SERVICEBASED STRATEGY

1
SERVICE-BASED STRATEGY
Prof. Horst O. Bender, Ph.D. Rotterdam School of
Management Erasmus University (NL) THESEUS
Institute (F) hobender_at_B2B-MSI.com
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INTENT TO REPURCHASE IS STRONGLY INFLUENCEDBY
SERVICE PERFORMANCE
Repurchase Intention
Service Problem
No Problem
Industry
Travel Leisure
70
93
Auto Repair Service
44
87
60
93
Telecommunications
40
73
Financial Services
Petrochemical Products
70
91
Life Insurance
69
89
3
THE PRODUCT-SERVICE CONTINUUM
Service and Product Service Dominated
Product and Service Product Dominated
Pure Service
Pure Product
Avoiding the price-sensitive customer
Avoidance of margin pressure
Potential for product differentiation
Significance of information technology
Proximity to customers
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CUSTOMER PERCEPTIONS Service What is
delivered? Service delivery process How is it
delivered? Service supplier Who delivers it?
THE CUSTOMER AS CO-PRODUCER
J L
ServiceProvider
THE SERVICE DELIVERY SYSTEM
Client
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SERVICE QUALITY A VICIOUS OR VIRTUOUS CIRCLE
Cut the workload by eliminating non- value-adding
work
Action to cut costs
Continuous improvement
Profits fall
Cut the workforce but the work remains the same
Higherproductivity
Satisfied customers
Morale falls
Ordersdecline
Higher profits
Satisfied employees
More investment projects
Customersdefect
Best employees leave
Customer service suffers
Expand the workforce
Vicious Circle
Virtuous Circle
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THE SERVQUAL MODEL
Expected Service
Perceived Service
Service Offered
Technical Quality (What?)
Functional Quality (How?)
7
SERVQUAL MODEL IMPORTANCE TO CUSTOMERS
Ability to perform the promised service
Reliability
32
Responsiveness
Delivering real and prompt solutions
22
Service Quality
19
Assurance
Competent and friendly staff
16
Customer understanding and care, ease of access,
communication
Empathy
11
Tangibles
Tangible parts of service operations
Source Zeithaml, Parasuraman Berry
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THE PREMISE OF CUSTOMER SERVICE STRATEGY

• The purpose of business is to generate and keep
  customers
• Customers are generated and kept through products
  and services that offer superior value
• Superior profit performance will result from the
  timely provision of value and from exercising
  cost control

CUSTOMER
THE ESSENCE OFSTRATEGY VALUE,COST AND SPEED
Technical Value
Service Value
VALUE/ SPEED
VALUE/ SPEED
COST/SPEED
COMPANY
COMPETITOR
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THE PROFITABILITY OF TECHNOLOGY-BASED
BUSINESSES IS INCREASINGLY DRIVEN BY SERVICES
EARLY EXAMPLE OTIS ELEVATOR OTISLINE (1984)

• When elevators are running really well, people
  do not notice them.Our objective is to go
  unnoticed.
• Bob Smith, Executive Vice President
• and Chief Operating Officer

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THE PROFITABILITY OF TECHNOLOGY-BASED
BUSINESSES IS INCREASINGLY DRIVEN BY SERVICES
EXAMPLE GENERAL ELECTRIC

• Jack Welch is remaking GE - Again. From health
  care to utilities,Welch sees big growth in
  sophisticated services that spring from GEs
  core strengths Business Week, October 28,
  1996
• Aircraft engines Signed a 10 year, 2.3 billion
  deal with British Airways to do engine
  maintenance work. GE aims to double engine
  servicing revenues to 4 billion by 2000.
• Power Generation Sees a 1b business operating
  and maintaining power plants in the U.S. and
  Europe.
• Transportation Pursuing locomotive maintenance
  deals. Will sell and service 150 railroad engines
  for Burlington Northern. Also developing an
  electronic tracking system to help railroads
  manage rolling stock more efficiently.
• Medical systems Launched an aggressive push to
  service rival manufacturers medical equipment.
  Is now signing exclusive multiyear service deals
  with big hospital chains and buying up
  independent service shops.
• Nearly 70 of GEs 2001 profit comes from
  services (up from 16.4 in 1980)

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THE PROFITABILITY OF TECHNOLOGY-BASED BUSINESSES
IS INCREASINGLY DRIVEN BY SERVICES
EXAMPLE BOEING

• Boeing struck a deal with DHL to modify 44 used
  jetliners, then deliver and maintain them long
  term. The transaction is valued at more than 2
  billion.
• Boeings newly reorganized aviation-services unit
  will convert the jets to package-freight
  aircraft, then sell and lease some of the jets
  back to the air-carrier unit of DHL.
• Boeing will provide all maintenance services
  through subcontracts with maintenance shops.
• Use of Boeing engineering and parts-distribution
  services is assured.
• Boeing is in talks with at least four other major
  carriers aimed at similar contracts.
• Boeing is modeling its efforts on successful
  initiatives by General Electric.
• Wall Street Journal Europe, October 5, 1999

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THE PROFITABILITY OF TECHNOLOGY-BASED BUSINESSES
IS INCREASINGLY DRIVEN BY SERVICES
EXAMPLE LEXUS (U.S.)

