Chapter 04 New Service Development

McGraw-Hill/Irwin Service Management: Operations, Strategy, and Information Technology, 6e

Copyright © 2008 by The McGraw-Hill Companies, Inc. All Rights Reserved.

Learning Objectives
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Describe the fundamental characteristics of service innovation. Describe the four structural and four managerial elements of service design. Describe the components of the customer value equation. Explain and differentiate what is meant by the divergence and the complexity of a service process. Describe the sequence of states and the enablers of the new service development process. Prepare a blueprint for a service operation. Explain the difference between direct and indirect customer contact. Compare and contrast the four approaches to service system design: production-line, customer as coproducer, and information empowerment.


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Designing a service delivery system is a creative process. It begins with a service concept and strategy to provide a service with feature that differentiate it from the competition. Various alternatives for achieving these objectives must be identified and analyzed before any decisions can be made.

Introduction (2)

Designing a service system involves issues such as location, facility design and layout for effective customer and work flow, procedures and job definitions for service providers, masures to ensure quality, extent of customer involvement, equipment selection, and adequate service capacity.

Introduction (3)

The design process is never finished; once the service becomes operational, modifications in the delivery system are introduced as conditions warrant.

Innovation in Services
Based on the NSF definitions, service innovation is the output of applied research and develpment efforts which has one of the following goals: Basic Research: Pursue a planned search for new knowledge regardless of possible application. Applied Research: Apply existing knowledge to problems in creation of new service. Development: Apply knowledge to problems to improve a current service.


Challenges for Service Innovation

Ability to protect intellectual and property technologies.(The transperancy of service system are make immitation simpler, and pattents are difficult to obtain) Incremental nature of innovation. (Because customers participate in service systems, innovation tends to be evolutionary rather than radical to allow for acceptance) Degree of integration required. (among people,products,and technology) Ability to build prototypes or conduct tests in a controlled environment.

Levels of Service Innovation

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Radical Innovations Major Innovation: new service that customers did not know they needed. Start-up Business: new service for underserved market. New Services for the Market Presently Served: new services to customers of an organization. Incremental Innovations Service Line Extensions: augmentation of existing service line (e.g. new menu items). Service Improvements: changes in service delivery process (e.g. self-service boarding kiosk). Style Changes: modest visible changes in appearances.


New Service Development

Ideas for new service innovations can originate from many sources. Customers can offer suggestions (e.g., menu additions at a restaurant) Frontline employees can be trained to listen to customers’concerns Customer databases can be mined for possible service extentions (e.g., additional financial services) These ideas form the input to the development stage of the new service development (NCD) cycle shown in the following figure

New Service Development Cycle
• Full-scale launch • Post-launch review

Full Launch
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• Formulation of new services objective / strategy • Idea generation and screening • Concept development and testing

• Service design and testing • Process and system design and testing • Marketing program design and testing • Personnel training • Service testing and pilot run • Test marketing


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• Business analysis 4-10 • Project authorization

New Service Development (2)

Technological advances often are the basis for radical service innovation. The following table presents examples and industry impact of technology-driven service innovations from various sources

Technology-Driven Service Innovations
Source of Technology Power/energy Service Example Jet aircraft Nuclear energy Hotel atrium Enclosed sports stadium Photochromic glass Synthetic engine oil Just-in-time (JIT) Six Sigma E-commerce Satellite TV Service Industry Impact International flight is feasible Less dependence on fossil fuel Feeling of grandeur/spaciousness Year-around use Energy conservation Fewer oil changes Reduce supply-chain inventories Institutionalize quality effort Increase market to world-wide Alternative to cable TV

Facility design





Service Design Elements
Design Elements Structural Delivery system Facility design Location Capacity planning Managerial Information Quality Service encounter Technology, scalability, use of Internet Measurement, design quality, recovery, tools, six-sigma Encounter triad, culture, supply relationships, outsourcing Process structure, service blueprint, strategic positioning Servicescapes, architecture, process flows, layout Geographic demand, site selection, location strategy Strategic role, queuing models, planning criteria Topics

Managing Capacity and Strategies, yield management, queue management Demand

Customer Value Equation (1)

To ensure acceptance of a new service innovation, the design process should take a customercentric view of what is important The value of a service from a customer’s perspective can be captured in the following equation

