SECTION A

1.0 INTRODUCTION

The Hong Kong-based Shangri-La Hotels and Resorts is the largest Asian-based
deluxe hotel group in the region. The name ‘Shangri-La’ and company philosophy,
‘Shangri-La hospitality from caring people’, were inspired by James Hilton’s legendary
novel, Lost Horizon. The novel’s mythical paradise perfectly encapsulates the ideal of
genuine serenity and service for which Shangri-La Hotels and Resorts has come to be
recognised. ‘Shangri-La Care’ is a living culture within the group, strongly supported by
the top management and continuously cascaded through the organisation.

In July 2003, the group took control of its first Australian property, Shangri-La Hotel
Sydney (formerly ANA Harbour Grand Hotel) as part of a global expansion strategy. Of
the 49 Shangri-La hotels worldwide, 37 are owned by the group through Hong Kong-
listed Shangri-La, Asia. The Sydney venture represents a shift away from the owner-
operator strategy of previous years as it leased the property. The company recognises that
greater expansion opportunities are available through lease, joint venture or management
contracts, but such projects threaten control over the quality of the Shangri-La brand. In
this context, success in Sydney has far-reaching implications for success of the group.
The struggles with cultural adaptation and adjustments to organisational processes will
provide a springboard for organisational learning and inform the group’s expansion into
other non-Asian locations.

Located in the heart of the historic Rocks district, Shangri-La, Sydney is most
famous for its sensational views of Sydney Harbour and twin icons the Harbour Bridge
and Opera House. In March 2005 an A$37 million refurbishment was completed,
incorporating guest rooms, public areas, restaurants and bars and setting a new citywide
benchmark for accommodation, food and beverage products and service. Performance
figures showed rapid improvement under the new management and have been continuing
to improve over the last 3 years 4 months. A competitor analysis carried out by ANA
Harbour Grand Hotel showed it was ranked fourth against the other major luxury hotels
in Sydney in 2001 and third in 2002. In July 2003 Shangri-La, Sydney was ranked fourth
against its competitors (Four Seasons, Westin, Sheraton and Intercontinental) in
occupancy ranking, third for average revenue per day and third for revenue share index.

As further recognition of Shangri-La’s success, the hotel received seven industry

awards in 2005. In 2006 it won Best Luxury Accommodation, NSW Tourism Awards;
Australian Hotels Association Deluxe Hotel of the Year; and Australian Hotels
Association Most Creative Marketing Campaign. The hotel was also voted One of the
Top 20 Overseas Business Hotels, Conde Nast Traveller (UK) 2006–07, demonstrating
Shangri-La’s growing international reputation. Shangri-La went from ‘0 to 100’, from
arriving to number one, in the Sydney deluxe hotel market in a short period of time.
However, the transition has not been easy, with a number of challenging cultural and
operational issues that needed to be addressed.

1
On his arrival at Shangri-La, Sydney, the general manager, Michael Cottan articulated a
clear vision to his team: We are going to be the number one hotel in two years! The
realisation of this vision meant facing some key challenges unique to the Australian
environment and new for the Shangri-La group’s singularly Asian experience of hotel
management. To the general manager’s frustration, and contrary to expectations, it
actually found that the process actually took 3 years 4 months. Some of the key issues
faced by Shangri-La in the ‘early days’ included:

• The property: This was the most pressing issue. Until the major refurbishment could be
undertaken in 2004, the initial re-branding needed to be supported by soft changes, such
as physical signage and bed linen, that could be accomplished quickly.

• Re-branding: Shangri-La considers itself to be the market leader in Asia yet the brand
image in Australia and North America is relatively low. This meant Sydney represented
an important stage of the global strategy.

• Human resource issues: ANA employees were firmly entrenched in the hotel and the
new management made a commitment to its new employees that Shangri-La was not
going to come in and get rid of people. The staffing issue had two major implications.
First, the change to a highly customer-responsive culture would be difficult without the
ability to employ new staff endowed with the necessary service oriented attitude
characteristic of the Shangri- La brand (Bettencourt, Gwinner and Meuter 2001). The
second implication was the practical obstacle to attaining the high levels of customer
service with only half the number of staff available than would normally be present in an
Asian hotel.

• National culture: Aside from the differences between the organisational cultures of
ANA and Shangri-La, the new management was facing its first foray into a Western
culture, which formed an interesting overlay to all the above challenges. How would
Australians interpret the brand? Could this environment really deliver the standard and
style of service that Shangri-La was used to delivering? The lack of experience with
working in a Western environment meant there was not a lot of experience to fall back
on. So what is ‘Shangri-La’? And how do you inspire employees to realise the vision
when they already feel they are providing a high level of service?

The following section describes how Shangri- La responded to the above organisational,
industrial and cultural issues and analyses how it successfully navigated its way from 0 to
100 (from start-up to market leader on revenue per room for the deluxe segment of the
hotel market in Sydney), albeit a little more slowly than was first anticipated.

