ISM 270ISM 270

Service Engineering and Service Engineering and ManagementManagement

Lecture 2Lecture 2

NotesNotes

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Homework 1 due next weekHomework 1 due next week Homework 2 due 2 weeksHomework 2 due 2 weeks Office hours 5pm room 2085Office hours 5pm room 2085 Computer access to SOE account availableComputer access to SOE account available Library challengesLibrary challenges

Homework: Week 1Homework: Week 1

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Data Envelopment Analysis (DEA)Data Envelopment Analysis (DEA)

Method for evaluating efficiency of similar Method for evaluating efficiency of similar venues/productsvenues/products Incorporates inputs and outputs – not just one Incorporates inputs and outputs – not just one

dimensionaldimensional Uses LINEAR PROGRAMMING (LP)Uses LINEAR PROGRAMMING (LP)

KEY IDEA:KEY IDEA: Weight the inputs and outputs to make one unit Weight the inputs and outputs to make one unit as as

efficient as possibleefficient as possible, relative to all others, relative to all others If this is 100% efficient, then the unit is on the frontier If this is 100% efficient, then the unit is on the frontier

of efficiency;of efficiency; If less than 100%, there are other units that could If less than 100%, there are other units that could

utilize the SAME inputs for MORE outputsutilize the SAME inputs for MORE outputs

DEA summary of termsDEA summary of terms

Define variablesDefine variables E_k = efficiency of unit kE_k = efficiency of unit k u_j= coefficient for output j (relative decrease in efficiency per u_j= coefficient for output j (relative decrease in efficiency per

unit reduction of output value)unit reduction of output value) v_i = coefficient for input i (relative increase in efficiency per unit v_i = coefficient for input i (relative increase in efficiency per unit

decrease of input value)decrease of input value) O_jk = observed ouput j units generated by service unit k during O_jk = observed ouput j units generated by service unit k during

one time periodone time period I_ik = no. units input used by service unit k during one periodI_ik = no. units input used by service unit k during one period

Note:Note: k=1..K = service unit counterk=1..K = service unit counter j=1..M = output counterj=1..M = output counter i=1..N = input counteri=1..N = input counter

DEA Objective and constraintsDEA Objective and constraints

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Evaluating unit eTrick = Rescaling to get linear equations

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Example from Text: Burger PalaceExample from Text: Burger Palace

Small, artificial example for illustration!Small, artificial example for illustration! Page 68Page 68 Excel formulationExcel formulation

The Nature of Services

Learning Objectives Classify a service into one of four categories using

the service process matrix. Describe a service using the four dimensions of the

service package. Discuss the managerial implications of the

distinctive characteristics of a service operation. Discuss the insights obtained from a strategic

classification of services. Discuss the role of a service manager from an

open-systems view of service.

An Integrated Approach to Service An Integrated Approach to Service ManagementManagement

The Eight ComponentsThe Eight Components • Product Elements • Product Elements • Place, Cyberspace, and Time • Place, Cyberspace, and Time • Promotion and Education • Promotion and Education • Price and Other User Outlays • Price and Other User Outlays + Process + Process + Productivity and Quality + Productivity and Quality + People + People + Physical Evidence + Physical Evidence

Require the Integration of Marketing, Require the Integration of Marketing, Operations, and Human ResourcesOperations, and Human Resources

Service/Product BundleService/Product Bundle

ElementElement Core Core GoodsGoods

ExampleExample

Core Core ServiceService

ExampleExample

BusinessBusiness Custom clothierCustom clothier Business hotelBusiness hotel

CoreCore Business suitsBusiness suits Room for the Room for the nightnight

PeripheralPeripheral

GoodsGoods

Garment bagGarment bag Bath robeBath robe

PeripheralPeripheral

ServiceService

Deferred Deferred payment planspayment plans

In house In house restaurantrestaurant

VariantVariant Coffee loungeCoffee lounge Airport shuttleAirport shuttle

The Service Process Matrix

Degree Degree of Interaction and Customization of labor Intensity Low High

Service factory: Service shop:

* Airlines * Hospitals

Low * Trucking * Auto repair

* Hotels * Other repair services

* Resorts and recreation

Mass service: Professional service:

* Retailing * Doctors

High * Wholesaling * Lawyers

* Schools * Accountants

* Retail aspects of * Architects

commercial banking

The Service Package Supporting Facility: The physical resources that must be in place before a service

can be sold. Examples are golf course, ski lift, hospital, airplane.

Facilitating Goods: The material consumed by the buyer or items provided by the consumer. Examples are food items, legal documents, golf clubs, medical history.

