service strategy

Service Management –

Service Strategy

Univ.-Prof. Dr.-Ing. Wolfgang Maass

Chair in Economics – Information and Service Systems (ISS)

Saarland University, Saarbrücken, Germany

WS 2011/2012

Thursdays, 8 –10 a.m.

Room HS 024, B4 1

Vision Wanted!

• How to place a service in the market? - All begins with an

entrepreneurÊs ideaentrepreneurÊs ideaentrepreneurÊs ideaentrepreneurÊs idea and an unmet need unmet need unmet need unmet need ⁄ (Fitzsimmons &

Fitzsimmons, 2011)

• „For any given market space, service strategy defines the

portfolio of services to be offered and the customers to be

supported.‰ (Iqbal & Nieves, p. 161, 2007)

• Strategic service vision Strategic service vision Strategic service vision Strategic service vision needs to be formulated when

entering a market

Univ.-Prof. Dr.-Ing. Wolfgang Maass26.10.2011 Slide 2

entering a market

• 4 categories of elements of strategic service vision (Chase

& Hayes 91)

• Specific questions help to develop categories

• Startup firms should answer questions from right to leftStartup firms should answer questions from right to leftStartup firms should answer questions from right to leftStartup firms should answer questions from right to left

Service Delivery Service Delivery Service Delivery Service Delivery

SystemSystemSystemSystem

Operating Operating Operating Operating

StrategyStrategyStrategyStrategy

Service Service Service Service

ConceptConceptConceptConcept

Target Market Target Market Target Market Target Market

SegmentsSegmentsSegmentsSegments

Who is our intended customer?What are the most important

elements of our service from

the customersÂs perspective

How will we differentiate

ourselves from our competitors?

How will we provide this

differentiated service?

Strategic Service Vision

Target Market SegmentsTarget Market SegmentsTarget Market SegmentsTarget Market Segments

What are common

characteristicscharacteristicscharacteristicscharacteristics of important

market segments?

Which dimensions can be used

to segmentsegmentsegmentsegment the marketthe marketthe marketthe market?







Target MarketTarget MarketTarget MarketTarget Market

SegmentsSegmentsSegmentsSegmentsHow well is the service concept

positioned in relation to customersÊ needs and competitorsÊ offering?

ExampleExampleExampleExample



to segmentsegmentsegmentsegment the marketthe marketthe marketthe market?

(demographic, psychographic)

How importantimportantimportantimportant are various

segments?

Which needsneedsneedsneeds do they have?

How well are these needs being

servedservedservedserved ⁄ in what manner? by

whom?


• State of Texas residents

• Business traveler who drives

because of inadequate service

• Inexpensive family travel on

weekends

(Heskett et al., 1997; Fitzsimmons & Fitzsimmons, 2011)


Service ConceptService ConceptService ConceptService Concept

What are important elements of the

service in terms of resultsresultsresultsresults for

customers?

How are these elements supposed to

be perceivedperceivedperceivedperceived by the target market








SegmentsSegmentsSegmentsSegmentsTo what extent is the value of results and

process quality for customers leveraged on service provider costs?




be perceivedperceivedperceivedperceived by the target market

segment? (by the market in general, by

employees, by others)

How do customerscustomerscustomerscustomers perceive the

service concept?

Which effortseffortseffortsefforts does this suggest in

terms of the manner in which the

service is ⁄ designed? delivered?

marketed?


• Serves peanuts and soft

drinks only

• Use of inner-city or low

traffic airports avoids

congestion

• Short flights with frequent

departures

• Carry-on luggage



Operating StrategyOperating StrategyOperating StrategyOperating Strategy

What are important elementselementselementselements of the

strategy? (operations, financing,

marketing, organization, HR, control)

On which strategic elements most efforteffortefforteffort

will be concentrated?








SegmentsSegmentsSegmentsSegmentsDoes the service

delivery system support the operating strategy?




will be concentrated?

Where will investmentinvestmentinvestmentinvestments be made?

How will quality and cost quality and cost quality and cost quality and cost be controlled?

(measures, incentives, rewards)

What resultsresultsresultsresults will be expected vs. vs. vs. vs.

competitioncompetitioncompetitioncompetition in terms of ⁄ QoS, cost

profile, productivity, morale/loyalty of

servers?


• Quick turnaround at gate

results in high utilization of

aircraft

• No assigned seating

rewards punctuality and

promotes on-time

performance



Service Delivery SystemService Delivery SystemService Delivery SystemService Delivery System

What are important featuresfeaturesfeaturesfeatures

of the service delivery

system? (role of people,

technology, equipment, layout,

procedures)








SegmentsSegmentsSegmentsSegments


Service Delivery SystemService Delivery SystemService Delivery SystemService Delivery System


What capacitycapacitycapacitycapacity does it

provide? (normally, at peak

levels)

To what extent does it⁄ help

ensure quality standardsquality standardsquality standardsquality standards?