2
2.0 MAJOR PROBLEMS

The Shangri-La group’s defining feature is based on its philosophy, ‘Shangri-La

hospitality from caring people’. Appendix A describes in detail the guiding principles of
‘Shangri-La hospitality’ and how employees are socialised into the culture through the
extensive training programs offered. A number of significant challenges had to be faced
in order to develop the Shangri-La culture. This next section identifies why Shangri-La,
Sydney can be considered a customer-responsive organisation and follows with a
discussion of the obstacles encountered in building this culture. The organisational
culture of Shangri-La can be understood as a customer-responsive culture. Some key
variables identified in the marketing literature as being routinely evident in customer
responsive cultures have been developed at Shangri-La, Sydney. An important one of
these is staff attitudes (Bettencourt and Gwinner 1996). Shangri-La ‘hires for attitude,
trains for skills’. Appendix A demonstrates that training constitutes a serious investment
—Shangri La spends about 1% of its total labour costs on training. Further, successful
customer-responsive cultures have employees who are conscientious about pleasing the
customer and willing to work outside their normal job requirements to satisfy a
customer’s needs. For example, when the doorperson greets a guest and finds out some
information they pass that information on to other members of the front office team.
Shangri-La, Sydney largely succeeded in building a customer-responsive culture, but
change was slower than initially anticipated due to restraining forces such staff turnover,
inappropriate training styles, low staffing levels and the complex legislative environment
of the Australian workplace. These restraining forces will now be Discussed.

Staff Turnover

Shangri-La, Sydney has one of the lowest staff turnover rates in the industry, but the issue
is a pressing one in countries such as Australia where work in the hospitality industry is
not generally considered as a career move. The group seeks to retain high-calibre
employees by helping them achieve their personal and career goals. The general manager
has had little success in lowering the level of turnover due to the nature of the labour
force, which consists of a large number of part-time and casual staff.

Training Styles

Shangri-La invests heavily in training (as described in Appendix A), and this forms the
core of the socialisation process. The training programs were also highly standardised
across the group, a fact which jarred with the Australian employees who questioned the
length of the training and the style of the videos used in training sessions. The human
resources manager has had to eliminate the culturally inappropriate content of the courses
and make them shorter. The basis of some of this resistance to the training styles of the
Asian parent company can be explained by differences in national culture, discussed later
in this case.

3
Staffing Levels

It is an ongoing frustration for all staff that they are expected to perform the same tasks in
the same way as in Asian hotels, but with almost half the number of staffing hours
available. On average the Shangri-La hotels in Asia have twice the number of employees
than the Sydney operation. This is largely due to the differences in costs associated with
salaries. Shangri-La, Sydney needed to adjust systems and apply for exceptions to
policies and procedures in order to adjust to its staffing levels. The composition of the
workforce in the Australian hotel industry is also different to that in Asian countries.
Research suggests that up to two-thirds of hospitality employment in Australia is
characterised as non-standard (combining parttime and casual) and around half is on a
casual basis (Timo and Davidson 2005), whereas the staff in other locations would be
predominantly fulltime. This has important implications for training outcomes,
motivation and cultural change.

Laws and Legislation

Australia’s industrial relations framework has undergone substantial change since the
1980s, including award restructuring and enterprise bargaining in line with the federal
government’s efficiency principles (Knox 2006). However, Australia’s institutionalised
industrial-relations framework, and the practices and attitudes associated with it, are still
very much a part of presentday management–employee relationships. The labour market
is characterised by more centralised, formalised processes, based significantly on legal
adversary relationships, than what is likely to be found in other countries (Lewis, Morkel
and Stockport 1999). Job demarcation rules are of particular significance for an
organisation building a customer-responsive culture. With restrictive workplace
legislation, it is very hard to get people to be flexible. The general manager highlighted
this as one of the biggest learning experiences:

. . . the general laws, legislation and issues here around labour force rules are also quite
different to Asia. You can pretty well do what you want in Asia to a certain degree. Every
country has certain regulations but nothing even gets close to the environment of work
legislation [in Australia].

4
3.0 MAJOR FINDINGS

Psychic distance refers to a measure of how far a country is perceived to be away from
Australia in terms of cultural elements such as belief systems, language barriers, and
different attitudes to business, material standards and patterns of behaviour (Fletcher and
Bohn 1998). The index of psychic distance ratings of countries from Australia shows that
China (the country of origin of the Shangri-La group) has the second largest psychic
distance (29.2) of the countries listed (Fletcher and Bohn 1998). Further, other Asian
countries where Shangri-La operates also have high psychic distance, for example Hong
Kong (psychic distance of 20.5), and Singapore (psychic distance of 19.3). Research has
shown that ‘the success of a relationship marketing strategy is heavily dependent on
levels of psychic distance’ (Conway and Swift 2000, p. 1391) and as highlighted, the
psychic distance between Australia and China is very high. Consequently, culture should
have an impact on the operations and dealings Shangri-La, Sydney has with head office,
and when dealing with the whole concept of operating in a new culture. The most
obvious and by far the most important focal point of psychic distance that needed to be
resolved quickly was the belief system associated with what ‘good service’ embodied.
‘Asian hospitality’ is at the heart of the Shangri-La brand and rests on the core values of
respect, courtesy, sincerity, helpfulness and humility. Australians are certainly capable of
behaving in this manner, but these are not the first qualities likely to come to mind when
describing the value systems that underlie Australian culture. When asked which of these
values were the most challenging to instil, one manager identified ‘sincerity’ and
‘humility’ as the most difficult:

Sincerity because some people see this as a job on the side while they’re studying. It’s not
their career. Sometimes it becomes very robotic, that style of service. It’s not innate to
genuinely want to be here for the customer.

