Part 1

FOUNDATIONS
FOR SERVICES
MARKETING

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

 Chapter
Introduction to Services 1

▪ What are services?

▪ Why services marketing?
▪ Service and Technology
▪ Characteristics of Services Compared to Goods
▪ Services Marketing Mix
▪ Staying Focused on the Customer

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 Objectives for Chapter 1:
Introduction to Services
▪ Explain what services are and identify important trends in
services.

▪ Explain the need for special services marketing concepts and

practices and why the need has developed and is accelerating.

▪ Explore the profound impact of technology on service.

▪ Outline the basic differences between goods and services and

the resulting challenges and opportunities for service
businesses.

▪ Introduce the expanded marketing mix for services and the

philosophy of customer focus, as powerful frameworks and
themes that are fundamental to the rest of the text.

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 Examples of Service Industries
▪ Health Care
▪ hospital, medical practice, dentistry, eye care
▪ Professional Services
▪ accounting, legal, architectural
▪ Financial Services
▪ banking, investment advising, insurance
▪ Hospitality
▪ restaurant, hotel/motel, bed & breakfast
▪ ski resort, rafting
▪ Travel
▪ airline, travel agency, theme park
▪ Others
▪ hair styling, pest control, plumbing, lawn maintenance, counseling
services, health club, interior design

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 Introduction

▪ The services sector is not only the dominant sector in

India’s GDP, but has also attracted significant foreign
investment, has contributed significantly to export and has
provided large-scale employment.
▪ India’s services sector covers a wide variety of activities
such as trade, hotel and restaurants, transport, storage
and communication, financing, insurance, real estate,
business services, community, social and personal
services, and services associated with construction.

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 Market Size

▪ The services sector is a key driver of India’s economic

growth.
▪ According to RBI, in February 2021, service exports stood
at US$ 17.54 billion, while imports stood at US$ 10.61
billion.

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 Industry Developments

▪ The services* category in India attracted cumulative

foreign direct investment (FDI) worth US$ 85.86 billion
between April 2000 and December 2020. The services
category ranked 1st in FDI inflow as per data released by
the Department for Promotion of Industry and Internal
Trade (DPIIT).
▪ In April 2021, the Ministry of Education (MoE) and
University Grants Commission (UGC) started a series of
online interactions with stakeholders to streamline forms
and processes to reduce compliance burden in the higher
education sector, as a follow-up to the government’s focus
on ease of doing business to enable ease of living for
stakeholders.
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 Industry Developments

▪ On March 17, 2021, the Health Ministry’s eSanjeevani

telemedicine services crossed 3 million (30 lakh)
teleconsultations since its launch, enabling patient-to-
doctor consultations from the confines of their home and
doctor-to-doctor consultations.
▪ In April 2021, Elon Musk’s SpaceX has started accepting
pre-orders for the beta version of its Starlink satellite
internet service in India for a fully refundable deposit of
US$ 99. Currently, the Department of Telecommunications
(DoT) is screening the move and more developments will
be unveiled soon.

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 Industry Developments

▪ In December 2020, a cohort of six health-tech start-ups—

AarogyaAI, BrainSightAI, Fluid AI, InMed Prognostics,
Wellthy Therapeutics, and Onward Assist—have been
selected by the India Edison Accelerator, fuelled by GE
Healthcare. India Edison Accelerator, the company's first
start-up partnership programme focused on Indian
mentors, creates strategic partners to co-develop
healthcare solutions.
▪ The Indian healthcare industry is expected to shift digitally
enabled remote consultations via teleconsultation. The
telemedicine market in India is expected to increase at a
CAGR of 31% from 2020 to 2025.
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 Industry Developments
▪ In December 2020, Gamma Skills Automation Training
introduced a unique robotics & automation career launch
programme for engineers, an ‘Industry 4.0 Hands-on Skill
Learning Centre’ located at IMT Manesar, Gurgaon in Haryana.
▪ In December 2020, the 'IGnITE’ programme was initiated by
Siemens, BMZ and MSDE to encourage high-quality training and
technical education. 'IGnITE' aims to develop highly trained
technicians, with an emphasis on getting them ready for the
industry and future, based on the German Dual Vocational
Educational Training (DVET) model. By 2024, this programme
aims to upskill ~40,000 employees.
▪ In October 2020, Bharti Airtel entered cloud communications
market with the launch of business-centric ‘Airtel IQ’.
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 Government Initiatives

▪ Under Union Budget 2021-22, the government allocated

Rs. 7,000 crore (US$ 963.97 million) to the BharatNet
programme to boost digital connectivity across India.
▪ FDI limit for insurance companies has been raised from
49% to 74% and 100% for insurance intermediates.
▪ On January 15, 2021, the third phase of Pradhan Mantri
Kaushal Vikas Yojana (PMKVY) was launched in 600
districts with 300+ skill courses. Spearheaded by the
Ministry of Skill Development and Entrepreneurship, the
third phase will focus on new-age and COVID-related
skills. PMKVY 3.0 aims to train eight lakh candidates.

