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Service and product development in a strategic alliance

September 15, 2019

Developing new products and services has become more and more important in
today’s turbulent business environment. In several European countries, also the financial
sector has turned into a dynamic industry in which product and service innovation has
gained importance (Vermeulen, 2004).

There is, however, a lack of research in the field of new service development (NSD)
(Stevens & Dimitriadis, 2005). Especially the role of customers in NSD has received
inadequate attention (Akamavi, 2005a). In addition, NSD in alliance context seems to be
an unexplored area.

Services differ from physical products, which brings particular features also to their
development efforts (Edvardsson et al., 2000; Alam & Perry, 2002; Stevens &
Dimitriadis, 2005). Nevertheless, the study of Vermeulen and Dankbaar (2002) shows
that several concepts originating from the new product development (NPD) literature are
applicable to service companies too.

Several firms collaborate with their partner companies in new product and service
development, which adds complexity. According to Rindfleisch and Moorman (2003),
fairly little is known about how inter-firm NPD and NSD affect the customers of the
collaborating companies. Their findings put forward that horizontal, i.e., competitor
dominated, new product alliances may have a negative impact on the level of the
companies’ customer orientation, which can be explained by the partners’ overlapping
knowledge and the lack of mutual trust.

This paper reports the findings of a study examining customer orientation in the early
phases of the NSD process in alliance context (Valkeapää, 2006). The study answers to
the following research question.
• What kind of a process supports customer orientation in the early phases of new
service development in a strategic alliance?

The empirical case study of the paper concerns NSD of a strategic alliance operating
in the financial sector in Finland. The paper presents the findings of a developmental
action research project that aimed at developing a new service idea further in a customer-
oriented way. The project was part of a research project called Co-Create carried out by
the Enterprise Simulation Laboratory SimLab at Helsinki University of Technology.
In this paper, NSD and services are examined from a process-oriented point of view.
We concentrate on examining business-to-consumer services because the case alliance
primarily develops new services targeted to household customers.

The paper describes the theoretical background, the methodology, the financial
service case study, and the results of the study followed by the managerial implications
and the conclusions.

The Characteristics of Services

Grönroos (1990, 2000) points out that services differ from physical products in many
ways. Services are processes by nature. They are produced and consumed at least partly
simultaneously, and also the customer participates in the production of the service.
(Grönroos 1990, 2000) According to Edvardsson and Olsson (1996), the fact that the
customer is a co-producer of the service has wide-reaching implications to NSD.

Services are intangible and cannot be stored like physical products. Another typical
feature of services is heterogeneity resulting from the uniqueness of the service situation
and the social relationship involved. (Grönroos, 1990, 2000)

Grönroos (1990) suggests that the core value of services is produced in the buyer-
seller interaction.
This interaction includes encounters between the service provider and
the customer, i.e., “the moments of truth”, which considerably affect service quality.
Edvardsson and Olsson (1996) note that the customer is the recipient of the service and
also judges its quality. Service quality depends on the quality of both the service process
and its outcome (Grönroos, 1990; Edvardsson & Olsson, 1996).

The primary task of NSD is to build prerequisites for services that add value for
customers. These prerequisites consist of the service concept, the service process, and the
service system. (Edvardsson & Olsson 1996)

Service Concept, Service Process, and Service System

The term service concept defines the customers’ needs and how these needs are
supposed to be satisfied by the service (Edvardsson & Olsson, 1996). The service concept
describes a potential new service including its features and benefits as well as motivation
for offering and purchasing it (Scheuing & Johnson, 1989).

It is often the service process that enables the differentiation of the service from
competing offerings (Grönroos 2000). According to Edvardsson and Olsson (1996), the
service process describes several standardized and potentially alternative activities that
must function in order to guarantee the production of the service. The service process
usually includes interfaces between different units of the company but also between the
customer, the company, and its business partners. These interfaces are often difficult to
control. (Edvardsson & Olsson, 1996)

By service system, Edvardsson and Olsson (1996) mean the resources that are
required by the service process to make the service concept concrete. These resources
contain the customers, the employees, the whole organization with its management
routines, and the environment including technical systems.

The role of information and communication technology (ICT) has increased
substantially in the service system. Technology enables new ways to communicate and
interact, but NSD should be customer-focused instead of being driven by technology
(Edvardsson et al., 2000).

