Service Management Operations, Strategy, and Information Technology Fifth Edition James A. Fitzsimmons Wim H, Seay Centennial Professor af Business University of Texas ot Austin Mona J. Fitzsimmons oa Beston Bur Ridge, IL Dubuque, IA Madson, WI NewYork Sanfrancisco St Louis angick Gogotd Ceraeae Kuala Lumpur “Lisbon London Madd Mexico City Mian Monreal New Delhi Santiago Scou! Sngepera Syoray Taipe! TrentoTo Our Family Michael, Kate, and Colleen Gary Samantha, Danwin, and Jordan ‘Melba Jott In Memory of Willam H, Seay SERVICE MANAGEMENT, FIFTH EDITION Inertial Ean 2008 Bicsve ih hy MoGraw-Hll Bdsation (Asi), fer enuf and export. Ths book st be reerpares tom th nanny o whieh sl by MeGaw aloe Intraoral [iscsi ao avalbles Nor Ames, Publshed by McGraw Hews abusnes unit of The MeGra-Hl Compaaies, fe. 123, ‘Avene ofthe Amerins, New You NY 1002. Copyright © 2006, 200% 2001, 198, 1994 by “Tee MeGrawil Cnpaies, Ie Allright eared Nop ofthe ptteato nay be ‘sproéied or cise in any form or by any mana, a toed ns databace retoad system, withthe por ween consent of Te Metal Caspies, Ine nln, but oni in any network er her eloczoie rage or tnesin, oe onde for dacs lenny Some spoils netocingeeeuone and pit cormponss, may aot be avaleo customs ‘side the Une Snes, 10 09 08 o7 06 as 20 09 08 07 06 cr 3m Liay of Coss Coal Number 2004055202 ‘When ordering this tide, use ISBN O7-124450.9 Price in Singapore‘The McGraw-Hill/Irwin Series ‘OPERATIONS MANAGEMENT Boeri Cass Comer Supply Cas ops Mansgaest (te, neta Agung ‘Operations Manapenen or Campedtive Sout Bie Devaar Riche ‘pean Management teraag Monstering nd Serves Ei Saton Dose He Mangere Partai ned Seply Management Opeatostoncom ‘Sond Eaton Fite Gloot Operaines Management Finns ae Fsinons ‘Operaens Management Cases Pia easoe Pree Management Manse State Tet Dad coe ogp 2 peux Facory Phe, Jacobs ed Wybade Wy ERD? Kaden Schonberg Operon nazenest ‘Seen eon ‘Sete eps Management Hot Bion Pureasng ad Suppy Chain lth in etapa Sik ‘ate Drie Operations Mangement Bo Bltoe dose, Seats ade HOM Operators Mamagomen: Pra Elion robin and Operas Anas Fy Ein Neto Compete Mantras Mansgewcrt, Pre ttm Ines fermion Stems Proje Danapeneet, ‘me Bion SimProje a rec Manaseoent Sinuaden or Claro Isrcton Fru Bon Seite Operatives tanazement Contemporary (Cheaper sua Case Sept Kura ud Ch ets Anaad improvement Sent er Krink Sine Let ‘Dsgneg nd Managing he Supls ‘Som Etior Operon Manasene ‘Spun zaioe ‘ins, Bor, Winer abe aeaactarag Pasay & Coats) Syste Fp on sia FrstEasoeAbout the Authors lames A, Ftesinmons resived a BSB. ia intial engineering fromm the University ‘of Michigan, an MBA fro: Westra Michigan University and a Ph.D. with distinction ‘rom the University of California at Los Angeles. His research in the area of emer- ‘gency ambulance location won the Stan Hardy Award in 1983 for te best paper pub- lished in the field of operations management. A computer program, ceferred to a8 CALL, has been used by major cities worldwice to plan emergency arsbulance sys- roms. Consulting assigaments include the RAND Corporation; the US. Air Foee; the ities of Los Angeles, Denver, Austin, Mefbourne, and Auckland; the Texas comptrol- ler, General Motors; La Quinta Motor Ina; Greyhound; TRICON Restauaats Intex. national; and MeDonalé’s, Teaching experience includes faculty appointments atthe University of California at Los Angeles, California State University t Northridge, the ‘University of New Mexico, Boston University Overseas Graduate Program, California. Polytechnic State University a San Luis Obispo, and the Helsinki Schocl of Heonemsics and Businses, Ho isa registered profesional engineerin the eats of Michigan and bas ‘eld industial engineering postions at Corning Giass Works and Hughes Aireraft Com- ‘pany, He served inthe US, Air Force as aa oficer in charge of base construction pea) ‘es, He held the position of Ph.D. graduate adviser freight year in the Departnen: of ‘Management at the University of Texas and was nominated for six teaching awards. ‘With Mona Ftesimmons he edited New Service Development: Creating Memorable Ex. _periencas published in 2000 by Sage Publication. Ho currently cores as service oper- ‘ations area editor far Production and Operations Management and member ofthe ‘editorial review board ofthe Journal of Seruize Research. ‘Mona J Fissimmons, a graduste ofthe University of Michigan, received hor undor- ‘graduate degree in journalism with major supporting workin chemistry and psychol- ‘oy, lr graduate wrk was in geology and st has taught in publi and private schools, ‘and atthe university level. She has done writing and editing forthe Encyclopaedia Bri tannica Education Corporation and for various professional journals and organizations ‘With James Fitzsimmons she edited New Service Development: Creating Memorable ‘Experiences published in 2000 by Sage Publications Her aoaprofessional activities hhave included voluateer work forthe Red Cross aquatics program and in wildlife re= Iabilftation. She hes pecticular interests in tke areas of environmental issues and the responsibilities of patients and piyscins in heath care.Table of Contents _ Preface xii Overview of the Book xiv PART ONE UNDERSTANDING SERVICES 1 Chapter 1 The Role of Services in an Economy 3 Leeming Objectives 3 Chapter Preview 4 Service Definitions 4 Dependency of Manufacturing on Services 4 Economic Evolution $ Stages of Beonomie Development Preinduria! Soeety 7 Induct Socio 8 Posinducrial Socieny 8 Nature ofthe Service Sector 9 New Experience Economy 11 Sources of Service Secior Growth 12 Innoveion 12 ‘Social Trends 13 ‘Service Benchmark: Wal-Mart is Number One oa the Fortune S00 List 14 ‘Summary It Key Terms and Definitions 15 “Topies for Discussion 15 Interactive Exercise 15. Selected Bibliosrephy 15 Endnotes 15 Chapter 2 ‘The Nature of Services earning Objectives 17 Caapter Preview 18 Service Classification 18 ‘The Service Package 19 Distintive Characteristics of Service Operations 21 ‘CastmerParcpation i the Serie Process 20 Simatareiy 2 Pershabliy 2 Intangiitiy 26 Hleteropensiy 25 Classifying Services for Suatgic Insights 25 Mare ofthe Senicedet 26 Relanonship with Customers. 27 W Customization and demons 27 Nate of Demand and Supply 28 Method of Sonica Delivery 29 ‘Aa Open-Systoms View of Services 29 Service Benchmark: Outside the Box 31 Summary 31 Key Terms and Definitions 32 “Topics for Discussion 32 Inseractive Exercise 32 (Case: Village Volvo 33, Case: Xpresso Labo 34 Seleced Bibliography 35 Endnotes 35 Chapter 3 Service Strategy 37 ‘Leaming Objectives 37 Chapter Preview 38 The Steatogic Service Vision 38 Understanding the Compestive Environment of Seevives 40 Competitive Service Suategies 41 (Overall Cost Leadership 4 Difirentiaton #2 Rein 44 ‘Winning Customers inthe Marketplace 44 Qualtee 45 Service Winsrs 46 Senice losers 46 ‘The Competitive Role of Information in Services 46 Creation of Bair 0 try 46 Revenue Generation 37 Databare Asser 38 Produtiviy Enhancement 49 ‘The Viewal Value Chain 1 Firs Sage Msi) 5 Second Stage (Mirorng Capebiiy) 31 Third Stage (New Customer Reacionships) 32 Limits in the Use of Information 52 “Anvicompetiive 52 Rimes 52 Imation of Privacy 52 Data Seewrty 13 elizility 33 eingIformation to Categorize Customors 58 Stages in Servic Firm Compettivensss 53 ‘ailblefor Serie 55owngman $8 Disinccive Competence Achieved 55 WorldClass Serie Delvery 16 ‘Service Benchmark: Cental Market Stuns Conventional Wisdom and Big-Name Products 57 Summary 58 Key Terms and Definitions 58 Interactive Exercise 59 ‘Topies for Discussion 59 Case: America West Airlines $9 (Case: The Best Litle Cookie Hause Around 60 Case: The Alamo Drafthouse | 62 Chapter 3 Supplement Data Envelopment Analysis (DEA) 64 Measuring Service Productivity 64 The DEA Model 68 DEA and Srategic Planning 70 Exercises 71 Case: Mid-Atlantic Bus Lines. 71 Selected Bibliography 72 Endnotes 73, PART TWO DESIGNING THE SERVICE ENTERPRISE 75 Chapter 4 New Service Development 77 Learning Objectives 77 Chapter Preview 78 New Service Development 78 Service Design Elements 80 Service Blueprinting 82 Strategic Positioning Through Process Structure $4 ‘Taxonomy for Service Process Design 86 Degree of Diergence 85 (Object ofthe Service Process 87 ‘pe of Customer Conse! 87 Generic Approaches 1 Service System Design $8 Producton-LineAzeroack 88 Customer at Coproducer $0 Customer Conaerpprozch 92 Iigormation Emponermant 93 CCastomer Value Equation 93 Renals Priced forthe Customer 95 Process Quay 95 Price io the Customer 95 Cost ofdesuring the Sovice 95 Secvice Benchmark: A Beter Mousetrap 96 Sammary 96 Key Terms and Definitions 96 ‘Topies for Discusion 97 Interactive Bxercise 97 Case: 100 Yen Sushi House 98 Case: Commmater Cleaning-A New Veoture Proposal 99 Case: Golfith 101 Selected Bibliography 102 Endnotes 104 Chapter 5 ‘Technology in Services 105 Learning Objectives 105 Chapter Preview 106 Technology in the Service Encounter ‘The Emergence of SelfService 107 Avtomation in Services 108 Internet Services 110 (Com of ge forthe Inzerne and eb tes Internet Modes 113, Electronic and Traditional Services 114 E-Business Models 114 ‘Sense Product Dimensiont 11S ‘Seree Process Dimensions 115 Economics of Scalability "116 ‘Technological Imovation in Services 117 Callonges of Adeping New Tecology in Services 117 Managing he Now Technology Adoption Procsss 117 Service Benchmaric Mirosof, Ford Drive Web 108 10 Deel 119) Summary 120 Key Terms and Definitions 120 Topics for Discussion 120 Interactive Exercise 120, Case: Amazon coma 120 Case: Evolution of B2C E-Commerce ia Japan 122 Selected Bibliography 125 Endnotes 125 Chapter 6 Service Quality 127 Lexrniag Objectives Chapter Preview 128 127 Defining Service Quality 128 Dimensions of Service Quay 128 Gaps i Service Quality 129 Measuring Service Quality 131 SERVQUAL 132 Scope of Service Qualty 138 (Quality Service by Design 138 “Incorporation of Quay inthe Service Package 136Taguchi Methods 138 Pokotote Fallafng) 138 ‘Qualy Fonction Deployment 140 Banchmariang 142 Walk-Through Audit 143 Devigning a Wale-Through Audit 144 Implications fer Managemen! 14 ‘The Walk-Through Audit asa Diagnostic Instrument 145 Achieving Service Quality 148 Cost of Qulty 148 Service Process Control 149 Sttsical Press Con! 150 Uneondinonal Sorice Guarance 154 Service Recovery 155 ‘Approaches to Serios Recovery 157 Stages in Quality Development 157 Service Benchmark: Service, uation, and Health (Care Winuers ofthe Malcolm Baldrige National Quality Award 159 Summary 160 Key Terms and Definitions ‘Topics for Discussion 161 Interactive Bxereise 161 Solved Problems 161 Exerises 163 Caso: Clean Sweep, Ine. 167 Case: The Complaint Loter 169 Case: The Museum of Art and Design Chapter 6 Supplement 173 Continuous Improvement 173 (Quality and Productivity Improvement Process Foundation of Continuous Improvement 173 Plan Do-Cheskrdet (PDCA) Cycle 173 Problem Sobing 174 Quality Tools for Analysis and Probless Solving 174 ‘Check Short 174 Ram Chart 176 Hisogam 176 Pare Chart 177 Flowchart 177 Consent. Bf: Diagram Seater iggran 179 Cont Chart 179 Programs for Organizations! Quality Improvement 180 Personne! Progans fr Quay Assirance 180 Qualy-Imarosement Program to Achieve Zero Defes 181 Doming’ 1-Poit Program 182 160 mn i ‘hble of contre Malcolm Baldrige National ual dard 183 1509000 184 StesSigma 185 (Case: Moga Bytes Restaurant Selected Bibliography 192 Enduotes 195 188 Chapter 7 ‘The Service Encounter Learning Objectives 197 Chapter Preview 197 The Service Encounter Triad 398 ‘Breounter Dominated by ke Service Orgaization 199 Contact Pesonnel-Domtaaid Encounter 199 GatomerDominated Encounter 199 ‘The Seeviee Organization 200 Gelnre 200 Empowerment 201 Cone! Ssiems 201 ‘Contac Persoanel 202 Selon 202 Training 204 ‘The Customer 205 “Expeciatons and vinudes 208 The Customer as Coprducer_ 205, Summary of Service Encoumters 207 (Creating a Customer Service Orientaion 207 Service Profit Chain 209 Summary 211 Service Beachaark: Miss Manners 0a Compisint Handling 212 ‘Key Terms and Definitions © 213 ‘Topics for Discussion 213 Iateractive Buereise 213 Case: Amy’ Toe Cream 214 Case: Entrprise Rent-A-Car 215 Selected Bibliography 217 Endnotes 220 197 Chapter 8 ‘The Supporting Facility 223, Leamning Objectives 723, Chapter Preview 224 Servicescapes 224 Behaviors in Servicscapes 225 Enaronmental Dimensions of Sericercapes 225 Facility Design 227 ‘Nate and Objectives of Service Organizations 228 Land dvalabiiy ard Space Reuiremenss 28 Flexibiliy 229Seowty 229 esthetic Faiors 230 The Community and Emironment 230 Process Analysis 231 Process Terminology 231 Facility Layout 233 Prot Layout andthe Work Alocetin Proslem 233 Process Layout andthe Rlatve Location Probl 235 ‘Environmental Poyehology and Orientation 239 Service Benchmark: Waere, Ob Where Shall We Go? 240 ‘Summary 240 Key Terms and Definitions 241 ‘Topics for Discussion 241 Interaetve Exercise 241 Solved Probloms 242 Exercises 243 (Case: Health Maintenance Organization (A). 247 (Case: Health Maintenance Orpanizatioa(B) 247 (Case: Esquire Department Store 248. Case: Central Market 269 Selected Bibliograpby 250 Endnotes 251 Chapter 9 Service Facility Location 253 Learning Objectives 253, Chapter Preview 254 Location Considerations 254 Geographic Representation 255 umber of Facilites 256 Optimizavon Criteria 256 ‘Estimation of Geographic Demand 257 Define te Target Population 238 Sele: a Uc oférea 258 Estimate Geographic Demand 258 Map Geographic Demand 258 Facility Location Techniques 259 Single Fesiiy 260 (Center of Gravity 283 Locating @ Retail Outer 264 ‘MulipleFocttites 263, Site Considerations. 257 Breaking the Rules 267 Compesitive Custoring 258 Sanwraton Marlaing 268 Marketing inermediories 268 ‘Subtituion of Conmaication fr Tmportation 269 Unpact ofthe Ioret on Service Location 279 Separation of Fron from Back Office 270 Geographic Information System 271 Summary 272 ‘Service Benchmark: Here a Bua, Taere a Bus, Everywhere a Bur-Bun 273 Key Terms and Definons 273, “Topics for Diszussion 774 Interactive Exercise 274 Solved Problems 274 Exercises 275, (Case: Health Maintenance Organization (A) 279 Case: Athol Furniture, Ine, 280 Selected Biblograpay 282 Endnotes 282 Chapter 10 Managing Projects 283 Learning Objecives 283 Chapter Preview 283 ‘The Nature of Project Management 284 Chareconsties of Projects 284 Project Managemen Process 284 ‘Selene the Projet Manager 285 ‘Buldng the Project Tear 286 Principles of Efecive Project Management 287 ‘Techniques for Project Management 287 Gant Project Ghats 287 A Gritigue of Gont Chars 288 Consrutng a Project Nework 289 (Criia! Path Method 290 Micro Project for Windows Anas 293 Resource Constraints 295, Activity Crashing 299 Incorporating Uncectaintyin Activity Times 302 otimaing Activity Duration Disrbucions 302 Project Compledon Time Distribution 303 A Crtique ofthe Project Completion Time Anas 304 Problems with Implomenting Critical Path Analysis 305 Monitoring Projects 305 Earned Yue Chart 307 Projet Termination 307 Project History Report 308 Summary 308 Service Benchmark: The House That Warren Built 309) Key Terms and Definitions 209 ‘Topics for Discussion 309 Interactive Exercise 310 Solved Problems 310 Brarcites 312Case: Info-Systems, oe. 317 Case: Whittier County Hospital Selected Bibliography 319 Endootes 320 sie PART THREE MANAGING SERVICE OPERATIONS 321 Chapter 11 Forecasting Demand for Services 323 ‘Learning Objectives 323, Chapter Preview 323 Subjective Models. 