Critical success factors of self-service technology innovation

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Critical success factors of self-service

technology innovation

A multiple case study on value creation, value capture and value

protection

University of Groningen

Faculty of Economics and Business

Business administration: Strategy and Innovation

August 24, 2012

Marco Oosterveer

Student number 1912003

University supervisor

Dr. R. van der Eijk

Company supervisor

M. Winters

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Preface

This master thesis is the result of 7 months of research in the field of innovation management and was conducted at Ahold. This is the most valuable and time consuming piece of work I completed as a student. Although it was hard working, writing my master thesis has been a valuable learning experience. I was happy to conduct my research in the field of business, as it was a great way to test my academic experience in practice.

I would like to thank all people that have been directly or indirectly involved in completing my master thesis. First of all, I would like to thank Ahold and especially Monique Winters and Jan de Heij for the opportunity to conduct my case study at the company. Their support and feedback helped me to get the right direction and improved the quality of my thesis. The company enabled me access to data which has been significantly valuable for my research. Furthermore I would like to thank all participants who provided data during the interviews.

I would also like to thank my university supervisor Rene van der Eijk for his valuable feedback during my project.

Zaandam, August 2012,

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Abstract

This study investigates the critical success factors for Self-Service Technology (SST) innovations in the retail market using a multiple case research approach. The research focuses on the companies’ strategic perspective analyzing the value creation, value capture and value protection activities. When a company manages these concepts in the right way, it should be able to increase the chance for SST innovations to become successful.

From the 18 constructs that were investigated in this study, four were critical to the success. These constructs are sociopolitical legitimacy, cognitive legitimacy, the firms’ bargaining power versus resource suppliers and legal protection.

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Executive summary

Globalization, tougher competition and increasing customer demands are all important reasons why organizations have to innovate. Innovation has become an integral part of many organizations’ strategy as innovation is one of the determinants of sustainable firm performance. Organizations often fail to successfully launch new products or services, failure rates are higher than 40%. This study analyzes the effect of the value creation, value capture and value protection activities in relation to successful and unsuccessful self service technology innovations. A self-service technology (SST) is a technical appliance which helps consumers to produce and consume a service without direct assistance of an organizations’ employee. The critical success factors are revealed which can help organizations to increase the chance of success of their innovations.

The academic literature on value capture is mainly focused on the broad concept of innovations. Literature lacks research after the effects of value capture determinants for various types of

innovations. Value capture determinants for SST innovations have never been studied. This research focuses on the companies’ perspective and only concerns the manageable factors. With the help of literature, 18 constructs are identified and linked to the success of SST innovations. These constructs can be categorized into three groups: (1) value creation activities, (2) value capture activities and (3) value protection activities. The first group contains the following activities: innovation lead time, presence of network externalities, presence of complementary goods/services, the level of

sociopolitical legitimacy, the level of cognitive legitimacy and the choice to use the SST. The second group, value capture activities, includes the firms’ bargaining power versus resource suppliers and the firms’ bargaining power versus consumers. And the final group comprehends: HRM, practical and tactical means, legal protection, difficulty to copy, radicalness of innovation, dominant design, manufacturing assets, distribution assets and marketing assets. An overview of all concepts is provided by the research framework in paragraph 2.4.

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Two of the value creation activities were found to be of critical importance to the success of SST innovations. First is the level of sociopolitical legitimacy. The more accepted an innovation is by society the higher the sociopolitical legitimacy and thus benefits successful innovation. Second is the level of cognitive legitimacy. The level of cognitive legitimacy increases as the organization invests more to make consumers familiar with the SST innovation, which positively influences the

innovations’ performance. Innovation lead time was found to be beneficial to the innovations’ success, but not critical. No relation was found between the success of an innovation and the presence of network externalities or complementary goods/services.

Regarding the value capture activities, bargaining power versus resource supplier was found to be critical to the success of SST innovations. A variety of suppliers to choose from and high control of the innovation process both contribute to the success. The study lacks information to judge about the firms’ bargaining power versus consumers.

One of the value protection activities was critical to the SST innovations’ success: legal protection. Formal forms of protection positively influenced the innovation performance. Two protection activities contributed to the success, but were not critical. First the practical and tactical means; secrecy of information, both internally as externally. Second is the degree of knowledge codification. For six activities, no relation to the innovations’ success was found. The activities are: HRM, practical and tactical means, difficulty to copy, radicalness of the innovation, presence of a dominant design, manufacturing assets and marketing assets. It was unable to judge about the relation of the

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Abbreviations

AH Albert Heijn

ARIT Ahold Retail Innovation Team ATM Automated Teller Machine EOK Easy Order Kiosk

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Table of figures

Table 1: Degree of 'newness' of innovations ... 16

Figure 1: Research framework ... 31

Table 2: Relevant situations for different research strategies (source: Yin, 2003) ... 34

Table 3: Industry cases ... 36

Table 4: Research participants ... 39

Table 5: Research variables ... 40

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Chapter 1: Introduction

In today’s world, globalization leads to an increase in competition. Commoditization is a

consequence of this increased competition; it forces companies to focus on innovation (Wilson & Doz 2011). Customer demands and needs change continually, making innovation a basic activity for organizations (Minguela Rata & Arias Aranda 2009).

Value capture has been actively studied in the light of product innovation (e.g. Teece 1986). In the field of services, value capture has not received much attention. Services become more important. Intense competition, changes in technology and an economy that increasingly relies on services for expansion has made the successful development of new services a key to success for many firms (de Brentani 1989). And service is an effective force against commoditization (Lyons et al. 2007). Service innovation management remains a challenging topic as more than 40% of new products and services fail to be successfully commercialized (de Brentani 2001). A difficulty in the retail industry is the copy-paste culture that prevails (Holla 2012). Value protection activities of innovations could delay (or ultimately prevent) copy-paste activities by competitors. The copy-paste culture suggests that value protection activities are underdeveloped by organizations.

