New service development: a review of the literature and annotated bibliography

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1 European Journal of Marketing 32,3/4 184 Received October 1996 Revised April 1997 a review of the literature and annotated bibliography Axel Johne and Chris Storey City University Business School, London Overview The purpose of this article is to provide a review and ready reference to recent writings on new service development (NSD). The article is aimed at students of NSD, that is to say, academics and practising managers, searching for new insights into how NSD can support organic business growth. The decision to concentrate exclusively on organic development rather than on acquisition or joint venture development is deliberate. As will be shown in the review of the literature, new service development relies on the expertise and cooperation of individuals working in teams during and after development. Acquisition and joint venture development introduces additional risks arising from the possibility of key personnel leaving or failing to cooperate. These special risks are worthy of study in their own right after the elements of organic service development have been mastered. The field of organic product development, embracing as it does the development of tangible, as well as service products, is undergoing a revolution. NSD and its generic equivalent of new product development (NPD) is increasingly seen by managers as embracing more than the improvement of core performance attributes. Attention is now focused by forward-looking managers on the whole offer, of which the core performance attributes are only a part. Doing this requires a far wider set of commercial variables to be considered in new service and new product development than has traditionally been the case. Our review of the literature builds on recent insights provided by researchers. We provide an expanded definition of NSD. The available literature is reviewed within this wider analytic framework and suggestions are made for future research. Definitions are an ever-present problem in any fast-changing area of endeavour. The words new service development and new product development are often used interchangeably. To help the reader who may be unfamiliar with certain current definitions, we provide some initial definitions here. More specialist definitions are introduced later. European Journal of Marketing, Vol. 32 No. 3/4, 1998, pp , MCB University Press, This is an extended article justified by its nature and content; it provides a comprehensive literature review and an annotated biography in an otherwise neglected area.

2 Service product. The predominantly intangible core attributes which customers purchase. Product development/innovation. The development (or improvement) of tangible or service products. New product development (NPD). The development of tangible products which are new to the supplier. Sometimes NPD is expanded to include new service development (see below). development (NSD). The development of service products which are new to the supplier. Offer development. The development, by the supplier, of core product (or service) attributes plus the development of the processes by which the product is evaluated, purchased and consumed. This annotated bibliography addresses all types of new service development. However, by far the greatest bulk of the published literature is concerned with the development of new financial services. It is only in recent years that academic researchers have begun to address issues concerned with the development of the very wide span of services offered today. The annotated bibliography is divided into two main parts. The first comprises a critical review of the NSD literature; the second comprises annotations of important writings which have been published in recent years in North American and European journals. a review 185 The challenge of new service development Introduction The relative ease with which many new service products can be developed has led to proliferation of product variants, particularly in the financial services sector. This frequently results in overloading customers and also staff with unwanted challenges. It is not surprising, therefore, that a large proportion of NSD has been less than successful. The purpose of this article is to provide help in the intricacies of making strategic choices in NSD, as well as in managing the processes involved. NSD involves developing offerings such as financial services; health care; telecommunications services; information services; leisure and hospitality services; travel services; facilities management services; educational services; legal services; and consulting services. Offerings can be sold either to consumers or to businesses, and sometimes to both. In recent years, a sizable body of specialist literature has accumulated which focuses on the development and marketing of services as distinct from tangible products. However, some writers have argued that it is unhelpful to differentiate between tangible and intangible product development. For example, the wellknown management writer, Sir John Harvey-Jones, former chairman of ICI, Britain s largest supplier of chemical products, has stressed that suppliers of high technology products are required to put just as much effort into providing

3 European Journal of Marketing 32,3/4 186 service in the form of technical information and assistance for some customers, as they are required to invest in ensuring that the quality of the core product is maintained. Harvey-Jones (1988) stresses that suppliers of high-technology products are, therefore, increasingly developing better services alongside better products. While tangible products may be offered with or without customer service elements, such support is always required in marketing service products. Nearly all service products involve close interaction with customers. Interaction is the distinguishing feature of service offerings. In many service sectors the interactive elements are the very essence of the service offer. This means that service suppliers must develop not only the precise form of the service product, but also the appropriate nature of interaction with customers. Because the interaction process is typically an integral part of a service, the development of a new service is usually far more complex, conceptually, than the development of a new tangible product. Offer development The realisation that customers may be attracted by more than core performance attributes has important practical implications for service providers. Operationally, it requires a wider set of variables to be brought into play for service development than has traditionally been the case. For example, in many financial services markets it has been found beneficial to augment core service product attributes with appropriate support in order to achieve differentiation from competitors offerings (Storey and Easingwood, 1994). As a result, some innovative financial service providers now routinely speak of developing new offers, rather than merely new products (Johne, 1994a). As will be discussed in detail later, offer development is a more all-embracing, and potentially far more powerful, competitive activity than concentrating solely on the development of core performance attributes. Product, or better offer, development is an important route to winning new business. Ansoff (1987) has produced a schema which illustrates the role of product development in business development activities. His matrix suggests that businesses have two main dimensions to consider market newness and product newness which presents four opportunity vectors for product development. Figure 1 shows how each of the four growth vectors may be served by distinct types of product development. Following deregulation in many British services markets, suppliers have become increasingly active in developing new products. Another reason for the increased attention now being paid by suppliers to product innovation is because this type of innovation is a result of adopting a more sophisticated approach to managing. For example, in respect of marketing activities, Kotler (1994) has argued that the adoption of marketing in banks has progressed sequentially as shown below with product innovation being given special attention during Stage 3:

