Customer Service - Principles of Service Marketing and Management - C Lovelock & L Wright

marketing, kinh doanh, bán hàng, sales

SERVICES IN THE MODERN ECONOMY

As consumers, we use services every day T u r n i n g on a light, watching TV, talking on the t e l e p h o n e , riding a bus, visiting t h e dentist, mailing a letter, getting a haircut, refueling a car, w r i t i n g a check, or sending clothes to the cleaners are all examples of service c o n s u m p t i o n at the individual level T h e institution at w h i c h you are study-ing is itself a c o m p l e x service o r g a n i z a t i o n In addition to e d u c a t i o n a l services, today's college facilities usually include libraries and cafeterias, counseling, a book-store, placement offices, copy services, telecommunications, and even a bank If you are enrolled at a residential university, campus services are also likely to include dor-mitories, health care, i n d o o r and o u t d o o r athletic facilities, a theater, and perhaps a post office

C u s t o m e r s are not always happy with the quality and value of the services they receive P e o p l e c o m p l a i n a b o u t late deliveries, r u d e o r i n c o m p e t e n t p e r s o n n e l ,

i n c o n v e n i e n t service h o u r s , p o o r p e r f o r m a n c e , and needlessly c o m p l i c a t e d p r o cedures T h e y g r u m b l e about t h e difficulty of finding sales clerks to help t h e m in retail stores, express frustration about mistakes on their credit card bills or bank state-ments, shake their heads over the complexity of n e w self-service e q u i p m e n t , m u t -ter about p o o r value, and sigh as they are forced to wait in line almost everywhere they go

-Suppliers of services often seem to have a very different set of concerns than the consumer M a n y suppliers complain about h o w difficult it is to make a profit, h o w hard it is to find skilled and motivated employees, or h o w difficult it has b e c o m e to please customers S o m e firms seem to believe that the surest route to financial suc-cess lies in cutting costs and eliminating " u n n e c e s s a r y " frills A few even give the impression that they could r u n a m u c h m o r e efficient o p e r a t i o n if it w e r e n ' t for all t h e stupid c u s t o m e r s w h o keep m a k i n g u n r e a s o n a b l e d e m a n d s and messing things up!

Fortunately, in almost every industry there are service suppliers w h o k n o w h o w to please their customers while also running a productive, profitable operation staffed by pleasant and competent employees By studying organizations such as Charles Schwab, Intrawest, Aggreko, Southwest Airlines, eBay, and the many others featured in this book,

we can draw important insights about the most effective ways to manage the different types of services found in today's economy

service: an act or

performance that creates

benefits for customers by

bringing about a desired

change in—or on behalf

turing or agriculture, but defining service can elude them Here are two approaches

that capture the essence of the word

*- A service is an act or performance offered by one party to another Although the process may be tied to a physical product, the performance is essentially intangible and does not normally result in ownership of any of the factors of production

>- Services are economic activities that create value and provide benefits for

cus-tomers at specific times and places, as a result of bringing about a desired change

i n — o r on behalf of-—the recipient of the service

M o r e humorously, service has also been described as "something that may be bought and sold, but which cannot be dropped on your foot."

Understanding the Service Sector

Services make up the bulk of today's economy, not only in the U n i t e d States and

Canada where they account for 73 percent and 67 percent of the gross domestic

prod-uct (GDP), respectively, but also in other developed industrial nations throughout the

world.1 Figure 1.1 shows h o w service industries contribute to the e c o n o m y of the

United States relative to manufacturing, government (itself mostly services), agriculture,

mining, and construction

The service sector accounts for most of the n e w j o b growth in developed c o u n

-tries In fact, unless you are already predestined for a career in a family manufacturing or

agricultural business, the probability is high that you will spend y o u r w o r k i n g life

in companies (or public agencies and nonprofit organizations) that create and deliver

services

As a nation's economy develops, the share of employment between agriculture,

industry (including manufacturing and m i n i n g ) , and services changes dramatically

Figure 1.2 shows how the evolution to a service-dominated employment base is likely

to take place over time as per capita income rises Service jobs n o w account for 76

per-cent of private sector payrolls in the United States, with wages growing at a faster pace

than in manufacturing jobs.2 In most countries, the service sector of the economy is

very diverse and includes a wide array of different industries, ranging in size from huge

enterprises that operate on a global basis to small entrepreneurial firms that serve a

sin-gle town

It comes as a surprise to most people to learn that the dominance of the service

sector is not limited to highly developed nations For instance, World Bank statistics

show that in many Latin American and Caribbean nations the service sector accounts

service sector: the portion

of a nations economy represented by services of all kinds, including those offered

by public and non-profit organizations

F I G U R E 1.1 Services in the U.S

Economy: Share of GDP by Industry, 1999

internal services: service

elements within any type of

business that facilitate

creation of, or add value to,

its final output

for m o r e than half the gross national product (GNP) and employs m o r e than half the labor force.3 These countries often have a large " u n d e r g r o u n d e c o n o m y " that is n o t captured in official statistics In M e x i c o , for instance, it has b e e n estimated that as

m u c h as 40 percent of trade and c o m m e r c e is "informal."4 Significant service o u t p u t

is created by u n d o c u m e n t e d w o r k in domestic j o b s (e.g., c o o k , housekeeper, dener) or in small, cash-based enterprises such as restaurants, laundries, r o o m i n g houses, and taxis

gar-Service organizations range in size from huge international corporations like lines, banking, insurance, telecommunications, hotel chains, and freight transportation to

air-a vair-ast air-arrair-ay of locair-ally owned air-and operair-ated smair-all businesses, including restair-aurair-ants, lair-aun-dries, taxis, optometrists, and n u m e r o u s business-to-business ("B2B") services Franchised service outlets—in fields ranging from fast foods to bookkeeping—combine the marketing characteristics of a large chain that offers a standardized product with local ownership and operation of a specific facility Some firms that create a time-sensitive physical product, such as printing or photographic processing, are n o w describing t h e m -selves as service businesses because speed, customization, and convenient locations create

laun-m u c h of the value added

There's a h i d d e n service sector, t o o , w i t h i n m a n y large c o r p o r a t i o n s that are classified by g o v e r n m e n t statisticians as being in manufacturing, agricultural, or nat-

ural resources industries So-called i n t e r n a l s e r v i c e s cover a w i d e array of activities

including recruitment, publications, legal and a c c o u n t i n g services, payroll tration, office cleaning, landscape m a i n t e n a n c e , freight transport, and m a n y o t h e r tasks To a g r o w i n g extent, organizations are choosing to outsource those internal services that can be p e r f o r m e d m o r e efficiently by a specialist subcontractor As these tasks are outsourced, they b e c o m e part of t h e competitive marketplace and are therefore categorized as c o n t r i b u t i n g to t h e service c o m p o n e n t of t h e economy Even w h e n such services are not outsourced, managers of the departments that s u p -ply t h e m w o u l d do well to think in terms of providing g o o d service to their internal customers

adminis-Governments and nonprofit organizations are also in the business of providing vices, although the extent of such involvement may vary widely from one country to another, reflecting both tradition and political values In many countries, colleges, hos-pitals, and museums are publicly owned or operate on a not-for-profit basis, but for-profit versions of each type of institution also exist

ser-MARKETING SERVICES VERSUS

PHYSICAL GOODS

The dynamic environment of services today places a p r e m i u m on effective marketing

Although it's still very important to run an efficient operation, it no longer guarantees

success.The service product must be tailored to customer needs, priced realistically,

dis-tributed through convenient channels, and actively promoted to customers N e w

mar-ket entrants are positioning their services to appeal to specific marmar-ket segments through

their pricing, communication efforts, and service delivery, rather than trying to be all

things to all people But are the marketing skills that have been developed in

manufac-turing companies directly transferable to service organizations? T h e answer is often no,

because marketing management tasks in the service sector tend to differ from those in

the manufacturing sector in several important respects

Basic Differences Between Goods and Services

Every product—a term used in this b o o k to describe the core output of any type of

industry—delivers benefits to the customers w h o purchase and use them G o o d s can be

described as physical objects or devices and services are actions or performances.6 Early

research into services sought to differentiate t h e m from goods, focusing particularly on

four generic differences, referred to as intangibility, heterogeneity (or variability),

per-ishability of output, and simultaneity of production and consumption.7 Although these

characteristics are still cited, they have been criticized for over-simplifying the

real-world environment M o r e practical insights are provided in Figure 1.3, which lists nine

basic differences that can help us to distinguish the tasks associated with service

market-ing and management from those involved with physical goods

It's important to note that in identifying these differences we're still dealing with

generalizations that do not apply equally to all services In Chapter 2, we classify services

into distinct categories, each of which presents somewhat different challenges for

mar-keters and other managers We also need to draw a distinction between marketing of

ser-vices and marketing goods through service In the former, it's the service itself that is being

sold and in the latter, service is added—usually free of charge—to enhance the appeal of

a manufactured product Now, let's examine each of the nine differences in more detail

C u s t o m e r s D o N o t O b t a i n O w n e r s h i p Perhaps the key distinction b e t w e e n

goods and services lies in the fact that customers usually derive value from services

without obtaining permanent ownership of any substantial tangible elements In many

instances, service marketers offer customers the opportunity to rent the use of a physical

object like a car or hotel room, or to hire the labor and skills of people whose expertise

ranges from brain surgery to k n o w i n g h o w to check customers into a hotel As a

product: the core output

(either a service or a manufactured good) produced by a firm

goods: physical objects or

devices that provide benefits for customers through

ownership or use

customers do not obtain ownership of services service products are intangible performances there is greater involvement of customers in the production process other people may form part of the product

there is greater variability in operational inputs and outputs many services are difficult for customers to evaluate there is typically an absence of inventories

the time factor is relatively more important delivery systems may involve both electronic and physical channels

F I G U R E 1.3

Basic Differences Between

Goods and Services

Checking in: People are part of

the product in hotel services, so

customer satisfaction depends

on both employee performance

and the behavior of the other

customers

intangible: something that

is experienced and cannot be

touched or preserved

purchaser of services yourself, you k n o w that "while your main interest is in the final

o u t p u t , the way in w h i c h you are treated d u r i n g service delivery can also have an important impact on your satisfaction

S e r v i c e P r o d u c t s as I n t a n g i b l e P e r f o r m a n c e s Although services often include

tangible elements—such as sitting in an airline seat, eating a meal, or getting damaged

e q u i p m e n t r e p a i r e d — t h e service p e r f o r m a n c e itself is basically an intangible T h e benefits of o w n i n g and using a manufactured p r o d u c t c o m e from its physical characteristics (although brand image may convey benefits, too) In services, the benefits come from the nature of the performance T h e notion of service as a performance that cannot be wrapped up and taken away leads to the use of a theatrical metaphor for service management, visualizing service delivery as similar to the staging of a play with service personnel as the actors and customers as the audience

Some services, such as rentals, include a physical object like a car or a power tool But marketing a car rental performance is very different from attempting to market the physical object alone For instance, in car rentals, customers usually reserve a particular category of vehicle, rather than a specific brand and model Instead of worrying about styling, colors, and upholstery, customers focus on price, location and appearance of pickup and delivery facilities, extent of insurance coverage, cleanliness and maintenance

of vehicles, provision of free shuttle buses at airports, availability of 2 4 - h o u r reservations service, hours w h e n rental locations are staffed, and quality of service provided by cus-tomer-contact personnel By contrast, the core benefit derived from owning a physical good normally comes specifically from its tangible elements, even though it may p r o -vide intangible benefits, too An interesting way to distinguish between goods and ser-vices is to place them on a scale from tangible dominant to intangible dominant (illus-

trated in Figure 1.4)

C u s t o m e r I n v o l v e m e n t i n t h e P r o d u c t i o n P r o c e s s P e r f o r m i n g a service

involves assembling and delivering the o u t p u t of a combination of physical facilities and mental or physical labor Often, customers are actively involved in helping create

CHAPTER ONE • WHY STUDY SERVICES; 11

F I G U R E 1.4 Value Added by Tangible versus Intangible Elements in Goods and Services

the service product, either by serving themselves (as in using a laundromat or ATM)

or by c o o p e r a t i n g w i t h service p e r s o n n e l in settings such as hair salons, hotels,

colleges, or hospitals As we "will see in C h a p t e r 2, services can be c a t e g o r i z e d

according to t h e e x t e n t of contact that t h e c u s t o m e r has w i t h t h e service

organization

People as Part of the P r o d u c t In high-contact services, customers not only come

into contact w i t h service personnel, but they may also r u b shoulders w i t h o t h e r

customers (literally so, if they ride a bus or subway during the rush h o u r ) T h e difference

between service businesses often lies in the quality of employees serving the customers

Similarly, the type of customers w h o patronize a particular service business helps to

define the nature of the service experience As such, people become part of the product

in many services M a n a g i n g these service encounters—especially those b e t w e e n

customers and service employees—is a challenging task

Greater Variability i n O p e r a t i o n a l I n p u t s a n d O u t p u t s T h e presence o f

personnel and o t h e r customers in the operational system makes it difficult to

standardize and control variability in both service inputs and outputs Manufactured

goods can be p r o d u c e d u n d e r controlled conditions, designed to optimize b o t h

productivity and quality, and then checked for conformance with quality standards long

before they reach the customer (Of course, their subsequent use by customers will vary

widely, reflecting customer needs and skills, as well as the nature of the usage occasion.)