Technologies to interact with customers have increasingly been deployed recent years, also called: self-service technologies. (Meuter et al. 2000). The practical strength of the value capture

phenomena have not been studied for self-service technology innovations. The study can be divided into three groups: value creation activities, value capture activities and value protection activities (Kivliece &Quelin 2012, Bowman & Ambrosini 2000 and Teece 1986). As more than 40% of new product and service innovations fail (de Brentani 2001), it is obvious that understanding the critical success factors of service innovations is of vital importance (Ernst 2002).

This research will focus on the value creation, capture and protection activities for self-service technology innovations in the retail market.

“It doesn’t matter where scientific discoveries and breakthrough technologies originate—for national

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1.1 Research objective and research questions

The purpose of this research is to explain the differences in the success of SST innovations within the retail market. What factors or bundles of factors lead to successful innovation? Existing theories are bundled into a theoretical framework in order to explain the success by the value appropriation activities of the innovators. The analysis is being conducted from the innovators’ perspective. Main research question:

What are the critical success factors for SST innovations in the retail market?

To answer the main question, some sub-questions must be answered:

1. What is the definition of successful SST innovations? 2. How is value created by SST innovations?

3. How is value captured from SST innovations? 4. How is value protected for SST innovations?

1.2 Scope

This study is conducted in the retail market and only concerns self service technology innovations. The research is being conducted from the innovators’ perspective. The consumers’ perspective is not taken into account.

1.3 Purpose

This research is initiated by Ahold Europe in order to identify factors that lead to successful

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1.4 Outline of the paper

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Chapter 2: Theoretical framework

This chapter will discuss all theory related to the research question. The theory of concepts and their relationships, derived form academic literature, are input for the research framework. In this

chapter, first, innovation will be defined. Then, the focus will shift to self-service technologies. The advantages and disadvantages from both company and consumer perspective will be discussed. Third paragraph will present value capture from innovation on the base of value creation, capture and protection activities. This paragraph includes 20 propositions which form the base of this research. Next, the research model is presented followed by an overview of the theory used. The chapter ends with a summary.

2.1 Innovation

This paragraph will discuss the definition, the variety, the radicalness and the definition of success of innovations.

2.1.1 Innovation defined

The scientific world comprehends many different definitions of innovations. Rogers (2003) has a rather simplistic definition of innovation: “An innovation is an idea, practice, or object that is perceived as new by an individual or other unit of adoption”. Garcia & Calantone (2002) define innovation as followed: “Innovation is an iterative process initiated by the perception of a new market and/or new service opportunity for a technology based invention which leads to

development, production, and marketing tasks striving for the commercial success of the invention”. In contrast to other authors’ definitions, Garcia and Calantone (2002) emphasize that the innovation process is an iterative process, learning takes place at all time during the process. Schumpeter (1934) described an innovation as: “the first commercial transaction involving the new product, process system or device”. Commercial transaction indicates that an invention should be brought to the market. This is more clearly defined by Wijnberg (2004): “...innovation should be something that is perceived to be new and should also be something new that, in contrast to the invention, is actually introduced in a market. Combining these definitions lead to four distinctive elements:

- iterative process

- the invention should be brought to the market - the innovation should perceived to be new - the innovation should bring commercial benefits

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14 customers and contributes to the knowledge store of the organization”. The authors suggest that innovations always add value to customers; this is not necessarily the case. Some process innovations aim to reduce costs (increase efficiency), this is sometimes not visible to the customers. A reduction of costs is not necessarily beneficial to customers; the company might capture all the benefits. Concluding: an innovation does not always add value to customers. Thus the definition that will be used in this report is: Innovation is the process by which an organization strives for the commercial

success of an invention; that is brought to the market, perceived to be new by the customers; and contributes to the knowledge base of the organization.

2.1.2 Variety of innovations

Innovations exist in many different forms; ranging from business model innovations to operational innovation (Agility Innovation 2012). The scientific world lacks a general accepted classification of innovation types. Jacobs (2007) introduced a simple classification, comprehending all innovations, using three types of innovations: product-, process- and transaction innovations. Product innovation is the development of a new product or service, such an innovation entails at least one of the following aspects:

- new material products (all physical, tangible attributes of a product, both design and functionality)

- new information products (intangible, all forms of content, easily reproducible) - new services (changes in design or concept)

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15 inseparable. Consequence is that services cannot be produced in advance of the consumption. Cowell (1988) adds another two differences: perishability and ownership. Perishability refers to the impossibility to store a service. This is in contrast to goods, which can be stored. The ownership of goods and services differ. The buyer of a good becomes the owner of the good. Where in services, the consumer receives access to or may make use of a service. This can be for a limited amount of time (e.g. a hotel reservation for one night) or for a number of times (number of bullets when shooting at a fairground shooting attraction).

Because of the many differences between services and products, van Ark et al. (2003) constructed an own definition for service innovation: "a new or considerably changed service concept, client

interaction channel, service delivery system or technological concept that individually, but most likely in combination, leads to one or more (re)new(ed) service functions that are new to the firm and do change the service/good offered on the market and do require structurally new technological, human or organizational capabilities of the service organization".

Process innovations are: “changes in the production processes of products (including services) which in principle should lead to more efficient production, not only within factories and service

organizations but also between them” (Jacobs, 2007). Innovations in processes could be both technical (like Radio frequency Identification or Near Field Communication) and non-technical (new organizational structure or only pin check-outs). Process innovations do not always lead to cost savings; they could also lead to an improved quality of the output. An example is the introduction of Computer Aided Design/Computer Aided Manufacturing (CADCAM). Examples of process innovations in the retail market are self-scanning, payment with iDeal and the use of RFID (tags embedded in the product) in the distribution process.

Finally transaction innovations are innovations by which products or services are brought to the attention of consumers in a new way. New market places are utilized or new marketing techniques are used, examples are innovations in market, sales or packaging. An example of an innovative marketing technique comes from Unox (Cup-a-soup), which introduced soup in small quantities intended to be consumed during the afternoon.