4 Low Market Newness (to supplier): High a review Product Newness (to supplier): Low High Source: Based on Ansoff (1987) Aim: Market Penetration Via: Product Improvement Aim: Product Development Via: New Product Lines Aim: Market Development Via: Product Line Extensions Aim: Diversification Via: New Products, New Markets 187 Figure 1. Growth vectors served by product development variants Stage 1. Marketing is advertising, sales promotion and publicity. Stage 2. Marketing is smiling and a friendly atmosphere. Stage 3. Marketing is innovation (mainly of products). Stage 4. Marketing is positioning of products. Stage 5. Marketing is analysis, planning, implementation and control. All suppliers that have adopted a more systematic approach to developing their business now pay careful attention to product innovation. In some services, suppliers have only recently placed emphasis on product innovation. These are often companies in the third stage in adopting marketing. At higher stages in adopting marketing, particularly when marketing is the driving force behind organic business growth, product innovation presents even greater challenges because of the need for careful integration with other functional specialisations. Differences between NSD and NPD A recurring theme in the literature is that the development of a service product is different from the development of a tangible product. From the supply point of view, and also from the buying point of view, there are doubtless important differences which are captured under three main headings: (1) Intangibility. Service products are predominantly intangible (even though efforts may be made to make them more tangible, for example by supporting financial service products with attractive looking plastic cards). Service products are predominantly processes rather than things. Intangibility has important operational consequences: e.g. intangible products are especially difficult to test in concept.

5 European Journal of Marketing 32,3/4 188 A difficulty arises from intangibility because services are processes and not physical entities. Services can be more easily modified than physical products or physical processes. Thus changes to the service offering may be made relatively quickly and easily by individual service workers without management agreement or appropriate organisational learning taking place. Modifications made in this way may be at the expense of customer service quality. A further difficulty resulting from intangibility is that developments may be easily copied by competitors. And, because service developments are not patentable, copying is rarely preventable. (2) Heterogeneity. Service products are often variable in quality because service is commonly produced and consumed simultaneously. Since it is created and consumed at the staff-customer interface, the service experience is likely to vary each and every time. Both staff and customers play roles in the delivery of service. The degree of variation is likely to depend on the degree of standardisation of the service and the amount of technology applied at the customer interface. Customers of services risk buying an outcome and/or experience which they cannot fully assess prior to purchase. Operationally, this requires, for example, constant emphasis on training and practice by supplier staff. (3) Simultaneity. Service products are typically produced and consumed simultaneously. This means that most services are inherently perishable and for this reason cannot be held in stock. Capacity planning is critical in service suppliers. Demand may vary greatly, yet needs to be met promptly or stands to be lost. Payne (1993) has pointed out that there are many tangible products which possess one or more of the above characteristics. It is, after all, only at the extreme that tangible products are highly tangible; closely controlled for variance; produced at a distance from customers, and stockpiled. However, most service products have a marked tendency towards the above three characteristics. When they are typified by intangibility and simultaneity, the process of evaluation, purchase and consumption is critically important. This is the justification for studying service product development in its own right. The development of new service offers requires careful attention to be paid to person-to-person skills in supplier organizations. Types of new service developments Lovelock (1984) has stressed that the word new is one of the most overused in the marketer s lexicon. Drawing on the work of Heany (1983), he posits different categories of service development, ranging from style changes right through to major innovations. These categories overlap, in part, with the wider-ranging product development categories advocated by Booz et al. (1982). The two categorisations are shown in Table I.