324 Delphi Method 324 CGroseimzact Anais 526 Fistorial Analogy 326 Causal Models 327 Regression Models 327 Eemnoneiic Modele 320 Time Series Models 329 1NePariod Moving Average 329 Simple Exponential Smooding 331 Relationship berseena and N33 Forecast ror 336 “Exponential Smoothing with Trond Adictmant 336 ‘Exponential Smoothing vith Scztonal Adpuronant 336 Exzonenil Smoothing wit Tend and Seasonal Adsense 338 ‘Sommory of Exponential Smooshing 340 Summary 340 Service Benchenatk: LL, Bean Improves CallCenter Forecasting 341 Key Terms and Definitions 344 “Tepes for Discussion 344 Ineractive Beercise. 344 Solved Problems. 344 Exorises 246 (Case: On Hollow Mocicel Evaluation Center. 348 ase: Gromial Functions, In. 349 Selected Bibliography 350 Endnotes 350 Chapter 12 ‘Managing Capacity and Demand 351 Learning Objectives 251 Chapter Preview 352 Strategies for Managing Demand 352 Segmaning Denand 353 (fering Price centres 354 Thole of Contents Promoting Of Pook Demand 355 Developing Complementary Services 358 eserctionSytens and Overbcoking 356 Strategies for Managing Capacity 358 Dally BorlokifSckoduing 358 Weey Works Schduling wick Des-OF Constraint 361 Increasing Customer Parclpaion 362 Creating Adutabe Capac 562 Sharing Capecity 368 Grose Training Employees 163 Using Par-Tone Employees 363, Scheduling Pare Time Teller ata Driven Bank 363 ‘Yield Management 364 eld Management Applications 309 Summary 370 Service Benchmark: Yield Management stAmerican Ailines 371 Key Terms and Definitions 373 ‘Topi for Discussion 373 Interactive Exercise 373, Solved Problems. 373 Exercises 375 ‘Case: River City National Bank 379 (Case: Gatenay International Airport 380 (Case: The Yield Management Analyst 382 Case: Sequoia Airtnes 385 Selected Bibliography 386 Endnotes 388 Chapter 13, ‘Managing Waiting Lines 389 Leaming Objectives 389 Chapter Preview 392 Queuing Systems 392 “The Incvitabilty of Waiting 392 The Peychology of Waiting 393 ‘That Old Em Feeling 294 ‘A Footin the Door 394 ‘he Light ofthe End ofthe Tunnel 395 ecwe Me, but as Nex! 395 Thay leo Save, Who St and Bit 305 ‘The Econemics of Waiting 396 Essential Features of Queuing Systems 397 Calling Population 398 ‘Aral Process 398 (Quowe Cofiaration 602 ‘Queus Disiling 406 Service Procaes #08 Summary 407Tale of contents Service Benchmarks Five Minutes in Line is Longer Service Benchmark: Simulation Modeling for ‘Than Five Minutes at Hard Labor 408 ‘Key Terms and Definitions 408 ‘Topies for Discussion 408 Interactive Exercise 408 (Case: Terty Car Rental 409 Case: Bye'll Be Seeing You 410 Chapter 13 Supplement Computer Simulation 412 Systems Simulation 413 ‘Simulation Methodology $13 ‘Moree Caro Simulation 438 Generating Rondom Veviebles 418 Diseyte-Event Simulation 418 ServiceModel Simulation Sofware. 419. Process Reengineering in the Telecommunications Industry 464 Key eras and Definitions 467 ‘Topies for Discussion 467 Interactive Exercise 467 Solved Problems 467 Exercises 469) (Case: Houston Port Authority 473 Case: Freedom Express 473, ase: Renaissance Clinic (B) 474 Seleced Bibliography 475 Endnotes 475 Chapter 15 ‘Demonstration: Customer Service Call Center 422 Service Supply Relationships 477 ‘Process Analysis: Manufacturing Cell 423 Build « Model: Order Processing System Tizaial 425 (Case: Pronto Pia 432 ‘Case: Renaissance Clinic (A) 432 Solved Problens 433 Brewises 436 ‘Sclected Bibliography 440 Endnows 441 Chapter 14 (Capacity Planning and Queuing Models Lenming Objectives 43, Chepter Preview 444 Capacity Planning 445 ‘Saige Role of Capac Decsions 445 Analytical Queuing Models 446 ‘Stondard MIM! Model 448 ‘Standard Wile Model 450 MGI Medel 454 General Self Serice MiGin Model 456 Finle-Quewe WA! Model 455 Finke-Queve Wile Masel 456 General Relationships Between System Characteristics 457, Capacity Planning Criteria 457 ‘Average Customer Mating Tene 458 Probability of Becesive Mating $39 Minimizing he Sun of Cstomer Wong Caste. ‘and Serie Case 4650 Probability of Sales Lae’ Because of Inadequate Wing Area 461 Reyurement That speci Profit on Last Unit of Capaciy Should us: Beceed Espected Lats 462 Summary 463 Learning Objectives 477 Chap Preview 478 Supply Cnain Management 478, Nerwork Model 478 Managing Uncerainty 479 Sigply Chin Satie Planing 480 Service Supply Relationships 482 Customer Supplier Duly $82 ‘Managerial implications of Bidirectional ‘443 Relationships 483, ‘Sersice Supply Relationships Are Hubs, Not his ai Service Capacity Is Analogous to leeniory 683 Customer Supplied Inputs Car Vary Quality 483, Sources of Vale in Service Supply Relationships 484 ‘Bidireoionel Optimization 184 Managenentof Productive Capaciny 484 Managemen of Ferishbiiy 485 Outsourcing Services 486 Beefs and Risks of Ousouring Services $87 Clasnfieaion of Business Services 488 Managerial Considerations with Service Employee Development Peoplliigh Importance) 490 FclittorSerise ProcesiLow Importance) #90 Profesional Series Precesiigh mporiance) 391 Service Benchmark: Crtizens Come Fist inkynehburg 491Suumary 491 Key Terms sn Defcitons 402 ‘Topics forDizousson 482 Intercive Enerciso 492 Case: Peapod Smart Shopping for Busy People 453 Case: Martgage Service Game 435 Chapter 15 Supplement Vehicle Routing, 498 Feld Service "498 The Clarke-Wright Algor 499 Veticle Rotizg with Conseains 503 A Manual Rotng Sytem 505 Solved Problems 508 Erereises 508 Case: The Daley Monthly Car Pol Case: Aiport Services, foe. 51 Selected Bibliography” 512 Endnotes 513 Chapter 16 ‘Managing Facilitating Goods S15 Learning Objectives 51S Chapter Preview 517 Inventory Theory 517 ‘Rol of enor te Sonices 517 Charectarisir of meniory Stems S19 Felevans Cote of an imvntory Stem 520 Order Quantity Models 520 Ezoonic Order Quantny 321 Ioventory Mode with Quan Discounts S24 Inventory Model with Planned Shoriages 327 Inventory Management under Uncertainty 529 Inventory Contol Systems 531 Continuous Review Sytem $31 Periodic Rviw Sytem 333 TheABCS of ventory Control 534 ‘Single-Period Model or Perishable Goods 535 “Expeced Voie Anas 336 Margael Analysis 537 Retail Discounting Model 538 Service Benchmark: A Chip in Time Isn't Stale 539 Summary 540 Key Terms and Defiaitions 540, ‘Topies for Discussion 547 Inreracive Beeise 541 Solved Problens 541 Exercises 543 Case: AD. Small Consulting 549 Case: Last Resort Restaurant 549 (Case: Fhysian Cycles 550 sul Tile of Cartnts x Selected Bittiograply $51 Endnows 551 Chapter 17 Growth and Globalization of Services 553, Lesming Objectives $53, Chapter Preview 554 Domestic Growth and Expansion Swategies 554 Focused Seviee 535 Focused Nomeork 555 Chstred Service 556 Diverse’ Noswork 557 Franchising 557 ‘The Nate of Franciing 337 Bunfits tothe Provohicee 358 Iecuas forte Pranchiver 538. Globalization of Services $60 Generic iceratonalSratgies 60 The Nawwe of he Barderess World S61 Plaming Tranraconal Operations 568 Global Service Stateges | 565 Muticouney Expansion 366 limporing Cistomers 567 Following Your Customer 567 Service Ofthoring 568 Beating he Clock 568 Service Benchmark: Small World and Other Myths 569 Summary 570 Key Terms and Definitions 570 ‘Topics for Disession $71 Interactive Exercise 371 (Case: Goodwill Industries International, nc (Gaze: Federal Expross: Tiger Intemational ‘Acquistion $74 Selected Bibliography Endaotes 578 32 Appendix A: Areas of Standard Normal Distribution 579 Appendix B: Uniformly Distributed Random Nambers (0,1) 580 Appendix C: Values of Le for the MiMe Queuing Model 581 AppendixD: Equations for Selected Queuing Models 583, Namelndex 586 Subject Index 590Preface Servioes touch te lives of every person inthis coun tay every day: food services, communication serv- fees, and emergency services, to name only a few. (ur welfare and the welfare of our economy are now based on services. The activities of manufacturing and agriculture will always be necessary but we can cat only so much food and we ean use only so zany goods. Services, however, ae largely experiential, ‘and we wil always havea limitless appetite for them, Service operations management is firmly estab lished asa field of stay that embraces al service in- dusres, For example, under the leadership of the senior author of this text, the discipline was recog- nized as an academe field and designated a a sepa rite track by the Decision Sciences Institute (DST) at its 1987 Boston meeting. In 1989 the Jaternational Journal of Service Industry Management wes inaugs- rated Finally, the First Intemational Service Ro- search Seminar in Service Management was held in France in 1990, drawing participants from the fields of opertions management, marketing, and organiza- tional behavior. This conference recognized the mul: tidisciplinery nature of services and dropped the adjective “operations” inorder to emphasize the inte= sratve nature of service management. Following the 1996 Orlando DSI service mini-conference, 2 Web site (2Atp/sampson.byx.eda} was established to sup- port faculty and students who are intrested in the Field of service management. Inthe second edition of this text, chapters on proj- et management and managing service inventories ‘were added to make the tex appropriate for use inin- ‘woduetory courses in operations management. TRe text afforded all eudents of business tbe opportunity to study operations from the prospoctive of heir f3- ‘ure employment ina service economy. The third edition recognized the emergence of a new experience economy that takes us beyond the trancaction-based service toa staged and memorable ‘experience, Delivery of services via the Internet wa also an emerging phenorasaon creating considerable ‘excitement asa new channel with a global reach. A ‘ew supplement on compete simulation was added to the walting-line chapter, and a popular computer ‘imation software package called Service Model was provided on a CD-ROM supplied withthe text ‘Tae fourth edition recognized the Impact of the Jotemet on service delivery with a new chapter on EsService that exploced the concept of scalability ‘A new chapter on service supply relationships re- ‘ognized the unique customer-supplier duality that ss in service interactions. Anew feature was the Jnclusion of the Mortgage Service Game, an interac= tive computer simulation that models service supply relationships ‘his edition continues to acknowledge and erapha- size the essential uniqueness of service manager: ‘These are some key features: + The book is writen in an engaging iterary style, makes extensive use of examples, and is based 08 the research and consulting experience of the authors + ‘The theme of managing services for competitive advantage is emphasized in each chapter and pro- vides 2 focus for each management topic. + The integration of marketing, operations, and u- ‘man behavior is recognized a5 cectal to effective service management. + To dispel the common belief that manufecuring management principles can be applied to services ‘without cecogniton ofthe different operating exvi- ronmens, the role of services in soviety and the uniqueness of service delivery ystems are stressed. + The information technologies of yield management, data envelopmeat analysis, and computer simla~ tion are included as iftasrations of three of the steaegc cols of information in managing services. + Empbesi is placed onthe need for continuous ima- ‘provement in quality and productivity in oder 0 compete effectively ina global environment + Tomtivate the reader, a vignetic of a well-known company starts each chapter, illustrating the strate- gio nature ofthe topic to be covered + Each chapter hs a preview, closing summary, key terms and definitions, service benetmark, topics for discussion, an insractive exer, sclved prob Jems and exeteises when appropriat, and one or + Packaged withthe tex is @ CD-ROM costining PawecPoin leone ides, Service Model srulationsofare, Mortgage Service Game, felt location Excel preadthest, chapter cuizes, and Web sts + The instructors manual contains ease analyses, ex reise solutions yield management game, objentive test banks, end lists of supplementary materials. “This edition includes the following pedagosical fea tures in each chapter: Learning Objectives belp students focus on the key cooceps inthe chapter Interactive Ecercises for class participation. Service Benchmarks illustrate oustanding examn- ples of excellence in service Key Terms and Definitions st he conclusion of ‘ach chapter serves asa quick reference and reminder of te new vocabulary just presented. Solved Problems before the exercises in selected ‘chapters Mutat in deal the steps taeen to resolve a quantitative problem. were very fortnate to have the first edition re viewed by several colleagues—ll people of integrity, swig and vision. Thee detailed comments insights, and thousht-provoking suggestions were gratefully re- ceived and incorporated in the text in many places, ‘Special thnks and acknowledgment go to the fol- Towing poople for their valuable reviews ofthe first ‘tition: Mohammad Ala, California State University, ‘Los Angeles; Joanna R. Baker, Virginia Polytechnic Fastiate and State Universi; Mark Davis, Bentley College; Maling Ehrakimpour, Univesity of Rhode Jsland; Michael Gleeson, indiana University; Ray “Haynee, California Polytechnie State University at Sen Luis Obispo, Art Hill the University of Min~ nesota: Sheryl Kimes, Comell University; and Richard Rei the University of New Mexico “The second edition benette from the constructive comments of te folowing reviewers: Kimberly Bates, New York University; Avi Dechtr, California State Uaiverity, Northridgo; Scott Dellzna, East Carolin ‘University: Sheryl Kimes, Comell University; Larry LeBlanc, Vandetbilt Univesity; Robert Lucas, Meto- politn State College of Denvex Barbara Osyk, Uni- ‘versity of Alton; Michael Showalter, Florida State Universi and V. Sridharan, Clemson University ‘The following reviewers couributed their experi- ‘ence and wisdom to the third edition: Sidhartha Das, George Mason Universins Avi Dechter, California State University at Norridge; Byroa Finch, Miami Freace 381 University of Ohio; Edward M. Buf Jr, Metropoli- ‘an State College of Denver; Ken Klassen, California State University at Northridge; Richard Reid Univer- sity of New Mexico, Albuquerque; Ishpal Rekis, California State University at San Marcos; and Ronald Satterfield, Univesity of South Florida ‘We wish to acknowledge to students who assisted us, Fang Wy, PRD. student at the University of Texas st Austin, eesisted in the development of some oxar- ‘ies aad preparation of the PowerPoint lecture pre- sentation forthe second edition. Edmond Gonzales, 2 MBA student at Tews, prepared the chapter (quizzes forthe third edition CD-ROM. A special thai ie extended to Rob Bateman ofthe ProModel ‘Corporation forthe preparation of the Pronto Pizza simlation case and assistance in our adoption of the ServiceModel software. ‘Tho fourth edition reflects the insights and sugges tions of the follow College of William and Mary Si son University; Join Goodale, Ball State Univers ‘Ken Klassen, California State University, Northridge: Pegay Les, Poan State University; Matthew Meuter, California State University, Nortiridge;Jeidesp Mot- \wani, Grand Valley Site University; Bizbieta Trybus, california State University, Northridge; Rohit Verma, University of Utah; and Janet Sayers, Massey Univer: sity New Zealand. A special thanks to colleges Ed ‘Anderson and Dog Mortice for permissioa to in- clude their Morigage Service Game and to Merk [Gnford, an MBA student atthe University of Texas at Austin, for preparing the computer software ‘The Fifh ection benefited from insigh's gathered ata focus group session in Washington, DC, atthe 2003 Decision Sciences Insitute anual ecting. We ae grief fr the many suggestions provided bythe following paricipants: Uday Apte, Southern Methodist