In this essay, I will be evaluate the effectiveness of reverse product life cycle as a theory of innovations in service and to find out if there is alternative model that does a better job in this. To answer the question, I will first look at some of the major characteristics of services and how they compare to that of manufactured goods; I will then look at the three different approaches of service innovation theories. Next, I will look at what a normal product life cycle looks like, how it can be used to explain innovations in manufactured goods. After that, I will look at the different stages of reverse product cycle and evaluate it effectiveness with the help of examples. I will also look at some of its limitations and questions raised by other authors. Finally I will look at the four dimension model of service innovation to find out if it is a better alternative than that of the reverse product cycle.
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Goods and services are often mentioned in the same sentence, while there are many similarities between the two, they are actually very different. Services are something that is intangible offered or sold to customers; it is not something that can be contact physically. When people purchase a good, they actually own the product after paying for it. But this is not the case in services. Good examples of services are public transports, mail deliveries, insurances, retail banking, and broadband internet. Here we can see, these are products that cannot be owned even if you pay for it.
The differences between goods and services are so huge and obvious; it is not surprised to see the innovation processes of the two are hugely different too.
Innovations in manufactured goods are often related to innovations in technologies. When it comes to research and development, manufacturing companies focus on improving the technologies and performances of their products. However innovation in services mainly focuses on improving the design of the services instead of the technological aspects.
Tekes, a Finnish website defined service innovation as the following : "Service innovation is a new or significantly improved service concept that is taken into practice. It can be for example a new customer interaction channel, a distribution system or a technological concept or a combination of them. A service innovation always includes replicable elements that can be identified and systematically reproduced in other cases or environments. The replicable element can be the service outcome or the service process as such or a part of them. A service innovation benefits both the service producer and customers and it improves its developer's competitive edge" (Tekes)
Although innovation in manufactured are much more well known than innovations in services, there were a number of models, theories or frameworks which was produced over the years in order to help and explain the nature of services innovations.
These theories and models can be fitted into three different approaches. They are service-orientated approaches, integrative approaches and technologist approaches.
In this essay, we will focus on Richard Barra's reverse product cycle which falls into the technologist category, it is important to note that the technologist approach is the most common approach out of the three, it focuses mainly on bringing in new equipments and technical systems into service firms and industries.
Reverse product cycle was introduced in one of Barra's articles named ' towards a theory of innovation in services which was published in the Research Policy journal in April 1986. Barra realized at the time the importance of services industries in the economies and that most of the economic theories of innovation focuses exclusively on manufacturing goods. Because of this, Barra decided to develop a theoretical model that explain innovation process in services industries. (Gallouj. F 1998)
Before we explain how the reverse product life cycle can be used to explain innovation in services, we need to first understand how the normal product life cycle operates. Product life cycle can be separated into four different stages: they are 1) the take-off or introduction stage, 2) the growth stage, 3) the maturity stage and finally 4) the decline stage. (QuickMBA)
During the introduction stage, the company's main objective is to promote the product therefore potential customers become aware of the existence of the new products. The product at this stage is new to the public, and its performance is often superior compare to alternatives. The price at this stage is usually high in order to cover the production costs, and the volume of output is often low. The competitive edge at this stage lies in the performances of the product. The nature of the innovation process here is product innovation (QuickMBA)
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The growth stage, during this stage, customers are well aware of the existence of the product and a number of competitors has emerged, these competitors will offer products with similar performances and merits. the main goals for firm at this phase is to increases or maintain market shares. The price at this stage is often lower than that of previous stage and the volume of output increases also. In order to gain a competitive advantage over its rivals, a firm will focuses on improving the quality of the product which can be done by adding additional features. The nature of the innovation process here is radical. (QuickMBA)
Maturity stage, during this stage even more competitors has emerged. The market starting to become saturated. The price of the product will further decrease as there are more competitions around, and the level of output greatly increases. The nature of the innovation process at this stage is incremental. The competitive focus here is to reduce production costs which leads to lower price and increasing output as much as possible therefore selling more units which leads to higher profits. (QuickMBA)
Decline stage, this stage is reached when the market is totally saturated and the product's technology become established. There are always the threats from newer and more advanced technologies here. When a new technology emerged, the whole cycle begins all over again, with the old technology declined and new technology introduced. (QuickMBA)
In his article, Barras argued that the product life cycle as a whole is not driven by one single force. He suggested that early on in the cycle, technology push driving force is predominant where as later on in the cycles where the nature of the innovations are incremental, the predominant force is usually demand pull force generated by users. (Barras. R 1986)
Now we understand how product life cycle can be used to explain the process of innovation in manufactured goods, we will now look at the reverse product life cycle which is concerned with innovations in services.