6 Booz et al. (1982) Lovelock (1984) New-to-the-world products. New products Major innovations. New products for markets as that not only represent a major new yet undefined and undimensioned challenge to the supplier, but which are Start-up businesses. New products for a market also seen to be quite new in the eyes of that is already served by existing products that customers meet the same generic products New product lines. New products which New products for the currently served market. represent major new challenges to the New products that attempt to offer existing supplier customers of the organization a product not Additions to existing product lines. New previously available there products that supplement a company s Product line extensions. Represent an established product lines, so rounding-out augmentation of the existing product line or the product mix different way of service Improvements and revisions to existing Product improvements. Changes in certain products. New products that provide features for existing products currently on offer improved performance and so replace to the currently served market existing products Style changes. Highly visible changes to existing Repositionings. Existing products that are products targeted to new markets or market segments Cost reductions. New products that provide similar performance at a lower cost of supply a review 189 Table I. New product categories Despite the fact that Lovelock s (1984) categorisation is aimed specifically at services, we deliberately use the wider-ranging categorisation of Booz et al. (1982) below to comment on the span of innovative activities involved in pursuing NSD. We begin with the term product development. Product development Product development is the umbrella term embracing improvements and also radical alterations to product or service performance attributes. Booz et al. (1982) have suggested six main types of product development efforts. The following four are typified by varying forms of newness in terms of their operational newness to the supplier; and also, in part, in terms of their newness to customers: (1) Product improvement (includes revisions to existing products). (2) New product lines (frequently me-too products). (3) Product line extensions (of existing product lines). (4) New-to-the-world products (which are new to the market and new to the supplier). Booz et al. (1982) posit two further types of product developments: (1) Cost reductions. (2) Repositionings.

7 European Journal of Marketing 32,3/4 190 It is of interest that both cost reduction and repositioning are possible for all the first four types of product developments. For this reason Johne (1996) has argued that cost reductions and repositionings are not distinct types of product developments in their own right. He refers to cost reduction as process development ; and to repositioning as product augmentation development, as is explained below. Process development All product developments can benefit from process development in the form of reductions in cost achieved through what is now widely referred to as reengineering efforts. An efficient supplier who keeps working on productivity can expect, over time, to develop products that offer the same, or even improved performance, at a lower cost. Such cost reductions may, or may not, be passed on to customers in the form of lower prices. Often customers demand ever lower prices. Rarely does a supplier not have to concern him/herself with cost reductions. Process development can go beyond simple cost reduction. It may involve a fundamental rethink and redesign of business processes. It may, therefore, involve changing working practices within the organization, such as making increased use of teams or introducing new technology. It has been asserted that the chief driving force behind such re-engineering efforts in service firms is not cost reductions per se, but improving customer service (Drew, 1994). Morris and Westbrook (1996) reported on a successful project to automate payment processing in a UK bank and commented: Through the dramatic quality and cost improvements which resulted, the bank gained a new competitive edge and opened up further strategic opportunities. Product augmentation development Just as cost reduction is not a separate category of product development, so too is this the case with repositioning. Again, repositioning is possible for all four types of product development efforts. Repositioning involves making changes to the way core product features are promoted and made available to customers. Repositioning achieved by this means has been referred to as product augmentation development (Johne, 1996). This term describes the support given by suppliers to customers. The sort of support which helps customers evaluate, buy and use a core product. Kotler (1994) quotes Levitt (1981) to explain the power of this form of The new competition is not between what companies produce but between what they add in the form of packaging, services, advertising, customer advice, financing, delivery arrangements, warehousing, and other things that people value. These items can contribute greatly to enhance attributes and are used by customers to choose between competing offers. In the case of services, augmentation takes on great importance. It embraces the processes by which customers evaluate, purchase and consume the service.

