The Rise Of Service

Client Packet: The Rise of Service Tony Polito

The Rise of Service

Throughout most of the 20 th Century, operations management was almost exclusively concerned with the production of manufactured goods in “smokestack” factories. As the 21 st Century begins, however, operations management is becoming increasingly concerned with the management of service operations. Today, only about 10% - 15% of American jobs today involve direct labor

("slamming the hammer on metal," so to speak), while 85% - 90% are service-like in nature.

Insurance companies, banks, accounting firms, hospitals and universities are all examples of service organizations that, in many ways, can be viewed as " service factories "

1 —service

‘systems’ comprised of inputs, processes and outputs. Hospitals take sick people as input, run them through a number of sequential processes such as admitting, X-raying, and operating, and eventually well people emerges as output. Universities take less educated people as input, run them through a number of sequential processes such as advising, taking lectures, testing, and eventually more educated people emerges as output (we hope!). Computer professionals maintain a similar view when they speak of computer systems as comprised of inputs like data entered at a keyboard, processing such as programs running, microprocessor chips working, and outputs like printed reports. In a larger sense, it is even possible to conceptualize entire businesses or governments as operations composed of a series of inputs, processes, and outputs; and the future of the field of operations management may well focus on the process management of such "organizational operations.”

What is a Service?

Like many other constructs in the social sciences, "service" lacks a single, precise, recognized definition. The Economist once suggested that if you can drop a product on your foot, it is a manufactured good; if not, then the product is a service. This is actually a fairly good intuitive definition of a service. The academic perspective on defining service, however, has been less clear and has changed more than once through history.

1 The term ‘service factory’ was popularized by the article “The service factory.” Richard Chase and David Garvin.

Harvard Business Review . 1989. 67(4): 61-70. The term, however, appears in the literature as early as

“Classifying services to gain strategic marketing insights.” Christopher Lovelock. 1983.

Journal of Marketing ,

47(Summer), 9-20.

Last Revision: June 22, 2011 Page 1


With the rise of mass production, division of labor and other Industrial Age tenets, service —as well as craftsmanship —was deemed unimportant. For instance, Adam Smith, the famous 18 th century economist, argues in the second book of his classic Wealth of Nations that service workers do not produce or add value and so are, unlike factory workers, “unproductive labours” whose costs detract from profit. Smith’s definition, though long out of favor, can still be found in use today. For example, the most recent version of the official dictionary of the American

Production and Inventory Control Society (APICS) defines a service as “those activities that support the production and distribution functions in any organization, such as customer service and field service.”

It was not until the middle of the 20 th Century that academics began to look at service as something more than mere servitude.

2 Two definitions of service during that time that are well recognized are definitions by Judd and by Hill. Judd defines a service as one where the "object of the market transaction is other than the transfer of ownership of a tangible commodity." 3 It appears, then, that The Economist is indebted to Judd for its definition of service as an intangible product. Hill defines service from an economic perspective, in that he sees both goods and services as transaction-based. Hill says that when the ownership of a physical object is transferred, it is said to be a good and that when a change in the condition or an object is effected, it is a service. This leads Hill to differentiate service factories from manufacturing factories based on who owns the inputs being labored upon.

4 Hill’s perspective, then, points out, not only that services are intangible, but that manufactured goods are producer-centric, while services are customer-centric.

Since that time, many academics have discussed the nature of services; most have chosen to define services in terms of how they differ from manufactured goods, a topic that is discussed in more detail below, or by classifying the different types of services. A quick check of the glossaries of major textbooks in the relevant fields finds more than a few definitions that simply define a service as “an intangible product,” not so much different from the definition offered so many years ago by Judd. One services academic, Christian Grönroos, stated not long ago that "it is probably

2 Unfortunately, it is a perspective that still persists. When many people speak of the service economy these days, they often have hamburger flip ping and other “McJobs” in mind, forgetting about large categories such as insurance, banking, health care and such.

3 “The Case for Redefining Services.” 1964. Robert Judd.

Journal of Marketing . 28(1).

4 “On Goods and Services.” 1977. T. Hill.

Review of Income and Wealth . 23(4).


Client Packet: The Rise of Service Tony Polito impossible and ... unnecessary to continue to debate service definitions." 5 As we will see below, the line between manufacturing and services is becoming increasingly blurred, and so Grönroos is probably right.

The Differences Between Manufactured Goods and Services

When first thinking about service operations, it is probably best to think of them as similar to manufacturing operations, again, as service factories or service systems comprised of inputs, processes and outputs. Further, the producers of services are very often just as concerned as the producers of manufactured goods about issues such as capacity, demand, location, price, suppliers, labor and schedules. A number of well-respected articles have been written that promote the many similarities between manufacturing services and manufacturing goods, including:

“Production-line Approach to Service.” 1972. Theodore Levitt. Harvard Business Review .

