Services Marketing Christopher Lovelock ppts combined

Chapter 1

Introduction to Services Marketing

Slide ©2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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How Important is the Service Sector in Our Economy?

In most countries, services add more economic value than agriculture, raw materials and manufacturing combined

In developed economies, employment is dominated by service jobs and most new job growth comes from services

Jobs range from high-paid professionals and technicians to minimum-wage positions

Service organizations can be any size—from huge global corporations to local small businesses

Most activities by government agencies and nonprofit organizations involve services



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Services dominate the United States Economy: GDP by Industry, 2001 (Fig. 1.1)

Agriculture, Forestry, Mining, Construction 8%

Finance, Insurance, Real Estate 20%

Manufacturing 14%

Government (mostly services) 13%

Wholesale and Retail Trade 16%

Other Services 11% SERVICES

Business Health Services 6% 5%

Transport, Utilities, Communications 8%

Source: Bureau of Economic Analysis, November 2002 Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Changing Structure of Employment as Economic Development Evolves (Fig. 1.2)

Agriculture Services

Industry

Time, per Capita Income Slide ©2004 by Christopher Lovelock and Jochen Wirtz


Source: IMF, 1997

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Some Service Industries Profiled by NAICS but Not Identified by SIC Codes Casino Hotels

HMO Medical Centers

Continuing Care Retirement Communities

Industrial Design Services

Diagnostic Imaging Centers

Investment Banking and Securities Dealing

Diet and Weight Reducing Centers

Management Consulting Services

Environmental Consulting

Satellite Telecommunications

Gold Courses and Country Clubs

Telemarketing Bureaus

Hazardous Waste Collection Slide ©2004 by Christopher Lovelock and Jochen Wirtz

Temporary Help Services


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Internal Services

Service elements within an organization that facilitate creation of--or add value to--its final output

Includes: accounting and payroll administration recruitment and training legal services transportation catering and food services cleaning and landscaping

Increasingly, these services are being outsourced Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Major Trends in Service Sector (Fig. 1.3)

Government Policies (e.g., regulations, trade agreements) Social Changes (e.g., affluence, lack of time, desire for experiences) Business Trends

Manufacturers offer service Growth of chains and franchising Pressures to improve productivity and quality More strategic alliances Marketing emphasis by nonprofits Innovative hiring practices

Advances in IT (e.g., speed, digitization, wireless, Internet) Internationalization (travel, transnational companies)



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Some Impacts of Technological Change

Radically alter ways in which service firms do business: with customers (new services, more convenience) behind the scenes (reengineering, new value chains)

Create relational databases about customer needs and behavior, mine databanks for insights

Leverage employee capabilities and enhance mobility Centralize customer service—faster and more responsive Develop national/global delivery systems Create new, Internet-based business models Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Marketing Relevant Differences Between Goods and Services



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Defining the Essence of a Service

An act or performance offered by one party to another An economic activity that does not result in ownership A process that creates benefits by facilitating a desired change in:

customers themselves physical possessions intangible assets



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Distinguishing Characteristics of Services (Table 1.1)

Customers do not obtain ownership of services Service products are ephemeral and cannot be inventoried Intangible elements dominate value creation Greater involvement of customers in production process Other people may form part of product experience Greater variability in operational inputs and outputs Many services are difficult for customers to evaluate Time factor is more important--speed may be key Delivery systems include electronic and physical channels Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Marketing Implications - 1

No ownership Customers obtain temporary rentals, hiring of personnel, or access

to facilities and systems Pricing often based on time Customer choice criteria may differ for renting vs. purchase--may include convenience, quality of personnel Can’t own people (no slavery!) but can hire expertise and labor

Services cannot be inventoried after production Service performances are ephemeral—transitory, perishable

Exception: some information-based output can be recorded in electronic/printed form and re-used many times Balancing demand and supply may be vital marketing strategy Key to profits: target right segments at right times at right price Need to determine whether benefits are perishable or durable Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Customers may be involved in production process Customer involvement includes self-service and cooperation with

service personnel Think of customers in these settings as “partial employees” Customer behavior and competence can help or hinder productivity, so marketers need to educate/train customers Changing the delivery process may affect role played by customers Design service facilities, equipment, and systems with customers in mind: user-friendly, convenient locations/schedules

Intangible elements dominate value creation Understand value added by labor and expertise of personnel Effective HR management is critical to achieve service quality Make highly intangible services more “concrete” by creating and

communicating physical images or metaphors and tangible clues Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Value Added by Tangible vs Intangible Elements in Goods and Services (Fig. 1.4) Hi Salt Soft drinks CD Player Golf clubs New car Tailored clothing Furniture rental

Lo

Fast food restaurant Plumbing repair Office cleaning Health club Airline flight Retail banking Insurance Weather forecast Intangible Elements



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Other people are often part of the service product Achieve competitive edge through perceived quality of employees Ensure job specs and standards for frontline service personnel reflect

both marketing and operational criteria Recognize that appearance and behavior of other customers can influence service experience positively or negatively Avoid inappropriate mix of customer segments at same time Manage customer behavior (the customer is not always right!)

Greater variability in operational inputs and outputs Must work hard to control quality and achieve consistency Seek to improve productivity through standardization, and by training

both employees and customers Need to have effective service recovery policies in place because it is more difficult to shield customers from service failures Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Often difficult for customers to evaluate services Educate customers to help them make good choices, avoid risk Tell customers what to expect, what to look for Create trusted brand with reputation for considerate, ethical behavior Encourage positive word-of-mouth from satisfied customers

Time factor assumes great importance Offer convenience of extended service hours up to 24/7 Understand customers’ time constraints and priorities Minimize waiting time Look for ways to compete on speed

Distribution channels take different forms Tangible activities must be delivered through physical channels Use electronic channels to deliver intangible, information-based

elements instantly and expand geographic reach



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Important Differences Exist among Services



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Four Categories of Services Employing Different Underlying Processes (Fig. 1.5)

What is the Nature of the Service Act? TANGIBLE ACTS

INTANGIBLE ACTS

Who or What is the Direct Recipient of the Service? DIRECTED AT PEOPLE

DIRECTED AT POSSESSIONS

People Processing

Possession Processing

e.g., airlines, hospitals, haircutting, restaurants hotels, fitness centers

e.g., freight, repair, cleaning, landscaping, retailing, recycling

Mental Stimulus Processing e.g., broadcasting, consulting, education, psychotherapy



Information Processing (directed at intangible assets)

e.g., accounting, banking, insurance, legal, research

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Implications of Service Processes (1) Seeking Efficiency May Lower Satisfaction Processes determine how services are created/delivered— process change may affect customer satisfaction

Imposing new processes on customers, especially

replacing people by machines, may cause dissatisfaction

New processes that improve efficiency by cutting costs may hurt service quality

Best new processes deliver benefits desired by customers Faster Simpler More conveniently

Customers may need to be educated about new procedures and how to use them



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Implications of Service Processes: (2) Designing the Service Factory People-processing services require customers to visit the “service factory,” so:

Think of facility as a “stage” for service performance

Design process around customer Choose convenient location Create pleasing appearance, avoid unwanted noises, smells

Consider customer needs--info, parking, food, toilets, etc.



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Implications of Service Processes: (3) Evaluating Alternative Delivery Channels For possession-processing, mental-stimulus processing, or information processing services, alternatives include: 1. Customers come to the service factory 2. Customers come to a retail office 3. Service employees visit customer’s home or workplace 4. Business is conducted at arm’s length through - physical channels (e.g., mail, courier service) - electronic channels (e.g., phone, fax, email, Web site)



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Implications of Service Processes: (4) Balancing Demand and Capacity When capacity to serve is limited and demand varies widely, problems arise because service output can’t be stored: 1. If demand is high and exceeds supply, business may be lost 2. If demand is low, productive capacity is wasted Potential solutions: - Manage demand - Manage capacity Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Implications of Service Processes: (5) Applying Information Technology All services can benefit from IT, but mental-stimulus processing and information-processing services have the most to gain: Remote delivery of informationbased services “anywhere, anytime” New service features through websites, email, and internet (e.g., information, reservations) More opportunities for self-service New types of services



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Implications of Service Processes: (6) Including People as Part of the Product Involvement in service delivery often entails contact with other people

Managers should be

concerned about employees’ appearance, social skills, technical skills

Other customers may enhance or detract from service experience--need to manage customer behavior



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The Services Marketing Mix



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Elements of The Services Marketing Mix: “7Ps” vs. the Traditional “4Ps”

Rethinking the original 4Ps Product elements Place and time Promotion and education Price and other user outlays Adding Three New Elements Physical environment Process People Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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The 7Ps: (1) Product Elements All Aspects of Service Performance that Create Value

Core product features—both tangible and intangible elements

Bundle of supplementary service elements Performance levels relative to competition Benefits delivered to customers (customers don’t buy a hotel room, they buy a good night’s sleep)

Guarantees Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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The 7Ps: (2) Place and Time Delivery Decisions: Where, When, and How

Geographic locations served Service schedules Physical channels Electronic channels Customer control and convenience Channel partners/intermediaries Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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The 7Ps: (3) Promotion and Education Informing, Educating, Persuading, and Reminding Customers Marketing communication tools media elements (print, broadcast, outdoor, retail, Internet, etc.) personal selling, customer service sales promotion publicity/PR

Imagery and recognition branding corporate design

Content information, advice persuasive messages customer education/training Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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The 7Ps: (4) Price and Other User Outlays Marketers Must Recognize that Customer Outlays Involve More than the Price Paid to Seller Traditional Pricing Tasks

Selling price, discounts, premiums Margins for intermediaries (if any) Credit terms Identify and Minimize Other Costs Incurred by Users

Additional monetary costs associated with service usage (e.g., travel to service location, parking, phone, babysitting,etc.)

Time expenditures, especially waiting Unwanted mental and physical effort Negative sensory experiences Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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The 7Ps: (5) Physical Environment Designing the Servicescape and providing tangible evidence of service performances

Create and maintaining physical appearances buildings/landscaping interior design/furnishings vehicles/equipment staff grooming/clothing sounds and smells other tangibles

Select tangible metaphors for use in marketing communications



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7Ps: (6) Process Method and Sequence in Service Creation and Delivery

Design of activity flows Number and sequence of actions for customers Providers of value chain components Nature of customer involvement Role of contact personnel Role of technology, degree of automation Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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The 7Ps: (7) People Managing the Human Side of the Enterprise

The right customer-contact employees performing tasks well job design recruiting/selection training motivation evaluation/rewards empowerment/teamwork

The right

customers for the firm’s mission

fit well with product/processes/corporate goals appreciate benefits and value offered possess (or can be educated to have) needed skills (co-production) firm is able to manage customer behavior Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Managing the 7Ps Requires Collaboration between Marketing, Operations, and HR Functions (Fig. 1.7)

Operations Management

Marketing Management Customers

Human Resources Management Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Chapter 2

Consumer Behavior in Service Encounters



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Where Does the Customer Fit in a Service Organization? (Fig. 2.1)

Consumers rarely involved in manufacture of goods but

often participate in service creation and delivery Challenge for service marketers is to understand how customers interact with service operations Flowcharting clarifies how customer involvement in service encounters varies with type of process - see Fig. 2-1: People processing (e.g., motel stay): customer is physically involved

throughout entire process Possession processing (e.g., DVD repair): involvement may be limited to drop off of physical item/description of problem and subsequent pick up Mental stimulus processing (e.g., weather forecast): involvement is mental, not physical; here customer simply receives output and acts on it Information processing (e.g., health insurance): involvement is mental specify information upfront and later receive documentation of coverage



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High-Contact and Low-Contact Services High Contact Services

Customers visit service facility and remain throughout service delivery

Active contact between customers and service personnel Includes most people-processing services Low Contact Services

Little or no physical contact with service personnel Contact usually at arm’s length through electronic or physical distribution channels

New technologies (e.g. Web) help reduce contact levels Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Levels of Customer Contact with Service Organizations (Fig. 2.2) Emphasizes encounters with service personnel

High Nursing Home

HairCut 4- Star Hotel

Management Consulting Good Restaurant

Telephone Banking

Airline Tra vel (Econ.)

