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From Dr. Scott Sampson's Understanding Services Businesses Book (click for table of contents)
SBP 6d: Mass Alliances⇐Prior —[in Unit 6: Identifying Strategic Threats]— Next⇒SBP 6f: Lowered Entry Barriers

SBP 6e: The Ephemeral Secret Service

With services, competitors posing as customers can study not only the service product, but often also the production process. Since most service processes cannot be patented, it can be difficult to keep the secrets of competitive advantage.

Why it occurs

This principle occurs because customers, be they competitors or others, are involved in the production process by virtue of the fact that they provide inputs to the process.


How does a competitor posing as a customer study the service innovation? In services that involve customer-self inputs, such as hotels, theme parks, and retailers, the competitors are free to spend as much time as they care to at the service facility observing exactly how things are done. With other services, the customer does not physically go to the service facility, but sends their belongings or information. In those cases, competitors can experiment by sending various belongings or information through the service process and observing how each is handled. The result can be a good idea how the service innovation is accomplished. (Isn't that sneaky.) farm4.static.flickr.com_3259_2585191273_a2470a7012.jpg As mentioned previously, some manufacturers require employees and suppliers to sign non-disclosure agreements upon accepting employment. Such a contract is enforceable should an employee or supplier later choose to go into competition with the company. With service organizations, it would generally be unreasonable to ask every customer-suppliers to sign a non-disclosure agreement. Not only are customers suppliers of inputs, but in some cases the customer supplies her own efforts as labor (such as self-service gasoline). (This issue will be revisited later in SBP: Capricious Labor) As such, the customer-labor gets to know the service process well, and is not likely to be bound by non-disclosure agreements.

An extension of this service principle involves how an innovator makes the innovation available to others. With manufactured products, which are patented, the patent holder can license the product to others, allowing them to produce the product. The patent holder typically gets a fee for each patented product so produced.

Services can be patented, such as with a so-called “methods” patent, which patents a process. Patent requirements include novelty (not previously discovered), non-obviousness, usefulness (must provide some user benefit). These requirements can make patenting of service processes difficult, which is why we say that most service processes cannot be patented.

With service innovations that cannot be patented, the innovator might employ a different strategy to allow others to use the innovation. That strategy is franchising, which is to “package” the service process and make it available to others for a franchise fee. A franchise is basically a do-it-yourself “kit” for duplicating a service (concept) innovation. What is to stop a competitor from duplicating the innovation without purchasing the franchise “kit?” Not a lot. However, they cannot copy the franchise brand name, which is usually trademarked. And with that brand name typically comes national advertising and an established reputation. Nevertheless, there are particular advantages to franchising companies to expand rapidly before competitors are able to establish competing brand names and reputations.

How it effects decisions

The service provider must decide if and how to protect service product and process innovations.

What to do about it


Time is generally of the essence when it comes to capitalizing on service innovations. This is why franchising is so popular among many innovative service businesses–franchising allows for rapid expansion.

Some service process innovations can be understood but not easily duplicated. An example is innovations based on corporate culture. Corporate culture is like a 40-ton ship–once it is moving a particular direction it is not easily turned. An example of service advantage through culture is the approach Disney takes to human resources at their theme parks and resorts. Every employee is a “cast member” that is well trained in the Disney traditions. There is a significant expectation for interaction with “guests,” and even the trash collectors are expected to personify the Disney experience. Despite a competitors' understanding and belief in the value of the Disney way, this information would be difficult to implement in an organization that has been doing things a different way.

For example

The idea of a quick-change oil, lube, and filter, was and is a great innovation. Vehicle owners know that the oil needs to be changed regularly, but were put off by the awful waits to have the vehicle serviced at traditional auto-mechanic shops. A gentleman whom I heard speak some years ago claims to be the originator of that innovation. Recognizing the value of his innovation, he immediately set out on a dramatic expansion campaign. (In fact, he expanded so rapidly that he ran into serious financial trouble–new stores were in progressively less desirable locations, meaning less profit.) Today there are all types of quick-change auto service companies around–you can bet the managers take their cars to competing shops to learn of any new innovations.

Banks and other financial services companies are constantly innovating. For example, American Express claims that they provide an advantage of a consolidated, itemized year-end statement. Well, if that is something that is indeed of value to customers, then what is to stop a competitor from being an American Express customer, getting the statement, and instructing the computer programmers to duplicate it.

My airline example

farm4.static.flickr.com_3245_2344446015_e7290fd78f.jpg Perhaps the most innovative of the major airlines is Southwest, who has defined an entirely new segment of low-cost air travel. One of their innovations is the twenty-minute turn around of a plane, meaning that from the time a plane lands until it takes off again is twenty minutes or less. This advantage gives Southwest tremendous cost advantages, since their airplanes are in the air generating revenue much more than planes of competing airlines. Southwest achieves twenty-minute turnarounds by getting everyone, including passengers, ready to go prior to the time the plane lands. With everyone ready and waiting, the process of changing baggage, fuel, and passengers is done quickly and efficiently. No food is loaded onto the planes except for nuts and soft drinks. And all employees do what it is takes to keep things moving, even if that means the pilot has to help load baggage. Employees and passengers feel this sense of urgency, which is the driving force of the airline's efficiency and cost savings. And it is a great dishonor to employees if their flight is delayed. (If such was the case for some other airlines, the employees would be constantly living in dishonor.)

Since the production efficiency of Southwest Airlines is based on procedures and on culture, it is not easily duplicated. Although major competitors can and have attempted to duplicate the efficient procedures, cultural inefficiency has prevented any from matching the Southwest cost structure (which in the early 1990's was about 7 cents per passenger mile, compared with 8-11 cents for competitors<FOOTNOTE>Southwest Airlines: 1993 (A) Harvard Business School case, page 6 and exhibit 8.</FOOTNOTE>).

How manufacturing differs

With manufacturing, products can be patented, and/or customers, competitors, and suppliers can be kept from production facilities.

Analysis questions

  1. What have been innovations in our service product or process?
  2. How did competitors respond?
  3. How sustainable was the advantage of that innovation? Why?

Application exercise

Describe a successful process innovation that occurred in your service business in recent memory. How do you suppose the innovation originated? Which do you think was the first company to adopt the innovation? Describe how you suppose competitors responded to the innovation. What attempts might the original innovator have made to keep the innovation a secret? Describe how competitors might have “discovered” the secret. How long do you suppose the innovation was truly a “secret?”

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