Academia Revista Latinoamericana de Administración Innovation capabilities in services: a multi-cases approach Vanessa Marques Daniel, Mauricio Pozzebon de Lima, Ângela Maria Ferrari Dambros, Downloaded by Linkoping University Library At 22:03 26 October 2017 (PT) Article information: To cite this document: Vanessa Marques Daniel, Mauricio Pozzebon de Lima, Ângela Maria Ferrari Dambros, (2017) "Innovation capabilities in services: a multi-cases approach", Academia Revista Latinoamericana de Administración, Vol. 30 Issue: 4, pp.490-507, https://doi.org/10.1108/ARLA-06-2016-0161 Permanent link to this document: https://doi.org/10.1108/ARLA-06-2016-0161 Downloaded on: 26 October 2017, At: 22:03 (PT) References: this document contains references to 45 other documents. 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The current issue and full text archive of this journal is available on Emerald Insight at: www.emeraldinsight.com/1012-8255.htm ARLA 30,4 Innovation capabilities in services: a multi-cases approach 490 Downloaded by Linkoping University Library At 22:03 26 October 2017 (PT) Received 1 June 2016 Revised 1 September 2016 21 November 2016 12 May 2017 Accepted 18 July 2017 Capacidades de inovação em serviços: uma abordagem multi-casos Vanessa Marques Daniel Department of Administration, Universidade Federal do Rio Grande do Sul, Porto Alegre, Brazil Mauricio Pozzebon de Lima Universidade Federal do Rio Grande do Sul, Porto Alegre, Brazil, and Ângela Maria Ferrari Dambros Escola de Administracao da UFRGS, Porto Alegre, Brazil Abstract Purpose – Considering the importance of services and innovation for the modern economy and the peculiarities that differentiate services from tangible goods, the purpose of this paper is to better understand how, based on the capabilities approach, innovation takes place in services. Design/methodology/approach – A qualitative multi-case study was conducted in five instances of innovation in the fitness market, using a semi-structured questionnaire as devised in Zawislak et al. (2014). Findings – The results show that the traditional capabilities framework is limited in explaining service innovation, as there are many levels of intangibility and non-linearity in service provision. Cases show that it is not possible to think of capabilities linearly in the service context. The authors propose that capabilities overlap, and the results show that this is a more accurate way of describing service dynamics. An alternative framework is suggested based on field findings, and a set of propositions are made for future research. Originality/value – For many years, services were perceived as non-innovative, complementary activities, geared mainly towards the production of goods. The value of this study is to investigate a topic (innovation) that is widely studied in the industrial sector in a service context, contributing to a largely unexplored field. Keywords Services, Capabilities, Innovation Paper type Research paper Resumen Academia Revista Latinoamericana de Administración Vol. 30 No. 4, 2017 pp. 490-507 © Emerald Publishing Limited 1012-8255 DOI 10.1108/ARLA-06-2016-0161 Propósito – Considerando a importância dos serviços e inovação na economia moderna, e as peculiaridades que diferenciam serviços de bens tangíveis, este estudo visa entender melhor como se dá a inovação nos serviços baseado na abordagem das capacidades. Método – Foi conduzido um estudo qualitativo multi-casos em cinco ambientes do mercado de atividades físicas utilizando um questionário semi-estruturado baseado em Zawislak et al. (2014). Achados – Os resultados mostram que a abordagem tradicional das capacidades é limitada em explicar a inovação em serviços, dado que existem diversos níveis de intangibilidade e não-lineariedade na provisão dos mesmos. Propomos que as capacidades se sobrepõem, e os resultados indicam que essa é uma forma mais acurada de descrever a dinâmica da inovação em serviços. É sugerida uma abordagem alternativa e uma série de proposições para pesquisas futuras. Originalidade/valour – Por muito tempo serviços eram percebidos como atividades complementares não inovativas direcionadas para a produção de bens. O valour desse estudo é investigar um tópico (inovação) já amplamente estudado no setor industrial, porém num contexto de serviços, assim contribuindo para um campo quase inexplorado. Palabras clave serviços, capacidades, inovação Innovation capabilities in services Downloaded by Linkoping University Library At 22:03 26 October 2017 (PT) Tipo de documento Trabajo de investigación 1. Introduction For many years, the world economy has been linked to goods manufacturing. The very definition of “product” was, for a long time, associated with tangible objects because past approaches considered services as incapable, by their nature, of creating economic value. Once considered unproductive, services are now seen as having marketable products with measurable value, since changes in technology and the use of microelectronics have altered the structure of world business. The transportability of services has been enhanced by the increased storability and information transmission, leading to restructuring of the service sector, which questions the traditional separation of economic activity as a means of analysis (Miozzo and Soete, 2001). The importance of the service sector has influenced academia to study phenomena that occur in these firms’ environments. Therefore, understanding the service economy dynamics and comprehending the innovation process in terms of services becomes crucial, as does the study of capabilities, which leads to innovation. Despite all this, innovation in services is still a largely unexplored field, and there is a strong tendency to transpose the accumulated knowledge about industry directly to services, without considering its specificities (Vargas, 2006). Chen et al. (2009) argue that there is no full and adequate understanding of the concept of service delivery innovation and its role in competition, especially due to IHIP service characteristics (intangibility, heterogeneity, inseparability and perishability), making service innovation unique to a certain degree. Similarly, Ordanini and Parasuraman (2011, p. 3) state “innovation research to date, though insightful, has treated services merely as a special category of products – that is, ‘what goods are not’ – thereby employing ‘residual’ conceptualisations of service innovation”. Considering the importance of service and innovation for the modern economy, the peculiarities that differentiate services from tangible goods, and the lack of research linking services and innovation capabilities, this paper aims to better understand how innovation takes place in services based on the capabilities approach. This paper is organised into six sections, including this introduction. Section 2 presents the main concepts about services, capabilities and innovation in services. Section 3 describes the methodology used in this research. Section 4 presents the results and analysis. Finally, the research conclusion and references are presented. 