University; Sanjesy Bordotc, College of William and Mary, Joe Felan, University of arkansas a Little Rock; Richard Franze, Kennesaw State Uni- verity; Cig Froche, University of Cincinnati; Ying Jae Les, St. Mary's College of California; Katherine MeFadden, Nortem Minois University; Mary Meix- ll, George Mason University; Elst (Chip) Minor, ‘Vaginia Commonwealth Universty, and Jake Simons, Georgia Southern University. We are also indebted 10 Mos. Margaret Seay who continues her generous support ‘We express special appreciation to all our friends ‘ho encouraged us and tolerated our social lapsesiv vane ofthe Book while we produced this book: In partculas, we arein- [Bell suggests thatthe ransformation ftom an industrial to a postindsetil society curs in many ways. Fit, tere isa natural development of services, such as tinsporston and utes to suppor industrial development. As labor saving deviees ae introduced into tae production process, mare workers engage in nonmanafactring activites, such ‘nainteance and repaiz Second, growth ofthe population and mass consuuption of ods inerate wholesale acd retail wade, along wits banking, ea} eat, and insarence, Third, ‘income inreases, the proportion spent onthe necessities af fod and home decreases, ‘nd the remainder creates a demand fr durable and then for services, JEmst Enge, a Prussian statistician of the 19th century, observed that as family ia- ‘comes insrease, the percentage spent on food and durables drope while consumptica of servis that reflect a desire for a more enriched life increases correspondingly. Tas phenomenon is analogous tothe Maslow bicrarcty of needs, which says that once the basic requirements of food and shelter ae satisfied, people seek physical goods and, finally, personal development. However, «necessary condition for the “geod lif" is health and education, In our attempts to eliminate disease and inresse the span of fe, health services become a eitical festue of moderasocies.Chapters Teel tovcinenBeneny 9 TABLE 1.3 Comparison of Societies Femures Pre Use of “Standard dominant Human Unite of Living Society Game Aativity Labor” Socal Life Measure Structure Technology Pre Against Agicuture Raw Extanded —Sub--——=—=Routing Simple hand Industial mature Mining muscle “household atence-—Tradional_—‘tacle power Autrortative Industial Agpinst Coeds Machine tnvidusl—Quantiy Bureaucratic Machines fabrcated production tending of goods Hiearchies! Pos: Among Services Artistic «Community Qualtyef iter. Information Indust persons Creative Hein dependent Intellectual termsof Glos heath, cuca, recrestion Higher education becomes the condition for entry into a postnatal society, which requis professional and technical skis ofits population. Also, claims Zor more services ‘znd socal justice ead growth in government, Coneers for envionmental protection require governmest intervention and illustrate the intaedepondent and even global char _scier of postindustriat problems, Table 1.3 summarizes the features that cheractrizo the prcindustral, industrial, nd postinduswial sages of economic development. Nature of the Service Sector For many people, service is synonymous with servitude and brings to mind workers Aipping hamburgers and waiting on ‘ables. Howevec the service ecto that has own significantly ove the past 50 years connet bo accurately described as composed ont ‘of lo-woge or Tow-skl jobs ia department stores and fast-food restaurants, Instead, asTable 14 shows, dhe fstes-growing jobs within the service sector ar in misella- neous services (eg, healt, education, professional services). Note that job areas ‘whose growth tates were less than the rae of increas in otal jbs (Le, les than 20.82 percent) lst marketshare, even though they showed guns in thoir absolute mumabers. ‘The exceptions are in mining, manufacturing, and federal government, which lot in absolute numbers and thus showed negative growth rats Changes inthe patem of employment will hve implications on where and how people live, on educational requirements, and, consequently, on the kinds of organi zations tat will be important to that society, Industrialization created the need forthe semisilled worker who could be aained in 2 few weeks to perform the routine rachine-tending tasks. The subsequent growth in the service sactor as cause a shift to white-collar occupations. Inthe United States, the year 1956 was a turing point. For the frst time in the history of industrial society, che aumber of white-collar ‘workers exceeded the mumber of blue-collar workers, and tke gep bas been widening since then. The most interesting growth as been in che managerial and professional ‘echnical fields, which are jobs that requires college education.10 Fanon ohcenc Sn, TABLE 1-4 Growth of US. Nonfarm Jobs 1992-2002 fobs Jobs Growth, 1992 sge2 1999 2002, of jobs (in 1/0005) (8) Gn 7,005) OH) (%) Goods preducing industries: “eal 221 a9 24273 1850 449 Mining ‘Gs 8 363 a 113 Consirucion 4492 4n3 6787 317 5108 Manufacturing: Durable goods ro277 2.46 roo 766 =223 "Nondurable goods 7337 72) 675 5m 126 Service producing industies: Tata! 85370 78.81 106939 81.50 2526 “Tarsportaton and publi utes 5718 527 5,898 526 2064 Wholesale wade 5997 552 6.933 528 1361 Real wade 193561782 Bs0e 178 2094 Fares, insurance, apd tealesate 5.602 608 7,638 582 15,70 service y0s2 2675 adsoz 3124 410 Government: ‘State and local 15676 14.48 14831407 ws Federal 2368 2B 2.807 19s 21219 Tetat 108,607 i128 20.82 ‘Sonn na pe a ana ena Coma rm morn ig Oe he ‘Siphon sage Saco iene nian DoE Sema Shamans ana “Today, service industries are the source of economic leadership. During the past 30 years, more than 4 million new jobs have been created inthe service sector to ab~ ‘sorb the infax of women into the workforce and to provice an alternative to the lack of job opportunites ia manafacraring, The service indusries now account Sor approe!= ‘ately 70 percont of the national incore in the United States. Given tha thee isa iit to how many earsa consumer ean use and how much one aa eat and erik, this should not be surprising, The appetite for services, however, especially innovative ones, i in- satable, Among the serviovs presealy in demaed ate those that reflect an aging popu Tatcn, suchas geriatric heath care, and others that refiect a two-income family, such as day cae. ‘The gromth of the servi sector has produced less cystic national economy. Du- ing the past four rosesions inthe United States, employment by service industries has actually increased, while jabs in manufacturing bave bora lost. This suggests that con- ‘sumers ae willing to postpone the purchase of products but will nt sasifice essential services like eausatia, telepkone, banking, heath car, and public services such as Fre and police proxection, ‘Several reasons can expla the rcession-esstantnetare of services. Fist, hy their anture services cannot be inventoried as isthe ease for products. Because cousump- tion and production occur simultansqusly for services, the demand for them is more ‘sable than that for manufactured goods, When the economy falters, many services ‘continue o survive, Hospitals Keep busy as usual, and, while commissions may drop in rel esate, insurance, and security businesses, employees need aot be lid offGrp Ts Thea ef Senor enary Second, during a recession, both consumers and business fim defe capital expes- rgasing wd coonacting orcresive‘ntensve in scenic aberntaries. ihecusomerina activites p. 7 pa pesonaland memorable Preindustral society an Svay-pIT agrarian society stuctared |, Mlustrate how the typeof worc he or she does intiuences a person's lifestyle, Forex axle, contrast farmer, a factory Worker, anda schoolteacher, 2. Is itpossble for an economy to be based entirely on services? 3, Whatis the value of self-service in an economy? ‘The class breaks into small groups. Fach group ideatifies service firms that should be listed inthe top Fortune 100 and places them in rank order of estimated annual Hlsket, J [.; WE. Sasser, Jes and C. W.L. Hart Service Breakthroughs. New York: Free Press, 1996, \Nic, Winter, and Deborah L, Kellogg, “How Profesors of Operations Managernent ‘View Service Operations” Production and Operations Management 8, no, 3 (Fall 1999), pp. 339-55. Pine, Joseph, and James Gilmore “Welcome tothe Experience Economy.” Harvard Business Review, jly-Augast 1998, pp. 97-105. Rifkin, Jeremy. The End of Work: The Decline of tke Global Labor Force and the Dawn of the Post Market Bra. New Yor: TarcherPutnam, 1995. 1. Colia Clu, The Consitions of Eoonomi Progress, Sede (London: Macaiian Co, 1957). 2. N.Y. Foote and PK. Het, "Soeal Moblityand Economie Advancement" American Beo- one Revie, May 1953, p. 36-78 5, Daniel Bell, The Coming af Past-ldustrial Soci: A Vortre in Social Forecasting, (iow York: Bare Books, 1973), 4, Towep Pine an James Gilmore, "Weleome tothe Bxpericase Bronoms,” Harvard Besnces ‘Revie, Jly-Asgust 198, pp. 97-105. 5. tapdivneneens govlpetwmrsinerinpso 6, Herold, Johnson, “Older Workers Help Meet Employment Needs" Personnel Journal, ‘May 1988, pp 100-105, 1, Edvard Cot, “Tee Coming ofthe Singles Society” The Futuris, July-Angust 1987, p-2Chapter TABLE 21 ServieeProduct Bundle The Nature of Services Learning Objectives ‘after completing this chapter, you shouldbe abet 1. Casy a service nto one of four catagories wing the sevice process mates, 2. Descibea service wing the four dimensions of the sence pacage. 3, Discuss the managerial implication af the dstinctve characteristics ofa service operation, 44, Diss the insights obtained tom a srategle csticaton of services. 5, Discus the ole ofa service manager ftom an open-ystems view of service operations. In this chapter, we explore che distinctive features of services, The service environ- ‘ment is suffcfently unique tallow us to question the direct application of raditonal manafacturing-hased techniques to services without some modification, although many approaches are analogous, Ignoring te differences between reanufacuring 2nd service requirements wil load to faihue, but mare importantly, recognition of the special features of services wil provide insights for enlightened and innovative man- ‘agement. Advanees in service management cannot occur without an appreciation of the service system environment. ‘The distinction berween a product and service is difficult to make, because the pprchase ofa producti accompanied by some facilitating service (eg, instalation) land the purchase ofa service often includes fallitating goods (@., food ata restau rant), Each purchase includes a bandle of goods and services as shown in Table 2.1 ‘Our examples each have 2 principal foeu or core activity that is either a product (Ge, business suits or service (i. room forthe night). However, peripheral goods and services augment the bundle offered ta the customer. Finally a variant often is used 10 Airerentinee the bundle From that of competitors. Element ‘Core Good Example Core Sevice ample Basins ‘Custom citer Business hotel ore Business sus Room forte night Peripheral goods Garment bag Batrrobe Perpnera Senice Defered payment plans Invhouse restaurant variant Cotfee lounge Apo shutie w18 motores Unstone Chapter Preview ‘The chapter begins with a classification of services based on the degree of customer in teraction or customization andthe degree of labor intensiveness. This classification al- loos us to focus on managerial ssoes that are found scross similar service industries ‘An appreciation ofthe nature of services begin with the realization that a service is package of explicit end implicit benefits performed within a supporting facility and ‘using facilitating goods. These multiple dimensions of a servie are central to the de sign and control ofa service delivery system. The distinctive characteristics of service ‘operations are discussed, ang then seriors are classified to obuain strategic insight. ‘Based on these observations, the rele ofthe service manager is viewed from an ‘open-aystem perspective. Tha is, the service manager must deal with an enviroameat fn which the eastomers are proscnt inthe delivery system. This contrasts with mano facturing operations that are islated or “buffered” fom the customer by an inventory ‘of finished goods. Thus, manufacturing traditionally as operated as a cost cents, {oeusing on proces efficiency. Service managers, who often operate as protic cente, rust be concerned with both efficient and effective delivery af services. -e Classification ‘Concepts of terviee management should be applicable tall service organizations, For ‘example, hoeptal administrators could leera something about their om basiness from the restaurant and hotel trade, Profesional services such a consulting aw and med ‘cine have special problems because the professional is tained to provide a specific linicl service (to use « medical example) but isnot knowledgeable in business man agement. Thus, professional service firms offer atactive career opportunities for any college graduates. “A service classification scheme ca: help to organize our disussion of service man- agement and break down th industry barriers to shared learning. As svggssted, hospi tals can lesra about housekeeping fom hotels, Loss obviously, dry-clesning ‘establishments caa lara from banks—cleancrs can adapt the convenience of night de- Posts enjoyed by banking customers by providing laundry bags and after-hours drop off boxes. For profesional fms, scheduling a consifting engagement is similar to planning & legal dofense or preparing a medical team for open-heart Super). “To demonstrate that macagement problems are common across service industries, Roger Schmenner proposed the service process matrix i Figure 21. In this matrix, servioes are classified across two cimensions that significanty fect the character of | the service delivery process. The vertical dimension measures the degree of labor in- ‘sity, whichis defined a he ratio of labor costo capital cost. Thus, capitalintesive services such a aiines and hospitals are found inte upper row because oftheir con- Siderabe investment in plant and equipment relative to labor costs. Laborintasive secvices suchas schools and legal assistance are found ir the bottom row beceuse their labor costs are high relative to thls capital requirements ‘The horizontal dimersion measures the degree of customer interaction and cus- tomization, which sa marketing variable that describes the ability of the customer to af- fect personally the nate of the service being delivered. Litle interaction between coustemer and service providers needed when the servioe is standardized rather than cus tomized. For example, a meal at MeDonala', which i assembled fro: prepared items, ‘slow in customization and served with litle interaction ocewting between the customerFIGURE 2.1 ‘The Service Process Matrix itm Seria Sp 3 pn Pomoean ‘Semen Seam hin Chopter2e mensewetsevien 19 Degree of interaction and eustomization Low Bien Service factory: Serie shop Airlines + Hospials B tow | + Tracking + Awto repair 4 1 Howls 1 Oter api ervies z 1 Resorts and recreation 3 ‘Mass service: Professional service: 8 * Rexaling + Poysilans i + Waolesaling + Lawyers High | schools + Accountants + Reta aspects of + aceite commer tanking and the service providers. In contrast, doctor and paint must interac filly inthe de 2gnesc end teavnent pass to achieve satisfactory resus Patent aso expect © be treated as invicta’ an wih o rote radical care thats customized othe pac- ar needs. eis inportnt ono, bovever, a the neraction rsa fo high cue ‘mization creates poset problems for mangement of tho serve davery proces. "Tae