Key Concepts for New Service Development

BO EDVARDSSON and JAN OLSSON

This article deals with service development from a quality perspective.

Our point of departure is to build in the right quality from the start.
The article presents a new frame of reference for new service
development based on empirical studies in Sweden. It argues that the
main task of service development is to create the right generic
prerequisites for the service. This means an efficient customer process,
that is to say the process must be adapted to the logic of the customer !v
behaviour and a good customer outcome, i.e., the service is associated
with quality. We distinguish three main types of development: the
development of the service concept, the development of the service
system (resource structure) and the development of the service
process.

BACKGROUND AND AIM

Many people see quality as the most important means of competition and a
prerequisite for satisfied customers and profitability [Edvardsson and
Thomasson, 1991]. Although services play a predominant role as regards
GDP and employment in the OECD countries, we know very little about
quality management of service operations. We know less about quality in
service companies than in manufacturing companies [Gummesson, 19911.
Our knowledge of quality in services needs to be expanded, both through
academic research and through action learning.
Many quality problems are recurrent and may to a great extent be seen as
the result of shortcomings in the development of new services [Edvardsson.
1992; Juran, 1992]. The service is not designed correctly -qualify problems
are built in [Gummesson, 19881. Crosby [19891 maintains that 7(>-90 per
cent of all quality problems are recurrent and are built into internal service
processes. The corresponding figure for manufacturing companies is 92 per
cent, according to Juran [1992].
This article deals with service development strategy from a quality

Bo Edvardsson is Associate Professor ot" Business Admdinistration and Director of the Service
Research Center, University of Karlstad, Karlstad, Sweden.
Jan Olsson is a consultant within Swedish Telecom on matters of quality assurance.

The Service Industries Journal, Vol.16, No.2 {April 1996), pp.140-164

PUBLISHED BY ['RANK CASS. LONDON
KEY CONCEPTS FOR NEW SERVICE DEVELOPMENT 14]

perspective. Our point of departure is that one of the major tasks in

developing new services is to build in the right quality from the start.
Our aim is to present a frame of reference for strategic service
development with the emphasis on how to build in the right quality from the
start. The frame of reference has emerged by degrees from a number of
studies within the Service Research Center (see. for instance, Norling et al
[1992] and from a pilot study in Swedish Telecom's Corporate Quality
Group [Edvardsson and Olsson. 1992]). The paper is primarily based on tbis
study. The frame of reference is also being tested in a NUTEK project where
we are studying the development of a number of services, such as X2000,
Teleguide. "smart card' services, the job vacancy computer system at AMS
offices and Samhall's cleaning concept.
We begin by defining what we mean by customer, quality and service.
This leads us onto a discussion of the concept of service development and
how to illustrate the results of a service development process. If we can
clearly describe the desired results of service development, this will make it
easier to ensure that the right quality is built in from the start.

CUSTOMER AND CUSTOMER ORIENTATION

For us, the customer is the person or organization receiving the outcome of
the operation [ISO, 19911. The added value and quality of the service is
realised with the customer and is interpreted/perceived by him. Without
customers there would be no income and thus no business. The main task of
service development is to create the prerequisites for services which the
customer perceives have an attractive added value. This presupposes that the
company has a thorough understanding of the customer's needs and
expectations.
Many service markets are being deregulated and competition is
increasing. This means that customers are being offered a greater number of
options. Customers who are not satisfied with their suppliers - because their
needs, wishes and expectations have not been reasonably satisfied - are
finding it increasingly easy to change suppliers.
Let us clarify what we mean by needs, wishes and expectations. Needs
are basic. Different customers look to satisfy their needs in different ways.
Wishes refer to the way in which tbe customer wants to satisfy a specific
need. However, it is not possible for him to satisfy all his wishes since, for
instance, he may lack the financial means. In our discussion we use the term
demand for those wishes for which the customer has purchasing power.
Expectation is an important concept in connection with service
development. Expectation is linked with a phenomenon or object, a specific
service or a certain company. Expectation is based on the customer's needs
142 THE SERVICE INDUSTRIES JOURNAL