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 Government Initiatives

▪ In January 2021, the Department of Telecom, Government

of India, signed an MoU with the Ministry of
Communications, Government of Japan, to strengthen
cooperation in the areas of 5G technologies, telecom
security and submarine optical fibre cable system.
▪ On November 4, 2020, the Union Cabinet, chaired by the
Prime Minister, Mr. Narendra Modi, approved to sign a
memorandum of understanding (MoU) between the
Ministry of Communication and Information Technology
and the Department of Digital, Culture, Media and Sports
(DCMS) of United Kingdom Government to cooperate in
the field of telecommunications/information and
communication technologies (ICTs).
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 Government Initiatives
▪ In October 2020, the government selected Hughes
Communications India to connect 5,000 village panchayats
in border and naxal-affected states and island territories
with satellite broadband under BharatNet project by March
2021.
▪ In September 2020, the government announced that it may
infuse Rs. 200 billion (US$ 2.72 billion) in public sector
banks through recapitalisation of bonds
▪ In the next five years, the Ministry of Electronics and
Information Technology is working to increase the
contribution of the digital economy to 20% of GDP. The
government is working to build cloud-based infrastructure
for collaborative networks that can be used for the creation
of innovative solutions by AI entrepreneurs and startups.
McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 Government Initiatives
▪ On Independence Day 2020, Prime Minister Mr. Narendra Modi
announced the National Digital Health Mission (NDHM) to provide a
unique health ID to every Indian and revolutionise the healthcare
industry by making it easily accessible to everyone in the country. The
policy draft is under ‘public consultation’ until September 21, 2020.
▪ In September 2020, the Government of Tamil Nadu announced a new
electronics & hardware manufacturing policy aligned with the old policy
to increase the state's electronics output to US$ 100 billion by 2025.
Under the policy, it aims to meet the requirement for incremental human
resource by upskilling and training >100,000 people by 2024.
▪ Government of India has launched the National Broadband Mission with
an aim to provide Broadband access to all villages by 2022.

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 Broad trends in Service Sector globally
▪ With more companies offering tiered service based on the calculated profitability
of different market segments, many customers are in fact getting less service
than they have in the past
▪ Increasing use by companies of self service and technology based service is
perceived as less service because no human interaction or human personalization
is provided
▪ Customer expectations are higher in all industries because of the excellent
service they receive from some companies
▪ Organizations have cut costs to the extent that they are too lean and too
understaffed to provide quality service
▪ The competitive job market results in less skilled people working in frontline
service jobs; talented workers soon get promoted or leave for better
opportunities
▪ Many companies give lip service to customer focus and service quality, but they
fail to provide the training, compensation and support of employees needed to
actually deliver quality service
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 Figure 1.2

Tangibility Spectrum
Salt
⚫ Soft Drinks
⚫ Detergents
⚫ Automobiles
⚫ CosmeticsFast-food
⚫ Outlets
⚫ Intangible
Dominant

Tangible
⚫
Dominant Fast-food
Outlets ⚫
Advertising
Agencies
⚫
Airlines ⚫
Investment
Management ⚫
Consulting ⚫
Teaching
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 Table 1.1

Eight Central Paradoxes of Technological

Products

Source: D. G. Mick and S. Fournier, “Paradoxes of Technology: Consumer Cognizance, Emotions, and Coping Strategies,” Journal of Consumer
Research 25 (September 1998), pp. 123–47.

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 Table 1.2

Goods versus Services

Source: A. Parasuraman, V.A. Zeithaml, and L. L. Berry, “A Conceptual Model of Service Quality and Its Implications for Future Research,” Journal of
Marketing 49 (Fall 1985), pp. 41–50.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

 Why study Services Marketing?

