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The Idea in Cursory

All successful firms must design a compelling offering and manage the workforce to deliver it at an bonny price. Just service firms must do even more: bargain with the frustrating fact that their customers can wreak havoc on service quality and costs.

For example, a customer dithering at a fast-food counter slows things down for anybody else waiting in line. An builder'southward customer struggling to analyze how a new facility will exist used drags out the design process.

To tackle this challenge, Frei advises aligning 4 key elements of your business:

  • What your service offering consists of
  • How you lot fund the excellence you want to provide
  • How yous manage employees to deliver quality service
  • What you do to help customers enhance—not erode—service

Get these elements pulling together, and none of them can pull your business organization apart—every bit service stars similar Wal-Mart, Commerce Banking concern, and Cleveland Clinic have discovered firsthand.

The Idea in Do

To consistently deliver service excellence, ensure that each of these four elements reinforces the others:

Service Offering

Determine how customers define "excellence" when it comes to your offering: Convenience? Friendliness? Flexible choices? Price? Identify what you'll exercise to deliver that excellence—and what you won't do. Instance:

Commerce Bank decided to serve customers who prized pleasant, contiguous service and convenience. It offers evening and weekend hours, buildings with high ceilings and natural light, and a fun contraption for redeeming loose change. Despite its relatively unattractive interest rates and narrow product range, its retail customer base has expanded dramatically.

Funding Mechanism

Recollect about how yous'll pay for the increased toll of the excellence you're seeking to provide through your service offer. Possibilities include:

  • Charging the client. For example, Starbucks customers value lingering in the company's coffee-business firm setting. To fund this inviting atmosphere, Starbucks charges a premium for its coffee.
  • Spending now to save afterwards. For instance, Intuit offers client support service free of charge. It uses callers' input to improve futurity versions of its software, and so customers volition ultimately demand less support.
  • Having customers do the piece of work. For example, airlines' self-bank check-in kiosks not only reduce costs; they likewise enhance the service offering past liberating travelers from long lines at staffed counters and past providing convenient tools such as seat maps.

Employee Direction

Ensure that your workforce management activities (recruiting, option, preparation, job blueprint) empower employees to deliver the excellence embodied in your service offerings. Example:

Commerce Bank competes on extended hours and friendly service, not on depression price or product multifariousness. It knows it doesn't need directly-A students to chief its limited production fix, and then information technology hires for attitude and trains for service. For instance, it uses simple recruiting criteria, such equally "Does this person grinning in a resting country?" And information technology encourages employees to recruit people they see providing not bad customer service in other industries.

Customer Management

Articulate which behaviors customers must demonstrate to go the most value from your service. Then design your service specifically to foster those behaviors. Example:

To get customers using the new self-bank check-in kiosks, airlines ensured that travelers could consummate the transactions with far fewer keystrokes than check-in personnel used to need. By contrast, retail stores that offer cocky-service checkout machines haven't made using those machines piece of cake for shoppers. Moreover, the stores expect shoppers to shoulder responsibility for fraud prevention past weighing bags during checkout. Issue? Anxious customers avoid the machines.

As the world'south major economies accept matured, they have become dominated by service-focused businesses. Merely 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 nosotros need new ones?

Let me submit that some new tools are necessary. When a business takes a production to market, whether it's a bones commodity like corn or a highly engineered offer similar a digital camera, the company must make the product itself compelling and also field a workforce capable of producing information technology at an attractive price. To be sure, neither job is easy to do well; enormous amounts of management attention and bookish research have been devoted to these challenges. Only delivering a service entails something else also: the management of customers, who are not only consumers of the service just tin as well be integral to its production. And considering customers' involvement equally producers tin wreak havoc on costs, service companies must likewise develop creative means to fund their distinctive advantages.