and wishes but it is also influenced, often to a considerable extent, by tbe

company's image or reputation on the market, the customer's previous
experience of the service company, the service company's marketing, and
so on. In other words, expectation is not linked to tbe subject, i.e., the
customer, or to the objeet, i.e., the service or service company, bu( to the
interaction between object and subject. Expectation changes over time as a
result of changes in customers' wishes, Tbe explanation lies in the fact that
object and subject bave changed. They are dialectically related.
To understand customers' needs and wishes properly, it is appropriate
and often necessary to involve customers in the process of developing new
services. Attractive and customer-friendly services emerge from a dialogue
with competent and demanding customers. We believe it is very important
to have close contact with the customer when developing new services. This
requires us to include customers in service development projects, to set up
a meaningful dialogue witb customers and to make it easier for them to
articulate tbeir needs, requirements and wishes. Tbe various value-loaded
activities In the service are defmed in tbe dialogue witb the customer. We
believe that this customer-active paradigm, i.e., working interactively with
customers, is to be preferred wben formulating and testing the servicc
concept and developing service processes. Tbe direct and active
involvement of customers is becoming increasingly common in the
development of high technological products but also in the automobile
industry, for example at Honda. In our view, a dialogue with customers
wben developing services is even more natural and urgent.
Services, we maintain, are produced by means of a process, which may
be described in various ways, for instance, in the form of internal services
to internal customers in a series of steps. Tbe result is an external service tu
customers on the market. Relations witbin the company should be seen in
tbe same way as external relations, tbat is, even witbin the company there
are customers with needs, wishes and expectations, hence the term internal
customer. The whole chain of customer relations must be organised; each
activity is important if the result is to be a service of tbe right quality.
Since quality is realised in the service encounter and the customer is the
ultimate judge of tbe service, customer orientation should be a central point
of departure for all service deveJopmeni. This means placing the customer
in the centre but not being governed in all respects by the customer and what
he says. It is important to understand and respect tbe customer's needs.
wishes and requirements but not to follow them slavishly. The customer-
oriented service company has insight into tbe customer's assessment criteria
and acts on them. It is also fully aware of tbe conditions prevailing at the
customers' place of business. What is important is that there is a trustful and
open dialogue between service company and customer.
KEY CONCEPTS FOR NEW SERVICE DEVELOPMENT 143

QUALITY

Quality is a multi-faceted concept. For us. it is a matter of satisfying the

needs and meeting the expectations of three main groups: customers, staff
and owners.
Somebody once said that quality. like beauty, is in the eye of the
beholder. The quality of a service is very much in the eye of the beholder.
This underlines the customer's key role. Therefore, the customer must never
be forgotten in service development if we have the ambition of building the
right quality into services from tbe start. It is not easy to define 'quality'. If
one were to ask a group of people what they understood quality to mean,
one would probably receive as many answers as people asked. Quality is
defined in ISO [1991] as 'the totality of features and characteristics of a
product that bear on its ability to satisfy stated or implied needs'.
A common definition of service quality is that 'the service should
correspond to the customers' expectations and satisfy their needs and
requirements'. The definition is customer-oriented but should not be
interpreted as meaning that tbe service provider should always comply with
the customer and his wishes. That it is the customer who decides what is
good or bad quality does not mean that the customer is always right or that
the customer can always fully articulate or verbalise his needs and wishes.
We would warn against customer myopia. However, we would also stress
how important it is for customers to assist in giving quality a clear and
operational content.
In many cases the customer needs assistance in making his needs and
quality requirements explicit. One way of helping him is to expose him to
new services, the new and better opportunities offered, for instance, by
information technology through the simulation of new services. The
abstract service is made concrete and it is easier for the customer to make
specific comments - even the unspoken needs and wishes are partially
revealed.
It is often appropriate to distinguish three groups of people whose
expectations, needs and demands should be taken into account; apart from
customers, these are staff and owners. One does not want to belittle the
importance of customers' perception of quality, on the contrary; but to be
able to offer customers the right quality, the other two groups must also be
satisfied. Our definition of quality is that it satisfies needs and meets
expectations, those of the customers, staff and owners. It is essential to
understand fully the various needs and expectations of these groups, how
they are formed and how they change. When developing services, it is
crucial to build in the right quality by balancing these partly contradictory
demands on the service.
144 THE SERVICE INDUSTRIES JOURNAL

SERVICE - A CUSTOMER OUTCOME

The International Organisation for Standardisation [ISO, I991| defines
service as a subset of product. A product is the result of a production
process. Producing i.s a matter of creating added value, thai is, the vaiue of
whal emerges is greater than the sum of the resources consumed during the
production process. In a market economy, added value is subjected to
continuous assessment. Here the customer plays a key role. The customet's
continual decision is to buy or not to buy, his selection of service and service
provider. If the custotner does not perceive that he receives added value, it
is not a matter of production but of destruction, and the customer is
obviously disinclined lo pay for it.
The customer-perceived outcome can be classified in many ways
depending on situation and purpose. For this, suitable variables are used. In
connection with service development two sets of variables would seem
central: lasting - temporary, tangible - intangible. (See Figure 1 below.) A
haircut is an example of a tangible, temporary result, and an insurance
policy an intangible lasting one.

FIGURE I
THE CUSTOMER-PERCEIVED RESULT CLASSIFIED IN TERMS OF THE VARIABLES LASTINtl -
TEMPORARY AND TANGIBLE - INTANGIBLE

Temporary
I
Lasting
Tangible Intangible

Let us illustrate this by consulting services. These services are often

invisible' and thus difficult for Swedish Telecom to explain and for the
customer to assess. This places special demands on marketing to prevent
unrealistic, often excessive expectations on the market. The expectations
which are created by marketing affect the customer's perception of the
KEY CONCEPTS FOR NEW SERVICE DEVELOPMENT 145

outcome. It is the responsibility of the consulting company and the

individual consultants to ensure that the customer does not have unrealistic
demands and expectations. Not infrequently, however, controlling customer
expectations is often forgotten in service development. The design and
implementation of marketing - giving the right promises and fulfilling them
- should be an integral part of the process of service development.
We believe that the concept of service should be approached from the
customer's perspective. It is the customer's total perception of the outcome
which 'is the service', which forms the perception of quality and determines
whether the customer is satisfied or not. The main task of service
development is to create the conditions for the right customer outcome.
Customers have different values and different grounds for assessment, they
perceive one and the same service in different ways. What the customer
does not perceive does not exist - is not a customer outcome.