Information: Operations data or information that is provided by the customer to enable efficient and customized service. Examples are patient medical records, seats available on a flight, customer preferences, location of customer to dispatch a taxi.

Explicit Services: Benefits readily observable by the senses. The essential or intrinsic features. Examples are quality of meal, attitude of the waiter, on-time departure.

Implicit Services: Psychological benefits or extrinsic features which the consumer may sense only vaguely. Examples are privacy of loan office, security of a well lighted parking lot.

Distinctive Characteristics of Services

Customer Participation in the Service Process: attention to facility design but opportunities for co-production

Simultaneity: opportunities for personal selling, interaction creates customer perceptions of quality

Perishability: cannot inventory, opportunity loss of idle capacity, need to match supply with demand

Intangibility: creative advertising, no patent protection, importance of reputation

Heterogeneity: customer participation in delivery process results in variability

Strategic Service Classification (Nature of the Service Act)

Strategic Service Classification (Nature of the Service Act)

Direct Recipient of the ServiceNature of

the Service Act People Things

People’s bodies: Physical possessions: Health care Freight transportation Passenger transportation Repair and maintenance

Tangible actions Beauty salons Veterinary care Exercise clinics Janitorial services Restaurants Laundry and dry cleaning

People’s minds: Intangible assets:

Education Banking

Intangible actions Broadcasting Legal services Information services Accounting Theaters Securities Museums Insurance

Strategic Service Classification (Relationship with Customers)Strategic Service Classification (Relationship with Customers)

Type of Relationship between Service Organization and Its CustomersNature of

Service Delivery “Membership” relationship No formal relationship

Insurance Radio station Telephone subscription Police protectionContinuous delivery Electric Utility Lighthouseof service Banking Public Highway

Long-distance phone calls Restaurant Theater series tickets Pay phoneDiscrete Transit pass Toll highwaytransactions Sam’s Wholesale Club Movie theater Airline frequent flyer Public transportation

Strategic Service Classification (Customization and Judgment)Strategic Service Classification (Customization and Judgment)

Extent to Which Service Characteristics Are CustomizedExtent to Which Personnel Exercise Judgment in Meeting Customer Needs High Low

Surgery Preventive health programs High Taxi services Education (large classes)

Gourmet restaurant Family restaurant

Telephone service Public transportation Hotel services Spectator sports Low Retail banking Movie theater Cafeteria Institutional food service

Strategic Service Classification (Nature of Demand and Supply)Strategic Service Classification (Nature of Demand and Supply)

Extent of Demand Fluctuation over Time

Extent to which Supply

Is Constrained Wide Narrow

Electricity Insurance

Peak demand can Telephone Legal services

usually be met Police emergency Banking

without a major delay Hospital maternity unit Laundry and dry cleaning

Tax preparation Fast food restaurant

Peak demand regularly Passenger transportation Movie theater

exceeds capacity Hotels and motels Gas station

Strategic Service Classification (Method of Service Delivery)

Strategic Service Classification (Method of Service Delivery)

Availability of Service OutletsNature of Interaction between Customer and

Service Organization Single site Multiple site Customer travels to Theater Bus service service organization Barbershop Fast-food chain

Service provider Taxi Mail delivery travels to customer Pest control service AAA emergency repairs

Transaction is at Credit card company Broadcast network arm’s length Local TV station Telephone company

Open Systems View of Services

Service Process Consumer Evaluation

Consumer arrivals Consumer participant departures Criteria

(input) Consumer-Provider ( output) Measurement

interface

Control Monitor

Customer demand Service operations manager Service personnel

Production function:

Perceived needs Alter Monitor and control process Schedule Empowerment

Location demand Marketing function: supply Training

Interact with consumers Attitudes

Control demand

Modify as necessary

Define standard

Service package

Supporting facility

Communicate Facilitating goods Basis of

by advertising Explicit services selection

Implicit services

Topics for Discussion

When does collecting information through service membership become an invasion of privacy?

What are some management problems associated with allowing service employees to exercise judgement in meeting customer needs?

What factors are important for a manager to consider when attempting to enhance a service firm’s image?

Sample QuizSample Quiz

LinkLink

Service Strategy Service Strategy Service Strategy Service Strategy

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

Formulate a strategic service vision. Discuss the competitive environment of services. Describe how a service competes using the three generic

service strategies. Discuss the service purchase decision. Discuss the competitive role of information in services. Explain the role of the virtual value chain in service

innovation. Discuss the limits in the use of information. Categorize a service firm according to its stage of Categorize a service firm according to its stage of

competitiveness.competitiveness. Conduct a data envelopment analysis (DEA).Conduct a data envelopment analysis (DEA).

