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SERVICE STRATEGY
Chapter 2
Service Management
 Learning Objectives
• Formulate a strategic service vision.
• Describe how a service competes using the three generic
service strategies.
• Perform a SWOT and Five Forces Analysis
• Discuss the competitive role of information in services.
• Explain the concept of the virtual value chain and its role in
service innovation.
• Categorize a service firm according to its stage of
competitiveness.

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Strategic Service Vision:
formulated by addressing questions..

• Target Market Segments

• (T-S)How well is the service concept positioned in relation to
customers’ needs and competitors’ offering?
• Service Concept
• (S-O)To what extent is the value of results and process quality for
customers leveraged over cost to the service provider?
• Operating Strategy
• (O-S) Does the service delivery system support the operating
strategy?
• Service Delivery System

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Target Market Segments
• What are common characteristics of the target
market?
• How can the target market be segmented (i.e.
demographic)?
• How important are various segments and their
needs?
• How well are these needs being served, in what
manner, by whom?

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Service Concept
• What are the results stated in terms of the customers?
• How is the system supposed to be perceived by the
target markets ( customers & employees)?
• How do customers perceive the service concept?
• What efforts are required in terms of the manner the
service is designed, delivered, marketed?

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Operating Strategy
• What are important business features (operations,
finance, marketing, organization, human resources,
control)?
• Where are effort and investments focused?
• How will quality and cost be controlled?
• What results will be expected versus competition
(quality of service, cost profile, productivity,
morale/loyalty of servers)?

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Service Delivery System
• What are the important delivery system features
(role of people, technology, equipment, layout,
procedures)?
• What capacity does it provide?
• How does the system differentiate itself form
competitors (i.e. quality, price, convenience)?
• Are barriers to entry created?

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Southwest Airlines Strategic Service Vision
https://www.youtube.com/watch?v=cMgarcFkXz4
https://www.youtube.com/watch?v=Jy0Yf1CAsuQ&feature=youtu.be

Service Delivery Operating Strategy Service Concept Target Market

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

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Example:
Southwest Airline

• A major U.S. airline and the world's largest low-cost

carrier, headquartered in Dallas, Texas.
• Was established in 1967 and adopted its current name in
1971.
• The airline has nearly 57,000 employees in 2018 and
operates more than 4,000 flights per day.
• It carries the most domestic passengers of any U.S.
airline. SWA has scheduled service to 99 destinations in
US, Puerto Rico, and abroad.
• SWA is the largest operator of the 737 worldwide with
over 700 in service, each averaging six flights per day.
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SWA: Outstanding Service at the Lowest Fares
Mission Statement

 The mission of Southwest Airlines is dedication to the

highest quality of Customer Service delivered with a
sense of warmth, friendliness, individual pride, and
Company Spirit.
Vision Statement
At Southwest, we strive to be the new generation of
flight transportation while providing luxury at a price
anyone can afford.

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Southwest Airlines
• Only major airline to have earned a profit every
year for nearly three decades.

• Southwest has won the Triple Crown (best on

time performance, fewest complaints, fewest lost
bags) for 5 years in a row. No other airline has
won this award.

• Southwest’s operating costs are 20% below the

industry average. Company is 84% unionized.
 Competitive Service Strategies :
(1) Overall Cost Leadership
• requires efficient-scale facilities, tight cost and overhead
control, and innovative technology
• i.e. McDonald’s , Walmart, Southwest Airlines
• Seeking Out Low-cost Customers (USAA, Costco, Sam’s Wholesale)
• Standardizing a Custom Service (H&R Block income tax preparation)
• Reducing the Personal Element in Service Delivery (ATM, self-
service at airline check-in)
• Reducing Network Costs
• (e.g., hub and spoke at FedEx)
• Hub in Memphis + state of the art sorting technology
• Why Memphis? Inside the Memphis hub | FedEx

• Taking Service Operations Offline

• e.g., shoe-repair drop-off, call center outside US
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Competitive Service Strategies
(2) Differentiation
• Lies in creating a service that is perceived as
being unique

• Making the Intangible Tangible (memorable) (e.g., Disney

Theme Parks, complimentary toiletry items)
• Customizing the Standard Product (e.g., Ritz Carlton, add
personalizing features)
• Reducing Perceived Risk (e.g., FedEx, auto repair Village Volve)
• Giving Attention to Personnel Training (e.g., McDonald’s
Hamburger University)
• Controlling Quality (e.g., Magic Pan foolproof machine)

• Note: Differentiation in service means being unique in

brand image, technology use, features, or reputation for
customer service. 2-13
Competitive Service Strategies:
(3) Focus
• Is built around the idea of serving a
particular target market by addressing
customers’ specific needs.
• Buyer Group: (e.g. USAA insurance and military officers)
• Service Offered: (e.g. Shouldice Hospital and hernia patients, Motel 6
for budget travelers, Federal Express for overnight package delivery)
• Geographic Region: (e.g. community college or neighborhood
restaurant)
• Achieve competitive advantage in its market segment by
meeting specific customer needs and/or lower costs
through specialization.