Retail Banking

Car Repair

Motel

Insurance

Dry Cleaning Fast Food

Movie Theater Cable TV

Subway • Internet Banking Mail Based Repairs

Emphasizes encounters with equipment Slide ©2004 by Christopher Lovelock and Jochen Wirtz

Internet-based Services


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Managing Service Encounters--1

Service encounter: A period of time during which customers interact directly with a service

Moments of truth: Defining points in service delivery where customers interact with employees or equipment

Critical incidents: specific encounters that result in

especially satisfying/dissatisfying outcomes for either customers or service employees



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Managing Service Encounters--2

Service success often rests on performance of junior contact personnel

Must train, coach, role model desired behavior Thoughtless or badly behaved customers can cause

problems for service personnel (and other customers)

Must educate customers, clarify what is expected, manage behavior



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The Purchase Process for Services (Adapted from Fig. 2-3)

Prepurchase Stage Awareness of need Information search Evaluation of alternative service suppliers Service Encounter Stage Request service from chosen supplier Service delivery Postpurchase Stage Evaluation of service performance Future intentions



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Perceived Risks in Purchasing and Using Services (Table 2.1)

Functional – unsatisfactory performance outcomes

Financial – monetary loss, unexpected extra costs

Temporal – wasted time, delays lead to problems

Physical – personal injury, damage to possessions

Psychological – fears and negative emotions

Social – how others may think and react

Sensory – unwanted impacts to any of five senses



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Factors that Influence Customer Expectations of Services

Personal Needs Desired Service Beliefs about What Is Possible

(Fig. 2.4)

Explicit & Implicit Service Promises Word-of-Mouth Past Experience

ZONE OF TOLERANCE

Perceived Service Alterations Adequate Service

Predicted Service

Situational Factors

Source: Adapted from Zeithaml, Parasuraman & Berry Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Components of Customer Expectations

Desired Service Level: wished-for level of service quality that customer believes can and should be delivered

Adequate Service Level: minimum acceptable level of service

Predicted Service Level: service level that customer believes firm will actually deliver

Zone of Tolerance: range within which customers are willing to accept variations in service delivery



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Intangible Attributes, Variability, and Quality Control Problems Make Services Hard to Evaluate

Search attributes – Tangible characteristics that allow customers to evaluate a product before purchase

Experience attributes – Characteristics that can be experienced when actually using the service

Credence attributes – Characteristics that are difficult to evaluate confidently even after consumption

Goods tend to be higher in search attributes, services tend to be higher in experience and credence attributes

Credence attributes force customers to trust that desired benefits have been delivered



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How Product Attributes Affect Ease of Evaluation) (Fig. 2.5)

High in search attributes

Complex surgery

Legal services

Computer repair

Haircut

Lawn fertilizer

Restaurant meals

Foods

Motor vehicle

Chair

Clothing

Easy to evaluate

Entertainment

Most Services

Most Goods

Difficult to evaluate

High in experience High in credence attributes attributes Source: Adapted from Zeithaml



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Customer Satisfaction is Central to the Marketing Concept

Satisfaction defined as attitude-like judgment following a service purchase or series of service interactions

Customers have expectations prior to consumption, observe service performance, compare it to expectations

Satisfaction judgments are based on this comparison Positive disconfirmation if better than expected Confirmation if same as expected Negative disconfirmation if worse than expected

Satisfaction reflects perceived service quality, price/quality tradeoffs, personal and situational factors

Research shows links between customer satisfaction and a firm’s financial performance



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Customer Delight: Going Beyond Satisfaction

Research shows that delight is a function of 3 components Unexpectedly high levels of performance Arousal (e.g., surprise, excitement) Positive affect (e.g., pleasure, joy, or happiness)

Is it possible for customers to be delighted by very mundane services?

Progressive Insurance has found ways to positively surprise customers with customer-friendly innovations and extraordinary customer service



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A Service Business is a System Comprising Three Overlapping Subsystems Service Operations (front stage and backstage)

Where inputs are processed and service elements created. Includes facilities, equipment, and personnel Service Delivery (front stage) Where “final assembly” of service elements takes place and service is delivered to customers Includes customer interactions with operations and other customers Service Marketing (front stage)

Includes service delivery (as above) and all other contacts between service firm and customers



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Service Marketing System: (1) High Contact Service--e.g., Hotel (Fig. 2.7) Service Marketing System Service Delivery System Other Customers

Service Operations System Interior & Exterior Facilities

Technical Core

Equipment

The Customer

Service People

Backstage (invisible)

Front Stage (visible)


Other Customers


Other Contact Points Advertising Sales Calls Market Research Surveys Billing / Statements Miscellaneous Mail, Phone Calls, Faxes, etc. Random Exposure to Facilities / Vehicles Chance Encounters with Service Personnel Word of Mouth

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Service Marketing System: (2) Low Contact Service--e.g., Credit Card (Fig. 2.8) Service Marketing System Service Delivery System Service Operations System

Other Contact Points

Advertising Mail Technical Core

Self Service Equipment

The Customer

Phone, Fax, Web site etc. Backstage (invisible)

Market Research Surveys Random Exposures Facilities, Personnel

Word of Mouth

Front Stage (visible)



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Service as Theater

“ All the world’s a stage and all the men and women merely players. They have their exits and their entrances and each man in his time plays many parts” William Shakespeare As You Like It



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The Dramaturgy of Service Delivery

Service dramas unfold on a “stage”--settings may change as performance unfolds

Many service dramas are tightly scripted, others improvised Front-stage personnel are like members of a cast Like actors, employees have roles, may wear special costumes, speak required lines, behave in specific ways

Support comes from a backstage production team Customers are the audience—depending on type of performance, may be passive or active



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Role and Script Theories

Role:

A set of behavior patterns learned through experience and communication

Role congruence: In service encounters, employees and customers must act out defined roles for good outcomes

Script: A sequence of behavior to be followed by employees and customers during service delivery

Some scripts (e.g. teeth cleaning) are routinized, others flexible Technology change may require a revised script Managers should reexamine existing scripts to find ways to improve

delivery, increase productivity, enhance experiences



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Chapter 3

Positioning Services in Competitive Markets



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Search for Competitive Advantage in Services Requires Differentiation and Focus

Intensifying competition in service sector threatens firms with no distinctive competence and undifferentiated offerings

Slowing market growth in mature service industries means that only way for a firm to grow is to take share from competitors

Rather than attempting to compete in an entire market, firm must focus efforts on those customers it can serve best Must decide how many service offerings with what distinctive (and desired) characteristics



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Standing Apart from the Competition

A business must set itself apart from its competition. To be successful it must identify and promote itself as the best provider of attributes that are important to target customers

GEORGE S. DAY



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Basic Focus Strategies for Services (Fig. 3.1)

BREADTH OF SERVICE OFFERINGS

Narrow Service Focused

Unfocused (Everything for everyone)

Fully Focused (Service and market focused)

Market Focused

Many NUMBER OF MARKETS SERVED

Few

Wide

Source: Robert Johnston Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Four Principles of Positioning Strategy

1. Must establish position for firm or product in minds of customers 2. Position should be distinctive, providing one simple, consistent message 3. Position must set firm/product apart from competitors 4. Firm cannot be all things to all people--must focus Jack Trout



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Uses of Positioning in Marketing Management (Table 3.1)

Understand relationships between products and markets compare to competition on specific attributes evaluate product’s ability to meet consumer needs/expectations predict demand at specific prices/performance levels

Identify market opportunities

introduce new products redesign existing products eliminate non-performing products

Make marketing mix decisions, respond to competition distribution/service delivery pricing communication



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Possible Dimensions for Developing Positioning Strategies

Product attributes Price/quality relationships Reference to competitors (usually shortcomings) Usage occasions User characteristics Product class Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Developing a Market Positioning Strategy (Fig. 3.3) MARKET ANALYSIS

- Size - Composition - Location - Trends

Define, Analyze Market Segments

Select Target Segments To Serve

INTERNAL ANALYSIS

- Resources - Reputation - Constraints - Values

Articulate Desired Position in Market

Marketing Action Plan

Select Benefits to Emphasize to Customers

COMPETITIVE ANALYSIS

- Strengths - Weaknesses - Current Positioning

Analyze Possibilities for Differentiation Source: Adapted from Michael R. Pearce



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Positioning of Hotels in Belleville: Price vs. Service Level (Fig. 3.4) Expensive

Grand Regency

PALACE Shangri-La

High Service Sheraton

Atlantic

Moderate Service

Italia Castle

Alexander IV Airport Plaza

Less Expensive Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Positioning of Hotels in Belleville: Location vs. Physical Luxury (Fig. 3.5) High Luxury

Regency

Grand Sheraton

Shangri-La

PALACE Financial District

Shopping District and Convention Centre

Inner Suburbs

Italia

Castle

Alexander IV Atlantic Airport Plaza Moderate Luxury



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Positioning after New Hotel Construction: Price vs. Service Level (Fig. 3.6) Mandarin New Grand Heritage Marriott Continental

Expensive

Action? Regency High Service

PALACE Shangri-La No action?

Moderate Service

Atlantic Sheraton Italia

Less Expensive



Castle Alexander IV Airport Plaza

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Positioning after New Hotel Construction: Location vs. Physical Luxury (Fig. 3.7) High Luxury Mandarin New Grand Heritage Marriott Sheraton Shangri-La

Continental Action? PALACE Financial District

No action?

Inner Suburbs

Shopping District and Convention Centre

Castle

Regency

Italia Alexander IV Atlantic Airport Plaza

Moderate Luxury



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Positioning Maps Help Managers to Visualize Strategy

Positioning maps display relative performance of competing firms on key attributes

Research provides inputs to development of positioning maps Challenge is to ensure that attributes employed in maps are important to target segments performance of individual firms on each attribute accurately

reflects perceptions of customers in target segments

Predictions can be made of how positions may change in the light of new developments in the future

Simple graphic representations are often easier for managers to grasp than tables of data or paragraphs of prose

Charts and maps can facilitate a “visual awakening” to threats and opportunities and suggest alternative strategic directions



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Chapter 4

Creating the Service Product



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Key Steps in Service Planning: Matching Opportunities to Resources

Must relate marketing opportunities to firm’s resources (physical, financial, technological, human)

Identify, evaluate firm’s marketing assets

Customer portfolio/lifetime value (customer equity) Market knowledge Marketing implementation skill Product line Competitive positioning strategies Brand reputation (brand equity)

Identify, evaluate firm’s operating assets

Physical facilities, equipment Technology and systems (especially IT) Human resources (numbers, skills, productivity) Leverage through alliances and partnerships Potential for customer self service Cost structure



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Service Design Involves Matching Marketing Concept with Operations Concept (Fig. 4.1) Corporate Objectives and Resources Marketing Assets

Operating Assets

(Customer Base, Mkt. Knowledge, Implementation Skills, Brand Reput.)

(Facilities/Equipment, IT Systems, People, Op. Skills, Cost Structure)

Service Marketing Concept

Service Operations Concept

•Benefits to customer from core/ supplementary elements, style, service level, accessibility

•Nature of processes •Geographic scope of ops •Scheduling •Facilities design/layout •HR (numbers, skills) •Leverage (partners, self-service) •Task allocation: front/backstage staff; customers as co-producers

•User costs/outlays incurred •Price/other monetary costs •Time •Mental and physical effort •Neg. sensory experiences

Service Delivery Process



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Understanding the Components of the Augmented Service Product



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Shostack’s Molecular Model of a Total Market Entity - Passenger Airline Service (Fig. 4-2) Distribution Price

Vehicle

Service frequency

Transport Pre- and post-flight service

In-flight service

Food and drink

KEY

Tangible elements Intangible elements Marketing Positioning (Weighted toward evidence) Slide ©2004 by Christopher Lovelock and Jochen Wirtz


Source: Shostack 1 - 72

Core Products and Supplementary Services

Most firms offer customers a package of benefits:

core product (a good or a service) supplementary services that add value to the core

In mature industries, core products often become commodities

Supplementary services help to differentiate core products and create competitive advantage by: facilitating use of the core service enhancing the value and appeal of the core



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Core and Supplementary Product Design: What Do We Offer and How Do We Create and Deliver It?

Supplementary services offered and how created and delivered

Delivery Concept For Core Product Scheduling

Process

Core Service Level


Customer Role


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What Should Be the Core and Supplementary Elements of Our Service Product?

How is our core product defined and what supplementary elements currently augment this core?

What product benefits create the most value for customers? Is our service package differentiated from the competition in ways that are meaningful to target customers?

What are current levels of service on the core product and each of the supplementary elements?

Can we charge more for higher service levels on key

attributes (e.g., faster response, better physical amenities, easier access, more staff, superior caliber personnel)?

Alternatively, should we cut service levels and charge less? Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Core and Supplementary Services in a Luxury Hotel (Offering Guests Much More than a Cheap Motel!)