8 There is strong empirical evidence which reinforces the importance of product augmentation development. For example, Cooper and Kleinschmidt (1987) in researching manufactured product development, have shown that the provision of appropriate support is important in achieving product superiority in the eyes of customers. They identified support as a key factor determining product development success. Similarly, in studies of successful consumer financial services, it has been found that product advantage on its own is relatively unimportant in differentiating between success and failure; it being variations in the service experience which explain most differences between product development success and failure (Easingwood and Storey, 1993; Storey and Easingwood, 1994). In a study of successful corporate banking product development, Johne and Pavlidis (1996) found augmentation to be of critical importance. Product augmentation development is important to suppliers because the same basic product attributes can be offered in different ways and at different prices to separate customer groups. An appropriate premium price can normally be charged when support is provided, which can lead to higher profit margins. On the other hand, offering a basic service with little or no support allows a supplier to make considerable cost savings which can be passed on to the customer. Product augmentation development relies on accurately interpreting and acting on customers preferences for promotional and distribution support. Mathur (1992) argues that customer service and also promotional support can be provided on the basis of expertise or personalisation (or both). Such forms of support present particularly powerful levers for gaining competitive advantage in financial services (Devlin and Ennew, 1995). Product augmentation does not always mean offering more or less direct support. It may involve changing the nature of the delivery process so that customers find it more convenient. This has been done highly successfully by First Direct, a subsidiary of Midland Bank. First Direct services its customers solely through 24-hour telephone contact. The new form of offer had by 1996 attracted over 500,000 new customers, making it Britain s fastest growing retail bank. The attraction of the new offer to busy customers is not the basic products (of which only a few are superior to those offered by other banks), nor the expert advice over the telephone, but the innovative distributive support. For the target group of customers, First Direct s 24-hour service availability more than compensates for the lack of traditional face-to-face contact. It is important to emphasise that product augmentation development is integrally linked with core product development in services. If a narrow definition of product development is used, product development is considered to be concerned solely with core performance attributes what in the field of service product development Grönroos (1990) has referred to as the basic service package. However, it is with the help of augmentation that an appropriate offer is placed on the market. Grönroos (1990) and also Storey and Easingwood (1994) refer to this wider output as the augmented service offer. a review 191

9 European Journal of Marketing 32,3/4 192 The relationship between offer development, product development and product augmentation development is shown in Figure 2. Market development It has been shown that product development is an essential ingredient of offer development (alongside augmented product development). The role of process development has also been commented on. Market development is the third leg of organic business development. Market development is often undertaken in parallel with other forms of development. It is concerned with improving the mix of target markets into which newly developed offers can be sold, thus enhancing the mix of customers served by the organization. Product Development (amending core product attributes) Offer Development Figure 2. Components of offer development Product Augmentation Development (amending the interaction with the customer) Lack of skill in market development will almost certainly result in an unwise mix of target markets. When this is so, skilled efforts at product development and also product augmentation development, as well as any efforts at process development are likely to fail in achieving full potential. For example, at the present time, as companies begin their assault on the former communist countries of Eastern Europe, market development is of critical importance. Market development opportunities misread or overlooked now are likely to lead to lost future product development opportunities. It has been shown that organic business development can be pursued by means of four types of supporting market development, product development, product augmentation development and process development, as depicted in Figure 3. In practice, these activities are likely to be undertaken in parallel, with differing emphasis being placed on each. In predominantly technology-driven businesses, heavy emphasis is frequently placed on product development, rather than on market development. On the other hand, in predominantly marketing-driven businesses, heavy emphasis is frequently placed on market development and on product augmentation development. In many businesses which supply services the situation is often different again, with heavy emphasis being placed on process development.

10 MARKET DEVELOPMENT PROCESS DEVELOPMENT BUSINESS DEVELOPMENT a review 193 OFFER DEVELOPMENT Comprising product development and product augmentation development Figure 3. Components of organic business development Conventional and new style product development strategies There are likely to be different views among managers concerning how their business is to be developed organically. Some managers will favour the longer term over the shorter term. Some will favour risk-taking over building up reserves. A major potential for conflict is the type of development to be favoured in driving a business forward: in other words, the types of product development strategies to be favoured. It is to this issue that we turn now. Analysts speak of proactive, as opposed to reactive, strategies. For example, drawing from military history, Kotler (1994) speaks of attacker and defender market and product strategies. Such strategies refer to strategic intent whether a supplier wants to lead product change or to follow the lead of others. Strategic intent is quite different from strategic content. Content is concerned with the approach adopted by a supplier to beat competitors through product development. In this respect, most suppliers feel comfortable with conventional approaches. They play according to established rules of engagement, and so can be described as invoking a combative maintenance product development strategy. Far fewer suppliers invoke a product development strategy which involves breaking existing rules of combat. Johne (1994b) has referred to this type of rule-breaking as new style product development. New style product development describes an approach which is output orientated, rather than input orientated. Its aim is to exploit market potentials as fully as possible. Success is judged against market potentials, not against past internal performance measures. The conventional approach to product development judges developments as successful if they meet internal hurdles, such as target rates of return. Johne (1994b) argues that the conventional approach is flawed for competitive purposes when hurdles set for internal performance criteria ignore market potentials. What distinguishes new style product development is that it involves taking a long and hard look to see how an existing market might be served better. Doing this successfully reshapes a market. The aim is to move away from slog-it-out combat in order to engage in

