\f\f\fChapter 2 Service Strategy Learning Objectives After completing this chapter, you should be able to: 1. Formulate a strategic service vision. 2. Describe how a service competes using the three generic service strategies. 3. Perform a SWOT and Five Forces Analysis. 4. Explain what is meant by qualifiers, service winners, and service losers. 5. Discuss the competitive role of information in services and its limits. 6. Explain the concept of the virtual value chain and its role in service innovation. 7. Discuss service firm sustainability and the triple bottom line impact. 8. Explain what features of a service firm lead to economics of scalability. 9. Categorize a service firm according to its stage of competitiveness. As machine technology once changed an agricultural economy into an industrial economy, today's information technology is transforming our industrial economy into a service economy. The availability of computers and global communication technologies has created industries for collecting, processing, and communicating information. Today everyone on the globe can be in instant communication with everyone else, and this revolution is changing world society in many ways. Consider the impact of the emerging private satellite network industry, which provides uplinks and downlinks for personnel training, product introductions, credit checks, billing, financial exchanges, and overall telecommunications. Kmart was among the first retail giants to establish a private satellite network using the new small-dish antenna VSAT (Very Small Aperture Terminal) placed on store roofs to receive and transmit masses of data. The VSAT at each Kmart is linked to the company's Troy, Michigan, data center via a satellite transponder leased from GTE Spacenet. The communication network has allowed Kmart to coordinate its multisite operations better and to realize substantial benefits, such as improved data transmission about the rate of sales, inventory status, product updates, and, most important, credit authorizations for customers. The instant accessibility of credit histories can significantly lower the risk of nonpayment that credit card companies face, thus lowering the discount rate that reverts back to the retailer. This savings alone eventually will pay for the cost of the satellite network.1 Chapter Preview Service strategy must begin with a vision of the place and purpose of the enterprise. A strategic service vision is formulated by addressing questions about the target market, service concept, operating strategy, and delivery system. However, the competitive environment of services presents challenges such as low entry barriers, 29 30 Part One Understanding Services product substitution, and limited opportunities for economies of scale that must be overcome. Three generic strategies have been found successful in formulating strategies that allow a firm to outperform competitors. The strategies of overall cost leadership, differentiation, and market focus are approaches that service firms have adopted in various ways to gain competitive advantage. With each of these strategies, however, management must not lose sight of the fact that only a focus on the customers and on satisfying their needs will result in a loyal customer base. Before entering a market, an analysis of a company's position relative to its competitors and other players is advisable. Such an analysis begins with the well-known five forces model to gain an appreciation of the competitive nature of the industry. A SWOT analysis to assess strengths, weakness, opportunities, and threats follows. Winning customers in the marketplace means competing on several dimensions. Customers base their purchase decisions on many variables, including price, convenience, reputation, and safety. The importance of a particular variable to a firm's success depends on the competitive marketplace and the preferences of individual customers. A framework for viewing the contribution of information to the competitive strategy of the service firm also is presented. Using the dimensions of strategic focus both external and internal and competitive use of information both online and offline, four strategic roles of information are identified: creation of barriers to entry, revenue generation, database asset, and productivity enhancement. Industry examples for each role illustrate how firms have used information effectively. Service product innovation is driven by an appreciation of the virtual value chain that assembles information on customer needs based on changing demographics and lifestyles. This database can be mined to develop new service offerings targeted at an existing customer base. However, there are limits to the use of information including questions of privacy, fairness, reliability, and data accuracy. The chapter concludes with a framework that categorizes service firms according to their level of competitiveness with respect to key operational dimensions. The Strategic Service Vision The purpose and place of a service firm in the market begins with an entrepreneur's idea and an unmet need. Table 2.1 presents a framework in the form of questions one should ask in formulating a strategic service vision. The basic categories presented from left to right are: service delivery system, operating strategy, service concept, and target market segments. Within each category questions are offered to help in the development of the category. As one moves between categories a question is posed to assess how well the category has achieved the strategic service vision. For example, the between-category question \"does the service delivery system support the operating strategy?\" addresses the appropriateness of the service delivery system for the intended operating strategy. Table 2.1 is limited to a domestic service. Additional questions are necessary to account for cultural elements when applied in a global context. The international elements that need to be added to the strategic service vision shown here can be found in Table 10.1 in the Globalization of Services chapter. To demonstrate the effectiveness of this framework, Table 2.2 illustrates the initial strategic service vision of Southwest Airlines when it served only three cities in Texas (i.e., Dallas, Houston, and San Antonio). With start-up firms such as Southwest Airlines, it is best to apply the strategic service vision from right to left beginning with the target market. 31 To what extent does it: Help ensure quality standards? Differentiate the service from competition? Provide barriers to entry by competitors? What results will be expected versus competition in terms of: Quality of service? Cost profile? Productivity? Morale/loyalty of servers? How will quality and cost be controlled? Measures? Incentives? Rewards? Where will investments be made? On which will the most effort be concentrated? What capacity does it provide? Normally? At peak levels? Does the service delivery system support the operating strategy? What are important elements of the strategy? Operations? Financing? Marketing? Organization? Human resources? Control? Operating Strategy What are important features of the service delivery system including: The role of people? Technology? Equipment? Layout? Procedures? Service Delivery System To what extent is the value of results and process quality for customers leveraged over cost to the service provider? What efforts does this suggest in terms of the manner in which the service is: Designed? Delivered? Marketed? How do customers perceive the service concept? How are these elements supposed to be perceived by the target market segment? By the market in general? By employees? By others? What are important elements of the service to be provided, stated in terms of results produced for customers? Service Concept Source: Adapted and reprinted by permission of J. L. Heskett,W. E. Sasser, and L. A. Schlesinger, The Service Profit Chain (New York: The Free Press, 1997), p. 9. TABLE 2.1 Elements of the Strategic Service Vision How well is the service concept positioned in relation to customers' needs