MASS CUSTOMIZATION AS A METHOD OF PROVIDING CLIENT'S PERSONALIZED SERVICE (A CASE STUDY OF NICON LUXURY HOTEL)

CHAPTER TWO

LITERATURE REVIEW

Introduction

Companies should listen more carefully to their customers (Fournier, Dobscha and Mick, 1998), pay more attention to delivering services (Gro¨nroos, 1997), and try to build lasting relationships with their most profitable customers instead of focusing on acquiring new customers (Peppers and Rogers, 1997; Reichheld, 1996). In the last three decades, many mass producers have tried to better meet consumer needs by increasing variety and brands. However, Kotler (1989) and Piller et al. (2000) noted that an increasing number of companies within various industries are incapable of addressing diverse consumer needs by merely using a variety strategy because the number of varieties required to address these needs is enormous and results in unit cost increases that are too substantial for demanding and price-conscious customers (Piller et al., 2000). In addition, excessive availability of choice also results in frustration as it complicates buying decisions (Cox and Alm, 1999). Therefore, it is becoming necessary to produce exactly what customers want.

Mass customization has the potential to solve these problems, by delivering to customers exactly what they want, at reasonable prices. To date, the high expectations of theorists and practitioners have not yet been met on a large scale (Agrawal, Kumaresh and Mercer, 2001; Zipkin, 2001).

Conceptual review

Mass customization (MC) can be defined as a strategy of providing even individually customized goods or services at production costs and lead-times of, or close to, large-scale mass production (Pine 1993a; Da Silveira et al. 2001). Hart (1995) gives a more broad, and in his words a visionary and idealistic definition for MC: “the ability to provide your customers with anything they want profitably, any time they want it, anywhere they want it, any way they want it”. In reality, the profitability requirement of the above definition compromises the other goals or at least restricts them to a “pre-determined envelope of variety” (Hart 1995). To put it differently, the customer is given a range of options on what can be delivered, when, where, and how.

Figure 6 Convergence towards mass customization, adapted from (Tiihonen & Soininen 1997

and Svensson & Barfod 2002)

There is a trend of companies converging towards MC from mass production and one-ofa-kind products (Tiihonen & Soininen 1997; Tiihonen 1999; Svensson & Barfod 2002; Lampel & Mintzberg 1996), see Figure 6. MC tries to combine the benefits of both crafted (or one-of-a-kind) and mass-produced products, that is products meeting individual customer needs better of crafted production and doing that effectively with relatively low prices and costs, as in mass production.

MASS CUSTOMIZATION IMPLEMENTATION

This section briefly describes how MC can be implemented and what kind of capabilities a company may need to do it.

Zipkin (2001) states that to successfully operate with MC the company should have three key capabilities in place: elicitation, process flexibility, and logistics capabilities. Naturally, the products have to be customizable (Da Silveira et al. 2001). The following is based on Zipkin (2001) and Berman (2002) who discusses Zipkin’s ideas also.

Elicitation is a mechanism of interacting with the customer to learn about customer specific information and their needs. Learning about needs is difficult. Often customers don’t know what they really want or are unsure about it. Even if they do know what they want they often cannot communicate it accurately. Moreover, what customers want may not be what they actually need. Information about the customer can be significant for MC too. For example, exact body measurements are necessary for custom-made clothing. To put it bluntly, you can’t give customers what they want without learning what that is first.

A high-volume but flexible process is needed in MC to translate the customer specific information into the actual product. How difficult it is to achieve sufficient process flexibility and keep costs comparable to mass scale processes, depends on the products fabricated. For example, processing information (like personalized news in Internet) is more flexible than processing physical parts (like in car manufacturing). Often only some stages of the overall process can be made flexible. For example, Levi Strauss doesn’t offer custom colors because fabric dyeing can’t be done on a large scale (Zipkin 2001). In short, if you want to give customers what they want your production process must be able to adapt to customer specific products.

The logistics steps into play after (and partly during) the product is fabricated. To be able to deliver the product to the right customer at least information about the customer’s identity must move along with the product. This must happen during product fabrication. In contrast to mass production, in MC the company must able to ship a correct product directly to the customer.