Any of these four elements—the offering or its funding machinery, the employee direction system or the customer management system—can be the undoing of a service business. This is handsomely demonstrated past my analysis of service companies that accept struggled over the past decade. What is only every bit clear, withal, is that there is no "right" manner to combine the elements. The appropriate design of whatsoever one of them depends upon the other iii. When we expect at service businesses that have grown and prospered—companies like Wal-Mart in retail, Commerce Bank in cyberbanking, 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 arroyo for crafting a profitable service business organisation based on these 4 critical elements (collectively chosen the "service model"). Developed as a core educational activity module at Harvard Business Schoolhouse, this approach recognizes the differences between service businesses and production businesses. Students in my course learn to think about those differences and their implications for direction practice. To a higher place all, they learn that to build a keen service business, managers must get the cadre elements of service pattern pulling together or else risk pulling the business autonomously.

i. The Offering

The challenge of service-business organisation management begins with design. As with production companies, a service business can't last long if the offering itself is fatally flawed. It must effectively run into the needs and desires of an bonny grouping of customers. In thinking most the design of a service, all the same, managers must undergo an important shift in perspective: Whereas product designers focus on the characteristics buyers will value, service designers do improve to focus on the experiences customers want to have. For case, customers may attribute convenience or friendly interaction to your service brand. They may compare your offering favorably with competitors' considering of extended hours, closer proximity, greater scope, or lower prices. Your management team must exist absolutely articulate about which attributes of service the business will compete on.

Strategy is frequently defined as what a business concern chooses non 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. Only since service businesses usually don't accept the luxury of but 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—near successful companies choose to deliver a subset of that package poorly. They don't make this choice casually. Instead, my inquiry has shown, they perform desperately at some things in order to excel at others. This can be considered a hard-coded trade-off. Call back about the company that can afford to stay open up for longer hours because it charges more than than the competition. This business is excelling on convenience and has relatively inferior performance on price. The price dimension fuels the service dimension.

Service excellence can be defined as what a business organization chooses not to practise well.

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 past the needs of customers. Managers should discover the relative importance customers place on attributes and and so friction match the investment in excellence with those priorities. At Wal-Mart, for example, ambience and sales help are least valued by its customers, depression prices and wide selection are virtually valued, and several other attributes rank at points in betwixt. (See the showroom "Wal-Mart's Value Proposition" in David J. Collis and Michael Thousand. Rukstad's commodity "Can Yous Say What Your Strategy Is?") The merchandise-offs Wal-Mart makes are deliberately informed by these preferences. The company optimizes specific aspects of its service offer to cater to its customers' priorities, and information technology 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 functioning.

The phenomenon, of course, has a circular aspect. Shoppers whose preferences match Wal-Mart'southward strengths self-select into its client base. Meanwhile, those who don't prefer Wal-Mart's attributes buy elsewhere. It is of import therefore to identify customer segments in terms of attribute preferences—or as some marketers prefer, in terms of customer needs. Identifying what might exist called customer operating segments is not the aforementioned exercise as traditional psychographic segmentation. Rather than stressing differences that enable increasingly targeted and potent messaging, this type of division aims to observe populations of customers who share a notion of what constitutes excellent service.

Once an attractive customer operating segment is plant, the mission is clear: Management should pattern a new offering or tweak an existing one to line up with that segment's preferences. Expect, for example, at the fit achieved by Commerce Bank, which has been able to abound its retail customer base dramatically fifty-fifty though its rates are among the worst in its markets and it has made limited acquisitions. Commerce Bank focuses on the fix of customers who intendance virtually the experience of visiting a physical branch. These customers come in all shapes and sizes—from young, outset-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 about important attribute and choose Commerce Bank because of its evening and weekend hours. Second nigh important to them is the friendliness of interactions with employees, and so the promise of a cheerful, familiar teller has become part of the banking company's cadre offering. Commerce has added to its branch ambience with interior elements both lovely (loftier ceilings and natural lite) and fun (an amusing contraption for redeeming loose change). When it comes to attributes less important to the bank'southward customers—price and product range—management is willing to cede the battle to competitors.

It is tempting to think, "If I'm a actually adept director, so I don't have to sacrifice annihilation to the competition." This well-intentioned logic can lead, ironically, to not excelling at annihilation. The only organizations I have seen that are superior at most service attributes need a toll premium of fifty% over their competitors. Virtually industries don't support this type of premium, and so trade-offs are necessary. I similar to tell managers that they are choosing between excellence paired with inferior functioning on one hand and mediocrity beyond all dimensions on the other. When managers understand that inferior performance in one dimension fuels superior performance in some other, the blueprint of excellent service is not far behind.

