1

Understanding Services

We begin our study of service management in Chapter 1 with an appreciation of thecentral role that
services play in the economies of nations and in world commerce. Noeconomy can function without
the infrastructure that services provide in the form oftransportation and communications and
without government services such as educationand health care. As an economy develops, however,
services become even more impor-tant, and soon the vast majority of the population is employed in
service activities.Chapter 2 addresses the nature of service operations and identifies their distinc-tive
characteristics. Perhaps the most important characteristic of service operations isthe presence of the
customer in the service delivery system. Focusing on the customerand serving his or her needs has
always been an important daily activity for service providers.An effective competitive strategy is
particularly important for service firms becausethey compete in an environment where there are
relatively low barriers to entry. We begin Chapter 3 with a discussion of the strategic service vision, a
framework in theform of questions about the purpose and place of a service firm in its market.
Thewell-known generic competitive strategies—overall cost leadership, differentiation,and focus—
are applied to services. The competitive role of information in services ishighlighted.

Chapter

The Role of Servicesin an Economy

Learning Objectives

 After completing this chapter, you should be able to:Identify traits that all services have in
common.Describe the central role of services in an economy.State the Clark-Fisher hypothesis
concerning the evolution of 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 new experience economy.Contrast the push versus pull theories of
innovation.Identify the sources of service sector growth.

We are witnessing the greatest labor migration since the industrial revolution. This migra-tion from
agriculture and manufacturing to services is both invisible and largely globalin scope. The migration
is driven by global communications, business and technologygrowth, urbanization, and low-cost
labor. Service industries are leaders in every industri-alized nation, they create new jobs that
dominate national economies, and have the poten-tial to enhance the quality of life of everyone.
Many of these jobs are for high-skilledknowledge workers and have the greatest projected growth in
professional and businessservices. For the top ten postindustrial nations the extent of the migration
to services overthe past 40 years is captured in Table 1.1.

1.2.3.4.5.6.7.8.

TABLE 1.1

Percent Employment in Services for the Top Ten Postindustrial Nations, 1965–2005
Source: http://www.bls.gov/fls/flscomparelf.htmTable 6: Civilian Employment Approximating U.S.
Concepts by Economic Sector

Country19651975198519952005

United States59.566.470.074.178.6United Kingdom51.358.364.171.477.0The Netherlands52.560.968
.373.476.5Sweden46.557.766.171.576.3Canada57.865.870.674.876.0 Australia54.661.568.473.175.8
France43.951.961.470.074.8Japan44.852.057.061.468.6Germany41.8n/
a51.660.868.5Italy36.544.055.362.265.5

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Part One

Understanding  Services

 Chapter Preview

In a discussion of economic development, we learn that modern industrialized econo-mies are

dominated by employment in the service sector industries. This represents anatural evolution of
economies from preindustrial to industrial and finally to postindus-trial societies. Furthermore, the
economic activity of society determines the nature ofhow people live and how the standard of living
is measured. The nature of the servicesector is explored in terms of employment opportunities,
contributions to economic sta- bility, and source of economic leadership. The observation that our
postindustrial societyis now evolving into an experience economy is discussed for both consumer
and businessservices. The growth of the service sector is attributed to innovation, social trends,
andinformation technology (e.g., Internet). We begin with a selection of service definitions.

Service Definitions

Many definitions of service are available but all contain a common theme of intangibilityand
simultaneous consumption. The following represent a sample of service definitions:

Services are deeds, processes, and performances. (Valarie A. Zeithaml and Mary Jo Bitner,

Services Marketing,

 New York: McGraw-Hill, 1996, p. 5.) A service is an activity or series of activities of more or less
intangible nature that nor-mally, but not necessarily, take place in interactions between
customer and service employeesand/or physical resources or goods and/or systems of the service
provider, which are providedas solutions to customer problems. (Christian Gronroos,

Service Management and  Marketing,

 Lexington, Mass: Lexington Books, 1990, p. 27.)Most authorities consider the services sector to
include all economic activities whose output isnot a physical product or construction, is generally
consumed at the time it is produced, and pro-vides added value in forms (such as convenience,
amusement, timeliness, comfort, or health) thatare essentially intangible concerns of its first
purchaser. (James Brian Quinn, Jordan J. Baruch,and Penny Cushman Paquette,

