Service Innovation: A Knowledge-based Approach
Kristina Buhagiar, Lisa A. Pace and Sandra M. Dingli
The Edward de Bono Institute for Creative Thinking and Innovation, University of Malta, Msida, Malta
Keywords: Knowledge Resources, Knowledge Creation, Knowledge Management, Service Innovation.
Abstract: Service innovation is generally conceptualized as a complex construct, the emergence of which is perceived
as heterogeneous, situated and path-dependent on hard-to-replicate intra- and inter-organizational knowledge
resources and processes. Due to the multidimensional nature of service innovation, studies in service
innovation theory have generally explored the service innovation process by applying the capabilities
approach, which focuses on firm-level routines for knowledge reconfiguration and service innovation, or by
applying a sociological orientation, where emphasis is placed on investigating the role of human actors and
human interactions in knowledge reconfiguration and service innovation. Building on these two approaches,
this paper proposes a conceptual model on the service innovation process grounded in a knowledge-based
approach. Emphasis in this model is placed on knowledge as a key resource and input to the service innovation
process, while through bridging firm-level capabilities with individual-level processes, the multi-levels
through which knowledge reconfiguration and service innovation may occur are illustrated.
1 INTRODUCTION
The literature on service innovation theory
characterizes service innovation as a transformative
and multidimensional construct, capable of evolving
through numerous intra- and inter-organizational
stimuli and knowledge acquisition and sharing
activities (Chae, 2012; Lusch & Nambisan, 2015;
Sundbo, 1997). Within the service innovation process,
a core resource which is generally acknowledged as
necessary for the development of service innovation is
knowledge (Miles, 2008; Nonaka & Takeuchi, 1995,
2019; Peschl & Fundneider, 2014), with the service
innovation process generally illustrated as a series of
interwoven and nuanced knowledge processes (Peschl
& Fundneider, 2014), and knowledge creation
activities framed as pivotal to the innovation process
and generally reflected in new services and
organizational systems (Nonaka & Takeuchi, 1995,
2019). Although “knowledge creation generates
innovation” (Nonaka & Takeuchi, 2019, p. 20), the
literature on service innovation theory falls short of
providing a comprehensive overview of the distinct
micro-foundation knowledge reconfiguration
processes deployed in service organizations to generate
innovation (Randhawa & Scerri, 2015), while research
aimed at investigating service innovation management
in complex and dynamic environments remains limited
(Carlborg et al., 2014). Similarly, the concept of
service innovation has been criticized as ambiguous,
ill-defined and particularly complex to conceptualize
(Witell et al., 2016).
To overcome these gaps in the literature and to
offer a more holistic perspective of the service
innovation process, this paper proposes a conceptual
model and a framework based on knowledge for the
service innovation process.
The objective of the framework is twofold. First,
it investigates individual-level and firm-level
processes involved in knowledge generation and
knowledge reconfiguration processes and how these
lead to service innovation. Second, it explores the
inter-linkages between the micro-level and firm-level
processes and how these together contribute to
service innovation.
The proposed model and framework are currently
being tested in the context of the accommodation
sector in Malta specifically, boutique hotels, where a
methodology grounded in strategy as practice is
applied. To investigate this model, semi-structured
interviews are being conducted with boutique hotel
owners, managers and employees to investigate how
innovation emerges through knowledge processes,
from both a micro-foundation and firm-level
perspective. In addition, focus groups with customers
are being held to explore whether and how the
knowledge generated and communicated by customers
is applied in the service innovation process.
Buhagiar, K., Pace, L. and Dingli, S.
Service Innovation: A Knowledge-based Approach.
DOI: 10.5220/0010652900003064
In Proceedings of the 13th International Joint Conference on Knowledge Discovery, Knowledge Engineering and Knowledge Management (IC3K 2021) - Volume 3: KMIS, pages 119-125
ISBN: 978-989-758-533-3; ISSN: 2184-3228
Copyright
c
 2021 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
119

2 THEORETICAL
BACKGROUND
2.1 Service Innovation
The literature discussing service innovation generally
portrays the innovation process as dynamic and
interactive, i.e., it is dependent on the interactions and
actions of multiple human actors (Chae, 2012).
