Chapter 3 Service Strategy Learning Objectives Formulate a
Chapter – 3 Service Strategy
Learning Objectives ØFormulate a strategic service vision. ØDiscuss the competitive environment of services. ØDescribe how a service competes using the three generic service strategies. ØDiscuss the service purchase decision. ØDiscuss the competitive role of information in services. ØExplain the role of the virtual value chain in service innovation. ØDiscuss the limits in the use of information. ØCategorize a service firm according to its stage of competitiveness. ØConduct a data envelopment analysis (DEA). 3 -2
Strategic Service Vision 1. Target Market Segments Ø What are common characteristics of important market segments? Ø What dimensions can be used to segment the market, demographic, psychographic? Ø How important are various segments? Ø What needs does each have? Ø How well are these needs being served, in what manner, by whom? 3 -3
Strategic Service Vision 2. Service Concept ØWhat are important elements of the service to be provided, stated in terms of results produced for customers? ØHow are these elements supposed to be perceived by the target market segment, by the market in general, by employees, by others? ØHow do customers perceive the service concept? ØWhat efforts does this suggest in terms of the manner in which the service is designed, delivered, marketed? 3 -4
Strategic Service Vision 3. Operating Strategy ØWhat are important elements of the strategy: operations, financing, marketing, organization, human resources, control? ØOn which will the most effort be concentrated? ØWhere will investments be made? ØHow will quality and cost be controlled: measures, incentives, rewards? ØWhat results will be expected versus competition in terms of, quality of service, cost profile, productivity, morale/loyalty of servers? 3 -5
Strategic Service Vision 4. Service Delivery System ØWhat are important features of the service delivery system including: role of people, technology, equipment, layout, procedures? ØWhat capacity does it provide, normally, at peak levels? ØTo what extent does it, help insure quality standards, differentiate the service from competition, provide barriers to entry by competitors? 3 -6
South-west Airlines ØTarget market segment v. Interstate business travelers with carry-on luggage who are currently driving v. Short flights ØService Concept v. On time performance v. Frequent departures ØOperating Strategy v. Fast airport turnaround to allow productive use of aircraft and provide frequent departures ØService delivery system v. Cabin crew with good interpersonal skills to create ‘fun’ atmosphere v. No assigned seating to provide fast gate turnaround v. Short distance haul – mostly carry-on luggage – less ground crew 3 -7
Competitive Environment of Services ØRelatively Low Overall Entry Barriers Ønot patentable ØTypically not capital intensive ØException – when you are first in a small market, or prized location advantage ØEconomies of Scale Limited Ølimited opportunities for economies of scale because of simultaneous production and consumption ØErratic Sales FluctuationsØ demand varies by time of day and day of the week with random arrivals 3 -8
Continued… ØNo Power Dealing with Buyers or Suppliers ØTypically service firms are small, so they have less power ØException are Mc. Donald’s buying beef ØProduct Substitutions for Service ØFor 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. ØHigh Customer Loyalty ØThis can act as a barrier to entry ØExit Barriers ØTypically low 3 -9
Competitive Service Strategies ØPorter argues that three generic competitive strategies exist: 1. Overall cost leadership 2. Differentiation 3. Focus 3 -10
1. Overall Cost Leadership ØRequires efficient scale facilities, tight cost and overhead control, and use of innovative technology ØImplementation 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). ØExamples, Wal-Mart, Mc. Donald’s 3 -11
How to attain cost leadership? ØSeeking Out Low-cost Customers v. Some customers cost less to serve than others v. Sam’s club and Costco serve customers who buy bulk and ask for little to no service ØStandardizing a Custom Service v. Example H&R block has taken only routine preparation though tax forms can be customized ØReducing the Personal Element in Service Delivery (promote selfservice) v. Technology use has allowed banks to provide access to ATMs and reduce human interface ØReducing Network Costs (hub and spoke) ØTaking Service Operations Off-line when customer is not required to be present – ex. drop off for laundry in Chicago 3 -12
