Role of Services in an Economy

WELCOME TO SERVICE ECONOMY

THE SERVICE ECONOMY Chapter 1

Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning Objectives

• Describe the central role of services in an economy.• Identify and differentiate the five stages of economic activity.• Describe the features of preindustrial, industrial, and

postindustrial societies.• Describe the features of the experience economy contrasting

the consumer (B2C) with the business (B2B).• Explain the essential features of the service-dominant logic.• Identify and critique the six distinctive characteristics of a

service operation and explain the implications for managers.• Describe a service using the service package dimensions.• Use the service process matrix to classify a service.

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Service Definitions Services are deeds, processes, and performances.

Valarie Zeithaml & Mary Jo Bitner

A service is a time-perishable, intangible experience performed for a customer acting in the role of a co-producer.

James Fitzsimmons

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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

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Nation % of WorldLabor

% Ag % Goods % Services

China 21.0 50 15 35India 17.0 60 17 23USA 4.8 2 20 78Indonesia 3.9 45 16 39Brazil 3.0 23 24 53Russia 2.5 12 23 65Japan 2.4 5 26 69Nigeria 2.2 70 10 20Bangladesh

2.2 63 11 26

Germany 1.4 3 28 69

Percent Employment in Services

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Role of Services in an Economy

INFRASTRUCTURE SERVICE· Communications· Transportation· Utilities· Banking

PERSONAL SERVICES· Healthcare· Restaurants· Hotels

CONSUMER(Self-service)

GOVERNMENT SERVICES· Military· Education· Judicial· Police and fire protection

DISTRIBUTION SERVICES

· Wholesaling · Retailing · Repairing

FINANCIAL SERVICES · Financing · Leasing · Insurance

MANUFACTURINGServices inside company:

· Finance· Accounting· Legal· R&D and design

BUSINESS SERVICES· Consulting· Auditing· Advertising· Waste disposal

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Stages of Economic Activity

Primary (Extractive): Agriculture, Mining, Fishing, Forestry

Secondary (Goods-Producing): Manufacturing, Processing

Tertiary (Domestic Services): Restaurants, Hotels, Laundry, Maintenance

Quaternary (Trade and Commerce): Transportation, Communications, Retailing, Finance, Government

Quinary (Extending Human Potential): Health, Education, Research, Arts, Recreation

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Trends in U.S. Employment by Sector

Agriculture:Value from harvesting

nature

Goods:Value from

making a product

Services:Value from enhancing the

capabilities and interactions among people

2012Year

Percen

t

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Stages of Economic Development Pre- Use of Standard dominant Human Unit of of Living Society Game Activity Labor Social Life Measure Structure Technology

Pre- Against Agriculture Raw Extended Sub- Routine Simple hand Industrial Nature Mining muscle household sistence Traditional tools

power Authoritative

Industrial Against Goods Machine Individual Quantity Bureaucratic Machines fabricated production tending of goods Hierarchical nature Post- Among Services Artistic Community Quality of Inter- Information industrial Persons Creative life in terms dependent Intellectual health, education, recreation

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Distribution of U.S. Employment, 2009

Transportation and utilities 19%

Other services 4%

Financial services6%Leisure and hospitality

9%

Health care and social assistance

11%

Professional and business services

12%

Construction5%

Manufacturing 9%

Federal government 2%

Information 2%

Agriculture and mining 2%

State and local government 13%

Self employed and unpaid family workers

6%

Educational services 2%

Retail and wholesale trade

14%

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Projected U.S. Job Growth, 2008 – 2018

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Economic Evolution

Economy Agrarian Industrial Service Experience

EconomicOffering

Food Packagedgoods

Commodityservice

Consumer services

Businessservices

Function Extract Make Deliver Stage Co-create

Nature Fungible Tangible Intangible Memorable Effectual

Attribute Natural Standardized Customized Personal Growth

Method of Supply

Stored in bulk

Inventoried Delivered on demand

Revealed over time

Sustained over time

Seller Trader Producer Provider Stager Collaborator

Buyer Market Customer Client Guest Collaborator

Expectation Quantity Features Benefits Sensations Capability

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The Four Realms of an Experience

Customer Participation

Passive Active

Environmental

Absorption Entertainment (Movie)

Education (Language)

Relationship Immersion Esthetic (Tourist)

Escapist (ScubaDiving)

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Experience Design Principles

• Theme the Experience (Forum shops)• Harmonize Impressions with Positive Cues

(O’Hare airport parking garage)• Eliminate Negative Cues

(Cinemark talking trash containers)• Mix in Memorabilia (Hard Rock T-shirts)• Engage all Five Senses (Mist in Rainforest)

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Typology of Services in the 21st Century

Core Experience Essential Feature Examples

Creative Present ideas Advertising, theater

Enabling Act as intermediary Transportation, communications

Experiential Presence of customer Massage, theme park

Extending Extend and maintain Warranty, health check

Entrusted Contractual agreement Service/repair, portfolio mgt.

