Formalising new service development in small and medium-sized enterprises.

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Master Thesis

Formalising New Service Development in Small

and Medium-Sized Enterprises

Author: Schelto Korf Student number: 10296018

MSc Business Studies Amsterdam Business School University of Amsterdam First supervisor: Dr. G.T. Vinig

Second supervisor: Dr. M.L. Van der Veen

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Abstract

New service development is the development of service products that are new to the supplier (Johne and Storey, 1998). NSD is critical for the survival, growth and profitability of services and service companies. Even though small and medium-sized enterprises (SMEs) account for more than 90 percent of today’s companies, limited research so far focused on NSD practices at SMEs. This research focuses on three aspects of NSD. At first, this study aims to uncover three factors for success in NSD which differ between large companies (LCs) and SMEs. At second, this study identified four needs in NSD among service managers in a case study at a single SME. Three of these needs are described by Smith et al. (2007) as ‘general needs in NSD present among managers at service companies’. A fourth need in NSD is identified at Company X and might be a need typically present among managers at service SMEs. At third, this research argues a new NSD framework to assist SMEs managers to accomodate the four identified NSD needs. This novel framework is based on the Stage Gate Model, the

Prerequisites Model and further includes a risk and return analysis. There is an option to include a Stakeholder Analysis.

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Introduction

A service can be defined as the application of competences (knowledge and skills) by one entity for the benefit of another (Vargo and Lusch, 2004). In most developed countries, the majority of revenues in business is generated by services rather than products (Menor et al., 2002). New service development is the development of a service product that is new to the supplier (Johne and Storey, 1998) by adapting an existing service product or introducing a completely new one next to existing service products. NSD can provide benefits to the service company by reducing costs, increasing sales revenues, attracting new customers, creating loyalty amongst existing ones (Storey and Easingwood, 1999) and by staying ahead of rivals (Jana, 2007). NSD is therefore critical in maintaining the viability and profitability of existing services (Storey and Easingwood, 1999), as well as for the survival and growth of the service company (Smith et al., 2007).

NSD might provide benefits to the service company, but it is also challenging to its managers. As a result, many new services fail to achieve their initial objectives and / or result in

dissatisfied customers. The identification of critical success factors for NSD has received extensive attention in academic literature (for instance Martin and Horne,1995; Kelly and Storey, 2000; Kelly, 2000; Smith et al., 2007). Six key factors contributing to the success of NSD have been identified in literature. These are: 1) the level of synergy with existing services; 2) participation by the company’s management; 3) the availability of essential resources (such as IT, headcount, time, knowledge and skills); 4) the availibity of specific NSD processes; 5) customer information and participation; and 6) responsiveness to opportunities.

This research focuses on one key factor for success: the availability of one or more specific NSD processes. The application of one or more systematic and formal NSD processes increases the likelihood of success of the companies NSD activities (de Brentani, 1986 in Smith et al., 2007; Martin and Horne, 1995). Despite the availability of NSD frameworks, NSD activities in service companies are often characterised by trial and error (Shostack, 1984) rather than by a systematic and formal approach (Rathmell, 1974, in Martin and Horne, 1993; Martin and Horne, 1993; Kelly and Storey, 2000; Menor et al., 2002). This is especially the case at small enterprises, where NSD practices are generally described as ad hoc and

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Existing research on NSD focuses on two interrelated key issues. These key issues are: 1) the development of the service design: and 2) the process to develop this new service. Managers have to accommodate these two issues in their NSD practices if they want to end up with a commercially successful new service. Managers generally face three NSD needs to

accommodate to these two key issues (Smith et al., 2007): first the need for a process for the development of the new service, second the need for a service design and third the need to define all resources and activities required to develop an accurate service design and process (Smith et al., 2007). Several NSD frameworks are available to assist managers to overcome one or more of these needs (for example Stuart and Tax, 1996; Shostack, 1984; Edvardsson and Olsson, 1996; Kelly and Storey, 2000; Chan and Wu, 2002; Alam and Perry, 2002; Vargo et al., 2008). Smith et al. (2007) selected five NSD frameworks that address one or more needs in NSD and applied them in the context of a hospital development. The applicability of this selection of NSD frameworks in other industries or companies or organisations has not been studied.

1. Problem statement

The use of a formal NSD process increases the likelyhood of success for NSD in a service company. Even though small and medium-sized companies (SMEs) account for more than 90 percent of today’s companies (Huang et al., 2002), research on formalisation of NSD and the applicability of existing NSD frameworks has focused on large companies (LCs). Due to key differences between SMEs and LCs, the generalization of existing NSD frameworks to SMEs is not straightforward. SMEs are characterised by a limited access to resources, a high market responsiveness and a limited availability of market and customer information. To successfully apply existing NSD frameworks at SMEs, these frameworks have to be applicable and

beneficial within the specific context of SMEs. Whether SMEs and their managers benefit from a formalisation of their NSD practices, and whether this can be done by using existing NSD frameworks, is the topic of this resarch.

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2. Research question

This research focuses on three aspects of NSD. First, this study aims to identify the key differences between large companies (LCs) and SMEs by focusing on the key factors for NSD success. Second, this research aims to identify the NSD needs among service managers during a case study at a single company. This is done by focusing on three needs described by Smith et al. (2007) as ‘general needs in NSD present among managers at service enterprises’. A fourth need in NSD is identified at this company. This fourth need, the need to evaluate the risks and returns of NSD, might typically be present among managers at service SMEs. Third, this study argues a formalised NSD framework to assist SME managers to accomodate the four NSD needs. This novel framework, derived from a selection of existing NSD frameworks, is proposed to formalise NSD practices within SMEs. In this research, the following main research question will be answered:

Will the introduction of an NSD framework adapted to the needs of SMEs increase the likelyhood of success of NSD in SMEs?

The purpose of this research is to provide managers and strategic practitioners with guidelines for the implementation of new services to increase the NSD success rate. Before the main research question can be answered, the following six sub-questions will be addressed:

1) Which differences in NSD practices exist between small and large companies? 2) How does the use of a formalized NSD process benefit LCs?

3) To which extent are NSD processes in SMEs formalised? 4) To which extent do SMEs have the same NSD needs as LCs?

5) Does a formalized NSD process accommodate the NSD needs of SME managers? 6) Which adaptations to existing NSD frameworks are needed to develop a novel NSD framework that answers to the needs of NSD among SME managers?