SERVICE - A CUSTOMER PROCESS

A service is generated by a process. The customer outcome is created in this
process. Processes which generate services are different from those in
which goods are manufactured. In the latter case, the manufacturing process
takes place at one time and in one place, the customer is not present, nor
does he participate in vhe process. In the case of services, however, the
customer does take part in the process as co-producer. The customer is
present and affects the result in terms of added value and quality. The role,
participation and responsibility of the customer in service production must
therefore be made clear. This is an important task in service development,
as is the construction of customer-friendly, pedagogical customer processes.
We pointed out earlier that customers have different needs, wishes and
expectations. But perhaps it is just as important when discussing service
development to take into account the fact that the behaviour of customers
varies considerably. The way each customer performs his tasks in the
customer process is in some sense unique. This means that the process is
customer-unique. The services arise in direct interaction with the customer
and the customer is not just the person who receives and assesses the
outcome; he/she also creates and produces it.
The customer process must lead to a customer outcome which has
sufficient added value for the service to be commercially successful, at least
in a long-term perspective. Added value is created in the customer process.
The customer receives and actively fonns impressions during the process
which affect his perception of the outcome.
Seeing the customer as co-producer of services has far-reaching
implications for service development. The behaviour of the customer, what
146 THE SERVICE INDUSTRIES JOURNAL

is logical and reasonable from the customer's perspective, must be taken

into account as the various processes are built up. How should we deai with
the fact that the customer has ideas, suggestions, feelings and so on which
make it necessary to assume that different customers will behave differently
and that one and the same customer may behave very differently on
different occasions? How can we create the best prerequisites for a good
customer outcome when we cannot control the whole process in which the
service is produced?

SERVICE THE PREREQUISITES FOR THE SERVICE

In the two previous sections we have highlighted two sides of the concept
of service based on ihe customer perspective: the customer outcome and the
customer process. The customer as the recipient and judge of the service in
terms of added value and quality - the customer outcome; and the customer
as co-producer of the .service in his partially unique manner - the customer
process. In quality terms we may speak of outcome quality and process
quality. In this section we highlight a third aspect of the service concept.
Our perspective is now that of the service company.
The customer's total perception of a certain service is thus based on his
perception of the outcome and the process. The customer outcome and the
customer process are, in their turn, dependent on the prerequisites in the
fonn of resources which have been built up to provide the service or, in
other words, to make the service possible.

FIGURE 2
THE CONCEPT OF SERVICE AS CUSTOMER OUTCOME. CUSTOMER PROCESS AND THl-
PREREQUISITES FOR SERVICE
KEY CONCEPTS FOR NEW SERVICE DEVELOPMENT 147

We maintain that the service company does tiot provide the service but the
prerequisites for various services. The company does not sell services but
opportunities for services which are generated in partially unique customer
processes with partly different customer outcomes. A logical consequence
of our reasoning is that the most central goal of service development is to
develop the best and right prerequisites for well-functioning customer
processes and attractive customer outcomes. By attractive customer
outcomes we mean that, in the eyes of the customer, the service is associated
with added value and quality. Naturally, a prerequisite for this is that it may
be achieved with some profitability for the company and that the needs and
expectations of the staff are reasonably satisfied.
We mean by the prerequisites for the service, for instance, the technical
resources, the administrative routines and procedures which customers must
understand and apply. We will discuss this in more detail and present a
model of the prerequisites for the service in the next section.
If we assume that the customer is co-producer, this means thai the
customer is either an asset or a 'disruptive factor' in the set of resources
providing the prerequisites for the service. This also means that some of the
prerequisites are outside the service company, at the customer's or
supplier's/partner's and therefore generally cannot be influenced or
controlled. Let us exemplify this with Swedish Telecom's services (see
Figure 3). The prerequisites might entail the equipment in the form of the
telephone exchange and telephones the customer has. Other factors are the
knowledge and experience the customer possesses, e.g., in the use of
telecommunication equipment.
A strategic issue is how that customer's various resources should and
can be utilised. It would seeni to be a major strategic task in service
development to answer this question. At the same time there would
probably be greater risk in that more of the prerequisites for the service were
not directly under the control of the company.
Let us relate the discussion in this section with the arguments in the
previous ones. A service means creating added value. Added value refers to
the customer's perception of the relation between quality and cost. The
customer assesses added value on the basis of the outcome he perceives.
This outcome is created and interpreted during the customer process. This
process does not occur in a vacuum but is dependent on resources. These
have been developed and organised by the service company. The company
provides the prerequisites for the service. The condition for good services is
provided by the prerequisites in the service company, its partners/suppliers
and customers. Creating the right prerequisites for a good customer process
and a good customer outcome is the main task of service development.
148 THE SERVICE INDUSTRIES JOURNAL
FIGURE .1
THE PREREQUISITES FOR THE SERVICE INCLUDE BOTH WHAT EXISTS WITHIN SWEDISH
TELECOM AND AT PARTNERS'/SUPPLIERS' AND CUSTOMERS' PREMISES

