CIB3006

SERVICE STRATEGY
Chapter 2

McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Strategic Service Vision
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?

2-2
Strategic Service Vision
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?

2-3
Strategic Service Vision
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?

2-4
Strategic Service Vision
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 to ensure quality
standards, differentiate the service from
competition, provide barriers to entry by
competitors?

2-5
Southwest Airlines Strategic Service Vision
Service Delivery Operating Strategy Service Concept Target Market
System Segment

• Fun cabin • Quick turnaround • Short flights with • State of Texas

atmosphere to at gate results in frequent residents
differentiate high utilization of departures
service aircraft • Business traveler
• Serve peanuts and who drives
• Use only Boeing • No assigned soft drinks only because of
737 aircraft to seating rewards inadequate service
control punctuality and • Use of inner-city
maintenance and promotes on-time or low traffic • Inexpensive
operating costs performance airports avoids family travel on
congestion weekends
• Hire cabin crew
based on attitude • Carry-on luggage

2-6
Competitive Environment of Services
• Relatively Low Overall Entry Barriers
• Economies of Scale Limited
• High Transportation Costs
• Erratic Sales Fluctuations
• No Power Dealing with Buyers or Suppliers
• Product Substitutions for Service
• High Customer Loyalty
• Strong Exit Barriers

2-7
Competitive Service Strategies (Overall Cost
Leadership)
• Seeking Out Low-cost Customers (e.g., USAA)
• Standardizing a Custom Service (e.g., H&R
Block)
• Reducing the Personal Element in Service
Delivery (e.g., promote self-service at airline
check-in)
• Reducing Network Costs (e.g., hub and spoke at
FedEx)
• Taking Service Operations Offline (e.g., shoe-
repair drop-off)
2-8
Competitive Service Strategies (Differentiation)
• Making the Intangible Tangible (memorable) (e.g.,
Disney Theme Parks)
• Customizing the Standard Product (e.g.,
Ritz Carlton)
• Reducing Perceived Risk (e.g., FedEx)
• Giving Attention to Personnel Training (e.g.,
McDonald’s Hamburger University)
• Controlling Quality (e.g., Shouldice Hospital)
Note: Differentiation in service means being unique in
brand image, technology use, features, or reputation for
customer service.

2-9
Competitive Service Strategies (Focus)
• Buyer Group: (e.g. USAA insurance and military officers)

• Service Offered: (e.g. Shouldice Hospital and hernia

patients)

• Geographic Region: (e.g. Austin Cable Vision and TV

watchers)

2-10
Porter’s Five Forces Model
Potential New
Entrants
- Barriers to entry
- Brand equity
- Capital requirements

Bargaining Power of Competitive Rivalry Bargaining Power of

Suppliers within Industry Customers
- Presence of substitute inputs - Number of competitors - Buyer’s price sensitivity
- Threat of forward integration - Rate of industry growth - Customer volume
- Uniqueness of inputs - Industry capacity - Information asymmetry

Threat of Substitutes
- Buyer propensity to substitute
- Buyer switching costs
- Product substitution for service
2-11
SWOT Analysis
Strengths
• What are your company’s advantages?
• What do you do better than anyone else?
• What unique resources do you have?
• What do people in your market see as your strengths?
Weaknesses
• What could you improve?
• What should you avoid?
• What factors lose sales?
• What are people in your market likely to see as a weakness?
Opportunities
• What are your competitors’ vulnerabilities?
• What are the current market trends?
• Does technology offer new service options?
• Are there niches in the market your organization can fill?
Threats
• What obstacles do you face?
• What are your competitors doing?
• Is your position threatened by changing technology?
• Do you have cash-flow problems?

2-12
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)
• Quality (Perceptions important)
• Reputation (Word-of-mouth)
• Safety (Customer well-being)
• Speed (Avoid excessive waiting)

2-13
Winning Customers in the Marketplace
• Service Qualifier: To be taken seriously, a certain level
must be attained on the competitive dimension, as
defined by other market players, e.g., cleanliness for a
fast food restaurant or safe aircraft for an airline.
• Service Winner: The competitive dimension that is
used to make the final choice among competitors, e.g.,
price.
• Service Loser: Defined by failure to deliver at or above
the expected level for a competitive dimension, e.g.,
failure to repair auto (dependability), rude treatment
(personalization), or late delivery of package (speed).