Reservation Cashier

Valet Parking

Business Center

Room Service

Reception A Bed for the Night in an Elegant Private Room with a Bathroom

Wake-up Call Telephone


Baggage Service

Cocktail Bar Entertainment/ Sports / Exercise

Restaurant


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What Happens, When, and in What Sequence? The Time Dimension in the Augmented Service Product

Reservation Parking

Get car Check in USE ROOM

Check out Phone USE GUESTROOM OVERNIGHT

Porter Meal

Pre Visit

Pay TV

Room service

Time Frame of an Overnight Hotel Stay (real-time service use)



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The Flower of Service: Categorizing Supplementary Services (Fig. 4-5)

Information Payment

Billing

Consultation

Core

Exceptions

Order-Taking

Hospitality

KEY:

Facilitating elements

Safekeeping

Enhancing elements Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Facilitating Services - Information (Table 4.1)

Core


Customers often require information about how to obtain and use a product or service. They may also need reminders and documentation


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Facilitating Services - Order-Taking (Table 4.2)

Core


Many goods and services must be ordered or reserved in advance. Customers need to know what is available and may want to secure commitment to delivery


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Facilitating Services - Billing (Table 4.3)

Core


“How much do I owe you?” Customers deserve clear, accurate and intelligible bills and statements


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Facilitating Services - Payment (Table 4.4)

Core


Customers may pay faster and more cheerfully if you make transactions simple and convenient for them


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Enhancing Services - Consultation (Table 4.5)

Core


Value can be added to goods and services by offering advice and consultation tailored to each customer’s needs and situation


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Enhancing Services - Hospitality (Table 4.6)

Core


Customers who invest time and effort in visiting a business and using its services deserve to be treated as welcome guests (after all, marketing invited them there!)


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Enhancing Services - Safekeeping (Table 4.7)

Core

Customers prefer not to worry about looking after the personal possessions that they bring with them to a service site. They may also want delivery and after-sales services for goods that they purchase or rent



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Enhancing Services - Exceptions (Table 4.8)

Core


Customers appreciate some flexibility in a business when they make special requests. They expect it when not everything goes according to plan


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Branding Service Products



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Service Branding: Clarifying Distinctive Service Offerings

Marriott Hotel Brands

British Airways Brands

Marriott Hotels

Intercontinental First Club World World Traveller World Traveller

Marriott Resorts Courtyard by Marriott Fairfield Inns Residence Inns

European Club Europe Euro-Traveller

SpringHill Suites TownePlace Suites Marriott Vacation Clubs

International Slide ©2004 by Christopher Lovelock and Jochen Wirtz

Plus

UK Domestic Shuttle


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Branding a High-Tech, B2B Product Line: A Family of Brands at Sun Microsystems

Corporate umbrella brand Sun Microsystems

Product line brand (system support services) Sun Spectrum Support

Sub-brands (4 levels of support service programs) » » » »

Platinum Gold Silver Bronze



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Sun Spectrum Support: Sub-branding Highlights Four Service Levels Sub-branding clarifies service levels offered at different fees Platinum: “Mission Critical”

On-site service 24/7, two-hour response; telephone support 24/7, onsite parts replacement; additional services available Gold: “Business Critical”

Onsite service Mon-Fri 8am-8pm, four-hour response; telephone support 24/7; onsite parts replacement Silver: “Basic Support”

Onsite service Mon-Fri 8am-5pm, four-hour response; telephone support Mon-Fri 8am-8pm; onsite parts replacement Bronze: “Self Support”

Phone support Mon-Fri 8am-5pm; parts replacement by courier Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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New Service Development



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New Service Development: A Hierarchy of New Service Categories

Major service innovations--new core products for previously undefined markets

Major process innovations--using new processes to deliver existing products and offer extra benefits

Product line extensions--additions to current product lines Process line extensions--alternative delivery procedures Supplementary service innovations--adding new or improved facilitating or enhancing elements

Style changes--visible changes in service design or scripts Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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New Service Development: Physical Goods as Source of Service Ideas

Customers can rent goods—use and return for a fee— instead of purchasing them

Customers can hire personnel to operate their own or rented equipment

Any new durable product may create need for after-sales services (possession processing)

Shipping Installation Problem-solving and consulting advice Cleaning Maintenance Repair Upgrading Disposal Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Creating Services as Substitutes for Owning and/or Using Goods (Fig. 4-7)

Own a Physical Good

Perform the Work Oneself Hire Someone to Do the Work

Rent the Use of a Physical Good

• Drive own car

• Rent car and drive it

• Type on own word processor

• Rent word processor and type

• Hire chauffeur to drive car

•• Hire a taxi or limousine

• Hire typist to use word processor

•• Send work to secretarial service



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Service Development through Delivery Options: Alternative Meal Service Formats (Fig. 4-8)

Fast-Food Restaurant (Eat In)

See sign

Park and enter

Order meal, and pay

Pick up meal

Find table and eat

Drive away, eat later

Drive-In Restaurant (Take Out)

See sign

Stop car at order point

Order via microphone

Get meal at pickup, pay

Home Delivery

Telephone Restaurant

Order food, give address

Driver rings doorbell

Pay driver, take food

Home Catering

Arrange to meet caterer

Plan meal, pay deposit

Food and staff arrive

Meal is prepared and served



Clear table and leave

Eat

Eat

Staff cleans up; pay

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Elements of a Hotel Offering: Trading off Room Price vs. Features/Services

External building design and features

Room features Food-related services Lounge facilities Services (e.g., reception) Leisure facilities Security—people/systems Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Success Factors in New Service Development

Market synergy

Good fit between new product and firm’s image/resources Advantage vs. competition in meeting customers’ needs Strong support from firm during/after launch Firm understands customer purchase decision behavior

Organizational factors

Strong interfunctional cooperation and coordination Internal marketing to educate staff on new product and its

competition Employees understand importance of new services to firm

Market research factors

Scientific studies conducted early in development process Product concept well defined before undertaking field studies



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Chapter 5

Designing the Communications Mix for Services



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Advertising Implications for Overcoming Intangibility (Fig. 5-1) Problem

Advertising Strategy

Generality - objective claims - subjective claims

Document physical system capacity Cite past performance statistics Present actual service delivery incident

Nonsearchability

Present customer testimonials Cite independently audited performance

Abstractness

Display typical customers benefiting

Impalpability

Documentary of step-by-step process, Case history of what firm did for customer Narration of customer’s subjective experience Source: Mittal and Baker



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Other Communications Challenges in Services Marketing

Facilitate customer involvement in production

prepare customers for service experience and demonstrate roles teach customers about new technologies, new features

Help customers to evaluate service offerings

provide tangible or statistical clues to service performance highlight quality of equipment and facilities emphasize employee qualifications, experience, professionalism

Simulate or dampen demand to match capacity provide information about timing of peak, off-peak periods offer promotions to stimulate off-peak demand

Promote contribution of service personnel help customers understand service encounter highlight expertise and commitment of backstage personnel Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Setting Clear Objectives: Checklist for Marketing Communications Planning (“5 Ws”)

Who is our target audience? What do we need to communicate and achieve? How should we communicate this? Where should we communicate this? When do communications need to take place?



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Common Educational and Promotional Objectives in Service Settings (Table 5-2)

Create memorable images of specific companies and their brands

Build awareness/interest for unfamiliar service/brand Build preference by communicating brand strengths and benefits

Compare service with competitors’ offerings and counter their claims

Reposition service relative to competition Stimulate demand in off-peak and discourage during peak Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Educational and Promotional Objectives (cont.)

Encourage trial by offering promotional incentives Reduce uncertainty/perceived risk by providing useful info and advice

Provide reassurance (e.g., promote service guarantees) Familiarize customers with service processes before use Teach customers how to use a service to best advantage Recognize and reward valued customers and employees Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Marketing Communications Mix for Services (Fig. 10.4)

Personal Communications

Advertising

Sales Promotion

Publicity & Public Relations

Instructional Materials

Sampling

Press releases/kits

Web sites

Coupons

Press conferences

Manuals

Corporate Design

Selling

Broadcast

Customer service

Print

Training

Internet

Sign-up rebates

Special events

Brochures

Vehicles

Telemarketing

Outdoor

Gifts

Sponsorship

Videoaudiocassettes

Equipment

Direct mail

Prize promotions

Trade Shows, Exhibitions

Software CD-ROM

Stationery

Media-initiated coverage

Voice mail

Uniforms

Word-of-mouth Word mouth (other of customers)

*

Signage

Interior decor

Key: * Denotes communications originating from outside the organization



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Originating Sources of Messages Received by a Target Audience (Fig. 5-5) Messages originating within the organization Front-line staff Service outlets Advertising Sales promotions Direct marketing Personal selling Public relations

A U D I E N C E

Word of mouth

Messages originating outside the organization Slide ©2004 by Christopher Lovelock and Jochen Wirtz

Media editorial


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What is Brand Equity and Why Does It Matter? (From Berry, “Cultivating Brand Equity”) Definition: A set of assets and liabilities linked to a brand’s name and symbol that adds to (or subtracts from) the perceived value of the product Insights

Brand equity can be positive or negative Positive brand equity creates marketing advantage for firm plus value for customer

Perceived value generates preference and loyalty Management of brand equity involves investment to create and enhance assets, remove liabilities



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A Service Branding Model: How Communications + Experience Create Brand Equity

Marketer-controlled communications

Firm’s Presented Brand (Sales, Advertising, PR)

Awareness of Firm’s Brand

Uncontrolled brand communications

Firm’s Brand Equity

What Media, Intermediaries, Word-of-Mouth Say re: Firm

Customer’s Experience with Firm

Meaning Attached To Firm’s Brand Source: Adapted from L. L. Berry ( Fig. 1)



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Marketing Communication and the Internet (1)

International in Scope Accessible from almost anywhere in the world Simplest form of international market entry

Internet Applications Promote consumer awareness and interest Provide information and consultation Facilitate 2-way communications through e-mail and chat rooms Stimulate product trial Enable customers to place orders Measure effectiveness of specific advertising/promotional

campaigns



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Marketing Communications and the Internet (2)

Web Site design considerations

Memorable address that is actively promoted Relevant, up-to-date content (text, graphics, photos) Contain information that target users will perceive as

useful/interesting Easy navigation Fast download

Internet advertising

Banners and buttons on portals and other websites seek to draw

online traffic to own site Limits to effectiveness—exposure (“eyeballs”) may not lead to increases in awareness/preference/sales Hence, advertising contracts may tie fees to marketing relevant behavior (e.g., giving personal info or making purchase) Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Chapter 6

Pricing and Revenue Management



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What Makes Service Pricing Strategy Different (and Difficult)?

No ownership of services--hard for firms to calculate financial costs of creating an intangible performance

Variability of inputs and outputs--how can firms define a “unit of service” and establish basis for pricing?

Many services hard for customers to evaluate--what are they getting in return for their money?

Importance of time factor--same service may have more value to customers when delivered faster

Delivery through physical or electronic channels--may create differences in perceived value



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Objectives of Pricing Strategies

Revenue and profit objectives Seek profit Cover costs

Patronage and user base-related objectives Build demand Build a user base



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The Pricing Tripod (Fig. 6.1)

Pricing Strategy

Competition Costs Slide ©2004 by Christopher Lovelock and Jochen Wirtz

Value to customer Services Marketing 5/E

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Three Main Approaches to Pricing

Cost-Based Pricing Set prices relative to financial costs

(problem: defining costs)

Competition-Based Pricing Monitor competitors’ pricing strategy

(especially if service lacks differentiation) Who is the price leader? (one firm sets the pace)

Value-Based Relate price to value perceived by customer



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Activity-Based Costing: Relating Activities to the Resources They Consume

Managers need to see costs as an integral part of a firm’s effort to create value for customers

When looking at prices, customers care about value to themselves, not what production costs the firm

Traditional cost accounting emphasizes expense categories, with arbitrary allocation of overheads

ABC management systems examine activities needed to create and deliver service (do they add value?)

