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Chapter 3

New Service Development

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 Source of Service Sector Growth
Information Technology.-bank funds transfer, x ray
Internet as a Service Enabler.(URL/HTTP, WWW, .com,
you tube, linked in, )
Impact of 5G in future
Innovation.
• Push theory ( Post-it).
• Pull theory ( Cash Management).
• Services derived from products ( DVD to Netflix).
• Exploiting information ( Auto part sales).
• Difficulty of testing service prototypes.-burger king

Changing Demographics.
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 Figure 3.1 Distribution of GDP in the
US Economy, 2007

A = Physical Product, B = Physical Service, C = Digital Product, D = Information Service

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 Impact of 5G
• (5G) mobile technology will change service delivery systems
significantly.
• All 5G wireless devices in a cell will be connected to the Internet and
telephone network by radio waves through a local antenna in the cell.
• Greater bandwidth, giving higher download speeds, eventually up to
10 gigabites per second.
• New applications in Internet of Things (IoT).
• Innovative business models: in retail, financial services, &
entertainment, healthcare and transportation systems.
• 5G comes at the expense of heavy infrastructure costs.

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 Innovation in Services

• Basic Research: Pursue a planned search for new

knowledge regardless of possible application.

• Applied Research: Apply existing knowledge to

create new service.

• Development: Apply knowledge to problems to

improve a current service.

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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 under served market.
• New Services for the Market Presently Served: new services to
existing customers of an organization.

Incremental Innovations
• Service Line Extensions: augmentation of existing service line (for
example, new menu items).
• Service Improvements: changes in service delivery process (for
example, self-service airline boarding kiosk).
• Style Changes: modest visible changes in appearances.

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 Technology-Driven Service
Innovations
Source of Technology Service Example Service Industry Impact
Power/energy Jet aircraft / Nuclear International flight is feasible
energy Less dependence on fossil fuel

Facility design Hotel architecture Feeling of

Enclosed sports grandeur/spaciousness
stadium Year-around use

Materials Photochromic glass Energy conservation for room

Synthetic engine oil Fewer oil changes

Methods Just-in-time (JIT) Reduce supply-chain

Six Sigma inventories
Institutionalize quality effort

Information E-commerce Increase market to world-wide

Satellite TV Alternative to cable TV

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 Figure 3.2 Blockchain Schematic

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 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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 Adoption of New Technology in
Services
• Challenges of Adopting New Technology.
• The Process is the Product.
• Back Office versus Front Office Changes.(MICR)
• Need for Standardization.

• Readiness to Embrace New Technology 8

contrast
Control chaos / freedom enslavement / new -obsolete /competence in-
c / efficiency in-e/ fulfill –create/ assimilation –isolation /engaging

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 Figure 3.3 The New service
Development (NSD) Process Cycle

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 Service Design Elements

Design Elements Topics

Structural
Delivery system Process structure, service blueprint, strategic
positioning ( patient’s coproduction )
Facility design Services capes, 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 Strategies, yield management, queue management
and demand

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 Service Design Elements
2. Managerial
➢Service encounter
✓ Service culture/ family relations
➢Managing capacity and
✓ Motivation demand
✓ Selection and training ✓ Strategies for altering demand
✓ Employee empowerment
and controlling supply-
reservations
✓ outsourcing
✓ Queue management
➢Quality
✓ Yield Management
✓ Measurement
➢Information
✓ Monitoring method

✓ Expectations versus perceptions

✓ Competitive resources

✓ Service guarantee ✓ Data collection

✓ Recovery tools, 6 sigma ✓ Use of internet

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 Customer Value Equation

Value =
( Results Produced ) + ( Process Quality )
( Price ) + ( Costs of Acquiring the Service )

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 Customer Value

➢Results produced for the customer

✓ It must satisfy the need for which it was purchased- eg. food
➢Process quality
✓ Since customer is a part of the process of service delivery, therefore it needs
improvement in process quality
➢Price to the customer
✓ Greater consistency in service quality should lower cost

✓ It allows greater alignment between customer perceptions and

expectations; resulting in lower price
➢Cost of acquiring the service
✓ Total cost of acquiring the service is important to customers

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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 to the server to customize the service,
for example, the activities of an attorney contrasted
with those of a paralegal, tax returns services

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 1. Degree of divergence

❖ Low divergence – standardized service with high

volume
• Tasks are routine
• Relatively low level of tech/professional skills required
• Production-line approach, example, McDonalds

❖ High divergence – customized services

• More tech/Professional and analytical skills required
• More flexibility required
• More capacity required

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 Structural Alternatives for a
Restaurant

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 1.Service Blueprint of Luxury Hotel

F = Possible Fail Point

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 2. Object of the Service Process

➢Working on goods of the customer, ex. Auto repair

✓ Property must be secured from damage or loss
➢Providing facilitating goods -eg restaurant
✓ Appropriate stock levels and the quality of these facilitating goods becomes
a concern
➢Processing information
✓ Done in back office, ex. cheque processing at a bank

✓ Providing information over phone , ex. Phone banking

➢Processing People, ex. Haircut or surgical operation
✓ High interpersonal skills required as well as technical skills

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 3. Type of Customer Contact

➢Decision on level of customer contact will decide

the type of training for employees and the design of
the facility
❖ Indirect via electronic media- email – no need for service
provider at the time of service delivery

❖ Indirect via phone – need for service provider at the time

of delivery and need for employee interpersonal skills

❖ Customer is physically present for part or full service –

need for interpersonal skills and requires careful planning
of layout

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 Table 3.4 Taxonomy of Service
Processes

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 Generic Approaches to Service Design
Production-line
• Limit Discretion of Personnel.-Mc Donald
• Division of Labor.
• Substitute Technology for People.-ATM
• Standardize the Service.

