Technology Innovation Management Review April 2014

Innovation in Services: A Literature Review

Rabeh Morrar

“ The increasingly prominent role being played by ”

service activities in productive systems have
combined to make innovation in the service
sector an issue of great importance.

Faiz Gallouj
Professor of Economics

The article reviews the literature relevant to innovation in services, which has flourished
since the 1990s. We discuss the definition of service and to what extent the characteristics
of service output have influenced the conceptualization of innovation in services. Then,
based on the literature review, we develop a conceptual framework for innovation in ser-
vice sector, which classifies innovation in service sector into three main approaches: i) as-
similation, where innovation in the service sector is assimilated from innovation in
manufacturing sector; ii) demarcation, which differentiates innovation in service sector
from the traditional conceptualization of innovation in manufacturing sector; and iii) syn-
thesis, which aggregates both assimilation and demarcation approaches within a common
conceptual framework. We discuss the relationship between innovation in services and eco-
nomic performance using productivity and employment as two indicators of performance.

Introduction sistent with the rise of the service economy, which now
accounts for nearly 70% of gross domestic product and
Awareness of the importance of service innovation as employment in member countries of the Organisation
an engine for the economic growth is a recent phe- for Economic Co-operation and Development (OECD,
nomenon. Previously, services were considered as non- 2005). Accordingly, the discussion about innovation in
innovative activities, or innovations in services were re- services should be extended beyond the traditional
duced to the adoption and use of technologies. The in- (technological) perspective.
novation literature was focused on the manufacturing
sector, technological product development, and pro- A number of studies have shed light on the specificities
cess innovation, and thus, innovation in services was of innovation in services beyond the traditional biased
addressed from a manufacturing perspective. Indeed, point of view, which constrained it to the adoption and
the corresponding literature “assimilated services with- use of technology (Gallouj & Weinstein 1997; Sundbo &
in the consolidated framework used for manufacturing Gallouj, 1999; Tether, 2005). These studies take into ac-
sectors and manufactured products” (Gallouj & Savona, count the main characteristics of the service product –
2009). The risk of such a bias towards manufacturing is its intangibility, its co-production, and its co-terminal-
the underestimation of innovation in services and its ef- ity – which makes it efficient to define innovation in ser-
fects, because innovation in services includes invisible vices.
or hidden innovations that are not captured by the tra-
ditional indicators of innovation in the manufacturing The objective of this article is to review the extant liter-
sector. ature on service innovation in order to identify and
evaluate different models of the innovation process in
However, the traditional approach has been increas- services. The article also aims to show how the unre-
ingly challenged, mainly because the underestimation solved issues relative to the definition of service output
of the dynamics of the service sector was seen as incon- have contributed to the underestimation of the per-

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Technology Innovation Management Review April 2014

