A Service Market Segmentation Approach To Strategic

Journal of Quality Management
6 (2001) 117 – 138

www.journalofqualitymanagement.com
A service market segmentation approach to strategic

human resource management
Beth G. Chung*
San Diego State University, College of Business Administration, 5500 Campanile Drive,
San Diego, CA 92182, USA
Received 1 March 2001; received in revised form 1 July 2001; accepted 1 September 2001
Abstract
In this article, I present a theoretical framework for devising and implementing a service
management strategy. I propose that using the service management strategy of focusing on a particular
customer market segment, via five functional service quality dimensions, would yield increased
organizational effectiveness through the fit of HRM practices, what was emphasized in those practices
and required employee role behaviors. Examples of how different HRM practices can support different
service strategies are also presented. D 2001 Elsevier Science Inc. All rights reserved.
Keywords: Service management strategy; Market; Segmentation; Service quality; Strategic human resource
management
1. Introduction
The fastest growing segment of the US economy is the service sector. In fact, the service
sector now accounts for 64% of the Gross Domestic Product (Lum & Moyer, 1998). Further, the
Bureau of Economic Analysis estimates that 83% of the American workforce will be in the
service sector by 2025 (Judy & D’Amico, 1997). Surprisingly, however, little attention has been
directed toward development of theories on the strategic management of services. This is
unfortunate for two reasons. First, service businesses are now in a phase parallel to the end of the
industrial growth era of the 1960s where manufacturing businesses had to revisit their growth
* Tel.: +1-619-594-2699; fax: +1-619-594-3272.

E-mail address: beth.chung@sdsu.edu (B.G. Chung).
1084-8568/01/$ – see front matter D 2001 Elsevier Science Inc. All rights reserved.
PII: S 1 0 8 4 - 8 5 6 8 ( 0 1 ) 0 0 0 3 4 - 7
118 B.G. Chung / Journal of Quality Management 6 (2001) 117–138
plans in a lower growth and turbulent environment. Service businesses enjoyed a boom period in
the last decade as US consumer affluence increased. Now, service businesses are finding that
they need to consolidate and battle for market share given overexpansion in many service
sectors. Consequently, service organizations are finding that they need to closely examine their
current business strategies (Allen, 1988). Second, service businesses are fundamentally
different from product-oriented businesses and the strategic management principles developed
and shaped in the manufacturing environment have little relevance (Allen, 1988). Services need
specific practices based on the three defining features of services: intangibility, simultaneous
production and delivery, and customer participation in the service (Bowen & Schneider, 1988).
Therefore, this article is an attempt to add to the literature and knowledge of the
management of services and further to provide a theoretical framework for devising a service
management strategy. In particular, I explore a service management strategy based on external
criteria (i.e., customer market segment expectations), discuss how this focus strategy can be
operationalized through HRM practices and the role behaviors emphasized in HRM practices.
In the following sections, I first discuss the ways in which service firms are different from
manufacturing firms and how these differences lead to different business strategies in the two
types of industries. Then, I describe the few service management strategies currently found in
the literature and the research that supports these strategies. Third, I propose a new service
management strategy framework that seeks to segment customers into target market segments
via their expectations on five dimensions of service quality and a corresponding price index.
Fourth, I discuss how HRM is linked to strategy and how to operationalize strategy through
HRM using role behavior theory. Finally, I present some propositions for future research.
2. The strategic management of services versus products
A services marketing and management field has evolved that views the management of
service firms differently from the management of manufacturing firms. Three distinct
attributes about services define their departure from pure products. Services are intangible,
involve simultaneous production and delivery, and also require some customer participation
in the production and delivery of their own service. According to Bowen and Schneider
(1988), these three attributes lie on three continua where pure services lie on one endpoint and
services that involve products lie at the other endpoint.
These continua reveal that, in the extreme, services can be quite different from goods in
what they are, how they are experienced and who produces them. The differences suggest that
the internal design of service organizations may need to be quite different from the internal
design of manufacturing organizations. In particular, the attributes of services make the
relationship between internal and external efficiency much more immediate. In manufactur-
ing, internal efficiency techniques can be used for cutting costs to increase competitiveness
but those techniques can be hidden from consumers. In services, strategies to improve internal
efficiency are not so easily buffered from consumers because customers are frequently present
and participating in the production of the service. Due to the continua of services discussed
above, Normann (1984) and others (e.g., Porter, 1980; Shaw, 1990; Thomas, 1978) have
B.G. Chung / Journal of Quality Management 6 (2001) 117–138 119
noted that strategic initiatives used for service firms must be different from the strategic
initiatives of manufacturing firms.
Table 1 summarizes the fundamental differences between product-oriented and service-
oriented firms with respect to various aspects of corporate planning and strategy. An
inspection of Table 1 reveals why it may be inappropriate to apply standard manufacturing
concepts to service institutions. Take, for example, the concept or strategy of matching supply
and demand, product firms are primarily managed through inventory controls while service
firms are managed largely through changes in behavior. Another way in which service firms
are managed differently from manufacturing firms is in their management of costing and
pricing: manufacturing firms primarily base their pricing on the physical product while
service firms base their pricing more on perceived value. Unfortunately, most service
companies still inappropriately embrace manufacturing strategies due to the absence of any
service-specific strategic models (Shaw, 1990). Thus, the topic of Section 3 is about the new
emphasis on strategies specific to services.
2.1. Services management philosophies
Typically, few service management strategies applied by service firms have been explicitly
labeled or thought of as ‘‘service management strategies.’’ However, some authors, as
mentioned above, have expressed an explicit need for the field to recognize service
management strategies as being different from manufacturing strategies.
Table 1
Product firms versus service firms on aspects of corporate strategy
Impact on
Concept-strategy Product firms Service firms
Standardization Provides focus Misplaces focus from the customer
Costing and pricing Based on physical product Based on perceptions of value
Productivity Can be measured Cannot be measured
Matching supply Managed through inventory Managed largely through changes
and demand in behavior
Economies of scale Permit unit costs to Permit unit costs to decline temporarily
decline permanently
Experience curve Reduces unit costs through Improves quality and value
cumulative production
Growth/size/share Directly influence profitability Indirectly influence image
Risk of launching new Lower as a result of market testing Higher as a result of greater reliance on
product/service customer trust
Barriers to entry Based on product and/or Based on human capital, customer base,
technology focus and/or network
Implementation of change Requires relatively few people Requires widespread consensus
and commitment
Source: Adapted from Shaw (1990). The service focus: developing winning game plans for service companies.
Homewood, IL: Irwin.
A few authors have conceptualized strategies specific to service firms. Thomas (1978)
proposed service strategies involving value engineering, pricing, proprietary technologies,
and differentiation through reputation. Lovelock (1983, 1991) posited classification schemes
based on segmenting services into clusters that share certain relevant marketing character-
istics. Still others (Gronroos, 1990; Heskett, 1990a, 1990b; Kurtz & Clow, 1998) have spoken
of strategies such as focusing on geographic area, service provider groups, internal
capabilities, price, image, superior resource, and technical quality. Unfortunately, many of
these service strategy themes have been developed only on a very basic theoretical level with
little empirical evidence to support them.
In the absence of specific service strategies, some service firms have tried to adapt the
generic competitive strategies first forwarded by Porter (1980) to their unique situation. For
example, McDonalds has used the cost leadership strategy to revolutionize the food industry
while other service organizations such as Nordstrom have embraced the differentiation
strategy by making its customer service unique. Lastly, firms such as Shouldice Hospital have
adopted the focus strategy to achieve its goals. The focus strategy, applied in service settings,
is especially noteworthy because it is in essence the application of overall cost leadership and/
or differentiation to a particular market segment (Fitzsimmons & Fitzsimmons, 1994). Each
of the examples as described by these authors is application of traditionally manufacturing-
oriented strategies. Despite the ingenuous adaptations of manufacturing strategies by these
exceptional service firms, there are no theories or conceptual frameworks for most service
organizations to use. Davidow and Uttal (1989), however, use these novel applications of
existing manufacturing strategies to forward a needed conceptual framework for service
firms. They have a three-step approach to business strategy focus which includes segmenting
the market to design core services, classifying customers according to the value they place on
service, and setting expectations slightly below perceived performance.
Their customer segment focus theory is not new in an absolute sense since it is reminiscent
of Porter’s focus strategy and is similar to a typical marketing plan incorporated in business
strategy plans. However, it is novel in the sense that Davidow and Uttal (1989) advocate it as
a primary business strategy and relate it specifically to service businesses.
Davidow and Uttal (1989) propose that an organization must either ‘‘focus or falter’’ and
that customer segments are the best focus to choose. They argue that focus promotes good
customer service by allowing firms to more precisely meet customer needs. Focus is also
said to lead to a better match of supply with demand because it helps organizations to
forecast demand more accurately, to alter demand, and to expand the role of customers in
producing service. They emphasize choosing an optimal mix and level of service elements
or facets for different customer segments. Provide too little service, or the wrong kind, and
customers will leave. Provide too much, of even the right kind, and the company will fail
through pricing itself out of the market. They suggest that the way to achieve a balance
between too much or too little service is to have a customer service strategy that segments
customers. The best way to segment is to isolate a reasonably homogeneous set of
customers that can be served at a profit.
Taking the focus or falter viewpoint, Nayyar (1992) conducted an empirical study of the
performance effects of three foci adopted by service firms: serving selected customer
segments, capitalizing on distinctive internal capabilities, and serving particular geographic

