Chapter – 3 Service Strategy 3 Service Management (5e) Operations, Strategy, Information Technology By Fitzsimmons and Fitzsimmons
Dec 21, 2015
Chapter – 3
Service Strategy
3
Service Management (5e)
Operations, Strategy, Information Technology
By
Fitzsimmons and Fitzsimmons
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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).
Learning ObjectivesLearning Objectives
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Strategic Service Vision1. Target Market Segments
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
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
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
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?
South-west AirlinesSouth-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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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
Competitive Environment of ServicesCompetitive Environment of Services
Continued…Continued…
No Power Dealing with Buyers or Suppliers Typically service firms are small, so they have less power Exception are McDonald’s 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 StrategiesCompetitive Service Strategies
Porter argues that three generic competitive strategies exist:
1. Overall cost leadership
2. Differentiation
3. Focus
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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
1. Overall Cost Leadership1. Overall Cost Leadership
How to attain cost leadership?How to attain cost leadership?
Seeking 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
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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
2. Differentiation2. Differentiation
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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. Focus3. Focus
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Availability (24 hour ATM)
Convenience (Site location)
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)
Customer Criteria for Selecting a Service Provider
Customer Criteria for Selecting a Service Provider
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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.
Service Purchase DecisionService Purchase Decision
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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).
Service Purchase Decision (cont.)Service Purchase Decision (cont.)
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Strategic Focus Competitive Use of Information On-line Off-line (Real time) (Analysis) Creation of barriers to entry:
Reservation system Frequent flyer user club Switching costs
Data base asset: Selling information Development of services Micro-marketing
External (Customer) Revenue generation:
Yield management Point of sale Expert systems
Productivity enhancement: Inventory status Data envelopment analysis (DEA)
Internal (Operations)
Competitive Role of Information in ServicesCompetitive Role of Information in Services
1. Creation of Barriers to Entry1. Creation of Barriers to Entry
Reservation system American Airline’s 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 Generation2. 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 Asset3. 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 CustomersUsing 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.
4. Productivity Enhancement4. Productivity Enhancement
Inventory status Real time inventory management and tie up with suppliers Better movement of inventory through multiple sites
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Marketplace vs Marketspace Physical versus virtual
Creating New Marketspace Using Information - 5 steps Gather Organize Select Synthesize Distribute
The Virtual Value ChainThe Virtual Value Chain
Example of USAAExample 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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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?
Limits in the Use of InformationLimits in the Use of Information
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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.
SERVICE QUALITY
Is subsidiary to cost, highly variable.
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.
Stages in Service Firm CompetitivenessStages in Service Firm Competitiveness
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1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service delivery
BACK OFFICE
Counting room. 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.
CUSTOMER
Unspecified, to be satisfied at minimum cost.
A market segment whose basic needs are understood.
A collection of individuals whose variation in needs is understood.
A source of stimulation, ideas, and opportunity.
INTRODUCTION OF NEW TECHNOLOGY
When necessary for survival, under duress.
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.
WORKFORCE
Negative constraint. Efficient resource; disciplined; follows procedures.
Permitted to select among alternative procedures.
Innovative; creates procedures.
FRONT-LINE MANAGEMENT Controls workers. Controls the process. 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
Stages in Service Firm CompetitivenessStages in Service Firm Competitiveness
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Discussion TopicsDiscussion 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”?