four quadrants ofthe service process natin hee becn give names, as defined by he te dineasions to deste the ure of the servers usted. Service fon ries provide a sandarized service wit igh capital investment, much ikea ine-fow ‘manifactring plant Service shope permit more service exttomization, bi they do 9 Jne high-capal envzonmert. Customers of mats service wl receive an unditfren- tsted serie ina labor-intensive environment, but tose soaking aproeestonal gene {cewill be given individual atcaton by highly tnined specials, ‘Manage of services in any category, wheter sevice factory, service shop, mass service, cr professional sevice, share similar challenges, a8 noted. in Figure 22. Services with high capital requirement (ie, lw labor ites), such a8 astines and spins, requ lose mentoring of technological advances remain compestive “This igh capa investment als eques managers to scbedul demand to maintain wi laation ofthe equipment. Aleratvely, manages of highly Iaborsntesive services, sech as medical or legal profesional, must emcentzle on perenne) matte. The degree of eastomiraton affects te ability o conto! the quality ofthe srvice being de- ered andthe perception of he sevice by the custome. Apprasches to addressing eas ofthese challenges are epics that wl be seuss in iatr chapters The Service Package Service managers have difficulty identifying their produc. This problem i parly a2 sult of the intangible narure of services, but iti the presence ofthe customer inthe rocess that creates concers forthe toal serve exporience. Consider the following20. Pate: Unttanng Sos FIGURE 2.2 Challenges for ‘Service Managers Fone fran Enel mer ‘cy Strainers ee Nalgene te Gage fr mates {ew snes Cease + Ringe hc 1 ita teen ei asd cnet Gata frnocges = Gatags mages een i £ Seer Tiate | | erie | ei. |_| Rage + hig weer ny Cezar, | Geel Fe) Fe + Sassen yd + Mee tvoner| tear axis | Po deat Bice || Beeler | cap fel ey Seomesy | Gekateae |] Magee tunecens ee Frese: + cect Challenges for managers eee Sapiens Scr vag 1 ins etpmanaedosrel 1 Eopiner se 1 Sein wont + Connecting genet ents] 1 Sareap ot eves Ligkeeegont ‘examples, Fora sit-dovm resturant, atmosphor is jut a important as the meal becanse ‘many diners segacd the occasion as a way to get together with frends. A customers opinion ofa bank ean be formed quickly on the basis of teller’schoerfuness or the length ofthe waiting line. "The service package's defined as e bundle of goods and services tat i provided in some eavironment. This bundle consis ofthe following five fears: 1. Supporting facil. The physical resourcos that mast bein place before a service can be offered. Examples awe a golf couse, a ski if, a hospital, nd an airplane 2. Facilitating goods. The material purchased or consumed by the buyer, or the items provided by the customer. Examples are golf clubs, skis, food items, r= placement auto pars, legal documents, and medical supplies. 3. Information. Operations dats or information that is provided by the customer to ‘enable efficient and customized service. Examples include patient medicel records, sete available ona light, customer preferences from prior visits, and location of eastomor to dispatch ata 4, Explics services, The benefits tat are readily observable bythe senses and thst ‘consist ofthe essential or intinsic festares of the service. Examples ae the ab- sence of pain after 2 tooth is repaired, a smooth-running automobile afer a runeup, andthe response time of fire deparment. ‘5. Implicit services. Psychological benefits that tae castomner may sense cnly vaguely, forthe extrinsi features ofthe service. Examples are the status ofa degree from an Ivy League schoo), the privacy of loan office, and worry-ffee aut repai\ctive Characteristics of Service Operations i Chagter2 MenveetSevos 21 All ofthese features are experienced by the customer and form ze basis of bis oF der perception ofthe service. Iris important thatthe service manager offer a total ex- perience forthe customer that is consistent withthe desired service package, Take, for ‘example, a budget botel, The supporting facility is aconcrete-block building wita aus tere frishings. Facilitating goods are reduced tothe minimum of sop and paper I formation ot room availabilty is used to book @ reservation. The explicit service isa ‘comfortable bein a cleanroom, and implicit services might include a friendly desk of the customer atthe ban is unnecessary: Such exceptions wl be noted a5 we discus the cistnetvecharacterstis of service operations. It should be noted bce ‘hat many ofthe unique charateristcs of srvices, such as customer participation nd pecishabiity, are interelated. ‘Customer Participation in the Service Process ‘The prosence ofthe customer as 2 participant in she service process requires an at- tention to facility design that isnot found in traditional manufacturing operations ‘That automobiles are made in a hot, dirty, noisy factory is of no concer tothe even tual buyers because they fist see the product in the pleasant surroundings of & dealers showroom. The presence ofthe customer on-site requires attention to the physial surundings ofthe service faciity thats not necessary forthe Zaczory, For {he custome, service i an experience occurring in the front office of the service fa city and the quality of service is enhanced ifthe service facility is éesigned from the customer’ perspective. Attention to interior decorating, furnishings, layout, oan oven col nin cso pcp of he serie, Com. ings invoked by picturing yourself in a stereotypical bus station with {hose produced oy imagining yousel it an azine terminal. Of course, passengers22 racOns, Untntenng Sovie TABLE 2.2 _ Criteria for Evalvating he Service Package ‘Ssnporting Fai Tecan Isic accesible by public waneportation? \siteenvaly located? 2. interar decorotig \sthe proper mood exabished? Quality and cocedintion of rite, 3. Supeoting equipment: Does the dentist use a mechanical or airdil? ‘wat type ana age of aerat does the charter ising use? fading Goods ‘Const: Ctspress of ranch res. Porton conal 2 Quant: Smal, medum, or large dre, ent Servers Taling of sevice perenne Is the aute mechanic cried by the National Insite or Automative Service Excellence, (NAS? ‘To what extent ae paraprofasionas used? ‘othe physicians Boars ceric? 2. Comprehensvenes: Discount broker compared with full service, General hospital compared with cic. Implice sevies Atte of sevice: (Cheer fight atendant Police officer suing trafic cation with tak. Suny service peson in restaurant. 2, Aumesohere Restaurant decor Manic in 2 ba Sense of confsion rather than order, 3, Waiting: Joining a eevesin banking queve Sing pieced on hol Ejoying a mari inthe restaurant bar Architectural operopriatenes Renaissance architecture for university ompus. Unique recogezable feature of blue Sle roof Massive grante fcads of downtown banke Foxit oyeu: lethare a natural flow of trae? ‘re adequate wating arses provided? Is there uanacessary travel or backvacting? Setecon: Variety of replacement mutes Number of menu tems onal sks aalatle onsite Aine’ on-time recor Profesional Standards Review Organization (SRO) oe doctors . Avalbity “wentyfourhour ATM sore, Isthereawebste? Is there tllfee number? ‘stot Collage degree trom Wy League schoo! Box seats at sports event, Sense of wel eng Large commercalairrat. Wielleignted paring lo. Privacy ard seca Atomey adsng cent private office ‘Magnetic key ard for tel room. 1 Convenience Use of appointments, Free perk. ‘are no allowed in the terminal's back office (og, the ngeage-handling area), which 's operated ina factory-like environment. However, some innovative service have ‘opened the buck office to public serutiay to promots confidence ia th servi (22, some restaurants provide a view into the kitchen, some auto repair bays can be ob served through windows in the waiting area), ‘An important consideration in providiag a service isthe realization thatthe cus- tomer can play an active part in the process. A few examples will ustate thattheCcpter2: Te NsuretSnion 28 Jnowledge, experienc, motivation, and even honesty ofthe customer al! direty affect the performance ofthe service eystem: 1. The popularity of supermarkets and discount stores is predicated on the idea that customers are willing to assume an active role inthe retailing process. 2, The accuracy of patients medical record can greatly influence the effectiveness, of the attending physician, 3. The education of student is determined largely by the student's own effort and contibutions, ‘This strategy is best lustrated by the fast-food resteurents that have significantly reduced the typical umber of serving and cleaning personnel. The customer not only places the order dirty from a limited menu but also is expected to clear the tble after the meal, Natural, the customer expects faster service and less expensive meals te compensate for theso inputs, but the service provider benefits ic many subtle ways. Fir, there are fever personnel who require supervision and suck things as fring bene fits. Second, ané more importantly, the customer provides the labor just atthe moment it is required; thus, service capacity varies more directly with demand rather than being fixed by the size of the employed staff. The customer acs like a temporary employee, arriving just when needed to perform duties to augment the work ofthe service sft ‘This stretogy has rceived great acceptance in a society, suchas the United States, ‘where self reliance is valued. Instead of being a passive buyer the customer becomes « contributor tothe gross national product. “Taking the customer out ofthe process, however, is becoming a common practice. ‘Consior retail banking in which customers are encouraged tous telephone or cam puter transactions, direct deposit, and automatic-debit bil paying instead of actually traveling to the bank. Moreaver, the advent of nteret commerce gives new meaning to the phrase “window shopping” Simultaneity ‘The fact tat services are created and consumed simultaneously an, thus, exanot be stored i a eritcal feature in the management of sevices. Ths inability t0 inventory ‘services precludes using th tecitional manufécturing strategy of relying on inventory as 2 buffer to absorb loctations ia demand, An inventory of finished goods serves 28 8 convenient syst boundary fora manufacurer, separating the intemal operations of planning and control fom the external environment. Tas, the manufacturing facility ‘can be operated a a constant level af ouput that is mot efficient. The factory is oper- ated a5 2 clesed system, with inventory decoupling the productive system fom us- tomer demand. Services, however, operate as open systems, with the full impact of demand variations being transmitted to the system, Iveniony also ean be used te decouple the sages in s mamufectuing provess. For services, the decoupling is achieved through customer waiting. Inventory coatol is a ‘mafor issue in manufaetaring operations, whereas in services, te corresponding problema is customer vaiting, or “queuing” The problems of selecting sevice capacity, facility ‘uslization, and use of ile time al are balanced aguinst customer waiting ine, ‘The simultaneous production and consumption in services als eliminates many op- portunities for quality-control intervention. A product can be inspected befors delivery, Dut services must rely on other measures to ensure the quality of services delivered. We address this important topic fa Chapter 624 Pasre thet er Perishability ‘A service isa pesbable commodity. Consider en empty alne set, an unoccupied hos- pital or hotel rom, or an hou without patent in the day ofa deat. In each ase lost ‘opportunity has occureé, Becnise a service cannot be store, tis lost forever when not ‘sed. The fal uilzaion of service capacity becomes « eanagement challenge, because ‘eastomr demand exhibis considerable vation and building inventory toabsoe these ‘Bucrustons rotor opton ‘Consumer demand for services typically exhibits very eylic behavior over short periods of time, with considerable variation between the peaks and valleys, The eus- tom of eating lunch between noon and {ru places a busden on restaurant accom rmodate the noon rash. The practice of day-end mailing by businesses contributes to ‘he fact that 60 percent of al levers are received atthe post affice between 4 ard 8 M2 The demand for emergency medical service in Los Angeles was found t9 vary from a low of 0.5 call por hour a 6 ant to 2 peak of 3.5 calls per howr a 6 rx This peakto-vallay rio of 7 to] also was tue for fire alas during an average day in New York Cig? For recreational and transportation services, seasonal variation in demand creates srgesinactvity- AS many tudeats know, fights home ae often booked months in a= ‘ance of spring break andthe Chistes holiday. Faced wih vaable demand end a time-perishable capacity to provide the service, she manager has three basi options 1. Smooth demand by 2 Using reserntins or appointents. 5, Using eee incetives (ar ivng telephone discounts for evening aad weske ends) o, Deming pak ines (2.2, venting to shop early and avoid the Christa sa). 2. Adjust servos capes by 2 Ung porimebep rng po hous 5: Schatling work sits ovary workforce need ccording to demand (te hone sorpanies staf thr operators fo ach al Soman) c. Inoreasing the estomerelteence content the service 3. Allow customers to wait. Ht ‘The last option canbe viewed a « passive contibution to the service process that caries the risk of losing a dissatisfied customer to competitor. By waiting, the cus tomer pests greater uslization of service capacity. Th aislines explicitly recognize ‘his by offering standby passengers aredaced price for their ickets. Intangibility Services are ideas and concepts; products are things. Therefore, it follows that service innovations are not patentable. To secure the benefits of «novel service concept, the ion must expand extremely rapidly and preempt any competiors. Franchising has ‘een the vehicle to Secure maket areas and establish a brané name. Franchising allows ‘he parent firm 2 sll ts idee to local entrepreneur, tous preserving capital while retaining contol and reducing risk ‘The intangible nature of services also presents problem for customers. When buy- ing a product, the eostomer is able tose, fe sand tests performance before pur- chase, Fora service, however, the customer must rely on the reputation of the service firm, In many servie areas, the goverament has intervened to guarantce acceptableClassifying Services for Strategic Insights® Cupar? Tenant toneer 25 service performances. Tarough the use of registration, licensing, and regulation, the ‘Bovernment can assure consumers thatthe training and test performance of some serv: ce providers moet cern standards. Ths, we find that public construction plans must ‘be approved by registered professions] enginoet,a doctor must be licensed to practice ‘medicine, andthe telephone company isa regulated lity. In is efforts to “protect” the consumer, however, the government may be stifling innovation, raising bariers to entry, and generally reducing competion Heterogeneity “he combination ofthe intangible nature ofservies and te customer a a parieipant fn the service ceiver system esl in variation of serves fos custom tester ‘Toe intercon between cstomec and employee in services, however creates the poss- bil ofa more complete human work experience. in seve, wok activity genaaly is onented tnard people rather than toward things. There are exoeptors, however, or services that process information (eg, communications) orestomes’ property (@, ‘brokerage