2. Services The economic concepts of productivity and value creation, mostly related to efficiency and utility generation, were created by economists, such as Adam Smith, David Ricardo, Alfred Marshall and Thomas Maltus (Kon, 2004). This perception considers that only industrial activities can generate value, restricting services to non-innovative and complementary activities for producing goods (Meirelles, 2006; Silva, et al., 2006; Morrar, 2014). The traditional perspective also considers services that are unmarketable, because they provide intangible and non-storable products, demanding continuous involvement between supplier and consumer during the development process and requiring simultaneity in production/provision and consumption (Miozzo and Soete, 2001). Over time, however, gradual changes in economic and technological dynamics have led to a new perspective on services, now seen as activities that link different sectors of the economy 491 ARLA 30,4 Downloaded by Linkoping University Library At 22:03 26 October 2017 (PT) 492 with diverse combinations of inputs (labour, material, information) in order to produce tangible and intangible products (Kon, 2004). Besides, crucial for the expansion of business activities, services have a strong influence on the productive performance of industry, since “services are complementary and relevant to the consumer, the latter being the primary goal of production, and therefore essential for productive activity” (Silva et al., 2006, p. 8). The distinction between goods and services is not always clear, resulting in a lack of consensus among researchers (Kon, 2004). Services can be supplied through human or mechanical work (machinery/equipment), so the results can be both tangible and intangible (Meirelles, 2006). According to Suciu (2013), the most frequently cited difference between goods and services is related to intangibility, but Hill (1999) questions the association of services with this characteristic, since technological changes and the advent of ICT have changed the nature of services, reducing their intangibility, simultaneity, and increasing their storability (Miozzo and Soete 2001; Kon, 2004; Meirelles, 2006). There is now a possibility of storing services on physical media (paper, hard discs), which can be reproduced and transported physically and electronically. Services generate tangible changes in the condition of physical objects or people, and thus the association of intangibility with services, “not only obscures the real nature and economic significance of intangibles, but also causes confusion about the true characteristics of services” (Hill, 1999, p. 426). A tangible product can be defined as “a physical object which is appropriable and, therefore, transferable between economic units” (Hill, 1977, p. 317), and an intangible one as “a change in the condition of a person or of a good belonging to some economic unit” (Hill, 1977, p. 318), this being a result of human activity (Say, 1983). Given this, we propose that a differentiation be made according to the products’ tangibility, as presented in Table I: The diversity of concepts and possibilities of combining goods and services leads to a wide variety of classifications. Among these, there are those that classify services according to their function and location in the supply chain (Kon, 2004), according to the volume of clients and level of product customisation (Silvestro et al., 1992), and relating to their association with goods and relationship with the market (Tinoco and Ribeiro, 2007). Intangible products Tangible products Related to Provision and consumption of intangible products occurs at the same time and location, being impossible to transport and store these products Intensive on human labour and information (knowledge exchange) Tangible product production, transportation, storage and consumption can occur at different times and locations Intensive on mechanical work (machines and equipment) and physical inputs to production of products Is possible to transfer the ownership of tangible products from supplier to customer during the transaction Little interaction between supplier and customer during the production process, it may be manufactured and consumed separately The possibility of manufacturing without customer involvement results on uniform outputs Perishability Due its immateriality, is not possible to transfer the ownership from supplier to customer High interaction between provider and customer during the development process, due the inseparability among provision and consumption The combination of immateriality and direct customer involvement on development process Table I. causes high variability of output, once products Characteristics according to products’ can differ from customer to customer tangibility Source: Adapted from Hill (1999), Meirelles (2006), Say (1983), Kon (2004), Suciu (2013) Operational inputs Ownership right Interconnection with customer during production and development Possibility of achieving uniform output Downloaded by Linkoping University Library At 22:03 26 October 2017 (PT) The boundary of tangibility between goods and services is becoming increasingly blurred, with a trend toward “tangibilisation” of services and “servitisation” of goods. While the former relates to the storage, replication and transport of certain kinds of services; the latter refers to the growing importance of services in industry. This is a change in the business perspective, from the supply of “pure goods” to the offering of “goodsservices” packages, in which the product is a part of the total supply (Almeida et al., 2011). In this vein, Johnson and Gustafsson (2003) proposed four generic categories of classification, disposed in a continuum where goods and services can be classified according to the combined solutions package offered to customers (Vargas, 2006), as presented in Figure 1. The first category, “pure goods”, includes industries that produce and supply tangible products without a direct relationship with customers. The second category, “core goods”, includes firms with tangible product portfolios that offer complementary services. The “core services” category presents firms that complement their main service portfolio by offering complementary goods. Finally, the “pure services” category embraces those firms that develop intangible products through direct interaction with their customers. Based on this continuum, it is possible to argue that there are many combinations of goods plus services, resulting in many ways of offering services in the market. Based on this previous discussion, the next section presents the relationship between services, innovation and capabilities, in an attempt to address how capabilities can lead to innovation in services. Innovation capabilities in services 493 3. Innovation in services Schumpeter (1997) defines innovation as new input combinations that turn into new goods; a new production arrangement; the uncovering of a new market; finding another source of raw materials; or a new way of organising an industry able to generate extraordinary profits. An innovation is only complete, in Schumpeter’s (1997) perspective, when the invention becomes a business transaction generating wealth. The author further states that technological innovation creates a disruption in the economic system, eliminating the steady state, creating new productive patterns, and leading companies to differentiation. Most studies that focus on innovation as the object of analysis still emphasise the industry as the one delivering an innovative good to the market. Even the studies that had focussed on innovation in the service sector until the mid-1990s were based on the use of concepts and methods