Information Access to information Internet search engine

Innovation Facilitate new concepts R&D services, product testing

Problem solving Access to specialists Consultants, counseling

Quality of life Improve well-being Healthcare, recreation, tourism

Regulation Establish rules and regulations Environment, legal, patents

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Foundation Premises of Service-Dominant Logic

1. Service is the fundamental basis of exchange.2. Indirect exchange masks the basis of exchange.3. Goods are distribution mechanisms for service provision.4. Operant resources are the source of competitive advantage5. All economies are service economies.6. The customer is always a co-creator of value.7. The enterprise can only offer value propositions.8. A service-centered view is customer oriented and relational.9. All economic and social actors are resource integrators.10. Value is uniquely determined by the beneficiary.

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Distinctive Characteristics of Services

• Simultaneity: opportunities for personal selling, interaction creates customer perceptions of quality

• Perishability: cannot inventory, opportunity loss of idle capacity, need to match supply with demand

• Intangibility: creative advertising, no patent protection, importance of reputation

• Heterogeneity: customer involvement in delivery process results in variability

• Customer Participation in the Service Process: attention to facility design, opportunities for co-production, concern for customer and employee behavior

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Non-ownership Classification of ServicesType of Service Customer value Examples Management Challenge

Goods rental Obtain temporary right to exclusive use

Vehicles, tools, furniture, equipment

Site selection and maintenance

Place and space rental

Obtain exclusive use of defined portion of a larger space

Hotel room, seat on airplane, storage unit

Housekeeping and achieving economies of scale

Labor and expertise

Hire other people to do a job

Car repair, surgery, management consulting

Expertise is a renewable resource, but time is perishable

Physical facility usage

Gain admission to a facility for a period of time

Theme park, camp ground, physical fitness gym

Queuing and crowd control

Network usage Gain access to participate

Electric utility, cell phone, internet

Availability and pricing decisions

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Implications of Rental/Usage Paradigm• Creates the option of renting a good upon demand

rather than purchase.• Service often involves selling slices of larger physical

entities.• Labor and expertise are renewable resources.• Time plays a central role in most services.• Service pricing should vary with time and availability.

Question: Can services in general be described as customers sharing resources?

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Service Package

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The Service Package• Supporting Facility: The physical resources that must

be in place before a service can be sold. Examples are golf course, ski lift, hospital, airplane.

• Facilitating Goods: The material consumed by the buyer or items provided by the consumer. Examples are food items, legal documents, golf clubs, medical history.

• Information: Operations data or information that is provided by the customer to enable efficient and customized service. Examples are patient medical records, seats available on a flight, customer preferences, location of customer to dispatch a taxi.

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The Service Package (cont.)• Explicit Services: Benefits readily observable by the

senses. The essential or intrinsic features. Examples are quality of meal, attitude of the waiter, on-time departure.

• Implicit Services: Psychological benefits or extrinsic features which the consumer may sense only vaguely. Examples are privacy of loan office, security of a well lighted parking lot.

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The Service Process Matrix

Degree Degree of Interaction and Customization of labor Intensity Low High Service Factory Service Shop * Airlines * Hospitals Low * Trucking * Auto repair * Hotels * Other repair services * Resorts and recreation Mass Service Professional Service * Retailing * Doctors High * Wholesaling * Lawyers * Schools * Accountants * Retail banking * Architects

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Open Systems View of Services

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Village Volvo’s Service Package

• Supporting Facility

• Facilitating Goods

• Information

• Explicit Services

• Implicit Services

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Village Volvo’s Distinctive Service Characteristics

• Intangibility

• Perishability

• Heterogeneity

• Simultaneity

• Customer Participation in the Service Process

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Managing Village Volvo

• How could Village Volvo manage its back office (repair operations) like a factory?

• How can Village Volvo differentiate itself from Volvo dealers?

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Xpresso Lube Facility

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Xpresso Lube’s Service Package• Supporting Facility

• Facilitating Goods

• Information

• Explicit Services

• Implicit Services

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Xpresso Lube’s Distinctive Service Characteristics

• Intangibility

• Perishability

• Heterogeneity

• Simultaneity

• Customer Participation in the Service Process

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Beyond Xpresso Lube • What elements of Xpresso Lube’s location contribute to its

success?

• Given the example of Xpresso Lube, what other services could be combined to “add value” for the customer?

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Discussion Topics

• Illustrate how the type of work he or she does influences a person’s lifestyle. For example, contrast a farmer, a factory worker, and a school teacher.

• Is it possible for an economy to be based entirely on services?• What is the value of self-service in an economy?• Determine if the service sector is currently expanding or contracting

based upon the Non-Manufacturing Index (NMI) found at the ISM Report on Business on the Institute of Supply Management website: www.ism.ws/ismreport/

• What are some management problems associated with allowing service employees to exercise judgment in meeting customer needs?

• Critique the “Distinctive Characteristics of Service Operations” by arguing that the characteristics of customer participation, simultaneity, perishability, intangibility, and heterogeneity may apply to goods as well.

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Interactive Class ExerciseThe class breaks into small groups. Each group identifies service firms that should be listed in the Fortune 100 and places them in rank order of estimated annual revenue.

http://money.cnn.com/magazines/fortune/fortune500/2012/full_list/

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