2.1.3 Successful or unsuccessful innovation?

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16 innovations, a definition of a successful innovation is required. Agarwal et al. (2003) and de Brentani (1989; 1991 & 1995) are one of the few who entered the field of measuring service innovation performance. Agarwal et al. (2003) propose a dichotomy when it comes to performance criteria to measure service innovation success: the objective performance and the judgmental performance. Objective performance criteria involve financial- or market based criteria (such as market share, profitability and cost savings). Judgmental performance involve customer and employee based measures: e.g. customer satisfaction, service quality and employee satisfaction. De Brentani (1991) interviewed about 90 managers to discover how service innovations are measured. She classified all measurements in four groups: sales and market share performance, competitive performance, cost performance and “other booster”. This grouping gives a better insight into innovation goals and measurements. “Other booster” contains customer satisfaction and synergies with the company. 2.1.4 Radical vs. incremental innovation

In innovation literature, radical- and incremental innovation are well-known phenomena. Garcia and Calantone (2002) discussed these terms to categorize innovations by the degree of ‘newness’ the innovation offers. Radical innovation refers to innovations that cause both a marketing- and a technological discontinuity on a micro and macro level. Incremental innovation only occurs at a micro level affecting either a marketing- or a technological discontinuity. Innovations at macro level are new to the world, market or industry. Innovations which are new to the firm or customer are assigned to the micro level. These two definitions do not cover all innovations; innovations that lie in between are called ‘really new innovations’. Really new innovations are thus a hybrid and cause one macro discontinuity and at least one micro discontinuity. A minor share is attributed to radical innovations. This is because after one radical innovation, many incremental innovations follow. An example is the first retailer introducing self-scanning, at that time it was radical. Nowadays more retailers introduced this innovation and many incremental innovations are applied to increase

efficiency. Rothwell and Gardiner (1988) describe the first process as radical innovation and the latter as reinnovation. The authors do make their point by stating that only radical innovation is real

innovation. Downside of this dichotomy is the large number of innovations seen as reinnovation (about 90%). Therefore the trichotomy of Garcia and Calantone (2002) is more valuable.

Table 1: Degree of 'newness' of innovations

Degree of 'newness' of innovations

Discontinuity

Macro Micro

Marketing Technology Marketing Technology

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Really new innovation X X X

Really new innovation X X

Incremental innovation X X

Incremental innovation X

Source: Adapted from Garcia and Calantone (2002)

Möller et al. (2008) used similar logic leading to a classification especially for service innovations: (1) established service innovation, (2) incremental service innovation and (3) radical service innovation. These generic service innovation strategies describe a level in terms of value creation. Established service innovations are characterized by a high stability and transparency of the value creation logic. These innovations are often developed in competitive markets, which forces firms to increase operational efficiency. The purpose of incremental service innovations is to add value for customers through incremental changes. Added value for customers is often achieved through increased efficiency. The aim of the innovation is to add value to existing market solutions (Möller et al. 2008). Finally radical service innovation is characterized by the development of a new service concept in order to create future value. This group embraces new produced technology, offerings and business concepts. The radical nature of the innovation causes uncertainty about the value potential and capture.

2.2 Self-service technology

This paragraph will discuss self-service technologies. First a definition is given, followed by the some examples of SST’s. Then the advantages for companies are discussed followed by the advantages from the consumers’ perspective.

2.2.1 Self-service technology typology

A self-service technology (SST) can be defined as a technological interface that allows customers to produce and consume services without direct assistance from employees (Meuter et al. 2000). SST innovations will logically fall under the product/service innovation typology from Jacobs (2007), which is explained in paragraph 2.1.2. Examples of SST’s are ATM’s (Automated Teller Machine), Self-scan devices and online purchasing systems (e.g. the Amazon website, where books can be

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18 SST’s differ from regular services. Normally, SST’s are services free of charge. In the banking world, customers do not pay directly to use a SST, but often indirectly. An example is the ATM service and internet banking offered, these costs are covered in a whole package (e.g. a current account package). In retail, there are often no costs involved for customers using the SST (e.g. using self-scanning in a supermarket). Customers pay for the products, not the services.

The development of SST’s takes more time than the development of regular services. Regular services are heavily dependent on employees, whereas SST’s do not require any labor input but depend on technology. The SST often has two main ingredients: physical elements (e.g. hardware) and the technology (which enables the “working)”. For example self-scanning required a significant development time. Both the technology (software) and the physical elements (e.g. hardware, such as scanning devices) had to be build.

2.2.2 Self-service technologies from a company’s perspective

Bitner et al. (2002) identified three reasons, from a company’s perspective, to make use of self-service technologies: to reduce costs, increase customer satisfaction/loyalty and to reach new customer segments. Essing (2012) adds another advantage that SST’s may offer. The use of SST’s increasingly enables organizations to collect customer information. Castro et al. (2010) name more added value that SST’s could bring: to standardize the customer experience and to increase

operational efficiency. Here an overview of advantages that SST’s could offer: - Reduce costs

There is a strong financial incentive for organizations to start using a SST. SST can often replace labor activities which can be realized at a much lower cost.

- Increase customer satisfaction and loyalty

Customers might value the SST as a better service and thus develop an increased customer satisfaction.

- Reach new customer segments

The use of a SST could help organizations to reach new customer segments. An example is an established store that additionally starts selling products on the internet. The presence of a SST might also attract customers from competitors which do not have such a SST.

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19 For example self-scan might offer data on average time consumers spent in the supermarket.

- Standardize customer experience

Personal service cannot guarantee the exact same service (level) because of situational factors such as the atmosphere or different personnel. A SST always guarantees the same service.

- Increase operational efficiency

SST’s could help organizations to react quicker to customer orders. An example is a web shop in stead of a paperback catalogues.

2.2.3 Self-service technologies from a consumers’ perspective

SST’s will be valued different by consumers than companies, because both have different interests. Castro et al. 2010 name six possible advantages, which are discussed below, that SST’s could offer. A seventh SST advantage is the ease to quit the service, as described by Stone (2011).

- Faster

Using a SST could be faster than the regular alternative. For example, an ATM can count money faster than an employee could.

- More convenient

SST’s are often more convenient. When remaining with the last example, ATM’s are available 24/7, where a bank closes at 6pm. The same applies to gas stations. When shopping clothes online, you could take all time to look through the assortment. In a physical store, you could feel rushed by others or people might possess places you want to explore.