Prerequisites for the Service

MODEL OE THE PREREQUISITES FOR THE SERVICE

The prerequisites for the service are the end result of the .service
development process. The goal (the right prerequisites) is described by
means of a model with three basic components; service concept, service
process and service system fEdvardsson, 1991 and Edvardsson and
Mattsson, 19921. The term service concept refers to the description of the
customer's needs and how they are to be satisfied in the form of the content
of the service or the design of the service package. Correspondence or
agreement between customer needs and the service offer is essential. The
outcome the customer perceives (cf. the discussion in the previous section
on service as customer outcome) determines the customer's perception of
the quality of the service.
Service process relates to the chain of activities that must function
properly if the service is to be produced. Certain activities are more
problematic or critical than others. Special attention should be paid to these
so that the customer process and the customer outcome achieve the right
quality at reasonable cost. The service process is the prototype for every
customer process (cf. the discussion in the previous section on service as a
customer process. The service process consists of a clear description of the
various activities needed to generate the service [Shostack, 1984, and 19871.
The service system constitutes the resources that are required by or are
available to the .service process in order to realise the service concept. It may
KEY CONCEPTS FOR NEW SERVICE DEVELOPMENT 149

be described in terms of a number of components. In our model these are

the service company's staff, the customers, the physical/technical
environment and the organisational structure [Edvardsson and Gustavsson,
1990J.

Service Concept
Service concept refers to the prototype for the service, i.e., the customer
utility and the benefits (value for the user) which the service and its various
sub-services are intended to provide and convey to the customer. The
service concept covers both the description of the customer needs to be
satisfied and how they are to be satisfied in the form of the content of the
service or the design of the service package, e.g., expressed in terms of core
service and supporting services. The service concept is a detailed
description of what is to be done for the customer (= what needs and wishes
are to be satisfied) and how this is to be achieved (= the service offer).
The service concept specifies the domain of needs with respect to extent
and nature (= both primary and secondary customer needs) and the service
offer (= both core service and supporting services) to meet this domain.
Correspondence between customer needs and service offer is crucial. The
service concept forms the point of departure and defines the demand for the
prerequisites that must be present for a service with the right quality to be
realised.
When discussing customer needs, it is useful to make a distinction
between primary and secondary needs [Edvardsson, 1991]. Primary needs
are those which act as a 'trigger', i.e., the reason why the customer
experiences a certain need; for instance, it might be the need to contact a
person in the UK. This need can be satisfied in various ways: by phone,
telefax, letter, telex or telegram, and so on. Different customers want to
satisfy this need in different ways depending on how urgent it is to reach the
person quickly and the customer's perception of the advantages and
disadvantages of the various alternatives. Let us assume that the customer
prefers the telephone. When the customer has decided to make a phone call,
further needs arise: how to gain access to a telephone, the telephone number
to the person in question, the number for the UK, and so on. These needs
are a function or result of the chosen service and are termed secondary
needs. Let us call the chosen means of communication the core service . If
the customer had chosen to write a letter, other secondary needs would have
arisen.
To satisfy these secondary needs, other services are needed, apart from
the telephone service, the core service. We have chosen to call these
services supporting services. In the case in question., directory enquiries is a
supporting service.
150 THE SERVICE INDUSTRIES JOURNAL

I'IGURE 4
MODEL OF THE SERVICE CONCEPT

A. Customer needs B. Design of the offer

f Supporting

Both primary and secondary needs (both explicit and implied) must be
dealt with for the customer to be satisfied. Studies show that the customer
expects this, and that high customer-perceived quality is based on the tact
that, apart from the core service, the service offer also includes a relevant
set of supporting .services of the right quality, as seen from the customer's
perspective. What distinguishes the successful service companies with
respect to customer-perceived quality and profitability - from the less
successful ones is often related to the extent and quality of the .supporting
services. Quality means both that the service represents added value for the
customer and that the customer finds it easy to use.
Several of the secondary needs are implied, i.e., the cu,s(omer assumes
that various services are available which will satisfy even secondary
customer needs in a reasonable manner. When the service concept is being
formulated and the service developed, it is necessary to identify and
understand these implied needs, wishes and expectations as well. This
requires information on and a thorough understanding of the customers to
be served by the service in question. When developing the service concept,
attention should be given to the fact that individual services often form part
of a system together with other services, existing and/or new. To achieve the
right quality and high productivity, these 'system aspects' should also be
taken into account.

The Service System

The service system includes the resources available to the process for
realising the service concept. The system forms a whole where the sub-
KEY CONCEPTS FOR NEW SERVICE DEVELOPMENT 151

systems must function separately but also together with other sub-systems.
In our model the various sub-systems of the service system or, put in other
terms, the resource structure is made up of the service company's svaff, the
customers, the physical/technical environment and organisation and control.
In the following we describe each of these resource categories.

