Harvard Business Review (Apr 2008 issue) had a great article on service design: pick a niche, make sure your system doesn't
just scratch an itch, and then serve that market by optimizing for that niche. I think there is a lot of interesting lessons in here about service design. The article agues that in service design you must pay attention to four elements, and they're often driven by the idea that "Service excellence can be defined as what a business chooses not to do well."
(1) the focus on offering. The offering here is to find out what customers want out of their service experience. If customers want longer store hours, you may be able to offer them out by trading off a higher cost to the products. It cites Walmart as an example, where they traded sales help for cheaper prices.
(2) the focus on the funding mechanism. The focus here is on understand who is going to pay for the service. For example, it uses Progressive insurance as an example, that they send vans to assess the damage on the accident scene. This turns out to reduce their fraud rate as well, and that's how they pay for the improved customer service experience.
(3) employee management system. Having your employees be of a certain type might mean you have to trade off on other attributes. For example, Commerce Bank focuses on having a great teller experience, so they don't select for the smartest straight-A students, but instead selects for people with great attitudes.
(4) customer management system. The key here is to design a way to modify customer behavior. Discounts and late fees is one way (instrumental) to modify behavior; Another is to use normative means such as reputation, shame, and pride to motivate customers to do the right thing. It cites Zipcar, the car-sharing service, as an example here.
The sidebar on how incumbents in a business react to more focused entrant firms was really educational, as it reflects well with how big companies sometimes react to threats to its current lines of business.