1 Chapter 3 Service Strategy

2 Learning Objectives 1. Formulate a strategic service vision. 2. Competitive environment of services. 3. Three generic service strategies. 4. Service purchase decision. 5. Competitive role of information. 6. Using Information to Categorize Customers 7. 4 Stages in Competitiveness

3 1. Strategic Service Vision (1) Target Market Segments (2) Service Concepts (3) Operating Strategy (4) Service Delivery System ex. Southwest Airlines

4 Southwest Airlines Strategic Service Vision Service Delivery System Operating Strategy Service Concept Target Market Segment Fun cabin atmosphere to differentiate service Fun cabin atmosphere to differentiate service Use only Boeing 737 aircraft to control maintenance and operating costs Use only Boeing 737 aircraft to control maintenance and operating costs Hire cabin crew based on attitude Hire cabin crew based on attitude Quick turnaround at gate results in high utilization of aircraft Quick turnaround at gate results in high utilization of aircraft No assigned seating rewards punctuality and promotes on- time performance No assigned seating rewards punctuality and promotes on- time performance Short flights with frequent departures Serve peanuts and soft drinks only Short flights with frequent departures Serve peanuts and soft drinks only Use of inner-city or low traffic airports avoids congestion Use of inner-city or low traffic airports avoids congestion Carry-on luggage Carry-on luggage State of Texas residents State of Texas residents Business traveler who drives because of inadequate service Business traveler who drives because of inadequate service Inexpensive family travel on weekends Inexpensive family travel on weekends

5 2. Competitive Environment of Services (1) Relatively Low Overall Entry Barriers (2) Economies of Scale Limited (3) Erratic Sales Fluctuations (4) No Power Dealing with Buyers or Suppliers (5) Product Substitutions for Service (6) High Customer Loyalty (7) High Exit Barriers

6 3. Competitive Service Strategies (1) Overall Cost Leadership ä Seeking Out Low-cost Customers ä Standardizing a Custom Service ä Reducing the Personal Element in Service Delivery (promote self-service) ä Reducing Network Costs (hub and spoke) ä Taking Service Operations Off-line

7 3. Competitive Service Strategies (2) Differentiation ä Making the Intangible Tangible (memorable) ä Customizing the Standard Product ä Reducing Perceived Risk ä Giving Attention to Personnel Training ä Controlling Quality

8 3. Competitive Service Strategies (3) Focus ä Buyer Group (USAA insurance and military officers) ä Service Offered (Shouldice Hospital and hernia patients) ä Geographic Region (Austin Cable Vision and TV watchers)

9 Target Strategic Advantage Target Strategic Advantage Low cost Uniqueness Low cost Uniqueness Entire Overall cost Differentiation Entire Overall cost Differentiation Market leadership Market leadership Market Focus Market Focus Segment Segment

10 4. Customer Criteria for Selecting a Service Provider ä ä Availability(24 hour ATM) ä ä Convenience(Site location) ä ä Dependability(On-time performance) ä ä Personalization(Know customer’s name) ä ä Price(Quality surrogate) ä ä Quality(Perceptions important) ä ä Reputation(Word-of-mouth) ä ä Safety(Customer well-being) ä ä Speed(Avoid excessive waiting)

11 4. Service Purchase Decision (1) Service Qualifier: To be taken seriously a certain level must be attained on the competitive dimension, as defined by other market players. (cleanliness for a fast food restaurant, (cleanliness for a fast food restaurant, safe aircraft for an airline) safe aircraft for an airline) (2) Service Winner: The competitive dimension used to make the final choice among competitors. (price)

12 4. Service Purchase Decision (3) Service Loser: Failure to deliver at or above the expected level for a competitive dimension. (failure to repair auto: dependability, (failure to repair auto: dependability, rude treatment: personalization, rude treatment: personalization, late delivery of package: speed) late delivery of package: speed)

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

14 5. The Virtual Value Chain 1st Stage (Visibility): See physical operations more effectively with information ex. USAA “paperless operation” 2 nd Stage (Mirroring Capability): Substitute virtual activities for physical ex. USAA “automate underwriting” 3 rd Stage (New Customer Relationships): Draw on information to deliver value to customer in new ways ex. USAA “event oriented service”

15 5. Limits in the Use of Information ä Anti-competitive (Barrier to entry) ä Fairness (Yield management) ä Invasion of Privacy (Micro-marketing) ä Data Security (Medical records) ä Reliability (Credit report)

16 6. Using Information to Categorize Customers ä Coding grades customers. ä Routing is used by call centers. ä Targeting allows choice customers to have fees waived and get other hidden discounts. ä Sharing data about your transaction history with other firms is a source of revenue.

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

18 Discussion Topics ä Give examples of service firms that use both the strategy of focus and differentiation and the strategy of focus and overall cost leadership. ä 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?

19 Interactive Class Exercise ä The class divides and debates the proposition “Frequent flyer award programs are or are not anticompetitive.”