However, w h e n services are consumed as they are produced, final "assembly" must take

place under real-time conditions, which may vary from customer to customer and even

from one time of the day to another As a result, mistakes and shortcomings are both

more likely and harder to conceal T h e s e factors make it difficult for service

organizations to improve productivity, control quality, and offer a consistent product As

variability: a lack of

consistency in inputs and outputs during the service production process

a former packaged goods marketer observed some years ago after moving to a n e w position at Holiday Inn:

We can't control the quality of our product as well as a Procter and Gamble control neer on a production line can Wlien you buy a box of Tide, you can reasonably be

engi-99 and 44/100ths percent sure that this stuff will work to get your clothes clean When you buy a Holiday Inn room, you're sure at some lesser percentage that it will work to give you a good night's sleep without any hassle, or people banging on the walls and all the bad things that can happen in a hotel 9

N o t all variations in service delivery are necessarily negative M o d e r n service nesses are recognizing the value of customizing at least some aspects of the service offer-ing to the needs and expectations of individual customers In some fields, like health care, customization is essential.10

busi-Harder for C u s t o m e r s to Evaluate Most physical goods tend to be relatively high in

"search attributes "These are characteristics that a customer can d e t e r m i n e prior to purchasing a product, such as color, style, shape, price, fit, feel, and smell O t h e r goods and some services, by contrast, may emphasize "experience attributes" that can only be discerned after purchase or during consumption (e.g., taste, wearability, ease of handling, quietness, and personal treatment) Finally, there are "credence attributes"—characteristics that customers find hard to evaluate even after consumption Examples include surgery and auto repairs, where the results of the service delivery may not be readily visible.11

No I n v e n t o r i e s for S e r v i c e s Because a service is a deed or performance, rather

than a tangible item that the c u s t o m e r keeps, it is " p e r i s h a b l e " and c a n n o t be inventoried Of course, the necessary facilities, equipment, and labor can be held in readiness to create the service, but these simply represent productive capacity, not the product itself Having unused capacity in a service business is rather like running water

i n t o a sink w i t h o u t a stopper T h e flow is wasted unless customers (or possessions requiring service) are present to receive it W h e n demand exceeds capacity, customers may be sent away disappointed, since no inventory is available for backup An important task for service marketers, therefore, is to find ways of s m o o t h i n g d e m a n d levels to match capacity

I m p o r t a n c e of t h e T i m e F a c t o r M a n y services are delivered in real time

Customers have to be physically present to receive service from organizations such as airlines, hospitals, haircutters, and restaurants T h e r e are limits as to h o w long customers are willing to be kept waiting and service must be delivered fast e n o u g h so that customers do not waste time receiving service Even w h e n service takes place in the back office, customers have expectations about how long a particular task should take to complete—whether it is repairing a machine, completing a research report, cleaning a suit, or preparing a legal document.Today's customers are increasingly time sensitive and speed is often a key element in good service

D i f f e r e n t D i s t r i b u t i o n C h a n n e l s U n l i k e manufacturers that require physical

distribution channels to move goods from factory to customers, many service businesses either use electronic channels (as in broadcasting or electronic funds transfer) or combine the service factory, retail outlet, and point of consumption at a single location

In the latter instance, service firms are responsible for m a n a g i n g c u s t o m e r - c o n t a c t personnel T h e y may also have to manage t h e behavior of customers in the service factory to ensure smoothly running operations and to avoid situations in which one person's behavior irritates other customers w h o are present at the same time

AN INTEGRATED APPROACH TO SERVICE

MANAGEMENT

This book is not just about service marketing T h r o u g h o u t the chapters, you'll find c o n

-tinuing reference to two other i m p o r t a n t functions: service operations and h u m a n

resource management Imagine yourself as the manager of a repair garage Or think big,

if you like, as the C E O of a major airline In either instance, you need to be (1) c o n

-cerned on a day-to-day basis that your customers are satisfied, (2) your operational

sys-tems are running smoothly and efficiently, and (3) your employees are not only working

productively but are also doing a good j o b either of serving customers directly or of

helping other employees to deliver good service Even if you see yourself as a middle

manager with specific responsibilities in marketing, operations, or h u m a n resources,

your success in your j o b will often involve the understanding of these other functions

and periodic meetings with colleagues working in these areas In short, integration of

activities between functions is the name of the game Problems in any one of these three

areas may signal financial difficulties ahead

The Eight Components of Integrated Service Management

When discussing strategies to market manufactured goods, marketers usually address

four basic strategic elements: product, price, place (or distribution), and promotion (or

communication) Collectively, these four categories are often referred to as the "4Ps" of

the marketing mix.1 2 However, the distinctive nature of service performances, especially

such aspects as customer involvement in production and the importance of the time

factor, requires that other strategic elements be included To capture the nature of this

challenge, we will be using the " 8 P s " of i n t e g r a t e d s e r v i c e m a n a g e m e n t , w h i c h

describe eight decision variables facing managers of service organizations

O u r visual metaphor for the 8Ps is the racing "eight," a lightweight boat or shell

powered by eight rowers, made famous by the Oxford and Cambridge boat race that

has taken place annually on the River Thames near London for almost 150 years Today,

similar races involving many different teams are a staple of rowing competitions around

the world, as well as a featured sport in the S u m m e r Olympics Speed comes not only

from the rowers' physical strength, but also from their harmony and cohesion as part of

a team To achieve optimal effectiveness, each of the eight rowers must pull on his or her

oar in unison with the others, following the direction of the coxswain, w h o is seated in

the stern A similar synergy and integration between each of the 8Ps is required for

suc-cess in any competitive service business (Figure 1.5).The c o x — w h o steers the boat, sets

integrated service

m a n a g e m e n t : the coordinated planning and execution of those marketing, operations, and human resources activities that are essential to a service firm's success

F I G U R E 1.5

The Eight Components of Integrated Service Management

product elements: all

components of the service

performance that create value

for customers

place, cyberspace, and

time: management decisions

about when, where, and how

to deliver services to

customers

process: a particular

method of operations or

series of actions, typically

involving steps that need to

occur in a defined sequence

the pace, motivates the crew, and keeps a close eye on competing boats in the race—is a metaphor for management

P r o d u c t E l e m e n t s Managers must select the features of both the core product and

the bundle of supplementary service elements surrounding it, with reference to the benefits desired by customers and h o w well competing products perform

P l a c e , C y b e r s p a c e , and T i m e Delivering product elements to customers involves

decisions on both the place and time of delivery and may involve physical or electronic distribution channels (or both), depending on the nature of the service being provided Messaging services and the Internet allow information-based services to be delivered in cyberspace for retrieval by telephone or computer wherever and whenever it suits the customer Firms may deliver service directly to their customers or through intermediary organizations like retail outlets o w n e d by other companies, w h i c h receive a fee or percentage of the selling price to perform certain tasks associated with sales, service, and

c u s t o m e r - c o n t a c t C u s t o m e r expectations of speed and convenience are b e c o m i n g important determinants in service delivery strategy

P r o c e s s Creating and delivering product elements to customers requires the design

and implementation of effective processes A process describes the m e t h o d and sequence

in which service operating systems work Badly designed processes are likely to annoy customers because of slow, bureaucratic, and ineffective service delivery Similarly, p o o r processes make it difficult for front-line staff to do their j o b s well, result in low productivity, and increase the likelihood of service failures

productivity: how

efficiently service inputs are

transformed into outputs

that add value for customers

quality: the degree to which

a service satisfies customers

by meeting their needs,

wants, and expectations

people: customers and

employees who are involved

in service production

Productivity and Quality These elements, often treated separately, should be seen as

t w o sides of t h e same coin No service firm can afford to address either element in isolation Improved productivity is essential to keep costs under control but managers must beware of making inappropriate cuts in service levels that are resented by customers (and perhaps by employees, too) Service quality, as defined by customers, is essential for product differentiation and for building customer loyalty However, investing in quality

i m p r o v e m e n t w i t h o u t understanding the trade-off b e t w e e n incremental costs and incremental revenues may place the profitability of the firm at risk

P e o p l e Many services depend on direct, personal interaction between customers and

a firm's employees (like getting a haircut or eating at a restaurant) T h e nature of these interactions strongly influences t h e customer's perceptions of service quality.1 4 Customers often judge the quality of the service they receive largely on their assessment

of the people providing the service Successful service firms devote significant effort to recruiting, training, and motivating their personnel, especially—but not exclusively— those w h o are in direct contact with customers

promotion and

education: all

communication activities and

incentives designed to build

customer preference for a

specific service or service

provider

P r o m o t i o n a n d E d u c a t i o n N o marketing p r o g r a m can succeed w i t h o u t a n

effective c o m m u n i c a t i o n program This c o m p o n e n t plays three vital roles: providing needed information and advice, persuading target customers of the merits of a specific product, and encouraging t h e m to take action at specific times In service marketing,

m u c h c o m m u n i c a t i o n is educational in nature, especially for n e w customers Companies may need to teach these customers about the benefits of the service, where and w h e n to obtain it, and h o w to participate effectively in service processes Communications can be delivered by individuals, such as salespeople and trainers, or through such media as TV, radio, newspapers, magazines, billboards, brochures, and Web sites

Physical E v i d e n c e T h e appearance of buildings, landscaping, vehicles, i n t e r i o r physical evidence: visual

furnishing, equipment, staff members, signs, printed materials, and other visible cues all or other tangible clues that provide tangible evidence of a firm's service style and quality Service firms need to provide evidence of service manage physical evidence carefully because it can have a profound impact on quality,

customers' impressions In services w i t h few tangible elements, such as insurance,

advertising is often employed to create meaningful symbols For instance, an umbrella

may symbolize protection, and a fortress, security

Price and O t h e r U s e r O u t l a y s This c o m p o n e n t addresses m a n a g e m e n t of the

outlays incurred by customers in obtaining benefits from the service p r o d u c t

Responsibilities are not limited to the traditional pricing tasks of establishing the selling

price to customers, which typically include setting trade margins and establishing credit

terms Service managers also recognize and, where practical, seek to minimize other

costs and burdens that customers may bear in purchasing and using a service, including

additional financial expenditures, time, mental and physical effort, and negative sensory

experiences

Unking Service Marketing, Operations, and Human Resources

As shown by the c o m p o n e n t elements of the 8Ps m o d e l , marketing cannot operate

in isolation from o t h e r functional areas in a successful service o r g a n i z a t i o n

Operations specialists, w h o usually have responsibility for productivity improvements

and quality control, manage the processes required to create and deliver the service

product Similarly, employees are recruited and trained by h u m a n resource managers

Even those w h o have c u s t o m e r - c o n t a c t responsibilities often report to operations

managers

In future chapters, we will be raising the question of h o w marketers should relate to

and involve their colleagues from other functional areas—especially operations and

human resources—in planning and implementing marketing strategies Firms whose

managers succeed in developing integrated strategies will have a better chance of

sur-viving and prospering Those that fail to grasp these implications, by contrast, are likely

to be outmaneuvered by competitors that are more adept at responding to the dramatic

changes affecting the service economy

You can expect to see the 8Ps framework used t h r o u g h o u t this book Although

any given chapter is likely to emphasize just one (or a few) of the eight components,

you should always keep in m i n d the i m p o r t a n c e of integrating the c o m p o n e n t ( s )

under discussion with each of the others w h e n formulating an overall strategy For a

quick clue about the principal focus of each chapter, find the boat diagram on the

opening page of the chapter You'll see that each oar represents one of the 8Ps N o t e

which of the eight oars are highlighted for the chapter you are studying Oars h i g h