of innovations verified in industry. In addition, research in this field was restricted to following the diffusion processes for service technologies (Barras, 1986). Given the limitations in this approach to service innovation, efforts have been made in recent years to establish a theory of innovation in services, or to verify convergences that make it possible to develop a perspective encompassing both goods and services, safeguarding their specificities (Vargas et al., 2013). Goods-services package Pure goods Core goods eg. commodity industries eg. automotive industries Core services Pure services eg. restaurants eg. consultancy Goods Source: Adapted from Johnson and Gustafsson (2003) Services Figure 1. The goods-to-services continuum ARLA 30,4 Downloaded by Linkoping University Library At 22:03 26 October 2017 (PT) 494 Although the service innovation area, in relation to the industrial sector, started later, it has grown considerably in the last decade (Lusch and Nambisan, 2015). Studies have been undertaken from different perspectives. Some have focussed on the theory, in order to promote advances and maturity in this area (e.g. Gallouj and Savona, 2009; Carlborg et al., 2014), whereas others have focussed on specific issues in an attempt to understand the dimensions of innovation in service (e.g. Meigounpoory et al., 2015), the value proposition (e.g. Skålén et al., 2015), and the relationship between innovation and productivity (e.g. Álvarez et al., 2015), among other contributions. When comparing with the manufacturing sector, service innovation seems to be “more nontechnical and resulting from small, incremental changes in processes and procedures that do not require much formal research and development” (Aboal et al., 2015, p. 538). Service innovation will always emerge from a process of interactive learning amongst the actors involved, occurring as planned, either intentionally or unintentionally (Gallouj and Savona, 2009). Innovation in the service sector has characteristics that distinguish it from other sectors. Sundbo and Gallouj (1998) formulated a summary of the characteristics inherent to the management of innovation in service companies. The first feature noticed is flexibility, as it identifies the absence of structures dedicated to innovation, such as Research and Development departments, with the innovation activity generally in charge of a marketing department or ad hoc project teams. According to these authors, it is the informal development of a set of people and activities that drives innovation. The second feature is the need for staff skills. Regardless of the branch of service, when purchasing a service, the customer expects the best service possible. Therefore, staff qualification becomes an important element, as does the development of learning mechanisms by the organisation. The third and final striking feature is the involvement of external stakeholders, especially customers and suppliers. Although the tendency to perceive that innovation in services is becoming more systematic, integrating the organisation’s strategy, it is still administered in a fairly contingent way. Thus, innovation in service works by solving a customer’s problem(s) (Sundbo and Gallouj, 2000). This solution may be given through a new service or by changing to an existing service, which must be put into practice. It provides benefits for the organisation that develop it and these benefits are the resulting in added value for customers (Toivonen and Tuominen, 2009). Sundbo and Gallouj (1998) show that innovation in services can occur in four ways: product innovation, process innovation, organisational or managerial innovations and market innovations. Product innovation relates to the provision of a new service, such as a new line of bank credit. Process innovation is related to the change in the way the customer is served, service delivery, or procedures for the preparation of the service. In turn, organisational or managerial innovations relate to the introduction of new techniques of planning, process management, and adoption of indicators, among others. Lastly, market innovations occur in the action of identifying new markets, market niches in which they operate, and also changing the organisation’s behaviour in the market in which it already operates. 3.1 Innovation capabilities in firms Throughout history, and as a result of the limited attention given to services, studies on firm capabilities have been built within the framework of an industrial logic. Based on the existing theoretical construction, one of the goals of this study is to verify the existence of limitations between the concepts associated with capabilities in industrial firms and those in service firms. In this paper, the firm is conceptualised by unifying two different, but complimentary, perspectives: transaction costs economics and Schumpeterian entrepreneurship. The first Downloaded by Linkoping University Library At 22:03 26 October 2017 (PT) argues that a firm is an agent that internalises and coordinates transactions inside an “organisation” so as to minimise its costs, when compared to the same transactions on the open market, operating within a governance structure (Coase, 1937; Williamson, 1991). The second perspective highlights the entrepreneur as the central figure, seeking changes and innovation in order to keep operating in the market through the use and development of multiple resource types (Schumpeter, 1942; Dosi, 1988; Nelson and Winter, 1982). By combining these two traditions, it is possible to define the firm as having both coordinator and entrepreneur functions. As Zawislak et al. (2012, pp. 15-16) puts it: “the firm is the technological-economic agent that produces goods and services and transacts in the market by operating within a cost-minimising organisational structure that should change over time by both internal and external forces”, or “an economic agent that promotes technological change and innovation in order not only to reduce costs (efficiency), but to increase revenues by making it more efficient than the market”. Ultimately, the firm will prevail if it succeeds in filling a market gap over time. To do this, it has to develop a specific knowledge or technology, operationalise it, organise it with a managerial corpus and engage in successful market transactions. To gain significance in the market, firms need to develop certain capabilities to overcome the competition. These capabilities and their combinations can boost innovations, be they products, processes, management, internal to the firm or external in the market. Over the past decade, many studies have been carried out to understand capabilities that can lead to innovation (Crossan and Apaydin, 2010; Guan and Ma, 2003; Lawson and Samson, 2001; Yam et al., 2011; Zawislak et al., 2012). These researchers show much understanding about firm innovation capabilities and their influence factors, such as culture, organisational intelligence, technology management, and market research, among others. In this study, we adopt the innovation capabilities framework from Zawislak et al. (2012), which has a traditional industrial logic, considering that every firm has four different, complimentary capabilities: technology development; operations; management; and transaction. Technological capability is the ability to interpret, absorb and transform a given technology to improve other