services), In the limited customer-comtact service indus, we now see 2 - treat the amount of phil teraction between the casiomer and a umn sevice ‘provider, The suatepc implications ofthe design ofa service delivery system and its Efecto te interaction between carter and service organization are topics in Part “wo: Designing the Service Enterprise An Open-Systems View of Services Service organizations are sufficiently unique in their character to require special man agement approaches that go beyond the simple adaptation of the management teeh- niques found ia manufacturing 2 product. The distinctive characteristics suggest tnlarging the system view to include the customer as a participant in the service process, As Figure 2.8 shows, the customer is viewed as an input that is transformed by the service proces into an output with some degree of satisfaction. “The role ofthe sevice operations manager inciudes the functions ofboth production and marketing in an open system withthe customer as participant. The taditenal man ‘efactring separation of te production and marketing functions, wits finshed goods in- ‘ventory as the interface, if nether possible nor appropriate in services, Marketing30 Patne Unto Set facune 27 -Avaliy otservie oes Mthedoervee ie Sua se Mate ses eee ccusomee| Tear Busserice Se ei one ‘Barbershop Fast-food chain Sage Matiagiongc” Exes Gi 38 ‘Service | Pest control service Mail delivery Se promer| Tes Aa sreney epi TE io ER chon 32 BE Temsarion| Crottcantcommaay | Naonal TV network = ‘is.atam’s | Local TV station ‘Telephone com oe “Some any a ficune 28 Opens iit View ot Serace coosecares Operations: aes aoe Torpma Secon - ences |__| Qe | ase | Emer EEE baer eeteeaenee | ann) Tana Cooetdenand eae pata Soham feces commeian | RECESS |__ maar ss] coon a = =| I l OUTSIDE THE BOK 2 You might think Herb Keliher, founder and former CEO of Southwest lines, has al the answers. His company s tne mest success aire n de Uned States by aimast every measure—ofvtne departures, fewest bags lost, most pasenger miles, and highest cus: tomer satisfaction, Souttvest Anes dnt obtain this lofty posidon, however, simply by having board ‘meetings and brinsioring sessions win the privacy ofits own wal. Company planes ‘280 ven “ouside the box” For example, to improve ve tumaround dime of ight, they ‘went to the races~-thelnlanapots 30 jn purticul. Instead of watching the race, however, ‘they watzhed the pit crews fuel and service the competing cas, Te observations gave them insights into equipment, handling pars, and teamwork that Vanslated into beter ‘ome sevice, These were sights thet could not be gains jst ty obsening the operat tions of ober ates, termes the race won in the pts perfoems two important functions in dil service operstioes: (1) edacating the consumer to ply a role as an active participant in the service process and (2) “soothing” demand tomaich service capacity. This carketng activity must be coordinated with scheduling ‘aff levels and with both controlling and evaluating che delivery process. By neces ‘he cperatons and marketing functions ae incegrate fo servi organizations. For services, she process the produce. Tes prosonce of te cartomer in the service process negates the closed-ystem perspective thats aken in manafoceuring, Techniquos to control operations in an isolated fctory producing 2 tangible good are inadequate for services. No longer isthe process machine-paced and the output easily measured, for compliznce with specifications Instead, customers urive with different demands fon the service; thus, multiple measures of performance are nacessay, Service erxply- ees interact directly with the customer, ith litle opportunity for management iter- vention, This requires extensive tining and empowerment of employees to act appropriately inthe absence of direct supervision Farther, customer impressions of service quality are based on the total service ex- perience, do just onthe explicit service that i performed. A concern fr employee &t- tinudes and taining becomes a necessity to ensure thatthe implicit service is also appreciated by the customer. When viewed from the cuamar’ perspective, te entire service process raises concerss ranging ftom the aesthetic dsiga of the Tacility to pleasant diversions in waiting areas. ‘Anopersystem concept of services also allows one to view the customer as a co- producer, Permitting he customer to participate actively In te service provess (ee. providing a salad barat a restaurant) can increase productivity, whieh in nur can ere: ste acompettve edge ‘Summary ‘The mansgement of an open system requires techniques and sensitivities different from those of a closed system, Service manages are faced with nonroutine operations jn which only indirect conto is possble. In services, itis the human element thats central to eetive operations, For example, the unavoidable interaction beween sv- ice provider and consumer isa source of great opportunity, as in direct selling. How. ver, ths interaction seldom ean be fully oatolled; thus, service quality may suffer. For this reason the attitude and appearance of persoanel ia service organizations are Important considerations. For services, the presence of the customer in the process a»Sk rc one: UnestangSes matecially ators what is viewed asthe product The unigue characteristics of intangi- bility, perishablity, and simultaneous provision and consumption inoduce speci challenges for service management, In many respects, the service manager opis Style of management tht incorporstes the functions of marketing and operations Key Terms and Definitions Topics for Discussion Back office the service customer (eg. dining area interaction and Gelivery activities nor of arestmurant).p. 27. csomization andthe ‘bservable to the Implicit services Aegree of labor intensity ‘evstomer (eg, restaurant psychological benefits or that esuls in four Iitehen) p22 Etrnsi features the catogores: service factory, Explicit services the customer may sense only service shop, mass service, essential or intrinsic vaguely (eg. soourty ofa and profesional service. eaures readily ‘welbighied parking lot, p. 18 ‘observable by the senses privacy ofa loan office). Supporting facility he (eg, onctime deparsre, p20 physio! esouroes that ‘quality of meal). p.20.' Service package 2 ‘must bein place before a Facilitating goods deteription ofa service service canbe offered ‘matedal purchased or based on four (eg. golf couee, Rospital tonsumed by the buyer, or components: supporting building, aizplane).p. 20 ftems provided by the | fuelliy, facilitating goods, .‘Time-perishable eapacity customer (eg, food golf explicit service, and service dats not used clubs). p20 implitservice.p. 19 during some period of ime Frontoffice the service Service process matrix ® and, therefore, is lost elivery activities Classification of services forever (eg, an erapty seat ‘observable wo the asedonthedegresof on anaitplaue).p. 4 1, What are the characteristics of services that willbe most appropriate for Internet delivery? 2, When does colleoting information through service membership become an invasion cof privacy? a 3. What are some of the management problems associated with allowing serves em- ployoes to exercise judgment in meeting customer needs? 4, Illustrate the “estinetve characterises of service operations” for a service with ich you are familia. 5, What factors are important for a manager to consider when attempting to enhance a service firm's image? 6, What coatributions to the management of professional service ims can a business school graduate provide? ‘The class breaks into five groups and each group is assigned one ofthe service cassi- fications (@., ture of set, reationship with customer, customization, nature of de- mand, or method af éelivey) to come up with an example for each quadraat in che natrxvitae Yoo the “new Kn toe." erepresents an eet, by mo former authored Velve desler mecharics to ror Joe quali resi service on eut-owarany Volos at 2 Fessonable cos On the bas of thr 2 combined years of training and experience with the local Volvo dea, they fave carne. respecte repuaon and 2 following oft ‘pied customers which make an independent servic ope brio feasle, Vilage Volo eccupis sew Butler bling (Ge. 2 peitriated meta stvetute) Bat has four werk bays lo addtion to an office, waiting area, and storage "The owner fel they have designed thei operation to provide cents wh a eastom car care sevice Rais un Brable atthe locl desir They have setae specie ‘ines each week when ints may dive Ip for quik rou {ie syices such tune-up and 08 changes, bat ety ‘courage clem to schedule appoints for Be agnosis and repair of specie problems. “AC Die tne of the appainiment the mechan who vil be working on the vehicle and the cient cus te prob- lens the cent has pobzed. On occasion, te mechere may {phe shot test aive with the chan to be co eat both Under the ee of concern. ‘thr source of inermation forthe mechanic the ‘custom Gare Vehicle Desir (CCVD), Vilage Volo maine ‘bins a corning fle on each vec it services Ths hit thy can hep the mechanic wo dlagnese problems and also provides carveniant cords vehicle isretured for war Fant zenvice onan ear repaic The nar ate cole ing ese of the COVD 262 ay of reminding” customers that rotne maintenance procedures maybe due “Aker the mechanic has mage a prtrninary diagnos ‘the service manager gives the vehicle omer an estimate tthe cost andthe approximate te when the repairs ‘be complated ft no expects prslers ase. Company poi ates that she ayer wl be consulted before any ‘herk ether than te ageed-on jk dane. Although eye “umomer may spe wits the macharie during the repair proces, tha sevice manage i he man porto contac. Fethe snice managers esporsty 2 sure the cus tomer understands tre praminary diogness, to aise the curtomer a any unaspecte problems and cos and to tly the customer wen the vehicle If ead Tor Pickup ‘Vilage Via hae no provi fo atematewarspora- tion for customer at ths tme, A shutle sence 840 oF these tines a dy is being coricered, because the owness thunk the suburban leation may deter sare cents. The wating room s equipped wth aeons comfortable ui, cos, a saftdrink vending machine, mageine, sd the local newspaper THis facliy used amas exch Sey by clans who come during the eroprit” tines > 5 nv Wednesdays and &to 10 Thuy) for ic, ot ‘ie Jobs such as tone-ups an buyer checks of sed ea. “The omerenechaies do no repas between? and 84 sand Sand Gry accuse these ar hey eater contact furs. They befeve is justo importntt aru with he ‘hon the repaethat hve been Gone ate cnc what Droblens ex before that wor coe, As rapes are made, the onmermechare notes any eter problems tat might reed aterton in the future (2 fm and tear bets ‘show sme ear and ay need toa replscas n about 1000 mies). Tess res ee brought te the astomar’ tenon atpckp tne and ae are scrdod in tha CCVD for ‘ezureuse, puhaps the fom ofa reir postcard tthe "Alla wor-aut pans that have been replaced are put in clean bor nis the car Mare earbasore paced part re ldenes and sr ard forthe clan inspection Care tak throughout the rep proces to kp the car dean, end the Inside fe vaciumed ar 8 courary before Dckup, Alter the resis ae finned the vac taken for shat et dive, The spake, ready for pia. The Vilage Voho owner ee ther asporibly as ex- tending beyond immediate sence to ther cans The ‘nner have desgped a netweaother seve prods eho atin regaing used pars ad waste products and te whom thay can refer cen fr werk hat net par of Vilage Ves senizes (6, body wor alignments andre upholtarng). The overt aa ave consierng te pense iy of efering 2 minzaurse one Setraay moring each rronth to teach clents what they can 60 to atin tele 200,000-mieVahe mesa Questions 1. Deserbe Vilage Voto serve packogs 2. Howare te csintve characte of see fm Be sated by Vilage Vovo? 3, Characterize ge Vl in regard tote nae ofthe sence at the reatirship wih customers, customize tion na judgment, be nate of demand and S190), and the metnod of ene calor. 4, Hove could Vilage Vato manages ack oie (Le, pt operation ke a facto? ‘5. How can Vilage Vevo diferente ise fom Voie aes)‘chatie Green, owner of Xpress Lube, 6 rot your spiel ‘ar repakman, A man of many talents, Chae geined val ble onlacgeof the ol-change bushes whe workng in the Specl Mixture Division of Cocchesr. Chare ba Feared trom is fther ang brother wile wong on ars when he wes growing up aod late supplemented this Knowledge by uns formal automotive ees Al seta ies between Chari and his fellow mechorss end there, bhonever Chale al profesional muscion, He las an ‘pright bass and singe and owns a coffee plertaton In Cent ie, ‘ihen is tne to ge your ei hanged, you have ly to exaiees change youre or poy someone ee (eS. cesleshp, independent acto meenonie, or 8 "quek lube” ston} 20 do t for you. Many. poop choose uick allchange sation: beers is ener thar ding it ‘hemeles anit is usualy quicker and eheape than going toa dealer ofan independent mechani Fol jum want to gs in and out ae and econ cay as posible. Most companies thst provseol-change Seve ae indtinguishable. They charge abut the sare Dice and ore found on simort sway major rest. Mest [people pick oe hate ose to home er! hatha short trating ine The chalange faced byte qicechange ron lees isto manage cemand, Most customers want sence ‘ring the lunch hour ater work, or]on Saturdays. An ik ange business, hereto, warts to move cuemer in and out as qucly as pore. Speed of seni isthe way they ty to afereniate tenses rom ther competitors ‘Cari remembers th lst Zine he paid to have Ns Crs o changed: Hewat inthe wating room with wea ‘ther eatomere when abe tchnitancar ine act a prablor vith an oie ny, “am you se ti?” Toe {erica held 3 PV vale is hand ane shook pro ducing 2 rable. “You bear ot? Thats trouble, We ‘gonna hive to replace this PCV vate The weman looked urzied, aur she agreed with themechane, Unorunaty, She det now tas the PCV inary eae spose ort tle, Tis even csmayed Charl. He belived that cus- tomers deserved goed sence and horaty, and he wat ted of seeing peop get “igped of." He decicea to do something about :hs problem by epecing is eum Ba- ess, Xoresso Lube, which WoUld spriizein change. 