1. Chapter – 3 Service Strategy
Service Management (5e)
Operations, Strategy, Information Technology By
Fitzsimmons and Fitzsimmons
Chapter – 3
Service Strategy

2. 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).

3. 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?

4. 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?

5. 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?

6. 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?

7. South-west Airlines Target market segment Service Concept
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

8. 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

9. 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

10. Competitive Service Strategies
Porter argues that three generic competitive strategies exist:
Overall cost leadership
Differentiation
Focus

11. 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

12. 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

13. 2. Differentiation HOW? Making the Intangible Tangible (memorable)
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

14. 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

15. 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)

16. 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.

17. 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).

18. Competitive Role of Information in Services

19. 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

20. 2. Revenue Generation Yield management Point of sale Expert system
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

21. 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

22. 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.

23. 4. Productivity Enhancement
Inventory status
Real time inventory management and tie up with suppliers
Better movement of inventory through multiple sites

24. The Virtual Value Chain
Marketplace vs Marketspace
Physical versus virtual
Creating New Marketspace Using Information - 5 steps
Gather
Organize
Select
Synthesize
Distribute

25. 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”

26. 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?

27. Stages in Service Firm Competitiveness

28. Stages in Service Firm Competitiveness

29. Discussion Topics
Give examples of service firms that use both the strategy of focus and differentiation and the strategy of focus and overall cost leadership.
What ethical issues are associated with micro-marketing?
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?
Give an example of a firm that begin as world-class and has remained in that category.
Could firms in the “world-class service delivery” stage of competitiveness be descried as “learning organizations”?