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Strategic Analysis: Should we enter an industry with a
new service offering?

• Industry level: Porter’s Five Forces

• Source zh.wikipedia.org
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(demand) - Information asymmetry

Threat of Substitutes
- Buyer propensity to substitute
- Buyer switching costs
- Product substitution for service
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 17

Reference http://www.embpro.com/2009/07/blog-post_41.html
Strategic Analysis: SWOT Individual firm level
Identify an organization’s internal strength and weakness as well as threats and opportunities in the external environment.
Aim to reveal competitive advantages, prepare for problems, develop contingency plans.

Reference http://www.sixsigmatrainingfree.com/swot-analysis.html
 SWOT Analysis
Strengths Opportunities
 What are your company’s advantages?  What are your competitors’
 What do you do better than anyone else? vulnerabilities?
 What unique resources do you have?  What are the current market
 What do people in your market see as trends?
your strengths?  Does technology offer new
service options?
 Are there niches in the market
your organization can fill?

Weaknesses Threats
 What could you improve?  What obstacles do you face?
 What should you avoid?  What are your competitors doing?
 What factors lose sales?  Is changing technology
 What are people in your market likely to threatening your position?
see as a weakness?  Do you have cash-flow
problems?
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SWOT 分析

Reference https://www.managertoday.com.tw/glossary/view/15
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)

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Competitive Role of Information in Services

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 Role of Information Technology
• Create of Barriers to Entry
• Reservations systems
• Frequent flyer to gain customer loyalty
• Develop customer relationships to increase switching costs

• Revenue Generation (revenue-maximizing strategy to make full

use of service capacity)
• Yield Management: Real-time pricing strategy maximizes the use of services,
ensures no seat goes empty for airlines
• Point of Sale: Walmart VideOcart, nearby items on sale flash onto the video screen.
• Expert system: Otis Elevator puts an expert system with laptop in the hands of its
maintenance staff to speed repairs in the field.
• Database Asset
• Can be mined for profiles of customers’ buying habits, developing new services &
Micromaketing
• Productivity Enhancement
• Inventory status, and manage multisite service operations (Data Envelopment
analysis), identify the most efficient producers
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 IoT: Swarm intelligence
:the network of physical objects—“things”—that are embedded with sensors, software, and other technologies for the purpose of connecting and exchanging data with other devices and systems over the internet.
Seamless communication is possible between people, processes, and things.
Digital systems can record, monitor, and adjust each interaction between connected things. The physical world meets the digital world. Ex: Io Medical Things

.
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Smart Homes and Connected Wearables
Guiding the Future of the Internet of Things ppt
Kelsey Clubb, Lisa Kirch, and Nital Patwa
 Why Worry about Internet of Things?
Guiding the Future of the Internet of Things ppt
Kelsey Clubb, Lisa Kirch, and Nital Patwa

● Many connected sensors

● Datasets contain sensitive info
● Hacked IoT device is unsafe
Data Analytics in Services

Source
http://tangamgami
ng.com/developing
-a-table-games-
analytics-strategy/

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Precision Marketing ： Target 運用 25 種商品（如乳液、無味香皂、棉花球、鈣片、
內含鋅或鎂的營養補充品等）預測女性顧客是否懷孕。

Source : http://www.nytimes.com/2012/02/19/magazine/shopping-habits.html?pagewanted=1&_r=3&hp

http://www.forbes.com/sites/kashmirhill/2012/02/16/how-target-figured-out-a-teen-girl-was-pregnant-before-her-father-did/
Application of Data Analytics by Service Industry

• Service Industry Data Analytics Application

• Airlines Operational performance & pricing model

• Investment Banks Portfolio management & risk
assessment
• Insurance Health assessment
• Hospitals In-patient care
• Hotel/Restaurant Revenue management
• Marketing Firms Sales & profitability improvement
• Casinos Customer loyalty programs
• Retailers Supply chain management
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Exploiting the Virtual Value Chain:
Create value with information
moved from physical marketplace to virtual marketspace

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)
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The Virtual Value Chain
• Marketplace vs Marketspace
• Creating New Markets by using Information
• Gather, Organize, Select, Synthesize, and Distribute

• Four Stage Evolution: ex United Services Automobile Association

• 1st Stage (New Processes): See physical operations more effectively with
information (USAA “paperless filing system”).
• 2nd Stage (New Knowledge): Substitute virtual activities for physical (USAA
“automate underwriting”). Database analytics for doing business with little
human interaction.
• 3rd Stage (New Products): Use and analyze 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” and online interactive seminars
dealing with current financial issues). 2-31
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)

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Stages in Service Firm Competitiveness
continuous improvement in productivity and quality must be part of firm’s strategy
(Chase & Hayes, 1991 describe the role of operations in the strategic development of service firms. Provides a way to measure and evaluate a firm’s progress in the
development of service delivery system.)

