meet whatthe market wants and demands. The third stage is the highest and most challeng-ing, and has a potential for producing the greatest impact. This stage involves thecreation of services that would never even occur to a customer to ask for. Technol-ogy is often an indispensible force in helping an organization achieve this level ofinnovation. Technology can be “new” or “existing” and Services can also be “new”and “existing.” Quadrant 1 (Fig. 2) represents the use of a new technology to anew service; Quadrant 2 represents the application of a new technology to an exist-ing service; quadrant 3 represents the use of an existing technology to an existingservice; and quadrant 4 involves the use of an existing technology to a new service.

Figure 3 shows the process of innovation as it relates to the Goods Sector.The R&D process is driven by the knowledge derived from the physical sciences,life sciences, and engineering. The distinction between research and developmentare well delineated in the Goods Sector. Research is knowledge creation, whiledevelopment involves the conversion of knowledge into production. Research consistsof basic research and applied research, both of which are guided by generalizedgoals and the needs of industry. Development involves the designing and buildingof prototypes. Engineering makes it possible to convert prototypes into products.

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Fig. 3.

Fig. 4. Research and development classification for goods and services sectors.

Figure 4 shows the connection between the various academic specialties and theareas of R&D typically adopted in the Goods and Services Sectors.

4. Innovator/Disruptor

While innovation has been a constant in the Services Sector, it has not receivedthe appropriate attention for the extent to which it is pursued by businesses. Ina recent study by Berg and Einspruch [2008], they analyzed ten companies iden-tified as disruptors, i.e. companies that have the potential to generate innovativediscontinuities in their respective fields of business, and fifty companies identifiedas innovators, i.e. companies that convert creativity and invention into commercialsuccess, to ascertain their relative presence in the Goods and Services Sectors of theeconomy. It was found that seven of the ten disruptor companies and twenty-five ofthe innovator companies were in services.

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5. Research and Development

Research and development (R&D) is a process used to create new or improvedtechnology that can provide a competitive advantage at the business, industry ornational level. While the rewards can be very high, the process of technologicalinnovation (of which R&D is the first phase) is complex and risky [Research andDevelopment (2002)]. The majority of R&D projects fail to provide the expectedfinancial results, and the successful projects (25 to 50 percent) must also pay for theprojects that are unsuccessful or are terminated early by management. In addition,the originator of R&D cannot appropriate all the benefits of its innovations and mustshare them with customers, the public, and even competitors. For these reasons,a company’s R&D efforts must be carefully organized, controlled, evaluated, andmanaged.

The primary purpose of academic and institutional R&D is to obtain new knowl-edge, which may or may not be applied to practical uses. In contrast, the objectiveof industrial R&D is to obtain new knowledge, applicable to the company’s businessneeds, that eventually will result in new or improved products, processes, systemsor services that can increase the company’s sales and profits [Research and Devel-opment (2002)].

The National Science Foundation (NSF) defines three types of R&D: basicresearch, applied research, and development. Basic research has as its objectivesa fuller knowledge or understanding of the subject under study, rather than a prac-tical application thereof. As applied to the industrial sector, basic research is definedas research that advances scientific knowledge but does not have specific commercialobjectives, although such investigation may be in the fields of present or potentialinterest to the company [Research and Development, Small Business Administration(2002)].

Applied research is directed towards gaining knowledge or understanding nec-essary for determining the means by which a recognized and specific need may bemet. In industry, applied research includes investigations directed to the discoveryof new knowledge having specific commercial objectives with respect to products,processes, or services. Development is the systematic utilization of the knowledgeor understanding gained from research toward the production of useful materials,devices, systems or methods, including design and development of prototypes andprocesses [R&D (2002)].

At this point, it is important to draw a distinction between development andengineering, which can be defined as utilization of state-of-the-art knowledge for thedesign and production of marketable goods and services. In other words, researchcreates knowledge and development designs and builds prototypes and proves theirfeasibility. Engineering then converts these prototypes into products or services thatcan be offered to the marketplace or into processes that can be used to produce com-mercial products and services [R&D (2002)]. According to the Accreditation Boardfor Engineering and Technology (ABET), engineering is “The profession in whicha knowledge of the mathematical and natural sciences gained by study, experience,and practice is applied with judgment to develop ways to utilize, economically, thematerials and forces of nature for the benefit of mankind” [ABET Inc. (1998–2008)].