regions. According to Nayyar, a focus on customer segments would result in superior
performance for a service firm for three reasons. First, it would facilitate identification of the
elements of service operations that are of strategic importance and concentration of the firm’s
efforts, investments, and controls. Second, a focused strategy yields benefits from stream-
lining operations, resulting in improved productivity and service quality. Third, a focus on
customer segments would prevent employee confusion that may arise from conflicts among
behaviors required to satisfy customers with differing needs.
His results from a study of 198 service firms showed that only a focus on selected
customer segments was associated with higher performance and that a focus on either internal
capabilities or geographic regions was associated with lower performance. Nayyar’s (1992)
line of research supports the ‘‘focus or falter’’ arguments put forth by Davidow and Uttal
(1989) mentioned above.
Nayyar’s (1992) research, however, does not specify how, or on what basis or bases,
organizations segmented their markets. He only states that once an organization has chosen
a customer segment and focused on that segment then the organization can offer multiple
facets of services targeted to that particular segment.
Although a few researchers in the services field (e.g., Davidow & Uttal, 1989; Heskett,
1986; Nayyar, 1992) do talk about focusing on customer segments, little concrete modeling
or research has actually been done on how to segment and what kinds of management
practices have to be taken into consideration when an organization decides to focus. Thus, in
this paper, I present a services management strategy framework which seeks to advance ways
(the ‘‘how’’) to segment a service industry into different market segments.
3. Proposed services management strategy framework
The service management strategy framework proposed here seeks to segment a service
industry (e.g., hotels) by breaking down the ‘‘how’’ of service. Gronroos (1990) calls this the
‘‘functional’’ quality of the service. Functional quality is how service providers perform their
tasks, what they say and how they do it. Gronroos asserts that functional quality is the aspect
of service that differentiates one service firm from another. He argues that a technical quality
advantage (referring to the core service) is short-lived because competitors can introduce
similar technical solutions rather quickly so it is up to functional quality — how the service is
delivered — to create a distinctive advantage for the long term. Thus, the framework is based
on five dimensions of perceived functional quality. Section 3.1 will explain how the five
dimensions were derived.
3.1. Service quality dimensions
The conceptualization and measurement of service quality has been an elusive concept
given the attributes of service (intangibility, simultaneous production and delivery, and
customers as co-producers). However, significant progress was made when Parasuraman,
Zeithaml, and Berry (1985) qualitatively found 10 dimensions of service quality and later
empirically found that these 10 dimensions collapsed into 5 core dimensions of service
quality (Parasuraman, Zeithaml, & Berry, 1988). That is, five dimensions were found to be
important to customers in their evaluations of the quality of the service they received. These
five dimensions were labeled as tangibles, reliability, responsiveness, assurance, and
empathy. Table 2 shows a comparison of the original 10 dimensions and the later 5
dimensions that were retained.
Over time, these five dimensions have been investigated in numerous service industries
including retail banking, credit card, securities brokerage, product repair and maintenance,
telephone repair, insurance (Parasuraman et al., 1988; Parasuraman, Zeithmal, & Berry, 1991),
hotel and restaurant (Knutson, Stevens, & Patton, 1995; Knutson, Stevens, Wullaert, Patton, &
Yokoyama, 1991), retail tire, placement center, and dental service (Carmen, 1990). In most of
these studies, the five dimensions seemed to remain relatively consistent. However, Carmen
(1990) found that some of the original 10 dimensions should be added initially depending on the
industry involved. Two dimensions that Carmen suggests retaining for the measurement of
service quality are courtesy and access. Thus, in total, seven factors seem to be important for
service quality (tangibles, reliability, responsiveness, assurance, empathy, courtesy, and access).
As mentioned previously, services should seek to achieve distinctiveness or a long-term
competitive advantage based on the ‘‘how’’ of service or functional quality. Based on this
criterion, five dimensions were selected for the present framework (reliability, responsiveness,
assurance, empathy, and courtesy). The other two dimensions of tangibles and access are not
dimensions that relate directly to functional quality and were not included. Tangibles refers to
the physical facilities and equipment as well as the appearance of personnel. Access refers to
convenient hours of operation and accessibility. These two dimensions are not included in the
framework since they are not necessarily under the employee’s control nor are they about the
actual delivery of service by employees.
Table 2
Dimensions of service quality
PZB (1985) PZB (1988)
Tangibles Tangibles
Reliability Reliability
Responsiveness Responsiveness
Communication Assurance
Credibility
Security
Competence
Courtesy
Understanding Empathy
Access
PZB denotes Parasuraman, Zeithaml, and Berry.
The five remaining dimensions and their definitions are described below:
Reliability: ability to consistently perform the promised service dependably and

