New service development process for Philips research

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Master thesis

New Service Development Process for Philips

Research

Master in Business Studies Philips Research

Entrepreneurship and Innovation Philips Group Innovation

University of Amsterdam High Tech Campus 34, Eindhoven, NL Supervisor: Dr. W. van der Aa Company Supervisor: Bart Ziemerink

Author: Tomer Arwas Student number: 10108327 Delivery date: 21st_{of July 2014}

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Acknowledgements

Writing this master thesis has been a stimulating and exciting journey, where I have not only gained knowledge on the topic of service innovation, yet also developed a skill set that will be useful in my future. I would like to thank all the people involved in this experience.

Firstly, I would like to express my sheer gratitude towards my thesis supervisor Dr. Wietze van der Aa for guiding me through this journey and the master track as a whole. Your feedback has helped me stay on course and overcome the hurdles on the way. Secondly I would like to thank my colleagues at Philips, and in particular my supervisor Bart Ziemerink for providing me with all necessary information and contacts to conduct this research. Furthermore, I would like to express my appreciation for you offering your time and input whenever needed.

I would like to thank all respondents in this research for their willingness to share information with me and devote their time for the purpose of my thesis. This project would have not been possible without your participation.

Last but not least, I would like to emphasize gratefulness to my family and friends for supporting me throughout this period. In particular I would like to thank Anastasia Schmalz for your support, input, and fruitful discussions about service innovation. I would like to thank the Philips interns for making this experience an unforgettable one. On this note, I hereby present my final thesis, the outcome of five months of research into the actual topic of servitization within Philips.

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Abstract

Purpose: The purpose of this study is to investigate the trend of servitization in manufacturing companies with regards to innovation processes. The aim is to develop a new service development (NSD) process and a set of service innovation tools that may be recommended to Philips Research.

Methodology: The empirical phase of this study was conducted in several steps: Philips internal interviews, four service companies interviews, ten product-service companies interviews, and service innovation tools questionnaire completed by six respondents. Findings: An NSD process framework has been conceptualized according to literature and has been tested with various service and product-service companies. It was found that service companies tend to have a less mature process than product-service companies. The combined findings from both groups of respondents validate the conceptual process model presented in this thesis. Respondents in this study acknowledged the four phases that are described in the conceptual framework: direction, ideation, development, and diffusion. A service innovation toolbox has been conceived. A set of dominant tools, a set of tools that are used moderately, and a set of tools that are not used or recognized by any of the respondents have been found.

Practical implications: Insights on the differences of products and services and their direct implications on the NSD process have been outlined and may be used for implementing a service process. The NSD process has been validated by service and product-service companies, the latter provides insights on how service innovation may be done in product-centric companies. A service innovation toolbox has been developed to accommodate the process.

Keywords: servitization, service innovation, NSD, innovation process, service innovation tools.

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1. Introduction

Economies worldwide have changed tremendously over the previous decades as value creation has shifted from physical products economy to knowledge and intangible products economy (Cáceres and Guzmán, 2014). For instance the U.S. economy had goods production accounting for three-fifths of economic output in the 1950’s, and by 2010 the economy shifted to services accounting for two-thirds of output (Tankersley, 2013). This trend is described by the term servitization, which was first coined in the late 80’s by Vandermerwe and Rada (1988). The growing trend of servitization and the realization of the benefits entailed in moving towards services have lead product-centric companies to include services in their core offerings (Lindberg and Nordin, 2008). Service may yield numerous benefits to product-oriented companies, amongst others are: improve customer relationships, satisfy customer needs better, capture more revenue, stabilize revenue, and differentiate from competition (Bettencourt and Brown, 2013). Nonetheless, the inclusion of services in the core offerings may raise several challenges due to the characteristics of services: heterogeneity, intangibility, simultaneity (co-production), interactivity, and perishability (Alam, 2006; Avlonitis et al., 2001; Cáceres and Guzmán, 2014). One of the key obstacles for product-centric companies is innovating on services, since manufacturing follows a more rational R&D-based innovation process (Cáceres and Guzmán, 2014). Moreover, physical products innovation is often considered to lead to more radical innovations, and to be more efficient and economical (Sundbo, 2011)

Innovation stands at the heart of an organization’s ability to sustain itself. In today’s competitive environment, product-oriented companies need to find ways to innovate value-adding services complementary to their existing product portfolio (Bettencourt and Brown, 2013). Developing new services provide important benefits such as increasing the profitability of current offerings, attracting new customers, maintaining and raising existing customers’ loyalty, and opening markets of opportunities (Menor et al., 2002). The ability of firms to differentiate through innovative services is of great

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formal and structured new product development (NPD) process, new service development (NSD) is considered an ad-hoc procedure. The requisite for an NSD process and adoption of applicable methods and techniques for manufacturing companies with regards to the extension of the service business has been emphasized by various scholars (Oliva and Kallenberg, 2003; Gebauer et al., 2005; Lightfoot and Gebauer, 2011; Smith et al., 2007; Cáceres and Guzmán, 2014). Consequently, this thesis will focus on the NSD process under the trend of servitization, the NSD process within manufacturing companies.

With respect to the structure of the thesis, firstly the Purpose and scope of the research project will be introduced, presenting the main research question and complementary sub-questions. Next, the section Literature Review will present an overview of the theoretical contributions on two major aspects: servitization and new service development. Literature on servitization will explain the servitization trend in general and provide an understanding of the differences between products and services, which will serve as a foundation to analyze critical requirements for a process supporting new service development. Following, a comprehensive model for NSD will be drawn, combining insights from a number of core articles. This framework will constitute the basis for the empirical data collection through qualitative interviews. Further, the section Research Methodology will describe the research sample and instruments and procedures used for data collection and analysis. The chapter Results will summarize research findings. Hereby, a three-fold approach will be taken. Firstly, background information of Philips following a servitization strategy, Philips’ process for NPD, and current efforts of NSD will be introduced. Secondly, data from both service and product-service companies will be presented and compared. Thirdly, data about tools will be presented. After which, a through analysis of the results will be presented, divided in accordance to the results sections. Lastly, final conclusions, managerial implications, limitations of research, and future research recommendations will conclude the paper.

