242 Information Management and Business Review Vol. 4, No. 5, pp. 242-251, May 2012 (ISSN 2220-3796) Driving Force for Service Innovation through Creating Unique Value Proposition: Capitalizing on Cultural Identity in the Spa Industry of Chiang Mai, Thailand Thanan Apivantanaporn, *John Walsh School of Management, Shinawatra University, Thailand *jcwalsh@siu.ac.th Abstract: The Thai spa industry is recognized as one of the driving forces for economic development in terms of revenue and employment. However, the current economic downturn and intensifying competition from neighboring countries pose substantial challenges and threats to the industry. The Royal Thai Government has initiated an innovative development model that capitalizes on the country’s unique cultural capital. This paper investigates a specific case study of Chiang Mai in Northern Thailand, where the legends and ancient wisdom of the now defunct Lanna state have been developed over the course of decades and now constitute significant constructive and creative cultural capital. It investigates these issues through examination of government policy and measures, expert opinions, literature review and field observations. It is found that three factors are relevant to the development of the industry: (1) knowledge based service; (2) collective cluster effort and (3) business ecology system; together, these contribute to new service innovation which in turn contributes to new business value propositions. Keywords: Value creation; service strategy; creative industry; spa industry; Thailand 1. Introduction As Thailand has struggled to graduate from the middle income status it has achieved by virtue of an economic model focusing on low labor cost manufacturing, its government has turned its attention in recent years to the issue of the knowledge-based economy (KBE). In manufacturing, moving to the KBE tends to center on ways to add value to inputs and outputs in the production of items. However, in the service sector, moving to the KBE can involve a process that is more difficult to specify. Helping to solve this problem is a significant part of this current paper. One of the country’s most important service sectors has for recent decades been tourism and its governing body, the Tourism Authority of Thailand (TAT), has paid attention to encouraging the upgrading of the tourism experience. Adding value to tourism involves the creation of an experience economy. This means, the component parts of tourism service provision have added to them value in the form of experience which is consumed by the tourist on the spot but which can also become a valued memory for long-term consumption and, also, a marketing spur in its own right. One of the principal component parts of the experience economy identified by the TAT has been the spa industry. It is through upgrading and integrating spa experiences into existing tourism consumption patterns that it is hoped Thailand will identify a pattern for entry into the upper income category of countries. Thailand was recognized as the Spa Capital of Asia during the spa awards for the year 2009, as organized by the Asia Spa magazine and many of its venues are prominent in the lists of nominees every year (Asia Spa, 2010). The spa industry has become one of the engines driving the economic development of Thailand, just as it is important in a number of different Asian countries. According to Intelligent Spas, “… the 743 spas operating in Thailand are expected to generate THB9.1 billion (approximately USD275 million) in revenue during 2009” (“Updated Spa Benchmark Report for Thailand, ” 2011). The spa industry is, therefore, a significant part of the tourism industry in Thailand and that has been one of the principal means of economic development in the Kingdom since the 1970s. Until quite recently, however, spas have been something of a commodity product in Thailand and little thought and effort have gone into developing them as added value business propositions or as part of integrated tourism resort destinations, which is what has occurred in more mature markets.