Service Strategy

Strategic Service Vision

Target Market Segments
Southwest Airlines:

Short flights (Less than an hour) Interstate business travelers w/ carryon luggage Driving by auto and/or frustrated by poor service of the major airlines serving Texas

Strategic Service Vision

Target 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 Vision

Service Concepts
Southwest Airlines:
On-time

performance & frequent departures are Critical are unnecessary

Meals

Strategic Service Vision

Service Concepts
What are important elements of the service to be

provided, stated in terms of results produced for customers? by the target market segment, by the market in general, by employees, by others?

How are these elements supposed to be perceived

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 Vision

Operating Strategy
Southwest Airlines:

Airport gate turnaround fast (keep aircraft in the air) Standard Aircraft (737) Customers enjoy the relaxed flying experience Employees see Southwest as an enjoyable place to work

Strategic Service Vision

Operating 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 Vision

Service Delivery System
Southwest Airlines:
Cabin

Crew to Create a Fun atmosphere No Assigned Seating

Quality

Measures On-time Performance, Lost Luggage

Strategic Service Vision

Service 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?

Service Design Elements

Structural: Delivery system (front & back office) Facility design (aesthetics, layout) Location (competition, site characteristics) Capacity planning (number of servers) Managerial Service encounter (culture, empowerment) Quality (measurement, guarantee) Managing capacity and demand (queues) Information (data collection, resource)

Porters Five Forces Model

Potential New Entrants - Barriers to entry - Brand equity - Capital requirements

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 - Buyers price sensitivity - Customer volume - Information asymmetry

Threat of Substitutes - Buyer propensity to substitute - Buyer switching costs - Product substitution for service
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SWOT Analysis
Strengths

What are your companys advantages? What do you do better than anyone else? What unique resources do you have? What do people in your market see as your strengths? Weaknesses What could you improve? What should you avoid? What factors lose sales? What are people in your market likely to see as a weakness? Opportunities What are your competitors vulnerabilities? What are the current market trends? Does technology offer new service options? Are there niches in the market your organization can fill? Threats What obstacles do you face? What are your competitors doing? Is changing technology threatening your position? Do you have cash-flow problems?

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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 Government Regulations

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 Quality
Note: 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)

Davidow & Uttals

Three-Step Approach to FOCUS
1. Segmenting the Market to Design Core

Services.
2. Classifying Customers According to the

Value They Place on Service.

3. Setting Expectations Slightly Below

Perceived Performance.

Winning Customers in the Marketplace

Availability Convenience Dependability Personalization Price Quality Reputation Safety Speed

(24 hour ATM) (Site location) (On-time performance) (Know customers name) (Quality surrogate) (Perceptions important) (Word-of-mouth) (Customer well-being) (Avoid excessive waiting)

Service Purchase Decision

Service Winner: The competitive dimension used to make the final choice among competitors. Example is Price, Convenience, Reputation 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 Purchase Decision (cont.)

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 On-line Off-line (Real time) (Analysis) Creation of barriers to entry: Data base asset: External Reservation system Selling information (Customer) Frequent user club Development of services Switching costs Micro-marketing Revenue generation: Productivity enhancement: Internal Yield management Inventory status (Operations) Point of sale Data envelopment Expert systems analysis (DEA)

Exploiting the Virtual Value Chain

Production Distribution Retailing Customer Physical 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

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The Virtual Value Chain

Marketplace vs Marketspace Creating New Markets Using Information (Gather, Organize, Select, Synthesize, and Distribute) Four Stage Evolution

1st Stage (New Processes):

See physical operations more effectively with information (USAA paperless operation)

2nd Stage (New Knowledge):

Substitute virtual activities for physical (USAA automate underwriting)

3rd Stage (New Products):

Use 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)
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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

Coding grades customers on how profitable their

business is.
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
Customers patronize service firm for reasons other than performance.

2. Journeyman

3. Distinctive competence

4. World-class service delivery

The companys name is synonymous with service excellence. Its service doesnt just satisfy customers; it delights them and thereby expands customer expectations to levels its competitors are unable to fulfill. Operations is a quick learner and fast innovator; it masters every step of the service delivery process and provides capabilities that are superior to competitors

Customers neither seek out Customers seek out the nor avoid the firm. firm on the basis of its sustained reputation for meeting customer expectations.

Operations is reactive, at best.

Operations functions in a mediocre, uninspired fashion.

Operations continually excels, reinforced by personnel management and systems that support an intense customer focus.