Customer Value Equation (2)
( Re sults Pr oduced ) + ( Pr ocessQuality ) Value = ( Pr ice ) + ( CostsofAcquiringtheService)


Strategic Positioning Through Process Structure

Degree of Complexity: Measured by the number of steps in the service blueprint. For example a clinic is less complex than a general hospital. Degree of Divergence: Amount of discretion permitted the server to customize the service. For example the activities of an attorney contrasted with those of a paralegal are highly divergent, because interaction with the clients requires judgment, discretion, and situational adaptation

Structural Alternatives for a Restaurant
LOWER COMPLEXITY/DIVERGENCE No Reservations Self-seating. Menu on Blackboard Eliminate Customer Fills Out Form Pre-prepared: No Choice Limit to Four Choices Sundae Bar: Self-service Coffee, Tea, Milk only Serve Salad & Entree Together: Bill and Beverage Together Cash only: Pay when Leaving CURRENT PROCESS TAKE RESERVATION SEAT GUESTS, GIVE MENUS SERVE WATER AND BREAD TAKE ORDERS Salad Bar Entree (6 choices) Dessert (6 choices) Beverage (6 choices) SERVE ORDERS CASH OR CREDIT CARD HIGHER COMPLEXITY/DIVERGENCE Specific Table Selection Recite Menu: Describe Entrees & Specials Assortment of Hot Breads and Hors D’oeuvres At table. Taken Personally by Maltre d’ Salad (4 choices) Expand to 10 Choices: Add Flaming Dishes; Bone Fish at Table Expand to 12 Choices Add Exotic Coffees; Wine list, Liqueurs Separate-courses; Hand Grind Pepper Choice of Payment. Including House Accounts: Serve Mints


Service Blueprinting

When a building is developed the design is captured on architectural drawings called blueprints These blueprints show what the product should look like and all the specifications needed for its manufacture. G.L.Shostack has proposed that a service delivery system also can be captured in a visual diagram (i.e., a service blueprint) and used in a similar menner for the design of services

Service Blueprint of Luxury Hotel (1)


Service Blueprint of Luxury Hotel (2)

At the top we find the “physical evidence” that customers will see (e.g., hotel exterior, room decor) and experience (waiting for check-in, taking a bath, watching TV) Activities in the first row above the “line of interaction” are customer-initiated steps, choices, and interactions the customer performs in the process of purchasing, consuming, and evaluating the service

Service Blueprint of Luxury Hotel (3)

Any vertical flow line crossing the “line of interaction”depicts a direct contact between the customer and organization (i.e., service encounter) Paralleling the customer actions are two areas of contact-employee actions. Above the “line of visibility” are actions in full view of the customer and thus “onstage” (e.g., checking in)

Service Blueprint of Luxury Hotel (4)

Below the line of visibility are activities that are “backstage” and not seen by the customer, such as taking food orders over the telephone. Below the “line of internal interaction” we find the support processes, such as a reservation information system and kitchen.

Service Blueprint of Luxury Hotel (5)

The position of”line of visibility” in a service blueprint can immediately signal the level of involvment of the customer in the service delivery proces. (e.g., the line of visibility is relatively high for a gourmet restaurant compered to that for a fast-food restaurant.

Service Blueprint of Luxury Hotel (6)

In summary, a blueprint is a precise definition of the service delivery system that allows the management to test the service concept on paper before any final commitments are made. The blueprint also facilitates problem solving and creative thinking by identifying potential failure and highlighting opportunities to enhance customers perception of service.

Taxonomy of Service Processes (1)

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Service processes can be classifed based on the following criteria: Degree of divergence, Object of the service process Degree of consumer contact.