capabilities in order to reach higher levels of technical-economic efficiency; it is responsible for developing the knowledge necessary to produce a firm’s products. Operational capability is the ability to perform the productive capacity through a set of daily routines (based on knowledge, skills and technical systems); i.e., responsible for converting the knowledge into a set of practical procedures to transform technology into products. Management capability is the ability to integrate and coordinate the firm’s resources, transforming them into coherent operation and transaction arrangements. Finally, transactional capability is the ability to reduce the costs of sales, communication and related activities (Zawislak et al., 2012). Integration among these capabilities builds the innovation capability, that can be understood as “both the technological learning process from the firm translated into the technology development and operations capabilities, as well as the managerial and transactional routines represented by the management and transaction capabilities” (Zawislak et al., 2012, p. 17). This innovation capabilities framework is presented in Figure 2. Innovation capabilities in services 495 Innovation capability Technology driven capabilities Technology development capability Operations capability Business driven capabilities Management capability Source: Adapted from Zawislak et al. (2012) Transaction capability Figure 2. Innovation capabilities framework ARLA 30,4 Downloaded by Linkoping University Library At 22:03 26 October 2017 (PT) 496 According to this logic, innovation can occur in any of these four capabilities: the firm can develop new technology, new ways of producing, innovative forms of management, and unexplored ways of transacting. Differential performance results from successful innovation in any of these capabilities over time, enjoying so-called Schumpeterian profits. Teece et al. (1997) use a different, but complementary, argument to elucidate that what makes a firm successful is its dynamic capabilities; i.e., its ability to achieve new forms of competitive advantage in a changing business environment. As the authors put it, “the term ‘capabilities’ emphasises the key role of strategic management in appropriately adapting, integrating, and reconfiguring internal and external organisational skills, resources and functional competencies to match the requirements of a changing environment” (Teece et al., 1997, p. 516). It is possible to connect the two approaches, as innovation can occur in any of the four capabilities resulting from new forms of competitive advantage created by a firm’s strategic management. The four capabilities cited above can also be distinguished in service companies, but considering that the model shown in Figure 2 was developed within the industrial linear logic – which is reflected on the factory floor, or the chain of activities internalised by the firm – the direct transposition of models would incur in ignoring the services’ specificity. IHIP service characteristics affect the way of developing the knowledge necessary for service production/development, since the clients are directly involved in the process. The clients’ active participation changes their perception of a product’s quality, since it is assessed throughout the development process and not only when it is finalised. Likewise, the simultaneity between supply and consumption affects both the operation and the supply of services to the market, making it difficult to establish routines for “mass production”. In this sense, Bressant and Nicolaidis (1988, apud Vargas, 2006) argue that network organisation is the ideal form of organisation for service operation, since it simultaneously allows the broadening of the range of intersectorial relations and the extension of customer relationships beyond the trade moment. The service management process is also differentiated, since the processes of development, operation and transaction occur simultaneously, undergoing continuous adjustments from beginning to end. Few studies try to link innovation capabilities in service delivery. Ordanini and Parasuraman (2011) propose a framework containing collaborative competency, dynamic capability of customer orientation and knowledge interfaces. In short, they study how capabilities impact innovation in service delivery. In a posterior work, Ordanini et al. (2014) argue that innovation in service delivery needs interlinked attributes to be adopted, but they do not discuss what capabilities firms need to develop these attributes. Based on this perspective, we argue that more intellectual exploration is needed to address innovation in services, since the capabilities framework was developed within industrial logic and may provide a limited explanation. However, the framework described earlier is maintained as a basis for the research due to the lack of related studies in services. In the next section, the research procedures used for exploring the relationship between capabilities and service innovation are described. 4. Research procedures This study is a qualitative exploratory research. The method is suitable for this research objective because there is a lack of evidence regarding innovation in a service context. There is a substantial amount of conceptual development in innovation, but it focusses mostly on the industrial sector. Due to this theoretical gap, a multi-case approach was chosen to further assess the way firms’ capabilities combine to create service innovation. This research technique seeks to understand a phenomenon that has not been broadly explored and that occurs in a non-controlled environment. In this kind of study, observing the reality collects empirical evidence and/or interviewing subjects who are directly related to the phenomenon in question (Yin, 2003). Downloaded by Linkoping University Library At 22:03 26 October 2017 (PT) The research instrument used was a semi-structured questionnaire, acquired from Zawislak et al. (2014), in which the authors analysed the characteristics of innovative firms in the Brazilian industrial context. A semi-structured questionnaire is a proper choice as it allows greater flexibility for the researcher, given that new questions can emerge and be explored in the field. The field of study was the Brazilian fitness services market. Specifically, in order to capture significant empirical variability, we investigated gyms that offered different services and with different customer profiles. Five cases were analysed: four gyms and one personal trainer. Data collection was carried out in three stages: first, data about the company was searched for in secondary sources ( firm’s website); second, semi-structured interviews were conducted from May to August 2014 with firms’ main manager; third, while visiting each firm, local data were collected. Confidentiality was maintained by using pseudonyms in each case. 5. Results 5.1 The industrial gym The industrial gym started in 2009 as a new business unit of an already established fitness chain, and was created to fulfil a gap detected in the Brazilian market. Since then, it has opened more than 100 units in three countries. Its main activity is to provide an affordable service with high quality fitness equipment and instructor supervision. The management structure is flatter than a traditional business. Knowledge is shared among units, although