Innovation in Services: A Literature Review

Rabeh Morrar

formance of service innovation in terms of productivity the most prominent arguments about the distinctions
and employment. First, the characteristics that are im- between goods and services, with a focus on the defini-
portant for defining and measuring innovation in ser- tion of services.
vices are discussed. Next, the main theoretical
perspective mobilized in the literature to account for in- Early definitions of services were based on technical cri-
novation in services is presented. This discussion ad- teria derived from classical economists. Three main
dresses the main theoretical inferences associated with definitions were adopted by those favouring a technical
each perspective accompanied with a survey of the characterization. The first definition, advanced by
most important pertinent application in each perspect- Smith (1776) and Say (1803), views a service as a
ive. Finally, we discuss the relationship between innov- product that is consumed in the instant of production.
ation in services, including productivity and The second definition, pioneered by Singelmann (1974)
employment as indicators of economic performance. and Fuchs (1968), takes the notion of co-production, in
other words, the interaction between consumer and
Defining Service Output producer in producing services. The third approach de-
scribes services as non-storable and non-transportable,
The characteristics of services have largely been neg- which distinguishes services from goods (Stanback,
lected by the innovation literature. There is a particular 1980).
analytical problem of the definition of service output,
which reflects on the definition of service innovation. Hill (1977) introduced the most widely cited definition
When analyzing service innovation, scholars have of services: “a change in the condition of a person, or a
merely analytical tools designed for manufacturing good belonging to some economic unit, which is
within the traditional technological view of innovation. brought about as a result of the activity of some other
This approach has led to the misunderstanding and the economic unit, with the prior agreement of the former
underestimation of innovation activities in services. person or economic unit”. With this definition, Hill
Gallouj and Savona (2009) argue that it has also led to a sought "to set forth a characterization of 'service situ-
wrong conclusion that innovation in services has a rel- ations' and of their outcomes that is both socio-technic-
atively small effect on economic performance in terms al and more synthetic" (Gadrey, 2000). Gadrey (2000)
of productivity and value added, compared to innova- expanded Hill’s definition by putting forward what is
tion in manufacturing known as the “service triangle”. In this view, “a service
activity is an operation intended to bring about a
Therefore, a clear definition of services and their char- change of state in a reality C that is owned or used by
acteristics is a key factor for the correct measuring of in- consumer B, the change being effected by service pro-
novation output in services and the estimation of the vider A at the request of B, and in many cases in collab-
real economic effect of services. However, “the study of oration with him / her, but without leading to the
services innovation immediately poses the question of production of a good that can circulate in the economy
how a ‘service’ should be defined” (DTI, 2007). Service independently of medium C”. In other words, Gadrey in-
production is an action, or a treatment protocol, that troduced services as a process or a set of processing op-
leads to a change of state, not the creation of a tangible erations that are implemented through interactions
good (Gallouj, 1998). Because of its fuzzy nature or in- (i.e., the intervention of B on C, the intervention of A on
tangibility, its heterogeneity and unstable character, a C, and service relations or interactions) between three
service is difficult to define, and therefore it is also diffi- main elements: service provider, client, and a reality to
cult to measure its output and productivity (Melvin, be transformed. The medium C in Gadrey’s definition
1995). may be material objects (M), information (I), knowledge
(K), or individuals (R). An important point in Gadrey’s
Arriving at a definition of a service is useful before dis- definition compared to Hill’s is that the output cannot
cussing the problem of defining innovation in the ser- circulate economically and independently from C.
vice sector and measuring the productivity impact of
innovation on services. However, there is no consensus Inspired by Lancaster (1966) and Saviotti and Metcalfe
today among economists about the theoretical charac- (1984), Gallouj and Weinstein (1997) developed a con-
terization of service activities and their output (i.e., "ser- ceptual framework for the provision of products (i.e.,
vices") (Gadrey, 2000). Therefore, this section of the goods and services) that describe service output in
article sets out to discuss, from a critical perspective, terms of a set of characteristics and competences,

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Technology Innovation Management Review April 2014

Innovation in Services: A Literature Review

Rabeh Morrar

which reflects both the internal structure of products not be perceived physically nor can the results be fully
and external properties. The delivery of services in this preconceived by the customer before delivery (Biege et
framework depends on the simultaneous mobilization al. 2013). In other words, service products and pro-
of competences (from service provider and clients) and cesses are characterized by a "fuzzy", information-rich,
(tangible or intangible) technical characteristics. In a and intangible nature, which means that they are not
more detailed description, the service provision may re- embedded in material or physical structures. Hetero-
quire the interactions between four main vectors: ser- geneity describes the variability of the results when
vice provider competencies [C], consumers’ providing services. Inseparability refers to the simultan-
competencies [C*], tangible and intangible technical eous provision and consumption of services; the cus-
characteristics [T], and finally, the vector of character- tomer is a co-producer and has to be included in the
istics of final service output [Y]. This framework has processes of both providing and consuming a service.
been used in a large extent to define innovation in ser- Finally, perishability refers to "the transitory nature of
vice within the synthesis approach, which is discussed services since these cannot be kept, stored for later util-
later in this article. ization, resold, or returned" (Biege et al. 2013).