50(5).

“The Industrialization of Service.” 1976. Theodore Levitt. Harvard Business Review .

54(5).

“The Service Factory.” 1989. Richard Chase and David Garvin. Harvard Business

Review . 67(4).

Based on these similarities, service researchers of the time were successful in transferring existing knowledge from manufacturing to services. For example, Dick Chase (a leading operations management academic in the area of services) and Doug Stewart pointed out in 1994 that services, just like manufacturing, should be poka-yoked to improve quality.

6 Nevertheless, in the early 1990’s, Chase also stated that “we have gone just about as far as we can go thinking about services in terms of man ufacturing.” 7 Chase’s statement suggests that the differences between services and manufacturing were becoming more important than their similarities as we entered the new economy.

5

Service Management and Marketing: Managing the Moments of Truth in Service Competition . 1990. Christian

Grönroos.

6 Make Your Service Fail-Safe. 1994. Dick Chase and Doug Stewart.

Sloan Management Review . 35(3).

7 From a 1995 personal correspondence with Doug Stewart, who worked closely with Dick Chase during that time.



At least through the 1980s and 1990s, there were are a number of characteristics that were used to typically differentiate (or used to differentiate) a service product from a manufactured good product. Many of these characteristics were originally observed within the marketing literature; the fact that “customer service” is a natural concern to marketers led to their interest in “service operations.” Service operations as a topic was widely neglected by operations management academics prior to the 1990s, who were primarily focused on narrower, more quantitative aspects of manufacturing (ie, optimizing inventory levels). Each of these characteristics is important to consider when trying to better understand the production of, and improve the quality of, services.

It should first be said, however, that the more current perspective is that a product is NOT either a manufactured good or a service. In fact, Fortune magazine stopped distinguishing between the two in its “Fortune 500 list” as far back as the 1990’s. The venerable Dow Jones “Industrial”

Average has also stopped making the distinction.

8 Since the 1980s, almost half of its thirty component “industrial” stocks have been replaced by corporations that are far more “service-like” than “manufacturing-like” in nature …corporations such as American Express, Disney, Chase,

Verizon and Microsoft. And many of the “industrial” corporations that remain within the DJIA …

IBM, Honeywell , Johnson & Johnson … are far less industrial than they were 50-60 years ago.

Today, a product is seen as a bundle (or “basket”) of both manufactured goods AND services . Consider tax preparation: it is a product that is primarily a service, but contains facilitating goods such as the completed paperwork. The personal computer on your desk and the automobile you drive are certainly manufactured goods, but these products contain facilitating services as well, such as the telephone numbers you can call for help and information. Said another way, every product contains some percentage of goods content and some percentage of service content . In the new economies of the 21 st Century, it appears that the percentage of service content in products is steadily increasing … making them “behave” vastly different from the “high goods content” products of the early 20 th Century.

Given that perspective, the 1980s/1990s li st of “differentiating” characteristics doesn’t really

“separate” manufactured goods products from service products … rather it just tells us why

“service content” differs so much from “goods content.”

8 The Dow Jones Industrial Average (or DJIA or DJI) is calculated by averaging the stock prices of the thirty corporations that Dow Jones has selected for this purpose. Whenever Dow Jones believes one of these companies is not representative of the broader American economy as a whole, they remove it from the list and replace it with another company.



And, to make things even more complicated, many of th ese characteristics … thought to be

“absolute” in the 1980s/1990s … are, as of recent, seen to have more than a few “exceptions.”

As The Economist definition suggests, services are typically intangible, nonphysical products as opposed to tangible, physical manufactured goods. The intangibility of services is the reason that services are more a product to be experienced as opposed to manufactured goods, which are more a product to be consumed.

9

Also, services are often much more perishable than typically durable manufactured goods. The “flying space” on an airplane that airline companies will sell to you is one service that clearly exemplifies these characteristics.

As Hill observes, the physical aspect of a customer or an individual is often the object of production . For example, when someone purchases the service of a tailor, the tailor works on improving that customer’s appearance. This is quite different from, say, purchasing clothing manufactured in a distant factory where those who produced the clothing do not even know who the customer will be. Another way to interpret this characteristic is to say that the customer or individual is often treated as if he were the “work-in-process” or “raw material” in the production process. On the other hand, most workers in a clothing manufacturing plant would point to cloth when asked to locate their factory’s work-in-process and raw material.