To answer the main research question, this research is contains three steps. First, it explores the concept of NSD and the five selected NSD frameworks based on the available body of research. This section describes a selection of differences between SMEs and LCs relevant in the context of NSD. The next section contains a case study in

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one service SME (using document studies, semistructured face-to-face interviews and observations) to determine the needs of NSD in the context of an SME. The final section describes an adapted framework based on the five selected NSD frameworks and adapted to the identified needs of the selected SME.

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New Service Development

1. The concept of service

There is no commonly accepted definition of service in literature. Vargo and Lusch (2004) provide a definition that captures the concept of service as used in this study. They define a service as ´the application of competences (knowledge and skills) by one entity for the benefit of another´. Service companies generate service products: ´the predominantly intangible core attributes which the customers purchase´ (Johne and Storey, 1998). Service products generally have three main characteristics:

1) Intangibility: service products are generally intangible and are ´processes´ rather than ´things´.

2) Simultaneity: service products are produced and consumed simultaneously. As a consequence, services require direct interaction between the service provider and the customer.

3) Heterogeneousness: service products have variability, as they are produced and consumed simultaneously. The degree of variation depends on the degree of standardisation of the service.

2. New service development

New service development is the development of service products that are new to the supplier (Johne and Storey, 1998). Applying NSD can provide multiple benefits to the service

company. NSD can provide benefits to the service company by reducing costs, increasing sales revenues, attracting new customers, creating loyalty amongst existing ones (Storey and Easingwood, 1999) and by staying ahead of rivals (Jana, 2007). As NSD can maintain the viability of service companies and the profitability of its services, it is considered critical for long-term survival of service companies (Storey and Easingwood, 1999).

There are several reasons for companies to develop or adapt a new product or service. Booz et al. (1982, in Johne and Storey, 1998) suggest six motivations to invest in product

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2) To introduce a new service line in an existing market (a new service for the service supplier, but a known service for the market);

3) To extend existing service lines;

4) To introduce new-to-the-world services; 5) To develop a service through cost reduction; 6) To develop a service through repositioning.

These types of NSD are interrelated where one development produces multiple benefits. New service development, as described in this study, covers all these six different types of NSD.

3. Factors of success in NSD

Even though NSD is crucial for a service company´s long-term survival, it is considered challenging to service company managers, as there is a serious risk of failure. Many new services fail to achieve their initial objectives and / or result in dissatisfied customers (Smith et al., 2007). Several reasons for these failures have been mentioned. Kelly and Storey (2000) describe the reasons for failure through four main barriers for successful NSD: 1) lack of supporting information technology; 2) lack of resources such as management, headcount and time; 3) lack of knowledge, skills, capabilities and processes; 4) company culture and attitude towards risk and innovation. In another survey, managers from service enterprises confirm two of these reasons stating that ´lack of resources´ and ´lack of expertise within the service company´ are their main barriers to successfully implement new services (Kelly, 2000). Other important reasons for NSD failure are an ínefficient service development process´ and á complex and inefficient decision-making process´ (Smith et al., 2007). Martin and Horne (1995) conclude that á lack of customer input and orientation´ is another important reason for NSD failure. Cheng et al. (2012) confirmed this finding, stating that a greater customer

involvement in the launch stage or the design stage facilitates the success of service innovations.

According to Martin and Horne (1995), the likelihood of success of service innovations can be increased by focusing on four factors: 1) participation of senior management; 2)

participation of customers; 3) participation of employees who are in regular direct contact with customers; 4) the amount of customer information used at the three crucial stages of the development process (idea generation, business analysis and marketing planning). De

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Brentani (1991) states that the ultimate key factor for success is the fit between the service product and its market needs and wants. Another important factor mentioned by De Brentani (1991) is the level of synergy between a new service and the company´s existing services. New-to-the-world services generally have the lowest level of success compared to

developments such as adapting existing service lines or introducing existing services to new markets. Storey and Easingwood (1993) found that NSD is increasingly successful if both the involvement of the company’s staff and the level of synergy with other services are high. Furthermore, market information and responsiveness to arising opportunities have been identified as NSD success factors.

Based on these factors for failure and success, a few factors are key to NSD success: 1) the level of synergy with existing services; 2) participation by the company management; 3) the availability of specific resources (such as financial resources, IT, headcount, time, knowledge and skills); 4) the availability of specific NSD processes; 5) customer information and

participation; 6) responsiveness to opportunities. All these factors significantly contribute to the success of NSD.

4. Risks of NSD

The returns on the introduction of a new service are always uncertain. Decisions on NSD are therefore always connected with a certain risk of loss for the company.This loss can be financial, physical or reputational (Byers et al., 2011, p 138). On one hand, managers tend to reduce the risk of an action; on the other hand they want to achieve higher returns. Managing these risks requires anticipating and moderating threats (Slyworzky, 2007, in Byers et al., 2011). Managers can reduce risks by applying customer knowledge and creating a unique value proposition with a profitable business model (Byers et al., 2011, p 156). Moderate changes in the technology plus a moderate change in the business model can therefore increase the attractiveness of the return profile (Treasy, 2004). An analysis of the risk-return profile can be part of the NSD process. To do this, one can focus on two risks in NSD: production risks and market risks (Riebel, 1965 in Fließ and Kleinaltenkamp, 2004).

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Production risk

Production risk is defined as a situation where a service provider and a customer agree on the delivery of a service product, but service provider fails to produce the agreed service product (Fließ and Kleinaltenkamp, 2004). Production risk is mainly connected to customer-induced activities and arises when customer contributions (or other external factors) do not fully meet the provider’s requirements. The production risk raises with the increase of the number of contact points between customer and supplier; each contact point means the introduction of additional external factors into the service process (Fließ, 2001, in Fließ and Kleinaltenkamp, 2004).

Market risk

Market risk concerns the existence (or absence) of a need for the new service in the market (Fließ and Kleinaltenkamp, 2004). Some R&D investments are partly or completely irreversible, for instance investments in training and salaries of research personnel.

Investments are also irreversible when resources cannot be transferred to other projects within the company; then, the investment cannot be recovered if a project fails (Grabowski, 1968, in Czarnitzki and Toole, 2012; Dixit and Pindyck, 1994, in Czarnitzki and Toole, 2012).