Taxonomy of Service Processes (2)
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In Table 4.5, services are broadly divided into low divergence (i.e., standardized services) and high divergence (i.e., customized service) Within these two categories, the object of the service is devided as goods, information, or people The degree of customer contact ranges from no contact to indirect contact to direct contact and is divided further into self-service and personal interaction with the service worker

Taxonomy of Service Processes (3)
No Customer Contact Indirect customer contact No customerservice worker interaction (selfservice) Customer service worker interaction Low divergence (standardized service) Processing Processing of goods Information Dry Check Cleaning processing Restocking Billing for a a vending credit card machine Ordering groceries from a home computer Operating a vending machine Assembling premade furniture Food service in a restaurant Hand car washing Withdrawing cash from an ATM Processing of people High divergence (customized service) Processing Processing of goods Information Auto repair Computer Tailoring a programming suit Designing a building Supervision of a landing by an air controller Operating an elevator Riding an escalator Sampling Documenting Driving a food at a medical rental car buffet dinner history Using a Bagging of health club groceries Searching for facility information in a library Providing Home Portrait Haircutting public carpet painting Performing transit cleaning Counseling a surgical Mass Landscaping operation vaccination service Processing of people

Direct Customer Contact

Giving a lecture Handling routine bank transactions


Degree of Divergence

Standardized service is designed for high volumes with a narrowly defined and focused service. The task is routine and require a workforce with relatively low levels of technical skill Because of repetitive nature of the service, opportunities to substitute automation for labor abound. It is also called as the production-line approach to a service design

Degree of Divergence (2)

For customized services more flexibility and judgement are required to perform the service task In addition, more information is exchanged between the customer and the service worker. They require high level of technical and analytical skills The workers are empowered

Object of the Service Process (1)

When goods are processed, a distinction must be made between goods that belong to the customer and goods that are provided by the service firm (i.e., facilitating goods) Processing information (i.e., receving, handling and manipulating data) occurs in all service systems. For other services, the information is communicated indirectly by electronic means, as with telephone-based account balance verification.

Object of the Service Process (2)

There are services such as counselling, however, in which information is processed through direct interaction between the client and the project team. Processing people involves physical changes (e.g.,haircut) or geographic changes (e.g., bus ride) Workers must posses interpersonal as well as technical skills

Type of Customer Contact (1)

Customer contact with the service delivery system can occur in three basic ways: 1. The customer can be physically present and interact directly with the service providers in the creation of the service 2. The contact may be indirect and occur via the internet from the customer’s home or office 3. Some service activities can be performed with no customer contact at all

Type of Customer Contact (2)

Direct customer contact is subdivided into two cathegories: 1. No interaction with service workers 2. Customer interaction with service workers Service processes with indirect customer contact or with no customer contact need not be constrained by issues that arise from the physical presence of the customer in the system

Type of Customer Contact (3)

The no-customer-contact and good-processing combination creates categories that normally are thought of as manufacturing. For example, dry cleaning is a batch process, and auto repair is a job shop

Generic Approaches to Service Design

Production-line • Limit Discretion of Personnel • Division of Labor • Substitute Technology for People • Standardize the Service Customer as Coproducer • Self Service • Smoothing Service Demand • Customer-Generated Content Customer Contact • Degree of Customer Contact • Separation of High and Low Contact Operations • Sales Opportunity and Service Delivery Options Information Empowerment • Employee • Customer


Discussion Questions

What are the limits in the production-line approach to service? Give an example of a service in which isolation of the technical core would be inappropriate. What are some drawbacks of customer participation in the service delivery process? What ethical issues are raised in the promotion of sales during a service transaction? Go to and find the current nonmanufacturing share of total business R&D for the countries listed in Table 1.1. Are there any surprises?


100 Yen Sushi House
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Prepare a service blueprint for the 100 Yen Sushi House. What features differentiate 100 Yen Sushi House and how do they create a competitive advantage? How has the 100 Yen Sushi House incorporated the just-in-time system into its operations? Suggest other services that could adopt the 100 Yen Sushi House service delivery concept.


100 Yen Sushi House Layout
Dishwashing Counter in Back CONVERSATION AREA Miso and Tea Station CONVEYOR BELT



Commuter Cleaning - New Venture Proposal
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Prepare a service blueprint for Commuter Cleaning. What generic approach to service design is illustrated by Commuter Cleaning, and what competitive advantage does this offer? Using the data in Table 4.7 calculate a break-even price per shirt if monthly demand is expected to be 20,000 shirts and the contract with a cleaning plant stipulates a charge of $0.50 per shirt. Critique the business concept, and make recommendations for improvement.





Prepare a service blueprint for Golfsmith. What generic approach to service design does Golfsmith illustrate and what competitive advantages does this design offer? Why is Golfsmith a good candidate for Internet sales?

The class breaks into small groups and prepares a service blueprint for Village Volvo.


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