▪ Service-based economies

▪ Service as a business imperative in manufacturing and IT

▪ Deregulated industries and professional service needs

▪ Services marketing is different

▪ Service equals profits

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 Characteristics of Services
Compared to Goods

Intangibility Heterogeneity

Simultaneous
Production
and Perishability
Consumption

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 Implications of Intangibility

▪ Services cannot be inventoried

▪ Services cannot be easily patented

▪ Services cannot be readily displayed or communicated

▪ Pricing is difficult

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 Implications of Heterogeneity

▪ Service delivery and customer satisfaction depend on

employee and customer actions

▪ Service quality depends on many uncontrollable factors

▪ There is no sure knowledge that the service delivered

matches what was planned and promoted

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Implications of Simultaneous Production
and Consumption
▪ Customers participate in and affect the transaction

▪ Customers affect each other

▪ Employees affect the service outcome

▪ Decentralization may be essential

▪ Mass production is difficult

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 Implications of Perishability

▪ It is difficult to synchronize supply and demand with

services

▪ Services cannot be returned or resold

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 Challenges for Services
▪ Defining and improving quality
▪ Designing and testing new services
▪ Communicating and maintaining a consistent image
▪ Accommodating fluctuating demand
▪ Motivating and sustaining employee commitment
▪ Coordinating marketing, operations, and human resource
efforts
▪ Setting prices
▪ Finding a balance between standardization versus
personalization
▪ Ensuring the delivery of consistent quality

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 Traditional Marketing Mix

▪ All elements within the control of the firm that

communicate the firm’s capabilities and image to
customers or that influence customer satisfaction with the
firm’s product and services:
▪ Product
▪ Price
▪ Place
▪ Promotion

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 Expanded Mix for Services --
The 7 Ps
▪ Product
▪ Price
▪ Place
▪ Promotion
▪ People
▪ All human actors who play a part in service delivery and thus influence the
buyer’s perceptions: namely, the firm’s personnel, the customer, and other
customers in the service environment.
▪ Physical Evidence
▪ The environment in which the service is delivered and where the firm and
customer interact, and any tangible components that facilitate performance
or communication of the service.
▪ Process
▪ The actual procedures, mechanisms, and flow of activities by which the
service is delivered—the service delivery and operating systems.

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 Table 1.3

Expanded Marketing Mix for Services

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 Ways to Use the 7 Ps
Overall Strategic Assessment
▪ How effective is a firm’s
services marketing mix?
▪ Is the mix well-aligned with
overall vision and strategy?
▪ What are the strengths and
weaknesses in terms of the
7 Ps?
McGraw-Hill/Irwin
Specific Service Implementation
▪ Who is the customer?
▪ What is the service?
▪ How effectively does the
services marketing mix for a
service communicate its
benefits and quality?
▪ What changes/
improvements are needed?
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 Chapter
The Gaps Model of Service Quality 2

▪ The Customer Gap

▪ The Provider Gaps:
▪ Gap 1 – not knowing what customers expect
▪ Gap 2 – not having the right service designs and
standards
▪ Gap 3 – not delivering to service standards
▪ Gap 4 – not matching performance to promises
▪ Putting It All Together: Closing the Gaps
 Objectives for Chapter 2:
The Gaps Model of Service Quality
▪ Introduce a framework, called the gaps model of service quality,
which is used to organize this textbook.

▪ Demonstrate that the gaps model is a useful framework for

understanding service quality in an organization.

▪ Demonstrate that the most critical service quality gap to close is

the customer gap, the difference between customer expectations
and perceptions.

▪ Show that four gaps that occur in companies, which we call

provider gaps, are responsible for the customer gap.

▪ Identify the factors responsible for each of the four provider

gaps.

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 Figure 2.1

The Customer Gap

Expected
service

Customer Gap

Perceived
service

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 Gaps Model of Service Quality

▪ Customer Gap:
▪ difference between customer expectations and perceptions
▪ Provider Gap 1 (The Knowledge Gap):
▪ not knowing what customers expect
▪ Provider Gap 2 (The Service Design & Standards Gap):
▪ not having the right service designs and standards
▪ Provider Gap 3 (The Service Performance Gap):
▪ not delivering to service standards
▪ Provider Gap 4 (The Communication Gap):
▪ not matching performance to promises

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 Key Factors Leading
to the Customer Gap

Customer
Customer Expectations
Gap

⚫ Provider Gap 1: Not knowing what customers expect

⚫ Provider Gap 2: Not selecting the right service designs and standards

⚫ Provider Gap 3: Not delivering to service standards

⚫ Provider Gap 4: Not matching performance to promises

Customer
Perceptions
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 Figure 2.2

Key Factors Leading to Provider Gap 1

Customer Expectations

▪ Inadequate marketing research orientation

Gap Insufficient marketing research
Research not focused on service quality
1 Inadequate use of market research
▪ Lack of upward communication
Lack of interaction between management and customers
Insufficient communication between contact employees and managers
Too many layers between contact personnel and top management
▪ Insufficient relationship focus
Lack of market segmentation
Focus on transactions rather than relationships
Focus on new customers rather than relationship customers
▪ Inadequate service recovery
Lack of encouragement to listen to customer complaints
Failure to make amends when things go wrong
No appropriate recovery mechanisms in place for service failures

