STRATEGIC APPROACHES FOR ACHIEVING
COST-EFFECTIVE SERVICE EXCELLENCE
Jochen WIRTZ1 & Valarie ZEITHAML2
ABSTRACT
This study explores strategies through which service firms can potentially
achieve high quality at low unit costs, or cost-effective service excellence (CESE) as
we term it. We reviewed the operations management (OM) literature on efficiency and
linked it with more recent research on service quality, service excellence, and
business modeling to explore how firms can potentially pursue a strategy of CESE.
We developed an integrated framework to organize potential strategies for pursing
CESE and supplemented it with a few initial case studies to illustrate these strategies.
We hope that the emerging framework can help academics and managers alike to
better understand the basic strategies and tradeoffs involved in pursuing the dual
strategy of cost-effective service excellence.
January 31, 2016
1Jochen Wirtz is Professor of Marketing, National University of Singapore, Singapore; Email:
[email protected]; Tel.: +65-6516-3656.
2Valarie Zeithaml is the David S. Van Pelt Family Distinguished Professor of Marketing; The University
of North Carolina at Chapel Hill, U.S.A.; Email: [email protected]; Tel.: +1-919-962-8214.
INTRODUCTION
Strategy research widely holds that it is extremely difficult to combine the
purportedly incompatible strategies of differentiation (through service excellence and
continuous innovation) and cost leadership (Heracleous & Wirtz, 2010). Strategy
experts such as Michael Porter argue that it is not possible to do so for a sustained
period because dual strategies entail contradictory investments and organizational
processes.
In the service operations and marketing literature, the trade-off between
customer satisfaction and service productivity has been widely acknowledged and
remains a key challenge for many organizations that strive towards operational and
service excellence (Anderson et al., 1997; Rust & Huang, 2012). However, evidence
suggests that there are firms that are both highly productive (i.e., have low unit costs)
and at the same time achieve highest levels of customer satisfaction. For example,
Shouldice Hospital has 50 to 75% lower costs compared to general hospitals, a
failure rate (i.e., reoccurrence rate) that is 1/12th of the industry, and exceptionally
high customer satisfaction. Another example is Jet Blue Airlines which has the lowest
cost per seat mile in the US and at the same time has the highest American Customer
Satisfaction Index (ACSI) score in its industry. These examples suggest that firms
with a highly focused business model (e.g., only hernia treatment in the case of
Shouldice Hospital, or Jet Blue Airlines’ focus on point-to-point budget travel) targeted
at an equally highly homogenous customer base can excel in both productivity and
customer satisfaction. This ‘focused service factory’ model that reduces
customer-induced uncertainty (i.e., customers tend to receive a single, highly
standardized service offering) seems to offer one avenue towards achieving
cost-effective service excellence.
Other business models have been shown to achieve both high productivity
and service excellence. For example, Singapore Airlines has earned a stellar
reputation in the fiercely competitive commercial aviation business by providing
customers with exceptional quality service, winning Condé Nast Traveler’s World’s
Best Airline award 24 out of the past 25 years. What is intriguing, however, is that
Singapore Airlines is simultaneously one of the world’s most cost-effective full-service
airlines. From 2001 to 2009, its costs per available seat kilometer (ASK) were just 4.6
cents (see Singapore Airlines’ annual reports), compared to 8–16 cents for
full-service European airlines, 7–8 cents for U.S. airlines, and 5–7 cents for Asian
airlines (IATA, 2007). In fact, Singapore Airlines had lower costs than most European
and American budget carriers, which ranged from 4 to 8 cents and 5 to 6 cents,
respectively. Like the focused service factory-based business models of Shouldice
Hospital and Jet Blue Airlines, Singapore Airlines, too, manages to combine the
purportedly incompatible strategies of service excellence and cost leadership
(Heracleous & Wirtz, 2010).
