Service Breakthroughs: Changing the Rules of the Game - Hardcover

Chapter 1

Creating Breakthrough Services

Outstanding service organizations are managed differently from their merely good competitors. Missions are stated differently. Managers act differently. Actions are based on totally different assumptions about the way success is achieved. And the results show it, both in terms of conventional measures of performance and the impact these services have on their competitors.

Recently one of us visited the Tyson's Corner Mall in northern Virginia. The visit resulted in one surprise after another as salespeople in large stores and small exhibited unusual interest in providing unexpectedly outstanding service. At first we attributed it to Southern hospitality. But the experience wasn't consistent with others we've had in the same area. And then it dawned on us. Among the four department stores which the huge mall contained, one was Nordstrom. And Nordstrom's level of service exceeded even that provided by other retailers that same day. The experience was a clear reflection of a strong conviction often expressed by Nordstrom's service managers that a store manager's primary responsibility is to satisfy customers.

Naturally, we had seen many of the things written about the high level of service provided by this fashion retailing organization. But we had not witnessed the impact it could have on an entire shopping center, one of the largest in the United States. The experience triggered a line of thinking about those one or two firms in every service industry that stand out from the pack. Firms that seem to gain momentum, almost as if they are propelled by an added force not available to their competitors. Firms that seem to have broken through some sort of figurative "sound barrier," that have passed through the turbulence that precedes the barrier into the relatively quiet, smooth zone beyond in which a management action produces exaggerated results, results that often exceed reasonable expectations. Firms that alter the very basis of competition in their industries.

We began to think of the offerings of these firms as breakthrough services and set out to try to capture in words, numbers, and diagrams the essence of what managers do to break the figurative sound barrier.

We started with three simple, beliefs: (1) it is possible to manage a good firm through the barrier that distinguishes the good from those that are moving beyond Mach 1; (2) outstanding services and the firms that provide them are made, not born; and (3) breakthrough services managers don't think like their merely good counterparts in competing organizations.

Having tested these ideas through numerous field observations, we are convinced more than ever that our starting beliefs hold up. But we have found out a great deal more along the way about how managers think and act in designing and delivering breakthrough services. They invariably start with the service encounter.

THE SERVICE ENCOUNTER

At the heart of every service is the service encounter. Everything flows from it. A service encounter, is the event at which a customer comes into contact with a service provider, its people, its communications and other technology, and the services it provides. It is the point in time at which especially marketing, operations, and human resource management are brought to bear on the process of creating and delivering a service that meets customers' needs, perceived risks, and expectations. It has been termed by Jan Carlzon, CEO of SAS (Scandinavian Airlines System), the "moment of truth" at which the representatives of a service company must prove to their customers that their company is the best alternative.

The most important relationships in a service encounter, based on research done to date, are summarized in Figure 1-1. We have purposely been selective in choosing elements of this model. The first is based on research findings; the others follow from it. They are:

1. The quality of service (customer satisfaction) = service quality delivered - service expected.
2. The value of a service to a customer = service quality (both the results realized and process by which they were achieved) divided by (price and other customer costs of acquiring the service).
3. Potential profit "leverage" in providing the service = value to the customer - cost to the service provider.
4. The profitability of a service to its provider = margin x repeat usage ÷ investment.

It occurred to us that most service managers understand these relationships. Why then do so few use this understanding to produce services that achieve true competitive superiority? The primary reason, we've concluded, is that most view these relationships as a set of trade-offs to be designed and managed in traditional ways that have been handed down from one generation of operating manager to the next for years. This is the view that assumes that nearly all decisions involve trade-offs. That higher quality requires greater investment or higher costs, or that lower costs naturally are associated with lower quality. That higher prices naturally reduce demand. And that the primary avenue to higher profits is higher margins. While these assumptions ignore the way in which customers assess the value of a service, they represent conventional, accepted management thinking.

Breakthrough managers look at the same relationships and see something else. They see the service encounter as a dynamic force with a potential for fueling a set of Self-reinforcing relationships shown in Figure 1-2. They take advantage of relationships that propel a firm through the competitive sound barrier, often by defying conventional logic concerning trade-offs. These managers spend less to achieve higher value and higher margins. They lower prices to increase margins. They raise prices and sell more. They understand customer value, quality, and ways of leveraging value over cost. Most important, they understand how to develop fanatical loyalty among customers, employees, suppliers, and investors, loyalty that produces the flow of results bordering Figure 1-2. In short, they frequently astound and often confuse their merely good competitors, who work just as hard but end up being second- or third-best.

Consider, for a moment, the underlying policies of Nordstrom and how management implements them. As we said earlier, everything flows from the mission of providing outstanding service to customers. The way this is achieved is by stocking fashion merchandise in greater depth and breadth than competitors; having pleasant, well-located stores; providing incentives to salespeople and managers to deliver superior service to customers; and then leaving it up to individual store managers and salespeople as to how superior service is to be achieved.

Merely good competitors whose managers practice by the "trade-off" philosophy look at Nordstrom and shake their heads. Because Nordstrom has more complete stocks of fashion merchandise, its inventory carrying costs should be higher than industry averages, right? Wrong. Nordstrom's inventory carrying costs in relation to sales are not higher. Well-designed stores in good locations featuring such amenities as live music performed on a grand piano in each store have to result in higher overhead and occupancy costs than for competitors, right? Wrong again. Nordstrom's overhead and occupancy costs in relation to sales are not higher. Because Nordstrom relies heavily on sales commissions, paying successful salespeople roughly twice as much as they could make at its most serious competitors' stores, it must have the highest labor costs in the industry, right? Still wrong. In relation to sales, Nordstrom's labor costs are at or below industry averages. Delegating the control of service quality to the point of sale must involve risks of achieving highly uneven service quality, right? The evidence suggests not. Nordstrom has one of the most fiercely loyal group of customers of any firm anywhere. Most are recruited by word-of-mouth referrals, thus reducing advertising costs to one of the lowest levels of all fashion retailing firms.