-lighted in dark blue indicate those c o m p o n e n t s that will be covered extensively in a

particular chapter, while a m e d i u m blue highlight identifies one that receives

rela-tively brief coverage If an oar remains white, it signals that this c o m p o n e n t is not

fea-tured in the chapter

THE EVOLVING ENVIRONMENT OF SERVICES

We've already noted that the service sector is in an almost constant state of change

What are the forces that drive its growth, shape its composition, and determine the basis

for competition? As shown in Figure 1.6, numerous factors are at work They can be

divided into five broad groups: government policies, social changes, business trends,

advances in information technology, and internationalization and globalization

price and other user outlays: expenditures of

money, time, and effort that customers incur in

purchasing and consuming services

-vented new firms from entering the industry have been dropped in many instances:

Geographic restrictions on service delivery have been reduced, there is more freedom

to compete on price, and existing firms have been able to expand into new markets or

new lines of business

However, reduced regulation is a mixed blessing Fears have been expressed that if

successful firms become too large, through a combination of internal growth and

acqui-sitions, there may eventually be a decline in the level of competition Conversely, lifting

restrictions on pricing benefits customers in the short run as competition lowers prices

but leaves insufficient profits for needed future investments For instance, fierce price

competition among American domestic airlines led to huge financial losses within the

industry during the early 1990s, bankrupting several airlines This made it difficult for

unprofitable carriers to invest in new aircraft and raised troublesome questions about

service quality and safety.15 Profitable foreign airlines, such as British Airways and

Singapore Airlines, gained market share by offering better service on international

routes instead of engaging in damaging price wars

Another important action taken by many national governments has been

privatiza-tion of what were once g o v e r n m e n t - o w n e d services T h e t e r m "privatizaprivatiza-tion," first

widely used in the United Kingdom, describes the policy of transforming government

organizations into investor-owned companies Privatization has b e e n m o v i n g ahead

rapidly in many European countries, as well as in Canada, Australia, N e w Zealand, and

more recently in some Asian and Latin American nations T h e transformation of

opera-tions like national airlines, telecommunication services, and utilities into private

enter-prise services has led to restructuring, cost cutting, and a more market-focused posture

When privatization is c o m b i n e d with a relaxing of regulatory barriers to allow

entry of new competitors, the marketing implications can be dramatic, with foreign

competitors moving into markets that were previously closed to outside investment

Thus, French companies specializing in water treatment have purchased and m o d e r n

-ized many of the privat-ized water utilities in Britain, while American companies have

invested in a n u m b e r of British regional electrical utilities In t u r n , British

Telecommunications has responded vigorously to new competition at h o m e and made

numerous investments around the world, including a strategic alliance with A T & T for

delivery of global services to international companies

Privatization can also apply to regional or local government departments At the

local level, for instance, services such as trash removal and recycling have been shifted

from the public sector to private firms N o t everyone is convinced that such changes are

beneficial to all segments of the population W h e n services are provided by public

agen-cies, there are often cross subsidies, designed to achieve broader social goals W i t h

priva-tization, there are fears that the search for efficiency and profits will lead to cuts in

ser-vice and price increases T h e result may be to deny less affluent segments the serser-vices

they need at prices they can afford Such fears fuel the arguments for continued

regula-tion of prices and terms of service in key industries such as health care,

telecommunica-tions, water, electricity, and passenger rail transportation

N o t all regulatory changes represent a relaxation of government rules In many

countries, steps continue to be taken to strengthen consumer protection laws, safeguard

employees, improve health and safety, and protect the environment These n e w rules

often require service firms to change their marketing strategies, their operational

proce-dures, and their h u m a n resource policies

Finally, national g o v e r n m e n t s control trade in b o t h goods and services

Negotiations at the World Trade Organization have led to a loosening of restrictions on

trade in some services, but not all Some countries are choosing to enter into free-trade

agreements with their neighbors Examples include the N o r t h American Free Trade

Agreement (NAFTA) c o n c l u d e d b e t w e e n Canada, M e x i c o , and the U n i t e d States;

Mercosur and Pacto Andino in South America; and, of course, the European U n i o n , whose membership may soon be expanded beyond the current 15 countries

Social Changes

T h e demand for consumer services—and the ways in which people use them—have been strongly influenced by a host of social changes M o r e people are living alone than before and there are m o r e households c o n t a i n i n g t w o w o r k i n g adults (including telecommuters w h o w o r k from i n - h o m e offices); as a result, more people find t h e m -selves short on time T h e y may be obliged to hire firms or individuals to perform tasks like childcare, housecleaning, laundry, and food preparation that were traditionally per-formed by a household member Per capita income has risen significantly in real terms for many segments of the population (although not all have benefited from this trend) Increasing affluence gives people m o r e disposable i n c o m e and there has b e e n an observed trend from purchasing new physical possessions to buying services and expe-riences In fact, some pundits have begun speaking of the "experience economy."1 6

A c o m b i n a t i o n of changing lifestyles, higher incomes, and declining prices for many high-technology products has meant that m o r e and m o r e people are buying c o m -puters, thus enabling t h e m to use the Internet to send and receive e-mail and access Web sites from around the world In the meantime, the rapid growth in the use of mobile phones and other wireless equipment means that customers are m o r e " c o n -nected" than ever before and no longer out of touch once they leave their homes or offices

Another important social trend has been increased immigration into countries such

as the U n i t e d States, Canada, and Australia These countries are b e c o m i n g m u c h more multicultural, posing o p p o r t u n i t i e s — a n d even requirements—for service features designed to meet the needs of non-traditional segments n o w living within the domes-tic market For instance, many immigrants, even if they have learned to speak the lan-guage of their new country, prefer to do business in their native tongues and appreciate those service organizations that accommodate this preference by offering communica-tions in multiple languages

Business Trends

O v e r the past 25 years, significant changes have taken place in h o w business firms ate For instance, service profit centers within manufacturing firms are transforming many well-known companies in fields such as computers, m o t o r vehicles, and electrical and mechanical equipment Supplementary services once designed to help sell equip-ment—including consultation, credit, transportation and delivery, installation, training, and maintenance—are n o w offered as profit-seeking services in their own right, even to customers w h o have chosen to purchase competing equipment Several large manufac-turers (including General Electric, Ford, and DaimlerChrysler) have b e c o m e important players in the global financial services industry as a result of developing credit financing and leasing divisions Similarly, many manufacturers n o w base m u c h of their competi-tive appeal on the capabilities of their worldwide consultation, maintenance, repair, and problem-solving services In fact, service profit centers contribute a substantial propor-tion of t h e revenues earned by such well-known "manufacturers" as IBM, H e w l e t t -Packard, and Xerox

oper-T h e financial pressures confronting public and nonprofit organizations have forced them to develop more efficient operations and to pay more attention to customer needs and competitive activities In their search for new sources of income, many " n o n - b u s i -ness" organizations are developing a stronger marketing orientation that often involves rethinking their product lines; adding profit-seeking services such as shops, retail cata-

logs, restaurants, and consultancy; becoming m o r e selective about the market segments

they target; and adopting more realistic pricing policies.1 7

Government or legal pressures have forced many professional associations to

remove or relax long-standing bans on advertising and promotional activities A m o n g

the types of professionals affected by such rulings are accountants, architects, doctors,

lawyers, and optometrists, whose practices n o w engage in m u c h more vigorous c o m

-petitive activity T h e freedom to engage in advertising, p r o m o t i o n , and overt selling

activities is essential in bringing innovative services, price cuts, and n e w delivery systems

to the attention of prospective customers However, some critics worry that advertising

by lawyers, especially in the U n i t e d States, simply encourages people to file more and

more lawsuits, many of them frivolous

With increasing competition, often price-based, has come greater pressure for firms

to improve productivity Demands by investors for better returns on their investments

have also fueled the search for new ways to increase profits by reducing the costs of

ser-vice delivery Historically, the serser-vice sector has lagged behind the manufacturing sector

in productivity improvement, but there are encouraging signs that some services are

beginning to catch up Using technology to replace labor (or to permit customer

self-service) is one cost-cutting route that has been followed in many service industries

Reengineering of processes often results in speeding up operations by cutting out

unnecessary steps However, managers need to be aware that cost-cutting measures,

dri-ven by finance and operations personnel without regard for customer needs, may lead to

a perceived deterioration in quality and convenience

Recognizing that improving quality was good for business and necessary for

effec-tive competition has led to a radical change in thinking Traditional definitions of

qual-ity (based on conformance to standards defined by operations managers) were replaced

by the new imperative of letting quality be customer driven This had enormous

impli-cations for the importance of service marketing and the role of customer research in

both the service and manufacturing sectors.1 8 N u m e r o u s firms have invested in research

to determine w h a t their customers want in every dimension of service, in quality

improvement programs designed to deliver what customers want, and in ongoing

mea-surement of h o w satisfied their customers are w i t h the quality of service received

However, maintaining quality levels over time is difficult and customer dissatisfaction

has risen in recent years

Franchising has b e c o m e widespread in many service industries, not only for c o n

-sumer services but also for business-to-business services It involves the licensing of

independent entrepreneurs to produce and sell a branded service according to tightly

specified procedures Because these entrepreneurs must invest their o w n capital,

fran-chising has become a popular way to finance the expansion of multi-site service chains

that deliver a consistent service concept Large franchise chains are replacing (or

absorbing) a wide array of small, independent service businesses in fields as diverse as b o o k

-keeping, car hire, dry-cleaning, haircutting, p h o t o c o p y i n g , p l u m b i n g , quick service

restaurants, and real estate brokerage services A m o n g the requirements for success are

creation of mass media advertising campaigns to promote brand names nationwide (and

even worldwide), standardization of service operations, formalized training programs, an

ongoing search for n e w products, continued emphasis on improving efficiency, and dual

marketing programs directed at both customers and franchisees

Finally, changes have occurred in service firms' hiring practices Traditionally, many

service industries were very inbred Managers t e n d e d to spend their entire careers

working within a single industry, even within a single organization Each industry was

seen as unique and outsiders were suspect Relatively few managers possessed graduate

degrees in business although they might have held an industry-specific diploma in a

field such as hotel management or health care administration In recent years, however,

competition and enlightened self-interest have led companies to recruit m o r e highly educated managers w h o are willing to question traditional ways of doing business and able to bring new ideas from previous work experience in another industry Some of the best service companies are k n o w n for being very selective in hiring employees, seeking individuals w h o will share the firm's strong service quality culture and be able

to relate to customers well W i t h i n many firms, intensive-training programs are n o w exposing employees, at all levels, to new tools and concepts

Advances in Information Technology

N e w and improved technologies are radically altering the ways in w h i c h many vice organizations do business with their customers, as well as altering what goes on behind the scenes M a n y types of technology have important implications for service, including biotechnology, power and energy technology, m e t h o d s technology (how people w o r k and h o w processes are organized), materials technology, physical design technology, and information technology In some cases, technology enables service firms to substitute automation for service personnel B u t in other instances, as sug-gested in recent advertising for Singapore Airlines (Figure 1.7), traditional personal service and new technology may go hand in hand to create an enhanced experience for customers

ser-Perhaps the most powerful force for change in service businesses comes from mation technology, reflecting the integration of computers and telecommunications Digitization allows text, graphics, video, and audio to be manipulated, stored, and trans-mitted in the digital language of computers Faster and m o r e powerful software enables firms to create relational databases that c o m b i n e information about customers w i t h details of all their transactions and then to " m i n e " these databases for insights into new trends, n e w approaches to segmentation, and n e w marketing opportunities Greater bandwidth, made possible by innovations such as fiber-optic cables, allows fast transmis-sion of vast amounts of information so that customer-contact personnel can interact almost instantly with a central database, no matter where they are located T h e creation

infor-of wireless networks and the miniaturization infor-of electronic e q u i p m e n t — f r o m cell

F I G U R E 1.7

Singapore Airlines Promotes

Both Its People and Its

High-Tech Entertainment

Technology

phones to laptops and scanners—allow sales and customer service personnel to keep in

touch while on the move Companies operating information-based services, such as

financial service firms, have seen the nature and scope of their businesses totally

trans-formed by the advent of global electronic delivery systems

In recent years, the development of the Internet and its best-known component,

the World W i d e Web, have provided not only an important n e w m e d i u m of c o m m u n i