The purpose of this article is to explore strategies through which service firms
can potentially achieve high quality at low unit costs, or as we termed it, cost-effective
service excellence (CESE). In the following, we will develop a conceptual framework
on CESE. Before exploring these strategies in more detail, we first discuss the
relationships between productivity, service quality, and profitability which are at the
heart of the operations–service excellence trade-off, followed by a discussion of the
root causes of both inefficiencies in service operations and failure to provide service
quality.
LINKING PRODUCTIVITY, SERVICE QUALITY AND PROFITABILITY
The individual relationships between service productivity, customer
satisfaction (i.e., excellence) and profitability are shown in Figure 1. When examining
the individual links, one can see that, everything being equal, higher customer
satisfaction should improve the bottom line through higher repeat purchase,
share-of-wallet, and referrals. Likewise, everything being equal, higher productivity
should lead to higher profitability as costs are reduced.
[Insert Figure 1 about here]
The relationship between productivity and customer satisfaction is more
complex. There is the general notion of a service productivity–customer satisfaction
trade-off. However, although the relationships between productivity, service quality,
and profitability can conflict, there are examples where productivity gains and
customer satisfaction are aligned. For example, if a service firm redesigns customer
service processes to be leaner, faster, and more convenient by eliminating
non-value-adding work steps, then both productivity and customer satisfaction
improve, and both have a direct and indirect positive effect on profitability. An
example would be serve-it-yourself yogurt stores, which substitute relatively
inexpensive and easy-to-use self-serve machines for multiple human contact people.
In this case, there is a positive impact on profitability through increased productivity
and through increased customer satisfaction and resulting loyalty.
In contrast, if productivity improvements result in changes in the service
experience customers do not like (e.g., replacing a human agent in a customer
contact center with an interactive voice response system to reduce headcount,
doubling class sizes to increase the productivity of university professors, or reducing
the frequency of trains to increase load factors), then there is a trade-off to be
expected. In the short term, productivity enhancements have an immediate and direct
positive effect on profitability. However, these productivity enhancements lead to
lower customer satisfaction, which over the medium to long term are likely to lead to
lower customer loyalty and referrals. This means that these productivity
improvements have a positive direct effect on profitability, but also a negative indirect
effect (via customer satisfaction). Likewise, improvements in service quality and
customer satisfaction that have negative effects on productivity (e.g., replacing an
interactive voice response system with human agents in a customer contact center,
reducing class sizes to improve the learning experience of students, or increasing the
frequency of trains to increase passenger convenience) will have medium to
long-term positive direct effects on profitability via customer loyalty, but have an
immediate negative indirect effect on profitability via reduced productivity. The net
result on profitability in both cases depends on the relative impact of the direct and
indirect effects.
Finally, some quality improvements may not have any implications on
productivity (e.g., improving a process in the front office that does not change the cost
of providing it) and vice versa (e.g., improving efficiency of back office operations that
do not have implications for customer touch points). That is, there is only a single
positive effect of productivity improvements on profitability or of customer satisfaction
improvements on profitability.
In sum, one can see that the relationship between productivity and customer
satisfaction can be positive, neutral, and negative. All strategies towards CESE have
to be viewed in the context of these potentially reinforcing, neutral, and conflicting
relationships as discussed next.
The purpose of this research is to explore the potential alignment and
conflicts shown in Figure 1 and review strategies through which service firms can
potentially achieve CESE. We reviewed the operations management literature on
efficiency, and linked it with more recent research on service quality, service
excellence, and business modeling to explore how firms can potentially pursue a
strategy of CESE. An integrated framework emerged that helps academics and
managers to organize and understand the basic strategies and trade-offs involved in
pursuing the dual strategy of cost-effective service excellence, and we hope it will
guide further research. We will discuss the core strategies for achieving CESE next.