ii. The Funding Mechanism

All managers, and fifty-fifty most customers, agree that there is no such affair every bit a free tiffin. Excellence comes at a price, and the cost must ultimately exist covered. With a tangible production, a company's mechanism for funding superior functioning is commonly relatively simple: the price tag. Only the customers who forfeit the actress cash can avail themselves of the premium offering. In a service business, developing a way to fund excellence can exist more complicated. Many times, pricing is not transaction based but involves the bundling of various elements of value or entails some kind of subscription, such as a monthly fee. In these cases, buyers can excerpt uneven amounts of value for their money. Indeed, even nonbuyers may derive value in certain service environments. For example, a shopper might spend time learning from a knowledgeable salesperson, only to leave the store empty-handed.

In a service business organisation, therefore, direction must give careful thought to how excellence volition be paid for. In that location must be a funding machinery in place to allow the company to outshine competitors in the attributes it has chosen. In my study of successful service businesses, I've seen the funding mechanism have four basic forms. Ii are ways of having the client pay, and two cover the cost of excellence with operational savings.

Charge the customer in a palatable way.

The classic approach to funding something of value is simply to have the client pay for it, only often it is possible to brand the form that payment takes less objectionable to customers. Rarely is that done with à la carte pricing for the niceties. A big part of Starbucks's appeal is that a customer can linger almost indefinitely in a coffeehouse setting. It's unthinkable that Starbucks would place meters next to its overstuffed chairs; a better style to fund the temper is to charge more than for the coffee. Commerce Bank is open up late and on weekends—earning information technology high marks on extended hours—and information technology pays for that service by giving a half percentage point less in interest on deposits. Could information technology fund the extra labor hours by charging for evening and weekend visits? Mayhap, but a slightly lower interest rate is more palatable. Management in whatsoever setting would do well to creatively consider what feels fair to its customers. Often, the least creative solution is to charge more for the detail service feature you are funding.

Create a win-win betwixt operational savings and value-added services.

Very clever direction teams discover ways to enhance the customer experience fifty-fifty while spending less (finding, in other words, that there tin be such a thing every bit a free lunch). Many of these innovations provide but a temporary competitive advantage, as they are rapidly recognized and copied. Some are surprisingly durable, however. An example is the immediate-response service provided by Progressive Casualty Insurance. When someone insured by Progressive is involved in an automobile blow, the company immediately sends out a van to assist that person and to assess the harm on the spot—often arriving on the scene earlier the law or tow trucks. Customers beloved this level of responsiveness and give the company loftier marks for service. Simply in apprehension of such a need someday, would they pay more in insurance premiums? Unfortunately, no. People are pathologically price sensitive about car insurance and well-nigh never select anything but the stone-bottom quote. The cardinal to Progressive's ability to fund this service is the price savings information technology ultimately yields. Commonly insurance providers are subject to fraud, with criminals making claims for accidents that were staged or never happened. Considering of these and other types of disputed claims, firms too incur high legal fees—which, combined with the other costs of fraud, add up to some $15 out of every $100 in insurance premiums across the industry. Since deploying its vans, Progressive has seen costs in both categories plummet. Sending a visitor representative to the scene pays for itself.

Progressive offers another customer convenience that many competitors have so far shied away from: giving quotes from other providers aslope its ain when a potential buyer inquires nearly the price of insurance. It's not that Progressive is determined to go 1 amend than rivals to win the business organization. In fact, Progressive's is the lowest quote only most half the time. What Progressive does believe is that its quote is the correct one given the probability of that person's getting into an accident—a probability that the insurer is best in form at determining. If indeed its quote is spot-on, then allowing a competitor to insure the customer at a lower charge per unit is doubly effective: Information technology frees Progressive from a money-losing suggestion while burdening its competitor with the unprofitable account. Thus a level of service that looks downright altruistic to the customer actually benefits the visitor. This is an instance of leveraging operations into a value-added service.

How tin your management team detect win-win solutions of its own? When I pose this question to managers, their impulse is to imagine what new value could be created for customers and then to ponder how that could be funded through cost savings. I suggest beginning instead by request, "Where are our biggest toll buckets?" With these in listen, managers tin can then simultaneously determine how to reduce costs and create a value-added service. A good first place to look? Anywhere that time is a large component of price. Removing time is often fruitful, since it can directly better service fifty-fifty as information technology cuts costs.

