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Analytics Magazine

Product or Service? Get smart: Digital business innovation

January/February 2016

business analytics news and articles

Smart technologies, services, processes and people add up to smart systems for every sector.

Haluk Demirkan Bulent Dal

By Haluk Demirkan (left) and Bulent Dal

To compete in the marketplace and maintain relevancy, companies need to constantly innovate. Just as important, today’s economic environment demands that innovation also consider how to design and transform delivery processes to improve productivity and performance. While there is a desire to be more global, integrated and customer-centric, actually getting new products and services to market are rare, and what we call frequent and radical innovations – new services and products that dramatically change the marketplace – are even rarer. For the past decade, many organizations have focused on traditional product innovation to address the challenges of globalization and economic transformation. Most of these companies are still clinging to what we call the invention model, centered on structured, bricks-and-mortar product development processes and platforms. If everybody is doing innovation, what are you doing differently?

Today, when a customer buys a drill, does he/she want a drill or a hole?

According to research, people don’t want to buy a quarter-inch drill. They want a quarter-inch hole. Another example can be cars. Robert Lutz, chairman of GM, once said, “An automobile is actually art, entertainment and mobile sculpture, which, coincidently, also happens to provide transportation.” Other examples are service platforms such as Uber, the world’s largest taxi company but owns no taxis; Airbnb, the largest accommodation provider but owns no real estate; Skype, one of the largest phone companies but owns no telco infrastructure; Alibaba, the world’s most valuable retailer but has no inventory; Facebook, the world’s most popular media owner but creates no content; and Netflix, the largest movie house but owns no cinemas.

Today …

  • Customers want to “hire” a product to do a job.
  • Commoditization of products results in price and margin pressures.
  • Customers are demanding services and solutions.
  • Services can provide platforms for profitability.
  • Loyalty and customer satisfaction are often driven by services.
  • Service offerings can differentiate firms in highly competitive industries.
  • The “ICT-enabled services-based-economy” is growing exponentially.

Digital Business

As a result, flexibility and agility to respond to changing business needs and to harness resources across global value chain partners are creating many challenges and issues for companies. Many organizations attempt to overcome these challenges and issues through improved efficiency, quality and speed of their operations, through mergers and networks [1]. But unanticipated consequences result in unnecessary costs, lack of responsiveness to customers, and missed opportunities for innovation. However, they often find that traditional innovation methods are inadequate and create negative externalities because they have insufficient scope in relation to the complexity and dynamics of their internal organizational systems and their external, resource-network and market systems. If that is the case, we need to look at things differently. The convergence of information communication technologies (ICT) and service thinking changed the nature of businesses, services and products by delivering them through digital solutions. This revolution created an emerging field called “digital business innovation,” “digitization” or “digital service innovation.”

Taking the path to service transformation, orientation and digital business innovation

Influenced by the emerging field of service science and systems (e.g., service-oriented technologies and management), several companies have gained attention in the past few years by developing more flexible business processes that co-create value with customers [2]. For example, Rolls Royce leveraged its expertise in aircraft engine manufacturing to implement a service-oriented power-by-the-hour offering for customers. This new business model better met customer needs and gave Rolls Royce more information about the way their customers use resources to create value. Apple and Google became the world’s largest software platforms without writing apps. Amazon became the world’s largest virtual computing service provider with its cloud platform.

Service thinking has transformed traditional products and services by adopting manufacturing concepts such as division of labor and knowledge, standardization and coordination of production and delivery to enable new forms of value creation and consumption. Industries such as retail, hospitality, restaurant, telecommunications, healthcare, transportation, finance and education are undergoing this type of transformation. ICT has enabled traditional manufacturers to become providers of services [3].

At the same time, ICT is moving off the desktop and out of offices and homes and into buildings, infrastructure and objects. Our ability to collect and analyze a flood of data from mobile solutions, sensors, cameras, etc. is getting much more efficient and effective. Cisco predicts that the Internet of Things (IoT) is expected to generate $14 trillion revenue in the next decade by connecting more than 200 billion devices [4]. Internet speed may double by next year. Smarter cities, retail, manufacturing, healthcare, transportation, telecommunication, logistics, supply chain, etc., will increase rapidly. We will increasingly utilize intelligent robotics, additive manufacturing (e.g., 3-D printers), self-driving cars and augmented reality. This will result in more data generation and collection storage, as well as increase the need for analysis and cognitive business (e.g., IBM Watson, Apple Siri, Microsoft Cortana, Google Now, Amazon Echo and Facebook AI). Digital innovations have great potential to reduce costs, increase efficiency and improve outcomes.