Another generally accepted characteristic of services is that services require a higher degree of customer contact , that is, the extent of required physical presence of the customer. A customer wishing to purchase a hairstyling service or a flying airline space must be physically present during their production processes. A customer purchasing insurance services will have to be physically present, though it might be at a local insurance agent’s office or it might be at the insurance company’s website. This characteristic appears to be a natural consequence of the fact that, as said above, services are more customer-centric than manufacturing. In manufacturing, customers are typically ‘kept at a distance’ from the manufacturing processes. Dick Chase formally identified this characteristic in his Customer Contact Model, where he classified types of services based on the level of customer contact they required.

10 This higher degree of contact under services often leads to customers as co-producers of services :

9 Joseph Pine and James Gilmore talk about service experiences in “How to Profit from your Experience,”

Wall

Street Journal , Monday, August 4, 1997, page A18. Pine and Gilmore go so far as to say that an experience is a category of product distinct from both a manufactured good and a service. The reader of Pine and Gilmore’s article, however, should see many similarities between a service product and the experience product that they describe.

10 Where does the customer fit in a service operation? 1978. Richard B. Chase.

Harvard Business Review . 56(6).



 customers tell their hairstylists what they think of the new hairstyle as it is being produced so that the stylist can alter the approach if needed.

 airline passengers have a significant say during their flight about how the flight will be operated, not only by placing the various and numerous typical demands upon their flight attendants, but by demanding that pilots increase the oxygen in the cabin, that they back away from the gate on schedule, that they return to the gate and deplane passengers when the flight is excessively delayed in the takeoff queue 11 and so on.

 customers can design then purchase a myriad of customized products —from diamond rings 12 to automobiles to music CDs —online.

Since services have higher customer contact and involve them as co-producers, it often (but not always) leads to a service having coincident production and marketing functions , as opposed to manufacturing, where production and marketing are discrete processes. A typical copy shop, such as those found near a university campus, is but one example; the service worker at the counter will first help the customer make selections from the various products the copy shop can provide, go on to close the sale, then go to the back of the shop to run the equipment and produce the customer’s order. To some extent, any service worker—a hairstylist, an airline attendant, a lawyer —is marketing his product while he is making and delivering it to the consumer. The relationship between production and marketing in services is so close that a significant amount of the interesting academic literature on service operations is authored by marketing faculty and/or appears in marketing publications.

Historically, management thought customer involvement in service design and production hindered effective operations, hence many services sought to separate the customer from production as much as possible, as in manufacturing, by placing most of the production in the

“ back office” and containing as much customer contact as possible in a smaller front office.

Again, typical copy shops offer an example. They typically have a larger production back office and smaller customer front office layout. Customers can see the large back office as the shop

11 A queue is the “official” term used in operations to refer to things that are lined up and waiting. A pile of wood waiting to be sanded in a furniture factory is “queued.” People at a bank winding through the maze of ropes toward a bank teller are “in a queue.”

12 http://www.adiamondisforever.com


Client Packet: The Rise of Service Tony Polito usually has no walls hiding the back office from customer view. Though the area behind the counter in the copy shop is off-limits to customers, the customer may access the counter area as well as use various pieces of equipment in the front of the shop. Outback Steakhouses refer to the customer areas as “front of house” and the kitchen areas as “back of house.” The vast majority of the operational work done at banks, insurance companies and the like is done in the back office, work never seen by its customers. Most visitors to Disney World do not realize that there is a huge back office of underground tunnels and management facilities used to operate the park that are far larger than the above-ground park itself. Managers today, however, better appreciate the benefits of being customer-driven so and look for opportunities to remove the back office and to involve customers in the production process where it is practical. Benihana and other Japanese restaurant chains have always placed their cooking production process, not in the back office, but right on the table where the customer is seated. This results in numerous benefits including reducing perceived wait time, reducing overall dining time (thereby increasing the number of customers that can be served) 13 as well as increasing customer satisfaction through cooking that doubles as an entertainment experience.

When a customer comes into contact with a service provider, it is often referred to as a moment of truth . The phrase was coined by Jan Carlzon while he was President of Scandinavian Airlines

System. Carlzon was unsure how he would begin to manage all of the critical aspects of the airline when he first became President; he decided every point of customer contact was a

“moment of truth” that could cause SAS to either retain or lose the customer. Carlzon believed that if he managed SAS’s moments of truth successfully that the desired effects on profitability, safety, quality, etc. would result.