-cation between service organizations and their customers, but also the potential for

creating radically new business models for delivery of services Properly designed and c o n

-figured, such Internet-based services offer unprecedented speed and reach For instance,

by taking advantage of the Internet, Amazon.com became a global operation in just a

few short years, marketing its huge array of books, music, and other items through its

Web site and using m o d e r n business logistics to ship purchases quickly to customers all

over the world

However, for many " d o t c o m " companies, including A m a z o n , profitability has

proved elusive and numerous start-up firms have failed In some cases, the problem lies

111 development of inappropriate e-commerce business models that failed to generate

sufficient revenues to cover expenses.2 0 Greater competition than anticipated, failure to

understand customer needs and expectations, p o o r execution, technology failures,

insuf-ficient working capital, and higher operating costs than predicted have all contributed

to such failures Underlying such failures is often a lack of understanding of some of the

key principles of service marketing and management

Technological change affects many other types of services, too, from airfreight to

hotels to retail stores Express package firms such as T N T , D H L , FedEx, and U P S

recog-nize that the ability to provide real-time information about customers' packages has

become as i m p o r t a n t to success as t h e physical m o v e m e n t of those packages

Technology does more than enable creation of new or improved services It may also

facilitate reengineering of such activities as delivery of information, order-taking and

payment; enhance a firm's ability to maintain m o r e consistent service standards; permit

creation of centralized customer service departments; allow replacement of personnel

by machines for repetitive tasks; and lead to greater involvement of customers in

operations through selfservice technology All in all, technology is an important theme r u n

-ning through this book It's covered in detail in Chapter 16

Internationalization and Globalization

The internationalization of service companies is readily apparent to any tourist or

business executive traveling abroad M o r e a n d m o r e services are b e i n g delivered

through national or global chains Brand names such as Air Canada, Burger King,

Body Shop, Hertz, Kinko's, and M a n d a r i n Hotels have spread far from their original

national roots In some instances, such chains are entirely company owned In other

instances, the creator of the original concept has entered into partnership with o u t

-side investors Airlines and airfreight companies that were formerly just domestic in

scope n o w have extensive foreign route networks N u m e r o u s financial service firms,

advertising agencies, h o t e l chains, fast-food restaurants, car rental agencies, and

accounting firms n o w operate on several continents Some of this growth has been

internally generated, b u t m u c h has also c o m e a b o u t t h r o u g h acquisitions of o t h e r

companies

A strategy of international expansion may be driven by a search for new markets or

by the need to respond to existing customers w h o are traveling abroad in increasing

numbers A similar situation prevails in business-to-business services W h e n companies

set up operations in other countries, they often prefer to deal with a few international

suppliers rather than numerous local firms

T h e net effect of such developments is to increase competition and to encourage the transfer of innovation in b o t h products and processes from c o u n t r y to country Developing a strategy for competing effectively across different countries is becoming a major marketing priority for many service firms Franchising offers a way to enable a service concept developed in one nation to be delivered around the world through dis-

t r i b u t i o n systems o w n e d by local investors For example, FedEx and U P S have expanded into numerous countries by purchasing local courier firms

M a n y w e l l - k n o w n service companies around the world are A m e r i c a n - o w n e d ; examples include Citicorp, McDonald's, and Accenture (Andersen Consulting) T h e upscale Four Seasons hotel chain is Canadian N o r t h Americans are often surprised to learn that D u n k i n ' D o n u t s and Holiday Inn are b o t h o w n e d by British companies, while France's G r o u p e Accor owns M o t e l 6 and R e d R o o f Inns and the Hoyts chain

of m o v i e theaters is Australian o w n e d An alternative to mergers and takeovers is strategic alliances, w h e r e several firms w o r k i n g in the same or complementary indus-tries in different countries j o i n forces to expand their geographic reach and product scope T h e airline and telecommunication industries are g o o d examples

Managing in a Continually Changing Environment

It has been said that the only person in the world w h o really appreciates a change is a wet baby However, the willingness and ability of managers in service firms to respond

to the dramatic changes affecting the service economy will determine w h e t h e r their own organizations survive and prosper or are defeated by more agile and adaptive c o m -petitors On the positive side, these changes are likely to increase the demand for many services, and the opening of the service economy means that there will be greater c o m -petition for that demand In turn, more competition will stimulate innovation, notably through the application of new and improved technologies Both singly and in combi-nation, these developments will require managers of service organizations to focus more sharply on marketing strategy

A STRUCTURE FOR MAKING SERVICE MANAGEMENT DECISIONS

As mentioned previously, this text has a strategic focus T h e 8Ps of integrated service strategy are tools that service managers can use to develop effective strategies for mar-keting and managing many different types of services T h e service decision framework reproduced in Figure 1.8 (and described in more depth in the introduction to Part I) outlines some of the key questions managers need to ask Figure 1.8 also indicates which of the 8Ps are particularly relevant in each instance Your challenge is to learn to ask the right questions and to learn to use the resulting answers to develop a viable strat-egy, employing different elements of the 8Ps as appropriate

T h e framework begins with a question that lies at the heart of marketing and

ness strategy in general: What business are we in? D e t e r m i n i n g the nature of the

busi-ness goes beyond just specifying the industry with which a specific service is usually associated Astute managers recognize that competition may c o m e from outside that industry as well as within it H e n c e they ask: W i t h what other goods and services do we

c o m p e t e ? " T h e answers may show that there are several different ways for customers to satisfy their needs.The need for forward thinking in decision making requires that m a n -agers also ask themselves, " W h a t forces for change do we face?" But perhaps the most

valuable insights come from determining what solutions a service offers to customers

Only w h e n service marketers understand what problems customers are trying to solve through use of their products can we truly say that they k n o w what business they are in

F I G U R E 1.8

Relating the 8Ps to the Service Management Decision Framework

T h e question, Who are our customers and how should we relate to them? is also

cen-tral to the study and practice of marketing Recognizing that most readers of this b o o k

already have some familiarity with marketing, we try to build on this prior

understand-ing rather than repeatunderstand-ing the basics of introductory marketunderstand-ing theory and practice

Hence we leave detailed discussion of customers to Part II of the book and focus there

on what is distinctive about service consumption

O n e of the keys to strategy formulation in services, not normally addressed in goods

marketing, is the question: What service processes can be used in our operation? As we show

in this text, the importance of this question goes beyond operational issues Marketers must

understand how the processes used to create and deliver service affect their customers,

influence the nature of the service product, and shape the options for delivering this vice H u m a n resource managers must understand how the choice of processes influences skill requirements and j o b descriptions for employees, including the nature of their interac-tions with customers We examine the issue of service processes in depth in Chapter 2

ser-Conclusion

W h y study services? M o d e r n economies are driven by service businesses, b o t h large and small Services are responsible for the creation of a substantial majority of new jobs, both skilled and unskilled, around the world T h e service sector includes a tremendous vari-ety of different industries, including many activities provided by public and nonprofit organizations It accounts for over half the economy in most developing countries and for over 70 percent in many highly developed economies

As we've shown in this chapter, services differ from manufacturing organizations in many important respects and require a distinctive approach to marketing and other

m a n a g e m e n t functions As a result, managers w h o want their enterprises to succeed cannot continue to rely solely on tools and concepts developed in the manufacturing sector In the remainder of this book, we'll discuss in more detail the unique challenges and opportunities faced by service businesses It's our hope that you'll use the material from this text to enhance your future experiences n o t only as a service employee or manager, but also as a customer of many different types of service businesses!

Study Questions and Exercises

1 Business schools have traditionally placed more emphasis on manufacturing industries than on service industries in their courses W h y do you think this is so? Does it matter?

2 W h y is time so important in services?

3 W h a t are the implications of increased competition in service industries that have been deregulated?

4 Give examples of h o w computer and telecommunications technologies have changed services that you use in your professional or personal life

5 Choose a service company you are familiar with and show h o w each of the eight elements (8Ps) of integrated service management applies to the company

6 Is the risk of unethical business practices greater or lesser in service businesses than in manufacturing firms? Explain your answer

7 W h y do marketing, operations, and h u m a n resources have to be m o r e closely linked in services than in manufacturing? Give examples

8 Answer the four questions associated with " W h a t business are we in?" from Figure 1.8 for Southwest Airlines, Charles Schwab, Aggreko, Intrawest, and eBay

Endnotes

1 The gross domestic product (GDP) and gross national product (GNP) are both widely used measures of a nation's economic activity They differ in their treatment of international transactions For the United States, there is little difference between the two measures, since only a tiny percentage of Americans work abroad and the foreign earnings

of U.S firms are broadly equal to the U.S earnings of foreign firms However, differences between G D P and G N P are substantial for countries w h e r e many nationals work abroad (e.g., Pakistan) or where foreign investment in the c o u n t r y greatly exceeds investment abroad by domestic firms (e.g., Canada)

2 James C C o o p e r and Kathleen Madigan, "Fragile Markets Are Tying the Fed's Hands,"

Business Week, 4 N o v e m b e r 1997', 3 3

3 World Bank, El Mundo delTrabajo en una Economia lntegrada (Washington D.C., 1995)

4 Javier Reynoso, "Progress and Prospects of Services M a n a g e m e n t in Latin America,"

International Journal of Service Industry Management, 10, no 5 (1999), 4 0 1 - 4 0 8

5 See, for example, the discussion of outsourcing information-based services in James Brian

Quinn, Intelligent Enterprise (NewYork: T h e Free Press, 1992), chap 3, 71—97

6 Leonard L Berry,"Services Marketing Is Different," Business, May-June 1980

7 W Earl Sasser, R Paul Olsen, and D Daryl Wyckoff, Management of Service Operations:Text,

Cases, and Readings (Boston: Allyn & Bacon, 1978)

8 G Lynn Shostack, "Breaking Free from Product Marketing,"Journal of Marketing 4 1 , no 2

(April 1977)

9 Gary Knisely, "Greater Marketing Emphasis by Holiday Inns Breaks Mold," Advertising

Age, 15 January 1979

10 Curtis P McLaughlin, " W h y Variation R e d u c t i o n Is N o t Everything: A N e w Paradigm

for Service Operations," International Journal of Service Industry Management 7, no 3 (1996),

1 7 - 3 1

11 This section is based onValarie A Zeithaml, " H o w C o n s u m e r Evaluation Processes Differ

Between Goods and Services," in J A Donnelly and W R George, Marketing of Services

(Chicago: American Marketing Association, 1981), 1 8 6 - 1 9 0

12 T h e 4Ps classification of marketing decision variables was created by E J e r o m e McCarthy,

Basic Marketing: A Managerial Approach ( H o m e w o o d , IL: R i c h a r d D Irwin, Inc., 1960)

13 Since the late 1970s, many theorists have tried to go beyond the 4Ps to capture the

complexity of service marketing in memorable fashion, emphasizing singly or in

combination, such factors as processes, personnel, and peripheral clues O u r 8Ps m o d e l of service management has b e e n derived and expanded from a framework that encompassed seven elements: the original 4Ps, plus Participants, Physical evidence and Process; it was proposed by Bernard H B o o m s and Mary J Bitner, "Marketing Strategies and

Organization Structures for Service Firms," in J H Donnelly and W R George, Marketing

of Services (Chicago: American Marketing Association, 1981), 4 7 - 5 1 Subsequently, B o o m s

created a cartoon diagram showing seven little "pea people," t w o of t h e m carrying oars, lifting a peapod-shaped boat This gave us the idea for t h e m e t a p h o r of a racing "eight," comprising eight rowers (the eighth being labeled "productivity and quality") plus a

coxswain to control the boat's speed and direction

14 For a review of the literature on this topic, see Michael D Hartline and O C Ferrell,

" T h e M a n a g e m e n t of C u s t o m e r C o n t a c t Service Employees," Journal of Marketing 60, no

4 (October 1996): 5 2 - 7 0

15 T i m o t h y K Smith, " W h y Air Travel Doesn't Work," Fortune, 3 April 1995, 4 2 - 5 6 ; and Bill Saporito, " G o i n g N o w h e r e Fast," Fortune, 3 April 1995, 58—59

16 B.Joseph Pine II and James H Gilmore, The Experience Economy (Boston: Harvard

Business School Press, 1999)