This was reiterated by another manager who noted that humility was not an attitude that
came naturally to many Australians:

Being in Australia we’ve had a slightly different form of hospitality. I think we’re not
quite as humble as the Asian style of hospitality. Even though we are serving people we
can tend to be a little bit proud.

‘Asian hospitality’ has now become ‘Shangri- La’ hospitality according to company
documents. This change is reflective of the new cultural mix that incorporates the
strengths and weaknesses of the employees in a new location and Shangri-La’s
willingness to adapt to new markets. Although Australians find humility a challenge they
can actually be strong in such service aspects as flexibility, empowerment and
anticipation of customer needs. It can be observed that whenever a challenge has arisen,
Shangri-La has responded by listening carefully and responding flexibly without
compromising its core values. Maintaining core values requires a deeper understanding of
what constitutes national cultural values of each Shangri-La location. Using Hofstede’s
(1980) framework as a guide some important differences between the value systems of
Asia and Australia were identified:

5
• Social orientation: Shangri-La is a very familyfocused company; this comes from the
Malaysian–Chinese family side of the company that is still very much involved. The
family culture encourages regular social activities for all staff, but when such functions
are run in Australia staff members are unlikely to enjoy the bonding experience. A
humorous example of differing values of group identification was played out as Shangri-
La head office directed staff to learn a company song. The human resources manager
reported that the staff in Asia were very proud of this song about peace, serenity and
paradise as it represented the company. She accurately anticipated that the song would be
far too ‘gooey and lovey-dovey’ to inflict on Australians who would most likely greet it
with derision. Fortunately the song was dropped from the training program before it was
imposed on the incredulous Australian staff.

• Planning and attention to detail: Shangri-La, in its administrative style, typifies the
great deal of formal attention generally given to processes in Chinese organisations to
ensure that there are significant levels of certainty (Shanks et al. 2000). It is this attention
to detail and systems that has been a sometimes tedious challenge for the Australian
employees, yet at the same time ensures consistency of quality.

• Humility: this is a core value at Shangri-La, yet in a strongly egalitarian country such
as Australia humility can almost seem like servility. Australians are typically casual, not
tending to treat people differently even when there are great differences in age or social
standing (Mackay 1993). A few staff noted that they felt they were expected to look up to
the guests in a way that they did not feel comfortable about. They are willing to offer
service, but view the guest as very much their equal no matter what their social standing
is. There is also ongoing discomfort noted amongst some staff members with the
reinforcement of hierarchical relationships within the culture of Shangri-La management.
Some employees note that managers maintain distance from staff below them and are
unlikely to engage directly with frontline employees. The disregard for power
differentials has, however, been turned to advantage by the sales and marketing team,
who are unafraid of approaching prospective clients to carve out new markets. They have
greater confidence than the Asian sales teams to prospect assertively for influential
clients.

• Goal orientation: Australia exhibits moderately aggressive goal behaviour. Chinese

culture presents a paradox, with research suggesting that the Chinese attitude when
directed at activities aimed at achieving something such as material goods could be seen
to be supportive of aggressive goal behaviour. Taoist and Confucian values, on the other
hand, emphasise harmony, simplicity and the rejection of selfassertiveness and
competition, which would be associated with passive goal orientation. The paradox
became evident in some comments:

This is going to contradict slightly, but it is a very Americanised Asian culture. It was all
these kind of programs, our core values, and all those sort of things. Very American based
in terms of the actual structure of the training and modules but the flavour is Asian.

6
4.0 THE IMPLICATIONS OF MARKETING FUNCTION

A key factor that has contributed to its success is the core values instilled at Shangri-La,
Sydney. These core values are firmly underlined by the clear market orientation that runs
through the whole organisation. Market orientation is the basis of the marketing
discipline; it refers to the implementation of the marketing concept, the cornerstone of
marketing theory (Kohli and Jaworski 1990). A definition of market orientation is ‘the
organization wide generation of market intelligence pertaining to current and future
customer needs, dissemination of the intelligence across departments, and organization
wide responsiveness to it’ (Kohli and Jaworski 1990, p. 6). It was reported that under
ANA and in the early months of the transition the hotel did have good service. But
Shangri-La’s strategic vision was not merely to adjust individual elements—it was to
alter the structure, systems and values of the hotel such that the gestalt of market
orientation was realised. Shangri-La, Sydney creates value for its guests by increasing the
benefits to them in relation to their costs. This was exemplified by the growth in the
corporate segment resulting from a strategy of bundling services rather than cutting rates.
The hotel decreases the guests’ costs in relation to what they are buying by providing a
unique style of service that is difficult to replicate. Training programs are developed and
adapted according to feedback from customers. For example, regular and high-status
customers like to be recognised, so the front office staff have instituted a program
whereby frequent guests are invited to be photographed so that next time they visit staff
will recognise them and address them by name. There is a high level of commitment to
return custom, and guest recovery is the basis of one Shangri-La’s compulsory training
programs. The effort to create superior value for the customer is evident throughout all
the company’s systems and processes. Inventory, revenue, bookings, check-in and
customer service systems are being upgraded constantly to make use of the latest
technology to create customer value. The company is diligent in removing obstacles to
coordination. One example of this is the call diversion system. When the phone bookings
are overloaded they are automatically bounced through to Kuala Lumpur so that no
customer is discouraged by unanswered calls. Helping to build the market orientation of
Shangri-La, Sydney was the marketing function. This played a pivotal role in the success
of Shangri-La, Sydney. The Shangri-La has been proactive in strategic and tactical areas
of marketing. Four areas of marketing are critical in the success of Shangri-La. These are
(1) the service encounter; (2) branding; (3) systems innovation; (4) target marketing.
Further, a major driver oft heir success is the repeat business they generate from key
customers. The Shangri-La, Sydney has achieved a 38% return guest ratio for the
business segment and a 22% return guest ratio for total
guest numbers. Further, the lifetime value of a key customer to the whole Shangri-La
group is estimated at US$120 000. Consequently, the importance of getting the marketing
‘right’ so customers will return is critical.