2. Purpose and scope

2.1. Aim of the thesis

Product-oriented companies are likely to have an R&D process that they use for developing new product offerings, yet they may be unable to apply these to include

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service components as well. Due to the complex nature of services, a more specific model might be considered by organizations seeking to add services to their core offerings and innovation initiatives. Through the research of this thesis, the objective is to define a clear process and a set of tools applicable to product-oriented companies to include services in their value propositions. Thereby the result would be an NSD process model aimed to assist product-oriented companies in the implementation of a servitization strategy. The eventual NSD process and toolbox would be recommended to Philips in their transition efforts towards services.

2.2. Research Question

In the literature, the focus is directed towards the fact that servitization is inevitable for product-oriented companies, and that it can lead to a number of benefits, yet may also raise some challenges along the way. However, little attention is paid to the process of developing new services within product-oriented companies. Although extensive literature on NPD and NSD exits, an investigation into how product-centric companies might innovate on services appears to be rather immature to the researcher’s best knowledge. Therefore the research question of this thesis is as follows:

How can product-oriented companies include new service development within their innovation efforts?

The following sub-questions are used to guide the research in more detail:

What are the underlying differences of services from products, and what are their implications on the innovation process?

What are the macro-level phases of the process? What are the stages in the process?

What tools may be used in the different phases of the process?

3. Literature review

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provide a background to the question this thesis addresses. Secondly, the various aspects of an NSD process are examined and various innovation models are described. Afterwards, the macro-level phases of NSD are obtained. Finally, the remainder of this chapter discusses these phases in details and the stages that correspond to each phase.

3.1. Servitization

In order to understand the term servitization it is essential to first define a product and a service and realize the differences between the two. A product is characterized as a material object (Baines et al., 2009), hence a tangible artifact. Services on the other hand are defined as an activity that a provider causes, usually with consideration, a receiver to change an exciting state to a new state that the receiver desires, where both a content and a channel are means to realize the service (Sakao and Shimomura, 2007). Additionally, services posses the four major characteristics: intangible, heterogeneous, simultaneously produced and consumed, and perishable (De Jong and Vermeulen, 2003), which will be discussed in detail later in this chapter. Product-centric companies are becoming more aware that they must integrate services into their core product offerings. This trend is described by the term servitization, which was first coined by Vandermerwe and Rada (1988), and defined as “market packages or ‘bundles’ of customer-focused combinations of goods, services, support, self-service and knowledge in order to add value to core product offerings”. This definition has stayed consistent throughout the literature following it.

There are several motives for companies to move towards a servitization approach. The first motive is a financial one. Services can generate significantly higher revenues from a product install base and tend to have greater margins than products alone (Anderson et al., 1997). Secondly, since services are dependent on an organization’s personnel, they may yield a long lasting competitive advantage that is difficult to imitate. (Heskett et al., 1997). Thirdly, the service component may be used as a marketing tool as it can influence purchasing decision (Gebauer and Fleisch, 2007). This is even more visible in the B2B market where customers are demanding more services (Oliva and Kallenberg, 2003).

Although service innovations tend to be small incremental improvements of processes and procedures, and may be considered easier to imitate by competitors (Atuahene‐ Gima, 1996), combining them with products may lead to a long lasting competitive

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advantage. Thus companies may also use service offerings to create new markets and gain competitive advantage through adding services to core of their offerings.

3.2. What is different about services?

To understand the need of an NSD process for a product-oriented organization, it is essential to firstly understand the underlying differences of services to products and their implications on the innovation process. A key difference between the development of products and services is the outcome of the process. The output of NPD is a physical good and its manufacturing specification, whereas the output of NSD is a fully developed service delivery system (Tatikonda and Zeitman, 2001). The system contains amongst others; service tasks, personnel requirements, specifications of supplementary equipment and materials, and the supporting facilities (id). Consequently, the output of the process is a series of steps and specifications list of all the elements supporting the accomplishment of the service, hence with NSD, the final product is the service delivery system (id).

It is commonly agreed that there are four unique characteristics that differentiate services from products and influence the innovation efforts of services: intangibility, simultaneity, heterogeneity, and perishability (Alam, 2006; Avlonitis et al., 2001; De Brentani, 1995; Johne and Storey, 1998; Tatikonda and Zeitman, 2001). This section will elaborate on each of the four characteristics and their influence on the NSD process. Additionally, Table 1 provides a summary of the characteristics of services in comparison to products.

Intangibility

Services are predominantly intangible; consequently they are a set of processes rather than physical artifacts (Johne and Storey, 1998), therefore they cannot be seen, felt, tasted, or touched in the same way as tangible objects (Tatikonda and Zeitman, 2001). This characteristic has several implications on the development process of services. Firstly, it is arduous to gain a common understanding of the service concept, which

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able conceptualize and evaluate it (Avlonitis et al., 2001). “Tangibilizing” the service pertains illustrating the concept through prototypes, flowcharts, drawing, and pictures in order to communicate with various stakeholders, and especially with customers (Tatikonda and Zeitman, 2001). Thirdly, due to the fact that services are easier to adjust than products, operational employees may change the offerings without clear management agreement and without conducting proper organizational learning (Johne and Storey, 1998). These changes may influence the service quality, and will in turn make the service more heterogeneous. Fourth, due to their intangible nature competitors may easily copy services, as they cannot be patented (id). Lastly, since customers are initially unable to see the potential benefits of the new service, the initial adoption of the service highly depends on the firm’s image and reputation (Tatikonda and Zeitman, 2001). This implies that it is important to maintain a high level of service quality, through developing common understandings of the new service in order to maintain a positive firm image amongst potential customers.

