3 Service Management (5e) Operations, Strategy, Information Technology

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

3-2 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).

3-3 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?

3-4 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?

3-5 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?

3-6 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?

3-7 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 Fast airport turnaround to allow productive use of aircraft and provide frequent departures Service Strategy 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

3-8 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 limited opportunities for economies of scale because of simultaneous production and consumption Erratic of Scale Limited Sales Fluctuations- demand varies by time of day and day of the week with random arrivals

3-9 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 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 Substitutions for Service Barriers Typically low

3-10 Competitive Service Strategies Porter argues that three generic competitive strategies exist: 1. Overall cost leadership 2. Differentiation 3. Focus

3-11 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

3-12 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

3-13 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 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 the Standard Product Attention to Personnel Training Service providers will ultimately make the difference Delivering consistent level of high Quality at multiple sites

3-14 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

3-15 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 Reputation Safety (Customer well-being) Speed (Avoid excessive waiting) (Quality surrogate because of intangibility) (both outcome & process; Perceptions important) (Word-of-mouth)

3-16 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.

3-17 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).

3-18 Competitive Role of Information in Services Strategic Focus Competitive Use of Information On-line (Real time) Creation of barriers to entry: Reservation system External (Customer) Frequent flyer user club Switching costs Revenue generation: Yield management Internal (Operations) Point of sale Expert systems Off-line (Analysis) Data base asset: Selling information Development of services Micro-marketing Productivity enhancement: Inventory status Data envelopment analysis (DEA)

3-19 1. Creation of Barriers to Entry Reservation American Airline’s Sabre System Frequent system 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

3-20 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

3-21 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

3-22 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.

3-23 4. Productivity Enhancement Inventory status Real time inventory management and tie up with suppliers Better movement of inventory through multiple sites

3-24 The Virtual Value Chain Marketplace Physical versus virtual Creating New Marketspace Using Information - 5 steps Gather Organize Select Synthesize Distribute vs Marketspace

3-25 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”

3-26 Limits in the Use of Information Anti-competitive How to account the expense on frequent flyer service? Fairness (Yield management) How to justify different price paid for same service by customers? Invasion Data of Privacy (Micro-marketing) Security (Medical records) How to protect sensitive information about people? Reliability (Barrier to entry) (Credit report) How to challenge erroneous information?

3-27 Stages in Service Firm Competitiveness 1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service delivery Customers patronize service firm for reasons other than performance. Customers neither seek out nor avoid the firm. Customers seek out the firm on the basis of its sustained reputation for meeting customer expectations The company’s name is synonymous with service excellence. Its service doesn’t just satisfy customers; it delights them and thereby expands customer expectations to levels its competitors are unable to fulfill. Operations is reactive, at best. Operations functions in a mediocre, uninspired fashion. Operations continually excels, reinforced by personnel management and systems that support an intense customer focus. Operations is a quick learner and fast innovator; it masters every step of the service delivery process and provides capabilities that are superior to competitors. Meets some customer expectations; consistent on one or two key dimensions. Exceeds customer expectations; consistent on multiple dimensions. Raises customer expectations and seeks challenge; improves continuously. SERVICE QUALITY Is subsidiary to cost, highly variable.

3-28 Stages in Service Firm Competitiveness 1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service delivery Contributes to service, plays an important role in the total service, is given attention, but is still a separate role. Is equally valued with front office; plays integral role. Is proactive, develops its own capabilities, and generates opportunities. A collection of individuals whose variation in needs is understood. A source of stimulation, ideas, and opportunity. When justified by cost savings. When promises to enhance service. Source of first-mover advantages, creating ability to do things your competitors can’t do. Efficient resource; disciplined; follows procedures. Permitted to select among alternative procedures. Innovative; creates procedures. Listens to customers; coaches and facilitates workers. Works to enhance their career. Is listened to by top management as a source of new ideas. Mentors BACK OFFICE Counting room. CUSTOMER Unspecified, to be A market segment whose satisfied at minimum cost. basic needs are understood. INTRODUCTION OF NEW TECHNOLOGY When necessary for survival, under duress. WORKFORCE Negative constraint. FRONT-LINE MANAGEMENT Controls workers. Controls the process.

3-29 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”?