• Lexus USA studied the whole car owner cycle -
  shopping, purchasing, owning, driving, servicing
  and trading in - to uncover every source of
  customer dissatisfaction - and optimized value to
  the customer at each step
• Notifies the buyer for scheduled maintenance
• Picks up the car and returns it, and includes a
  free loaner and car wash
• Provides 24-hour road service
• Sets goals for resale value and has programs to
  buy back used cars. Trade-ins are highest in
  industry
• Aimed for higher profits for dealers - for new
  cars, reconditioning and resale
• Service charges low - to achieve a larger
  percentage of the service base. Post-warranty
  service 80 of customers vs. industry figure of
  30-40
• Best parts inventory management system - higher
  parts availability, lower inventory costs
  -average of 100,000 per dealer vs. 200,000
  industry average
• Two percent of Toyotas sales, 33 percent of its
  profits

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THE PROFITABILITY OF TECHNOLOGY-BASED BUSINESSES
IS INCREASINGLY DRIVEN BY SERVICES
EXAMPLE CATERPILLAR

• Caterpillar uses information technology to
  improve customer service. It installs diagnostic
  chips in all its new machines, which alert local
  dealers, via satellite, if a machine is in need
  of a new part
• In moving in logistical services,
  Caterpillarleverages its spare parts core
  competence. Worldwide, Caterpillar distributes
  about 3.3 billion worth of components a year for
  customers. These include Delco, Siemens,
  Hewlett-Packard, Sun Microsystems, New Holland,
  Hyundai, Chrysler and Hiab. Sales of annual
  logistical service operations are estimated 200
  to 300 million. The business is expanding at
  some 30 p.a.
• Business Week August 27, 1997

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DIAGNOSING PROFIT OPPORTUNITIES PROFIT POOLS
U.S. AUTO INDUSTRY PROFIT POOL
25
Leasing
20
Extended Warranty
15
PROFIT MARGIN
Repair Service
10
Auto Loans
Auto Insurance
5
Auto Manufacturing
Parts
Used Car Dealers
0
100
0
New Car Dealers
Gasoline
Auto Rental
SHARE OF INDUSTRY REVENUE
Source Gadiesh and Gilbert,HBR May/June 1998
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DIAGNOSING PROFIT OPPORTUNITIES PROFIT POOLS
PC INDUSTRY PROFIT POOL
40
30
PROFIT MARGIN
20
Microprocessors
10
Software
Services
Other Components
Personal computers
0
100
Peripherals
Source Gadiesh and Gilbert,HBR May/June 1998
SHARE OF INDUSTRY REVENUE
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WHERE THE MONEY IS
Personal Computers Annual Cost of Use in
Network 6,259
Locomotives Total Annual Cost of
Rail Operations 29 billion
Automobiles Total Annual Cost 5.5X Product Costs
100
Network Administration
Yard Operations, Railroad Administration, Other
Other
Network Technical Support
Finance
Network Equipment
80
Repair
Train Operations
Nonproductive Operations by End User (Downtime,
File Management, etc.)
Insurance
60
Gasoline
40
Infrastructure
Administration
Technical Support
Freight Car Services
20
Desktop Hardware
New Car Purchase
Locomotive Services
Locomotives
0
Total Expenditure 5X Product Costs
Total Expenditure 21X Product Costs
Total Expenditure 5.5X Product Costs
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CUSTOMER SERVICE CHOICE
Comprehensive Service Process Service Product/Sys
tem Service Component Service General Service
Service Depth

• Service Pricing
• Bundled
• Unbundled

Service Timing Pre-sale At sale
Post-sale Downstream
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MATCHING SERVICE DEPTH TO CUSTOMER BUYING
ORIENTATION