- Price

For some SST’s, prices are lower than choosing for the regular service. An example is a gas station where they count a premium price for the regular service.

- Accessibility

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20 - Control

The customers can control the service encounter and do not feel pressure from others, for example from customers behind them in the waiting line. Customers form a partner of an organization in self-service delivery when using self-service

technologies. Bettencourt (1997) argues that customers’ cooperation during the service encounter contributes to their own and others’ satisfaction and service quality perceptions.

- Privacy reasons

Privacy could also be a reason for customers to prefer using a SST over a regular face-to-face service. Reason is that customers could be ashamed to buy certain products or do not want other people to know about their (dis)abilities.

- Ease to quit

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2.3 Capturing value from innovation

This paragraph discusses the theory that forms the base of this research. Capturing value is

concerned with “getting the most” out of an innovation. This is described by the value creation, value capture and value protection activities of a company applied for an innovation. Paragraph 2.5

provides an overview of the theory used in this paragraph. 2.3.1 Value creation

“From the point of view of a strategizing firm, product and process innovations are potential means of value creation” (Foss and Foss 2002). Wijnberg (2004) stated that in order to be successful in economic terms, producers have to create value and also to capture and protect that value. Innovating is a way by which value can be created, “service innovation shapes value creation” (Möller et al. 2008). Value creation is the contribution to the utility of the final product (Mol et al. 2005). A popping question might be how value of innovations is determined. The answer is actually quite clear: “…value of an innovation can only be determined within the context of a set of preferences of selectors, and therefore within a particular selection system or combination of selection systems” (Wijnberg 2004, Wijnberg and Gemser 2000). The innovator might value the innovation differently than the selectors. The authors distinguished three different selection systems: market-, peer- and expert selection. In a market selection system, the consumers of the final product are the selectors. Or as Priem (2007) defined: “Consumers are arbiters of value”. The producers have the function of selectors in a peer selection system, an example are the academy awards where producers rate each other. In an expert selection system, a third party is known as the selector. An example of expert selection is the golden globes where industry specialists vote. De Brentani (1989) suggests that many organizations create and launch service innovations too quick; they do not ensure that they meet customer requirements and thus create enough value.

The market selection system is the most common system, within this field Zeithaml (1988) studied consumers and distinguished four groups of consumers according to how they value products or services. The four groups are: (1) value is low price, (2) value is whatever I want in a product, (3) value is the quality I get for the price I pay and (4) value is what I get for what I give. Value is a tradeoff between what you pay and what you get. This indicates that also consumers value innovations differently. Jacobs (2007) concluded: innovations fail if they are incompatible with selectors’ demands or values.

Value creation activities

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22 complementarity and (3) cost minimization/efficiency enhancement. Complementary goods and network externalities (both externalities) can add value to a product or service (Foss and Foss 2002). Both are easily observable. Network externality refers to an increase in value when the installed based increases. The value of sending text messages by mobile phone has grown when the installed base increased. If you are the only one who could send and receive text messages, the innovation has no value. Dew and Read (2007) argue that: “product value is dependent on growth in installed base and availability of complementary goods”. Pisano and Teece (2007) go further and argue that to provide value to users; every innovation requires complementary goods, technologies or services. Lange et al. (2001) add: “…the larger the total number of complementary goods available, the greater the opportunity to purchase compatible …...” An example of complementary goods are a Blackberry phone and tablet which allows mutually synchronization of agenda’s, applications etc. A Blackberry phone has more value to someone who already has a Blackberry tablet.. Lange et al. (2001) emphasize the subjective side of network externality as people base the purchase decision on the perceived benefits and the likelihood that others will adopt the technology.

Resource complementarity comprises all resources and their combined effects. Examples are marketing-, manufacturing- and service activities. Lead time and legitimacy are seen as the most important resources. The lead time of an innovation can create value. Innovation lead time is: “…the elapsed time between the date of prior product entry and the date of competitive imitation” (Poletti et al. 2011). An innovation has more value when it is the only one on the market (Adner and Kapoor 2010). When a better technology is brought to the market the value will possibly decrease.

For the more radical innovations in the industry, legitimacy is required. Legitimacy is needed to make the target group aware of the function of the innovation. Another aspect is to what degree

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23 marketing has to be used to inform customers of the difference between one company’s offerings and those of competitors. An example is: “creating a strong service image and by linking its corporate reputation to the service offering“(de Brentani 1989; de Brentani 1991). Second, more tangible signals should be used, like a setting (surrounding) or visible and tangible clues. An example of the latter is a brochure with pictures of paintings in an arts museum.An example of a lack of

sociopolitical legitimacy is Nike who is often being accused of child labor in their Asian factories by Amnesty International. This example indicates only one social group has a negative opinion about an organizations’ operations, but there could be more. Other social groups could be distributors,

investors, government or the people living in an organizations’ neighborhood. Pinch and Bijker (1984) emphasize that different social groups have different opinions. Thus to gain social legitimacy a different approach is required for each group. This does not differ from cognitive legitimacy where different segments have different requirements.

Legitimacy is required for several reasons. Aldrich and Fiol (1994) describe the need to gain governmental approval for securing subsidies and receive protection through legislation. Rao et al. (2008) found a positive relationship between the degree of legitimacy an organization has achieved and the rewards from their new products. Rao (1994) also stress the importance of gaining legitimacy for customers as it is positively related to the organizations’ survival. Higgins and Gulati (2003) did research after the legitimacy of organizations and their importance to stakeholders. An example of their findings is the positive relationship between legitimacy and the willingness of investment banks to cooperate with start-ups.

Cost minimization and efficiency enhancement are measurable. Cost minimization for innovations are often prevalent when the innovator achieves cost minimizations by replacing old

services/products by new ones. Efficiency enhancement is also measurable. An example is an ATM where the average waiting time decreases compared to a regular service for cash withdrawal. The choice between the regular service and a new SST is also a means of efficiency enhancement. Consumers might base their choice on time and ease of use. Most often, cost minimization and efficiency enhancement are combined for SST innovations. Cost minimizations do not necessarily result in tighter consumer prices. So choice leads to higher satisfaction for consumers (Dabhoikar 1996).

