Chapter 3

Service Strategy

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 Learning Objectives

1. Critically discuss the competitive environment of services.

2. Formulate a strategic service vision.
3. Describe how a service competes using the three generic service strategies.
4. Perform a SWOT and Five Forces Analysis.
5. Explain what qualifiers, service winners, and service losers mean.
6. Discuss the competitive role of information in services.
7. Explain the concept of the virtual value chain and its role in service innovation.
8. Identify potential limits in the use of information as part of a competitive strategy.
9. Categorise a service firm according to its stage of competitiveness.

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 Summary Points

• Service strategy must begin with a vision of the place and purpose of the
enterprise.
• A strategic service vision addresses questions about the target market,
service concept, operating strategy, and delivery system.
• The competitive environment of services presents challenges such as low
entry barriers, product substitution, and limited opportunities for economies
of scale that must be overcome.
• The strategies of overall cost leadership, differentiation, and market focus
are approaches that service firms have adopted to gain competitive
advantage.
• Management must not lose sight of the fact that only focusing on the
customers and satisfying their needs will result in a loyal customer base.
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• Before entering a market, it is advisable to analyse a company’s position
relative to its competitors and other players.
• The five forces model helps to gain an appreciation of the competitive
nature of an industry.
• A SWOT analysis helps to assess strengths, weaknesses, opportunities,
and threats.
• Customers base their purchase decisions on many variables, including
price, convenience, reputation, and safety.
• The importance of a particular variable to a firm’s success depends on the
competitive marketplace and the preferences of individual customers.
• Four strategic roles of information are identified: Creation of barriers to
entry, revenue generation, database asset, and productivity enhancement.
• Service product innovation is driven by an appreciation of the virtual value
chain that assembles information on customer needs.

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 Understanding the Competitive Environment of
Services
• The reasons for the difficulty of service firms to compete:
 Relatively low overall entry barriers.
 Minimal opportunities for economies of scale.
 Erratic sales fluctuations.
 No advantage of size in dealing with buyers or suppliers.
 Product substitution.
 Customer loyalty.
 Exit barriers.

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 Competitive Service Strategies

• Three generic competitive strategies: Overall cost leadership,

differentiation, and focus.
• An overall cost leadership strategy requires efficient-scale facilities, tight
cost and overhead control, and often innovative technology.
• Seeking out low-cost customers.
• Standardising a custom service.
• Reducing the personal element in service delivery.
• Reducing network costs.
• Taking service operations offline.

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• The essence of the differentiation strategy lies in creating a service that is
perceived as being unique.
 Making the intangible tangible.
 Customising the standard product.
 Reducing perceived risk.
 Giving attention to personnel training.
 Controlling quality.

• The focus strategy concerns well-servicing a particular target market by

addressing customers’ specific needs.
• Davidow and Uttal argue how important customer selection is to achieving
a successful focus strategy. 7
 Strategic Analysis
• Strategic analysis begins with an objective, such as “Should we enter an
industry with a new service offering?”
• The five forces model is used at the industry level (e.g., airlines) to
determine competitive intensity and market attractiveness.
 Competitive rivalry within the industry.
 Potential new entrants.
 Threat of substitutes.
 Bargaining power of suppliers.
 Bargaining power of customers.

• SWOT analysis:
 Strengths, weaknesses, opportunities, threats.
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 Winning Customers in the Marketplace
• Depending on the competition and personal needs, customers select a
service provider using the following criteria:
 Availability.
 Convenience.
 Dependability.
 Personalisation.
 Price.
 Quality.
 Reputation.
 Safety.
 Speed.

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• Before a service firm can be taken seriously as a market competitor, it
must attain a certain level for each service-competitive dimension.
• Service winners are dimensions such as price, convenience, or reputation
that customers use to choose among competitors.
• Failure to deliver at or above the expected level for a competitive
dimension can result in a dissatisfied customer who is lost forever.

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 The Competitive Role of Information in Services
• Three uses of information for creating barriers to entry:
 Reservations systems.
 Frequent flyers or similar programmes to gain customer loyalty.
 Development of customer relationships to increase switching costs.

• A barrier to entry can be created by investing in online reservation systems

provided to sales intermediaries such as travel agents.
• Establishing customer relationships creates a cost in the form of an
inconvenience for the customer to switch to another provider.

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• The concept of yield management is best understood as a revenue-
maximizing strategy to use service capacity fully.
• Yield management is applying information to improve the revenue
generated by a time-perishable resource.
• Otis Elevator Company uses an expert system and laptop computers in
the hands of its maintenance staff to speed repairs in the field.
• The database a service firm possesses can be a hidden asset of strategic
importance.
• Dun & Bradstreet created a business by selling access to its database of
business credit information.

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• Club Med has evolved to reflect the maturing of its membership.
• Today, we can see a focused service strategy that can target customers at
the micro level.
• New developments in the collection and analysis of information have
increased our ability to manage multisite service operations.
• Using a hand-held computer, Frito-Lay sales representatives have
eliminated paper forms.
• Data envelopment analysis (DEA) is a linear programming technique to
evaluate nonprofit and public sector organisations.
• Banker and Morey applied DEA to a 60-unit fast-food restaurant chain and
found 33 units efficient.
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 The Virtual Value Chain

• Businesses compete in a physical world of people and things called a

marketplace and a virtual world of information called a marketspace.
• The process of creating value has long been described as stages linked
together to form a value chain.
• To create value with information, managers must look to the market space.
• Stages to move from the marketplace to marketspace:
 First stage (new processes)
 Second stage (new knowledge)
 Third stage (new products)
 Fourth stage (new relationships)

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 Limits in the Use of Information

• Anticompetitive.
• Fairness.
• Invasion of privacy.
• Data security.
• Reliability.

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 Stages in Service Firm Competitiveness

• If a service firm is to remain competitive, continuous improvement in

productivity and quality must be part of its strategy and corporate culture.

• Four stages of service firm competitiveness:

 Available for service.
 Journeyman.
 Distinctive competence achieved.
 World-class service delivery.

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