Unit 3.

Service Strategy

Nguyen Manh Tuan

Learning Objectives
 Formulate a strategic service vision.
 Discuss the competitive environment of services.
 Describe how a service competes using the 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.

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 1. Strategic Service Vision
A. 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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 1. Strategic Service Vision
B. 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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 1. Strategic Service Vision
C. 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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 1. Strategic Service Vision
D. 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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Ex: Southwest 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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2. Competitive Environment of Services

Reasons for the difficulty of economic

environment
 Relatively Low Overall Entry Barriers
 Economies of Scale Limited
 Erratic Sales Fluctuations
 No Advantage of Size in Dealing with Buyers or
Suppliers
 Product Substitutions for Service
 High Customer Loyalty
 Exit Barriers

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2. 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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2. Competitive Environment of Services

 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 high

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3. Generic Service Strategies
A. Porter’s 3 generic competitive strategies:
1. Overall cost leadership

2. Differentiation

3. Focus

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A1. 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).
 Ex: Wal-Mart, McDonald’s

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A1. Overall Cost Leadership
How to attain cost leadership?

 Seeking Out Low-cost Customers

 Some customers cost less to serve than others

 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 when customer is not

required to be present

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A2. Differentiation
Differentiation in service means being unique in brand image,
technology use, features, or reputation for customer service.
How to differentiate?
 Making the Intangible Tangible (memorable)
 Ex: ?
 Customizing the Standard Product
 Ex: ?
 Reducing Perceived Risk
 Ex: ?
 Giving Attention to Personnel Training
 Ex: ?
 Delivering consistent level of high quality at multiple sites
 Ex: ?

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A3. 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.
 How to focus?
 Buyer Group:
 Service Offered:
 Geographic Region:
Ex: ?

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3. Generic Service Strategies
B. D’Aveni(1997): Hypercompetition and 7S
Framework
 Competitive advantage is rapidly erased by competition
and the market
 The 7 Ss are:
1. Superior stakeholder satisfaction
2. Strategic soothsaying
3. Positioning for speed
4. Positioning for surprise
5. Shifting the rules of competition
6. Signaling strategic intent
7. Simultaneous and sequential strategic thrusts

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B. D’Aveni’(1997) 7S

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4. Customer Criteria for Selecting a Service
Provider
 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)
 Reputation (Word-of-mouth)
 Safety (Customer well-being)
 Speed (Avoid excessive waiting)

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4. 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.
Ex: 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.
Ex: price, convenience, reputation.
 Service Loser
 Failure to deliver at or above the expected level for a competitive
dimension.
Ex: failure to repair auto (dependability), rude treatment
(personalization) or late delivery of package (speed).

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5. Competitive Role of Information in Services

Strategic Focus Competitive Use of Information

On-line Off-line
(Real time) (Analysis)
Creation of barriers to Data base asset:
External entry: Selling information
(Customer) Reservation system Development of services
Frequent flyer user club Micro-marketing
Switching costs
Revenue generation: Productivity
Internal Yield management enhancement:
(Operations) Point of sale Inventory status
Expert systems Data envelopment
analysis (DEA)

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5.1. 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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5.2. 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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5.3. 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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5.4. Productivity Enhancement

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

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6. 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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7. 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: USAA
 United Service Automobile Association (USAA): provides
financial services to military personnel and their families
and becomes 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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8. Limitations 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 (Micromarketing)

 Data Security (Medical records)

How to protect sensitive information about people?

 Reliability (Credit report)

How to challenge erroneous information?

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9. Stages in Service Firm Competitiveness
1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service delivery

Customers patronize Customers neither seek Customers seek out the firm The company’s name is
service firm for reasons out nor avoid the firm. on the basis of its sustained synonymous with service
other than performance. reputation for meeting excellence. Its service doesn’t just
customer expectations satisfy customers; it delights them
and thereby expands customer
expectations to levels its
competitors are unable to fulfill.

Operations is reactive, at Operations functions in Operations continually Operations is a quick learner and
best. a mediocre, uninspired excels, reinforced by fast innovator; it masters every
fashion. personnel management and step of the service delivery
systems that support an process and provides capabilities
intense customer focus. that are superior to competitors.

SERVICE QUALITY
Is subsidiary to cost, Meets some customer Exceeds customer Raises customer expectations and
highly variable. expectations; consistent expectations; consistent on seeks challenge; improves
on one or two key multiple dimensions. continuously.
dimensions.

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9. Stages in Service Firm Competitiveness
1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service delivery
BACK OFFICE
Counting room. Contributes to service, plays Is equally valued with front Is proactive, develops its own
an important role in the total office; plays integral role. capabilities, and generates
service, is given attention, but opportunities.
is still a separate role.

CUSTOMER
Unspecified, to be A market segment whose A collection of individuals A source of stimulation, ideas,
satisfied at minimum cost. basic needs are understood. whose variation in needs is and opportunity.
understood.
INTRODUCTION OF NEW TECHNOLOGY
When necessary for When justified by cost savings. When promises to enhance Source of first-mover
survival, under duress. service. advantages, creating ability to do
things your competitors can’t do.
WORKFORCE
Negative constraint. Efficient resource; disciplined; Permitted to select among Innovative; creates procedures.
follows procedures. alternative 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

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Home Assignment
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. 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?
3. Give an example of a firm that begin as world-class and
has remained in that category.
4. Could firms in the “world-class service delivery” stage of
competitiveness be descried as “learning
organizations”?

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