Service Innovations
Service innovations concern different dimensions of services, such as the service
concept, the customer interface, the service delivery, or the technology involved (De Jong
& Vermeulen, 2003). A new idea is a starting point for an innovation. When the idea is
successfully developed and implemented to create new benefit, such as profit, an
innovation emerges. Innovation can deal with products, services, or processes. (Smeds,
1994; De Jong & Vermeulen, 2003)

Avlonitis, Papastathopoulou, and Gounaris (2001) have developed a typology of
innovations for new financial services. According to them, the most innovative type
includes new-to-the-market services. The next type constitutes of new-to-the-company
services. The services that have new delivery processes are the third type. The fourth,
fifth, and sixth types are called service modifications, service line extensions, and service
repositionings. The service developed in our case study represents new-to-the-company
service. Thus, it can be regarded as innovative.

The level of innovativeness of the new service also affects NSD and its success
factors. The structuring and the critical points of the NSD process differ between projects
that concern radically versus incrementally innovative services. (Avlonitis,
Papastathopoulou & Gounaris, 2001; De Brentani, 2001)

The New Service Development Process

Many models illustrating NSD stem from the NPD theory that is much more
developed than the theory concerning services (Scheuing & Johnson, 1989; Akamavi,
2005a; Stevens & Dimitriadis, 2005). The NSD process has been described in the
literature by sequential process models and, on the other hand, by models that emphasize
an organizational perspective (Stevens & Dimitriadis, 2005). Our framework is primarily
sequential, but we also recognize organizational factors, such as interaction, supporting
customer-oriented NSD in a strategic alliance. Our framework has elements of interaction
models that describe interaction and communication between people or groups and
factors affecting it (Wiio, 1989).
The Early Phases of the New Service Development Process

The NSD process consists of sequential and parallel activities (Alam & Perry, 2002).
The early phases of the process include formulating service objectives and strategy,
generating ideas, screening ideas, developing the service concept, testing the service
concept, and analyzing business implications of the service (Scheuing & Johnson, 1989).

New service ideas may emerge already in the course of the planning of service
objectives and strategy. The phases of idea screening, concept development, concept
testing, and business analysis can be carried out in parallel. (Alam & Perry, 2002)

Johne and Storey (1998) note that developing a new service is usually more complex
than developing a physical product. This is because, besides developing the concept, also
the interaction process with the customers has to be developed. They also point out that
intangibility makes it difficult to test service concepts. Edvardsson et al. (2000) stress this
complexity by stating that the service concept, the service process, and the service system
relate closely to each other and are developed to some extent in parallel.

Organizational factors originating from the NPD theory, such as effective and open
communication, cross-functionality, and teamwork, have been suggested to contribute to
NSD too (Vermeulen & Dankbaar, 2002; Stevens & Dimitriadis, 2005). Communication
between different parties may improve if cross-functional project teams are used or if the
phases of the NSD process are carried out in parallel (Vermeulen & Dankbaar, 2002).
Akamavi (2005a) suggests that an iterative NSD process helps to involve customers and
personnel from supportive activities (e.g. front office) in NSD.

The study of De Brentani (2001) suggests that the most important success factors for
new business services are the service’s fit to the customers’ needs and the expertise of the
front office personnel, regardless of the level of innovativeness of the service. Customers
and front office personnel possess a lot of valuable knowledge about customer needs and
competing offerings, and they should participate in NSD. The commitment of front office
personnel is crucial since the success of the new service depends mostly on their abilities
after the launch. (De Brentani, 2001)

Improving Customer Orientation in New Service Development

Kärkkäinen, Piippo, and Tuominen (2001) state that customer-oriented NPD requires
collecting knowledge about the customers’ needs in a systematic way and designing
products based on this knowledge. This holds true for services as well. Customer needs
can be studied with the help of various techniques, such as market research and
observation (Edvardsson et al., 2000).

According to Johne and Storey (1998), it is important to involve customers in NSD
and to help them to articulate their needs. The simultaneity of production and
consumption and the customer’s participation in service delivery make it even more
important to involve customers in the development efforts than in the case of physical
products (Vermeulen, 2004; Akamavi, 2005a).

Process-oriented management emphasizes customer orientation and cross-
functionality. Activities of a process can be modeled in chronological order in a process
model, and the actors of the process can simulate the progress of the process by role-
playing. (Hannus, 1994) Process modeling can enhance the development of new services
in a customer-oriented way because designing the service process helps to examine the
customer’s interaction with the service (Edvardsson et al., 2000). Process modeling can
also help to identify bottlenecks and to improve the quality of service (Akamavi 2005b).

business process simulation method (Smeds, 1994, 1997; Smeds, Haho &
Alvesalo, 2003; Forssén & Haho, 2001; Haho, 2002) has been successfully applied to
improving a customer-oriented way of working in collaborative service provisioning. The
method has enabled partner companies to discover customer needs (Koskelainen et al.,
2005) and to create common understanding about the needs of the partners’ common
customers (Jaatinen, Södergård & Peuhkurinen, 2005).

