This chapter offers insights for service firm innovators on the mechanisms that are most effective in appropriating an economic return from innovations that create new service customer products and the processes that underpin the design and delivery of such services. We assume that a primary purpose of innovations, be they innovations in the processes that generate a service or an innovation in a service offering to the customer, is to capture profits for the firm. Practical examples of a service innovation in our study would be the introduction of a new communications support system for customers, a new type of working capital bank loan product for business customers, or a new engineering consulting service for road infrastructure contractors. Process improvements might include creating systems in a consulting firm to more efficiently train new graduates in client engagement, improvements to the process of credit approval by a bank or a new audit design process by an accountancy firm.
A recent review of the literature on appropriation regimes (James, Leiblein and Lu 2013) demonstrates that much is known about the relationship between four individual appropriation regimes, namely patents, secrecy, lead time, and complimentary assets and also about manufacturing settings. Less is known about how different appropriation regimes are bundled together to impact collectively upon protecting profits of innovation and also more generally about service firm appropriation regimes. James et al (2013) recommend that researchers seek to fill these gaps using CEO or R&D function surveys that explore combinations of appropriation mechanisms and how these impact upon profit protection in multiple settings. This chapter addresses this call to action. Our first contribution is therefore to identify clusters of appropriation mechanisms that bundle together into distinct appropriation regimes, that are conceptually and statistically valid, and then to test their individual and interactive relationship with firm performance.
We surveyed 622 service firms with more than 50 employees located on the island of Ireland, obtaining a response from 188 CEO/Business level senior management, to estimate how effective a series of mechanisms were to protect the profit streams that flowed from innovations to service offerings and from innovation in the processes that are used to design and deliver services. These firms were typically incumbents, with an installed based of customers and hence their innovations sought to both retain installed customers in the face of competition and grow into new markets. We explore the four appropriation regimes noted by James et al (2013). We expand on these resulting in a clustering of five appropriation regimes. Our work addresses mechanisms that protect both service product and process innovations, thus bringing together in one service industry survey multiple appropriation regimes across the spectrum of innovation activity. We found that service offering’s profit streams were protected by the stability of their legal protections (copyrights, patents and trade secrecy) and by the coherence of their market offering (reputation regarding quality, compatibility with existing services and marketing support staff). Process innovations were protected by legal stability; process commercialisation protections (accreditation of the process, branding, and long term contracts with customers); and internal resource supports (dedicated project management, supportive organizational culture, and compatibility with existing processes).
Using a 10 item scale of firm profitability we observed that both the appropriation regimes of legal product stability and an internal process resource are negatively associated with profit streams: they may create innovations, but fail to protect profit streams. Effective appropriation regimes that protect innovation profits were: the product commercialisation appropriation regime for the service offering (reputation for quality, dedicated marketing staff and compatibility with existing products), process commercialisation appropriation regimes (helping the process to be recognized as quality by external customers and orientated to their needs) and legal protection of the process from imitation. Our study highlights that purely legal methods to protect the profit streams of an innovation have limited impact, however appropriation regimes deploying a mix of legal and non-legal mechanisms do protect profits flowing from service ‘product’ and process innovations. A moderating effect was observed, but only in limited circumstances, thus many of these appropriation regime clusters were found to have independent and not interactive impacts on profit streams.
This study has three research questions. First, to identify conceptually and empirically valid clusters of appropriation mechanisms in practice. Second, how do these clusters, which we refer to as appropriation regimes, impact firm performance? Third, how do moderations between appropriation regimes impact firm performance? These research questions are important to theory, as they seek to fill gaps in the literature, and to industry, as the answers to these questions could provide a road map for managers wishing to maximize returns from innovations. We use a unique survey dataset from CEO/Head of Business Unit respondents across the Irish services industry to address these questions.
Ahrweiler, P., Gilbert, N. and Pyka, A.