Propositions

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SST innovations are successful when:

- network externalities exist (P1a)

- complementary goods/services are present (P1b) - the firm is the innovator rather than the imitator (P1c) - the SST is seen as correct and responsible by society (P1d)

- the company points the added value of the SST to consumers (P1e) - consumers have the choice to use the SST (P1f)

2.3.2 Value capture (vertically)

According to Foss (2003), value refers either to the difference between revenues and the costs of purchased inputs or the difference between revenues and all costs made by the firm. The author refers to the first as the value added and the latter as the added value by the firm. Capturing value is mainly associated with the vertical dimension of the value system (Mol et al. 2005).

Bargaining power of the focal firm versus buyers downstream and suppliers upstream are of vital importance. This competitive process determines the amount of value being captured. Difference in value captured exists between firms, two forces play an important role (Bowman and Ambrosini 2000):

- Consumers compare producers’ products, their own needs and the competitive offerings (downstream)

- Resource suppliers make a comparison between the deal they have struck with this firm, and possible deals they could make with alternative buyers of their resource (upstream)

Value created by an organization does not necessarily mean that the organization also captures the value. The value captured is: “…the outcome of the competitive processes taking place among firms with dissimilar value chains” (Mol et al. 2005). This could lead to a situation where an organization captures more value than they create, this phenomenon is called value chain envy. A market where value chain envy is present is extremely attractive for potential new entrants. Value protection mechanisms should be consulted to protect the captured value.

One of the challenges in capturing value is to get the most out of a product. Jacobs (2007) summarized the role of product innovation clearly: “capturing value from innovations increasingly means selling them in different forms at the same time”. This approach requires different business models like Teece (2010) described in his work. This phenomenon is also studied by Chesbrough and Rosenbloom (2002). They describe the inputs as the technical domain and the output as the economic domain. Between the technical and economic domain, the business model adds value and determines how much value can be captured (see appendix 1).

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25 Value capture activities

The value capture activities contain two main elements; as mentioned by Bowman and Ambrosini (2000). First is the bargaining power of the innovating firm versus their resource suppliers. The likeliness of cooperation depends on the possible alternative companies to cooperate with. This applies to both firms. Second is the bargaining power of the innovating firm versus consumers. Consumers compare the competitive offerings.

Propositions

The two concepts of value capture lead to the following propositions.

SST innovations are successful when:

- the firms’ bargaining power is positive versus the resource suppliers’ bargaining power (P2a)

- the firms’ bargaining power is positive versus the consumers’ bargaining power (P2b)

2.3.3 Value protection (horizontally)

This paragraph discusses the factors that determine if the innovator wins or if the imitator (also called follower) wins. The innovator (also called first mover) can gain an advantage, but not necessarily. Pisano (2006) names various cases where the innovators failed to get the economic returns on their innovations. A recent example are Lycos and Excite who were the first with an online search engine, they lost from imitator Yahoo. But Yahoo was not able to remain their value capture and eventually lost territory to Google.

Foss and Foss (2002) defined protection as followed: “reference is made to resource-consuming strategies of reducing others’ capture attempts”. Teece (1986) identified three fundamental building blocks to explain the distribution of outcomes of innovation: regimes of appropriability, the dominant design paradigm and complementary assets.

Value protection activities:

Regimes of appropriability

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26 Property Rights (IPR). Intellectual property has grown in importance by its impact on companies’ market value (Reitzig 2004). Laukkanen and Puumalainen (2007) stress the importance of the combinations of the used forms of IPR. Patents give an exclusive right to the patentee for a fixed period of time in exchange to disclose an invention. In theory, patents should offer a perfect appropriability. However, the requirements for validation of patents are high and it is difficult to prove infringement (Teece 1988). In practice, it seems relatively easy to circumnavigate patents. Arundel (2001) found the logical consequence: company’s rate secrecy as more effective than the use of patents. Mazzoleni and Nelson (1998) discuss four functions that patents serve. First patents provide organization the requisite incentive to invent. Motivation is stimulated by the temporary monopoly the patentee obtains. Second, patents commit resources to the invention. When a patent is granted in an early stage, the company is ensured that it will reach the economic benefits if the innovation technically works. Third, patents induce the disclosure of inventions. Because patents are granted, inventors will be more likely to disclose (parts of) their inventions so that others can make use of the invention too. The last theory suggests that patents enable the development of broad prospects. Disclosure of inventions enables further development of the technique.

Patents can be split into two categories:

- Design patents, these patents cover the design of an objective

- Functional or utility patents cover the functional aspects of an objective “A trademark, trade mark, or trade-mark is a distinctive sign or indicator, used by an individual, business organization, or other legal entity, to identify that the products or services with which the trademark appears originate from a unique source, and to distinguish its products or services from those of other entities” (Wikipedia 2011). Trademarks are typically used on words, names, phrases, logo’s, designs, images or symbols. Trademarks are also possible on a combination of these aspects. Trade secrets are useful if a firm can keep the innovation secret till its market introduction. Some innovations can even be kept secretly after market introduction, for example chemical formulas or other liquids. An example of the latter is the formula Coca Cola uses for its main product. Still nobody knows the right combination of ingredients Coca Cola uses. Trade secrets are often used for process innovations, mainly because they are difficult to protect. As earlier mentioned, intangibility of services makes them easier to imitate (Amara et al. 2008).Copyright offers a tight appropriability on content. Content with copyright cannot be used by others than the copyright holder(s). There are minor exceptions on this law, for example: content may be used if ‘quoted or cited’ and content may be used for educational purposes.

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27 depends mainly on knowledge, the degree to which knowledge is tacit or codified plays a role. “Codified knowledge is easier to transmit and receive, and is more exposed to industrial espionage and the like” (Teece 1986). Tacit knowledge is much harder to transfer, because it is difficult to articulate tacit knowledge when you do not possess the knowledge. This knowledge transition requires face-to-face contact and is costly (Teece 1998). The technology in products is observable after market entrance, whereas process innovations are much more difficult to observe. Innovation in services is often combined with process changes and thus harder observable than product innovations. Amara et al. 2008 use the framework provided by Howells et al. 2003. This framework suggests that the appropriability of service innovations depends on the level of codification and the level of output tangibility (Appendix 2). For SST’s, the knowledge is more codified and the output is tangible. According to the framework, patents should be the primary appropriability mechanism.