there is a global board. The management likes to think it has a unique management method when compared to other gyms. The manager interviewed argued that this gym does not have any direct competitors; in general, other gyms add many services that raise the cost of membership. The firm’s main objective is to provide training on a large scale, and this goes hand-in-hand with its low- pricing policy, in place, not just in particular units, but throughout the whole chain. The idea is to be “close to people”, offering a high quality, low-cost locale near everybody’s home where they can work out. Thus, this gym’s objective was to revolutionise the market: to offer a large-scale low-cost fitness service. Employees have some targets in terms of service quality, but not in sales. The focus is to welcome customers and carry out administrative tasks. Technology is important for facilitating customer service: it is possible to subscribe and pay via the internet or on self-service totems. There are virtual classes clients can attend, and modern standard fitness equipment. Innovation is a concern in the firm. This cost-benefit model was the first to be implemented in Brazil, and a consequence of the original franchise’s expansion plans. This model was an innovation for the company and for the Brazilian market. The manager stated that innovation is a constant topic in the firm’s strategic plans. An interesting statement was that, imagining the firm’s capabilities, the four of them are equally important: “it’s a flat model; the four are side by side”. Yet this gym’s fitness service is still somewhat intangible. The firm operates more as an industrial business than a pure service – this is why we have called this case the “industrial gym”. There is a high degree of standardisation in the gym’s processes, and there is no customised customer experience besides the training prescriptions. The value creation is cantered on a low cost, high-scale perspective. Even if the service itself may not be the best from a customer perspective, it has high capillarity in the market, with plans for further expansion. 5.2 The diversified gym This gym was established in 2010, but the brand had already existed in Brazil for over 30 years. The gym is part of a larger group that has a corporate board. It is mandatory for the gym to have a local shareholder, who is the manager and will be in charge of giving an Innovation capabilities in services 497 ARLA 30,4 Downloaded by Linkoping University Library At 22:03 26 October 2017 (PT) 498 identity to the business. The board’s objective is to develop the chain’s strategic management, focussing on innovations, equipment, techniques, and modern solutions. Each team assesses whether the new acquisition or technique will be valued by its customers. The management is concerned with “what the customers want, what the gym’s public is searching for”, seeking the gym’s own personality through its clients. The customer profile is different from the traditional urban inhabitant. The neighbourhood has a unique vivacity due to the presence of a lake in the region. Therefore, the gym’s range encompasses people more inclined to engage in outdoor activities than indoor ones. This is why the management has to make sure it designs activities that will be compatible with this lifestyle. This gym’s board wants to be a step ahead in terms of technology. As such, it has developed software that helps trainers to design personalised activities for their clients. This software has many features, for example, it blocks certain types of exercises if an injury is reported. The objective is to provide a personalised experience, and to show that the gym cares about its customers’ health. The fitness room has up to seven instructors working at the same time, and they make a point of knowing the customer by name, try to create a closer bond and avoid a feeling of “I am just another customer”. Besides the fitness room, the gym offers more than 140 sessions a month of different activities: dance classes, martial arts, sports, and gymnastics for select groups from children to the elderly. This is because it aims to provide an array of activities related to general welfare, rather than just traditional weightlifting exercises. The gym has a specific way of stimulating innovation in the business: it rewards employees who create a new technique, process, activity, and so on. The employee responsible for the innovation then competes with other innovators from different units for an annual award. There is also an annual meeting, convened with both management and instructors, to discuss innovation involving the whole chain. Intangibility is present in the gym’s relationship with its customers, concerned with conciliating its activities with clients’ lifestyles. As the manager affirmed, innovation can occur in any of the business’ capabilities. For him, all the capabilities are very important. He did not determine any one as being more prevalent. But this gym has some industrial traits, as it offers many kinds of activities in the same way factories offer many lines of goods. We called this case the “diversified gym” to highlight its feature of mixing pure services with services that remind us of industrial diversification. 5.3 The family gym The gym was established in 1986 as a swimming school. Later on, in the 1990s, it started to offer gymnastics and weightlifting training. Since then, the gym has expanded its services, and now offers an array of activities and facilities, such as swimming (children and adults), a fitness room, Pilates, a running club, personal trainers, and dance, to about 600 active members. All the activities are coordinated by a general manager who is the business owner. He started as an employee in 2004, and identified an opportunity to acquire the gym in 2007. He stated that the change in ownership happened because the older investor lost interest in the business. From then on, the gym has undergone important changes in the way it conducts its activities. The new owner altered the consumer retention strategy: the focus changed from monthly to annual and biannual membership plans. The idea of this was to build customer loyalty and create a closer bond. Moreover, its positioning changed to that of a diversified gym that could embrace all family members, from children to the elderly. This happened because, besides a good array of physical activities, it offers a closer contact with its clients, and trainers and other employees are stimulated to engage in friendly informal conversations Downloaded by Linkoping University Library At 22:03 26 October 2017 (PT) with clients. This is made possible by maintaining a not too crowded environment, and a medium sized fitness room, not the usual huge floors with loads of people and equipment. This new positioning avoided direct competitors, since others could not combine diversified fitness activities with a “user-friendly” approach. The manager said that, indeed, the retention rate had risen substantially following the change of strategy. However, the gym has many indirect competitors, such as the classic fitness gyms, leisure clubs, and low cost “do-it-yourself” franchise gyms. All the pricing is determined internally, and the only activity that is fixed considering market prices is Pilates, because the local competition is very high. In fact, management has no sound knowledge about Pilates’ competition. Technology