Company Perceptions of
Customer Expectations
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 Figure 2.3

Key Factors Leading to Provider Gap 2

Customer-Driven Service
Designs and Standards

Gap ▪ Poor service design

Unsystematic new service development process
2 Vague, undefined service designs
Failure to connect service design to service positioning
▪ Absence of customer-driven standards
Lack of customer-driven service standards
Absence of process management to focus on customer
requirements
Absence of formal process for setting service quality goals
▪ Inappropriate physical evidence and servicescape
Failure to develop tangibles in line with customer expectations
Servicescape design that does not meet customer and
employee needs
Inadequate maintenance and updating of the servicescape

Management Perceptions of
Customer Expectations
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 Figure 2.4

Key Factors Leading to Provider Gap 3

Customer-Driven Service
Designs and Standards

Gap ▪ Deficiencies in human resource policies

Ineffective recruitment
Role ambiguity and role conflict
3 Poor employee-technology job fit
Inappropriate evaluation and compensation systems
Lack of empowerment, perceived control, and teamwork
▪ Customers who do not fulfill roles
Customers who lack knowledge of their roles and responsibilities
Customers who negatively impact each other
▪ Problems with service intermediaries
Channel conflict over objectives and performance
Difficulty controlling quality and consistency
Tension between empowerment and control
▪ Failure to match supply and demand
Failure to smooth peaks and valleys of demand
Inappropriate customer mix
Overreliance on price to smooth demand

Service Delivery
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 Figure 2.5

Key Factors Leading to Provider Gap 4

Service Delivery

▪ Lack of integrated services marketing communications

Gap Tendency to view each external communication as independent
Not including interactive marketing in communications plan

4 Absence of strong internal marketing program

▪ Ineffective management of customer expectations
Absence of customer expectation management through all forms of
communication
Lack of adequate education for customers
▪ Overpromising
Overpromising in advertising
Overpromising in personal selling
Overpromising through physical evidence cues
▪ Inadequate horizontal communications
Insufficient communication between sales and operations
Insufficient communication between advertising and operations
Differences in policies and procedures across branches or units

External Communications to
Customers
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 Figure 2.6

Gaps Model of Service Quality

Expected
Service
CUSTOMER
Customer
Gap
Perceived
Service

External
COMPANY Service
Communications
Delivery Gap 4 to Customers
Gap 3
Gap 1 Customer-Driven
Service Designs and
Standards
Gap 2
Company Perceptions
of Consumer
Expectations
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 1

Services Management – Integrating

Marketing and Operations Management
Perspectives

Term IV

Prof. Abhishek Srivastava

Indian Institute of Management, Kashipur

What is Operations Management?

Operations management is the management of systems or

processes that create goods and / or provide services through the
transformation of inputs into outputs
What is Operations Management?
 Services??????

Making consumers happy by proving value

How much value????

https://www.youtube.com/watch?v=XUBeW_NFggM
 5

Service Operations Management

The implementation of the organizations strategy through the operational

control of the organization by focusing on not only product or service
development,

But also the delivery of products and services to the end customer in a way

that drives co-creation of value between customer and business’

 Goods and Services

• Tangible
• Uniformity of input/output
• Production usually separate
from consumption
• Can be inventoried
• Low customer contact
• Capital intensive
Characteristics of Services

• Intangible
• Produced and consumed at same
time
• Often unique
• High customer interaction
• Inconsistent product definition
• Often knowledge-based
• Frequently dispersed
• Labor intensive
Role of Services in an Economy
Stages of Economic Activity (ctd..)
 17 of top 25 are services (59.7% of Top 25 Co’s revenues)

Rank Company Name Revenues Profits S=Service Service Description

1
2
2013 Fortune 25 Companies
Wal-Mart Stores
Exxon Mobil
($ billions)
469.2
449.9
($ millions) H=Hybrid
16,999
44,880
S Retail