Digital business revolution with convergence of ICTs and services

In today’s globally competitive business environment, innovation is not a strategic option; it is a fundamental prerequisite for a company’s survival, organizational renewal and national economic wealth. Firms are now establishing market leadership and growing their revenues by mastering digital service innovations. For example, the traditional advertising agencies now have to be able to blend digital products and services with creative strategy. Amazon is as much a retailer and supply chain leader as it is a digital service innovator. Similarly, the Netflix business model is heavily reliant on continuously building and enhancing digital products and services to compete in the entertainment industry. Ford is realizing that its future competitors are likely to be Facebook and Google and not BMW and Toyota. Apple is more than a computer manufacturer with iTunes, apps, cell phones, tablets, etc.

Another good example can be smart retail platforms (e.g., Obase Detailer, Intel’s AIM suite) that collect and analyze data from transactional systems, data warehouses, customer relationship management systems and location-based analytics.

So, are you looking to be an innovative service provider with digital business? How to start such a journey, and how to stay the course.

Digital innovation is a new way of thinking and doing things. A key characteristic of digital innovation is that it often changes the roles of providers, co-producers and customers of services and alters their patterns of interaction. Different organizations have different perspectives on the opportunities created by the ICTs, but all are looking to improve efficiency and outcomes. One of the biggest challenges is deciding where and how to start this journey, and how to stay on course.

Culture change/mindset. Understand the service (value co-creation). Service, which can be defined as the application of competence, knowledge and capability to create benefit (or value) for another, derives from the interactions of entities known as service systems. They are: intangible, inability to inventory, perishable, inseparability (produced and consumed simultaneously), value co-creation process, collaboration with many stakeholders (e.g., B2B2C), high involvement of people in delivery (or service system), and very complex. Simultaneity of production and consumption of services occur in complex service environments due to interaction of people, processes, technology and shared information.

Customer experience. Think about how to measure and improve customer experience. The customer experience embodies what it’s like to be a digital service customer of your organization, whether buying digital or physical products. Amazon’s customer experience includes the website and the digitized business processes touching the customer, like the shopping cart and payment options, as well as messaging, such as delivery alerts and email acknowledgments with design thinking. The experience also includes Amazon’s well-developed customer-created content: customer product ratings and reviews, as well as sophisticated tools like search, a detailed history of purchases and tailored recommendations [5].

Strategy re-mapping. Redefine your market space for future growth by assessing your current market space. This would include: current markets/current offerings (market penetration strategy), new markets/current offerings (market development strategy), current markets/new products-services (product/service development strategy) and maximum opportunity strategy (new markets/new products and services).

Concept/idea. A “new value proposition” targeted at a particular market. One way to reduce that risk is to make changes to your company’s mix of products or services [6]. Focus narrowly, search for commonalities across products and services or create a portfolio of offerings. If your business currently serves multiple segments, it may be best to subdivide into focused units rather than try to apply one model.

Platform economics. Driving digital business innovation with analytics, smart services, social, cloud, Internet of Everything (IoE), service-orientation and cognition for value co-creation and outcome [7]:

  • To achieve economies of scale with digital business models requires the development and reuse of service-based digitized platforms across the enterprise [8].
  • Review the business processes, applications, data networks and connections, databases, servers, etc., to identify which applications need to remain in their present form, and which can be removed to the new framework. Also identify which IT platforms servers, PCs, workstations, operating systems and software need to be upgraded or replaced.
  • Global platform but customizable locally. This means an enterprise with a federated business architecture with a global content repository, expanded taxonomies, modular design and global and local innovation.
  • Enabled with IoT, smart services gather and share information directly with each other through onsite and virtual cloud solutions, making it possible to collect, record and analyze new data streams faster and more accurately. The ability to collect and analyze a flood of data from mobile solutions, sensors, cameras, etc., with smart automation is getting much more efficient and effective. These IT-enabled solutions should have integration capability that helps implement the new configurations of operational competencies by developing the required patterns of interactions with each other.
  • Every “thing” should be able to reconfigure itself – the ability to rearrange existing resources and services into new configurations of operational competencies that better match the environment.
  • Every “thing” should be able to sense the environment, identify needs and spot new opportunities. It requires tracking and monitoring service providers’ and receivers’ activities, as well as technology performance to understand usage trends, navigation trends, etc.
  • Every “thing” must have coordination capability – the ability to manage dependencies among resources and tasks to create new ways of performing a set of activities.
  • Significant amount of data are collected with IoE and smart service. New models, methods and algorithms are needed to analyze this data effectively and efficiently.
  • The next generation of things should have cognitive capabilities. They should be able to learn by driving innovative thinking and new knowledge generation to enhance existing services. This involves incorporating user community feedback and modifying, adding, deleting and synthesizing content and software services as indicated, thus capturing industry trends and needed software service categories for adding, updating or deleting skills, knowledge and experience categories and content.
  • Data collected is useful, relevant and actionable. In the 21st century, everybody and everything become data creators and data consumers.
  • After use, every “thing” should have a plan for disabling, destroying and disposing plans for itself if there are no needs for them. Apply correct privacy and security procedures. Companies need to get value from product complexity without confusing customers or making it too difficult for employees to get things done [9].