and competitors' offering? How well are these needs being served? In what manner? By whom? What needs does each have? How important are various segments? What dimensions can be used to segment the market? Demographic? Psychographic? What are common characteristics of important market segments? Target Market Segments 32 Part One Understanding Services TABLE 2.2 Southwest Airlines Strategic Service Vision Service Delivery System Operating Strategy Service Concept Target Market Segment Fun cabin atmosphere to differentiate service Use only Boeing 737 aircraft to control maintenance and operating costs Hire cabin crew based on attitude Quick turnaround at gate results in high utilization of aircraft No assigned seating rewards punctuality and promotes on-time performance Short flights with frequent departures Serves peanuts and soft drinks only Use of inner-city or low traffic airports avoids congestion Carry-on luggage State of Texas residents Business traveler who drives because of inadequate airline service Inexpensive family travel on weekends Understanding the Competitive Environment of Services In general, service firms compete in a difficult economic environment, and there are many reasons for this difficulty: Relatively low overall entry barriers. Service innovations are not patentable, and in most cases, services are not capital-intensive. Thus, innovations can easily be copied by competitors. However, other types of entry barriers exist, such as locating a resort hotel on the best beach of an island (e.g., Club Med's former location on the island of Moorea in French Polynesia). Minimal opportunities for economies of scale. The necessity of physical travel for many services limits the market area and results in small-scale outlets. Franchised firms can realize some economies of scale by sharing purchasing or advertising costs; in other instances, using the Internet can be a substitute for physical travel (e.g., ordering from Amazon.com). Erratic sales fluctuations. Service demand varies as a function of the time of day and the day of the week (and sometimes seasonally), with random arrivals. Can you think of some exceptions? No advantage of size in dealing with buyers or suppliers. The small size of many service firms places them at a disadvantage in bargaining with powerful buyers or suppliers. Many exceptions should come to mind, however, such as McDonald's buying beef and Marriott buying mattresses. Product substitution. Product innovations can be a substitute for services (e.g., the home pregnancy test). Thus, service firms must not only watch other service competitors but also anticipate potential product innovations that might make their services obsolete. Customer loyalty. Established firms using personalized service create a loyal customer base, which becomes a barrier to entry by new services. For example, a hospital supply firm may place its own ordering computer terminals at customers' sites. These terminals then facilitate the placement of new orders to the extent that competitors are effectively excluded. Exit barriers. Marginal service firms may continue to operate despite low, or even nonexistent, profits. For example, a privately held firm may have employment of family members rather than maximizing profit as its goal. Other service firms, such as antique stores or scuba diving shops, have a hobby or romantic appeal that provides their owners with enough job satisfaction to offset low financial compensation. Thus, profit-motivated competitors would find it difficult to drive these privately held firms from the market. For any particular service industry, there are firms that have overcome these competitive difficulties and prospered. For example, McDonald's has achieved a dominant Chapter 2 Service Strategy 33 position in the fast-food industry by overcoming many of the difficulties listed here. New entrants, however, must develop a service strategy that will address the important competitive features of their respective industries. Three generic strategies have been successful in providing a competitive advantage, and illustrations of how service firms have used these strategies will be our next topic. Competitive Service Strategies2 There are three generic competitive strategies: overall cost leadership, differentiation, and focus. Each strategy will be described in turn, with examples of how service firms use them to outperform their competition. Overall Cost Leadership An overall cost leadership strategy requires efficient-scale facilities, tight cost and overhead control, and often innovative technology as well. Having a low-cost position provides a defense against competition, because less efficient competitors will suffer first from competitive pressures. Implementing a low-cost strategy usually requires high capital investment in state-of-the-art equipment, aggressive pricing, and start-up losses to build market share. A cost leadership strategy sometimes can revolutionize an industry, as illustrated by the success of McDonald's, Walmart, and Federal Express. Moreover, service firms have been able to achieve low-cost leadership using a variety of approaches. Seeking Out Low-Cost Customers Some customers cost less to serve than others, and they can be targeted by the service provider. For example, United Services Automobile Association (USAA) occupies a preeminent position among automobile insurers because it serves only military personnel and their families. This group also entails lower cost because its members, who are relatively nomadic, are accustomed to and willing to do business by telephone, mail, or online. Consequently, USAA is able to eliminate any need for the extensive sales force employed by traditional insurers. Another example of this strategy is provided by lowcost retailers such as Sam's Wholesale Club and Costco, which target customers who are willing to buy in quantity, do without frills, and serve themselves. Standardizing a Custom Service Typically, income tax preparation is considered to be a customized service. H&R Block, however, has been successful in serving customers nationwide when only routine tax preparation is required. Also, storefront legal services and family health care centers are attractive means of delivering routine professional services at low cost. The key word here is routine. However, product substitution is always a danger (e.g., Turbo Tax). Reducing the Personal Element in Service Delivery The potentially high-risk strategy of reducing the personal element in service delivery can be accepted by customers if increased convenience results. For example, convenient access to ATMs has weaned customers from personal interaction with live tellers and, consequently, has reduced transaction costs for banks. Reducing Network Costs Unusual start-up costs are encountered by service firms that require a network to knit together providers and customers. Electric utilities, which have substantial fixed costs in transmission lines, provide the most obvious example. Federal Express conceived a unique approach to reducing network costs by using a hub-and-spoke network. By locating a hub in Memphis with state-of-the-art sorting technology, the overnight air-package carrier was able to serve the United States with no direct routes between the cities that it served. Each time a new city is added to the network, Federal Express only needs to add one more route to and from the hub instead of adding routes between all the cities served. 34 Part One Understanding Services The efficiency of the hub-and-spoke network strategy has not been lost on passenger airline operators, either. Taking Service Operations Offline Many services, such as haircutting and passenger transportation, are inherently \"online,\" because they can only be performed with the customer present. For services in which the customer need not be present, the service transaction can be \"decoupled,\" with some content performed \"offline.