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. 1-2

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 1-3

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 1-4

Nation% of World Labor % Ag% Goods% Services China India USA Indonesia Brazil Russia Japan Nigeria Banglades h Germany Percent Employment in Services 1-5

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 MANUFACTURING Services inside company: · Finance · Accounting · Legal · R&D and design BUSINESS SERVICES · Consulting · Auditing · Advertising · Waste disposal 1-6

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 1-7

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 2012 Year Percent 1-8

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 1-9

Distribution of U.S. Employment,

Projected U.S. Job Growth, 2008 –

Economic Evolution EconomyAgrarianIndustrialServiceExperience Economic Offering FoodPackaged goods Commodity service Consumer services Business services FunctionExtractMakeDeliverStageCo-create NatureFungibleTangibleIntangibleMemorableEffectual AttributeNaturalStandardizedCustomizedPersonalGrowth Method of Supply Stored in bulk InventoriedDelivered on demand Revealed over time Sustained over time SellerTraderProducerProviderStagerCollaborator BuyerMarketCustomerClientGuestCollaborator ExpectationQuantityFeaturesBenefitsSensationsCapability 1-12

The Four Realms of an Experience 1-13

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) 1-14

Typology of Services in the 21 st Century Core ExperienceEssential FeatureExamples CreativePresent ideasAdvertising, theater EnablingAct as intermediaryTransportation, communications ExperientialPresence of customerMassage, theme park ExtendingExtend and maintainWarranty, health check EntrustedContractual agreementService/repair, portfolio mgt. InformationAccess to informationInternet search engine InnovationFacilitate new conceptsR&D services, product testing Problem solvingAccess to specialistsConsultants, counseling Quality of lifeImprove well-beingHealthcare, recreation, tourism RegulationEstablish rules and regulationsEnvironment, legal, patents 1-15

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 advantage 5. 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. 1-16

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 1-17

Non-ownership Classification of Services Type of ServiceCustomer valueExamplesManagement Challenge Goods rentalObtain 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 usageGain access to participateElectric utility, cell phone, internet Availability and pricing decisions 1-18

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? 1-19

Service Package 1-20

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. 1-21

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. 1-22

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 1-23

Open Systems View of Services 1-24

Village Volvo’s Service Package Supporting Facility Facilitating Goods Information Explicit Services Implicit Services 1-25

Village Volvo’s Distinctive Service Characteristics Intangibility Perishability Heterogeneity Simultaneity Customer Participation in the Service Process 1-26

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? 1-27

Xpresso Lube Facility 1-28

Xpresso Lube’s Service Package Supporting Facility Facilitating Goods Information Explicit Services Implicit Services 1-29

Xpresso Lube’s Distinctive Service Characteristics Intangibility Perishability Heterogeneity Simultaneity Customer Participation in the Service Process 1-30

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? 1-31

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: 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. 1-32

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. ull_list/ ull_list/ 1-33