14 One popular alternate term for moment of truth is “ the service encounter.

”

If a consumer purchases a manufactured good such as a ordinary television, most of its quality attributes are easily perceived: the picture comes on or it does not, the color is accurate or is not, the remote control and instructions are in the box or they are not and so on. Since a service is intangible, the quality attributes of a service are far more difficult to measure . What is it that that can be quantified an d measured within a “quality experience” at an expensive restaurant?

The thickness of the steak? Its weight? Its temperature? Such things are but a small part of the

13 Total customer dining time is heavily governed by the activities of the chefs … and the chefs typically orchestrate quick customer turnover. The "bottleneck" (or constraining resource) in such restaurants is often not availability of tables but the availability of chefs.

14 Moments of Truth: New Strategies for Today’s Customer

. 1987. Jan Carlzon.


Client Packet: The Rise of Service Tony Polito total “experience.” A customer should not wait “too long” for service in a restaurant, but how long is “too long?” You might say, five minutes, or one minute or ten minutes, but, in the final analysis,

“too long” is a subjective quality attribute that depends on the perception of the consumer. “Too long” depends on who the customer is, which restaurant he is in, what time of day it is, what the prices are, what mood he is in and so on. If the restaurant customer thinks he has waited too long, he may well not return, so when the customer thinks he has waited too long – even if he has hardly waited at all —then he really has waited too long. Consequently, customer perceptions of the quality of service require greater management than that of manufactured goods.

As discussed above, Benihana effectively manages wait time perception; there are many other examples. A wait for a ride at Disneyland may take hours, yet research indicates that Disneyland customers greatly underestimate the time they have spent waiting and that only a small portion of

Disneyland customers are seriously dissatisfied with the amount of time they wait. Why? The queues are constructed so that they are comprised of a series of shorter lines that turn back and forth around blind corners that hide from the customer how far it really is to the front of the line.

During the entire wa iting process, then, customers are constantly thinking that “it will just be a few more minutes” —over and over again. Also, Disney typically decorates the waiting line area with distractions and entertaining features so that the time seems to pass quickly.15 The volcano in front of The Mirage casino in Las Vegas is set to erupt every twenty minutes, this interval was chosen because on busy weekends, people have to wait about fifteen minutes for the valet to bring their car around; customers are ‘entertained’ by waiting for the next eruption … instead of frustrated by waiting for their cars. Another Vegas example: people standing in line to clear security at Las Vegas’ McCarran Airport see a video of famous Vegas entertainers giving tips on how they can speed up the process. Charlotte’s airport has large rocking chairs throughout its terminal; other airports such as Boston and Philadelphia have followed suit.

An interesting concept that has arisen from the need to manage customer perceptions of the quality in services is that of “ service bookends .” Advocates of service bookends believe that extra and special effort should be made to manage customer perceptions at the very beginning

15 The source of this Disneyland example (to the best of my recollection at this moment) is

Service Breakthroughs:

Changing the Rules of the Game . 1990. James Heskett, Earl Sasser, and Christopher Hart. Since the authors noted this example, Disneyland has begun exper imenting with ride reservations as well as “VIP” waiting lines for those who pay a premium. Two relevant articles on this topic are:

Prescription for Waiting-in-Line Blues: Entertain, Enlighten, and Engage. 1991. K. Katz, B. Larson and R. Larson.

Sloan Management Review . 1991.

The Psychology of Waiting Lines. 1984. David Maister. Harvard Business Review . March-April.


Client Packet: The Rise of Service Tony Polito and the very end of their service experience as these bookends will have a great deal of influence over how the entire service experience is perceived by the customer. One does not have to look far to see examples of service professionals practicing the art of service bookends:



Professors often start and end a course with exciting activities



New car salesmen often send an unexpected small free gift to customers several weeks after their purchase (but before the sales satisfaction survey arrives)



Tourists to Hawaii are often greeted by having a wreath of flowers placed around their neck



Pleasant greeters start your service experience at Wal-Marts and Outback Steakhouses.

There is likely a body of evidence within psychology research to support the notion of service bookends. For example, there is much good evidence to support the hypothesis that the impression made during the first minutes of a job interview is strongly related to the final hiring decision.

16

One characteristic of services that was once universally accepted is that services are simultaneously produced, delivered and experienced , as opposed to manufactured goods that are first produced, then later delivered, then even later consumed. Examples include:

 a hairstylist that produces the new hairstyle product at the same time you are beginning to consume your new hairstyle

 a doctor that produces your “surgery” product when you need it and want to “use” it

 an airline that produces the “flying space” it sells at the same time passengers are flying in it

 the electric company that produces electricity then immediately pushes it ‘down the line’ to customers who use it right away

This also means that when something goes wrong during the service encounter, the customer is present to experience it. When a frozen TV dinner is mis-produced, it can be stopped and/or corrected in production —long before the customer ever sees it. When a customer receives a burnt steak at a restaurant, well, it is too late, the customer is already “involved” in the mistake.

