Week 7 (Semester 2) – Operations Strategy: SME and Service Sector Applications II Chapter 12 Outline of the Lecture The second lecture completes chapter 12 and deals with the service sector. In particular: 1. Appreciating the nature of services and the service sector. 2. Developing an operations strategy for service sector communities. 3. Understanding the business choices and integrative elements of a service strategy. 4. Discussing the ‘building blocks’ of a service strategy. Topics involved 1. Service sector operations strategies 2.1 The nature of service provision 2.2 Formulating a service sector operations strategy (using figure 12.1) 2.3 Service operations strategy building blocks Suggested Visual Aids & Handouts Figure 12.1 – Business decisions and integrative elements Discussion Questions 1. How can we model the value of a service? There are six important elements: · · · · · Perceived quality – fitness for use Intrinsic attributes – the core and supplementary service benefits provided to the customer Extrinsic attributes – external to the service but of immense psychological value Monetary price – the sum of expenses incurred to obtain the service Non-monetary price – Any perceived sacrifice over and above the monetary price paid · Time – time to use the service, the time saving element of the service, the time horizon for the service benefits to be realized. 2. Explain what is meant by the term a ‘package of features’ when discussing a service. As Fitzsimmons and Fitzsimmons (2000) suggest, we must think of a service as a bundle of elements: · · · · Supporting facilities – resources necessary Facilitating goods – material elements of the service Explicit services – readily observable benefits that are intrinsic features Implicit services – the psychological benefits for the customer and the basis of perception of the overall service. These features can be thought of and analyzed using the ‘moments of truth’ experience (the total experience can be ruined by one bad moment!) 3. Why is the service sector a particularly difficult environment? In most Western economies, the service sector is one of the most prolific and competitive. There is a proliferation of services available due to: · Low entry barriers – capital intensity and investment is relatively low. Services can easily be copied; only brand names can be protected. Location and equipment may provide a barrier for market entry, but these are quickly eroded; especially with the use of information communication technology. In addition, many commentators now suggest that loyalty to a service is often psychologically lower than in the case of a tangible good. A question for discussion, perhaps? · Opportunities for economy of scale. The opportunities to produce a large batch of a particular service are limited as the product is mostly consumed at point of production and is often individualized. · Erratic demand levels. Services are, in general, more likely to be affected by fluctuations in demand caused by weather, time of day, seasonality and random events. · Size and power disadvantages. Often service providers are small and medium organizations that are at a disadvantage when negotiating with more powerful suppliers and customers. · Service substitution. Services can often be easily duplicated and substituted with another product. Witness the number of fast food outlets in the average High Street or mall. · Exit barriers. These are relatively low and firms can easily switch between segments of the same market 1. What are the business choices and integrative elements needed for a service strategy? Business choices include: · · · Target market – careful identification of the segment is vital Service concept – precise definition of the value we provide to match the needs of the target market Operations strategy – decisions regarding how the service will be delivered in the future and the building blocks of that strategy Integrative elements include: · · · Positioning – conceptual and practical in order to differentiate from competitors Value/cost leverage – providing more value, but at less cost than competitors by customizing and standardizing certain service features. Strategy/system integration – consistency between the operations strategy, business strategy and the operational delivery system. Case Exercise – Swedish Medical Centre, Seattle 1. This is a relatively straightforward exercise, but we offer a few pointers Six essential parts of a service · · Perceived quality – quality of the medical intervention, with highly trained and expert staff Intrinsic attributes – the benefits of attending a world class hospital. These include medical expertise (core attributes) and general support facilities such as meals, décor, access, etc (‘comfort’ factors) · · · · Extrinsic attributes – the reputation of the Swedish is international Monetary price – the overall cost of attending the hospital (not only medical charges, but any loss of income or travel costs) Non-monetary price – time anxiety, inconvenience, etc. Time – the time involved in attending the hospital and how this compares with a competitor (both for procedures and waiting) The features of the service: · · · · Supporting facilities – the physical resources and technology necessary for a topclass hospital Facilitating goods – patient records, catering, cleaning, medical supplies Explicit services – observable benefits such a cure for illness or the lessening of pain and discomfort Implicit services – the status of a world class hospital and a sense of reassurance that may bring to patients and families. 2. As before, the building blocks approach can be used: · Core competencies, capabilities and processes (process-based, delivery of medical interventions in a safe and hygienic environment; system-based, the scheduling of operations and consultations together with after-care; organization-based, linking together all the services, medical and non-medical, needed to run a hospital; network-based, the necessary medical supply network, emergency services, medical insurance providers, etc) · · · Resources (medical, computer equipment and a highly trained work-force) Technologies (development and maintenance of the necessary technologies to support the infrastructure of a hospital (appointments, scheduling, supplies, etc) Key tactical activities to support a strategic positioning (the Swedish relies upon a reputation for well co-ordinated services with a minimum of delay – these require well-developed daily tactical processes and procedures that will have to be planned in advance. 3. Does the Swedish require more than one operations strategy? If so, for what products and/or services? As with many organizations, the sheer complexity of their operating environment and the proliferation of services provided may necessitate more than one strategy. As a reminder, this customization can be undertaken by either service and or customer. Thus for the Swedish, it is more likely that groups of services can use individual operations strategies. Operations, out patients, emergency services, after-care services, addiction services, community care, and support services are all possibilities. It is also conceivable that an operations strategy might be developed for customers. For example, fee paying, medical insurance, executive or economy service might be feasible. 4. Can these strategies be customized? If so, how? As mentioned earlier, once the building blocks of a strategy are identified, we can begin to customize the strategy by putting a particular emphasis upon some strategic themes, and the linkages between them, over and above others. 5. Intriguingly, the Swedish CEO suggests that increasing both quality and the variety of service can cut costs. Can this be done? If so, how? Some organizations will strive for both low cost and high quality as a strategic positioning (major UK supermarkets are an example). Increasing quality will reduce errors that lead to higher cost in the long run. Increasing the variety of service would normally increase cost; however, for an organization the size of the Swedish, we can begin to see how specialization within the various services will eventually drive down costs.