\" For example, a shoe repair service could locate dispersed kiosks for customer drop-off/pick-up, thus consolidating orders for delivery to an off-site repair factory, which even could be located offshore. Performing services offline represents significant cost savings because of economies of scale from consolidation, low-cost facility location (e.g., American Airlines has one of its 800-number reservations centers located in the Caribbean), and absence of the customer in the system. In short, the decoupled service operation is run like a factory. Differentiation The essence of the differentiation strategy lies in creating a service that is perceived as being unique. Approaches to differentiation can take many forms: brand image (e.g., McDonald's golden arches), technology (e.g., Sprint's fiber-optic network), features (e.g., American Express's complete travel services), customer service (e.g., Nordstrom's reputation among department stores), dealer network (e.g., Century 21's nationwide real estate presence), and other dimensions. A differentiation strategy does not ignore costs, but its primary thrust lies in creating customer loyalty. As illustrated here, differentiation to enhance the service often is achieved at some cost that the targeted customer is willing to pay. Making the Intangible Tangible By their very nature, services often are intangible and leave the customer with no physical reminder of the purchase. Recognizing the need to remind customers of their stay, many hotels now provide complimentary toiletry items with the hotel name prominently affixed. The Hartford Steam Boiler Inspection and Insurance Company (now part of Munich Re) writes insurance on industrial power plants, but this company has enhanced its service to include regular inspections and recommendations to managers for avoiding potential problems. Customizing the Standard Product Providing a customized touch may endear a firm to its customers at very little cost. A hotel operator who is able to address a guest by name can make an impression that translates into repeat business. Hair salons have added many personalizing features (e.g., personal stylist, juice bar, relaxed surroundings, mood music) to differentiate themselves from barbershops. Burger King's efforts to promote a made-to-order policy is an attempt to differentiate itself from McDonald's classic make-to-stock approach to fast-food service. Reducing Perceived Risk Lack of information about the purchase of a service creates a sense of risk-taking for many customers. Lacking knowledge or self-confidence about services such as auto repair, customers will seek out providers who take the extra time to explain the work to be done, present a clean and organized facility, and guarantee their work (e.g., Village Volvo). Customers often see the \"peace of mind\" that is engendered when this trusting relationship develops as being worth the extra expense. Giving Attention to Personnel Training Investment in personnel development and training that results in enhanced service quality is a competitive advantage that is difficult to replicate. Firms that lead their industries are known among competitors for the quality of their training programs. In some cases, Chapter 2 Service Strategy 35 these firms have established collegelike training centers (e.g., McDonald's Hamburger University in Oak Brook, Illinois, near Chicago). Controlling Quality Delivering a consistent level of service quality at multiple sites with a labor-intensive system is a significant challenge. Firms have approached this problem in a variety of ways, including personnel training, explicit procedures, technology, limits on the scope of the service, direct supervision, and peer pressure, among others. For example, to ensure consistency, the Magic Pan chain of restaurants designed a foolproof machine to produce its famous crpes. The question of service quality is further complicated by the potential gap between customer expectations and experiences. Influencing customer quality expectations thus becomes an issue, which is explored in Chapter 6, Service Quality. Focus The focus strategy is built around the idea of servicing a particular target market very well by addressing customers' specific needs. The market segment could be a particular buyer group (e.g., USAA and the military community), service (e.g., Shouldice Hospital and patients with inguinal hernias, Motel 6 and budget travelers, Federal Express and people who need guaranteed overnight package delivery), or geographic region (e.g., community college or neighborhood restaurant). The focus strategy rests on the premise that the firm can serve its narrow target market more effectively and/or efficiently than other firms trying to serve a broad market. As a result, the firm achieves competitive advantage in its market segment by meeting specific customer needs and/or by lower costs through specialization. Thus, the focus strategy is the application of differentiation and/or overall cost leadership to a particular market segment rather than the entire market. Davidow and Uttal argue how important customer selection is to achieving a successful focus strategy.3 They relate how one bank in Palo Alto, California, targets wealthy individuals and discourages others by policies such as closing an account after two checks have bounced. Davidow and Uttal's three-step approach to focus includes segmenting the market to design core services, classifying customers according to the value they place on service, and setting expectations slightly below perceived performance. Strategic Analysis Strategic analysis begins with a stated objective, such as \"should we enter an industry with a new service offering?\" Two popular planning tools include (1) Porter's five forces analysis of the target industry structure and (2) SWOT analysis to assess the organization's strengths, weaknesses, opportunities, and threats in a market. Porter's Five Forces Analysis4 The five forces model is used at the industry level (e.g., airlines) to determine the competitive intensity and, therefore, attractiveness of a market. The five forces affect the ability of a firm to attract customers and make a profit. Figure 2.1 shows a model of the five forces with example issues to consider in each case. Consider Netflix as an example firm entering the video rental industry. Our discussion begins with the center block (Competitive Rivalry within Industry) upon which the external forces act. Competitive Rivalry within Industry. Often this factor is the major determinant of industry competitiveness. Rivals might be aggressive price competitors or they might use nonprice strategies such as innovation, branding, or superior quality. Industry capacity relative to total customer demand is an important indicator of whether a new entrant will find customers. An exception was Southwest Airlines, which entered the Texas market offering low-cost fares and frequent departures that tapped a latent demand of business commuters who usually traveled by car. When Netflix entered the 36 Part One Understanding Services FIGURE 2.1 Potential New Entrants Barriers to entry Brand equity Capital requirements Porter's Five Forces Model Bargaining Power of Suppliers Presence of substitute inputs Threat of forward integration Uniqueness of inputs Competitive Rivalry within Industry Number of competitors Rate of industry growth Industry capacity Bargaining Power of Customers Buyer's price sensitivity Customer volume Information asymmetry Threat of Substitutes Buyer propensity to substitute Buyer switching costs Product substitution for service market offering DVDs exclusively by mail, its only rivals were rental stores such as Blockbuster. Potential New Entrants. Profitable markets that yield high returns invite new competitors. For example, at one time Walmart challenged Netflix, but subsequently left the field because it was unable to overcome Netflix's established brand. Threat of Substitutes. For services, substitutes often take the form of a product. For example, Turbo Tax software is a substitute for the services of a tax accountant. Similarly, Netflix faces competition from cable companies that allow customers to download videos direct to their television using Tivoli. Bargaining Power of