Sector Importance
In less than three decades after the end of World War II, manufacturing as a wealth generator has been overtaken by service sector organizations in terms of contribution to Gross Domestic Product (GDP) and as a source of employment. When service providers such as banks and insurance companies sought to achieve higher market share in the 1980s, many adopted marketing principles involving heavy reliance upon advertising and sales promotions that had proven effective for tangible goods companies such as Coca-Cola or Proctor & Gamble. Service sector promotional spending rose dramatically, but many service firms did not enjoy any real growth in market share as a result of their increased emphasis on marketing activities. This failure of branded goods marketing to be effective in the case of service sector firms led both practitioners and academics to recognize the need for new concepts and approaches in the management of service operations (Raich and Crepaz 2009).
This new focus of efforts led to recognition that services exhibit the following inherent differences relative to manufactured goods (Zeithmal and Bitner 1996):
Intangibility, which reflects the fact that many services cannot be seen, tasted, or touched in the same way that customers can sense tangible goods.
Heterogeneity due to the fact that customers often exhibit variations in the nature of their needs, and because service delivery often involves people, the quality of the service delivered by different employees may exhibit variation.
Perishability because services cannot be stored and saved for later sales; this means managing the balance between fluctuations in supply and demand requires new approaches in the management of service delivery. Even more importantly, many services, such as empty seats on an aircraft, represent potential revenue that cannot be recovered at some later date.
Simultaneous production and consumption reflecting the fact that many services are produced and consumed with both the customer and the supplier requiring to be present in the same location.
In addition to these identified unique characteristics, an even more fundamental problem is that, in the case of many service goods, such as banking, insurance, or mass market retailing, there is often no way for a supplier to create differences in the service proposition, which permits distinguishing the offering from other suppliers in the same market sector. This situation can be contrasted with tangible goods, where attributes, such as design, appearance, or superior performance, permit suppliers to differentiate their company from competition. As a consequence, it can be argued that exploiting entrepreneurship in a service sector situation is somewhat more difficult than in a tangible goods business (Chaston 2016).
The other difficulty in differentiating the service firm from competition is the commonality in the nature of the service offering, which often means that in terms of exploiting the 4Ps of marketing (i.e., product, promotion, price, and place) in many markets, suppliers can only rely on exploiting price as a way of distinguishing their proposition from competition. Given the limitations of exploiting the 4Ps in service sector firms to build market share, additional variables have been recognized as a route through which to assist differentiation of benefit propositions in the market place. The three commonest additional variables that may provide an opportunity for entrepreneurial enhancement of the traditional marketing mix are as follows (Magrath 1986):
People who are all of the individuals associated with any aspect of supplying, delivering, or interacting with the customer during the service provision process
Processes, which are the procedures, mechanisms, activities, and systems associated with the creation and delivery of a service
Physical evidence, which is constituted of all the physical elements of the environment in which customer interaction and service provision occurs
Playbook Guideline 69: The unique characteristics of service markets means exploiting technological entrepreneurship to differentiate the organization from competition can be extremely difficult
Breaking Market Convention
Case Aims: To illustrate how in a long-established service sector a new distribution system can be radically altered by an entrepreneurial proposition
In 1994, Jeff Bezos identified the Internet as an entrepreneurial opportunity through which to create a new approach to retailing that did not involve terrestrial outlets. Bezos determined that the five most-promising products for online distribution were compact disks, computer hardware, computer software, videos, and books. He selected books as the first online product proposition based on large worldwide mass market demand for literature, books’ low prices, and the huge number of titles available. The major advantage of selling books online was that, while the largest brick and mortar bookstores and mail order catalogs might offer up to 200,000 titles, his online bookstore Amazon.com could offer an even wider selection because of the ability to operate out of a virtual warehouse while relying upon publishers to store actual products (Harris 2011).
Through his actions, Bezos demonstrated to the world the huge entrepreneurial opportunities available from taking service sector propositions online.
It is probable that the most successful service sector innovations are those that concurrently reduce operating costs through achieving a high scale of operations while sustaining customer value. Bezos clearly understood this fact as demonstrated by his strategy of moving overseas, expanding the product line beyond books and permitting affiliates to market their products via the Amazon website, and more recently, offering cloud computing and Big Data management services.