7
(1) The service encounter

The service encounter with consumers is a critical part of the overall marketing mix for
hotels, particularly hotels that are in the deluxe segment of the market. Shangri-La
hospitality has been successfully embedded in the corporate culture and is communicated
to the customer through the marketing activities. Marketing in particular needs to match
this culture as the ‘mystique’ of Shangri-La may be as much to do with shaping and
reaffirming guests’ perceptions of the Shangri-La experience as it is to do with
developing any specific staff behaviours.

(2) Branding

They associate the brand with Audrey Hepburn. She [the Shangri-La] is refined, she’s
beautiful and really the only subtle difference is that she’s Asian.

The development of the Shangri-La brand has been successful, given the short period of
time the product has been in the market. A number of factors have helped build the brand
over this period of time, including:

• labelling the hotel: The Shangri-La building holds a prominent position on the Sydney
city skyline, thus allowing for a high level of exposure.

• integrated marketing communications: The majority of the marketing messages

disseminated by Shangri-La have been seen as being ‘on brand’—that is, telling the one
story.

• service levels: Service has been a key ingredient in building the brand.

• aggressive public relations and advertising campaigns: Shangri-La has used public
relations and advertising assertively to disseminate the brand message in the marketplace.

• price integrity: Shangri-La was seen not to reduce its room rates to the extent of other
competitors in the deluxe segment of the hotel market in Sydney. Consequently, this has
limited the diluting effects that large discounts can have on the brand, particularly with
competitors at the premium end of a market.

(3) Systems innovation

Although Shangri-La service levels are a key component of its success, the face-to-face
element of the interaction is only one part of the experience. Systems that allow quality
service to be delivered are needed. This is another area where it is evident that the
marketing activities of the hotel are well integrated throughout the organisation. Systems
that allow for the staff to better meet service levels have been implemented. This is
critical at Shangri-La, Sydney compared to a number of other Shangri- La hotels
throughout Asia due to the low staffing levels in Sydney that make it particularly

8
vulnerable to service shortfalls.

(4) Target marketing (the corporate market)

The seasonal fluctuation in demand was a weakness that Shangri-La turned into an
opportunity by reducing dependence on the leisure market and assertively seeking
corporate accounts. This strategy has paid dividends for Shangri-La with demand now
more evenly spread over the year. The way in which this was achieved was also an
important element in the success of Shangri-La. Rather than engage in rate-cutting
competition that would damage the brand Shangri-La followed a value-added approach.
They won over accounts by identifying the specific needs of the corporate customer and
bundling services to satisfy those needs, for example internet facilities for specific
groups. All these marketing activities required that a central question of international
marketing be addressed—to what extent should an international firm standardise its
marketing mix when entering other countries? Like many international firms Shangri-La
Hotels and Resorts seems to adopt a two-step process: it standardises some elements of
the marketing mix such as brand name, product design and positioning, and then local
managers are called upon to critique the marketing strategies and develop plans to
implement customised elements of the marketing mix. There is clearly a high degree of
control of the brand that is exercised centrally, yet examples such as dropping of the word
‘dominance’ from the corporate mission statement indicate a willingness to respond to
varying conditions. The journey from 0 to 100 has not been an easy one, but the cultural
blend exemplified by Shangri-La, Sydney has provided much valuable learning for the
larger organisation as it seeks out new markets and ventures into new socio-cultural
environments.

5.0 CONCLUSIONS

To conclude, service economy has become the focus of the world. At the same time, the
methods of how to market service and enhance service quality have been the hot issues.
After anglicizing the unique features e.g. intangible, perishable, and heterogeneous of
service, this report take Shangri-La who pursue superior service, coupled with wise
marketing strategies as a living model and set out to discover the appropriate approaches
of service marketing management.

Moreover, a good service company should also consider differentiating service, providing
the most suitable and material services to customers and acting with integrity when
launching marketing. Only by connecting the characteristics of service with principles of
marketing strategy and absorb invaluable experiences from successful counterparts, can a
service organization achieve its goal and dream.

