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MGS8770
Service Operations Management
Understanding the Basics of Services
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2
Learning Objectives
Describe the central role of services in an
economy
Discuss the evolution of an economy from an
agrarian society to a service society
Describe and contrast the features of the new
experience economy with those of previous
economies
Describe the features of the new service economy
Identify the sources of service sector growth
3
Learning Objectives
Explain what is meant by a service-product bundle
Identity and critique the five distinctive characteristics of a service operation and explain the implications for managers
Explain how services can be described as customers renting resources
Describe a service using the five dimensions of the service package
Use the service process matrix to classify a service.
Explain how a strategic classification of services can be helpful to managers
Explain the role of a service manager from an open-systems view of service
4
Why Study Service Operations?
Service plays a significant role in our economy
and our life
Management tools that are appropriate for
manufacturing are not all transferable into a
service environment
Knowing how to effectively and efficiently
manage service operations can gain you a
competitive edge
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5
What Are Services?
Difficult to define unambiguously
“Non-farming, non-manufacturing
employment”
Instead, it is easier to identify some
unique characteristics
6
Unique Characteristics of Services
Intangibility
Perishability
Heterogeneity
Simultaneity
Customer Participation in the Service
Process
7
Unique Characteristics of Services
Intangibility: creative advertising, no patent protection, importance of reputation
Perishability: cannot inventory, opportunity loss of idle capacity, need to match supply with demand
Heterogeneity: customer participation in delivery process results in variability
Simultaneity: opportunities for personal selling, interaction creates customer perceptions of quality
Customer Participation in the Service Process: attention to facility design but opportunities for co-production
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8
Services Characteristics and Managerial Implications
Adapt all business processes/decisions
Describe the fundamental characteristics as they apply to services
Examine the implications of the fundamental characteristics
on the customer and therefore on operations
Explore the potential managerial actions to address
the implications of the fundamental characteristics
Fundamental Issues with Unique Service Characteristics
Fundamental
Characteristics Managerial Implications Managerial Actions
Intangibility
Perishability
Heterogeneity
Simultaneity
Product is a process and
difficult to evaluate; Perceived
risk is high
Product cannot be inventoried;
demand management is key to
profitable capacity utilization
Service varies across frontline
providers, customers, and over
time. Quality control is difficult
Customers are resources and
co-producers; Customer
participation needs to be
managed
Find ways to reduce
perceived risk, e.g., service
guarantees
Smooth fluctuations with
effective scheduling and
demand partitioning, e.g.,
promoting off-peak demand
All frontline personnel are
marketers as well, e.g.,
training in customer
interaction skills
Shape individual customer
behavior during consumption,
e.g. diagnostic questions for
service specifications
Fundamental Issues with Unique Service Characteristics
Fundamental
Characteristics Managerial Implications Managerial Actions
Intangibility
Perishability
Heterogeneity
Simultaneity
Product is a process and
difficult to evaluate; Perceived
risk is high
Product cannot be inventoried;
demand management is key to
profitable capacity utilization
Service varies across frontline
providers, customers, and over
time. Quality control is difficult
Customers are resources and
co-producers; Customer
participation needs to be
managed
Find ways to reduce
perceived risk, e.g., service
guarantees
Smooth fluctuations with
effective scheduling and
demand partitioning, e.g.,
promoting off-peak demand
All frontline personnel are
marketers as well, e.g.,
training in customer
interaction skills
Shape individual customer
behavior during consumption,
e.g. diagnostic questions for
service specifications
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11
Non-ownershipCharacteristic of Services
Type of
Service Customer Value Examples
Management
Challenges
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 renewable,
but time is perishable
Physical facility usage
Gain admission to a
facility for a period of
time
Theme park, camp
ground, fitness gym
Queuing and crowd
control
Network usage
Gain access to
participate
Electric utility, cell
phone, internet
Availability and
pricing decisions
12
Service Definitions
“A Service is a time-perishable, intangible
experience performed for a customer acting in
the role of a coproducer.”
―James Fitzsimmons
“Services are deeds, processes, and
performances.”