Simultaneously, service innovation is conceptualized
as interwoven in service ecosystems, where actors
continually exchange and integrate resources, leading
to the co-creation of new value (Lusch & Nambisan,
2015). For example, Saxena’s (2005) research of 45
tourism stakeholders in the Peak District National
Park, United Kingdom, revealed that networks led to
collective learning and acted as a hub for knowledge
and innovation. Within service ecosystems, all
market actors, ranging from customers, suppliers, to
competitors, represent potential avenues for the co-
production of innovation, which occurs through
processes for knowledge integration and combination
(Lusch & Nambisan, 2015). For example, Nieves and
Diaz-Meneses’s (2018) research on hotels in the
Canary Islands, Spain, concluded that incremental
innovations were positively influenced by external
knowledge sources, such as local organizations
operating in different economic sectors, non-local
tourism providers, general and institutional
information sources and customers.
Simultaneously, the evolution of service
innovation may be systematic, unsystematic or a
combination of both (Song et al., 2009; Toivonen &
Tuominen, 2009), with systematic innovation
developing through project and product teams, an
organization’s strategy and intentional efforts to
generate novel solutions, and unsystematic
innovation developing through open innovation, the
use of external networks and search-and-learning
processes (Coombs & Miles, 2000; Song et al., 2009;
Sundbo, 1997; Toivonen & Tuminen, 2009)
In addition, the degree of novelty invoked by a
service innovation may range from radical to
incremental (Chae, 2012; Goodman & Dingli, 2017),
while it may occur in four dimensions, including
service concept, client interface innovation, service
delivery system innovation and technology
innovation (Miles, 2008).
Due to service innovation’s complex and
multidimensional nature, understanding the service
innovation process has become a foremost priority for
service organizations seeking to react proactively to
market changes (Rubalcaba et al., 2012).
Although a significant proportion of the literature
on service innovation focuses on defining and
characterizing the different dimensions of service
innovation (see, for example, Chae, 2012; Sundbo,
1997), this paper grounds itself in a knowledge-based
approach towards conceptualizing the service
innovation process.
2.2 Knowledge Resources and Service
Innovation
As previously discussed, service innovation is a
process which is contingent on novel combinations
and re-combinations of knowledge resources from a
variety of intra- and inter-organizational actors
(Lusch & Nambisan, 2015).
From this perspective, service innovation may be
perceived to consist of “highly complex knowledge
processes” (Peschl & Fundneider, 2014, p. 347),
where, through the development of new knowledge,
organizations are able to effectively react to market
changes and shape their future.
From a (dynamic) capabilities perspective, the
“complex knowledge processes” referred to by Peschl
and Fundneider (2014) may be disaggregated into
three core firm-level capabilities. These are
absorptive capacity (Cohen & Levinthal, 1990),
combinative capabilities (Kogut & Zander, 1992) and
knowledge management capabilities (Nielsen, 2006).
Absorptive capacity refers to the capacity of
organizations to acknowledge the value of external
information, assimilate it and exploit it to yield
commercial gains (Cohen & Levinthal, 1990). It
contributes towards enhanced performance
improvements and competitive advantages in hotels
(Pongsathornwiwat et al., 2019). Similarly, it has
been associated with enhanced product, process and
marketing innovations in hotels (Nieves et al., 2014).
Combinative capabilities mirror capacities aimed
at creating new knowledge (Kogut & Zander, 1992).
They have been associated with enhanced
competitiveness and service innovations in hotels
(Santos-Vijande et al., 2018), while interactions
between employees in a spa resort in Sweden were
found to lead to new ideas and innovation
opportunities (Engen & Magnusson, 2015).
Knowledge management capabilities, which refer
to processes associated with knowledge aggregation
and profiteering (Nielsen, 2006), have been found to
contribute towards knowledge creation activities,
enhanced performance, consistent service quality and
the acquisition of competitive advantages in hotels
(Baytok et al., 2014; Salem, 2014).
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The literature which views service innovation
from a capabilities perspective has established strong
grounds for the existence of a positive relationship
between knowledge resources and service
innovation; however, the majority of the studies in
this field have generally emphasized macro-level or
firm-level phenomena (Jarzabkowski, 2005). As a
result, Foss and Linder (2019) have labelled
‘capabilities’ to represent a terminology with elusive
micro-foundations, whilst stating that “if a manager
does not understand how the capabilities of the firm
she manages somehow emerge from individual-level
skills, actions, and so on, it is not clear how she can
manage capabilities, including developing and
leveraging such capabilities” (p. 1).
The micro-foundations referred to in this paper
reflect the unique processes which undergird firm-
level; 1) sensing capabilities, 2) knowledge
development capabilities, 3) integration and
coordination capabilities, and 4) seizing capabilities.
Therefore, micro-foundations reflect processes at the
individual-level used by organizational personnel to
reconfigure knowledge resources and lead to
innovation. In turn, these micro-foundation processes,
if systemized through, for example, institutionalization
procedures, represent the basis upon which firm-level
capabilities for service innovation develop.