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Stages in Service Firm Competitiveness

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Case 2.1 United Commercial Bank
and El Banco page 54-56
Banks for Targeted Ethnic Communities

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United Commercial Bank
• Largest commercial bank in the United States focused on Chinese-
American community
• $6.32 billion in assets
• $1.4 billion in capital
• 46 branches in California (San Francisco, LA, and Sacramento)
• 2 branches in New York
• “Representative offices” in Taiwan and China, and one branch in
Hong Kong
• Founded in 1974 in San Francisco
• Organized as a thrift
• Continued focus on time deposits as primary deposit product

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Chinese-American Depositors:
High Demand for Time Deposits
United Commercial Bank has an unusually high proportion of
savings accounts and time deposits
• UCB’s reliance on savings and CDs places it above the 95% percentile among
banks overall
• Chinese-Americans tend to use banks to save, instead of brokerage firms or
other investments

UCBH: Deposit Analysis United Commercial All Banks*

(As of Dec 31, 2004) Amount Percent Percent

Total deposits 5,222,672 100.0% 100.0%

Transaction accounts 133,083 2.5% 14.6%

Money market accounts 1,288,595 24.7% 34.3%

Savings accounts 946,165 18.1% 15.2%
Total MMA and savings 2,234,760 42.8% 49.5%

Time deposits under $100k 916,077 17.5% 16.8%

Time deposits over $100k 1,610,270 30.8% 17.4%
Total time deposits 2,526,347 48.4% 34.2%

Deposits in foreign offices 328,572 6.3% 1.7%

* All commercial banks with assets between $1B and $10B.

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UCB
Saving account + CD s place UCB above the 95th percentile
among banks.
Interest expense stands at the 71st percentile for large banks
overall.
Chinese-American customers primarily demand savings
accounts and CDs with high rates of interest.
Almost 90 percent loans are real estate loans.
Loan-to-value ratio for real estate loans is 58% for UCB, vs
80 % on average for other banks.
Charges much lower account fees than others.
Fee income account only 0.32 % of assets vs. 1.7% in other
banks.

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El Banco:
Banking for Latinos in Atlanta
• Hispanic retail banking concept based in Atlanta, Georgia
• “Franchised” bank offering designed by individuals from check-cashing
business
• Originally part of smaller local bank in Atlanta; now a subsidiary of Suntrust
• Products include deposit accounts, fee-based check cashing, mortgages, and
international funds transfers (i.e. to Mexico)
• 6 branches in Atlanta
• Rapid growth from first branch in January 2002:
• Jan. 2002 Deal signed by El Banco and Flag Bank
• Jun. 2002 1 Branch
• Dec. 2002 2 Branches, 1st Branch cash flow positive
• Jun. 2003 2nd Branch cash flow positive, NCB buys El Banco
• Dec. 2003 4 Branches, 50 employees, SunTrust buys NCB
• Jun. 2004 6 Branches, 125 employees
• Atlanta is 6.5% Hispanic (268,851 according to 2000 census)

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El Banco: Products Closely Matched to Customers

• Revenue model is based primarily on service fees

• Check cashing alone is 1/3 of revenues
• Fee income is over half of total bank income
• Fee income as a percentage of total revenue for community
banks overall averages 24.8%
• El Banco’s fee income ratio is greater than 99% of banks
• El Banco also conducts mortgage lending for the Latino
community
• Interest rates range from 8.0-9.5%, versus 4.86% on average
for Georgia
• High rates partly explained by fact that many of El Banco
customers are undocumented

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El Banco Branches: Smaller, Informal, Retail

Branch strategy focuses on convenience and informality

• No motor banking (no commercial customers)
• Small branches located in strip centers already frequented by
Latinos
• Branches are informal (i.e. you don’t feel foolish wearing
work clothes)

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El Banco Strategy: Acquire Customers Early
El Banco tries to acquire customers earlier than normal banks
• Customers use retail financial services (i.e. check cashing) provided by non-banks.
• Change point exists as customers grow in affluence (open bank, brokerage
accounts)
• Acquiring customers early and offering many services, El Banco avoids change
points
• Customer lifetime value is high if El Banco meets their needs as they grow in affluence.
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Question: Compare and contrast the strategic service
vision of El Banco and United Commercial Bank

Strategic Service Vision Element El Banco United Commercial Bank

Target Market Segments

Service Concept

Operating Strategy

Service Delivery System

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