11 European Journal of Marketing 32,3/4 194 new forms of competitive warfare in which the initiator the new style product developer calls the shots. An example of new style product development is Direct Line, a wholly-owned subsidiary of the Royal Bank of Scotland, set up in 1985 to offer insurance. What was new about Direct Line was not the basic insurance cover (i.e. the core product attributes), but the way these are made available to customers through product augmentation. Direct Line was one of the first motor insurance businesses to cut out the traditional broker middleman in order to interface directly with customers using telesales techniques. In its first five years of operation it acquired 300,000 new policyholders in Britain. In contrast, over the same period, established insurance companies, using solely brokers, fought each other according to existing rules of combat, and so were pleased if they managed to increase their client base by 5 or more per cent per annum. In no case did this come anywhere near the figure achieved by Direct Line. First Direct telephone banking (already referred to) is another example of new style product development. The distinguishing feature of new style product development is that it is market rather than supply based. Today, many service markets are changing much faster than ever before. It is a matter of strategic choice whether a supplier elects to react to these changes, or whether it initiates them. Proactive product, or better offer developers want to lead. However, while such intent provides the stimulus, careful analysis is required for the purpose of deciding on strategic content. As far as strategic content is concerned, analysts such as Peters (1990); McKenna (1991); Hamel and Prahalad (1994) argue that innovative market vision provides the foundation for analysing and acting on customer preferences. Types of offer developments Offer development comprises a set of business activities undertaken by suppliers acting in their own self-interest. It is appropriate, therefore, for these activities to be studied from the viewpoint of the supplier, rather than from the viewpoint of the buyer. This distinction is important. It is, for example, common practice for suppliers to develop offers which are new to them, but which have already been made available on the market by competitors. This means that the offer may not appear as new to buyers, but certainly presents a new challenge for suppliers who have fallen behind in the competitive race. From the point of view of the supplier, two dimensions determine the newness of the offer. First, the newness of the product attributes; second, the newness of the augmentation provided. These two dimensions and the four types of offer development which can be pursued are shown in Figure 4. The reader will notice similarities with Figure 1, which earlier dealt solely with product development variants. Both figures address the same business aims; the difference between them is that Figure 4 shows how specific business aims can be served by particular types of offer developments.

12 Newness of the Product Attributes (to supplier): Low High a review Newness of the Product Augmentation (to supplier): Low Aim: Market Penetration Via: Offer Improvement e.g. improved core attributes and/or improved augmentation Aim: Market Development Aim: Product Development Via: predominantly: Product Development e.g. new product variants such as new derivatives in banking Aim: Diversification 195 High Via: predominantly: Product Augmentation Development e.g. First Direct, Direct Line Via: New-to-the-World Offers e.g. a new business:- overnight delivery (DHL) distance education (O.U.) temporary managers Figure 4. Growth vectors served by offer development variants Offer improvement is likely to pose a supplier with lesser challenges and risks than new-to-the-world offers (in Figure 4). In the case of the latter, both product attributes as well as product augmentation pose fresh challenges. In between these two extremes is a wide range of offer development options. It has already been pointed out that businesses can be expected to engage in the type of offer development with which they feel most comfortable. In predominantly technology-driven companies greatest emphasis is often placed on core product attributes. This has also been found to be the case with technically sophisticated banking products sold to corporate customers (Johne and Pavlidis, 1996). In predominantly marketing-driven companies, greatest emphasis is likely to be placed on product augmentation development. Product augmentation is effected through focused expenditures on distribution, promotion and operations. It is advertising which informs customers about the availability and performance of offers. It can also enhance image. Personal sales efforts provide pre-sale; during-sale, and after-sale advice and service to customers. Expenditures on distribution are also important. These determine the ways in which core product attributes are made available to target markets. Distribution expenditures will, as has already been shown, reflect investments made for effecting direct links with customers (by mail or telephone) to replace contact through independent intermediaries. The importance of gaining more direct access to customers in today s competitive marketplace is widely recognised. Many financial services suppliers are now working furiously to develop new methods of distribution that can complement existing strengths in order to gain wider access to consumer and business markets (Ennew and Watkins, 1992). Reliance on

