Contemporary Scenario of Service Industry - Essay Example

COMPARISON AND CONTRAST OF THE STRATEGIES USED IN SERVICE INDUSTRY TO GAIN COMPETITIVE ADVANTAGE TABLE OF CONTENTS TABLE OF CONTENTS 1 Introduction: 2 Contemporary scenario of service industry – 2 Implementation of models for gaining competitive advantage in service sector: SERVAQUAL model 3 Service sectors and competitive advantage: 5 Comparison of service industries in respect to their competitive strategies: 7 Strategic management in the hospitality and tourism sector 7 Strategic management in the Airline industry sector 9 Conclusion: 10 Reference List 12 Bibliography 14 Introduction: The purpose of competitive advantage is to achieve a sustainable development and thereby, enhance business performance. In today’s business organization, strategic management has become one of the key components in service sectors. According to Keltner et al. (1999), competitive advantage is a state where producer of a service sector has captured the full marketplace share and thereby, create more economic value over its opponent. During the recent recession period, most of the companies in service sector found it difficult to maintain their competitive position. In this paper, the researcher has discussed on various strategies and models adopted by service industries to attain competitive advantage and identifying the key success factors of the behind accomplishing their corporate image. Contemporary scenario of service industry – Service sector is the portion of economy that generally produces intangible goods. Throughout the world, service sector faces high level of competition as there are many buyers and seller in the market. Producing service trend generally requires less natural capital and more human capital. One of the major benefits of growing service sector is, less pressure on local and global environment (Reed and DeFillippi, 1990). Presently developing countries gives more emphasis on service sector in comparison to the other sectors. In the modern world, growth of service sector is particularly important as it allows employing educated labour force and thus, reducing unemployment and economic crisis. Implementation of models for gaining competitive advantage in service sector: SERVAQUAL model In service sector, service quality is one of the basic tools to gain competitive advantage. As defined by West and DeCastro (2001), there is no proper definition to the service quality due to existence of discrepancies among the people. Measuring service quality is the most recurrent topic in management literature. However, (Youndt et al. 1996) described that perceived service quality by the people is the best way to measure attributes of the service over which the company has control. Youndt et al. (1996) developed a conceptual framework of service quality where they identified five major gaps that could impact customer’s evaluation of service qualities in various industries in service sectors, for instance banking, tourists, event and hospitality. These gaps were: Gap 1: Consumer expectation ~ Management perception gap Service firms may not always understand what service or features they must have in their product to meet needs of the customers, or what level of features needed to be added in order to deliver high quality service. Gap 2: Management perception ~ service quality specification gap This gap arises when firms positively identify wants of the customers, but the means to deliver service according to their expectation does not exist (Godard, 2001). Some factors that contribute to the gap could be market condition, recourse constraints and management indifference. This affects service quality as well as the perception of the customers. Gap 3: Service quality specification ~ service delivery gap Companies may have proper guidance on how to treat their customer correctly and provide service well, but it does not guarantee high service quality. Low performance of the employees can affect service delivery process which in turn, impact on the way of consumer perceives service quality (Tallman and Atchison, 1996). Gap 4: Service quality specifications ~ external communication gap External communication is not only important to assure customer’s expectation, but also customer’s perception towards the service delivery. Sometime, firms in the service sector have to reflect to their customers the special efforts put in for service quality improvement without which customers can neglect their services. Gap 5: Expected service ~ perceived service gap The above analysis signifies that, the means to ensure good service quality is meeting customer’s expectation, and it depends on customer’s ability to perceive actual performance provided by the firm, in the context of what they expected. Service quality in service sector is quite different from any other retail and other environment. In service sector, it is necessary to look at the quality of service from the perspective of the customers. According to MacDuffie (1995), service quality can result in high customer satisfaction and thereby, gain in competitive advantage. Service quality stimulates business profit and thus ensures a competitive stance. In service sector, competitive position is the direct outcome of service quality. Hence, the current competitive scenario of service sector demands for focusing on the improvement service quality. SERVAQUAL model is effective for analysing performance of the service sector. However, gaps in service quality need to be fulfilled for attaining sustainable competitive advantage. Service