Must link resource expenses to:

variety of products produced complexity of products demands made by individual customers



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Net Value = (Benefits – Outlays) (Fig. 6.3)

Effort Time

e

Perceived Outlays

Perceived Benefits



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Enhancing Gross Value

Pricing Strategies to Reduce Uncertainty service guarantees benefit-driven (pricing that aspect of service that creates value) flat rate (quoting a fixed price in advance)

Relationship Pricing non-price incentives discounts for volume purchases discounts for purchasing multiple services

Low-cost Leadership Convince customers not to equate price with quality Must keep economic costs low to ensure profitability at low price



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Paying for Service: The Customer’s Perspective Customer “expenditures” on service comprise both financial and non-financial outlays

Financial costs: price of purchasing service expenses associated with search, purchase activity, usage

Time expenditures Physical effort (e.g., fatigue, discomfort) Psychological burdens (mental effort, negative feelings) Negative sensory burdens (unpleasant sensations affecting any of the five senses)



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Determining the Total Costs of a Service to the Consumer (Fig. 6.4) Price

Search Costs

Related Monetary Costs Time Costs Purchase and Use Costs

Operating Costs

Incidental Expenses

Physical Costs Psychological Costs Sensory Costs

After Costs

Necessary follow-up Problem solving



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Trading off Monetary and Non- Monetary Costs (Fig. 6.5)

Which clinic would you patronize if you needed a chest x-ray (assuming all three clinics offer good quality) ? Clinic A

Clinic B

Price $45 Located 1 hour away by car or transit Next available appointment is in 3 weeks Hours: Monday – Friday, 9am – 5pm Estimated wait at clinic is about 2 hours

Price $85 Located 15 min away by car or transit Next available appointment is in 1 week Hours: Monday – Friday, 8am – 10pm Estimated wait at clinic is about 30 45 minutes



Clinic C Price $125 Located next to your office or college Next appointment is in 1 day Hours: Mo –Sat, 8am – 10pm By appointment estimated wait at clinic is about 0 to 15 minutes 1 - 120

Increasing Net Value by Reducing Non-financial Costs of Service

Reduce time costs of service at each stage Minimize unwanted psychological costs of service Eliminate unwanted physical costs of service Decrease unpleasant sensory costs of service



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Revenue Management: Maximizing Revenue from Available Capacity at a Given Time

Based on price customization - charging different customers (value segments) different prices for same product

Useful in dynamic markets where demand can be divided into different price buckets according to price sensitivity

Requires rate fences to prevent customers in one value

segment from purchasing more cheaply than willing to pay

RM uses mathematical models to examine historical data and real time information to determine what prices to charge within each price bucket how many service units) to allocate to each bucket



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The Strategic Levers of Revenue (Yield) Management Price

Duration

Fixed

Predictable

Unpredictable

Variable

Quadrant 1:

Quadrant 2:

Movies Stadiums/Arenas

Hotel Rooms Airline Seats

Function Space

Rental Cars Cruise Lines

Quadrant 3:

Quadrant 4:

Restaurants Golf Courses

Continuing Care Hospitals



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Dealing with Common Customer Conflicts Arising from Revenue Management Customer conflict can arise from:

Marketing tools to reduce customer conflicts:

Perceived Unfairness & Perceived

Financial Risk Associated with Multi-Tier Pricing and Selective Inventory Availability

Fenced Pricing Bundling Categorising High Published Price

Unfulfilled Inventory Commitment

Well designed Customer Recovery

Unfulfilled Demand of Regular

Preferred Availability Policies

Customers Unfulfilled Price Expectation of Group Customers Change in the Nature of the Service


Programme for Oversale

Offer Lower Displacement Cost

Alternatives Physical Segregation & Perceptible Extra Service Set Optimal Capacity Utilisation Level


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Price Elasticity (Fig. 6.6)

Price per unit of service

Di De

De Di

Quantity of Units Demanded De : Demand is price elastic. Small changes in price lead to big changes in demand. Di : Demand for service is price inelastic. Big changes have little impact on demand.



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Key Categories of Rate Fences (Table 6.2)

Rate Fences

Examples

Physical (Product-related) Fences Basic Product

Amenities Service Level

Class of travel (Business/Economy class) Size and furnishing of a hotel room Seat location in a theatre Free breakfast at a hotel, airport pick up etc. Free golf cart at a golf course Priority wait listing Increase in baggage allowances Dedicated service hotlines Dedicated account management team



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Key Categories of Rate Fences (Table 6.2 cont’d)

Non Physical Fences Transaction Characteristics Time of booking or reservation Location of booking or reservation Flexibility of ticket usage

Requirements for advance purchase Must pay full fare two weeks before departure Passengers booking air tickets for an identical route in different countries are charged different prices

Fees/penalties for canceling or changing a reservation (up to loss of entire ticket price) Non refundable reservation fees



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Non Physical Fences (cont’d) Consumption Characteristics Time or duration of use

Early bird special in restaurant before 6pm Must stay over on Sat for airline, hotel Must stay at least five days

Location of consumption

Price depends on departure location, esp in international travel Prices vary by location (between cities, city centre versus edges of city)



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Non Physical Fences (cont’d) Buyer Characteristics Frequency or volume of consumption

Member of certain loyalty-tier with the firm get

Group membership

Child, student, senior citizen discounts Affiliation with certain groups (e.g. Alumni)

Size of customer group

Group discounts based on size of group

priority pricing, discounts or loyalty benefits



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Relating Price Buckets and Fences to the Demand Curve (Fig. 6.7) Price per Seat First Class Full Fare Economy (No Restrictions) One-Week Advance Purchase One-Week Advance Purchase, Saturday Night Stayover 3-Week Advance Purchase, Saturday Night Stayover 3-Week Adv. Prchs, Sat. Night Stay., $100 for Changes 3-Wk Adv. Prchs, Sat. Night Stay, No changes/refunds Late Sales through Consolidators/ Internet, no refunds

Capacity of 1st-class Cabin

Capacity of Aircraft

No. of Seats Demanded



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Ethical Concerns in Pricing

Customers are vulnerable when service is hard to evaluate or they don’t observe work

Many services have complex pricing schedules hard to understand difficult to calculate full costs in advance of service

Unfairness and misrepresentation in price promotions misleading advertising hidden charges

Too many rules and regulations

customers feel constrained, exploited customers unfairly penalized when plans change



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Pricing Issues: Putting Strategy into Practice (Table 6.3) How much to charge? What basis for pricing? Who should collect payment? Where should payment be made? When should payment be made? How should payment be made? How to communicate prices? Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Consumption follows the Timing of Payments

Frequency of Health Club Visits

Annual Payment Plan

Quarterly Payment Plan

Frequency of Health Club Visits

(Research Insight 6.1)

Semiannual Payment Plan

Monthly Payment Plan

Time Line

Time Line

Source: John Gourville and Dilip Soman, “Pricing and the Psychology of Consumption,” Harvard Business Review, September 2002, 90-96.



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Chapter 7

Distributing Services



1 - 134

Applying the Flow Model of Distribution to Services Distribution embraced three interrelated elements

Information and promotion flow Negotiation flow Product flow



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Information and Physical Processes of the Augmented Service Product (Fig. 7.1) Information Processes Payment

Information Consultation OrderTaking

Core

Billing

Exceptions

Hospitality Safekeeping

Physical Processes Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Using Websites for Service Delivery Information Read brochure/FAQ; get schedules/ directions; check prices

Consultation

Payment

Conduct e-mail dialog Use expert systems

Pay by bank card Direct debit

Billing

Order-Taking

Receive bill Make auction bid Check account status

Core

Exceptions

Make/confirm reservations Submit applications Order goods, check status

Hospitality

Make special requests Resolve problems

Record preferences

Safekeeping Track package movements Check repair status

CORE: Use Web to deliver information-based core services Slide ©2004 by Christopher Lovelock and Jochen Wirtz


1 - 137

Options for Service Delivery There are 3 types of interactions between customers and service firms

Customer goes to the service provider (or intermediary) Service provider goes to the customer Interaction at arm’s length (via the Internet, telephone, fax, mail, etc.)



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Method of Service Delivery (Table 7.1) Availability of Service Outlets Nature of Interaction Single Site Multiple Sites between Customer and Service Organization Customer goes to service organization Service organization goes to customer Customer and service organization transact at arm’s length

Theater Barbershop House painting Mobile car wash Credit card company Local TV station



Bus service Fast-food chain Mail delivery Auto club road service Broadcast network Telephone company

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Place vs. Cyberspace Required for people processing services

Place - customers and

suppliers meet in a physical Offers live experiences, social environment interaction, e.g., food services

More emphasis on eye-catching servicescape, entertainment

Cyberspace - customers

and suppliers do business electronically in virtual environment created by phone/internet linkages


Ideal for info-based services Saves time Facilitates information gathering May use express logistics service to deliver physical core products


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“24/7” - Factors Encouraging Extended Operating Hours (Mgt Memo 7.1)

Economic pressure from consumers Changes in legislation Economic incentives to improve asset utilization Availability of employees to work nights, weekends Automated self-service



1 - 141

Technology Revolutionizes Service Delivery: Some Examples

Smart mobile telephones to link users to Internet Voice recognition software Automated kiosks for self-service (e.g. bank ATMs) Web sites provide information take orders and accept payment deliver information-based services

Smart cards that can act as “electronic wallets”



1 - 142

E-Commerce: Factors that Attract Customers to Virtual Stores

Convenience (24-hour availability, save time, effort) Ease of obtaining information on-line and searching for desired items

Better prices than in bricks-and-mortar stores Broad selection



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Splitting Responsibilities for Delivering Supplementary Services (Fig. 7.2)

As created by originating firm

Core

As enhanced by distributor

+


As experienced by customer

=


Core

1 - 144

Franchising Franchising is a fast growth strategy, when

Resources are limited Long-term commitment of store managers is crucial Local knowledge is important Fast growth is necessary to pre-empt competition



1 - 145

Service Process and Market Entry

People Processing Services

Export the service concept Import customers Transport customers to new locations

Possession Processing Services

Most require an ongoing local presence, whether it is the

customers dropping off items or personnel visiting customer sites

Information Based Services

Export the service to a local service factory Import customers Export the information via telecommunications and transform it

locally Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Barriers to International Trade in Services

Operating successfully in international markets remains

difficult for certain services despite efforts of the WTO and control relaxations

Barriers include

Refusal by immigration offices to issue work permits Heavy taxes on foreign firms Domestic preference policies Legal restrictions Lack of broadly-agreed accounting standards Cultural differences (esp. for entertainment industry)



1 - 147

Forces for Internationalization

Market drivers Competition drivers Technology drivers Cost drivers Government drivers Impact will vary by service type (people, possessions, information)



1 - 148

Modes of Internationalization

Export information-based services transmit via electronic channels store in physical media, ship as merchandise

Use third parties to market/deliver service concept licensing agents brokers franchising alliance partners minority joint ventures

Control service enterprise abroad direct investment in new business buyout of existing business



1 - 149

Impact of Globalization Drivers on Different Service Categories (Table 7.2)

Globalization Drivers

People Processing


Information Based

Competition

Simultaneity of production and consumption limits leverage of foreign competitive advantage, but management systems can be globalized

Technology drives globalization of competitors with technical edge.

Highly vulnerable to global dominance by competitors with monopoly or competitive advantage in information.

Market

People differ economically and culturally, so needs for service and ability to pay may vary.

Level of economic developments impacts demand for services to individually owned goods

Demand for many services is derived to a significant degree from economic and educational levels.



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Impact of Globalization Drivers on Different Service Categories (Table 7.2, cont’d) Globalization People Drivers Processing Use of IT for delivery of Technology


Information Based

Need for technologysupplementary services based service delivery may be a function of systems depends on ownership and familiarity possessions requiring with technology. service and the cost trade-offs in labor substitution

Ability to deliver core services through remote terminals may be a function of investment in computerization etc.

Cost

Variable labor rates may impact on pricing in labor-sensitive services.

Variable labor rates may favor low-cost locations.

Major cost elements can be centralized & minor cost elements localized.

Government

Social policies (e.g., health) vary widely and may affect labor cost etc.