accurately.
Responsiveness: willingness to help customers and provide prompt service.
Assurance: knowledge and competence of employees and their ability to convey trust
and confidence.
Empathy: understanding and tailoring service to customers’ specific needs, providing
individualized/customized attention.
Courtesy: providing ‘‘tender loving care,’’ warmth, friendliness, courtesy.
I propose that service organizations should try to maximize service quality through
attention to these five dimensions in that for pure service organizations (where quality is
isomorphic with delivery), the ‘‘functional quality’’ or ‘‘how’’ of service is most important to
the customer. Thus, I advocate focusing on the delivery piece of service quality (functional
quality) which exists in all services versus focusing on total or global service quality — parts
of which may or may not be important for different kinds of services and therefore may dilute
resources. Further, I will focus my discussions of each dimension only in terms of the service-
oriented pieces of the dimension versus any product-oriented applications.
In addition to the five functional attributes of service quality, I propose that price is another
factor to be considered as it provides expectations for perceived value. Therefore, if price sets
expectations for the level of service required, then a mismatch between service levels on the
five factors and price will lead to unmet expectations and poor service quality evaluations. In
other words, price is always on the other end of the service quality equation.
In order to illustrate this framework, Table 3 provides an example of a few typical
market segments with their appropriate corresponding price index in the hotel industry. It
is proposed that customers have different combinations of expectations for different kinds
of services. There is no one answer to the question of what customers expect of service
(Schneider & Bowen, 1995). Further, there are different expectations for different services
Table 3
Market segment typology
Examples of service market
segments within hotels * Reliability Responsiveness Assurance Empathy Courtesy = Price
Budget hotels (e.g., Motel 6) + = $
Business hotels (e.g., Marriott Courtyard) + + 0 /0 = $
Family/extended-stay suite hotels + 0 0 0/ + 0/ + = $
(e.g., Residence Inn)
Luxury hotels (e.g., Ritz Carlton) + + + + + = $
Bed and breakfast inns + 0 0 + + = $
Any organization can choose to be low ( ), average (0), or high (+) on the five factors. Price drives value
perceptions, therefore, successful firms will price according to the levels of service they provide.
* List of market segments is not exhaustive.
within the same service industry. Therefore, it is imperative for a service business to
understand the frequently subtle differences in expectations that customers in different
market segments have. It is the above five dimensions of expectations that can serve to
categorize those differences. These five dimensions, or criteria of expectations, combine
to make a number of different potential customer market segments within an industry
(e.g., hotels).
Any particular service organization can decide to be low, average, or excellent on any one
or all of these service factors. As Table 3 shows, minus signs ( ) indicates minimal
performance, zeros (0) indicate average or moderate performance while pluses (+) indicate
excellent performance on a factor. For example, a hotel that is focused on the budget lodging
segment would aim to achieve excellence in terms of reliable service in that it delivers on its
promises and is consistent but would not spend many resources on the other four factors in an
effort to contain costs. In Table 3, all segments are indicated as needing to be high on
reliability as this dimension has consistently been shown to be important to all customers of
all segments and is repeatedly hierarchically ranked as being the most important dimension.
In fact, research has shown that the dimension of reliability is often in a tier by itself (Knutson
et al., 1995; Knutson, Stevens, Patton, & Thompson, 1992). For example, Knutson et al.
(1995) found that the distance between reliability and the number two ranked dimension is
greater than the sum of the gaps between all of the other dimensions.
Referring back to the examples of segments in Table 3, different organizations can be in
the same business (e.g., lodging) but have a different combination of attributes that
correspond to a different set of customer expectations. Take as an example a business-
oriented hotel. This kind of hotel would survive and prosper if it delivers adequately on what
the market segment expects. This market segment is looking for excellence in reliability —
a consistent and dependable service each time, excellence in responsiveness as business
travelers often have the ‘‘time is money’’ mentality, moderate levels of competence and
confidence in the hotel, less customization is acceptable and sometimes preferred, and
‘‘tender loving care’’ or the dimension of courtesy is a minimal factor as most travelers would
not want to spend too much time chatting and exchanging niceties. As a result, the
appropriate amount to charge for this service mix will be in the midrange level. This kind
of establishment can be just as successful as a luxury hotel, or any other kind of hotel, given
that the price to expectations quotient is equal and the level of service provided is equal to the
expectations of the market segment served. The key is in providing the right kind and level of
service expected. More of everything is not always better. As Rafaeli and Sutton (1990) and
Wiley (1991) have found, actually giving too much interpersonal attention in a ‘‘speedy’’
service such as a convenience store or fast-food restaurant may not prove beneficial to the
organization such that profits may actually be lower. This is because customers are expecting
speed and efficiency, not conversation.
As Table 3 shows, a service industry (e.g., hotels) can have several customer service
segments based on these five factors. Although the market combinations (e.g., types of
hotels) are all common to providing lodging, they each appeal to different customers with
different sets of expectations and hence survive when they set and manage these expectations
accordingly. This is similar to the concept of distinctive competence and strategy as discussed
by Snow and Hrebiniak (1980). They make the point that substantially different forms of
strategy can be used contemporaneously in environments that are generally similar. The
framework in Table 3 is suggesting that different strategies (and therefore different HRM
strategies and behaviors emphasized, discussed later) for different market segments can be
equally beneficial and profitable for organizations in the same environment (e.g., the hotel
industry). It is also important to keep in mind that customers with different sets of
expectations can even be the same customers but at different points in their lives or at
different times of the day (Schneider, 1994).
Service organizations must decide what service business they are in or want to be in, who
their target market is, and what the target market expects — and then deliver against those
expectations (Schneider & Bowen, 1995). As previous research has established (Parasuraman
et al., 1985, 1988) there are expectation dimensions of service quality common to all services.
However, it is in knowing the specific expectations of a particular market segment on the five
proposed dimensions of expectations and setting an appropriate matching price that allows an
organization to deliver against those expectations and thus achieve the perception of
superiority relative to the competition. As Schuler and Jackson (1987a) advocate, deciding
on which strategy is the best strategy to pursue depends on several factors — certainly
customer wants and the nature of the competition are key factors.
Proposition 1: Customer markets can be segmented by their expectations on five

