Creating New Markets Through Service Innovation

Many companies make incremental improvements to their service offerings, but few succeed in creating service innovations that generate new markets or reshape existing ones. To move in that direction, executives must understand the different types of market-creating service innovations as well as the nine factors that enable these innovations.

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For decades, the importance of services to the global economy has grown steadily while the importance of goods has declined. In fact, services now dominate, making up about 70% of the aggregate production and employment in the Organization for Economic Cooperation and Development (OECD) nations and contributing about 75% of the GDP in the United States.1 It’s only natural, then, that companies are constantly seeking to provide better services, regardless of whether they are in a “pure” service business or in a manufacturing industry that must increasingly rely on its service operations for continued profitability.

However, most improvements to service activities are incremental. Stores stay open longer; product makers establish Web sites with e-commerce functions; airlines, casinos and supermarket chains enhance loyalty card programs. These improvements are useful and indeed necessary, but they are limited in the kind of returns they can produce. Only rarely does a company develop a service that creates an entirely new market or so reshapes a market that the company enjoys unforeseen profits for a considerable length of time.

One such organization is Enterprise Rent-A-Car Company. Enterprise has been strikingly successful: In an industry long led by The Hertz Corp. and Avis Rent-A-Car System Inc., it exploited a new idea to overtake them both. Founded by Jack Taylor in St. Louis in 1957 as a car leasing business, Enterprise added a rental division in 1962 when Taylor’s customers began telling him that they often needed a car when theirs was in the shop for repair. While other rental car companies targeted travelers at airports, Enterprise focused on local customers who needed a replacement vehicle temporarily. This strategy required Enterprise to locate its offices close to where people live and work, and encouraged the company to develop such innovations as its “We’ll pick you up” service. Today, Enterprise’s revenues exceed $8 billion, and the company boasts the largest fleet size and the most rental locations in the United States.2 Ninety percent of the U.S. population lives within a 15-mile drive of one of Enterprise’s offices.3

In effect, Enterprise’s innovative view created a new market for car rentals in the same way that FedEx Corp. redefined the package delivery market.



1. A. Wölfl, “The Service Economy in OECD Countries,” working paper 2005/3, OECD — Directorate for Science, Technology and Industry, Feb. 11, 2005; and Office of the U.S. Trade Representative, “U.S. Submits Revised Services Offer to the WTO,” press release (Washington, D.C.: Executive Office of the President, May 31, 2005).

2. “Enterprise Rent-A-Car Revenue Exceeds $8 Billion: Records Set in Revenues, Fleet Size and Locations,” September 21, 2005,; and “Car Rental in the United States — Industry Profile,” October 2004,

3. “Rental Car Industry Expansion into Neighborhoods Fuels and Fills Americans’ Appetites,” Enterprise Rent-A-Car press release, May 18, 2005.

4. W.C. Kim and R. Mauborgne, “Blue Ocean Strategy,” Harvard Business Review 82 (October 2004): 76–84.

5. G. Keighley, “The Phantasmagoria Factory,” Business 2.0 (February 2004): 103–107.

6. L.L. Berry, K. Seiders and S.S. Wilder, “Innovations in Access to Care: A Patient-Centered Approach,” Annals of Internal Medicine 139, no. 7 (2003): 568–574.

7. “FedEx Corporate History,” accessed October 30, 2005,

8. D. Foust, “Frederick W. Smith: No Overnight Success,” Business Week, Sept. 20, 2004, 18.

9. “Skype Gives Small Businesses Market Advantage,” Skype press release, Oct. 25, 2005.

10. “Change in Assets: Item 2.01 Completion of Acquisition or Disposition of Assets,” SEC Filings for eBay, Form 8-K for eBay Inc., Oct. 18, 2005.

11. M. Krauss, “Starbucks ‘architect’ explains brand design,” Marketing News 39, no. 8 (May 1, 2005): 19–20.

12. M. Boyle, “Drug Wars,” Fortune, June 13, 2005, 79.

13. F. Barber and R. Strack, “The Surprising Economics of ‘People Business’,” Harvard Business Review (June 2005): 80–90.

14. L.L. Berry, L.P. Carbone and S.H. Haeckel, “Managing the Total Customer Experience,” MIT Sloan Management Review 43, no. 3 (spring 2002): 85–89.

15. S.M. Keaveney, “Customer Switching Behavior in Service Industries: An Exploratory Study,” Journal of Marketing 59 (April 1995): 71–82; and L.A. Mohr and M.J. Bitner, “The Role of Employee Effort in Satisfaction with Service Transactions,” Journal of Business Research 32, no. 3 (March 1995): 239–252.

16. B. DeSimone, “Cirque’s Siren Call to Athletes,” USA Today, July 7, 2005, sec. C, p. 1.

17. D. Joachim, “FedEx Delivers on CEO’s IT Vision,” Oct. 25, 1999,

18. S. Gray, “Coffee on the Double,” Wall Street Journal, Apr. 12, 2005, B1.

19. S. Munoz, media relations manager, FedEx, interview with authors, July 8, 2005.

20. B. Elgin, “Managing Google’s Idea Factory,” Business Week, Oct. 3, 2005, 88–90.

21. B. O’Reilly, “The Secrets of America’s Most Admired Corporations: New Ideas, New Products,” Fortune, March 3, 1997, 60–64.

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