Policies may decrease/increase cost & encourage/discourage certain activities

Policies may impact demand and supply and distort pricing



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Chapter 8

Designing and Managing Service Processes



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Developing a Blueprint – Some Basic Advice

Identify key activities in creating and delivering the service

Distinguish between front stage (what

customers experience) and back stage

Chart activities in sequence Show how interactions between customers

and employees are supported by backstage activities and systems

Establish service standards for each step Identify potential fail points Focus initially on “big picture” (later, can drill down for more detail in specific areas)



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Service Blueprinting: Key Components 1. Define standards for frontstage activities 2. Specify physical evidence 3. Identify principal customer actions 4. ------------line of interaction (customers and front stage personnel)-------5. Front stage actions by customer-contact personnel 6. ------------line of visibility (between front stage and backstage)-------------7. Backstage actions by customer contact personnel 8. Support processes involving other service personnel 9. Support processes involving IT Where appropriate, show fail points and risk of excessive waits



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Simplified Example: Blueprinting a Hotel Visit (extract only)

Hotel exterior, lobby, employees, key

Stage

Physical Evidence

Front

Line of Interaction

Make Customer reservation Actions Employee Actions Face-to-face Phone Contact

Backstage

Line of Visibility

Arrive, valet park

Check-in at reception

Doorman greets, valet takes car

Receptionist verifies, gives key to room

Elevator, corridor, room, bellhop Go to room

Rep. records, confirms Make up Room

Valet Parks Car Enter data


Register guest data Services Marketing 5/E

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Improving Reliability of Processes by Failure Proofing

Analysis of reasons for failure often reveals opportunities for failure proofing to reduce/eliminate risk of errors

Errors include: treatment errors—human failures during contact with customers tangible errors—failures in physical elements of service

Fail-safe procedures include measures to prevent omission of tasks or performance of tasks incorrectly in wrong order too slowly not needed or specified

Need fail-safe methods for both employees and customers Slide ©2004 by Christopher Lovelock and Jochen Wirtz


1 - 156

Process Redesign: Principal Approaches (Table 8-1)

Eliminating non-value-adding steps Shifting to self-service Delivering direct service Bundling services Redesigning physical aspects of service processes



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Customers as Co-Producers: Levels of Participation in Service Production

Low – Employees and systems do all the work Medium – Customer inputs required to assist provider Provide needed information, instructions Make personal effort May share physical possessions

High – Customer works actively with provider to co-produce the service



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Self Service Technologies (SSTs)

Self-service is ultimate form of customer involvement in service production

Customers undertake specific activities using facilities or systems

provided by service supplier Customer’s time and effort replace those of employees

Concept is not new—self-serve supermarkets date from 1930s, ATMs and self-serve gas pumps from 1970s

Today, customers face wide array of SSTs to deliver

information-based services, both core and supplementary

Many companies seek to divert customers from employee contact to Internet-based self-service



1 - 159

Service Firms as Teachers: Well-trained Customers Perform Better

Firms must teach customers roles as co-producers of service

Customers need to know how to achieve best results

Education can be provided through:

Brochures Advertising Posted instructions Machine-based instructions Websites, including FAQs Service providers Fellow customers

Employees must be well-trained to help advise, assist customers



1 - 160

Managing Customers as Partial Employees to Increase Productivity and Quality 1. Analyze customers’ present roles in the business and compare to management’s ideal 2. Determine if customers know how to perform and have necessary skills 3. Motivate customers by ensuring that will be rewarded for performing well 4. Regularly appraise customers’ performance; if unsatisfactory, consider changing roles or termination



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The Problem of Customer Misbehavior – Identifying and Managing “Jaycustomers” What is a jaycustomer? A customer who behaves in a thoughtless or abusive fashion, causing problems for the firm itself, employees, other customers

Why do jaycustomers matter?

Can disrupt processes Affect service quality May spoil experience of other customers

What should a firm do about them?

Try to avoid attracting potential jaycustomers Institute preventive measures Control abusive behavior quickly Take legal action against abusers BUT firm must act in ways that don’t alienate other customers



1 - 162

Six Types of “Jaycustomer”

Thief – seeks to avoid paying for service Rule breaker – ignores rules of social behavior and/or procedures for safe, efficient use of service

Belligerent – angrily abuses service personnel (and sometimes other customers) physically and/or emotionally

Family Feuders – fight with other customers in their party Vandal – deliberately damages physical facilities, furnishings, and equipment

Deadbeat – fails to pay bills on time Can you think of others? How should firms deal with each of these problems?



1 - 163

Chapter 9

Balancing Demand and Capacity



1 - 164

Relating Demand to Capacity: Four Key Concepts

Excess demand: too much demand relative to capacity at a given time

Excess capacity: too much capacity relative to demand at a given time

Maximum capacity: upper limit to a firm’s ability to meet demand at a given time

Optimum capacity: point beyond which service quality declines as more customers are serviced



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Variations in Demand Relative to Capacity (Fig. 9-1) VOLUME DEMANDED Demand exceeds capacity (business is lost) CAPACITY UTILIZED Demand exceeds optimum capacity (quality declines)

Maximum Available Capacity Optimum Capacity (Demand and Supply Well Balanced

Excess capacity (wasted resources)

Low Utilization (May Send Bad Signals)

TIME CYCLE 1 Slide ©2004 by Christopher Lovelock and Jochen Wirtz


TIME CYCLE 2 1 - 166

Defining Productive Capacity in Services

Physical facilities to contain customers Physical facilities to store or process goods Physical equipment to process people, possessions, or information

Labor used for physical or mental work Public/private infrastructure—e.g., highways, airports, electricity



1 - 167

Alternative Capacity Management Strategies

Level capacity (fixed level at all times) Stretch and shrink

offer inferior extra capacity at peaks (e.g. bus/metro standees) vary seated space per customer (e.g. elbow room, leg room) extend/cut hours of service

Chase demand (adjust capacity to match demand) schedule downtime in low demand periods use part-time employees rent or share extra facilities and equipment cross-train employees

Flexible Capacity (vary mix by segment) Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Predictable Demand Patterns and Their Underlying Causes (Table 9-1)

Predictable Cycles of Demand Levels day week month year other


Underlying Causes of Cyclical Variations employment billing or tax

payments/refunds pay days school hours/holidays seasonal climate changes public/religious holidays natural cycles (e.g. coastal tides) Services Marketing 5/E

1 - 169

Causes of Seemingly Random Changes in Demand Levels

Weather Health problems Accidents, Fires, Crime Natural disasters Question: which of these events can be predicted?



1 - 170

Alternative Demand Management Strategies (Table 9-2)

Take no action

let customers sort it out

Reduce demand

higher prices communication promoting alternative times

Increase demand

lower prices communication, including promotional incentives vary product features to increase desirability more convenient delivery times and places

Inventory demand by reservation system Inventory demand by formalized queueing Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Hotel Room Demand Curves by Segment and by Season (Fig. 9-2)

Price per Room Night

Bl

Bh

Bh = business travelers in high season

Th

Bl = business travelers in low season Tl

Th = tourist in high season Tl = tourist in low season

Bl

Bh

Th Tl

Quantity of Rooms Demanded at Each Price by Travelers in Each Segment in Each Season Slide ©2004 by Christopher Lovelock and Jochen Wirtz


Note: hypothetical example 1 - 172

Avoiding Burdensome Waits for Customers

Add extra capacity so that demand can be met at most times (problem: may add too many costs)

Rethink design of queuing system to give priority to certain customers or transactions

Redesign processes to shorten transaction time Manage customer behavior and perceptions of wait Install a reservations system Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Alternative Queuing Configurations (Fig. 9-4) Single line, single server, single stage Single line, single servers at sequential stages Parallel lines to multiple servers Designated lines to designated servers

Single line to multiple servers (“snake”) “Take a number” (single or multiple servers)

28



24

26 27 32

21 20

25

30 31

29

23

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Tailoring Queuing Systems to Market Segments: Criteria for Allocation to Designated Lines

Urgency of job emergencies vs. non-emergencies

Duration of service transaction number of items to transact complexity of task

Payment of premium price First class vs. economy

Importance of customer frequent users/loyal customers vs. others



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Ten Propositions on the Psychology of Waiting Lines (Table 9-3) 1. Unoccupied time feels longer 2. Preprocess/postprocess waiting feel longer than inprocess 3. Anxiety makes waiting seem longer 4. Uncertain waiting is longer than known, finite waiting 5. Unexplained waiting seems longer 6. Unfair waiting is longer than equitable waiting 7. People will wait longer for more valuable services 8. Waiting alone feels longer than in groups 9. Physically uncomfortable waiting feels longer 10. Waiting seems longer to new or occasional users Sources: Maister; Davis & Heineke; Jones & Peppiatt Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Benefits of Effective Reservations Systems

Controls and smoothes demand Pre-sells service Informs and educates customers in advance of arrival Customers avoid waiting in line for service (if service times are honored)

Data capture helps organizations prepare financial projections



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Characteristics of Well-designed Reservations Systems

Fast and user friendly for customers and staff Can answer customer questions Offers options for self service (e.g. Web) Accommodates preferences (e.g., room with view) Deflects demand from unavailable first choices to alternative times and locations

Includes strategies for no-shows and overbooking requiring deposits to discourage no-shows canceling unpaid bookings after designated time compensating victims of over-booking



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Setting Capacity Allocation Sales Targets for a Hotel by Segment and Time Period (Fig. 9-5) Capacity (% rooms) 100%

Week 7

Week 36

(Low Season)

(High Season)

Out of commission for renovation

Executive service guests

Executive service guests Transient guests 50%

Weekend package Transient guests

W/E package

Groups and conventions Groups (no conventions) Airline contracts Nights: M

Tu

W

Th

Airline contracts F


S

Sn

M

Time


Tu

W

Th

F

S

Sn 1 - 179

Information Needed for Demand and Capacity Management Strategies

Historical data on demand level and composition, noting responses to marketing variables

Demand forecasts by segment under specified conditions Fixed and variable cost data, profitability of incremental sales

Site-by-site demand variations Customer attitudes towards queuing Customer evaluations of quality at different levels of capacity utilization



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Chapter 10

Planning the Service Environment



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The Purpose of Service Environments The service environment influences buyer behaviour in 3 ways

Message-creating Medium: symbolic cues to communicate the distinctive nature and quality of the service experience.

Attention-creating Medium: to make the servicescape stand out from other competing establishments, and to attract customers from target segments.

Effect-creating Medium: colors, textures, sounds, scents and spatial design to enhance the desired service experience, and/or to heighten an appetite for certain goods, services or experiences

Helps the firm to create a distinctive image & positioning that is unique. Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Comparison of Hotel Lobbies (Figure 10.1)

The servicescape is part of the value proposition!

Orbit Hotel and Hostel, Los Angeles Four Seasons Hotel, New York Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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The Mehrabian-Russell Stimulus-Response Model (Figure 10.2)

Environmental Stimuli & Cognitive Processes

Dimensions of Affect:


Pleasure and Arousal


Response Behaviors: Approach/ Avoidance & Cognitive Processes

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The Mehrabian-Russell Stimulus-Response Model

Simple and fundamental model of how people respond to environments

Peoples’ conscious and unconscious perceptions and

interpretation of the environment influence how they feel in that environment

Feelings, rather than perceptions or thoughts drive behavior

Typical outcome variable is ‘approach’ or ‘avoidance’ of an environment, but other possible outcomes can be added to the model as well



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The Russell Model of Affect

Arousing Distressing

Exciting

Pleasant

Unpleasant

Relaxing

Boring

Sleepy



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The Russell Model of Affect

Emotional responses to environments can be described along two main dimensions, pleasure and arousal.

Pleasure is subjective depending on how much the individual likes or dislikes the environment

Arousal quality of an environment is dependent on its “information load”, i.e., its degree of

Novelty (unexpected, surprising, new, familiar) and

Complexity (number of elements, extent of motion or change)



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Drivers of Affect

Affect can be caused by perceptions and cognitive processes of any degree of complexity.