Customer Satisfaction
Ultimately, the success of organizations is dependent on delivering customer satisfaction. Usually, this can only occur when the customer’s expectations are equaled or even exceeded by their actual perceptions generated during the purchase and consumption process. The advantage in the case of tangible goods is the existence of defined product specifications that guide the manufacturing process, and the quality control systems permit rectification of product quality problems before goods are shipped. This will usually ensure customer expectations are matched by perceptions. Variables such as intangibility, the heterogeneous needs of customers, and the potential variation in behavior among employees engaged in service provision means achievement of the same outcome is much more difficult. As a consequence, service quality is a critically important issue in service markets and can, in some cases, provide the basis for differentiating the supplier from competition (Mayer, Erhart, and Schneider 2009).
The key objective in delivering service quality satisfaction is to minimize the gap between customers’ desires and actual experience (i.e., the gap between what they hope will happen and what actually occurs). Research by Parasuraman, Zeithaml, and Berry (1988) led to the development of a model named SERVQUAL for assessing the effectiveness and quality of the service provision process. Their research identified the following variables, which could be used to categorize customer expectations:
Reliability, which is the ability to perform the promised service dependably and accurately
Tangibles, which are the images created by the appearance of physical facilities, equipment, personnel, and communication materials
Responsiveness, which is the willingness to help customers and provide prompt service
Assurance, which is by the process by which the knowledge, ability, and courtesy of employees engenders customer trust and confidence in the service provider
Empathy, which is created by the caring, individualized attention, which employees offer the customer
The conventional use of SERVQUAL data is to identify ways of minimizing the gap between customer perceptions and expectations. The entrepreneurial service firm can be expected to pursue a more farsighted objective of (a) removing the gap completely and (b) where feasible, implementing actions to ensure the actual service experience totally exceeds customer expectations. In the case of a pure play online service provider, the basic SERVQUAL model will provide the information to determine whether actions need to be implemented to enhance the service quality. The potential problem facing a “clicks and mortar provider” is that factors influencing customer expectations may differ between online and terrestrial situations. In those cases where this is thought to apply, the organization will need to modify the SERVQUAL model to accommodate the need to differentiate between different types of customers. One such approach is illustrated in Figure 10.1 in which the organization will need to assume that the following gaps exist:
Gap 1a not comprehending the actual expectations of terrestrial customers.
Gap 1b not comprehending the actual expectations of online customers.
Gap 2a a failure to translate perceptions of terrestrial customer expectations into service quality standards.
Gap 2b a failure to translate perceptions of online customer expectations into service quality standards.
Gap 3a a lack of resources or inadequately skilled employees results in an inability to deliver services which meet terrestrial performance standards.
Gap 3b a lack of resources or inadequately skilled employees results in an inability to deliver services which meet online performance standards.
Gap 4a communicating information to customers via terrestrial channels which causes them to be misled or misunderstand service provision.
Gap 4b communicating information to customers via social media channels which causes them to be misled or misunderstand service provision.
Gap 5a a combination of Gaps 1a to 4a determining terrestrial customers overall assessment of how their expectations have been met.
Gap 5b a combination of Gaps 1b to 4b determining online customers overall assessment of how their expectations have been met.
Figure 10.1 Gap-based quality factors in financial services provision
In terms of online services, the provider has many more opportunities to exploit a strategy of delivering superior service quality. This is because the organization is in a more informed position by exploiting real-time data to assess customer expectations versus perceptions and evaluate all aspects of the service delivery process by analyzing website analytics, product returns, and customer complaints. In those cases where performance is inadequate, the organization has various options such as website automation, revising back office systems, investing in training, adding more staff, or seeking to further automate certain aspects of the service delivery process. Further enhancement of customer understanding can be achieved by undertaking market research accompanied by regular assessments of employee attitudes and motivation (Chaston 2015).
Piccoli, Brohman, and Parasuraman (2004) proposed that online firms will exploit technology to create more innovative services and enhance the effectiveness of customer interaction. As technology is increasingly used to provide a widening array of innovative support services, customers may develop a perception of the higher level of service quality being delivered. A key reason for this outcome is automated support services that provide a means of supplying the missing “human touch” by leveraging IT to provide multiple assistance, which, in many cases, could not realistically be delivered in an offline setting.
Playbook Guideline 70: A key source for exploiting technological entrepreneurship is to leverage IT to achieve or deliver a superior service experience
Meeting Customer Expectations
Case Aims: To illustrate how entrepreneurial solutions can ensure avoidance of service gaps and thereby ensure customer expectations are fulfilled
Once a firm comprehends the nature of customer expectations, then one way of ensuring that these expectations are always exceeded is to set operating standards well above those used by conventional competitors. Starbucks, which is a chain of coffee houses now operating in a number of countries around the world, started life in 1971 as a single gourmet coffee store in Seattle, Washington. The cornerstone upon which the company’s success was founded is an obsession with brewing the best possible cup of coffee. To embed these standards into all employees, the company runs extensive training programs during which participants are briefed in detail on every aspect of the Starbuck operation. Additionally, during these sessions, employees are educated about the world of coffee in order to permit them hold informed conversations with their customers. To further enhance customer dialog by building on the firm’s role as a social gathering place, the company has become an entrepreneurial leader in the exploitation of the social media. These activities involve services maintained by the firm (e.g., MyStarbucks Idea) and via third-party services such as Facebook, Twitter, YouTube, and Foursquare.
