4.11 Innovation Types and Innovation Management Practices in Service Companies

International Journal of Operations & Production Management
Innovation types and innovation management practices in service companies

Adegoke Oke
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Adegoke Oke, (2007),"Innovation types and innovation management practices in service companies",
International Journal of Operations & Production Management, Vol. 27 Iss 6 pp. 564 - 587
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IJOPM
27,6 Innovation types and innovation
management practices
in service companies
564
Adegoke Oke
School of Global Management and Leadership,
Arizona State University, Glendale, Arizona, USA
Abstract
Purpose – The purpose of this study is to investigate the different types of innovation that are
predominant in companies in the UK services sector, the degree of innovativeness, the practices
associated with the pursuit of innovation and their relationship with company performance.
Design/methodology/approach – The empirical phase of the study was conducted using a
two-stage process initiated by interviews and completed with mail surveys. Interviews were held with
six senior executives of leading service companies in the UK. 214 senior managers of UK service
companies were surveyed. The response rate was 47 per cent. Relevant statistical analytical
techniques including regressions were used to analyse the data.
Findings – Product innovations are emphasized more in telecommunications and financial sectors
than in transport and retail sectors while service innovations are emphasized more in retail and
transport sectors. Radical and incremental innovations were found to be related to innovation
performance. Radical innovations were also found to be related to innovation management practices.
Practical implications – Service companies need to pursue radical, me-too and incremental
innovations. Formal practices and processes must not be limited to the pursuit of radical innovations.
Service companies must also recognize the pursuit of incremental innovations formally in their
innovation strategies and define formal process for implementing these types of innovation.
Originality/value – The finding that formal practices are set up to foster the development of radical
innovations in spite of the fact that both me-too and incremental innovations are also related to
innovation performance represents an interesting contribution. Applying a framework that was based
on the development of new products and innovations in the manufacturing context to the service
context represents a contribution to the extant literature. Finally, investigating the link between
innovation types, innovativeness, management practices and innovation performance in service
companies is pioneering.
Keywords Innovation, Product innovation, New products, Service industries, United Kingdom
Paper type Research paper
Introduction
The importance of the service sector is growing in western economies. There has been
a growth in the service sector contribution to the GNP in the UK over the last ten years
(Figure 1). In 2005, services were responsible for 50 per cent of GNP in the UK while the
manufacturing sector contributed 14.9 per cent of GNP (EIU, 2006). Innovations in
services have led to the greatest level of growth and dynamism over the past several
International Journal of Operations & years in terms of economic activity (de Brentani, 2001). The service sector is comprised
Production Management
Vol. 27 No. 6, 2007
pp. 564-587 The author would like to thank Professor Phil Mizzi for his valuable comments. The author
q Emerald Group Publishing Limited
0144-3577
would also like to thank the anonymous reviewers of this paper for their careful reading of the
DOI 10.1108/01443570710750268 paper and their constructive comments.
Manufacturing Innovation types
60 Services (combined) and management
practices
50
40 565
% of total GDP
30
20
10 Figure 1.
Percent of total GDP of