3 Chevron 233.9 6,179

4 Phillips 66 169.6 4,124
5 Berkshire Hathaway 162.5 14,824 S Financial Services
6 Apple 156.5 41,733
7 General Motors 152.3 6,188
8 General Electric 146.9 13,641 H Mfg + Financial Services
9 Valero Energy 138.3 2,083
10 Ford Motor 134.3 5,665
11 AT&T 127.4 7,264 S Communications
12 Fannie Mae 127.2 7,220 S Financial Services
13 CVS Caremark 123.1 3,877 S Retail
14 McKesson 122.7 1,403 S Healthcare (pharma distrib)
15 Hewlett-Packard 120.4 -12,650
16 Verizon Communications 115.8 875 S Communications
17 UnitedHealth Group 110.6 5,526 S Healthcare
18 J.P. Morgan Chase & Co. 108.2 21,284 S Financial Services
19 Cardinal Health 107.6 1,069 S Healthcare (pharma distrib)
20 International Business Machines 104.5 16,604 S Consulting
21 Bank of America Corp 100.1 4,188 S Financial Services
22 Costco Wholesale 99.1 1,709 S Retail
23 Kroger 96.8 1,497 S Retail
24 Express Scripts Holding 94.4 1,313 S Insurance
25 Wells Fargo 91.2 18,897 S Financial Services
Service Operations Management

Services
Vs.
Operations
 12

• https://www.youtube.com/watch?v=iL65JZJ_K
Vo
Goods vs. Service Operations

• Differences
1. Customer contact
2. Uniformity of input
3. Labor content of jobs
4. Uniformity of output
5. Measurement of productivity
6. Production and delivery
7. Quality assurance
8. Amount of inventory
 1
Manufacturing vs. Service ! 4

Characteristic Manufacturing Service

Output

Customer contact

Uniformity of output

Labor content

Uniformity of input

Measurement of
productivity
Opportunity to correct
quality problems
 1
Manufacturing vs. Service ! 5

Characteristic Manufacturing Service

Output Tangible Intangible
Customer contact Low High
Uniformity of output High Low
Labor content Low High
Uniformity of input High Low
Measurement of Easy Difficult
productivity
Opportunity to correct Easy Difficult
quality problems
 16

The Service Characteristics and Operational

Issues
• In purchasing a service, the consumer interacts with the workforce, equipment,
and physical environment that create the service.

• The process itself is, therefore, one dimension of the product. In contrast, the
manufacturing process is isolated from the consumer and has an impact on the
consumer only through what effect it has on the product.

• The elements of the manufacturing process are designed for the effective
production of the physical good that is its output.

• The labor, equipment, and facilities are functionally designed with the cost and
quality of the product being the primary criteria for evaluating how effectively
these resources are utilized.

• In contrast, the service delivery system must be designed with the presence of the
consumer in mind.”
 17

The Service Characteristics and Operational

Issues
• Most goods are produced in factories without the presence of customers. Services are
usually sold first and then produced and consumed simultaneously.

• The inseparability of production and consumption, often called simultaneity, makes the
production process exposed for customer examination and influence. There is no buffer
or clear distinction between the production stage and the consumption stage.

• Heterogeneity in service outputs exists for two reasons. First, the service may be
intentionally customized.
• Second, because of human involvement of the service provider and the customer,
variability is naturally created.

• The output of the service can vary from service provider to service provider, from customer to
customer, and from day to day.

• To make it more complicated and interesting, customers’ evaluation of the same service
performance can be quite different.
 18

The Service Characteristics and Operational

Issues (ctd..)

DamagedIntangibility
brand reputation and
Consumer trust

Heterogeneity

Inseparability of production
and consumption

Perishability & labor intensity.

 19

The Service Characteristics and Operational

Issues (ctd..)

• In services, unused capacity is capacity lost forever. Airline seats not taken, motel rooms
not occupied, and theater tickets not sold cannot be stored and sold tomorrow.

• This characteristic is often called perishability. Perishability leads to difficulty in demand

management, capacity utilization, production planning, and personnel scheduling.

• Finally, service organizations are often characterized as being more labor intensive
than manufacturing organizations. Service management is seen as being different
from manufacturing management because of the higher labor content in most service
settings.
 20

Variability and Services

• Customers introduce tremendous variability

• Dealing with that variability is a central challenge in making a service offering
profitable.

• Operations management theory, rooted in the manufacturing context, typically has

only one thing to say about variability: It must be eliminated.
• Any educated manager learns to recognize it as the enemy of quality.
 21

Variability in the supply chain

The ordering patterns

share a common
recurring theme; the
variabilities of the
upstream site are always
greater than those of the
downstream site
 22

Causes of the bullwhip effect (BWE)

• Demand forecast updating

• Order batching

• Price fluctuation

• Rationing and shortage gaming

 23

Why Variability in Services is Important and difference

from Production variability?