In order to manage service processes efficiently, either standardization or automation of service procedures has been suggested, or a reduction of the number of customer contact points by delegating activities to the customer. However, these measures cause inflexibility of service processes, increase the market risk and raise the costs per process if the company does not manage to find enough customers for these unindividualized, and therefore substitutable, service offers (Fließ and Kleinaltenkamp, 2004).

As both production risk and market risk influence costs and productivity, efficiency

management obviously should consist of balancing production and market risk by balancing customer-induced and customer-independent activities (Fließ and Kleinaltenkamp, 2004).

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5. NSD needs

As mentioned, multiple factors have been identified that lead to successful innovation in service company. These factors can all be related to either 1) the service design and outcome or 2) the process of NSD. Smith et al. (2007) has converted these factors into three needs among service company´s managers working on NSD. First is the need for a process for the development of the new service. Second is the need to design the service. Third is the need to define all resources and activities that are required for an accurate design and process of the service. Formalisation of NSD processes is one method to address to the needs in NSD.

6. Formalisation of NSD

The use of a systematic and formal NSD process increases the likelihood of success of the newly introduced service (de Brentani, 1986 in Smith et al., 2007; Martin and Horne, 1995). Formalisation of the NSD process consists of identifying methods suitable to the NSD process and defining the order of these methods. Formalising the NSD process can help avoid

redundant work and prevent repeating past mistakes. It also enables the reuse of existing expertise (Bullinger et al., 2003). Formalising NSD practices is particularly beneficial to those companies that regularly develop new services. The benefits of formalisation are higher when a low level of synergy exists between the new service and the company´s existing services. Finally, formalisation of NSD processes that include a strong customer focus and participation of senior management, seem to better address service managers’ NSD needs (Smith et al., 2007), especially in companies that want to introduce innovative services.

The formalisation process often begins by describing the development process and standardising the individual steps of the process. The level of formalisation varies from a strictly predefined (rigid) process to a flexible one. Homogenous services generally require a rigid process, while for heterogeneous services a more flexible process is preferred. The added value of formalisation seems higher for truly innovative companies introducing new-to-the-market services. Companies with a more defensive strategy, for instance companies regularly copying competitor services, less often formalise their NSD processes (Kelly and Storey, 2000).

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NSD and company size

SMEs and LCs do not only differ in size, but also in many ways the companies are organised and managed. In this chapter a few key differences are described that are relevant in NSD practices.

1. Definition of an SME

SMEs are companies with fewer than 250 employees and an annual turnover of less than 50 million euro or an annual balance sheet total not exceeding 43 million euro (Commission Recommendation 2003/361/EC, 2003). Vice versa, LCs can thus be defined as companies with a higher number of employees, a higher annual turnover or balance sheet total.

2. Differences between SMEs and LCs relevant for NSD

Differences between SMEs and LCs cover many areas: product innovation (Ettlie and

Rubenstein, 1987), the availability of resources, market and customer information, marketing practices (Coviello et al., 2000), capital structure (López-Gracia and Sogorb-Mira, 2008), market uncertainty (Czarnitzki and Toole, 2012), market responsiveness, complexity of organisational structure (Carrier, 1994) and HRM practices (Golhar and Deshpande, 1997). Many of these differences relate to the possibilities SMEs have for innovation and NSD. Three of the identified differences (the availability of resources, the responsiveness to

opportunities and the availability of market and customer information) are considered success factors for NSD as well and are therefore considered the most relevant differences in the context of this study.

Availability of resources

Schollhammer and Kuriloff (1979, in Coviello et al., 2000) state that small companies generally have less resources available compared to large companies. This availability of resources plays an important role in NSD and can be explained by looking at one of the most important resources of the NSD process: access to financial resources. SMEs often have

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limited access to financial resources for investments requiring long development cycles and long payback periods. Compared to LCs, small companies tend to have less access to formal financial sources such as granting of credits from commercial banks. As a result, they tend to have a smaller share of their investment and working capital financed through formal

financial sources. This limited access restricts SMEs more than larger companies (Beck, 2006) and because of it, SMEs are forced to perform their NSD activities with less access to external capital.

Responsiveness to opportunities

SMEs are characterised as independent and they tend to have a distinctive management style, ownership and scale and scope of operations (Schollhammer and Kuriloff, 1979 in Coviello et al., 2000). This distinctive character of SMEs is often connected with the involvement and influence of their entrepreneurs (Carrier, 1994). The organisational structures in SMEs are less rigid, complex and sophisticated compared to those in LCs. Furthermore, SMEs generally have a rather short-term scope of strategic and marketing planning (Carrier, 1994 in Coviello et al., 2000; Coviello et al., 2000). This entrepreneurial and flexible management style makes SMEs more responsive to arising market opportunities.

A first reason why SMEs are more responsive, originate from its employees’ less specific specializations. As a result, cross-functional teams are more easily formed at SMEs than at LCs and team members therefore have a clearer idea of their contributions to the service development process at SMEs. If management has a clear vision on the activities of the company’s cross-functional teams, SMEs face a lower risk of disconnection within the team as a result of bureaucracy, delays and miscommunication.

A second reason is the lower flexibility in spreading the risks of failure at SMEs. SMEs are less flexible to spread these risks among multiple projects or over large sales volumes. With many interrelated and ongoing R&D projects, LCs have the option to shift resources across projects within the company in response to changes in market conditions. Shifting resources is not or hardly possible within SMEs. R&D investments by SMEs are therefore more

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options and SMEs react faster to market uncertainty than LCs do (Czarnitzki and Toole, 2012). As a result, SMEs face a higher production and market risk than LCs.

Availability of market and customer information

SMEs marketing activities are mainly driven by intuition rather than theory Coviello et al. (2000). This can be explained by looking at the marketing informaton the company uses and the way they organise their marketing practices. At first, SMEs use information from

individual customers, while LCs use general market information. At second, SMEs mainly use informal marketing processes rather than formal approaches. Formal marketing activities (as described in the marketing mix) are often applied at LCs, but they are hardly practiced by SMEs. The informal character of SMEs marketing activities matches with the difference in market and customer information they use. SMEs have limited resources to perform their marketing activities. As an example, SMEs have fewer ways to measure market performance than larger companies. Both SMEs and LCs use financial indicators (like market size), however SMEs make fewer use of other types of measures (like competitive comparisons) as LCs do. As SMEs have more customer contacts than LCs have, direct customer information is often used by SMEs instead general market data. Because of this source of data, SMEs also choose for informal marketing activities, while LCs mainly rely on general marketing data.