In line with Foss and Linder’s (2019) rationale, the
following section proposes a multi-level knowledge-
based model and framework of the service innovation
process. The objective of the proposed model is to
present a comprehensive representation of how
different micro-foundation knowledge reconfiguration
processes and firm-level capabilities may contribute
towards the development of service innovation.
3 PROPOSAL
This section presents the knowledge-based model of
service innovation, illustrated in Figure 1 below. As a
starting point to the discussion in this section, the
micro-foundation processes service organizations are
conceptualized to apply to develop service innovation
are critically discussed. This is followed by a brief
overview of the role of institutionalization practices
and firm-level capabilities in the innovation process.
3.1 Micro-foundation Processes for
Knowledge Reconfiguration and
Service Innovation
In line with Figure 1 below, micro-foundation
processes for knowledge reconfiguration are
subdivided into four phases, these are:
 Phase 1: Discovery
 Phase 2: Idea generation
 Phase 3: Knowledge coordination
 Phase 4: Implementation
Figure 1: Knowledge-based mode of service innovation.
Service Innovation: A Knowledge-based Approach
121

At a micro-foundation level, each phase is
comprised of several knowledge-based processes. It
is relevant to note that, while Figure 1 outlines a linear
knowledge-based processes, service innovation may
develop in a linear or non-linear manner, and it may
occur through different paths, i.e., organizations need
not apply all the knowledge-based processes outlined
in Figure 1 to develop service innovation.
Thus, Figure 1 acts as a basis for the
conceptualization of service innovation from a
knowledge-based and holistic perspective.
Phase 1: Discovery
Phase 1, Discovery, illustrates two processes
individuals within organizations are conceptualized
to apply in order to recognize innovation
opportunities. These are:
Internal Sensing – internal sensing occurs once
organizational personnel immerse themselves in tacit
knowledge, leading to the development of novel
thoughts, hypothesis, concepts and judgements
(Nonaka & Toyama, 2005; Polanyi, 1966/2009). For
example, Engen and Magusson’s (2018) research of
front-line employees in service organizations
revealed that employees identified avenues for
innovation as they were conducting their ‘ordinary’
work, or through, for example, reporting problems.
Once novel thoughts are generated, if these are
externalized through interactive processes, such as,
for example, socialization activities, accumulated
tacit knowledge may lead to the development of new
knowledge (Nonaka, 1994; Nonaka et al., 2000).
External Sensing – external sensing refers to the
acquisition of explicit or tacit data, information and
knowledge from an organization’s external
environment through various forms of interaction, for
example, informal meetings with customers and
stakeholders, email, electronic media, patents and
document specifications (Nonaka et al., 2000; Smith,
2001). For example, Del Vecchio et al.’s (2018)
longitudinal case study on the impacts of big data
collected via social media at an event in Bari, Italy,
revealed that big data enabled tourism organizations
to identify innovation opportunities through tracking
customer satisfaction levels and harvesting data on
the tourism experience.
Phase 2: Idea Generation
Phase 2, Idea Generation, illustrates three processes
through which new knowledge develops in service
organizations. These are:
Externalization of Tacit Knowledge - following
internal and external sensing processes,
organizational personnel may choose to externalize
their subjective tacit knowledge through interactive
processes, such as the sharing of knowledge with
colleagues. Once knowledge sharing occurs, this
leads to a recursive cycle of debate, conflicting
perspectives and the development of new knowledge
(Nonaka & Toyama, 2005). For example, Engen and
Magusson’s (2015) study, which explored the process
of creativity in front-line employees in three units at
a large hotel concluded that co-worker support and
feedback from management stimulated additional
idea creation and development. According to the
authors “it seemed essential in many ways that the
unit manager listened and gave feedback. These
practices appeared to spark the process of creating
ideals while also providing a mutual understanding of
the acceptance or rejection of the ideas” (Engen &
Magusson, 2015, p. 315).
Knowledge Creation - while knowledge creation
may occur at any point in the knowledge-based model
of service innovation, it occurs once organizational
personnel have externalized their tacit knowledge,
leading to combinations and re-combinations of
knowledge resources by way of dialogue and
interactions.
Knowledge Leverage - knowledge leverage
occurs when organizational personnel purposefully
exploit existing knowledge bases present within an
organization through, for example, coupling
divergent knowledge sets or through combing explicit
forms of knowledge, mirroring updated specifications
and organizational procedures (Nonaka et al.,1996;
Nonaka & Toyama, 2005). For example, Baytok et
al.’s (2014) analysis of middle and senior managers
in 5-star hotels in Turkey revealed that knowledge
management processes were used to guide
collaboration between different departments in order
to effectively create new knowledge and ideas for
thermal hotels.