2. Differentiation in service means being unique in brand image, technology use, features, or reputation for customer service. HOW? ØMaking the Intangible Tangible (memorable) ØFor example giving toiletries in hotels to remind of the comfortable stay ØCustomizing the Standard Product ØFor example addressing a customer by the name can give an impression of customization of otherwise a standardized service ØReducing Perceived Risk ØBy providing guarantee, example pest control ØGiving Attention to Personnel Training ØService providers will ultimately make the difference ØDelivering consistent level of high Quality at multiple sites 3 -13
3. Focus ØThis strategy is built around providing a target market with very specific need. ØWorks on the assumption that the firm can serve its narrow market more effectively and efficiently. ØExample ØService Offered: (e. g. Shouldice Hospital and hernia patients). ØHarley Davidson 3 -14
Customer Criteria for Selecting a Service Provider ØAvailability (24 hour ATM) ØConvenience (Site location) ØDependability (On-time performance) ØPersonalization ØPrice (Know customer’s name) (Quality surrogate because of intangibility) ØQuality (both outcome & process; Perceptions important) ØReputation (Word-of-mouth) ØSafety (Customer well-being) ØSpeed (Avoid excessive waiting) 3 -15
Service Purchase Decision ØService Qualifier üTo be taken seriously a certain level must be attained by the service provider on the competitive dimension, as defined by other market players. üExamples are cleanliness for a fast food restaurant or safe aircraft for an airline. ØService Winner üThe competitive dimension used to make the final choice among competitors. üExample is price, convenience, reputation. 3 -16
Service Purchase Decision (cont. ) ØService Loser üFailure to deliver at or above the expected level for a competitive dimension. üExamples are failure to repair auto (dependability), rude treatment (personalization) or late delivery of package (speed). 3 -17
Competitive Role of Information in Services 3 -18
1. Creation of Barriers to Entry ØReservation system üAmerican Airline’s Sabre System ØFrequent User club üAmerican airlines used its reservation system to also create frequent flyer club to reward people to accumulate credit ØSwitching cost üData transfer üNew software and hardware requirements 3 -19
2. Revenue Generation ØYield management üReal time pricing by monitoring demand supply ØPoint of sale üinformation can travel to suppliers for real time inventory management üServer can transmit order information directly to the kitchen and to the cashier at the same time ØExpert system üPast data can be fed to create expert systems – which maintenance people can recall to trouble shoot problems 3 -20
3. Database Asset ØSelling information ØDeveloping services üData mining to find new trends for new services or improving existing services ØMicromarketing üTo target your advertisements 3 -21
Using Information to Categorize Customers ØCoding ügrade customers on how profitable their business is. ØRouting üused by call centers to place customers in different queues based on customer code. ØTargeting üallows choice customers to have fees waived and get other hidden discounts. ØSharing üdata about your transaction history with other firms is a source of revenue. 3 -22
4. Productivity Enhancement ØInventory status üReal time inventory management and tie up with suppliers üBetter movement of inventory through multiple sites 3 -23
The Virtual Value Chain ØMarketplace vs Marketspace üPhysical versus virtual ØCreating New Marketspace Using Information - 5 steps ØGather ØOrganize ØSelect ØSynthesize ØDistribute 3 -24
Example of USAA ØUnited 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. ØThree Stage Evolution ü 1 st Stage (Visibility): See physical operations more effectively with information – Ex. USAA “paperless operation ü 2 nd Stage (Mirroring Capability): Substitute virtual activities for physical – Ex. USAA “automate underwriting” ü 3 rd Stage (New Customer Relationships): Draw on information to deliver value to customer in new ways – Ex. USAA “event oriented service” 3 -25
Limits in the Use of Information ØAnti-competitive (Barrier to entry) üHow to account the expense on frequent flyer service? ØFairness (Yield management) üHow to justify different price paid for same service by customers? ØInvasion of Privacy (Micro-marketing) ØData Security (Medical records) üHow to protect sensitive information about people? ØReliability (Credit report) üHow to challenge erroneous information? 3 -26
Stages in Service Firm Competitiveness 3 -27
Stages in Service Firm Competitiveness 3 -28
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”? 3 -29
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