ROOT CAUSES OF CONFLICTS BETWEEN SERVICE EXCELLENCE AND
PRODUCTIVITY IN SERVICE OPERATIONS
The rich literature in service quality and excellence discusses reasons for
challenges in delivering superior service performance (e.g., Zeithaml and
Parasuraman 2004). The most prevalent model to identify the challenges is the Gaps
Model of Service Quality, which classifies the underlying causes preventing service
excellence as four gaps: Gap 1: Not knowing what customers expect; Gap 2: Not
selecting the right service designs and standards; Gap 3: Not delivering to service
standards; and Gap 4: Not matching performance to promises (Zeithaml and
Parasuraman 2004). Based on anecdotal evidence, important underlying reasons for
these quality gaps include cost and productivity requirements. For example,
productivity requirements often do not allow higher headcounts in customer contact
centers or a higher density in retail branch networks.
An equally abundant literature in operations identifies difficulties in delivering
service productivity As the topic of our paper is the joint provision of service
excellence and productivity, we focus here on the three root causes of providing both
at the same time.
There are three root causes of the challenges service firms face in achieving
CESE. These root causes make it notoriously hard to achieve productivity gains and
assure quality through industrialization of processes (including deployment of
systems and technology, deskilling, and economies of scale). These root causes are:
(1) distributed operations and real-time production and consumption of many
services, (2) the required integration of operations, human resources and marketing
functions in the delivery of service, and (3) customer-induced input, process and
output uncertainty.
First, achieving CESE seems particularly difficult for service firms because
aspects of service provision (among them distributed operations, simultaneous
production and consumption, and customization in real time at the point of the
customer interface) make industrialization, deskilling, economies of scale, and
productivity difficult to achieve. To illustrate, services tend to be produced through
distributed operations (e.g., every fast food outlet, beach resort, and bank branch can
be viewed as a mini-factory). Unlike in goods manufacturing with its efficient global
supply chains that can be both highly cost-effective and deliver top notch quality (e.g.,
Apple’s contract manufacturing in China produces top quality products at low cost),
service productivity and service quality remain a challenge.
Second, in service-based value propositions, the customer’s experience and
satisfaction are often heavily dependent on the additional 3 Ps of services marketing
(i.e., people, process, and physical environment) (Wirtz & Lovelock, 2016). This
means that the three functions of operations, marketing, and human resources
management have to be tightly integrated to deliver customer satisfaction. This
integration frequently leads to trade-offs between functional objectives, especially
between marketing and operations. This trade-off is well documented, with marketing
typically focused on customer satisfaction, loyalty, sales, cross-selling, upselling, and
market share, whereas operations worries about unit costs, productivity, and capacity
utilization (Zeithaml et al., 2013). Striving for CESE, therefore, first has to overcome
functional silos and lead to an integration and agreement on a common set of key
performance indicators (KPIs) for all key functions that together determine the
customers’ experience.
Third, a key root cause of challenges for achieving CESE is
customer-introduced uncertainty. That is, operations cannot be organized and
scheduled at optimum efficiency as customer arrival times and customer service
requests, needs, and wants (i.e., what customers want to consume when and how)
are uncertain. If a firm strives to satisfy its customers, it has to have capacity ready at
the time of customer demand, and it has to provide (expensive) flexibility at the
customer interface offering the right type of process capacity, employee skills, and
supplies to deliver against customer needs and expectations. Offering all these ‘on
demand’ is challenging and expensive.
A DUAL FOCUS CULTURE STRATEGY
The operations management literature distinguishes between actual
efficiency and potential efficiency at a given level of uncertainty. It identifies
uncertainty in terms of input (e.g., customer arrival patterns), process (customer
process preferences), and output (customer requests) as the key variables that
determine the potential level of efficiency. Firms that want to improve efficiency can
first move their actual efficiency towards their potential efficiency at their current level
of uncertainty. These are ‘generic productivity strategies’. Here, typical approaches
include cost control, reduction of wastage, training of employees, better capacity
utilization, and redesign of customer service processes (e.g., through the use of lean
six sigma). Many of these strategies and activities that drive cost-effectiveness are
not in conflict with service excellence. In fact, productivity improvements frequently
bring with them quality improvements at the same time. These are the ‘no brainers’
and ‘low-hanging fruits’ every process redesign or (lean) six sigma initiative pursues.
