MT631
LECTURE # 9
OUTLINE

Services differ from products in terms of the four I's:
  1. Inconsistency - Service inconsistency arises from the uniqueness of each application, from the differences between individual providers and from the timing of service delivery.
  2. Inseparability - It is difficult to separate the service from the deliverer of the service or from the service setting.
  3. Intangibility - Services can't be touched or seen before the purchase decision.
  4. Inventory - It is difficult to store a service.

The Manor Memorial Hospital Case
What do you think the primary patronage motives are for the DHC, given the existing comparative situation?
    The DHC is an ambulatory health care facilty that is designed for primary/episodic and minor emergency treatment. A clinic of this type is often referred to as a "Doc-in-the-box". Patronage is motivated by unanticipated minor illness or the periodic need for routine examinations. Locational proximity is of primary concern since accessibility and a quick turn-around are extremely important. It should be noted that staff competency is not an issue, just accessibility (perceived risk is probably low).
What segments exist for the DHC's current service mix?
    Choice is initiated by either the individual or the business/employer. It appears that a consumer segment (for personal illness and minor emergencies) and a business segment (for exams) exists.
What is the probable consumer decision process?
    Could be rather routine and very situational (time-of-day and day-of-week) for consumers. Could involve dual decision making (for third party situations).
What is the DCH's current financial situation and what are the probable causes for this situation?
    A plot of the data given reveals that fixed cost are stable (r-square = .02837) for the last 10 months, contribution margins are stable, revenues are rising and losses are falling. Everything seems to be normal and as expected for the start-up period of a new venture.
What are the prospects for DHC under the status quo?
    Not bad if the unit can continue its current trend. A plot of the # of visits shows a strong linear trend (r-square = .9119) for the last 10 months.This trend should bring traffic (# of visits) to breakeven within 10 more months. The concern is in terms of the clinic's ability to continue to service this flow given the noon-time congestion that results from the nature of the types of visits currently encountered.
What is the current BEP for the DHC's operation? In monthly $ volume? In monthly visits?
    Using data for the last 10 months only, the BEP monthly volume = Average Fixed Costs/Average Contribution = $18835/.83577 = $22536. The BE # of visits = BE $ Volume/Average Charge per Visit = 22536/33.84 = 666.
What is the current customer/service mix and how does it effect load factors? What are the impacts on profitability?
    53% of traffic is for personal illness and exams. These occasions have the lowest average charge per visit, contribute to the congestion problem and offer the lowest likelihood of referrals.
What is DCH's current marketing situation and future prospects?
    Low repeat performance, little evidence of any competitive advantage other than locational.
What is the current operational perspective? Especially as it applies to capacity considerations?
    Worst case scenario is complete grid-lock durng peak period.
It is proposed that an 8% increase in average service charges be instituted for next year along with a reduction in bad debt. What is the managerial philosophy reflected in these proposed changes?
    The apparent belief is that the problem is one of simply adjusting costs and revenue. There is no consideration for the customers. This is consistent with the approach used for a "management" firm.
What are the expected results of these changes?
    Estimated pro-forma income for next year is a $69,861 loss. This is better than the first year's loss, but does nothing to impact the problems of service mix or traffic congestion.
What about the threat posed by the potential new competitor to be located 5 blocks to the north?
    A graphic analysis using the data on the direction and distance of travel for existing patrons reveals that the DCH's primary "drawing" area is in the central, southern and western portions of the 5 block area. The proposed competitor's location would indicate a potential los of only 20-25% under a notion of uniform distribution of demand. Given the skewness in draw (probably influenced by the arteral flows given on the area map), the expected loss is probably less than 10%.
What is the estimate of the DHC's penetration rate within its area of operation?
    Using the survey data for personal illness/exams, the average frequency per interested area worker was calculated to be .9. Given that there are 5832 persons in the area who would use the DHC (50% of the 11663 total) then the estimated potential number of personal illness/exam visits is 5249. The estimate number of actual personal illness/exam visits within in the first year is 53% of (3490 + 410). The estimated penetration or capture rate is then, 2067/5249 = 39.4%.

    The threat posed by the potential new center is more imagined than real. The DHC hasn't really begun to capture the market at its own back door.

What is the real problem?
    The case demonsrtates a basic marketing problem - demand/load management.
What strategic changes are necessary to solve the problem?
    The DHC must either:
    1. Change the service mix
    2. Alter demand by day-part
    3. Pursue repeat purchases
    4. Pursue referrals
    5. Or adopt some appropriate combination of the four options listed above

A lack of time caused us to skip the following section during our in-class review of this case. It was strongly suggested that the students continue their own review of these alternatives. The material provided below is given to assist in that independent review.

What are the Pros and Cons for each of the four alternatives:
  1. Do Nothing
      It was noted above that even with the price increase and appropriate cost controls, the financial situation would not improve sufficient enough to accomplish the objective of breaking-even in the near future. Additionally unless some change is made, there is little likelihood of improving referrals. A "do nothing" decision is clearly unacceptable.
  2. Expand Operating Hours
      Given Worth's projections, expanded hours should increase total annual visits to 4952, even with the proposed 8% increase in charges. The average value of a visit will rise to $37.58 (using Worth's estimates to derive the weighted average charge). Thus the change will have a positive effect on revenue. Gross revenue may be computed to be $186,096. At a constant contribution margin of 85.3%, dollar contribution comes in at around $158,740. The down side comes in the increase in costs. Assuming total personnel hours go up by only one-third and factoring in the proposed 5% wage increase, personnel costs go to $105,096. With the other expected cost increases, total costs goes to $298,356 to yield a net loss of right at $140000. Financially the clinic is better off staying closed those extra hours. Also there is no real evidence to support the belief that expanded hours will improve referrals.