―Valarie Zeithaml & Mary Jo Bitner
13
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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14
Interactive Role of Services
15Type of Process
Transformation Transportation
Ser
vic
e S
ecto
r
Service Industries
Ancillary and Support Services
Services in Manufacturing
Info
rmat
ion
Po
sses
sio
n
Peo
ple
Types of Services
16
Service Industries Healthcare
Hospitality
Financial/Professional Services
Retail
Transportation
Ancillary and Support Services Temporary/Janitorial Help
Security
Food Service
Services in Manufacturing Financing
Distribution
Warehousing
Different Types of Services
Service Sector
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17
Different Types of Services
Service Process
Transform Transport
Restaurant, Airplane,
Hospital Taxi
Car Wash, Freight Truck,
Dry Cleaning Cargo Ship
Payroll Checks, Post, EDI,
Tax Returns e-mail
People:
Possessions:
Data/
Information:
Object of
Process
Service Process
18
In-Class Exercise
Identifies 10 largest service firms (based on
annual revenue) and places them in rank order
19
Service/Product Bundle
100%
Goods
100%
Services
% goods
% services
cons
ulti
ng
auto
s
hote
ls
groc
erie
s
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The Service Package
Supporting Facility: The physical resources that must
be in place before a service can be sold.
Facilitating Goods: The material consumed by the
buyer or items provided by the consumer.
Information: Operations data or information that is
provided by the customer to enable efficient and
customized service.
Explicit Services: Benefits readily observable by the
senses—The essential or intrinsic features.
Implicit Services: Psychological benefits or extrinsic
features which the consumer may sense only vaguely—
The extrinsic features.
Open Systems View of Service Operations
Service Process Consumer Evaluation
Consumer arrivals Consumer participant departures Criteria
(input) Consumer-Provider ( output) Measurement
interface
Control Monitor
Customer demand Service operations manager Service personnel
Production function:
Perceived needs Alter Monitor and control process Schedule Empowerment
Location demand Marketing function: supply Training
Interact with consumers Attitudes
Control demand
Modify as necessary
Define standard
Service package
Supporting facility
Communicate Facilitating goods Basis of
by advertising Explicit services selection
Implicit services
Service Process Consumer Evaluation
Consumer arrivals Consumer participant departures Criteria
(input) Consumer-Provider ( output) Measurement
interface
Control Monitor
Customer demand Service operations manager Service personnel
Production function:
Perceived needs Alter Monitor and control process Schedule Empowerment
Location demand Marketing function: supply Training
Interact with consumers Attitudes
Control demand
Modify as necessary
Define standard
Service package
Supporting facility
Communicate Facilitating goods Basis of
by advertising Explicit services selection
Implicit services
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Stages of Economic Development
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 of health, Global
education,
recreation
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Trends in U.S. Employment by Sector
Agriculture: Value from
harvesting nature
Services: Value from providing
the economic infrastructure
Manufacturing: Value from
making products
24
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
25
Percent Labor Statistics for Selected Nations in 2003
Nation World Labor Agriculture Goods Services 25-year increase
in services
China 21% 50% 15% 35% 191%
India 17% 60% 17% 23% 28%
Indonesia 3.9% 45% 16% 39% 35%
U.S. 4.8% 3% 27% 70% 21%
Brazil 3% 23% 24% 53% 20%
Russia 2.5% 12% 23% 65% 38%
Japan 2.4% 5% 25% 70% 40%
Nigeria 2.2% 70% 10% 20% 30%
Bangladesh 2.2% 63% 11% 26% 30%
Germany 1.4% 3% 33% 64% 44%
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Percent Distribution of U.S.
Employment by Industry
26
Sources of Service Sector Growth
Information Technology (e.g. Internet)
Innovation Push theory (e.g. Post-it)
Pull theory (e.g. Cash Management)
Services derived from products (e.g. Netflix)
Exploiting information (e.g. Auto parts sales)
New ideas from testing service prototypes
Changing Demographics Aging of the population
Two-income families
Growth in number of single people
28
Evolution of Services in An Economy
Infrastructure services Transportation, government, healthcare
Support services Banking, insurance, retail
Recretional and leisure services Restaurants, hotels, travel
Education services Especially in higher education
Time saving services Mail order, childcare, shop-at-home services
The service experience Theme parks, restaurants, hair salons etc.