17 See Christopher H Lovelock and Charles B.Weinberg, Public and Nonprofit Marketing, 2 / e

( R e d w o o d City, C A : T h e Scientific Press/Boyd and Davis, 1989); and Philip Kotler and

Alan Andreasen, Strategic Marketing for Nonprofit Organizations, 5 / e ( U p p e r Saddle River,

NJ: Prentice-Hall, 1996)

18 SeeValarie A Zeithaml, A Parasuraman, and Leonard L Berry, Delivering Quality Service

( N e w York: T h e Free Press, 1990); and Sandra Vandermerwe, " T h e Market Power Is in the

Services Because the Value Is in the Results," European Management Journal 8, no 4 (1990)

19 Diane Brady,"Why Service Stinks," Business Week, 23 O c t o b e r 2000, 1 1 8 - 1 2 8

20 See MarciaVickers, "Models from Mars," Business Week, 4 September 2 0 0 0 , 1 0 6 - 1 0 7 ; and Jerry U s e e m and Eryn Brown, " D o t - C o m s : W h a t Have We Learned?" Fortune, 30

O c t o b e r 2000, 8 2 - 1 0 4

chapter-twO

Understanding Service Processes

Susan Munro, Service Consumer

Susan Munro, a final-year business student, had breakfast and then

clicked onto the Internet to check the local weather forecast It

pre-dicted rain, so she grabbed an umbrella before leaving the apartment

and walking to the bus stop for her daily ride to the university On the

way, she dropped a letter in a mailbox The bus arrived on schedule It

was the usual driver, who recognized her and gave a cheerful greeting

as she showed her commuter pass The bus was quite full, carrying a

mix of students and office workers, so she had to stand

Arriving at her destination, Susan left the bus and walked to the

College of Business Joining a throng of other students, she took a seat

in the large classroom where her finance class was held The professor

lectured in a near monotone for 75 minutes, occasionally projecting

charts on a large screen to illustrate certain calculations Susan

reflected that it would be just as effective—and far more convenient—

if the course were transmitted over the Web or recorded on videotapes

that students could watch at their leisure She much preferred the

mar-keting course that followed because this professor was a very dynamic

individual who believed in having an active dialog with the students

Susan made several contributions to the discussion and felt that she

learned a lot from listening to others' analyses and opinions

She and three friends ate lunch at the recently modernized Student

Union The old cafeteria, a gloomy place that served boring food at high

prices, had been replaced by a well-lit and colorfully decorated new food

court, featuring a variety of small kiosks These included both local

sup-pliers and brand-name fast-food chains, which offered choices of

sand-wiches, as well as health foods and a variety of desserts Although she

had wanted a sandwich, the line of waiting customers at the sandwich shop was rather long, so Susan joined her friends at Burger King and then splurged on a caffe latte from the adjacent Hav-a-Java coffee stand The food court was unusually crowded today, perhaps because of the rain now pouring down outside When they finally found a table, they had to clear off the dirty trays "Lazy slobs!" commented her friend Mark, referring to the previous customers

After lunch, Susan stopped at the cash machine, inserted her bank card, and withdrew some money Remembering that she had a job interview at the end of the week, she telephoned her hairdresser and counted herself lucky to be able to make an appointment for later

in the day because of a cancellation by another client Leaving the Student Union, she ran across the rain-soaked plaza to the Language Department In preparation for her next class, Business Spanish, she spent an hour in the language lab, watching an engaging videotape of customers making purchases at different types of stores, then repeat-ing key phrases and listening to her own recorded voice "My accent's definitely getting better!" she said to herself

With Spanish phrases filling her head, Susan headed off to visit the hairdresser She liked the store, which had a bright, trendy decor and well-groomed, friendly staff Unfortunately, the cutter was running late and Susan had to wait 20 minutes, which she used to review a chapter for tomorrow's human resources course Some of the other waiting customers were reading magazines provided by the store Eventually, it was time for a shampoo, after which the cutter proposed

a slightly different cut Susan agreed, although she drew the line at the

suggestion to lighten her hair color She sat very still, watching the

process in the mirror and turning her head when requested She was

pleased with the result and complimented the cutter on her work

Including the shampoo, the process had lasted about 40 minutes She

tipped the cutter and paid at the reception desk

The rain had stopped and the sun was shining as Susan left the

store, so she walked home, stopping on the way to pick up clothes from

the cleaners This store was rather gloomy, smelled of cleaning

sol-vents, and badly needed repainting She was annoyed to find that

although her silk blouse was ready as promised, the suit she would

need for her interview was not The assistant, who had dirty fingernails,

mumbled an apology in an insincere tone without making eye contact

Although the store was convenient and the quality of work quite good,

Susan considered the employees unfriendly and not very helpful

Back at her apartment building, she opened the mailbox in the

lobby Her mail included a bill from her insurance company, which

required no action since payment was deducted automatically from

her bank account There was also a postcard from her optometrist,

reminding her to schedule a new eye exam Susan made a mental

note to call for an appointment, anticipating that she might need a

revised prescription for her contact lenses She was about to discard

the junk mail when she noticed a flyer promoting a new dry-cleaning

store and including a coupon for a discount She decided to try the

new firm and pocketed the coupon

Since it was her turn to cook dinner, she looked in the kitchen to

see what food was available Susan sighed—there wasn't much Maybe

she would make a salad and call for delivery of a large pizza

define a service process

describe four different types of service processes and their strategic implications

recognize that the nature of a customers contact with a service varies according to the underlying process

27

HOW DO SERVICES DIFFER FROM ONE ANOTHER?

T h e service sector is amazingly varied, and the variety of transactions made by Susan

M u n r o represents only a small sample of all the services directed at individual c o n sumers As a review of the listings in the Yellow Pages will show, there are also many business services directed at corporate purchasers It's surprising h o w many managers in service businesses consider their industries to be u n i q u e — o r at least distinctively differ-ent Certainly, there are distinctions to be drawn, but it would be a mistake to assume that any one service used by Susan has nothing in c o m m o n with any of the others she might use

-In Chapter 1, we looked at some of the ways in which services might differ from goods In this chapter, our focus is on developing useful ways of grouping services into categories that share managerially relevant characteristics, especially as they relate to

marketing strategy In particular, we examine the nature of the processes—a key element

among the 8Ps—by which services are created and delivered We find that important insights can be gained by looking for similarities between "different" service industries

T h e more service managers can identify meaningful parallels to their o w n firms' tions, the better their chances of beating the competition by borrowing good ideas from other businesses O n e hallmark of innovative service firms is that their managers have been willing to look outside their own industries for useful ideas that they can try in their own organizations We start our search for useful categorization schemes by exam-ining h o w goods have traditionally been classified

situa-The Value of Classification Schemes

Classification schemes are the primary means used by researchers to organize items into different classes or groups for the purpose of systematic investigation and theory devel-opment They are as useful in management research as in pure science Marketing prac-titioners have long recognized the value of developing distinctive strategies for different types of goods O n e of the most famous classification schemes divides goods into c o n -venience, shopping, and specialty categories, according to h o w frequently consumers buy t h e m and h o w m u c h effort they are prepared to put into comparing alternatives and locating the right product to match their n e e d s 2 This scheme helps managers obtain a better understanding of consumer expectations and behavior and provides insights into the management of retail distribution systems This same classification can also be applied to retail service institutions, from financial service providers to hair salons

Another major classification is between durable and nondurable goods Durability

is closely associated with purchase frequency, which has important implications for the development of b o t h distribution and communications strategies Although service per-formances are intangible, the durability of benefits is relevant to repurchase frequency For example, you probably purchase a haircut less often than you buy a caffe latte (at least if you are a typical student or a coffee connoisseur)

Yet a n o t h e r classification is c o n s u m e r goods (those purchased for personal or household use) versus industrial goods (those purchased by companies and other orga-nizations) This classification relates not only to the types of goods purchased—although there is some overlap—but also to methods for evaluating competing alternatives, p u r -chasing procedures, size of purchase orders, and actual usage O n c e again, this classifica-tion is transferable to services For example, you may be the only one involved in a deci-sion about w h e t h e r to purchase America Online (AOL) or another Internet provider for your o w n computer, but a corporate decision about what online services to select

for employees may involve managers and technical specialists from several departments

Business-to-business services, as the name suggests, include a large group of services

tar-geted at corporate customers and may range from executive recruiting to security and

from payroll management to sandblasting

Although these goods-based classification schemes are helpful, they don't go far

enough in highlighting the key strategic issues We need to classify services into

market-ing-relevant groups, looking for points of similarity among different service industries

We can use the insights from these classifications to focus on marketing strategies that

are relevant to specific service situations

Core Products versus Supplementary Services

Many service products consist of a " b u n d l e " that includes a variety of service elements

and even some physical goods It's important to distinguish between the core product that

the customer buys and the set of supplementary services that often accompany that p r o d

-uct For instance, the core p r o d u c t of t h e l o d g i n g industry is a b e d for the night,

whether that bed is located in a youth hostel d o r m or in a luxury room at a five-star

hotel Youth hostels don't offer many additional services b e y o n d reservations, basic

meals, and simple washing facilities By contrast, as shown in Figure 2 1 , a luxury hotel

will offer many additional services to enhance its guests' visits Some of these services

will be offered free and others will carry a charge, but they are all secondary to the core

service of overnight sleeping accommodation that defines the lodging industry

When we speak of services in this chapter, we are referring to the core service that

the customer is buying—such as taking an airline flight, attending a concert, hiring an

accounting firm to prepare an audit of a company's accounts, or purchasing a h o m e

-owner's insurance policy A cluster of supplementary services that are intended to add

value to the core also accompanies most services Examples include meals and baggage

F I G U R E 2.1 Core Product and Supplementary Services for a Luxury Hotel

tangible: capable of being

touched, held, or preserved

in physical form over time

intangibility: a distinctive

characteristic of services that

makes it impossible to touch

or hold on to them in the

same manner as physical

goods

service on an airline flight, refreshments at a concert, professional advice from an rienced auditor, or a helpful booklet from an insurance company with suggestions on

expe-h o w to protect your expe-h o m e

How Might Services Be Classified?

T h e traditional way of g r o u p i n g services is by industry Service managers may say,

"We're in the transportation business" (or hospitality, banking, telecommunications, or repair and maintenance).These groupings help us define the core products offered by the firm and understand both customer needs and competition However, they may not capture the true nature of each business because service delivery can differ widely even within a single category (i.e., food can be provided to customers in settings that range from airport Taco Bells to four-star restaurants)

Various proposals have been made for classifying services.3 A m o n g the meaningful ways in which services can be grouped or classified are those listed in Table 2 1

D e g r e e o f Tangibility o r Intangibility o f Service P r o c e s s e s Does the service

do s o m e t h i n g physical and t a n g i b l e (like food services or dry cleaning), or do its processes involve a greater a m o u n t of i n t a n g i b i l i t y (like teaching or telephoning)?

