Problem based perspective and KIBS

A Problem-Based Perspective on Knowledge-Intensity in Services Business
Paavo Ritala1
, Tatiana Andreeva2
, Miia Kosonen1
and Kirsimarja Blomqvist1
1
Lappeenranta University of Technology, School of Business, Lappeenranta, Finland
2
Graduate School of Management, St. Petersburg State University, St. Petersburg, Russia
ritala@lut.fi
andreeva@som.pu.ru
miia.kosonen@lut.fi
kirsimarja.blomqvist@lut.fi
Abstract: Extant research on services has strongly emphasized knowledge-based services as the
driver of economic growth and innovation. Thus, prior literature has separated between
“knowledge-intensive” and “other” services, and suggested that the knowledge-intensive services are
often those responsible of innovation and value creation. In our view this is an oversimplification of
prevailing reality in services business. In this study, we suggest – in contrary to the earlier studies –
that all services are knowledge-intensive by nature but they differ along the nature of knowledge
processes involved from the perspective of the customer and provider. In exploring the issue, we
adopt a “problem-based perspective” on knowledge-intensity in services business, following the latest
theoretical developments in the field of knowledge-based view of the firm and related problem-solving
perspective. Our paper sketches a framework where the knowledge processes regarding service
co-creation and delivery are conceptualized on two axes – 1) knowledge required from the customer
in defining and executing the service and 2) nature of the service-providing process. In the framework,
the knowledge intensity of services is explored from an interactive perspective, where problems are
identified and solved in collaboration between customers and providers. In this, varying kinds of
knowledge sharing is needed between the customer and the service provider, and also different types
of problem-solving and knowledge creation processes in service delivery from the provider
perspective. On the basis of the developed conceptual framework, we provide implications concerning
organizing of various types of services, as well as new insights on the discussion on
knowledge-intensity in service business and relevance of knowledge management challenges and
practices for this field. The results show that every type of service actually involves
knowledge-intensity, but the nature of the knowledge sharing and knowledge creation processes
varies along the customer knowledge requirements and the problem-solving process of the provider in
delivering the service.
Keywords: services, knowledge, problem-solving, customer, provider
1. Introduction
Services sector has shown significant growth and has become the dominant driver of economic
growth in many economies over the last decades (Andersen et al., 2000). Consequently, research on
services has gained increasing attention within recent years, aiming to understand the factors of
competitiveness in this field. The basic assumption behind this stream of research is that services
differ from products in many important aspects. In particular, services are seen as extremely
heterogeneous and often intangible processes, which most often involve and depend on specialized
human labour. At the same time, another stream of research, dedicated to the “knowledge economy”,
has enjoyed growing interest (e.g., Romer and Kurtzman, 2004). Basically, this approach claims that
knowledge is the key source of competitive advantage in the contemporary environment (e.g.,
Nonaka, 1991; Davenport and Prusak, 2000) and focuses the attention on managing this resource in
the most efficient way (Foss et al., 2010). It also suggests that for some businesses, typically labelled
“knowledge-intensive”, this task is undoubtedly important (Starbuck, 1992; Alvesson, 1995; Nurmi,
1998).
These two streams meet in the discussion about specific challenges and best practices of
managing so called “knowledge-intensive services” that have been under increasing interest (e.g.,
Tether and Hipp, 2002; Freel, 2006). We suggest that there are two biases in this literature. First,
most of this discussion is centred on a quite narrow group of firms, identified as “Knowledge Intensive
Business Services” or “KIBS”. Implicitly, the rest of the services are recognized as “other” that are not
as knowledge-intensive and thus knowledge-related issues implicitly fall out of the discussion of the
sources of their competitive advantage. Second, there is a widely promoted opinion that only the
KIBS-firms generate value and contribute to growth in the contemporary economy (e.g. Andersen et
al., 2000).