is not focussed just in the gym, but rather, there is a policy of always trying to add better fitness equipment and keep everything in good working order, bearing in mind the limited space (which has doubled in the last four years). It became clear that what creates value is the capacity of fostering a family environment in what is, traditionally, a place for lone individuals. Usually, gyms are not capable of turning customers into friends, even less so of capturing members that include whole families. Creating bonds in this gym is the rule and the lone weightlifter is the exception. It seems that even the importance of the quality of the fitness equipment pales beside members’ feelings of being cared for. We called this case the “family gym” because of the different relationship it has with its clients. It believes that management capability comes first, followed by operations, transactions, and technology. The intangibility here plays an important and central role: the firm’s position on the goods-service continuum is more left-sided than right. This “intangible innovation” comes from a mix of the way in which operations and transactions are carried out with customers, guided by a central manager and assisted by some technology (equipment). Our analyses indicate that it is a consequence of an overlapping of capabilities, yet the transaction capability is preponderant. 5.4 The neighbourhood gym (NG) Founded in 1965 and acquired by the current owner in 1970, the NG is the oldest in operation in Rio Grande do Sul State. Initially focussing on bodybuilding, the gym has changed its focus since the 1990s due to market demands, specialising in weight training for health and welfare. Its clients include a range of men and women aged 16 and over. This is a small business that has a team of three professionals (the owner plus two employees) and attends approximately 200 clients per month in three shifts. Each team member is responsible for one shift, and his/her activities include customer assistance, controlling sign-ups, payments and gym entry. To facilitate these administrative processes, the gym uses well-known software for gyms, which also records monthly assessments and monitoring of clients’ progress with customised training, developed by instructors according to client’s demands and constraints. The execution of the training is the customer’s responsibility, and the instructor plays the role of an assistant. When the gym was founded, the knowledge came from the owner’s experience as a gym client and from international specialised magazines – information about bodybuilding was restricted. Today, college curriculums have changed and knowledge comes from continuous search for new techniques by employees’ experience and expertise, as well as from the clients’ demands during training. The owner is the manager. He predominantly makes the decisions on tactical and operational levels, and has a very particular understanding of the firm’s position in the market. Despite considering competition a good thing, because it pushes companies to evolve, the owner believes that “there is enough market for everyone” and does not perform any competition analysis. Regarding strategy, the owner’s vision is that “the academy only Innovation capabilities in services 499 ARLA 30,4 Downloaded by Linkoping University Library At 22:03 26 October 2017 (PT) 500 exists because of the clients”, and by believing that the gym has sufficient capacity to maintain a family atmosphere, he does not intend to expand the business. His goal is to keep the gym running by modernising his equipment and techniques, but without expanding the range of activities, since “by doing many things at the same time, you can’t do everything well”. The pricing of the services is cost-based and takes into account the socioeconomic profile of the clients. In order to maintain a more affordable price, the gym negotiates with local suppliers, and buys customised equipment that, according to the interviewees, are cheaper and similar in quality when compared to those sold in specialised stores. The price varies according to the number of training days, and the gym offers only monthly packages (it has no semi-annual or annual packages), because it considers this the most advantageous for both parties. This system allows the gym to control the real number of regular clients, and customers may sign out at any time without major financial losses. As a form of customer loyalty, it has a renewable programme every year, which offers monthly discounts to clients who maintain their attendance for 12 consecutive months (discounting one month for holidays). The gym attempts to maintain a close relationship with its clients, like a family. According to the owner, the gym is not only a place where clients can improve their physical health, but also a kind of therapy, a moment to interact with other people. He believes that large gyms cannot offer this proximity because there is a distance between customers and the owner: “today, if customers want to complain or talk, they come straight to me”. This proximity generates a loyalty that runs through generations of clients, and customer satisfaction, associated with virtual communication channels (website and social media) is the main tool through which the company is promoted. The firm is open to receiving suggestions from customers and employees, and the clients are consulted before any changes. The owner states that the most significant change that occurred in the business was the change in the gym’s focus implemented in the 1990s – from bodybuilding to weight training focussed on health care, and the expansion of the physical space in 2012. While the former may be considered, at the time, as a sector innovation, which resulted in the expansion of its market niche, the latter was an innovation at firm level. Focussing on health care increased demand by 50 per cent, and expanding the gym space increased its capacity to 250 clients. The owner stated that all capabilities are interlinked and equally important. Compared to other cases, we highlight again the intangible nature of the product offered. Although the gym uses some technology to manage the administrative processes, it has updated the equipment and has its own training models; it appears that customer relationships are the main driver that allows the perpetuation of the firm. Clients are usually friends and they know their colleagues by name. They all live near the gym and share the feeling of neighbourhood/community, which is why we called this case the “neighbourhood gym”. 