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Value creation in service delivery: relating market segmentation, incentives and operational performance

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This paper studies service delivery design in settings where firms engage in value creation activities, that have the objective of generating additional revenue from customer interactions. The implementation of these type of initiatives are often considered as failures by managers. The paper explores possible reasons for these failures, by providing a general modelling framework to analyze the ties between market segmentation decisions, incentives, and process performance in such service delivery systems. The firm is modelled as a single server queue, in a principal-agent framework. Customers have different value generation potentials, whose realizations are observed by the server but not by the manager of the firm. The manager determines a market segmentation scheme given an overall customer value generation profile, which divides customers into two groups (high and low), as well as a service level for each segment. The server decides which one of the two available service levels (high and low) to provide for each customer, given a compensation scheme offered by the manager. The optimal market segmentation decision, optimal service level choice and a set of optimal linear incentive contracts that enable their implementation, are characterized. The robustness of these strategies are explored with respect to model parameters and assumptions. It is shown that a market segmentation scheme that combines revenue generation concerns with their process implications is essential for success. Possible reasons for incentive design failure are identified.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2002/2002-89.pdf

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Copyright INSEAD. All rights reserved