Innovation in Service System Solutions: How Can New Business Models Drive the Transformation of Regions and Sectors in Europe?

Introduction

Before the 1990s, service innovation has been somehow neglected by academia and research. For instance, the Community Innovation Survey (CIS), implemented by the European Union, mostly focused on manufacturing and technological innovation, providing less attention to services (Pires et al., 2008). Over the last two decades, however, services have become increasingly important. They highly contribute to economic growth in most OECD (Organization for Economic Co-operation and Development) economies, generating the most important amount of jobs (Schulze, 2011). The service sector employs more than 70% of the active work force and contributes with about 70% to GDP (Gross Domestic Product) in the advanced European economies (Rubalcaba, 2011). Nowadays, “service innovations are ubiquitous and their role in creating economic growth and wellbeing is increasingly acknowledged” (Den Hertog et al., 2010, p. 490). Service innovations support growth and structural change across the whole economy. They improve the productivity of the economy, while providing fuel for innovation in other industries (European Commission, 2012). Nevertheless, services cannot be regarded as a panacea to economic problems; only the combination of a strong manufacturing sector and innovative services can lead Europe to achieve a competitive advantage (European Commission, 2012).

To create welfare and wellbeing in Europe, the European Commission devised the so-called Europe 2020 Strategy, focusing on smart, sustainable and inclusive growth. Smart growth is based on innovation and knowledge. Sustainable growth promotes resource efficiency as well as greener and more competitive environment. Inclusive growth fosters a high-employment economy, delivering social and territorial cohesion (Report by the expert panel on service innovation in the EU, 2011a, 2011b). Therefore, the Europe 2020 strategy will lead to fundamental transformations in many regions. For instance, cities should become smarter and sustainable with new concepts of mobility and energy supply. In fact, mobility and energy are two areas, in which service innovations will play an important role in the future. The EU and its member states created different initiatives and programs to support innovation policies in Europe. The Innovation Union flagship initiative forces European regions to develop regional innovation strategies for smart specialization. According to Foray, smart specialization is essential “for regions that wish to stay in the game” (Foray, 2009, p. 14). More concretely, smart specialization “… means identifying the unique characteristics and assets of each country and region, highlighting each region´s competitive advantages, and rallying regional stakeholders and resources around an excellence-driven vision of their future” (European Commission, 2011, p. 2).

Smart specialization cannot be achieved without service innovations. An idea that has been recently introduced by the European Commission is that service innovations have the potential to support the transformation of regions in Europe. Services are said to be transformative “when they disrupt traditional channels to market, business processes and models, to enhance significantly customer experience in a way which impacts upon the value chain as a whole” (Report by the expert panel on service innovation in the EU, 2011a, p. 7).

In this paper, we aim to clarify the concept of transformative power of service innovation. First, we demonstrate that service innovation is a multidimensional concept that combines three elements, which are tightly interwoven: offering, process and business model innovations. Then, we focus, in particular, on the business models of service system solutions and discuss how they can be transformative. We show how the service business model concept can enable us to grasp how service innovations can lead to the transformation of sectors and regions. The paper is organized as follows. First, we define services and service innovation. Next we provide a useful taxonomy of business models for service system solution providers. Afterwards we provide a short overview of selected initiatives and programs of the EU commission in the area of service innovation; we introduce the concept of large scale demonstrators suggested by the expert panel on service innovation, and provide an explanation how service business models can be transformative. In this regard, we take electric mobility in Germany as a case example. Finally, we provide a short summary and identify directions for future research.