DSE7100 Managing Service Operations

1. 1 Prof. Xiande Zhao Department of Decision Sciences and Managerial Economics, Tel. 2609-7650 Email: xiande@baf.msmail.cuhk.edu.hk Website: http://ihome.cuhk.edu.hk/~b103313/index.htm Tutor: Mr. Zhuang Baochao, K. K. Leung Building, G23 Tel. 26098560 Email: bochao@baf.msmail.cuhk.edu.hk DSE7100Managing Service Operations

2. 2 Objectives: To understand the importance and economics of customer loyalty and how to build customer loyalty; To formulate service strategies and the strategic service vision for a service business; To manage operating role of customers in service delivery; To design sustainable service models that successfully incorporate a customer’s operating role; To analyze customer data to inform managerial decision making To manage changes in service settings. To examine special challenges and problems facing service organizations in Hong Kong.

3. 3 Teaching Methods the Participant-Centered Learning and the Case Method (PCLCM) as advocated by the Harvard Business School. Case discussions Experience sharing Reading material Lectures and videos students are strongly encouraged to participate in class discussions by sharing their ideas, opinions, working and personal experiences.

4. 4 Assessment: Individual case and exercise 30% Group case assignments 70%

5. 5 Books and Reference Articles Text Book (TB): Fitzsimmons, J. A. and Fitzsimmons, M, J. (2008), Service Management: Operations, Strategy, and Information Technology, Irwin/McGraw-Hill, Sixth Edition Reference Books (RB): Zeithaml, V. A. and Bitner, M. J. (2003), Service Marketing: Integrating Customer Focus Across the Firm, McGraw-Hill Book Company, International Edition Lovelock, C., Wirtz J., Keh, H.T., and Lu, X, (2005), Services Marketing in Asia: People, Technology and Strategy, Second Edition Reference Articles (RA): Heskett J. L. Jones, T. O., Lovemen, G. W. Sasser, W. E, & L.A. Schlesinger “Putting the Service Profit Chain to Work”, Harvard Business Review, March- April 1994, 164-174, reprint no. 94204 Reichheld, F. E. and Sasser, W. E. Jr., “Zero Defections: Quality Comes to Services”, Harvard Business Review, September-October 1990, 105-111 Zeithaml, V. A., Rust, R. and Lemon, K. N. “The Customer Pyramid: creating and serving profitable customers” California Management Review, Vol. 43, No. 4. Summer 2001, 118-142

6. 6 Importance of customer satisfaction and loyalty Service Quality and Value Measurement of Service Quality Service quality GAP model Employee Satisfaction and Retention Internal service Quality Application of the service profit Chain

7. How do we make profits in a service business? What are some of the key drivers of profitability in service businesses? What are the most important factor that influence the profitability of a service business?

8. 8 What Drives Profitability? Customer Loyalty

9. 9 3 Rs Customer retention Repeat/Related business Referral What are the behaviors of a loyal customer?

10. 10 Why Loyal Customers Matter?

11. 11 How much profit a customer generates over time?

12. 12 What are the major factors that contribute to the increase in profit? Profits derived from the increased purchase Profits from reduced operating costs Profits from referrals to other customers Profits from price premiums.

13. 13 Why customers become more profitable over time?

14. 14 How does the defection rate influence profitability?

15. 15

16. 16 What influences Customer Loyalty?

17. WHAT IS VALUE?

18. 18 What is external service value?

19. What is Service Quality? WHAT ARE THE MAJOR DIFFERENCES BETWEEN SERVICE QUALITY AND PRODUCT QUALITY?

20. In-class Exercise 1 Recall a recent service situation in which you are not satisfied with the services provided. Please do the following: 1. Why you are not satisfied with the service? 2. What did the service personnel do to make you dissatisfied? 3. What was your expectation for the service? 4. What do you think are the major causes of the problem? 5. What can the organization do to prevent the problem from happening again in the future?

21. In-Class Exercise 2 Recall a recent service situation in which you are very delighted with the services provided. Please do the following: 1. Why you are delighted with the service? 2. What did the service personnel do to make you so happy? 3. What was your expectation for the service? 4. How can the service organization make this service a norm rather than an exception.?