Scientific American,

 vol. 257, no. 2, December 1987, p. 50.)Services are economic activities offered by one party to
another, most commonly employingtime-based performances to bring about desired results in
recipients themselves or in objectsor other assets for which purchasers have responsibility. In
exchange for their money, time, andeffort, service customers expect to obtain value from access to
goods, labor, professional skills,facilities, networks, and systems; but they do not normally take
ownership of any of the physi-cal elements involved. (Christopher Lovelock and Lauren Wright,

Services Marketing:  People,Technology, Strategy,

 6th ed., Upper Saddle River, NJ: Prentice-Hall, 2007, p. 6.)A service system is a value-coproduction
configuration of people, technology, other internaland external service systems, and shared
information (such as language, processes, metrics, prices, policies, and laws). (Jim Spohrer, Paul
Maglio, John Bailey, and Daniel Gruhl,

Computer,

 January 2007, p. 72.) A service is a time-perishable, intangible experience performed for a customer
acting in therole of co-producer. (James Fitzsimmons)

 Facilitating Role of Services in an Economy

As shown in Figure 1.1, services are central to the economic activity in any society.Infrastructure
services, such as transportation and communications, are the essential linksamong all sectors of the
economy, including the final consumer. In a complex economy, both infrastructure and distribution
services function as intermediaries and as the chan-nel of distribution to the final consumer.
Infrastructure services are a prerequisite for aneconomy to become industrialized; therefore, no
advanced society can be without theseservices.In an industrialized economy, specialized firms can
supply business services to manu-facturing firms more cheaply and efficiently than manufacturing
firms can supply these

Chapter 1

The Role of Services in  an Economy

services for themselves. Thus, more and more often we find advertising, consulting, andother
business services being provided for the manufacturing sector by service firms.Except for basic
subsistence living, where individual households are self-sufficient,service activities are absolutely
necessary for the economy to function and to enhancethe quality of life. Consider, for example, the
importance of a banking industry to trans-fer funds and a transportation industry to move food
products to areas that cannot pro-duce them. Moreover, a wide variety of personal services, such as
restaurants, lodging,cleaning, and child care, have been created to move former household functions
into theeconomy.Government services play a critical role in providing a stable environment
forinvestment and economic growth. Services such as public education, health care, well-maintained
roads, safe drinking water, clean air, and public safety are necessary for anynation’s economy
to survive and people to prosper.Increasingly, the profitability of manufacturers depends on
exploiting value-addedservices. For example, automobile manufacturers have discovered that
financing and/orleasing automobiles can achieve significant profits. Otis Elevator long ago found that
rev-enues from after-sales maintenance contracts far exceed the profits from elevator equip-ment
sales. As personal computers become a commodity product with very low margins,firms turn to
network and communication services to improve profits.Thus, it is imperative to recognize that
services are not peripheral activities but ratherintegral parts of society. They are central to a
functioning and healthy economy and lie atthe heart of that economy. Finally, the service sector not
only facilitates but also makes possible the goods-
producing activities of the manufacturing sectors. Services are thecrucial force for today’s change
toward a global economy.

Economic Evolution

In the early 1900s, only 3 of every 10 workers in the United States were employed inthe services
sector. The remaining workers were active in agriculture and industry. By1950, employment in
services accounted for 50 percent of the workforce. Today, servicesemploy about 8 out of every 10
workers. During the past 90 years, we have witnessed amajor evolution in our society from being
predominantly manufacturing-based to being predominantly service-based.

Infrastructure Services• Communications• Transportation• Utilities• BankingDistribution Services•

Wholesaling• Retailing• RepairingPersonal Services• Health care• Restaurants•
HotelsConsumer(Self-service)Government Services• Military• Education• Judicial• Police and fire
protectionManufacturing
Services inside company:

• Finance• Accounting• Legal• R&D and designFinancial Services• Financing• Leasing•

InsuranceBusiness Services• Consulting• Auditing• Advertising• Waste disposal

 FIGURE 1.1

Role of Services in anEconomy

Source: After Bruce R. Guileand James Brian Quinn, eds.,

Technology in Services: Policies forGrowth, Trade, and Employment,

 Washington, D.C.: NationalAcademy Press, 1988, p. 214.