0 manufacturing and service
1995 1996 1997 1998 1999 2000 2002 2003 2004 2005 sectors: UK data (EIU,
1995-2006 data)
Year
of the transport, government, education, health care, social and personal services, retail
and wholesale, hotels and restaurants, telecommunication and financial sectors. The
financial services sector, contributing 20.8 per cent of GNP in the UK in 2005 (EIU,
2006), is wide ranging and covers banks, building societies, insurance and companies
from other sectors setting up financial services operations. The barriers to entry are
relatively low, likely due to the ease of copying new financial products and the
difficulty of achieving sustainable competitive advantages using product strategy
(Drew, 1995).
In response to the growth of the service sector, academic interest in the management
of service companies has also grown (Johnston, 1999). Early work in services focused
on the diffusion and adoption of innovative services (Peterson et al., 1972; Green et al.,
1974; Warren et al., 1989). The differentiating characteristics of services from
manufacturing, intangibility, perishability, heterogeneity and simultaneity were at the
forefront of this work on services (Johne and Storey, 1997; Song et al., 1999). In spite of
these differences, research studies on services have followed the more established line
of studies on manufactured products. For example, in the service operations
management, studies were undertaken to investigate key operations issues including
capacity management, design, total quality management, strategy formulation and
flexibility in service operations (Sullivan, 1982; Galloway and White, 1989; Harvey,
1990; McLaughlin et al., 1991; Haynes and Thies, 1991; Silvestro, 1999; Collier and
Meyer, 2000; Brah et al., 2000; Klassen and Rohleder, 2002; Aranda, 2003; Voss et al.,
2005). Studies on innovations in the service sector, however, have received little
attention from academic researchers (Johne and Storey, 1997; de Brentani, 2001).
Lievens and Moenaert (2001) contend that research contributions in the field of service
innovation have evolved gradually and are still largely fragmented. Drew (1995)
argued that research on new product development and innovation in financial services
has lagged behind similar investigation in the manufacturing sector. Research
identifying innovation types and exploring relationships between innovation types,
management practices and innovation performance has particularly lagged. Menor et al.
IJOPM (2002) contend that although there is agreement in the literature that different types of
27,6 innovations exist in service companies, there is still little agreement on what these
different types are. The objective of this study is to identify the different types of
innovation that are predominant in companies in the UK services sector, the degree of
innovativeness, the practices associated with the pursuit of innovation and their
relationship with company performance.
566
Literature review and research questions
Research contributions in service innovation have drawn on an extensive literature in
new product development in manufacturing. Some studies investigating the success
factors in financial services simply incorporated the traditional manufacturing
paradigms of new product success into a service setting (Lievens and Moenaert, 2001).
Other studies explored the differences between new product development and new
service development (Easingwood, 1986; Cooper et al., 1994; Griffin, 1997; de Brentani,
2001). Avlonitis et al. (2001) investigated the role of service innovativeness in new
financial services by extending an earlier study by Song et al. (1999) on manufactured
products. Avlonitis et al. (2001) identified different types of service innovativeness
bearing similarities to the product innovativeness types developed by Song et al.
(1999). These studies established links between the types of innovativeness and
different development patterns including formality and cross-functional teams.
Avlonitis et al. (2001) focused on service products to determine the degree of
innovations in service companies. de Brentani (2001) focused on service products in
studying innovation in business services. The core offering of service companies is
often referred to as a service product or simply as a product even though most tend to
be intangible (Oke, 2004). The terms “service product innovations” and “product
innovations” have been used interchangeably in the literature to describe a particular
set of innovations in service companies. Service product innovations are related to new
developments in the core offering of service companies that tend to create new revenue
streams. In the financial and insurance services sector, this includes new or improved
mortgage products like interest only or other repayment options, credit cards options
like gold, silver, platinum, or blue cards or a corporate card and general insurance
products like buildings, contents, travel, medical, motor and payment protection.
Service product innovations for investment banks include the development of
investment solutions for clients like the restructuring of debt using derivative
instruments.
Gadrey et al. (1995) define service innovations as innovations in processes and
innovations in organization for existing service products. Service innovations can,
therefore, be described as new developments in activities undertaken to deliver core
service products for various reasons, e.g. to make those core service products more
attractive to consumers. Such developments tend to involve interaction with customers
and can be associated with either new or existing service products. Johne and Storey
(1997) argue that service suppliers must develop the precise form of service product
and the appropriate nature of interaction with customers since the interaction process
is typically an integral part of an offering. Service innovations are, therefore, related to
variations in product delivery or add-on services embellishing the service experience
for the customer. The service innovations may influence or be influenced by
innovations in the core service product. Service innovations include new processes for Innovation types
fast-tracking insurance claims and faster processes for issuing credit cards. and management
Managers of service companies will be concerned with a portfolio of product and
service innovation projects which have differing degrees of innovativeness. These practices
projects might include radical type projects concerning new products or services and
incremental type projects concerning improvements to existing products or
services (Cooper et al., 1999). de Brentani (2001) suggested that the understanding of 567
how to achieve positive product outcomes can be improved by exploring the
innovativeness of products being developed by firms. Several studies have
investigated the innovativeness of different types of innovation and their
relationship with performance. Discontinuous innovations, defined as innovations
with high-technological newness and a high degree of newness to market by
de Brentani (2001), have been found to result in major competitive advantages (Urban
and Hauser, 1993; Crawford, 1994; Lynn et al., 1996; Griffin, 1997). Storey and
Easingwood (1998) argue that simple augmented service offerings have the capability
to impact a company’s profitability and sales. Cooper and Kleinschmidt (1986) and
Cooper and de Brentani (1991) have argued that highly innovative and incremental
new products would lead to superior performance in industrial product firms. Many
studies exploring the relationship between innovation types, their innovativeness and
company performance were based on manufactured, tangible products. One
contribution of this paper is an investigation of innovation types and their
innovativeness predominant in UK service companies and the relationship between
innovation types and their innovativeness with innovation performance. The RQ1 that
was investigated is:
RQ1. What are the types of and the innovativeness of, innovations that are
predominant in the UK service sector and how do innovation types and their
innovativeness relate to innovation performance?
Ali (1994) argues that the type of innovation and the innovativeness of an innovation
being developed relate to the approach or practice that a manager employs to develop
or implement the project. Song and Montoya-Weiss (1998) find that a formal process
may be detrimental to success when the innovation is an improvement to existing
products. Few studies actually investigate the link between the type and
innovativeness of an innovation and the type of innovation practice adopted by
service firms, though de Brentani (2001) is an exception. A second contribution of this
paper will be the identification of practices that service companies employ for
developing different dimensions of product or service innovations or innovativeness.
The RQ2 investigated is:
RQ2. What is the relationship between the innovativeness of service product
innovations and service innovations and the practices employed by service
companies to develop these innovations?
RQ1 and RQ2 are represented in the conceptual framework shown in Figure 2.
Different measures have been used to assess the innovation performance of service
firms. Generally, outcome measures of innovation have been based on financial and
non-financial metrics (see Avlonitis et al., 2001; Cooper and Kleinschmidt, 1995,
respectively). Various measures of innovation performance in service firms have been
IJOPM
Innovation Service Products Services
27,6 types
568
Innovativeness Radical ‘Me-too’ Incremental Radical ‘Me-too’ Incremental
RQ1 RQ2
Figure 2. Innovation
The conceptual Innovation
Management
framework performance
practices
summarized in Voss et al. (1992). Perceptual, non-financial measures of innovation