Digital business innovation: The time is now.

There is a big move toward digitization of business: incorporating more of customers’ experience; executing more processes and working together with partners in the value chain; increasing the number of “digital natives” (young current and future customers and employees who expect a brilliant digital experience in all of their interactions); and embracing the dawning of the age of the customer voice, in which customers have a much stronger impact on enterprises via ratings of their services and via online comments through Twitter and other social media. Before the Internet, business operated primarily in a physical world of “place”: It was a world that was tangible, product-based and oriented toward customer transactions. Today, many industries – all moving at different rates – are shifting toward a digital world of “space”: more intangible, more service-based and oriented toward customer experience.

Technology allows customers to produce service entirely on their own (“self-service”), employees to provide services from anywhere in the world (remote, outsourced services), and companies to integrate technology into a total mix of service offerings (smart services).

To be truly successful, such a move will require a new kind of talent – T-shaped people – supported by a new kind of organization. In other words, companies need to retune their talent engines to support a new generation of innovation [10]. Organizations need to find new or improved ways of generating, prioritizing and managing digital innovation from idea generation through the end of the development lifecycle when the innovation becomes a new service platform or a complementary value-added service. These new ways of managing innovation need to consider the differences between incremental and radical innovation and recognize the leverage that can be gained from co-creation of value with the customer and customer experience.

Haluk Demirkan ( is a professor of Service Innovation and Business Analytics at the Milgard School of Business, University of Washington-Tacoma. He has a Ph.D. in information systems and operations management from the University of Florida. He is a longtime member of INFORMS.

Bulent Dal ( is a co-founder and general manager of Obase Analytical Solutions, Istanbul, Turkey. His expertise is in scientific retail analytical solutions. He has a Ph.D. in computer sciences engineering from Istanbul University.


  1. Demirkan, H., Kauffman, R.J., Vayghan, J.A., Fill, H-G., Karagiannis, D. and Maglio, P.P., 2009, “Service-Oriented Technology and Management: Perspectives on Research and Practice for the Coming Decade,” The Electronic Commerce Research and Applications Journal, Vol. 7, No. 4, pp. 356-376.
  2. Spohrer, J. and Maglio, P. P., 2008, “The emergence of service science: Toward systematic service innovations to accelerate co-creation of value,” Production and Operations Management, Vol. 17, pp. 1-9.
  3. Harmon, R., Demirkan, H. and Chan, E., 2011, “Redefining Market Opportunities through Service Innovation,” 2011 Portland International Conference on Management of Engineering & Technology, Portland, Oregon, August.
  4. Bort, J., 2013, “Cisco’s John Chambers Has Found a New $14 Trillion Market,” Business Insider, May 29, 2013 (
  5. Peter Weill and Stephanie L. Woerner, 2013, “Optimizing Your Digital Business Model,” MIT Sloan Management Review, Spring 2013, Vol. 54, No. 3, pp. 70-78.
  6. Karan Girotra and Serguei Netessine, 2014, “Four Paths to Business Model Innovation,” Harvard Business Review, July–August 2014, pp. 96-103.
  7. Demirkan, H., 2013, “Smart Healthcare Systems Framework: More Service Oriented, Instrumented, Interconnected and Intelligent,” IEEE IT Professional, September/October, pp. 38-45.
  8. Demirkan, H., Kauffman, R.J., Vayghan, J.A., Fill, H-G., Karagiannis, D. and Maglio, P.P., 2009, “Service-Oriented Technology and Management: Perspectives on Research and Practice for the Coming Decade,” The Electronic Commerce Research and Applications Journal, Vol. 7, No. 4, pp. 356-376, January issue.
  9. Martin Mocker, Peter Weill and Stephanie L. Woerner, “Revisiting Complexity in the Digital Age,” 2014, MIT Sloan Management Review, Summer 2014, pp. 72-81.
  10. Demirkan, H. and Spohrer, J. C., 2015, “T-Shaped Innovators: Identifying the Right Talent to Support Service Innovation,” Research Technology Management, Vol. 58, No. 5, pp. 12-15, September/October issue.

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