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In industry, there are two closely related processes by which new products andnew forms of old products are created through technological innovation — two typesof research, basic and applied. Basic research is directed toward a generalized goal(e.g. genetic research in a pharmaceutical laboratory). Applied research directs theresults of basic research toward the needs of a specific industry and results in thedevelopment of new or modified products or processes. In addition to carrying outbasic and applied research and developing models, R&D staff may evaluate theefficiency and cost of the product [Britannica Concise Encyclopedia (2006)].

There is a fundamental distinction between R&D in the physical, engineer-ing, and life sciences and R&D in the social sciences and humanities. Importantareas of research and development in the physical, engineering, and life sciencesfields include biotechnology; nanotechnology; pharmaceutical; chemical and materi-als science; electronics; aerospace; and automotive. Important fields of research anddevelopment in the social sciences and humanities include economics, sociology,anthropology, and psychology [Bureau of Labor and Statistics (2008)].

6. Cognitive Science

Cognitive science may be broadly defined as the multidisciplinary study of mind andbehavior [Lugar (1994)]. It draws on multiple empirical disciplines, including psy-chology, psychiatry, philosophy, neuroscience, linguistics, anthropology, computerscience, sociology and biology. Perception is the ability to take in information viathe senses and process it in some way. Vision and hearing are two dominant sensesthat allow us to perceive the environment.

Miles [2008] notes that in a typical manufacturing-based model, innovation islargely organized and led by formal research and development (R&D) departmentsand production engineering; whereas, services innovation is commonly organizedusing the principles of project management and carried out informally across theorganization.

The R&D-like activities that they identified were typically performed by adhoc groups rather than by permanent departments. They were not recorded orreported as “R&D.” Sundbo (1993, 1998) found neither in-house research nor R&Ddepartments in the Danish firms that he studied; his literature review found onlyone study that described a formal R&D process in services. Gadrey et al. [1995],who also found very little by way of discussion of services and R&D, concludedthat the concept of R&D has evolved in “une histoire sans services.” But thereis now overwhelming evidence of services activity in R&D. Microsoft spent morethan US$6.5 billion on R&D in 2006 for example, making it fifth among the world’sbiggest R&D spenders (it was not even among the top 150 in 1992) [Department ofTrade and Industry (DTI), (2006)].

An important contribution to the discussion of services R&D was made by Djellalet al. [2003]. They review the Frascati 2002 Manual definition of R&D, and critiqueits applicability to much of the innovation activities of services on the ground thatthese activities involve different types of knowledge and transformative process thanthose involved in main innovation activities of manufacturing firms. Djellal et al.suggest a broader definition of R&D that would encompass both manufacturing

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and services, and more explicitly acknowledge research in the social sciences andhumanities (again both basic and applied) on the grounds that this research occupiesan essential place in services.

Furthermore, the Frascati Manual goes to considerable length in discussing issuesof services R&D, with detailed discussions of R&D in software development and inservices activities and industries, arguing that “The tools developed for identifyingR&D in traditional fields and industries are not always easy to apply to these newareas”. One of the cited reasons for this is the complex mixture of technology-relatedand more social science-related R&D in many services innovation projects. Anotherpoint is that in services companies, R&D is not always organized as formally as inmanufacturing companies (i.e. with a dedicated R&D department, researchers orresearch engineers identified as such in the establishment’s personnel list, etc.). Theconcept of R&D in services is still less specific and sometimes goes unrecognizedby the enterprises involved. The Manual goes on to give examples of services R&Dand to suggest criteria for identifying its presence. Djellal et al. [2003] similarlyconsidered some cases of service innovation and R&D-like activities, but this ledthem to suggest a revised and extended definition of R&D: Research, design andexperimental development (RD&D) comprise creative work undertaken on a sys-tematic basis in order to increase the stock of knowledge, including knowledge ofman, culture and society (particularly knowledge of the behavior of economic agentsand that of productive organizations), and the use of this stock of this knowledge todevise new applications (whether they involve goods, services, processes, methodsor organizations). Services innovation is organized in a variety of ways, then. Majordevelopments are typically organized by means of a temporary project develop-ment group, or by some looser form of networking across parts of the organization.Less substantial changes in practice often emerge through on-the-job innovation orthrough the channeling of novel ideas and technologies via professional networks.There are rarely specialized staff undertaking R&D-type activities — these activitiesare a function of professionals whose occupational title has nothing to do with R&D.Sometimes these staff are attached to a development project; often they engage inthe R&D-type activities on a part-time and possibly sporadic basis. Those respon-sible for reporting (for annual reports, tax returns, or R&D surveys) may have littlecontact with these R&D-like processes.