functional service quality dimensions. Focusing on customer market segments can be
the foundation for a core service business strategy.
3.2. Applicability of framework
The framework is a generic one that is conceptually useful for all service industries. It is
not limited to restaurants, hotels, or airlines but can include insurance companies, banks,
accounting firms, and so on. I propose that the framework can be useful for devising a
comprehensive strategic services management plan, a plan that would integrate the efforts of
Marketing, HRM, and Operations Management such that the expectations of the market
segment targeted by management can be maximally satisfied.
However, it is important to keep in mind that this framework may be an oversimplification
of the real world given that other, more tangible expectation dimensions are also involved in
market segmentation issues. However, the framework is useful as a basis for starting to
develop a comprehensive theory around the management of services especially in terms of
developing specific service delivery competencies which are harder to replicate.
The framework should also be considered in terms of the costs and benefits of focusing on
a particular market segment. For example, is company growth limited as a result of having a
specific focus? There is nothing in this framework that would suggest that growth would be a
limitation associated with focusing on a customer segment. Expansion and growth for any
company should be controlled and based on good market analysis. The proposed model
would suggest that if companies do decide to expand, the growth should be in areas that are
compatible with the current customer segment focus. Take for example, Southwest Airlines.
Southwest recently decided to expand their operations. Their expansion is both controlled
and well researched. They decided to expand to more destinations. To their credit, the
destinations they have chosen are smaller commuter cities thereby allowing them to maintain
their focus on low cost/value for short-flight-segment customers. In contrast, People’s
Express is an example of an airline that expanded and lost sight of its primary market
segment. People’s Express initially prospered because of its tight focus on budget travelers.
When they expanded, they decided to target business travelers as well — a very different
market segment with a very different set of needs. A conflict with the old budget-minded
strategy occurred and blurred the strategic focus of the firm. Eventually its demise came with
a net loss of US$300 million and a sale to Texas Air. Overall then, there are few costs
associated with having a market segment focus as long as this strategic focus is systematic-
ally carried into all aspects of organizational planning and operations. There are, however,
tremendous benefits as discussed previously.
When applying this model to different industries, a number of issues should be considered.
First, for some industries, certain service quality dimensions may not be distinguishing
factors for different market segments within the industry. For example, in the case of airlines,
no customer market segment will want to fly an airline that is minimal on the dimension of
assurance. Because of the level of risk involved, most customers will expect the service
personnel to be adequately competent and able to convey safety and trust. Second, different
industries may require modification of items and factors to reflect their unique situation.
Carmen (1990) recommends that different service industries add dimensions or items that
they believe are particularly important or unique to the industry in question.
Overall then, a primary assertion of this paper is that within the same service industry (e.g.,
hotels), different firms can appeal to different market segments (e.g., luxury vs. bed and
breakfast) at a profit by uncovering specific customer expectations, managing those expect-
ations, setting price appropriately, and delivering on the expectations. Management must first
be clear about the market segment(s) they want to serve or are serving, then they must go
about discovering specific customer expectations by using a modified form of the service
quality index. Second, expectations need to be managed by organizational policies,
advertisement, behavior of personnel, price, and so forth. Last, organizations need to deliver
on these expectations by structuring their HRM practices in a strategic manner to fit the
particular market segment they have chosen to serve. Different target market segments are
hypothesized to have different characteristics that require an organization to employ different
HRM practices and/or to employ similar HRM practices but in different ways to appropriately
serve the market segments’ needs.
In the remainder of this paper, I will discuss how to effectively use HRM practices to
successfully implement a service management strategy based on a focus toward target market
segments. HRM is critical for implementing a focus strategy given that employees in a
service firm are the primary producers in service delivery. HRM practices are also of
particular interest for this strategy framework given that the dimensions for a focus strategy
are based on functional quality attributes–service quality attributes that relate directly and
only to employees.
4. The strategy–HRM link in service organizations
Over the years, many schools of thought have developed regarding the importance of
HRM to strategy especially in service organizations. All these viewpoints are similar in theme
but are abstracted here as separate philosophies for purposes of explication. The first school
of thought believes that human resources (employees) represent tremendous assets and that
the way these assets are managed can easily make or break the profitability and growth
potential of an organization (Normann, 1991). Normann (1991) contends that people are
essential in analyzing and interpreting what is happening in the marketplace, their creative
capacities are required to design and refine the product offerings and the service delivery
system, their discretionary capacities construct the ‘‘fit’’ between the product offering and the
customers’ needs, and they are the ‘‘face’’ of the service organization at the ‘‘moments of
truth.’’ Similarly, Lengnick-Hall and Lengnick-Hall (1990) assert that people can provide a
significant source of service quality or distinctiveness that cannot be duplicated by even the
most sophisticated machines. Findings by Schnell et al. (1991) support these assertions. They
found that high overall financial performance and business strategy were all associated with
the core HR philosophy that human resources are central to the firm’s success and that they
are an asset to be invested in rather than a cost to be minimized.
A second philosophy suggests that because employees and customers are psychologically
close (Schneider & Bowen, 1985), HR policies, practices, and procedures inadvertently affect
customers and thus the achievement of future strategic objectives. That is, if a service
organization pursues a market-oriented strategy — one that seeks to meet or exceed the
expectations of its particular market segment — then customers’ attitudes toward service
quality would be an important criterion on which to evaluate the success of an organization.
In addition, if customers’ attitudes are affected by employees’ attitudes toward internal HRM
practices, then the strategy of meeting customers’ expectations would likely be integrated
with the HRM practices of the firm.
Support for this viewpoint comes from many sources. First, Schneider and Bowen (1985)