Suppliers. Suppliers of inputs can be a source of power over the firm because of product uniqueness or monopoly source. The most important suppliers to Netflix are the DVD distributors, but Netflix has considerable leverage because of volume purchases. Bargaining Power of Customers. Netflix customers might be able to exert price pressure and, thus, restrict high margins. In the travel industry the use of Priceline.com and Hotwire.com have shifted the information asymmetry to the advantage of the customer. However, Netflix uses information about customer purchases to recommend other movies with similar themes, thereby stimulating demand. SWOT Analysis: Strengths, Weaknesses, Opportunities, Threats Following the industry level of analysis, using the five forces model, SWOT analysis is conducted at the individual firm level. A SWOT analysis identifies an organization's internal strength and weakness as well as threats and opportunities in the external environment. The aim of the analysis is to reveal competitive advantages, analyze prospects, prepare for problems, and allow for development of contingency plans. A SWOT analysis begins with a stated objective and concludes with a summary of strengths to be maintained, built upon, or leveraged; weaknesses to be remedied; opportunities to be prioritized, captured, or built upon; and threats to be countered, minimized, or managed. A SWOT analysis is subjective, and two people often arrive at different final versions, thus emphasizing the value of collaboration. Table 2.3 presents a sample of typical questions that might be asked in each of the four quadrants of a SWOT analysis. Chapter 2 TABLE 2.3 Service Strategy 37 Strengths Weaknesses What are your company's advantages? What could you improve? What do you do better than anyone else? What should you avoid? What unique resources do you have? What factors lose sales? What do people in your market see as your strengths? What are people in your market likely to see as a weakness? Opportunities SWOT Analysis Threats What are your competitors' vulnerabilities? What obstacles do you face? What are the current market trends? What are your competitors doing? Does technology offer new service options? Is changing technology threatening your position? Are there niches in the market your organization can fill? Do you have cash-flow problems? Winning Customers in the Marketplace Depending on the competition and personal needs, customers select a service provider using criteria listed here. This list is not intended to be complete, because the very addition of a new dimension by a firm represents an attempt to engage in a strategy of differentiation. For example, initiation of the frequent flyer program \"AAdvantage\" by American Airlines was an attempt to add the dimension of customer loyalty to competition among airlines. Availability. How accessible is the service? The use of ATMs by banks has created 24-hour availability of some banking services (i.e., service beyond the traditional \"banker's hours\"). Use of 800-numbers and websites by service firms facilitates access to information and personal accounts 24/7. Convenience. The location of the service defines convenience for customers who must travel to that service. Gasoline stations, fast-food restaurants, and dry cleaners are examples of services that must select locations on busy streets if they are to succeed. Dependability. How reliable is the service? For example, once the exterminator is gone, how soon do the bugs return? A major complaint regarding automobile repair services is the failure to fix the problem on the first visit. For airlines, on-time performance is a statistic collected by the FAA. Personalization. Are you treated as an individual? For example, hotels have discovered that repeat customers respond to being greeted by their name. The degree of customization allowed in providing the service, no matter how slight, can be viewed as more personalized service. Price. Competing on price is not as effective in services as it is with products, because it often is difficult to compare the costs of services objectively. Comparing costs in the delivery of routine services such as an oil change might be easy, but in professional services, competition on price can be considered counterproductive because price often is viewed as being a surrogate for quality. Quality. Service quality is a function of the relationship between a customer's prior expectations of the service and his or her perception of the service experience both during and after the fact. Unlike product quality, service quality is judged by both the process of service delivery and the outcome of the service. Reputation. The uncertainty that is associated with the selection of a service provider often is resolved by talking with others about their experiences before a decision is made. Unlike a product, a poor service experience cannot be exchanged or returned for a different model. Positive word-of-mouth is the most effective form of advertising. 38 Part One Understanding Services Safety. Well-being and security are important considerations because in many services, such as air travel and medicine, the customers are putting their lives in the hands of the service provider. Speed. How long must I wait for service? For emergency services such as fire and police protection, response time is the major criterion of performance. In other services, waiting sometimes might be considered a trade-off for receiving more personalized services, or in reduced rates. Writing about manufacturing strategy, Terry Hill used the term order-winning criteria to refer to competitive dimensions that sell products.5 He further suggested that some criteria could be called qualifiers, because the presence of these dimensions is necessary for a product to enter the marketplace. Finally, Hill said that some qualifiers could be considered order-losing sensitive. We will use a similar logic and the service criteria listed earlier to describe the service purchase decision. The purchase decision sequence begins with qualifying potential service firms (e.g., must the doctor be on my PPO list?), followed by making a final selection from this subset of service firms using a service winner (e.g., which of the PPO doctors has the best reputation?). After the initial service experience, a return will be based on whether a \"service loser\" has occurred (e.g., the doctor was cold and impersonal). Qualifiers Before a service firm can be taken seriously as a competitor in the market, it must attain a certain level for each service-competitive dimension, as defined by the other market players. For example, in airline service, we would name safety, as defined by the airworthiness of the aircraft and by the rating of the pilots, as an obvious qualifier. In a mature market such as fast foods, established competitors may define a level of quality, such as cleanliness, that new entrants must at least match to be viable contenders. For fast food, a dimension that once was a service winner, such as a drive-in window, over time could become a qualifier because some customers will not stop otherwise. Service Winners Service winners are dimensions such as price, convenience, or reputation that are used by a customer to make a choice among competitors. Depending on the needs of the customer at the time of the purchase, the service winner may vary. For example, seeking a restaurant for lunch might be based on convenience, but a dinner date could be influenced by reputation. Note that a service winner can become an industry qualifier (e.g., ATM use by banks). Service Losers Failure to deliver at or above the expected level for a competitive dimension can result in a dissatisfied customer who is lost forever. For various reasons, the dimensions of dependability, personalization, and speed are particularly vulnerable to becoming service losers. Some examples might be failure of an auto dealer to repair a mechanical problem (i.e., dependability), rude treatment by a doctor (i.e., personalization), or failure of an overnight service to deliver a package on time (i.e., speed). Sustainability in Services Most casual observers might wonder why a service firm needs to worry about sustainability because no pollution-making fumes come out of a typical service facility. But when looked at thoughtfully, service firms have as big a role to play in the sustainability movement as manufacturing plants. Responsibilities of service firms go far beyond recycling their papers and reducing energy usage. A wide range of opportunities and threats in sustainability efforts can affect a service operation significantly. For most service firms, environmental, social, and economic sustainability are essential features for the long-term viability of operations. Designing efficient processes and Chapter 2 Service Strategy 39 practicesas well as cultivating corporate cultures that eliminate negative environmental and social impacts and improve corporate imagerequires significant organizational commitment to sustainability.6 Several forces that motivate a service firm to consider sustainability as a strategy include: Regulations/legislation: The U.S. Environmental Protection Agency (EPA) outlines regulations to protect human health and the environment. Directives from the Waste Electrical and Electronic Equipment (WEEE) and Restriction of Hazardous Substances (RoHS) set targets for collection, recycling, and recovery for all types of electrical and other hazardous materials. Also, international standards such as ISO 14000 and ISO 26000 exist for environmental protection and social responsibility. Perception/image building: Many of the sustainability efforts by service firms cater to public relations. Customers often seek out providers that are leaders in the sustainability movement. Economic: Certain aspects of sustainable operations actually save money for a firm, for example, waste reduction (as a part of lean operation) and value recovery. Triple Bottom Line (TBL) The term triple bottom line (TBL or 3BL) was coined to evaluate a firm on social, economic, and environmental criteria in relation to sustainability.7 Different forms of triple bottom line concepts are possible. Shell Oil Company, for example, popularized the model, \"People, Planet, and Profit.\" The 20th-century urban planner and educator, Patrick Geddes, used the phrase \"Folk, Work and Place\" in the same vein as today's 3BL. Social issues include labor practices, workforce diversity, human rights, and community outreach. Economic issues include capital efficiency, growth enhancement, cost reduction, and risk management. Environmental issues include clean air, water and land, emission control, and waste management. In addition to these issues, we also can find overlapping criteria. Socioeconomic issues include job creation, skill enhancement, and business ethics. Eco-efficiency refers to resource efficiency and life-cycle management. Social-environmental issues include global climate change, environmental justice, and health safety. As shown in Figure 2.2, when all three basic criteria are satisfied, true sustainability can be achieved. Some factors that support a movement to sustainability in service operations include: Labor, material, and energy costs will continue to grow. Public pressure for environmental, health, and safety performance is likely to remain strong. Consumer demand for services offered by 3BL companies is likely to grow. Strong nongovernmental organization (NGO) activities concerning sustainable business practices exist. Beyond its internal sustainable efforts, a service firm needs to consider the following external factors:8 Ripple effect: Often the biggest impact a service firm has is not its service offerings themselves, but how the firm affects the behavior and choices of its customers. When a bank approves a mortgage for a homebuyer, its influence goes beyond the financial aspects and includes factors that could affect the quality of life in the community, local traffic flow, diversity of residents, home-insurance costs, and even the national economy. Strategic threats: Sustainability-related trends can threaten the foundation of a business. Global warming has resulted in lack of snow at several ski resorts, which in turn shortens the ski season and decreases profits. Extreme climate concerns the insurance 40 Part One Understanding Services FIGURE 2.2 The Triple Bottom Line in Relation to Sustainability Source: http://www.conocophillips.com/EN/susdev/commitments/Page/ApproachCommitments.aspx Innovation Capital efficiency Risk management Margin improvement Growth enhancement Total shareholder return Economic Growth Job creation Skills enhancement Local economic impacts Social investments Business ethics Security SocioEconomic Resource efficiency Product stewardship Life-cycle management Products to services EcoEfficiency Sustainability Diversity Human rights Community outreach Indigenous communities Labor relations Social Progress SocioEnvironmental Environmental Stewardship Clean air, water, and land Emissions reductions Zero waste, releases, and spills Biodiversity Safety and health Environmental regulations Global climate change Access to potable water Crisis management Environmental justice industry because it generates more devastating storm formation. Nongovernmental organizations (NGOs) are known to call out service firms for unethical practices. Home Depot, for example, was criticized by the Rainforest Action Network for selling products from old-growth forests that are ecologically sensitive and illegally logged. Emerging opportunities: The sustainability movement opens doors for making positive contributions to society and for building goodwill. Starbucks, sometimes vilified for unethical business practices, attracts responsible coffee growers with premiumprice, long-term contracts and guidelines for environmental responsibilities (shadegrown, bird-friendly) and social concerns (labor practices). We see many examples of sustainable efforts by multinational companies such as Nike and Walmart. Lee Scott, president and CEO of Walmart since 2000, gave his defining \"Twenty First Century Leadership\" speech on October 24, 2005, in which he laid out three long term goals: (1) to be supplied 100 percent by renewable energy, (2) to create zero waste, and (3) to sell products that sustain our resources and environment.9 Following that speech, Walmart embarked upon a search for waste elimination and improved efficiency. For example, it condensed products like laundry detergent into small, easily packed shipping containers; retrofitted long haul trucks with small air conditioners to allow sleeping drivers to turn off their diesel engines; reduced plastic and cardboard packaging; started buying directly from farmers with emphasis on organic Chapter 2 Service Strategy 41 food (e.g., carrying seafood certified by Marine Stewardship Council); and built and sold RoHS compliant computers from Toshiba. Saving money by being green was the objective. Critics argue that Walmart's green initiatives are unsustainable, mainly owing to exorbitant cost (more than $500 million per year), a sub-optimal product assortment, and criticism of factory labor conditions. But Walmart claims that the public goodwill and the improved assurance of supply as a result of its sustainability efforts are worth much more than the direct profit generated.10 As a result of sustainable efforts by service firms, the U.S. economy has seen a new area of job employment, i.e., \"green-collar\" jobs. Salient features for these jobs include concern for the environment, skill development for operating sustainable businesses, increased interest in energy-efficiency, and exploring the human connection to the environment. Green-collar jobs are not the highest paying jobs, but their attraction lies in social responsibility. As the motto goes: Green, Not Greed, Is Good!! The Competitive Role of Information in Services11 For service management, information technology is helping to define the competitive strategy of successful firms. Figure 2.3 illustrates the different roles in which information technology can support a service firm's competitive strategy. We