SERVICE QUALITY is subsidiary to cost, highly variable.

Meets some customer Exceeds customer Raises customer expectations; consistent on expectations; consistent on expectations and seeks one or two key dimensions. multiple dimensions. challenge; improves continuously.

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Stages in Service Firm Competitiveness

1. Available for service
BACK OFFICE Counting room. Contributes to service, plays an Is equally valued with front important role in the total office; plays integral role. service, is given attention, but is still a separate role. Is proactive, develops its own capabilities, and generates opportunities.

2. Journeyman

3. Distinctive competence

4. World-class service delivery

CUSTOMER Unspecified, to be satisfied at minimum cost. A market segment whose basic A collection of individuals needs are understood. whose variation in needs is understood. A source of stimulation, ideas, and opportunity.

INTRODUCTION OF NEW TECHNOLOGY When necessary for survival, under duress. When justified by cost savings. When promises to enhance service. Source of first-mover advantages, creating ability to do things your competitors cant do.

WORKFORCE Negative constraint. Efficient resource; disciplined; Permitted to select among follows procedure. alternative procedures. Innovative; creates procedures.

FRONT-LINE MANAGEMENT Controls workers. Controls the process. Listens to customers; coaches Is listened to by top 3-27 and facilitates workers. management as a source of

UNITED COMMERCIAL BANK and EL BANCO

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 $484.0 million in capital

46 branches in California (San FranciscoLA, and Sacramento) 2 branches in New York Representative offices in Taiwan and China, and a branch in Hong Kong Founded in 1974 to serve the Chinese-American community in San Francisco Organized as a thrift Continued focus on time deposits as primary deposit product All of us at UCB share your values of dedication to hard work, savings,

and education. We are committed to providing highly personalized service, and a wide range of consumer and commercial banking products and services to help you, your family, and your business achieve your American Dream.

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Cultural Focus on Chinese-American Community

Cultural focus on Chinese-American community Promotions involve tea sets and involvement with local Pacific Heritage Museum Most employees speak Cantonese as first language

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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

UCBs 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 (As of Dec 31, 2004) Total deposits Transaction accounts Money market accounts Savings accounts Total MMA and savings Time deposits under $100k Time deposits over $100k Total time deposits Deposits in foreign offices United Commercial Amount Percent 5,222,672 133,083 1,288,595 946,165 2,234,760 916,077 1,610,270 2,526,347 328,572 100.0% 2.5% 24.7% 18.1% 42.8% 17.5% 30.8% 48.4% 6.3% All Banks* Percent 100.0% 14.6% 34.3% 15.2% 49.5% 16.8% 17.4% 34.2% 1.7%
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* All commercial banks with assets between $1B and $10B.

Product Focus: Trade Finance

UCB offers sophisticated trade finance account management tools

Many United Commercial customers operate import-export businesses related to China UCBs trade finance offering facilitates letters of credit and management of trading operations

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Asian-American Banks: Superior Valuation

Publicly-traded banks focused on the Asian-American communities enjoy premium stock market valuations

Lending to the Chinese and Korean communities has resulted in lower loan losses and fewer charge-offs Asian-American banks are far more efficient and more profitable than community banks as a whole

C o m m e r c ia l B a n k s F o c u s e d o n A s ia n -A m e ric a n s
A p r il 3 0 , 2 0 0 5 Com pany N am e E th n ic ity UCBH C h in e s e C a th a y G e n e ra l B a n c o rpC h in e s e E a s t W e s t B a n c o rp C h in e s e H an m i F in a n c ia l C o rp K o re a n N ara B a n c o rp K o re a n W ils h ire B a n c o rp K o re a n M a rk e t Cap 1 ,4 2 4 .6 1 ,5 7 2 .1 1 ,6 8 3 .8 7 1 2 .8 3 1 1 .3 3 8 0 .8 N C O 's / A v g . lo a n s 0 .0 1 % 0 .2 4 % 0 .0 6 % 0 .1 1 % 0 .1 6 % -0 .0 2 % 0 .0 9 % 0 .1 4 % P r ic e / E ff ic ie n c y TBV r a tio 4 4 8 .0 % 4 2 .9 % 3 5 8 .0 % 3 2 .9 % 3 4 9 .0 % 3 9 .7 % 3 9 8 .0 % 4 7 .8 % 3 0 6 .0 % 5 7 .4 % 4 0 5 .0 % 4 2 .2 % 3 7 7 .3 3 % 2 5 2 .0 0 % 4 3 .8 1 % 5 8 .5 8 %
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T ic k e r UCBH CATY EW BC H AFC NARA W IB C

