3
Service Management (5e)
Operations, Strategy, Information Technology
By
Fitzsimmons and Fitzsimmons
Chapter – 3
Service Strategy
3-2
Learning Objectives
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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).
3-3
Strategic Service Vision
1. Target Market Segments
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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?
3-4
Strategic Service Vision
2. 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?
3-5
Strategic Service Vision
3. 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?
3-6
Strategic Service Vision
4. 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?
3-7
South-west Airlines
 Target
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market segment
Interstate business travelers with carry-on luggage who are currently driving
Short flights
 Service
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Concept
On time performance
Frequent departures
 Operating

Fast airport turnaround to allow productive use of aircraft and provide
frequent departures
 Service

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Strategy
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
3-8
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
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 Economies
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limited opportunities for economies of scale because of
simultaneous production and consumption
 Erratic

of Scale Limited
Sales Fluctuations-
demand varies by time of day and day of the week with random
arrivals
3-9
Continued…
 No
Power Dealing with Buyers or Suppliers
Typically service firms are small, so they have less power
 Exception are McDonald’s buying beef
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 Product
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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

Substitutions for Service
Barriers
Typically low
3-10
Competitive Service Strategies
 Porter
argues that three generic competitive
strategies exist:
1.
Overall cost leadership
2.
Differentiation
3.
Focus
3-11
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, McDonald’s
3-12
How to attain cost leadership?
 Seeking

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Out Low-cost Customers
Some customers cost less to serve than others
Sam’s club and Costco serve customers who buy bulk and ask for little to no
service
 Standardizing

a Custom Service
Example H&R 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
3-13
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)
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For example giving toiletries in hotels to remind of the comfortable stay
 Customizing
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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

the Standard Product
Attention to Personnel Training
Service providers will ultimately make the difference
 Delivering
consistent level of high Quality at multiple sites
3-14
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

3-15
Customer Criteria for Selecting
a Service Provider

Availability
(24 hour ATM)

Convenience
(Site location)
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Dependability
(On-time performance)

Personalization
(Know customer’s 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)
3-16
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
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The competitive dimension used to make the final choice among
competitors.
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Example is price, convenience, reputation.
3-17
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).

3-18
Competitive Role of Information in Services
Strategic Focus
Competitive Use of Information
On-line
(Real time)
Creation of barriers to entry:
Reservation system
External
(Customer) Frequent flyer user club
Switching costs
Revenue generation:
Yield management
Internal
(Operations) Point of sale
Expert systems
Off-line
(Analysis)
Data base asset:
Selling information
Development of services
Micro-marketing
Productivity enhancement:
Inventory status
Data envelopment
analysis (DEA)
3-19
1. Creation of Barriers to Entry
 Reservation

American Airline’s Sabre System
 Frequent

system
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

3-20
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
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 Expert

system
Past data can be fed to create expert systems – which maintenance
people can recall to trouble shoot problems
3-21
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
3-22
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.
3-23
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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3-24
The Virtual Value Chain
 Marketplace

Physical versus virtual
 Creating
New Marketspace Using Information - 5 steps
Gather
 Organize
 Select
 Synthesize
 Distribute
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vs Marketspace
3-25
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”
3-26
Limits in the Use of Information
 Anti-competitive

How to account the expense on frequent flyer service?
 Fairness
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(Yield management)
How to justify different price paid for same service by customers?
 Invasion
 Data
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of Privacy (Micro-marketing)
Security (Medical records)
How to protect sensitive information about people?
 Reliability

(Barrier to entry)
(Credit report)
How to challenge erroneous information?
3-27
Stages in Service Firm Competitiveness
1. Available for service
2. Journeyman
3. Distinctive competence
4. World-class service delivery
Customers patronize
service firm for reasons
other than performance.
Customers neither seek
out nor avoid the firm.
Customers seek out the firm
on the basis of its sustained
reputation for meeting
customer expectations
The company’s name is
synonymous with service
excellence. Its service doesn’t just
satisfy customers; it delights them
and thereby expands customer
expectations to levels its
competitors are unable to fulfill.
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.
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.
Meets some customer
expectations; consistent
on one or two key
dimensions.
Exceeds customer
expectations; consistent on
multiple dimensions.
Raises customer expectations and
seeks challenge; improves
continuously.
SERVICE QUALITY
Is subsidiary to cost,
highly variable.
3-28
Stages in Service Firm Competitiveness
1. Available for service
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.
Is equally valued with front
office; plays integral role.
Is proactive, develops its own
capabilities, and generates
opportunities.
A collection of individuals
whose variation in needs is
understood.
A source of stimulation, ideas,
and opportunity.
When justified by cost savings.
When promises to enhance
service.
Source of first-mover
advantages, creating ability to do
things your competitors can’t do.
Efficient resource; disciplined;
follows procedures.
Permitted to select among
alternative procedures.
Innovative; creates 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
BACK OFFICE
Counting room.
CUSTOMER
Unspecified, to be
A market segment whose
satisfied at minimum cost. basic needs are understood.
INTRODUCTION OF NEW TECHNOLOGY
When necessary for
survival, under duress.
WORKFORCE
Negative constraint.
FRONT-LINE MANAGEMENT
Controls workers.
Controls the process.
3-29
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”?