'No one tikes to walt ong time to have his oe ol change, especialy because the facies usually are not ‘vey peasant The wating recs ae sma dey nd ee ‘ised with unearforabe cha 3 telvison ets vale abe, I his a small seen arc reception fe poor Any ‘agains are probably car rested and morths oi the ‘scoflee wo din, thas been sting nan ae pot sree ary that marin! ‘Care designed the ertonment for his buses 0 98 eet rom that ofthe waditnalcikchange station He Py chose not to compete wit he othe o-change companies head > head, but instead changed "he game” When be canwertad an old gatsenice station Into Xpresso Lube, peope tld him sat itwela never eork They ss he hod tbomach wating area aod the Stalls had Hes instead of the ‘sual isso it woul take 20 Jong & change aca ‘Chae use these unusual fates hs advontage Duving he development phase of hisbsines, Cate no- ceo tings about he lea ad ratonal economies bot the epresobarand a-chonge marits wet saturated ‘Consumers viewed these ences a commas and seed ‘beirputcate decison on price. Chase conse tht face tor and he unappealing envecnment of exsing obchange ‘uals and, inamomentof entrepreneur rvetion, t= ‘ded to combine the cafe bor cae with on ol-change bine, ‘Kpreco lube was sarted with the purpote of providing 2 unique, pesiont, sod honest experience Chere hod ‘rorough Knowledge ofboth the coe and oi-change ‘busines, 40 the merger af these two experiences come at aly © hi. nae, when Xpeeio Lube Sst spened he ‘ke drew on Hi musician roots and brought in ban poy in tha avenings. As Xora Lubes scese grou, Chae Fe hodto phase eta lve musicbecause he was too busy wah the oer agpacs of he busine Cate nver forgot the exparence of seclagoshers get tested dishonesty. Today the maori of his estomers re ‘women, wie fequerty have buen thevictins af ananest repsime, and elege student, “Ute ld Taes lve me,” Chara sys, “because we hav eared thie rus” “Te go wating rea was wasformed toa coffee bar wth numer of amenities to male hr armen vst any lrfyabie He oferada vary of coffee and an stmesphere that done mak the eastorars fe ae Fey ae wae ingroom.nfac, some customers care injustice, “The fears ar crpetec nd thre are numerous bes and has An outside tran covered for we when the weather plksant A oreo sam provides misc anc the rebding Frets cuter and appeting i cent tre. Bocas of re aumospnere he has created, Chari does rot Rave to compete on spend which ant Xpeso Wb tose tts ane only to ste Furthernore using We gives femplnyees an opportunty ta shaw the estore when something i wrong wits Mis or her er. The easter can {9 under the cat with me eenrican and actualy et probe. Other allcrange sttrs do not have ths Iunury—they ean ow their customer ogo down nto the ptso lok 3 thal cae. Ps ae cy and unsafe places for any eatomer, Contequendy, 2 customer must tae the employer's advice about extra wort that neces to be done—ane hope he ord i not beng Hepes of "Wren 3 customer does aoe Want 2¢ Wa, Xpress Lube provides wansporation £9 and from work. Tne servicehelps smoot demand dering the weskaystenoons, 29 Customers wl not all come after $b dung the west oF SS Satrcay. The Wanepor sence «provid by te au motive sie enter rght bahind Npresio Lube, which Wao owned by Cate, University Automotive nas he precrer to Xpre Labe, wien Cate pened in 1984. Uris Aut prowdes car repair ences for many makes and models of ears. A gas sation was located in a fe ‘25ecznt to Univety Aut when the station wert ous insines in the eat nines, Chatie Bought he property fd opened Xpresio Lube on the Ste ia 1998. Xpresso {tbe non provides 30 peteon ofthe revenoes forthe int business “Astin shore to thaUnivesty of Tea, 2 thing high- tech buna community and eguaby the nation's bet ve ruse Al of thee factors give Asn 3 very diverse popula- on, Xpress Lube neton on = main see near the ue eniyatacts 3 broad spac of cstmets, Buta it Theses customers cn wa to many loa hope whe Be Grape 2: Teniewot sit 35 ‘as mt being seniced, Hal ice Bookstore, Whestlle ‘Coop fod ters oy'sce Creamy and Ty fy ra within (cay malng distance. The bsinets provides age dea of {ulm for Chari, lve coming te work boeuss ery ay barge ne anal diferent stoma ta ou shop Questions 1. Owerbe Koes Lubes see patags 2. Hon ae the dinctve characters of «service oper tion lasted by Xpress Lube? 2. Charactarte Xpreseo Lube in epudto the nate fe ence 3th reatinuhip with customer, eustor2a- ton and jedgrant the nature of demand ane SUED, Sand the method of sec delve. 4, What lements of Xpress Lube’ lation contibut hevecee? 5. Gen the example of xpreso tbe, what over sences ‘ould be combines to "ad value forthe cartomer? Selected Bibliography Preétedon and Operon Management 5,00, (Wie 1996) pp. 298-308. ‘Cook, David; Chon-Hust Gob; and Chen H. Chung. “Service Typologies: A State of the Art Survey” Production and Operations Management 8, no. 3 (all 1999), pp. 318-38. lest, James L, "Lessons inthe Service Sector” Harvard Business Review, char“ Me Fey Reon of Sei ei” | Moc ipl 157 gp 182. | 1, Based os “Customer Benefit Paskage” fund in David A. Coli, Te Service/ua Slee prenetes ti, Bure Ridge Tl: Ten, 1998), pp. 3-68. 2, RC, Coben, R. MeBridge, R.Thraion and. White, Ler Mal Sten Peformance Design: An dna! ldethod for Bvtocing Cendidote Mechanzaton Repor RiGS (hasngroo, D.C Tastee or Deteae Anti, 1970). 5. James A, Fitzsizsmons, "Tha Usa of Spots! Anafes to Validate Planing Medel” Soio- ‘Economic Planing Sciences 8, 30,3, Uae 197) pp. 12-28. 4. E.FL Blum, Urban Fre Protection: Sues of the New York Cy Fire Deparment, 681 (ew eck: New York iy Ran Tie, 1971). 5. G.N. Hostage, "Quality Control in «Service Busines” Haran Business Review S3,00.4, {Guly-avgust 1975), pp. 58-106 i 6, Adapted fom Christopher H, Lovelock, “Clssifving Services to Gaia Seatople Maceting esighs Journal of Marerng 47 (Sumer 1983), p. 920. 7. Progred by Rich Elis, Thomas Prahomme, and Marly Yonzs wer the sepsrvision of Profesor James A Flasiminns !Chapter Service Strategy Learning Objectives ‘Alter competing ti chapter, you should beable to: 1. Formulate a seategic sence vison. 2, Cleally seus the compettve envircament of serdces. 3. Describe, with examples, how a service competes using the generic sevice strategies of overal cost leecnhip, ciferetiaton, end focus 4, Discuts ta svc purchace decison inthe context of qualifiers, service winner, and service loser, 5, Discuss the competitive role of information in series. 6, Explain the concept ofthe vial value chain and its lain servis innovation. 7, Discuss the lms inthe use of information, 8. Categorize a sevice firm according to stage of competitiveness 9. Conduct a data envelopmert anayss (OES). ‘As machine technology once changed an agricultural economy into an industrial econ- ‘omy, todays information technology is tansforming our industrial economy iato 8 service evonomy: The avileilty of computes and global communication techaolo- {ics has created industries for collecting, processing, and communicating information, ‘Today everyone on te globe can bein instant communication with everyone ese, and this reveltion is changing world society in many ways. Consider the impact of the ‘emerging private satelite network indstry, which provides uplink and downlink for personel trining, produc introduction, credit choc, bling, financil exchange, ‘nd overall tlecommuniations. ‘Kmart was among the First real giants to establish a private satellite neswork using the new small-dish antenna VSAT (Very Small Aperture Terminal) placed on store rooft to receive and transmit masses of datz, The VSAT at each Karis linked to the ‘compas Troy, Michigm, data center via a satellite wansponder leased fom GTE Spacenet. The communication network as alowed Kmart to coordinate its multisite operations better and to realize substantia] benefits, such as improved data transmis sion about the rate of sles, inventory states, product updates, and, most important, credit authorizations for customers. The instant accessibility of credit histories can sg aifcanuy loner the risk of nonpayment that credit card companies fice, ths lowering ‘the discount rate that reverts bec to te eter This savings alone eventually ml pay forthe cot ofthe satelite network! ”38 rarone_Unteranng Somes Chapter Preview Service strategy must begin with a vision ofthe place and purpose ofthe enterprise. A steatgic service vision is formulated by addressing questions about the target marke, service concepe, operating suategy, and delivery system. However, the competitive et vironment of services presents challenges suc as low entry barriers, product substiu- tion, and limited opportunities for evonomies of scale that must be overcome. ‘Three generic strategies have been found successful in formulating strategies that allow a firm to outperform compatitors. The strategies of overall cost leadership, dif ferentiation, and market focus ae approaches that service firms have adopted in var- fous ways to gain competitive advantage. With each of these strategies, however, ‘management must no lose sight ofthe fact that only 2 cus onthe customers and 08, satisfying their needs will result ina loyal customer base. ‘Winning customers in the marketplace means competing on several dimensions. Customers base their purchase decisions on many varisbles, including price, con- venience, reputation, and safety. The impoctance ofa particular variable to fiat success depends on tke competitive marketplace and the preferences of individual customers. 'A framework Zor viewing the contribution of information to the competitive sta:- gy ofthe service firm aso is presented. Using the dimensions of sates focus, both external and internal, and competitive use of inforration, both online and offline, our stratogic oles of infomation are identifiod: creation of barriers to oxtry, revenue _gencration, database atst, and productivity enhancement, Industry examples foreach role ilustrete Row firms bave used information effectively. Service product innovation is driven by an appreciation of the virtual valve chain ‘hat assembles information on customer needs based on changing demographics and lifestyles, Tis database can be mined to develop naw servo offerings targeted at an existing customer base, However, ther are Hants to the use of information including questions of privacy, fairness, rlibiity and dats accuracy. ‘The chapter concludes witha framework that categorizes service fms according 10 ‘heir level of compesitiveness with respect to key operational dimensions, The Strategic Service Vision i ‘The purpose and place of @ service firm in the macket begins with an entrepreneur’ {dea anc an unmet need. Table 3.1 present a framework i the form of questions one should askin formulating a statepie service vision. The basic categories include serv- joe delivery syst, opetating stategy service concept, and target macket segments. Between cach category a question is offered-to evaluate the effectiveness of the cate ‘Bory to support the prior category as one moves from left to right in assessing the ‘Stategi service vision. For example, che question "Does the service delivery system, ‘support the operating strategy?” enables one to address the appropriateness of the service delivery system for the intended opaatingstatogy. ‘To demonstrat te effectiveness of tis Famework, we wil state the sttogic service vision of Southwos: Airlines at to time it started when it served only three cites in Texas (Dallas, Houston, and San Antoni). With start-up firms such as South- west lines it is best to apply the statgic service vision from right o let beginning with he tanger marke.“eggnog ymeso me ou eternoe ae ne an Seve ore apa NA RE S| esoqadue ‘eq Aav voy Ka gouwe yey ut way sans pana Bulag spa adiouo axa aienvon SMB PMMOK | — jeyyayo | DIOSaIN aNBIed {pajonuo> 29802 SP ‘sewoism op m0, ue en aor ‘Aen in ianey yop ete eura OL pea 0p spsBU IU sno fa eapeu aq 90h Ad Subunseny i BUM sarap ed ay saweub2s snayen au3b TAEION sie quency 0} repel aia fa epiord _ys90p Apede> eum pnydesbourheg ‘Duudesoowsa “aayeu soup aay) ae 80H, jy wswi6es or pasn | a> a ue> su0HUBKUD UM asnwowsn 46) paonpoxd esuowbes saysay suo w sayew wueLod pains ‘papiox aq 0 osusuepeRp Sonos oy fo suas soya th Prereetsrny usvodu 8 3eunA queued 38 uM uBuDSS THSIOD DANS Fares BaD was eueyn BIEL Aronoa mas ToRADADS ENS BIOMOVI LE ATAVL49 ar one Usteonty Soves + Tanger marker segments. Maske to interstate business ravers with cary-on lug~ ge who ace currently diving by ato andor are fruseate by the poor service of the major srines serving Texas. + Service concept. On-time pecformance and fiequeat departures are critical and reals are unnecessary on these stor flights (ie, es than an how). + Operating srategy. Aispot gate turnaround must be fast t9 make productive use of aircraft and provide fequent departures. Purchase of recat isthe most significant invesiment, Altiough Sothwest will seek o be the low-cost producer, paseagers wil ejay the relaxed fying experience and employees wil se Southwest 28 an en- Jevable place to work + Serve diver system. Cabin crews wil be those who have the interpersoral skills to creat a “fon” etnosphere aboard the aircraft aud telp differentiate Southwest from the major carirs. Noasigned seating wil fact fest gteturnround and simplify ticket sales, Aine quality measores such a ontie performance and lost luggage willbe attainable wit ease beeause ofthe short point-to-point fights and passengers who only have eary-on luggage. Understanding the Competitive Environment of Services In general, serve firms compete in a dificult economic environment, and there are ‘many reasons for this difficulty + Relasvely low overall entry Barrer, Service innovations aze aot patentable, and in ‘most cases services are not eapital-intnsive. Thus, imovations can easily be copied by competitors. Honever, other types of entry barriers exist, such as locating a re- sort hotel onthe best beach ofan island (e.g, the Club Med locatoa oo the island of Moora in Frac Polynesia) + Miniral opporauniis for economies of seal, Recall from Chapter 2 that because (of the simultaneous production and consumption of servioes, te eustomer ast travel the service facility ox the service must travel tothe customer The necessity of physical cavel limits the market area and results in small-scale outlets. Fran- chised firms can realize some economies of scale by sharing purchasing or adver- tising costs in other instances, electronic communications can be substituted for physical revel (eg, ordering fom LL, Bean by telephone). + Brrate sales fluctuations. Service demand varies as a function of the time of day land the day ofthe week (and sometimes seasonally), with random arrivals. Can yoo ‘think of some exceptions? + No advancage of size in dealing with buyers or suppliers. The small sizeof many servioe firms places them at e disadvantage in bargaining with powerful buyers or ‘suppliers, Many exceptions should come to mind, however, such a8 McDonald's ‘baying boef ené Marrots baying marresses, + Product substttion, Product innovations can be a substitute for services (eg the hhome pregnancy tes). Thus, service firs rust no: only watch other service com- petitors but also enteipate potential product imovations tbat might make their secv- fees obsolete. + Customer lovato: Established firms using personalized service create a loyal ous- tomer bas, which becomes a barrier o entry by new services, For example, a hos- pital supply firm may place its own ordering computer terminals at customers*Cnpter3: tov Sy 49 sites. These terminals then facilitate the placement of new orders to the exten hat compesters are effectively excloded. + Exir barriers, Marginal service firms may eoatiaus to operate despite low, or even nonexistent, profits, For example, a privately held firm may have employment of ‘amily members rather than maximizing profitas its gol. Other service firms, such ag antique stores or scuba diving shops, have a hobby or romantic appeal that pro- ‘ides their ovmere with enough job satisfaction to ose lw financial eompensa- on, Thus, profit motivated competitors would find it difficult to drive these privately held firms from the marc. ! For any particular service industry, thee ae firms that have overcome these competi- tive dificalies and prospered. For example, McDonald has achieved a dominant po- sition in the fast-food industry by overcoming many ofthe difficulties listed here. New ‘entrats, however, must develop a service srategy that will address the important com- petitive fearures oftheir rospective industries. Taree generic strategies bave been suc- Cessfl in providing a competitive advantage, and lustrations of how service firms ‘have used these suategies wil be our next topic. Competitive Service Strategies” ‘Michael Porter bas argued persuasively that three generic competitive strategies exist: ‘overall cost leadership, diferentition, and focus Each staxepy will be described in tur, with examples of how service firms use them te outperform teir competition ‘Overall Cost