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Services in the EconomyChapter 111 Introduction: Services in the EconomyWhat is a service?An idea?A circumstance?A convenience?A physical thing?2Service DefinitionsService is a time-perishable, intangible experience performed for a customer acting in the role of a co-producer. - James Fitzsimmons

Services are deeds, processes, and performances.- Valarie Zeithaml & Mary Jo Bitner31 Introduction: Services in the EconomyDefinition 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 Fitzsimmons41 Introduction: Services in the EconomyWhy Study Service Operations?Service firms are a large percentage of the economies of industrialized nations and its growing80% of the US economy (employment and GDP)

There is little focus on services in the academic world. Gain a competitive edge.

Not all management tools that are appropriate for manufacturing are transferable into a service environment1

51 Introduction: Services in the EconomyThe Importance of Service SectorHistorically service is defined by what it is not:Services are notGoods Producing Manufacturing & ConstructionExtraction Agriculture, forestry, fishing & miningServices Retailing, Wholesaling, Transportation, Financial services, etc.Nowadays service is ubiquitous.

61 Introduction: Services in the EconomyRole of Services in an Economy

71 Introduction: Services in the Economy2

Historical US Employment by Economic Sector

81 Introduction: Services in the EconomyDistribution of GDP in the US EconomyProductServicesPhysicalInformation6%10%31%53%37%63%84%16%DBAC91 Introduction: Services in the EconomyEconomic StagesFeaturesSocietyGamePre-dominant ActivityUse of Human LaborUnit of Social LifeStandard of Living MeasureStructureTechnologyPre-IndustrialAgainst NatureAgriculture, MiningRaw Muscle PowerExtended HouseholdSubsistenceRoutine, Traditional, Authoritative Simple hand toolsIndustrialAgainst fabricated natureGoods, ProductionMachine tendingIndividualQuantity of GoodsBureaucratic,HierarchicalMachinesPost-IndustrialAmong PersonsServicesArtistic, Creative, IntellectualCommunityQuality of life in terms of health, education, recreationInterdependent, GlobalInformation101 Introduction: Services in the Economya. PreindustrialLife is characterized as a game against natureLife is conditioned by the elements such as the weather, the quality of soil, and availability of waterAgriculture is the most prominent. More than 80% workforce in Agriculture sectorService occupations mostly were domestic servants and sailorsProductivity is low and bears little evidence of technology

111 Introduction: Services in the Economyb. IndustrialYear 1900 to 1950Important activity Goods productionFocus of attention is on making more with lessWork is accomplished in the artificial environment of the factoryExtreme division of laborDehumanizing jobs hence labor unions were formedManual workers outnumbered white collar workers121 Introduction: Services in the Economyc. PostindustrialYear 1950 onwardsService producing industries increased from 50% to 80% in USHealth, Education, & recreation predominates and it determines Quality of LifeA small subset of the service economy called experiences will be a dominant economic forceInformation rather than muscle was the focus; workers value based on judgment, creativity & theoretical reasoning

131 Introduction: Services in the EconomyNew Experience EconomyService undergoing transformation from the traditional concept of a service transaction to one of an experience.Eg: Disney World, Starbucks, etc.EconomyAgrarianIndustrialServiceExperienceFunctionExtractMakeDeliverStageNatureExchangeableTangibleIntangibleMemorableAttributeNaturalStandardizedCustomizedPersonalMethod of SupplyStored in BulkInventoriedDelivered on demandRevealed over timeSellerTraderManufacturerProviderStagerBuyerMarketUserClientGuest141 Introduction: Services in the EconomyThe four realms of experienceCustomer ParticipationPassiveActiveEnvironmental RelationshipAbsorptionEntertainment (Movie)Education (Language)ImmersionEstheticism (Tourist)Escapism (Scuba diving)151 Introduction: Services in the EconomyReasons for Transformation from Industrial to Post Industrial EraNatural development of services such as transportation & Utilities to support industrial development

Population growth & mass consumption of goods increase wholesale & retail trade along with banking, real estate, & insurance

Changing Demographics Aging of the population Two-income families Urbanisation

161 Introduction: Services in the Economy3

What is Operations?The transformation process that turns inputs into outputs, that is, the act of combining people, raw materials, technology, etc. into useable services and productsWho is in the operations function?The people who actually make a product or perform a serviceTypically operations has the largest number of employees of any functional areaImportance of studying operations in services171 Introduction: Services in the Economy4

But Im going into marketing, finance, strategyRegardless of your functional area, you will be involved in transformational processes, in other words, getting things doneService operations can help you get things done more effectively and more efficiently.181 Introduction: Services in the EconomyOpportunities in Service SectorVast & untapped opportunities to improve service businesses.

Only manufacturing is being considered for a time being.

Imbalance exists which creates a huge opportunity191 Introduction: Services in the Economy5

Characteristics of services Rules:Services are intangible

Simultaneous production and consumption

Proximity to the customerServices cannot be inventoriedExceptions:Facilitating goods: playbills, groceries

Computer system upgrades; janitorial services

Internet-based services; catalogs

Retailers hold inventory; hotel rooms, airline seats are inventory201 Introduction: Services in the EconomyGoods Contain Services / Services Contain Goods1. Operations management210255075100255075100AutomobileComputerInstalled CarpetingFast-food MealRestaurant MealAuto RepairHospital CareAdvertising AgencyInvestment ManagementConsulting ServiceCounselingPercent of Product that is a GoodPercent of Product that is a Service21This slide should help you make the point that a product is seldom only a good or only a service but usually includes some of each. You might also raise the point that as companies are reaching the limit of evolution of the physical (good), they are tending to add information (a service) to their product. Finally, it is important that the student be able to cite examples illustrating each of the ranges shown in the slide.Classification frameworksClassification helps in finding commonalities Similarities helps in finding insightsWell known classificationsCustomer Contact ModelService Process Matrix (Proposed by Schmenner)221 Introduction: Services in the Economy6

Customer Contact ModelServices are classified according to the amount of customer contactPure ServicesMixed ServicesQuasi-Mfg.ManufacturingMedicalRestaurantsTransportationBranch officesHome officesDistribution centersGuiding Principle:

High ContactLow Contact231 Introduction: Services in the EconomyService Process MatrixCustomer contact Low HighCapital intensiveService FactoryAirlinesTruckingHotelsCustom ShopAuto repairMedical treatmentCharter travel serviceLabor intensiveMass ServicesTeachingLive entertainmentCafeteriaProfessional ServicesDoctorsLawyersArchitectsAuditingRigid processFlexible ProcessChapter 3 Service Environment248

Low Labor IntensityChallenges for managersCapital decisionsTechnological advancesManaging peak/non-peak demandScheduling service deliveryHigh Labor IntensityChallenges for managersHiring, trainingMethods developmentEmployee welfareScheduling workforcesControl of far-flung locationsManaging growthLow Interaction/CustomizationChallenges for managersMarketingMaking service warmAttention to physical surroundingsManaging fairly rigid hierarchy with need for standard operating proceduresHigh Interaction/CustomizationChallenges for managersFighting cost increasesMaintaining qualityReacting to consumer intervention in processManaging flat hierarchy with loose subordinate-superior relationshipsGaining employee loyalty251 Introduction: Services in the Economy