Reverse product life cycle works in a complete opposite direction compared to the normal product cycle. The first stage of the cycle involves incremental innovations which aim to increase the efficiency of existing services. The second stage of the cycle is concerned with radical innovations where innovations are focused on improving the quality of existing services. The third and final stage of the reverse product cycle is focus on developing a totally brand new service that is significantly different compared to other services in the industries. (Barras. R 1986)
To have a better understanding of the reverse product cycle, we will look at a few examples that were illustrated in Barra's articles. The examples we will look at are local governments, insurance companies and accounting companies which are all in the services industries.
During the first stage of the cycle in the 1970, companies were applying mainframe computer technology in services organisations. The purpose of the application is to improve efficiency as well as cutting down the demand for labour in services sector. The application of computer technology was employed by insurance company to computerised records of policies. It also provides computer audit techniques as well as internal time recording for accounting companies. Finally it was used by local governments to computerise personnel records and payroll. The applications of mainframes computers had greatly increase the efficiency in these three sectors, it has cut down the demand for labour by a considerable amount. The nature of innovation is incremental and the type of investment is considered to be in the capital deepening nature. The full effects of the mainframes computer became fully conscious to companies by 1979 which lead to the reverse cycle entering the next stage. (Barras. R 1986)
In the second stage which was round the 1980s, companies began applying mini and micro computer technology in the services industries. Local government used the technology to computerize house waiting list. Insurance companies began to provide online quotations in branch offices. And accountancy used the technology to computerized accounting management and book-keeping services. The mini and micro computer technology is radical rather than incremental; it improves the effectiveness of the services instead of just the efficiency. Unlike the previous stage, the type of investment is considered to be capital widening investment and it has no impact on the demand of labour. (Barras. R 1986)
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In the third stage of the reverse product cycle, the focus is not on improving the quality of the services anymore; instead it is about creating totally new services. At this stage, companies concentrates on developing a new service that is different and better to other services in the industries. By doing this, companies can create a completely new market. Back to our examples, networking technology was developed in the 1990s and was employed by insurance companies, accounting companies and local governments. This networking technology provides users a full online insurance and investment services. For accounting companies, the networking technology allows companies to offer a completely automatic audit and accounts services. For the local governments, viewdata system became available to the local residents to get public information services. Like previous stage, the investement type here is again considered to be capital widening, however the nature of the innovation is no longer just a process, instead it focuses on product. It is important to point out that this stage has a positive impact on labour, increasing the demand of labour and level of employments. (Barras. R 1986)
Once the new technology is established and adopted by public, just like the normal product life cycle, the reverse cycle will start all over again and start at stage one again where innovation nature would be incremental and focuses on improving the efficiency of the new product. (Barras. R 1986)
Now that we understand how the reverse product cycle operates, it is important for us to examine its validity in explaining innovation is services. In an article named Innovation in reverse: services and the reverse product cycle which was published in the European Journal of Innovation Management in 1998, the author, Professor Faiz Gallouj pointed out the limitations of the model in the third stage. Gallouj argued that the model sees innovations as products. But in services, the product is in fact a process, therefore it is difficult for a process to be explained in a model that was originally designed to explain a product. (Gallouj. F 1998)
Gallouj pointed out that Barra's model are drawn from case studies that focus only on information and telecommunications technologies in vanguard services sector. And because of this, Gallouj raised two questions in his article. The first being if the model is valid for all vanguard services? And the second question is if the model is valid in explaining technologies other than information and telecommunications? (Gallouj. F 1998)
There are evidences to show that the reverse product cycle does not apply to all vanguard services. The first example is legal consultancy in France which is clearly a type of services. An empirical study carried out by Gallouj suggested that legal consultancy in France does not appeared to show a reverse product life cycle. This is because consultancy is not open to technological information and it doesn't handle codified information. Having said that, there are signs of innovations in this activity, but the nature of innovations doesn't fall into the ones in the reverse product cycle. (Gallouj. F 1998)
The second example is notary, microcomputers and fax machines were introduced to these services but these innovations are only incremental, there are no signs of radical and product innovations. (Gallouj. F 1998)
