ISM 270

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ISM 270. Service Engineering and Management Lecture 2. Notes. Video of class available from website Username: Password: Homework 1 due next week Homework 2 due 2 weeks Office hours 5pm room 2085 Computer access to SOE account available Library challenges. Homework: Week 1. Link.

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### ISM 270

Service Engineering and Management

Lecture 2

Notes
• Video of class available from website
• Homework 1 due next week
• Homework 2 due 2 weeks
• Office hours 5pm room 2085
• Library challenges
Data Envelopment Analysis (DEA)
• Method for evaluating efficiency of similar venues/products
• Incorporates inputs and outputs – not just one dimensional
• Uses LINEAR PROGRAMMING (LP)
• KEY IDEA:
• Weight the inputs and outputs to make one unit as efficient as possible, relative to all others
• If this is 100% efficient, then the unit is on the frontier of efficiency;
• If less than 100%, there are other units that could utilize the SAME inputs for MORE outputs
DEA summary of terms
• Define variables
• E_k = efficiency of unit k
• u_j= coefficient for output j (relative decrease in efficiency per unit reduction of output value)
• v_i = coefficient for input i (relative increase in efficiency per unit decrease of input value)
• O_jk = observed ouput j units generated by service unit k during one time period
• I_ik = no. units input used by service unit k during one period
• Note:
• k=1..K = service unit counter
• j=1..M = output counter
• i=1..N = input counter
DEA Objective and constraints

Evaluating unit e

Trick = Rescaling to get linear equations

Example from Text: Burger Palace
• Small, artificial example for illustration!
• Page 68
• Excel 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 Management

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

Require the Integration of Marketing, Operations, and Human Resources

The Service Process Matrix

Degree Degree of Interaction and Customization

of labor IntensityLow 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)

Direct Recipient of the Service

Nature of

the Service ActPeople 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

Information services Accounting

Theaters Securities

Museums Insurance

Type of Relationship between Service Organization and Its Customers

Nature of

Service Delivery“Membership” relationship No formal relationship

Telephone subscription Police protection

Continuous delivery Electric Utility Lighthouse

of service Banking Public Highway

Long-distance phone calls Restaurant

Theater series tickets Pay phone

Discrete Transit pass Toll highway

transactions Sam’s Wholesale Club Movie theater

Airline frequent flyer Public transportation

Extent to Which Service Characteristics Are Customized

Extent to Which Personnel

Exercise Judgment in Meeting

Customer NeedsHigh 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

Extent of Demand Fluctuation over Time

Extent to which Supply

Is ConstrainedWide 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

Availability of Service Outlets

Nature of Interaction

between Customer and

Service OrganizationSingle 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 demandService operations managerService 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

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?

### Service Strategy

Learning 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 competitiveness.
• Conduct a data envelopment analysis (DEA).
Strategic Service VisionTarget Market Segments
• What are common characteristics of important market segments?
• What dimensions can be used to segment the market, demographic, psychographic?
• How important are various segments?
• What needs does each have?
• How well are these needs being served, in what manner, by whom?
Strategic Service VisionService Concept
• What are important elements of the service to be provided, stated in terms of results produced for customers?
• How are these elements supposed to be perceived by the target market segment, by the market in general, by employees, by others?
• How do customers perceive the service concept?
• What efforts does this suggest in terms of the manner in which the service is designed, delivered, marketed?
Strategic Service VisionOperating Strategy
• What are important elements of the strategy: operations, financing, marketing, organization, human resources, control?
• On which will the most effort be concentrated?
• Where will investments be made?
• How will quality and cost be controlled: measures, incentives, rewards?
• What results will be expected versus competition in terms of, quality of service, cost profile, productivity, morale/loyalty of servers?
Strategic Service VisionService Delivery System
• What are important features of the service delivery system including: role of people, technology, equipment, layout, procedures?
• What capacity does it provide, normally, at peak levels?
• To what extent does it, help insure quality standards, differentiate the service from competition, provide barriers to entry by competitors?
Competitive Environment of Services
• Relatively Low Overall Entry Barriers
• Economies of Scale Limited
• High Transportation Costs
• Erratic Sales Fluctuations
• No Power Dealing with Buyers or Suppliers
• Product Substitutions for Service
• High Customer Loyalty
• Exit Barriers
Competitive Service Strategies (Overall Cost Leadership)
• Seeking Out Low-cost Customers
• Standardizing a Custom Service
• Reducing the Personal Element in Service Delivery (promote self-service)
• Reducing Network Costs (hub and spoke)
• Taking Service Operations Off-line
Competitive Service Strategies (Differentiation)
• Making the Intangible Tangible (memorable)
• Customizing the Standard Product
• Reducing Perceived Risk
• Giving Attention to Personnel Training
• Controlling QualityNote: Differentiation in service means being unique in brand image, technology use, features, or reputation for customer service.
Competitive Service Strategies (Focus)
• Buyer Group: (e.g. USAA insurance and military officers)
• Service Offered: (e.g. Shouldice Hospital and hernia patients)
• Geographic Region: (e.g. Austin Cable Vision and TV watchers)
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)
Service Purchase Decision
• Service 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 Winner: The competitive dimension used to make the final choice among competitors. Example is price.
• Service 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 in Services