Spend now to save later.

Often it is possible, if somewhat painful, to brand operational investments that will pay off eventually by reducing customers' needs for auxiliary service in the future. A classic case is Intuit'southward conclusion to provide complimentary customer support, in defiance of the software industry norm. Call centers are expensive to staff considering of the combination of technical knowledge and sociability required to field inquiries finer. Customers meanwhile are extremely uneven in their neediness vis-à-vis information technology. For virtually software makers this adds up to the obvious decision that customers should be charged for support.

Intuit founder Scott Cook sees the matter differently. Those needy calls, he believes, are a useful form of input to continued product evolution—the engine of future revenues—and that justifies an even greater expense outlay. Intuit has its higher salaried product-evolution people, not solely client service people, fielding calls and so that subsequent versions of its offerings volition be informed past directly knowledge of what users are trying to reach and how they are being frustrated. This is part of a broader commitment to feedback-driven comeback that Melt refers to equally "DIRST"—for "exercise it right the second time." The investment has paid off in improve software, which means a lower call book. "Our competition thinks we're crazy," Cook says, and he understands why. "If we got as many calls equally they do, we'd exist out of concern."

Have the customer practice the work.

One other blazon of funding mechanism for enhanced service puts the toll dorsum in the customer's court, simply in the class of labor. Offering self-service, from pump-your-own gas to self-managed brokerage accounts, is a well-established mode to keep costs depression. If the goal is service excellence, though, you must create a situation in which the customer volition prefer the exercise-it-yourself adequacy over a readily available full-service culling. Airlines have achieved this, at final, with flight cheque-in kiosks, although the value proffer they initially presented was dubious. At first, passengers felt compelled to use the relatively unappealing kiosks only because carriers had allowed the lines in front of manned desks to become intolerable. Today, however, frequent fliers prefer the kiosks because they provide readier access to useful tools similar seat maps. Businesses looking to reach service excellence in other settings should not take such an indirect route. They should fix themselves the claiming of creating cocky-service capabilities that customers volition welcome. Indeed, if a self-service option is truly preferable, customers should be willing to accept on the work for nothing or even pay for the privilege. When managers designing self-service solutions are not permitted to add together the inducement of price discounts, they are forced to focus on improving the customer experience.

If a self-service option is truly preferable, customers should exist willing to take on the work for nothing or fifty-fifty pay for the privilege.

Whatever funding mechanism is used to comprehend the costs of excellence, it is best idea out as thoroughly as possible prior to the launch of a new service, rather than amended in light of experience afterward. When a service that's been perceived every bit free suddenly has fees associated with it, customers tend to react with disproportionate displeasure. And since companies cannot thrive by offer service gratis, information technology is vital that they not ready expectations that can't exist sustained. With careful analysis and design, a visitor can offer and fund a better service feel than its customers would enjoy elsewhere.

3. The Employee Management Organisation

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 than affect there. Top management must give careful attention to recruiting and selection processes, preparation, job blueprint, performance direction, and other components that make up the employee management system. More than to the point, the decisions made in these areas should reflect the service attributes the company aims to be known for.

To blueprint a well-integrated employee direction system, commencement with ii unproblematic diagnostic questions. First: What makes our employees reasonably able to achieve excellence? And then: What makes our employees reasonably motivated to accomplish excellence? Thoughtfully considered, the answers will interpret into company-specific policies and programs. Companies that neglect to connect the dots between their employee management approaches and customers' service preferences volition find it very hard to honor their service promises.

At one big international retail banking company I studied, a senior managing director had come to a depressing realization. "Our service stinks," she told me. Under her guidance the banking company took diverse measures, mainly centering on incentives and training, simply the problem persisted. Customer feel in the branch did not meliorate. Perplexed only adamant, the executive decided to become a frontline employee herself for a month. She thought information technology would accept that much time to experience a typical range of service interactions and come across the roots of the problem. In fact, it took one solar day. "From the time the doors opened, customers were yelling at me," she reported. "By the finish of the day, I was yelling back." What became clear was that employees were set upwardly to fail. Recent cantankerous-selling initiatives had created a set of customers with more complex needs and higher expectations for their relationship with the depository financial institution, but employees had non been equipped to answer. As a event of decisions made by the direction team (all individually sensible), the typical employee did not have a reasonable chance of succeeding. The bank's employee management system was cleaved.