Simultaneity

Simultaneity refers to the co-production and inseparability of services, ergo they are produced and consumed at the same time in the presence of both the service provider and the customer, opposing to tangible products that are produced first and then consumed (Tatikonda and Zeitman, 2001). This is considered to be the most important factor (Menor et al., 2002), and may influence the service development process in several ways. Firstly, the customer’s perspective of quality may not only be influenced by the service delivery system, yet also by the service provider (Avlonitis et al., 2001) and the service outcome (Grönroos, 1998). Secondly, since customers and customer-contact personnel are involved in the service delivery process, both these stakeholders need to be intimately involved in the development process (Tatikonda and Zeitman, 2001). Likewise, Shostack (1984) argues that back-office employees need to be involved as well due to the fact that production and delivery integral facets of services. Since customers are involved in the production and delivery of the service, they are a crucial component of the development process (Alam, 2006). Thirdly, the requirement of operational personnel’s involvement within the process may limit the number of ideas and level of innovation as these personnel devote their time to maintain continuing operations, hence the feasibility of new services is highly dependent on operations capabilities (Tatikonda and Zeitman, 2001). Fourth, in consideration of reaching

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economies of scale, the process should distinct between front-room and back-room operations, design, and implications on volume and variety of the service. Lastly, customer potential input during the service production needs to be considered during the development process (id).

Heterogeneity

Heterogeneity raises the fact that services are co-produced and therefore, service performance quality and service experience, are seldom identical across customers and providers. Customers posses the risk of acquiring an outcome or experience that they cannot fully asses prior to the consumption (Johne and Storey, 1998). Consequently, there are several implications on the NSD process derived from this characteristic. Firstly, in order to reduce the service variety across providers and over time, it is essential to set an emphasis on training of operational employees (Avlonitis et al., 2001). It is essential to ensure that employees understand the service and deliver it in ways that are in line with the firm’s vision of the service. Poor execution of the service is a threat to the commercialization of it, thus involving employees and customers during the NSD process can reduce this risk (Tatikonda and Zeitman, 2001). Secondly, the level of variation is dependent on the degree of standardization of the service and the amount of technology applied to the user interface (Johne and Storey, 1998). Lastly, in planning the service delivery system during the development phase, it is fundamental to accommodate some planned variations in input and processing (Tatikonda and Zeitman, 2001).

Perishability

Services cannot be saved, inventoried, resold, or returned. Subsequently, unused service capacity is lost and if demand exceeds the service capacity, demand may be lost (Tatikonda and Zeitman, 2001). This entails that capacity planning is crucial for the service supplier, and must be considered during the NSD process (Johne and Storey, 1998). Methods to shift demand such as pricing, and systems to prioritize and allocate

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should be developed during the NSD process, rather than after introduction of the service (id).

The following table summarizes the characteristics that differentiate service from products.

Products Services

Tangible – physical artifacts Intangible – cannot be seen, felt, tasted, _{or touched} Produced first, then consumed Simultaneity / Co-produced – both customers and services providers are

present at the moment of production Homogeneous – high level of

standardization Heterogeneous – high level of variation Perdurable – can be inventoried, resold,

and returned Perishable – exists only during the service production Table 1: Product versus service characteristics

3.3. NSD process

A service can be defined as a series of interactions between participants, processes, and physical elements (Johnston, 1999). Hence a new service entails any changes to the service concept, which compel different competencies from existing operations (Menor et al., 2002). Confronted with increased pressure to reduce innovation cycle time and develop meaningful new solutions, firms are urged to adapt a process that organizes their innovation efforts (Cooper, 2001). It is essential to identify various methods and activities that are useful to develop new services, and place them in a certain order with a dedicated process (Bullinger, 2003). Dividing the development process into predefined stages guarantees that the process is transparent (id).

In the absence of a NSD process, firms often struggle, as new services are not clearly defined, hence there are no impeccable descriptions of the service contents, relevant procedures, and required resources (Bullinger et al., 2003). “Successful new services rarely emerge by mere happenstance. Rather, they tend to be the outgrowth of an appropriately designed structure and a carefully orchestrated process.” (Scheuing and Johnson, 1989). Companies that develop new services on a regular basis are bound to seek a process or a scheme in order to avoid redundant work, repetition of past mistakes, and enable existing know-how to be used optimally (Bullinger, 2003). The NSD process objectives are to minimize time-to-market, maximize fit between service

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characteristics and customers’ desires, and reduce development costs (Menor et al., 2002).

Cooper (2001) proposes the Stage-Gate idea-to-launch process, which acts as a blueprint for managing NPD effectively and efficiently. It has been used widely by many organizations and if implemented and used correctly, it is a proven method of developing successful new products (Cooper, 2008). Although the Stage-Gate model was originally developed within a tangible products environment, it has been applied extensively to new service development (Smith et al., 2007). Nevertheless, the model does not describe the organizational levels that various activities and stages occur (id). The model consists of a series of stages where information is obtained and analyzed, and every stage ends with a gate where a decision to go ahead or kill the project is made. The stages contain activities aiming to collect information and reduce risk and uncertainties, which indicates that the cost of every proceeding stage is higher than its preceding stage. Ad-hoc teams from different department within the organization perform these activities, and no department owns any particular stage. At the end of each stage the gate consists of deliverables, criteria, and outputs. The deliverables include the information the team brings to the gate, and are decided at the output of the previous gate. The criteria are a mandatory checklist and should be adjusted per project. The output of a gate is a decision: go, kill, hold, or recycle, with an approved action plan and a list of deliverables for the next stage (Cooper, 2001).

