WELCOME TO

SERVICE ECONOMY
THE SERVICE ECONOMY
Chapter 1

McGraw-Hill/Irwin

Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

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.
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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

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Definition of Service Firms

Service enterprises are organizations that facilitate the
production and distribution of goods, support other firms
in meeting their goals, and add value to our personal
lives.
James Fitzsimmons

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Percent Employment in Services

Nation

% of World
Labor

% Ag

% Goods % Services

China

21.0

50

15

35

India
USA

17.0
4.8

60
2

17
20

23
78

Indonesia
Brazil

3.9
3.0

45
23

16
24

39
53

Russia
Japan

2.5
2.4

12
5

23
26

65
69

Nigeria

2.2

70

10

20

Banglades
h

2.2

63

11

26

Germany

1.4

28

69

1-5

Role of Services in an Economy

FINANCIAL SERVICES
Financing
Leasing
Insurance

MANUFACTURING
Services inside company:
Finance
Accounting
Legal
R&D and design

BUSINESS SERVICES
Consulting
Auditing
Advertising
Waste disposal

INFRASTRUCTURE SERVICE
Communications
Transportation
Utilities
Banking

DISTRIBUTION
SERVICES
Wholesaling
Retailing
Repairing

PERSONAL SERVICES
Healthcare
Restaurants
Hotels

CONSUMER
(Self-service)

GOVERNMENT SERVICES
Military
Education
Judicial
Police and fire protection
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Stages of Economic Activity

Quinary (Extending Human

Potential):
Health, Education, Research, Arts,
Recreation
Quaternary (Trade and Commerce):
Transportation, Communications, Retailing, Finance,
Government
Tertiary (Domestic Services): Restaurants, Hotels, Laundry,
Maintenance
Secondary (Goods-Producing): Manufacturing,
Processing
Primary (Extractive): Agriculture, Mining, Fishing,
Forestry
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Percent

Trends in U.S. Employment by Sector

Services:
Value from enhancing
the
Goods: capabilities and
Value from
interactions among
making a
people
product
Agriculture:
Value from
harvesting
nature
Year

2012
1-8

Stages of Economic Development

Society

Game

PreAgainst
Industrial Nature

Industrial

Postindustrial

Predominant
Activity
Agriculture
Mining

Use of
Human
Labor
Raw
muscle

Against
Goods
Machine
fabricated production tending
nature
Among Services
Persons

Artistic
Creative
Intellectual

Standard
Unit of
of Living
Social Life Measure Structure
Extended
household
power
Individual

Technology

SubRoutine
Simple hand
sistence Traditional
tools
Authoritative
Quantity
of goods

Community Quality of
life in terms
health,
education,
recreation

Bureaucratic Machines
Hierarchical

Interdependent

Information

1-9

Distribution of U.S. Employment, 2009

Agriculture and mining
2% Construction
5%

Retail and
wholesale trade
14%

Manufacturing
9%

Federal government 2%
Information 2%

Professional and
business services
12%

Transportation and utilities 19%

Other services 4%

Health care
and social assistance
11%

State and local government

13%

Educational services
2%
Leisure and hospitality
9%

Financial services
6%

Self employed and

unpaid family workers
6%

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Projected U.S. Job Growth, 2008 2018

1-11

Economic Evolution
Economy

Agrarian

Industrial

Service

Experience

Economic
Offering

Food

Packaged
goods

Commodity
service

Consumer
services

Business
services

Function

Extract

Make

Deliver

Stage

Co-create

Nature

Fungible

Tangible

Intangible

Memorable

Effectual

Attribute

Natural

Standardized

Customized

Personal

Growth

Method of
Supply

Stored in
bulk

Inventoried

Delivered on
demand

Revealed over
time

Sustained over
time

Seller

Trader

Producer

Provider

Stager

Collaborator

Buyer

Market

Customer

Client

Guest

Collaborator

Expectation

Quantity

Features

Benefits

Sensations

Capability
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The Four Realms of an Experience

Customer Participation
Passive

Active

Absorption Entertainment Education

(Movie)
(Language)
Environmental
Relationship

Immersion Esthetic
(Tourist)

Escapist
(ScubaDiving)

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Experience Design Principles

Theme the Experience (Forum shops)
Harmonize Impressions with Positive Cues

(OHare airport parking garage)

Eliminate Negative Cues
(Cinemark talking trash containers)
Mix in Memorabilia (Hard Rock T-shirts)
Engage all Five Senses (Mist in Rainforest)

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Typology of Services in the 21st Century

Core Experience

Essential Feature

Examples

Creative

Present ideas

Advertising, theater

Enabling

Act as intermediary

Transportation, communications

Experiential

Presence of customer

Massage, theme park

Extending

Extend and maintain

Warranty, health check

Entrusted

Contractual agreement

Service/repair, portfolio mgt.

Information

Access to information

Internet search engine

Innovation

Facilitate new concepts

R&D services, product testing

Problem solving

Access to specialists

Consultants, counseling

Quality of life

Improve well-being

Healthcare, recreation, tourism

Regulation

Establish rules and regulations

Environment, legal, patents

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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.
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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
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Non-ownership Classification of
Services
Type of Service

Customer value

Examples

Management Challenge

Goods rental

Obtain temporary right to

exclusive use

Vehicles, tools, furniture,

equipment

Site selection and

maintenance

Place and space

rental

Obtain exclusive use of

defined portion of a
larger space

Hotel room, seat on

airplane, storage unit

Housekeeping and
achieving economies
of scale

Labor and
expertise

Hire other people to do a

job

Car repair, surgery,

management
consulting

Expertise is 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 usage

Gain access to
participate

Electric 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?
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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.

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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.

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The Service Process Matrix

Degree
of labor Intensity

Low

High

Degree of Interaction and Customization

Low
High
Service Factory
Service Shop
* Airlines
* Hospitals
* Trucking
* Auto repair
* Hotels
* Other repair services
* Resorts and recreation
Mass Service
* Retailing
* Wholesaling
* Schools
* Retail banking

Professional Service
* Doctors
* Lawyers
* Accountants
* Architects

1-23

Open Systems View of Services

1-24

Village Volvos Service Package

Supporting Facility
Facilitating Goods
Information
Explicit Services
Implicit Services

1-25

Village Volvos 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 Lubes Service Package

Supporting Facility
Facilitating Goods
Information
Explicit Services
Implicit Services

1-29

Xpresso Lubes Distinctive Service Characteristics

Intangibility
Perishability
Heterogeneity
Simultaneity
Customer Participation in the Service Process
1-30

Beyond Xpresso Lube

What elements of Xpresso Lubes 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 persons

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:
www.ism.ws/ismreport/
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.
http://money.cnn.com/magazines/fortune/fortune500/2012/ful
l_list/

1-33