9
APPENDIX A FROM GOOD TO GREAT— TRAINING IS KEY AT SHANGRI-
LA

‘Great hotels are made by great employees, not by crystal chandeliers or expensive
carpets.’ This strongly held belief at Shangri-La Hotels and Resorts translates to a firm
commitment to employee development. Such dedication will be increasingly important as
the group’s workforce grows from 28 000 to an expected 50 000 by 2010. The process
begins with careful selection—staff are ‘hired for attitude, trained for skills’—providing a
fertile foundation for the Shangri-La philosophies to be embraced. Shangri-La then
invests heavily in training— perhaps more than any other hotel group—with intensive,
ongoing coaching for all staff at 50 hotels and resorts. The group then retains its high
calibre staff by creating an environment whereby employees may achieve their personal
and career goals; Shangri-La has one of the lowest staff turnover rates in the industry.
The group’s defining feature is its exceptional and warm hospitality, as defined by its
philosophy ‘Shangri- La Hospitality from Caring People’. All staff undergo the ‘Shangri-
La Care’ training program within six months of joining the group. The program is
designed to develop a consistent Shangri-La style of service to deliver a superior guest
experience and build brand loyalty. Respect, courtesy, sincerity, helpfulness and humility
are all core values of the training. Under the umbrella theme ‘Shangri-La Care . . . The
Shangri-La Way,’ the program is divided into four modules: Shangri-La Care 1
—‘Shangri-La hospitality from caring people’, Shangri-La Care 2— Delighting
customers’, Shangri-La Care 3—‘Recover to gain loyalty’ and Shangri-La Care 4
—‘Taking ownership’. The four modules of Shangri-La Care focus on the group’s
mission: ‘delighting customers each and every time’, part of Shangri-La’s Guiding
Principles. Shangri-La Care is a living culture within the group, strongly supported by
top management and continuously cascaded through the organisation. All hotels are
required to allocate a specific budget for [staff] training and development, and the hotels’
general managers are responsible for ensuring that all the allocated funds are spent year
after year.

Training in China

A focal region for training programs is China as Shangri- La [expects to] expand its
portfolio of 21 hotels there to more than 30 by 2008, requiring its current China
workforce to increase by nearly 9000 employees, of which 20% will be at managerial
levels. In December 2004, the group opened the Shangri-La Academy, Beijing. The
Academy offers a number of certificate programs and a diploma program open to both
existing Shangri-La employees [and] public students. The certificate programs [cover
the] culinary arts, food and beverage service, front office, housekeeping, laundry,
engineering, training and development, and human resources management. All the
courses have an institutional learning component and sequential on-thethe- job training
in the hotels. To date, the Academy has trained more than 770 students, with a total of
2000 graduates expected by 2008.

10
Creating a ‘STAR’ sales force

Shangri-La Hotels and Resorts launched a proprietary sales and marketing training
program in 2005—‘STAR’ (Shangri-La Training for Aggressive Revenues). More than
US$3 million will be spent over four years to STAR-train 2000 sales and marketing
employees in hotels and worldwide sales offices. The first tailor-made sales education
program for Shangri-La, STAR incorporates the essence of Shangri-La’s corporate
culture in teaching essential selling skills, negotiation, strategic sales management, sales
leadership and motivation skills.

Learning online

E-learning courses for management staff were launched with eCornell in April 2005.
There are 57 online courses available in five areas: human resources management,
management essentials, hospitality and food service management, strategic management
and financial management. Three thousand spaces for employees will be offered over the
[period 2006 to 2011].

Training ‘on the road’

The Shangri-La group established the Mobile Learning Centre in 2003, which offers a
wide variety of leadership and management programs conducted by in-house and
external trainers in different hubs in strategic locations. This provides employees
continuous learning opportunities within the group. Hong Kong-based Shangri-La Hotels
and Resorts, Asia–Pacific’s leading luxury hotel group, currently manages 50 hotels
under the five-star Shangri-La and four-star Traders brands, with a rooms inventory of
over 24 000. The group has over 40 projects under development in Canada, mainland
China, France, India, Japan, Macau, Maldives, Philippines, Qatar, Seychelles, Thailand,
United Arab Emirates, United Kingdom and the United States.

11
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‘Differences in critical success factors in ERP systems implementation in Australia and
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Wallace, A.F.C. (2007) Culture and Personality, Random House, New York.

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SECTION B

a) Services marketing are different from the marketing of tangible products in a number
of ways. Using the examples of the airline industry (both domestic and international),
illustrate some of the difficulties in marketing services to a potential customer.

A product is tangible, which means the customer can touch and see the product before
deciding to make a purchase. Items such as packaging and presentation may compel a
customer to purchase a product. Services, on the other hand, are not tangible, which can
make them more difficult to promote and sell than a product. There are four unique
characteristics that define the nature of a service. They are the following: service
intangibility, service inseparability, service variability, and service perishability.

The first, service intangibility, means that the service cannot be experienced before it is
bought, and so, in order to make the service tangible, sellers show evidence of its quality.
Airline industry has an intangible nature because they offer actions and performances
instead of goods. Airline industries provide you with a transport service to get you from
one destination to another destination. This service cannot be seen or touched by the
customer although the customer may be able to see and touch certain tangible
components of the service such as the airplane seats and flight tickets.