13 European Journal of Marketing 32,3/4 196 historical distribution arrangements is increasingly being questioned. As new competitors move into established market sectors, they bring with them expertise in different distribution methods and do not feel constrained by existing corporate structures. Many traditional suppliers have been forced to amend their distribution arrangements to meet this new competition. Adding new channels to existing ones creates hybrid marketing systems (Moriarty and Moran, 1990). Additional forces behind distribution expenditures include attempts by many financial institutions to become more complete service providers, serving new as well as existing customers with a wider range of products. Some of these new products require new channels. In many parts of the financial services industry it is now accepted by management that traditional channels (i.e. branch networks for banks; salesforces for insurance companies; intermediaries for investment houses) are no longer sufficient to attract the target customers of the future; also, that those forms of augmentation no longer provide the means for servicing certain customers appropriately. Purposes served by new service development NSD can serve two main sets of purposes: (1) business purposes; and (2) personal purposes. Business purposes are those aimed at fulfilling the objectives of the supplying organization; personal objectives are aimed at fulfilling the personal objectives of those involved. We deal with each in turn. Business purposes of NSD The main types of service development were discussed in the previous section. It was seen that NSD ranges from improvements right through to new-to-theworld offers. The multitude of forms which NSD can take reflects the fact that individual service offers are in practice launched for very different business purposes. Johne (1995) has discussed methods for evaluating different types of developments within a business development context. Very rarely are new products developed purely for the bottom-line profit they add. Individual developments may, for example, be launched to complement existing products; to use company resources more fully; to broaden or improve the company image; to diversify, or to grow into new markets (Shipley et al., 1991). In the financial services sector, the commercial aims of these wider forms of product development include: enhancing the profitability of other products; attracting new customers; improving the loyalty of existing customers; providing a platform for future new service products by opening up a new market, or changing the company s image (Easingwood and Percival, 1990). Individual product developments can also usefully add to an existing range of products, making it more likely that a supplier will be able to satisfy all of their customers financial services needs and wants so that these are able to

14 engage in one stop shopping (Berry, 1982). This can help to tie a customer to one supplier. For, if a customer uses a competitor to buy a missing service, there is always the risk of that customer eventually switching all their business (Haaroff, 1983). In the financial services sector many product developments have in recent years been of a defensive nature, being designed to retain existing customers (Davison et al., 1989; Drew, 1995b). Additional benefits can, of course, result such as enhancing the company s image; gaining a reputation for innovativeness, and enhancing competitive capability across a wider front. In financial service markets the opportunity cost of lost custom is frequently considerably higher than the actual cost of introducing a new product (Haaroff, 1983). This is a particularly important issue because customer loyalty in the financial services sector is declining. Customers are increasingly inclined to use several financial institutions to satisfy their different financial needs. It has been pointed out that there may, indeed, be fewer reasons for staying loyal to a bank as technological developments make interaction more impersonal (Lewis, 1989; Moutinho and Brownlie, 1989). A new service may achieve higher overall customer satisfaction through increasing the number of satisfied customers as well as increasing the satisfaction of existing customers. Satisfied customers provide referrals and may be willing to pay a price premium (Reicheld and Sasser, 1990). Similarly, perceived service quality is said to lead to repeat purchases (Grönroos, 1990). In addition, building a reputation for being innovative may make it easier for a company to introduce radical new products as consumers are more ready to accept such products from proven innovators (MacMillan and McCaffrey, 1984). New product introductions may also be used to change the perceptions of consumers within existing markets (see Easingwood and Percival, 1990). Companies may introduce products specifically to increase their profile with intermediaries and consumers, especially in market segments or geographical areas where they have traditionally been weak, rather than opening up entirely new markets. For example, when a Scottish bank launched a home banking service in England, it significantly increased its profile in England (Tait and Davis, 1989). Similarly, the marketing in the USA of a cash management service by a UK bank helped with the marketing of its other corporate banking services (Haaroff, 1983). NSD may be undertaken to prepare for the future (Dvir and Shenhar, 1990). The technical infrastructure for the development and production, that is to say, the hardware, software and delivery systems of one new product, can provide a platform for other new services (Shostack, 1984a). The human resource infrastructure in design, production and marketing can be improved because the process of developing a new product and overcoming various administrative, legal and operational barriers generates expertise that can be employed in the future (MacMillan and McCaffrey, 1984). The development of a new service can lead to a better understanding of a market s particular requirements, making it easier to spot further opportunities (Easingwood and Percival, 1990). a review 197

