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Integrating product and service innovation: industry leaders complement their product offerings with service innovations to boost overall customer value.

Article Excerpt
Companies have been pouring money into product development for decades. This investment has undeniably produced some successful incremental and breakthrough product innovations. However, the relentless, single-minded focus on product innovation has also had unanticipated consequences: a competitive stalemate due to product parity and diminishing returns on the innovation investment. When key industry players make similar heavy investments and follow similar product development road maps, they chase a similar range of new product options. This allows them to quickly counteract competitors' early moves with a battery of "me-too" products. Nobody wins. The result is what I call the tragedy of commonness--diminishing differentiation in many product markets, including hardware, software, medical devices, and consumer goods.

What's to be done? Increasingly, industry leaders complement their product offerings with service innovation to enhance the overall customer value. Hewlett-Packard, Apple, Rolls-Royce, Motorola, Oracle, and GE can all credit service innovation with boosting their innovation returns and market position. TomTom, a leading supplier of navigation devices, provides a service that lets users update maps based on road conditions that they encounter and share them with other users (once they have been checked). In the first nine months, over one million updates have been shared among users and what was a navigation product has emerged as a product plus service offering that better meets customers' information needs (1). For TomTom and the other companies combining products and services, the net result of product plus service innovation is growth in the existing customer base as well as expansion into adjacent markets.

In this article, I discuss how companies make the transition to integrated products and services. In particular, I show how companies organize to use key levers to create innovative solutions--not just products--to customer and consumer problems.

Stages of Innovation Management Maturity

To keep ahead of the competition, companies need robust innovation management capabilities that deliver improved solutions for customers. Our research and experience (2) show that leading innovators add increasingly higher levels of services and advance through four stages of solution management maturity (Figure 1). What maturity is your company? Are you satisfied with the current status? At the higher stages, your company would derive a much greater portion of sales revenue from services (and integrated product/service solutions) rather than from products alone. Importantly, you would experience greater revenue growth and profitability.

Figure 1 depicts the four stages. The horizontal axis, "Maturity level," shows increasing amounts of services included in the solutions a company provides to consumers as it reaches higher levels of innovation maturity. The initial stages of innovation maturity are primarily product-focused and contain relatively small amounts of services that are used to augment and complement the products. The later stages of service innovation maturity have higher levels of services that are integrated with the products to solve customer problems.

The vertical axis, "Ratio of services revenue to total revenue," describes the growing impact on revenues that services make as the maturity increases. As companies increase in service maturity they add more services to their product portfolio and the revenues associated with those services increase as a percentage of the overall revenues. For example, in Stage 4, as companies strive to provide comprehensive solutions to customer problems, the revenues from services can be larger than for...

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