In the service context, the challenge is far more subtle:

(1) it wouldn’t be wise to drive out all variability;

• customers judge the quality of their experience in large part by how much of the variability
they introduce is accommodated, not how sternly it is denied.

(2) While manufacturers have virtually complete control over the cost and quality
of their production inputs, service companies face this one, huge exception:
• Their customers are themselves key inputs to the production process.

• That form of input is, by its nature, capricious, emotional, and adamantly
disinterested in the company’s profit agenda
 24

Types of Variability

Arrival variability

Damaged brand
Request reputation and
variability
Consumer trust

Capability variability

Effort variability

Subjective preference
variability

1. Arrival variability
• Customers do not all want service
at the same time or at times
necessarily convenient for the
company.
• Many a grocery store manager has
bemoaned shoppers’ inability to space
their transactions such that checkout
clerks remain busy and lines do not form at
the registers.
25
• The classic way to address arrival
variability is to require
appointments or reservations,
but that makes sense only in certain
situations.
• In many service environments, such as
retail stores, call centers, or emergency
rooms, the customers themselves cannot
foresee or delay their needs. The
resulting inefficiencies have inspired a
large body of work in what’s known as
queuing theory and many solutions
 26

2. Request variability

• The range of what customers ask for in a

service environment
• At a resort, vacationers want different amenities.
 27

3. Capability variability.

• Service businesses must also • A cleaning service may arrive, do its

work with customers whose work, and leave, having had no real
own capabilities differ. interaction with the customer.

• The customer’s particular capabilities

• Whether because of greater make little difference to how well the
knowledge, skill, physical crew does its job.
abilities, or resources, some
customers perform tasks easily • In a medical setting, by contrast, a
and others require hand-holding. patient may be more or less able to
describe his symptoms, and that will
affect the quality of the health
• Capability variability clearly care he receives
becomes more important when
customers are active participants
in the production and delivery of
a service.
 28

4. Effort variability
• An internal accountant may or may not
take care to hand over well-organized files to
her company’s independent auditor.
• A shopper at a warehouse club may or
may not have the remaining energy to return
When customers must perform a role his massive shopping cart to one of the
in a service interaction, it’s up to them corrals in the parking lot.
how much effort they apply to the task.
• Such effort variability has an
impact on service quality and
cost.
 29

5. Subjective preference variability.

• Customers also vary in their opinions about what it means to be treated

well in a service environment.

• One diner appreciates the warmth of a waiter’s first-name introduction; another resents his
presumption of intimacy.
• When a top partner in a law firm lavishes attention on engagements, some clients will be gratified
by the proof of their cases’ importance. Others will think those expensive billable hours could be
doled out more judiciously.

• These are personal preferences, but they introduce as much unpredictability

as any other variable and make it that much harder to serve a broad base of
customers.
 30

Types of Customer Variability

TYPE CUSTOMERS EXAMPLE

Don’t all want service at the same

Arrival time, or at times convenient for your
company.

Request Ask for a range of things

Vary in their ability to perform tasks

Capability
needed to receive service.

Expend varying degrees of energy on

Effort
tasks needed to receive service.

Subjective Have different opinions about what it

preference means to be treated well.
 31

Types of Customer Variability

TYPE CUSTOMERS EXAMPLE

Don’t all want service at the same

Grocery shoppers can’t space their transactions such
Arrival time, or at times convenient for your
that checkout clerks remain busy and lines don’t form.
company.

Request Ask for a range of things At a resort, vacationers all want different amenities

Vary in their ability to perform tasks A patient has difficulty describing his symptoms,
Capability
needed to receive service. affecting the quality of health care received.

A warehouse club shopper doesn’t return his cart to a

Expend varying degrees of energy on
Effort parking lot corral—raising the store’s costs and
tasks needed to receive service.
impinging on other customers’ experience.

One diner appreciates the warmth of the waiter’s first-

Subjective Have different opinions about what it
name introduction; another resents his presumption
preference means to be treated well.
of equal footing.
 32

A Classic Trade-Off: Accommodate vs. Reduction

• Wherever customer-introduced • Consider a classic illustration of a reduction

variability creates operational issues strategy: the restaurant menu. Menus, by their
nature, are a way to constrain request
for a company, managers face a choice:
variability. They put a limit on what would
otherwise be an infinite number of potential
Do they want to accommodate that orders and therefore make it possible for a
variability or reduce it? restaurant to offer meals of consistent quality at a
reasonable cost. But customers chafe under too
many constraints
Generally, companies that emphasize the
service experience tend toward • For them, the ability to request variations in
accommodation, and preparation, ingredients, and side dishes—or to
order off the menu entirely—is part of a premier
dining experience. When restaurants do not
those that emphasize operational accommodate special orders, they reduce the
simplicity—usually as a means to keep costs complexity of the operating environment but also
low—tend toward reduction. may diminish service quality
 33

Reduction Strategy

• Companies that use reduction strategies tend to attract price-conscious

customers who are willing to trade off an excellent service experience for low
prices.