Strategic Service VisionStrategic Service VisionTarget Market SegmentsTarget Market Segments

What are common characteristics of important market What are common characteristics of important market segments?segments?

What dimensions can be used to segment the market, What dimensions can be used to segment the market, demographic, psychographic?demographic, psychographic?

How important are various segments?How important are various segments? What needs does each have?What needs does each have? How well are these needs being served, in what manner, How well are these needs being served, in what manner,

by whom? by whom?

Strategic Service VisionStrategic Service VisionService ConceptService Concept

What are important elements of the service to be What are important elements of the service to be provided, stated in terms of results produced for provided, stated in terms of results produced for customers?customers?

How are these elements supposed to be perceived by How are these elements supposed to be perceived by the target market segment, by the market in general, by the target market segment, by the market in general, by employees, by others?employees, by others?

How do customers perceive the service concept?How do customers perceive the service concept? What efforts does this suggest in terms of the manner in What efforts does this suggest in terms of the manner in

which the service is designed, delivered, marketed?which the service is designed, delivered, marketed?

Strategic Service VisionStrategic Service VisionOperating StrategyOperating Strategy

What are important elements of the strategy: What are important elements of the strategy: operations, financing, marketing, organization, operations, financing, marketing, organization, human resources, control?human resources, control?

On which will the most effort be concentrated?On which will the most effort be concentrated? Where will investments be made?Where will investments be made? How will quality and cost be controlled: How will quality and cost be controlled:

measures, incentives, rewards?measures, incentives, rewards? What results will be expected versus competition What results will be expected versus competition

in terms of, quality of service, cost profile, in terms of, quality of service, cost profile, productivity, morale/loyalty of servers?productivity, morale/loyalty of servers?

Strategic Service VisionStrategic Service VisionService Delivery SystemService Delivery System

What are important features of the service delivery What are important features of the service delivery system including: role of people, technology, equipment, system including: role of people, technology, equipment, layout, procedures?layout, procedures?

What capacity does it provide, normally, at peak levels?What capacity does it provide, normally, at peak levels? To what extent does it, help insure quality standards, To what extent does it, help insure quality standards,

differentiate the service from competition, provide differentiate the service from competition, provide barriers to entry by competitors?barriers to entry by competitors?

Competitive Environment of ServicesCompetitive Environment of ServicesCompetitive Environment of ServicesCompetitive Environment of Services

Relatively Low Overall Entry BarriersRelatively Low Overall Entry Barriers Economies of Scale LimitedEconomies of Scale Limited High Transportation CostsHigh Transportation Costs Erratic Sales FluctuationsErratic Sales Fluctuations No Power Dealing with Buyers or SuppliersNo Power Dealing with Buyers or Suppliers Product Substitutions for ServiceProduct Substitutions for Service High Customer LoyaltyHigh Customer Loyalty Exit Barriers Exit Barriers

Competitive Service Strategies Competitive Service Strategies (Overall Cost Leadership)(Overall Cost Leadership)

Competitive Service Strategies Competitive Service Strategies (Overall Cost Leadership)(Overall Cost Leadership)

Seeking Out Low-cost CustomersSeeking Out Low-cost Customers Standardizing a Custom Service Standardizing a Custom Service Reducing the Personal Element in Service Reducing the Personal Element in Service

Delivery (promote self-service)Delivery (promote self-service) Reducing Network Costs (hub and spoke)Reducing Network Costs (hub and spoke) Taking Service Operations Off-lineTaking Service Operations Off-line

Competitive Service Strategies Competitive Service Strategies (Differentiation)(Differentiation)

Competitive Service Strategies Competitive Service Strategies (Differentiation)(Differentiation)

Making the Intangible Tangible (memorable)Making the Intangible Tangible (memorable) Customizing the Standard ProductCustomizing the Standard Product Reducing Perceived RiskReducing Perceived Risk Giving Attention to Personnel TrainingGiving Attention to Personnel Training Controlling QualityControlling Quality

Note: Differentiation in service means being unique in brand image, technology use, features, or reputation for customer service.