If your business organization requires heroism of your employees to continue customers happy, then you have bad service by design. Employee self-sacrifice is rarely a sustainable resources. Instead, design a organization that allows the boilerplate employee to thrive. This is function of Commerce Banking company's competitive formula. Recall that the banking company chooses to compete on extended hours and friendly interactions and non on low price and product breadth. Now think how that strategy could inform employee management; the implications are not hard to imagine. For example, Commerce concluded that it didn't require straight-A students to master its express product prepare; it could rent for attitude and train for service. In job interviews, its managers could use simple weed-out criteria—similar "Does this person smile in a resting state?"—rather than trying to maximize across a broad range of positive characteristics. The bank'southward current employees could be deployed equally talent scouts, on the principle that information technology takes one to know one. (When people from Commerce run into someone providing bang-up service in another setting, whether at a eating place or at a gas station, they hand out a card printed with a compliment and a proposition to consider working for Commerce.)

It'south a simple reality that employees who are above average in both attitude and bent are expensive to employ. They are non only attractive to you but also attractive to your competitors, which drives up wages. A concern that wants to maintain a competitive cost structure will probably demand to compromise on one quality or the other (or, if information technology insists on having both, discover a way to fund that luxury). If, as Commerce Bank does, yous cull to rent for attitude, then you lot must engineer things and then that even lower-aptitude employees volition reliably deliver great service. Similar managers who don't want to acknowledge that their service is designed to be junior on some attributes, many people are reluctant to acknowledge a trade-off betwixt bent and mental attitude. Merely failure to adapt this economical reality in the pattern of the employee management system is a common culprit in flawed service.

4. The Customer Direction Arrangement

In a service environment, employees aren't the simply people affecting the toll and quality of service delivered. The customers themselves tin exist involved in operational processes, sometimes to a very large extent, and their input influences their experiences (and often other customers' also). For example, an architectural firm's client may explicate the purpose of a new facility well or poorly, and that volition affect the efficiency of the design process and the quality of the end production. A customer who dithers at a fast-food counter makes the service less fast for anybody behind him.

Customer interest in operations has profound implications for management considering it alters the traditional role of the business in value creation. The classic product-based business buys materials and adds value to them in some way. The enhanced-value production is then delivered to customers, who pay to receive information technology. In a service business, however, employees and customers are both function of the value-creation process. A chief do good is that customer labor can be far less expensive than employee labor. It tin besides lead to better service experiences. When students participate more in a classroom environment, for instance, they acquire more. Merely there are challenges, as well. Designing a system that explicitly manages these challenges is essential to service success.

Consider the issue of client selection. Service designs may call for customers to perform of import tasks, but for the most function customers have no interview, no background bank check, and no personality profile. Equally a quondam senior executive from Nestlé at present working in financial services put information technology, "I could command who was in my factory at Nestlé; I have no such command over the customers in my bank's branches."

In addition, despite many organizations' best efforts, customers are not as like shooting fish in a barrel to train every bit employees. There are usually many times more customers than employees, and creating constructive training materials for such a large, dispersed, unpaid, and ofttimes irrelevantly skilled workforce is difficult. When this holds true, firms must arrange the express training in the pattern of the service experience. If tasks are shifted from employees to customers—from higher-skilled to lower-skilled people—and so they must exist adapted accordingly. Airlines seem to go this right. Call up (if yous can) the final time you checked in with an agent at the total-service counter. Chances are you witnessed the amanuensis complete a dizzying sequence of keystrokes. It would not seem reasonable to expect customers to perform these same steps, and then when the check-in part was transferred to customers, it was dramatically simplified. By contrast, call back of the self-service supermarket checkout. Here customers are asked non only to do what trained employees take washed previously just too to shoulder the additional responsibility of fraud prevention through a complicated process of weighing numberless. Asking customers to perform more than-complicated tasks than college-skilled employees contributes to the disarray and anxiety that surrounds these checkout lines.

