Chapter 3

New Service Development

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 Learning Objectives

■ Describe sources of service sector growth.

■ Describe fundamental characteristics of service innovation.
■ Describe managerial issues associated with adoption of new
technology.
■ Explain and differentiate what is meant by the divergence and the
complexity of a service process.
■ Describe the sequence of stages and the enablers of the new service
development process cycle.
■ Prepare a service blueprint
■ Compare and contrast the four approaches to service system design:
production-line, customer as coproducer, customer contact and
information empowerment.
■ Explain how intellectual property rights protect a service brand.
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Source of Service Sector Growth
■ Information Technology
■ The Internet as a Service Enabler
■ Innovation
■ Push theory (e.g. Post-it)
■ Pull theory (e.g. Cash Management)
■ Services derived from products (e.g. Netflix)
■ Exploiting information (e.g. Auto part sales)
■ Difficulty of testing service prototypes
■ Changing Demographics

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Figure 3.1: Distribution of GDP
in U.S. Economy, 2007

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Innovation in Services
■ Basic Research: Activity directed toward
increases in knowledge without specific
application.
■ Applied Research: Activity directed toward
gaining knowledge that will meet a specific
need.
■ Development: Systematic use of knowledge
directed toward the production of a product,
service, or method.
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Unique Challenges for Service
Innovation

■ Ability to protect intellectual and

property technologies
■ Incremental nature of innovation
■ Degree of integration required
■ Ability to build prototypes or conduct
tests in a controlled environment

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Table 3.1: Levels of Service
Innovation

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Figure 3.2: Blockchain
Schematic

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Challenges of Adopting New
Technology in Services
■ Success depends on customer acceptance
■ Employees often need to be retrained
■ Need for adoption by all to realize full benefit
■ Incentive to innovate hampered since many
ideas cannot be patented

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Figure 3.3: The NSD Process
Cycle

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Table 3.2: Technology-Driven
Service Innovation

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Service Design Elements
Design Elements Topics
Structural
Delivery system Process structure, service blueprint, strategic positioning

Facility design Servicescapes, architecture, process flows, layout

Location Geographic demand, site selection, location strategy

Capacity planning Strategic role, queuing models, planning criteria

Managerial
Information Technology, scalability, use of Internet
Quality Measurement, design quality, recovery, tools, six-sigma

Service encounter Encounter triad, culture, supply relationships, outsourcing

Managing capacity and Strategies, yield management, queue management

demand
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Strategic Positioning
through Process Structure
■ Degree of Complexity : The number and
intricacy of steps, e.g., fast-food take-out is
less complex than preparation of gourmet
dinner at fine restaurant
■ Degree of Divergence : Amount of
discretion or freedom that the server has to
customize the service, e.g., the activities of
an attorney contrasted with those of a
paralegal

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Table 3.3: Structural Alternatives for
a Restaurant

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Figure 3.4: Blueprint of San Francisco
Giants Game (Template and First Stage)

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Figure 3.4: Blueprint of San Francisco
Giants Game (Final Product)

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Table 3.4: Taxonomy of Service Processes

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Generic Approaches to Service
System Design
■ Production-Line Approach
• Limited Discretionary Action of Personnel
• Division of Labor
• Substitution of Technology for People
• Service Standardization
■ Customer as Coproducer
• Self-Service
• Smoothing Service Demand
• Customer-Generated Content
■ Customer Contact Approach
• Degree of Customer Contact
• Separation of High- and Low-Contact Operations
• Sales Opportunity and Service Delivery Options
■ Information Empowerment
• Employee Empowerment
• Customer Empowerment
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Figure 3.6: Sales Opportunity
and Service Design

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Intellectual Property
■ Intellectual property is divided into categories:
■ industrial properties are inventions (e.g., artificial heart) for
commercial purpose and protected by patents granted for a
certain period of time to prevent others from using the
invention without license
■ a trademark (e.g., McDonald’s golden arches) is a distinctive
sign that is used to prevent confusion among products in the
marketplace
■ industrial design rights (e.g., Starbucks’ store ambience)
protect the appearance, style, or design from infringement
■ a trade secret (e.g., KFC’s recipe for fried chicken batter) is
information concerning the practices or proprietary
knowledge of a business.
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Discussion Questions

■ What are the limits to 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?
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Interactive Class Exercise

The class breaks into small groups and

prepares a service blueprint for Village
Volvo.

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 Case 3.1: 100 Yen Sushi House
Layout
Dishwashing Counter in
Back
CONVERSATION AREA
Miso and Tea Station

CONVEYOR
BELT

CONVERSATION AREA
TAKE-OUT
POSITION

ENTRANCE = CHEF

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 Case 3.1: 100 Yen Sushi House
Questions
1. Prepare a service blueprint for the 100 Yen Sushi
House.
2. What features of the 100 Yen Sushi House service
delivery system differentiate it from the
competition, and what competitive advantages do
they offer?
3. How has the 100 Yen Sushi House incorporated the
just-in-time system into its operations?
4. Suggest other services that could adopt the 100
Yen Sushi House service delivery concept.
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Case 3.2: COMMUTER CLEANING
– A New Venture Proposal

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 Case 3.2: Commuter Cleaning -
New Venture Proposal Questions
1. Prepare a service blueprint for Commuter Cleaning.
2. What generic approach to service design is illustrated
by Commuter Cleaning, and what competitive
advantage does this design offer?
3. Using the data in Table 3.5, 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.
4. Critique the business concept, and make
recommendations for improvement.

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Service Blueprint

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Breakeven Analysis

Fixed Expenses =
(Demand)*(Price -Charge)
$13,404 = 20,000*(Price - 0.50)

Price = (13,404 + 10,000)/20,000

= $1.17

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Case 3.3: [Link]

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Amazon’s Success Factors

■ First mover advantage (mind share)

■ Low overhead costs (60 inventory
turns/yr.)
■ Cross-Marketing: Amazon Associates
Program (other web sites link book
sales)
■ Customer service (recommendations)

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Online Book Buying Experience

■ Convenience
■ Browsing experience
■ Searching
■ Editorial content
■ Delivery
■ Payment
■ Recommendations
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Supply Chain Management

■ Amazon orders from wholesaler and

repackages and ships (cross-docking?)
■ Dependent upon one wholesaler (Ingram)
■ Considering self-distribution (buying directly
from publishers)
■ Ingram response by offering drop-shipping
■ Traditional distribution system is designed to
stock retail store shelves

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Barnes and Noble Response

■ Internet seen as a new channel to leverage

existing assets and strengths.
■ Features (online community reflective of real
store)
■ Pricing (30/20% vs 40% Amazon top 500)
■ Alliances (Firefly collaborative filtering)
■ Information Technology (Web farm flexibility)

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Amazon’s Challenges

■ Operations (Barnes & Noble - 2%

margins)
■ International expansion
■ Brand extension into online music sales
■ Backward integration into
self-publishing

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Case 3.3: [Link]
Questions
1. How does [Link] illustrate the sources of
service sector growth? Comment on
information technology, the Internet as an
enabler, innovation, and changing
demographics.
2. What generic approach(es) to service design
does [Link] illustrate and what
competitive advantages does this design offer?
3. Is [Link] a model for the future of
retailing?

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■ [Link]
mkFTIq6I

■ [Link]
Kldt1fPI

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