As the world’s major economies have matured, they have become dominated by service-focused businesses. But many of the management tools and techniques that service managers use were designed to tackle the challenges of product companies. Are these sufficient, or do we need new ones?
Let me submit that some new tools are necessary. When a business takes a product to market, whether it’s a basic commodity like corn or a highly engineered offering like a digital camera, the company must make the product itself compelling and also field a workforce capable of producing it at an attractive price. To be sure, neither job is easy to do well; enormous amounts of management attention and academic research have been devoted to these challenges. But delivering a service entails something else as well: the management of customers, who are not simply consumers of the service but can also be integral to its production. And because customers’ involvement as producers can wreak havoc on costs, service companies must also develop creative ways to fund their distinctive advantages.
Any of these four elements—the offering or its funding mechanism, the employee management system or the customer management system—can be the undoing of a service business. This is amply demonstrated by my analysis of service companies that have struggled over the past decade. What is just as clear, however, is that there is no “right” way to combine the elements. The appropriate design of any one of them depends upon the other three. When we look at service businesses that have grown and prospered—companies like Wal-Mart in retail, Commerce Bank in banking, and the Cleveland Clinic in health care—it is their effective integration of the elements that stands out more than the cleverness of any element in isolation.
This article outlines an approach for crafting a profitable service business based on these four critical elements (collectively called the “service model”). Developed as a core teaching module at Harvard Business School, this approach recognizes the differences between service businesses and product businesses. Students in my course learn to think about those differences and their implications for management practice. Above all, they learn that to build a great service business, managers must get the core elements of service design pulling together or else risk pulling the business apart.
The challenge of service-business management begins with design. As with product companies, a service business can’t last long if the offering itself is fatally flawed. It must effectively meet the needs and desires of an attractive group of customers. In thinking about the design of a service, however, managers must undergo an important shift in perspective: Whereas product designers focus on the characteristics buyers will value, service designers do better to focus on the experiences customers want to have. For example, customers may attribute convenience or friendly interaction to your service brand. They may compare your offering favorably with competitors’ because of extended hours, closer proximity, greater scope, or lower prices. Your management team must be absolutely clear about which attributes of service the business will compete on.
Strategy is often defined as what a business chooses not to do. Similarly, service excellence can be defined as what a business chooses not to do well. If this sounds odd, it should. Rarely do we advise that the path to excellence is through inferior performance. But since service businesses usually don’t have the luxury of simply failing to deliver some aspects of their service—every physical store must have employees on-site, for example, even if they’re not particularly skilled or plentiful—most successful companies choose to deliver a subset of that package poorly. They don’t make this choice casually. Instead, my research has shown, they perform badly at some things in order to excel at others. This can be considered a hard-coded trade-off. Think about the company that can afford to stay open for longer hours because it charges more than the competition. This business is excelling on convenience and has relatively inferior performance on price. The price dimension fuels the service dimension.
To create a successful service offering, managers need to determine which attributes to target for excellence and which to target for inferior performance. These choices should be heavily informed by the needs of customers. Managers should discover the relative importance customers place on attributes and then match the investment in excellence with those priorities. At Wal-Mart, for example, ambience and sales help are least valued by its customers, low prices and wide selection are most valued, and several other attributes rank at points in between. (See the exhibit “Wal-Mart’s Value Proposition” in David J. Collis and Michael G. Rukstad’s article “Can You Say What Your Strategy Is?”) The trade-offs Wal-Mart makes are deliberately informed by these preferences. The company optimizes specific aspects of its service offering to cater to its customers’ priorities, and it refuses to overinvest in underappreciated attributes. The fact that it takes a drubbing from competitors on things its customers care less about drives its overall performance.
The phenomenon, of course, has a circular aspect. Shoppers whose preferences match Wal-Mart’s strengths self-select into its customer base. Meanwhile, those who don’t prefer Wal-Mart’s attributes buy elsewhere. It is important therefore to identify customer segments in terms of attribute preferences—or as some marketers prefer, in terms of customer needs. Identifying what might be called customer operating segments is not the same exercise as traditional psychographic segmentation. Rather than stressing differences that enable increasingly targeted and potent messaging, this type of segmentation aims to find populations of customers who share a notion of what constitutes excellent service.