There is a strong need for tight control of the process in order to reduce innovation costs (Cooper, 2001). Many companies let too many ideas through, or let the wrong ideas go through too far, which ends up in an innovation failure. The Stage-Gate approach is meant to make the process of generating an idea and bringing it to the market a faster one. Nevertheless, this is not an easy task, and managers are not always successful at implementing this method. One of the major problems managers face when taking the Stage-Gate approach is the gate. The project team, project leaders, and the gatekeepers do not always understand the concept of the gate. This leads to over-deliverables at the

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It is not meant to be a rigid process; rather instead, it is a map of getting from point A to point B, from an idea to the launching of a successful new offering. Stages may overlap; hence it is not a liner process. It is not a project control mechanism or a project management system, since it is a macro process rather than a micro process. Furthermore, gates need to have sharp teeth, that is, projects may fail at any stage of the process, and decision makers have to ensure that only projects that meet all the criteria and the firm is willing to invest resources in will pass (Cooper, 2008). In addition to the abovementioned guidelines, the process has been recently revolutionized to fit the faster paced, more competitive and global world. Cooper (2014) presents the Triple A System, which builds on the original Stage-Gate model and turns it into a more agile, vibrant, dynamic, flexible, faster, and leaner process model. The Triple A stands for: adaptive and flexible, agile, and accelerated. Adaptive and flexible refers to the spiral and iterative development incorporated within the process in order to present something to customers as early as possible through a series of build-test-revise iterations. Agile denotes the incorporation of elements of the rapid development system used within the software industry. This includes sprints and scrums, and short time-boxed increments where deliverables can be demonstrated to stakeholders rather than documentation. Accelerated refers to focus on accelerating the process, where activities in stages may overlap. There is more focus on the fuzzy-front end, aiming to make it less fuzzy in order to scope projects, and reduce unknown, risks, and uncertainties as early as possible. The process may be described according to the following two dimensions; whether it is formal or informal and whether it is a waterfall or a spiral process.

Formal versus Informal processes

The NSD process involves the standardizing of certain development steps. The degree of standardization of these steps determines the level of formalization of the process. The degree of formalization ranges from a predefined, strict development process on the one end and to a flexible, situation specific process on the other end (Bullinger, 2003). Nevertheless, formalization does not mean constraining the whole process to rigid rules, but defining particular guidelines. Bullinger (2003) describes the formalization of the development process according to reference models that are able to support the project planning, steering, and monitoring. The reference models consist of detailed documentation of project flows and structures, and the people responsible for projects.

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Waterfall versus Spiral processes

NSD process may take the form of either a waterfall model or a spiral model. A waterfall model a linear progression of individual phases, where the transition from one phase to the next is conditioned to 100% completion of the previous phase. Hence each phase builds upon the output of the previous phase, which may be considered a disadvantage as it minimizes flexibility due to the rigid nature of it (Bullinger, 2003). Furthermore, opportunities for shortening the innovation cycle cannot be exploited because of the sequential nature of the stages and cannot be done in parallel (id). On the contrary side, spiral models an iterative process where each of stages in the linear model, are repeated numerous times. Ergo, meaningful intermediate outcomes may be obtained quickly and at an early point of the development period, which allows for errors in downstream cycles to be corrected (id).

3.4. Macro levels of NSD

It is essential to define a set of macro level phases in the process of developing new products or services. This allows for a broader overview of the process and distinguishing in which phase of development a service innovation is at. Furthermore, it is also important for the purpose of explanation (Scheuing and Johnson, 1989), and consequently will aid in the implementation of the NSD process across the organization. Various scholars describe several macro level phases for the innovation process. The processes can be seen as either linear and waterfall fashion or in a spiral and cyclical approach.

A number of scholars describe the innovation process as a linear one. The innovation value chain by Hansen and Birkinshaw (2007) describes innovation as a sequential three-phase process, namely idea generation, conversion, and diffusion. Idea generation may occur inside a business unit, across unites, or outside the firm. Idea conversion involves applying the right commercial mix to the right ideas. Idea diffusion is spreading of the new idea both internally and externally (id). By dividing the innovation process

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for the service innovation effort according to the organization’s corporate and marketing objectives, and selects the ideas to be pursued. The design stage comprises of the largest number of steps. It involves refining service ideas, developing delivery systems and marketing programs. At the testing stage, the service concept and delivery system are virtually ready for launch, and are tested on a small scale. The final introduction stage involves initiating a full-scale launch of the service and reviewing it. Tatikonda and Zeitman (2001) describe the NSD process as consisting of three macro-stages: the front-end, the back-end, and the product introduction. The front-end stage is conducted by marketing, and is where the service concepts that should be developed are chosen. The back-end stage is carried out by operations personnel, and involves the implementation of the service concepts. The last stage, product introduction is done by both marketing and operations, and comprises of market rollout and the final review of the service concept. Similarly, Silverstein et al. (2013) describe innovation as a two-faceted process: front-end innovation and back-end exploration, which they consider as two separate processes. The front-end process is playful, open-minded, and nonlinear search for new solutions, where it is encouraged to generate the right ideas and fail fast and cheap. On the other hand, the back-end exploration is a stage-gated and linear process aiming to commercialize new solutions that have already been proven viable in the front-end process.

Johnson et al. (2000) describe the process as nonlinear and iterative, hence a cyclical process. The process is divided into four stages: design, analysis, development, and full launch. The design and analysis stages are the planning phase of the process, and consider decisions of market viability, internal resources, and capabilities. The development and full launch stages are referred to as the execution phase, where the service delivery system is designed and cross-functional development efforts begin to take place. Comparably, Stickdorn and Schneider (2011) describe the innovation process as iterative with four main steps: exploration, creation, reflection and implementation. Exploration involves understanding the organization’s strategy, identifying customer problems, and generating new solutions. The creation step is where the ideas turn into concepts and are tested several times, it is important to explore as many possible mistakes at this stage. Reflection includes generating a vision of the service concept in the consumer mind. Finally, the implementation step involves the eventual market launch of the service.

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Liedtka and Ogilvie (2011) describe the innovation process as having four main stages: what is, what if, what wows, and what works. What is stage is the exploration phase, investigating the current reality in order to identify the real problems or opportunities to be addressed. Furthermore, it also involves assessing the potential value or profitability of steering in any one direction. What if stage is used to envision a new future, and involves generating ideas and formulating hypothesis based on the analysis of the current situation done in the previous stage. What wows stage includes screening and selection of possible options, and the eventual concept creation and initial rapid testing of the selected ideas in the marketplace. Lastly, what works stage involves bring the product to the market and a full-scale launch.

Based on the various NSD and innovation processes described in the literature, four prevalent phases can be defined: direction, ideation, development, and diffusion. These four stages adapt the waterfall approach, where the completion of the previous phase is necessary in order to move to the next phase. The direction and ideation phases are often intertwined and are frequently included in one phase by various scholars, however it is important to separate these into two separate phases to make a clear distinction between the activities that are done in each and to emphasize the sequential nature of them. It is fundamental to firstly understand the current situation and set the course before commencing on envisioning the future (Liedtka and Ogilvie, 2011). Development was found to be a phase in all models in the literature, and diffusion is the final market rollout, which is the end of the cycle.