Knowledge Capture - Knowledge Capture
represents the codification of tacit knowledge,
leading to the refinement of ideas or the creation of
new knowledge (Nonaka et al., 1996).
Phase 3: Knowledge Coordination
Phase 3, Knowledge Coordination, refers to two
processes organizational personnel may implement to
ensure that innovation activities are viable, including
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an analysis of the skills required for the task at hand,
and the sharing of new knowledge.
Knowledge Assembly - once knowledge has
been codified, action may be taken to assemble the
knowledge bases required to deploy the innovation
(Nielsen, 2006). For example, Wang et al.’s (2018)
analysis of a Spa and Resort in Taiwan revealed that
the hotel required the knowledge and collaborative
efforts of the hotel’s artistic director, employees,
artists, playwrights and customers in order to develop
and choreograph a new service, consisting of a
theatrical performance for customers.
Knowledge Sharing - knowledge sharing occurs
once codified knowledge regarding the innovation is
distributed to personnel who are generally, but not
necessarily, within the organization (Nielsen, 2006).
For example, Hoarau’s (2014) research on Icelandic
nature-based tourism organizations revealed that one
of the sampled organizations spread new knowledge
within the organization by way of presentations,
newsletters and research papers, while another
organization disseminated new knowledge through
handbooks and informal gatherings.
Phase 4: Implementation
Phase 4, Implementation, represents the processes
used when integrating innovation into an
organization’s infrastructure.
Knowledge Use - This occurs once captured
knowledge is exploited, i.e., implemented, generally
(but not necessarily) within the organization’s
infrastructure or service delivery processes (Nielsen,
2006).
Innovation - once new knowledge is
implemented, it may result in innovation in the
service concept, client interface, service delivery
system and technology (Miles, 2008).
3.2 Routinization of Service
Innovation: Institutionalization
Practices and Firm-level
Capabilities
In line with Figure 1 above, the conceptual model
proposed in this paper positions service innovation as
a construct which may develop: 1) unsystematically
and in a non-linear manner by way of multiple
combinations of impromptu micro-foundation
processes, or 2) systematically by way of firm-level
routines.
Thus, if the micro-foundation processes discussed
in Section 3.1 are routinized through
institutionalization practices, then this gives rise to
firm-level capabilities for systematic knowledge
reconfiguration and innovation.
Through institutionalization practices, which
refer to documents and tools used to establish
routinized activities, an organization develops a firm-
level ‘memory’, the output of which generally results
in organizational personnel establishing habitual
activities and operational consistency (Helfat et al.,
2007; Nelson & Winter, 1982; Zollo & Winter, 2002).
Micro-foundation activities may transform into
firm-level routines. This may lead to the development
of four knowledge reconfiguration capabilities, these
are:
1. Sensing capabilities
2. Knowledge development capabilities
3. Integrating and coordinating
capabilities
4. Seizing capabilities
The four capabilities outlined above directly build
on the micro-foundation processes discussed in
Section 3.1, however, these processes are generally
recursive and stable, meaning that innovation is likely
to occur in a systematic and methodical manner.
The objective of Figure 1 above is to present a
holistic illustration of the service innovation process
from a knowledge-based perspective that is capable
of accounting for innovations which may occur
through the individual-level actions and interactions
of the human actors within an organization, and
through the development of firm-level capabilities for
the reconfiguration of knowledge resources and
service innovation.
4 CONCLUSION
Service innovation generally evolves through
combinations and re-combinations of knowledge
resources from intra- and inter-organizational actors
(Sundbo, 1997; Toivonen & Tuominen, 2009), with
service innovation theory supporting this perspective
(Lusch & Nambisan, 2015; Rubalcaba et al., 2012).
Building on this orientation towards service
innovation theory, this paper presented a holistic
model of the service innovation process from a
knowledge-based perspective.
Service Innovation: A Knowledge-based Approach
123

The proposed model places emphasis on the
multiple processes through which knowledge may be
reconfigured to emerge as service innovation.
Although the proposed model is being tested in
the context of the boutique hotel sector in Malta,
future research could focus on investigating the
model in different contexts, e.g., in educational
organizations, telecoms, hospitals or software
development organizations.
In addition, future research may focus on
investigating whether different types of service
organizations exhibit comparative differences when
implementing micro-foundation processes and firm-
level capabilities.
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