5.5 The personal trainer This personal trainer has been operating in the market since 1999. He was part of a group of eight personal trainers with ample experience. The main interface between this professional and his customer is established on first contact – the majority of clients are recommended. Some of his clients have been with him for over six years and have created an all-important close bond with him. The objective is not to pay attention only to physical aspects, but to psychological ones too. He accumulated knowledge through many courses, a post-graduation in exercise physiology, functional training, and management seminars. He is part of a fitness study group (eight to ten people), with monthly sessions. Several scientific articles in major journals are selected to foster discussion, and the aim is to share knowledge and techniques that will be applied in practice. Downloaded by Linkoping University Library At 22:03 26 October 2017 (PT) Many aspects demand attention in this job. The first is assiduity, which is central. Then a bond has to be created with the customer, and he must be motivated. The message that the trainer tries to convey is that physical activity is important to people’s lives and essential for sustained future health. It is always necessary, however, to combine the needs and objectives of clients to design a personalised plan of activities. Another important issue is the close relationship the professional creates with his customers. To sustain this relationship, besides training, he needs to be aware of what is happening in society in general: the political situation, the economy, and social issues, in Brazil and worldwide. This is why he has to make sure he is up-to-date, listen to the radio, browse the Net, read newspapers, and so on. Also, knowing some of his customers’ preferences will help establish conversation. For example, if the client likes sailing, the trainer will try to learn a little about it in order to chat about it with his client. This attitude will help to establish a good trainer-pupil relationship, and it is the core of loyalty. Some pricing policies exist to maintain the retention rates stable: for every renewal of the semi-annual plan, customers get one month free of charge. He tries to implement a strategy to motivate people to exercise. Sometimes, it is difficult to find an activity that is suitable because of a client’s inherent condition or disability. In this scenario, knowledge is crucial, and training must be highly personalised. Anyway, the aim will always be the clients’ long-term welfare. Fitness equipment is not that important since many clients work out in parks or in the street. The trainer has to be aware of the client’s diverse objectives, mood and preferred exercise. He has to be prepared to hear a “no” and change the training session on the go. The degree of intimacy is higher than in usual gyms, thus there is high intangibility in the instructor-client relationship. This is the main value created, and innovation is an effort that comes entirely from the professional, which is not an easy task. Much research is needed to create a unique type of activity that will keep old customers and attract new ones, and there is always the possibility of being imitated by other trainers. When asked what capability is the most important, the trainer answered “transaction”, because, in his view, the relationship with customers is primordial in his activity. 6. Analysis and discussion A synthesis of the capabilities in the analysis of the cases is presented in Table II. There was significant differentiation between the cases, with several levels of intangibility detected. The industrial gym shows many characteristics of the traditional standardised large scale production lines. The diversified gym has a mix of pure service and services that are like goods in a way. The family gym, while it has some level of diversification, presents high intangibility with its bond with clients. It is less diversified and has a high level of community spirit that keeps the gym running, even with its low reach. Finally, the personal trainer has the highest intangibility level in his activities, because he has to train his clients, even without specific fitness equipment. With these diverse tangibility levels in mind, it is possible to sort the cases using the services continuum ( Johnson and Gustafsson, 2003). This classification is important to show that, first, these services have many supply modes, and, second, that the cases captured this diversity. This can be seen in Figure 3. In terms of capabilities, the case descriptions show that the four capabilities are present in the firms, as defined by Zawislak et al. (2014). Therefore, we share the proposition that every firm has technology, operations, management and transaction capability. Although the four capabilities are present, the way they relate to each other shows significant differences when compared to the Zawislak et al.’s (2014) model. This is because services are offered by different means, as discussed in the related literature. Cases showed that is not possible to think of capabilities in a service context in a linear mode. We propose Innovation capabilities in services 501 ARLA 30,4 Technology capability 502 Downloaded by Linkoping University Library At 22:03 26 October 2017 (PT) Operational capability Table II. Cases’ capabilities synthesis Industrial gym Diversified gym Family gym The gym uses technology for facilitating the customer service: Virtual classes and modern fitness equipment. Technology is central The gym’s objective is revolutionise the market by offering large-scale low-cost fitness service The gym developed a software that helps trainers to design personalised activities to their customers The gym has a policy of always add good fitness equipment and keep everything functional, although it is not a “high tech” gym Besides the The gym fitness room, the strategy is gym offers more maintaining a than 140 not too crowded sessions of ambience and a diversified medium sized activities fitness room so monthly trainers can manage to attend all customers Management is The gym is A general more flat than a part of a larger manager who is traditional business. group that has also the business Knowledge is a corporate owner shared among units board. It is not coordinates all self-managed the activities Neighbourhood Personal gym trainer The gym’s goal is to keep running through modernisation of equipment and techniques Auxiliary equipment is essential since many clients workout in parks and such The gym strategy is to continue working with fitness (specialisation) without expanding the range of activities It is important to be aware of the diverse objectives, mood, and preferred client’s way of exercising to achieve operational efficiency Managerial The Management capability management is comes from the held by the trainer himself business owner, who makes decisions predominantly on tactical and operational levels The gym’s goal Pricing is cost- The trainer is Transactional The gym’s goal is to The goal is to is to build based and the concerned not capability be “close to the provide a customer loyalty gym attempts to to give people”, offering a personalised and create a maintain a close attention to place near experience, physical everybody’s home showing that the closer bond with relationship with its clients aspects only to workout with gym cares about all family members, from but to quality and low customer’s children to psychological cost. Pricing is very health elderly ones as well relevant Source: Elaborated by the authors that capabilities overlap, and the results showed they are a more accurate way of describing service dynamics. Starting from the basic innovation capabilities framework of Zawislak et al. (2012), we propose a different framework, considering the form of integrating the capabilities in services. Instead of linking the four capabilities linearly, we argue their capabilities will overlap in the creation of value, and innovation comes within this association. Therefore, the distinct feature is that, although the four capabilities will always exist in some way, they overlap and are impossible to separate or arrange linearly. This