In order to define the particular stages within the process, a systematic literature review has been carried out with regards to the NSD stages mentioned by various scholars. The stages of each process found in the literature have been laid out according to the abovementioned phases, and an overlap of stages has been sought. The most endemic stages have been selected to study further and use for the NSD process presented in this thesis. An overview of the literature survey and the stages of each can be seen in Appendix 1. The next section will describe these phases and the particular stages

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discover consumer problems (Liedtka and Ogilvie, 2011). Setting the direction at the beginning of the process allows for effective and efficient service innovation efforts (Scheuing and Johnson, 1989). As with new product development, the key to successful outcomes for the process lies in the up-front predevelopment activities (Cooper, 2001). “Driven by a sense of urgency and a perceived need for the "quick fix," many service firms jump right into idea generation. Doing this is akin to lifting anchor without first determining the desired destination. The course of the ship then becomes the result of whim and happenstance.” (Scheuing and Johnson, 1989, pg. 28). Consequently, completing this phase prior to idea generation is critical for the overall success of the outcome of the process. The following sections will elaborate on the three stages within this phase: new service strategy formulation, opportunity identification, and need analysis.

New service strategy formulation

The outset of the process begins with the formulating the new service strategy, which in turn determines the contents of the following stages. It is a prerequisite that will yield effective idea generation and concept development (Cooper, 2001). The service strategy is defined in line with the organization’s marketing objectives, which are essentially a consequence of the corporate strategy and mission (Scheuing and Johnson, 1989). In defining the new service strategy, several activities are carried out at this stage. A situation analysis is done through interaction with service staff and desk research (Shekar, 2007). The motive for service improvements or new services is established and issues with existing services are defined in colligation with front-line service employees. The precise research objectives and constraints are agreed upon, and an initial research plan is crafted (id).

The outcome of the stage should be the service strategy accompanied by the objectives and scope of the study. It is essential for service innovators to have a clear understanding of what business they are in, as it yields the prime focus for the development process (Scheuing and Johnson, 1989). Ergo, the strategy “defines the arenas of strategic focus and should specify what is in bounds and what is out of bounds for opportunity and idea identification” (Cooper, 2001).

This stage ends with a decision gate where either a go or no go decision is made. The decision is made based on the strategic fit with the corporate strategy and on whether a

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synergy exists with the organizations current vision (Shekar, 2007). Moreover, the new service direction needs to fit with the customers’ known image of the company, since services that have a strong fit are more likely to become successful (Tatikonda and Zeithaml, 2001). After the research scope is set, the search for opportunities, customer problems and unmet customer needs can begin.

Opportunity identification

The aim of the second stage is to define particular opportunities within the domain of the new service strategy. This stage involves secondary research into literature and a competitive analysis (Shekar, 2007). Opportunities are being sought in accordance with the organization’s available resources (id). Furthermore, potential for increasing current services usage is being assessed. This stage ends with a gate of whether to pursue a particular opportunity or examine other opportunities (id). At the end of this stage, a particular opportunity is selected, which narrows down the research quest.

Need analysis

This stage aims at exploring and evaluating consumer needs and problems. Internal and external data is amassed in order to identify specific problems and needs of the current offerings (Shekar, 2007). This comprises of a thorough examination of user behavior, needs, attitudes, and service usage, which may be done through focus groups with users and service staff (id). The service elements and their importance are reviewed with users and front-line service employees. It is important to understand which attributes customers do not like about current offerings and identify any trade-offs they would rather not have to make, “the clues to the new future lie in dissatisfaction with the present” (Liedtka and Ogilvie, 2011). National and international experts are consulted, assisting in the execution of a trend analysis, intended to identify the target market segment for the new service according to user demographics, perceptions, and interest in the use of services (Shekar, 2007). At the end of this stage, the scope and area focus of the service is clearly defined, and ideas can be generated according to the narrowed

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phase is often referred to as the fuzzy front-end, since the process within this phase is inexplicit and involves ad-hoc decisions (Montoya‐Weiss and O'Driscoll, 2000). The stages within the fuzzy front-end include idea generation, idea screening, and concept development. These stages are considered to be critical as they set the foundation that the rest NSD project is built on (Alam, 2006). Consequently gaining a better understanding of this phase, and proactively managing it can increase the chances of developing successful new offerings (Dahl and Moreau, 2002). The fuzzy front-end is considered the most information intensive stage, with the highest number of different types of information from both internal and external sources (Zahay et al., 2004). A major source of external information in this phase is the customer, and has been suggested to be crucial for the idea generation and screening stages (Alam, 2002). Furthermore, Alam (2006) recommends that collaborating customers should be selected carefully, since the customer interaction success is dependent on the strategic fit between the customer and the firm. However, Magnusson et al. (2003) found that although customer’s ideas were innovative and had higher perceived user value, they were on average less likely to be converted into commercial services. Therefore, user interaction has to be managed properly in order to make positive contributions at this phase (id).

The following section will describe the stages involved in generating ideas through to creating a final service concept and business case. At the end of this phase an idea should be thoroughly explored and be ready to start development.

Idea generation

Idea generation is the first stage towards creating a new and meaningful customer solution. Of the fuzzy front-end stages, idea generation is considered to be the most critical one, since it essentially governs the rest of the stages in the process (Alam, 2006). Nevertheless, many companies do not focus much of their efforts on this stage as the idea generation is considered an uncertain process where ideas are conceived accidently or based on guesstimates (id). Cooper (2001) argues that it is important to adopt various techniques in order to produce innovative ideas. It is indispensable to establish an idea-generating system consisting of a set of specific actions that can lead to better idea generation and capture those in an effective manner.