Leadership ‘An overall cost leadership strategy requires efficcnt-scle facilites, tight cost and ‘overhead conto, and often imaovative technology as wel. Having low-cost position provides a defence against competion, because less efficent competitors wil safer First from compettive prestare. tmplemeating a low-cost strateay usualy requires igh copital investment in safe-ofthoar equipment, aggressive pricing and sarap Toss to build market sare. cost leadership strategy sometimes ean evohsionize an indosry, a ilusrated by the success of MeDonalés, Wal-Mart, and Federal Express. Moreover, service firms have been able to achieve low-cost leadership using a variety of approaches Seeking Out Low-Cost Customers | Some customers cost less to serve than others, and they canbe targeted ty the service provider. For example, Unit Services Automobile Association (USA) occupies a pre= ‘eminent poston emeng automobile insurers bocaus it serves only military personnel and cei fais. This group also entails lower cot because its members, who are ela- tively nomad, are willing to do business by telepbone, mail, or online and are accus~ tomed to doing so, Consoquently, USAA is ble to eliminate any need for he exceusive sales force employed by tradional insurers. Another example of this stetegy is provided by low-cost talons such as Sam's Wholesale Ciub and Cosco, which target customers ‘who ae wiling to buy in quantity, do without fills and serve themselves, Standaraizing a Custom Service “Typically, income tax preparation is considered to be a customized service. H& R. Bock, however, bas been successful in serving customers nationwide when only routine42 exons Unt ovis ‘ax preparation is required Also, storffont legal services and family healthcare cents ‘are atvactve means of delivering routine professional servioes a low cost. The key ‘word her is ruin. Reducing the Personal Element in Service Delivery ‘The potentially higt-rsk swategy of reducing the personal element inservice dalivery canbe accepted by customers if increased convenience results. For example, conven iat access to ATMS bas weaned customers from personal interaction with live tellers and, consequently, has reduced transaction costs for barks. Reducing Network Costs ‘Unusual start-up costs are encountered by service fms that require @ netwark to kit together providers and customers, Electr utes, which have substantial xed costs in tranamiseion lines, provide the most obvious example, Federal Express conceived @ unique approach to reducing network costs by using @ hib-and-spoke nerwork, By lo- cating a hub in Memphis with state-f-the-art sorting technology, he overnight air package carrer was able serve the United States with no direct routes between the ‘ties that it served. Bach time a mew city is added tothe network, Federal Express only ‘needs to add an more route to and from the hub instead of adding routes between all, the cities served. The efficiency ofthe hub-end-spoke network strategy has not been loston passenger airline operators, either Taking Service Operations Offine Many services, sush as haieutng and passenger ransporatio, ae iskerenty “on- Jin’ because they can oly be performed wid he eastomer proven. For services ia which the customer need nt be present, tbe service transaction ean be “éecoupleg” ‘wth some conten performed “offing” For xample ashe repair servic ul ccs Aispesed Kiosks fr eastomercrop-ofpckeup, hs consolidating orders foe delivery to an offsite repair factory, wich cold even be lactedofshore. Performing services cine repeseuts significant cost savings because of economies of eae fom eoesol- ‘ation, low-cost fait location (eg, American Ailing: has oo of its $00-mumber ‘escevaions centers located in the Cabhean), and absence ofthe catoma in tz ays tem In shor, te decoupled service operation is can ike a factors. Differen ‘The eesence of the diforetaton strategy’ lis in ereting a service ‘hat is perceived as boing unique. Approaches to differontiation can take many forms: brand ima (€8., McDonald's golden arches), technology (eg. Sprint's fiberoptics network), fetures (ug. American Expres’ complete travel services), customer service 2, Nordstrom ‘epulation ameng deparment stores), dealer naswork (e.g, Century 21's nationwide ral estate presence), and other dimensions. differentiation eraegy does nat ignore ost, but its primary thrust ies in creating customer loyalty. As illuseated hero, differenti tion to enaance the serve often is achieved at ome cost cet the tangoted customer willing © pay. Making the Intangible Tangible By thei very nature, services offen ar intangible and leave the customer wits no phys- cal reminder of te purchase, Recognizing the need 1 remind customers of thei lay many hotels now provide complimentary tileny items with tbe hotal name promi nantly affixed. The Hertford Steam Boiler Inspection and Insurance Company itesGroped: seesonigy 8 insurance on industal power plans, bur this company has enhanced its service to inchide regular inspetions and recommendations to managers for avoiding potential problems (Cusiomising the Standard Product Providing a customized touch may endcar 2 firm tits customers at very litle cost. A. hotel operator who is able to address a guest by name can make an impression that translates into repeat busines, Heir salons have added many personalizing fearures (ee, persona stylis, juice bar, relaxed surroundings, mood tausic) to difereatite ‘hemseives from berbershops. Burger King's efforts to promote a made-to-order policy is natempt to diffeenateisef from McDonalds classic make-to-stock approach to t-food service Reducing Porceived Risk Lack of information about the purchase ofa service creates sense of risking for ‘many customers, Lacking knowledge or self-confidence abou services such as auiore- pair, customers will sack out providers who take the extra time to explain the work to be done, present clean and organized facility, and guarantee their work (eg, Villag™ ‘Volie). Customers often soothe “peace of mind” tat is engendered when this trusting relationship develops as being wort the extra expense. Giving Attention to Personnel Training lnvesimeat in persoanel development and training that results in enhanced service quality isa competitive advantage tat is dificult 0 replicate. Firms that lead their in dostries are knosm among competters forthe quality of ther training programs. In4 Pet ne UnertengSrie some cases, these firms have established collegelike taining centers (e-£,MeDonalé’ Hamburger Universigy in Oak Brook, Iiliois, near Chicago). Conerlling Quatisy Delivering 2 consistent level of service quality at multiple sites with labor intensive sys {emis a significant challenge. Fims have approached this problem in a varity of ways, including personae] taining, explicit procedures, technology, nits on the scope of the service, direct supervision, and peer pressure, among others. For example, 10 eusure Com sisteny, the Magic Pan chain of restnrants designed 2 foolproof mache to produce is famous cxépes, The question of sevice quali further cormplicted by the poeta gap ‘berumen customer expectations and experiences. Influencing eastomer quality expect tions thus becomes an issbe, which is explored in Chapter 6, Service Quality, Focus ‘The focur satcgy is built around the idea of servicing a particular target market very well by addressing customers specific needs. The market segment could be a particw- lar buyer group (@g., USAA and the military community), service (., Shouldice Hospital ard patents with inguinal hernias, Motel 6 and budget travelers, Federal Express and people who need guaranteed overnight package delivery), or geographic region (e.g, community college or neighborhood resturant). The focus strategy rests ‘on the premise thatthe firm can servos narrow target market more effectively and/or efficiently chan other finns tying to serve 2 broad market AS a result, the firm achieves competitive advantage in is market sepmect hy meeting specific cstom reeds andir by lower costs throug specialization. Thus, the focus strategy isthe plication of differentiation andor overall coe leadership to particular market segment rathor than the entize market. Davidow and Utal argue how important customer selection is to achioving a suo- cessful foeus suateyy* They relate how one bank in Palo Alt, California, gets ‘wealthy individuals and discourages others by policies such as closing an acount after two checks have kounced. Davidow and Ural’ three-step approach to focus includes sopmenting the market fo design core services, classifying customers accord ing tothe value they place on serve, and setting expecations slighty below perceived performance ining Customers in the Marketplace Depending oa the competition and persooal needs, customers select service provider using criteria listed here. This lis is aot intended tobe complet, because the ery a ition of now dimension by a firm reprosents an atemapt to engago io a statogy of iferctistion. For example, initiation of the frequen yer program “AAdvantage” by American Airtnes was an aiecpt to add the cimension of customer loyalty to compe- tion among ailnes. + Availability, Row accessible is the service? The use of ATMs by banks has created ‘2é-hour availabilty of some banking services ((2., service beyond the traditional “banker's hours"). Use of 600-nurabers by many service fis facilitates aocess af ‘er normal working hours. + Comenionce. Tie location ofthe service defines conveniance for cutceners wo mst travel fo tat eervice, Gasoline tations, fst Food reecurans, aad dey eleaner ze ex amps of services that must selet locations on basy stots if thoy arto succeed.Chapters Sesmtgy AS + Dependability How reliable i the serves? For example, once the exterminator is ‘gone, how soon do the bugs retum? A major complaint regarding automobile repair services isthe fllure to fix the problem onthe fist vist Fr aitines, on-time por- formance is statistic collected by the FAA. + Personalization. Are you teated as an individual? For example, hotels have dis ‘covered that repeat eastoaers respond to being grested by theirhame. The degree of customization allowed in providing the service, no mater how slight, ean be ‘viewed as more personalized Service. + Price. Compeiag oa price is not a5 effective in services as it is with products, ‘because it often is dificult to compare the costs of services objectively. It may be ‘easy to compare costs in the delivery of routine services such as an oi change, but in ‘professional services, competition on price might be considered counterproductive ‘because price often is viewed as being a surrogate for quality + Qual. Service quality isa function ofthe relationship between customer’ prior expectations af the service and his or her peroepion of the service experience both daring and afer the Fact. Unlike product quality, service quality is judged by bots the process of service datvery andthe outcome of the service. + Reputation. The uncertainty that is associated with the selection of a service provider often is resolved by talking with others about their experiences before & Gocision is made. Unlike s procs, a poor service experience cannot be exchanged ‘orretumed fora differnt model. Positive word-of-mouth is tho most effective form. of advertising + Safety, Well-being and security are important considerations because in many services, such as ai travel and medicine, the customers ae putting thei ives inthe bands ofthe service provider. + Speed. How long must I wait for service? For emergency services suchas fire and police protection, response time isthe major eriterion of performance. In other serv= cos, wating sometimes may be considered a trade-off for receiving more personal ied services, such as reduced rates. ‘Writing about manufacturing strategy, Tey Hill used the term order-inning cite- ra to refer to competitive dimensions that sell products* Tle furtner suggested that some criteria could be called qualfers, because he preseace ofthese dimensions is necessary fora product to enter the masiespiace. Finally, Hill sid chat some qualifies could be considered order-losing sensitive ‘We wil ue a similar ogi andthe service ertaria listed eater o describe the service purchase decision. The purchase decison sequence begins with qualifying potential service fms (¢., must the doctor be on my PPO lst), followed by making final se Jection fom this subset of service firms using a service wianes (eg. which ofthe PPO octers asthe be repuaon?). ter to inal servic experience, a return wll be based ‘on wether a “service loser" has occurred (eg. the doctor was cold and impersonal). Qualifiers Before a sevice firm canbe taken seriously asa competitor inthe musket itmust attain a cerain level for each service-competiive dimension, as defined by te otber aarket players. For example, in arline sevice, we would name safety, as defined bythe eir- ‘yorthiness ofthe aircraft and bythe rating ofthe pilots, as an obvious quale Inara tare mazket sub as fast foods, exablished compottors may define a level of quality, such as cleanliness, that new entrants must atleast match to be vsble contenders.For fat food, s dimension that ones was a service winner, such a a drive-in window, ‘over die could become a qualifier because some customers Wil 2: sop otherwise. Service Winners Service winners ae dimensions such a pice, convenience, or reputation that are used by 2 customer to make a coice among competitors. Depending on the abods ofthe ‘customer at the time ofthe purchase, the service winner may vary For example, seek ing a restaurant for Iunch aay be based on convenience, butadisner date could be in- ‘ivenced by reputation. Note that a service winner can become an industry qualifier (@g, ATM use by banks), Service Losers Failure wo deliver at or above te expected level fora competitive dimension can result ina disertied customer wh i lost forever For varios reasons, the dimensions of ‘dependability, persoealization, and speed ate particulary wulneable to becoming service lovers, Some examples night be failure ofan ato dealer to reper amocheni- ‘al problem (ic, dependability), rade treatment by a doctor (.