Chapter – 3

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Service Management (5e) Operations, Strategy,
Information Technology By Fitzsimmons and
Fitzsimmons

• Chapter 3
• Service Strategy

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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).

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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?

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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?

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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?

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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?

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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

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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

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Continued

• No Power Dealing with Buyers or Suppliers
• Typically service firms are small, so they have
  less power
• Exception are McDonalds 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

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Competitive Service Strategies

• Porter argues that three generic competitive
  strategies exist
• Overall cost leadership
• Differentiation
• Focus

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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, McDonalds

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How to attain cost leadership?

• Seeking Out Low-cost Customers
• Some customers cost less to serve than others
• Sams club and Costco serve customers who buy
  bulk and ask for little to no service
• Standardizing a Custom Service
• Example HR 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

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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

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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

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Customer Criteria for Selecting a Service
Provider

• Availability (24 hour ATM)
• Convenience (Site location)
• Dependability (On-time performance)
• Personalization (Know customers 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)

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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.

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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).

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Competitive Role of Information in Services

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1. Creation of Barriers to Entry

• Reservation system
• American Airlines 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

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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

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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

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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.

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4. Productivity Enhancement

• Inventory status
• Real time inventory management and tie up with
  suppliers
• Better movement of inventory through multiple
  sites

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The Virtual Value Chain

• Marketplace vs Marketspace
• Physical versus virtual
• Creating New Marketspace Using Information - 5
  steps
• Gather
• Organize
• Select
• Synthesize
• Distribute

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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

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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?

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Stages in Service Firm Competitiveness

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Stages in Service Firm Competitiveness
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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?