In our view both biases create an oversimplified understanding of the nature of services that
may mislead efforts both of managers and policymakers. First, we suggest that all services are
fundamentally knowledge-based, but they just differ in terms of the nature of knowledge and
knowledge processes involved. Consider, for example, a traditional example of a knowledge-intensive
service – a consulting firm. A consulting firm employs skilled individuals and teams who co-create
solutions with their customers in the task of solving certain problems. Such service indeed requires
sharing of specialized knowledge, as well as creation of new knowledge – making the label of
“knowledge-intensive” well deserved. However, it can be argued that all types of services include
some type of knowledge integration and creation at some stages of the service. For example,
providing of basic transportation services (e.g. train, bus) requires the usage and integration of
specialized knowledge such as routing, schedule planning, and driving. The difference to consulting is
that the usage of the knowledge might be more routinized. However, both of these services require
and in many ways consist of specialized knowledge. Thus, it is actually very hard to split all services
into two “black-and-white” categories according to their knowledge-intensity, since all services are
fundamentally 1) outputs of knowledge processes and 2) consist more or less from knowledge.
Second, evidence from practice suggests that in a number of countries significant growth actually
comes from the services that are classically labelled as not knowledge intensive – for example,
well-being sector in Finland or tourism sector in countries like France, Spain and Greece. Thus, in
order to understand better the sources of competitive advantage in services sector, we need a more
comprehensive and nuanced view of knowledge-intensity in services.
To address this question, we propose a more pragmatic conceptualization on the nature of
service business – a one which we call ”a problem-based perspective on knowledge-intensity in
services business”. In this task, we utilize the knowledge-based view of the firm (Grant, 1996;
Spender, 1996), as well as the problem-solving perspective of a firm (Nickerson and Zenger, 2004;
Nickerson et al., 2007, Heiman et al. 2009), which views the organization as a problem-solving entity,
where the role of the organization is to solve valuable problems and utilize various knowledge
processes in this task. In accordance to problem-based perspective we analyze knowledge-intensity
in services simultaneously from both customer and provider perspectives, showing that services can
be seen as problems-to-be-solved and where the process involves different levels of knowledge
sharing and creation. While earlier conceptualizations of knowledge intensity of providers and
customers exist (see e.g. Hauknes, 1999), the problem-solving perspective allows for a more usable
analysis in terms of understanding the knowledge processes involved in the service provision
process.
The main contribution of our study is twofold. First, we elaborate a knowledge-process based
view on services, where problem identification and -solving issues are analyzed. Such framework
enables a useful theoretical and practical categorization of all types of services based on the different
levels and types of their knowledge-intensity. It also leads to important managerial implications for
building sustainable competitive advantage in the different types of services business. Second, we
distinctively identify the role of customers and providers, which helps to analyze the problem
identification and solving processes from a service / value co-creation perspective.
Our study is structured as follows. First, we critically review the extant literature on services and
knowledge-intensity and suggest that services are knowledge processes involving both customers
and providers in value co-creation. Second, we present a knowledge-based problem-solving
framework of service business. Finally, we discuss the implications of the framework for theory and
practice.
2. Services and knowledge-intensity
In extant services literature, knowledge-intensity has been of increasing interest, and some services
have been explicitly recognized as being “knowledge-intensive” (for example, KIBS-services; Tether
and Hipp, 2002; Freel, 2006). However, our literature review suggests that the discussion of
knowledge-intensity in services is predominantly focused on a very special type of services - business
services and/or professional services (e.g., Von Nordenflycht, 2010). Surely, these service industries
have their own specific challenges that are well discussed in the literature (e.g., Meister, 1993;
Lowendahl, 2000; Brock, 2006; Empson, Chapman, 2006; Greenwood et al., 2007; Briscoe, 2007).
We claim that such a narrow discussion of knowledge-intensity in services hinders the deeper
understanding of the competitiveness factors in a much wider range of firms. To develop this point, we
address two conceptual issues – distinctive features of services and the concept of
knowledge-intensity.
First, let us turn to the notion of knowledge-intensity. Despite the concept is popular nowadays,
there is a lack of clarity about it. In theory, it indicates that the firm’s output relies on a substantial

body of complex knowledge (e.g., Starbuck, 1992; Winch, Schneider, 1993). However, how do we
define whether the knowledge is enough “complex”, and its’ body is enough “substantial”? In practice,
knowledge intensity has been frequently operationalized through the share of employees with higher
(post-secondary) education (Starbuck, 1992; Thornbill, 2004) or the level of R&D expenditure
(Willoughby, Galvin, 2005). Both approaches have been extensively criticized as very inaccurate
proxies of knowledge intensity, and as not applicable to many types of businesses and
product/service contexts (e.g., Andreeva, forthcoming; Autio et al., 2000, Spender, Grant, 1996;
Eisenhardt, Schoonhoven, 1990). Thus, it has been suggested that knowledge intensity should be
measured by managers’ assessments (Autio et al., 2000) which are inherently subjective in their
nature.