sectors and competitive advantage: The nature of competition in service sector industry can be observed with the help of Porter’s five forces analysis. The Porter’s forces analysis can be examined in the following ways: Supplier’s power ~ Supplier power is an assessment over how it is easy for the supplier to drive up price of the raw materials. Thus, it is mainly driven by number of suppliers, uniqueness of the product or services, switching cost of the firm from one to another supplier and strengths of the supplier. In airline industry, as the number of supplier is very limited, they enjoy a high bargaining power. At the same time, airline industries do not easily switch to the other supplier and most of them have long term contract with their supplier. Thus, bargaining power of the supplier has low threat on the airline industry (Ramsay et al. 2000). On the other hand, travel industries cannot buyout its supplier like airline industry. In terms of supplier concentration, there are huge fragmentation in hotels, tour operator and car rentals. Buyer’s power ~ It is an assessment on how buyers are able to bargain over the market price. This is generally driven by number of firms, switching cost from one firm to another, number of buyers in the market and importance of individual buyers. The airline industry is made up with two different groups of buyers. First one is individual buyers, who buy plane tickets for a number of reasons, may be personal or business related. The second one is travel agencies or online portal. This group, works as a middle man between airlines and flyers. Between these two different segments of buyers, there are large amount of customers in Airline industry. Thus, overall bargaining power of the customers is extremely low threat for airline industry. Conversely, in hospitality sector, buyers are fragmented and at the same time switching cost for buyers is not so high. Buyers can buy services directly from the suppliers (hotels). Thus, buyer’s power sometime acts as the huge threat for the industry. Competitive rivalry ~ Competitive rivalry is an assessment of number of capable competitor in the market. As the rising fuel prices and internal competition with low cost airlines have slowed the growth of the industry (Starbucks, 1992). High fixed costs in airline make it difficult to compete against low cost airlines and also maintain their competitive position. Conversely, in tourism sector, competition rivalry varies according to the location of the firm. For example, hotels in metropolitan areas enjoyed high competitive edge over the hotels in rural areas. Threats of substitution ~ Threats of substitution varies according to the number of substitute product exists in the market. Airline industry faces medium substitution risk level. Consumer can choose other types of transportation, such as train, bus to get their destination. Airlines surpass all other form of substitute, when it comes to convenience and cost. Thus, the threat of substitute product is very high in airline industry. However, there is no major threat of substitute product to a specific hotel or its service. The loyalty of the consumer segment of a hotel depends on the service offerings and their uniqueness, however; the luxurious hotels often do not want to compromise the pricing of the services as it can reflect quality failure. Thus, substitute product is not a major threat to the hospitality industry. Threats of new entrance ~ Threat of new entrance is another major aspect of Porter’s five forces analysis of competitive advantage. It provides low threats for airline industry. As the switching cost is very low, the existing firm in airline sector have a large cost advantage. Entry of a new firm in the market requires large initial investment. Thus, the existing firms can use their high capital to retaliate against the new firms easily (Godard, 2001). On the other hand, outset of hotel projects demands for most cost effective use of resources to its construction process, pre-operational expenses, furnishing and equipment and so on. Initial capital requirement in hotel sector is very high. It is based on long term basis investment motive and thus, the industry creates high barriers to restrict new entrance. Comparison of service industries in respect to their competitive strategies: Strategic management in the hospitality and tourism sector Strategic alliance – Apart from focusing on service quality, another common way used by most of the hotels is strategic alliance. In order to create new market opportunities, hotels have increasingly entered into the strategic alliance with its competing firms. There are mainly two market entry options available to an industry, export and foreign direct investment. The former option provides less control over the host market, while the latter one offers full control with full profit retention. Strategic alliance in the hospitality sector allows a firm to expand rapidly with little capital and to keep up change with the customer’s expectation (Jones and Ville, 1996). In recent years, numerous number of small hotel chain aligned themselves with international partner, for instance, Holiday Inn, Choice Hotel, Sheraton and Marriott. It acts as a transition strategy that helps to increase company’s performance. Thus, strategic alliance is an important strategy adopted by the hospitality firms to gain competitive advantage in their operational markets. Use of information technology in hospitality sector – According to Herzenberg et al. (1998), technology plays an important role in hospitality