PREST Information Society “Services are where we should look for the innovations of the future” Seminar question Antonio

1. PRESTInformation Society“Services are where we should look for the innovations of the future”Seminar questionAntonio SchuhFebruary 15th, 2002

2. Agenda Innovation in Services: some elements for discussion Discussion and Questions

3. IntroductionServices defined Main dimensions in defining/classifying services and examples + KIBS: consultants, legal, tech specialists Consumer services: transportation, cust service Customisation Manual services: cleaning, gardening Financial services Information processing/total value added - + Based on Miles & Boden, “Introduction: Are Services Special? “ in Services and the Knowledge-based economy”. Services, in spite of its heterogeneity, usually share characteristics as processing of non-material goods and a made-to-order quality.

4. 100% 90% 20% 22% 23% 80% Electricity Physics 18% 70% 23% 28% Mechanical engineering 60% 8% 3% 2% Fixed construction % of patents by field 8% 50% 6% 2% 5% 1% 1% Textiles & paper 17% 40% Chemisty & metalurgy 10% 11% 30% Operations & Transport 15% 18% 20% 19% Human necessities 10% 16% 14% 10% 0% Euope Japan US Region Do services innovate?Macroeconomic indicators of services innovativeness (1) Patents by field of application in the Triad countries, 2000 Source: Trilateral Statistical Report, 2000. http://www.european-patent-office.org/tws/tsr_2000/42app.htm Domains where services typically operate are not particularly important sources of patents statistics.

5. Do services innovate?Macroeconomic indicators of services innovativeness (2) Compared productivity growth time series, 1958-1997 2.50% 2.14% 2.00% 1.50% 1.24% Manufacturing Average yearly productivity growth (total factor) 1.04% Services 0.88% 1.00% 0.62% 0.39% 0.50% 0.19% 0.16% 0.00% 1958-1967 1967-1977 1977-87 1987-97 Decade Source: Edward Wolff, The Productivity Paradox: evidence from indirect indicators of seervice sector productivity growth. http://www.csls.ca/jrn/v32n2_03.pdf+B1:B9 Additionally, productivity growth in services has been substantially bellow manufacturing, suggesting limited impact of innovation.

6. The Poirot MethodologyCircumstantial evidence of innovation in services Potential determinants of innovative activities Means Motive Opportunity Services may be innovative if they have motive, means and opportunities to be so.

7. Circumstantial evidence: motiveServices motivation to innovate Need of differentiation Need of exploiting new niches Need of exploiting industry reconfiguration Driver Expla-nation • Differentiation in services may come from • Company reputation • Personal relationships/credibility • Time-to-market • Quality • Firm growth and longevity is incompatible with attributes held by individuals • Innovation may improve all other differentiation factors • Services industries usually have low entry barriers • Increased rivalry promotes move towards under-exploited niches • Niches may only be profitably exploited under novel • Service parameters (quality, time-to-market, guarantees) • Relationship to 3rd parties • Revenue models • …therefore requiring innovation • Industries are being reconfigured by • Vertical disintegration • New business models • Innovation may • Leverage upon new technologies • Reduce transaction costs (e.g., telework) • Advantages • Lower cost position • Externalities

8. Circumstantial evidence: meansServices access to means to support innovation Better workforce education More deployable resources Factor ICT Role & Impor-tance • Increased productive efficiency, freeing resources to new activities • Process stability • Increased organisational cohesion • Increased stock of codified knowledge embedded in IT applications • Members of the organization have an increased ability to learn from/absorb experiences and therefore engage in innovative activities • Increase in size of the services sector leading to bigger service companies • Size affecting ability to innovate by resource accumulation

9. Circumstantial evidence: meansAvailability of Information and Communication Technologies World telecoms revenue and PCs in operation 1,500 700 1320 1,300 1210 600 1112 550 1,100 1015 500 500 946 885 900 430 778 400 675 370 Revenue (US$ Billions) Units (Millions) 700 606 580 320 522 300 500 260 230 200 190 300 170 150 130 100 100 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001a 0 Telecom market revenue Personal computers Source: ITU, http://www.itu.int/ITU-D/ict/statistics/at_glance/KeyTelecom99.html While telecommunications revenues grew on average 4% p.a. (in spite of ever lower prices), PCs grew even faster (12% p.a.).