New Service Development in a Strategic Alliance
NSD can be carried out by a single company or an inter-company alliance. The case
study of this paper concerns NSD conducted by a strategic alliance consisting of two
partner companies. Inkpen (2001) defines a strategic alliance as a partnership in which
resources and governance structures from two or more organizations are utilized in
collaboration to create strategic benefit. According to him, mutual interdependence
between the partners exists, although the strategic partners remain independent

The alliance formation can be justified by strategic, transaction cost related, or
learning related reasons. Inter-partner learning enables alliance partners to access and
acquire complementary capabilities and knowledge. However, some proprietary assets
need to be protected. (Kale, Singh & Perlmutter, 2000)

Learning, sharing knowledge, and operating in a customer-oriented way in a strategic
alliance require strong relational ties built on mutual trust and interaction between
partners. (Kale, Singh & Perlmutter, 2000; Rindfleisch & Moorman, 2003) Trust is a
fundamental success factor for strategic partnering. The strategic partners also need to
establish a shared vision as well as shared values and rules in order to succeed. (Ståhle &
Laento, 2000)

According to Gerwin and Ferris (2004), strategic partners have several alternatives
from which to choose the organization of the collaborative NPD project. The decision-
making and the work itself can be carried out by a joint project team or separate teams.
The composition of the project team also affects the learning opportunities of the
partners. (Gerwin & Ferris, 2004) The NSD project of our case study was carried out by a
joint project team that included service developers from both partners.

The Background of the Case Study
The case study of this paper concerns NSD of a strategic alliance operating in the
financial sector in Finland. The developmental action research project was part of the
case alliance’s wider NSD project. The case study examines a single NSD project that is
an instance of the general NSD process of the case alliance.

The case alliance consists of an insurance organization and a group of banks that have
a common representative ‹‹ Figure 2 ››. In addition, a data system provider that is closely
committed to the banks participated in the NSD project of the case study.

Figure 2: The case alliance (Valkeapää, 2006)
One of the collaboration fields of the case alliance is NSD that has been carried out
for a couple of years. In the Finnish market, there are a few banking and insurance related
services developed by the case alliance. Besides collaborative NSD, the case companies
develop services independently.

The New Service Development Project of the Case Study

The NSD project of the case study concerns the development of a collaborative, ICT-
based service that includes features from both banking and insurance services. The
service is targeted to household customers.

The case alliance’s service objectives were derived from the partnership strategy that
embodied the partners’ shared vision. New services of the case companies relate closely
to the customer schemes of the companies. The partners did not have a shared customer
strategy, but they had gone through their own customer schemes together.

The idea of the collaborative service arouse when the managers of the case companies
thought through collaborative service objectives. They pondered how the companies
could create competitive advantage and added value to customers together.

Both partner companies considered the service idea as a promising opportunity, so
they decided to continue developing it. The partners organized common meetings in
which the service developers tried to concretize the initial service idea and to create
consensus about it. After the partners had a better understanding about the idea, they
formed a joint project team whose mission was to turn the idea into a service concept and
a service process and to analyze its business implications. The team included ten service
developers representing the insurance organization, the banks, and the data system
provider. The case alliance also decided to include an external party, the SimLab research
unit, in the NSD project. The task of the SimLab’s researchers was to facilitate the
development of the new service in a customer-oriented way.

The representatives of the joint project team gathered several times to design the
service concept together. They also participated in the group sessions in SimLab ‹‹ see
Figure 1 above ››. In two process modeling sessions, the service developers designed the
collaborative service process in group discussions led by the researchers. The visual
model of the service process was formed using paper sheets in the first process modeling
session. The model included the phases from selecting the sales channel to the use of the
new service. Later on, the researchers modeled the process with the help of modeling
software. The model was improved in the second modeling session.

The service concept and the service process were tested and developed further in the
simulation day. The use of the service was discussed around visually modeled case
examples representing real-life situations that might relate to the use of the new
collaborative service. The participants of the simulation brought up their own experiences
and ideas as potential customers of the new service, which worked as substance for the
further development of the service concept. The other parts of the service process were
discussed around a model representing the steps of the future service process in
chronological order.