There is an underlying thought in Zipkin’s (2001) and Berman’s (2002) discussion: there are three phases in MC process that a company generally must go through when delivering a customized product for a customer. The phases and the MC capabilities needed in them are collated and illustrated in Figure 7.

Figure 7 Mass customization process phases and capabilities

Pine (1993a, 1993b) suggests five product-oriented ways to MC. One way is to customize services around existing standardized products and services. Tailoring is done by offering customer specific services that provide added value for the customer in addition to the standardized goods or services. Another way is to modularize components to customize end products and services i.e. to create modular components that can be combined in a number of ways into a wide range of different end products, like PCs for example. One way to achieve MC based on modularization is product configuration, which is in the focus of this thesis and discussed in more detail next in chapter 3.

REQUIREMENTS FOR MASS CUSTOMIZATION

This section briefly goes through some identified requirements for successful adoption and operation of MC. The following discussion is summarized in Table 1. The table contains the full list of references where the issues have been raised; the following discussion lists only example references to keep it more readable.

To be able to offer individualized products the company must have detailed knowledge of the customer needs (e.g. Hart 1995). The knowledge about the needs is required for two reasons. First, to be able to design products that meet varied customers needs the company must have an idea of what its customers generally want. Second, the customers have to express their individual preferences when specifying the product they want to buy. Knowing the preferences is not enough, however. The company must have the process in place to translate the customer preferences to accurate product specifications (e.g. Hart 1995) that are necessary to be able to produce exactly the product the customer wanted.

In MC where the production happens in response to varied customer needs the sharing of knowledge is important (e.g. Kotha 1995). Information must flow from the customer to sales and marketing through to production and distribution for the company to be able to produce the individualized solution for the customer. Naturally, the products themselves must be customizable for MC to be successful (e.g. Da Silveira et al. 2001).

Table 1 Internal MC implementation requirements

Internal MC implementation requirements

The company should have detailed knowledge of the needs of its customers and the means to get it, preferably in a collaborative relationship with the customers. (Hart 1995; Kotha 1996; Radder & Louw 1999; Zipkin 2001; Berman 2002; Broekhuizen & Alsem 2002; StegerJensen & Svensson 2004)

The company must have the process in place to translate customer needs into product specifications. (Hart 1995; Radder & Louw 1999; Da Silveira et al. 2001; Berman 2002; Broekhuizen & Alsem 2002; Svensson & Barfod 2002; MacCarthy & Brabazon 2003)

Knowledge and information must be shared. (Kotha 1995; Da Silveira et al. 2001; Zipkin 2001; Broekhuizen & Alsem 2002; Piller & Tseng 2003)

Products should be customizable. (Radder & Louw 1999; Da Silveira et al. 2001; Berman 2002; Broekhuizen & Alsem 2002)

BENEFITS AND CHALLENGES OF MASS CUSTOMIZATION

This chapter aims to give a brief overview of the benefits and challenges related to MC and customers. The benefits are summarized in Table 2 and the challenges in Table 3. Similarly as for Table 1, the tables contain the full list of references that have been omitted from the following discussion for brevity.

BENEFITS

An obvious benefit from MC to the customer is the better fit between the needs of the customers and products offered (e.g. Pine 1993a). The participation of the customer in the elicitation of needs and product preferences may make the shopping experience more enjoyable (e.g. Huffman & Kahn 1998) and increase satisfaction in the final product (e.g. Bardacki & Whitelock 2003). The continuing dialogue with customers in detailed elicitation of customer needs potentially gives the company an improved ability to analyze new product opportunities (Berman 2002) and more accurate information about demand (Agrawal et al 2001). The continuing interaction with customers may give the company a competitive advantage as they get to know their customers more deeply, perhaps better than the competition (Bardacki & Whitelock 2003). Furthermore, once the elicitation has been done for the first time, it may be unnecessary to repeat some parts of it on future transactions. There is thus time invested in the relationship for both the company and its customers (Bardacki & Whitelock 2003). Switching to competition would mean going over the elicitation again and losing the time invested.

Table 2 Benefits from mass customization

MC benefits

Improved fit with customers’ unique needs. (Pine 1993a, p. 127; Kotha 1995; Agrawal et al.