performance based on first-mover or pioneering advantages are adopted in this study
due to the difficulty in obtaining objective financial measures (Cooper et al., 1994;
Griffin, 1997; Song et al., 1999). Innovation management practices are defined as what
companies habitually do to manage the process of carrying out an innovation (Oke,
2002). A firm would employ a particular practice then if it sees the practice as an
effective way of delivering good innovation performance. Johnston (1999) proposed
that service research be focused on the application of frameworks and techniques.
A number of frameworks have been developed for managing innovation in various
companies, though predominantly in manufacturing companies. The McKinsey 7-S
model (Peters and Waterman, 1982; Song et al., 1999) was used as a framework to
investigate the strategic management practices for innovation in various Canadian
financial services firms (Drew, 1995). Strategic planning practices relating to
innovation, barriers to product innovation, organization changes to promote
innovation, drivers of new product development strategy, structures and systems
for innovation, approaches to new product development and human resource strategies
for innovation were studied. Cooper (1998) recommended a stage-gate approach for
managing the process of innovation, an approach that enables firms to manage, direct
and control their innovation efforts and has been adopted by many firms. A major
critique of Cooper’s stage-gate approach, however, is that it focuses mainly on process
factors. Other organizational factors that impact innovation performance certainly
need to be considered. The Pentathlon framework (Goffin and Pfeiffer, 1999; Oke and
Goffin, 2001) is a simple framework that addresses several soft organizational and
process issues (Figure 3) and is adopted for this study. The Pentathlon framework is a
generic framework for managing innovation and was developed from an extensive
comparative study of innovation management practices for manufacturing companies
in the UK and Germany. This framework is comprised of several different elements
Innovation types
Innovation Strategy and management
practices
Creativity/Ideas Implementation
Selection (New Product
Management
Development, etc) 569
Market
-Products
-Processes
-Services Figure 3.
Human Resource Management The “innovation
pentathlon”
used to investigate innovation management practices in previous studies (Drew, 1995;

Griffin, 1997; de Brentani, 2001).

Goffin and Pfeiffer (1999) argue that to achieve successful innovation management,
companies must achieve good performance in five areas and ensure that efforts in these
areas are integrated. The five areas are innovation strategy, creativity and ideas
management, selection and portfolio management, implementation management and
human resource management.
Innovation strategy. The importance of having a clearly defined new product
strategy guiding the innovation process was recognised by Griffin (1997) and Cooper
et al. (1999). Innovation strategy provides a clear direction and focuses the effort of the
entire organization on a common innovation goal. Management needs to develop
the strategy and communicate the role of innovation within a company, decide how to
use technology and drive performance improvements through the use of appropriate
performance indicators. Oke (2002) suggested that the first step in formulating an
innovation strategy is to define what innovation means to the firm or the areas of focus
in terms of innovation. By understanding the drivers of innovation needs, a firm can
develop its focus areas for innovation. The innovation strategy needs to specify how
the importance of innovation will be communicated to employees to achieve their
buy-in and must explicitly reflect the importance that management places on
innovation. Kuczmarski & Associates (1994) suggested that more successful firms had
more tangible and visible signs of management commitment to new product
development especially in terms of providing adequate funding and resources, than
less successful firms. A Mercer Management Consulting (1994) study also reveals that
the management of high performing companies was visibly and tangibly committed to
new product development and explicitly formulated and communicated the firm’s new
product development strategy.
The middle portion of the framework, creativity and ideas management, selection
and portfolio management and implementation management, comprises the processes
necessary for carrying out or developing an innovation. The process used in carrying
out an innovation task is a heavily researched topic and requires understanding of how
firms manage the process of developing new products and services. Development
includes the process of generating, selecting and transforming ideas into commercially
viable products and services. Several studies suggest that firms with high performance
in innovation usually have a formal process for developing new products and services
IJOPM (Shostack, 1984; de Brentani, 1991; Terrill, 1992; Cooper et al., 1994; Cooper and
27,6 Kleinschmidt, 1995, Griffin, 1997; Swink, 1998; Tatikonda and Rosenthal, 2000 and
Shaw et al., 2001). In service firms, however, the use of formal processes does not
appear to be common (Mitchell Madison Group, 1995).
This formal process includes creativity and ideas management, selection and
portfolio management and implementation management. Creativity and Ideas
570 Management is the stimulation of ideas addressing customer requirements. The
scope of ideas should be wide and all employees should be involved and ideas from
customers cultivated. Selection and Portfolio Management provides an efficient means
to select from the many ideas generated and choose the best ideas for implementation.
Implementation is the fundamental capability to turn new ideas into new products, new
services and processes. Many manufacturers have structured implementation
processes and these are often based on Stage-Gate approaches to new product
development. Innovative companies manage new product development similar to a
manufacturing process, for example, by looking at bottlenecks and how they can be
avoided (Oke and Goffin, 2001).
The Human Resource Management element of the framework deals mainly with
people and organization climate issues: the underlying impetus of innovation
management is the need to create an environment where employees are motivated
to contribute to innovation. An effective human resource policy that supports
innovation and encourages the development of an innovative organization is
needed. O’Reilly and Tushman (1997) suggested that firms should focus on
norms that support creativity and implementation in order to build an innovative
culture. Rewarding employees for their innovation effort is one way to build an
innovative culture. Studies that have looked at the type of reward mechanisms