shall explore each of these roles in turn with illustrations from successful applications. Creation of Barriers to Entry As noted earlier, many services exist in markets that have low entry barriers. However, barriers to entry can be created by using economies of scale, building market share, creating switching costs, investing in communications networks, and using databases and information technologies to strategic advantage. We will discuss three uses of information for creating barriers to entry: reservations systems, frequent flyer or similar programs to gain customer loyalty, and development of customer relationships to increase switching costs. Reservation Systems A barrier to entry can be created by investing in online reservations systems that are provided to sales intermediaries such as Expedia. American Airline's SABRE system is FIGURE 2.3 Competitive use of information Strategic Roles of Information in Services Source: Adapted from James A. Fitzsimmons, \"Strategic Role of Information in Services,\" in Rakesh V. Sarin (ed.), Perspectives in Operations Management: Essays in Honor of Elwood S. Buffa, Norwell, Mass: Kluwer Academic Publishers, 1993, p. 103. Online (Real Time) External (Customer) Internal (Operations) Offline (Analysis) Creation of barriers to entry: Reservation system Frequent user club Switching costs Database asset: Revenue generation: Yield management Point of sales Expert systems Productivity enhancement: Inventory status Data envelopment analysis (DEA) Selling information Development of services Micromarketing 42 Part One Understanding Services an example of the kind of subtle barrier to entry that is created by a comprehensive information system. United and Delta have duplicated this reservations system at great cost, but most smaller carriers use these existing systems for a fee. The competitive importance of online reservations systems became evident in late 1982. At this time, the Civil Aeronautics Board (CAB) and the U.S. Department of Justice began a joint investigation of possible antitrust violations by airline reservations systems. In this investigation, Frontier Airlines filed charges accusing United of unfairly restricting competition in the use of its Apollo computerized reservations system. Frequent User Club It was a small step for American Airlines, given its massive reservations system, to add passenger accounts to accumulate travel credit for frequent flyer awards. These programs, which award free trips and other awards, create strong brand loyalty among travelers, particularly business travelers who are not paying their own way. Thus, the discount fares of a new competitor have no appeal to these travelers. Switching Costs Establishing customer relationships creates a cost in the form of an inconvenience for the customer to switch to another provider. Think of the hassle of changing your bank after you have arranged for automatic bill payment from your checking account. Information technology in the form of online computer terminals has been used in the medical supplies industry to link hospitals directly to the suppliers' distribution networks. Both American Hospital Supply and McKesson, the drug distributor, have installed their online terminals in hospitals so that supplies and drugs can be purchased as the need arises. Significant switching costs are built into this arrangement, because the hospital is able to reduce inventory-carrying costs and has the convenience of online ordering for replenishments. The supplier benefits by a reduction in selling costs because it is difficult for a competitor to entice away a customer who is already co-opted into its system. Revenue Generation Real-time information technologies with a focus on internal operations can play a competitive role in increasing revenue opportunities. The concept of yield management is best understood as a revenue-maximizing strategy to make full use of service capacity (e.g., seats on an airline flight). The advent of smartphones and tablets has created opportunities for innovative point-of-sale suggestions, and the use of expert systems resident on servers and accessible by laptop computers in the field allows increased customer service. Yield Management Through the use of its SABRE reservations system, American Airlines was the first to realize the potential of what is now called yield management. By constantly monitoring the status of both its upcoming flights and competitors' flights on the same route, American makes pricing and allocation decisions on unsold seats. Thus, the number of Supersaver fares allocated to a particular flight can be adjusted to ensure that remaining empty seats have a chance of being sold, but not at the expense of a full-fare seat. This real-time pricing strategy maximizes the revenue for each flight by ensuring that no seat goes empty for want of a bargain-seeking passenger while holding some seats in reserve for late arrivals who are willing to pay full fare. Thus, yield management is the application of information to improve the revenue that is generated by a time-perishable resource (e.g., airline seats, hotel rooms). The success of yield management for American has not gone unnoticed by other service industries; for example, Marriott Hotels has installed a nationwide yield management system to increase occupancy rates. In addition, American Airlines is capitalizing on its innovation by selling the yield management software to noncompetitive industries such as the French national railroad. The topic of yield management is covered in more detail in Chapter 11, Managing Capacity and Demand. Chapter 2 Service Strategy 43 Point of Sale In China, Walmart introduced a new toy for the discount shopper: the VideOcart. As the shopper pushes the VideOcart through the store, nearby items on sale flash onto the attached video screen. The cart also helps customers find items in the store by listing hundreds of products by department and then displaying a map of the store. For another example, consider a commercial application for the iPad. With this device, a server in a restaurant can transmit an order directly to the kitchen monitor and the bill to the cashier at the same time. This saves unnecessary steps and allows more time for suggestive selling. Expert Systems Otis Elevator Company puts an expert system together with laptop or tablet computers in the hands of its maintenance staff to speed repairs in the field. Collecting information on the behavior of its elevators over the years has led to a knowledge base that is incorporated into the expert system. Using the computer, a repair person in the field can access the system that is resident on a server and receive diagnostic help in identifying the source of a problem. As a result, elevators are placed back in service quickly, and fewer repair people are needed. Some of the earlier applications of expert systems have been in the medical field, to aid in disease diagnosis. As another example, an oil exploration expert system was able to identify promising drilling sites for a major oil company. Database Asset The database a service firm possesses can be a hidden asset of strategic importance. The expense of assembling and maintaining a large database is itself a barrier to entry by competitors. More important, however, the database can be mined for profiles of customers' buying habits, and these present opportunities for developing new services. Selling Information Dun & Bradstreet created a business by selling access to its database of business credit information. American Home Shield, a provider of service contracts for individual home heating, plumbing, and electrical systems, also discovered that it had a valuable asset in its database, accumulated over many years of repair experience; manufacturers now are invited to access this database to evaluate the performance patterns of their products. American Express has detailed information about the spending habits of its cardholders and now offers breakdowns of customer spending patterns to its retail customers. Rental car employees use hand-held computers to speed