The literature also has two different views on knowledge intensity, either defining it as mainly
relying on knowledge embodied in individuals (Alvesson, 2000), or as including also knowledge
embedded in equipment, products, and organizational routines (Morris, Empson, 1998; Starbuck,
1992). Some recent authors argue that true knowledge intensity refers only to the first type, as
otherwise an overly broad universe of firms will be included into discussion (Von Nordenflycht, 2010).
However, if knowledge intensity implies that a firm needs to take care of managing its knowledge in
order to compete successfully, such a person-centric view of knowledge intensity will exclude from the
discussion many firms for which managing knowledge is an important issue. Indeed, a polar view
argues that any human activity is based on and involves some knowledge (e.g., Kelloway, Barling,
2000). This brief discussion of the knowledge intensity concept vividly illustrates that there is no
simple solution to differentiate clearly between “knowledge-intensive” and “non-knowledge-intensive”
business. A more fine-grained approach to knowledge intensity, that includes different types and
levels, might be a solution to this problem.
Second, let us turn to services. In the abundant literature on services, few issues appear
recurrently as distinctive characteristics of services. These are intangibility, heterogeneity,
inseparability and perishability (typically referred as IHIP). Altogether, they make services highly
dependent on human factor – employees who actually provide the service. This fact implies the
importance of employees’ skills and knowledge (including the tacit one) for all types of services. This
idea is supported by recent empirical evidence, suggesting that human capital is more important for
service firms compared to manufacturing ones (Kianto et al., forthcoming). Another distinctive feature
of services is the close interaction with the customer (Vargo, Lusch, 2006). In fact, according to some
sources the process of providing the service is viewed as a client co-production or co-creation
(Bettencourt et al., 2002; Skjoelsvik et al., 2007; Ordanini, Pasini, 2008) This aspect implies that any
service involves at least some knowledge sharing between the client and service provider, though its’
intensity and complexity depends on the type of service. Thus the very nature of services implies that
any service relies at least on some human knowledge and involves at least some knowledge sharing.
Therefore, dualistic discrimination between “knowledge-intensive” and “non-knowledge-intensive”
services appears to be oversimplification of reality.
Based on these two streams of argumentation, we posit that all services are inherently
knowledge-intensive, though to a different degree and/or of different types, and thus may require
different strategies and governance mechanisms and related capabilities for managing
service-specific critical knowledge. Therefore, there is a need for a more detailed and sophisticated
framework of knowledge intensity in services that will help to identify the sources of competitive
advantage in particular service sector and to gain a better understanding of the best management
practices that can enhance this competitive advantage.
3. A knowledge-based problem-solving framework of service business
Problem-solving perspective of a firm (Nickerson and Zenger, 2004; Nickerson et al., 2007) takes a
problem as the unit of analysis. The perspective builds on the knowledge based view of the firm
(Kogut and Zander, 1992; Conner and Prahalad, 1996; Grant, 1996) and also contributes to the
recent discussion around the “knowledge governance” approach (Foss, 2007; Foss et al. 2010). From
this perspective, any individual organization is seen as a problem-solving entity. The “problem” is
understood in a broad sense, including any type of organizational activity that can create value if it is
solved. Successful organizations are able to identify and solve problems that eventually bring unique
competitive value in the eyes of the organization’s customers. The problem-solving perspective helps
to understand the nature of the problems that the organization encounters and identifies which
problem solving methods (i.e. organizational knowledge processes) are most applicable.

3.1 Services as problems-to-be-solved
While the problem-solving perspective has been used to describe the identification and solving of
problems inside an individual organization (Nickerson and Zenger, 2004; Nickerson et al., 2007), we
extend the logic to cover customer-provider interface in order to describe service business through the
lenses of this perspective. We claim that the services can fundamentally be seen as
problems-to-be-solved. A service is often a specific benefit that the customer obtains in terms of e.g.
convenience, time saving, physical transformation, or a value adding function for customers
possessions (for a review, see e.g. Cook et al., 1999; Lovelock, 1983). All these can be viewed as
different types of problems. For example, the customer can seek a solution for a broken car (solution
= repair), monetary assets that are in redundant use (solution = financial advice, e.g. wealth
management), transportation (solution = a bus service / taxi), or uncertainty over customer needs
(solution = market research / consulting advice). All these examples include the logic that there is a
problem which has been identified, and that providing a solution to it creates value.