Those strategies keep the current business model unchanged and adopt best
practices to achieve the same output with less input. However, these generic
productivity strategies in themselves do not necessarily lead to service excellence.
For this, an organization needs to combine this intensive intense focus on costs, incl
using all the standard cost-reductions strategies”, combined with an equally intense
customer centricity and focus on service excellence, a strategy we term the “dual
culture strategy”.
The dual culture strategy governs employees’ thinking and decision making
regarding when to emphasize cost-effectiveness and when service excellence. Often,
both objectives are aligned and can be pursued at the same time, but sometimes
trade-offs have to be made. Here, employees need to know how to make such
decisions, and an internalized dual culture has to provide this governance
mechanism. This is a difficult strategy to execute as it imposes two often conflicting
objectives on all employees, and it needs to be driven by powerful reward and
incentive systems (i.e., KPIs that integrate both productivity and service excellence
objectives), selection (Bateson et al., 2014), training, and role-modeling by top
management (Wirtz et al., 2008). For example, Singapore Airlines’ bonus scheme
gives employees the opportunity to earn bonuses of up to 50% of their annual salary
depending on the profitability of the airline. Internal communications and training
continuously emphasize that profit is a function of service excellence (which drives
revenues through the loyalty of demanding business travelers who are SIA’s most
valuable customers and core target segment) and costs (which is the other side of the
profit equation). As a result, Singapore Airlines’ people have internalized that
anything that touches the customer must be consistent with Singapore Airlines’
premium positioning, whereas everything behind the scenes is subject to extreme
cost control (Wirtz et al., 2008). This strategy ensures a great service experience for
customers, while at the same time everything is done internally to drive productivity.
Generic strategies to cut costs and boost productivity, infused with a dual culture
approach that emphasizes both service excellence and cost-effectiveness to
everyone in the organization, can lead to highly competitive service firms.
In conclusion, to achieve CESE without changing the level of potential
efficiency, the customer experience, the customer value proposition or the business
model, the entire organization needs to be aligned and focused on cost-effectiveness
and service excellence at the same time, and understand how to make trade-offs
should both foci be in conflict.
CHANGING THE CUSTOMER INTERFACE AND BUSINESS MODEL
Firms can also increase the level of potential efficiency by reducing
customer-induced uncertainty. These strategies require changes in customer
behavior at a minimum and often reduce customer choice (e.g., modular options
rather than full customization) and process flexibility (customers have a tighter script
to follow and tend to be more integrated into the service process). Here, typical steps
include (1) isolating the technical core through buffering and shifting activities from
the front to the back office, (2) reducing customer contact and choice, and (3)
production lining and industrializing the service (Levitt, 1972, 1976). These strategies
take uncertainty out of the service process and thereby reduce potential conflicts
between productivity and service excellence.
First, isolating the technical core through buffering from the front office and
shifting activities from the front to the back office enables firms to operate the back
office much more cost-effectively through deployment of technology and systems,
which leads to a reduction of fluctuations in workload and capacity utilization.
Second, reducing customer choice, interaction flexibility, and contact in the
front office through modularization of service allows the deployment of systems and
technology even in the front office (Chase, 1978). Once processes and products are
simple enough, the deployment of self-service technologies (SSTs) becomes
feasible. However, deploying such technologies and systems can have a significant
impact on the nature of the customer experience. For example, deploying biometrics
can change the customer experience (e.g., increase convenience but also raise
privacy concerns; Heracleous & Wirtz 2006; Wirtz & Lwin, 2009). A master of SST
and co-creation is Google, which is happy to spend millions to get its SSTs right, but
has an aversion towards increasing headcount. Google focuses on scalable solutions
that deliver excellence in self-service. Its AdWords service generated almost $ 60
billion in revenues, but was supported by an advertiser customer service team of only
some 3.000 people!