and Tornow and Wiley (1991) have found that organizations in which employees describe the
HRM practices under which they work in more positive terms, have customers who report
they receive superior service quality. Further, Schneider and Bowen found that customer and
employee attitudes were related to their own and one another’s turnover intentions.
If a climate for service is conceptualized as employees’ perceptions of one or more
strategic imperatives manifested through work place routines and rewards, then the work of
Schneider, Wheeler, and Cox (1992) also attests to the necessary link between HRM and
service strategy. Their research showed that some of the strongest correlates of a service
strategy imperative were HRM issues such as hiring procedures (r = .64), performance
feedback (r = .46), internal equity of compensation (r = .43), and training (r = .40).
The last viewpoint found in the literature is the role behavior perspective. This perspective
is both a rationale for the link between HRM and strategy as well as a theory for explaining the
process or how integration takes place. The role behavior perspective is one of the original and
more popular theoretical models used in the strategic HRM literature (Wright & McMahan,
1992). The theory focuses on employee behavior as the mediator between strategy and firm
performance. It assumes that the purpose of various HR practices is to elicit and control
employee attitudes and behaviors. The specific attitudes and behaviors that will be most
effective for organizations differ depending upon various characteristics of organizations,
including the organizational strategy. Thus, these differences in role behaviors required by the
organization’s strategy require different HRM practices to elicit and reinforce those behaviors.
A good example of the role behavior perspective is Schuler and Jackson’s (1987a) model
for linking HRM practices with competitive strategies. In their article, they adopted Porter’s
(1980) competitive strategies (innovation, quality enhancement, and cost reduction) and
discussed how each strategy would require different HRM practices. The rationale they used
for these linkages was that employee role behaviors are instrumental in the implementation of
competitive strategies.
Another example of the role behavior perspective can be found in Miles and Snow’s
(1984) description of the different types of behaviors necessary for strategies within the Miles
and Snow (1978) organizational type framework. These authors compared the strategy types
of defenders, prospectors, and analyzers with regard to the different types of HR practices
required. The authors did not explicitly address the role behaviors that are associated with the
different strategy types. However, akin with the role behavior perspective, they assumed that
HR practices differ among strategy types due to the different behaviors and skills necessary to
carry out the strategy.
Proposition 2: The strategy of a service organization defines the role behaviors needed
by its employees. Specifically, a service strategy based on customer expectations will
require employee role behaviors that correspond to these expectations.
Although all the above philosophies make the same point, that HRM practices should
indeed be linked to strategic planning and implementation in service organizations, role
behavior theory, in particular, offers an integrative conceptualization that is both
behavioral and testable. As such, I adopt it as a basis for hypothesizing specific
HRM–strategy links.
4.1. Human resources practices elicit needed role behaviors
Role theory has served as a valuable conceptual and theoretical framework for the
study of individual behavior in organizations (Kahn, Wolfe, Quinn, Snoek, & Rosenthal,
1964; Katz & Kahn, 1978). Roles have been seen as the boundaries between individuals
and organizations. More specifically, roles have been viewed as conveyors of information
to individuals in the organization. It has been suggested that role behavior theory can be
applied to improve understanding of HRM practices used in the service sector (Jackson &
Schuler, 1992). In fact, Jackson and Schuler (1992) found that there were indeed
differences between service and manufacturing firms in terms of HRM practices. For
example, employees in service firms had more formalized performance appraisals, more
input from clients, and their performance appraisals were more likely to be used to
determine compensation, etc. Based on these data collected from 267 organizations, they
suggest that a role behavior theory perspective holds promise as an explanation for HRM
practices used in service firms.
One of the desired goals of this paper then is to develop and forward a service management
strategy framework that can be used to explain individual behavior in and across organ-
izations by providing an explanation for interorganizational variations in the HRM practices
that presumably shape behavior. The role behavior theory perspective (Dougherty &
Pritchard, 1985; Naylor, Pritchard, & Ilgen, 1980) provides useful insights for understanding
and explaining interorganizational differences in HRM practices and consequent employee
and organizational behaviors.
In applying the role theory perspective specifically to this paper, it is suggested that (1)
HRM practices are used by organizations to convey role information to produce actual role
behaviors; (2) different HRM practices convey different role information; and (3) the role
information an organization needs to send (thereby defining needed role behaviors) is in
part a function of the business as determined by such characteristics as whether it is
manufacturing or service and the market segment to be served. In this case, the specific
characteristics are a market segment’s expectations for reliability, responsiveness, assurance,
empathy, and courtesy.
Overall then, business characteristics, such as strategy, dictate what role behaviors are
needed by employees; HRM is then used to stimulate, reinforce, and send information about
those behaviors leading to actual exhibited role behaviors. This model assumes as previously
mentioned that employers use HRM practices to elicit needed role behaviors. Based on the
role theory perspective, correspondence between needed and actual role behaviors is expected
to be associated with effective organizations while lack of correspondence is expected to be
associated with ineffective organizations. However, in order to get desired role behaviors or
congruence between needed and displayed role behaviors, it will be important not only to
have the right kinds of general HRM practices in place but to also emphasize the right kinds
of behaviors in those HRM practices. In Section 4.2, I describe what I regard as ‘‘the missing
link’’ — the gap between an HRM practice and desired role behaviors.
4.2. The missing link
The present paper has a symbiotic relationship with past work done by Schuler and
colleagues (Jackson & Schuler, 1992; Jackson, Schuler, & Rivero, 1989; Schuler, 1987, 1989;
Schuler & Jackson, 1987a, 1987b). In their studies, they asked these kinds of questions: What
kinds of HRM practices are used with different strategies? Are role behaviors a necessary
rationale for linking strategy to HRM practices? That is, are role behaviors assumed to be
instrumental in the implementation of competitive strategies? In order to answer these kinds
of questions, they used the Human Resource Management Practices Menu developed by
Schuler (1987), which lists continua of practices under each major HRM component. For
example, the HRM component of ‘‘Planning Choices’’ has continua of practices such as
informal/formal, loose/tight, short-term/long-term, etc. Schuler and colleagues theorized that,
