THE FINANCIAL AND ECONOMIC IMPACT OF SERVICE ISHA CHAMAN (15-MBA-11) ISHA BANDRAL (16-MBA-11) KARNIDH KAUR (17-MBA-11)
OBJECTIVES• Examine the direct effects of service on profits.• Consider the impact of service on getting new customers.• Evaluate the role of service in keeping customers.• Discuss what is know about the key service drivers of overall service quality, customer retention and profitability.• Discuss the balanced performance scorecard to focus on strategic measurements other than financials.
HOW DO SERVICE QUALITY IMPROVEMENTS WILL BE A GOOD INVESTMENT?WHERE IN THE COMPANY SHOULD THE MONEY BE INVESTED TO ACHIEVE HIGHER RETURNS?
Return On Service QualityAssumptions:• Service Quality is an investment.• Service Quality efforts must be financially accountable.• It is possible to spend too much on service quality• Not all service quality expenditures are equally valid.
The Direct Relationship between Service and Profits“Will service improvement result in Profitability?” Service Quality ? Profits
STRATEGY FOR IMPROVING PROFITABILITY1. Reduce costs: focus on cost cutting and efficiencies. 2. Build revenues through improvements to customer service, customer satisfaction, and customer retention. 3. Combine (1) and (2).
Offensive Marketing Effects of Service Service quality can help companies attract more andbetter customers to a business, through OFFENSIVE MARKETING Attracting more and better customers-involves market share, reputation, and price premiums-PIMS (profit impact of marketing strategy) Example: There are several auto repair shops in a three block area. One of the shop owners decides to extend his operating hours until 10:00pm Monday-Thursday and provide a pick-up and delivery service, and guarantee all repairs for six months.
Offensive Marketing Effects of Service on ProfitsServiceQuality Profits Market Share Reputation Sales Price Premium
• When service is good, a company gains a positive reputation and through that, a higher market share and ability to charge more than its competitors for services.
Profit Impact of Marketing Strategy• Companies offering superior service achieve higher than normal market share growth and that service quality influences profit through increased market share and premium prices as well as lowered costs and less rework.
• Satisfied customers spread positive word of mouth, which leads to the attraction of new customers and then to higher market share.
Defensive Marketing Effects of Service on Profit- CUSTOMER RETENTION Costs Volume of MarginsService Customer PurchasesQuality Retention Price Premium Word of Mouth Profits
Effects of Service on Behavioral Intentions and Profits Costs Volume of Margins Purchases Customer Retention Price Behavioral PremiumService Intentions Word of Mouth Profits Sales
The “80/20” Customer Pyramid Most Profitable What segment spends more with Customers us over time, costs less to maintain, Best Customers spreads positive word of mouth? Other Customers What segment costs us in time, effort and money yet does not provide the returnLeast Profitable we want? What segment is Customers difficult to do business with?
The Key Drivers of Service Quality, Customer Retention, and ProfitsKey Drivers Service Encounters Service Encounter Service Encounter Service Behavioral Customer Quality Intentions Retention Profits Service Encounter Service Encounter
Service Quality Spells Profits Costs Defensive Volume of Margins Marketing Purchases Price PremiumService CustomerQuality Retention Word of Mouth Profits Market Share Sales Offensive Marketing Reputation Price Premium
Company PerformanceMeasurementWHAT YOU MEASURE IS WHAT YOUGET ‘MEASUREMENT MOTIVATES’
BALANCED SCORE CARD (A performance measurement system) Term coined by ART SCHNEIDERMAN(1987) Devised by ROBERT S KAPLAN & DAVID P NORTAN
DEFINITION The balanced scorecard is a strategicplanning and m anagem system that ent is used extensively in business and industry, governm and non-profit ent organizations worldwide to align business activities to the vision and strategy of the organization, im proveinternal and external com unications, m and m onitor organization’s perform ance against strategic goals.
BALANCED SCORE CARD DOES WHAT• Translates vision and strategy into action;• Defines the strategic linkages to integrate performance across organizations;• Communicates objectives and measures to a business unit, joint venture, or shared service;• Aligns strategic initiatives;• Aligns everyone within an organization so that all employees understand how and what they do supports the strategy;• Provides a basis for compensation; and• Provides feedback to the senior management if the strategy is working.
Financial Measures Price Premium Volume Increases Value of Customer Referrals Customer Value of Cross Sales Operational Perspective Perspective Long-term Value of Right first time (% hits)Service Perceptions Customer Defection rateService Expectations Right on time (% hits) SAMPLE MEASUREMENTS FORPerceived Value BALANCED SCORECARD Responsiveness (% on time) Transaction time (hours,Behavioral Intentions: Percentage of Loyalty Innovation and days) Percentage of Intent to Switch Learning Perspective No. of Customer Referrals Number of new products Throughput time No. of Cross Sales No. of Defections Return on innovation Reduction in waste Employee skills Process quality Time to market Time spent talking to customers
BALANCED SCORE CARD IN PRACTICE• Implemented not only in corporations but also in government and non profit organizations.• In 2001, the UNIVERSITY OF VIRGINIA LIBRARY, a system of 11 different libraries with holdings of 4 million volumes, became the first library in North America to implement balanced score card to improve its performance.
LIMITATIONS One fact is that it is not easy to implement this tool because it involves a lot of subjectivity. Also, the tool is much more complex compared to the other tools. The measures that need to be taken are contingent upon the kind of environment, industry and the business the organization is in. The tool has tried to fill up the void that exists in most management systems. However, a lot of refinement is still required, so that it becomes understandable to every stakeholder associated with the organization and removing subjectivity to a large extent.
CONCLUSION The balanced scorecard is a very important strategic management tool which helps an organization not only to measure performance, but also decide/manage the strategies needed to be adopted/modified so that the long-term goals are achieved. In other words, the application of this tool ensures the consistency of vision and action which is the first step towards the development of a successful organization. Also, proper implementation can ensure the development of competencies within an organization which will help it in developing a competitive advantage, without which it cannot be expected to outperform its rivals.