Unraveling the Service Innovation Dilemma: The Promise of Network Embeddedness

Service innovation, unlike product innovation, is not easily scalable in the production process. In general, as firms attempt to grow, one potential direction for growth is through a firm's ability in applying the same processes and resources used for a single unit of production to larger volumes, thus saving costs through economies of scale. Whereas product-oriented companies can easily achieve cost reduction through scientifically tested and validated operational processes for product innovation, the peculiar nature of services do not permit such formal processes to be applied to service offerings. In this chapter, we identify network approaches through which firms engage the “service innovation dilemma” — the problem of diseconomies of scale in a world of increasing demand for services. We argue that firms can develop sustainable competitive advantage in services through “real” and “virtual” embedded inter-firm and customer co-creation (market) mechanisms. We conclude with some implications for theory and practice in services and related innovations.