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Chapter 03

Service Strategy

Copyright 2008 by The McGraw-Hill Companies, Inc. All

Rights Reserved.
Service Management: Operations,
Learning Objectives

Formulate a strategic service vision.

Discuss the competitive environment of services.
Describe how a service competes using the three
generic service strategies.
Explain what is meant by qualifiers, service winners, and
service losers.
Discuss the competitive role of information in services.
Explain the concept of the virtual value chain and its
role in service innovation.
Identify potential limits in the use of information as a
competitive strategy.
Categorize a service firm according to its stage of

Strategic Service Vision
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?

Strategic Service Vision
Service Concept
What are important elements of the service to be
provided, stated in terms of results produced for
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?

Strategic Service Vision
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?

Strategic Service Vision
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

Southwest Airlines Strategic
Service Vision

Service Delivery System Operating Strategy Service Concept Target Market Segment

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

Competitive Environment of

Relatively Low Overall Entry Barriers

Economies of Scale Limited
High Transportation Costs
Erratic Sales Fluctuations
No Power Dealing with Buyers or Suppliers
Product Substitutions for Service
High Customer Loyalty
Exit Barriers

Competitive Service Strategies
(Overall Cost Leadership)

Seeking Out Low-cost Customers

Standardizing a Custom Service
Reducing the Personal Element in
Service Delivery (promote self-
Reducing Network Costs (hub and
Taking Service Operations Off-line
Competitive Service Strategies

Making the Intangible Tangible (memorable)

Customizing the Standard Product
Reducing Perceived Risk
Giving Attention to Personnel Training
Controlling Quality

Note: Differentiation in service means being

unique in brand image, technology use, features,
or reputation for customer service.

Competitive Service Strategies

Buyer Group: (e.g. USAA insurance

and military officers)

Service Offered: (e.g. Shouldice

Hospital and hernia patients)

Geographic Region: (e.g. Austin

Cable Vision and TV watchers)
Customer Criteria for Selecting
a Service Provider
Availability (24 hour ATM)
Convenience (Site location)
Dependability (On-time performance)
Personalization (Know customers name)
Price (Quality surrogate)
Quality (Perceptions important)
Reputation (Word-of-mouth)
Safety (Customer well-being)
Speed (Avoid excessive waiting)

Winning Customers in the
Service Qualifier: To be taken seriously a certain level
must be attained 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
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
Competitive Role of Information
in Services

Strategic Focus Competitive Use of Information

On-line Off-line
(Real time) (Analysis)
Creation of barriers to entry: Data base asset:
External Reservation system Selling information
(Customer) Frequent user club Development of services
Switching costs Micro-marketing

Revenue generation: Productivity

Internal Yield management Inventory status
(Operations) Point of sale Data envelopment
Expert systems analysis (DEA)

The Virtual Value Chain
Marketplace vs Marketspace
Creating New Markets Using Information (Gather,
Organize, Select, Synthesize, and Distribute)
Three Stage Evolution
1st Stage (Visibility): See physical operations more
effectively with information Ex. USAA paperless
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

Limits in the Use of Information

Anti-competitive (e.g. Barrier to entry)

Fairness (e.g. Yield management)
Invasion of Privacy (e.g. Micro-
Data Security (e.g. Medical records)
Reliability (e.g. Credit report)

Using Information to Categorize

Coding grades customers on how profitable

their business is.
Routing is 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.

Stages in Service Firm

1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service delivery

Customers patronize service Customers neither seek Customers seek out the firm The companys name is synonymous
firm for reasons other than out nor avoid the firm. on the basis of its sustained with service excellence. Its service
performance. reputation for meeting doesnt just satisfy customers; it
customer expectations delights them and thereby expands
customer expectations to levels its
competitors are unable to fulfill.

Operations is reactive, Operations functions in a Operations continually excels, Operations is a quick learner and fast
at best. mediocre, uninspired reinforced by personnel innovator; it masters every step of the
fashion. management and systems service delivery process and provides
that support an intense capabilities that are superior to
customer focus. competitors.
Is subsidiary to cost, Meets some customer Exceeds customer Raises customer expectations and
highly variable. expectations; consistent expectations; consistent seeks challenge; improves
on one or two key on multiple dimensions. continuously.

Stages in Service Firm

1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service


Counting room. Contributes to service, plays Is equally valued with front Is proactive, develops its own
an important role in the total office; plays integral role. capabilities, and generates
service, is given attention, opportunities.
but is still a separate role.
Unspecified, to be A market segment whose A collection of individuals A source of stimulation, ideas,
satisfied at minimum cost. basic needs are understood. whose variation in needs is and opportunity.
When necessary for When justified by cost When promises to enhance Source of first-mover advantages,
survival, under duress. savings. service. creating ability to do things your
competitors cant do.
Negative constraint. Efficient resource; disciplined; Permitted to select among Innovative; creates procedures.
follows procedures. alternative procedures.
Controls workers. Controls the process. Listens to customers; coaches Is listened to by top management
and facilitates workers. as a source of new ideas. Mentors
works to enhance
their career.

Alamo Drafthouse Positioning


Few Many


Alamo Drafthouse Strategic Service

Target market segments

Service concept

Operating strategy

Service delivery system

Alamo Drafthouse Winning

Service winners

Service losers

Make recommendations for Tim and Carrie that would increase profit

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-
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
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 described as learning

Interactive Class Exercise
The class divides and debates the
proposition Frequent flyer award
programs are or are not