As the services by their very nature involve intense cooperation between a client and a
provider, knowledge intensity in services can be delineated on two categories – knowledge required
from the customer and the nature of the service-providing process. First, the knowledge required from
the customer suggests that the customers are the fundamental initiators (more or less consciously) of
the problems (or the issue around which they have a problem that they have not specified yet) on
which they seek solutions. In this task, there are varying levels of knowledge sharing required
between the customer and the provider in interactively identifying the exact problem-to-be-solved.
Second, nature of the service-providing process suggests that the service provider solves the problem
for (and with) the customer through certain problem-solving processes. Again, there are varying levels
of knowledge requirements in such processes.
In the following sections, we first discuss knowledge required from the customer and then the
nature of the service-providing process in terms of different knowledge processes.
3.2 Knowledge required from the customer
Customers are viewed here as individuals or institutions seeking for solutions for their “problems” in
collaboration with the service providers. The knowledge inputs required from the customer indicates
which type and amount of knowledge sharing is involved in this task from the customer perspective.
The required knowledge exchange can be roughly divided into three categories: no knowledge inputs,
basic or routine knowledge, and service-creation related (situational) knowledge.
First, some services require (almost) no knowledge inputs from the customer. In such cases,
the problem identification is a process where the customer has a problem (= a service need) which is
repeated over and over again, to the extent that the identification of the problem is basically similar
each time the problem occurs. Services that are used frequently in a similar manner, such as
transportation, grocery store shopping, or car repair are situated within this category.
Second, some services require the sharing of basic or routine knowledge between customer
and provider. In these cases, the customer has a problem which is repeated from time to time and is
thus of familiar nature, but there is a notable variation over the specific customer need involved each
time the service is requested. Examples of such services include hair dressing from consumer
services perspective, and market research from b-to-b perspective.
Third, certain services require service-creation related knowledge to be exchanged between the
customer and provider. In such cases, the customer has a unique need which needs to be
communicated in case-by-case basis. Such needs are related to one time, individualized services,
which often include contingencies over the time, place, and other contextual issues related to the
service process. In other words, the knowledge requirements are situational. For example, the
services provided by fire brigade are most likely to be unique for the customer, and most likely to
involve unforeseen elements related to the environment where the service is needed.
3.3 Nature of the service-providing process
As the services are viewed as problems-to-be-solved in our perspective, the nature of the service
providing process is discussed as different types of problem-solving processes. The nature of the
problem-solving (i.e. service-providing) process fundamentally affects the variation in the amount and
need for the provider to create unique, service-specific knowledge during the process. The
knowledge-related processes in service provision can be roughly divided under three categories on
the basis of their nature: routinized, customized and unstructured. Routinized problem-processes are
based on repetition, customized processes on variation over repetition, and unstructured processes
relate to unique and non-routinized processes (for a relatively similar treatment on routines, see e.g.
Lillrank, 2003).

First, routinized problem solving is a process where the service is delivered as a standard
offering, where very little or no customization is involved (unless there is a crisis in the delivery
process). Often, routinized problem solving can be (almost) completely automated or standardized. In
the process of delivering these kinds of services, there is usually no need to create unique knowledge
from the perspective of the provider. Examples include car wash or railroad transportation, which are
practically pre-determined in terms of their delivery process. Routinized problem solving sometimes
also allows for mass customization of services, where the customer has the possibility to affect the
contents of the offering (situational knowledge) although the service delivery is routinized. Google, for
instance, pursues to offer access to any type of information the customer is seeking, and to do it in a
way which can be scaled to cover all the possible customers possessing an internet connection.
