I would say that an experiment (or measurement) counts as an observation. But you are right that observation is more general. For example much of what we observe in the universe cannot be recreated in a laboratory.The only problem I have with your characterization of the scientific method is that you are not explicitly acknowledging the importance of observation in the formulation of hypotheses.
Formulation of hypotheses would count as a potential refinement of an existing theory (if there is one). Such a refinement may be rejected by further experiments/observations.
The fallacy of Lucas and Marco is that they believe that a scientific theory is either "right" or "wrong". By definition no scientific theory is right. Any theory should be viewed as only an approximation to reality. Everyone knows Newtonian mechanics has been superseded by general relativity but Newtonian mechanics occurs as a limit of general relativity and it still describes perfectly 99.999% or our observable world. So characterizing Newtonian mechanics as "wrong" in one's signature because it does not account for some extremely subtle phenomena is simply idiotic.