Welcome to Service Management Chapter 1 The Service Economy CLO1 1 Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives n n n n n n n n 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. Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 2 Table 1.1: Sector Employment in Top Ten Nations by 2015 Labor Force Size Nation % of World Labor % Agri % Goods % Services 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 Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 3 Service Definitions Services are deeds, processes, and performances. Valarie Zeithaml, Mary Jo Bitner, & Dwayne Gremler Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 4 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 Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 5 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 Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 6 Figure 1.1: Role of Services in an Economy Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 7 Figure 1.2: Stages of Economic Activity Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 8 Figure 1.3: Trends in U.S. Employment by Sector, 1850-2015 90 80 Service 70 60 50 Percent Manufacturing 40 30 20 Agriculture 10 0 1860 1880 1900 1920 0 1940 0 1960 0 1980 2000 2020 Year Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 9 Table 1.2: Comparison of Societies Society Game Predominant Activity PreIndustrial Against nature Agriculture Mining Features Use of Standard Human Unit of of Living Labor Social Life Measure Structure Technology Raw muscle power Extended household Subsistence Routine Simple hand Traditional tools Authoritative Industrial Against Goods fabricated production nature Machine tending Individual Quantity of goods Bureaucratic Machines Hierarchical Postindustrial Artistic Community Creative Intellectual Among persons Services Quality of Interlife in terms dependent health, Global education, recreation Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. Information 10 Figure 1.4: Distribution of U.S. Employment by Industry, 2014 11 Table 1.3: Language of Economic Evolution Economy Agrarian Industrial Service Experience Economic Offering Food Packaged goods Commodity service Consumer services (B2C) Business services (B2B) 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 12 Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. Experience Design Principles n n n n n 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) Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 13 Figure 1.5: The Four Realms of an Experience Passive Customer Participation Active Environmental Relationship Absorption Immersion Entertainment Estheticism (movie (tourist) Education Escapism (language) (scuba diving) Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 14 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 Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 15 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. Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 16 Distinctive Characteristics of Service Operations n n n n n n 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 Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 17 Table 1.6: Nonownership Classification of Services Type of Service Customer Value Examples Management Challenge Goods rental Obtain temporary right to Vehicles, tools, furniture, exclusive use 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 Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. Availability and pricing decisions 18 Figure 1.6: Service Package Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 19 The Service Package n n n 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. Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 20 The Service Package (cont.) n n 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, smoothrunning 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. Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 21 Figure 1.7: The Service Process Matrix Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 22 Figure 1.8: Challenges for Service Managers Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 23 Figure 1.9: Open Systems View of Services Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 24 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 Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 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/ Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 26 Case 1.1: Village Volvo 1. Describe Village Volvo’s service package. n Supporting Facility n Facilitating Goods n Information n Explicit Services n Implicit Services Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 27 Case 1.1: Village Volvo 2. How are the distinctive characteristics of a service firm illustrated by Village Volvo? n Customer Participation n Simultaneity n Perishability n Intangibility n Heterogeneity n Nontransferrable Ownership Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 28 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? Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 29 Case 1.2: Xpresso Lube 1. Describe Xpresso Lube’s service package. n Supporting Facility n Facilitating Goods n Information n Explicit Services n Implicit Services Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 30 Case 1.2: Expresso Lube 2. How are the distinctive characteristics of a service operation illustrated by Expresso Lube? n Customer Participation n Simultaneity n Perishability n Intangibility n Heterogeneity n Nontransferrable Ownership Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 31 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? Copyright © 2019 by The McGraw-Hill Companies, Inc. All rights reserved. 32