Third, the focused service factory typically delivers a single service product,
ideally to a homogeneous segment (Skinner, 1974). In general, it is more costly to
satisfy heterogeneous than homogenous customer preferences (Fornell, 1992). This
is particularly true for services where individual (i.e., more heterogeneous)
preferences tend to be fulfilled by customized solutions provided by (costly)
employees in distributed operations. One way to drastically increase productivity and
customer satisfaction at the same time is to tailor a single solution that is highly
industrialized to the exact needs of a specific segment. This was illustrated in the
introduction using the examples of Shouldice Hospital and Jet Blue Airlines. The
principle is simple: who will be faster and better, the generalist who has to cater to a
wide range of customer needs and has to have the flexibility, capacity and skills to
deal with a wide range of products (e.g., a general lawyer dealing with a wide range of
cases), or a specialist who only delivers a single product to a single segment (e.g., a
lawyer focusing on trusts and wills)?
[Insert Figure 2 about here]
BRINGING IT ALL TOGETHER INTO AN INTEGRATED FRAMEWORK
The dual culture strategy does not change the underlying cause of service
inefficiency (i.e., customer-induced uncertainty and distributed operations), but brings
the actual level of productivity closer to the potential level at a given level of
uncertainty, while at the same time, has an intense focus on the customer and service
excellence. The next three strategies require lower levels of uncertainty and higher
volume, and therefore require addressing the underlying causes of inefficiencies. As
a consequence, they typically also require changes in the customer interface. That is,
they require strategic service product and process design decisions.
Figure 2 regarding the journey from the unchanged customer interface
towards a focused service factory model, and how the four strategies to improve
productivity relate to each stage. One can look at Figure 2 like a funnel where one
can move a service from being unstructured, completely flexible but typically
expensive and inefficient to run, to a highly effective focused service factory. The four
strategies for increasing productivity can be aligned along this funnel.
The focus of this article is on striving for service excellence while driving
productivity at the same time. Figure 3 integrates the four strategies with the
uncertainty reduction and industrialization framework of Figure 2 and presents typical
tactics that can be employed at each stage. Furthermore, as discussed at the
beginning of this article, a dual culture that focuses on both service excellence and
cost-effectiveness is needed, but is difficult to achieve. As shown in Figure 3, this
need for a dual service culture decreases as an organization moves towards a
focused service factory model as cost-effectiveness is increasingly hardwired into the
system and does not require constant attention and focus by service employees.
[Insert Figure 3 about here]
METHODOLOGY
Following the development of the conceptual framework, we researched
companies that fit into the different strategies. We first outlined criteria for service
excellence, profitability, and productivity. These criteria tended to be similar for
profitability, as common measures existed across industries and companies. These
measures include return on sales compared to industry, return on assets compared to
industry, and growth in sales and profits compared to industry. However, criteria for
the other two performance measures in most cases were more variable across
companies. For service excellence, when companies were measured by the
American Customer Satisfaction Index or J.D. Power, we were able to use their
computations but we also used sources such as service excellence awards (e.g.,
from J.D. Power), customer satisfaction scores compared to industry, rankings of
companies, customer ratings and reviews (e.g., Trip Advisor ratings, social media
sentiment analysis), industry awards and other third-party data points, and customer
churn rates.
For productivity, some common measures existed such as labor productivity
compared to industry (revenue/number of full-time equivalent employee) and asset
productivity compared to industry (revenue per dollar of assets). We also used
industry-specific productivity measures (e.g., cost/seat mile or cost/passenger mile in
an airline context).
CASE EXAMPLES
We aim to analyze 30 organizations that achieved CESE and explore how
they were able to become simultaneously a quality and a cost-leader in their
respective industries. This research is work in progress. A few organizations were
analyzed and we briefly describe them in this section.