Laukkanen and Puumalainen (2007) added 3 new dimensions to the appropriability regime: lead time; practical and tactical means; and human resource management (HRM). Lead time refers to being the first in the market with a particular innovation. Adner and Kapoor (2010) describe the first mover mechanism as: “The first mover advantage literature has identified important considerations

under which technology leaders gain or lose from early entry into new markets”. Companies can

acquire customers and specific resources (e.g. location, distribution channels etc.) in an early stage. The early attracted customers can develop a brand loyalty and know what they can expect from the company’s products. Because of the experience that the company gets with the product, the technical development will start and the company can gain a technical leadership in the market. Obtaining scarce assets in an early stage could also prevent followers from entrance to these assets. The first mover can exploit buyer switching costs to protect their share. These costs are associated with learning how to use the product.

A first mover disadvantage (and thus a late mover advantage) is the risk a company takes, the product can easily fail. The first mover has high costs, especially for developing the product(s), but also for setting up distribution channels and advertising. First mover are uncertain about customer requirements, high costs are associated with learning about customer requirements.

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28

Dominant design paradigm

Teece (1986) stated that there are two stages in the development of a given branch of a science: the preparadigmatic stage and the paradigmatic stage. The preparadigmatic stage is characterized by the “lack of a general accepted concept of a phenomenon in the field of study”. In this phase, organizations with different products/services compete on designs. Over time, one of the designs seems to be more auspicious than others, this depends on the degree to which it meets user requirements. An example of a preparadigmatic stage is the battle Blue ray and HD had. They were both aiming at becoming the industry standard. Blue ray convinced the selectors and won the battle to become the industry standard. When a certain industry standard has developed, the process reaches the paradigmatic stage. Competition on design belongs to the past and competition is on price now. Manufacturing processes are optimized to achieve economies of scale. If imitation is relatively easy, imitators enter the market. Consumers may even recognize, not on purpose, an imitation as the industry standard. Consequence is that not the innovator (who sets the industry standard), but the imitator benefits the most.

Why do dominant designs emerge in a market rather than developing multiple techniques next to each other? An increased use of the technique causes greater learning. Increased learning results in an improvement of the technology, this is beneficial to the market. Network externalities are a result of an increase in adoption of a technique. Users benefit from an increase of adoption, the technique becomes more valuable (Dew and Read 2007). When a dominant design has emerged, the

development of complementary assets takes place at a faster rate.

The use of coalitions or strategic alliances can be beneficial in the competition for a dominant design (Pek-Hooi 2007). A powerful organization (or a combination of them) can persuade the selectors to choose a certain technology. Governmental organizations could also select a dominant design when it’s beneficial to consumer welfare. An example is the choice of the European Union to select a wireless phone standard. This choice ensured all inhabitants connectedness, because everybody uses the same technique.

Complementary assets

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29 There is a wide variety of assets which play a role in commercialization of an innovation: manufacturing, sourcing, distribution, marketing, Human Resource Management (HRM), Financial management, service etc. In this research; manufacturing, distribution and marketing assets will be analyzed. Because cognitive legitimacy is closely related to marketing, marketing activities will be assessed with the exception of all activities which are related to the market introduction.

Organizations do often not possess all complementary assets. When the appropriability regime is weak, complementary assets are of critical importance. Question then is: Do you integrate the assets or do you make use of subcontractors? The decision whether to contract an asset holder or to integrate the complementary assets depends on (Teece 1986):

- Type of assets (Generic, cospecialized or specialized) - Costs of integrating and contracting

- Competitive position innovator versus imitator

- Bargaining power of innovator/imitator versus the owner of the complementary assets

Integration of complementary assets requires upfront capital expenditures. When disposable capital is low, contracting seems to be more likely than integration. If owners of complementary assets are advantageously positioned against innovators and imitators, it is needless for innovators to build a specialized asset (Teece 1986). An exception in this situation may be an advantageous position of innovators against imitators in commissioning complementary assets.

Not all three fundamental building blocks have to offer strong protection. A weaker building block could be compensated by a strong one. “Operating in a weak appropriability regime does not

necessarily mean a first-mover strategy will not work. It simply means that a firm will need to protect its position by securing access to complementary specialized assets” (Pisano 2006).

Propositions

Last section provided an abstract of all value protection activities. They are linked to successful SST innovation by the following propositions.

SST innovations are successful when:

- the innovation is legally protected (P3a) - it is difficult to copy (P3b)

- the innovation is radical rather than incremental (P3c)

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30 - the firm is the innovator rather than the imitator (P1c)

- secrecy of information is secured (P3e) - a restraint of competition is present (P3f)

- a dominant design emerged before introduction (paradigmatic phase) (P3g) - the firm's manufacturing activities are positive related to competitors’

manufacturing activities (P3h)

- the firm's distribution activities are positive related to competitors’ distribution activities (P3i)

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31

2.4 Research framework

The value creation, capture and protection activities discussed above lead to the basis of the research framework. The activities contain a total of 18 constructs influencing the innovation performance. The 18 constructs will be related to the innovation performance; both for successful and unsuccessful innovations. The concepts mentioned here are followed by the adequate propositions (which are described in the previous sections).