16 One reference to service bookends found in the academic literature is within “Want to Perfect Your Company’s

Service? Use Behavioral S cience,” Richard Chase and Sriram Dasu, Harvard Business Review , June, 2001.



Hence, service workers must be well trained and practiced in the art of service recovery , ie, the ability to fully correct the customer’s perception so that it is as if the error had never occurred.

Generally speaking, effective service recovery requires more than the mere correction of the error, but also a demonstration of additional effort and/or concern as compensation for the fact that the error ever occurred —it is not enough to just replace the burnt steak with another steak … the customer has already been inconvenienced and disappointed … something more must be done to “make up” for the fact that a steak was burned in the first place … something that demonstrates a sincere regret and concern that the customer received less-than-perfect service.

The service characteristic of simultaneous production, delivery and experience is just a byproduct of the fact that services preferred just-in-time, customer-driven pull systems . The preference for these approaches was born out of necessity,

17 since services often cannot be inventoried .

For example, neither can a hairstylist “inventory” your finished hairstyle product in advance nor can a doctor inventory your surgery product in advance. And, without inventory, services often queued customers , that is, services made customers wait in line. Customers waiting in services often substituted for the waiting traditionally done by inventory in manufacturing. For example, if you want a new hairstyle, you may purchase a wig out of inventory with no waiting or you may purchase hairstyling services, but if you do you purchase hairstyling services, you may very well have to make an appointment … or take a chair and wait. Queuing customers in lieu of queuing inventory is also clearly in keeping with the earlier mentioned characteristic that the customer or individual is often treated as if he were the “work-in-process” or “raw material” in the production process.

The perspective that all services cannot be inventoried is likely rooted in thinking (such as Adam

Smith’s thinking noted above) that equates service with servants. Today, however, we see that service is much, much more than human servitude. While traditional “servant-based” services often resist being inventoried, more modern “technology-based” services 18 often do not.

19 For

17 Recall that the Japanese preference for these methods was also born out of necessity.

18 Thomas, in his 1978

Harvard Business Review article, argued that “important consequences flow from whether a service business is equipment-based or peoplebased,” but to date most discussions of service operations have not observed or expounded upon this significant distinction.

19 Rathmell, in his 1966 article, “What is Meant by Services?” also anticipated the difference between small-scale, servant-based service and large-scale, technology-based service, stating that "the use of service technology at the expense of personalized service ... would mean that services will follow goods from custom to mass production and standardization." This prophetic statement, unfortunately, did not anticipate the possibility of the mass customization of service content.


Client Packet: The Rise of Service Tony Polito instance, Shakespeare could not “inventory” the production of one of his plays, but today, motion picture “factories” can indeed produce and inventory such an “entertainment service.” Further, existing technologies can be used to deliver that entertainment service product, not simultaneously, but pretty much when and where the consumer wants it —no waiting. Lines of software code, shelves of DVDs at Blockbuster, masters of musical recordings and videotaped university lectures are but a few examples of services being held in inventory.

20 Note that these examples are also less perishable services.

Through much of history, high labor content or “labor-intensiveness” was considered by many to be a major characteristic of services, differentiating it from the “capital-intensive” manufacturing of goods. Again, this perspective is likely rooted in thinking that equates service with servants. Time has revealed this thinking to be incorrect.

21 Today, services are increasingly delivered through the use of “capital-intensive” technology. Consider travel agencies, auction houses and stock market trading floors; each used to employ intense laboring of armies of white-collar workers.

Today they have been largely supplanted by electronic technologies such as Orbitz, eBay and the

NASDAQ stock exchange. Banking, due to its requirements for, and its massive investments in, technology, is today a capital-intensive service industry, online or otherwise. Health care is another service industry that was once very labor-intensive, but today is quite capital-intensive.

Types of "Service Factories"

Even when academics first started trying to categorize types of factories, it was clear that the classification of service factories was problematic. According to two very well recognized Harvard

Business Review articles written by Hayes and Wheelwright in 1979, 22 there are several basic types of “manufacturing” factories.

The types are arranged along a spectrum:

20 Nevertheless, I still see many introductory textbooks today claim that services cannot be inventoried.

21 Again, I still see high labor content listed as a service characteristic in many introductory textbooks today.

22 Link manufacturing process and product life cycles. 1979. Robert Hayes and Steven Wheelwright.

Harvard

Business Review . 57(1). The dynamics of process-product life cycles. 1979. Robert Hayes and Steven

Wheelwright. Harvard Business Review . 57(2). The original articles named four types; the model is sometimes refined, as here, to include five types.



