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50 Knowledge and the firm

3. Innovation, consumption and

knowledge: services and

encapsulation

Jeremy Howells1

1. INTRODUCTION

The role that consumption plays in the innovation process within the firm

and in the formation remains a neglected aspect of a firm’s capabilities.

Thus consumption and the way firms consume intermediate goods and

services form an important, but neglected, part of a firm’s capability set.

The role of services is highlighted in this review and discussion. This is

because by introducing a service dimension to the discussion about innov￾ation, a new perspective is shed on the process of consumption and its rela￾tionship within innovation within the firm. This is for three interrelated

reasons. Firstly, it is suggested that services are important in the consump￾tion of new goods (and services). Secondly, the way (i.e. the routines that

they can potentially develop) firms consume (intermediate) goods yields

service-like attributes and these form important and distinctive capabilities

for the firm. Lastly, related to this, the process of consumption and the

development of routines associated with this process are forms of disem￾bodied, service innovations.

The analysis seeks to focus on the role of consumption in influencing

innovation in intermediate goods and services. It is presented here that this

is a neglected field of research for a number of reasons. Firstly, despite a

number of studies, the role of consumption and demand in the innovation

process still remains largely neglected. Secondly, and in particular, the role

of consumption in service innovation has only been briefly commented

upon. This is particularly true in connection with the consumption by firms

of intermediate services and goods, where most of the discussion on service

consumption has been in respect of final consumption by individuals and

households (see, for example, Gershuny, 1978; Gershuny and Miles, 1983).2

This chapter therefore seeks to put forward an exploratory framework in

relation to the role that consumption may play in services in the innovation

51

process within the firm exploring existing literature and using primary case

study material. In this context, the analysis highlights the important role

that services play in the consumption of new goods by firms, and the inter￾play and blurring between goods and services in consumption (although this

is not a new phenomenon as will be shown). The focus, therefore, as will be

explained, is primarily on the consumption of intermediate goods and ser￾vices by firms, and not in the role of final consumption in innovation per se.

To this end this chapter is structured as follows. Section 2 discusses the

nature and role of consumption in services. Section 3 expands the analysis

to consider the relationship between consumption and services and innova￾tion. Section 4 examines what elements of the consumption process in rela￾tion to innovation have been studied already. Section 5 concludes.

2. CONSUMPTION AND SERVICE CONSUMPTION

From a period of relative stasis in terms of academic interest and progress,

there have been a number of recent analyses which have sought to review

and critique existing consumption theory particularly from a neoclassical

perspective but also more generally from other reformulated economic

studies. These studies have sought to further develop and integrate con￾sumption theory within a wider socioeconomic context, in particular focus￾ing on consumption as a change agent.

It is not the intention here to further review these studies in detail.

However, these more recent analyses have highlighted a number of charac￾teristics of consumption building upon the existing body of literature that

have not been readily acknowledged in the past. In brief, these are that

consumption is an active, rather than passive process, with consumers

actively seeking novelty to satisfy needs and tastes (Bianchi, 1998, p. 65 and

pp. 75–81). Consumers therefore act as interactive agents in the wider com￾petitive environment (Gualerzi, 1998, p. 59). However, effective consump￾tion patterns require time and resources to develop (Loasby, 1998, p. 94) and

this sets constraints on such trial-and-error learning (Metcalfe, 2001, p. 44).

In this way consumption activity can also be seen as forming a key capabil￾ity of the firm (Langlois and Cosgel, 1998, pp. 110–11), which involves a

process of learning for consumers (Loasby, 1998, p. 98; Robertson and Yu,

2001, p. 190; Witt, 2001, pp. 28–31). It can also be seen in the development

of efficient routines (Langlois and Cosgel, 1998, p. 59; Langlois, 2001, p. 90)

for successful consumption.

These above points highlight a sea change in thinking about the nature,

value and importance of consumption in shaping economic change and

including innovation. In particular, such studies stress that to be an effective

52 Knowledge and the firm