Figure 1: Research framework

Value creation activities

- Network externalities (P1a) - Complementary goods/ services (P1b)

- Innovation lead time (P1c) - Sociopolitical legitimacy (P1d) - Cognitive legitimacy (P1e) - Choice to use the SST (P1f)

Innovation outcome Successful innovation Unsuccessful innovation

Value capture activities

- Bargaining power of firm versus resource suppliers (P2a) - Bargaining power of firm versus consumers (P2b)

Value protection activities

- Legal protection (P3a) - Difficulty to copy (P3b)

- Radicalness of innovation (P3c) - Knowledge codification (P3d) - Innovation lead time (P1c) - Practical and tactical means (P3e)

- HRM (P3f)

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32

2.5 Overview of theory

Value creation elements: Value capture elements: Value protection elements:

Network externali ty

Complement-ary goods Legitimacy

First mover advantage Bargaining power vs. Suppliers Bargaining power vs. Consumers Appropriabili-ty regime Dominant design Complementa-ry assets Teece 1986 X X X

Aldrich & Fiol 1994 X

Bowman &

Ambrosini 2000 X X

Lange et al. 2001 X X

Chesbrough &

Rosenbloom 2002 X X

Higgins & Gulati

2003 X

Mazzoleni & Nelson

2004 X

Reitzig 2004 X

Mol et al. 2005 X X

Pisano 2006 X

Dew & Read 2007 X X X

Laukkanen &

puumalainen 2007 X

Pek-Hooi 2007 X

Rao et al. 2008 X

Adner & Kapoor

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33

2.6 Summary

This chapter started with a definition of innovation. It is defined as process in which a novel idea (invention) is brought the market; customers perceive the innovation to be new; and learning takes place during the process. Second, the variety of innovations is presented, innovation performance parameters are discussed and the differences between incremental and radical innovations are explained. Paragraph 2 focuses on the type of innovations that this study focuses on: SST’s. The increasing deployment of them is assisted by the many advantages both for companies and

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34

Chapter 3: Methodology

Research is about solving a problem, in this case to provide (an) answer(s) to the main- and sub questions. The methodology is concerned with the process to solve the problem, or as Yin (2003) said: ”the methodology is a logical plan for getting from ‘here’ to ‘there’, where ‘here’ may be defined as the initial set of questions to be answered, and ‘there’ is some set of conclusions (answers) about these questions. The next sessions are concerned with the research strategy, data collection, data analysis, design quality and the research context.

3.1 Research strategy

This research aims to find the critical success factors for SST innovations in the retail market. Two scenarios are of interest, namely the factors that lead to successful innovations and the factors that lead to unsuccessful innovations. In these cases, the factors are the dependent variable and the innovations are the independent variable. Existing literature concerning methodology is used to determine the research strategy. Yin (2003) made a classification scheme (table 3) where is explained what research method should be used. The research strategy depends on the research question, this research’s main question is: What are the critical success factors for SST innovations in the retail

market? According to the scheme, either a survey or an archival analysis should be the research

strategy. However, the author argues that if a “what” question is explanatory, then any of the five methods can be used.

The presence of an internship offers the possibility to make use of contemporary events. This research aims to cover contextual conditions which are highly relevant for the study. Another goal is to explain presumed causal links in real-life settings. These three goals formed the main reason to choose for a case study (qualitative research). According to Anitsal and Flint (2006), Qualitative research is a viable method in providing realism, richness of verbal descriptions and a more precise picture of phenomenon. To discover and explain the critical success and failure factors in the retail market, an embedded case study is conducted. The case study will result in a descriptive research. An embedded case study means that the there is more than one unit of analysis. In this research, multiple cases are used to increase the internal validity.

Table 2: Relevant situations for different research strategies (source: Yin, 2003)

Strategy Form of research question Requires control of behavioral events? Focuses on contemporary events?

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35 Survey

Who, what, where, how many, how

much? No Yes

Archival analysis

Who, what, where, how many, how

much? No Yes/no

History How, why? No No

Case study How, why? No Yes

3.2 Research context

The innovations (as in table 3) are qualified to be successful or unsuccessful according to Ahold’s subjective judgment. For Appie, goals were determined in advance of the innovation and these goals were also achieved, but were unavailable to due confidentiality. Self scan 2.0 AH is determined to be successful because it has become a fixed part of the larger AH stores where it saves costs (of cashiers). 1st self scan project AH, mobile couponing, Shopping buddy and AH Payter are unsuccessful as they disappeared from the market. Research learned that targets were not defined for all innovations. And although some had defined targets, those were not always evaluated according to the previously set targets. The Easy order kiosk from McDonalds is determined to be successful because of their high rate of implementation (in 58 of the 228 restaurants). Both Mijn ID and the Digital advertisement board are from 2011 and it is too early to call them successful or not. Both are incorporated on request of Ahold. These innovations are not incorporated in the conclusions.

3.3 Company profile and cases

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36 Here is an overview of the cases selected for this research:

Table 3: Industry cases

SST innovations

Successful Easy order kiosk at McDonalds

Self-scan 2.0 AH

Appie (App on mobile phone/tablet) Unsuccessful 1st self-scan project AH (asterix)

Mobile couponing

Shopping buddy Stop&Shop Mobile payment (AH Payter) Undefined Mijn ID AH

Digital advertisement board AH

Easy order-kiosk at McDonalds

McDonalds did a trial in their restaurant in Amsterdam Zuidoost with a kiosk where consumers could order their products with this electronically ordering system (touch screen). It is comparable to a McDrive but then in store. By separating and automating the ordering process, McDonalds can operate more efficiently. For the consumers, this resulted in a shorter waiting time to order and to receive the placed order. In the meanwhile, the kiosk is implemented in approximately 58 McDonald’s establishments.

Self-scan 2.0 at Albert Heijn

In stead of consumers who collect their groceries and hand them over to the cashier to scan the groceries, consumers scan their groceries their selves during their shopping trip. After scanning, they place the scanning device in a self-scan checkout. The check-out loads the groceries list and proceeds to payment. During the shopping trip, customers are able to see a running total; this could help customers doing their groceries. After various tests with self-scanning since 2004, Albert Heijn started to implement this concept nationally from 2006. Nowadays, self-scanning is available in approximately 130 of the companies’ stores.

Appie (Albert Heijn)

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37

1st self-scan project AH (Project Asterix)

In the 90’s, Albert Heijn was already working on a self-scan project including tests in the market. This project ended around the start of the 21st century. This banana shaped scanning device had similar possibilities as the later successfully introduced self-scan devices. At this time, there was only one point where self-scan devices could be dispensed (which was at the beginning of the store). In the beginning, customers had to pay at regular cash desks. In 2004, the successful self-scan 2.0 project was started. The payment terminal was introduced by the start of this project.