that best practice firms offer to their employees have been based on financial and
non-financial rewards (Page, 1993; Kuczmarski & Associates, 1994; Feldman, 1996;
Griffin, 1997). Griffin’s (1997) PDMA study found that the most frequent source of
reward for new product development in the firms surveyed is the completion
dinner, where the team shares a celebratory meal paid for by the firm. Building a
culture of innovation, however, is more than just rewarding the employees for a
job done well. In terms of the categories in the Pentathlon framework, human
resource policy or people issues have been relatively ignored in the literature. It is
important to note that being good in one area of the Innovation Pentathlon
(Figure 3) is typically not good enough. Just like in the sporting analogy
(Pentathlon sport) good performance in all five areas is often more important than
exceptional performance in just one area (Oke and Goffin, 2001). The present
challenge is to explore the applicability of the Innovation Pentathlon framework in
service sector companies.
Methodology
Existing studies in service sector innovation management can be grouped into two
main methodologies: qualitative research (Haaroff, 1983; Grden-Ellson et al., 1986;
Johne, 1993; Edvardsson et al., 1995) or survey research (Drew, 1995; Atuahene-Gima,
1996; Cooper, 1998). Bryman (1988) argued that the two approaches can be
complementary as opposed to antagonistic. Qualitative research, by generating richer
and more elaborate information about the phenomenon under investigation, can be
used to overcome the limitations of quantitative research and vice-versa. The present Innovation types
study combines both methodologies, using qualitative interviews to clarify the and management
concepts identified in the innovation management literature and then using these
results to aid in the development of the survey questionnaire. practices
The empirical phase of the research was conducted using a two-stage process
initiated by interviews and completed with mail surveys. Interviews were held with six
senior executives, two from an insurance company, two from a bank and two from a 571
multinational telecommunication company. The organizations were selected from a
UK business school’s alumni database, the same database from which the main survey
study sample was to be selected. These six organizations were subsequently excluded
from the main survey sample. The alumnus in each company helped to identify the
appropriate individuals to interview. Four of the interviewees were business
development and product managers and two of the interviewees held the title of
innovation manager. All were selected because their area of responsibilities included
the development of new products and services in their respective organizations and all
were based in the UK. Interview questions were based on the innovation management
literature review and were semi-structured. Interviews lasted between one and two
hours and were audio taped. The interview covered topics related to the interviewee’s
understanding of the meaning of innovation, the types and innovativeness of
innovations in service companies, the management practices employed for
developing innovations and processes for managing innovation and people. Archival
data including strategy documentation were collected when possible, providing
converging lines of enquiry to increase the study’s validity.
Content analysis was conducted manually for each interview from verbatim
transcripts to clarify the concepts relating to the research questions. The results of each
interview were confirmed and tested in subsequent interviews. The emerging themes
and concepts from the interview analyses were then compared and the concepts used
in the next stage of the research were defined (Miles and Huberman, 1994).
Interviewing two key informants in each company made pattern matching possible
and increased the internal validity and reliability of the study.
The interviews confirmed the results from the literature relating to innovation
types, their degree of innovativeness and innovation management practices in service
companies. In terms of innovation types, four of the interviewees were clear in their
understanding of the distinction between products and services while the other two
referred to service innovation as related to the process. In further discussions with the
latter interviewees, their understanding of service innovations was clarified as new
developments in activities to deliver the core service products. It was also clear that for
product and service innovation there are developments that could be classified as
radical, incremental or those that are copied from competitors or me-too innovations
(Figure 2). The practices used in managing innovations differed across the companies.
The telecommunication company tended to use more formal procedures than the
financial and insurance companies. The practices of each company, however, fit within
the Innovation Pentathlon framework (Figure 3). The survey questionnaire was
designed using ideas gleaned from the interviews and the innovations management
literature.
Fifty questions were culled from questions used in previous survey studies on
innovation management (Griffin, 1997; de Brentani, 2001; Avlonitis et al., 2001).
IJOPM 20 additional questions were derived from the pilot interviews. The questionnaire used
27,6 a mix of positively and negatively worded questions. This approach minimizes the
tendency for respondents to focus responses on one end of the scale. The survey
questionnaire was based on three main constructs related to the research questions –
innovation types and their degree of innovativeness, innovation performance
and innovation management practices. For innovation types, two types of service
572 company innovation were investigated: product and service innovations. Definitions
for product innovation (i.e. new developments in the core offering of service companies
that tend to create new revenue streams) and service innovation (i.e. new developments
in activities undertaken to deliver core service products) were included in the
questionnaire to guide respondents. Each innovation type was sub-divided into three
dimensions reflecting the extent of their innovativeness as incremental, me-too, or
radical as in new-to-the-world. A multi-item 1-5 Likert scale was developed to measure
the degree of product and service innovativeness. In evaluating the degree of
incremental product or service innovation, for example, respondents rated the extent to
which the following activities were pursued within the organization:
.
revisions to existing products/services;
.
service/product line extensions;
. adaptation of an existing product/service to meet specific customer; and
.
adaptation of an existing product/service to meet or serve new markets.
Innovation Performance was evaluated using a perceptual, non-financial measure

