Service businesses now make up about 70% of the aggregate production and employment in the OECD nations, yet true innovation is rare in the service sector. Many companies incrementally improve their offerings, but few succeed in creating service innovations that launch new markets or reshape existing ones. The premise of this article is that by thinking about a service in terms of its core benefits and the separability of its use from its production, managers can more easily see how to outinnovate their competitors. Before they can do so, though, they must understand the different types of market-creating service innovations as well as the factors that enable them. The authors introduce and describe a two-by-two matrix whose taxonomy helps managers think strategically about service innovations that can create new markets. The dimensions of the matrix refer to the type of benefit offered and the degree of service separability. The article references best-practices examples including Enterprise Rent-A-Car, FedEx, eBay, Starbucks, Cirque du Soleil, Google, Southwest Airlines, Walgreens, Netflix and Barnes & Noble to illuminate each of the four cells of the matrix and explain the value to managers of understanding the dynamics of the cell that is most applicable to their service innovation efforts.

By Edward F. McDonough III, Michael H. Zack, Hsing-Er Lin and Iris Berdrow
Fall 2008
Reprint 50114
Volume 50, Number 1, pages 53-58, 6 pages
Primary Topic: Corporate Strategy
Secondary Topic: Technology and Innovation

Summary from MIT Sloan Management Review

The way we think about strategy is woefully incomplete, the authors contend. The traditional idea of focusing on the positioning of products (or services) underplays much of what most would agree makes a company truly competitive. Not only does it give short shrift to what a company knows, it ignores completely the fact that in today’s dynamic economy, organizations have to continually reinvent who they are and what they do in large and small ways. And one important means of doing so is through innovation. An effective strategy, then, is comprised of three key components: product/market, knowledge and innovation positions. But even if a company masters the three strategic positions of product/market, knowledge and innovation independently, it is still at risk. Only when all three positions are aligned and mutually reinforcing can a strategy succeed. In adopting the notion of alignment, organizations need to view each position — product/market, knowledge and innovation — as aspects of an organization’s overall strategy. Creating an integrated strategy thus requires focusing not on each position separately, but rather on all three positions simultaneously. The authors introduce the notion of competing based not only on what an organization makes or the service it provides, but on what it knows and how it innovates. Each aspect represents a competitive position that must be evaluated relative to the capabilities of the organization and to others in the marketplace battling for the same space. And each component must not only be aligned with the other two, but it needs to be adjusted as circumstances warrant. When done correctly, organizations — such as Buckman Laboratories, which is profiled here — thrive. When done badly, the company can suffer, and perhaps fatally so, as the history of Polaroid points out.

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