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MGS8770
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Service Operations Management
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Understanding the
Basics of Services
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Learning Objectives
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 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
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2
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Learning Objectives
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 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 opensystems view of service
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3
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Why Study Service
Operations?
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 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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4
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What Are Services?
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 Difficult to define unambiguously
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 “Non-farming, non-manufacturing
employment”
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 Instead, it is easier to identify some
unique characteristics
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5
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Unique Characteristics of
Services
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 Intangibility
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 Perishability
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 Heterogeneity
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 Simultaneity
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 Customer Participation in the Service
Process
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6
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Unique Characteristics of
Services
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 Intangibility: creative advertising, no patent protection,
importance of reputation
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 Perishability: cannot inventory, opportunity loss of idle
capacity, need to match supply with demand
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 Heterogeneity: customer participation in delivery
process results in variability
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 Simultaneity: opportunities for personal selling,
interaction creates customer perceptions of quality
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 Customer Participation in the Service Process:
attention to facility design but opportunities for coproduction
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7
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Services Characteristics and
Managerial Implications
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Describe the fundamental characteristics as they apply to services
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Examine the implications of the fundamental characteristics
on the customer and therefore on operations
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Explore the potential managerial actions to address
the implications of the fundamental characteristics
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Adapt all business processes/decisions
8
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Fundamental Issues with Unique
Service Characteristics
Fundamental
Characteristics
Intangibility
Perishability
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Managerial Implications
Managerial Actions
Product is a process and
difficult to evaluate; Perceived
risk is high
Product cannot be inventoried;
demand management is key to
profitable capacity utilization
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
Heterogeneity
Service varies across frontline
providers, customers, and over
time. Quality control is difficult
Simultaneity
Customers are resources and
co-producers; Customer
participation needs to be
managed
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Fundamental Issues with Unique
Service Characteristics
Fundamental
Characteristics
Intangibility
Perishability
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Managerial Implications
Managerial Actions
Product is a process and
difficult to evaluate; Perceived
risk is high
Product cannot be inventoried;
demand management is key to
profitable capacity utilization
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
Heterogeneity
Service varies across frontline
providers, customers, and over
time. Quality control is difficult
Simultaneity
Customers are resources and
co-producers; Customer
participation needs to be
managed
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Non-ownership
Characteristic of Services
Type of
Service
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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
Labor and
expertise
Obtain exclusive use of
defined portion of a
larger space
Hotel room, seat on
airplane, storage unit
Housekeeping and
achieving economies
of scale
Hire other people to do
a job
Car repair, surgery,
Expertise is renewable,
management consulting but time is perishable
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Physical
facility
usage
Network
usage
Gain admission to a
facility for a period of
time
Theme park, camp
ground, fitness gym
Queuing and crowd
control
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Gain access to
participate
Electric utility, cell
phone, internet
Availability and
pricing decisions
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11
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Service Definitions
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“A Service is a time-perishable, intangible
experience performed for a customer acting in
the role of a coproducer.”
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―James Fitzsimmons
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“Services are deeds, processes, and
performances.”
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―Valarie Zeithaml & Mary Jo Bitner
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12
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Definition of Service Firms
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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.
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― James Fitzsimmons
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13
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Interactive Role of Services
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14
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Types of Services
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Information
Possession
Service Industries
People
Service Sector
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Ancillary and Support Services
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Services in Manufacturing
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Transformation
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Transportation
Type of Process
15
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Different Types of Services
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Service Sector
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 Service Industries





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Healthcare
Hospitality
Financial/Professional Services
Retail
Transportation
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 Ancillary and Support Services
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Temporary/Janitorial Help
Security
Food Service
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