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A specific NSD framework for SMEs

Many different NSD frameworks are developed to provide service companies and their managers a deeper understanding of NSD processes (for example, Stuart and Tax, 1996; Shostack, 1984; Edvardsson and Olsson, 1996; Kelly and Storey, 2000; Chan and Wu, 2002; Alam and Perry, 2002; and Vargo et al., 2008). These frameworks generally focus on specific parts of the NSD process, without covering all NSD practices that are taking place at service companies. As a results, none of the existing NSD frameworks addresses to all three

previously mentioned NSD needs. According to Smith et al. (2007), a panoramic, holistic NSD approach provides a successful service design and NSD process. This panoramic

approach should be outlined with a high level of precision for practical execution. Smith et al. selected five NSD frameworks and applied a panoramic approach by combining these NSD frameworks. Every NSD framework addresses at least one of the three NSD needs and

together they address all three. This research analyses whether these five selected frameworks can also be used to address the NSD needs of SMEs.

1. Defining the applicability of NSD frameworks at SMEs

Though the application of the described NSD frameworks can be beneficial to a service company, there are several known weak points. Bullinger et al. (2003) note that NSD frameworks often do not reflect the needs of practical users, explaining this by identifying four separate weak points applicable to most of the available models:

1. Insufficient focus on detail: the available NSD models tend to focus on higher-level process steps and do not describe any concrete activities or directly applicable methods.

2. Lack of configurability: the models generally define a rigid development process and do not allow for ways to adapt to specific service types.

3. Lack of practical documentation: all known reference models are the result of theoretical observations rather than practical applications.

4. Lack of ICT support: none of the models is applicable to, or supported by modern information and communication technologies.

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Even though Bullinger et al. don´t relate these weaknesses of the available NSD frameworks to the company size, they seem very relevant in the context of SMEs. It is clear that SMEs will easier adopt and benefit from frameworks that are easily applicable and flexible and easy to implement and use without the use of extensive technical and personnel resources. These weak points therefore provide useful topics to analyse the applicability of the NSD

frameworks at SMEs.

Within this study, the analysis of the applicability at SMEs of each NSD framework contains five steps. First, a description of the framework’s core concept is given. The NSD needs to which the framework addresses are also defined. Second, three main differences between SMEs and LCs relevant in the context of NSD are outlined. As a reminder, these three differences are: 1) availability of customer information; 2) availability of resources; and 3) responsiveness to opportunities. Finally, the applicability at SMEs of the NSD framework is defined by looking at the three given criteria.

The three relevant differences between SMEs and LCs are mentioned after the description of the core concept of the NSD framework. The first difference is the data necessary to use the model. This is done by focusing on the input data needed to use the NSD framework

successfully. SMEs have limited data available for use as input material for the NSD framework. Furthermore, SMEs mostly use direct customer information rather than market information. Therefore, the use of the NSD frameworks should be valuable using the kind of information that SMEs do possess.

Next, the accessibility of the resources necessary to successfully implement and apply the NSD framework is described. SMEs have limited technical and personel resources, so the use of an NSD framework is only beneficial for SME managers if the framework can be applied without extensive use of resources. So only a limited amount of technical resources (such as computer hardware or software licences) should be needed and the implementation and application of the NSD framework should not be labour intensive.

After this, the impact of the use of the NSD framework on the company’s responsiveness is analysed. To avoid a negative impact on the company’s competitiveness, the impact of the use of the NSD framework on the company’s responsiveness to arising opportunities needs to be limited. This responsiveness is generally considered as a strategic benefit of SMEs over LCs.

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Finally, the three identified differences are combined to define the applicability of each given NSD framework for SMEs. At the end of the description of the five NSD frameworks, there is a schematic overview of the evaluation of their applicability at SMEs .

2. The Prerequisites Model

Core concept

Edvardsson and Olsson (1996) describe the concept of NSD from three interrelated

perspectives: (1) the service concept; (2) the service system; and (3) the service process. Key concept is the idea that the development of the right prerequisites in these three perspectives is necessary for the development of a successful service. The service concept refers to a

customer’s needs and how the service offered addresses them. This is done by describing the utilities and benefits of the service. The service system refers to the incorporation of all available resources to realise the service concept and the service process to ´the chain or chains of parallel and sequential activities which must function if the service is to be produced´ (Edvardsson and Olsson, 1996). The development of the service system accomodates the need to define all resources and activities for development of the novel service, while the development of the service process addresses the need for a service design.

Necessary input data

The aim of developing a service concept is to decide whether to proceed with the service idea. To define the service concept, a managers can starts with a description of the primary and secondary needs of the customer. Next, the core and supporting service activities needed to fulfil these needs are defined (Edvardsson and Olsson, 1996). Finally, the key factors influencing the service quality and the added value to the customer are determined. Information about competitor services and their ways to address customer needs can be included. Service company managers can decide in how much detail they want to define the service concept through keeping these descriptions panoramic or very precise. Extensive market information is not necessary, as the model can be applied using customer data of only a limited amount of customers.

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The service system consists of an overview of resources needed to develop the service concept (Edvardsson and Olsson, 1996). To analyse the resources necessary for the service process, these categories can be distinguished: 1) service company staff: 2) customers: 3) physical and technical environment; 4) organisation structure (Edvardsson and Guystavsson, 1990, in Edvardsson and Olsson, 1996). This can also be a very general or a very detailed overview and requires a fair / good understanding of the internal resources of the service company.

The service process describes ´the chain or chains of parallel and sequential activities which must function if the service is to be produced´ (Edvardsson and Olsson, 1996). The idea is to develop standardised and precisely described steps in the service process to increase control over the overall service process. In a detailed description, all activities in the process

performed by customers, the service provider itself or by partner organisations, are included. To better understand the experience of the customer while consuming the service, a ´line of visibility´ can be developed. This line of visibility wille indicate which parts of the system are visible to customers. A definition of the service process requires very detailed information about the all individual activities within the service process. Often, a high level of detail is unnecessary; for instance, in companies where the service process is flexible. The

Prerequisites Model also contains options of a rather panoramic approach to defining the service process.

Resources needed

An analysis according to the Prerequisites model does not require any specific technical resources, as the information can be collected on a computer of the service company’s manager. Managers working with the Prerequisites model need to have a basic level of understanding of business economics and operations to interpret input and output data.