<., personalization), of fallae of an overnight service to deliver a package oa time (ie, speed) The Competitive Role of Information in Services® ‘For service management, information technology is helping to define the competitive ssrategy of successful firms. Figure 3.1 lustats the different roles in which informa- tion technology can support a service finn’s competitive strategy. We sball explore ‘each of thse roles in ura with illustrations from successful applications. Creation of Barriers to Entry ‘As noted ears, many services exit in markets tht have low entry barirs. James L. Hesket, however, has argued that barriers to erty canbe created by using economies of sale building market share, creating switching cost, ivesting in communications FIGURE 3.1 Competitive use of inpemation State Roe of iam Informa Online ottine Serviess (Real tne) (Analysis) revere ne, Ete = Creation of barriers Database ase: eect wen : eeierem” Exerad | Resenation system Seling information Seine Customer) | Frequect ue club Development of services aaa Switching costs Micronaskeing Revenue generation: Product enhancement Tmemal_ | Yieid management Inventory tas {Operaions)| Point of sls Dasa envelopineatsnalysis Expt systems EA)Chapters: Snes 47 networks, and using databases and information technologies to suategic advantage.” ‘We will discuss three uses of information for creating bariers to entry: reservations systoms, frequent flyer or simile programs to gain customer loyalty, and develepment of customer relationships to increase switching cos. Reservation Systems ‘A barier to entry can be created by investing in online reservations systems that are provided to selos intermediaries such as travel agents, American Airlines SABRE Sys- fem isan example ofthe kindof subtle baries to entzy tat is created by a compreben- sive information system. United tnd Delia ave duplicated this eservations system at reat cos, bur most smaller caries se these existing systems fora fee. The compet five importance of oaline reservations systems became evident in late 1982. At this time, the Civil Aeronautics Board (CAB) and the US. Department of Jostce began a joint investigation of possible antitrust violations by airline reservations systems. Ip this investigation, rontir Aisles filed charges accusing United of nfeily restrict {ng competion inthe use of its Apollo computerized reservations system Frequent User Chub twas « ema sep for American Airlines, given its massive reservations system, to ‘add up passenger accounts to accumulate eravel credit fr frequeat flyer award. These programs, which award free trips and several ancillary benefits eeate strong bred Toyalty among travelers, pacticularly business twavelere who axe not paying their oan ‘yay. Taus the discount fares ofa new competitor bave no appeal to these travelers, 2s People Expres leamed, A travel consultant has boen quoted a8 saying, “Tes one ofthe ‘most anticompetitive programs ever erect”? ‘Afted Kaha, the father of deregulation, headed the CAB inthe late 1970s and did ‘ot forests how airlines would create reservations systems and frequent iyr plans to sille competition, Hei quoted as saying, "Nobody recognized al the waysin which a ‘carrer could insulate isl from competition.” Switching Coss Information technology inthe form of online computer terminals has been used inthe retical spies incusty toi hospital directly to the supplier’ dstbuton netwocks Bots Amerisen Hospital Supply and MeKessn, the drug distributer, have installed thoi onlin terminals in hospitals so that supplies and érugs can be purchased as the need arises. Significant switching costs are bul into this arrangement, beoause the hospital is able o rece invenory-carying costs and has the convenience of online ordering fore Flenishments, Tae supplier benefits by «reducson in selling cess because it is d-icat fora competitor to entie avay a eastomer who is already cooptes int its system. Revenue Generation Realtime information technologies witha focus on internal operations con play a com petitive role i increasing revenue opportunities. Tae concept of yield management is best undertaod as a reverue-maxiniing strategy to make full use of service capacity ‘Advances in microcomputers have cres:ed oppertunities for innovative point-of-sale Sevices, andthe use of expert systems ted to $00-numnbers allows increased customer Yield Management ‘Through the use of ts SABRE resewvations system, American Aisles was the fist 0 realize the potential of wht snow calle yi‘d maragemen: By constantly monitring45 PatGne Uae Soves ‘he stats ofboth its upcoming flights and competitors’ flights onthe same route, Amer. jean makes pricing and allocation decisions oa unsold sets. Thus, the number of Su- persaver fare allocated toa particular flight canbe adjused to ensure that remaining, empty seats haves chazce of being sol, but nt atthe expense ofa full-fre seat. Tis real-time pricing strategy maximizes the even for each ligt by ensuring that no seat goes cmpy for vant of bargan-seckingpassnger while holding some seas reserve {or late eves who are wig to pay fl fare. "Ths, yield management is the application of information to improve the revenue that is generatod by a tme-perishable resource (eg, airline sets, hotel rooms). The sueeess of yield managemttt for American has not goue unnoticed by ether service industries; for example, Marriot Hotels has installed a nationwide yield management system to increase occupancy rates. In addition, American Airlines is capitalizing on {ts innovation by selling the yield management software to noncompetitive industries sch asthe French national railroad. The topic of yield management is covered in smore detail in Chspter 12 Poin: of Sale ‘Wal-Mart has discovered a new toy forthe discount shopper: the VideOcart. As the shopper pastes the VideOcart trough the store, information about the departinent at Ian flashes ono the atached video screen. The cart also helps customers find tems ‘nthe store ty listing hundreds of produets by department and thea displaying a map ‘of tho store, The company supplying the cart claims that it has increased sales by $1 per visit in tals at supermarkets For another example, consider use of the palm- ‘sized microcomputer wansmiter. Wit ths device, 2 server in a restaurant can transmit ‘an order directly to the Kitchen monitor and the bil tothe eashier tthe same time. This saves unnecessary steps and allows more time for suggestive selling, Expert Systems (Otis Elevator Company puts an expert system together with laptop computers in the bands ofits maintenance Staff'o speed repairs in te field. Collecting information onthe [behavior of ts clevatoes over the years has led to a knowledge base that is incorporated {no the export system. Using a loptop computer, a repair person i te field can eal up the system and receive diagnostic help in idessfying the source ofa problem. AS ar sul, elevators ae placed back in service quichly, andbewer repair people aze needed ‘Some of the earlier applications of expert systems have beet it the mesial field ané, ‘conceivably these systems could be accessed by physicims fora fee. As another exam ple, an oil exploration expect system was abl to identify promising ding sites for a ‘mujer oil company Database Asset SanzesL, Heskett observed thatthe dtsbase a service frm posteses can bea Ridden ‘set of ateyie importance. Tae expense of ascmbling and msntaning lege dta- base is iseifa barrier to entry by competitors. More important, howevs, the database can be mined for profiles of customers’ buying habits, and these preseat opportunities for developing new services Selling Information Dun & Bradstreet ested a business by selling access to its databace of business redit information. American ome Shield a provider of service contracts for individual home beating plumbing, and electial systems, also discovered that it hada valuable asstinupto Sntesatay 9 lis database, accumulated over many yous of repair experience, zanufectrers nov are in- ‘ited to access this database to evaluate the performance pattems oftheir products, Amer ‘can Express has detailed information about the spending habits ofits cardholders and now offers breakdowns of eusiomer spending pat ‘eras its etal customers Developing Services (Club Med, an alkinclusive resort compeny ‘with locations worlwide, has evolved fo 1e- ‘ect the maturing ofits membership. Staying the database of member charactenstics, Club a aoe ME Med calizd tat over tine sence swig nl ar employees we handheld computers to speed wp the singles members have become marred Wath SeSep. a reasoning cesomer te sve mises HOMS Sydren. Tn order to continue capturing future vacation visits, Cub Med mocified some of ite locations to accommodate families with young children, Now parents can enjoy the ‘beach and water spots wile tir children ar supervised by Club Med counselors ata childen's pare neazty. More recently, Club Med bas added cruise ships ta its vacation ‘passes to attract the more senior members who are no longer interested in water poms. As this example illustrates, service firms that capture customer data at the ime ‘ofthe iniiel purchase have the opportunity to establish lifetime relationship, with the potential for creating new oe modified services for future purchase, Micromarketing “Today, can soo ately focused service strategy tat can target customers atthe micro Jovel Barcoding ané cbeckout scanner technology creas a wealia of consumer buying information that can be used to target customers with precision. As Table 3.2 shows, analysis ofthis database allows marketers to pinpoint heir adverbing and product dis tribution To increate sales, Borden Tac, bas used such information to select stores in ‘which to feature is premium pasta sauce. Kraft USA saw its sales of cream ehoese in- ‘ease ater tegotng ite avers othe tastes ofa particular store shoppes.® American Express, by analyzing infarmston about its cusomers end their changing spending pat- terns in motioulous detall, cam even tell when they pet married. Productivity Enhancement [New developments inthe collection and analysis of information have increased our ahily to manage multisite service operations. Though ns of notebook computers, - ‘ail inventory ean be managed on = daily basis 1 make beter use of shelf space by rbetching displayed products with sles, formation celleted on the performance of tlie units can be used to identify the most efficient producers and productivity 5 enhanced system when the sources of these successes are shared with other sites The foundation for learning organization is then established Inventory Status ‘Using a hand-held computer, Frito-Lay sales representatives have eliminated paper forms, They dowalead te dat collectod on their routes each day va telephone tothe Plano, Texas, headquarters, and the company then uses these data to Keep tack of159 Penne Unset er TABLE 3.2 Example of Micromarketing Analysis iting the Bull Bye Micromackses can now target produc’ best customers andthe stores where hey’r mst ely fo shop Here one company's analysis of thee prodoct’ best tages i the New York sea. ‘rand eter Pan peanut butter Stott Red Box ‘oxen enteeee Coos ight beer ven User Profle Lfesye and edi Profle” Top Tee oer Households with). * Heavy video renters Foodltown Super Market Sd headed by + Goto treme pars 3350 Hempstead Turnpike Tesayearolds, + Below average TV Levtown, NY fn suburban and viewers Pathmark Supermarket nealaress Above average dio 3635 Herostead Turpike listeners Levittown, NY King Kallen Market 596 Stewart Ave Bethpage, NY Houssholde headed * Gotogambiing DDan’s Supreme Super by people $5 and ‘easnos Market ‘older and upecole —* Ghe panier 60.62 88h st. iburban + Invated in pubic ushing, NY households etnies Food Empod headed by + Trowel fequentiy Madson Ave. & 74th St. 35-S4.yearolds 1 Heavy newspaper NewYork NY react, ‘Waldbaum Super Markot + Above average TV 196-35 Horace Haring viewers ushing, NY Heac of household + Belong toa health dub Food Emporium 2i-Seyeusokd, ‘Buy rock mule 11488 Yor Wve. mile to upper + Thavel by plane New York NY Income, suburban GW pares, cookouts Food Emporium and-urtan 1 entviceos Fist ave. & 72nd Se, + Heay TV sports New York, NY viewers Gristede’s Supermarket 3506 g6th New York NY inventory levels, pricing, produtt promotions and stale or returned merchandise. These ally updates on sales, manufacturing, and distribution keep fresh products moving ‘through the system, meting consurer domancs. Fora pershsble prodact like potato ips, having the righ product atthe right place and inthe proper emount is eiial 10 Frito-Lay’s success, One spokesperson sud thatthe company saved more than $40 mil ion ints fist year because of reduced paperwork, reduced loses from stale produc, ‘and route consoligston.© Data Envelopment Analysis ‘Daua emelopmen: anaiyss (DEA) isa linea programming tesanique developed by ‘Charnes, W. W. Cooper, and E. Rhodes to evaluste nonprofit and public sector ‘organizations. Subsequently thos found applications in for-profit service organizations DEA compares each service delivery unit with all ether service unis fora multisite or ‘ganization, and it computes an efficiency rating tis based onthe rato of resourceChater 3: seve sey 51 {npus to opus. Multiple inputs (e.g, labor-ours, materia's) and multiple outputs ©. sles, referral) ae posible and desiniblein measuring a units efficiency. Taking this in- fermion the linea programming model determines the efficiency frontier on the basis of those few units producing at 100 percent efficiency. Areas for improvement can be identified by comparing the operating prectioes of efficient units wath those of less eff Cent units, Sharing management practices of etfcient units with less efficient unis peo- vides an opporunty forthe later’ improvement and enhancement of total system productivity, Repeated use of DEA can establish a climate of organizational learning that fuels competitive sategy of cost leadership ‘Banker end Morey applied DEA toa 60-anit ft food restaurant chain and found 38 units o be efficent” In their analysis, three ouspus (i.e food sales for breast, Tuneh, end dinner) and six inputs (.e, supplies and materials, labor, age of store, ad ‘versting expenditures, wan versus rural ieation, and existence cf driven window) ‘were used, It is incaresting to note that te inputs included both discretionary and un- controllable variables (e.g, the demographic variable of urbanfreal locations, whether ‘or not tho unit had a grive-in window). The topic of data envelopment analysis is cov ‘ered in more deal as a supplement this chapter. The Virtual Value Chain’® “Today, businesses compete ia two worlds’ physical world of people and things called a markeyplace anda virwal world of information called a markespace. For example, “after Bares and Noble opened a Web site it established a presence in the virtual mar- ietspace ereated by the Internet, but it aso continues its competitive position as the leading bookstore in the markerplace. The nature of the marketspace that requires cus- ‘omer information for order fulfilment slo enable the service provider to collect use- {il information such as customer buying behavior and addresses. The marketspace information can also be usod to improve the service delivery process both in terms of customer value and productivity. For example, FedEx now exploits its information {atabsse by allowing customers to track packages thomselves using the company Web site instead of calling a customer service representative. "Altaough the value chain ofthe marketspace can rior that of the traditional mar~ ketplace, the value-adding process first must gather raw information that is processed and finally iseibuted. This activity involves a sequence of five seps—gathering,of- ganizing, selecting, synthesizing, and distrbuting information. "The United Services Automobile Association (USAA), which provides financial services to military persoane and thes families, has become a world-class competitor by exploiting the virual value chain. USAA moved from the markezplece to market pace in a three-stage evolution, First Stage (Visibility) | ‘The first stage involves seeing the physical operations more effectively with informa- t sion, USAA bocame a “paperess operation” as it moved from a manuel paper-based fling stem to one based on ¢al computarind database with access via desktop terminals, Second Stage (Mirroring Capability) ‘he second stage, physical activities are substituted with visual ateratives. ALUSAA, information systoms were installed to automate the core business of insurance sles and Underuriting. Ia the process, USAA captured signifiant amouns of information aboutcustomers who are members of the association, Unlike a typical insurance company, USAA has no traveling sales fore and al ofits businossis conduct by telephone, mil, or Internet, All member-contact employees are tained to evaluate members’ needs and provide appropriate products and setvices, Consequently, USAA bas been able to build