Theoretical frame of reference
This chapter highlights the literature considered to be relevant for the purpose of this thesis. A theoretical framework is presented to provide the reader with a thorough understanding of theoretical components and how they relate to our research.
In this section we are going to explore relevant literature pertaining to our topic and the research area. First, since our research involves competitive strategy, we start with a brief description of the concept of competitive strategy and the different types of strategies. Later we discuss the four service characteristics chosen in the study, as how they have been described in the literature. Then their relevancy to customer satisfaction. In doing so, we will then be able to describe the model which we have established and the relevant hypotheses pertaining to it.
Porter (1980) argues that firm can choose one of the three generic competitive strategies. Porter’s model of competitive strategies is shown in figure 1 and is arguably the most well-known strategic model when it comes to competition in the market. These strategies are also known as generic strategies. These three generic strategies are:
Cost leadership strategy – when the firm focuses on being the lowest cost service producer, by reducing operational costs below their competitors. According to Porter (1980) firms are more inclined to use it when they have a considerable market share. furthermore, he states that the following strategy is powerful when the price is dominant, when differences from one brand to another do not matter to customers, when the product fully achieve the customers’ needs without considering to quality a dominant competitive force, finally, when buyers are a quite large and have power to claim for down prices (Porter, 1997). However, following the cost leadership will have some flaws such as needs for high initial market share cheap raw materials and wide distribution networks, existing product line will therefore shall be redesigned to provide the related products and achieve the customer base as possible and other rival in the industry will be easily reduce their cost also through imitation of the production process (Porter, 1997).
Differentiation strategy – when the firms seek to produce unique product which differ significantly from competitors’ products (Porter, 1997). This strategy may limit the market share for the organization, it also requires high startup and running costs (Porter, 1997). However, pursuing this strategy leads to limit the market share, defection of existing customers since it involves cost trade off, it also requires high start-up and high running costs. Further, the products are subject to imitation by rivals if market’s differentiation declines (Porter, 1997).
Focus strategy–when the firms focus on a narrower zone of the total market. It can be a low cost focus strategy i.e. firms focus on low cost products or it could be differentiation focus i.e. firms produce products for specific buyer segments (Porter 1980). However, the strategy leads to similar production costs and investments as differentiation strategy, it will lead to change in the product specification which in turn causes cost disadvantages, and the non-focused products begin to meet the demands. It makes competitors to identify more tightly the market segments (Porter, 1997).
According to Day et al., (1988) competitive strategy is thus a result of external forces in the environment, which will in turn lead to particular competitive environment as shown in the model below. Therefore, managers need to determine the success factors which lead them to win over their rivals in the competitive environment and then select their competitive strategies based on these factors (Day et al., 1987).
Porter (1980) argues that if firms follow both cost leadership and differentiation strategy, this will lead to having unclear strategy that increases the likelihood of failure. And the firms will therefore be stuck in the middle. As when the firm invests in high differentiation position, it results indeed in high overall cost position, hence the firm will be unable to compete since its cost structure is too high. Moreover, it’s unable also to compete for differentiation with premium price since products and/or services are less differentiated than other firms applying differentiation strategy
However, many researchers oppose Porter’s hypothesis ‘Stuck in the middle’ and state that a firm can implement both cost leadership and differentiation strategy (Campell-Hunt, 2000). In addition, Karnani (1984) who concluded according to his model, firms not necessarily need to follow one of the three strategies and therefore is possible to pursue both high differentiation and low average cost position. Other investigations contradicted Porter’s ‘stuck in the middle’ hypothesis, when it was argued that customers in any marketplace buy products on the basis other than price and most industries offer these opportunities, to attract them. When they add, for example new features in the product or when they focus to differentiate their products in providing high quality products. As a result, this proves that there is great chance for firms to combine two strategies to meet market needs and outperform their rivals.
Murray (1988) argues that a firm is not precluded to pursue hybrid strategy since external factors of viable cost leadership are independent from that of product differentiation. The first stems from industry’s structural characteristics and stems from customer’s tastes. Empirical investigations oppose Porter’s statement “a cost leader that competes against a product differentiator must also be a product differentiator, and vice versa” (Murray, 1988, p. 396). For example, Phillips, Chang and Buzzell (1983) found that quality of product i.e. product differentiation was negatively related to relative direct cost i.e. cost leadership (Murray, 1988). Moreover, other researchers found that costs declined faster for firms that pursue high quality i.e. differentiation than firms that produced low quality product, hence cost savings can be earned for quality products (Murray, 1988). However, recent empirical results produced some contradiction, for example some firms in Greece found that efficiency is better in pursuing one strategy rather than dual one. This has been also observed in some firms in South American countries, which has negative impacts on export performance (Li and Li, 2008).