Mobile couponing

Mobile couponing does not refer to coupons on a mobile phone, but to coupons being ‘mobile’. In the past, customers could see their personal discounts on the Albert Heijn website. Customers had to print these coupons and take them to the supermarket when shopping. This project simplified the process. Customers could still see their personal discounts at the website, but the discounts were automatically received when their bonus card was scanned. In this trial in 2010, 1,000 customers were invited to join. They only had to register with their bonus card.

Shopping buddy at Stop&Shop

Stop&Shop is a supermarket concern in the United States with more than 375 stores. They developed a shopping buddy in 2004 and serves as a personal shopping assistant during the shopping trip. The emphasis lied on the self-scan function. Additional services were: grocery list, add reminders to your list, show (personal) discounted articles, place deli orders (and receive a message when ready), show recipes (and add all ingredients to shopping list), a button to call for employee help and a map of the supermarket including where to find the products.

Mobile payment (AH Payter)

Mobile payment was in cooperation with the company Payter and started in 2007. They approached Albert Heijn to use their mobile payment system in one supermarket. Payment was achieved by a telephone including a NFC chip. These telephones were sold at an interesting price to stimulate the use of mobile payment. Payment terminals were installed at the check-outs; the phone needs to be hold close to the terminal in order to pay. Albert Heijn was not the only party cooperating with Payter, a majority of the stores in the ‘Koopgoot” (Rotterdam) used Payter’s mobile payment.

Mijn ID at Albert Heijn

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38 telephone. This sticker is a digital wallet. The wallet can be “filled” manually through internet banking, but also automatically. A detection-terminal is placed at a check-out. The telephone needs to be held close to the terminal so that the NFC sticker will be detected and the transaction will be completed. An average payment transaction cost only 11 seconds. By realizing a quicker payment, the supermarket can serve an increased number of consumers.

Digital advertisement board at Albert Heijn

This new service innovation offers customers the option to offer or request products or services. This is still similar to old advertisement board at Albert Heijn. The new board offers a new design, digital interface and a formal structure. New is the possibility to design your own personal advertisement (within the possibilities offered by AH; pimp your ad) and add a photo. The advertisement could be made in the supermarket or at home through the Albert Heijn website. Activation of the advertisement should be done in the supermarket. By bringing a new customer interface, Albert Heijn aims to help the local community by their quests. This innovation was launched in 2011.

3.4 Data collection

Secondary data

First, secondary data is used to review the literature and build the research framework (See paragraph 2.4). Sources of secondary data used are academic literature, found through the academic search engines (e.g. Business source premier, Econlit and Purple Search). To strengthen scientific findings and to set up the methodology, documentation found trough internet (e.g. reports, websites and PowerPoint slides) and specialized books are used. Internal documentation is used as additional data. Second, primary data is used to research the practical elaborations of the innovation strategies followed by organizations. These data are obtained trough semi-structured interviews.

Semi-structured interviews

Semi-structured interviews are conducted one-on-one and on a face-to-face basis. Both open and closed questions were involved. This interviewing technique allows an explanation of questions, which will likely lead to a better response than achieved with a structured interview (Hove and Anda 2005). Additionally, extra questions could be asked to explore reasons for certain decisions or actions (Millwood and Heath 2000).

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39 Table 4: Research participants

# Case: Name: Function: Responsibility

1

Easy order kiosk at McDonalds

R.

Kosterman

Product Specialist Retail for the

BENELUX at Wincor Nixdorf

Mc Donalds' contact at Wincor 2 Self-scan 2.0 AH

M. Fillekers

Innovation Program Manager at Ahold

Europe Initiative leader

3

Appie (App on mobile phone/tablet)

S. Ferguson

Senior manager digital development at

Ahold Europe Initiative leader

4

1st self-scan project AH (asterix)

H.

Koolmees Innovation architect at Ahold Europe

Innovation contact selfscan 5 Mobile couponing

H.

Koolmees Innovation architect at Ahold Europe Initiative leader 6

Shopping buddy Stop&Shop

H.

Koolmees Innovation architect at Ahold Europe

Contact person Ahold Europe 7

Mobile payment (AH Payter)

H.

Koolmees Innovation architect at Ahold Europe Initiative leader 8 Mijn ID AH

M. Fillekers

9

Digital advertisement board AH

M. Fillekers

3.5 Data analysis

All nine interviews are recorded and transcribed at a later stage. The use of recordings enables the interviewer to focus on the topic, the respondents’ answers and guarantees that the transcription will be accurate (Seaman 1999). The composed propositions are compared with the primary and secondary data obtained. All transcribed interviews can be found in appendix 3.

3.6 Description of variables

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40 Table 5: Research variables

Research framework elements: Measurements:

Network externalities (P1a) The presence of network externalities (Yes/no) Complementary goods/services (P1b) The presence of complementary

goods/services (Yes (and which)/no) Innovation lead time (P1c) Innovator or imitator

Sociopolitical legitimacy (P1d) Acceptance by society measured by remarks placed by stakeholders

Cognitive legitimacy (P1e) Activities by company to point the added value to consumers

Choice to use the SST (P1f) Forced or flexible to use the SST

Bargaining power vs. Suppliers (P2a)

Number of alternative suppliers and control over the innovation process

Bargaining power vs. Consumers (P2b) Size of innovators' firm opposite competitors

Legal protection (P3a) Presence of legal forms of protection Difficulty to copy (P3b) Difficult or easy to copy innovation Radicalness of innovation (P3c) Innovation more radical or incremental Knowledge codification (P3d) Innovations' knowledge more tacit or codified Practical and tactical means (P3e) Arrangements regarding secrecy of

information

HRM (P3f) Presence of a firms' restraint of competition in contracts

Dominant design (P3g) Presence of a dominant design or not Manufacturing (P3h) Capability of firm to produce cheaper/better

than competitors

Distribution (P3i) Capability firm to distribute cheaper/better than competitors

Marketing (P3j) Frequency of advertisements, price promotions (compared to competitors)

3.7 Design quality

The research is carried out in the retail market for several reasons. First of all, the retail market enables entrance to multiple sources of data. As this research is combined with an internship, documented company data can be obtained and employees are more easily accessible.

Critical success factors of self-service technology innovation