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The idea generation can be both bottom-up and top-down. Bottom-up refers to the unexpected ideas where any employee within the organization may pledge possibilities for new solutions, while on the other hand, top-down is a directed effort from higher up management to solve a particular problem or act upon a market opportunity. It is important to keep both routes active continuously, as great ideas can come from both ways (Cooper, 2001). Furthermore, a focal point for idea generation has to be established. This means that one person is in charge of stimulating, generating, and receiving new ideas. This includes moving the idea to the idea screening stage, where a decision will be made on whether to develop the idea further (id). Moreover, an idea bank has to be established, since for some ideas the timing may be wrong or there are not enough resources available at a particular point in time (id).

Generation of ideas includes the participation of both service users and front-line service employees, and can be done with the use of focus groups (Shekar, 2007). Conducting Voice-of-Customer research is essential to produce customer relevant and valuable new propositions (Cooper, 2001). As with NPD, the customer is the user of the product, ergo they are able to orient towards the solutions that best meet their needs. Since the customer is part of the service delivery system, and thus can postulate ideas about their role in the service delivery process (Tatikonda and Zeithaml, 2001). Furthermore, in an experiment about user interaction conducted by Magnusson et al. (2003), they found that users generate more original ideas than the firm’s employees, and thus are “a fresh injection into the creative vein of the company” (id, pp 121). Moreover, it was also found that it is important to moderate the user involvement as it can influence the outcome. Too much involvement of users may lead to them taking on the role of professional service developer rather than user representatives, while on the other hand, too little involvement can lead users to propose ideas that are not plausible for the firm due to lack of awareness of the organization’s capabilities (id).

Suppliers of products and services, agents, and competitors can prove to be a valuable source of input at this stage as well (Scheuing and Johnson, 1989). Likewise, front-line

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Idea screening

In this stage, the number of ideas should be reduced based on their fit with the service strategy formulated in earlier stages. This initial idea screening is done in a rather crude fashion in a fairly judgmental manner, aiming to separate the meritorious ideas from the less auspicious ones (Scheuing and Johnson, 1989). Checklist screening matrices and scoring methods can be applied to cut the number of ideas (Shekar, 2007). Furthermore, front-line employees can be asked on whether they understand the proposition, whether they feel that it satisfies unmet needs, and whether they are for the new service concept (Tatikonda and Zeithaml, 2001). This stage ends with a gate, where a number of ideas pass through to a further development of the concept and business case (Cooper, 2001). Hence the outcome of this stage is a number of ideas that intuitively have a high potential and are worthwhile researching further into.

Concept development

In this stage the ideas that have been selected are built into completely developed concepts through input of front-line employees and users of the service (Shekar, 2007). The concept should include a description of a particular customer experienced problem, a summary of the main benefits and attributes, the rationale for offering the new service and why potential users will be willing to purchase it (Scheuing and Johnson, 1989). The prototype of the new service is developed as a basis for testing and further refining of key features at an early stage of the innovation process (Bullinger, 2003). It is fundamental to reach an agreement of what the concept is at this stage. This may be done through the use of drawings and flowcharts describing the rudiments of the service concept (Tatikonda and Zeithaml, 2001).

Concept testing

At this stage the initial market test of the new proposition is carried out. This stage should be a speedy and low-cost assessment of the concept and its market prospects. The project is formally assigned resources, yet these are limited and aim only at gaining more insights about the proposed concept in order to pass through the gate into the next stage (Cooper, 2001). Consequently a number of people may be assigned to execute a low budget concept test.

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Due to the intangibility characteristic of services, this initial market research stage is considered to be fairly challenging. While for products, concept testing involves presentencing dummy advertisements of the new concepts to prospect customers and evaluating their reaction to it. Concept testing for services tends to be less reliable due to the difficulty in presenting the idea in a clear and understandable manner to the customer (Tatikonda and Zeithaml, 2001). Although concept testing for services may be an arduous task, it is definitely obligatory for development process.

At this point it is also essential to highlight and understand the strategic and competitive reasoning for the concept. A desultory financial analysis should be done at this stage. This acts as a “sanity check” to ensure that there is a profitable scenario for the new business opportunity at some point in the future (Cooper, 2001).

New services are more likely to succeed if they meet existing and unmet customer needs (Tax and Stuart, 1997). Consequently, the concept testing stage aims at assessing whether potential customers of the new service offering understand the proposed idea, react positively towards it, and feel that it satisfies unmet needs (Scheuing and Johnson, 1989). Additionally, initial marketing research encourages rapid learning and iterative concept improvements. It assesses points of value, variability in points of quality, and aids in exploring various approaches for the service delivery (Tatikonda and Zeithaml, 2001). Moreover, front-line service staff is also involved in the evaluation of the new concept, as they are part of the service delivery process (Shekar, 2007).

This stage ends with a gate that aims to eliminate ideas that prove to have little interest from potential clients. While criteria such as financial prospects and technical dependency are important for evaluating the concept, the testing stage is focused on criteria from the user perspective (Shekar, 2007). Furthermore, the activities of this stage should aid in improving service attributes and features to fully developed service concepts (Scheuing and Johnson, 1989).

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(service solution) and project definition, project justification, and project plan (Cooper, 2001). These are necessary deliverables for the project authorization gate.

Cooper (2001) describes several actions compulsory in formalizing the business case. Voice-of-the-customer research is done in order to develop the service concept features, benefits, value proposition, performance, and a complete description of the service. A thorough competitive and market analysis is conducted, looking at both direct and indirect competition, and determine market size, trends, and segment size. Furthermore, it is necessary to justify the proposition from a financial perspective. Financial analysis has to be done thoroughly at this stage and provide with reliable estimations of payback period and discounted cash flow analysis. Finally, a plan of action for the rest of the project has to be created.

Project authorization

Bedsides executing the project correctly, and taking all the necessary steps to develop a proper new service concept and business case, it is crucial to choose the right projects. This is the final stage of the ideation phase, which ends with the most important gate. The purpose of this gate is to assign scarce resource to the truly deserving projects (Cooper, 2001).

Cooper (2001) defines three approaches to project selection: benefit measurement techniques, economic models, and portfolio selection and management methods. Benefit measurement techniques are subjective assessments of the final proposition on whether it fits with corporate objectives, competitive advantages, and market attractiveness. Economic models focus on the financial aspect and treat the proposition like an investment decision. Portfolio methods consider all the projects that are in the NSD process at any point in time.

