Service Management

Service Strategy

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

Chair in Economics Information and Service Systems (ISS)

Saarland University, Saarbrcken, 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

entrepreneurs idea and an 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 needs to be formulated when
entering a market
4 categories of elements of strategic service vision (Chase
& Hayes 91)
Service Delivery Operating Service Target Market
System Strategy Concept Segments
How will we provide this How will we differentiate What are the most important Who is our intended customer?
differentiated service? ourselves from our competitors? elements of our service from
the customerss perspective

Specific questions help to develop categories

Startup firms should answer questions from right to left

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 2

 Strategic Service Vision
How well is the service concept Service Delivery
System
Operating
Strategy
Service
Concept
Target Market
Segments

positioned in relation to customers

needs and competitors offering? Target Market Segments

What are common

characteristics of important
market segments?

Example Which dimensions can be used

Target Market Segments to segment the market?
market
(demographic, psychographic)
State of Texas residents
Business traveler who drives How important are various
because of inadequate service segments?
Inexpensive family travel on
Which needs do they have?
weekends
How well are these needs being
served in what manner? by
whom?
(Heskett et al., 1997; Fitzsimmons & Fitzsimmons, 2011)

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 3

 Strategic Service Vision
To what extent is the value of results and Service Delivery
System
Operating
Strategy
Service
Concept
Target Market
Segments

process quality for customers leveraged on

service provider costs? Service Concept

What are important elements of the

service in terms of results for
customers?
Example How are these elements supposed to
Service Concept be perceived by the target market
Serves peanuts and soft segment? (by the market in general, by
employees, by others)
drinks only
Use of inner-city or low How do customers perceive the
traffic airports avoids service concept?
congestion
Which efforts does this suggest in
Short flights with frequent
terms of the manner in which the
departures service is designed? delivered?
Carry-on luggage marketed?
(Heskett et al., 1997; Fitzsimmons & Fitzsimmons, 2011)

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 4

 Strategic Service Vision
Does the service Service Delivery
System
Operating
Strategy
Service
Concept
Target Market
Segments

delivery system support

the operating strategy? Operating Strategy

What are important elements of the

strategy? (operations, financing,
marketing, organization, HR, control)
Example On which strategic elements most effort
Operating Strategy will be concentrated?
Quick turnaround at gate
Where will investments
investment be made?
results in high utilization of
aircraft How will quality and cost be controlled?
No assigned seating (measures, incentives, rewards)
rewards punctuality and
promotes on-time What results will be expected vs.
performance competition in terms of QoS, cost
profile, productivity, morale/loyalty of
servers?
(Heskett et al., 1997; Fitzsimmons & Fitzsimmons, 2011)

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 5

 Strategic Service Vision
Service Delivery Operating Service Target Market
System Strategy Concept Segments

Service Delivery System

What are important features

of the service delivery
system? (role of people,
Example technology, equipment, layout,
procedures)
Service Delivery System
Fun cabin atmosphere to What capacity does it
differentiate service provide? (normally, at peak
levels)
Use only Boeing 737
aircraft to control To what extent does it help
maintenance and operating ensure quality standards?
standards
costs Differentiate from services of
Hire cabin crew based on competitors? Provide barriers
attitude to entry for competitors?

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

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 6

 Competitive Environment of Services

Formulating a strategic service vision is

important - Why?
Service firms compete in difficult economic
environments characterized by
(1) Relatively low overall entry barriers; e.g., service
innovations are not patentable and are not capital-
intensive in most cases
(2) Reduced opportunities for economies of scale
(new: cloud computing/utility computing)
(3) Erratic sales fluctuations; service demand varies as
a function of time and day of week TinyURL.co
m
(4) No advantage of size in dealing with buyers or
suppliers; caused by small size of many service
firms
(Fitzsimmons & Fitzsimmons, 2011)

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 7

 Competitive Environment of Services

(5) Product substitution - product innovations can

be 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 loyalty - created by established firms
(7) 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

(Fitzsimmons & Fitzsimmons, 2011)

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 8

 Competitive Service Strategies

3 generic competitive strategies (Porter, 1980)

(1) Overall 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.,
McDonalds, Walmart
Seeking out low-
low-cost customers that are willing to buy in quantity, without frills and
serve themselves
Standardizing a customized service; routine professional services at low cost
Reducing personal element in service delivery; high-risk strategy accepted by
customers if increased convenience results
Reducing network costs
Taking service operations offline; decouple service transaction from customer, e.g.,
drop-off/pick-up (Porter, 1980; Fitzsimmons & Fitzsimmons, 2011)

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 9

 Competitive Service Strategies

(2) Differentiation Creating a service that is

perceived as being unique 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 tangible,

tangible e.g., by reminding
customers of their purchase
Customizing the standard product; providing a personal touch
Reducing perceived 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 - enhanced service quality
Controlling quality - delivering consistent level of service quality