Competitive Service Strategies Competitive Service Strategies (Focus)(Focus)

Competitive Service Strategies Competitive Service Strategies (Focus)(Focus)

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

Service Offered: (e.g. Shouldice Hospital Service Offered: (e.g. Shouldice Hospital and hernia patients)and hernia patients)

Geographic Region: (e.g. Austin Cable Geographic Region: (e.g. Austin Cable Vision and TV watchers)Vision and TV watchers)

Customer Criteria for SelectingCustomer Criteria for Selecting a Service Provider a Service Provider

Customer Criteria for SelectingCustomer Criteria for Selecting a Service Provider 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)

Service Purchase DecisionService Purchase DecisionService Purchase DecisionService Purchase Decision Service QualifierService Qualifier: : To be taken seriously a certain level

must be attained on the competitive dimension, as defined by other market players. Examples are cleanliness for a fast food restaurant or safe aircraft for an airline.

Service WinnerService Winner: : The competitive dimension used to make the final choice among competitors. Example is price.

Service LoserService Loser: : Failure to deliver at or above the expected level for a competitive dimension. Examples are failure to repair auto (dependability), rude treatment (personalization) or late delivery of package (speed).

Competitive Role of Information Competitive Role of Information in Servicesin Services

Strategic Focus Competitive Use of Information Strategic Focus Competitive Use of Information

On-lineOn-line

(Real time)(Real time)

Off-lineOff-line

(Analysis)(Analysis)

External External

(Customer) (Customer)

Creation of barriers to entry:Creation of barriers to entry:

Reservation system Reservation system

Frequent user clubFrequent user club

Switching costsSwitching costs

Data base asset:Data base asset:

Selling information Selling information

Development of services Development of services

Micro-marketingMicro-marketing

InternalInternal

(Operations)(Operations)

Revenue generation: Revenue generation:

Yield managementYield management

Point of sale Expert systemsPoint of sale Expert systems

Productivity enhancementProductivity enhancement

Inventory status Inventory status

Data envelopmentData envelopment

analysis (DEA) analysis (DEA)

The Virtual Value ChainThe Virtual Value Chain

MarketMarketplaceplace vs Market vs Marketspacespace Creating New Markets Using Information (Gather, Creating New Markets Using Information (Gather,

Organize, Select, Synthesize, and Distribute)Organize, Select, Synthesize, and Distribute) Three Stage EvolutionThree Stage Evolution

• 1st Stage (Visibility): See physical operations more • 1st Stage (Visibility): See physical operations more effectively with information – Ex. USAA “paperless effectively with information – Ex. USAA “paperless operation”operation” • 2 • 2ndnd Stage (Mirroring Capability): Substitute virtual activities Stage (Mirroring Capability): Substitute virtual activities for physical – Ex. USAA “automate underwriting”for physical – Ex. USAA “automate underwriting” • 3 • 3rdrd Stage (New Customer Relationships): Draw on Stage (New Customer Relationships): Draw on information to deliver value to customer in new ways – Ex. information to deliver value to customer in new ways – Ex. USAA “event oriented service”USAA “event oriented service”

Limits in the Use of InformationLimits in the Use of Information Anti-competitive (Barrier to entry)Anti-competitive (Barrier to entry)

Fairness (Yield management)Fairness (Yield management)

Invasion of Privacy (Micro-marketing)Invasion of Privacy (Micro-marketing)

Data Security (Medical records)Data Security (Medical records)

Reliability (Credit report)Reliability (Credit report)

Using Information to Categorize Using Information to Categorize CustomersCustomers

CodingCoding grades customers on how profitable their grades customers on how profitable their business is.business is.

RoutingRouting is used by call centers to place is used by call centers to place customers in different queues based on customers in different queues based on customer code.customer code.

TargetingTargeting allows choice customers to have fees allows choice customers to have fees waived and get other hidden discounts.waived and get other hidden discounts.

SharingSharing data about your transaction history with data about your transaction history with other firms is a source of revenue.other firms is a source of revenue.

Stages in Service Firm CompetitivenessStages in Service Firm CompetitivenessStages in Service Firm CompetitivenessStages in Service Firm Competitiveness 1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service delivery1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service delivery

Customers patronize service Customers neither seek Customers seek out the firm The company’s name is synonymousCustomers patronize service Customers neither seek Customers seek out the firm The company’s name is synonymous firm for reasons other than out nor avoid the firm. on the basis of its sustained with service excellence. Its servicefirm for reasons other than out nor avoid the firm. on the basis of its sustained with service excellence. Its service performance. reputation for meeting doesn’t just satisfy customers; itperformance. reputation for meeting doesn’t just satisfy customers; it customer expectations customer expectations delightsdelights them and thereby expands them and thereby expands customer expectations to levels itscustomer expectations to levels its competitors are unable to fulfill.competitors are unable to fulfill.