will occur, basically, because of the medium to high degree of intangibility present in services. Figure 4 illustrates this. Our cases showed that the intersection is the place for creating value and innovation. Innovation can emerge from any capability, but will be perceived only if it is merged with Innovation capabilities in services Goods-services package Core services Pure services Downloaded by Linkoping University Library At 22:03 26 October 2017 (PT) m m m er ym in gy gy gy lg ra d d y t a l e o i i l o fi m str na rh rsi Fa du rso ou ve e i In b P h D ig Ne Source: Elaborated by the authors Technology development capability 503 Figure 3. Services continuum of the analysed cases Operations capability Innovation capability Transaction capability Management capability Source: Elaborated by the authors the other capabilities. Even if one capability is preponderant, and it probably will be, this model advances our understanding of service innovation dynamics: without the superimposition of capabilities, innovation is not possible. This is a striking difference between the proposed model and Zawislak et al.’s (2012): while the former has an industrial mind-set, the latter tries to capture the specificities of service offering. This dynamic can be detected in some managers’ statements when they argue that all capabilities are important for firm innovation success. The intangibility in service provision and the simultaneity between consumption and supply compels firm’s capabilities to have synergy, even though one can be more preponderant at a certain time. Based on this analysis, we propose our set of propositions for the capabilities framework in services: P1. Every firm has all four capabilities. None of them are null. We share the same proposition as Zawislak et al. (2012) because the cases showed that, indeed, it is not possible to think of a firm functioning without any one of the capabilities. In addition, because offering and consumption occurs at the same moment, the four capabilities will be present at the same time. This dynamic is presented in Figure 4, which includes the intersection of capabilities. Figure 4. Innovation capabilities framework for services ARLA 30,4 The case descriptions showed that one capability could be more important than others, with respect to the kind of service offered. Therefore, the second proposition is presented: P2. To be innovative, at least one of the firm’s capabilities must be predominant, but not independent. Downloaded by Linkoping University Library At 22:03 26 October 2017 (PT) 504 This proposition is similar to Zawislak et al. (2012), but with an addition: one capability will probably be predominant and have more potential for creating innovation, but it will be successful only if it is well merged with the other capabilities. Moreover, non-linearity is central in service provision and innovation. It is possible to argue that, due to the specificities in service offering, a firm’s capabilities can behave in diverse ways when meeting customer needs. This was observed in the different way capabilities related to each other in the cases analysed, leading to the next proposition: P3. The more intangible the service is, the more transaction capability will be central. The analysis showed that, as we move toward the pure services continuum, more transactional skills are needed for the service’s performance. The close relationship between trainer and pupil is highly important for value perception. While the industrial gym does not focus on personalised experience, the personal trainer has to provide a different class every time. Furthermore, every time a pure service is provided, the customer will assess it in terms of cost-benefit and the wide range of alternatives in the market. Thus, the transactional capability will not work independently of the others, for example, knowledge has to be present to be converted into new training methods. 7. Conclusion Service innovation still lacks solid underpinning from the scientific literature, despite its growing importance in the world economy. The aim of this exploratory research was to advance understanding of innovation in services, focussing on the capabilities, departing from the related literature and seeking new insights. An exploratory research was conducted to fulfil this study’s objective. The field of study was gyms that have diverse ways of doing business. The search for gyms with different business approaches had the purpose of identifying dissimilarities in their innovation capabilities. Regarding the capabilities, results indicate that the four capabilities exist in both industrial and service businesses. However, it is not possible to think of capabilities in a service context in a linear way, as shown in Zawislak et al. (2014), which focussed on the industrial sector. We propose that capabilities overlap, and this study showed that it is a more accurate way of describing service dynamics. Intangibility plays a key role in services and service innovation. Therefore, results indicate that it is not possible to think of innovation in services without an intersection of capabilities. This is a central difference between the services and manufacturing industries that Zawislak et al. (2014) did not point out. Thus, we identified the same capabilities as Zawislak et al. (2014), and verified that one will always be more central. Moreover, intangibility makes firms that are in a pure service context more transactional as they move into a pure service context. We argue that our model advances our understanding of innovation, capabilities and service relations. Nevertheless, to consolidate our proposition, and even expand it, more research is necessary, with a greater array of service types and more diverse firms. We suggest that more exploratory research should be conducted in diverse service sectors to relate to the model presented. Then, a quantitative approach would be possible to assess the relationship between the preponderant capabilities and innovation. Since this is an exploratory research, generalisations are not possible. Future research should try to work with samples that can make inferences about how capabilities work in services and their relation to firms’ success. As the service sector is very diverse, we suggest more field research to see if our proposed model makes sense in other activities besides fitness. References Downloaded by Linkoping University Library At 22:03 26 October 2017 (PT) Aboal, D., Bravo-Ortega, C. and Crespi, G. 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Zawislak, P.A., Tello-Gamarra, J.T., Alves, A.C., Barbieux, D. and Reichert, F.M. (2014), “The different innovation capabilities of the firm: further remarks upon the Brazilian experience”, Journal of Innovation Economics & Management, Vol. 13 No. 1, pp. 129-150. Further reading Ministério do Desenvolvimento, Indústria e Comércio Exterior (2014), “Importância do Setor Terciário”, available at: www.mdic.gov.br/sitio/interna/interna.php?area=4&menu=4485 (accessed July 21, 2014). Corresponding author Mauricio Pozzebon de Lima can be contacted at: [email protected] For instructions on how to order reprints of this article, please visit our website: www.emeraldgrouppublishing.com/licensing/reprints.htm Or contact us for further details: [email protected] Innovation capabilities in services 507
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