Part One
Understanding  Services

 Economists studying economic growth are not surprised by these events. Colin Clarkargues that as
nations become industrialized, there is an inevitable shift of employmentfrom one sector of the
economy to another.

 As productivity increases in one sector, thelabor force moves into another. This observation, known
as the

Clark-Fisher hypothe-  sis,

 leads to a classification of economies by noting the activity of the majority of theworkforce.Figure

1.2 describes a hierarchy of economic activity. Many economists, includingClark, limited their
analyses to only three stages, of which the tertiary stage was simplyservices. We have taken the
suggestion of Nelson N. Foote and Paul K. Hatt and sub-divided the service stage to create a total of
five stages.

 Today, an overwhelming number of countries are still in a primary stage of develop-ment. These
economies are based on extracting natural resources from the land.
Their productivity is low, and income is subject to fluctuations based on the prices of com-modities
such as sugar and copper. In much of Africa and parts of Asia, more than 70 percent of the labor
force is engaged in extractive activities.Figure 1.3 shows the rapid increase in service employment in
the United States over the past century and illustrates the almost mirror image decline
in agriculture employment. Note that the “industrial revolution” began in the United States about 18
50 with a percentage of manufacturing employment
about equal to that projected for 2010. Thissector employment trajectory is repeated for all of the
nations represented in Table 1.1.Although not included in Table 1.1, the emerging economies of
India, China, andBrazil already approach 50 percent service employment. We can observe that migra-
tion to services is a predictable evolution in the workforce of all nations, and successfulindustrial
economies are built on a strong service sector. Furthermore, competition inservices is global.
Consider the growth of call centers in India and commercial banking by the Japanese. Trade in
services remains a challenge, however, because many countrieserect barriers to protect domestic
firms. India and Mexico, for example, prohibit the saleof insurance by foreign companies.

Stages of Economic Development

Describing where our society has been, its current condition, and its most likely future isthe task of
social historians. Daniel Bell, a professor of sociology at Harvard University,has written extensively on
this topic, and the material that follows is based on his work.

 To place the concept of a postindustrial society in perspective, we must compare its fea-tures with
those of preindustrial and industrial societies.

FIGURE 1.2

Stages of EconomicActivity

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

Chapter 1

The Role of Services in  an Economy

 Preindustrial Society
The condition of most of the world’s population today is one of subsistence, or a

  prein-dustrial society.

Life is characterized as a game against nature. Working with muscle power and tradition, the
labor force is engaged in agriculture, mining, and fishing. Lifeis conditioned by the elements, such as
the weather, the quality of the soil, and the avail-ability of water. The rhythm of life is shaped by
nature, and the pace of work varieswith the seasons. Productivity is low and bears little evidence of
technology. Social liferevolves around the extended household, and this combination of low
productivity andlarge population results in high rates of underemployment (workers not fully
utilized).Many seek positions in services, but of the personal or household variety.
Preindustrialsocieties are agrarian and structured around tradition, routine, and authority.

Industrial Society

The predominant activity in an

industrial society

 is the production of goods. The focusof attention is on making more with less. Energy and machines
multiply the output perlabor-hour and structure the nature of work. Division of labor is the
operational “law”that creates routine tasks and the notion of the semiskilled worker. Work is
accomplishedin the artificial environment of the factory, and people tend the machines. Life
becomesa game that is played against a fabricated nature—a world of cities, factories, and tene-
ments. The rhythm of life is machine-paced and dominated by rigid working hours andtime clocks.An
industrial society is a world of schedules and acute awareness of the value of time.The standard of
living becomes measured by the quantity of goods, but note that the com- plexity of coordinating
the production and distribution of goods results in the creation oflarge bureaucratic and hierarchic
organizations. These organizations are designed with cer-tain roles for their members, and their
operation tends to be impersonal, with persons treatedas things. The individual is the unit of social
life in a society that is considered to be the sumtotal of all the individual decisions being made in the
marketplace. Of course, the unrelent-ing pressure of industrial life is softened by the countervailing
force of labor unions.