The links between services and sources of knowledge were explored in a recentstudy [IOIR (2003)], which used Community Innovation Services (CIS) data andcase study research to depict, for the United States at least, weak links between theServices Sector (R&D services were a marked exception) and Universities, whereinnovation is concerned. Services tend to make more use of consultants — whichcould be seen as providing more industrially “tuned” and practically applicableknowledge of immediate relevance, of course. But the relative lack of innovation-related contact with Universities, as compared with that for manufacturing, suggeststhat these sources of knowledge are less well “tuned” to the innovation requirementsof services. Other work, e.g. [Miles (1999)] indicates that most services seem to bepoorly linked to innovation systems, although some knowledge-intensive businessservices (KIBS) are active nodes in these systems. The more typical services firms,

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however, have little idea of where to go to access relevant social science or engineer-ing knowledge — they often resort to consultancies as necessary intermediaries.

7. Accidental Innovations and Random Genius

While the process of innovation is deliberate and systematic in most cases, there areseveral instances in which innovation was both accidental and the product of randomgenius. An example is Viagra (sildenafil citrate) which was initially developed asa treatment for angina. Despite the huge sums of money invested in R&D, thedrug did little to alleviate the symptoms of coronary heart disease. The pill didhowever, have one small, but noticeable side effect: some men in the study reportedhaving long lasting erections while taking the drug. (Nico Carbellano, Publishingand Multimedia).

Another example of accidental innovation is the Automatic Teller Machine(ATM): John Shepherd-Barron, a former executive with British printing firm DeLa Rue, is credited with being the father of the automated teller machine or ATM.He hit upon the idea of a chocolate bar dispenser, but replacing chocolate withcash (Justin Rohrlich, Publishing and Multimedia). Post-It Notes: “In 1968, a 3Mchemist discovered a glue that was strong enough to bind to a surface, but weakenough to be removed and reused many times. It was, essentially, faulty glue (CoryBortnicker, Publishing and Multimedia). Superglue: “A Kodak scientist namedHarry Coover came up with the formulation during World War II while searchingfor a way to make plastic gun-sight lenses. Coover rejected it out of hand becauseit was deemed to be ‘too sticky.’ (Nico Carbellano, Publishing and Multimedia).Microwave: “In 1946, an engineer with the Raytheon Corp., was testing vacuumtubes for a research project. After stopping in front of a radar set, he noticed thata chocolate bar in his pocket had melted, thus giving birth to the microwave oven.The first commercial microwave weighed 670 pounds, was almost 6 feet tall, andcost about $20,000 in today’s value (Justin Rohrlich, Publishing and Multimedia).

8. Measurement of Innovation

There is a general consensus regarding the lack of a definitive measure for innova-tion. Some researchers suggest that the measures of innovation vary by companyand by industry. The most common metrics are patent creation and R&D spending.The specific problems arising from the assessment of innovation activities in the ser-vice sector should not be underestimated [Voss et al. (1992)]. Classical measurementconcepts used for the manufacturing sector provide little informative value. It has tobe noted that the differentiation of innovation activities and other processes (e.g.,organizational learning) is — due to many incremental innovations — often notunequivocally possible [Preissl (1998, p. 525); Preissl (1997, p. 15)]. The Germaninnovation survey of Services Sector companies underlines the insufficient qualitiesof traditional input, throughput and output concepts as indicators; therefore, othermeasurement mechanisms and indicators are needed.