These two examples have shown that the reverse product cycle isn't really valid for all vanguard services. Barras' model is only valid in explaining vanguard services that are greatly influenced by technological evolution. (Gallouj. F 1998)
We will now look at the second question raised by Gallouj, whether the reverse product cycle model can be applied to technologies other than information and telecommunications? (Gallouj. F 1998)
Again to answer this question, we will look at two examples that were discussed in Gallouj's paper. The first example is containerized transport, it was an incremental innovations in the beginning improving efficiency of transports which falls nicely into the first stage of the cycle. In the second stage, the sizes of the containers are made identical and unloading cranes was introduced. These changes greatly improves the effectiveness of the services, the service's quality was greatly enhanced. In recent years, the tracking technology has been introduced to this service making it possible to know the exact details of the container at all time, these details includes its ownership, its origins and its destinations. This technology improves the services so much that it can considered being a brand new service. Therefore we can see the innovations in containerized transports over the years fit the reverse product cycle quite nicely. (Gallouj. F 1998)
The second example Gallouj discussed is the fast food services in America. He suggested that cooking and refrigeration technologies are incremental innovations whereas computerized menu ordering is radical innovations process as it increases the quality of the services by a considerable amount. (Gallouj. F 1998)
From these two examples, we can see the reverse product cycle can be applied on other services other than information and telecommunication.
So is the reverse product cycle a good model to explain innovations in services? Should we continue to use it in the future? The model is useful in explaining innovation process when the innovation is technological related, however not all innovations are technological; therefore the model is only useful in explaining some areas of services innovation. Having said that, the model still provides tremendous amounts of insights on how some innovations process are carried out, therefore it should still be used in the future.
So are there any other models that are more promising than the reverse product cycle by Barras? As mentioned earlier, one of the shortcomings of Barras' model is that it only focuses on innovations that are considered to be technological. Therefore it would be useful to look at Den Hertog's four dimensional model of service innovations which explain four different areas of innovations. The four dimensions are 1) service concept 2) client interface 3) service delivery system and 4) technological options.
The above diagram is taken from the international journal of innovation management page 495
New service concept is when a new idea is introduced in a particular market. The new idea only has to be new in the market in question; it can be an existing in other markets. Call centre service is a good example of this dimension. (Hertog. D 2000)
New client interface is the interface design between the service provider and the customers. The communication channels between service providers and customers can be innovation itself. A good example of this dimension is electronic data interchange (EDI) (Hertog. D 2000)
Service delivery system is similar to dimension two, but it is actual arrangement that is planned internally by the service provider in order to make sure their employees to do their job correctly. A good example of this dimension would be how amazon delivery ebooks using 3g technology onto consumers' kindle reader (Hertog. D 2000)
Technological option is the final dimension, although innovation doesn't have to be technological, many innovations have technological elements. IT is the most common form of innovations, a good example would be parcel tracking services provided by royal mail. (Hertog. D 2000)
Hertog suggested that any given service innovations will have a combinations of the dimensions mentioned above. In fact, quite frequently they become interdependent with each other. Often times when a new service product is introduced in the market, it will need a new client interface design so communication between service provider is clear, also new delivery system should be planned too in order for the staff to delivery the service properly. (Hertog. D 2000) For example Royal mail introducing the tracking technologies of parcels will need a brand new interface (website) for consumers to be able to use the services; they will also need staff to deal with issues with the tracking system that might occur (delivery system)
The four dimension model is an excellent framework illustrating how services innovation can be operated; looking at more than one dimension of innovations at a time allows the model to be applied to most services innovation. And because of this, the four dimension model should be superior to the reverse product cycle when explaining innovations in services. Having said that the Barras' model still offered considerable amount of insights, therefore it should not be discarded.
In this report, we have learnt how the normal product life cycle can be used to explain innovation in manufacturing goods, what are the key features in each stage. We have also learnt how innovation in services worked in an opposite manner by looking at the reverse product cycle, and understood the model's limitations by applying it to different examples of services. We also seen what the four dimensions of innovations are and how they can be used as an alternative theory to explain innovation in services and finally we have understood the effectiveness of this model and how it compares to the reverse product cycle.