Second, customized problem solving is a process where the service is delivered in a tailored
way, but which is built on an existing service framework. Customized problem solving offers services
that adapt to the needs of various customers. Examples from the basic end of the customer
knowledge sharing continuum include annual repair or maintenance services, which are very basic
services from the point of view of the customer, but require variation over the solution depending on
the repair needs. For problems requiring more distinctive, situational knowledge, customized problem
solving invloves interactive, co-created service offerings. Examples include singing lessons or hair
dressing, where the customer has the option to make individual requests, and the service provider
has the possibility to customize the offering. Further examples from the more situation-specific
customer needs include emergency services such as police and fire brigade, which involve unique
service needs from the customer perspective, but which are based on a sufficiently well developed
service delivery framework. The common denominator here is that the service is nevertheless based
on pre-existing understanding between the customer and the provider on the framing of the service
(e.g. cutting hair).
Third, unstructured problem solving is a process where the service is delivered in a completely
unique way, involving almost no pre-existing structures. For services where no knowledge inputs are
needed from the customer, unstructured problem solving is likely to be quite rare. On the other hand,
for solutions related to exhange of situational, service-creation related knowledge, unstructured
processes involve individualized and creative service offerings which are quite commonplace in the
contemporary economy. A good example of such activity is interior design, where each case is
different depending on the context and the customized customer needs. Further examples involve
unique and one time service activities, where each identified customer problem is solved in a unique
way. Examples include creative R&D services, and consulting projects concerning a specific
emergent problem of the client.
In the Figure 1, a matrix is presented where the nature of the knowledge requirements from the
customer, as well as the nature of the service-providing process is illustrated. As discussed
throughout the last two sections, these two axes determine the nature of knowledge intensity in
services from both customer and provider perspective. According to the model, services can be
categorized according to the need for knowledge sharing between the customer and the service
provider in determining the service, and according to the need to create unique service-specific
knowledge.

Figure 1. Types and levels of knowledge-intensity in services
5. Conclusion and implications
Recent service literature (e.g. Tether and Hipp, 2002; Freel, 2006) suggests that services can be
categorized as knowledge-intensive and “other” services, and that knowledge-intensive services are
those that involve the possibility to substantive innovation and value creation. The argument posited in
our study was that all types of services are fundamentally knowledge intensive, but there is variation
in the knowledge and related interaction processes involved in identifying and solving problems
related to customer needs concerning different types of services.
We described services as problems-to-be-solved, involving 1) different levels of
knowledge required from the customer and 2) types of problem-solving processes (routine,
customized, unstructured) requiring varying levels of knowledge creation from the provider. On the
basis of these axes, we suggested a framework of knowledge intensity, which provides a more
in-depth view on approaching different types of services and their knowledge-intensity than the
pre-existing formulations.
Our study provides important implications to the literature and practice. Firstly, we
elaborated a knowledge-process based view on services, incorporating the problem identification and
solving perspective to the discussion. Secondly, our study unravelled the complexity related to
knowledge-intensive services by providing a framework on the nature of knowledge intensity. It
provides support for further theoretical and empirical, but also practical work on analyzing the
knowledge-related value creation and related organizing within all types of services, and not only
those cited as “knowledge-intensive” in the extant literature. Thirdly, we approached
knowledge-intensity not as a passive state but interaction between service providers and customers,
thus incorporating the service co-creation perspective (e.g. Bettencourt et al., 2002) and illustrating
the types of knowledge needed for mutual problem identification and solving.
Based on the framework different types of services can be studied empirically for a
more fine-grained understanding of the axes and different classes in the typology. In the spirit of
knowledge governance perspective our typology provides a useful point of departure for studying
efficient and effective knowledge transfer mechanisms and related individual skill and organizational
capabilities required.

Our study leads to important managerial implications for building sustainable
competitive advantage. It is expected that most of the relatively more routine type of service-providing
processes with no or very little knowledge input from the customer can be automized and sold over
the Internet. Also, it is expected that customer knowledge and related relational capabilities is critical
in most of services (but they can be executed in different ways) whereas the role of innovation related
capabilities is accentuated in unstructured services requiring situational knowledge. Further, most
firms’ service offering are seen to consist of a variety of services requiring different type and level of
knowledge sharing with customer, and differing degree of unique knowledge from the service
provider. Thus for most service providers the relevant knowledge governance issue is to optimize the
relevant knowledge processes and related skills related to the whole offering and not only to single
services. However, our typology can provide a valuable tool for practitioners to analyze their services
portfolio in line with types and levels of knowledge intensity.
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