A s s e ts 6 ,4 8 8 ,7 7 2 6 ,1 6 5 ,8 2 9 6 ,3 7 1 ,0 2 8 3 ,1 0 4 ,1 8 8 1 ,5 0 6 ,5 2 7 1 ,3 7 7 ,2 9 7

ROE 1 7 .8 % 1 3 .9 % 1 8 .1 % 1 1 .9 % 2 0 .4 % 2 6 .3 % 1 8 .0 5 % 1 3 .1 5 %

AVERAG ES C o m m u n ity b a n k s

El Banco: Banking 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 Bancos 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 dont feel foolish wearing work clothes)

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El Banco: Marketing Mimicry

El Banco has sought to associate itself with Western Union
Western Union is one of the most recognized names in financial services for Latinos Many Hispanics have successfully sent money to relatives with Western Union

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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
ves t me n
ce

Customer lifetime value is high if El Banco meets their needs as they grow in affluence In
Ho me F
Fin an
In s

ts

Depth of Relationship

Traditional US Banking Category Entry Point

e Ch ck ing

Ve h
Pe rs o na l

ura n

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Lo

ina

nc ing

cin g

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ccount Savings A

d ar it C

co Ac

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bit De

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M AT

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s ran yT

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Customer Lifetime Value

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ng

QUESTIONS
1. Compare and contrast the strategic service

vision of El Banco and United Commercial Bank 2. Identify the service winners, qualifiers, and service losers for El Banco and United Commercial Bank 3. What are the differentiating features of banks that target ethnic communities

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United Commercial Bank and El Banco

Strategic Service Vision Element Service Delivery System El Banco United Commercial Bank

Operating Strategy

Service Concept

Target Market Segments

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United Commercial Bank and El Banco

El Banco United Commercial Bank

Qualifier Service Winner Service Loser

What are the differentiating features of banks that target ethnic communities?
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Summary
United Commercial

Highly profitable and growing bank for entrepreneurial Chinese-American community Asian-American banks show the opportunity for other ethnic banks El Banco Fast growing retail bank designed specifically for Latino community Orientation towards customers on the border between banking and non-bank financial services Ethnic banking Well-articulated cultural focus on target communities (language, look-and-feel) Products that match unique customer needs (trade finance, check cashing) Favorable financial metrics (profitability, growth, asset quality) If the community has a distinct identity and distinct product needs, then banks have an opportunity to capitalize on those distinctions

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Alamo Drafthouse Positioning

FOOD QUALITY
Good

MOVIE SELECTION
Few Many

Poor

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Alamo Drafthouse Strategic Service Vision

Target market segments Service concept Operating strategy Service delivery system

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Alamo Drafthouse Winning Customers

Qualifiers Service winners Service losers

Make recommendations for Tim and Carrie that would increase profitability.

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Discussion Topics
1. 2. 3.

4. 5.

Give examples of service firms that use both the strategy of focus and differentiation and the strategy of focus and overall cost leadership. What ethical issues are associated with micromarketing? For each of the three generic strategies (i.e., cost leadership, differentiation, and focus) which of the four competitive uses of information is most powerful? Give an example of a firm that begin as world-class and has remained in that category. Could firms in the world-class service delivery stage of competitiveness be described as learning organizations?
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Interactive Class Exercise

The class divides and debates the proposition

Frequent flyer award programs are or are not anticompetitive.

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United Commercial Bank & El Banco

Compare and contrast the strategic vision
Service Delivery System Operating Strategy Service Concept Target Market Segments

El Banco

Spanish spoken Franchise Fee based Latinos Hispanic Low cost informal services physical setting store fronts Attract first time bank customers Location in Loans to Chinese-American businesses communities High interest Branches in CDs China, Taiwan, Low fees Hong Kong ChineseAmericans

United Chinese spoken Commercial Conservative Bank Import-export services

United Commercial Bank & El Banco

Identify the winners, qualifiers, and service losers
Service Winners El Banco Qualifiers Service Losers

Check cashing Spanish Money spoken transfers Informal location

Affluent customers seek lower cost services

United Commercial Bank

Low fees Chinese Lack of Import-export spoken sophisticated services Soundness andservices Safety

The differentiating features of banks that target ethnic communities?

Products that match unique customer needs

(trade finance, check cashing)

Well articulated cultural focus on target

community (language, physical setting)

Convenient location accessible to community

(ethnic population centers, places frequently visited by community members)