Customers as well accept a great deal of discretion in their operational activities, usually far more than employees. When a company introduces a new process that information technology wants employees to use, it tin simply outcome a mandate. When customers are involved, transitions like this tin be significantly more complicated. Look at Zipcar, the popular motorcar-sharing service. To keep costs depression, its service model depends on customers to clean, refuel, and render cars in time for the next user. Motivating employees to perform these tasks would be routine; motivating client-operators has required a complex, evolving mix of rewards and penalties.

In managing customers in your operations, then, you'll need to accost a few key questions: Which customers are you focusing on? Which behaviors do you want? And which techniques volition most effectively influence behavior? For case, a company whose business model depends on customers' timeliness—whether it's a dental office packing its appointment agenda or a video store circulating hit films—may use more- or less-heavy-handed tactics to ensure compliance. In a previous article for Harvard Business concern Review ("Breaking the Trade-Off Betwixt Efficiency and Service," Nov 2006), I related lessons from several companies that have used a range of techniques to change customer behavior. These techniques can be divided into two basic categories: instrumental (the carrots and sticks we commonly see play out as discounts and belatedly fees) and normative (the employ of shame, blame, and pride to motivate us to render shopping carts and pick upwards trash even when no ane is looking). The important thing is to manage customers in a style that is consequent with the service attributes you've chosen to emphasize overall.

Integrating the Elements

Successful service companies have a working plan that incorporates all four elements of service blueprint. Inside each of those areas, notwithstanding, it is difficult to spot any best practise. This is because the whole business organization depends more than on the interconnection of the four than on any one element.

A standout example of constructive overall integration is the Cleveland Clinic, which is consistently ranked among America's virtually eminent hospitals and has been a leader in pioneering cardiac care for decades. Information technology's hard to put a finger on the source of that advantage. The fact that the clinic has specialty centers focusing on diabetes, for example, or cardiac care is not infrequent in itself. Its refusal to attach financial rewards to doctors' productivity is unusual just might non exist effective elsewhere. Stride dorsum from the details, yet, and the bigger motion picture emerges. Attracting the highest-severity patients ways that doctors will always face a challenging environment in need of innovative solutions. Organizing into disease centers rather than narrower, more than traditional lines of specialization (such as kidneys or claret) sets the stage for cantankerous-disciplinary collaboration—and thus for novel perspectives—inside those centers. Removing productivity incentives gives doctors license to spend time on innovation, which is enhanced past their close piece of work with specialists from other fields. The particular choices made on methods, processes, and personnel are the correct ones for the Cleveland Dispensary considering they complement ane another and come together in a smoothly operating system.

Whatever service company, no matter how long established, tin benefit from a review of its operations using the framework laid out in this commodity. Bringing the iv elements of service design into tighter alignment can be an ongoing process of small tweaks and experiments in change, inspired past the kinds of questions included in the sidebar "Diagnosing Service Blueprint." A direction team planning to launch a new service will notice the framework particularly helpful. It flags the decisions that should be made early and in tandem so that they don't clash down the road. And at the highest level, information technology underscores two very important principles of service design. Outset, there is no such thing as a skilful idea in isolation; there is only a proficient idea in the context of a specific service model. 2d, it is folly to endeavour to be all things to all customers.

The success or failure of a service business comes down to whether it gets four things right or wrong—and whether it balances them effectively. Here are some questions that will sharpen managers' thinking along each dimension and help companies gauge how well their service models are integrated.

1. The Offering

Which service attributes (convenience? friendliness?) does the firm target for excellence?

Which ones does it compromise in club to accomplish excellence in other areas?

How practise its service attributes match up with targeted customers' priorities?

2. The Funding Machinery

Are customers paying as palatably as possible?

Tin operational benefits be reaped from service features?

Are there longer-term benefits to current service features?

Are customers happily choosing to perform work (without the lure of a discount) or just trying to avoid more than-miserable alternatives?

3. The Employee Management System

What makes employees reasonably able to produce excellence?

What makes them reasonably motivated to produce excellence?

Accept jobs been designed realistically, given employee selection, training, and motivation challenges?

four. The Customer Management System

Which customers are you incorporating into your operations?

What is their job design?

What take you done to ensure they have the skills to do the job?

What have you lot done to ensure they want to do the job?

How will y'all manage whatsoever gaps in their performance?

The Whole Service Model

Are the decisions you make in one dimension supported by those you've fabricated in the others?

Does the service model create long-term value for customers, employees, and shareholders?