Whether the required input data are available to the service company manager depends on the level of detail of information one can generate. The addition of more data will provide a more detailled description of the service concept, service process and service system but also requires more effort from the service company’s manager.

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Impact on a service company’s responsiveness

The Prerequisites model is quite flexible in use. A panoramic description of the service concept, service system and service process might provide the service managers already a decent understanding of the internal and external possibilities and challenges to develop a new service. A more detailled analysis might be required in some cases, for instance for the

development of highly innovative services. Furthermore, this might be preferred by managers when certain NSD activities face high risks or unpredictable commercial results. In those case a lower responsiveness might be accepted when this results in a better understanding of the three service prerequisites.

Applicability in SMEs

An analysis of the service concept should result in a clear description of the customer needs addressed by the service and the way the new service adds value for the customer. An analysis of the competition can be included by companing the service concept to existing service service products from competitors.

The analysis of the service system provides a detailed overview of the resources necessary to bring the new service to an operational level. Within the service system, staff is often

perceived as the crucial factor for customer-perceived quality. Additionally, wage costs are often high in service companies, another reason why staff is an important aspect of NSD. An analysis of staff prerequisites gives an overview of the requirements concerning knowledge, experience, motivation and training of the staff with respect to the new service.

The analysis of the service process provides a blueprint of the service, including the resources necessary to operate the new service and an analysis of the level of control of the service process. A line of visibility showing the points of interaction can be used to understand how customers experience the new service.

Intuition often drives decisions about new services at SMEs. The use of the Prerequisites Model can assist service managers to get a better understanding of the requirements to develop a new service successfully. This model is flexible, offering service managers the

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possibility to decide for a panoramic or detailed description of the service concept, service system and service process. A more extensive analysis will take more time and resources, but will provide more detailed information. The limited resources needed to implement and use the model, together with its flexibility, make this model applicable in the context of SMEs.

3. Quality function deployment

Core concept

Quality function deployment (QFD) is a framework developed in the 1970s to improve the quality of product design and the design process using a customer needs analysis and it has since been applied in different areas of product and service development. QFD approaches for specific industries such as governmental organisations, banking, accounting, health care and research and education institutes have been developed (Chan and Wu, 2002), None of these approaches focuses specifically on the needs of SMEs. QFD provides data which assist managers to design an optimal service and to define all resources and activities for service implementation and execution. Several QFD (software) tools exist with added features for planning, design, decision-making, engineering, management, timing, teamwork and costing.

QFD is applied constructing a house of quality (HOQ) in several steps creating a visual display (the actual HOQ) of a substantial amount of information. This display shows the relationships between the different service elements that are defined in the HOQ. This model shows managers the relationships between the service elements and provides insights in the optimal settings for the new service. QFD also provides data on a service’s competitiveness. To develop the HOQ, service managers collect data and define the relationships between different types of data. The data collection for QFD requires in-depth research and in some cases benchmarking.

Necessary input data

An HOQ is developed by following certain steps in a prescribed order. Smith et al. (2007) described a six-step plan to construct an HOQ in a service setting. First, the service concept should be defined in terms of key customer requirements and attributes. Next, the most important moments of contact with the customer, the service encounters, are defined. The

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third step consists of primary research among consumers and other stakeholders to assess the importance of service elements. This is done by looking at perceived performance levels and performance of competitors. Fourth, the resources required to deliver on the desired service outcome (according to customer needs) attributes are assessed. These resources are called the system prerequisites and include staff numbers and their skill levels, automated systems, etc. The fifth step is to analyse the competitive position and resource requirements. Finally, control measures focusing on the customer satisfaction of the service are established.

Necessary resources

QFD requires a significant amount of data and a specific software tool to build the HOQ, managers need a good understanding of the methodology and a lot of time to make QFD beneficial for their company. The entire process of QFD implementation and application can therefore be time-consuming and costly (Smith et al., 2007). Several software tools and consultancy agents are available to support QFD implementation and use, but their usage adds to the costs for the service company. Overall, a large amount of technical and human

resources (including training) are necessary to successfully implement QFD in any organisation.

Impact on a service company’s responsiveness

The development of an HOQ is an extensive process requiring a lot of data. The quality of the model largely depends on the quality of the input data, so the reliability of the model may be impacted by relationships between the service elements being vague (Smith et al., 2007). The use of QFD can therefore be expected to lead to a lower responsiveness of the company to arising opportunities.

Applicability in SMEs

Introducing QFD at an SME can lead to several drawbacks. A first major drawback is the high amount of technical and human resources needed to get QFD successfully implemented and used in any organisation. Firstly, as the model is not easy to use and implement, managers

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will most likely need training and / or support to use it. Secondly, a specialized software application must be purchased or licensed to develop an HOQ. Thirdly, the collection of data for QFD can be time-consuming (Smith et al., 2007) and requires a lot of resources.

A second major drawback is the negative impact the use of QFD will have on the company´s responsiveness to arising opportunities. As QFD is resource and time consuming, Service company´s will react much slower to arising market opportunities if they have to build a HOQ before they will decide to develop a new service.

A third major drawback is the concern about the quality and reliability of the generated data. Smith et al. (2007) mentioned that the process might include subjectivity and a variable interpretation of data. ´In real life´, relationships between data are not always as clear as the HOQ suggests, so a QFD model can contain incorrect assumptions about customer behaviour. Finally, changes in competitor behaviour might require adaptations in underlying assumptions used in the model.

QFD requires a large amount of technical and human resources for a successful

implementation and application. For LCs this might be beneficial in the long term; however, applying this model is not expected to lead to overall benefits for SMEs. Furthermore, the outcome data are not always reliable and the model’s use is expected to impact the

responsiveness of the service company negatively. For these two reasons, in most cases, QFD is not expected to be beneficial for SMEs.

4. Service blueprinting

Core concept

Service blueprinting is a method for designing, visualising and managing the service process. The initial goal of service blueprinting was to design a service in such a way that the service and its stages are quantifiable and objective (Shostack, 1984). According to Zeitham and Bitner (2000; in Fließ and Kleinaltenkamp, 2004), a service blueprint is a map that accurately portrays the service system. By applying a systematic analysis and emphasis on control, service blueprinting helps managers to uncover and anticipate potential problems in the

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service design. This introduces a level of standardisation of service delivery. The visualization helps all staff involved in the service delivery process to understand the process.