10. Circumstantial evidence: meansImprovement in workforce education Students in tertiary education as a % of relevant age group (selected countries) 90 81 80 70 56 60 52 50 1980 41 39 1997 40 33 31 30 19 18 20 15 11 11 8 10 4 0 US UK Japan Singapore Switzerland Brazil Indonesia Source: World Bank, World development indicators 2000. Nnote: Countries selected to represent either developed countries in several regions (US, UK, Switzerland, Japan); recently industrialized countries (Singapore); and developing countries (Brazil, Indonesia). Selection criteria was absolute or relative (per capita) GDP. Germany is absent for unavailability of data.

11. 80 74.5 73 71.5 71 67.5 70 63.5 62 62 59 58 60 54.5 51.5 50 40.5 1980 40 1998 31 30 20 10 0 UK US Singapore Switzerland Japan Brazil Indonesia Circumstantial evidence: meansContinued expansion of the service sector % of workforce employed in the service sector (selected countries) Source: World Bank, World development indicators 2000.

12. Circumstantial evidence: opportunityEvents creating opportunities for accelerating innovation in services • Globalisation • Numerous new economics agents via trade or foreign direct invest • Need for localisation of processes and products, advisory services • Outsourcing in manufacturing • Increased competitive pressure in manufacturing leading to increased specialisation • Non-core functions (frequently service companies) transferred to specialists • GE’s Jack Welch: “make someone’s back office is your front office” • Manufacturing differentiation via services • Efficient customer support • Mass customisation Services innovation might be further promoted by trends in manufacturing and other clients of service companies.

13. Circumstantial evidence: meansGlobalisation Worldwide exports index (1980=100) 350 313 278 300 272 268 263 250 250 200 169 150 100 96 100 50 - 1980 1985 1990 1995 1996 1997 1998 1999 2000 Source: WTO Statistics Division, http://www.wto.org/english/res_e/statis_e/statis_e.htm

14. Circumstantial evidence: meansOutsourcing in manufacturing % of US manufacturing workers outsourced 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 Source: Estevão, Marcello; Lach, Saul. Measuring Labor Outsourcing in U.S. Manufacturing. http://www.epionline.org/study_lach_12-2001.html

15. Anedoctal evidenceCase studies in services innovation Examples of service innovation Implications • Lawyer´s offices: new types of practices • Banks: ATMs • Consultants: project retrieval systems • McDonald’s R&D: Big Mac vs. McArc • Parcel freight: Federal Express • Travel agents: adoption of teletext • Technological vs. Organizational innovations • Before mass ICTs, mostly organizational • Technologization process • Distributed innovation/Lack of central R&D • Unstructured process • Several departments/individuals involved • Links with business strategy • Involvement of leadership Several studies demonstrate that services can successfully innovate and draw insights on how the process works.

16. Services as the forefront of innovationAttributes of services that foster innovation • Connectedness • Interacting with large number of parties • Exposed to a large number of potential innovations • Results of innovations are frequently easy to observe since is hard to separate production from consumption • Low asset specificity • Easy to reconfigure products and redefine processes • Unfortunately, also difficult to ensure appropriation of rents from innovation • Low capital requirements • Many innovations are easy to adopt • Experimental adoption and re-invention is promoted • Drawback: managerial fads

17. Services as the forefront of innovationServices/KIBS roles in promotion of innovations Moral Hazard reduction • KIBS can assess a project’s/entrepreneur’s claim on the value of an innovation Legitimization Knowledge transfer agent • KIBS can help firms converge to dominant designs/organizational forms • KIBS bring either compensating knowledge (competency-destruction innovations) or increase in a firm’s absortive capabilities KIBS Outsoucer Gatekeeper • KIBS can provide efficiently inputs to the innovation process • KIBS may selectively link an innovation to complementary skills/resources

18. Services as the forefront of innovationConclusions • Services innovation is hard to capture in tradition macroeconomic statistics, but is happening. Services do innovate. • Services have all the structural conditions to pursue innovation • Motive: need for differentiation, new niches to exploit, new industry configurations/business models • Means: ICT, increasingly educated workforce, bigger size • Opportunity: globalisation creating new economics agents in domestic economies , outsourcing, rise of information-intensive functions • Services have attributes that allows it to foster innovation both intra- and inter-organisations Services innovation is not only possible but likely to accelerate in the next few years with the continued action of the drivers and learning effects.

19. Agenda Innovation in Services: some elements for discussion Discussion and Questions

20. Services as the forefront of innovationInnovation process:services vs. manufacturing compared xxx xxx XXX XXX Manu-facturing • XX • XXX • XXX • XXX Services • XXX • XXX • XX • xxx