Chapter – 3

Service Strategy

3

Service Management (5e)

Operations, Strategy, Information Technology

By

Fitzsimmons and Fitzsimmons

3-2

Formulate a strategic service vision. Discuss the competitive environment of services. Describe how a service competes using the three generic service

strategies. Discuss the service purchase decision. Discuss the competitive role of information in services. Explain the role of the virtual value chain in service innovation. Discuss the limits in the use of information. Categorize a service firm according to its stage of

competitiveness. Conduct a data envelopment analysis (DEA).

Learning ObjectivesLearning Objectives

3-3

Strategic Service Vision1. Target Market Segments

Strategic Service Vision1. Target Market Segments

What are common characteristics of important market segments?

What dimensions can be used to segment the market, demographic, psychographic?

How important are various segments? What needs does each have? How well are these needs being served, in what manner, by

whom?

3-4

Strategic Service Vision2. Service Concept

Strategic Service Vision2. Service Concept

What are important elements of the service to be provided, stated in terms of results produced for customers?

How are these elements supposed to be perceived by the target market segment, by the market in general, by employees, by others?

How do customers perceive the service concept? What efforts does this suggest in terms of the manner in

which the service is designed, delivered, marketed?

3-5

Strategic Service Vision3. Operating Strategy

Strategic Service Vision3. Operating Strategy

What are important elements of the strategy: operations, financing, marketing, organization, human resources, control?

On which will the most effort be concentrated? Where will investments be made? How will quality and cost be controlled: measures,

incentives, rewards? What results will be expected versus competition in terms of,

quality of service, cost profile, productivity, morale/loyalty of servers?

3-6

Strategic Service Vision4. Service Delivery System

Strategic Service Vision4. Service Delivery System

What are important features of the service delivery system including: role of people, technology, equipment, layout, procedures?

What capacity does it provide, normally, at peak levels? To what extent does it, help insure quality standards,

differentiate the service from competition, provide barriers to entry by competitors?

South-west AirlinesSouth-west Airlines

Target market segment Interstate business travelers with carry-on luggage who are currently driving Short flights

Service Concept On time performance Frequent departures

Operating Strategy Fast airport turnaround to allow productive use of aircraft and provide

frequent departures

Service delivery system Cabin crew with good interpersonal skills to create ‘fun’ atmosphere No assigned seating to provide fast gate turnaround Short distance haul – mostly carry-on luggage – less ground crew

3-7

3-8

Relatively Low Overall Entry Barriers not patentable Typically not capital intensive Exception – when you are first in a small market, or prized location

advantage

Economies of Scale Limited limited opportunities for economies of scale because of

simultaneous production and consumption

Erratic Sales Fluctuations- demand varies by time of day and day of the week with random

arrivals

Competitive Environment of ServicesCompetitive Environment of Services

Continued…Continued…

No Power Dealing with Buyers or Suppliers Typically service firms are small, so they have less power Exception are McDonald’s buying beef

Product Substitutions for Service For example blood pressure or diabetes checking can be done at

home due to innovations. So service firms need to watch for competition from other service firms and product innovations.

High Customer Loyalty This can act as a barrier to entry

Exit Barriers Typically low

3-9

Competitive Service StrategiesCompetitive Service Strategies

Porter argues that three generic competitive strategies exist:

1. Overall cost leadership

2. Differentiation

3. Focus

3-10

3-11

Requires efficient scale facilities, tight cost and overhead control, and use of innovative technology

Implementation of this strategy typically requires high capital investment in state of the art equipment, and aggressive pricing (even when it may lead to start up losses).

Examples, Wal-Mart, McDonald’s

1. Overall Cost Leadership1. Overall Cost Leadership

How to attain cost leadership?How to attain cost leadership?

Seeking Out Low-cost Customers Some customers cost less to serve than others Sam’s club and Costco serve customers who buy bulk and ask for little to no

service

Standardizing a Custom Service Example H&R block has taken only routine preparation though tax forms can

be customized

Reducing the Personal Element in Service Delivery (promote self-service) Technology use has allowed banks to provide access to ATMs and reduce

human interface

Reducing Network Costs (hub and spoke) Taking Service Operations Off-line when customer is not

required to be present – ex. drop off for laundry in Chicago

3-12

3-13

Differentiation in service means being unique in brand image, technology use, features, or reputation for customer service.

HOW? Making the Intangible Tangible (memorable) For example giving toiletries in hotels to remind of the comfortable stay

Customizing the Standard Product For example addressing a customer by the name can give an impression of

customization of otherwise a standardized service

Reducing Perceived Risk By providing guarantee, example pest control

Giving Attention to Personnel Training Service providers will ultimately make the difference

Delivering consistent level of high Quality at multiple sites

2. Differentiation2. Differentiation

3-14

This strategy is built around providing a target market with very specific need.

Works on the assumption that the firm can serve its narrow market more effectively and efficiently.

Example Service Offered: (e.g. Shouldice Hospital and hernia patients). Harley Davidson

3. Focus3. Focus

3-15

Availability (24 hour ATM)

Convenience (Site location)

Dependability (On-time performance)

Personalization (Know customer’s name)

Price (Quality surrogate because of intangibility)

Quality (both outcome & process; Perceptions important)

Reputation (Word-of-mouth)

Safety (Customer well-being)

Speed (Avoid excessive waiting)

Customer Criteria for Selecting a Service Provider

Customer Criteria for Selecting a Service Provider

3-16

Service Qualifier To be taken seriously a certain level must be attained by the

service provider on the competitive dimension, as defined by other market players.

Examples are cleanliness for a fast food restaurant or safe aircraft for an airline.

Service Winner The competitive dimension used to make the final choice among

competitors.