Simple Cognitive Processes, Perception of Stimuli tangible cues (of service quality) consumer satisfaction

Complex Cognitive Processes affective charged schemata processing attribution processes

The more complex a cognitive process becomes, the more powerful its potential impact on affect.However, most service encounters are routine. Simple processes can determine affect. Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Behavioral Consequence of Affect

Basically, pleasant environments result in approach,

and

unpleasant environments result in avoidance

Arousal acts as an amplifier of the basic effect of pleasure on behavior

If the environment is pleasant, increasing arousal can lead

to excitement and stronger positive consumer response. If the environment is unpleasant, increasing arousal level will move consumers into the Distressing region

Feelings during the service encounter is also an important driver of customer loyalty



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An Integrated Framework – Bitner’s ServiceScape Model (Figure 10.4) Environmental Dimensions

Ambient Conditions

Space/ Function

Signs, Symbols & Artefacts

Moderators Holistic Environment

Internal Responses Cognitive Emotional Psychological

Employee Response Moderator

Employee Responses

Perceived ServiceScape

Customer Response Moderator


Customer Responses Cognitive Emotional Psychological


Behaviour

Approach or Avoid Social Interaction Between Customers & Employees

Approach or Avoid

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An Integrated Framework – Bitner’s ServiceScape Model(con’t)

Identifies the main dimensions in a service environment and views them holistically

Customer and employee responses classified under,

cognitive, emotional and psychological which would in turn lead to overt behavior towards the environment

Key to effective design is how well each individual dimension fits together with everything else



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Dimensions of the Service Environment Service environments are complex and have many design elements. The main dimensions in the servicescape model includes:

Ambient Conditions Music (e.g, fast tempo and high volume increase arousal

levels) Scent (strong impact on mood, affect and evaluative

responses, purchase intention and in-store behavior) Color (e.g, warm colors associated with elated mood states

and arousal but also increase anxiety, cool colors reduce arousal but can elicit peacefulness and calm) Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Dimensions of the Service Environment (con’t)

Spatial Layout and Functionality Layout refers to size and shape of furnishings and the ways it

is arranged Functionality is the ability of those items to facilitate performance

Signs, Symbols and Artifact Explicit or implicit signals to communicate the firm’s image,

help consumers find their way and to convey the rules of behavior



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Impact of Music on Restaurant Diners (Table 10-2) Restaurant Patron Behavior

Fast-beat Slow-beat Difference between Music Music Slow and Fast-beat Environment Environment Environments Absolute Difference

% Difference

Consumer time spent at table

45min

56min

+11min

+24%

Spending on food

$55.12

$55.81

+$0.69

+1%

Spending on beverages

$21.62

$30.47

+$8.85

+41%

Total spending

$76.74

$86.28

+$9.54

+12%

Estimated gross margin

$48.62

$55.82

+$7.20

+15%



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The Effects of Scents on the Perceptions of Store Environments (Table 10-3) Evaluation

Unscented Environment Mean Ratings

Scented Environment Mean Ratings

Difference

Store Evaluation Negative/positive

4.65

5.24

+0.59

Outdated/modern

3.76

4.72

+0.96

Store Environment Unattractive/attracti ve Drab/colorful

4.12

4.98

+0.86

3.63

4.72

+1.09

Boring/Stimulating

3.75

4.40

+0.65



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The Effects of Scents on the Perceptions of Store Environments (Table 10-3) Evaluation

Unscented Environment Mean Ratings

Scented Environment Mean Ratings

Difference

Outdated/up- to-date style

4.71

5.43

+0.72

Inadequate/adequate

3.80

4.65

+0.85

Low/high quality

4.81

5.48

+0.67

Low/high price

5.20

4.93

-0.27

Merchandise



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Aromatherapy: The Effects of Fragrance on People (Table 10-4) Fragrance

Aromath erapy

Aromather apy Class

Tradition Potential Psychological al Use Impact on People

Orange

Citrus

Calming

Calming and relaxing effect esp. for nervous people

Lavender

Herbaceo Calming, us balancing, soothing

Jasmine

Floral

Soothing agent, astringen t Muscle relaxant, soothing agent Emollient soothing agent Skin cleanser

Increase attention level and boosts energy

Peppermint Minty

Uplifting, balancing Energizing, stimulating



Relaxing and calming, helps create a homey and comfortable feel Helps makes people feel refreshed, joyful, comfortable

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Common Associations and Human Responses to Colors (Table 10-5) Color

Degree of Nature Common Association and Warmth Symbol Human Responses to Color

Red

Warm

Earth

High energy and passion; can excite, stimulate, and increase arousal and blood pressures

Orange

Warmest

Sunset

Emotions, expressions, and warmth

Green

Cool

Grass and Trees

Nurturing, healing and unconditional love

Blue

Coolest

Sky and Relaxation, serenity and loyalty Ocean



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Selection of Environmental Design Elements

There is a multitude of research on the perception and

impact of environmental stimuli on behaviour, including: People density, crowding Lighting Sound/noise Scents and odours Queues

No standard formula to designing the perfect combination of these elements.

Design from the customer’s perspective Design with a holistic view! Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Tools to Guide in Servicescape Design

Keen Observation of Customers’ Behavior and Responses to the service environment by management, supervisors, branch managers, and frontline staff

Feedback and Ideas from Frontline Staff and Customers using a broad array of research tools ranging from suggestion boxes to focus groups and surveys.

Field Experiments can be used to manipulate specific

dimensions in an environment and the effects observed.

Blueprinting or Service Mapping - extended to include the physical evidence in the environment.



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Chapter 11

Managing People for Service Advantage



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Frontline Service Personnel: Source of Customer Loyalty and Competitive Advantage

Frontline is an important source of differentiation and competitive advantage. It is: a core part of the product the service firm the brand

Frontline also drives customer loyalty, with employees

playing key role in anticipating customer needs, customizing service delivery and building personalized relationships



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Boundary Spanning Roles

Boundary spanners link the inside of the organization to the outside world

Multiplicity of roles often results in service staff having to pursue both operational and marketing goals

Consider management expectations of restaurant servers: deliver a highly satisfying dining experience to their customers be fast and efficient at executing operational task of serving

customers do selling and cross selling, e.g. “We have some nice desserts to follow your main course”



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Role Stress in the Frontline 3 main causes of role stress: Person vs. Role: Conflicts between what jobs require and

employee’s own personality and beliefs Organization vs. Customer: Dilemma whether to follow

company rules or to satisfy customer demands Customer vs. Customer: Conflicts between customers that

demand service staff intervention



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Emotional Labor

“The act of expressing socially desired emotions during

service transactions” (Hochschild, The Managed Heart)

Three approaches used by employees surface acting deep acting spontaneous response

Performing emotional labor in response to society’s or management’s display rules can be stressful

Good HR practice emphasizes selective recruitment, training, counseling, strategies to alleviate stress



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The Cycles of Failure, Mediocrity and Success Too many managers make short-sighted assumptions about financial implications of: Low pay Low investment (recruitment, training) High turnover human resource strategies

Often costs of short-sighted policies are ignored: Costs of constant recruiting, hiring & training Lower productivity & lower sales of new workers Costs of disruptions to a service while a job remains unfilled Loss of departing person’s knowledge of business and customers Cost of dissatisfied customers



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Cycle of Failure (Fig. 11.1) Customer turnover

Failure to develop customer loyalty

Repeat emphasis on attracting new customers

Low profit margins

High employee turnover; poor service quality

Use of technology Emphasis on to control quality rules rather than service Payment of low wages

No continuity in relationship for Employee dissatisfaction; customer poor service attitude

Customer dissatisfaction

Employees become bored

Narrow design of jobs to accommodate low skill level

Minimization of selection effort Minimization of training

Employees can’t respond to customer problems

Source: Schlesinger and Heskett



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Routinized Intermittent

‘Normality’ of Service Sabotage Behaviors

Service Sabotage (Fig. 11-A) ‘Openness’ of Service Sabotage Behaviors Covert

Overt

Customary-Private Service Sabotage

Customer-Public Service Sabotage

e.g. Waiters serving smaller servings, bad beer or sour wine

e.g. Talking to guests like young kids and putting them down

Sporadic-Private Service Sabotage

Sporadic-Public Service Sabotage

e.g. Chef occasionally purposefully slowing down orders

e.g. Waiters spilling soup onto laps, gravy onto sleeves, or hot plates into someone’s hands



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Cycle of Mediocrity (Fig. 11.2) Customers trade horror stories

Other suppliers (if any) seen as equally poor

Employee dissatisfaction (but can’t easily quit)

Employees spend working life in environment of mediocrity Narrow design of jobs

No incentive for cooperative relationship to obtain better service

Emphasis on rules vs. pleasing customers

Complaints met by indifference or hostility

Training emphasizes Success = learning rules not making mistakes Service not focused on customers’ needs Jobs are boring and repetitive; employees Good wages/benefits unresponsive high job E security Resentment at inflexibility and Promotion lack of employee initiative; and pay complaints to employees increases based Initiative is on longevity, discouraged lack of mistakes Customer dissatisfaction



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Cycle of Success (Fig. 11.3) Low customer turnover

Customer loyalty

Higher profit margins

Lowered turnover, high service quality Continuity in relationship with customer Employee satisfaction, positive service attitude

High customer satisfaction

Repeat emphasis on customer loyalty and retention

Extensive training

Broadened job designs

Train, empower frontline personnel to control quality

Above average wages Intensified selection effort

Source: Heskett and Schlesinger



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How to Manage People for Service Advantage? Staff performance is a function of both ability and motivation. How can we get able service employees who are motivated to productively deliver service excellence?

1. Hire the right people 2. Enable your people 3. Motivate and energize your people



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Hire the Right People

“The old saying ‘People are your most important asset’ is wrong. The RIGHT people are your most most important asset.” Jim Collins Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Recruitment

The right people are a firm’s most important asset: take a focused, marketing-like approach to recruitment

Clarify what must be hired versus what can be taught Clarify nature of the working environment, corporate values and style, in addition to job specs

Ensure candidates have/can obtain needed qualifications Evaluate candidate’s fit with firm’s culture and values Fit personalities, styles, energies to the appropriate jobs Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Select And Hire the Right People: (1) Be the Preferred Employer Create a large pool: “Compete for Talent Market Share”

What determines a firm’s applicant pool? Positive Quality The

image in the community as place to work

of its services

firm’s perceived status

There is no perfect employee Different

jobs are best filled by people with different skills, styles or personalities

Hire

candidates that fit firm’s core values and culture

Focus

on recruiting naturally warm personalities



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Select and Hire the Right People: (2) How to Identify the Best Candidates

Observe Behavior Hire

based on observed behavior, not words you hear

Best

predictor of future behavior is past behavior

Consider

group hiring sessions where candidates given group tasks

Personality Testing Willingness

to treat co-workers and customers with courtesy, consideration and tact

Perceptiveness Ability

regarding customer needs

to communicate accurately and pleasantly



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Select and Hire the Right People: (3) How to Identify the Best Candidates

Employ Multiple, Structured Interviews

Use structured interviews built around job requirements

Use more than one interviewer to reduce similar to me effects

Give Applicants a Realistic Preview of the Job

Chance to have “hands-on” with the job

Assess how the candidates respond to job realities

Allow candidates to self select themselves out of the job



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Train Service Employees

The Organizational Culture, Purpose and Strategy Promote core values, get emotional commitment to strategy Get managers to teach “why”, “what” and “how” of job.

Interpersonal and Technical Skills Both are necessary but neither is sufficient for optimal job

performance

Product/Service Knowledge Staff’s product knowledge is a key aspect of service quality Staff need to be able to explain product features and to position

products correctly



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Factors Favoring Employee Empowerment

Firm’s strategy is based on competitive differentiation and on personalized, customized service

Emphasis on long-term relationships vs. one-time transactions Use of complex and non-routine technologies Environment is unpredictable, contains surprises Managers are comfortable letting employees work independently for benefit of firm and customers

Employees seek to deepen skills, like working with others, and are good at group processes



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Control vs. Involvement Model of Management Control concentrates 4 key features at top of organization; Involvement pushes them down:

Information about operating results and measures of competitive performance

Rewards based on organizational performance (e.g. profit sharing, stock ownership)

Knowledge/skills enabling employees to understand and contribute to organizational performance

Power to influence work procedures and organizational direction (e.g. quality circles, self-managing teams) Source: Bowen and Lawler



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Levels of Employee Involvement

Suggestion involvement

Employee recommendation

Job involvement

Jobs redesigned Employees retrained Supervisors facilitate

High involvement

Information is shared Employees skilled in teamwork, problem solving etc. Participate in decisions Profit sharing and stock ownership



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Motivate and Energize the Frontline Use the full range of available rewards effectively, including:

Job content Feedback and recognition Goal accomplishment



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The Inverted Organizational Pyramid (Fig. 11.5) Customer Base Top Mgmt

Frontline Staff

Middle Mgmt

Legend:

Frontline Staff

Middle Mgmt & Top Mgmt Support Frontline

Traditional Organizational Pyramid

Inverted Pyramid with a Customer & Frontline Focus

= Service encounters, or ‘Moments of Truth.’



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The Wheel of Successful HR in Service Firms (Fig. 11.6) Leadership that: 1. Hire the Right People

Focuses the entire organization on supporting the frontline Fosters a strong service culture with passion for service and productivity Drives values that inspire, energize and guide service providers

3. Motivate & Energize Your People

Utilize the full range of rewards

Be the preferred employer & compete for talent market share

Service Excellence & Productivity

Intensify the selection process

2. Enable Your People Empower Frontline Build high performance service delivery teams Extensive Training



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Chapter 12

Managing Relationships and Building Loyalty



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Four Stages of Brand Loyalty in a Consumer

Cognitive loyalty – perception from brand attribute

information that one brand is preferable to its alternatives

Affective loyalty – developing a liking for the brand based on cumulatively satisfying usage occasions

Conative loyalty – commitment to rebuying the same brand Action loyalty – exhibiting consistent repurchase behavior



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Loyalty is Important to Profitability : Index of Customer Profits over Time (Fig. 12.1) (Year 1=100) 350 – 300 250 200 150 100 50 0

Year 1 Credit card

Year 2 Industrial laundry

Year 3

Year 4

Industrial distribution

Year 5 Auto servicing

Based on data from Reichheld and Sasser



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What Makes Loyal Customers More Profitable?

