Chapter – 3 Service Strategy
Service Management (5e)Operations, Strategy, Information TechnologyByFitzsimmons and
FitzsimmonsChapter – 3Service 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 drivingShort flightsService
ConceptOn time performanceFrequent departuresOperating StrategyFast airport turnaround to
allow productive use of aircraft and provide frequent departuresService delivery systemCabin
crew with good interpersonal skills to create ‘fun’ atmosphereNo assigned seating to provide
fast gate turnaroundShort distance haul – mostly carry-on luggage – less ground crew
8 Competitive Environment of Services
Relatively Low Overall Entry Barriersnot patentableTypically not capital intensiveException –
when you are first in a small market, or prized location advantageEconomies of Scale
Limitedlimited opportunities for economies of scale because of simultaneous production and
consumptionErratic 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 powerException are McDonald’s buying
beefProduct Substitutions for ServiceFor 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 LoyaltyThis can act as a barrier to
entryExit BarriersTypically low
10 Competitive Service Strategies
Porter argues that three generic competitive strategies exist:Overall cost
leadershipDifferentiationFocus
11 1. Overall Cost Leadership
Requires efficient scale facilities, tight cost and overhead control, and use of innovative
technologyImplementation 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 CustomersSome customers cost less to serve than othersSam’s club and
Costco serve customers who buy bulk and ask for little to no serviceStandardizing a Custom
ServiceExample H&R block has taken only routine preparation though tax forms can be
customizedReducing the Personal Element in Service Delivery (promote self-
service)Technology use has allowed banks to provide access to ATMs and reduce human
interfaceReducing 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 stayCustomizing the Standard
ProductFor example addressing a customer by the name can give an impression of
customization of otherwise a standardized serviceReducing Perceived RiskBy providing
guarantee, example pest controlGiving Attention to Personnel TrainingService providers will
ultimately make the differenceDelivering consistent level of high Quality at multiple sites
14 3. FocusThis 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.ExampleService 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 QualifierTo 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 WinnerThe competitive dimension
used to make the final choice among competitors.Example is price, convenience, reputation.
17 Service Purchase Decision (cont.)
Service LoserFailure 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 systemAmerican Airline’s Sabre SystemFrequent User clubAmerican airlines used
its reservation system to also create frequent flyer club to reward people to accumulate
creditSwitching costData transferNew software and hardware requirements
20 2. Revenue Generation Yield management Point of sale Expert system
Real time pricing by monitoring demand and supplyPoint of saleinformation can travel to
suppliers for real time inventory managementServer can transmit order information directly to
the kitchen and to the cashier at the same timeExpert systemPast 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
servicesMicromarketingTo target your advertisements
22 Using Information to Categorize Customers
Codinggrade customers on how profitable their business is.Routingused by call centers to place
customers in different queues based on customer code.Targetingallows choice customers to
have fees waived and get other hidden discounts.Sharingdata about your transaction history
with other firms is a source of revenue.
23 4. Productivity Enhancement
Inventory statusReal time inventory management and tie up with suppliersBetter movement of
inventory through multiple sites
24 The Virtual Value Chain
Marketplace vs MarketspacePhysical versus virtualCreating New Marketspace Using
Information - 5 stepsGatherOrganizeSelectSynthesizeDistribute
25 Example of USAAUnited 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 Evolution1st Stage (Visibility): See physical
operations more effectively with information – Ex. USAA “paperless operation2nd 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 TopicsGive 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”?