0101850187018901910193019501970199020102030405060708090100

Year

      P     e     r     c     e     n      t

Agriculture: Value from harvesting natureManufacturing: Value from making productsServices: Value

from providing the economic infrastructure

 FIGURE 1.3

Trends in U.S.Employment by Sector,1850–2010

Source: U.S. Department ofCommerce, Bureau of the Census,

  Historical Statistics of the UnitedStates,

 1975, p. 137, and http://www.bls.gov/fls/flscomparelf.htm

 

Part One

Understanding  Services

 Postindustrial Society

While an industrial society defines the standard of living by the quantity of goods,the
  postindustrial  society

 is concerned with the quality of life, as measured by serv-ices such as health, education, and
recreation. The central figure is the professional person, because rather than energy or physical
strength, information is the key resource.Life now is a game played among persons. Social life
becomes more difficult because political claims and social rights multiply. Society becomes aware
that the independ-ent actions of individuals can combine to create havoc for everyone, as seen in
traf-fic congestion and environmental pollution. The community rather than the individual becomes
the social unit.Bell suggests that the transformation from an industrial to a postindustrial
societyoccurs in many ways. First, there is a natural development of services, such as
trans- portation and utilities, to support industrial development. As labor-saving devices areintroduc
ed into the production process, more workers engage in nonmanufacturingactivities, such as
maintenance and repair. Second, growth of the population and massconsumption of goods increase
wholesale and retail trade, along with banking, realestate, and insurance. Third, as income increases,
the proportion spent on the necessitiesof food and home decreases, and the remainder creates a
demand for durables and thenfor services.Ernst Engel, a Prussian statistician of the 19th century,
observed that as family incomesincrease, the percentage spent on food and durables drops while
consumption of servicesthat reflect a desire for a more enriched life increases correspondingly. This
phenomenonis analogous to the Maslow hierarchy of needs, which says that once the basic require-
ments of food and shelter are satisfied, people seek physical goods and, finally,
personaldevelopment. However, a necessary condition for the “good life” is health and education.In
our attempts to eliminate disease and increase the span of life, health services becomea critical
feature of modern society.Higher education becomes the condition for entry into a postindustrial
society,which requires professional and technical skills of its population. Also, claims for
moreservices and social justice lead to a growth in government. Concerns for environmen-tal
protection require government intervention and illustrate the interdependent andeven global
character of postindustrial problems. Table 1.2 summarizes the featuresthat characterize the
preindustrial, industrial, and postindustrial stages of economicdevelopment.

FeaturesSocietyGamePredominantActivityUse ofHumanLaborUnit ofSocial LifeStandardof

LivingMeasureStructureTechnology

Pre-industrial Againstnature AgricultureMiningRawmusclepower ExtendedhouseholdSubsistenceRou
tineTraditional AuthoritativeSimple
handtoolsIndustrialAgainst fabricatednatureGoodsproductionMachinetendingIndividualQuantityof
goodsBureaucraticHierarchicalMachinesPost-industrial AmongpersonsServicesArtisticCreativeIntellec
tualCommunityQuality oflife in termsof health,education,recreationInter-
dependentGlobalInformation

TABLE 1.2

Comparison of Societies
 

Chapter 1

The Role of Services in  an Economy

 Nature of the Service Sector

For many people,

  service

 is synonymous with

  servitude

 and brings to mind workers flip- ping hamburgers and waiting on tables. However, the service

sector that has grown sig-nificantly over the past 50 years cannot be accurately described as
composed only oflow-wage or low-skill jobs in department stores and fast-food restaurants. Instead,
asFigure 1.4 shows, employment in 2006 was divided among a number of high-skill serv-ice
categories such as professional and business services, health care and social assist-ance, and
educational services.Changes in the pattern of employment will have implications on where and how
peo- ple live, on educational requirements, and, consequently, on the kinds of organizationsthat will
be important to that society. Industrialization created the need for the semiskilledworker who could
be trained in a few weeks to perform the routine machine-tendingtasks. The subsequent growth in
the service sector has caused a shift to white-collar occu- pations. In the United States, the year
1956 was a turning point. For the first time in thehistory of industrial society, the number of white-
collar workers exceeded the numberof blue-collar workers, and the gap has been widening since
then. The most interestinggrowth has been in the managerial and professional-technical fields, which
are jobs thatrequire a college education.Today, service industries are the source of economic
leadership. During the past30 years, more than 44 million new jobs have been created in the service
sector toabsorb the influx of women into the workforce and to provide an alternative to thelack of
job opportunities in manufacturing. The service industries now account forapproximately 70 percent
of the national income in the United States. Given that thereis a limit to how many cars a consumer
can use and how much one can eat and drink,this should not be surprising. The appetite for services,
however, especially innovativeones, is insatiable. Among the services presently in demand are those
that reflect anaging population, such as geriatric health care, and others that reflect a two-
incomefamily, such as day care.The growth of the service sector has produced a less cyclic national
economy. Duringthe past four recessions in the United States, employment by service industries has
actually