Continuous Flow Repetitive Mfg. Batch Job Shop Project

Highest

Lowest

Gasoline

Milk, OJ Plants

Mining

Food/Agriculture



Books

Soft Drinks

Automobiles

Higher 

Use of Capital Equipment and Technology (versus Labor)

Lot/Batch Size

Economies of Scale

Customer Price Sensitivity

Operational Standardization and Efficiency; Process Stability



Degree of Commodity-like Product Attributes

Higher



Use of Labor (Versus Capital Equipment and Technology)

Breadth of Product Line

Degree of Service Content in Product

Equipment Flexibility

Customer Participation in Design & Production

Difficulty of Production Planning & Production Control

Degree of Product Customization

Cost of Product Customization

Inventory Levels

Some Approximate Examples

Furniture

Fashion Clothing

Metal Tool & Die

Hospital

Shipbuilding

Construction

At one extreme of the spectrum is the continuous flow factory

23

such as a gasoline factory, where

Lowest

Highest there is only one product in the product line and it is produced in high volume. At the other extreme of the spectrum is the ‘project factory,’ such as a skyscraper construction ‘factory,’ where there are many products in the product line (every skyscraper is different) and they are produced in low volume (each is only built once). The other types of factories differ in degree from these two extremes along this spectrum. Historically, manufacturers strived to shift their manufacturing environment toward the continuous flow end of the spectrum, in order to remove uncertainty as well as to capture the economies of scale associated with high volume production.

And how does services fit in this spectrum? Not very well, actually. Many services contain characteristics from both ends of the spectrum. McDonalds, as we said, is much like an assembly line, repetitive manufacturing/continuous flow in nature. And its burgers are fairly commodity-like

23 Alternate terms for continuous flow include “flow” and “process industry” (eg, “poultry processing plant”). In a continuous flow environment, quantity is often measured in volume (eg, gallons per hour) instead of discrete units.



… if McDonald’s is closed, oh well, it’s off to In-N-Out Burger!

24 On the other hand, its products/processes are high in labor content and can be somewhat customized (“I’ll take mine with extra onions!”). Home Depot retails the same carpet in huge volume throughout America, but the customer service and installation they provide will be highly customized to the need of each individual customer. Or consider this situation:

A number of Original Levi's retail outlets now offer made-to-order women's bluejeans. Customer measurements are entered at the POS (ie, point-of-sale) terminal and directed to a numerically controlled cutting device at the company's

Tennessee plant. Each pair of custom-cut jeans travels down the assembly line and upon completion is shipped directly to the individual customers.

How does this bluejean example fit into H ayes and Wheelwright’s theory? Not well at all. In some ways, it is project-like: small lot size, flexible equipment, a highly customized product. In other ways, it is a continuous flow factory: high capital intensity, a single type of product flowing down a single production line, large quantities, low inventory levels. Mass customization factories do not appear have any place within the Hayes and Wheelwright theory.

Despite this “missing link” for services within the Hayes and Wheelwright theory, the theory has been generally accepted in the operations management field for well over twenty years. Alas, the world has changed a lot since Hayes and Wheelwright first developed their model and, with the rise of service, this missing link has become far more obvious. No other generally respected scheme for global categorization of all factories has emerged to replace the Hayes & Wheelwright model.

The service factory classification scheme that presently dominates academia is Roger

Schmenner’s Service Process Matrix 25 that places all service factories into one of four categories based on their degrees of customization and labor intensity:



Mass service low degree of customization, high degree of labor intensity



Professional service high degree of customization, high degree of labor intensity



Service factory low degree of customization, low degree of labor intensity



Service shop high degree of customization, low degree of labor intensity

24 http://www.in-n-out.com

25 How can service businesses survive and prosper?" 1986. Roger W. Schmenner.

Sloan Management Review .

Spring, pp. 21-32.



Schmenner characterized this work as a theory for services that clearly paralleled the Hayes and

Wheelwright theory for manufacturing, eg, that increasing interaction and customization causes the service factory to give way to the service shop in similar manner as continuous flow gives way to job shop manufacturing. Since Schmenner relies upon Hayes and Wheelwright’s model, it contains the same difficulties; there are many services that do not fit “neatly” into just one of

Schmenner’s four categories.

The model below, called the Content Continuum, attempts to expand the work of Hayes and

Wheelwright … and it seems to be more descriptive and explanatory for the 21 st Century economy.

