guest article by Tor W. Andreassen, Line Lervik-Olsen, and Seidali Kurtmollaiev from the CSI at NHH

According to Harvard-professor Clayton Christensen, there are three types of innovations:

Innovations that reduce costs and improve efficiency. The end-result of these innovations are often loss of jobs. The development of industrial robots and algorithms are two examples of innovations that replaces labor with capital. Firms quest to become more digital, is another example. We call these innovations efficiency innovations.

Innovations that make goods or services better by improving the level of quality or reduce the variance in quality. Decisions pertaining to what to improve is often inspired by customer satisfaction measures which identify which quality area and attributes have the stronger correlations with customer satisfaction. These innovations are called sustainability innovations

Innovations that do old things in a new way or something completely new. These innovations are radically different from the existing solutions. The end-result of these innovations are often the creation of new firms and jobs. Platform companies like Uber and Airbnb are two examples of brand new solutions to an existing offer: transportation and hospitality. We call these innovations disruptive innovations.

Through our research in and our effort to develop a new national measure for customers’ perception of firms’ innovativeness (i.e. The Norwegian Innovation Index), we identified four areas where customers were capable of noticing changes made by the provider. These are:

  • Core service: For example, perceived changes in Starbuck’s beverages or food
  • Service delivery: For example, perceived changes in how the service was delivered by Starbucks’ barista, through their app, or web pages
  • Customer relationships: For example, any perceived change in how the provider tries to establish, maintain or deepen its relationship with its customers
  • Servicescape: any perceived change in the “theater” where the service provision takes place. For Starbucks, the interior design of it restaurants.

In the Norwegian Innovation Index (NII) model, these four areas are correlated with perceives innovativeness and emotional response. Perceived innovativeness is positively correlated with perceived relative attractiveness which is linked to customer loyalty. A perceived change (positive or negative) in any of the four innovation areas, will according to the NII-model impact perceived innovativeness and emotions and ultimately customer loyalty. From a statistical point of view, our research model fits like hand in glove with all fit statistics well within defined ranges.

We collected data from 58 companies in 19 industries and 5812 of their current customers. While the findings differed among industries and firms, the effect of one innovation investment was constant over all industries and firms: perceived changes in customer relationships were negatively correlated with perceived innovativeness and emotions. This is striking and surprising.

In short, the finding implies that whatever the firms do to innovate in how they develop, maintain, or deepen relationships with customers, in fact reduce customers’ perception of the firms’ innovativeness. The finding is worrying because perceived innovativeness is linked to customer loyalty through perceived attractiveness in the market place, this finding must be the opposite of what firms want to achieve. Using theory, how can we explain this finding?

From principal-agent theory (Jensen & Meckling 1976) we can find one explanation: An agent (the firm) is hired by the principal (the customer) to do a job for them as though the principal did the job herself. For the agent to do the best job she can, the principal must delegate some autonomy and decision authority while maintaining an incentive system to align the two parties’ common interests, i.e. get the job done in an efficient and effective way to the principal’s satisfaction.

The findings imply that the agent has started to act in her own best interest which is a direct violation of the principal-agent relationship. In other words: her innovations in building a relationship with the principal is primarily seen from the agent’s perspective to safeguard future cash flow from the client by for example building switching costs. This is the opposite of what the principal wants which cause them to report a negative correlation between relationship innovations and the firm’s perceived innovativeness.

From this study, we can draw that (service) firms must return to a philosophy of serving and co-creating value with the principal, i.e. become more customer oriented in their innovation thinking. The key question in any innovation is: how may this improve customer value added? From the Norwegian Innovation Index, we learned that customers are telling firms that they need to rethink how they approach customer relations innovations.

Tor W. Andreassen, Norwegian School of Economics
Line Lervik-Olsen, Norwegian Business School and Norwegian School of Economics
Seidali Kurtmollaiev, Norwegian School of Economics