Customer can ba a Coproducer:

• Self Service.
• Smoothing Service Demand.
• Customer-Generated Content.

Customer Contact:
• Degree of Customer Contact.: cust time in system/total time for service
• Separation of High and Low Contact Operations.
• Sales Opportunity and Service Delivery Options.

Information Empowerment:
• Employee: data, RDBMS, .computer interaction ,
• Customer.

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 1. Production-Line Approach

➢Characteristics
✓ Routine and simple services, consistent Q, eg: McDonald
✓ High standardization, efficient operations:
✓ Low customer contact
➢Limited discretionary action of personnel – to get consistency
➢Division of Labor – total job is broken into groups of simple tasks
➢Substitution of technology for people – example ATM machines

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 2. Customer as Co-Producer

➢Characteristics
✓ Customer is present when the service is being performed

✓ We can use the customer as a producer – through proper design of the service

✓ Compensate the customer for their service or design

➢Self Service – E-tickets over the Internet provide convenience
➢Smoothing Service Demand – will allow better use of capacity, which is time-
perishable
✓ Customers must participate, adjusting the time of their demand to match
availability Appointments, reservations, price incentives
✓ Half price drink before 6PM
Customer generated content in Wikipedia

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 3. Customer-Contact Approach

High contact : excellent interpersonal skill

Low contact: Need for communication across line of visibility Advantage
of separation ,because of back office
Airline :

• Airport reservation clerks /flight attendants

• Baggage handler/ aircraft maintenance
Considerations that will impact high and low contact

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 3. Customer-Contact Approach

➢ Manufacturing
✓ maximizing productivity and capacity utilization;
✓ inventory to decouple production from customer demand

➢ Services
➢ Contact: % of customer time in system relative to total time
✓ When low contact –manufacturing in back-office high capacity utilization and
economies of scale

✓ When high-contact – the quality is determined by customers’ experience – both

the process and the outcome are important

✓ Separate high and low contact areas to bring efficiency. --some activities like maint /
laundry

✓ Degree of Customer Contact Influences Efficiency of Service

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 4. Information Empowerment

➢Employee empowerment – faster and accurate

❖ Record keeping
❖ customer names/addresses - relationship
❖ Supplier database - relationship
❖ Communication with other firms
❖ All operations can be integrated (ERP systems)
➢Customer empowerment
❖ Customer no longer depends upon service provider
❖ Customers can use Internet to educate themselves
❖ Bar code/RFID helps to reduce time

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 Figure 3.6 Sales Opportunity and
Service Design

Adapted from R. B. Chase and N. J. Aquilano, "A Matrix for Linking Marketing and Production Variables in Service System
Design," Production and Operations Management, 6th ed., Richard D. Irwin, Inc., Homewood, IL, 1992, p. 123.

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 100 Yen Sushi House Layout

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 Thanks

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 100 Yen Sushi House Questions
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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 Commuter Cleaning: New Venture
Proposal
• 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.

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 Service Blueprint

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 Breakeven Analysis

Fixed Expenses = (Demand)  (Price − Charge)

$13,404 = 20,000  (Price − 0.50)

13, 404 + 10, 000
Price =
20, 000
= $1.17

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 Zoom Video: Business Model
• Zoom Video Communications, Inc., was founded by
Eric Yuan in 2011 as a cloud-based software platform.
• Zoom supports teleconferencing, telecommunications,
remote learning, and social interactions in addition to
cloud storage.
• Basic service is free and allows a subscriber to host up
to 100+ participants, limits group meetings to 40
minutes, and allows unlimited time for one-on-one
meetings.
• More extensive programs, including larger groups,
unlimited times, cloud storage, and technical support
are available for fees.

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 Zoom Video: Financials

• The company grew steadily until the COVID-19

pandemic in 2020, after which its market value
erupted.
• Stock prices soared from $87.00 per share in
February 2020 to $588.84 per share in October 2020.

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 Zoom Video: Future?

• Whether or not Zoom can remain at this level is

uncertain.
• When the pandemic’s grip on business
operations loosens, will people return to offices
to work or will they continue to work from home?
• Will family members gather together physically,
or will they continue to gather for Zoom
meetings?

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 Zoom Video Questions
• How does Zoom Video Communications illustrate the
sources of service sector growth? Comment on
information technology, Internet as an enabler,
innovation, and changing demographics.
• What generic approaches(s) to service design does
Zoom Video Communications illustrate and what are the
competitive challenges and advantages?
• Visit https://finance.yahoo.com using the stock symbol
ZM to report on the extent of current Zoom Video
Communications service offerings and speculate on
their sources of revenue.

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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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 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 divergence and complexity of a service
process.
• Describe the sequence of stages and the enablers of the new service
development process.
• 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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 Figure 3.4 Blueprint of San Francisco
Giants Game (Template and First Stage)

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 Figure 3.5 Blueprint of San Francisco
Giants Game (Final Product)

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