Different levels of intangibility in service processes shape the nature of the service delivery system and also affect the role of employees and the experience of customers Susan's burger was a very tangible o u t c o m e of Burger King's service process But the effects of Susan's experiences in her finance and marketing classes are highly intangible and thus m u c h more difficult to evaluate

D i r e c t R e c i p i e n t of the S e r v i c e P r o c e s s Some services, like haircutting or public

transportation, are directed at customers themselves Customers also seek services (like dry cleaning) to restore or improve objects that b e l o n g to t h e m , but they remain uninvolved in the process of service delivery and do not consume the benefits until later T h e nature of the service encounter between service suppliers and their customers varies widely according to the extent to w h i c h customers themselves are integrally involved in the service process Contrast Susan's e x t e n d e d interactions with the haircutter and her brief encounter with the mailbox on her way to school

P l a c e a n d T i m e o f S e r v i c e D e l i v e r y W h e n designing delivery systems, service

marketers must ask themselves w h e t h e r customers need to visit the service organization

at its o w n sites (as Susan did with the university, the hair salon, and the cleaners) or

w h e t h e r service should come to the customer (like the Internet weather information service and the pizza delivery to her apartment) Or perhaps the interaction can occur through physical channels like mail (as with her insurance) or electronic channels (as with her A T M banking transaction).These managerial decisions involve consideration

of the nature of the service itself, w h e r e customers are located (both h o m e and workplace may be relevant), their preferences relating to time of purchase and use, the relative costs of different alternatives, and—in some instances—seasonal factors

Customization versus Standardization Services can be classified according to the

degree of c u s t o m i z a t i o n or s t a n d a r d i z a t i o n involved in service delivery An

important marketing decision is w h e t h e r all customers should receive the same service

or whether service features (and the underlying processes) should be adapted to meet

individual requirements Susan's insurance policy is probably one of several standard

options.The bus service is standardized, with a fixed route and schedule (unlike a taxi),

but passengers can choose w h e n to ride and where to get on and off By encouraging

student discussion and debate, Susan's marketing professor is offering a more customized

course than her finance professor H e r haircut is customized (although other w o m e n

may wear the same style), and although her future eye exam will follow standardized

procedures, the optometrist's analysis of the results will result in a customized

prescription for new contact lenses to correct her vision

customization: tailoring

service characteristics to meet each customer's specific needs and preferences

standardization: reducing

variation in service tions and delivery

opera-Nature of the R e l a t i o n s h i p w i t h C u s t o m e r s S o m e services involve a formal

relationship, in which each customer is k n o w n to the organization and all transactions

are individually recorded and attributed (like Susan's bank or optometrist) But in

other services, unidentified customers u n d e r t a k e fleeting transactions and t h e n

disappear from the organization's sight (for instance, the p h o n e company has no record

of her call from the pay p h o n e ) S o m e services lend themselves naturally to a

"membership" relationship, in which customers must apply to j o i n the " c l u b " and their

subsequent p e r f o r m a n c e is m o n i t o r e d over time (as in insurance or college

enrollment) O t h e r services, like buses, hair salons, dry cleaners, and restaurants, need to

undertake proactive efforts to create an o n g o i n g relationship A l t h o u g h t h e bus

company does n o t record Susan's rides, it could keep records of all m o n t h l y pass

holders so that it can mail out passes every m o n t h , plus a newsletter describing service

improvements or route and schedule changes Sometimes companies create special

club memberships or frequent user programs to reward loyal customers For instance,

both the hair salon and the dry cleaner could record customers' names and addresses

and periodically make t h e m special offers Similarly, Internet sites can be designed to

record visits from a specific user address

To enjoy the services of a Whitewater rafting company, you have to go to a suitable river at the right time of the year

E x t e n t t o w h i c h D e m a n d a n d S u p p l y Are i n B a l a n c e Some service industries

face steady d e m a n d for their services, whereas o t h e r s e n c o u n t e r significant fluctuations W h e n the demand for service fluctuates widely over time, capacity must

be adjusted to a c c o m m o d a t e the level of d e m a n d or marketing strategies must be

i m p l e m e n t e d to predict, manage, and s m o o t h d e m a n d levels to b r i n g t h e m i n t o balance with capacity Some demand fluctuations are tied to events that marketers can't control For example, m o r e students eat l u n c h in the S t u d e n t U n i o n at Susan's university on a rainy day, resulting in a long line at the sandwich shop and a shortage

of empty tables

E x t e n t t o w h i c h F a c i l i t i e s , E q u i p m e n t , a n d P e o p l e A r e Part o f t h e S e r v i c e

E x p e r i e n c e C u s t o m e r s ' service experiences are shaped, in part, by the extent to

w h i c h they are exposed to tangible elements in the service delivery system T h e bus that Susan rides is very tangible; so are her classrooms, t h e table and chairs in the food court, and the V C R in the language lab In contrast, the physical evidence of her insurance company may be limited to occasional letters, and she may see little

m o r e of her bank than m o n t h l y statements and the A T M that she uses at the Student

U n i o n

T h e cheerful bus driver humanizes Susan's bus ride She appears to think better of her dynamic marketing professor than of her dull finance professor She likes her trendy hair salon and the friendly cutter but n o t the smelly dry-cleaning store and its unfriendly employees, even though the quality of cleaning is good W h e n the cleaner fails to deliver her suit on time and, coincidentally, she receives a discount coupon in the mail from a competitor, she's ready to switch

T h e service classification strategies we've just discussed can help managers address the following questions: W h a t does our service operation actually do? W h a t sorts of processes are involved in creating the core product that we offer to customers? And speaking of customers, where do they fit into our operation? T h e answers will differ,

d e p e n d i n g on the nature of the u n d e r l y i n g service process required to create and deliver a particular service So n o w we t u r n to the most fundamental of the 8Ps of

integrated service m a n a g e m e n t — t h e processes by 'which service products are created

and delivered

SERVICE AS A PROCESS

Marketers don't usually need to k n o w the specifics of h o w physical goods are tured—that responsibility belongs to the people w h o run the factory However, the sit-uation is different in services Because their customers are often involved in service p r o -duction and may have preferences for certain methods of service delivery, marketers do need to understand the nature of the processes through which services are created and delivered Furthermore, they should be involved in any decisions to change the nature

manufac-of a given process if that change will affect customers

A process is a particular m e t h o d of operation or a series of actions, typically ing multiple steps that often need to take place in a defined sequence T h i n k about the steps that Susan went through at the hair salon: phoning in advance to make an appoint-ment, arriving at the store, waiting, having a shampoo, discussing options with the cut-ter, having her hair cut and styled, tipping, paying, and finally leaving the store Service processes range from relatively simple procedures involving only a few steps—such as filling a car's tank with fuel—to highly complex activities like transporting passengers

involv-on an internatiinvolv-onal flight

T h e characteristics of the processes that might be used in a particular service ation necessarily reflect the nature of the business W i t h i n certain constraints, the choice

oper-F I G U R E 2.2 Service Decision Framework

as It Relates to Processes

of processes may also be shaped by customer expectations and preferences Looking at

the processes currently used is only part of the story, since alternative processes may be

available for exploration As indicated by our service decision framework (Figure 2.2),

it's important for marketers to understand: (1) w h e t h e r the service is directed at

cus-tomers themselves or at their possessions, (2) w h e t h e r service entails delivery of tangible

or intangible actions, (3) the sequence in which different elements of service delivery

need to be organized, and (4) the role played by information

T h e answers to be gained from such analysis can help managers to identify the

ser-vice benefits offered by the serser-vice product, consider options for improving

productiv-ity and qualproductiv-ity, clarify h o w customer involvement relates to design of service facilities,

evaluate alternative channels for service delivery, and determine if there will be p r o b

-lems in balancing demand for the service against our organization's productive capacity

Finally, understanding these service processes helps managers to evaluate the strategic

roles that might be played by people and technology

people processing: services

that involve tangible actions

to people's bodies

Categorizing Service Processes

A process involves transforming input into output But what is each service tion actually processing and h o w does it perform this task? Two broad categories are processed in services: people and objects In many cases, ranging from passenger trans-portation to education, customers themselves are the principal input to the service process In other instances, the key input is an object like a malfunctioning computer or

organiza-a piece of finorganiza-anciorganiza-al dorganiza-atorganiza-a In some services, organiza-as in organiza-all morganiza-anuforganiza-acturing, the process is physicorganiza-al and something tangible takes place But in information-based services, the process can

be almost entirely intangible

By looking at services from a purely operational perspective, we see that they can

be categorized into four broad groups.Table 2.2 shows a four-way classification scheme based on tangible actions either to people's bodies or to customers' physical possessions and intangible actions to people's minds or to their intangible assets.4

Each of these four categories involves fundamentally different forms of processes, with vital implications for marketing, operations, and h u m a n resource managers We refer to the categories as people processing, possession processing, mental stimulus p r o -cessing, and information processing Although the industries within each category may appear at first sight to be very different, analysis will show that they do, in fact, share important process-related characteristics As a result, managers in one industry may be able to obtain useful insights by studying another one and then creating valuable i n n o -vations for their o w n organization

1 P e o p l e p r o c e s s i n g involves tangible actions to people's bodies Examples of

people-processing services include passenger transportation, haircutting, and dental work Customers need to be physically present throughout service deliv-ery to receive its desired benefits

TABLE 2.2

Understanding the Nature of

the Service Act

Who or What Is the Direct Recipient of the Service?

What Is the Nature

of the Service Act? People Possessions

Tangible Actions (People Processing)

Services directed at people's bodies:

Passenger transportation Health care

Lodging Beauty salons Physical therapy Fitness centers Restaurants/bars Haircutting Funeral services

Intangible Actions (Mental Stimulus Processing)

Services directed at people's minds:

Advertising/PR Arts and entertainment Broadcasting/cable Management consulting Education

Information services Music concerts Psychotherapy Religion

(Possession Processing)

Services directed at physical possessions:

Freight transportation Repair and maintenance Warehousing/storage Janitorial services Retail distribution Laundry and dry cleaning Refueling

Landscaping/lawn care Disposal/recycling

(Information Processing)

Services directed at intangible assets:

Accounting Banking Data processing Data transmission Insurance Legal services Programming Research Securities investment

C H A P T E R T W O • U N D E R S T A N D I N G S E R V I C E P R O C E S S E S 35

2 Possession p r o c e s s i n g includes tangible actions to goods and other physical

possessions b e l o n g i n g to t h e customer Examples of possession processing

include airfreight, lawn m o w i n g , and cleaning services In these instances, the

object requiring processing must be present, but the customer need not be

3 Mental stimulus p r o c e s s i n g refers to intangible actions directed at people's

minds Services in this category include entertainment, spectator sports, theater

performances, and education In such instances, customers must be present m e n

-tally but can be located either in a specific service facility or in a remote location

connected by broadcast signals or telecommunication linkages

4 I n f o r m a t i o n p r o c e s s i n g describes intangible actions directed at a customer's

assets Examples of information-processing services include insurance, banking,

and consulting In this category, little direct involvement with the customer may

be needed once the request for service has been initiated

Let's examine why these four different types of processes often have distinctive

implica-tions for marketing, operaimplica-tions, and h u m a n resource strategies

People Processing

From ancient times, people have sought out services directed at themselves (e.g., being

transported, fed, lodged, restored to health, or made more beautiful) To receive these

types of services, customers must physically enter the service system Because they are

an integral part of the process, they cannot obtain the benefits they desire by dealing at

arm's length with service suppliers They must enter the service factory, which is a

physical location where people or machines (or both) create and deliver service benefits

to customers Sometimes, of course, service providers are willing to come to customers,

bringing the necessary tools of their trade to create the desired benefits in the

cus-tomers' choice of locations

If customers want the benefits that a people-processing service has to offer, they

must be prepared to cooperate actively with the service operation For example, Susan

cooperates with her hair stylist by sitting still and turning her head as requested She will

also have to be part of the process w h e n she visits the optometrist for her next eye

exam T h e level of involvement required of customers may entail anything from

board-ing a city bus for a five-minute ride to undergoboard-ing a lengthy course of unpleasant

treat-ments at a hospital In between these extremes are such activities as ordering and eating

a meal; having one's hair washed, cut, and styled; and spending some nights in a hotel

room T h e output from these services (after a period of time that can vary from minutes

to months) is a customer w h o has reached her destination or satisfied his hunger or is

now sporting clean and stylishly cut hair or has had a good night's sleep away from

home or is n o w in physically better health

It's important for managers to think about process and output in terms of what

happens to the customer (or the physical object being processed) because it helps them

to identify what benefits are being created Reflecting on the service process itself helps

to identify some of the nonfinancial costs—such as time, mental and physical effort, and

even fear and pain—that customers incur in obtaining these benefits

possession processing:

tangible actions to goods and other physical possessions belonging to customers

mental stimulus ing: intangible actions

process-directed at peoples minds

information processing:

intangible actions directed at customers' assets

service factory: the

physi-cal site where service tions take place

opera-Possession Processing

Often, customers ask a service organization to provide treatment for some physical

posses-sion—which could be anything from a house to a hedge, a car to a computer, or a dress to

a dog Many such activities are quasi-manufacturing operations and do not always involve

simultaneous production and consumption Examples include cleaning, maintaining,

stor-ing, improvstor-ing, or repairing physical objects—both live and inanimate—that belong to the

customer in order to extend their usefulness Additional possession-processing services include transport and storage of goods; wholesale and retail distribution; and installation, removal, and disposal of equipment—in short, the entire value-adding chain of activities that may take place during the lifetime of the object in question

Customers are less physically involved with this type of service than with processing services Consider the difference between passenger and parcel transporta-tion In the former you have to go along for the ride to obtain the benefit of getting from one location to another But with package service, you drop the package off at a mailbox or post office counter (or request a courier to collect it from your h o m e or office) and wait for it to be delivered to the recipient In most possession-processing ser-vices, the customer's involvement is usually limited to dropping off the item that needs treatment, requesting the service, explaining the problem, and later returning to pick up the item and pay the bill (like Susan's visit to the cleaners to pick up her blouse and suit) If the object to be processed is something that is difficult or impossible to move, like landscaping, installed software, heavy equipment, or part of a building, the service factory must c o m e to the customer, w i t h service personnel b r i n g i n g the tools and materials necessary to complete the j o b on-site

people-T h e service process could involve applying insecticide in a house to get rid of ants, trimming a hedge at an office park, repairing a car, installing software in a computer, cleaning a jacket, or giving an injection to the family dog T h e output in each instance should be a satisfactory solution to the customer's problem or some tangible enhance-ment of the item in question In Susan's case, the cleaners disappointed her because her suit wasn't ready w h e n promised

Mental Stimulus Processing

Services that interact with people's minds include education, news and information, professional advice, psychotherapy, e n t e r t a i n m e n t , and certain religious activities

A n y t h i n g t o u c h i n g people's minds has the p o w e r to shape attitudes and influence behavior So, w h e n customers are in a position of dependency or there is potential for manipulation, strong ethical standards and careful oversight are required

Receiving these services requires an investment of time on the customer's part However, recipients don't necessarily have to be physically present in a service factory— just mentally in communication with the information being presented.There's an inter-esting contrast here with people-processing services Passengers can sleep through a flight and still arrive at their desired destination But if Susan falls asleep in class or during an educational TV broadcast, she will not be any wiser at the end than at the beginning!

