Welcome to

Service Management
Chapter 1
The Service Economy

1
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 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.
2
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 Table 1.1: Sector Employment in Top Ten
Nations by 2015 Labor Force Size

Nation % of World % Agri % Goods % Services

Labor
China 21.2 33.6 30.3 36.1
India 13.9 49.0 20.0 31.0
European Union 6.4 5.0 21.9 73.1
United States 4.3 0.7 20.3 79.0
Indonesia 3.4 38.9 13.2 47.9
Brazil 3.0 15.7 13.3 71.0
Bangladesh 2.3 47.0 13.0 40.0
Russia 2.1 9.4 27.6 63.0
Japan 1.8 2.9 26.2 70.9
Pakistan 1.7 43.7 22.4 33.9 3
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 Service Definitions

Services are deeds, processes, and performances.

Valarie Zeithaml, Mary Jo Bitner, & Dwayne Gremler

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 Service Definitions - continued

Services are economic activities offered by one party to

another, most commonly employing time-based
performances to bring about desired results in recipients
themselves or in objects or other assets for which
purchasers have responsibility. In exchange for their
money, time, and effort, service customers expect to
obtain value from access to goods, labor, professional
skills, facilities, networks, and systems; but they do not
normally take ownership of any of the physical elements
involved.
Christopher Lovelock and Lauren Wright
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 Service System Definition

A service system is a value-coproduction

configuration of people, technology, other
internal and external service systems, and shared
information (such as language, processes,
metrics, prices, policies, and laws).
Jim Spohrer, Paul Maglio, John Bailey, and Daniel Gruhl

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Figure 1.1: Role of Services in an
Economy

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Figure 1.2: Stages of Economic
Activity

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Figure 1.3: Trends in U.S.
Employment by Sector, 1850-2015
90

80
Service
70

60

50

Percent Manufacturing
40

30

20

10
Agriculture

0
1860 1880 1900 1920 1940 1960 1980 2000 2020
0 0 0
Year
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 Table 1.2: Comparison of Societies
Features
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, Global
education,
recreation

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Figure 1.4: Distribution of U.S.
Employment by Industry, 2014

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Table 1.3: Language of Economic
Evolution
Economy Agrarian Industrial Service Experience

Economic Food Packaged Commodity Consumer Business

Offering goods service services (B2C) services (B2B)

Function Extract Make Deliver Stage Co-create

Nature Fungible Tangible Intangible Memorable Effectual

Attribute Natural Standardized Customized Personal Growth

Method of Stored in Inventoried Delivered on Revealed over Sustained over

Supply bulk demand time time
Seller Trader Producer Provider Stager Collaborator

Buyer Market Customer Client Guest Collaborator

Expectation Quantity Features Benefits Sensations Capability

12
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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 (Club Med group
pictures)
 Engage all Five Senses (Jungle sounds and
mist in Rainforest Cafe)
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 Figure 1.5: The Four Realms of an
Experience

Environmental Relationship
Absorption Immersion
Passive Entertainment Estheticism
Customer (movie (tourist)
Participation Active Education Escapism
(language) (scuba diving)

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Table 1.4: 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

15
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 Table 1.5: Foundational Premises
(FPs) of Service-Dominant Logic
1. Service is the fundamental basis of exchange.
2. Indirect exchange masks the fundamental basis of exchange.
3. Goods are distribution mechanisms for service provision.
4. Operant resources are the fundamental source of competitive advantage.
5. All economies are service economies.
6. The customer is always a co-creator of value.
7. The enterprise cannot deliver value, but only offer value propositions.
8. A service-centered view is inherently customer-oriented and relational.
9. All economic and social actors are resource integrators.
10. Value is uniquely and phenomenologically determined by the beneficiary.