Agriculture and mining2%Construction5%Manufacturing9%Federal Government 2%Information

2%Transportation and utilities3%Other services2%State and localgovernment13%Financial
activities6%Leisure and hospitality9%Educational services11%Health care andsocial
assistance10%Professional andbusiness services12%Retail andwholesale trade14%

 FIGURE 1.4

Percent Distributionof U.S. Employment byIndustry, 2006

Source: http://www.bls.gov/news.release.ecopro.t01.htm

10

Part One

Understanding  Services

increased, while jobs in manufacturing have been lost. This suggests that consumers are will-ing to
postpone the purchase of products but will not sacrifice essential services like educa-tion, telephone,
banking, health care, and public services such as fire and police protection.Several reasons can
explain the recession-resistant nature of services. First, by theirnature, services cannot be
inventoried, as is the case for products. Because consumptionand production occur simultaneously
for services, the demand for them is more stablethan that for manufactured goods. When the
economy falters, many services continue tosurvive. Hospitals keep busy as usual, and, while
commissions may drop in real estate,insurance, and security businesses, employees need not be laid
off.Second, during a recession, both consumers and business firms defer capital expen-ditures and
instead fix up and make do with existing equipment. Thus, service jobs inmaintenance and repair are
created.

The 21

st

 Century Career

As shown in Figure 1.5, health care and social assistance and professional and businessservices have
the largest projected change in employment in the coming decade. These high-skill careers will
exhibit the following characteristics according to Michelle L. Casto:

 More career opportunities for everyone.Freedom to choose from a variety of jobs, tasks, and
assignments.More flexibility in how and where work is performed (i.e., working from home
ortelecommuting).More control over your own time.Greater opportunity to express yourself through
your work.Ability to shape and reshape your life’s work in accordance with your values and
interests.Increased opportunity to develop other skills by working in various industries
andenvironments.Self-empowerment mindset.Allows one to create situations or positions where
one can fill a need in the world thatis not being filled.Opportunity to present oneself as an
independent contractor or vendor with servicesto offer.••••••••••

20%

 −

10%0%10%20%30%Manufacturing

Agriculture and mining

Federal governmentRetail and wholesale tradeState and local

governmentInformationConstructionTransportation and utilitiesOther servicesLeisure and
hospitalityFinancial servicesEducational servicesProfessional and business servicesHealth care and
social assistanceAll Industry Average

FIGURE 1.5

Projected PercentChange in U.S.Employment byIndustry, 2006–2016

Source: http://www.bls.gov/news.release/ecopro.t01.htm
 

Chapter 1

The Role of Services in  an Economy

11

 New Experience Economy

The nature of the service economy has moved past the transactional nature of servicesto one of
experience-based relationships. Consider how Starbucks and Disney Worldhave defined their
respective services as an experience. Table 1.3 describes the featuresof different economies in the
historical evolution from agrarian to experience. To appre-ciate the subtle differences, pay particular
attention to the words used to describe eacheconomy. Note that the

experience economy

 is further divided into consumer servicesand business services.

Consumer Service Experience

Experiences create added value by engaging and connecting with the customer in a per-sonal and
memorable way. As businesses explicitly charge for the memorable encoun-ters they stage, we
transition from a service economy to the new experience economy.Figure 1.6 displays four types of
consumer experiences characterized by the level of cus-tomer participation and level of interaction
with the environment. Entertainment (e.g.,watching a movie) is the least involved level of experience
and escapist (e.g., scubadiving) requires the most commitment from the customer.Consumer service
experience design is based on five principles.