One of the most well-known conceptualizations of ser- As mentioned earlier, a clear definition of services pro-
vices in the last decade is the service-dominant logic by motes understanding of service innovation. Due to the
Vargo and Lusch (2004). Their approach was to redress IHIP criteria, the dichotomy, or classification, of innova-
the model of exchange in marketing, which had a dom- tion into product and process innovation is not easy to
inant logic based on the exchange of "goods", which are apply to services in comparison with that in the manu-
mainly manufactured outputs. In the new marketing- facturing sector. For example, inseparability or co-ter-
dominant logic, service provision rather than goods is minality blurs the dividing line between product and
fundamental to economic exchange. process innovation (Bitran & Pedrosa, 1998). And, it
highlights the role of clients in service innovation. The
The main proposition of service-dominant logic is that: client plays an important role in the development of
new services (Kline & Rosenberg, 1986; De Brentani,
"...organizations, markets, and society are fun- 2001). In any service innovation, feedback provided
damentally concerned with exchange of service – the ap- through the consumers of services is an important
plications of competences (knowledge and skills) for the source of incremental service innovation (Riedl et al.,
benefit of a party. That is, service is exchanged for ser- 2008). In manufacturing, conversely, the clients are in-
vice; all firms are service firms; all markets are centered dependent of the production process; they are just
on the exchange of service, and all economies and societ- users of final products, and they do not participate in
ies are service based. Consequently, marketing thought the production and delivery of the product.
and practice should be grounded in service logic, prin-
ciples, and theories" (Lusch & Vargo, 2004). The intangibility of services confirms the key role that
information technology plays in innovation activities in
Thus, the service-dominant logic highlights the role of services (Sirilli & Evangelista, 1998). However, the intan-
producer and consumer in the production of a service gibility of service products hinder the measurement of
(i.e., value is co-created). the service output. Some scholars (Gallouj & Weinstein,
1997; Windrum & Garcia-Goni, 2008) have tried to over-
In similar work, Grönroos (2006) makes a comparison come the ill-defined nature of service outputs by devel-
between service logic and good logic. He found that ser- oping a new approach that is applicable to both
vice logic best fits the context of most goods-producing tangible and intangible products. This integrative ap-
businesses today. Goods are one of several types of re- proach is discussed later in this article.
sources functioning in a service-like process, and it is
this process that is the service that customers consume. The low levels of capital equipment used in many ser-
vices indicate that the technological competences and
Four main criteria, commonly referred to as the "IHIP physical capital that play a major role in the production
criteria", have been used to distinguish services from of industrial goods are less consistent with the "fuzzy"
products: intangibility, heterogeneity, inseparability, or immaterial outputs of services. Service firms are con-
and perishability (Fisk et al., 1993). Services are con- sidered to be rather highly dependent on competences
sidered intangible because, unlike products, they can- embedded in human capital as a key competitive factor

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Technology Innovation Management Review April 2014

Innovation in Services: A Literature Review

Rabeh Morrar

and strategic element in the organization and delivery Assimilation

of service products (Sirilli & Evangelista, 1998). Thus, In the assimilation approach, innovation in services is
services may need special innovation that is not de- perceived as fundamentally similar to innovation in
pendent on physical artifacts or complex technological manufacturing. This traditional approach to innovation
changes (i.e., formalized R&D) or modes in which train- in services only considers technological or visible
ing activities and organizational changes are central di- modes of product and process innovation. It ignores
mensions of the innovation process (Castellacci, 2006). other non-technological or invisible modes of innova-
tion, which are likely to include several types of innova-
Conceptual Perspectives for Innovation in tion-like “social innovations, organizational
Service innovations, methodological innovations, marketing in-
novations, innovations involving intangible products or
Service innovation studies have tried to go beyond the processes, etc.” (Djellal & Gallouj, 2010b). Therefore,
manufacturing-based perspective (e.g., Gallouj; 2002; the assimilation approach underestimates innovation
Gallouj & Weinstein 1997). They have sought to address in service activities, which is characterized by its intan-
the peculiarities of service activities in terms of innova- gible (invisible) and information-based nature.
tion. In this view, the service-based approach (Gallouj,
1994) and integrative approach (Gallouj & Weinstein, The theoretical and empirical works favoring an assimil-
1997) are considered two prominent conceptualization ation approach are the most numerous. Within this per-
frameworks that extend beyond the traditional per- spective, Barras' reverse product lifecycle (Barras, 1986)
spective, which is represented by the assimilation ap- is one of the most prominent works devoted to the ad-
proach. Table 1 summarizes the three conceptual option of information and communication technolo-
approaches to innovation in services: assimilation, de- gies in service activities and their effects on innovation.
marcation, and integration. The reverse product lifecycle, in contrast to the tradi-

