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Chapter 04New Service Development

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

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

Learning Objectives 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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Introduction 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.

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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.

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Levels of Service Innovation

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.

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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

People

Technology Systems

Product

Full Launch Development

Design Analysis

Org

aniz

atio

nal

Con

text Team

s

Tools

Enablers

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

• Business analysis• Project authorization

• Full-scale launch• Post-launch review

• 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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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

Service Example Service Industry Impact

Power/energy Jet aircraft Nuclear energy

International flight is feasibleLess dependence on fossil fuel

Facility design Hotel atriumEnclosed sports stadium

Feeling of grandeur/spaciousnessYear-around use

Materials Photochromic glassSynthetic engine oil

Energy conservationFewer oil changes

Methods Just-in-time (JIT)Six Sigma

Reduce supply-chain inventoriesInstitutionalize quality effort

Information E-commerceSatellite TV

Increase market to world-wideAlternative to cable TV

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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 Demand

Strategies, yield management, queue management

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Customer Value Equation (1)

To ensure acceptance of a new service innovation, the design process should take a customer-centric 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)

erviceuiringtheSCostsofAcqice

tyocessQualioducedsultsValue

Pr

PrPrRe

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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

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Structural Alternatives for a Restaurant

No ReservationsSelf-seating. Menu on Blackboard

EliminateCustomer Fills Out Form

Pre-prepared: No Choice

Limit to Four Choices

Sundae Bar: Self-service

Coffee, Tea, Milk onlyServe Salad & Entree Together:

Bill and Beverage Together

Cash only: Pay when Leaving

TAKE RESERVATIONSEAT GUESTS, GIVE MENUSSERVE WATER AND BREAD

TAKE ORDERS

Salad Bar

Entree (6 choices)

Dessert (6 choices)

Beverage (6 choices)SERVE ORDERS

CASH OR CREDIT CARD

Specific Table SelectionRecite Menu: Describe Entrees & SpecialsAssortment of Hot Breads and Hors D’oeuvresAt table. Taken Personally by Maltre d’

Salad (4 choices)

Expand to 10 Choices: Add Flaming Dishes;Bone Fish at TableExpand to 12 Choices

Add Exotic Coffees; Wine list, LiqueursSeparate-courses; Hand Grind Pepper

Choice of Payment. Including House Accounts:Serve Mints

LOWER COMPLEXITY/DIVERGENCE CURRENT PROCESS HIGHER COMPLEXITY/DIVERGENCE

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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)

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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)

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) 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)

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

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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

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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 http://www.oecd.org/home and find the current non-manufacturing share of total business R&D for the countries listed in Table 1.1. Are there any surprises?

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100 Yen Sushi House

1. Prepare a service blueprint for the 100 Yen Sushi House.

2. What features differentiate 100 Yen Sushi House and how do they create a competitive advantage?

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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100 Yen Sushi House Layout

Miso and Tea Station

CONVERSATION AREA

CO

NV

ER

SA

TIO

N A

RE

A

Dishwashing Counter in Back

ENTRANCE

CONVEYOR BELT

TAKE-OUT POSITION

= CHEF

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Commuter Cleaning - New Venture Proposal

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 offer?

3. 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.

4. Critique the business concept, and make recommendations for improvement.

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Golfsmith

1. Prepare a service blueprint for Golfsmith.

2. What generic approach to service design does Golfsmith illustrate and what competitive advantages does this design offer?

3. Why is Golfsmith a good candidate for Internet sales?

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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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