where responses ranged from strongly disagree to strongly agree on the following:
.
one of the first to market with innovative new product and services;
.
more effective than our competitors at taking existing ideas and making them
into something better;
. better than our competitors at developing products and services to meet
customer needs;
.
perceived by customers to be more innovative than our competitors; and
.
at the leading edge of innovation.
Finally, five elements of innovation management practices based on the Innovation

Pentathlon framework (Figure 3) were investigated. A multi-item scale comprising at
least five items per scale was developed to measure each element. In measuring the
innovation strategy element of innovation management practices, for example,
respondents rated the extent to which the following was true within the organizations
with 1 ¼ to a lesser extent up to 5 ¼ to a great extent):
.
introduction of innovation as a fundamental part of the company’s philosophy
and values;
.
there is clarity of corporate vision and goals relating to innovation;
.
goals for innovation are communicated effectively throughout the company;
.
new initiatives are aligned with the overall business strategy; and
.
top management is fully committed to support innovation activities and
programmes.
The survey questionnaire was pre-tested using ten practitioners involved in new Innovation types
product development activities. Practitioner understanding of the questions was and management
similar across the pre-test group. Some apparently ambiguous questions were
reworded and two questions were removed based on the received input. The final practices
survey questionnaire was composed of 70 questions listed over six pages. Some 65
questions were close-ended and required answers on a 1-5 Likert scale.
Information on 270 senior executives working in various companies in the service 573
sector in the UK was obtained from the same UK business school alumni database.
The sample is not necessarily representative of the total UK service sector population
and so there exists a potential for bias and appropriate caution should be exercised
when generalizing the results of the study. The selected alumni executives were each
contacted through electronic mail and telephone to enlist their participation in the
study. Some initial alumni contacts suggested contacting other senior managers
directly or indirectly active in the management of innovation or new product
development within the organization. Some 214 senior managers in different service
sector companies were contacted and the objectives of the study were explained to
them. These managers were typically the leaders of a department or business unit. The
resulting unit of analysis was a company, a strategic business unit, or a division with
the actual type depending on the overall size of the organization.
The survey questionnaire was then sent via letter and electronic mail to the 214
senior managers. This mailing was followed-up by both telephone and electronic mail.
About 101 usable questionnaires were returned yielding a 47 per cent response rate.
The initial contact made with the respondents and the intensive follow-up process
helped to ensure a reasonable response rate. The breakdown of the respondent by
sector is summarized in Table I.
Table I shows that company response from different sectors was in relative
proportion to mailing list representation, although the financial and insurance sector
had the highest response rate where an alumnus was more likely to complete the
questionnaire than a secondary contact. Further, the financial and insurance sector
represents 54 per cent of the entire UK service sector (EIU, 2006).
Construct validity
Innovation performance was measured using five self reported items drawn from the
Cooper et al. (1994) and Avlonitis et al. (2001) studies. A principal component factor
analysis was conducted on the five innovation performance items. The varimax
rotation method used yielded one factor or component with an eigenvalue $ 1 and a
cumulative percent of variance explained ¼ 68.4 per cent. No item had a loading of
less than 0.3. Product and service innovativeness were measured using 30 items.
Total survey Percentage Number Percentage Percentage

Sector population of population of respondents of sample response rate
Financial and insurance 108 50.47 59 58.42 54.63

Retail 42 19.63 16 15.84 38.10
Transport 16 7.47 6 5.94 37.50 Table I.
Telecommunications 48 22.43 20 19.80 41.67 Breakdown of
Total 214 100 101 100 47.2 respondents by sector
IJOPM The initial factor analysis indicated a six-factor model. Two items had loadings of less
27,6 than 0.3 and were subsequently removed. Repeating the analysis confirmed six factors
with eigenvalue $ 1 and cumulative percent of variance explained ¼ 73.6 per cent.
Three factors represent the degree of product innovativeness and the other three
represent service innovativeness. Innovation management practices were measured
using 30 items. Initial factor analysis indicated a six-factor model. Three items had
574 loadings of less than 0.3 and were removed from the analysis. Repeating the factor
analysis yielded five factors with eigenvalue $ 1 and cumulative percent of variance
explained ¼ 63.8 per cent. The factors represent practices for managing innovation in
organizations including strategy formulation, the process of generating and
implementing ideas and people-related issues.
Reliability
The internal consistency method was employed to estimate the reliability of the
measures used in the questionnaire. This test assesses the homogeneity and
inter-correlation of the items used in a measure to ensure that these items group
together and are capable of independently measuring the same construct (Forza, 2002).
The Cronbach (1951) coefficient a is a reliability indicator for which 0.7 is considered
the threshold. Table II shows the Cronbach-a values for all factors and shows that each
item used measures the same factor.
Results and discussion
Recall RQ1. What are the types of and the innovativeness of, innovations that are
predominant in companies in the service sector and how do these
relate to innovation performance?
Table III reports summary statistics for each factor analysed and shows that service
companies tend to focus more on incremental innovations and me-too products and
services than on radical innovations (the arithmetic mean scores for incremental
Constructs Factors Innovativeness Cronbach-a
Innovation performance 0.84 (five items)

Innovation types Service products Incremental 0.90 (four items)
Radical (new to
the world) 0.86 (five items)
“Me-too” 0.82 (five items)
Services Incremental 0.83 (four items)
Radical (new to 0.92 (five items)
the world)
“Me-too” 0.85 (five items)
Innovation management Innovation strategy 0.75 (five items)
practices
Creativity/ideas management 0.79 (six items)
Table II. Selection and portfolio management 0.82 (six items)
Internal consistency Implementation 0.78 (six items)
method test Human resource management 0.82 (five items)
Innovation types
Factors Mean Standard deviation
and management
Innovation performance 4.02 1.21 practices
Incremental products 3.72 0.56
Radical (new-to-the-world) products 2.92 0.64
“Me-too” products 3.76 0.42
Incremental services 4.04 1.13 575
Radical (new-to-the-world) services 3.51 0.75
“Me-too” services 3.84 0.56
Innovation strategy 3.12 1.14
Creativity/ideas management 2.83 0.73
Selection and portfolio management 2.92 1.22
Implementation 3.24 0.72 Table III.
Human resource management 2.13 1.41 Descriptive statistics
products and services are, respectively, higher than the arithmetic mean scores for
radical products and services). Avlonitis et al. (2001) explain the bias towards
incremental innovations by noting that radical products or services tend to be major
innovations and that customers are often unable to articulate their new product or
service needs. Radical products also involve a higher degree of risk and require greater
company effort and resource commitment (de Brentani, 2001). Consequently,
investment in radical product innovations could be ineffective and possibly
undesirable (Lynn et al., 1996). Johne and Storey (1997) argue that there is an overall
lack of radical innovation in services and Cowell (1988) suggests that this lack may be
due to the ease of copying services and the difficulty in patenting services.
Cross-sectoral analyses using one-way analysis of variance were computed for each
of the two innovation types, product and service. The test results in Table IV show
significant differences with a probability value of 0.000 in the pursuit of both product
and service innovations across the service sector. Transport and retail businesses focus
significantly more on service innovations than product innovations based on paired
t-tests. The result may reflect the similar portfolio of products offered by transport and
retail companies. The method of delivering core products and augmented activities
around the core product tends to constitute the real differentiator in the transport and
retail sectors.
Telecommunication and financial businesses focus significantly more on product
innovation than service innovation based on paired t-tests. The telecommunications
sector has been dominated by technological advancements that greatly influence the
rate of product innovation, for example, the constant advancement of mobile
communications devices (Barczak, 1995; Mullins and Sutherland, 1998).
Post-hoc comparison t-tests were conducted to compare the differences between two
unrelated samples two sectors at a time for a given innovation type and the results are
summarized in Table V. A significant difference for service innovation is indicated
between the transport and the financial sector with a probability value ¼ 0.002,
between transport and the telecommunications sector with a probability
value ¼ 0.006, but not between transportation and the retail sector. A significant
difference for service innovation is also indicated between the retail sector and the
financial sector with a probability value ¼ 0.000 and between retail and the
telecommunications sector with a probability value ¼ 0.000.
27,6
means
576
IJOPM
Table IV.
pursued by sector –
Types of innovation
Financial Telecommunications Transport Retail ANOVA Overall means
Product innovations 3.85 4.02 2.05 2.04 F ¼ 38.73 p ¼ 0.000 * * * 3.47

