Service Innovation in the Retail Sector How retailers make decisions in a turbulent retail landscape Name: Simone Velders Student number: 6584268 University: Utrecht Universtiy Course name: Master’s Thesis Innovation Sciences Course code: GEO4-2239X University Supervisor: Koen Frenken Second reader: Matthijs Janssen Internship company: Avanade Internship supervisor: Yorrick Celis Date: July 31st, 2021 0 Acknowledgements I sincerely want to thank my supervisor Koen Frenken for his time and feedback throughout the duration of my thesis. I believe that his feedback helped me lift this thesis to a higher level. I also want to thank my second reader, Matthijs Janssen, for giving elaborate feedback on my proposal, as well as taking some extra time to talk about it in person. Furthermore, I would like to thank Yorrick Celis for being my supervisor during my time at Avanade. He not only gave me feedback on my thesis, he gave me guidance for my career. I would like to thank my all retailers and experts who took the time to talk to me and give me interesting insights. Finally, I would like to thank my friends and my family for supporting me throughout this process. 1 Abstract: Fast and complex changes in the retail landscape cause retailers to struggle and some even to close their doors. To survive, brick-and-mortar retailers are innovating their services to create a memorable customer experience. Understanding the innovation decision process is complex since the service innovation options are plentiful and retailers are known to have an unstructured approach to innovation. Up to date, retail innovation literature is limited, fragmented and does not incorporate service innovation literature. This research uses prior conditions from Rogers’ innovation-decision model to select factors previously identified in both retail and service innovation literature, thereby bridging the literature strands. Even though retailers often adopt technologies, they also innovate themselves. Therefore, this research uses the synthesis perspective on innovation and enriches Rogers’ model meant for the adoption of technological innovations with factors from service innovation literature. Qualitative analysis of interviews with representatives from fashion retailers’ headquarters in the Netherlands show that previous practice and felt needs or problems barely influence the decision process, retailers learn from their cycles of search and change, rely on knowledge from their own manufacturing operations and retailer conferences, imitate other retailers and ultimately base their decision on personal preferences and gut feeling. Using the interviews enabled the identification of thirteen common innovations that have been implemented in the last five years. This research used the service blueprinting technique to create a visual rendering of a generic service process and underlying organization structure of Dutch fashion stores. The service blueprint was used to analyse the effect of the innovations on the service. Results show that typical innovations are not complex and do not have a large impact on the service, are part of the omnichannel trend, and concern innovations in the collection. Finally, the interview data enabled Qualitative Comparative Analysis (QCA), an analysis which links causal combinations of factors to specific innovations - making this the first study to do so on a large-scale. Results from the QCA show that whereas experimentation is necessary for multiple innovations, an interaction between organisational learning without the capability to sense opportunities leads to the implementation of more practical yet simple innovations, and the distinction between large, innovative firms as opposed to small non-innovative firms causes retailers to implement either technological innovations or innovations that have been on the market for a while, respectively. The popularity of three industry trends outweighs the influence of factors on the decision. Keywords: Innovation – decision-making - service innovation – service blueprint - retail – fashion – synthesis perspective – prior conditions 2 CONTENT 1. Introduction ..................................................................................................................................... 4 2. Global trends in the fashion retail ................................................................................................... 8 2.1 Digital customer contact ........................................................................................................... 8 2.2 Accelerated fashion cycles ........................................................................................................ 8 2.3 New customer lifestyles ............................................................................................................ 9 2.4 Experiential stores ..................................................................................................................... 9 3. Theoretical framework .................................................................................................................. 11 3.1 A shift towards services ........................................................................................................... 11 3.2 Identifying service innovation through a service blueprint .................................................... 12 3.3 Service innovation decision-making ........................................................................................ 14 3.4 Prior conditions in the retail and service innovation literature .............................................. 17 4. Research Methods ......................................................................................................................... 24 4.1 Research design ....................................................................................................................... 24 4.2 Sampling strategy and case selection ...................................................................................... 25 4.3 Data collection ......................................................................................................................... 26 4.4 Data analysis ............................................................................................................................ 29 4.5 Research quality indicators ..................................................................................................... 32 5. Results ........................................................................................................................................... 34 5.1 Service in the fashion industry ................................................................................................ 34 5.2 Service innovation decisions amongst fashion retailers in the Netherlands .......................... 36 5.3 Factors influencing the service innovation decisions .............................................................. 57 5.4 Qualitative Comparative Analysis of Service Innovations ....................................................... 64 6. Corona Crisis: a push for innovation?............................................................................................ 80 7. Conclusion ..................................................................................................................................... 85 8. Discussion ...................................................................................................................................... 88 8.1 Theoretical implications .......................................................................................................... 88 8.2 Limitations ............................................................................................................................... 89 8.3 Further research ...................................................................................................................... 90 8.4 Policy implications: promoting innovation amongst retailers ................................................ 91 8.5 Managerial implications: future challenges ............................................................................ 93 Reference list ..................................................................................................................................... 96 Appendix .......................................................................................................................................... 101 3 1. Introduction Retail has always been evolving, but even more so in today’s landscape. Fierce competition and uncertainty brought about by trends like globalization and digitalization cause changes to happen at faster paces and are more complex (Olsson, Paredes, Johansson, Roese, & Ritzén, 2019). Worsening economic conditions in the first decade of the twenty-first century created an even more turbulent retail environment. Consumers became more value-conscious, buying less and buying differently (Berry et al., 2010). Today, customers hold the balance of power. If they become dissatisfied with the service they are receiving, they have many alternatives readily available (Valacich & Schneider, 2012). Consequently, many well-known stores are struggling (Mende & Noble, 2019). Moreover, customers increasingly embrace online shopping, which causes trouble for brick-and-mortar retailers in particular (CBN insights, 2019). Retailers like Abercrombie & Fitch and Foot Locker have closed their store sites, whereas others such as The