A rather new empirical approach is possible — via the statistics of trademarks(brands). This includes dealer’s brands, trademarks and service marks. Past trends

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have shown that brands are registered just shortly before the launch of the productor service on the market while patents occur at a later phase in the innovationprocess. Additionally, it is often the case that products and services related tobrands are launched with no significant selection process. This is in sharp contrastto patents. In a survey on patents in the Services Sector, trademarks were rankedhighest in the importance of various protection instruments [Blind et al. (2003,p. 17)]. On the other hand, even services containing no or only low levels of inno-vation can be brand protected. This limits the trademarks statistics value as aninnovation indicator [Blind et al. (2003, p. 17)].

From these data, the use of trademark statistics may be helpful in investi-gating innovation in services, but are often not directly linked to an innovation[Blind et al. (2003); Djellal and Gallouj (2001)]. The Business Week InnovationIndex (businessweek.com/innovate/global index/) tracks 25 corporations known fortheir forward-thinking products, processes, consumer experience, or business mod-els. The companies with innovative business models tend to have the highest averagestock returns and highest average revenue growth of all the companies in the index[Jana (2008)].

9. Patents

According to the literature, patent protection and the theoretical concept of patentcompetition in the Services Sector are only of minor importance. In almost everyempirical study on services innovation, the protection of innovation activities isseen to be extremely difficult while the majority of innovations in the manufacturingsector are protected by some kind of intellectual property rights, [Blind et al. (2003);Djellal et al. (2003); Andersen and Howells (2000)].

Most researchers agree that the process of measuring innovation is both challeng-ing and tricky. According to John Seely Brown, co-chairman of the Deloitte Centerfor Edge Innovation, former chief scientist of Xerox Corporation and director of itsPalo Alto Research Center (P.A.R.C.), there are three different kinds of innovation,each with its own metrics. Incremental innovation, Architectural innovations andDisruptive innovations.

Incremental innovation is the mainstay of consumer electronics and many otherconsumer goods. It can be easily measured by looking at how much revenue eachyear is produced by new products versus legacy products.Architectural innovations are often deeper and more surprising than the incre-mental kind since they involve a restructuring of the very building blocks of aproduct family, industry, or infrastructure.Disruptive innovations are perhaps the most interesting, at least from a societalpoint of view. Many students of innovation question if something can even becalled a real innovation if it doesn’t end up altering social practices. Consider, forexample, how the cell phone, digital camera or the personal computer, as prod-ucts — or the world wide web, as a service — have slowly but surely transformedhow we live, work, learn, and socialize. These innovations cause people to see andinteract with the world differently. Metrics for such innovations are tricky, since

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social practices evolve slowly and are continuously present. Consequently, theybecome the frame of reference for society.

According to Ashish Arora, professor of economics and public policy at the HeinzSchool, Carnegie Mellon University, innovation can be measured by the additionalprofit it generates and expressed as a return on the investments made for that pur-pose. At the level of the industry or even economy as a whole, economists use theconcept of “total factor productivity,” which captures a similar idea. The profitsfrom an innovation can be a long time coming and depend upon many factors —some outside the innovator’s control. An innovation may be ahead of its time (asCharles Babbage’s mechanical computer perhaps was), may require extensive devel-opment, or may require extensive investments in infrastructure (as any clean fuel,such as hydrogen, certainly will). The government statistical agencies in Europeand the Community Innovation Surveys (C.I.S.) measure innovation in terms of thenumber of new products and services introduced, or the share of revenues linked tothese new products and services. Such measures carry with them certain challenges.In some cases, the product may be new only to the firm; another firm may havealready introduced it. This may be an innovation for the firm, but not for the mar-ket. In other cases, the product may have already been developed by another firm,perhaps in another country. Patents are another widely used measure. Typically,patents were thought to apply mainly to technical inventions, and in most of theworld, they still do. However, in the United States, one can even patent innova-tions relating to new ways of doing businesses, as Amazon’s infamous “one-click”payment patent.

Other measures of innovation include the following:

10. Number of Patents

The use of patents to measure innovation has been written about extensively. Onereason for the use of patents lies in the fact that patents are one of the few tangiblemeasures of output from an R&D process. One of the principal drawbacks of theuse of patents is the suggestion that more new patents are better than fewer newpatents. This notion creates an environment in which some researchers may beseduced into filing multiple patents on trivial components — an act that couldpotentially yield zero business value but could serve to boost the patent numbers.

11. R&D Returns

R&D resources have questionable returns according to some studies. A significantpercent of R&D dollars are wasted and are aimed at delivering patents instead ofdeveloping high-impact solutions that add value to customers and deliver positivefinancial returns.