Services like entertainment and education are often created in one place and mitted by television, radio, or the Internet to individual customers in distant locations However, they can also be delivered to groups of customers at the originating location

trans-in a facility such as a theater or lecture hall We need to recognize that watchtrans-ing a live concert on television in one's h o m e is not the same experience as watching it in a c o n -cert hall in the company of hundreds or even thousands of other people Managers of concert halls face many of the same challenges as their colleagues in people-processing services Similarly, the experience of participating in a discussion-based class through interactive cable television lacks the intimacy of people debating one another in the same room

Because t h e core c o n t e n t of all services in this category is information based (whether music, voice, or visual images), it can easily be converted to digital bits or ana-log signals; recorded for posterity; and transformed into a manufactured product, such as

a compact disc, videotape, or audiocassette, which may then be packaged and marketed

much like any other physical good These services can thus be "inventoried" because

they can be consumed at a later date than w h e n they were produced For instance,

Susans Spanish videotape can be used over and over again by students visiting the

lan-guage lab

Information Processing

Information processing, one of the buzzwords of our age, has been revolutionized by

computers But not all information is processed by machines Professionals in a wide

variety of fields also use their brains to perform information processing and packaging

Information is the most intangible form of service output, but it may be transformed

into more enduring, tangible forms as letters, reports, books, tapes, or CDs A m o n g the

services that are highly dependent on the effective collection and processing of

infor-mation are financial services and professional services like accounting, law, marketing

research, management consulting, and medical diagnosis

The extent of customer involvement in both information and mental stimulus p r o

-cessing is often determined more by tradition and a personal desire to meet the supplier

face to face than by the needs of the operational process Strictly speaking, personal

con-tact is quite unnecessary in industries like banking or insurance W h y subject your firm to

all the complexities of managing a people-processing service w h e n you could deliver the

same core product at arm's length? As a customer, why go to the service factory w h e n

there's no compelling need to do so? Susan appears comfortable dealing at arm's length

with both her bank and her insurance company, using a self-service A T M for her

bank-ing transactions and receivbank-ing mail communications from her insurance company

Habit and tradition often lie at the root of existing service delivery systems and

ser-vice usage patterns Professionals and their clients may say they prefer to meet face to

face because they feel that in this way they learn more about each other's needs,

capa-bilities, and personalities However, experience shows that successful personal

relation-ships, built on trust, can be created and maintained purely through telephone or e-mail

contact

DIFFERENT PROCESSES POSE DISTINCTIVE MANAGEMENT CHALLENGES

T h e challenges and tasks facing managers w h o work in each of the four different service categories just described are likely to vary to some extent T h e classification of processes displayed earlier is central in understanding these differences and developing effective service strategies N o t only does it offer insights into the nature of service benefits in each instance, but it also provides an understanding of the behavior that is required of customers As suggested in Figure 2.2, there are also implications for designing the ser-vice delivery system, balancing demand and capacity, applying technology to service processes, and managing people as part of the service product

Balancing Productivity and Quality Concerns

Managers need to recognize that operational processes, however important, are basically just a means to an end T h e key is to understand the specific benefits that a service p r o -vides for its users Many firms bundle together lots of different activities as part of their effort to provide g o o d service B u t innovation in service delivery requires constant attention to the processes underlying delivery of the core product—a bed for the night

in the lodging industry, fast transportation of people in the airline industry, or cleaning and pressing clothes in the laundry industry

N e w processes may allow service organizations to deliver the same (or improved) benefits to customers through distinctly different approaches But firms need to be clear about their objectives and the implications for customers Sometimes, adopting a new process improves productivity by cutting costs at the expense of service quality In other instances, customers are delighted to encounter faster, simpler, and m o r e convenient procedures So, operations managers need to beware of imposing new processes, in the name of efficiency, on customers w h o prefer the existing approach (particularly w h e n the n e w approach replaces personal service by employees with automated procedures that require customers to do m u c h of the w o r k themselves) By collaborating with mar-keting personnel, operations specialists will improve their chances of designing n e w processes that deliver the benefits desired by customers in user-friendly ways A m o n g other things, customers may need to be educated about the benefits of new procedures and h o w to use them

How Customer Involvement Affects Design of the Service Factory

Every service has customers (or hopes to find some), but not every service interacts

w i t h t h e m in t h e same way C u s t o m e r involvement in t h e core activity may vary sharply for each of the four categories of service process N o t h i n g can alter the fact that people-processing services require the customer to be physically present in the service factory If you're currently in N e w York and want to be in L o n d o n tomorrow, you simply can't avoid boarding an international flight and spending time in a jet high above the Atlantic If you want your hair cut, you can't delegate this activity to s o m e -body else's head—you have to sit in the haircutter's chair yourself If you have the mis-fortune to break your leg, you will personally have to submit to the unpleasantness of having the b o n e X-rayed, reset by an orthopedic surgeon, and then encased in a p r o -tective cast for several weeks

W h e n customers visit a service factory, their satisfaction will be influenced by such factors as:

>- encounters with service personnel,

*- appearance and features of service facilities—both exterior and interior,

>• interactions with self-service equipment, and

>• characteristics and behavior of other customers

If customers are required to be physically present throughout service delivery, the

process must be designed around them from the m o m e n t they arrive at what we call the

"service factory." T h e longer they remain at that site, the more likely they are to need

other services, including hospitality basics like food, beverages, and toilets Service

deliv-ery sites that customers visit must be located and designed with their convenience in

mind Furthermore, the nature of the facilities offers important physical evidence of the

service itself If the service factory is ugly, noisy, smelly, confusingly laid out, and in an

inconvenient location, customers are likely to have negative impressions Marketing

managers need to work closely with their counterparts in operations to design facilities

that are both pleasing to customers and efficient to operate At Susan's college, the

redesigned food court at the Student U n i o n replaced a cafeteria that provided a less

attractive experience (as well as worse food) T h e exterior of a building creates

impor-tant first impressions, whereas the interior can be thought of as the "stage" on which the

service performance is delivered T h e interior of Susan's hair salon appeals to her but

that of the dry cleaner does not

Marketers need to work with h u m a n resource managers, too Here the task is to

ensure that those employees w h o are in contact with customers present an acceptable

appearance and have both the personal and technical skills needed to perform well.The

workers at the dry-cleaning store Susan uses appear to lack such skills If service

deliv-ery requires customers to interact with employees, b o t h parties may need some basic

training or guidance on h o w to work together cooperatively to achieve the best results

If customers are expected to do some of the w o r k themselves—as in

self-service—facil-ities and equipment must be user-friendly

Evaluating Alternative Channels for Service Delivery

Unlike the situation in people-processing services, managers responsible for possession

processing, mental stimulus processing, and information processing need not oblige

their customers to visit a service factory Instead, they may be able to offer a choice of

several alternative delivery channels: (1) letting customers come to a user-friendly

factory, (2) limiting contact to a small retail office that is separate from the facfactory, (3) c o m

-ing to the customer's h o m e or office, and (4) conduct-ing business at arm's length

Let's consider the cleaning and pressing of clothes—a possession-processing

service—as an example O n e approach is to do your laundry at h o m e If you lack the n e c

-essary machines, you can pay to use a laundromat, w h i c h is essentially a self-service

cleaning factory If you prefer to leave the task of laundry and dry cleaning to

profes-sionals, as Susan chose to do with her best clothes, you can go to a retail store that serves

as a drop-off location for dirty clothes and a pickup point for newly cleaned items

Sometimes, cleaning is conducted in a space behind the store; at other times, the

cloth-ing is transported to an industrial operation some distance away H o m e pickup and

delivery is available in some cities, but this service tends to be expensive because of the

extra costs involved Innovation in service delivery sometimes takes the form of

chang-ing the delivery location to offer customers greater convenience (see the box,

"Entrepreneur Sells Mobile Oil Changes")

Both physical and electronic channels allow customers and suppliers to conduct

service transactions at arm's length For instance, instead of shopping at the mall, you can

study a printed catalog and order by telephone for mail delivery; or you can shop on the

Internet, entering your orders electronically after reviewing your choices at a Web site

Information-based items, like software, research reports, or real estate listings can be

downloaded immediately to your own computer

Entrepreneur Sells Mobile

Oil Changes

His market is busy delivery fleets

and people on the go

By MIKE KARATH

Staff Writer

HYANNIS—Andrew Todoroff discovered oil on Cape Cod

For people who don't have time to take their car in for an oil

change, Todoroff brings the auto shop to them

About two years ago he opened Lube On Location, which

ser-vices commercial fleets and personal autos across the Cape It

pro-vides oil changes for $26.95; tire rotation for $21.15; wiper blades

starting at $15 and air filter changes starting at $12, tax included

In the next several months he will add a vacuum system to his

van and offer complete interior cleanings for about $30

Todoroff popped up from beneath a red Mazda recently after

finishing an oil change in the parking lot of a Main Street Hyannis

business A drop of motor oil ran down his face as he wiped his

hands

"The woman who owns the car, her husband called and said

she wasn't really taking care of it," Todoroff said "I had been doing

work on his truck, so he asked if I could do his wife's car while she

was at work." He added, "People at the bank saw me doing her car,

and I got more business from it."

Lube On Location specializes in fleets like courier companies

Todoroff services them early in the morning while the trucks are

being loaded and in the late afternoon while they are being

unloaded

"He saves me a ton of money," said Edward Matz, fleet

man-ager of Cape Allied Transit in West Yarmouth, a courier service

"Just in manpower alone he saves me a lot because I don't have to

pay a guy to take the truck to a station, sit and wait for an oil

change."

Matz said Todoroff is so "efficient and clean" with the

com-pany's 70 trucks that he hired him for the comcom-pany's New

Hampshire and Rhode Island terminals as well

Todoroff is registered with the state Environmental Protection

Agency to carry waste oil, which is burned at a Hyannis car

dealer-ship's waste oil furnace He also has a general insurance policy that

covers accidents or spills

Todoroff, 27, a Poughkeepsie, N.Y., native is married and is the

father of a one-year-old son and another on the way In 1989 he

moved to the Cape to be near his brother

He had been working as a cook and a carpet cleaner when a friend suggested he start an auto maintenance business

"I've always worked on my own cars," Todoroff said "He got

me thinking about it, and soon after that, I read about a guy in Entrepreneur magazine who manufactures equipment to do oil changes on location."

Todoroff sold his car to buy used equipment he saw in a trade magazine classified ad

The business has about 600 clients, Todoroff said, but he would not disclose his yearly sales He plans to hire his first employee in May as sales continue to climb

Despite Todoroff's success, skeptics like John Paul, a spokesman for the American Automobile Association in Rockland, don't see on-location businesses as a hot new trend

"I don't know if you're going to see it take off," Paul said

"The idea never really caught on in this part of the country because it is contingent on good weather I'd also say that if it wasn't for places like Jiffy Lube, it would be a service whose time had come."