Service innovation 3.53 3.62 4.53 4.73 F ¼ 18.09 p ¼ 0.000 * * * 3.79
Paired t-tests p ¼ 0.03 * p ¼ 0.005 * * p ¼ 0.000 * * * p ¼ 0.000 * * *
Notes: *p , 0.05; * *p , 0.01; * * *p , 0.001; the scores for the product/service innovations are created from the arithmetic mean of the scores of each of
the related lower level variable items (i.e. questionnaire items for incremental, radical and “me-too” products and services)
Financial ( p) Telecommunications ( p) Transport ( p) Retail ( p)

Sector Product Service Product Service Product Service Product Service
Financial 0.076 0.316 0.000 * * * 0.002 * * 0.000 * * * 0.000 * * *

Telecommunications 0.076 0.316 0.000 * * * 0.006 * * 0.000 * * * 0.000 * * *
Transport 0.000 * * * 0.002 * * 0.000 * * * 0.006 * * 0.402 0.065
Retail 0.000 * * * 0.000 * * * 0.000 * * * 0.000 * * * 0.402 0.065
Notes: *p , 0.05; * *p , 0.01; * * *p , 0.001
and management
practices
Innovation types
577
t-tests
sector – two sample
Types of innovation by
Table V.
IJOPM Table VI shows the arithmetic mean scores for the perception of innovation
27,6 performance across the responding sectors. Cross-sectoral analyses using one-way
analysis of variance show that significant differences, with probability value ¼ 0.000
and F-statistic ¼ 21.84, exist across the sectors in the self reported innovation
performances. The post-hoc comparison t-tests indicate a significant difference in the
level of perceived innovation performance when comparing the financial sector to the
578 retail sector and the transport sector, with both probability values equal to 0.000. A
significant difference is also found between telecommunications and both retail and
transport sectors, with probability values again equal to 0.000. Companies in
telecommunications and financial services scored their innovation performance higher
than companies in the retail and transport sectors.
Table VII summarizes the regression results from regressing the dependent
variable innovation performance on the independent variables product and service
innovativeness and shows an adjusted R 2 of 0.282 with probability value ¼ 0.000.
The results suggest that the innovativeness of products and services explain
significant variation in innovation performance. The results also show that the pursuit
of radical product innovations and radical service innovations is positively associated
with innovation performance. Radical innovations are new-to-the-world products and
services and they apparently send the right signals in terms of a firm’s innovative
capability to the market. Thus, this result is not surprising. The pursuit of incremental
innovations in products and services is also positively related to innovation
performance. Although this study used a non-financial measure of innovation
performance, the results are comparable with studies arguing that incremental
innovations are related to financial measures of innovation performance such as
increased market share and the profitability of other services (Avlonitis et al., 2001;
Sector Financial Telecommunications Transport Retail
Innovation performance (means) 4.23 4.35 3.04 3.25

Financial ( p) 0.224 0.000 * * * 0.000 * * *
Telecommunications ( p) 0.224 0.000 * * * 0.000 * * *
Table VI. Transport ( p) 0.000 * * * 0.000 * * * 0.222
Innovation performance Retail ( p) 0.000 * * * 0.000 * * * 0.222
by sector – two sample
t-tests Notes: *p , 0.05; * *p , 0.01; * * *p , 0.001
Factors b p
Incremental products 0.213 * 0.031