How well do extensions to your core business fit with your existing service model?

Are you trying to be all things to all people—or specific things to specific people?

The first point notes the importance of fit, mentioned before as a fundamental forcefulness of the Cleveland Clinic. At the clinic, management knows that extensions to its core business organization must be examined closely for their fit with its existing service model. The system recently abandoned the concept of a high-end wellness and spa offer because it didn't build on the hospital's core operational strengths. In some ways this seems similar an obvious point, merely managers often stray into areas of relative weakness, particularly when they see a house they consider to be a direct competitor succeeding with a service they don't yet offer. Progressive fabricated this mistake when information technology decided to venture into the habitation insurance market. No question, there is money to exist fabricated in dwelling insurance, as innumerable firms have shown. Just Progressive failed in its endeavor considering the challenges of that concern did non match up with the company's competitive strengths. Call back that Progressive is justifiably proud of its analytics advantage, which enables information technology to effectively size upwards the risk that a given policyholder volition file a merits. Unfortunately, that kind of actuarial prowess is not as central to making a turn a profit on insuring homes. Abode insurers ascent or fall on the management of their investment portfolios—and that is a relative weakness of Progressive. (Firms typically lose money on the insurance just make money investing prepaid premiums.) The fit, in retrospect, was a bad one. It should have been seen that way early on.

Just as common a failing is the misguided want to be all things to all people. In today's service economy, it is nearly incommunicable to design a service model to embrace a huge range of customers and remain competitive beyond them. Instead, firms should design their service models for more than targeted excellence by being specific things to specific people.

Great service companies are, almost without exception, very clever about selecting their customers. We saw this in Progressive's highly informed choice of whom to practice business with. Commerce Banking company, from its ancestry in 1973, knew information technology should stake out its own claim on the market. "The world," its founder Vernon Hill said, "did not demand another 'me-as well' bank. I had no uppercase, no brand name, and I had to search for a manner to differentiate from the other players." Shouldice Hospital, a Canadian specialist in hernia operations, is highly selective almost its customer base of operations. Not just does it serve just patients experiencing a sure type of ailment, it has the luxury of operating on otherwise healthy people. It has skimmed the cream of the market.

Becoming a Multifocused Firm

Inevitably, companies that attempt to be all things to all people begin to struggle when upstart competitors like Shouldice start picking off assisting niches. Often, the decline is not taken seriously until it's also late. (See the sidebar "Coming to Terms with the Threat.")

How exercise incumbents react when a focused entrant appears on the scene? The usual response seems to follow four singled-out stages of "strategic grief."

Dismissal. The incumbent perceives the aspirant as a nonthreat. Information technology is a deceptively easy cess to make, given that the focused firm has optimized its service model to be deliberately practiced—and bad—at certain aspects of the incumbent's business concern.

Sadness. Adjacent comes a sense of loss as profitable customers first to defect. They are willing, if not eager, to make the trade-offs inherent in the aspirant's service model.

Relief. Sadness is replaced by relief as the realization dawns that only 1 of the incumbent'due south customer segments is beingness targeted past the focused entrant. The new competitor may win on a few dimensions of value and have certain customers away, but there are still many other segments to serve!

Dread. Finally, the larger threat reveals itself. The problem is not this single entrant; information technology's the inevitable attack of focused firms on other fronts.

Spotted in time, the threat of focused competitors can exist met effectively. Is in that location a troubling area of competitive activity on your radar screen? If so, don't be lulled by its pocket-size scale and isolation. Move quickly to understand what'south going on there. In particular, focus on the entrant'southward rate of comeback along critical measures like market share, share of wallet, and service quality. Benchmarks of absolute difference can fool managers into believing that the threat is not imminent. Only when a new competitor improves faster than you lot do, the gap soon closes.

Once you acquire the threat is real, explore your potential advantages. Can y'all compete effectively as a "multifocused" firm (one that targets multiple niches rather than trying to tackle everything)? The threat needs to exist addressed with humility. The temptation will exist smashing to believe that "our way" remains the ameliorate manner. If anything, overstate the fact that it is not, and proceed from that assumption to craft a competitive response.