Theme the experience

 is illustrated by the Forum Shops in Las Vegas that are decorated with Roman columnsand where
salespeople wear togas. An example of

harmonize impressions with positivecues

 is found at the O’Hare Airport Parking Garage where each floor is painted with adistinctive color and
unique music is played to help returning travelers find their parkedautomobiles (e.g., hard rock on
the first floor and classical on the second).

  Eliminatenegative cues

 is illustrated creatively by the use of talking trash containers (i.e., thecontainer says “thank you”
when an item is discarded) at a Cinemark Theater in Austin,

EconomyAgrarianIndustrialServiceExperienceEconomicOffering

FoodPackagedgoodsCommodityserviceConsumerservicesBusinessservices

Function

ExtractMakeDeliverStageCo-create

Nature

FungibleTangibleIntangibleMemorableEffectual

Attribute

NaturalStandardizedCustomizedPersonalGrowth

Methodof Supply

Stored inbulkInventoriedDeliveredon demandRevealedover timeSustainedover time

Seller

TraderProducerProviderStagerCollaborator 

Buyer

MarketCustomerClientGuestCollaborator 

Expectation

QuantityFeaturesBenefitsSensationsCapability

 TABLE 1.3

Economic Evolution

Customer participation

Passive Active 

Environmentalrelationship

Absorption

Entertainment(movie)Education(language)
Immersion

Estheticism(tourist)Escapism(scuba diving)

FIGURE 1.6

The Four Realmsof an Experience

Source: Reprinted by permis-sion of

  Harvard Business Review.

 Exhibit adapted from “Welcometo the Experience Economy,” byB. Joseph Pine II and James
H.Gilmore, July–August 1998, p. 102.Copyright © 1998 by the Presidentand Fellows of Harvard
College: allrights reserved.
 

12

Part One

Understanding  Services

Texas. An example of

mix in memorabilia

 is providing group pictures of vacationers toClub Med.

  Engage all five senses

 is found at the Rainforest Café in Las Vegas (e.g., jun-gle sounds and mist in the air).

Business Service Experience

For business-to-business (B2B) services, value is derived from the coproduction or col-laborative
nature of the relationship such as we see in a consultancy engagement. Thenew business service
experience has three dimensions:

 Co-creation of value

The customer is a coproducer of the value extracted from the relationship.The customer is an input
to the service process.

Relationships

The relationship with the customer is of paramount importance because it is a sourceof innovation
and differentiation.Long-term relationships facilitate the ability to tailor the service offerings to
custom-ers’ needs.
Service capability

Provide service capacity to meet fluctuations in demands while retaining quality ofservice.Quality of
service is measured primarily from the perspective of the customer.The core experience of B2B
service is one of creating, enabling, problem solving, andinnovative use of information that is not
consumed in the exchange, but is enhanced andremains available for further use by others.Table 1.4
presents a complete listing of both consumer and business service experi-ences to be found in the 21

st

 century, all of which rely heavily on a skilled knowledge- based workforce.••••••

Scuba divers escape to an underwater world that requires special equipment for survival.

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13

 Sources of Service Sector Growth

Service sector growth is fueled by advances in information technology, innovation, andchanging

demographics that create new demands. Information technology has a sub-stantial impact on the
growth of digital services. Figure 1.7 shows how information(digital) services have grown to the point
that this “information sector” dominates theU.S. economy, contributing 53 percent to the GDP
(Gross Domestic Product). The arrowson the two axes show the direction of projected growth in the
services and informationcomponents of the economy. Notice how information services (quadrant D)
is growing atthe expense of physical products (quadrant A).

 Information Technology

The drive to miniaturize information technology equipment such as the Blackberry forInternet
connectivity removes the need for physical proximity for service delivery
and permits alternative delivery formats. Banking, for example, has become an electronicservice
with online access to personal accounts for transfer of funds or payment of bills.In health care, X-rays
are digitized and transmitted off-shore for interpretation by a radi-ologist. Information technology
has thus impacted the process of service delivery and

Core ExperienceEssential FeatureExamples

CreativePresent ideasAdvertising, theater EnablingAct as intermediaryTransportation, communicatio
nsExperientialPresence of customerMassage, theme parkExtendingExtend and maintainWarranty, he
alth checkEntrustedContractual agreementService/repair, portfolio
mgt.InformationAccess to informationInternet search engineInnovationFacilitate new conceptsR&D s
ervices, product testingProblem solvingAccess to specialistsConsultants, counselingQuality of lifeImp
rove well-beingHealth care, recreation, tourismRegulationEstablish rules and
regulationsEnvironment, legal, patents

TABLE 1.4

Typology of Services inthe 21

st

 Century

Source: Adapted from Bryson, J. R.,P. W. Daniels, and B. Warf.