Seven service developers, three customer servants, and eighteen representatives of
end-customers participated in the simulation discussions in the morning. The
representatives of customer servants and end-customers did not have prior knowledge
about the new service. In the afternoon, the service developers and the customer servants
worked in three groups to tackle the challenges recognized in the course of the simulation
Dozens of ideas concerning the new collaborative service were raised in the
simulation day, and the service concept was developed further by utilizing these ideas.
Some ideas concerning the service process may lead to service innovations, but
innovative ideas concerning the service concept itself were not born.

According to the filled questionnaire and the follow-up interviews, most service
developers considered the interaction with the representatives of customer servants and
end-customers as highly valuable because it enabled the reflection of their ideas with
these parties. In addition, the process-oriented approach was regarded as important.
Modeling and simulating the service process helped to build shared understanding
between partner companies and to consider the customer as the driving force in the
development of the new service.

Business analysis was conducted by the companies’ joint project team during and
after the development of the service concept. Later on, the joint project team gave
recommendations concerning the implementation of the new service. Due to some
external changes in the operating environment, the implementation of the service could
not be started immediately. The implementation waits for a more suitable time.

As a result of the study, a model of a customer-oriented NSD process in a strategic
alliance was created ‹‹ Figure 3 ››. The model presents the prerequisites and the early
phases of the collaborative NSD process as well as the interaction that is needed to
support the customer orientation of collaborative NSD (see Valkeapää, 2006).

Figure 3: The model of a customer-oriented NSD process in a strategic alliance

The prerequisites of the collaborative NSD process include trust, shared vision,
strategy, values, rules, and a shared view on the customers. The early phases of the
collaborative NSD process consist of formulating collaborative service objectives,
generating ideas, screening ideas, developing the concept and the service process, testing
the concept and the service process, and analyzing business implications of the service.

The parties that need to interact in order to improve the customer orientation of
collaborative NSD include service developers (back office), customer servants (front
office), and customers. The content of the interaction (e.g. the participants and the topics
of discussions) varies in different phases of the NSD process.

Customer-oriented NSD requires that knowledge about customer needs is collected
and utilized to support service innovation. Diverse methods (e.g. market research and
observation) can help to discover customer needs. In the case study of this paper, the
business process simulation method was applied in order to enhance interaction and to
acquire knowledge about customer needs.

The managers of collaborating companies can use our framework to identify factors
that contribute to the customer orientation of NSD in alliance context.
The results of the study highlight the importance of the collaborative development and
testing of the joint service process already in the early phases of the NSD process. The
development of the service process is important in NSD of a single company and the
importance increases when companies collaborate. The interfaces between different
actors in the service process within and between the collaborators are difficult to control.
It is a challenge to design and implement clear and consistent service processes in an
alliance. Furthermore, collaborative service processes have potential for service
innovations, so their development should be emphasized.
In collaborative NSD, it is important that there is enough interaction between the
service developers of the collaborating organizations. This peer-interaction between the
partners is crucial in order to build common vocabulary and consensus about the
collaborative service. In addition, the service developers need to interact with the
customer servants and the customers in order to discover customer needs. This cross-
group interaction should take place within one company but also between the partners.
The business process simulation method helps to develop and test customer-oriented
service processes in alliance context. The method supports both peer-interaction and
cross-group interaction. Managers are encouraged to use business process simulation in
collaborative NSD projects in order to improve customer orientation.
Finally, the study implies that the collaborating companies should have a shared
vision and strategy and the customer schemes of the organizations should be compatible
enough. The shared vision and strategy should be implemented in the organizations in
order to make sure that they also guide the work of the service developers.

According to the results of this study, the early phases of the collaborative NSD
process include formulating service objectives, generating ideas, screening ideas,
developing the service concept and the service process, testing the service concept and
the service process, and analyzing business implications. 

The development and testing of the service process differentiate NSD from NPD.
Developing and testing the collaborative service process is crucial since the service
process helps to make intangible services concrete and to differentiate them from
competing services. In alliance context, joint service processes easily become complex,
which highlights the importance of their careful collaborative development.
In collaborative NSD, interaction between the service developers of the strategic
partners is crucial but the service developers should also interact with the customer
servants and the customers. This is especially important in service context due to the
special characteristics of services, such as the customer’s participation in service delivery.
We claim that business process simulation supports both peer-interaction between the
partners and cross-group interaction within one company and between the partners, which
helps to develop customer-oriented collaborative services. 

Action researchers affect the research results because they act as change agents and
interact actively with the research subject. Therefore, it is important for an action
researcher to document the research process and to evaluate the results of the study.
(Gummesson, 2000)
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