Based on these analyses, a final decision has to be made on whether to continue with the project or stop it. Once the proposition passes this gate, a substantial amount of resources is allocated to the project and the development program begins (Cooper, 2001).

3.7. Development

According to Tatikonda and Zeithaml (2001), the development phase draws the line between the front-end and back-end of the NSD process. The back-end starts the

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development of the service delivery system and the final implementation of the service. This phase is also referred to as service engineering, which is defined as “a technical discipline concerned with the systematic development and design of services using suitable models, methods, and tools.” (Bullinger et al., 2003). It builds on engineering know-how in product development to develop new services in a technical and methodological approach (id).

Tatikonda and Zeithaml (2001) categorize the back-end into four fundamental elements categories that must be developed: the overall service delivery process sequence, people, facilities, and supporting equipment and products to the delivery process. Similarly, Bullinger et al. (2003) describes three outcomes of the service development process that make up the service concept: resource models, process models, and product models. Product models map out what the service does, process models describes how to achieve this, and resource models describes the necessary human resources and capabilities as well as other supporting operating resources and facilities. Consequently, the stages within this phase will aim at defining and developing these elements categories and models. The first stage is to establish the service architecture (service design and specification stage), after which it becomes clear what has to be developed in personnel, supporting facilities, and facilitating goods.

Product architecture outlines the main elements of a product, and states how these elements interact with each other (Ulrich et al., 2011). Similarly, service architecture converts a service concept into a service delivery process, through translating the concept into a plan of how to achieve it (Tatikonda and Zeithaml, 2001). More specifically, the service architecture lists the elements that need to be developed in each of the aforementioned elements categories, it identifies the level of newness of these elements with respect to existing capabilities, and specify which resources are necessary to develop these elements. Accordingly, every new service will require different prioritizing of the elements categories. The service architecture is considered crucial to successful new service development (id).

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Chakrabarti, 1999). This perspective can be used in the NSD development phase. The service newness determines the degree of change from current operational capabilities, which thus identifies the capabilities that need to be developed. The degree of change may range from none at all to a completely new service delivery system (Tatikonda and Zeithaml, 2001).

This phase is an iterative process where the complete service delivery system or service concept and all the specific elements of the service are continuously refined (Tatikonda and Zeithaml, 2001). Hence the process is a rapid prototyping and testing pattern (Cooper, 2011), which may go on until the prototype is ready for market launch.

Service design and specifications

At this point the service concept is clearly defined and understood by both customers and operational employees, and a valid business case exists. The service design is essentially a prototype of the service delivery system (Tatikonda and Zeithaml, 2001). Developing the service design includes the input of potential customers and the operational personnel that will be offering the service eventually (Scheuing and Johnson, 1989). This means that the service is co-created with customers, and their feedback is considered throughout the development process.

The prototype includes a step-by-step description of the delivery process and flow of materials, information, people (customers and operational employees), equipment, and facility requirements (Tatikonda and Zeithaml, 2001). Further, the prototype’s depth and cost can be measured along two dimensions, namely scope and physicality. The scope is a full-scale service delivery system on the one end and a small prototype of a particular part of the process. Physicality ranges from abstract prototyping to a specific description depicted through drawings and flowcharts (id). Hence, a full-scale service delivery system that is very specific is considered very in depth, yet also more expensive. Full-scale system prototypes are iterative in nature as ideas emerge throughout the design process and more information is gained (id).

Supporting facilities design and facilitating equipment

At this stage, the necessary physical resources for the provision of the service are considered and developed. Tatikonda and Zeithaml (2001) describe four facets of supporting facility, namely interior elements, exterior elements, location, and

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information technology (IT). Interior elements comprise of components such as the facility layout (front-room and back-room), furnishing, design and decoration. Exterior elements include external decoration and design, landscaping, and parking. Location determines where to locate the facility, and where to carry out various service tasks and procedures. Lastly, IT includes any hardware and software that are necessary to enable communication and information processing (id). This draws on one particular difference from product development. While on the one hand front-end employees have to be trained with necessary competencies to interact with customers, it is also compulsory to assure that they will be supported with appropriate and sufficient resources in the service performance phase (Bullinger, 2003).

NSD facilities planning and design in contrast to NPD has to consider the fact that services have a front-room and that the development of the coordination between the front-room and back-room demands close attention (Tatikonda and Zeithaml, 2001). The back-room is isolated from the customer and resembles traditional manufacturing operations, yet it is difference in the sense that it has to be closely coordinated with the front-room. The development of the front-room has to consider both operational and marketing aspects. Additionally, other aspects to consider in the service facility design are service encounter points, moments of truth where the customer judges the service provider, waiting lines, and customer orientation throughout the service.

Some services may require the use of equipment in the delivery process. These are physical products that may be developed in traditional NPD manner, however they differ in the sense that they are part of the service-delivery system and thus must fit within the system (Tatikonda and Zeithaml, 2001). This implies that the requirements for the development of these physical products may be different that usual NPD process.

Personnel training

Employees have to be trained to deliver the service to customers. Employees include front-line employees that are in contact with consumers, backroom personnel, and

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of personnel that interact with customers (id). Planning future customer contact personnel deployment draws on a fundamental distinction from product development, since these employees have posses the required competences to interact with clients, and at the same time also conduct advance preparations to ensure that they are supporting during the production of services (Bullinger, 2003).

Due to the fact that customers are co-producers of the service, they can be considered as “partial employees”, and need to understand their job. Ergo, they may also need to be trained. Since they have a particular role within the service, they need to understand what behavior is expected from them (Tatikonda and Zeithaml, 2001).

Pilot run and service testing

This stage builds on all the previous stages of the development phase and aims at doing a final check before launching the product. Service testing determines customer acceptance of the final outcome and the pilot run ensures that the service delivery system is as flawless as it can be (Scheuing and Johnson, 1989). The test may be done in the real world or in a simulated environment (Tatikonda and Zeithaml, 2001).