Service process matrix
model for product-process lifecycle was created by Wheelright and Hayes (1979). Schmenner (1986) established a service process matrix as shown in figure 3. In this matrix, he suggested labour intensity on the X-axis (like process-variation) and throughput on the Y-axis (like process). Accordingly, movement towards the diagonal enhances the efficiency which in turn increases productivity, and ultimately profitability. Later Schmenner (2004) asserted that his original matrix was almost true, but needs slight adjustments as shown in figure 4. Schmenner (2004) noticed that not all service firms are essentially needed to be on diagonal, instead firm can be out of diagonal, suggesting by this new concept, the “theory of swift”. In this theory, he suggests that the faster materials flow, the more profitable firm is. In other words, increase in firm’s productivity has positive relationship with materials flow. However, years later, Schmenner concluded that firms can be profitable anywhere in the matrix but diagonal is just one suggestion (Miles, 2013).
Since the research investigation is fundamentally constructed on generic strategies suggested by Porter, it is necessary therefore to delineate service variables that categorize service firms (Miles, 2013). Two groups of variables are identified; product differentiation variable relative to service and/or product uniqueness. Specifically, variables that define differentiation strategy, i.e., quality, service quality and servicescape variables, in other words, firm’s service characteristics. Another group is related to cost leadership variables which concern efficiency and price. Specifically, variables that define the cost leadership strategy, i.e., value. On the other hand, it is imperatively important to measure such variables through customer perception and/or the satisfaction level due to variables’ intangibility (Miles, 2013). Therefore, according to Miles (2013) firms following differentiation strategy must understand the desired service characteristics to meet customer’s perception about quality, service quality and servicescape. Similarly, for firms following cost leadership strategy, they must understand how to influence customer’s perceptions about value.
It is defined as a combination of many different dimensions which influence the customers’ holistic expectations and perceptions of the offered service (Miles, Miles and Cannon, 2012). Bitner et al. (1994) defines it as when customers use surroundings to categorize the service. Wakefield and Blodgett (1996) gave additional explanations and added facility aesthetics such as colour, music, lighting, and furniture to increase attract customers as well as the overall cleanliness, in other word, it means the overall atmospheric elements such as the physical designs and decor, posters, lighting, signs and advertisements. In summary, the literature suggests several ideas of servicescape. First, interactions between service provider and customers which lead to various needs in physical surroundings; second, servicescape could lead to categorize the service in particular ways in response to customer’s particular emotions; third, servicescape can play prominent role in design, plan and executions of any industry. All of these ideas are important because they suggest relationship between servicescape and firms’ strategy to obtaining customer satisfaction (Miles et al., 2012). As a result, servicescape has vital role in service industries such as fast food, retailing, restaurants and hotels (Miles, 2013).
Service quality has been broadly investigated over the past years. It is a multidimensional concept and can be measured using two methods. First method measures discrepancies between customers’ expectations and perceptions of service, the second is the “customers’ overall impression of the relative inferiority/superiority of the organization and its services” (Zhao, et al., 2011). The literature defines service quality as multidimensional concept regardless of the method. For example, Grönroos (1984) proposed two dimensions, technical quality which measure what consumers get from service encounter and functional quality pertained to service delivery. Later Parasuraman et al. (1988) created a five dimensional framework for service quality. It consists of five important factors, which are; reliability, responsiveness, assurance, empathy and tangibility (Zhao et al., 2012). Based on that, they developed a 22-item instrument called SERVQUAL which has been used widely for assessment of service quality in service marketing. Later Rust and Oliver (1994) established a three component service quality model, which measures service quality using three dimensions, which are service product, service delivery and service environment. However, Dabholkar et al. (1995) suggested a multilevel model which assesses service quality by five dimensions i.e. “physical aspects reliability, personal interactions problem solving and policy. And six sub dimensions (appearance, convenience, promises, doing it right, inspiring confidence and being courteous and helpful)”. Brady and Cronin (2001) built up a hierarchical model which measures the level of service quality based on three dimensions, i.e., interaction quality, physical environment quality and outcome quality, each of these dimensions has three sub dimensions and comprising attitudes, behaviour and expertise etc. As a result, many subsequent studies have implemented this model and deduced that the measurement of service quality changes according to the type of service being offered (Zhao et al., 2012).
2 Theoretical frame of reference
2.1 Competitive Strategy
2.2 Combination strategy
2.3 Service process matrix
2.4 Service characteristics
2.5 Customer satisfaction
2.6 Linking service characteristics and customer satisfaction .
2.7 Competitive Strategy: Linking service characteristics and customer satisfaction .
2.8 Development of hypotheses
3.1 Research strategy
3.2 Research design
3.3 Scientific approach
3.4 Research Method
4.1 Fast-food overview
4.2 Descriptive statistics of collected data
4.3 Descriptive results: service characteristics
5.2 Reliability of Measures
5.3 Validity of measures
5.4 Analysis of hypotheses
6.3 Future Suggestions
GET THE COMPLETE PROJECT
Alignment of service characteristics with competitive strategy & customer satisfaction: A Comparative study in fast food industry