sector to attain competitive advantage. Use of technology allows in attaining continuous communication, from reservation to checkout. Several hotels and tourism industries, for instance, Hampton, Microtel Sheraton Hotel and Howard Johnson have implemented internet technology to stimulate online advertising, online ordering and convince their customers to choose a tourist location. The online booking engine strategies helps their customers by cutting down costs for travel business and give them more control over their purchasing process. Further, execution of PMS software is another contribution of information technology. With the help of this software, hotel industries are able to get solution to nay complicated logical problems in business operation. Service Differentiation Hospitality sector also gain competitive advantage by product differentiation. Service offered by hotel sector are similar in nature, but sometime big hotels like Marriot, Hilton offer additional service to charge a premium for their product, where the competitor are unable to imitate (Doorewaard and Meihuizen, 2000). This segmentation is made on the basis of lifestyle, ages, socio economic group and size of the buyers. Apart from that, to achieve competitive advantage, tourism sector also focus on increasing its overall attractiveness. Performance is one of the main indicators of competitiveness in tourism industry. Strategic management in the Airline industry sector Service differentiation: Differentiation in goods and services satisfy needs of the customers in a sustainable competitive advantage. This allows a company to differentiate their product and generate a comparatively better and higher profit margin. In Airline industry, there are large numbers of consumer those have focused on service differentiation strategy to gain competitive advantage. British Airways can be cited as one of the best examples of service differentiation strategy. British Airways provides differentiated service based on purchasing power and economic status of the consumers (Boxall and Purcell, 2000). On every month, British Airways conduct a market research to know their customer in better way. Its current strategy is, upgrading their customer’s experience through introduction of mobile and text services for its business class customer. Strategic alliance: In order to achieve desired economics of scale, airline industry sometime forms cross-border alliance between an airline and its partner. The first step of this approach is, to make sure that the airline has a dominant position in its domestic market. This is generally accomplished via purchasing smaller industries in the market or launching new airline that cater to the different market segment worldwide. As in case of British Airways, it has merged with its wholly owned subsidiaries, Bramon Airways and British Regional Airlines to strengthen its position in the UK domestic market. Conversely, European airlines are also restructuring their networks to increase their competitive position. The airlines in Europe are entering into strategic alliances through code share agreement, franchising agreement and joint ventures. These alliances also create better competitive position for the partners. Use of information technology in Airline industry ~ Just like hospitality sector, technology is also a major factor to attain competitive advantage in airline industry; however, processes are quite different. There are major numbers of airline companies those are believes that use of information technology is effective strategy to gain competitive advantage (West and DeCastro, 2001). For example, aviation industry is increasingly banking new technology to provide better customer service and gain competitive advantage. Airline industries are stepping up their investment on latest technology to position themselves in the market. Some exciting technology that has been used by today’s aviation industry are lucrative e-commerce strategy, unbundled pricing strategy, customer re-call strategy and so on. Today, around 75% of the customer use e-commerce strategy as a means to make their ticket booking (Godard, 2001). Further, advertisement on social networking site helps customer to share their travel experience. Airline industries have concentrated on measuring their customer’s sentiments through social media analytics and thereby, are able to address the area of their customer’s dissatisfaction. In addition to that, offering unbundled pricing is another major source to attain competitive advantage in airline industry. Conclusion: This paper has focused on various ways and strategy adopted by industries in service environment to gain competitive position. By conducting the study, it has been found that, both airline and tourism sector has adopted various strategies to attain competitive advantage. Strategic alliance and service differentiation has been found to be more effective in airline industries, while use of information technology is more appropriate in tourism sector. Firms in service sector are continually trying to adopt various strategies to gain competitive edge. However, for both the sector ensuring a good service quality is one major component to manage their position and competitive position. Further, raise in technical standard and price factor also a key determination to create competitive advantage in service sector. Reference List Boxall, P., and Purcell, J., 2000. Strategic human resource management: where have we come from and where should we be going? 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