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 Distinctive Characteristics
of Service Operations
 Customer Participation: attention to facility design,
opportunities for co-production
 Simultaneity: services created and consumed
simultaneously, cannot be stored
 Perishability: cannot inventory, opportunity loss of idle
capacity, need to match supply with demand
 Intangibility: services are ideas and concepts, service
innovations are not patentable, franchising, importance of
reputation
 Heterogeneity: customer involvement in delivery
process results in variability
 Nontransferrable Ownership: services do not involve
transfer of ownership
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 Table 1.6: Nonownership
Classification of Services
Type of Service Customer Value Examples Management Challenge

Goods rental Obtain temporary right to Vehicles, tools, furniture, Site selection and
exclusive use equipment maintenance

Place and space Obtain exclusive use of Hotel room, seat on Housekeeping and
rental defined portion of a airplane, storage unit achieving economies of
larger space scale
Labor and Hire other people to do a Car repair, surgery, Expertise is a renewable
expertise job management consulting resource, but time is
perishable

Physical facility Gain admission to a Theme park, camp Queuing and crowd
usage facility for a period of ground, physical fitness control
time gym
Network usage Gain access to participate Electric utility, cell Availability and pricing
phone, Internet decisions
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Figure 1.6: Service Package

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The Service Package

 Supporting Facility: The physical resources that must

be in place before a service can be offered. Examples are
golf course, ski lift, hospital, airplane.
 Facilitating Goods: The material purchased or
consumed by the buyer, or items provided by the
consumer. Examples are golf clubs, skis, food items,
replacement auto parts, legal documents, and medical
supplies.
 Information: Data that is available from the customer
or provider to enable efficient and customized service.
Examples are patient medical records, seats available on a
flight, customer preferences, GPS location of customer to
dispatch a taxi, and Google map link on hotel website.
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The Service Package (cont.)

 Explicit Services: Benefits readily observable by

the senses and that consist of the essential or
intrinsic features of the service. Examples are the
absence of pain when a tooth is repaired, smooth-
running vehicle after a tuneup, and response time of
a fire department.
 Implicit Services: Psychological benefits that the
customer may sense only vaguely, or extrinsic
features of the service. Examples are the status of an
Ivy League degree, the privacy of a loan office, and
worry-free auto repair.
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Figure 1.7: The Service
Process Matrix

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Figure 1.8: Challenges for Service
Managers

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Figure 1.9: Open Systems View of
Services

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 Discussion Topics

1. 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.
2. Is it possible for an economy to be based entirely on services?
3. What is the value of self-service in an economy?
4. 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:
http://instituteforsupplymanagement.org/ISMReport/
5. What are challenges of the sharing economy with respect to
regulation, insurance, and trust issues?
6. Critique the distinctive characteristics of service operations by
arguing that the characteristics of customer participation, simultaneity,
perishability, intangibility, heterogeneity, and nontransferable
ownership might apply to goods as well.
25
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Interactive Class Exercise

The 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://fortune.com/fortune500/list/

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Case 1.1: Village Volvo

1. Describe Village Volvo’s service package.

 Supporting Facility

 Facilitating Goods

 Information

 Explicit Services

 Implicit Services
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Case 1.1: Village Volvo

2. How are the distinctive characteristics of a

service firm illustrated by Village Volvo?
 Customer Participation

 Simultaneity

 Perishability

 Intangibility

 Heterogeneity

 Nontransferrable Ownership

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Case 1.1: Village Volvo

3. How could Village Volvo manage its

back office (repair operations) like a
factory?

4. How can Village Volvo differentiate

itself from Volvo dealers?

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Case 1.2: Xpresso Lube

1. Describe Xpresso Lube’s service package.

 Supporting Facility

 Facilitating Goods

 Information

 Explicit Services

 Implicit Services
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Case 1.2: Expresso Lube

2. How are the distinctive characteristics of a

service operation illustrated by Expresso Lube?
 Customer Participation

 Simultaneity

 Perishability

 Intangibility

 Heterogeneity

 Nontransferrable Ownership

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Case 1.2: Xpresso Lube

3. What elements of Xpresso Lube’s

location contribute to its success?

4. Given the example of Xpresso Lube,

what other services could be combined to
“add value” for the customer?

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