SERVICE STRATEGY

Module 1 –
Part 2

McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
 Module 1 – Part 2

• The Strategic Service Vision - Understanding the

Competitive Environment of Services –Competitive
Service Strategies-Strategic Analysis - Porter’s Five
Forces Analysis -Winning Customers in the Marketplace -
The Competitive Role of Information in Services - The
Virtual Value Chain -Limits in the Use of Information -
Using Information to Categorize Customers

• 
Learning Objectives
• Formulate a strategic service vision.
• Describe how a service competes using the three generic
service strategies.
• Perform a Five Forces Analysis
• Explain service 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.
• .

2-3
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?

2-4
Strategic Service Vision
Service Concept
• What are the 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?

2-5
Strategic Service Vision
Operating Strategy
• What are the 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?

2-6
Strategic Service Vision
Service Delivery System
• What are the 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 to ensure quality
standards, differentiate the service from
competition, provide barriers to entry by
competitors?

2-7
Southwest Airlines Strategic Service Vision
Service Delivery Operating Strategy Service Concept Target Market
System Segment

• Fun cabin • Quick turnaround • Short flights with • State of Texas

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

2-8
 Understanding the Competitive Environment of Services

Competitive Environment of Services

• Relatively Low Overall Entry Barriers
• Economies of Scale Limited
• Erratic Sales Fluctuations
• No Power Dealing with Buyers or Suppliers
• Product Substitutions for Service
• High Customer Loyalty
• Strong Exit Barriers

2-9
Competitive Service Strategies
Three Types
1. (Overall Cost Leadership)
• Seeking Out Low-cost Customers (e.g., USAA)
• Standardizing a Custom Service (e.g., H&R
Block)
• Reducing the Personal Element in Service
Delivery (e.g., promote self-service at airline
check-in , ATM) )
• Reducing Network Costs (e.g., hub and spoke at
FedEx)
• Taking Service Operations Offline (e.g., shoe-
repair drop-off)

2-10
Competitive Service Strategies
(2. Differentiation)
• Making the Intangible Tangible (memorable) (e.g.,
Disney Theme Parks)
• Customizing the Standard Product (e.g.,
Ritz Carlton)
• Reducing Perceived Risk (e.g., Village Volvo,
FedEx)
• Giving Attention to Personnel Training (e.g.,
McDonald’s Hamburger University)
• Controlling Quality (e.g., Shouldice Hospital)
Note: Differentiation in service means being unique in
brand image, technology use, features, or reputation for
customer service.

2-11
Competitive Service Strategies
(3.Focus)

• Buyer Group: (e.g. USAA insurance and military officers)

• Service Offered: (e.g. Shouldice Hospital and inguinal

hernia patients)

• Geographic Region: (e.g Community college or

neighborhood resaturant. )
• Focus strategy is the application of differentiation and
/or/overall cost leadership to a particular segment rather
than the entire market

2-12
Porter’s Five Forces Model
Potential New
Entrants
- Barriers to entry
- Brand equity
- Capital requirements

Bargaining Power of Competitive Rivalry Bargaining Power of

Suppliers within Industry Customers
- Presence of substitute inputs - Number of competitors - Buyer’s price sensitivity
- Threat of forward integration - Rate of industry growth - Customer volume
- Uniqueness of inputs - Industry capacity - Information asymmetry

Threat of Substitutes
- Buyer propensity to substitute
- Buyer switching costs
- Product substitution for service
2-13
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)
• Quality (Perceptions important)
• Reputation (Word-of-mouth)
• Safety (Customer well-being)
• Speed (Avoid excessive waiting)

2-14
Winning Customers in the Marketplace
• Service Qualifier: To be taken seriously, a certain level
must be attained on the competitive dimension, as
defined by other market players, e.g., cleanliness for a
fast food restaurant or safe aircraft for an airline.
• Service Winner: The competitive dimension that is
used to make the final choice among competitors, e.g.,
price, convenience or reputation.
• Service Loser: Defined by failure to deliver at or above
the expected level for a competitive dimension
• e.g., failure to repair auto (dependability),
• rude treatment (personalization), or late delivery of
package (speed).
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Competitive Role of Information in Services

2-16
Limits in the Use of Information
• Anti-competitive (e.g. Barrier to entry)
• Fairness (e.g. Yield management)
• Invasion of Privacy (e.g. Micro-marketing)
• Data Security (e.g. Medical records)
• Reliability (e.g. Credit report)

2-17
Using Information to Categorize Customers
• Coding grades customers based 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.

2-18
Exploiting the Virtual Value Chain

Production Distribution Retailing Customer

Physical Value Chain

Apply the generic

value-adding steps of
the information world:
- Gather
- Organize
- Select
- Synthesize
- Distribute
to each physical activity
to create virtual value.

New New New New Virtual Value Chain

Processes Knowledge Products Relationships
(Stage 1) (Stage 2) (Stage 3) (Stage 4)
2-19
The Virtual Value Chain
• Marketplace vs Marketspace
• Creating New Markets Using Information (Gather, Organize,
Select, Synthesize, and Distribute)
• Four Stage Evolution

• 1st Stage (New Processes): See physical operations more

effectively with information (USAA “paperless operation”).
• 2nd Stage (New Knowledge): Substitute virtual activities for
physical (USAA “automate underwriting”).
• 3rd Stage (New Products): Use information to deliver value to
customers in new ways (USAA “event oriented service”).
• 4th Stage (New Relationships): Seek customer collaboration in
co-creation of value (USAA “financial planning service”).
2-20
Discussion Topics
• Give 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?

2-21