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From Dr. Scott Sampson's Understanding Services Businesses Book (click for table of contents)
SBP 5b: Identifying Key Production Elements⇐Prior —[in Unit 5: Identifying Strategic Opportunities]— Next⇒SBP 5d: JIT Information

SBP 5c: Positioning Amid Customers and Competitors

With services, the service provider can attain competitive positioning by defining the relationship with the customer relative to competitors.

Why it occurs

This principle occurs because customer involvement allows for differing types of relationships between the customer and the company. Customer involvement is a natural consequence of the Unified Services Theory.


It is important to note that there are a myriad of positioning strategies a service provider might take. Herein, we only consider three very generic strategies: cost leadership, focus, and differentiation. Let's consider each, particularly looking at the way customer inputs impacts our ability to position in that way.

(1) Cost leadership

There can be clear advantages in many service industries to being the low-cost producer. An assumption in this positioning strategy is that the internal efficiencies of the company's production process results in lower costs of service production, which allows the company to charge the customer less for the service.

What is the relationship between the customer and the company which is assuming an overall cost leadership strategy? The relationship is often something like: “We (the service provider) will work hard to be efficient and keep costs down for us and you (the customer), and in return, you (the customer) will conform to our efficient procedures.”

What limits the ability to establish such a relationship in service businesses? What limits the ability of a service provider to operate efficiently? Two thing that go hand in hand: customer inputs and variability. Variability is the enemy of efficiency. Variability in a production process diminishes the learning advantages of repetition, of simple (non-divergent) procedures, and of economies of scale. (As will be revisited in the Lowered Entry Barriers Service Business Principle)

In manufacturing processes the way we improve our efficiency is to drive out variability. Can we not drive out variability in service processes? Where does variability largely come from in service processes? From customer inputs. Therefore, if we wanted to flagrantly drive variability out of service processes then we would need to eliminate customer inputs, which will drive us out of the service business. (The Unified Services Theory reminds us that those customer inputs are essential to the service process.)

Besides causing variability, customer inputs cause further challenges in our ability to attain production efficiency and cost leadership by allowing for unreasonable expectations from the customer. Customers may claim they want low-cost service, but they may simultaneously expect to have customized service– service that conforms to the specific production requirements of their customer inputs. With very few exceptions, the customer can't have it both ways. Therefore, as much as customers may claim to like a low-cost service, if they are not willing to allow their customer inputs to conform to standardized production, the low-cost strategy will generally not work.

That's the bad news. The good news is that if a company can attain efficiency and low cost in a way customers don't mind, then cost leadership can be an extremely successful strategy that will be hard to duplicate by other companies. And how might a company attain efficiency and low cost? Perhaps the best way is to reduce the extent of customer inputs allowed into the production process. Here are a few examples:


A number of years ago, Taco Bell introduced the “value meal” strategy, which was for the most part a cost leadership strategy. With competitors (other fast food restaurants), the customer inputs entered the process quite early, even before the food was actually produced. Competitors were thus able to customize the food production to some degree. Taco Bell, on the other hand, produced all of the food item components at a more centralized location apart from the restaurant. Since the food was centrally manufactured (i.e. without customer inputs), Taco Bell experienced tremendous efficiencies and cost savings. The customer inputs (i.e. the customer's specifications of an order) trigger nothing more than the final assembly of the food items. (Food items are all inventoried in bags, including the pre-cooked meat that is reheated before being sold.) This, however, limits the ability to conform to various customer inputs (or order specifications). The fact is, you can “have it your way” in extremely few ways. (Try this, for example–visit a Taco Bell restaurant and request, “Instead of having diced tomatoes on my taco, could I please have a whole tomato slice?” It is unlikely they have ever had a whole tomato slice anywhere in the restaurant. Slicing tomatoes for one customer is inefficient.)

Taco Bell's strategy was successful because customers did not mind (or did not perceive) that the company did most of the food production prior to their arrival (with customer inputs) at the restaurant. And many competitors have had a hard time providing low costs as well as Taco Bell.