Goods Goods Goods Goods Goods Service Service Service Service Service

Flow



Line



Batch



Shop



Project

 

Project



Shop



Batch



Line



Flow



Lowest

Highest

Lowest

Highest

 Higher 

Degree of Service Content in Product

Degree of Product Customization

Equipment Flexibility

Breadth of Product Line

Customer Participation in Design & Production

Customer as Object of Production

Economies of Scope

 Higher

Degree of Goods Content in Product



Customer Price Sensitivity

Cost of Product Customization



Highest



Use of Labor (Versus Capital Equipment and Technology)

Inventory Levels

Difficulty of Production Planning & Production Control

 Lowest 

Use of Capital Equipment and Technology (versus Labor)

Lot/Batch Size

Operational Standardization and Efficiency; Process Stability

Degree of Commodity-like Product Attributes

Highest

Lowest

Lowest

Highest



The Content Continuum is based on the amount of service content in the product. At left, there is very little service content; at right, very high service content. Our “new economy” adds ever more service content to its products; as such, products are “shifting toward” the far right side of the

Content Continuum. In this model, the mass-customized Levi bluejeans indeed “has a home” … toward the right side of the spectrum where higher customization, higher capital equipment levels, large quantities, high equipment flexibility, low inventory levels, and high customer orientation all simultaneously reside.

The model distinguishes between “ economies of scale ” versus “ economies of scope .”

Economies of scale refers to concept that more profit (per unit) will be made when that same exact product is produced in larger quantities, the two primary reasons for such higher unit profitability being:



 the “spreading” of fixed costs over more units, and the more efficient operations resulting from working on the same product over and over again (ie, from moving further along “ the learning curve .

”)

Economies of scope refers to the concept that more profit can be made by adding new products that compliment the types of customers and competencies that the company already possesses.

Amazon was one of the first companies to retail products on the Web. They began by only selling books —they didn’t cost much to ship and customers didn’t usually need to “see” a book before buying it. Amazon quickly discovered that many other items —such as CDs and DVDs—also lent themselves well to being sold the same way for the same reason. A celebrity such as Brittney

Spears can “brand” a wide range of items—clothing, perfume, body lotions and such—anything that will associate well with her “image.” Reese’s went from selling peanut-butter chocolate cups

... to selling peanut butter. FedEx began as airbased overnight delivery …then progressed into slower, ground-based package delivery.

Economies of scale is really more of a 20 th Century notion, while the 21 st Century is shaping up to be one that is more oriented toward economies of scope. Economies of scale is producer-oriented , how the company’s internal functions can be changed to increase profit; economies of scope, on the other hand, is customer-oriented , how the company can achieve increased profit by discovering more customer revenue.

The increasing level of shading toward the ends of the Content Continuum is intended to demonstrate the increasing requirement for, and the involvement of, technology. Mass production


Client Packet: The Rise of Service Tony Polito requires a great deal of mechanical technology; mass customization requires a great deal of more modern technology. Indeed, modern technology and service content are closely linked in the new economy; each example of a service characteristic that was noted above as disproved in our new economy was disproved by a counterexample that uses modern technology in some new way.

© 2000, 2006. All rights reserved.



Relevant Readings

A matrix approach to the classification of marketing of goods and services. 1981. M. Bell in Marketing of services . J. H. Donnelly & W. R. George.

Some strategy implications of a matrix approach to the classification of marketing goods and services.

1986. M. Bell. Journal of the Academy of Marketing Science . 14(1).

Servicescapes: The impact of physical surroundings on customers and employees. 1992. Mary Jo Bitner.

Journal of Marketing . 56(2).

Development of a taxonomy of services to gain strategic marketing insights. 1990. J. Bowen. Journal of the Academy of Marketing Science . 18(1): 43-49.

Operations management: The management of productive systems . 1975. Elwood Buffa.

Where does the customer fit in a service operation? 1978. Richard Chase. Harvard Business Review.

56(6).

The customer contact approach to services: Theoretical bases and practical extensions. 1981. Richard

Chase. Operations Research . 29(4).

A matrix for linking marketing and production variables in service system design. 1985. Richard Chase in

1985 Proceedings of the American Institute for Decision Sciences . B. Hartman and J. Ringuest.

The service factory. 1989. Richard Chase and David Garvin. Harvard Business Review . 67(4).

Beefing up operations in service firms. 1991. Richard Chase and Robert Hayes. Sloan Management

Review . 33(1).

Service operations management . 1982. J. Fitzsimmons and R. Sullivan.

Marketing in the service industries . 1985. G. Foxall.

Service management and marketing: Managing the moments of truth in service competition . 1990.