depending on what employee characteristics are needed (e.g., low risk orientation versus high
risk orientation, concern for process versus concern for results) based on organizational
strategy, choices can be made about the kinds of general HRM practices that should be used.
For example, if the corporate strategy is of an entrepreneurial nature, then Schuler posits that
employees would need to have characteristics of being innovative, cooperative, risk-taking,
etc. From this, corresponding HRM practice choices for staffing would be broad paths,
multiple ladders, and open and implicit criteria.
Although the line of work pursued by Schuler and colleagues is the first step in uncovering
how strategy is related to HRM and necessary role behaviors, in this article, I propose another
level of distinction. In the present model, it is proposed that assurance of eliciting necessary
role behaviors for realizing the strategy is not only in the general HRM practices used (e.g.,
internal/external staffing) but in the behaviors that are actually emphasized within these
practices. In other words, the model underlying the work by Schuler and colleagues’ is at a
higher level of abstraction in that they propose that organizations will make different strategic
choices about HRM practices that fit the organizational strategy based on the role behaviors
needed. Certain HRM practices (e.g., behavioral vs. results criteria used in performance
appraisals), in turn, are thought to directly elicit specific role behaviors. In the current model,
it is proposed that organizations should emphasize specific market-oriented behaviors within
those HRM practices that are clearly aligned with organizational strategy. In other words, I
propose that within those HRM practices chosen for supporting a particular strategy, different
role behaviors should be explicitly emphasized and elicited. For example, if long-term
training is used for luxury hotels, within this type of training, specific behaviors regarding
individual attention and customization should be taught and emphasized. Similarly, if
behavioral criteria in performance appraisals are used, within these performance appraisals,
attentive and customized behaviors should serve as criteria for ratings.
The difference between Schuler and colleagues’ model and the present proposal is that the
former focused on ‘‘which HRM practices to use’’ while the latter focuses further on ‘‘what to
emphasize.’’ Although, Schuler and Jackson (1987b) show that there is a relationship
between organizational strategy and HRM practices, they also note that organizations
sometimes vary on HRM practices regardless of strategy. Thus, the present model proposes
that, regardless of the general HRM practice chosen, it is the specific behaviors emphasized
within those practices that are important for eliciting needed role behaviors. In this way, the
theoretical link between HRM practices and the role behaviors they purport to elicit is made
more explicit. I believe that this may be the missing link that ties actual role behaviors to the
behaviors general HRM practices are thought to elicit.
Proposition 3: HRM practices and the behaviors emphasized in those HRM practices
communicate and elicit needed role behaviors.
Proposition 4: The better the fit between strategy and HRM practices including
behavioral emphases, the more effective the organization will be in terms of success
indicators such as service quality, customer loyalty, and profits.
Proposition 5: The better the fit between employee role behaviors displayed and the
market segment served (strategy), the more effective the organization will be in terms of
success indicators such as service quality, customer loyalty, and profits.
5. Operationalization of the service strategy framework
The best way to envision how HRM practices can support the service strategy framework
is to work through an example. By way of demonstration, I picked four HRM topics
(selection, training, performance appraisals and rewards, and level of supervision needed) and
compared how these HRM practices might differ on what is emphasized depending on the
hotel segment in question. The examples show how different market segments might use
market-oriented HRM practices and emphases differently to support a strategy based on the
framework of market segmentation as specified by this paper.
In terms of selection, a luxury hotel, based on the fact that they would attempt to achieve
excellence on all 5 dimensions of service quality, would have more stringent requirements than
all other segments listed in Table 3. A luxury hotel might select employees based on extensive
hospitality experience, knowledge of luxury hotels, degree requirements — specifically,
attendance at a first-rate school for hospitality management, dependability, oral communica-
tion skills in which to better explain the service, strong interpersonal skills, high levels of
conveyed confidence, service-orientation, etc. This type of hotel might tend to use more
selection instruments in order to appropriately test for all the knowledge, skills, and abilities
(KSAs) that are important. A family/extended-stay hotel might have different selection
practices or emphasize different KSAs in the selection process. For example, this type of
hotel might select based on some hospitality experience, experience working with children,
degree requirements that may focus on either hospitality businesses or topics related to
children, dependability, and patience. Obviously, job analyses of different jobs in these
different market segments could identify the precise KSAs and levels of KSAs required for
each job. Furthermore, the methods used for making hiring decisions would also likely differ.
For the family/extended-stay hotel, an application, interview, and reference check might be
appropriate while for the luxury hotel, an assessment center type of selection device might be
needed to accurately assess the KSAs needed on the job. Even if the same number and type of
selection instruments were used, different questions and scenarios would be need to be applied
within each instrument.
Similarly, differences in training frequency and content would also vary across hotels
focusing on different strategies. For family/extended-stay hotels, training might focus on
child safety, tips on interacting with children with the philosophy that keeping children happy
keeps parents coming back, child CPR, providing information on the types of issues/services
that are important to families (e.g., ability to heat bottles, access to high chairs, etc.). For
business hotels, training might focus on expediency of front desk services, accuracy of
billing, professionalism in answering phones, etc. All of these training content issues
correspond to the market being served and the level and type of expectations customers
have for each dimension of service.
The frequency of training may also be different between various hotel segments. Although
more continuous training is always desired, a budget hotel may do fine with having just initial
company and job training, followed by some basic skills training. A luxury hotel, on the other
hand, would benefit by having frequent and continuous training on multiple service-oriented
topics to achieve a high consistent level of service.
Different segments might also differ in the source and content used in performance
appraisals. For example, some segments (e.g., bed-and-breakfast inns) may use customer
comment cards while another segment may use quantity of check-outs during crucial times
(e.g., business hotels). However, one practice should remain the same across all segments. In