Table 1. Conceptual perspective for innovation in services

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Technology Innovation Management Review April 2014

Innovation in Services: A Literature Review

Rabeh Morrar

tional product lifecycle model (Abernathy & Utterback, organizational innovation, ad-hoc innovation, and mar-
1975), starts with the introduction of incremental pro- keting innovation. For example, Gadrey and Gallouj
cess innovations that aim to improve the efficiency of (1998) developed a new topology for consultancy that
the service produced. In the second phase, more radic- breaks down the product/process technological tax-
al process innovations are implemented to improve the onomy for service innovation and includes three ser-
quality of services. In the final phase, new product in- vice specific types of innovation: ad-hoc innovation,
novations are produced. new-expertise fields of innovation, and formalization
innovation. McCabe (2000) has focused on organiza-
Another important illustration of the assimilation ap- tional innovation (e.g., work organizations and stand-
proach is provided by the construction of new evolu- ardized methods of management control) in financial
tionary taxonomies for innovation in services, which services. In similar work, Van der Aa and Elfring (2002)
emphasize different trajectories for different groups of developed a taxonomy of three modes of organization
activities according to their technological intensive as- innovation: multi-unit organizations, new combina-
pect (Evangelista, 2000; Miozzo & Soete, 2001; Soete & tions of services, and customers as co-producers.
Miozzo, 1989). Soete and Miozzo's taxonomy (1989) dis-
tinguishes the following trajectories: supplier-domin- Integration
ated, scale-intensive, science-based, information The integrative, or synthesizing, approach aggregates
intensive, and specialized suppliers. both the assimilation and demarcation approaches
within a common conceptual framework that enlarges
Innovation systems and networks are also other import- the view of innovation. This new perspective encom-
ant concepts for discussing the innovation activities in passes both services and goods and technological and
an interactive and dynamic process (Edquist 1997; Lun- non-technological modes of innovation (Gallouj &
dvall, 1992; Manley, 2002; Nelson, 1993). These innova- Savona, 2009; Gallouj & Windrum, 2009). It represents
tion networks also reflect a technology bias when they the emerging and expanding phase of the natural life-
address service innovation. cycle of theoretical development in the service innova-
tion discussion. The most important contribution in
Demarcation the integrative approach is provided by Gallouj and
The demarcation approach considers that it is inappro- Weinstein (1997), who apply a characteristics-based
priate to study service innovation activities by only mo- representation to the product. As mentioned earlier, in
bilizing conceptual and empirical tools that are mainly such a representation, the product is represented by
developed for technical-based activities (e.g., R&D, pat- four main vectors, and “innovation can be defined ac-
ents, and accumulation of capital). In Gallouj and cordingly as the changes affecting one or more ele-
Savona’s (2009) natural lifecycle of theoretical concern, ments of one or more vectors of characteristics (both
the assimilation approach represents the maturity technical and service) or of competences” (Gallouj &
phase. Savona, 2009).