Singapore Airlines is an example of an organization that focuses intensely on
standard cost reduction strategies and cost-effectiveness while at the same time
being exceedingly customer centric with the aim of providing industry-leading service
quality and products.
The National Library Board in Singapore has a limited budget but was tasked
to scale up its membership and reach to drive life-long learning in Singapore. This led
to dramatic innovations and deployment of technology in both the back-office and
front-office, with globally leading SST deployment (e.g., it was the first library globally
to use RFID, and developed library branches that operate entirely without
customer-facing employees – all processes are entirely enabled through SSTs).
Google is well known for its positive treatment of employees, offering meals,
sports, massages and 20% of their time to work on ideas of their own. In fact, it has
been #1 or #2 in Fortune’s Top 100 firms to work for in the past two years. While this
suggests that it expends resources that are not cost-efficient, the company is an
excellent example of a company that delivers CESE. It does this by using modular
and scalable self-service technology to substitute for interpersonal contact between
customers and employees. The company has an extreme focus on “scalable
solutions” that do not require headcount. It standardizes these offerings—such as
AdWords—so well that customers can use them as self-service technologies without
requiring direct interaction with employees. For this reason, the company is extremely
cost-effective on a “per customer” or “per transaction” basis. This also means that
Google can be extremely generous to the “few” employees they do have, most of who
are involved in the development of new services rather than in serving customers
directly. Google has very few customer service/frontline employees relative to the
number of paying customers (i.e., advertisers), content providers (e.g., publishers),
and users (e.g., search engine end-users).
Amazon.com is a different example of a mix of dual culture: the firm is highly
customer-centric while at the same time being extremely cost-conscious in a way that
differs from Google. The company does not appear anywhere on the list of best
companies to work for. Amazon puts the needs of its customers first. Jeff Bezos,
founder and CEO of Amazon, himself is infamous for becoming enraged when
individual customers complain, requiring that anxious workers chase down solutions
immediately. Amazon is so customer-centric that in the early days of the company,
Bezos ignored pleas from Wall Street to improve profitability; instead, he invested
potential profits back into the business to improve its quality and service to
customers. Ultimately, the company achieved both high profitability and high service
quality evaluations. In its most recent two quarters, Amazon has shown highly
profitable results. The Amazon cloud business’s operating income in the third quarter
of 2015 ($521 million) was almost as much as Amazon’s North America e-commerce
business ($528 million). Its operating margins were 3 percent and 25 percent for its
North America business, and revenue grew 78 percent year over year. Amazon ranks
#1 in the ACSI for its industry. Bezos achieves incredible productivity in an unusual
way: squeezing it out of employees. One source reported that workers “were pushed
harder and harder to work faster and faster until they were terminated, they quit or
they got injured.” (Nocera 2015).
Ex-employees report that the company has a “gladiator culture” (Stone 2013).
Amazon is known for cost reduction approaches such as minimizing employee
compensation and designing bonuses so that they are back loaded to assure that
employees remain. The company gives out low-cost ORCA cards to avoid subsidizing
parking costs, using cheap blond-wood door-desks shoved together for conference
room tables, not subsidizing food but instead making only vending machines
available, and providing new workers with only minimal materials (that they must
return in they leave). He is known for frugality, for not spending money on anything
that doesn’t matter to customers (Stone 2013).
Jet Blue Airlines is an illustration of the focused service factory. The firm
offers low-cost, high-quality service to a limited number of non-stop point-to-point
destinations typically from New York City. At inception, JetBlue was a “new kind of
low fare airline,” offering the types of amenities reserved for pricier carriers, including
wider seats, more legroom and storage space, and 24 channels of inflight television.