3.8. Diffusion

This is the final phase of the process, which focuses on both internal and external diffusion of the service. This involves spreading the new service innovation to all appropriate markets, and within the organization as the whole organization needs to be engaged in turning the new service into a success (Hansen and Birkinshaw, 2007).

Service full-scale launch and post-launch review

This stage involves the introduction of the new service to the firm’s entire market area (Scheuing and Johnson, 1989). At this stage the service may still need to be further modified, and is finally reviewed in the post-launch review stage, which may trigger the process to start all over again.

With the aim of drawing a conceptual framework to serve as a basis for data collection, four macro-level phases and 16 stages have been defined according to the systematic literature review of the NSD process. Each phase contains a number of stages to be completed before moving on to the next phase. The first phase is direction and contains three stages: new service strategy, opportunity identification, and need analysis, which

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set out the course for the service innovation project. The second phase is ideation and consists of 6 stages: idea generation, idea screening, concept development, concept testing, business analysis and business case formalization, and project authorization. Hence at this phase ideas are being conceived and developed on conceptual and business parameters, with the objective of establishing a mature idea at the end of the phase. The third phase is development where capabilities and resources are developed in order to implement the new service idea, and involves 5 stages: service design and specifications, supporting facilities and facilitating equipment, personnel training, pilot run, and refine service delivery process. The final phase is diffusion where the service is implemented both internally and externally, and consists of two stages: service full-scale launch and post-launch review. A summary of the phases and their corresponding stages can be seen in table 2 below. Furthermore, it has been frequently stated that the customer should be intimately considered and / or involved throughout the process, while front-line employees are also encouraged to participate in the process. Different NSD models examined in the literature follow either an linear or an iterative approach, however recent literature is leaning towards an iterative approach. Moreover, models often entail several decision points such as gates, where the number of ideas is reduced throughout the process, hence adapting a funnel approach.

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4. New Service Development Framework

Based on the literature an NSD framework has been conceived, and is illustrated in figure 1 below. The large arrows at the bottom represent the four macro-level phases that were found to be prevalent in the literature: direction, ideation, development, and diffusion. These phases adopt the waterfall process approach (Bullinger, 2003), where it is necessary for each preceding phase to be completed before the start of the new phase. Each phase corresponds to a number of micro-level stages that are illustrated as bubbles above it to indicate they are part of that phase.

The stages are based on the systematic literature review presented in the previous section. Furthermore, the framework adopts the spiral approach (Bullinger, 2003), as mentioned by various scholars that the process for new services is non-linear and iterative on the micro-level processes (Johnson et al. 2000; Shekar, 2007). It must also be noted that although the stages follow a certain sequence with arrows, within each phase they are not exclusive from each other and may be done simultaneously in case necessary (Cooper, 2008; Cooper, 2014; Shekar, 2007). Additionally, the process consists of various gates at the end of some stages, which are based on the Stage-Gate concept of Cooper (2001). At these points a decision concerning the project has to be made, and it must satisfy all criteria of that gate to continue through the process.

The sizes of the circles corresponding to each phase are routed to the design thinking approach where phases require more divergent or convergent thinking. The moments of divergence and convergence are largely based on Liedtka and Ogilvie (2011) conception of an innovation process. Hence the direction phase requires a more converged thinking where the course of the project is narrowed down, followed by ideation that urges for a more divergent thinking approach and expanding the innovator’s vision to avoid being trapped in the routine problem solving frameworks. After a certain concept is selected the vision of the project narrows down for the development phase, after which the new service offerings is well defined and the vision converges more in the final phase, diffusion.

The customers are in the middle of each cycle as they are encouraged to be involved throughout the process, and their involvement in the process has to be considered and well managed (Shekar, 2007; Tatikonda and Zeithaml, 2001; Alam, 2002). Customer

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interaction signifies the contact points between the service producers and the representatives of one or more customer groups at various stages of the process (Alam, 2006). Consequently, customer interaction is considered to be more important in services than in products due to the inseparable nature of services, where customers are part of both the consumption and production of the service (Kelley et al., 1990). Additionally, customer interaction throughout the process was found in numerous studies to be crucial for the success of a new service (Alam, 2006; Zahay et al., 2004; Magnusson et al. 2003; de Brentani and Cooper, 1992; Lukas and Ferell, 2000). Furthermore, front-line employees’ close relationships with customers and knowledge of customers’ needs and competitive offerings can assist in outlining possible new service innovations. Frontline employees are encouraged to be strongly involved in the ideation and development phase yet may be less beneficial in the diffusion phase (De Jong and Vermeulen, 2003).

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Figure 1: New Service Development Process Source: own illustration

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5. Methodology

With the aim of developing a process model for new service development, an inductive research approach has been applied. Following similar research into innovation processes done by various scholars (e.g. Johnson and Mena, 2008; Shekar, 2007; Alam and Perry, 2002; Tax and Stuart, 1997), a qualitative research methodology will be adopted. Qualitative research is an investigative process in which research relies on the researcher as an instrument for data collection and on the respondents’ meanings (Creswell, 2009). Qualitative research in opposition to quantitative research allows preserving explanation and context of the phenomenon studied (Myers, 2013), uses social actor’s meanings to understand the phenomenon (Gephart, 2004), and enables the researcher to gain insights into complex social processes (Eisenhardt and Graebner, 2007). Furthermore, qualitative research provides substantiated insights that can reveal how broad concepts and theories operate in particular cases (Gephart, 2004). Hence, in studying the trend of servitization and its implications on the R&D process within product-centric organizations, qualitative research could yield valuable insights on various firm’s innovation practices and processes.

The research has been carried out as part of an internship within Philips Research in Eindhoven, the Netherlands. Philips is an appropriate research unit for the purpose of this thesis, since the company has recently defined one of its business models as services and is currently following the servitization strategy. This is further explained through the Philips company introduction and background for research section presented in the results chapter.

5.1. Description of sample

Participant within the research are Philips personnel accompanied by interviews with external stakeholders of the organization about their innovation processes. Consequently, respondents can be categorized into two groups: internal employees and external companies.

New service development process for Philips research