Further customer interaction has been achieved through the exploitation of mobile devices. Starbucks has collaborated with Apple, distributing weekly iTunes songs, offering a custom Starbucks iTunes channel, and integrating in-store music to display a Starbucks button in iTunes for further sampling and purchase. An iPhone app provides store menus, nutrition information, store locators, card management, and even payment facilities. While the success of these efforts varies, they collectively underscore the firm’s willingness to experiment (Gallaugher 2010).
Competitive Advantage
Hamel and Pralahad (1994) proposed that the relevance of resource-based view (RBV) theory in high-tech service industries is validated by an organization’s ability to assemble a bundle of skills and technologies that permit the organization to develop a unique, new technology platform. These authors suggest an example of this perspective is provided by the case of Microsoft. The company’s core competence in the development of new software platforms has permitted the company to become the dominant provider of software installed in both business and home PCs. Furthermore, having achieved market dominance for a specific business platform, Microsoft has greatly increased the probability that newly acquired internal competences will provide the basis for further market growth and the launch of new products.
Kay (1993) noted that the problems associated with establishing a viable differentiation strategy in service markets means the RBV theory has significant appeal in terms of focusing management attention on internal capabilities as the basis for achieving competitive advantage. One way of applying the RBV theory in service firms is to examine which of the additional “3Ps” of people, process, or physical evidence could provide the basis for offering a proposition seen as more appealing than competitors’ offerings. Kay suggested strategy is about relating the organization’s core competences to external environments, and that to be successful, competitive advantage must be sustainable, and where feasible, also be unique. He suggested there are four potential sources of strength available to an organization, namely reputation, innovation, internal and external relationships, and organizational assets.
In the case of service organizations where benefit differentiation is difficult to achieve, a usual strategic philosophy is to focus either on offering superior quality or a lower-cost proposition. This strategic positioning dimension can often be enhanced by deciding whether to have the capacity to deliver transactional services to a large number of customers or alternatively to focus on making highly accurate, specialist customized services available to a selective group of customers (Goyal and Srivastava 2015).
Playbook Guideline 71: Where benefit differentiation is difficult, technological entrepreneurs may need to focus on developing one or more new superior organizational competences
Financial Services
Long before the advent of the Internet, the financial services industry had been using electronic data interchange systems to manage the flow of information between institutions and clients. The industry was one of the first to identify the opportunities offered by the storage, access, and transfer of data using computers. The Internet was soon recognized as providing new opportunities to lower costs by exploiting this medium in place of channels such as the telephone, fax, or cable-linked computer networks. As broadband speeds have improved, this has assisted organizations, such as banks, to migrate their customers from terrestrial to online transactions, and thereby, reduce operating costs (Allen, McAndres, and Strahan 2002).
Some banks have used technology for redesigning business processes, providing new products and services, and improving the organizational work environment. Guimaraes, Bransford, and Guimaraes (2010) concluded that in the banking sector, successful innovation requires knowledge of the best technology available, effective use of specific technologies, and benchmarking the use of specific technologies relative to competition.
Playbook Guideline 72: Technological entrepreneurship provides new pathways through which financial services firms can deliver enhanced service or reduce transaction costs
Business Model Innovation
Most service sector firms operate within long-established supply chains to deliver customer satisfaction. Gaining access to these supply chains can be difficult for a new entrant, and the possibility of entrenched conservative values among supply chain members or the final customer may prove a barrier to successfully launching a highly innovative new service. Hence, it may be necessary to consider switching to a different supply chain, or alternatively, creating an entirely new supply chain. The advent of the Internet, as illustrated by Amazon.com’s impact on terrestrial retailing, has been one of the most important technological changes that has provided new business model opportunities for innovation across many service industry sectors.
Koen, Bertels, and Elsum (2011) proposed that business model information typology (BMIT) permits classification of innovation along the three dimensions of technology, value network, and resolution of any financial hurdles. They further divided the innovation space into two zones, sustaining innovation and business model innovation. Within the technology dimension, they identified three types of technologies, namely incremental, architectural, and radical technological innovation. Architectural innovation is about creating new ways to integrate components in a system to permit incremental changes to an existing technology. An example of architectural innovation is the iPod, which was not based on entirely new technology, but did represent an entirely new design.