The company’s press release promised innovations like touch-screen check-in and
“fares 65 percent less than other airlines on identical routes.” The traveling public
responds favorably to the excellent customer service as reflected in its top position on
J.D. Power and the ACSI in the airline industry. Thanks to its younger fleet and newer
staff, the firm enjoyed lower maintenance and labor costs than its old-school
competitors. It was also well-capitalized; the combination of lower costs and a strong
balance sheet helped JetBlue become profitable. Its revenues quadrupled during the
2000s—and the company made a profit every year. It had climbed to 11th place in
revenue passenger miles generated, and had done so with fewer planes than many
of its bigger competitors.
Narayana Health and Shouldice Hospital both focus on a single surgery each,
cardiac surgeries for the former, and hernia for the latter. Both operate focused
service factories and pursue highly focused business models targeted at a highly
homogenous customer base. A key difference between both organizations is that
Narayana aims to also deliver healthcare to the poorest in India and therefore has an
intense cost-focus to keep prices low (wealthier patients cross-subsidize poor
patients, and low overall costs allow a wider coverage), whereas no particular
cost-focus can be recognized at Shouldice Hospital.
Figure 4 shows the extent to which these organization pursue the various
CESE strategies and tools. It seems that these strategies and tools are used in an
almost modular manner that allows a mixing and matching of tools and putting
different degrees of emphasis on them depending on the industry context and
organizational objectives.
[Insert Figure 4 about here]
IMPLICATIONS FOR SERVICE STRATEGY AND MANAGEMENT
A dual culture approach can be pursued by any organization, but it is difficult
to execute and senior management must walk the talk. Senior management must
build a culture for cost-consciousness, intense customer focus and service
excellence at the same time. In our experience this is a difficult strategy to pursue and
it seems to be easier to ‘sell’ to employees when the firm is under intense competitive
pressure. We have worked with service organizations across industries and
continents, and have seen how intensifying competition and cost pressures push
organizations to seek ways to increase efficiency while maintaining high levels of
quality. There is a palpable shift across many industries towards a more rigorous
application of generic strategies and a dual culture focus.
On the other extreme is the focused service factory. The requirement of a
dual culture approach declines as the business model moves towards a ‘focused
service factory’ in which both efficiency and excellence are increasingly inbuilt into the
business model. We feel that focused service factories offer many interesting
business opportunities in both the online world (e.g., there are many services that are
delivered through apps one can download onto a smartphone) and the real world.
Such focused service factories typically combine smart processes and new
technologies that provide tailored solutions for well-defined problems and narrowly
defined customer segments. For example, TranscribeMe (www.transcribeme.com)
uses highly automated processes, speech recognition algorithms, and crowd workers
to deliver speech-to-text transformation at better quality and lower cost than any ‘old
world’ transcription business. In healthcare, Narayana Health
(www.narayanahealth.org) decided to industrialize open-heart surgery and now
delivers high quality at rock bottom costs. It decided not to build a ‘general hospital’
that intertwines many service processes and segments and therefore is incredibly
complex and expensive, and does not have the same quality output.
The level of uncertainty in customer service processes and resulting business
models is a strategic decision. Does a firm want to be a specialist or a generalist?
This decision leads to very different value propositions, pricing strategies, customer
segments, and business models. On their own turf, a specialist will always beat the
generalist in terms of efficiency and effectiveness, and this is especially so in services
with distributed operations. However, the focused service factory is often only suited
for tightly defined customer segments (e.g., healthy patients who have a particular
hernia problem in the case of Shouldice Hospital, or Internet and financially savvy
people in the case of ING Direct).
Even within a given business model, service firms need to be intensely aware
of the cost implications of providing options, flexibility, customization, added products,
and features offered to their customers. Complexity and uncertainty grow
exponentially and reduce the level of potential/theoretical efficiency while making it
more and more difficult to deliver service excellence. Therefore, it is an important and
strategic decision where, along the continuum from a full service provider to a
focused service factory, a firm decides to position itself while aiming to delight its
customers.
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