The service company's staff. The staff are usually seen as the service
company's key resource. We believe it correct to focus on the staff in this
way when developing services. There are, namely, studies which show that
the customer's perception of the quality of a service depends lo a great
extent on how he perceives the staff as regards, for instance, their
knowledge and commitment [see. e.g.. Crane and Clarke, 19881. For many
customers, individual staff are by and large synonymous with the service. If
we assume this is the case, then we should consider the staff as more than a
resource, we should see them as part of the service. The intangible service
becomes tangible for the customer in the encounter with individual staff. It
is in this interplay between staff and customer, the process of truth, that
many services arise and become tangible.
If we see the staff not just as something one resource among others but
as the critical or decisive factor enabling the customer to perceive that he is
receiving a service of the right quality, it is natural to adapt techniques,
systems, routines and other resources to human logic, i.e., the customers'
and staff's natural way of behaving. Thus, we cannot simply specify the
demands on system and processes lor a new service on the basis of the
service concept. We must also understand how individuals and groups of
staff can be encouraged to work in the best manner. We must take their
special needs, demands and wishes into account - not just those of the
customers. To do a good job, the staff, in the company and the company's
partners, must be knowledgeable, motivated and committed.
Knowledge and experience alone have proved to be insufficient for high
performance in service companies. Motivation and enjoyment in work arc
also necessary. Motivation is primarily achieved through work content,
relations with fellow workers and one's immediate supervisor, and relations
to customers. If we are successful in designing attractive jobs and a
stimulating work environment, this will probably be the most important
quality-creating factor in service development.
It is a reasonable assumption that the choice of staff (those who are to
help provide the service) and their training/education should be an integral
part of the development of new services. The staff are often the crucial
factor for customer-perceived quality but in some cases they are also the
dominant factor on the cost side. Wage costs are on average much higher in
service companies than in manufacturing companies. This is a further
152 THE SERVICE INDUSTRIES JOURNAL

important reason why staff should be given special status when designing
new services. The production system becomes a socio-technical system
with the focus on Ihe staff, which should result in the right service and high
productivity. The recruitment, training, development and outplacement of
stalf arc often not handled in a systematic and professional fashion in
Swedish service companies. Furthermore, the analysis of work content and
job design, tasks and reward systems are important but often neglected areas
in .service development.

The customers. Naturally the customers have a key role. The customer - a
company or private individual/household - is part of the service system. It
is not just a matter of the customer's knowledge and his ability to assimilate
information but also, for instance, the equipment he uses and the
administrative routines employed in the customer company. All this is pan
of the .service system and thus influences the prerequisites for the service.
Marketing plays a central role in relations with the customer in establishing
quality from the outset. Marketing consists of establishing and developing
mutually trustful and profitable customer relations. Marketing is much more
than advertising and sales visits. It also includes the design of invoices,
dealing with customers on the telephone, information material, the image
the media project of the company, but above all the perception of the
customer outcome and the customer process.
In t)rder to give the right promises, one must understand customers
needs, wishes and expectations and co-ordinate one'.s markeiin^
accordingly. One must not promise more than one's competence or capacity
to deliver. The company mu.st have both the will and the ability (ti provide
the services that the customers need and expect.
We believe that an important but often neglected task in marketing - in
particular when introducing new services on the market - is to infonn the
customer and 'train' him in the role of co-producer. This emerges as a major
factor in the introduction of new services.
The service system should be so designed that it is easy for the customer not
only to take part in but also to actively contribute to the p(X)cess. When
developing new services, it is necessary, we have found, to organise the
following: firstly, interaction between customers, e.g., a queue system when the
service is overloaded; secondly, the customer's relationship with the company's
organisation as regards routines; thirdly, the interaction between customers and
staff; and fourthly, the interaction with the physical/lechnica! environment.
The exchange, with the customer in the centre, should be organised so
that the customer can make the best contribution both by providing
information and by performing various parts of the service process.
KEY CONCEPTS FOR NEW SERVICE DEVELOPMENT 153

The physical/technical environment. The physical/technical environment

includes premises, computers and other technical systems but also the
equipment at partners' and customers' premises. The continuous
improvement of the technical environment through the utilisation of
opportunities offered by technical developments may be absolutely
essential for the survival and development of the company. At the same time
it is becoming increasingly obvious that technology is not a goal in itself but
a means, a means of creating favourable conditions for increasingly better
services and increasingly more profitable business deals. Technical
developments should be customer-driven and business-driven. Technology-
driven developments seldom result in the best added value, the most
attractive services and the best customer-perceived quality.
Technical developments alone, even if they are business-driven, are
insufficient. Other parts of the service system - the staff, the organisational
structure, the administrative regulatory systems and the customers - must
interact with the technical environment.
Technology and equipment mean possibilities and limitations. It is a
matter of identifying and benefiting from the advantages and possibilities
and avoiding the limitations in the service system. Naturally, it may be
necessary to change the physical/technical prerequisites to create the right
prerequisites for a new service. However, the normal situation is that a new
service is, to all intents and purposes, dependent on and must work within
the framework of the existing technical environment. The physical/technical
resources can have different features and functions, and they can fit more or
less well together. It is important, of course, that they do not just work with
other physical/technical resources but also suit the organisation and are
adapted to customer and staff logic.