Radical products 0.352 * * * 0.000
“Me-too” products 0.105 0.270
Table VII. Incremental services 0.302 * * 0.004
Regressing innovation Radical services 0.314 * * 0.002
performance on “Me-too” services 0.125 0.180
product/service
innovativeness Notes: *p , 0.05; * *p , 0.01; * * *p , 0.001, Adjusted R 2 ¼ 0.282; F ¼ 7.524, Sig ¼ 0.000
Storey and Easingwood, 1998). A positive relationship between incremental Innovation types
innovations and innovation performance is likely due to service improvements and management
providing opportunities for cross-selling. A customer, for example, would see a
financial institution as a one stop shop that can satisfy all of their needs (Avlonitis et al., practices
2001). The relationship between me-too innovations and innovation performance was
positive, but it was not significant at the 0.05 level ( p ¼ 0.321 and p ¼ 0.432 for me-too
products and services, respectively). For some firms, the reason for embarking on 579
me-too innovations may not be solely for profit but just to keep up with the
competition.
Recall RQ2. What is the relationship between the innovativeness of service
product innovations and services innovations and the practices
employed by service companies to develop these innovations?
Innovation management practices or new product process factors (de Brentani, 2001)
are practices undertaken to manage innovation or the new product and new service
development process. These include the five elements identified earlier. Table VIII
presents the results for six regressions when each of the six dimensions of
product/service innovativeness in turn (dependent variable) is regressed on the five
innovation management practices (independent variables). The results suggest that the
five innovation practices explain less than 10 per cent of the variation in incremental
products and incremental services developments. The five practices explain 35.7 and
24.5 per cent of the variation in radical products and radical services innovation. Some
14.2 per cent of the variation in me-too products and 8.5 per cent in me-too services
were explained by management practices. Variables other than the innovation
management practices considered might also explain the variation given the low-R 2
values.
Innovation strategy
Table VIII further reveals that having a comprehensible and working innovation
strategy is significantly related to the pursuit of radical products, with b ¼ 0.324 and
p ¼ 0.005 and radical services innovation with b ¼ 0.261 and p ¼ 0.021. This result is
similar to previous findings, suggesting that highly innovative firms have a clearly
defined new product strategy that guides the development of new products and
services (Griffin, 1997; Cooper et al., 1999). The link between innovation strategy and
radical innovations may be a reflection of the general belief that innovation is mainly
about radical products and services.
Human resource management

The human resource management construct comprises measures such as the extent to
which the importance of innovation is understood by employees, the extent to which
human resource policies support creativity, risk taking and change, the extent to which
employees are rewarded for innovation and the extent to which innovation is covered
in performance appraisals. A significant relationship is found between these practices
and the pursuit of radical products with b ¼ 0.296 and p ¼ 0.016 and radical services
with b ¼ 0.283 and p ¼ 0.019. The significance may be an indication of human
resource policy bias toward the development of radical innovations – reflecting
again the view that innovation is all about radical products and services. The result
27,6
580
practices
IJOPM
Regressing
Table VIII.
product/service
innovativeness on
innovation management
Incremental Radical “Me-too” Incremental Radical “Me-too”
products products products services services services
Innovation strategy 0.132 (0.152) 0.324 * * (0.005) 0.173 (0.090) 0.092 (0.327) 0.261 * (0.021) 0.096 (0.321)
Creativity and ideas management 0.112 (0.174) 0.257 * (0.023) 0.229 * (0.034) 0.125 (0.160) 0.211 * (0.042) 0.169 (0.097)
Selection and portfolio management 0.142 (0.110) 0.238 * (0.029) 0.092 (0.342) 0.124 (0.162) 0.184 (0.085) 0.098 (0.320)
Implementation 0.094 (0.324) 0.243 * (0.027) 0.145 (0.107) 0.142 (0.109) 0.198 (0.062) 0.084 (410)
Human resource management 0.096 (0.324) 0.296 * (0.016) 0.096 (0.322) 0.157 (0.190) 0.283 * (0.019) 0.087 (0.382)
Adjusted R 2 0.075 0.357 0.142 0.096 0.245 0.085
F 2.322 * (0.042) 8.472 * * * (0.000) 5.312 * * (0.006) 3.125 * (0.029) 7.361 * * * (0.000) 2.892 * (0.035)
Notes: *p , 0.05; * *p , 0.01; * * *p , 0.001; figures which are given in parentheses are p values
is consistent with another study that found training and development activities in Innovation types
banks to be supportive of radical innovation (Drew, 1995). and management
Creativity and ideas management
practices
The results of the regression analysis (Table VIII) reveal that having a process for
capturing and managing ideas is significantly related to the pursuit of radical products
(b ¼ 0.257, p ¼ 0.023), radical services (b ¼ 0.211, p ¼ 0.042) and “me-too” products 581
(b ¼ 0.229, p ¼ 0.034). This is consistent with an earlier study (Griffin, 1997) which
finds that concept generation is perceived as important and is the most frequently
included step for service development processes compared with manufactured goods
where it is the next-to-least frequently used step. However, the significant relationship
between ideas management and “me-too” products is an interesting one – as this
implies that service companies tend to have processes in place to source and capture
ideas externally. Owing to the ease of copying, competitors have been identified as an
important source of ideas for new products in service companies (Easingwood, 1986;
Hooley and Mann, 1988). No significant relationship is found between ideas
management and “me too” services. This may be due to the fact that services cannot be
easily copied and also because they tend to be unique to the organization.
Selection and portfolio management

The regression results summarized in Table VIII also reveal that having a process for
screening and managing ideas is significantly related to the pursuit of radical products
innovation only, with b ¼ 0.238 and p ¼ 0.029. Again, this result may relate to service
organizations having formal procedures for the development of radical innovations
only and not for incremental innovations. The Easingwood (1986) and Edgett (1993)
studies also found that most service organizations use informal screening procedures
for incremental services. Drew (1995) found, however, that formal financial criteria
such as return on investment, discounted cash flow methods and payback period
calculations were frequently used by banks to screen ideas for new products and
services.
Implementation
The implementation construct comprises measures such as the extent of using
multi-functional teams, formal procedures and stage-gate systems for developing
and implementing innovative ideas. Table VIII shows that having a process for
implementing ideas is significantly related to the pursuit of radical products
innovation with b ¼ 0.243 and p ¼ 0.027. The lack of a significant relationship
between the implementation construct and the other dimensions of products and
service innovation is comparable to the de Brentani (1989) and Mitchell Madison Group
(1995) findings that the use of formal processes for carrying out the development
activities for new products in service companies occurs less often than in
manufacturing companies. The result is also consistent with Griffin’s (1997) PDMA
study result that overall there is less use of multi-functional teams, a measure of the
implementation construct, in less innovative projects such as incremental
improvement and cost reduction projects. One possible explanation for the
uncommon use of formal processes in service companies may be the need for
flexibility in developing service products, which may be restricted if there are strict
IJOPM guidelines for the development and the delivery process. Johne and Storey (1997) have,
27,6 however, highlighted the importance of having formal procedures for implementing
service innovations since the heterogeneity of services often leads to a highly variable
quality in services. To reduce variation in the service experience, the degree of
standardisation and the amount of technology applied at the customer interface must
be increased. Generally, only the pursuit of radical product innovation is significantly
582 related to the innovation management practices defined in the study. Radical service
innovation is significantly related to all with the exception of implementation and
selection and portfolio management practices. These results indicate a bias toward the
development of radical products and services as the main sources of innovation for
service companies. Given that service company innovations are predominantly
non-radical in nature, as shown in Table III, it seems surprising that management
processes for managing innovations are mostly set up to foster radical innovations.
A possible explanation is that incremental innovations are seen as a continuous
improvement activity and are not managed as innovations.
Conclusion and implications