15 European Journal of Marketing 32,3/4 198 The benefit of attracting new customers, rather than selling to existing ones, is straightforward as it is hoped that these customers will become users of other services offered by the firm. However, the building of a customer base is a much more strategic goal than a short-term selling objective (Berry, 1986; Meidan, 1984). It is recognised that attracting new customers is considerably more difficult and costly than the soft option of selling to existing ones (Meidan, 1984). An ideal new service is one that attracts new business (Berry, 1982). Many product introductions in the financial services sector are designed to attract new customers by offering improved versions of existing products (Davison et al., 1989). The attraction of new customers can even be the specific reason for the introduction of a new product. For example, a recently introduced building society checking account was developed with the principal objective of attracting new customers who will eventually purchase other more profitable products (Edgett and Jones, 1991). A UK bank introduced a cash management service in the hope they may, over time, become their customers main banker (Haaroff, 1983). It should be noted that some benefits of NSD may be interrelated, and of course any development project can produce multi-benefits. s aimed at producing immediate benefits to the firm can produce strategic by-products. Even new products which, at first, are thought of as failures, can benefit the firm in the long term by augmenting the organization s knowledge of new markets or technologies, or by building the strength of the organisation itself (Maidique and Zirger, 1985). In the financial services sector the benefits to the firm of such by-products have been found to equal the estimated direct financial benefits (Easingwood and Percival, 1990; Storey and Easingwood, 1993b). It has been claimed that the financial loss from development failures in the case of financial service products can be low (Davison et al., 1989). There are, however, considerable hidden costs in introducing new products, such as the cost of wasted managerial effort on less than successful products; the adverse effect of failure on corporate image, and a reduced ability to introduce other new products because of resource constraints (Bortree, 1991). Another problem is that many financial products cannot be withdrawn once launched. Although a product can be made unavailable to new customers, it frequently needs to be maintained and supported for existing users (Davison et al., 1989; Easingwood, 1986). Personal purposes of NSD Little research has been reported into the personal aspirations of managers involved in NSD. Recent work undertaken by Griffin and Page (1993) is insightful. It shows that the aspirations of most middle level product development managers are distinctly different from those of many academic researchers and top corporate level executives. New product development managers are reported, first and foremost, as wanting to avoid (individual) product development failures. It appears that very few empirical researchers have asked managers probing questions about the sort of product development

16 success they actually aim at. Griffin and Page s (1993) investigation is a notable exception. These researchers found that managers concentrate attention heavily on financial and sales measures with predominant emphasis on the shorter run. In addition, managers are intently interested in how projects proceed in terms of team performance, and giving personal satisfaction to participants. This is an area crying out for more research. The new service development process In reviewing the literature on the new service development process, six key themes emerge (as depicted in Figure 5). These are: (1) the corporate environment; (2) the process itself; (3) the people involved; (4) analysis of opportunities; (5) development; and (6) implementation. a review 199 Corporate Environment Process People Analysis Development Implementation Figure 5. development themes Corporate environment While there are always market opportunities, firms often have difficulty in capitalising on these opportunities. Research studies have investigated barriers to innovation and the pre-requisites for new service development to flourish (Drew, 1995a; Ennew and Wright, 1990; Hodgson, 1986a; Thwaites, 1992). All these studies have stressed the need for a clear corporate vision concerning the role NSD is to play in organic business development. For NSD to flourish, top management must be committed to innovation, both in terms of the resources made available for development and with practical help. Clear goals must be set for the NSD programme. In general, the culture of the organisation plays an important role. There should not be fear of failure. Excessive bureaucracy can stifle innovation. Internal systems should support innovation and enhance communication. A lack of high quality and experienced development staff is a major barrier to innovation. Job descriptions and reward systems should,

17 European Journal of Marketing 32,3/4 200 ideally, also be linked to innovation. MacMillan and McCaffery (1984) suggest encouraging internal entrepreneurs as a means of pursuing aggressive product innovation. Many service companies do not, as yet, have a strategic focus on NSD and lack development competencies and appropriate organisational structures (Easingwood, 1986; Edgett, 1993; Martin and Horne, 1993; Scheuing and Johnson, 1989a). It has, however, been found that top performing banks have more formalised and better structured new service development programmes than lesser performing banks (Johne and Harborne, 1985; Johne and Pavlidis,1996; Reidenbach and Moak, 1986). Johne (1993) found that few top insurance managers provide the sort of support that could be described as envisioning, energizing and enabling an innovation programme. Edvardsson, et al. (1995) have identified further problem areas in the management of development projects. These include a lack of clarity in who owns the project, resulting in intra-organizational conflicts; and also co-ordination problems. As a result, there is often a lack of information about specifications and goals at the start of the development process. Faster product development has been identified as a major strategic priority (Drew, 1995b; Ennew and Wright, 1990). The main barriers to rapid innovation include the issues outlined above. In addition, Drew (1995b) suggests using reengineering principles to change an organization s culture and structure. This, coupled with a greater commitment to teamworking and empowerment, can certainly result in faster product development. The process Shostack (1984b) has identified four essential characteristics of an effective development process for new service products: (1) objectivity; (2) precision; (3) fact-driven; and (4) methodologically based. Certainly, in the field of tangible product development, there is now evidence of highly sophisticated procedures being used. For example, Cooper (1994) expounds the merits of third generation new product practices which go beyond simple functional stage-gate systems and introduce focus on business objectives; fluidity; fuzzy-gates, and more flexibility. In general, these levels of sophistication have yet to be attained in many fields of services development. In the overall area of services, in which product development can often be copied quickly, and frequently involves very minor investments in terms of time and money, current activity is described as failing to meet Shostack s essential characteristics. Bowers (1989); Scheuing and Johnson (1989a); Martin and Horne (1993) have all shown that service suppliers do not, in general, use

