Chapter 03 Service Strategy

McGraw-Hill/Irwin Service Management: Operations, Strategy, and Information Technology, 6e

Copyright 2008 by The McGraw-Hill Companies, Inc. All Rights Reserved.

Learning Objectives

Formulate a strategic service vision. Discuss the competitive environment of services. Describe how a service competes using the three generic service strategies. Explain what is meant by qualifiers, service winners, and service losers. Discuss the competitive role of information in services. Explain the concept of the virtual value chain and its role in service innovation. Identify potential limits in the use of information as a competitive strategy. Categorize a service firm according to its stage of competitiveness.
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Strategic Service Vision

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?

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Strategic Service Vision

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?
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Strategic Service Vision

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?
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Strategic Service Vision

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?

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Southwest Airlines Strategic Service Vision

Service Delivery System Operating Strategy Service Concept Target Market Segment

Fun cabin atmosphere to differentiate service Use only Boeing 737 aircraft to control maintenance and operating costs Hire cabin crew based on attitude

Quick turnaround at gate results in high utilization of aircraft No assigned seating rewards punctuality and promotes on-time performance

Short flights with frequent departures Serve peanuts and soft drinks only Use of inner-city or low traffic airports avoids congestion Carry-on luggage

State of Texas residents Business traveler who drives because of inadequate service Inexpensive family travel on weekends

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Competitive Environment of Services

Relatively Low Overall Entry Barriers Economies of Scale Limited High Transportation Costs Erratic Sales Fluctuations No Power Dealing with Buyers or Suppliers Product Substitutions for Service High Customer Loyalty Exit Barriers
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Competitive Service Strategies (Overall Cost Leadership)

Seeking Out Low-cost Customers Standardizing a Custom Service Reducing the Personal Element in Service Delivery (promote self-service) Reducing Network Costs (hub and spoke) Taking Service Operations Off-line
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Competitive Service Strategies (Differentiation)

Making the Intangible Tangible (memorable) Customizing the Standard Product Reducing Perceived Risk Giving Attention to Personnel Training Controlling Quality
Note: Differentiation in service means being unique in brand image, technology use, features, or reputation for customer service.
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Competitive Service Strategies (Focus)

Buyer Group: (e.g. USAA insurance and military officers) Service Offered: (e.g. Shouldice Hospital and hernia patients) Geographic Region: (e.g. Austin Cable Vision and TV watchers)
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Customer Criteria for Selecting a Service Provider

Availability Convenience Dependability Personalization Price Quality Reputation Safety Speed

(24 hour ATM) (Site location) (On-time performance) (Know customers name) (Quality surrogate) (Perceptions important) (Word-of-mouth) (Customer well-being) (Avoid excessive waiting)
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Winning Customers in the Marketplace

Service Qualifier: To be taken seriously a certain level

must be attained 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. 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).
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Competitive Role of Information in Services

Strategic Focus Competitive Use of Information On-line Off-line (Real time) (Analysis)

Creation of barriers to entry:

External Reservation system (Customer) Frequent user club Switching costs

Data base asset:

Selling information Development of services Micro-marketing

Revenue generation:
Internal (Operations) Yield management Point of sale Expert systems

Productivity enhancement:
Inventory status Data envelopment analysis (DEA)

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The Virtual Value Chain

Marketplace vs Marketspace Creating New Markets Using Information (Gather, Organize, Select, Synthesize, and Distribute) 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
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Limits in the Use of Information

Anti-competitive (e.g. Barrier to entry) Fairness (e.g. Yield management) Invasion of Privacy (e.g. Micromarketing) Data Security (e.g. Medical records) Reliability (e.g. Credit report)
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Using Information to Categorize Customers

Coding grades customers on how profitable their business is. Routing is 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.
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Stages in Service Firm Competitiveness

1. Available for service Customers patronize service firm for reasons other than performance. 2. Journeyman Customers neither seek out nor avoid the firm. 3. Distinctive competence Customers seek out the firm on the basis of its sustained reputation for meeting customer expectations 4. World-class service delivery The company s name is synonymous with service excellence. Its service doesnt just satisfy customers; it delights them and thereby expands customer expectations to levels its competitors are unable to fulfill. 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. Raises customer expectations and seeks challenge; improves continuously.

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. Exceeds customer expectations; consistent on multiple dimensions.

SERVICE QUALITY Is subsidiary to cost, highly variable.

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

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Stages in Service Firm Competitiveness

1. Available for service BACK OFFICE Counting room. 2. Journeyman 3. Distinctive competence 4. World-class service delivery

Contributes to service, plays an important role in the total service, is given attention, but is still a separate role. A market segment whose basic needs are understood.

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 collection of individuals whose variation in needs is understood. When promises to enhance service.

A source of stimulation, ideas, and opportunity.

INTRODUCTION OF NEW TECHNOLOGY When necessary for When justified by cost survival, under duress. savings.

Source of first-mover advantages, creating ability to do things your competitors cant do. Innovative; creates procedures.

WORKFORCE Negative constraint.

FRONT-LINE MANAGEMENT Controls workers.

Efficient resource; disciplined; follows procedures. Controls the process.

Permitted to select among alternative procedures. 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

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United Commercial Bank and El Banco

Strategic Service Vision Element Service Delivery System El Banco United Commercial Bank

Operating Strategy

Service Concept

Target Market Segments

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United Commercial Bank and El Banco

El Banco Qualifier Service Winner Service Loser
What are the differentiating features of banks that target ethnic communities?
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United Commercial Bank

Alamo Drafthouse Positioning

FOOD QUALITY
Good

MOVIE SELECTION
Few Many

Poor

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Alamo Drafthouse Strategic Service Vision

Target market segments Service concept Operating strategy

Service delivery system

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Alamo Drafthouse Winning Customers

Qualifiers Service winners Service losers

Make recommendations for Tim and Carrie that would increase profitability.

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Discussion Topics
1.

2. 3.

4. 5.

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 micromarketing? 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 described as learning organizations?
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Interactive Class Exercise

The class divides and debates the proposition Frequent flyer award programs are or are not anticompetitive.

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