22. The Role of Expectations in Service

23. Perceived Service Quality

24. WHAT ARE THE DIMENSIONS OF SERVICE QUALITY? Reliability: The ability to perform the promised service dependably and accurately Assurance: The knowledge and courtesy of employees and their ability to convey trust and confidence. Tangibles: The appearance of physical facilities, equipment, personnel, and communication materials Empathy: The provision of caring, individualized attention to customers. Responsiveness: The willingness to help customers and to provide prompt services

25. How to Improve Service Quality?

27. Summary of the Key Gaps GAP1: the Knowledge GAP Not knowing what the customers expect GAP2: the Specification GAP Not selecting the right service design and standards GAP3: The Delivery GAP Not delivering services according to the standard GAP4: The Promise GAP Not matching performance to promise GAP5: The service GAP GAP between customers perception and expectations

28. Take Home Exercise  Use your organization or other service organizations as examples to do the following 1. Identify some problems or aspects of services that customers are dissatisfied with and/or often complain about? 2.. Use the service quality gap model to identify the proper gaps that caused the problem. 3. What are the key factors that caused each of one the gaps that you have identified? 4. Suggest measures to reduce the gaps. How will these measures help to improve customer satisfaction and what are some of the difficulties associated with implementing these measures

29. 29 Key Factors Leading to the Customer Gap

30. 30 Key Factors Leading to Provider Gap 1

31. 31 Key Factors Leading to Provider Gap 2

32. Key Factors Leading to Provider GAP 2

33. Service Quality Spells Profits

34. 34 Key Factors Leading to Provider GAP 3

35. Strategies for Enhancing Customer Participation

37. 37 Key Factors Leading to Provider GAP 4

38. How to Measure SERVICE QUALITY? Measuring Service Quality Using “SERVQUAL” “SERVQUAL” is a multiple-item scale for measuring the five dimensions of service quality: reliability, responsiveness, assurance, empathy, and tangibles A score for the quality of service is calculated by computing the difference between the ratings that customers assign to paired expectation and perception statements

39. MEASURING SERVICE QUALITY THE SERVQUAL INSTRUMENTa DIRECTIONS: This survey deals with your opinions of ??? services. Please show the extent to which you think firms offering ??? services should possess the features described by each statement. Do this by picking one of the seven numbers next to each statement. If you strongly agree that these firms should possess a feature, circle the number 7. If you strongly disagree that these firms should possess a feature, circle 1. If your feelings are not strong, circle one of the numbers in the middle. There are no right or wrong answers ? all we are interested in is a number that best shows your expectations about firms offering ??? services.

40. MEASURING SERVICE QUALITY Tangibles E1. They should have up-to-date equipment. E2. Their physical facilities should be visually appealing. E3. Their employees should be well dressed and appear neat E4. The appearance of the physical facilities of these firms should be in keeping with the type of services provided..

41. MEASURING SERVICE QUALITY Reliability E5. When these firms promise to do something by a certain time, they should do so. E6. When customers have problems, these firms should be sympathetic and reassuring. E7. These firms should be dependable. E8. They should provide their services at the time they promise to do so. E9. They should keep their records accurately.

42. MEASURING SERVICE QUALITY Responsiveness E10. They shouldn’t be expected to tell customers exactly when services will be performed. (?)b E11. It is not realistic for customers to expect prompt service from employees of these firms. (?) E12. Their employees don’t always have to be willing to help customers. (?) E13. It is okay if they are too busy to respond to customer requests promptly. (?)

43. MEASURING SERVICE QUALITY Assurance E14. Customers should be able to trust employees of these firms. E15. Customers should be able to feel safe in their transactions with these firms’ employees. E16. Their employees should be polite. E17. Their employees should get adequate support from these firms to do their jobs well. Empathy E18. These firms should not be expected to give customers individual attention. (?) E19. Employees of these firms cannot be expected to give customers personal attention. (?) E20. It is unrealistic to expect employees to know what the needs of their customers are. (?) E21. It is unrealistic to expect these firms to have their customers’ best interests at heart. (?) E22. They shouldn’t be expected to have operating hours convenient to all their customers. (?)