The value network dimension encompasses how a firm identifies, works with, and reacts to members of the supply chain. Relationships can be a critical source of competitive advantage. Business model innovation often requires the development of a new value network involving a different supply chain and the creation of new relationships within this supply chain.
Playbook Guideline 73: Service sector technological entrepreneurship may require the creation of a new business model in order to be successful
Remodeling the Music Industry
Case Aims: To illustrate how new technology has provided new entrepreneurial opportunities in the music industry
For many years, the music industry was dominated by a small number of record companies that controlled the market and determined which recording artists would receive promotional support. The advent of Internet, MP3, and peer-to-peer (P2P) networks dramatically altered this business model, with recorded music evolving from a physical entity to a digital good accessed online through search and sampling software. Today’s albums can actually be playlists self-created by consumers based on their own tastes and preferences. New services, such as Apple, Yahoo, eMusic, have emerged to offer digital songs ( Bhattacharjee et al. 2009).
As online music has become the dominant product form, artists and musicians have recognized the power of new technologies, that is, it may be feasible to survive without depending upon a record company supporting and promoting them. Increasingly new and well-established artists are making their products available online themselves, and hence, are no longer dependent on a contract with a major label as the only pathway through which to achieve commercial success. The music industry has recognized the profit potential for product extensions or peripherals, such as ringtones and call back tones, music within video games, music within social networking sites, and personalized playlists. However, the music industry has not been able to corner this market because they face competition from a multitude of market intermediaries, wireless carriers, game developers, and online service entities.
The change in the industry is an excellent example of Christensen’s (1997) view of disruptive innovation whereby industry disruption through new players has dramatically reduced prices. Downloading thrives on the Internet not only because it can be free, but also because it offers unlimited scope and endless selection. It was not until 2008 that the major recording firms agreed to open up their catalogs of rights. This action supported the development of new subscription models based on the concept of “bundling” music with other services or devices using an Internet Service Provider (ISP) subscription, a mobile phone, or a portable player. While the music comes virtually “free” to consumers under this model (e.g., www.spotify.com), record companies and artists get paid a percentage from the sale of services or devices.
Productivity
Ultimately, the performance of any organization is determined by the productivity of the employees relative to other organizations engaged in the provision of the same goods and services (Rust and Huang 2012). Employees are often the highest cost component in many organizations. Hence, it is not surprising that entrepreneurs and organizations have sought ways whereby the employee can be replaced by automation. However, automation is rarely a low-cost option because organizations are required to make significant investments in new capital equipment. Compared to the tangible goods sector, service organizations have achieved much less success in exploiting mechanization and automation to improve productivity. In part, this reflects the need to employ people to provide the interface between the supplier and the market when servicing heterogeneous customer needs. Another factor is that, in certain service sectors, such as the fast-food industry, low skills’ individuals can be recruited and paid a minimum wage.
Playbook Guideline 74: Technological entrepreneurship may provide an opportunity to exploit automation to reduce service sector operating costs
The IT Revolution
The arrival of the Internet offered the potential of instant access to information, and the ability to order products and services online on a 24/7 basis totally changed the nature and future opportunities in virtually every service industry sector. More recently, the advent of mobile technology, such as the smartphone, has further altered, and in some cases, completely changed the dynamics and nature of supplier–customer interaction within service markets. Wright and Dawood (2009) noted it was not until the 21st century that the necessary advances were in place across computing, electronic communications, and exploitation of the Internet to permit effective exploitation of IT within many service sectors. This new era, which has been labeled by some as the “smart age” (Anon 2010), offers new opportunities to those service firms that have the core competences in the area of acquiring and analyzing very large datasets, thereby permitting exploitation of smart-age technology for creating a competitive advantage based on a superior understanding of customer needs.
In order to exploit advances in technology to evolve new paradigms for delivering services, enhancing customer satisfaction, or improving productivity, service firms must comprehend the nature of the latest advances in digital technologies and how these can provide the basis for implementing fundamental organizational change. The problem facing many service operations, especially those in more mature industries, such as retailing or banking, is that the senior management may lack sufficient technological knowledge to determine whether the latest advances can deliver the cost and benefit outcomes that are being claimed. It is for these reasons the entry point should be that of seeking to determine how new technology may impact a future service strategy based around assessing the role of people in the delivery of processes.
Playbook Guideline 75: The advent of the smart age has opened up a whole new range of ways through which technological entrepreneurship can be exploited by service firms