Tend to spend more as relationship develops customer’s balances may grow may consolidate purchases to one supplier

Cost less to serve less need for information and assistance make fewer mistakes

Recommend new customers to firm (act as unpaid sales people)

Trust leads to willingness to pay regular prices vs. shopping for discounts



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Analyzing Why Customers Are More Profitable over Time (Fig. 12.2) Profit from price premium Profit from references Profit from reduced op. costs Profit from increased usage Base Profit

1

2

3

4

5

6

7

Year Slide ©2004 by Christopher Lovelock and Jochen Wirtz

Source: Reichheld and Sasser


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Measuring Customer Equity: Calculating Life Time Value of Each Customer

Value at Acquisition

revenues (application fee + initial purchase) Less costs (marketing +credit check + account set up)

Annual Value (project for each year of relationship)

revenues (annual fee + sales + service fees + value of referrals) Less costs (account management + cost of sales + write-offs)

Net Present Value

Determine anticipated customer relationship lifetime Select appropriate discount figure Sum anticipated annual values (future profits) at chosen discount

rate

Customer Equity is total sum of NPVs of all current customers Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Customer-Firm Relationship Today’s marketers seek to develop long-term relationships with customers. Relationship marketing includes:

Database Marketing: Involves the use of technology by

delivering differentiated service levels to consumers and subsequently tracking the relationship.

Interaction Marketing: Usually in B2B context where people and the social process also add mutually beneficial value.

Network Marketing: Common in B2B context where companies commit resources to develop positions in a network of relationships with the stakeholders and relevant agencies.



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Types of Relationships with Customers (Table 12.1)

Type of Relationship--Firm and Customer Nature of Service Delivery Continuous

Discrete transactions

“Membership” Cable TV Insurance College enrollment Subscriber phone Theater subscription Warranty repair



No formal relationship Radio station Police Lighthouse Pay phone Movie theater Public transport

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Basic Segmentation Issues: Building an Appropriate Customer Portfolio

Target customers whose needs match firm’s capabilities Focus on value of prospective customers within each segment, not just numbers

Avoid targeting customers who might abuse: our employees, facilities other customers

Create a mix of segments to reduce risks of volatility during swings of economic cycles



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Service-Relevant Segmentation Variables

Timing of service use (e.g., by hour, day, season) Level of skill and experience as co-producer/selfserver

Preferred language in face-to-face contact Access to electronic delivery systems (e.g., Internet) Attitudes toward use of new service technologies



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Identifying and Selecting Target Segments (Mgt Memo 12.2)

User characteristics

demographics psychographics geographic location benefits sought

User behavior


when, where, how services used quantity/value of purchases frequency of use profitability of relationship sensitivity to marketing variables


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Portfolio of Professional Assignments

(Fig. 12.4)

Major, State-of-the-art challenges for the firm’s principals that give the firm high visibility Demanding client assignments offering a learning experience for the firm’s most experienced associates

“Pacesetters”

Significant Projects

Routine client projects shared among principals and associates

“Bread and Butter” Projects

Analytical Work on Project Data



Entry-level tasks for new associates or for research assistants & paraprofessionals

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The Customer Pyramid (Fig. 12.5) Good Relationship Customers Which segment sees high value in our offer, spends more with us over time, costs less to maintain, and spreads positive word-of-mouth?

Platinum Gold

Which segment costs us in time, effort and money, yet does not provide the return we want? Which segment is difficult to do business with?

Iron Lead Poor Relationship Customers Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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How Customers See Relational Benefits in Service Industries (Research Insights 12.1)

Confidence benefits

less risk of something going wrong, less anxiety ability to trust provider know what to expect get firm’s best service level

Social benefits

mutual recognition, known by name friendship, enjoyment of social aspects

Special treatment benefits

better prices, discounts, special deals unavailable to others extra services higher priority with waits, faster service



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The Customer Satisfaction-Loyalty Relationship (Fig. 12.6)

Apostle

Loyalty (Retention)

100

Zone of Affection 80

Near Apostle 60

40

Zone of Indifference Zone of Defection

20

Terrorist 0

1 Very dissatisfied

2

3

4

Neither satisfied Dissatisfied Satisfied nor dissatisfied

5 Very Satisfied

Satisfaction Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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The Wheel of Loyalty (Fig. 12.7) 3. Reduce Churn Drivers Conduct churn diagnostic Address key churn drivers Enabled through: Frontline staff Account managers Membership programs CRM Systems

Implement complaint handling & service recovery Increase switching costs

Build higher level bonds

1. Build a Foundation for Loyalty Segment the market Be selective in acquisition Use effective tiering of service.

Customer Loyalty

Deliver quality service.

2. Create Loyalty Bonds Deepen the relationship Give loyalty rewards



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Rewarding Value of Use, Not Just Frequency at British Airways (Best Practice in Action 12.2) Dedicated reservations Reservations assurance Priority waitlist and standby Advance notification of delays

exceeding 4 hours

Upgraded check-in Preferred boarding Special services assistance Bonus air miles Upgrade for two



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Drivers of Service Switching (Fig. 12.9) Service Failure / Recovery

Value Proposition

Core Service Failure

Pricing

• Service Mistakes • Billing Errors • Service Catastrophe

Service Encounter Failures • • • •

Uncaring Impolite Unresponsive Unknowledgeable

• • • •

Service Switching

Response to Service Failure • Negative Response • No Response • Reluctant Response

High Price Price Increases Unfair Pricing Deceptive Pricing

Inconvenience • Location/Hours • Wait for Appointment • Wait for Service

Competition • Found Better Service

Others Involuntary Switching

Ethical Problems

• Customer Moved • Provider Closed

• Unsafe • Cheat • Hard Sell • Conflict of Interest



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Common CRM Applications (Mgt Memo 12.2)

Signifies the whole process by which relationships with customers are built and maintained.

CRM as an enabler, offering a “unified customer interface” and allow firms to better understand and segment the customers etc. Applications include: Data collection Data analysis Sales force automation Marketing automation Call center automation



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Customer Relationship Strategies with CRM Systems: Key Questions

How should our value proposition change to increase customer loyalty?

How much customization or one-to-one marketing and service delivery is appropriate and profitable?

What is the incremental profit potential of increasing share of wallet with current customers? How much does this vary by customer tier and/or segment?

How much time and resource can we allocate to CRM right now? If we believe in CRM, why have we not taken steps in that direction before? What can we do today to develop customer relationship without spending on technology?



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Chapter 13

Customer Feedback and Service Recovery



1 - 244

American Customer Satisfaction Index: Selected Industry Scores, 2002 Score (Max = 100)

100 90

85

80

79

80

79

74

71

71

70

66

70

76 65

62

60 50 40 30 20 10 % Change 0 3.7% 2002 vs 2001

1.3% 0.0% 1.3% 2.8% 0.0% 0.0% 8.2% 2.9% -2.6%

4.8% 3.3%

Industry:



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Key Questions for Managers to Ask about Customer Complaining Behavior

Why do customers complain? What proportion of unhappy customers complain? Why don’t unhappy customers complain? Who is most likely to complain? Where do customers complain?



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Courses of Action Open to a Dissatisfied Customer (Figure 13.1) Complain to the service firm Take some form of public action Service Encounter is Dissatisfactory

Take some form of private action

Take no action

Complain to a third party Take legal action to seek redress Defect (switch provider) Negative word-ofmouth

Any one or a combination of these responses is possible Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Dimensions of Perceived Fairness in Service Recovery Process (Figure 13.2) Complaint Handling & Service Recovery Process Justice Dimensions of the Service Recovery Process Procedural Justice

Interactive Justice

Outcome Justice

Customer Satisfaction with the Service Recovery Source: Tax and Brown Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Proportion of Unhappy Customers Who Buy Again Depending on the Complaint Process 100 90 80 70 60 50 40 30 20 10 0

95% 82% 70% 54% 46% 37% 19% 9% Customer did not complain

Complaint was not resolved

Problem cost > $100

Complaint was resolved

Complaint was resolved quickly

Problem cost $1 - 5 Source: TARP study



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Impact of Effective Service Recovery on Retention

No Problem

84%

Problem, but effectively resolved

92%

Problem Unresolved

46% 0%

10%

20%

30%

40%

50%

60%

70%

80%

90% 100%

Customer Retention Source: IBM-Rochester study Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Components of an Effective Service Recovery System (Figure 13.3)

Do Dothe theJob JobRight Rightthe the First Time First Time

+

Effective EffectiveComplaint Complaint Handling Handling

Identify IdentifyService Service Complaints Complaints

=

Increased IncreasedSatisfaction Satisfaction and Loyalty and Loyalty Conduct ConductResearch Research Monitor MonitorComplaints Complaints Develop Develop“Complaints “Complaints as Opportunity” as Opportunity” Culture Culture

Resolve ResolveComplaints Complaints Effectively Effectively

Develop DevelopEffective Effective System and System andTraining Traininginin Complaints Handling Complaints Handling

Learn Learnfrom fromthe the Recovery Experience Recovery Experience

Conduct ConductRoot RootCause Cause Analysis Analysis

Close the Loop via Feedback



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Strategies to Reduce Customer Complaint Barriers (Table 13.1) Complaint Barriers for Dissatisfied Customers

Strategies to Reduce These Barriers

Inconvenience Difficult to find the right complaint procedure. Effort, e.g., writing a letter.

Make feedback easy and convenient by: Printing Customer Service Hotline numbers, e-mail and postal addresses on all customer communications materials.

Doubtful Pay Off Uncertain whether any action, and what action will be taken by the firm to address the issue the customer is unhappy with.

Reassure customers that their feedback will be taken seriously and will pay off by: Having service recovery procedures in place, and communicating this to customers. Featuring service improvements that resulted from customer feedback.

Unpleasantness Complaining customers fear that they may be treated rudely, may have to hassle, or may feel embarrassed to complain.

Make providing feedback a positive experience: Thank customers for their feedback. Train the frontline not to hassle and make customers feel comfortable. Allow for anonymous feedback.



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How to Enable Effective Service Recovery

Be proactive—on the spot, before customers complain

Plan recovery procedures Teach recovery skills to relevant personnel Empower personnel to use judgment and skills to develop recovery solutions



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Guidelines for Effective Problem Resolution (Management Memo 13.1) Act fast

Give benefit of doubt

Admit mistakes but don’t be defensive

Clarify steps to solve problem

Understand problem from customer’s viewpoint

Keep customers informed of progress

Don’t argue

Consider compensation

Acknowledge customer’s feelings

Persevere to regain goodwill



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Service Guarantees Help Promote and Achieve Service Loyalty Force firms to focus on what customers want Set clear standards Highlights cost of service failures Require systems to get & act on, customer feedback Reduce risks of purchase and build loyalty



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Types of Service Guarantees

Single attribute-specific guarantee – one key service attribute is covered

Multiattribute-specific guarantee – a few important service attributes are covered

Full-satisfaction guarantee – all service aspects covered with no exceptions

Combined guarantee – like the full-satisfaction, adding explicit minimum performance standards on important attributes



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The Hampton Inn 100% Satisfaction Guarantee (Figure 13.4)

What are the benefits of such a guarantee?

Are there any downsides?