      It is worth noting that the motivation behind pursuing expanded hours comes in some part from looking to competition. MEDCENTER and others do it so it must work. These assumed competitors are listed in the case exhibit as Suburban clinics. Recall our discussion of the prospects of being alone and sick in the downtown area after everyone else has flown off to the protections of the surburbs. Certainly the circumstances are different, but the emphasis placed on the possibilities demonstrates a major flaw in strategic thinking. Your goal shouldn't always be to look to your competitors for the means for running your business. Don't be so quick to play someone else's game. The role of marketing management is to establish your own offering such that when it is compared to the offerings of others, it is preferred by your target.

      Consider the following quote from W. E. Deming (the supposed father of Quality Management): "You won't get ahead by watching your competetion. You better be watching your customer."

  3. Add Gynecology Services
      A pro-forma income statement can be developed for this alternative similar to the one developed above for extended hours. Given Worth's projections of demand and again assuming the 8% increase in charges, the weighted average charge per visit can be computed to be $41.03. Remember to use the relative number of visits as your weights and multiply these by your adjusted charges. The total projected visits are given to be 6313 so estimated revenue is expected to be slightly less than $260,000. At an assumed constant contribution margin of 85.3%, total contribution is $220,946. Total costs, to include the $29,120 in fees for a Gynecologist, are $229,328. The difference is a loss of $8,382 which is close enough to breakeven, especially when you consider the referrals that might be expected from this aspect of DHC's new practice. So it seems to be a financially solid plan. But don't sell short the extended marketing benefits. This action should help with repeat business, referrals (possibly obstetrics given the general age of this target), the service mix, spread the load by allowing appointments in the off-peak times and should offer a major point of differentiation with all the other generic "Doc-in-a-boxes"
  4. Expand Hours and Add GYN Services
      The financial drill on this problem is as-before. The bottom line is that net losses are expected to be $78,235. It seems that inherent in Worth's projections of visits, the response elasticity to expanded hours does not compensate for the increased costs. Add to this the fact that expanded hours don't help achieve the primary objectives for the clinic; it appears that expanded hours are not feasible (or viable in the language that we adopted eariler).

Cautionary Note:
Much of the foregoing analysis was dependent on the results of the number crunching. A reasoning analyst would pause and question the faith held in the numbers that were crunched. All the "projected" demand was extrapolated from the informed opinions of the Assistant Administrator. Causes to suspect these figures include Worth's apparent perspective on the working of the DCH and the basic risk that is associated with offering speciality services via a historically homogeneous channel. The outcome of this type thinking and the related numerical anlaysis that it involves falls under the general description of a "sensitivity" analysis. You know that might make an interesting exam question. What do you think?

Epilogue
The administrators for Manor Memorial Hospital decided to offer gynecology services begining in June of 1986. The first month's number of actual GYN visits were 500. This number was one-fourth of Worth's forecasted number of visits for the entire year. This one change in the service mix was instrumental in permiting DCH to exceed its breakeven goal by 1987.

Parting Observation:
As discussed in class this case demonstrates the peak load problem that is common in the service sector. Capacity must be available for peak demand conditions. This often sets the total cost structure (especially for service businesses where the bulk of the costs are fixed). The revenue side is generally very uneven for services with extremely spiked peak demand. Thus theaters, restrauants, electrical utilities have all had to innovate solutions to this reoccurring problem. Premium pricing during peak loads and discounted off-peak times are typical "time of day" or "day part" solutions. Conservation based marketing ("good cents" programs and altered life-stlye advertising) has been used successfully to "smooth" peaks. Incidentally this action isn't new, the old coal-ice plants were classic examples of peak load smoothing within the products sector.

The point is that general strategic "fixes" are available for this type of problem. The creativty comes in tailoring the general approach to the specific situation. Manor Memorial simply chose to sell its unused capacity to a different market segment. We covered this thought process in our eariler discussions of the product/market expansion grid. See summary outline for lecture #2. 

                           hjg

After the case review was completed a "debriefing" session was held for the first exam results. The grade distribution (for the on-site students) was given along with the numeric procedure for computing the raw scores and the adjusted (curved) grades. The desired response to each of the exam questions was described. Overall the exam results were considered good (by the instructor) and within the expected grade parameters.

The listings above are to provide structural assistance to your study. They are not attended to be inclusive of every item/topic that was presented in the lecture period.

Additional Study Questions and Drill Exercises
Given the survey results on intentions to visit the DHC, the current capture rate for personal illness/exams is only 39.4% within the 5 block area. Assume that without any additional services, total visitors for next year increases by fifty percent and that the proportion intending to use the DHC and the expected frequency of visits by individuals remain unchanged. What would the mix between personal illness/exams and all other types of visits need to be for the capture rate to increase to 60%?

Given the regression results described in the outline summary, how likely is the 50% increase that is suggested above? Be sure to state all your concerns regarding your response here.

The addition of Gynecological service to the service mix for the DHC is a calculated action to smooth the peak-load and generate higher assay referrals. With this addition the Clinic is expected to break-even within one year (actually a loss of $8400 is projected, but we'll call that close enough). Given the information in the outline summary's epilogue, discuss the most reasonable course of action that one might expect after the first month's operation with the GYN service in the offering?

Why were extended hours non-viable? A more technical explanation than fear of the downtown area after dark is required.