Jochen Wirtz is a professor of marketing at the National University of Singapore (NUS) Business School.
Rapid advances in technology are promising to transform the service sector in much the same way as the industrial revolution in the 18th century reshaped manufacturing.
As technologies become smarter, smaller, cheaper and more sophisticated there are few services that will not be affected. Developments in areas such as mobile technology, wearables, robotics, virtual reality, speech recognition and artificial intelligence will bring opportunities for a wide range of service innovations that have the potential to dramatically improve the customer experience, service quality and productivity all at the same time.
Self-driving cars, drone-delivery and largely robot-staffed hotels and restaurants are only the beginning of this revolution, with new technologies creating opportunities for firms to become both cost-leaders and service-leaders in their respective industries.
In my research, I have looked at dozens of companies around the world that have accomplished this seemingly impossible feat. These visionary firms have achieved what I and my colleague Professor Valarie Zeithaml, of the University of North Carolina at Chapel Hill, have termed Cost-Effective Service Excellence (CESE).
The “Focused Service Factory”
One standout firm that I often refer to in my teaching is Narayana Healthcare, the world’s largest cardiac surgery provider. Operating a chain of hospitals across India, Narayana has become a pioneer in delivering CESE in the health industry by adopting a strategy known as the “focused service factory.”
Founded in 2000, Narayana has pursued a highly-targeted business model, focusing on one aspect of healthcare: heart surgery. This has enabled it to achieve both strong productivity and high customer satisfaction simultaneously by tailoring a single solution to meet the exact needs of a specific segment of customers.
For most service firms, whatever sector they operate in, it is more costly to satisfy heterogeneous than homogeneous customer preferences. Business operations cannot be organized and scheduled at optimum efficiency as customer arrival times, product and feature choices, preferences, capabilities and customer effort and involvement in service production all vary.
Meeting these variables by offering flexibility and the right type of process capacity, employee skills, and supplies “on demand” and at high quality is challenging and expensive.
By adopting the focused service factory strategy, Narayana hospitals follow tightly-defined and industrialized service processes targeted at a highly homogeneous customer base. As a result, Narayana is able to deliver reliably exactly what its target customers want by offering a single, highly standardized, and excellent service offering.
This has also allowed Narayana’s growing chain of hospitals to concentrate on advancing surgery quality and made it a leading innovator in the field. Narayana, for example, was a pioneer in developing beating open heart surgery, whereas other surgeries generally involve stopping the heart for the duration of the procedure.
By operating on a high volume of similar cases, Narayana surgeons can access detailed analysis of procedures and continuously improve the group’s offering. Doctors receive comparative performance data for their own hospital and 21 others in the group, encouraging them to share best practices.
At the same time centralization of surgeries in a few hospitals has enabled concentrated utilization, low unit costs, further driving learning and innovation.
By building up market share–Narayana performs about 12% of open heart surgeries in India–it has also been able to strike competitive deals with suppliers, especially for equipment and consumables.
Narayana is not the only caregiver to successfully apply the focused service factory strategy. Around the world other healthcare operators are using new technologies to deliver high volume, cost-effective service excellence. By simplifying and industrializing procedures, hospitals are able to plan, control and automate, reducing surgery times and operating theatre costs.
Such practices are of course not confined to only the health industry.
U.S. airline JetBlue, for example, has followed a focused service factory strategy applying it to offer a successful low-cost, high-quality, operationally simple point-to-point airline service. Its focused operations are further supported by a young fleet of limited aircraft types, resulting in low maintenance costs.
Founded in 2000 and now the sixth largest carrier in the U.S., the airline also operates longer-haul overnight flights to increase aircraft utilization. Its operating model has resulted in low costs per seat mile while delivering higher quality service than full service airlines at a price that is only marginally higher than that of other low-cost carriers.
As technology develops, a rapidly growing number of app-based and online services are using the focused service model to offer a tightly-designed product to specific customer segments. A notable example is the recent rapid growth of fintech services that apply smart processes and emerging technologies to offer solutions to specific financial needs such as travel insurance, international remittance and brokerage services.
The focused service factory model offers a strategic lens through which these new services can be viewed and approached.
Similar to the shift that started in the industrial revolution from craftsmen to mass production, an accelerated shift in the service sector towards modular, self-service technology and focused service factory-based business models is likely to occur.
As in manufacturing, the craftsman-equivalent will still offer a viable business model, although mostly at a high price. The mass market for many services is likely to shift to the focused service factory.