2001; Berman 2002; Broekhuizen & Alsem 2002; Bardacki & Whitelock 2003; MacCarthy & Brabazon 2003; Piller & Tseng 2003)

Customer’s shopping experience may be more enjoyable (Huffman & Kahn 1998; Broekhuizen & Alsem 2002). Customer participation in the design may increase satisfaction (Huffman & Kahn 1998) with final product (Bardacki & Whitelock 2003; Piller & Tseng 2003).

Improved ability to analyze opportunities due to continuing dialogue with customers (Berman 2002). More accurate information about demand (Agrawal et al. 2001) and customers that could be used as a competitive advantage; knowing the customer better than competitors (Bardacki & Whitelock 2003).

CHALLENGES

An MC customer is often faced with several inconveniences. Customized products tend to be more expensive than standard products (e.g. Bardacki & Whitelock 2003), an issue closely related to price sensitivity of customers. Moreover, as customized products are usually produced, or at least the finishing touches made, in response to customer orders the customer has to wait sometime before receiving the finished product (e.g. Zipkin 2001).

Giving product preferences is related to several subtle challenges. First of all, the customer has to spend at least some effort to the product specification (e.g. Berman 2002). Furthermore, too often the customers are presented with an overwhelming number of options, which may confuse them (e.g. Pine 1993a). The customers must also have sufficient confidence in giving preferences to be able accept the risk of making wrong decisions (as by nature customized product may not be returned) (e.g. Berman 2002). Additionally, the customers may see giving explicit preferences and own information in the product specification as an invasion of privacy (e.g. Broekhuizen & van Alsem 2002). As a MC customer usually does not get to see the finished product at the time of the sale it may be difficult to judge whether the end product presents good value (e.g. Broekhuizen & van Alsem 2002). This and the fact that customized products are more or less individualized means that comparison-shopping is harder for customers, which could lead to rising prices (Agrawal et al 2001). It is not as easy to find a matching product to compare to for a customized product.

Trust may be an issue too. The customers have to trust the company to deliver the finished product exactly as specified. Customers may be less tolerant of errors in delivery or deviations from the ordered product features as a customized product is exactly what the customer wanted (e.g. Berman 2002). Interestingly however, there is some evidence that the willingness of a company to customize its products for the customer creates trust in general (Doney & Cannon 1997) and also initial trust in an online environment (Koufaris & Hampton-Sosa 2004).

Table 3 Mass customization challenges

MC challenges

Increased price of the products (Hart 1995; Radder & Louw 1999; Agrawal et al. 2001; Svensson & Barfod 2002; Bardacki & Whitelock 2003; Piller & Tseng 2003; Goldsmith & Freiden 2004).

Waiting for the finished product (Radder & Louw 1999; Agrawal et al. 2001; Zipkin 2001; Svensson & Barfod 2002; Bardacki & Whitelock 2003; MacCarthy & Brabazon 2003; Piller & Tseng 2003).

Time and effort spent by customer in the product specification (Berman 2002; Broekhuizen & Alsem 2002; Bardacki & Whitelock 2003; Piller & Tseng 2003).

Overwhelming amount of options available may confuse customers. (Pine 1993a, p. 246; Beaty 1996; Huffman & Kahn 1998; Radder & Louw 1999; Zipkin 2001; Berman 2002; Broekhuizen & Alsem 2002; Svensson & Barfod 2002; Piller & Tseng 2003; Steger-Jensen & Svensson 2004)

Customers must have sufficient confidence in giving preferences to accept risk of making wrong decisions. (Berman 2002; Piller & Tseng 2003)

Customers may see giving explicit preferences in specifications as an invasion of privacy (Pine 1993a, p. 245; Broekhuizen & Alsem 2002; Pitta et al. 2003)

Limited transparency of customized product may hamper customer judgment of whether end product is good value. (Broekhuizen & Alsem 2002; Piller & Tseng 2003)

Comparison shopping harder for customers, could lead to price rise (Agrawal et al. 2001).