Many articles have been published on the design of a successful service blueprint (for instance Shostack, 1984; Fließ and Kleinaltenkamp, 2004; Smith et al., 2007). Several case studies focus on the effectiveness of service blueprinting in different industries; for instance, airline services (Gustafsson et al., 1999, in Kostopoulos et al., 2012), ICT services

(Hyȍtylȍinen and Mȍller, 2007, in Kostopoulos et al., 2012) and non-profit organizations (Polonsky and Garma, 2006, in Kostopoulos et al., 2012). To show the visualization of a service blueprint, an example is added in Appendix 1.

A successful service blueprint process results in a standardized procedure flexible enough to satisfy individual customer needs (Kostopoulos et al., 2012). It is often difficult to capture the service process in micro processes, especially if the service is consumed during the service process itself (e.g. in the case of health care or hospitality services). In those cases, only a service blueprint capturing the general process can be created, without a high level of detail. Service blueprinting addresses the need for service design and also to the need to define all resources and activities necessary to execute the service process.

Necessary input data

According to Smith et al. (2007), the process of service blueprinting is described in four steps: 1) map all processes involved in the service, 2) identify where problems may occur 3)

establish time frames for the execution of services including the allowed deviation and 4) define the potential negative impact on customer satisfaction and retention of these deviations. Fließ and Kleinaltenkamp (2004) have added additional stages and lines to the model to further express the internal organisational structure of the service company.

The development of a systematic and detailled service blueprint requires a high amount of effort from the service company’s manager, especially in cases where regular contact between the service provider and customer over longer period occurs.

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Necessary resources

A few resources are needed for Service Blueprinting. Developing a systematic and detailed service blueprint requires a lot of time from the service manager, especially in case of regular contact between the service provider and the customer over a longer period of time. Service managers also need to have a good understanding of the service process to develop a detailed service blueprint. Specialized tools and techniques to develop a service blueprint exist (Smith et al., 2007), however they require additional resources (time, skills and money) to use such an application. Without using specialized tools and trainings, a more panoramic overview of the service blueprint can be generated. In that case this method becomes similar to the Prerequisites Model’s description of the service process.

Impact on a service company’s responsiveness

Even though NSD processes are often informal, introducing new services, most companies will follow a certain number of steps in a specific order. In these cases, the Stage Gate Model can be implemented as a further optimization of existing NSD process rather than to introduce a completely novel framework. Such a new NSD process might affect the company’s

responsiveness if the service manager requests a high level of detail. The introduction of other frameworks (which can be integrated at ´Stages´) in the NSD process might strongly impact the company’s responsiveness.

Applicability in SMEs

If limited resources are available, for example at SMEs, developing a highly detailed blueprint costs the service company manager a significant amount of resources. Including service blueprinting in the NSD process, will likely results in a reduction of the SMEs responsivenes to arising opportunities. Whether it is still beneficial to do this, has to be decided case-by-case. It is however expected that developing a service blueprint with a low level of detail might be the only beneficial option for SMEs managers. In those cases, generating a service process / blueprint according to the guidelines from the Prerequisites Model is a similar alternative. One can therefore conclude, that Service Blueprinting is not beneficial to SMEs that already apply the Prerequisites Model.

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5. Stage Gate model

Core concept

The Stage Gate Model (Cooper, 1996; Bowers, 1987 and 1989, Scheuing and Johnson, 1989, in Alam and Perry, 2002) is a framework guiding service company managers through all stages of the NSD process. These stages are separated by ‘gates’ focusing on the financial and strategic impact of each accomplished stage (Cooper, 1996). In the early gates, a wide range of business considerations is taken into account. Continuing through the gates reduces the number of options so that only a limited number of service ‘prototypes’ can be developed, tested and launched during the final gates (Smith et al., 2007). The Stage Gate Model takes one through the NSD process in a controlled manner, so that costs and efforts can be reduced and ease and speed of the NSD process is increased (Cooper, 1996). The Stage Gate Model only addresses to the need for an NSD process.

Literature contains different variants of the Stage Gate Model, which managers can adapt to their own interests and context. Alam and Perry (2002) describe a ten-step model, which, according to them, most companies go through during the NSD process. Larger companies follow a more bureaucratic, sequential NSD process, while smaller companies conduct some of the steps simultaneously and in a more informal and non-systematic manner. Appendix 2 contains a visualization of both the sequential and the parallel Stage Gate Model.

Some steps in the Stage Gate Model are analysed further. According to service managers, idea generation and idea screening are the most important stages (Alam and Perry, 2002). Many managers at service companies generate service ideas fairly easily, even without formal idea generation procedures (Easingwood, 1986). The screening stage is an early stage of the NSD process and uses quantitative and qualitative screening criteria in a single or a multi-stage procedure. Often, the amount of grounded data and ´hard facts´ is limited in this stage. Even though managers consider the estimated profit, revenues and market share the most important criteria in the selection process for projects (Scheuing and Johnson, 1989 in Kelly and Storey, 2000; Martin and Horne, 1993), most decisions on the NSD process continuation are based on the subjective opinions of the management team (Kelly and Storey, 2000).

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Necessary input data

Using the Stage Gate Model, service managers must develop a timeframe, a financial budget and an overview of all activities and responsibilities at all stages of the process. The exact definition of these items can be defined by the service manager. This framework is flexible to the extent that for each stage, the service manager can choose a high or low level of detail depending on the manager’s needs, interests and the complexity of the service under development.

Necessary resources

Using the Stage Gate Model does not require specific resources, software packages or training. However, a service manager must have a basic understanding of the service processes at their company. Creating an extensive definition of each stage requires a precise definition of each activity and a large amount of input data and effort from the company manager. Whether these resources are available and whether using the model with such a level of detail is beneficial needs to be decided on a case-by-case basis.

Impact on a service company’s responsiveness

Even though NSD processes are often informal, it is expected that most companies follow a certain number of steps in a certain order for the introduction of new services. In those

companies, the implementation of the Stage Gate Model can be used as a further optimization of the existing NSD process rather than introducing a completely novel framework. The novel NSD process might impacts the company’s responsiveness if the level of detail that the service manager requests is high. Hence that the introduction of other frameworks during the NSD processes might (which can be integrated as ´Stages´of the Gates of the Stage Gate Model) might have a strong impact the company’s responsiveness if they are complext and require a large amount of resources.

