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Part - IV

Competitive Service Strategies

Michael Porter has argued persuasively that three generic competitive strategies exist: overall cost leadership, differentiation, and focus.

Overall Cost Leadership

An overall cost leadership strategy requires efficient-scale facilities, tight cost and overhead control, and often-innovative technology as well. Having a low-cost position provides a defense against competition, because less efficient competitors will suffer first from competitive pressures. Implementing a low-cost strategy usually requires high capital investment in state-of-the-art equipment, aggressive pricing, and start-up losses to build market share. A cost leadership strategy sometimes can revolutionize an industry, as illustrated by the success of MacDonald's, Wal-Mart, and Federal Express. Moreover, service firms gave been able to achieve low-cost leadership using a variety of approaches.

• Seeking out Low-Cost Customers: Some customers cost less to serve than others, and the service provider can target them. For example, United Services Association (USAA) occupies a preeminent position among automobile insurance because it serves only military officers, a group that presents a lower-than-average risk of problems requiring compensation. This group also entails lower cost because its members, who are relatively nomadic, are willing to do business by telephone or mail and are accustomed to doing so. Consequently, USAA is able to conduct all of its business transactions by phone and mail, eliminating any need for the expensive sales force employed by traditional insurers. Another example of this strategy is provided by low-cost retailers such as Sam's Wholesale Club and Price Club, which target customers who are willing to buy in quantity, do without frills, and serve themselves.

• Standardizing a custom Service: Typically, income tax preparation is considered to be a customized service. H & R Block, however, has been successful in serving customers nationwide when only routine tax preparation is required. Also, storefront legal services and family health care centers are attractive means of delivering routine professional services at low cost. The keyword here is routine.

• Reducing the Personal Element in Service Delivery: The potentially high-risk strategy of reducing the personal element in service delivery can be accepted by customers if increased convenience results. For example, convenient access to ATMs has weaned customers from personal interaction with live tellers and, consequently, has reduced transaction costs for banks.

• Reducing Network Costs: Service firms that require a network to knit together providers and customers encounter unusual start-up costs. Electric utilities, which have substantial fixed costs in transmission lines, provide the most obvious example. Federal Express conceived a unique approach to reduce network costs by using a "hub-and-spoke" network. By locating a hub in Memphis with state-of-the-art sorting technology, the overnight air-package carrier was able to serve the United States with no direct routes between all the cities served. The efficiency of the hub-and-spoke network strategy has not been lost on passenger airline operators, either.

• Taking Service Operations Offline: Many services, such as haircutting and passenger transportation, are inherently "online", because they can only be performed with the customer present. Fir services in which the customer need not be present, the service transaction can be "decoupled", with some content performed "offline". For example, a shoe repair service could even be located offshore. Performing services offline represents significant cost savings because of economies of scale from consolidation, low cost facility location (e.g. American Airlines has one of its 800- number reservations centers located in the Caribbean) and absence of the customer in the system. In short, the decoupled service operation is run like a factory.

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* The author is presently studying at NITIE