Organisation and control. The fourth component in the system is

organisation and control. This includes, first of all, the organisational
structure, i.e., the division into activity and profit centres. The organisational
structure must clearly define responsibility and authority in an appropriate
manner. Is the responsibility for the various activities in connection with the
introduction of a new service clear? Have responsibility and authority been
appropriately delegated? Are profit centres and other activity centres
logically and suitably organised with respect to their tasks? Is the company
organised to focus on the customer's needs, the service and business?
The second aspect of organisation is the administrative support systems.
These systems, e.g., planning and information, financial system and wage
system, play a key role in controlling the business. The administrative
support and control systems require information and supply information
about individual services. How the systems for handling administration in
154 THE SERVICE INDUSTRIES JOURNAL

service companies are designed is often of much greater importance for the
prerequisites for a service than most people realise, in connection with
service development even the administrative systems must be adjusted or
complemented to produce a workable service.
Thirdly, the interaction, dialogue with customers and other interested
parties - in the first place, partners and suppliers - is an important part of
the organisation and control of the service system. This includes, for
instance, how feedback is achieved, how complaints and customer
dissatisfaction are handled but also opening hours, telephone times and the
possible VIP treatment of major or faithful customers. One aspect is how
easy it is for customers to contact the company, a specific department or
individual in the company; for example, is it easy to find the person
responsible for a certain task, the person or department one wants, or does
the company provide parking for visitors?
The fourth aspect we include is the organisation of the various activities
connected with marketing. There are three important tasks in marketing that
need to be organised and controlled. Eirstly, using market and customer
analyses to understand the competitive situation, customers' needs and
demands, and customer logic. Secondly, ensuring that realistic e.xpectations
are created. Thirdly, teaching customers how to actA>ehave in the role ot co-
producer. Before approaching customers on the market, it is essential to create
the right internal conditions and understanding by means of internal markeling
to staff and partners. Internal marketing first and then external marketing.
Our model of the service system is presented in Figure 5.

FIGURE 5
MODEL OF THE SERVICE SYSTEM

Physical/
technical
environment

Source: Edvardsson and Gustavsson [1990:15].

KEY CONCEPTS EOR NEW SERVICE DEVELOPMENT 155

The Service Process

The service process is the chain or chains of parallel and sequential
activities which must function if the service is to be produced. The service
process consists partly of activities at partners' and customers' premises.
The company thus does not have direct control over all parts of the process
but must nevertheless be able to control the process in its entirety.
All pans of the service process are important but some sub-processes or
activities are more problematic or critical than others. Special attention
should be paid to these to ensure that the customer process and customer
outcome have the right quality at reasonable cost. The interfaces between
departments within the company and with partners and customers are parts
of the process which are often difficult to control.
What is then the difference between service process and customer
process? Service process refers to the prototype or model for various
customer processes. It must be able to handle several customer-specific
processes. The service process consists of a precise description of various
standardised and (alternative) activities in the customer process. These
activities do not take place until the customer activates the service process.
The activities to be performed are indicated by the service process, i.e., the
prerequisites for the customer process.
As the complexity of streams of processes increases, so does the
probability that a company will lose control of the characteristics that
are necessary to meet customer expectations, add value, and hold down
costs. The result is the worst of two worlds: as the quality level falls
below customer expectations, the cost of producing the product or
service increases out of proportion to the value added. [Conti, 1989: 45]
To generate a service which meets the service concept in all respects, it is
necessary to determine in detail the process, including micro-processes and
individual activities, which will ensure the right service. Quality and
productivity must be built in from the beginning by developing the 'right'
service process.
We maintain that it is necessary but not sufficient for all departments to
participate in the development of the service process. Despite this, there is
an obvious risk that each department or function will optimise its 'own'
processes and not heed the whole and the inter-functional dependency
relations which exist in all organizations. Important managerial tasks in
connection with service development include, firstly, creating an
understanding of the custon\er outcome and customer process; secondly,
involving the customers in the development process, helping customers
articulate their needs, even those that are implicit, and 'attaching importance
156 THE SERVICE INDUSTRIES JOURNAL

to the customer's voice'; thirdly, involving strategic partners and suppliers

when they are affected.

FIGURE 6
THE SERVICE PROCESS

Customer

Define Understand inlemal Understand end

Cfuality requirements customers'expectatiom customers' e?cpectations

During the process various parts of the service system are utilised. The
system i.s static, it provides the necessary resources, whilst the process i.s
dynamic, consisting of activities which are linked in microprocesses to form
the service process. This process should be designed to utilise the
possibilities of the system, not least the service company's staff, and to
handle its limitations in the best way. Many new services are more or le.ss
dependent on the conditions in the existing system. This means that staff
with knowledge and understanding of the possibilities and limitations of the
service system, not just at a general level but also in detail, should be
involved in service development. Without this contribution it is difficult to
see that the service system will support the service process, which is our
point of departure.
An important aspect of the service process is the so-caDed line of
visibility, i.e., which parts of the service system the customer should and
should not see during the customer process. Seeing the restaurant's kitchen
and perhaps the raw materials, and experiencing the smells may influence
the customer-perceived quality positively or negatively. Standing in a queue
at a bank and, at the same time, seeing the staff behind the counter taking a
break is an indication that the line of visibility is poorly drawn.
Studies show that in many instances the service system has in-built
recurrent defects, which create more or less serious problems in the service
process [see, for instance, Norling, Edvardsson and Gummesson, 1992]. In
some cases it may be said that the system puts a spoke in the wheel of the
service process, which, of course, was not the intention. We must conclude
KEY CONCEPTS FOR NEW SERVICE DEVELOPMENT 157
from this that the service process and service system should be developed
interactively on the basis of the possibilities and limitations of the latter. The
service system may need to be changed and developed but the consequences
of these changes for other parts of the system must be simultaneously taken
into account.
In Figure 7 below we present a model of the prerequisites for the service
based on the three components: service concept, service system and service
process.