Differentiate from services of

competitors? Provide barriers barriers barriers barriers

to entry to entry to entry to entry for competitors?

• Fun cabin atmosphere to

differentiate service

• Use only Boeing 737

aircraft to control

maintenance and operating

costs

• Hire cabin crew based on

attitude


Competitive Environment of Services

• Formulating a strategic service vision strategic service vision strategic service vision strategic service vision is

important - Why?

• Service firms compete in difficult economic

environments characterized by ⁄

(1)Relatively lowlowlowlow overall entry barriers; entry barriers; entry barriers; entry barriers; e.g., service

innovations are not patentable and are not capital-


innovations are not patentable and are not capital-

intensive in most cases

(2)(2)(2)(2) Reduced opportunities Reduced opportunities Reduced opportunities Reduced opportunities for economies of scale economies of scale economies of scale economies of scale (new: cloud computing/utility computing)

(3)Erratic sales fluctuations; sales fluctuations; sales fluctuations; sales fluctuations; service demand varies as

a function of time and day of week

(4)No advantage of size in dealing with buyers or

suppliers; caused by small size small size small size small size of many service

firms

TinyURL.coTinyURL.coTinyURL.coTinyURL.co

mmmm

(Fitzsimmons & Fitzsimmons, 2011)

Competitive Environment of Services

(5)Product substitution - product innovations can

be substitutes substitutes substitutes substitutes for services (e.g., home

pregnancy test) and vice versa (e.g., washing

machine -> launderette); service firms must also

watch other potential products innovations

(6)Customer loyaltyloyaltyloyaltyloyalty - created by established firms

(7)(7)(7)(7) Exit barriers Exit barriers Exit barriers Exit barriers – e.g. difficult to drive out non-profit


(7)(7)(7)(7) Exit barriers Exit barriers Exit barriers Exit barriers – e.g. difficult to drive out non-profit

organizations or low-profit firms

• New entrants have to develop service

strategies that address important competitive

features of their respective industries


Competitive Service Strategies

3 generic competitive strategies (Porter, 1980)

(1)(1)(1)(1) Overall cost leadershipOverall cost leadershipOverall cost leadershipOverall cost leadership - Implementing low-

cost strategy requires high capital investment

in state-of-the-art equipment and aggressive

pricing; can revolutionize an industry, e.g.,

McDonaldÊs, Walmart


McDonaldÊs, Walmart

• Seeking out lowlowlowlow----cost customers cost customers cost customers cost customers that are willing to buy in quantity, without frills and

serve themselves

• StandardizingStandardizingStandardizingStandardizing a customized service; routine professional services at low cost

• Reducing personal element Reducing personal element Reducing personal element Reducing personal element in service delivery; high-risk strategy accepted by

customers if increased convenience results

• Reducing network costsReducing network costsReducing network costsReducing network costs

• Taking service operations offline; „decouple‰ „decouple‰ „decouple‰ „decouple‰ service transaction from customer, e.g.,

drop-off/pick-up(Porter, 1980; Fitzsimmons & Fitzsimmons, 2011)


(2)(2)(2)(2) Differentiation Differentiation Differentiation Differentiation – Creating a service that is

perceived as being uniqueuniqueuniqueunique based on brand

image, technology, features, customer

service, dealer network etc. - primary thrust

lies in creating customer loyalty; e.g.,

American Express, Mercedes-Benz, Apple


• Making intangible services tangibletangibletangibletangible, e.g., by reminding

customers of their purchase

• CustomizingCustomizingCustomizingCustomizing the standard product; providing a personal touch

• ReducingReducingReducingReducing perceived risk,risk,risk,risk, e.g., provide extra time to explain work

to be done to avoid lack of information about the purchase

• Giving attention to personnel training personnel training personnel training personnel training ---- enhanced service quality

• Controlling qualityqualityqualityquality - delivering consistent level of service quality

(Porter, 1980; Fitzsimmons & Fitzsimmons, 2011)


(3)(3)(3)(3) Focus Focus Focus Focus – servicing a particular market very

well by addressing customersÊ specific customersÊ specific customersÊ specific customersÊ specific

needsneedsneedsneeds, e.g., particular buyer group, service

or geographic region; examples are low

budget hotels, overnight package delivery

etc.