2-14
Sustainability in Services
Motivations:
• Regulations/legislation
• Environmental Protection Agency (EPA)
• Waste Electrical and Electronic Equipment (WEEE)
• Restriction of Hazardous Substances (RoHS)
• Perception/Image Building
• Economic
• Cost savings from waste reduction

2-15
Triple Bottom Line Impact

2-16
Competitive Role of Information in Services

2-17
Exploiting the Virtual Value Chain

Production Distribution Retailing Customer

Physical Value Chain

Apply the generic

value-adding steps of
the information world:
- Gather
- Organize
- Select
- Synthesize
- Distribute
to each physical activity
to create virtual value.

New New New New Virtual Value Chain

Processes Knowledge Products Relationships
(Stage 1) (Stage 2) (Stage 3) (Stage 4)
2-18
The Virtual Value Chain
• Marketplace vs Marketspace
• Creating New Markets Using Information (Gather, Organize,
Select, Synthesize, and Distribute)
• Four Stage Evolution

• 1st Stage (New Processes): See physical operations more

effectively with information (USAA “paperless operation”).
• 2nd Stage (New Knowledge): Substitute virtual activities for
physical (USAA “automate underwriting”).
• 3rd Stage (New Products): Use information to deliver value to
customers in new ways (USAA “event oriented service”).
• 4th Stage (New Relationships): Seek customer collaboration in
co-creation of value (USAA “financial planning service”).
2-19
 Economics of Scalability
Dimensions High Scalability Low
Selling Selling value- Selling Selling goods
E-commerce information (e- added service services with goods (e-commerce)
continuum service)

Information vs. Information Information with Goods with support Goods dominate
goods content dominates some service services

Degree of customer Self-service Call center Call center support Call center order
content backup processing
Standardization vs. Mass Some Limited Fill individual orders
customization distribution personalization customization
Shipping and Digital asset Mailing Shipping Shipping, order
handling costs fulfillment, and
warehousing
After-sales service None Answer questions Remote maintenance Returns possible

Example service Used car prices Online leisure Computer/IT support Online retailer
travel agent
Example firm Kbb.com InfoHub.com Everdream.com Amazon.com
2-20
Limits in the Use of Information
• Anti-competitive (e.g. Barrier to entry)
• Fairness (e.g. Yield management)
• Invasion of Privacy (e.g. Micro-marketing)
• Data Security (e.g. Medical records)
• Reliability (e.g. Credit report)

2-21
Using Information to Categorize Customers
• Coding grades customers on how profitable their
business is.
• Routing is 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.

2-22
Stages in Service Firm Competitiveness

2-23
 24

Tutorial Question 1
Ch 1
 
CASE: XPRESSO LUBE
 
 
1. Describe Xpresso Lube’s service package?
 
2. How are the distinctive characteristics of a service operation
illustrated by Xpresso Lube?
 
3. Characterize Xpresso Lube in regard to nature of the service
act, relationship with customers, customization and judgment,
nature of demand and supply, and method of service delivery.
 
4. What elements of Xpresso Lube’s location contribute to its
success?
 
5. Given the example of Xpresso Lube, what other services could
be combined to “add value” for the customer?
 25
Tutorial Question 2
TOPICS FOR DISCUSSION
1. Give examples of service firms that use the strategy of focus and differentiation
and the strategy of focus and overall cost leadership.
2. What ethical issues are associated with micromarketing?
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 began as world-class and has remained in that
category.
.
5. Could firms in the “world-class service delivery” stage of competitiveness be
described as “learning organizations’?
6. Compare and contrast sustainability efforts in service operations and
manufacturing.
 
7. Conduct a triple bottom line evaluation for a hospital by identifying its social,
economic, and environmental attributes that enhance the sustainability
movement.