Example is price, convenience, reputation.

Service Purchase DecisionService Purchase Decision

3-17

Service Loser Failure to deliver at or above the expected level for a competitive

dimension. Examples are failure to repair auto (dependability), rude treatment

(personalization) or late delivery of package (speed).

Service Purchase Decision (cont.)Service Purchase Decision (cont.)

3-18

Strategic Focus Competitive Use of Information On-line Off-line (Real time) (Analysis) Creation of barriers to entry:

Reservation system Frequent flyer user club Switching costs

Data base asset: Selling information Development of services Micro-marketing

External (Customer) Revenue generation:

Yield management Point of sale Expert systems

Productivity enhancement: Inventory status Data envelopment analysis (DEA)

Internal (Operations)

Competitive Role of Information in ServicesCompetitive Role of Information in Services

1. Creation of Barriers to Entry1. Creation of Barriers to Entry

Reservation system American Airline’s Sabre System

Frequent User club American airlines used its reservation system to also create

frequent flyer club to reward people to accumulate credit

Switching cost Data transfer New software and hardware requirements

3-19

2. Revenue Generation2. Revenue Generation

Yield management Real time pricing by monitoring demand and supply

Point of sale information can travel to suppliers for real time inventory

management Server can transmit order information directly to the kitchen and to

the cashier at the same time

Expert system Past data can be fed to create expert systems – which maintenance

people can recall to trouble shoot problems

3-20

3. Database Asset3. Database Asset

Selling information

Developing services Data mining to find new trends for new services or improving

existing services

Micromarketing To target your advertisements

3-21

3-22

Using Information to Categorize CustomersUsing Information to Categorize Customers

Coding grade customers on how profitable their business is.

Routing used by call centers to place customers in different queues based

on customer code.

Targeting allows choice customers to have fees waived and get other hidden

discounts.

Sharing data about your transaction history with other firms is a source of

revenue.

4. Productivity Enhancement4. Productivity Enhancement

Inventory status Real time inventory management and tie up with suppliers Better movement of inventory through multiple sites

3-23

3-24

Marketplace vs Marketspace Physical versus virtual

Creating New Marketspace Using Information - 5 steps Gather Organize Select Synthesize Distribute

The Virtual Value ChainThe Virtual Value Chain

Example of USAAExample of USAA

United Service Automobile Association (USAA), which provides financial services to military personnel and their families has become a world class competitor by exploiting the virtual value chain.

Three Stage Evolution 1st Stage (Visibility): See physical operations more effectively with

information – Ex. USAA “paperless operation

2nd Stage (Mirroring Capability): Substitute virtual activities for physical – Ex. USAA “automate underwriting”

3rd Stage (New Customer Relationships): Draw on information to deliver value to customer in new ways – Ex. USAA “event oriented service”

3-25

3-26

Anti-competitive (Barrier to entry) How to account the expense on frequent flyer service?

Fairness (Yield management) How to justify different price paid for same service by customers?

Invasion of Privacy (Micro-marketing)

Data Security (Medical records) How to protect sensitive information about people?

Reliability (Credit report) How to challenge erroneous information?

Limits in the Use of InformationLimits in the Use of Information

3-27

1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service delivery Customers patronize service firm for reasons other than performance.

Customers neither seek out nor avoid the firm.

Customers seek out the firm on the basis of its sustained reputation for meeting customer expectations

The company’s name is synonymous with service excellence. Its service doesn’t just satisfy customers; it delights them and thereby expands customer expectations to levels its competitors are unable to fulfill.

Operations is reactive, at best.

Operations functions in a mediocre, uninspired fashion.

Operations continually excels, reinforced by personnel management and systems that support an intense customer focus.

Operations is a quick learner and fast innovator; it masters every step of the service delivery process and provides capabilities that are superior to competitors.

SERVICE QUALITY

Is subsidiary to cost, highly variable.

Meets some customer expectations; consistent on one or two key dimensions.

Exceeds customer expectations; consistent on multiple dimensions.

Raises customer expectations and seeks challenge; improves continuously.

Stages in Service Firm CompetitivenessStages in Service Firm Competitiveness

3-28

1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service delivery

BACK OFFICE

Counting room. Contributes to service, plays an important role in the total service, is given attention, but is still a separate role.

Is equally valued with front office; plays integral role.

Is proactive, develops its own capabilities, and generates opportunities.

CUSTOMER

Unspecified, to be satisfied at minimum cost.

A market segment whose basic needs are understood.

A collection of individuals whose variation in needs is understood.

A source of stimulation, ideas, and opportunity.

INTRODUCTION OF NEW TECHNOLOGY

When necessary for survival, under duress.

When justified by cost savings. When promises to enhance service.

Source of first-mover advantages, creating ability to do things your competitors can’t do.

WORKFORCE

Negative constraint. Efficient resource; disciplined; follows procedures.

Permitted to select among alternative procedures.

Innovative; creates procedures.

FRONT-LINE MANAGEMENT Controls workers. Controls the process. Listens to customers;

coaches and facilitates workers. Works to enhance their career.

Is listened to by top management as a source of new ideas. Mentors

Stages in Service Firm CompetitivenessStages in Service Firm Competitiveness

3-29

Discussion TopicsDiscussion Topics

1. Give examples of service firms that use both the strategy of focus and differentiation and the strategy of focus and overall cost leadership.

2. What ethical issues are associated with micro-marketing?

3. For each of the three generic strategies (i.e., cost leadership, differentiation, and focus) which of the four competitive uses of information is most powerful?

4. Give an example of a firm that begin as world-class and has remained in that category.

5. Could firms in the “world-class service delivery” stage of competitiveness be descried as “learning organizations”?