Business: Netflix streaming service only.
Service Strategies
1. What are the major competitive factors relevant to your service business? The list of factors on the “service strategy” lecture notes may give your some starting points.
2. Given your evaluation of competitive factors, formulate a set of service strategies? Remember, you do not have to do everything listed on the “service strategy” notes and you can add anything you like to the set of strategies.
3. Do your service strategies reflect your position(s) on the service classification matrix? Will they give you a competitive advantage against others? How?
Service Operating System
1. Describe your service operating system.
2. Which approach (production line, co-producer, personal attention, or any combination of them) do you use in the design of your operating system?
3. Evaluate the degree of contact, efficiency, and additional sales opportunity involved in your operating system. Describe the tradeoff among these attributes.
4. How does your service operating system reflect your service strategies designated in the previous section?
Service Strategy and Competitiveness
Competitive Factors in Service Business
In the previous lecture, we discussed the service classification scheme (i.e., the service process/positioning matrix) and how to apply it efficiently (in terms of cost and operation) and effectively (toward our customer base and corporate expansion or downsizing). We also examined various factors associated with the degree of labor-capital intensity and level of interaction. This should help us to allocate the financial resources in order to achieve our expected goals for service quality.
In this lecture, we use the concepts and implementation ideas learned in previous classes to develop or enhance our service business strategies. Remember, our basic objective is to gain competitive advantage over our competitors. First of all, let us examine the factors a service business may face in a competitive environment. Please keep in mind that some of these factors may or may not be applicable to a certain business. You have to use your own judgment to determine the relevancy.
Demand uncertainty
Service operations usually suffer a higher degree of uncertainty but some businesses may see a more (or less) prominent effect than the others. Given this inevitable issue, the idea is how to hedge against a highly uncertain or unexpected demand.
Erratic sales fluctuation
Even demand is roughly predictable to a certain extent, the sales may still experience wide fluctuation, not to mention that demand may not completely translate into sales (revenue). Again, this stems from the basic characteristics of “service” in that customers are co-producer and part of the service operating system. Erratic fluctuation is more difficult to manage than uncertain demand because a matching of supply level with demand is hard to achieve.
Low entry barrier
Some generic services can be easily replaced by rivals’ while specialized or customized services cannot. It has a connection to the relative locations of the company and its rivals on the service process matrix. Application of proper service strategies can alleviate this issue. This is basically “weeding” tactic.
Potentially high exit barrier
The nature of some services lead to higher exit barrier. However, it can be used as a strategic advantage against potential rivals if properly applied. This is essentially scare tactic.
Service substitution
Service substitution means how easily the service(s) can be replaced by others. For services which experience high degree of substitution, being able to meet demand is very crucial to the business. Creating customization or specialization is another way to reduce the detrimental impact. Again, it is related to the relative positions on the service process matrix.
Customer loyalty
Customer loyalty is more of the counter measure to alleviate demand uncertainty, erratic sales fluctuation, and the negative impact of easy service substitution.
Minimal economies of scale
Certain service operations are not efficient or cost effective unless they attain a certain minimum level of economy of scale. Usually, they belong to service factory and service shop on the service process matrix. What are the implications? From an accounting perspective, it means a high fixed to variable ratio and a lower contribution margin. Be aware that a contribution margin is not the same as a profit margin.
Basic Tools for Strategic Competition
Having realized what factors are imperative to the competition with our service business, we can proceed to examine the “basic tools” for gaining advantage or maintain an edge in the strategic competition. Generally speaking, we can classify our tools as either structural elements or managerial elements. Structural elements deal with the many operational issues of our business and are usually more difficult to alter in the short run. Managerial elements are associated with human and personnel issues. These elements, because of the human interaction, involve a higher degree of irregularity and uncertainty.
Structural Elements (less flexible and cannot be changed frequently):
Location
Convenience and cost are two important factors. Another consideration is whether the service business is adopting a centralized or decentralized supporting / distribution network.
Facility Design
Customer friendly, supplier friendly, or both. It is highly related to the desired service strategies and the design of a proper service operating system.
Delivery/Service Operating System
The design of operating system has to be consistent with and reflect the chosen service strategies. This, in turn, depends on the relative locations on the service process matrix.
Capacity Planning
It is a matter of matching supply and demand. However, there are profound consequences related to service strategies and operating system.
Managerial Elements (more flexible and can be adjusted without high cost):
Service Encounter
Selection and training of employees, responsibilities, corporate culture, motivation, interaction and communication with customers, allowing customers to be part of operating system (or take charge.)
Quality
Methods of measurement, criteria, manipulation of customer expectation, change of consumer perception, service package, warranty and guarantee.
Managing capacity (supply) and demand
Strategies associated with altering demand and controlling supply, waiting line management, inventory management, forecasting system, etc.
Information
Competitive resources, data (both our company and our rivals), efficient database management, supply chain networks, etc.
Competitive Service Strategies
There can be an endless stream of service strategies that we can formulate in the business environment. However, these strategies can be related to one or more of the three general areas a company tries to again advantage – cost, service/product differentiation, and focus (or to create a competitive edge.)
Cost
Cost strategies focus on relatively low pricing and thus require lower operating costs to attract and retain customers. In general, we need efficient facilities and operating systems, tight cost control, and innovative management techniques and technologies. Supply chain and logistics management practices are usually involved to help bring down the total costs shared by the strategic alliance of companies.
Generalization of this type of strategies
Standardizing customer service
Reducing personal element in service delivery
Seeking out low-cost customers
Reducing network costs
Taking some services offline and adopt service factory approach
Differentiation
Differentiation strategies are based on the idea of creating a service that is unique to our business. In other words, we create a monopolistic competition and our business image is always retained in customers and potential customers’ minds.
Generalization of this type of strategies
Making the intangible service visible to customers
Customizing the standard product or service
Emphasizing the special or unique features of the service
Making explicit the tradeoff between premium price and the differentiated service
Reducing risk and variation associated with the offering of differentiated service
Investing in better personnel training and employee management so employees will better understand the differentiation and perform better services
Brand image and name is a selling point
Focus
Focus strategies are built around the concept of serving a particular target market very well by addressing the customers’ specific needs. Under certain circumstances, it can reduce uncertain and increase loyalty.
Generalization of this type of strategies
Identifying and sharpening the focus of the service offered What services to be kept and what services to be dropped?
Evaluating if the focused market size is large enough to support profitability
May need to use heavy marketing to introduce the focused service to public at the beginning
Considering fixed and variable costs
Evaluating the tradeoff between premium price and quantity loss due to focusing
Brand name and reputation is a selling point
Considering the option of adding new line of services in future
How do these features related to the nature and classification of our planned services?