Strategic Focus Competitive Use of Information

The Virtual Value Chain
• Marketplace vs Marketspace
• Creating New Markets Using Information (Gather, Organize, Select, Synthesize, and Distribute)
• Three Stage Evolution• 1st Stage (Visibility): See physical operations more effectively with information – Ex. USAA “paperless operation” • 2nd Stage (Mirroring Capability): Substitute virtual activities for physical – Ex. USAA “automate underwriting” • 3rd Stage (New Customer Relationships): Draw on information to deliver value to customer in new ways – Ex. USAA “event oriented service”
Limits in the Use of Information
• Anti-competitive (Barrier to entry)
• Fairness (Yield management)
• Invasion of Privacy (Micro-marketing)
• Data Security (Medical records)
• Reliability (Credit report)
Using Information to Categorize Customers
• Routing is used by call centers to place customers in different queues based on customer code.
• Targeting allows choice customers to have fees waived and get other hidden discounts.
• Sharing data about your transaction history with other firms is a source of revenue.
Stages in Service Firm Competitiveness

1. 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 synonymous

firm 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; it

customer expectations delights them and thereby expands

customer expectations to levels its

competitors are unable to fulfill.

Operations 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

fashion. management and systems service delivery process and provides

that support an intense capabilities that are superior to

customer focus. competitors.

SERVICE QUALITY

Is subsidiary to cost, Meets some customer Exceeds customer Raises customer expectations and

highly variable. expectations; consistent expectations; consistent seeks challenge; improves

on one or two key on multiple dimensions. continuously.

dimensions.

Stages in Service Firm Competitiveness

1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service delivery

BACK OFFICE

Counting 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 generates

service, is given attention, opportunities.

but is still a separate role.

CUSTOMER

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.

understood.

INTRODUCTION OF NEW TECHNOLOGY

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 your

competitors can’t do.

WORKFORCE

Negative constraint. Efficient resource; disciplined; Permitted to select among Innovative; creates procedures.

follows procedures. alternative procedures.

FRONT-LINE MANAGEMENT

Controls workers. Controls the process. Listens to customers; coaches Is listened to by top management

and facilitates workers. as a source of new ideas. Mentors works to enhance their career.

America West Airlines Strategy

Low cost Uniqueness

Entire

Market

Market Overall cost Differentiation

Focus

America West Winning Customers
• Service Qualifiers:
• Service Winners:
• Service Losers:
America West Strategic Service Vision
• Target market segments
• Service concept
• Operating strategy
• Service delivery system
America West Airlines Positioning

CABIN SERVICE

Full Service

PREFLIGHT SERVICE

Inconvenient Convenient

No Amenities

Next week:
• Alan Karp, HP Labs
• Technology in Services
• Project 1 given
• Homework 1 due