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Applicability in SMEs

The sequential Stage Gate Model assumes that each step is finished before the start of the next step, which in reality is often not the case. The parallel version of the Stage Gate Model therefore fits better in SMEs. As SMEs have limited resources and tend to have an informal NSD approach, a more flexible and less detailed approach of the Stage Gate Model better fits to SMEs. Because the model is very panoramic and uses details sparsely, service company managers can easily include their own methods to adjust the individual steps. This can also be a drawback of the model, as there are no guidelines on how to execute the Stage Gate Model’s individual steps. Nevertheless, the Stage Gate Model is a very useful ´backbone´ of the NSD process and can be easily integrated into SMEs. Service company managers can include other NSD frameworks and available management applications according to their intention to implement a formalised NSD process.

6. Stakeholder Model

Core concept

A stakeholder in an organization is ´any group or individual who can affect or is affected by the achievement of the organization’s objectives´ (Freeman, 1984 in Clulow, 2005). Those connections of a company that have a direct or indirect impact on the newly implemented service are considered its stakeholders, for example suppliers, customers, partners and social communities. Used in an NSD context, the Stakeholder Model analyses the various

stakeholder groups according to defined criteria, enabling managers to identify a

stakeholder’s importance in a particular decision (Freeman, 1984 in Smith et al., 2007). Data about relevant stakeholders is especially useful in combination with other NSD frameworks. A stakeholder analysis can be easily integrated in the definition of the service concept (as part of the Prerequisites Model) or during idea screening and business analysis (integrated in The Stage Gate Model).

Necessary input data

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stakeholders within each sector. With this overview of potential stakeholders, the individual stakeholders are then identified focusing on their interests and resources and looking at their scope (local, national, international), the benefits for each stakeholder (why they might be interested in the service or the NSD process), their perception of downside risks and their potential contributions to make the service successful (Bunn et al., 2002). The third step is analysing and classifying the stakeholders according to stakeholders attributes. This gives an idea of stakeholder positions and is a useful starting point for a stakeholder relationship strategy.

Bunn et al. analyse each stakeholder according to three criteria: power, legitimacy and importance (Mitchell et al., 1997, in Bunn et al., 2002). Power relates to the influence a stakeholder can have on the service or the service provider; legitimacy concerns the social and legal acceptance of the service; importance (Bunn et al. call it urgency instead of importance) of the stakeholder for the newly developed service. This classification method identifies seven different types of stakeholders based on the presence of one or more criteria (see Appendix 3). Each type of stakeholder has a different set of characteristics that is used to define

management strategies (Bunn et al., 2002). As a fourth step, the dynamic relationships among stakeholders in terms of power, legitimacy and importance of the stakeholder are examined. Finally, generic stakeholder management strategies are extrapolated. Six strategies have been identified (Savage et al., 1991, Harrison and St John 1996 in Bunn et al., 2002). The decision for a certain strategy depends on the degree of connection a stakeholder has with the novel service. Certain stakeholders require an active approach (for instance, key customers, key suppliers and business partners), while other stakeholders can be monitored without actively involving them. The service company has to consider how to use its available resources and what benefits this brings to the service company.

Necessary resources

Information about each individual stakeholder is necessary for a good stakeholder analysis. This can take up a serious amount of time and effort from the service manager, depending on the amount of already available data. The manager can perform a limited or an extensive stakeholder analysis, depending on their interests and the relevance of the analysis. In a more extensive approach, the service manager looks at market reviews, business strategies and

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political intentions of stakeholders. Sometimes this information is directly available on an organisation’s website and in annual reports, but in other cases the manager may have to discuss specific topics with a stakeholder’s representative. No specific technical resources are required to perform a Stakeholder analysis.

Impact on a service company’s responsiveness

A panoramic stakeholder analysis can be performed within a relatively short timeframe and will therefore usually not delay the service company’s responsiveness significantly. A more extensive approach requires many more resources and may significantly lower the service company’s responsiveness.

Applicability in SMEs

A stakeholder analysis provides an overview of all relevant stakeholders for a service company in relation to a specific service, and includes a seven-category characterisation of the stakeholders. Whether this is relevant for the service manager depends on the context of the novel service; for some services and in some industries a stakeholder analysis is more important than in other industries. In the context of SMEs, only a panoramic approach seems applicable, as the resources for a more extensive approach are limited. An extensive

stakeholder evaluation is also expected to delay the speed of implementation of the novel service. Generallly, the benefit of an extensive stakeholder evaluation is expected to be limited and the required resources can be put to better use for other purposes.

7. The applicability of the NSD framework at SMEs

The applicability of the individual NSD frameworks is described using three criteria: 1) the accessibility of the necessary input data for SMEs; 2) the accessibility of the resources needed to use the framework; and 3) the impact of the use of the NSD framework on the service company’s responsiveness. Table 1 shows the analysis of the individual NSD frameworks.

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Table 1. The applicability of the five NSD frameworks at SMEs.

Overal, this analysis shows that Quality Function Deployment and Service Blueprinting are not easily applicable at SMEs. This is for three reasons. First, because they require a large amount of resources needed for execution. Second, they have a negative impact on the service company’s responsiveness. Finally, both models are quite complex to use for service

managers. The other three NSD frameworks are better applicable within SMEs.

Two criteria have been selected to develop a comprehensive NSD framework for SMEs based on the five selected NSD frameworks. The first criterion is that the overall NSD framework should address all three NSD needs. The second criterion is that the NSD framework should be applicable to SMEs. The applicability of the five selected NSD frameworks at SMEs is further analysed during a case study at Company X. Based on analysis of both literature and the case study, a comprehensive NSD framework is proposed for SMEs.This is part of the Results section of this research.

NSD framework

need addressed:

accessabi-lity of necessary data accessabi-lity of necessary resources impact on company’s responsive-ness applicability of NSD framework for SMEs Prerequisites Model - service process: - - service design: ++ - definition of resources: ++ ++ ++ +/- + Quality Function Deployment - service process: +/- - service design: ++ - definition of resources: ++ +/- - - - Service Blueprinting - service process: - - service design: ++ - definition of resources: + +/- +/- - - Stage Gate Model - service process: ++ - service design: - - definition of resources: - + ++ + + Stakeholder Model - service process: +/- - service design: - - definition of resources: - +/- +/- +/- +/-

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Methodology

1. Research method

A qualitative research approach explores topics in more depth and detail than quantitative research. In this case, a qualitative research approach was used to gain a thorough insight into NSD practices at one service SME (further refered to as Company X). Mortelmans (2007, p. 97) describes four types of qualitative research designs: explorative, illustrative, descriptive and emancipatory research. Due to the character of this case study, emancipatory research is the most appropriate type. Recent literature discusses NSD as a research topic; however, its application to this case is new. The data collection focuses on an analysis of the NSD

methodology at one company, and as such, this part of the research is explorative. The goal is a description of the current needs of managers at Company X and the NSD processes they use.