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Key Objectives of Effective Customer Feedback Systems

Assessment and benchmarking of service quality and performance

Customer-driven learning and improvements Creating a customer-oriented service culture



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Building a Customer Feedback System

Total market surveys Post-transaction surveys Ongoing customer surveys Customer advisory panels Employee surveys/panels Focus groups Mystery shopping Complaint analysis Capture of service operating data



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Strengths and Weakness of Key Customer Feedback Collection Tools (Table 13.3) Selection of a cocktail of effective customer feedback collection tools. Multi-level Measurement

Collection Tools

Service Satisfaction

Process Satisfaction

Specific Feedback

Actionable

Represen Potential -tative, for Service Reliable Recovery

First Hand Learning

Cost Effective

Total Market Survey (inclu. competitors) Annual Survey on overall satisfaction Transactional Survey (process specific) Service Feedback Cards (process specific) Mystery Shopping (service testers) Unsolicited Feedback Recd (Online feedback system) Focus Group Discussions Service Reviews

Meets Requirements:

Fully

Moderate


Little/Not at all


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Entry Points for Unsolicited Feedback

Employees serving customers face-to-face or by phone Intermediaries acting for original supplier Managers contacted by customers at head/regional office Complaint cards mailed or placed in special box Complaints passed to company by third-party recipients consumer advocates trade organizations legislative agencies other customers



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Chapter 14

Improving Service Quality and Productivity



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Importance of Productivity and Quality for Service Marketers Productivity

Helps to keep costs down

lower prices to develop market, compete better increase margins to permit larger marketing budgets raise profits to invest in service innovation

May impact service experience (must avoid negatives) May require customer involvement, cooperation Quality

Gain competitive advantage, maintain loyalty Increase value (may permit higher margins) Improve profits Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Perspectives on Service Quality Transcendental: Quality = excellence. Recognized only through experience

Product-Based: Quality is precise and measurable User-Based:

Quality lies in the eyes of the beholder

ManufacturingBased:

Quality is conformance to the firm’s developed specifications

Value-Based:

Quality is a trade-off between price and value



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Dimensions of Service Quality

Tangibles Reliability Responsiveness Assurance

competence, courtesy credibility security

Empathy access communication understanding of customer



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Seven Service Quality Gaps (Fig. 14.1) CUSTOMER

Customer needs and expectations

1. Knowledge Gap Management definition of these needs

MANAGEMENT

2. Standards Gap Translation into design/delivery specs

3. Delivery Gap Execution of design/delivery specs

4. I.C.Gap

Advertising and sales promises

5. Perceptions Gap

Customer interpretation of communications

Customer perceptions of product execution

7.

6. Interpretation Gap

Service Gap Customer experience relative to expectations



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Prescriptions for Closing Service Quality Gaps (Table 14.3)

Knowledge: Learn what customers expect--conduct research, dialogue, feedback

Standards: Specify SQ standards that reflect expectations Delivery: Ensure service performance matches specs-consider roles of employees, equipment, customers

Internal communications: Ensure performance levels match marketing promises

Perceptions:

Educate customers to see reality of service

delivery

Interpretation: Pretest communications to make sure message is clear and unambiguous.



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Hard and Soft Measures of Service Quality

Hard measures refer to standards and measures that can be counted, timed or measured through audits typically operational processes or outcomes e.g. how many trains arrived late?

Soft measures refer to standards and measures that cannot easily be observed and must be collected by talking to customers, employees or others e.g. SERVQUAL, surveys, and customer advisory panels.

Control charts are useful for displaying performance over time against specific quality standards.



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Hard Measures of Service Quality

Control charts to monitor a single variable

Service quality indexes Root cause analysis (fishbone charts)

Pareto analysis



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Composition e of FedEx’s Service Quality Index (SQI) (Table 14.4) Failure Type

Weighting X Factor

Late Delivery – Right Day Late Delivery – Wrong Day Tracing request unanswered Complaints reopened Missing proofs of delivery Invoice adjustments Missed pickups Lost packages Damaged packages Aircraft Delays (minutes) Overcharged (packages missing label) Abandoned calls

No of Daily = Incidents Points

1 5 1 5 1 1 10 10 10 5 5 1

Total Failure Points (SQI) = Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Control Chart: Percent of Flights Leaving within 15 Minutes of Schedule (Fig. 14.2)

100% 90% 80% 70% 60% J

F

M

A

M

J

J

A

S

O

N

D

Month Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Tools to Address Service Quality Problems

Fishbone diagrams: A cause-and-effect diagram to identify potential causes of problems.

Pareto charts: Separating the trivial from the important.

Often, a majority of problems is caused by a minority of causes i.e. the 80/20 rule.

Blueprinting: A visualization of service delivery. It allows one to identify fail points in both the frontstage and backstage.



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Cause and Effect Chart for Airline Departure Delays (Fig. 14.3) Facilities, Equipment

Arrive late Oversized bags

Customers Customers

Frontstage Front-Stage Personnel Personnel

Procedure Procedures

Delayed check-in Gate agents Aircraft late to procedure gate cannot process Mechanical fast enough Acceptance of late Failures passengers Late/unavailable Late pushback airline crew

Delayed Departures Late food service

Other Causes Weather Air traffic

Late cabin cleaners

Late baggage

Weight and balance sheet late

Late fuel Materials, Materials, Supplies Supplies

Poor announcement of departures

Backstage Personnel


Information


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Analysis of Causes of Flight Departure Delays

15.3%

23.1%

15.4%

(Fig. 14.4)

All stations, excluding Chicago-Midway Hub 11.7%

23.1%

23.1%

33.3%

33.3% 53.3%

15%

Washington Natl.

Late passengers Waiting for pushback Waiting for fueling


19% 9.5%

8.7% 11.3%

Newark

4.9 %

Late weight and balance sheet Late cabin cleaning / supplies Other


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Return on Quality (ROQ)

ROQ approach is based on four assumptions: Quality is an investment Quality efforts must be financially accountable It’s possible to spend too much on quality Not all quality expenditures are equally valid

Implication: Quality improvement efforts may benefit

from

being related to productivity improvement programs



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When Does Improving Service Reliability Become Uneconomical? (Fig. 14.5) Satisfy Target Customers Through Service Recovery

Service Reliability

100%

Optimal Point of Reliability: Cost of Failure = Service Recovery

A

B

Satisfy Target Customers Through Service Delivery as Planned

D

C

Investment Small Cost, Large Improvement

Large Cost, Small Improvement



Assumption: Customers are equally (or even more) satisfied with the service recovery provided than with a service that is delivered as planned.

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Productivity in a Service Context

Productivity measures amount of output produced relative to the amount of inputs.

Improvement in productivity means an improvement in the ratio of outputs to inputs.

Intangible nature of many service elements makes it hard

to measure the productivity of service firms, especially for information based services.



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Efficiency, Effectiveness, and Productivity

Efficiency: comparison to a standard--usually time-based (e.g., how long employee takes to perform specific task) Problem: focus on inputs rather than outcomes May ignore variations in quality or value of service

Effectiveness: degree to which firm is meeting its goals Cannot divorce productivity from quality/customer satisfaction

Productivity: financial valuation of outputs to inputs Consistent delivery of outcomes desired by customers should

command higher prices



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Measuring Service Productivity

Traditional measures of service output tend to ignore variations in quality or value of service

That is, they focus on outputs rather than outcomes, and stress

efficiency but not effectiveness.

Firms that are more effective in consistently delivering

outcomes desired by customers can command higher prices. Furthermore, loyal customers are more profitable.

Measures with customers as denominator include: profitability by customer capital employed per customer shareholder equity per customer



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Questions to Ask When Developing Strategies to Improve Service Productivity

How to transform inputs into outputs efficiently? Will improving productivity hurt quality? Will improving quality hurt productivity? Are employees or technology the key to productivity? Can customers contribute to higher productivity?



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Operations-driven vs. Customer-driven Actions to Improve Service Productivity Operations-driven strategies Customer-driven strategies Control costs, reduce waste Change timing of customer demand Set productive capacity to match average demand Involve customers more in Automate labor tasks production Upgrade equipment and systems Ask customers to use third parties Train employees Leverage less-skilled employees through expert systems Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Backstage and Frontstage Productivity Changes: Implications for Customers

Backstage improvements can ripple to the front stage and affect customers

e.g., new printing peripherals may affect appearance of bank

statements.

Front-stage productivity enhancements are especially visible in high contact services.

Some may just require passive acceptance by customers Others require customers to change their scripts and behavior.



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Overcoming Customers’ Reluctance to Accept Changes in Environment and Behavior

Develop customer trust Understand customers’ habits and expectations Pretest new procedures and equipment Publicize the benefits Teach customers to use innovations and promote trial Monitor performance, continue to seek improvements Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Six Sigma Methodology to Improve and Redesign Customer Service Processes Process Improvement Process Design/Redesign Define Measure Analyze

Improve

Control

Identify the problem Define requirements Set goals Validate problem/process Refine problem/goal Measure key steps/inputs Develop causal hypothesis Identify root causes Validate hypothesis Develop ideas to measure root causes Test solutions Measure results Establish measures to maintain performance Correct problems if needed


Identify specific or broad problems Define goal/change vision Clarify scope & customer requirements Measure performance to requirements Gather process efficiency data Identify best practices Assess process design Refine requirements Design new process Implement new process, structures and systems

Establish measures & reviews to maintain performance Correct problems if needed


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Chapter 15

Organizing for Service Leadership



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Customer-Led versus Market-Oriented Philosophies of Management

Firms may lose market leader position if listen too closely to current customers

Service leadership requires curiosity, risk taking Customer-led businesses focus on understanding expressed desires of customers in currently served markets

Market-oriented businesses commit to understand current/

latent customer desires plus competitors’ plans, capabilities Scan market more broadly, have longer-term focus Work closely with lead users (windows to future vs. anchors to

past) Combine traditional research with experimentation, observation

Conclusion: Pursue customer satisfaction, but set limits on being led by customers, especially during rapid change



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The Service Profit Chain (Fig. 15.1) Internal

External Service concept

Operating strategy and service delivery system

Target Market

Loyalty

CUSTOMERS

EMPLOYEES Satisfaction Productivity & Output Quality

Service Value

Revenue Growth Satisfaction

Loyalty

Profitability

Capability Service Quality

• Workplace design • Job design • Selection and development • Rewards and recognition • Information and communication • Tools for serving customers

Quality and productivity improvements yield higher service quality and lower costs



• Lifetime value • Retention • Repeat business • Referral

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Causal Links in the Service Profit Chain (Table 15.1)

Customer loyalty drives profitability and growth Customer satisfaction drives customer loyalty Value drives customer satisfaction Employee productivity and retention drive value Employee loyalty drives productivity Employee satisfaction drives loyalty and productivity Internal quality drives employee satisfaction Top management leadership underlies chain’s success Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Integrating Three Functional Imperatives (recap from Chapter 1)

Marketing Imperative

Human Resources Imperative

Customers

Operations Imperative



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Defining Three Functional Imperatives

Marketing Imperative

Target “right” customers and build relationships Offer solutions that meet their needs Define quality package with competitive advantage

Operations Imperative

Create, deliver specified service to target customers Adhere to consistent quality standards Achieve high productivity to ensure acceptable costs

Human Resource Imperative

Recruit and retain the best employees for each job Train and motivate them to work well together Achieve both productivity and customer satisfaction



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Reducing Intra-Organizational Tension

Transfers and cross training Cross functional taskforces New tasks and new people Process management teams Gain-sharing programs



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The Search for Synergy: A Top Management Perspective What do we want?

What do our employees, intermediaries, and other partners want?

What do our customers want?

What can we do? Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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From Losers to Leaders: Moving Up the Service Performance Ladder

Service Leaders

Crème de la crème of their respective industries Names synonymous with outstanding service, customer delight

Service Professionals Clear positioning strategy

Sustained reputation for meeting customer expectations

Service Non-entities

Traditional operations mindset Rudimentary marketing, often emphasizing price discounts

Service Losers

Only survive because of lack of viable alternatives in marketplace



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Achieving Service Leadership by Focusing on Role of Each Functional Area

Marketing: move from tactical to innovative and strategic

Operations: move from reactive/cost oriented to focused, innovative, well coordinated with marketing and HR

Human Resources: move from tight control of lowcost workers to quality of employees as strategic advantage



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Leadership for Change Management Involves Eight Stages

Create sense of urgency to develop impetus for change Put together strong team to direct process Create appropriate vision of where organization must go Communicate new vision broadly Empower employees to act on vision Produce sufficient short term results to create credibility Build momentum to tackle tougher problems Anchor new behaviors in the organizational culture Source: John Kotter Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Leadership Qualities Needed in Service Organizations

Vision, charisma, persistence, high expectations, expertise, empathy, persuasiveness, integrity

Ability to visualize quality of service as foundation for competing

Believe in people who work for the firm, make good communications a priority

Possess a natural enthusiasm for the business, teach it to others, pass on nuances, secrets, crafts of operating

Cultivate leadership qualities of others in organization Use values to navigate firms through difficult times Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Transformational Leadership May Require Changing Corporate Culture

Corporate Culture: Shared Shared Shared Shared Shared

perceptions regarding what is important values about what is right and wrong understanding about what works and what doesn’t beliefs about why these things are important styles of working and relating to others

Climate for Service--Tangible working environment atop underlying culture. Influential factors include:

Shared perceptions concerning practices, procedures and types of

behaviors that get rewarded Clarity about mission and values, level of commitment to common purpose Flexibility: freedom to innovate, sense of responsibility, standards Slide ©2004 by Christopher Lovelock and Jochen Wirtz


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Services Marketing Christopher Lovelock ppts combined

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