Another cost leadership example is Southwest Airlines. They also have successfully minimized the adverse inefficiency affects of customer inputs in their air transportation production process. Here are a few examples for you to try… Next time you are making a flight reservation with Southwest Airlines, give them an additional customer-information input: tell them you really would like a window seat. What will they do with that gem of information? Nothing! They will likely tell you that if you really want a window seat then you should arrive at the airport early so that you can be a first passenger on the plane. Or, tell them you would really like some low-salt food to eat on the plane (they will probably suggest a location where you can buy it before you board). Finally, if your “self input” is a little late to catch a Southwest connecting flight, observe how long Southwest is willing to delay the connection for you to board. In my experience, other airlines tend delay connecting flights quite frequently (when it is required). But Southwest will just put you on the next flight. Southwest's efficient strategy has no room for variability in the arrival times of customer-self inputs. (But I like they way they get you to your destination on time, and I love their low fares!)

As we would see in both of these examples, another key to success in implementing a cost leadership strategy is being able to communicate to customers exactly what the service provider intends to provide. That way customers can be prepared to conform, or choose to go elsewhere.

(2) Focus

The focus strategy is to meet the exclusive needs of a (perhaps narrowly defined) target customer group.

What is the relationship between the customer and the company that is taking a focus strategy? The relationship is something like: “You (the customer) will allow yourself to be identified with a particular customer group that has particular needs, and we (the service provider) will try to meet the specific needs of that customer group.”

One way to look at focus is as a narrow intensity. We don't try to do everything. In fact, the phrase “focus on everything” is an oxymoron. Instead, the focus strategy is to just provide that service which would appeal to a specific customer group. If that group has somewhat unique needs, then the expectation is that they will be more likely to patronize a service provider that focuses on those needs (than on one that doesn't quite meet the needs).

What limits the ability to establish such a relationship with customers in service businesses? A significant potential problem occurs if the customer group being focused on is not in fact a group with unique homogenous needs. Why is that a problem? Because the limited scope of production of a focus strategy causes inefficiencies that cause cost problems. (Increases costs to the producer, such as by lower economies of scale, and costs to the customer, such as less convenient locations.) And, if the needs are not in fact somewhat unique, then any general service provider can provide the service! (nullifying the competitive advantage)

The real challenge in pursuing the focus positioning strategy is that customer inputs tend to be heterogeneous (all a little bit different), not homogenous (all mostly the same). Thus, the key to effectively implementing a focus strategy in a service environment is being able to qualify the homogeneity of customer inputs.

Here are a few examples…

farm1.static.flickr.com_117_368595505_7ecba1d69c.jpg Shouldice Hospital is a hospital in Canada that operates (literally) only on a particular type of hernia. They are extremely focuses, not providing any other surgical procedure except for this particular hernia operation. The great thing is that if you need that operation, there is probably no hospital more able to meet your needs than Shouldice. A key to Shouldice's success in their focus strategy is the ability to qualify customer inputs. One way they do this is by sending the potential patient a questionnaire to describe the condition. If it does not appear to fit the focused procedures of Shouldice, such as a patient with corresponding obesity problems, then the customer will be turned away and will have to go to a less-focused hospital for the procedure.

Another example of a focus strategy is the adult education chain known as the University of Phoenix. Even though many educational institutions provide adult education to employed persons, few have near the focus on that customer group as the University of Phoenix does. As a result, they cater to the specific needs of that group, including “one night a week” education and a complete curriculum geared specifically for students with already stressful full-time jobs. Their entire operation system is designed for that type of student, and even their instructors are mostly individuals with full-time jobs in the community. (And not like university faculty who mix a lot of theory in with even applied instruction.) The University of Phoenix qualifies the somewhat heterogeneous needs of their target customers–people expecting the breadth and depth of curriculum of other educational institutions would not likely be satisfied with the University of Phoenix offerings–but it is just right for the target market.

(3) Differentiation

The differentiation strategy is to provide a unique service–or to provide a service in a way that is different from the way competitors provide the service. With manufactured goods, differentiation is simply to make a relatively unique product, or to deliver it in a different way. With services, a common way that we might differentiate is in the handling of customer inputs. We may handle customer inputs in a way that is different from the way our competitors do. Examples will be given below.

What is the relationship between the customer and the company that is taking a differentiation strategy? The relationship is often something like: “You (the customer) can provide your inputs for service from us (the service provider) or any of our competitors; however, none of them will handle your inputs the way we will.”