• People who choose discount airlines, bulk retailers, movie matinees, and off-peak travel options
essentially reduce their collective variability by conforming to a company’s operational needs, even
at the risk of an inferior service experience.
 34

Accommodation strategies
• Accommodation strategies take different forms, depending on the business and
type of customer-introduced variability.

• Very often, accommodation involves asking experienced employees to

compensate for the variations among customers
• For example, in a business where customers have divergent views of how service should be
delivered (a business, that is, with high subjective-preference variability), a veteran employee learns
to diagnose customer types. By making on-the-fly adaptations to suit their preferences, he
essentially “protects” the customers from having to make many adjustments of their own.
• It costs more, of course, to hire, train, and keep employees who can compensate for customers.

• Therefore, the success of an accommodation strategy usually hinges on a

company’s ability to persuade customers to pay more to cover the added expense.

• Generally, only companies at the high end of their competitive landscape can
command such a premium.

• Those at the low end must rely on strategies to reduce variability.

 35

• https://www.youtube.com/watch?v=fkgv7lXw3x
c
• https://www.youtube.com/watch?v=4BSfWh9u
HoY
• https://www.youtube.com/watch?v=tNpGFaoY
WVA
 36

The Service Characteristics and Operational

Issues (ctd..)

The matrix shows possibilities beyond

classic reduction and classic
accommodation strategies:

A company can greatly reduce the

impact of variability on its operating
environment without compromising
the service experience by targeting
customers on the basis of variability type.
 37

Creative Strategies for Managing Variability

STRATEGY EXAMPLES

(1) Online auction house eBay accommodates arrival, request, capability,

and effort variability at low cost by having customers, not employees,
Low-cost perform virtually all the labor of buying and selling items on its Web site.
accommodation (paying
little or nothing to serve
highly variable customers) (2) Dell Computer accommodates arrival and request variability by
outsourcing on-site customer service to third-party providers. To maintain
high-quality customer relationships, Dell puts a “service wrapper” around
outsourced customer contacts, disguising the third party’s role.

Creative Strategies for Managing Variability
STRATEGY
Uncompromised
reduction (decreasing
variability without eroding
customers’ experience)
38
EXAMPLES
(1) At Starbucks, customers can order many permutations of beverages—
choosing among sizes, flavors, and preparation techniques. To reduce request
variability and fill orders accurately and efficiently, Starbucks trains counter
clerks to call out orders to beverage makers in a particular way. It also reduces
capability variability by teaching customers its ordering protocol. For
instance, it provides a “guide to ordering” pamphlet and has clerks repeat
orders to customers in the correct way (not the way they were presented).
Most customers learn to avoid the implied correction by stating their order
according to protocol.
(2) Zipcar, a car-sharing service, reduces effort variability by charging
penalties to customers who return cars to their parking spaces late—behavior
that raises Zipcar’s costs and spoils other customers’ experience
 39

Classic Low-Cost Classic Reduction Uncompromised

Accommodation Accommodation Reduction

Arrival • Make sure plenty of Hire lower-cost • Require • Create

employees are on hand labor • Automate reservations complementary
tasks • Provide off-peak demand to smooth
• Outsource customer pricing arrivals without
contact • Limit service requiring customers
• Create self-service availability to change their
options behavior

Request • Make sure many Hire lower-cost • Require customers Limit service
employees with specialized labor to make breadth • Target
specialized skills are on • Automate tasks reservations for customers on the
hand • Create self-service specific types of basis of their requests
• Train employees to options service • Persuade
handle many kinds of customers to
requests compromise their
requests • Limit
service breadth

Capability Make sure employees are • Hire lower-cost • Require customers Target customers
on hand who can adapt to labor to increase their on the basis of their
customers’ varied skill • Create self-service level of capability capability
levels • Do work for options that require no before they use the
customers special skills service
 40

Classic Accommodation Low-Cost Classic Reduction Uncompromised

Accommodation Reduction

Effort • Make sure employees are
on hand who can
compensate for
customers’ lack of effort •
Do work for customers
• Hire lower-cost • Use rewards and Target customers on
labor • Create self- penalties to get the basis of
service options customers to motivation • Use a
with extensive increase their normative approach
automation effort to get customers to
increase their effort

Request • Make sure employees are on • Create self-service Persuade • Target customers
hand who can diagnose options that permit customers to on the basis of their
differences in customization adjust their subjective
expectations and adapt expectations to preferences
accordingly match the value
proposition
Services Management – Integrating Marketing and
Operations Management Perspectives

Outsourcing Services

Prof. Abhishek Srivastava

Indian Institute of Management, Kashipur

• https://www.youtube.com/watch?v=aqhjNJk
vC9w

• https://www.youtube.com/watch?v=IpQsJt9
wqhM

2
 Outsourcing

• WhatsApp
• Alibaba
• Unilever
• Google
 What is Outsourcing?

