Chapter

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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

1. Give examples of service firms that use both the
   strategy of focus and differentiation and the
   strategy of focus and overall cost leadership.
2. What ethical issues are associated with
   micro-marketing?
3. 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?
4. Give an example of a firm that begin as
   world-class and has remained in that category.
5. Could firms in the world-class service delivery
   stage of competitiveness be descried as learning
   organizations?