Once an attractive customer operating segment is found, the mission is clear: Management should design a new offering or tweak an existing one to line up with that segment’s preferences. Look, for example, at the fit achieved by Commerce Bank, which has been able to grow its retail customer base dramatically even though its rates are among the worst in its markets and it has made limited acquisitions. Commerce Bank focuses on the set of customers who care about the experience of visiting a physical branch. These customers come in all shapes and sizes—from young, first-time banking clients to time-strapped urban professionals to elderly retirees. As an operating segment, however, they all believe that convenience is a bank’s most important attribute and choose Commerce Bank because of its evening and weekend hours. Second most important to them is the friendliness of interactions with employees, and so the promise of a cheerful, familiar teller has become part of the bank’s core offering. Commerce has added to its branch ambience with interior elements both lovely (high ceilings and natural light) and fun (an amusing contraption for redeeming loose change). When it comes to attributes less important to the bank’s customers—price and product range—management is willing to cede the battle to competitors.
It is tempting to think, “If I’m a really good manager, then I don’t have to cede anything to the competition.” This well-intentioned logic can lead, ironically, to not excelling at anything. The only organizations I have seen that are superior at most service attributes demand a price premium of 50% over their competitors. Most industries don’t support this type of premium, and so trade-offs are necessary. I like to tell managers that they are choosing between excellence paired with inferior performance on one hand and mediocrity across all dimensions on the other. When managers understand that inferior performance in one dimension fuels superior performance in another, the design of excellent service is not far behind.
The Employee Management System
Companies often live or die on the quality of their workforces, but because service businesses are typically people intensive, a relative advantage in employee management has all the more impact there. Top management must give careful attention to recruiting and selection processes, training, job design, performance management, and other components that make up the employee management system. More to the point, the decisions made in these areas should reflect the service attributes the company aims to be known for.
To design a well-integrated employee management system, start with two simple diagnostic questions. First: What makes our employees reasonably able to achieve excellence? And then: What makes our employees reasonably motivated to achieve excellence? Thoughtfully considered, the answers will translate into company-specific policies and programs. Companies that neglect to connect the dots between their employee management approaches and customers’ service preferences will find it very hard to honor their service promises.
At one large international retail bank I studied, a senior manager had come to a depressing realization. “Our service stinks,” she told me. Under her guidance the bank took various measures, mainly centering on incentives and training, but the problem persisted. Customer experience in the branch did not improve. Perplexed but determined, the executive decided to become a frontline employee herself for a month. She thought it would take that much time to experience a typical range of service interactions and see the roots of the problem. In fact, it took one day. “From the time the doors opened, customers were yelling at me,” she reported. “By the end of the day, I was yelling back.” What became clear was that employees were set up to fail. Recent cross-selling initiatives had created a set of customers with more complex needs and higher expectations for their relationship with the bank, but employees had not been equipped to respond. As a result of decisions made by the management team (all individually sensible), the typical employee did not have a reasonable chance of succeeding. The bank’s employee management system was broken.
If your business requires heroism of your employees to keep customers happy, then you have bad service by design. Employee self-sacrifice is rarely a sustainable resource. Instead, design a system that allows the average employee to thrive. This is part of Commerce Bank’s competitive formula. Recall that the bank chooses to compete on extended hours and friendly interactions and not on low price and product breadth. Now think how that strategy could inform employee management; the implications are not hard to imagine. For instance, Commerce concluded that it didn’t require straight-A students to master its limited product set; it could hire for attitude and train for service. In job interviews, its managers could use simple weed-out criteria—like “Does this person smile in a resting state?”—rather than trying to maximize across a wide range of positive characteristics. The bank’s current employees could be deployed as talent scouts, on the principle that it takes one to know one. (When people from Commerce see someone providing great service in another setting, whether at a restaurant or at a gas station, they hand out a card printed with a compliment and a suggestion to consider working for Commerce.)
It’s a simple reality that employees who are above average in both attitude and aptitude are expensive to employ. They are not only attractive to you but also attractive to your competitors, which drives up wages. A business that wants to maintain a competitive cost structure will probably need to compromise on one quality or the other (or, if it insists on having both, find a way to fund that luxury). If, as Commerce Bank does, you choose to hire for attitude, then you must engineer things so that even lower-aptitude employees will reliably deliver great service. Like managers who don’t want to admit that their service is designed to be inferior on some attributes, many people are reluctant to acknowledge a trade-off between aptitude and attitude. But failure to accommodate this economic reality in the design of the employee management system is a common culprit in flawed service.