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29
The New Experience Economy
Economy Agrarian Industrial Service Experience
Function Extract Make Deliver Stage
Nature Fungible 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
30
The Four Realms of An Experience
Customer Participation
Passive Active
Absorption Entertainment
(Movie)
Education
(Language)
Immersion Esthetic
(Tourist)
Escapist
(Skydiving)
En
vir
on
men
tal
rela
tion
ship
Describe the category characteristics as
they apply to the specific service
Examine other services that share these category characteristics
Explore the feasibility of replicating successful
managerial actions from services sharing
a category characteristic
Adapt all business processes/decisions
Strategic Uses of Service Classifications --Category Characteristics
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32
The 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
33
The Service Process Matrix
Challenges For Managers
Low Labor Intensity (service factory & service shop)
Capital decisions
Technological advances
Managing peak/non-peak demand
Scheduling service delivery
High Labor Intensity (mass service & professional service)
Hiring, training
Methods development
Employee welfare
Scheduling workforces
Control of far-flung locations
Managing growth
34
The Service Process Matrix
Challenges For Managers
Low Interaction/Customization (service factory & mass service)
Marketing
Making service “warm”
Attention to physical surroundings
Managing fairly rigid hierarchy with need for standard operating procedures
High Interaction/Customization (service shop & professional service)
Fighting cost increases
Maintaining quality
Reacting to consumer intervention in process
Managing flat hierarchy with loose subordinate-superior relationships
Gaining employee loyalty
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35
Strategic Service Classification
Nature of the Service Act
People Things
Services directed at Services directed at goods
people's bodies: and other physical
Health care possessions:
Tangible Passenger transportation Freight transportation
actions Beauty salons Repair and maintenance
Exercise clinics Laundry and dry cleaning
Restaurants Veterinary care
Services directed at Services directed at
people's minds: intangible assets:
Education Banking
Intangible Broadcasting Legal services
actions Information services Accounting
Theaters Securities
Museums Insurance
Direct recipient of the service
Na
ture
of
the
se
rvic
e a
ct
36
Strategic Service Classification
Relationships with Customers
"Membership" relationship No formal relationship
Insurance Radio station
Continuous Telephone subscription Police protection
delivery of Electric utility Lighthouse
service Banking Public highway
Long-distance phone calls Toll highway
Theater series tickets Pay phone
Discrete Transit pass Movie theater
transactions Wholesale buying club Public transportation
Airline frequent flyer Restaurant
organization and its customers
Type of relationship between service
Natu
re o
f th
e s
erv
ice d
elivery
37
Strategic Service Classification
Customization and Judgment
High Low
Surgery Education (large classes)
Taxi service Preventive health programs
High Gourmet restaurant Family restaurant
Telephone service Public transportation
Hotel services Movie theater
Low Retail banking Spectator sports
Cafeteria Institutional food service
Extent to which service characteristics are customized
Exte
nt
to w
hic
h c
usto
me
r co
nta
ct
pers
on
nel exerc
ise ju
dg
men
t in
meeti
ng
in
div
idu
al cu
sto
me
r n
eed
s
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Strategic Service Classification
Nature of Demand and Supply
Wide Narrow
Electricity Insurance
Peak demand Telephone Legal services
can usually be Hospital maternity unit Banking
met without Police emergencies Laundry and dry cleaning
major delay
Tax preparation Fast-food restaurant
Peak demand Passenger transportation Movie theater
regularly Hotels and motels Gas station
exceeds
capacity
Extent of demand fluctuations over time
Exte
nt
to w
hic
h s
up
ply
is c
on
str
ain
ed
39
Strategic Service Classification
Method of Service Delivery
Single site Multiple sites
Customer Theater Bus service
travels to Barbershop Fast-food chain
service firm
Service Pest control service Mail delivery
provider Taxi AAA emergency repairs
travels to
customer
Transaction Credit card company National TV network
is at arm's Local TV station Telephone company
length
Availability of service outlets
Natu
re o
f in
tera
cti
on
betw
een
cu
sto
mer
an
d s
erv
ice o
rgan
izati
on
40
Group Exercise
Form Five Groups. Based on one of the
service classifications (nature of act,
relationship with customer, customization,
nature of demand, or method of delivery),
each group should come up with an
example for each of the four/six
quadrants in the matrix.
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Reading
Delivering Excellent Service
Discuss one major lesson you learned from this article and why it is important
Why are lessons learned from outstanding service firms also applicable to manufacturing firms?
What is an “encounter”? Why is it important?
Comment on “the more intangible the product, the stronger the cultural values, beliefs, and norms must be” (p.49)?
What are the benefits and issues with customer’s co-production?