 Services in Manufacturing



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Financing
Distribution
Warehousing
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16
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Different Types of Services
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Service Process
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Service Process
Object of
Process
Transform
Transport
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People:
Restaurant,
Airplane,
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Hospital
Taxi
Car Wash,
Dry Cleaning
Freight Truck,
Cargo Ship
Payroll Checks,
Tax Returns
Post, EDI,
e-mail
Possessions:
Data/
Information:
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17
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In-Class Exercise
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 Identifies 10 largest service firms (based on
annual revenue) and places them in rank order
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18
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Service/Product Bundle
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hotels
consulting
100%
Goods
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% services
autos
groceries
% goods
100%
Services
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19
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The Service Package
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 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.
20
Consumer arrivals
(input)
Consumer participant
Consumer-Provider
interface
Control
Customer demand
Perceived needs
Location
Alter
demand
Evaluation
departures
( output)
Criteria
Measurement
Service personnel
Schedule
supply
Modify as necessary
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Monitor
Monitor and control process
Marketing function:
Interact with consumers
Control demand
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Consumer
Service operations manager
Production function:
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Open Systems View of
Service Operations
Service Process
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Empowerment
Training
Attitudes
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Define standard
Communicate
by advertising
Service package
Supporting facility
Facilitating goods
Explicit services
Implicit services
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Basis of
selection
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Stages of Economic
Development
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Features
Society
Game
Predominant
Activity
Use of
Human
Labor
Unit of
Social Life
Standard
of Living
Measure
PreIndustrial
Against
Nature
Agriculture
Mining
Raw
muscle
power
Extended
household
Industrial
Against
fabricated
nature
Goods
production
Machine
tending
Individual
Postindustrial
Among
Persons
Services
Artistic
Community
Creative
Intellectual
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Structure
Technology
Subsistence
Routine
Traditional
Authoritative
Simple hand
tools
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Quantity
of goods
Bureaucratic
Hierarchical
Machines
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Quality of
life in terms
of health,
education,
recreation
Interdependent
Global
Information
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22
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Trends in U.S. Employment by
Sector
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Agriculture: Value from
harvesting nature
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Manufacturing: Value from
making products
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Services: Value from providing
the economic infrastructure
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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
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24
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Percent Labor Statistics for
Selected Nations in 2003
Nation
World Labor Agriculture Goods Services
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25-year increase
in services
191%
China
21%
50%
15%
35%
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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25
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Percent Distribution of U.S.
Employment by Industry
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26
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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
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Evolution of Services in An
Economy
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Transportation, government, healthcare
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Support services
Banking, insurance, retail
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Recretional and leisure services
Restaurants, hotels, travel
Infrastructure services
Education services
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Especially in higher education
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Time saving services
The service experience
Mail order, childcare, shop-at-home services
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Theme parks, restaurants, hair salons etc.
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28
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The New Experience Economy
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Economy
Agrarian
Industrial
Service
Experience
Function
Extract
Make
Deliver
Stage
Nature
Fungible
Tangible
Intangible
Memorable
Attribute
Natural
Standardized Customized Personal
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Method of
supply
Stored in
bulk
Inventoried
___________________________________
Seller
Trader
Manufacturer Provider
Stager
Buyer
Market
User
Guest
Delivered
on demand
Client
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Revealed
over time
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29
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Environmental
relationship
The Four Realms of
An Experience
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Customer Participation
Passive
Active
Absorption Entertainment Education
(Movie)
(Language)
Immersion Esthetic
(Tourist)
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Escapist
(Skydiving)
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30
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Strategic Uses of Service Classifications
--Category Characteristics
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Describe the category characteristics as
they apply to the specific service
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Examine other services that share these
category characteristics
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Explore the feasibility of replicating successful
managerial actions from services sharing
a category characteristic
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Adapt all business processes/decisions
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The Service Process Matrix
___________________________________
Degree of Interaction and Customization
Low
Low
Service Factory
• Airlines
• Trucking
• Hotels
Service Shop
• Hospitals
• Auto Repair
• Other Repair Services
High
Mass Service
• Retailing
• Wholesaling
• Schools
• Retail Aspects of
Commercial Banking
Professional Service
• Doctors
• Lawyers
• Accountants
• Architects
Degree of
Labor
Intensity
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High
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32
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The Service Process Matrix
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Challenges For Managers
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 Low Labor Intensity (service factory & service shop)




___________________________________
Capital decisions
Technological advances
Managing peak/non-peak demand
Scheduling service delivery
___________________________________
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 High Labor Intensity (mass service & professional service)






___________________________________
Hiring, training
Methods development
Employee welfare
Scheduling workforces
Control of far-flung locations
Managing growth
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33
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The Service Process Matrix
___________________________________
Challenges For Managers
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 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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34
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Strategic Service Classification
___________________________________
Nature of the Service Act
___________________________________
Direct recipient of the service
Nature of the service act
People
Tangible
actions
Intangible
actions
Things
Services directed at
people's bodies:
Health care
Passenger transportation
Beauty salons
Exercise clinics
Restaurants
Services directed at goods
and other physical
possessions:
Freight transportation
Repair and maintenance
Laundry and dry cleaning
Veterinary care
Services directed at
people's minds:
Education
Broadcasting
Information services
Theaters
Museums
Services directed at
intangible assets:
Banking
Legal services
Accounting
Securities
Insurance
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35
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Strategic Service Classification
Relationships with Customers
___________________________________
Type of relationship between service
organization and its customers
Nature of the service delivery
"Membership" relationship
Continuous
delivery of
service
Discrete
transactions
No formal relationship
Insurance
Telephone subscription
Electric utility
Banking
Radio station
Police protection
Lighthouse
Public highway
Long-distance phone calls
Theater series tickets
Transit pass
Wholesale buying club
Airline frequent flyer
Toll highway
Pay phone
Movie theater
Public transportation
Restaurant
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36
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Strategic Service Classification
Customization and Judgment
Extent to which customer contact
personnel exercise judgment in
meeting individual customer needs
Extent to which service characteristics are customized
High
High
___________________________________
___________________________________
___________________________________
Low
Surgery
Taxi service
Gourmet restaurant
Education (large classes)
Preventive health programs
Family restaurant
Telephone service
Hotel services
Retail banking
Cafeteria
Public transportation
Movie theater
Spectator sports
Institutional food service
___________________________________
___________________________________
___________________________________
Low
___________________________________
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37
___________________________________
___________________________________
___________________________________
Strategic Service Classification
___________________________________
Nature of Demand and Supply
___________________________________
Extent of demand fluctuations over time
Extent to which supply
is constrained
Wide
Peak demand
can usually be
met without
major delay
Peak demand
regularly
exceeds
capacity
___________________________________
Narrow
Electricity
Telephone
Hospital maternity unit
Police emergencies
Insurance
Legal services
Banking
Laundry and dry cleaning
Tax preparation
Passenger transportation
Hotels and motels
Fast-food restaurant
Movie theater
Gas station
___________________________________
___________________________________
___________________________________
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38
___________________________________
___________________________________
Strategic Service Classification
___________________________________
Method of Service Delivery
___________________________________
Availability of service outlets
Nature of interaction between
customer and service organization
Single site
Customer
travels to
service firm
Service
provider
travels to
customer
Transaction
is at arm's
length
Theater
Barbershop
___________________________________
Multiple sites
___________________________________
Bus service
Fast-food chain
___________________________________
Pest control service
Taxi
Mail delivery
AAA emergency repairs
Credit card company
Local TV station
National TV network
Telephone company
___________________________________
___________________________________
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39
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___________________________________
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.
40
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___________________________________
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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?
___________________________________
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___________________________________
___________________________________
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