The results of Nordstrom's breakthrough service are mirrored not only in the company's loyal customers but also in its high productivity of assets and personnel; in its ability to retain experienced, capable people; and in its substantial profit on investment even while growing rapidly. At the heart of Nordstrom's success is an understanding of not just how to deliver value to customers or how to control costs, but rather how to leverage value over cost to achieve profit.

LEVERAGING VALUE OVER COST TO ACHIEVE PROFIT

The difference between the value of a service to a customer and the cost of providing it determines profit potential. It is what we call profit leverage. The extent to which it is fully captured by the service provider depends on its pricing policy.

VALUE OF SERVICE

What we receive for what we pay is the basis for measuring value in services as well as products. Our perception of what we receive in a service, however, is based both on results obtained and the manner in which the results are achieved.

Quality of Service. Results and the process by which they are delivered are the components of what we call service quality.

Results from a service often are difficult to assess. As Valarie Zeithaml has pointed out, it is hard to know the results even after we have purchased many services. In contrast, we see the result immediately when we try on a piece of clothing or wear it in public for the first time. We can get some idea of the potential result before we buy. Other goods and many services are harder to assess in advance. For example, we have to have our hair styled to know whether we received good results from the hair stylist. It's nearly as hard to correct a bad haircut in process as it is to reverse it after the fact.

With many services, including almost all educational (this book, for example), medical, legal, and other professional services, the problem is even more extreme. We don't know the results even after the service has been performed. Astute service providers understand this and take measures to assure us that the result will be a good one, often through the process by which the service is delivered.

While we may not be able to assess results before, during, or even after some services, we frequently are able to observe how a service is delivered. This is why outstanding service organizations devote as much attention to the manner of service delivery as to the achievement of desired results.

Quality = Actual Service - Expected Service. Results and process, and thus quality, are evaluated by customers in terms of what they actually receive in relation to what they expected. Because needs and expectations vary by customer and situation, service quality is a highly subjective matter. Clearly, the customer defines quality.

Absolute measurements of service quality that do not include customer expectations miss the point. Customers have different expectations of the quality they can expect from different types of service providers, competitors within the same industry, and the same providers at different points in time and under varying conditions. This helps explain why customers regularly rate auto service quality at such chain organizations as Sears, Firestone, and Midas Muffler higher than at their authorized General Motors, Ford, or Toyota dealers. They expect more from the latter. And because they save their complex auto "medical" problems for the authorized dealer, they do not always come away satisfied. They expect only to get a muffler replaced at a certain price at Midas and it happens.

Customers often expect more rapid response from a Federal Express representative than they do from their doctor. Why? They have been conditioned to believe that the doctor is busier and a scarcer resource, whether it is true or not. One organization, Au Bon Pain, a French bakery café chain featuring sandwiches made with croissants, organized a "Moments of Truth" quality excellence program. As a result, it established several standards, including one borrowed from McDonald's, that no customer should wait more than two minutes in line to place an order. This standard, however, was modified to three minutes when customers indicated that they didn't expect Au Bon Pain to be as fast as a McDonald's because the food being served obviously took longer to prepare.

Customers expect better service from a firm that has provided good service in the past than one that has not, suggesting the importance of a series of service encounters and results over time. And customer expectations may or may not take into account the impact of peak or slack business times on the quality of service or the fact that they may buy different classes of service from the same provider from time to time. Thus, airlines serving travelers who use first class on business but who are traveling coach class with families on vacation regularly run the risk of being perceived as offering poor service, suggesting the need to find ways of making available some form of "first-class" vacation travel to those customers and their families.

Breakthrough service managers understand that a high-quality service encounter raises expectations for future encounters, not only those involving a customer with the same service company, but also those of its competitors. Thus, it is both a competitive weapon and a prod for continued service improvement. In a sense, high-quality service is its own best competition. The term "personal best," sought by competitive track and field athletes, applies in successful service firms as their customers' expectations are ratcheted upward and they strive to meet or exceed them with new features, variety, and positive service "surprises."

This ratchet effect may vary from one targeted customer segment to another, however. For years, the success of McDonald's has been based in part on the fact that one of its primary customer targets, children, typically do not want change from one encounter to another. They want the successful experience repeated exactly as it was the last time, whether or not their dutiful parents concur.

Perceived service quality can be enhanced both through efforts to improve results produced for customers and through efforts to condition their expectations about the nature of the service encounter and the results it might produce. Both are important.

One of the major themes of this book is service improvement. But we shouldn't overlook the fact that many services are enhanced through the conditioning of expectations. The medical profession, for example, has done a masterful job of enhancing value of service perceptions by conditioning prospective patients to expect to be treated like small children, told little, accept much of what happens to them on faith, and not be disappointed with failures to correct medical problems.

One progressive hospital manager, Erie Chapman, CEO of the U.S. Health Corporation, compares the situation of hospital patients unfavorably to that of prison inmates. In his view, both are subjected to excessive questioning, st...