18 sophisticated and formal development procedures. For example, Reidenbach and Moak (1986) found that the average length of the development process for banks was a surprisingly long six months, and that new product failures tend to be those that skip certain stages of the process or that are carried out haphazardly (see later section Key activities ). Much of the research into the development of new services has looked at how different stages in the development process have been carried out. Edgett (1996) found that financial service companies are still skipping large parts of the process and even when stages are carried out they are done less than proficiently. Most research into the development process has followed Booz et al. s (1982) simple model of the new product development process (see Table II), or an adaptation of it. While NSD has to follow the same generic process as NPD, the relative importance of each stage and how each stage is carried out is affected by the unique characteristics of services. Product screening, concept testing, product testing and market testing techniques have found to be little used in NSD (Bowers, 1989; Davison et al., 1989; Easingwood, 1986; Edgett, 1993; Scheuing and Johnson, 1989a). Where they are carried out, they are done less than proficiently, even though they are considered to have a high impact on the outcome (Mohammed-Salleh and Easingwood, 1993; Reidenbach and Moak, 1986). It might be that sophisticated and formal procedures are followed for larger investments in service product development. To date no empirical results confirm this. While it is probable that more expensive investments will, indeed, be assessed more rigorously, it is also likely that such rigour is a function of management s overall approach to business development, rather than being primarily a function of project size. It is surprising that there has not been more effort to develop a specific service development model. An exception is the model by Scheuing and Johnson (1989a) which makes the important distinction between the design of the service and the design of the delivery process (see Figure 6). Because a review 201 New product strategy Idea generation Screening and evaluation Business analysis Development Testing Commercialization Source: Booz et al. (1982) Identify the strategic business requirements that the new product should satisfy Search for product ideas to meet strategic objectives A quick analysis of ideas made against criteria that reflect the objectives of the organisation A detailed analysis of the attractiveness of an idea in business terms Translation of the idea into an actual product for the market The commercial experiments necessary to verify earlier business judgements The when, where, to whom and how decisions of the launch Table II. New product development model

19 European Journal of Marketing 32,3/4 202 Marketing objectives Internal sources Customer contact personnel 1. Formulation of new service objectives and strategy 2. Idea generation 3. Idea screening 4. Concept development Environmental analysis External sources Prospects 5. Concept testing Budget development 6. Business analysis Market 7. Project authorization Operations personnel 8. Service design and testing Users Operations personnel 9. Process and systems design and testing 10. Marketing and program design and testing Users 11. Personnel training All personnel 12. Service testing & pilot run Users 13. Test marketing Users Figure 6. Normative model of new service development process 14. Full-scale launch 15. Post-launch Source: Scheuing and Johnson (1989a) services are, by their nature processes, delivery systems assume a high importance in the development of successful new services (Langeard and Eiglier, 1983; Lovelock, 1984). The model also shows the involvement of customer-contact staff and customers in the process. Shostack (1984b) discussess the development of a discount brokerage service. The development process identified was complex (see Figure 7). It was highly verbal and iterative with each stage aimed at further specifying the service and its process. Often rudimentary documentation and informal decision making results in costly delays. However, it is also argued that a detailed, formalized planning system stifles the creativity needed to develop really successful new services (Edvardsson et al., 1995).

20 First level stages: 1. First phase definition vague description of the basic service function produced. 2. First phase analysis information gathering process (internal and external). 3. First phase synthesis clarification of the service definition and boundaries drawn. a review 203 Second level stages: 4. Second phase definition detailed service description produced. 5. Second phase analysis internal review of the service and external market research. 6. Second phase synthesis documentation of service description & implementation plans. The final stages: 7. First phase implementation operation functions put in place and tested. 8. Second phase implementation implementation of communication strategy. 9. Market introduction the service goes live. Source: Shostack (1984b) 10. Post-introduction audit review of service and starting point for further development. Figure 7. A discount brokerage example of NSD The people As has already been stressed, people involvement is crucial in NSD. There are three groups of individuals that must be managed in an effective development project: (1) the development staff; (2) the customer-contact staff; and (3) the customers.

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