• Combination of differentiation and/or overall cost

leadership in a particular market particular market particular market particular market rather than

entire market

(Porter, 1980; Davidow & Uttal, 1989; Fitzsimmons & Fitzsimmons, 2011)

Strategic Analysis

• „Yes or No!‰ – „Should we enter an

industry with a new service

offering?‰

• 2 popular planning tools

Potential New Potential New Potential New Potential New

EntrantsEntrantsEntrantsEntrants

Competitive Competitive Competitive Competitive

Rivalry within Rivalry within Rivalry within Rivalry within

IndustryIndustryIndustryIndustry

Bargaining Bargaining Bargaining Bargaining

Power of Power of Power of Power of

CustomersCustomersCustomersCustomers

Bargaining Bargaining Bargaining Bargaining

Power of Power of Power of Power of

SuppliersSuppliersSuppliersSuppliers

Threat of Threat of Threat of Threat of

SubstitutesSubstitutesSubstitutesSubstitutesInterne Analyse



• PorterÊs five forces analysis of

target industry structure (Porter,

1985)

• SWOT analysis to assess the

organizationÊs strengths,

weaknesses, opportunities, and

threats in a market

SWOT SWOT SWOT SWOT AnalyseAnalyseAnalyseAnalyse

Interne Analyse

Stärken (Stärken (Stärken (Stärken (StrengthsStrengthsStrengthsStrengths))))Schwächen Schwächen Schwächen Schwächen

((((WeaknessesWeaknessesWeaknessesWeaknesses))))

ExterneAnalyse

ChancenChancenChancenChancen

(Opportunities)(Opportunities)(Opportunities)(Opportunities)

Verfolgen von neuen

Chancen, die gut zu

den Stärken des

Unternehmens passen.

Schwächen

eliminieren, um neue

Chancen zu nutzen.

GefahrenGefahrenGefahrenGefahren

(Threats)(Threats)(Threats)(Threats)

Stärken nutzen, um

Bedrohungen

abzuwenden.

Verteidigungs-

strategien entwickeln,

um vorhandene

Schwächen nicht zum

Ziel von Bedrohungen

werden zu lassen.

Competitive Role of Information

• IT helps to define competitive firm strategies

• Strategic roles of information in services (Fitzsimmons, 1993; Heskett 1986;

Bott, 1985):

Creation of barriers to entry

• reservation systems

Database asset

• selling information

Online (real time)Online (real time)Online (real time)Online (real time) Offline (analysis)Offline (analysis)Offline (analysis)Offline (analysis)

External External External External


• reservation systems

• frequent user club

• switching costs

• selling information

• development of

services

• micromarketing

Revenue generation

• yield management

• point of sales

• expert systems

Productivity

enhancement

• inventory status

• data envelopment

analysis (DEA)

Collecting and

analyzing

information of

(multisite)

service

operations

External External External External

(customer)(customer)(customer)(customer)

Internal Internal Internal Internal

(operations)(operations)(operations)(operations)

Brainteaser

• Look at the 3 generic strategies, i.e. cost

leadership, differentiation and focus.

• Which of the four competitive uses of

information is most powerful for each of the 3

strategies?

10 10 10 10

MinutesMinutesMinutesMinutes


strategies?

• Discuss it with your neighbor!

Heads up!

• Limits in use of information - questions of fairness,

invasion of privacy and anticompetitiveness

• AnticompetitiveAnticompetitiveAnticompetitiveAnticompetitive

• Frequent flyer programs - How to consider free-trip awards? Removal

of price competition?

• FairnessFairnessFairnessFairness

• Is yield management fair? Easiest way to start a riot when asking


• Is yield management fair? Easiest way to start a riot when asking

passengers on a flight how much their tickets cost.

• Invasion on privacyInvasion on privacyInvasion on privacyInvasion on privacy

• Record of every private purchase? Big databases with personal

data?

• Data securityData securityData securityData security

• Transmission of these personal data to other firms?

• Reliability of dataReliability of dataReliability of dataReliability of data

• Are the data correct, e.g., considered by a credit-report agency?(Brady, 2000; Fitzsimmons & Fitzsimmons, 2011)

Virtual Value Chain

PhysicalPhysicalPhysicalPhysical

MarketMarketMarketMarket

Physical world of

people and

things

ElectronicElectronicElectronicElectronic

MarketMarketMarketMarket

Virtual world of

information

Establishment of presence in electronic

market based on competitive position in

physical market

Collecting information to improve

service delivery process and

creation of customer value


thingscreation of customer value

• Traditional, physical value chain consists of sequence of stages beginning

with manufacturing and ending with sales to customer

• Virtual value chain (Rayport & Sviokla, 1995) was traditionally treated as

value-adding elements; not as source of value - but this is no longer the

case in service companies

(Rayport & Sviokla, 1995; Fitzsimmons & Fitzsimmons, 2011)

Virtual Value Chain

Virtual Value ChainVirtual Value ChainVirtual Value ChainVirtual Value Chain

Traditional or Physical Traditional or Physical Traditional or Physical Traditional or Physical

Value ChainValue ChainValue ChainValue Chain

New Processes New Processes New Processes New Processes

(Stage 1)(Stage 1)(Stage 1)(Stage 1)