The main objective of this study was to identify the types of innovations predominant
in the service sector and the degree of their innovativeness and how these types and
degree of innovation relate to innovation performance and innovation management
practices employed to implement innovation. Analysis of a postal survey of UK service
companies suggested that they focus innovation activities more on incremental
product innovations, incremental service innovations and me-too innovations as
compared to radical products innovations and radical services innovations. This study
also investigated the relationships between innovation types, the degree of
innovativeness, innovation performance and innovation management practices.
Radical product innovation and radical service innovation were found to be
significantly related to innovation performance. Innovation performance was also
found to be significantly related to the pursuit of incremental innovations for products
and for services. The relationship between product and service innovativeness and
innovation management practices, however, reveals that formal practices tend to be
biased toward the development of radical innovations. This result may be due to
the belief that innovation is mainly about radical products. This study suggests,
therefore, that service companies must recognise the pursuit of incremental
innovations formally in their innovation strategies and define formal practices for
implementing these types of innovations.
In the sample overall, incremental, me-too and radical service innovations were
found to be more predominant than product innovations of the same types. However,
this disguised significant differences in emphasis between sectors; with financial and
telecommunications both emphasizing product innovations over service innovations.
These two sectors were similar in that no significant differences were found between
them when the company responses to the pursuit of the two innovation categories of
product and service were compared in turn. Given the growth in telecommunications
technology, a focus on radical product innovation is not surprising. Innovations in the
transport and retail sectors are more focused on service innovations. Some results
of this study are similar to the results of studies conducted in different service
industries (Johne and Davis, 1993; Drew, 1995; Griffin, 1997; de Brentani, 2001) and in
the manufacturing sector (Griffin, 1997; Cooper, 1998; Goffin and Pfeiffer, 1999; Song Innovation types
et al., 1999) and these similarities provide a level of support to this study. Several and management
factors may limit the generality of the results. The survey was based on an opportunity
sample of service sector senior managers who were alumni or work colleagues of practices
alumni of a UK business school. The sample is also biased towards the financial and
insurance sector, perhaps due to this sector representing 54 per cent of the entire UK
service sector (EIU, 2006). Future study should broaden the sample of firms and 583
managers. The cross-sectional data used provides only a snapshot of the dynamics of
firm behaviour in relation to how innovation is managed and time series data will
extend this snapshot. Basing measures on managerial perceptions has limitations.
Although we provided definitional guidance for service and product innovations in the
survey, one cannot completely rule out the possibility of respondents confusing or
using the terms interchangeably. Thus, objective measures would be a benefit in future
studies. Objective measures for measuring innovation types and innovation
performance, for example, the number of patents and the percentage of revenue
generated from innovations and financial performance measures, for example, the
return on investment and the return on sales might be used. These measures can be
used to investigate the types of innovation and the innovation management practices
that predominate in low-performing and top-performing service companies. In-depth
case studies might shed further light on how companies actually manage the
introduction and development of different types of innovation, the issues involved and
how these issues are resolved. These suggestions may well help further the
understanding of innovation management practices in service companies.
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Hamilton, New York, NY.
Johne, A. (1996), “Avoiding product development failure is not enough”, European Management
Journal, Vol. 14 No. 2, pp. 176-80.
Corresponding author
Adegoke Oke can be contacted at: adegoke.oke@asu.edu
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4.11 Innovation Types and Innovation Management Practices in Service Companies

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4.11 Innovation Types and Innovation Management Practices in Service Companies

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International Journal of Operations & Production Management

Innovation types and innovation management practices in service companies

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Percent of total GDP of

summarized in Voss et al. (1992). Perceptual, non-financial measures of innovation

used to investigate innovation management practices in previous studies (Drew, 1995;

Griffin, 1997; de Brentani, 2001).

Innovation Performance was evaluated using a perceptual, non-financial measure

Finally, five elements of innovation management practices based on the Innovation

Total survey Percentage Number Percentage Percentage

Financial and insurance 108 50.47 59 58.42 54.63

Results and discussion

Constructs Factors Innovativeness Cronbach-a

Innovation performance 0.84 (five items)

Product innovations 3.85 4.02 2.05 2.04 F ¼ 38.73 p ¼ 0.000 * * * 3.47

Financial ( p) Telecommunications ( p) Transport ( p) Retail ( p)

Financial 0.076 0.316 0.000 * * * 0.002 * * 0.000 * * * 0.000 * * *

Sector Financial Telecommunications Transport Retail

Innovation performance (means) 4.23 4.35 3.04 3.25

Incremental products 0.213 * 0.031

Human resource management

Selection and portfolio management

improvement activity and are not managed as innovations.

Conclusion and implications

Journal, Vol. 14 No. 2, pp. 176-80.

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