up the car drop-off process, allowing customers to avoid missing flights. Comstock/PunchStock Developing Services Club Med, an all-inclusive resort company with locations worldwide, has evolved to reflect the maturing of its membership. Studying the database of member characteristics, Club Med realized that over time its once swinging singles members have become married with children. In order to continue capturing future vacation visits, Club Med modified some of its locations to accommodate families with young children. Now parents can enjoy the beach and water sports while their children are supervised by Club Med counselors at a children's park nearby. More recently, Club Med has added cruise ships to its vacation possibilities to attract the more senior members who are no longer interested in water sports. As this example illustrates, service firms that capture customer data at the time of the initial purchase have the opportunity to establish a lifetime relationship, with the potential for creating new or modified services for future purchase. Micromarketing Today, we can see a truly focused service strategy that can target customers at the micro level. Bar coding and checkout scanner technology create a wealth of consumer buying 44 Part One Understanding Services information that can be used to target customers with precision. Analysis of this database allows marketers to pinpoint their advertising and product distribution. To increase sales, Borden Inc. has used such information to select stores in which to feature its premium pasta sauce. Kraft USA saw its sales of cream cheese increase after targeting its flavors to the tastes of a particular store's shoppers. American Express, by analyzing information about its customers and their changing spending patterns in meticulous detail, can even tell when they get married. Productivity Enhancement New developments in the collection and analysis of information have increased our ability to manage multisite service operations. Through use of bar code information, retail inventory can be managed on a daily basis to make better use of shelf space by matching displayed products with sales. Information collected on the performance of multisite units can be used to identify the most efficient producers, and productivity is enhanced systemwide when the sources of these successes are shared with other sites. The foundation for a learning organization is then established. Inventory Status Using a tablet computer, Frito-Lay sales representatives have eliminated paper forms. They download the data collected on their routes each day via the Internet to the Plano, Texas, headquarters, and the company then uses these data to keep track of inventory levels, pricing, product promotions, and stale or returned merchandise. These daily updates on sales, manufacturing, and distribution keep fresh products moving through the system, matching consumer demands. For a perishable product like potato chips, having the right product at the right place and in the proper amount is critical to Frito-Lay's success. Data Envelopment Analysis Data envelopment analysis (DEA) is a linear programming technique developed by A. Charnes, W. W. Cooper, and E. Rhodes to evaluate nonprofit and public sector organizations. Subsequently, it has found applications in for-profit service organizations. DEA compares each service delivery unit with all other service units for a multisite organization, and it computes an efficiency rating that is based on the ratio of resource inputs to outputs. Multiple inputs (e.g., labor-hours, materials) and multiple outputs (e.g., sales, referrals) are possible and desirable in measuring a unit's efficiency. The linear programming model uses this information to determine the efficiency frontier on the basis of those units producing at 100 percent efficiency. Areas for improvement can be identified by comparing the operating practices of efficient units with those of less efficient units. Sharing management practices of efficient units with less efficient units provides an opportunity for the latter's improvement and enhancement of total system productivity. Repeated use of DEA can establish a climate of organizational learning that fuels a competitive strategy of cost leadership. In one case, applying DEA to a 60-unit fast-food restaurant chain found 33 units to be efficient. Three outputs (i.e., food sales for breakfast, lunch, and dinner) and six inputs (i.e., supplies and materials, labor, age of store, advertising expenditures, urban versus rural location, and existence of a drive-in window) were used. It is interesting to note that the inputs included both discretionary and uncontrollable variables (e.g., the demographic variable of urban/rural locations, whether or not the unit had a drive-in window). The topic of data envelopment analysis is covered in more detail as a supplement to Chapter 7, Process Improvement. The Virtual Value Chain12 Today, businesses compete in two worlds: a physical world of people and things called a marketplace and a virtual world of information called a marketspace. For example, after Barnes and Noble opened a website it established a presence in the virtual Chapter 2 Service Strategy 45 marketspace created by the Internet, but it also continued its competitive position as the leading bookstore in the marketplace. The nature of the marketspace that requires customer information for order fulfillment also enables the service provider to collect useful information such as customer buying behavior and addresses. The marketspace information can also be used to improve the service delivery process and create customer value. The process of creating value has long been described as stages linked together to form a value chain. The traditional physical value chain, as shown at the top of Figure 2.4, consists of a sequence of stages beginning with manufacturing and ending with sales to a customer. The virtual value chain, as shown at the bottom of Figure 2.4, traditionally has been treated as information supporting physical value-adding elements, but not as a source of value itself. For example, managers use information on inventory levels to monitor the process, but they rarely use information itself to create new value for the customer. This is no longer the case for breakthrough service companies. For example, FedEx now exploits its information database by allowing customers to track packages themselves using the company's website on the Internet. Now customers can locate a package in transit by entering the airbill number, and they can even identify the name of the person who signed for it when delivered. Convenient tracking of a package added customer value and initially differentiated FedEx from its competitors. To create value with information, managers must look to the marketspace. Although the value chain of the marketspace can mirror that of the marketplace, the value-adding process first must gather raw information that is processed and finally distributed. The value-adding steps are virtual in that they are performed through and with information. Creating value in any stage of a virtual value chain involves a sequence of five activities: gathering, organizing, selecting, synthesizing, and distributing information. The United Services 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. USAA moved from the marketplace to marketspace in a four-stage evolution. First Stage (New Processes) The first stage involves seeing the physical operations more effectively with information. USAA became a \"paperless operation,\" as it moved from a manual paper-based filing system to one based on a central computerized database with access via desktop terminals. FIGURE 2.4 Production Distribution Retailing Customer Physical Value Chain Exploiting the Virtual Value Chain Apply the generic valueadding steps of the information world: Gather Organize Select Synthesize Distribute to each physical activity to create virtual value. New Processes (Stage 1) New Knowledge (Stage 2) New Products (Stage 3) New Relationships (Stage 4) Virtual Value Chain 46 