The demarcation perspective seeks to consider any spe- The importance of the synthesis framework is also asso-
cific characteristics of the nature and modes of organiz- ciated with the fact that the boundaries between goods
ation of innovation in services (Gallouj & Savona, 2009), and services have become blurred. This framework is
and it emphasizes the importance of service trajector- motivated by the convergence between service and
ies, taking into account the characteristics of service manufacturing, where the distinction between innova-
output (i.e., immateriality, interactivity, and co-produc- tion in services and manufacturing is becoming more
tion). It focuses on non-technological (service-based) difficult due to the service dynamic and innovation
and invisible innovation output (e.g., service customiza- blurring. In this new context, two main changes are tak-
tion, problem solving, new solutions, new methods, ing place: manufacturing is becoming more like ser-
and new organizational structures). These innovation vices and services are becoming more like
activities contribute to the economic development. manufacturing. In the former case, manufacturing
firms produce more service products related to the
The demarcation approach leads to the production of main industrial products, and therefore, higher por-
new typologies for innovation in services; these typolo- tions of their turnovers are becoming achieved through
gies are innovation indicators dedicated to services that selling services (Howells, 2006). This process is
include non-technological types of innovation such as summed up as the "servitization" of the manufacturing

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Technology Innovation Management Review April 2014

Innovation in Services: A Literature Review

Rabeh Morrar

industry (Quinn et al., 1990). In the latter case, services by the traditional indicators of innovation, while the
firms become more innovative and greater parts of performance gap is reflected in an underestimation of
their innovative output are reflected by the traditional the efforts directed towards improving performance (or
technological innovation in manufacturing. In other certain forms of performance) in those economies”.
words, “services become more manufacturing-like in
innovation” (Howells, 2006). Therefore, the synthesis Measuring the productivity of immaterial and non tech-
framework is required to “redefine the product in such nology-based services might need different methods
a way that it offers a relatively solid framework to gener- from those employed to measure the productivity of
alize a theory of innovation for material and immaterial material and technical activities in the manufacturing
product” (Gallouj & Savona, 2009). The synthesis ap- sector. For example, Biege and colleagues (2013) de-
proach “highlights the increasing complex and multidi- noted that characteristic features of services were detec-
mensional character of modern services and ted as reasons for the gap in measuring productivity in
manufacturing, including the increasing bundling of services. In addition to IHIP, Biege underlined four re-
services and manufacturing into solutions’’ (Salter & quirements when measuring productivity in services:
Tether, 2006).
1. The innovativeness of the output has to be included
The integrative approach is broadly used in the recent to adequately measure productivity in knowledge-in-
literature of innovation in services. In recent years, tensive business services. Innovativeness is meas-
most of the conceptual frameworks and empirical tests ured by differentiating "services new to the
addressing innovation in services apply an integrative company" from "services new to the market".
approach in which both technological and non-techno-
logical innovation are emphasized (Gebauer, 2008; 2. The "internal output of a service process has to be in-
Hipp et al., 2000; Tidd, 2006; Ulaga & Reinartz, 2011). cluded to adequately measure service productivity.

Service Innovation and Economic 3. Input figures in productivity measurement concepts

Performance for innovative services have to include interactive in-
puts that are not expressed by provider's and custom-
In a service economy, defining and identifying the er's inputs, especially time and cost induced by
whole range of innovation is not easy, and it requires us interactive loops in service processes mainly in know-
to go beyond the assimilation, technology-biased per- ledge-intensive business services.
spective. Anyhow, in services as in manufacturing, in-
novation is a major source of economic performance. 4. Knowledge, competencies, and skills are central re-
However, the link between innovation in services and sources in many services, and they should be in-
economic variables such as productivity should be clari- cluded in a productivity measurement concept.
fied. Indeed, in the service economy, the innovation
gap is associated with a performance gap. Corsten (1994) measured service productivity based on
an approach from production theory, which consists of
Innovations in services and productivity factor combinations between inputs and correspond-
Conceptually, there is no specific answer to the ques- ing outputs. In other words, service productivity is
tion of the degree and sign of the relationship between measured using multiple stages of a service delivery
innovation in services and productivity, but it is related process.
to the service specificities that “influence the definition
and measurement of productivity” (Djellal & Gallouj, Johnston and Jones (2004) proposed two perspectives
2009). for measuring service productivity: i) operational pro-
ductivity, which is measured by the ratio of operational
The use of a technological or industrial approach for outputs to inputs of a period of time, and ii) customer
measuring innovation activities in services will lead to productivity, which is measured by the ratio of custom-
the under-estimation of both innovation and economic er output, such as experience and outcome, to value-to-
performance. And, it will lead to two gaps: an innova- customer inputs, such as time, effort, and costs.
tion gap and a performance gap (Djellal & Gallouj,
2010a). According to Djellal and Gallouj (2010b), “the Effect of service innovation on employment
innovation gap indicates that our economies contain The relationship between innovation and employment
invisible or hidden innovations that are not captured has been the subject of abundant literature. This de-