order to maintain market focus, all segments should use performance appraisals based on
critical market-oriented behaviors. That is, the performance appraisals should be behaviorally
based and should focus on the behaviors of importance for that type of hotel. For example,
business hotels might emphasize behaviors related to responsiveness while bed-and-breakfast
inns might emphasize behaviors related to the ‘‘personal touch.’’
Lastly, the level and type of supervision needed across segments may be different. An
employee at a luxury hotel may require more discretion when dealing with patrons. These
employees may need to make on-the-spot adjustments based on customers’ needs without
checking with a supervisor first. Work, then, becomes less formally supervised the more the
service requires excellence on all five service quality dimensions. In this case, empower-
ment and participative decision making would need to be heavily emphasized. Supervisors
would act more like facilitators of service than enforcers of rules. In contrast, a budget
hotel with its primary customer expectation on the dimension of reliability will probably
have tighter controls and emphasize enforcement of policies to ensure delivery of
excellence on reliability.
As the examples demonstrate, focusing on a particular market segment requires HRM
practices that are quite particular to the customers in that segment in order to survive and
be successful. It is important to note that these differences in HRM practices are not
based solely on the overall level of service expected but the types of behaviors and
dimensions of service quality that are important for each market segment. That is, HRM
practices for each segment should focus on dimensions that are important to that
particular market segment. As Knutson et al. (1995) showed, different market segments
did not vary only in terms of overall level, where a lower segment (e.g., fast food) just
expected lower service across all dimensions. Instead, she found that segments differed
based on the dimension in question. Sometimes fast food customers had lower service
expectations on a certain service quality dimension and other times they had higher
expectation on a service quality dimension than consumers of fine restaurants. Therefore,
organizations need to choose the service elements that they are going to achieve
excellence on and deliver, via HRM practices, on those elements focusing resources in
that area. A focus strategy is important given that there is only a limited amount of
resources available in any given organization.
6. Organizational effectiveness and the feedback loop
When HRM practices and what is emphasized in those practices are in alignment with
the strategy chosen, employees are more likely to exhibit the actual role behaviors
necessary to realize the strategy. In turn, when these role behaviors are exhibited, service
organizations are likely to be successful on a number of fronts (e.g., organizational
competitiveness, increased profits, increased service quality). First and most obviously,
there will be increased service quality especially if the strategy is to focus on a specific
customer market’s needs. That is, if employees are displaying necessary role behaviors as a
result of market-oriented HRM practices and what’s emphasized, then a natural con-
sequence would be increased customer service quality views. Service quality views, in turn,
have been shown in previous studies to be correlated with organizational performance
measures (Zeithaml, 2000).
First, there is evidence from the PIMS (Profit Impact of Marketing Strategies)
database, which contains information about strategy and performance on 2600 busi-
nesses worldwide. Their compiled information demonstrates that service quality is linked
to six performance indicators: (1) customer loyalty, (2) repeat purchases, (3) reduced
vulnerability to price wars, (4) ability to command high relative price without affecting
market share, (5) lower marketing costs, and (6) market share improvements (Buzzell &
Gale, 1987).
In addition, independent studies have been done by numerous authors (e.g., Anderson,
Fornell, & Lehmann, 1994; Tornow & Wiley, 1991) that also establish relationships
between service quality and organizational performance outcomes. For example, Tornow
and Wiley (1991) showed that customer satisfaction was related to contract retention
(r = .37) while others have shown relationships to customer retention and higher profits
(Deshpandé, Farley, & Ibster, 1993; Narver & Slater, 1990; Rust & Zahorik, 1993). Further
there is evidence to show that employee attitudes and behaviors are directly related to
organizational effectiveness and profits (Denison, 1990; Ulrich, Halbrook, Meder, Stuchlik,
& Thorpe, 1991).
6.1. Feedback from customers
Ultimately, customer service quality evaluations will have to be monitored and fed
back into the strategy since customer expectations may change over time. As Schneider,
White, and Paul (1998) showed, there is a reciprocal relationship between customers’
perceptions of service quality and service climate. That is, not only did internal service
climate affect customer service quality perceptions but customer perceptions also affected
organizational practices. Customer needs are bound to change over time with changes in
society (e.g., less time to cook), therefore, it is up to service companies to listen to their
customers and make adjustments to improve and hopefully retain customers. Over time, a
service firm may find that the characteristics and expectations of the market segment they
once served has changed dramatically and may have to choose between altering their
strategy accordingly or finding another segment to serve. In any case, there must always
be a feedback loop; this is true for any organization but especially for service
organizations since their foundation and continued success greatly depends on the external
environment (i.e., customers).
Proposition 6: In successful organizations, customer service quality views are fed back
into the strategic formula and affect decisions about market segment focus.
7. Summary and model
Fig. 1 depicts a model that encapsulates Propositions 1, 2, 3, 4, 5, and 6. Fig. 1 shows that
focusing on a specific market segment as a service management strategy defines role
behaviors needed by employees to serve that market. HRM practices and behavioral
emphases should then be carefully chosen to communicate this role information to employ-
ees. In turn, employees will display needed role behaviors which leads to organizational
effectiveness. However, there needs to be a continual feedback loop from service quality
evaluations to strategy so that strategy may be altered depending on the changes in the
environment (e.g., different customer expectations).
8. Implications
8.1. Implications for research
The model proposed is one which lends itself to hypothesis testing. In fact, I have
conducted a preliminary empirical study of a modified version of the model. Overall, I
recommend two levels of analyses — the individual and the organizational level. Role
behaviors should be measured at the individual level while strategy, fit indices and
organizational effectiveness should be measured at the organizational level. HRM practices
can be measured either at the individual or the organizational level. At the individual level,
individual employees would be asked to describe their HRM practices and what is
emphasized in the HRM practices; these results would then be aggregated to the organiza-
tional level. HRM practices can also be measured at the organizational level by asking the
HRM manager to describe their current HRM practices and emphases.
Fig. 1. A market-oriented services management model.