Implicit in the appropriateness of a differentiation strategy is the idea that customers will value the ways in which service production is different for the differentiator. If the service is perceived by customers to be a “commodity,” such as the way camera film processing or long-distance telephone service often is viewed, then the low-cost provider will have a dramatic advantage over a higher cost differentiator. Nevertheless, there are dramatically fewer service commodities than goods commodities, for reasons explained by the Unified Services Theory. (see, for example, SBP: Heterogeneous Production)

farm1.static.flickr.com_148_336209777_8648559213.jpg What else limits the ability to establish such a relationship in service businesses? We have explored the implication of customization in services. If our competitors customize, then it would be quite difficult to say that we provide a unique service, since customizing competitors could simply customize the service to do exactly what we do. The advantage we may gain over the customizing competitors is that we are better at the way we are different. In fact, uniquely heightened customization is an example of differentiation.

Some wonder how differentiation strategy differs from the focus strategy. Consider the difference in the relationships with the customer: With differentiation we are not focusing on a specific group of customers, but on a general way we can be better than our competitors. With differentiation, we do not require our customers to have somewhat homogeneous needs, but treat all potential customers in a way that is different and potentially valued. Despite this dramatic oversimplification of a complex issue, in some instances differentiation and focus strategies are intertwined. (In fact, to differentiate by being lower cost is the essence of the cost leadership strategy. Yet “cost leadership” is the preferred and more precise name for that generic strategy.)

Disney is an example of a differentiator. Lots of companies have theme parks, resorts, water parks, etc. But Disney (the parks division) is different in their attempt to provide what they call the “magic” of Disney. They extensively leverage their fictional characters, particularly Mickey Mouse. Whereas potential competitors offer “rides” or “attractions,” Disney provides a fantasy experience. (And they are clearly not taking a focus or a cost leadership strategy!)

The Ritz-Carlton luxury hotel chain attempted to differentiate on the basis of customization. They had a computer system which tracked a dramatic variety of customer preferences (which are customer-information inputs describing ways the customer-self input wants to be processed). Ritz-Carlton was successful at differentiating, with very few competing hotels that would be considered peers. Unfortunately, many potential Ritz-Carlton customers viewed a hotel stay as a little more of a commodity than Ritz-Carlton required payment for, and thus the high costs of customization led to serious financial problems. Marriott Corporation, the purchaser of Ritz-Carlton, has a big task of keeping the high-quality image of Ritz-Carlton while reducing the inefficiency caused by the hyper-customized service system.

For example

(examples were given above)

My airline example

We previously described Southwest Airlines cost leadership strategy. An example of airlines with a focus strategy are those that only fly gamblers to Las Vegas. A differentiating airline would be the Concorde portion of British Airways–no one gets you there faster and in more style.

How manufacturing differs

With manufacturing, the relationship between the customer and the company is that the customer selects and consumes the output, and on occasion provides general feedback.

Analysis questions

  1. Are we focused on meeting specific needs at a price that attracts customers to us (cost leadership)?
  2. Are we focused on meeting the needs of a specific customer group (focus)?
  3. Are we focused on meeting needs in a way that is different from the way our competitors meet those needs (differentiation)?
  4. What operational actions are appropriate for that generic strategy? In other words, how do we implement the chosen strategy?

Application exercise

Construct a strategic positioning map. Pick two of the three generic strategies for axes, and put “yes” and “no” at each end of the axis. “Yes” is for companies that absolutely follow that strategy, “no” is for those that do not, and degrees of “somewhat” are in between. For focus and differentiation strategies, identify exactly what the focus is or what the differentiation is. Plot a point that shows where your company exists relative to the general industry. Plot points for a few other companies in the industry. (All plots are your estimates.) Comment on what ways your company is well positioned and what ways it is not. Here is a simple example: (S=Southwest Airlines, C=the Concorde, D1=Delta Airlines on routes that Southwest also serves, D2=Delta Airlines on all other routes, M=my airline that only flies business travelers to Japan)

I observe that my (“M”) company's nearest competitor is Delta Airlines. Successful positioning will require establishing a close need-filling relationship with my specific target customer group–business travelers to Japan.

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