ServiceWorlds: People, Organizations,Technologies.

 New York:Routledge, 2004, p. 33.

ProductMaterialServicesABDC31%6%37%63%53%84%16%Information10%

Sector Description Example

Physical ProductsAutomotive, Steel, ChemicalsTransportation, RetailingComputers, DVDs,

HDTVFinance, TelecommunicationsPhysical ServicesDigital ProductsInformation ServicesABCD

FIGURE 1.7

Distribution of GDP inthe U.S. Economy

Source: Karmarkar, Uday and UdayM. Apte. “Operations Managementin the

Information Economy:Information Products, Processes,and Chains,”

  Journal of Operations  Management 

 25 no. 2 (March 2007), p. 440.

 

14

Part One

Understanding  Services
created new service value chains with new business opportunities as creative intermedi-aries. Uday
Karmarkar and Uday Apte make the following three propositions:

 In the future, the major part of the United States GDP is going to be generated by“information
chains” and not supply chains, and most managers are going to beemployed in the information
sectors.The management of these information chains and sectors has a great deal to do with process
economics and its impact on the configuration and operation of informationchains and
processes.Technological developments underlie and drive the economics of processes and
valuechains.

Innovation

The product development model that is driven by technology and engineering could becalled a

  push theory of innovation.

 A concept for a new product germinates in the labora-tory with a scientific discovery that becomes a
solution looking for a problem. The 3Mexperience with Post-it notes is one example of this
innovation process. The laboratorydiscovery was a poor adhesive, which found a creative use as glue
for notes to be attachedtemporarily to objects without leaving a mark when removed.The
introduction of new product technology, however, does have an ancillary effect onservice innovation.
For example, the DVD player spawned a video rental business and cre-ated a renewed demand for
old movies. The next innovation was the creation of Netflix todeliver the DVD to your home by mail.
The Internet and World Wide Web were developedas a robust network of linked computers for
military and scientific file sharing. It becamethe essential enabler for e-commerce and more recently
the platform for social networkssuch as Facebook and LinkedIn and, of course, the ability to search
the world with Google.For services, the Cash Management Account introduced by Merrill Lynch is an
exam- ple of the

  pull theory of innovation.

 During the period of high interest rates in the 1980s,a need arose to finance short-term corporate
cash flows because individual investors wereinterested in obtaining an interest rate that was higher
than those currently available on passbook bank deposits. A new service concept often originates
with an observant contactemployee who identifies an unmet customer need. For example, a hotel
might institute anairport shuttle service because the concierge noticed a high demand for taxi
service.Service innovation also can arise from exploiting information available from other activ-ities.
For example, records of sales by auto parts stores can be used to identify frequent fail-ure areas in
particular models of cars. This information has value both for the manufacturer,who can accomplish
engineering changes, and for the retailer, who can diagnose customer problems. In addition,
the creative use of information can be a source of new services, or itcan add value to existing
services. For example, an annual summary statement of transac-tions furnished by one’s financial
institution has added value at income tax time.Service innovators face a difficult problem in testing
their service ideas. The proc-ess of product development includes building a laboratory prototype for
testing beforefull-scale production is initiated. One example of an effort in this direction is
provided by Burger King, which acquired a warehouse in Miami to enclose a replica of its stand-ard
outlet. This mock restaurant was used to simulate changes in layout that would berequired for the
introduction of new features such as drive-through window service anda breakfast menu.

Changing Demographics
The French Revolution provides an interesting historical example of how a social changeresulted in a
new service industry. Before the revolution, only two restaurants were inexistence in Paris; shortly
afterwards, there were more than 500. The deposed nobilityhad been forced to give up their private
chefs, who found that opening their own restau-rants was a logical solution to their unemployment.