Ch01 services in the economy

Chapter 1

Why Study Service Operations?• Service firms are a large percentage of the

economies of industrialized nations and it’s growing– 80% of the US economy (employment and GDP)

• There is little focus on services in the academic world. Gain a competitive edge.

• Not all management tools that are appropriate for manufacturing are transferable into a service environment

1

The Importance of Service SectorHistorically service is defined by what it is

not:Services are not

Goods Producing Manufacturing & Construction Extraction Agriculture, forestry, fishing & mining

Services Retailing, Wholesaling, Transportation, Financial services, etc.

Nowadays service is ubiquitous.

Role of Services in an Economy

Service Definitions A Service is a Time-perishable, Intangible

Experience Performed for a Customer Acting in the Role of a Co-producer.

- James Fitzsimmons

Services are deeds, processes, and performances.

- Valarie Zeithaml & Mary Jo Bitner

Definition of Service Firms Service Enterprises are Organizations that

Facilitate the Production and Distribution of Goods, Support Other Firms in Meeting Their Goals, and Add Value to Our Personal Lives.

- James Fitzsimmons

Bell’s Stages of Economic DevelopmentPreindustrialIndustrialPostindustrial

Features

Society Game Pre-dominant Activity

Use of Human Labor

Unit of Social Life

Standard of Living Measure

Structure Technology

Pre-Industrial

Against Nature

Agriculture, Mining

Raw Muscle Power

Extended Household

Subsistence

Routine, Traditional, Authoritative

Simple hand tools

Industrial Against fabricated nature

Goods, Production

Machine tending

Individual Quantity of Goods

Bureaucratic,Hierarchical

Machines

Post-Industrial

Among Persons

Services Artistic, Creative, Intellectual

Community

Quality of life in terms of health, education, recreation

Interdependent, Global

Information

2

Historical US Employment by Economic Sector

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1800 1850 1900 1950 2001

Year

Perc

ent

of W

ork

forc

e

Extraction

Goods Producing

Service Producing

Growth of Services

Percent Service Employment for Selected Industrialized Nations

Country 1965 1975 1985 1995 2005

United States 59.5 66.4 70.0 74.1 78.6

United Kingdom 51.3 58.3 64.1 71.4 77.0

The Netherlands 52.5 60.9 68.3 73.4 76.5

Sweden 46.5 57.7 66.1 71.5 76.3

Canada 57.8 65.8 70.6 74.8 76.0

Australia 54.6 61.5 68.4 73.1 75.8

France 43.9 51.9 61.4 70.0 74.8

Japan 44.8 52.0 57.0 61.4 68.6

Germany 41.8 n/a 51.6 60.8 68.5

Italy 36.5 44.0 55.3 62.2 65.5

Product Services

Physical

Information

6%

10%

31%

53%

37%

63%

84%16%

D

BA

C

a. PreindustrialIn U.S , during year 1800Employment in extraction field Agriculture is the most prominent. More than

80% workforce in Agriculture sectorService occupations mostly were domestic

servants and sailorsFamily relationships and tradition important

but education and innovation are notQuality of life dependent on nature

b. IndustrialYear 1900 to 1950Important activity Goods productionQuality of Life Measured by accumulation of

goods. “He who dies with the most toys, wins”Focus was on maximizing the productivity of labor

and machinesExtreme division of laborDehumanizing jobs hence labor unions were

formed“Manual workers” outnumbered “white collar

workers”

c. PostindustrialYear 1950 onwardsService producing industries increased from 50%

to 80% in USHealth, Education, & recreation predominates

and it determines Quality of LifeA small subset of the service economy called

“experiences” will be a dominant economic forceInformation rather than muscle was the focus;

workers value based on judgment, creativity & theoretical reasoning

New paradigms are required to manage service industries.

New Experience EconomyService undergoing transformation from the

traditional concept of a service transaction to one of an experience.

Eg: Disney World, Starbucks, etc.Economy Agrarian Industrial Service Experience

Function Extract Make Deliver Stage

Nature Exchangeable

Tangible Intangible Memorable

Attribute Natural Standardized

Customized Personal

Method of Supply

Stored in Bulk

Inventoried Delivered on demand

Revealed over time

Seller Trader Manufacturer

Provider Stager

Buyer Market User Client Guest

The four realms of experience

Customer Participation

Passive Active

Environmental Relationship

Absorption Entertainment (Movie)

Education (Language)

ImmersionEstheticism

(Tourist)Escapism

(Scuba diving)

Reasons for transformation from industrial to post industrial eraNatural development of services such as

transportation & Utilities to support industrial development

Population growth & mass consumption of goods increase wholesale & retail trade along with banking, real estate, & insurance

Higher income means higher demand for durables & services, proportion spent on food & home decreases. (Similar to Maslow’s Hierarchy)

3

What is Operations?The transformation process that turns

inputs into outputs, that is, the act of combining people, raw materials, technology, etc. into useable services and products

Who is in the operations function?The people who actually make a product or

perform a serviceTypically operations has the largest number

of employees of any functional area

Importance of studying “operations” in services

4

But I’m going into marketing, finance, strategy…

Regardless of your functional area, you will be involved in “transformational processes”, in other words, “getting things done”

Service operations can help you get things done more effectively and more efficiently.

Opportunities in Service SectorVast & untapped opportunities to improve

service businesses.Only manufacturing is being considered for a

time being.Imbalance exists which creates a huge

opportunity

5

Characteristics of services …Rules:

Services are intangible

Simultaneous production and consumption

Proximity to the customer

Services cannot be inventoried

Exceptions:Facilitating goods: playbills,

groceriesComputer system upgrades;

janitorial services; live music

Internet-based services; catalogs

Retailers hold inventory; hotel rooms, airline seats are inventory

Modern Products

Operations in the Service SectorMany products: Combination of Goods and ServicesServices

Repair and MaintenanceGovernmentFood and LodgingTransportationInsuranceTradeFinancialReal EstateEducationLegalMedicalEntertainment and Other professional Occupations

Classification frameworksClassification helps in finding commonalities Similarities helps in finding insightsWell known classifications

Customer Contact ModelService Process Matrix (Proposed by

Schmenner)

6

Customer Contact ModelServices are classified according to the

amount of customer contactPure Services Mixed Services Quasi-Mfg. Manufacturing

MedicalRestaurantsTransportation

Branch offices Home officesDistribution centers

•Guiding Principle:

timeCreationService

TimeContactCustomerfEfficiencyPotential

__

__1_

High Contact Low Contact

7

Service Process Matrix

Professional Service•Doctors•Lawyers•Accountants•Architects

Mass Service•Retailing•Wholesaling•Schools•Retail Aspects of Commercial Banking

High

Service Shop•Hospitals•Auto Repair•Other Repair Services

Service Factory•Airlines•Trucking•Hotels

Low

HighLow

Degree of Labor Intensity

Degree of Interaction and Customization

8

Low Labor IntensityChallenges for managers

Capital decisions Technological advances Managing peak/non-peak demand Scheduling service delivery

High Labor Intensity Challenges for managers

Hiring, training Methods development Employee welfare Scheduling workforces Control of far-flung locations Managing growth

Low Interaction/CustomizationChallenges for managers

Marketing Making service “warm” Attention to physical

surroundings Managing fairly rigid hierarchy

with need for standard operating procedures

High Interaction/CustomizationChallenges for managers

Fighting cost increases Maintaining quality Reacting to consumer

intervention in process Managing flat hierarchy with

loose subordinate-superior relationships

Gaining employee loyalty