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Technology Innovation Management Review April 2014

Innovation in Services: A Literature Review

Rabeh Morrar

bate originated in manufacturing sector to analyze the portant tools to focus on non-technological aspects of
effect of technological change on employment (Free- service innovation, which were previously ignored due
man & Soete, 1987; Hicks,1973; Pasinetti, 1981). In this to the application of an assimilation view for innova-
context, two counter-arguments are put forth. The first tion in service sectors. Also, recent studies show the in-
argument anticipates a reduction in employment due tegrative approach is found to be the most promising
to technological advancement. The second argument and comprehensive theoretical perspective that is em-
assumes that market-compensation mechanisms are ployed to discuss innovation in service sectors. The re-
able to overcome the negative effect on employment lationship between innovation in services and
caused by labour-saving process innovation (Vivarelli, economic performance were discussed using productiv-
2007; Vivarelli & Pianta, 2000). ity and employment as two important indicators for
economic performance.
In services, the technological trajectories are not the
main form of innovation. Innovation activities include This article has sought to provide an extensive and mul-
other non-technological elements. Therefore, the tifaceted review of the research on innovation in ser-
product/process dichotomy in the analysis of the effect vices over the last two decades. Its aim is to generate
on employment is not always consistent with service more achievable policy implications for how innova-
sector. The employment debate in the manufacturing tion in the service sector should be discussed in an in-
sector is unlikely to sufficiently explain the effect on em- tegrative approach in order to reveal the vital role that
ployment by non-technological forms of innovation in innovation in services might play in modern econom-
services. For example, new market strategies make im- ies. This literature review opens further discussion
portant changes to consumer preferences and increase about new issues in innovation in services, such as in-
the market demands for new services, which in turn af- novation networks in services – mainly public-private
fect the employment rate. In addition, some of the com- innovation networks, social innovation, and entrepren-
pensation mechanisms (e.g., lower prices, new eurship in the service sector.
investments, and new machines) in manufacturing in-
dustries cannot always be applied directly to services.
For example, because of the immateriality and co-pro-
ductivity of many service outputs, it is not always easy About the Author
to fix their prices and measure their intangible invest-
ment. In many services, there is an overlap between Rabeh Morrar is an Assistant Professor of Innova-
types of innovation, and it is not easy to disentangle tion Economics at An-Najah National University in
them and distinguish labour-saving from labour-using Nablus, Palestine. Rabeh's doctoral dissertation
effects. from Lille 1 University in France focused on public-
private innovation networks in the service sector,
Consequently, new methodological and conceptual and his current research is focused on innovation in
frameworks might be needed to explain the employ- the service sector, R&D management, and techno-
ment effect of immaterial and invisible activities bey- logy management. Rabeh is also CEO of BEST, a
ond the product/process dichotomy. New proxies are small business in Palestine that provides innovation
needed, provided that they are developed on the basis solutions and training.
of the industrial sector, such as R&D and patents. In ad-
dition, new compensation and contradictory mechan-
isms need to be envisaged. These new mechanisms References
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Technology Innovation Management Review April 2014

Innovation in Services: A Literature Review

Rabeh Morrar

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Citation: Morrar, R. 2014. Innovation in Services: A Literature Review. Technology Innovation Management Review, 4(4): 6–14.
http://timreview.ca/article/780

Keywords: innovation, service innovation, assimilation approach, demarcation approach, synthesis approach, economic performance

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