Customers need to trust the provider to deliver a specified product. No errors tolerated (as this is just what the customer wanted). (Berman 2002; Broekhuizen & Alsem 2002; Piller & Tseng 2003)

Classifications of Mass Customization

There are many methods to achieve mass customization (A˚ hlstro¨m and Westbrook, 1999). Each method can be categorized by 1) the degree of organizational transformation that is required and 2) the mass customization approach. The degree of transformation required refers to the initial point in the manufacturing process where customers can alter their products (i.e. point of customer involvement), whereas the mass customization approaches relate to the nature of the customization.

The degree of organizational transformation required largely depends on the initial point of customer involvement (Duray and Milligan 1999; Duray et al. 2000; Lampel and Mintzberg, 1996), also known as the ‘‘decoupling point’’ (Alfnes and Strandhagen, 2000). The earlier customers influence the fabrication or assembly processes, the higher the impact will be on the end product and the more significant the required organizational transformation (Duray, 2002). According to Piller (1998), the initial point of customer involvement breaks down into four types of mass-customized products: customized additional services, adaptive products, modular products and tailor-made products. While the initial point of customer involvement relates to the internal transformation required, mass customization approaches relate to how customer value can be created and involve the nature of the inherent customization rather than the organizational changes needed. Gilmore and Pine (1997a) identified four approaches that can be used to customize the offering. Companies can change the ‘packaging’ of the product (cosmetic approach), the

Table 1. Levels and approaches of mass customization.

Stages Approaches Types of products

Design Collaborative, Transparent Tailor-made products

Fabrication Collaborative, Transparent Tailor-made products

Assembly Collaborative, Transparent Modular products

Additional services Cosmetic Customized additional services

Usage Adaptive Adaptive products

product itself (transparent approach), both product and packaging (collaborative approach), or enable customers to customize the product during use (adaptive approach). These four approaches, or ‘faces’ as Gilmore and Pine (1997a) termed them, deal with the four sacrifices customers face when purchasing products. By acting on the sacrifices customers make each time, the customer sacrifice, i.e., the gap between what a customer settles for and what he or she exactly wants, can be minimized (Gilmore and Pine, 1997b). The ‘either-or’ sacrifice represents the point at which a consumer must make unnecessary trade-offs. The ability of a customer to collaborate on the design of a product – changing both the product and the representation – circumvents this ‘either-or’ sacrifice. It is the most pervasive approach and dialog with customers is needed. The second approach, the transparent approach, deals with the ‘repeat-of’ sacrifice and allows customers to avoid annoying, repetitive tasks by changing the product without the customer’s explicit knowledge. This approach is particularly suitable for serving convenience-oriented customers, but it requires customer’s needs to be predictable or easily accessible. Companies must elicit the customer’s needs over time and adapt the product or service to the customer’s requirements. The Ritz-Carlton Hotel, for example, provides the preferred newspapers and drinks of individual guests based on data collected during prior stays. The customer preferences are stored in a database and are used to tailor the offering for subsequent visits. The third approach, the cosmetic approach, deals with the ‘form-of sacrifice’ and is appropriate when customers are satisfied with the functioning of the product, but not with the form. Many users of cellular phones are content with the basic functions, but desire cosmetic changes to their phones. The adaptive approach helps customers to solve the ‘sort-through’ sacrifice by allowing them to satisfy their needs without sorting through numerous options. For example, some automobiles remember a driver’s seat position and favorite radio stations when they insert their unique car key. By examining individual customer sacrifices, methods can be developed to improve customer satisfaction by closely meeting individual customer needs (Hart, 1995; Pine and Gilmore, 1999).

Table 1 shows that both classifications are related: the earlier customers can alter production, the better their wishes are met. In other words, the uniqueness of the offering is correlated to the initial point of customer involvement (Hart, 1995). However, mass customizers are not obliged to enable customers to alter the production process at the earliest possible stage. When customers are satisfied with the product’s functioning, but are less satisfied with the product’s representation, then cosmetic changes are more likely to deliver value, as opposed to complicated product adaptations. Managers must find an optimal balance between the additional customer value created and the investments required to allow customization on a mass scale. In order to determine the feasibility and success of mass customization, we believe it is useful to use both classifications. As such, the additional value created (i.e., nature of customization) and the necessary organizational changes (i.e., initial point of customer involvement) are incorporated.