• EXAMPLE ABB SERVICE
• Comprehensive service taking over
  themaintenance function of the customer's plant
  or substantial parts thereof
• Process service the maintenanceof sections of
  the customer'smanufacturing process,
  includingnon-ABB equipment. Process maintenance
  goes beyond individual machines
• Product/system service the on-site repair by
  ABB specialists. Requires captive parts
• Component service the repair of productsin ABB
  workshops. Generally reduced inimportance
  because of improved reliabilityof products
• General service small repairs and
  mainlystandardized services. Intense
  competitionof local independent maintenance
  companies

Low
Comprehensive Service
Process Service
Price
Sensitivity
Product/System Service
Component Service
General Service
High
Low
High
Service Dimensionality
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EXAMPLE OF COMPREHENSIVE SERVICESKF
TROUBLE-FREE OPERATION
TM

• We promise you increased uptime and reduced
  costs!
• Basic TFO Services
• Inspection
• Technical assistance
• Failure analysis Expanded TFO Services
• Training Plant maintenance assessment
• Application engineering Reliability systems -
  local and via satellite
• Installation services Predictive and
  preventive maintenance programs
• Inventory consolidation Root cause failure
  analysis
• Mapping Lubrication and filtration
  management
• Store audits Equipment maintenance and
  monitoring -
• Bearing rework fans, pumps, gear boxes and
  spindles
• Precision balancing
• Precision alignment
• Productivity management process
• Application-specific training
• Technology upgrades

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EXAMPLE OF COMPREHENSIVE SERVICESKF
TROUBLE-FREE OPERATION
TM

• Step 1. Becoming partners.
• Step 2. Defining problems and setting goals.
  Examples - Cost reduction - Bearing
  consumption - Reliability -
  Breakdown response - Stock levels
  - Availability. - Quality and technical
  support
• Step 3. Freeing tied-up capital.
• Step 4. Reducing purchasing costs.
• Step 5. Selecting the right bearing.
• Step 6. Caring for your bearings.
• Step 7. Condition monitoring.
• Step 8. Using the right tools and lubricant.
• Step 9. Training.
• Step 10. Prolonging bearing life.

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MEASURING PERFORMANCE

• Product margin vs. service margin
• Downstream margin sum of all service margins
• Customer profitability
• Profit per installed unit
• Share of customers total downstream-activity
  system
• Total customer return over the life cycle

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E-SERVICES GE TURBINE OPTIMIZER
Turbine Optimizer provides you with the tools
and information to help you maximize your GE Gas
Turbine, Steam Turbine and Generator investment

• GEs Turbine Optimizer is an online service tool
  that provides
• Unit specific information
• Fleet comparison data for specificGE Gas Turbine
  frame sizes
• What-if scenarios that demonstrateperformance
  enhancements realized when specific upgrades
  areperformed against the current unit
• List of GE packaged offerings
• GE technical information letters and publications
  
• List of monitoring and diagnostics service
  offerings
• Ability to request quotations and buy online

www.gepower.com
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DIAGNOSTICS
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1. IS THERE AN OPPORTUNITY FOR DOWNSTREAM
SERVICES?
1A. Attractiveness of Downstream Business
Ratio .....

• Ratio of installed baseto new product sales
• Life cycle economic activity asa multiple of
  product cost
• Difference between downstreamprofit and product
  profit

Low
High
Multiple .....
High
Low
Product profit ....... Downstream
profit .......
Low
High
Downstream Moves are
Attractive and Imperative
Relatively Unattractive
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1. IS THERE AN OPPORTUNITY FOR DOWNSTREAM
SERVICES?
1B. Product and Market Structure

• Magnitude of productdifferentiation
• Market share of top five customers
• Share of total profit earnedfrom top 20 of
  customers

Commodity
Significant Patent Position
Superior Brand
Technology Lead
Share top five .......
High
Low
Share top 20 .......
High
Low
Downstream Moves are
Attractive and Imperative
Relatively Unattractive
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1. IS THERE AN OPPORTUNITY FOR DOWNSTREAM
SERVICES?
1C. Power of Distribution Channel

• Importance of distributorsin your marketing mix
• Distribution expenses as a percentage of product
  price
• Degree of channel concentrationmarket share of
  top five distributors
• Degree of channel innovationand multiplication

Low
High
Continue with the following questions only if
distributors are a relatively important element
of yourmarketing mix. If they are not,
downstream services are attractive
Dist. and selling exp. .......
High
Low
Top five distributors .......
High
Low
Dynamic and multiplying
Stable and monolithic
Downstream Moves are
Attractive and Imperative
Relatively Unattractive
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2. WHAT IS THE MAGNITUDE OF THE OPPORTUNITY?
100
Service Costs (as of total life cycle expenses)
80
Service Profit Margin .....
60
40
Hardware Costs (as of total life cycle expenses)
20
Hardware Profit Margin .....
0