44. MEASURING SERVICE QUALITY DIRECTIONS: The following set of statements relate to your feelings about XYZ. For each statement, please show the extent to which you believe XYZ has the feature described by the statement. Once again, circling a 7 means that you strongly agree that XYZ has that feature, and circling a 1 means that you strongly disagree. You may circle any of the numbers in the middle that show how strong your feelings are. There are no right or wrong answers ? all we are interested in is a number that best shows your perceptions about XYZ. P1. XYZ has up-to-date equipment. P2. XYZ’s physical facilities are visually appealing. P3. XYZ’s employees are well dressed and appear neat. P4. The appearance of the physical facilities of XYZ is in keeping with the type of services provided.

45. MEASURING SERVICE QUALITY P5. When XYZ promises to do something by a certain time, it does so. P6. When you have problems XYZ is sympathetic and reassuring. P7. XYZ is dependable. P8. XYZ provides its services at the time it promises to do so. P9. XYZ keeps its records accurately. P10. XYZ does not tell customers exactly when services will be performed. (?) P11. You do not receive prompt service from XYZ’s employees. (?) P12. Employees of XYZ are not always willing to help customer requests promptly. (?)

46. MEASURING SERVICE QUALITY P13. Employees of XYZ are too busy to respond to customer requests promptly. (?) P14. You can trust employees of XYZ. P15. You feel safe in your transactions with XYZ’s employees. P16. Employees of XYZ are polite. P17. Employees get adequate support from XYZ to do their jobs well. P18. XYZ does not give you individual attention. (?) P19. Employees of XYZ do not give you personal attention. (?) P20. Employees of XYZ do not know what your needs are. (?) P21. XYZ does not have your best interests at heart. (?) P22. XYZ does not have operating hours convenient to all their customers. (?)

47. Applications of SERVQAL Identify areas for improvements Understand customer requirements or expectations: what dimensions are important? Track longitudinal trends Benchmarking performance

48. Problems or limitations of SERVQUAL Some items are vague and difficult to understand Are the five dimensions sufficient and accurate Questionnaire is too long not applicable to all industries consistency across industries is it necessary to measure both expectations and perception? SERVPERF

49. 49 Employee Satisfaction

50. What are some of the benefits of long term and loyal employees Long-term employees are knowledgeable about our products, services, and policies and procedures. They have close relationship with customers They are familiar with our customers’ needs and problems. They can help us improve the quality of products or services or the way we serve customers. They are valuable resources for helping other workers do a good job of serving customers and can provide leadership on the front line.

51. What are some of the dawbacks of long term employees? They may have poor qualifications, knowledge and skills They may have a poor attitude towards serving They may not be innovative enough They are slow to learn new things They are afraid of changes Playing politics, bad habits etc

52. 52 Costs of High Turnover

53. Costs of employee turn overs Rreplacing an employee with 5-8 years of experience with one with less than 1 year experience Automobile sales: $36,000 in sales per month Broker at a security firm: $2.5 Million in commission during the first 5 years.

54. 54 -Work place & system design-Job Design-Recruitment & Selection-Training &Development-Opportunities for advancement-learning opportunities-Employee Reward & Recognition-Empowerment & tools for serving customer

55. 55

56. 56 How to use the service profit chain? Measuring the relationships in the service profit chain across units Communicating results of the self-appraisal resulting from the measurement Developing a “balanced score card” of performance measures Designing efforts to help managers improve service profit chain performance Tying recognition and rewards to established measures Communicating results and encouraging “best practices”

57. 57 Reading Assignment “Heskett J. L. Jones, T. O., Lovemen, G. W., Sasser, W. E. & Schlesinger, L. A. Putting the Service Profit Chain to Work, Harvard Business Review, March- April 1994, pp 164-174” . Berry, L. L, Zeithaml, V.A., & Parasuraman, A., “Five Imperatives for Improving Service Quality,” Sloan Management Review, Summer 1990, pp. 29-38 Parasuraman, A., Zeithaml, V.A., & Berry, L. L., “A Conceptual Model of Service Quality and Its implications for Future Research,” Journal of Marketing, Vol. 49, Fall 1985, pp. 41-50

58. 58 Thinking Assignments How can a company use the service profit chain to help improve profit? Please list a few things that a company can do.

59. 59 Assignment question for FedEx case (due on Dec. 9, 2008) Describe FedEx’s corporate philosophy and explain how FedEx’s systems fit in the context of its corporate philosophy. How has FedEx used information technology to provide 100% customer service?