Several other key considerations are also necessary in the operationalization of the
variables. First, it is necessary to find organizations, which have clear target markets and
use distinctive service as a strategy. Second, it will be important to not only identify the types
of HRM practices used but also the kinds of behaviors emphasized. For example, a training
class should be analyzed both in terms of the type of training provided (e.g., skill-building vs.
policy) and the behavioral content that is taught. Similarly, resulting role behaviors displayed
by employees should be examined on a behavioral level, by a number of different sources: the
employee, supervisor and customer. I believe that analysis on a behavioral level helps to
ensure consistency of measurement between behaviors that HRM practices are thought to
elicit and the actual role behaviors displayed. In turn, there should also be consistency in
measuring service quality views in behavioral terms as well.
8.2. Implications for practice
This model clearly has some important implications for practice. As anecdotal evidence
suggests, organizations that focus on their target customer market segments are leaders in
their field (e.g., Nordstrom, Shouldice Hospital). They are already doing many of the
things suggested by the model. Instead of trying to match best practices with those of other
firms, especially manufacturing firms, they are creating their own best practices. These
firms are able to do that because they understand and focus all of their energy, resources,
policies, and rewards, on their particular set of customers. It is by making the strategy clear
to all, having a market-oriented perspective, implementing a systemic effort, coordinating
all departments, and emphasizing and rewarding the right kinds of behaviors that are
crucial to success. The framework presented can be a useful tool in helping organizational
leaders and service employees to understand the often subtle differences between
customers’ expectations in their market segment versus other market segments. Knowing
these differences is crucial in providing the ‘‘right’’ mix of service for the organization’s
particular set of customers.
9. Conclusion
With services now dominating the GDP and the experienced maturation of the market, it
has become imperative for the services management field to develop theories that pertain
specifically to the operation of service firms. Unfortunately, available research and theory on
services has been scarce. Much of the services literature is of an anecdotal nature and much of
the research that has been done is largely in the marketing field. Therefore, I believe that this
article fills a greatly needed gap in the advancement of the services management field.
In service firms, customers, employees and their interactions are the keys to success.
Therefore, any theory on service must include all three elements. I believe that the current
model is one of the first steps in establishing a theoretical framework for the management of
services that incorporates all three elements. The present article adds to the literature by
providing some theoretical grounding for the formulation and implementation of strategy in
service firms by proposing the link between the external environment (customer expectations
of service quality) to strategy, strategy to HRM practices, HRM practices to role behaviors,
and role behaviors to organizational effectiveness. Further, this model contributes to the
literature by revealing what may be a missing piece of the puzzle in HRM studies. I suggest
that what is emphasized in HRM practices on the five dimensions of service quality in
addition to how it is carried out is important for the delivery of service quality. Therefore, I
propose that HRM practices are a useful tool for communicating and achieving strategic goals
through guiding role behaviors provided that both the what and how of HRM practices is
consistent in their message sent.
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A Service Market Segmentation Approach To Strategic

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Journal of Quality Management

6 (2001) 117 – 138

A service market segmentation approach to strategic

* Tel.: +1-619-594-2699; fax: +1-619-594-3272.

2. The strategic management of services versus products

2.1. Services management philosophies

segments, capitalizing on distinctive internal capabilities, and serving particular geographic

3. Proposed services management strategy framework

3.1. Service quality dimensions

 Reliability: ability to consistently perform the promised service dependably and

Proposition 1: Customer markets can be segmented by their expectations on five

3.2. Applicability of framework

4. The strategy–HRM link in service organizations

4.1. Human resources practices elicit needed role behaviors

4.2. The missing link

5. Operationalization of the service strategy framework

6. Organizational effectiveness and the feedback loop

6.1. Feedback from customers

7. Summary and model

8.1. Implications for research

Fig. 1. A market-oriented services management model.

8.2. Implications for practice

Shaw, J. C. (1990). The service focus. Homewood, IL: Irwin.

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Reliability: ability to consistently perform the promised service dependably and