3

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 Vision

1. 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 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?
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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?
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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?
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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 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 Strategies

Porter argues that three generic competitive
strategies exist:
1. Overall cost leadership

2. Differentiation
3. 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, McDonald’s
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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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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 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)
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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 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 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”?