Part One Understanding Services Collecting feedback on movies viewed allows for targeted recommendations. Reproduced by permission of Netflix, Inc., Copyright 2012 Netflix, Inc. All rights reserved. Second Stage (New Knowledge) In the second stage, virtual alternatives substitute for physical activities. At USAA, information systems were installed to automate the core business of insurance sales and underwriting. In the process, USAA captured significant amounts of information about customers who are members of the association. Unlike a typical insurance company, USAA has no traveling sales force and all of its business is conducted by telephone, mail, or Internet. All member-contact employees are trained to evaluate members' needs and provide appropriate products and services. Consequently, USAA has been able to build a database on its members who are accustomed to doing business with relatively little human interaction. Third Stage (New Products) In this stage, member information is analyzed to discover new product needs and methods to deliver value. As the database accumulated, USAA prepared member risk profiles and customized policies. Analyzing the flow of information harvested along the virtual value chain, in particular the aging of its members, USAA instituted products targeted to members' evolving needs, such as property and casualty insurance, banking products and services, life and health insurance, mutual funds, and retirement communities. The \"event-oriented service\" anticipates individual member needs such as a teenage child requiring auto insurance. Today, members can manage their financial portfolio using the USAA website. Fourth Stage (New Relationships) In the final stage, opportunities for customer collaboration in the co-creation of value are explored. Retired and active duty members of USAA need financial planning. In response, USAA created web-based investment planning tools and frequent online interactive seminars dealing with current financial issues. Economics of Scalability Scalability is the ability of a firm to improve contribution margins (Revenue 2 Variable costs) as its sales volume increases. Infinite scalability can occur only when the variable cost of serving an additional customer is zero. There are three sources of scalability: (1) conduct only information or data-transfer services (e.g., online encyclopedia), (2) allow customers to serve themselves (e.g., online reservations), and (3) let customers serve other customers (e.g., online auctions). As shown in Table 2.4, the features of a service determine the extent of scalability that is possible. Note that kbb.com represents Kelly Blue Book, a source for new and used car prices, and Everdream.com is a company, acquired by Dell in 2009, that allows small Chapter 2 TABLE 2.4 Service Strategy 47 Scalability and E-Commerce Dimensions High Scalability Low E-commerce continuum Selling Information (e-service) Selling value-added service Selling services with goods Selling goods (e-commerce) Information vs. goods content Information dominates Information with some service Goods with support services Goods dominate Degree of customer content Self-service Call center backup Call center support Call center order processing Standardization vs. customization Mass distribution Some personalization Limited customization Fill individual orders Shipping and handling costs Digital asset Mailing Shipping Shipping, order fulfillment, and warehousing After-sales service None Answer questions Remote maintenance Returns possible Example service Used car prices Online leisure travel agent Computer/IT support Online retailer Example firm Kbb.com InfoHub.com Everdream.com Amazon.com businesses to outsource their IT function by leasing their computers and receiving daily hard-drive backup, maintenance, and support remotely. Scalability is not enough because, without differentiation, the service can lead to commoditization with only the price leader surviving. Differentiation can be accomplished by capitalizing on the \"network effect.\" When the value for any one customer increases with the growth in total number of customers such as in online auctions (e.g., eBay), a network effect is experienced. Also, cultivating a reputation for effective human intervention can lead to a strategic advantage. Because customers often need help, a staff of responsive, effective, and empathetic call-center agents can foster customer loyalty. Internet-enabled service is, of course, self-service delivered at home. We might be surprised at just how satisfied customers are with Internet service. In Table 2.5, the Internet services (Internet Retail, Internet Brokerage, and Internet Travel) are in good company TABLE 2.5 Customer Satisfaction Scores Source: American Customer Satisfaction Index, University of Michigan, Ann Arbor, Michigan, http://www.theacsi.org. Rank Service Industry Customer Satisfaction Scale of 0-100 1 Internet retail (Newegg) 88 2 Express delivery (FedEx) 84 3 Specialty stores (Costco) 83 4 Supermarkets (Publix) 82 5 Airlines (Southwest) 81 Full-service restaurant (Olive Garden) 81 6 Internet brokerage (Fidelity Investments) 80 Department stores (Nordstrom and Kohls) 80 Energy utilities (Sempra Energy) 80 7 Hotels (Hilton) 79 8 Internet travel (Expedia) 77 Limited-service restaurants (Domino's Pizza) 77 48 Part One Understanding Services with other service firms because of their reputation for exceptional service. The firms selected for inclusion in Table 2.5 are the leaders in customer satisfaction in their respective industries. It is noteworthy that Newegg, an Internet retailer, received an 88, the highest reported score for all service firms. Self-service has become an established and appreciated delivery mode for digital services. Limits in the Use of Information So far only the benefits of using information as a competitive strategy have been addressed. Some of these strategies, however, raise questions of fairness, invasion of privacy, and anticompetitiveness. Also, if these strategies were abused, the result could harm consumers. Anticompetitive To create entry barriers, the use of reservation systems and frequent user programs has been identified as potentially anticompetitive. For example, how should a frequent flyer's free-trip award be considered, particularly when the passenger has been traveling on business at corporate expense? The IRS is considering taxing the free trip as income in kind, and corporations believe that the free tickets belong to the company. The long-run implication, however, is the removal of price competition in air travel. Fairness Perhaps the easiest way to start a riot is asking airline passengers on a flight how much their tickets cost. Under yield management, ticket prices can change every hour; therefore, price is a moving target and the ticketing process a lottery. At the extreme, is yield management fair and equitable to the public, or has every service price always been negotiable? Are customers only now becoming aware of their buying power? Invasion of Privacy The concept of micromarketing has the potential to create the most violent backlash from consumers because of the perceived invasion of privacy. When a record of your every purchase at the local supermarket is shared with eager manufacturers, very manipulative sales practices, such as targeting buyers of a competitor's soft drink with enticements to buy an alternative, could result. Lotus Development Corporation felt the sting of consumer displeasure after announcing the availability of its MarketPlace household database to anyone with a PC and modem. Lotus received more than 30,000 requests from irate persons wanting to be removed from this database. Lotus subsequently withdrew its offer of general availability, but it continues to sell access to the database to large corporations. Data Security Allowing information to get into hands of others for inappropriate use is a significant problem for government agencies such as the IRS; however, releasing personal medical records to insurance firms or potential employers without the consent of the patient is fa