Chapter – 3 Service Strategy

1. 3 Service Management (5e) Operations, Strategy, Information Technology By Fitzsimmons and Fitzsimmons Chapter – 3 Service Strategy

2. Learning Objectives • 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).

3. 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?

4. 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?

5. 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?

6. 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?

7. South-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

8. Competitive Environment of Services • 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

9. 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

10. Competitive Service Strategies • Porter argues that three generic competitive strategies exist: • Overall cost leadership • Differentiation • Focus

11. 1. Overall Cost Leadership • 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

12. 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

13. 2. Differentiation 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

14. 3. Focus • 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

15. Customer Criteria for Selecting a Service Provider • 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)

16. Service Purchase Decision • 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.

17. Service Purchase Decision (cont.) • 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).

18. Competitive Role of Information in Services

19. 1. 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

20. 2. 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

21. 3. Database Asset • Selling information • Developing services • Data mining to find new trends for new services or improving existing services • Micromarketing • To target your advertisements

22. Using 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.

23. 4. Productivity Enhancement • Inventory status • Real time inventory management and tie up with suppliers • Better movement of inventory through multiple sites

24. The Virtual Value Chain • Marketplace vs Marketspace • Physical versus virtual • Creating New Marketspace Using Information - 5 steps • Gather • Organize • Select • Synthesize • Distribute

25. Example 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”

26. Limits in the Use of Information • 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?

27. Stages in Service Firm Competitiveness

28. Stages in Service Firm Competitiveness

29. Discussion Topics • Give examples of service firms that use both the strategy of focus and differentiation and the strategy of focus and overall cost leadership. • What ethical issues are associated with micro-marketing? • 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? • Give an example of a firm that begin as world-class and has remained in that category. • Could firms in the “world-class service delivery” stage of competitiveness be descried as “learning organizations”?