Due to its intangibility nature, this has present several service marketing challenges.
Since services cannot be inventoried, thus fluctuations in demand are often difficult to
manage. For example, the demand for flight tickets during holiday and festive seasons are
much higher compared to non-holiday and festive seasons. However, the airlines still
have the same number of seats to sell year-round. Since services cannot be easily
patented, competitors can easily copy new service concepts. For example, Malaysia
Airlines could provide an access to online webpage for all its passengers to check and
book the flight ticket where other airlines can provide the same online booking system
too. Next, services cannot be readily displayed or easily communicated to customers;
therefore quality may be difficult for customers to experience beforehand. For example,
an airline customer cannot experience the tangible outcome of the traveling journey when
purchase in advance An airline customer can perceive intuitively whether his or her
traveling experiences will be safe and enjoyable, prior to purchasing the ticket. The
implications of the intangibility of airline services are that the airline services cannot be
displayed, sampled, tested, or evaluated before purchase. For example, the airline agency
cannot display a trip to "Hawaai", and a potential passenger cannot "try" the trip before
purchase. Consequently, airline services represent more abstract concept than physical
goods. This is in contrast to the purchase of physical goods such as shoes, which can be
displayed and tried on before purchase. Lastly due to intangibility nature, decision on
what to include in advertising and promotional materials are challenging. The
promotional materials and advertising must reflect with the quality and experience the
airlines are giving the customers. Besides that it is also hard to determine the actual cost
for a unit of service since the price-quality relationship is complex.

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Service inseparability simply means that the provider and the buyer are intricately linked
and must be present in order for the service to be rendered. Since services are often
simultaneously produced and consumed at the same time, the quality of service and
customer satisfaction will be highly dependent on what happens in real time. Airline
services cannot be produced in one place, transported for sale in another, and sold and
consume again in another. Airline services are sold first and then produced and consumed
simultaneously at the same time and place. A passenger first purchases an airline ticket
and then consumes the in-flight as it is produced. The inseparability of the production and
consumption of airline services implies that the mass production of airline services would
be extremely difficult because it would require large numbers of passengers and service
providers at one time and place. This, of course would have enormous environmental,
social, cultural and economic implications. Therefore, the scale of airline operation must
be limited to a manageable level. In contrast, production, distribution, and consumption
of physical goods are separated in both time and space. Most manufactured physical
goods are produced in one place, packaged and transported through wholesalers to
retailers for sale in another location at a different time.

Service heterogeneity is determined by the particular entity or circumstances surrounding

the service. Airline services are heterogeneous. They vary in standard and quality over
time because they are delivered by people to people and are a function of human
performance. Each service experience is different because it varies from providers to
providers and from customer to customer. For example, services provided by the same
airline provider vary on a daily, weekly, and even monthly basis, depending on the travel
consultants moods, feelings, attitudes, skills and knowledge. Similarly, customers differ
in their needs and requirements. For example, two passengers on the same airplane may
have two different unique demands and experience the airplane journey in their own way.
There could be a probability that one passenger is harder to please then the other making
the experience that they have different from each other. In contrast, physical goods such
as cars and television sets are relatively homogeneous regardless of their brands. Their
production does not depend so much on who produced them and where they are
produced. Due to its heterogeneity nature, ensuring service quality is very challenging.
Further, providers are unable to maintain the same service performance because
performance also depends on passengers demand for services. In the peak season, when
there is great demand for traveling in airline services, providers are unable to spend as
much time with customers as in periods of low demands. Thus, quality of services may
vary significantly.

Service perishability describes the characteristic that services must be rendered on the
spot and cannot be stocked for a later time. For example, it is not possible to save the
spare seat on a flight that is leaving today and move it to tomorrow.if tomorrow's flight is
overbooked. The unsold airline ticket cannot be stored and used at a later date. Airline
services are short-lived. Airlines must try to fill all seats on all flights because an empty
seat means that revenue is lost. To avoid loss, airlines charge customers with penalties for

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canceled tickets at later time. In contrast, unsold physical goods can be stored, kept in
stock for a period of time, and then sold without a loss of revenue.

b) Outline some of the challenges facing Malaysia Airlines (MAS) and Air Asia in
getting customers to develop a preference for flying with them. What two or three
key services marketing (or Marketing Communications) initiatives would you take?

The challenges faced by Malaysia Airlines (MAS) and Air Asia in getting customers to
develop a preference for flying with them includes aggressive competition between
airlines especially low cost airlines and full-fledged airlines. For example, the stiff
competition between Malaysia Airlines, a full-fledge airline and Air Asia, a low cost
carrier airline. One of the main challenges faced by airlines is increase of the cost. The
rise of fuel prices and higher labour costs causes an increase in flight ticket prices. With
the recent increase of living cost issues, many customers having dilemma on going for a
vacation by utilizing airline services. With many other service provider in airline industry
and with their attractive promotions, it is hard to meet all customer's needs at once. This
probably causes airline services to maintain their customer loyalty whereby the
competitors may provide extra benefit on their traveling packages. However, quality of
services are more challenging to be visualizing by the service provider and customer and
it is difficult for the customer to display their confidence of the service unless they
experience the service by themselves by comparing standard and perceptions of result
performance. Facilities is one of the very crucial elements not only to the airport but also
lack of advancement and not to meet the world class technology. Many airports nowadays
are beset with overcrowding and delays. Besides that, with the rise of the jumbo jets,
many airports have a hard time accommodating these aircraft due to the airport sizes.