Operations is reactive, Operations functions in a Operations continually excels, Operations is a quick learner and fastOperations is reactive, Operations functions in a Operations continually excels, Operations is a quick learner and fast at best. mediocre, uninspired reinforced by personnel innovator; it masters every step of the at best. mediocre, uninspired reinforced by personnel innovator; it masters every step of the fashion. management and systems service delivery process and providesfashion. management and systems service delivery process and provides that support an intense capabilities that are superior tothat support an intense capabilities that are superior to customer focus. competitors.customer focus. competitors. SERVICE QUALITYSERVICE QUALITY Is subsidiary to cost, Meets some customer Exceeds customer Raises customer expectations andIs subsidiary to cost, Meets some customer Exceeds customer Raises customer expectations and highly variable. expectations; consistent expectations; consistent seeks challenge; improveshighly variable. expectations; consistent expectations; consistent seeks challenge; improves on one or two key on multiple dimensions. continuously.on one or two key on multiple dimensions. continuously. dimensions.dimensions.

Stages in Service Firm CompetitivenessStages in Service Firm CompetitivenessStages in Service Firm CompetitivenessStages in Service Firm Competitiveness1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service delivery1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service delivery

BACK OFFICEBACK OFFICECounting room. Contributes to service, plays Is equally valued with front Is proactive, develops its ownCounting room. Contributes to service, plays Is equally valued with front Is proactive, develops its own an important role in the total office; plays integral role. capabilities, and generatesan important role in the total office; plays integral role. capabilities, and generates service, is given attention, opportunities.service, is given attention, opportunities.

but is still a separate role.but is still a separate role.CUSTOMERCUSTOMERUnspecified, to be A market segment whose A collection of individuals A source of stimulation, ideas,Unspecified, to be A market segment whose A collection of individuals A source of stimulation, ideas,satisfied at minimum cost. basic needs are understood. whose variation in needs is and opportunity.satisfied at minimum cost. basic needs are understood. whose variation in needs is and opportunity. understood.understood.INTRODUCTION OF NEW TECHNOLOGYINTRODUCTION OF NEW TECHNOLOGYWhen necessary for When justified by cost When promises to enhance Source of first-mover advantages,When necessary for When justified by cost When promises to enhance Source of first-mover advantages,survival, under duress. savings. service. creating ability to do things yoursurvival, under duress. savings. service. creating ability to do things your

competitors can’t do.competitors can’t do.WORKFORCEWORKFORCENegative constraint. Efficient resource; disciplined; Permitted to select among Innovative; creates procedures.Negative constraint. Efficient resource; disciplined; Permitted to select among Innovative; creates procedures. follows procedures. alternative procedures.follows procedures. alternative procedures.FRONT-LINE MANAGEMENTFRONT-LINE MANAGEMENTControls workers. Controls the process. Listens to customers; coaches Is listened to by top managementControls workers. Controls the process. Listens to customers; coaches Is listened to by top management

and facilitates workers. as a source of new ideas. Mentors and facilitates workers. as a source of new ideas. Mentors

works to enhance their career. works to enhance their career.

Mini case: America WestMini case: America West

ReadRead

America West Airlines StrategyAmerica West Airlines StrategyAmerica West Airlines StrategyAmerica West Airlines Strategy

TargetTarget Strategic AdvantageStrategic Advantage Low cost UniquenessLow cost Uniqueness Entire Entire Market Market

Market Market Overall cost DifferentiationOverall cost Differentiation Segment Segment leadershipleadership

FocusFocus

America West Winning CustomersAmerica West Winning CustomersAmerica West Winning CustomersAmerica West Winning Customers

Service Qualifiers:Service Qualifiers:

Service Winners:Service Winners:

Service Losers:Service Losers:

America West Strategic Service VisionAmerica West Strategic Service Vision

Target market segmentsTarget market segments

Service conceptService concept

Operating strategyOperating strategy

Service delivery systemService delivery system

America West Airlines PositioningAmerica West Airlines PositioningAmerica West Airlines PositioningAmerica West Airlines Positioning

CABIN SERVICECABIN SERVICE

Full ServiceFull Service

PREFLIGHT SERVICEPREFLIGHT SERVICE Inconvenient ConvenientInconvenient Convenient

No AmenitiesNo Amenities

Homework 2Homework 2

Paul MaglioPaul Maglio

Next week:Next week:

Alan Karp, HP LabsAlan Karp, HP Labs Technology in ServicesTechnology in Services Project 1 givenProject 1 given Homework 1 dueHomework 1 due