But Todoroff may have the edge over those businesses Jiffy Lube in Hyannis charges $28 including tax for an individual oil change That is $1.39 more than what Lube On Location charges

"My target customer during the day is someone who doesn't want to waste a Saturday to get an oil change done," Todoroff said

"They have such busy work weeks that when the weekend comes, they'd rather go for a ride or spend their time doing something fun

or interesting."

Service on the go

Lube On Location oil change includes:

Change oil and oil filter, lube ail fittings; check and fill antifreeze, automatic transmission fluid, power steering fluid, brake fluid, windshield washer fluid; check battery, wipers, belts, radiator hoses, air pressure in tires, and head- lights

Price: $26.95 (including tax) Jiffy Lube in Hyannis:

Change oil and oil filter, lube the chassis, check and top off all fluids except antifreeze, vacuum interior, check tires, and clean front and rear outside windows

Price: $28.34 (including tax)

Today's managers need to be creative, because information technology and m o d e r n

package transportation services offer many opportunities to rethink the place and time

of service delivery Some manufacturers of small pieces of equipment allow customers

to bypass retail dealers w h e n a product needs repair Instead, a courier will pick up the

defective item, ship it to a repair site, and return it a few days later w h e n it has been

fixed Electronic distribution channels offer even more convenience because

transporta-tion time can be eliminated For instance, using telecommunicatransporta-tion links, engineers in a

central facility (which could even be on the other side of the world) may be able to

diagnose problems in defective computers and software at distant customer locations

and send signals to correct the defects As we noted in Chapter 1, advances in

telecom-munications and in the design of user-friendly terminals have played an important role

in creating new services and new delivery channels for existing services

Rethinking service delivery procedures for all but people processing may allow a

firm to get customers out of the factory and transform a high-contact service into a

low-contact one W h e n the nature of the process makes it possible to deliver service at

arm's length, the design and location of the factory can focus on purely operational p r i

-orities For example, some industry observers predict that the traditional bank branch

will eventually cease to exist and we will conduct most of our banking and credit union

transactions through ATMs, telephones, or personal computers (PCs) and m o d e m s T h e

chances of success in such an endeavor will be enhanced w h e n the n e w procedures are

user-friendly and offer customers greater convenience

Balancing Demand and Capacity

In general, services that process people and physical objects are m o r e likely to face

capacity limitations than those that are information based R a d i o and television

trans-missions, for instance, can reach any n u m b e r of homes within their receiving area or

cable distribution network In recent years, capacity in such industries has been vastly

increased by greater computer power, digital switching, and the replacement of coaxial

cables with broadband fiber-optic ones Yet technology has not found similar ways to

increase the capacity of those service operations that process people and their physical

possessions without big j u m p s in cost As a result, managing demand effectively is

essen-tial to improve productivity in services that involve tangible actions Either customers

must be given incentives to use the service outside peak periods or capacity must be

allocated in advance through reservations For example, a golf course may employ both

of these strategies by discounting greens fees during off-peak hours and requiring

reser-vations for the busier tee times

Sharp fluctuations in demand pose a problem for many organizations, although

manufacturing firms can inventory supplies of their product as a hedge against

fluctua-tions in demand This strategy enables manufacturers to enjoy the economies derived

from operating factories at steady production levels Few service businesses can easily do

the same For example, the potential income from an empty seat on an airliner is lost

forever once that flight takes off Hotel rooms are equally perishable, and the productive

capacity of an auto repair shop is "wasted if no cars c o m e in for servicing on a day w h e n

the shop is open Conversely, w h e n demand for service exceeds supply, the excess

busi-ness may be lost If someone cannot get a seat on one flight, another carrier gets the

business or the trip is canceled In other situations, customers may be forced to wait in

line until sufficient productive capacity is available to serve them

Unfortunately, in people-processing services there are limits to h o w long customers

will wait in line They have other things to do and become bored, resentful, tired, and

hungry Susan was not willing to wait for a sandwich at the food court, so she chose a

burger instead O n e strategy for reducing or eliminating the need for waiting is to

insti-tute a reservations system, but the times offered should be realistic (Note that Susan's hair salon offered appointments but was not running on schedule the day that she vis-ited it.) In contrast, physical possessions rarely suffer if they have to wait (unless they are highly perishable) In this case, customers are most concerned with the cost and incon-venience associated with delays For example, Susan worries about what she'll do if her only suit is not returned from the dry cleaner in time for her j o b interview!

Applying Technology to Service Processes

In Chapter 1, we mentioned six types of technologies that have important implications for services: biotechnology, power and energy technology, methods technology (how people w o r k and h o w processes are organized), materials technology, physical design technology, and information technology T h e extent to which any of these technologies can be applied to the core product of a specific service business depends on the process underlying the creation and delivery of that product

P e o p l e - P r o c e s s i n g Services Because customers interact directly with the physical

organization, this category of service is particularly concerned with the physical design

of front-stage facilities and s u p p o r t i n g e q u i p m e n t , as well as w i t h the materials employed to construct t h e m and the p o w e r sources used to drive t h e m C u s t o m e r satisfaction with these facilities may be as important as internal operational concerns For instance, the n e w food court at Susan's university, featuring a variety of different food vendors, represents innovation in physical design and in food preparation and delivery methods for institutional food services It not only looks more appealing but also offers more choice As such, the food court probably attracts more customers than the old cafeteria But improved physical features alone may n o t suffice for an organization to achieve its productivity and quality goals T h e right choice of methods technologies plays a key role in determining how employees, customers, and physical elements interact on-site to create the desired service

Many technologies have been refined to serve the needs of specific industries All transportation industries are shaped by n e w developments in power technologies, since these affect speed, fuel consumption, and both noise and air pollution Hospitals are the beneficiaries of advances in the physical design of new equipment needed to diagnose and treat patients, as well as biotechnology Methods of treatment in health care are con-stantly evolving, too, requiring both h u m a n and technical skills that are often practiced

in a team setting Restaurants have improved their productivity by investing in n e w food-related technologies (such as preprocessed meals and improved strains of vegeta-bles derived from biotechnology research) as well as in devices to simplify food prepara-tion and cooking

P o s s e s s i o n - P r o c e s s i n g S e r v i c e s T h e s e services also emphasize power, design,

materials, and methods technologies, since the core products tend to involve physical activities ranging from transport to storage, from installation to cleaning, and from fueling to repair But there's a key difference b e t w e e n people and "things." Unlike

h u m a n beings, whose size and shape are more or less a given, physical possessions can be redesigned to make t h e m easier to service In fact, the first and best service that

manufacturers and architects can give their customers is to design serviceability into

physical goods and facilities Unfortunately, this goal is often ignored There are many examples of equipment that is difficult to package and transport; machines that have to

be totally disassembled by an expert to replace a simple part; electronic controls that only an 11-year-old video-game specialist understands h o w to operate; and buildings that are hard to clean and maintain

C H A P T E R T W O • U N D E R S T A N D I N G S E R V I C E P R O C E S S E S 43 Mental S t i m u l u s - P r o c e s s i n g Services Strategic developments in this category are

driven primarily by information technology (IT) Advances in telecommunications,

from cellular p h o n e s to satellite links and addressable cable TV, have o p e n e d up

significant new possibilities for the information, news, entertainment, and education

industries However, making the most of advances in IT often requires development of

innovative equipment that is, in turn, d e p e n d e n t on advances in physical design and

materials technologies For instance, miniaturization of p o w e r sources (such as tiny

batteries) facilitates creation of smaller and lighter devices like flat screens, lightweight

modems, portable faxes, cellular telephones, and pocket-size hard disks C o m b i n i n g

portability with wireless n e t w o r k s frees users from t h e constraints of fixed-site

installations and dramatically extends the usefulness of the Internet and World W i d e

Web In turn, making use of n e w applications requires changes in methods technology

for both employees and customers

I n f o r m a t i o n - P r o c e s s i n g S e r v i c e s As w i t h services in the previous category,

advances in information-processing services depend heavily on IT For instance,

IT-based telemedicine allows health care providers to transmit real-time patient

information—including scans, X rays, and data from m o n i t o r i n g e q u i p m e n t — t o a

distant expert w h o can provide immediate consultation and advise local providers on

what treatments to offer O n c e again, these IT advances are closely allied to physical

design, materials, and methods technologies

Making the M o s t of I n f o r m a t i o n T e c h n o l o g y It's clear that i n f o r m a t i o n - b a s e d

services (a t e r m that covers b o t h mental stimulus processing and information

processing) have the most to gain from advances in information technology, because

they allow the operation to be physically separate from customers M o d e r n

telecommunications and computer technologies enable customers to connect through a

computer (or other input-output devices, such as an ATM) with the service provider's

system in a n o t h e r location For example, customers of a brokerage firm, such as

Charles Schwab or E-trade, can connect to the company through the Internet and then

manage their own portfolios, keying in orders for buying and selling stocks on their

own computers

The Internet offers new ways to deliver service for a broad array of industries

Many Web sites, however, offer an example of marketing goods through service rather

than marketing a core service product Consider Figure 2.3 In the case o f F l o o z c o m ,

the core product—financial services—can be delivered directly via e-mail In the case of

Lands' End, by contrast, the site offers only supplementary services, including

informa-tion about the goods sold by the company and the opportunity to order and pay for

them online Actual delivery of the clothing sold by Lands' End requires the use of

phys-ical channels

Several of the services used by Susan M u n r o employ IT applications designed not

only to link customers in one location with providers in another, but also to enable

cus-tomers to perform self-service For instance, she accessed an I n t e r n e t site to get a

weather forecast, and w i t h d r e w m o n e y from an A T M In the case of her Business

Spanish course, technology allowed Susan to learn from viewing videotapes that were

probably recorded elsewhere several years earlier T h e ability to offer customers

self-service through automated e q u i p m e n t (such as A T M s ) , intelligent telephones, and

the Internet is of growing importance for service marketing strategy.7

Radio and television provide many examples of h o w technology has transformed

the nature of the core product and its delivery system From studio symphony

perfor-mances to electronic churches and call-in gardening advice programs, broadcasting—

and now interactive cable—has created n e w ways to bring advice, entertainment,

cul-information-based vices; all services in which

ser-the principal value comes from the transmission of data to customers (includes both mental stimulus pro-cessing and information pro-cessing)

F I G U R E 2.3

Web sites can deliver

Flooz.corn's electronic gift

certificates directly but

ture, and spiritual enlightenment to widely scattered audiences In many countries, e d u cation is offered through electronic channels as an alternative to the traditional m o d e of face-to-face presentations in a physical classroom

-Entire virtual universities are springing up, such as the University of Phoenix in the U n i t e d States O n e of the oldest and most extensive efforts of this nature is the

O p e n University ( O U ) in Great Britain T h e OU has been offering degree programs

to students n a t i o n w i d e t h r o u g h the electronic campus of the British Broadcasting

C o r p o r a t i o n (BBC) for over 30 years Anyone can watch or hear the broadcast p r o grams, of course, b u t students also receive p r i n t e d course material and videotapes through the mail and c o m m u n i c a t e w i t h tutors by mail, e-mail, or telephone In a

-n u m b e r of courses, real-time class discussio-ns betwee-n i-nstructors a-nd stude-nts take place by telephone and a few even use videoconferencing Yet these techniques still cannot provide all the features and benefits of education on a physical campus, w h e r e

m u c h of the learning takes place outside the classroom So, to provide some of the advantages of traditional education, the OU encourages advanced students to partici-pate in short residential programs, often held on a real college campus d u r i n g vacation periods

T h a n k s to advances in technology, distance education has b e c o m e international

in scope It offers particular potential in Africa, w h e r e only 3 percent of 18 to 25 year olds enroll in college and few have any business experience In 1997, the W o r l d Bank launched the African Virtual University, w h i c h enables students in 16 African c o u n -tries to take courses and seminars taught by professors from universities around the world Instructors deliver lectures in front of cameras in their o w n classrooms and

t h e v i d e o is r o u t e d via fiber optics, I S D N lines, or satellite to an u p l i n k in

W a s h i n g t o n , D C F r o m t h e r e it is transmitted by satellite to various locations in Africa, w h e r e a student in Ghana can talk with the instructor in real time via stan-dard telephone lines while students in Kenya, Tanzania, and Z i m b a b w e listen to the dialog