New Knowledge New Knowledge New Knowledge New Knowledge


New Products New Products New Products New Products


New Relationships New Relationships New Relationships New Relationships


ProductionProductionProductionProduction DistributionDistributionDistributionDistribution RetailingRetailingRetailingRetailing CustomerCustomerCustomerCustomer


• Value-adding process of virtual value chain must gather raw information that

is processed and finally distributed

• Value-adding steps are virtual; performed through and with information

• Creation of value at any stage involves sequence of 5 activities: gathering,

organizing, selecting, synthesizing, distributing information

(Stage 1)(Stage 1)(Stage 1)(Stage 1) (Stage 2)(Stage 2)(Stage 2)(Stage 2) (Stage 3)(Stage 3)(Stage 3)(Stage 3) (Stage 4)(Stage 4)(Stage 4)(Stage 4)


Virtual Value Chain

• First Stage – New Processes

• Considering physical operations more effectively more effectively more effectively more effectively with

information, e.g., paperless operations

• Second Stage – New Knowledge

• Virtual alternatives substitutesubstitutesubstitutesubstitute for physical activities, e.g.,

installing information systems to automate business while

capturing information about customers


• Third Stage – New Products

• Analysis of customer information to discover new product new product new product new product

needs and methodsneeds and methodsneeds and methodsneeds and methods to deliver value, e.g., customization of

standard products

• Fourth Stage – New Relationships

• Exploration of opportunities for customer collaboration in the

cocococo----creation of valuecreation of valuecreation of valuecreation of value, e.g., web-based user-generated content

concerning products


Stages in Service Firm Competitiveness

Available for ServiceAvailable for ServiceAvailable for ServiceAvailable for Service

• Operations need to

• Framework by Chase & Hayes (1991) describes role of operationsrole of operationsrole of operationsrole of operations in strategic development of service firms

• Framework provides way to measure and evaluatemeasure and evaluatemeasure and evaluatemeasure and evaluate a firmÊs progress in developing the service delivery system

• Services need not start at stage 1

(Detailed discussion in exercise)

JourneymanJourneymanJourneymanJourneyman

• Keeping pace with

Distinctive CompetenceDistinctive CompetenceDistinctive CompetenceDistinctive Competence

• Clear vision of what

WorldWorldWorldWorld----Class Service DeliveryClass Service DeliveryClass Service DeliveryClass Service Delivery

• Operations become pro-active,

forcing higher performance


• Operations need to

be performed at

minimum cost

• Firms are either

relatively young or

those that serve a

niche market

„DonÊt screw up‰

• Keeping pace with

competitors

• All operate

essentially the

same way

„DonÊt let our competitors gain too much of an advantage over us‰

• Clear vision of what

creates value for

customers

• Consistent choices with

respect to service quality

• Operations is typical

advocate of TQM

• Challenge for operations:

assure that the

operations strategy

remains supportive

• Open to new service

initiatives

forcing higher performance

standards on the whole company,

identifying new business

opportunities, helping redefine the

firmÊs competitive strategy

• Create needs, establish

expectations, and continually

expand those expectations

• Customer = consultants

• IT = potential means for develop

competitive advantage

Literature

Books:• Fitzsimmons, J. A. and Fitzsimmons, M. J. Service Management - Operations, Strategy, Information

Technology, McGraw - Hill, 2011.

• Heskett, J. L. Managing in the Service Economy, Harvard Business School Press, 1986.

• Heskett, J. L., Sasser, W. E. and Schlesinger, L. A. The Service Profit Chain, Free Press, 1997.

• Iqbal, M. and Nieves, M. Service Strategy: Office of Government Commerce (ITIL), The Stationery Office Ltd,

2007.

• Porter, M. E. Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, 1985.

• Porter, M. E. Competitive strategies: Techniques for analysing industries and competitors, Free Press, 1980.


Papers:• Bott, H. S. "Information for Competitive Advantage," Operations Management Review (), 1985, pp. 35.

• Brady, D. "Why Service Stinks," Business Week (), 2000, pp. 124.

• Chase, R. B. and Hayes, R. H. ıBeefing up Operations in Service Firms," Sloan Management Review (33:1),

1991, pp. 17.

• Davidow, W. H. and Uttal, B. "Service Companies: Focus or Falter," Harvard Business Review (), 1989, pp. 77-

85.

• Fitzsimmons, J. A. "Strategic Role of Information in Services"'Perspectives in Operations Management:

Essays in Honor of Elwood S. Buffa', Kluwer Academic Publishers, 1993.

• Rayport, J. F. and Sviokla, J. J. "Exploiting the Virtual Value Chain," Harvard Business Review (), 1995.



Chair in Information and Service Systems

Saarland University, Germany

service strategy

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