FIGURE 7
MODEL 01- THE PREREQUISITES OF THE SERVICE

A CONCEPT FOR SERVICE DEVELOPMENT

In this section we first analyse ISO's approach to and description of the
process of developing a service. Then we present a sketch of how we see the
process. This is based on the approaches, concepts and arguments presented
above.
^5g THE SERVICE INDUSTRIES JOURNAL

Service Design according to ISO

The ISO standard will probably be very important for certain services. Thus
it would seem natural to briefly present and evaluate ISO's description and
definition of service design.
ISO, 1991 [E] Quality management and quality system elements.
Guidelines for services describes in brief terms what is meant by designing
a service.
The process of designing a service involves converting the service
brief into specifications for both the service and its delivery and
control, while reflecting the organisation's options (i.e.. aims, policies
and costs).
The service specification defines the service to be provided, whereas
the service delivery specification defines the means and methods used
to deliver the service. The quality control specification defines the
procedures for evaluating and controlling the service delivery
characteristics.
Design of the service specification, the service delivery specification
and quality control specification are interdependent and interact
through the design process. Flow charts are a useful method to depict
all activities, relationships and interdependences.
The principles of quality control should be applied to the design
process itself, (p.9)
The term 'service brief refers to the customer need(s) the .service is to
satisfy. It is important to take note of the demands that are placed on the
service-producing organisation and the service to be developed, in order to
ensure that the customer's needs are really met. 'This brief defines the
customers' needs and the related service organisation's capabilities as a set
of requirements and instructions that form the basis for the design ot a
service' (p. 9).
With delimited and specific customer needs as the point of departure, the
demands which the service-producing company must take into account
when developing and .specifying a new service are defined. This description
in ISO is very similar to what we have termed the prerequisites for the
service. There is a major difference, however, in that ISO does not see the
customer as part of the service system but as outside it. The demand for and
need of adjustment to the resources and conditions prevailing at the
customer's are not taken into account, at least not explicitly. Our view of the
service process means that the customer - internal or external - is part of
the service-producing organisation, and that he contributes actively to the
process by performing certain steps or activities. Without this contribution
KEY CONCEPTS FOR NEW SERVICE DEVELOPMENT 159

from the customer the service will not be initiated. The wording in ISO is
an indication that its approach to reality is still informed by the logic of
industrial production rather than that of service production.
However, the ISO standard has adopted a process approach. Developing
services is thus a matter of creating conditions for producing added value
for the customer. ISO points out that the development of flow charts is a
useful method of specifying activities, relations and dependencies in the
service process. The process is termed 'service delivery' which implies
'supplier activities necessary to provide the service'.
ISO defines customer as 'the recipient of a product or service'. They
have still not learnt that, apart from being the recipient of the service, the
customer (if not in all service production) can be co-producer - to a greater
or lesser extent.

Our Model for New Service Development

Naturally, the process of new service development can be described in
various ways. We argue that the main task of service development is to
create the right generic prerequisites for the service. This means an efficient
customer process: the process must be adapted to the logic of the customer's
behaviour and a good customer outcome, that is, the service is associated,
in the eyes of the customer, with quality and added value.
We distinguish three main types of development within our frame of
reference: the development of the service concept, the development of the
service system and the development of the service process (see Figure 8).
Obviously, the time required for the processes and the dependency relations
between them vary from project to project.