However, some incumbents have managed to compete finer with their more than-focused rivals, and there is much to learn from their experience. The common thread in their competitive responses to upstarts is the capacity to become "multifocused." In other words, they stopped trying to encompass the entire waterfront with a single service model. Instead they pursued multiple niches with optimized service models—each designed to achieve excellence on some dimensions at the expense of inferior performance on others. The cloak-and-dagger to success in a multifocused business firm is the ability to benefit from having various service models nether one firm umbrella. This benefit often comes in the form of shared services (that is, internal service providers), which enable a firm to generate economies of scale and economies of feel across its service models. Effectiveness at utilizing shared services to the advantage of the private service models tin determine the success of a multifocused firm. (Meet the exhibit "Are Focused Competitors Nipping at Your Flanks?")

Highly focused firms are the bane of big, established companies. Considering they laser-target sure client segments, they are able to optimize their service models. The service quality they provide, using specialized employees and a customized product gear up, is potent. By contrast, incumbent firms typically attract a mix of customers, rent and develop a variety of employees, and—as a result of splendid, well-intentioned suggestions from both groups—are rampant product proliferators.

The shared services architecture tin can be seen in multifocused corporations across industries—from Yum Brands, a collection of five fast-food companies, to Omnicom, which consists of hundreds of companies in the interactive-marketing space, to GE, which seems to have no limit on the markets it can enter. Each corporation has created singled-out service models for distinct customer operating segments and gauges the overall benefit of the models by assessing how much they gain from one another. What determines whether a visitor has assembled the right portfolio of service models? It comes down to a critical test: Is each of the firm's distinct service models ameliorate off as a upshot of the others? If the answer is no, information technology signals that performance is about to decline or that the company may want to spin off some service models. If the answer is yes, it's almost always thanks to superior management of shared services, and the incumbent thrives.

The services shared in multifocused companies typically include business functions like finance, purchasing, it, human resource, and executive training. The scale advantages they provide are straightforward and include pooled purchasing, preferred access to credit, and other cost-related benefits. Economies of experience are more than difficult to realize just tin besides be more valuable. Hither, the challenge is to employ knowledge gained in 1 service model to strengthen the performance of the others. To a limited extent, this kind of knowledge transfer occurs informally; this has always been the hope and hope of diversified companies. The important divergence in successful multifocused firms is that they formalize the procedure, designing very explicit ways of leveraging experience across service models. Knowledge transfer is facilitated by deliberate investments in such programs equally formal best-practice sharing; centralized, dynamic employee training; and the rotation of managers among models.

My research convinces me that the best ways of sustaining growth in a service business is to employ the multifocused model, yet it is as well axiomatic that this model requires concentrated attempt to defend. Leaders of individual service models constantly assert that dedicated, rather than shared, resource would do more than to strengthen their own businesses. Operations managers, meanwhile, heighten a chorus of complaint that shared services require more-vigilant control "below the line" if they are to deliver the necessary economies of scope and experience. Given the perpetual assault on the model, it may not be surprising that some other common characteristic of successful multifocused firms is directive (fifty-fifty autocratic) leadership. This leadership style accommodates dissimilar personalities, but information technology always relies on senior managers who are able and willing to exert strong influence on subordinates. They must be, in order to residue the competitive autonomy of individual service models with the commonage value of shared services. Without potent, centralized leadership, revenue-generating line managers typically overrule shared-services managers, particularly in moments of strategic distress. Indeed, companies frequently stack the deck by placing stronger leaders in the service models than in the shared services, effectively undermining the performance of the system.

The Management-Exercise Frontier

Management scholars, and not a few practitioners, have taken upwardly an interesting contend in recent years: Is the bailiwick of management fundamentally different in service businesses than in product businesses? The way in which management is studied and taught in graduate business schools was forged in the context of the industrial economic system. Are the approaches that worked for manufacturing companies equally applicable to services?

Equally service businesses continue to innovate, succeed, and be studied, the answers are condign clearer. The framework presented here suggests why the traditional techniques have proved as durable every bit they have and why they still leave sophisticated managers wanting more. Much of what determines the health of a product business—the soundness of its offering and the direction of its people—is merely as indispensable in a service business organisation and can be addressed with a similar tool kit. Merely whole new areas involving the roles of customers accept opened up, and their tool kits are only now being assembled.

A version of this article appeared in the Apr 2008 issue of Harvard Business organization Review.