Chapter 3
Service Strategy
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Learning Objectives
1. Formulate a strategic service vision.
2. Competitive environment of services.
3. Three generic service strategies.
4. Service purchase decision.
5. Competitive role of information.
6. Using Information to Categorize Customers
7. 4 Stages in Competitiveness
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1. Strategic Service Vision
(1) Target
Market Segments
(2) Service Concepts
(3) Operating Strategy
(4) Service Delivery System
ex. Southwest Airlines
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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
• Quick turnaround at
gate results in high
utilization of aircraft
• Short flights with
frequent departures
• Serve peanuts and
soft drinks only
• State of Texas residents
• Use only Boeing 737
aircraft to control
maintenance and
operating costs
• No assigned seating
rewards punctuality
and promotes ontime performance
• Hire cabin crew based
on attitude
• Use of inner-city or low
traffic airports
avoids congestion
• Business traveler who
drives because of
inadequate service
• Inexpensive family
travel on weekends
• Carry-on luggage
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2. Competitive Environment
of Services
(1) Relatively Low Overall Entry Barriers
(2) Economies of Scale Limited
(3) Erratic Sales Fluctuations
(4) No Power Dealing with Buyers or Suppliers
(5) Product Substitutions for Service
(6) High Customer Loyalty
(7) High Exit Barriers
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3. Competitive Service Strategies
(1) 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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3. Competitive Service Strategies
(2) Differentiation
Making the Intangible Tangible
(memorable)
 Customizing the Standard Product
 Reducing Perceived Risk
 Giving Attention to Personnel Training
 Controlling Quality

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3. Competitive Service Strategies
(3) Focus
Buyer Group (USAA insurance and
military officers)
 Service Offered (Shouldice Hospital and
hernia patients)
 Geographic Region (Austin Cable Vision
and TV watchers)

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Target
Entire
Market
Market
Segment
Strategic Advantage
Low cost
Uniqueness
Overall cost
leadership
Differentiation
Focus
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4. 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 customer’s name)
(Quality surrogate)
(Perceptions important)
(Word-of-mouth)
(Customer well-being)
(Avoid excessive waiting)
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4. Service Purchase Decision
(1) Service Qualifier: To be taken seriously
a certain level must be attained on the
competitive dimension, as defined by
other market players.
(cleanliness for a fast food restaurant,
safe aircraft for an airline)
(2) Service Winner: The competitive
dimension used to make the final choice
among competitors. (price)
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4. Service Purchase Decision
(3) Service Loser: Failure to deliver at or
above the expected level for a competitive
dimension.
(failure to repair auto: dependability,
rude treatment: personalization,
late delivery of package: speed)
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5. Competitive Role of
Information in Services
Strategic Focus
Competitive Use of Information
On-line (Real time)
External
(Customer)
Off-line (Analysis)
Creation of barriers to entry: Data base asset:
Reservation system
Selling information
Frequent user club
Development of services
Switching costs
Micro-marketing
Revenue generation:
Internal
Yield management
(Operations) Point of sale
Expert systems
Productivity enhancement:
Inventory status
Data envelopment
analysis (DEA)
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5. The Virtual Value Chain
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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5. Limits in the Use of Information
Anti-competitive (Barrier to entry)
 Fairness (Yield management)
 Invasion of Privacy (Micro-marketing)
 Data Security (Medical records)
 Reliability (Credit report)

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6. Using Information to Categorize
Customers


Coding grades customers.
Routing is used by call centers.

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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7. 4 Stages in Competitiveness
1. Available for service
2. Journeyman
3. Distinctive competence achieved
4. World-class service delivery
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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.
 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?

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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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