Christian Grönroos.

Link manufacturing process and product life cycles. 1979. Robert Hayes and Steven Wheelwright.

Harvard Business Review . 57(1).



The dynamics of process-product life cycles. 1979. Robert Hayes and Steven Wheelwright. Harvard

Business Review . 57(2).

A Conceptual model of service quality. 1988. J. Haywood-Farmer. International Journal of Operations and

Production Management . 8(6).

Service is everybody's business. 1994. R. Henkoff. Fortune . 129(13).

Rethinking strategy for service management. 1990. James Heskett in Service management effectiveness:

Balancing strategy, organization and human resources, operations, and marketing . In David

Bowen, Richard Chase, Thomas Cummings, et al.

On goods and services. 1977. T. Hill . Review of Income and Wealth . 23(4).

Classification of service businesses from a utility creation perspective. 1992. C. Hsieh and T. Chu. 1992.

Service Industries Journal . 12(4).

Managing service companies: strategies for success . 1991. Ken Irons. Economist Intelligence Unit.

London.

The case for redefining services. 1964. Robert Judd. Journal of Marketing . 28(1).

Organization and customer: Managing design and coordination of services. 1989. R. Larsson and D.

Bowen. Academy of Management Review . 14(2).

Production-line approach to service. 1972. Theodore Levitt. Harvard Business Review. 50(5).

The industrialization of service. 1976. Theodore Levitt. Harvard Business Review. 54(5).

Classifying services to gain strategic marketing insights. 1983. Christopher Lovelock. Journal of

Marketing . 47(3).

Services marketing: Text, cases and readings . 1984. Christopher Lovelock.

Toward a classification of services. 1980. Christopher Lovelock in Theoretical Developments in

Marketing . Charles Lamb Jr. and Patrick M. Dunne.

Balancing the professional service firm. 1982. D. Maister. Sloan Management Review . 23(5).

Managing facilitator services. 1982. D. Maister and C. Lovelock. Sloan Management Review . 23(4).



Enhancing the customer contact model. 1990. T. Mersha. Journal of Operations Management . 1990. 9(3).

Towards a core typology of service organizations. 1980. P. Mills and N. Marguiles. Academy of

Management Review . 5(2).

Service operations management . 1990. Robert Murdick, Barry Render and Roberta Russell.

Computer allows Levi's to offer made-to-order jeans. 1994. New York Times . November 8: D10.

Service Breakthroughs: Changing the Rules of the Game . 1990. James Heskett, Earl Sasser, and

Christopher Hart.

Mass customization: The New Frontier in Business Competition . 1993. Joseph Pine.

The content continuum: Extending the Hayes & Wheelwright Process-Product Diagonal to facilitate improvement of services. 2003. Tony Polito and Kevin Watson. The Journal of American

Academy of Business, Cambridge . 4(1/2).

What is meant by services. 1966. J. Rathmell. Journal of Marketing . 30(4).

The marketing of services: Categorization with implications for strategy. 1977. A. Ryans and D. Wittink in

Contemporary marketing thought . B Greenberg and D. Bellenger.

Management of service operations: Text, cases and readings . 1978. W. Sasser, R. Olson and D.

Wyckoff.

How can service businesses survive and prosper? 1986. Roger Schmenner. Sloan Management Review .

27(3).

Service operations management . 1995. Roger Schmenner.

What do the words 'product' and 'service' really mean for management? 1992. M. Schwartz. Quality

Progress . 25(6).

Breaking free from product marketing. 1977. Lynn Shostack. Journal of Marketing . 41(4).

Silpakit, Patriza and Fisk, Raymond P. 1985. Participatizing the Service Encounter: A Theoretical

Framework. 1985. Patriza Silpakit and Raymond Fisk in Services marketing in a changing environment . Thomas Bloch, Gregory Upah, Valarie Zeithaml.



A dependent demand approach to service organization planning and control. 1982. C. Synder, J. Cox and

R. Jesse. Academy of Management Review . 47(3).

Consumerism in the service sector. 1983. R. Stiff and J. Pollack in Emerging perspectives on services marketing . L. Berry, Lynn Shostak and G. Upah.

Strategy is different in service businesses. 1978. D. Thomas. Harvard Business Review . 56(3).

Organizations in action: Social science bases of administrative theory . 1967. J. Thompson.

In the lab: Garment scanner could be perfect fit. 1994. Wall Street Journal . September 20: B1.


The Rise Of Service

Related documents

Products

Support

The Rise Of Service

Related documents

Add this document to collection(s)

Add this document to saved

Suggest us how to improve StudyLib