(Porter, 1980; Fitzsimmons & Fitzsimmons, 2011)

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 10

 Competitive Service Strategies

(3) Focus servicing a particular market very

well by addressing customers specific
needs,
needs 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 rather than
entire market

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

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 11

 Strategic Analysis
Potential New
Entrants
Yes or No! Should we enter an
industry with a new service
Bargaining Competitive Bargaining
offering? Power of Rivalry within Power of
2 popular planning tools Suppliers Industry Customers

Threat of
Interne Analyse
Substitutes
SWOT Analyse
Schwchen
Strken (Strengths
(Strengths)
Strengths)
(Weaknesses)
Weaknesses) Porters five forces analysis of
Verfolgen von neuen
Chancen Chancen, die gut zu
Schwchen target industry structure (Porter,
eliminieren, um neue
(Opportunities) den Strken des
Unternehmens passen.
Chancen zu nutzen. 1985)
Externe
Analyse
Verteidigungs- SWOT analysis to assess the
strategien entwickeln,
Gefahren
Strken nutzen, um
Bedrohungen
um vorhandene organizations strengths,
(Threats) Schwchen nicht zum
abzuwenden.
Ziel von Bedrohungen weaknesses, opportunities, and
werden zu lassen.
threats in a market
(Fitzsimmons & Fitzsimmons, 2011)

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 12

 Competitive Role of Information

IT helps to define competitive firm strategies

Strategic roles of information in services (Fitzsimmons, 1993; Heskett 1986;
Bott, 1985):

Online (real time) Offline (analysis)

Creation of barriers to entry Database asset

External reservation systems selling information
(customer) frequent user club development of
switching costs services
micromarketing
Revenue generation Productivity Collecting and
yield management enhancement analyzing
Internal information of
(operations) point of sales inventory status (multisite)
expert systems data envelopment service
analysis (DEA) operations

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 13

 Brainteaser

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

10 leadership, differentiation and focus.

Minutes Which of the four competitive uses of

information is most powerful for each of the 3
strategies?

Discuss it with your neighbor!

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 14

 Heads up!

Limits in use of information - questions of fairness,

invasion of privacy and anticompetitiveness

Anticompetitive
Frequent flyer programs - How to consider free-trip awards? Removal
of price competition?
Fairness
Is yield management fair? Easiest way to start a riot when asking
passengers on a flight how much their tickets cost.
Invasion on privacy
Record of every private purchase? Big databases with personal
data?
Data security
Transmission of these personal data to other firms?
Reliability of data
Are the data correct, e.g., considered by a credit-report agency?
(Brady, 2000; Fitzsimmons & Fitzsimmons, 2011)

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 15

 Virtual Value Chain

Physical Electronic
Establishment of presence in electronic
Market market based on competitive position in Market
physical market
Physical world of Virtual world of
people and Collecting information to improve information
service delivery process and
things creation 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)

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 16

 Virtual Value Chain

Traditional or Physical
Production Distribution Retailing Customer Value Chain

New Processes New Knowledge New Products New Relationships Virtual Value Chain
(Stage 1) (Stage 2) (Stage 3) (Stage 4)

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

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 17

 Virtual Value Chain

First Stage New Processes

Considering physical operations more effectively with
information, e.g., paperless operations
Second Stage New Knowledge
Virtual alternatives substitute 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
needs and methods to deliver value, e.g., customization of
standard products
Fourth Stage New Relationships
Exploration of opportunities for customer collaboration in the
co-
co-creation of value,
value e.g., web-based user-generated content
concerning products
(Rayport & Sviokla, 1995; Fitzsimmons & Fitzsimmons, 2011)

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 18

 Stages in Service Firm Competitiveness

Framework by Chase & Hayes (1991) describes role of operations in strategic

development of service firms
Framework provides way to measure and evaluate a firms progress in developing
the service delivery system
Services need not start at stage 1
(Detailed discussion in exercise)

Available for Service Journeyman Distinctive Competence World-

World-Class Service Delivery
Operations become pro-active,
Operations need to Keeping pace with Clear vision of what forcing higher performance
be performed at competitors creates value for standards on the whole company,
minimum cost All operate customers identifying new business
Firms are either essentially the Consistent choices with opportunities, helping redefine the
relatively young or same way respect to service quality firms competitive strategy
those that serve a Operations is typical Create needs, establish
niche market advocate of TQM expectations, and continually
Challenge for operations: expand those expectations
Dont let our assure that the Customer = consultants
competitors gain too operations strategy
much of an remains supportive IT = potential means for develop
Dont screw up advantage over us Open to new service competitive advantage
initiatives

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 19

 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. Beefing 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.

26.10.2011 Univ.-Prof. Dr.-Ing. Wolfgang Maass Slide 20

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

Chair in Information and Service Systems

Saarland University, Germany

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