12. Percentage of Revenue from Products Less Than3 to 5 Years Old

This is one of the most commonly used measures of innovation for public companies.It is also highly dangerous, creating systematic distortions in behavior that can

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destroy business value and any semblance of an innovation culture. It is supposedto work by calculating the revenue generated from recently introduced product lines,and measuring that revenue as a percentage of overall revenue. It is intended as aform of freshness indicator for the business, and has the benefit in that it measuresrealized outputs rather than expected benefit. One of the challenges posed by thismeasure is in the ambiguity inherent in the definition of “innovative revenue.”

In the table that follows (Table 1), a summary of the key points of innovationas they relate to goods and services is presented.

Table 1. The variables affecting goods and services innovation.

Attributes Goods Services

Process ofInnovation

Typically concentrated within theResearch and Developmentdepartment of a company.

Miles (2008) notes that, in a typicalmanufacturing-based model,innovation is largely organized andled by formal research anddevelopment (R&D) departmentsand production engineering.

Generally the result of an informalcollective effort of management, sales,IT specialists and other staff within acompany to respond to new marketneeds. It is diffused throughout acompany [Ganz, in Advances inService Innovations edited by Spathand Fahnrich (2007).]

Service innovation is commonlyorganized using the principles ofproject management and carried outas part of the work process, [Miles(2008).]Other techniques used include QualityFunction Deployment (QFD), FailureMode and Effect Analysis (FMEA),Structured Analysis and DesignTechnique (SADT), ServiceBlueprinting [Shostack (1984)] andother process modeling methods. Itshould be noted that these techniques

are not limited to the Services Sector.

Dimensions ofInnovation

Typically has fewer dimensionssuch as a new product ortechnology.

There are more dimensions to serviceinnovation than there are to productinnovation. Service innovation can be

a new service concept, it can be a newway to interact with customers, a newway of service delivery or a technologyinnovation supporting either one ofthe three (concept, interaction ordelivery).

Examples ofInnovativeCompanies

Apple, 3M, Toyota, Samsung,Sony, Dell, BMW, Intel, Nike,Motorola, Cisco, Honda, Renault,Sony Ericsson, Tesco, Danone,Siemens, ExxonMobil, etc.[BusinessWeek, April 24, 2006,Berg and Einspruch, 2008)].

Google, Microsoft, General Electric,Starbucks, IBM, Virgin, IDEO, eBay,IKEA, Wal-Mart, Amazon, Target,Southwest, Infosys, Whole Foods,JetBlue, FedEx, etc. [(BusinessWeek,April 24, 2006, Berg and Einspruch,2008)].

Use of InformationTechnology inInnovation

Widely used in Goods Sectorinnovation, but not indispensable.

Indispensable in Services Sectorinnovation

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Table 1. (Continued).

Attributes Goods Services

Measurement ofInnovation

• Patents

• Intellectual property rights

• Total shareholder return

• Percentage of revenue fromproducts less than 3 to 5 yearsold

• The contribution to a company’sshare price.

It should be noted that thesemeasures are not limited to theGoods Sector.

• Copyrights

• Trademarks

• Servicemarks

Research andDevelopment(R&D)

• Heavily relies on the physicalsciences

• Performed by permanentdepartments

• Widely used in manufacturing

• Heavily relies on the cognitivesciences

• Performed by ad hoc groups

• Limited, but growing use in services(e.g., Microsoft)

The InnovationProcess

Product innovations are notrapidly implemented and copied.

Service innovations are rapidlyimplemented and copied.

Use of Prototype Heavy in the Goods Sector There are practically no detailedstudies dealing with the use ofprototyping models in connection withservices development [(Bullinger et al.,2003)].

Protection ofInnovation

The majority of innovations in themanufacturing sector are protectedby some kind of intellectualproperty rights, [(Blind et al.,2003; Djellal et al., 2003; Andersenand Howells, 2000)].

In almost every empirical study onservices innovation, the protection ofinnovation activities is seen to beextremely difficult while the majorityof innovations in the manufacturingsector are protected by some kind ofintellectual property rights, [Blindet al. (2003); Djellal et al. (2003);Andersen and Howells (2000)].