The first key services marketing initiatives that they should implement is managing their
service promises. It is considered a serious problem when companies fail to provide the
service that they promise such as the vows made by sales people and service personnel
and advertising claims. An airline should ensure that all personnel have the necessary
information to make accurate statements. This can be done by coordinating proper
external communication between the advertising team, sales team and public relations
department. Another strategy to manage service promises is by creating a strong service
brand.

The second key services marketing initiatives that an airline can implement is managing
customers expectations. The key to managing customer’s expectations begins with
managing service promises. Appropriate and accurate communication about services is
important in managing customer’s expectations. Marketers for the airlines must be
realistically reflect what happens in actual service encounters and airline operations must
deliver what is promised in communications. In promoting and differentiating the
services, the airline cannot afford to raise expectations above the level at which its
personnel’s can consistently perform. This is because if external communication sets up
unrealistic expectations, actual encounters will disappoint the customers. Many airlines
also find themselves in the position of having to actively manage customer’s expectations
downward such as when they have to tell the customer that the flight ticket will only be
available only at a higher price or even when they have to cancel flight when they are not

16
full and charge for food. Airlines can offer service guarantee to the customers. A service
guarantee gives an assurance to the customers that the company will stand behind them.
The benefit by offering service guarantee is an increase in the likelihood of a customer’s
choosing or remaining with the company. Another strategy to reset customers expectation
is by giving customer options for aspects of service that are meaningful such as time and
cost. For example, a customer can have a choice of booking their flight ticket months
earlier to pay for a lower price or book their flight ticket last minute and having to pay a
higher price. If customers understand the trade-off and asked to make a choice, they are
more satisfied because their service expectations for each option become more realistic.

Another strategy that an airline has taken to manage customer’s expectations is done
through creating tiered-value service offerings. Tiered-value offerings are offerings of
different versions of their products with prices to commensurate with the value customers
perceive. For example, offering different ticket prices such as a flexi ticket whereby the
customer can change the date of the flight without any extra charges and a basic ticket
where no changes can be made to the booking. This practice places the burden of
choosing the service level on the customer thus familiarizing the customer with specific
service expectations. On the company level, they can identify which customers are
willing to pay higher prices for higher service levels.

The third key service marketing initiatives that an airline can implement is educating the
customers. This means that the airlines have to educate the customers on what and how
the services will be provide. If the customer is unclear about the services provided they
will be disappointed and more often than not, they will hold the service company
responsible rather than themselves. Sometimes the customers do not know the criteria in
which they should judge the service. Making the customers aware of standards and efforts
to improve service that are not readily apparent can improve service quality perceptions.

c) Maria does fly MAS for long-haul international flights to Europe and she is an
Enrich Club member, yet it does not have her as a domestic customer on its
flights.What, if anything could MAS do so to acquire her as a customer on its key
domestic routes?

Malaysian Airlines (MAS) should improve its efforts in building long term customer
relationship. This can be done through relationship marketing. Relationship marketing is
a philosophy of managing business strategically by focusing on keeping and improving
relationships with current customers rather than on acquiring new customers. Customers
will remain loyal to a firm when they receive greater value relative to what they expect
from competing firms. Consumers are more likely to stay in a relationship with the
company when the quality, satisfaction and specific benefits exceed the monetary and
nonmonetary costs. Malaysian Airlines (MAS) already has the platform on managing
relationship marketing, which is through its Enrich Members Club. However, more often
than not, the membership does not influence its members to stay with them. For example
in the case of Maria whereby she fly with Malaysian Airlines (MAS) for long-haul
international flights to Europe but does not uses Malaysia Airlines (MAS) for its domestic

17
flights. In order to acquire her as a customer on its domestic routes, Malaysian Airlines
(MAS) has to improve its Enrich Club membership.

Malaysia Airlines can give special benefits for Enrich Club members who want to use
their domestic flight services such as special discounted price and special treatment such
as free business class upgrades should there be an empty business class seat. Besides that,
Malaysian Airlines can allow Enrich Club members to redeem or collect Enrich Miles
during domestic flights. For example, Maria can buy a domestic flight ticket by using the
miles points or even shopping vouchers, travel accessories, accommodation, car rentals,
and day-to-day lifestyle products and holiday package. Malaysian Airlines should also
provide better facilities for Enrich Club members such as better airport lounge for Enrich
Club members such as free meal and drinks at the lounge and an express boarding lanes
for domestic flights and international flights . Moreover, Malaysia Airlines should also
offer complimentary insurance coverage for domestic routes for Enrich Club members.
Lastly, Malaysia Airlines should also give precedence for their Enrich Club members for
the best fare flights available and best offer available for domestic routes.

d) Maria appears to be looking for different service experiences with her short haul
domestic flights and her long haul international flight. Consider why this is the case
and the implications this has for the services marketing mix. Illustrate this for three
of the seven P’s.

From the question above, Maria is seeking different service experiences with her short
haul domestic flights and her long haul international flights. For example, for a short haul
domestic flight, the dimension of empathy, responsiveness, assurance, reliability and
tangibility may not be an issue for service quality. However for a long haul international
flight, the five dimensions of service quality may play an even more important role in the
experiences that Maria wants. She would want the air stewardess to have the ability to
perform the promised service dependably, the willingness to help her and provide prompt
service during the journey, the courtesy of the air stewardess, the caring individualized
attention and lastly the facilities and equipment that the airplane have. For example, for a
forty-five minute to two hours domestic flight, Maria may not need a state of the art
entertainment system but for a ten-hour international flight, she will need an
entertainment system to keep herself entertained.