FIGURE 8
MODEL OF THE SERVICE DEVELOPMENT PROCESS

Service Concept Development

Service Systran Development

Service Process Development

160 THE SERVICE INDUSTRIES JOURNAL

Development of the service concept. The idea for the new service is
systematically and critically evaluated, taking into account the external and
internal, as detailed above. Further, a commercial assessment is made by
means of a general cost and income analysis. The concept is developed with
the aid of experienced people in the field, both staff from the service
company and demanding/knowledgeable customers. The aim is first to
decide whether or not to proceed with the idea and then, given a go-ahead
decision, to determine the key factors influencing the quality of the service
and its vaiue for the customer. This should result in a preliminary concept
for the service and details about the customers to whom the service is to be
offered - the target market. The new service is compared with existing
services and the feasibility of producing it within reasonable technical and
economical limits examined. As a basis for the economic assessment, a
rough estimate of the cost is made and a preliminary, value-based price set.
With the primary and secondary customer needs as a basis, the service
offer, namely the core service and support services, is specified. Further, it
is important to see how well the service offer corresponds to customer needs
and how well the projected service fits into the assortment. A crucial point
here is to determine the extent to which the existing service system may be
used.
Naturally, concept development requires good information. To achieve
this, it is most probably necessary to conduct an external analysis of the
market conditions and an internal analysis of the strengths and weaknesses
of the company. Externally the idea for a new or changed service is
evaluated and specified by means of an analysis of customers, competitors
and institutions. In the customer analysis the idea is related to the
customers' needs, wishes, expectations and behaviour - customer logic. The
presumptive clientele's grounds for assessment and links with existing
service providers, and the size and development of the market are taken into
account.
The competitor analysis identifies the competition both from
competitors in the same trade and competitors from 'outside', so-called
invaders. Existing services offered by competitors, their strategies and
possible new services which may be introduced etc are studied. The
strengths and weaknesses of competitors are identified and assessed.The
institutional analysis may, for instance, cover legal demands and conditions,
ethical or moral aspects and political conditions. The analyses of customers,
competitors and institutions are integrated by specifying and evaluating
market conditions in the form of threats and possibilities.
Internal resources are required in order to take advantage of the
possibilities offered by the market. These may be technological, financial,
knowledge related and organisational. The internal analysis results in a
 KEY CONCEPTS FOR NEW SERVICE DEVELOPMENT ]61

description and evaluation of the company's strengths and weaknesses in

relation to the idea for the new service.

Development of the service system. The service concept places demands on

the service system. The resources of the system must be so designed that the
concept can be realised, that the right service can be generated. The
development of the service system and service process must go hand in
hand. The central activities involved in developing the service system
include a demand specification on the basis of the service concept, a
thorough assessment of the current service system and a detailed description
of the design of the system for the new service.
Developing the service system is a matter of selecting and training the
staff who are to deal with the new service. They must know exactly what is
expected of them, what their responsibilities are, and so on. Their
motivation will be increased if they can take part in the development of the
system. There are several advantages to be gained here, they will have a
better understanding of the service as a whole and their commitment will be
greater in that they have been given a chance to influence the process.
Developing the service system is also a matter of training and adapting to
the customers one has chosen to serve. Training customers is a question of
information, education and marketing. According to Harvey et al. [19921
the (detailed) design of the interaction between customers and service
company staff is a critical parameter in service development.
A third aspect of the development of the service system concerns the
physical/technical environment. The fourth component - organisation -
must also be improved; this involves administrative support systems,
responsibility for the various activities in the service process and a realistic
plan for the introduction and marketing of the new service. Harvey et al.
[1992] stress the importance of carefully designing the interaction with and
demands on suppliers and specifying quality demands to ensure that the
process works as intended.

Development of the service process. Developing the service process

involves the specification of the activities needed to generated the service.
Special attention must be paid to the critical points in the process. The roles
and responsibility of customers and partners must be clarified, the control
of customers' expectations specified and the procedures for teaching the
customer to correctly perform his 'tasks' in the service process decided on.
Detailed but comprehensible blueprints of how the service is to be produced
can often be of assistance here. Alternative service processes can be tested
with the aid of appropriate computer-based simulation techniques.
Essential activities include the detailed deseription of the service process
 THE SERVICE INDUSTRIES JOURNAL
162
with respect to activities and sub-processes, equipment, quality and eost
factors, critical points and line of visibility. Costs are calculated in detail and
a value-based price determined. Information for the control of customer
expectations and marketing communication is produced. Instruments for
quality measurement and control are designed.
Figure 9 presents an overview of the development process and its results
i.e., the prerequisites for the service. It should be emphasised that it is the
possibilities for the service that are produced, not the service itself The
service is not generated and added value realised until the customer makes
use of the possibilities, i.e., the actual service. Not until then does he
perceive and assess the service itself

FIGURE 9
MODEL OF THE SERVICE DEVELOPMENT PROCESS AND THE PREREQUISIIK-S
FOR THE SERVICE

Service Development Service Prerequisites

CONCLUSION
In this article a new frame of reference for new service development has
been presented. The focus is on designed quality. To maintain the viability
and profitability of a service company, we argue that it is essential to
develop and provide services of the right quality in a resource-effective
manner. The quality of the services governs the customer's perception of the
company in the market.
The service is produced in a customer process where customer, company
and sub-contractors are actors. The quality of the process is controlled by
 KEY CONCEPTS FOR NEW SERVICE DEVELOPMENT 163
the prerequisites each actor takes with him into the customer process. These
prerequisites are governed by the company's service concept, service
process and service system. The service company must develop and offer a
service concept which is appropriate to the customer's needs and which
contains attractive added-value and a 'customer-friendly' and generic
service process. The service system must provide the necessary resources
for the service process.

FIGURE 10
THE IMPORTANCE OF SERVICE DEVELOPMENT FOR THE SERVICE COMPANY'S INTERNAL
FFFICIENCY AND THE CUSTOMER-PERCEIVED QUALITY OF A SERVICE

Service Development

Service Prerequisites

During the often brief periods of time in which a customer process is

activated there is little chance of correcting the quality problems which may
arise because of incorrect or poor prerequisites. Thus it is crucial for the
quality of the service to develop services which create the best prerequisites.
Service development must co-ordinate the development of concept, process
and system where each aspect requires special treatment.

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