The second step is an analysis of the general applicability of the comprehensive NSD

framework at SMEs in general, to explore whether this new NSD framework provides added value to SME’s managers. An emancipatory research design is preferred as the goal is to create a usable framework for SME managers. A descriptive design is less appropriate as the goal is not limited to describing and explaining a specific and/or unique case (Mortelmans, 2007, p. 99).

2. Data collection

To collect data, a case study is done at one service company, Company X, which employs approximately 40 employees an has annual turnover of approximately five million euro. This company operates mainly in a business-to-business (B2B) setting and offers multiple contract laboratory services based on molecular biology technologies. Its customers are situated mostly in Europe with a large concentration in the Netherlands. The company is fully owned by its two founders and has a management board consisting of the two owners and the two department managers.

Data for this research is collected through document study, face-to-face interviews and observation. The data collection process also involves setting the boundaries for this research

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2.1. Document study

The available documentation is selected based on availability and relevance to the research topic. The amount of available documentation is limited, as not a lot of documentation is developed during the NSD process. The following documentation is available:

1) Data sheets (developed in Microsoft Excel) with calculations for some recently developed services. These sheets contain the following data: costs of laboratory reagents, depreciation of several laboratory instruments, calculation of labour costs, break-even-point calculations and cost-price calculations. For some services, multiple scenarios are elaborated with varying customer purchases and cost prices. This generates differences in the revenue and profit amounts for each scenario.

2) A business plan for service development developed by one interviewee using Microsoft Word files following a PRINCE2® method (PRojects IN Controlled Environments). PRINCE2® is a general method for project management navigating the user through all steps of a project.

3) Development plans (in Microsoft Excel) containing strategic and marketing activities for the upcoming year (2013). These plans describe the added value of several services. Some descriptions include service development activities including definitions of responsibilities and timelines of execution.

2.2 Semi-structured interviews

Eight individual face-to-face structured interviews were conducted. The choice for semi-structured interviews relies on the emancipatory approach of this study. The conceptual NSD frameworks are tested during the interview analysis. The study attempts to deepen the

understanding of NSD at Company X and of its managers’ needs and challenges. As this approach leaves room to add variables to the presented frameworks, the interview design has to allow for a certain freedom.

The interviews between the interviewer and the interviewee took place in a conference room at Company X. All of the interviewees have been employed by Company X for at least two

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years, during which period they were directly involved in NSD processes in Company X. The interviewees hold the following positions:

- One Commercial Director / Board Member and 50-percent owner of the company; - Two Department Managers / Board Members who report to the Commercial Director; - Four Product Specialists; each Product Specialist is responsible for multiple services.

They report to one Department Manager and manage the laboratory performing the execution of existing services;

- One Key Account Manager (responsible for sales and marketing activities) who reports to one of the Department Managers.

All interviews were recorded and the transcipts are documented. The interviewees were ensured that the recordings would be treated confidentially, as the data will be anonymized and only used for internal analysis.

The interview started with an informal introduction to NSD and the background of the study. The interviews were structured among five topics. First, each interviewee was asked about his experiences with and opinion of current NSD practices at Company X. The interview then went on to address the three NSD needs as identified by Smith et al. (2007). The second topic was the definition of the service concept the benefits of the new service for it’s customers and the service company. The definition of the service concept is one of the three prerequisites of the Prerequisites Model and can be part of the idea-screening stage of the Stage Gate Model. The third interview topic was the NSD process in order to understand the NSD process at Company X and the level of formalisation of this process. The fourth topic was introduced to analyse the definition of all resources and activities required for an accurate design and process of the service. Finally, a fourth need discovered during the interviews (the need to define the risks and returns of a service development) was also discussed with each of the interviewees. The list of interview questions is added in Appendix 4.

2.3. Observation

The third way of data collection is observation (including participating observation). Observation took place during visits of the author at Company X, which started eightteen months before and ended a few months after the interviews. During this period, multiple NSD activities took place. Some of these observations were discussed in the interviews.

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2.4. Data analysis

The data analysis was done by reading, encoding and interpreting all information. This resulted in the development of concepts and the construction of new theories about NSD activities in SMEs in general and at Company X in particular. These novel concepts and theories are described in the following chapters. As three sources of data were used, the data from different sources were used for data triangulation.

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Results

The interviews took place in July 2013. Each interview lasted 40 to 60 minutes. Afterwards, all interviews were written out and analysed in a detailed report. The interviews were structured along six topics: 1) NSD at Company X; 2) defining the service concept; 3) the NSD process; 4) the service design; and 5) the definition of resources and activities needed to develop and execute a new service. The questionnaire used in the interviews is added in Appendix 4. A sixth topic, the risk and return analysis came up during every interview. The data derived from the case study is used to analyse the applicability of the five selected NSD frameworks at Company X. Based on this analysis, a specific NSD framework for SMEs is proposed at the end of this chapter.

1. NSD at Company X

Several questions were asked to explore the interviewees´ NSD experiences at Company X. These questions aim to clarify: 1) the interviewees’ experiences in NSD; 2) his opinion about performances in recent NSD practices; 2) which criteria are used to decide to continue or quit the NSD activities; 3) his opinion on the formalisation of NSD activities at Company X; and 4) relevance of the topic of NSD for his job and for the company.

Firstly, each interviewee was asked about his experiences with the development of new services. In response, they gave examples of recently developed services and their NSD processes, the organisation of responsibilities during the NSD process and the interviewee’s role in this proces.

All interviewees confirmed that they participated in several stages of the NSD process. The Commercial Manager states that he is mainly involved in idea generation and development of new service concepts. Within the company, he is the main decision-maker on the continuation of NSD processes . The two Department Managers regularly bring in new service ideas and, in some cases, do the idea screening and business analysis, consisting of collecting market or customer data and calculating break-even points for new services. The five Product

Specialists are involved in the implementation of a new service. For one service, the Key Account Manager made a service design by defining adaptations to an existing service to

Formalising new service development in small and medium-sized enterprises.

Master Thesis