It goes for meals as well, usually short haul flights does not provide meals but they do
provide snacks such as juices and peanuts and Maria does not need a meal for short haul
flights but she does for a long haul flight. Lastly is price factor. Assuming that the
situation in question (c) applies whereby Maria flies with Malaysia Airlines (MAS) for
her long-haul international flights but not for her domestic flights, this might be because
of price. Malaysia Airlines competitor that is the low cost carrier Air Asia has started a
price war for its domestic flight. With the minimal needs of the five dimension of service
quality, price will come as the next factor to choose a preferred airline. Based on the
question above, because Maria is looking for a different service experience for a long
haul and short haul flights, it will have an implication of the services marketing mix.

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A marketing mix is the elements an organization controls that can be used to satisfy or
communicate with customers. Traditional marketing mix includes product, place,
promotion and price. However in the service marketing mix, there are extended three
elements, which are people, physical evidence and process. The seven elements in the
service marketing mix are shown in Figure 1.

Figure 1: The 7 P's Service Marketing Mix

The three service marketing mix that has an implication from the situation stated in the
question above are product, physical evidence and price.

The airline industry is a service that satisfies customer needs for traveling. In the airline
industry the customers can be divided into two segments, standard and business. While
the airline industry started out as a standard item, business travel has changed this
industry to a necessity. As we further become a global economy and communication
between international companies intensifies, travel needs continue to increase. The
business traveller has always had the need for the airline industry. Satisfying the customer
needs today involves competitive rates, convenient booking of flights and benefits with
those flights. Since Malaysia Airlines is full fledged carrier, the service provider will be
more focusing in products which converts for service by providing the good and better
facilities for international long haul flight where long journey of flight takes place. This
includes the big sizes of flight such as Boeing and Airbus to meet the comfort of the
airline passengers. Passengers traveling in Malaysia Airlines enjoy not only impeccable
service, but lounge access, fully lie-flat seats, complimentary meal and beverage service,
pajamas for night flights, an amenity kit, a more generous baggage allowance and
personal entertainment systems with audio and video on demand. Whereby in Air Asia,
oligopoly of domestic airlines, much more focusing in economic price for the flight
service but at same time maintain their comfort service to passengers because most of the
domestic journeys is short journey. So, this gives Maria more choices of products to

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looking for different service experiences with her short haul domestic flights and her long
haul international flight.

Next is physical evidence. Physical evidence is the environment in which the service is
delivered and where the firm and the customer interact as well as any tangible
components that facilitate performance and communication of the service. The service is
intangible because unlike a product it can't be experienced before it is delivered. It is the
ability and environment in which a service is delivered. Because it is intangible
customers are at greater risk when deciding whether to use a service, so to reduce this
risk, and improve success, potential customer are offered the chance to see what the
service would be like with the use of testimonials, demonstrations etc. Physical layout is
not only relevant to its promotional materials, but also to the layout and structure of the
organization, and websites. Customers have far higher expectations and therefore they
select the particular service which they know will satisfy their want. Since both Malaysia
Airline and Air Asia is airlines service provider, which is intangibility, the experiences of
their journey cannot be displayed to their customers unless the customers have to
purchase and experience themselves. But, both airlines can encourage or motivate the
customers to gain review or feedback from other users who already tried their services
from magazines or online websites. This will help build confidence for customers to try
out the airline services themselves. Visual projection on variety promotional packages
should included in the templates, brochures and website to show an attracting picture
where it might attract the interest of customers to travel with them. For Maria, she can
check online websites for further information and details about the flight experiences
from other users which will help her to choose the right service provider for the either
international or domestic journey.

Lastly, the price is another element which becomes the option to consider before
purchasing the ticket. There is a lot of pricing strategies included to meet all kind of
customers and their budget to travel on airlines. The premium pricing is when the airlines
may set prices above the market price either to reflect the image of quality or the unique
status of the product. The product features are not shared by its competitors or the
company itself may enjoy a strong reputation that the 'brand image' alone is sufficient to
merit a premium price. Next strategy is value for money pricing, where the intention here
is to charge the average price for the product and emphasize that it represents excellent
value for money at this price. This enables the airline to achieve good levels of profit on
the basis of established reputation. Further strategy is cheap value pricing, where the
objective here is to undercut the competition and price is used to trigger the purchase
immediately. Unit profits are low, but overall profits are achieved. Air Asia and Malaysia
Airlines have slashed their prices to meet the competition of domestic airlines so that they
can consolidate their position in the market. Common strategy is low cost pricing, where
With the advent of the low-cost airlines in the Indian aviation industry, a different low-
cost flying concept has come up. Since these low-cost airlines are trying to woo the
customers by providing air travel in exceptionally low prices, a price-band kind of pricing
has to be designed.In low-pricing strategies, the airlines provide very low prices for the
flight tickets. Also, they prices are made cheaper by booking the tickets long before the

20
flight date. Since Maria has many choices in pricing strategies to be selected, the airlines
absolutely can meet the demand of Maria according to her budget.

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