[Berg and Einspruch (2008)] discussthe point that many servicescompanies rely (on a non-exclusivebasis) upon the patents generated bytheir (goods) suppliers and do notseek patent protection for their owninnovations. They also discuss thepoint that services companies buildother barriers to entry, e.g., branding.

13. Discussion

There is an abundance of literature dealing with the distinctions between goods andservices innovation. Most of them examined one or two of the components discussedin this paper. The principal objective of this paper is to capture these distinctionsin a manner that allows for comparison and future analysis. Without a uniform

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understanding of the key characteristics of the Services Sector, it is very difficultto draw inferences about the achievement of innovation within the sector. Equallyimportant is the need to understand the use of the term innovation as appliedto the Services Sector. This paper examines the seven key areas that have beenthe targets of previous papers and attempts to consolidate these ideas in a concisemanner. Two conceptual frameworks and a summary table (Table 1) have emergedfrom this paper as follows:

• Services R&D Conceptual Framework (Fig. 2): The schematic diagram (referredto as a conceptual framework) shows the key components of services R&D. Thisframework is aimed at informing the understanding about how R&D is carriedout in Services and the critical role that customers and technology play in servicesR&D.

• Goods R&D Conceptual Framework (Fig. 3): The schematic diagram (referred toas a conceptual framework) presented in this paper shows the key components ofgoods R&D. This framework validates the understanding about how goods R&Dis carried out as well as the intervening variables driving the goods R&D process.In examining these two conceptual frameworks, the contrast between the two issignificantly revealed and clarified.

• The Variables Affecting Goods and Services Innovation (Table 1): This tablesummarizes the differences between Goods and Services innovation within thecontext of seven key variables — process of innovation, dimensions of innovation,examples of innovative companies, use of information technology in innovation,measurement of innovation, research and development (R&D), the innovationprocess, use of prototype and protection of innovation.

While this paper reinforces the conclusions reached by other studies with regardto innovation, it specifically highlights on an aggregate scale, the areas in whichthe Goods and Services Sectors differ. Future research should take these distinc-tions into account, not as single items but collectively. It is critical to consider howthese innovation variables interact with one another in the context of goods andservices.

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Biography

Vincent K. Omachonu is an Associate Professor of Industrial Engineering atthe University of Miami. He received his Ph.D. in Industrial Engineering from thePolytechnic Institute of New York, Brooklyn. He has two masters degrees – onein Operations Research from Columbia University, New York, and the other inIndustrial Engineering from the University of Miami, Florida. His B.S. degree isalso in Industrial Engineering from the University of Miami. Dr. Omachonu wasone of the early contributors to the field of health care quality management. Hisseminal book titled Total Quality and Productivity Management in Health Care

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Innovation 127

Organizations received the Institute of Industrial Engineers Joint Publishers Book-of-the-Year Award in 1993. Dr. Omachonu is a Master Black Belt in Six Sigma anda Professional Engineer (PE) in the State of Florida.

Dr. Omachonu’s two previous books are Principles of Total Quality (co- authoredwith J. Ross), third edition (2005) and Healthcare Performance Improvement, 1999.He has conducted research and published papers in the fields of health care qual-ity, service sector, and quality management. He is the recipient of university-wideteaching award, and several awards for excellence in teaching from the Universityof Miami School of Business, where he has taught in the Executive MBA — HealthAdministration Program.

Norman G. Einspruch received the PhD degree in Applied Mathematics fromBrown University. He was employed by Texas Instruments Incorporated for eighteenyears in a variety of technical/managerial positions, including Director of the Cen-tral Research Laboratories. During the last thirty-three years at the University ofMiami, he has served as Dean of the College of Engineering and as Chairman of theDepartment of Industrial Engineering; he is Senior Fellow in Science and Technol-ogy, Professor of Electrical and Computer Engineering and Professor of IndustrialEngineering. His current research area, in which he has published extensively, relatesto characterizing the similarities and differences between the Goods Sector and theServices Sector of the economy, with special emphasis on the role of technologyand technology management. He is a Life Fellow of the Institute of Electrical andElectronics Engineers, a Fellow of the American Physical Society, a Fellow of theAcoustical Society of America, and a Fellow of the American Association for theAdvancement of Science.

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