“The strategic use of outside resources to perform activities traditionally

handled by internal staff and resources” Dave Griffiths

Why Outsource?

Provide services that are scalable, secure, and efficient, while improving
overall service and reducing costs
 Outsourcing

• Fashion Industry (Nike) (all manufacturing outsourced)

• Electronics Industry
• Cisco, Apple (over 70% of components outsourced)
 Benefits of Outsourcing Services

Traditional role - reaction to problem

1. Reduction and control of costs
2. Avoid large capital investment
costs
3. Insufficient resources available Relations
1. Economies of scale
Modern role – business strategy
2. Risk pooling
1. Allows the firm to focus on its core competence. 3. Increased flexibility
4. Keeping up with cutting-edge
2. Decreases costs by purchasing from an outside source rather
technology
than performing in-house. 5. Creating value for the
organization and its customers
3. Provides access to latest technology without investment. 6. Building partnerships
Local hospitals seldom invest in expensive diagnostic equipment such as an
MRI but rather contract with an outside source to provide the specialized service.

4. Leverages benefits from a supplier who has economies of scale.

- Automobile dealers seldom have an in-house collision repair capability because
the demand faced by a dealer is erratic and, thus keeping highly paid specialists busy all the
time is difficult.
Two Main Reasons for Outsourcing

Dependency on Capacity
Firm has the knowledge and the skills required, but No
capacity

Dependency on knowledge / Capabilities

Firm does not have the people, skills, and knowledge required.
Outsources in order to have access to these capabilities.
Issues With Outsourcing

• Loss of Control
• Loss of Competitive Knowledge open up opportunities for
competitors
• Lose their ability to introduce new designs
• Preventing innovations that require cross functional teamwork
• Increased cash outflow
• Confidentiality and security
• Selection of supplier
• Loss of staff or moral problems
• Provider may not understand business environment
• Provider slow to react to changes in strategy
Outsourcing Process
Outsourcing Costs

• Search costs:
are incurred in finding a capable supplier.

• Bargaining costs:
are associated with reaching an acceptable agreement with the other party and
drawing up a contract.

• Enforcement costs:
are incurred in making sure the other party sticks to the terms of the contract, and
taking legal action if it does not
Factors influencing Make or Buy decisions

Make Decision

1. Cost considerations less expensive to make the part

2. Desire to integrate plan operations

3. Productive use of excess capacity to help absorb fixed overheads.

4. Needs to exert direct control over service quality and delivery

5. Secrecy for service design

6. Unreliable suppliers.

7. No suitable supplier quotation

Factors influencing make or buy decisions

Buy/Outsource Decision

1. Cost considerations less expensive to outsource service

2. Suppliers research and specialized know-how

3. Small volume requirements

4. Limited production facilities

5. Desire to maintain stable workforce in periods of rising sales.

6. Desire to maintain multiple source policy.

7. Monopoly items which are rationed by the government and on which, the buyer
has no option.
How service outsourcing decision is different?

Outsourcing services in general, however, pose challenges because of the intangible nature of
services.
For example, the development of written specifications for the service desired is a challenge.

it is difficult to judge if the services being delivered are meeting expectations, because they are
not subject to close scrutiny.
For example, how does one know if the contractor supplying plant security is being effective?.

Material goods can be inspected upon delivery, but this opportunity does not exist for purchased
services.

Outsourcing is complicated also by the need to satisfy a larger number of affected personnel.

Contracted services such as travel booking, janitorial services, and food services are examples that
affect all employees personally, not in the detached way that material goods acquired for use in the production
process are viewed.
How service outsourcing decision is different?

Business services are often classified according to degree of tangibility

The degree of tangibility describes the extent to which the service has physically measurable
output properties.
Some services such as janitorial or laundry are highly tangible and have well defined and
measurable output.
Other services such as public relations or advertising have output that is significantly less
measurable and more difficult to define

Second dimension representing the criticality or importance of the service to the buying firm must
be considered in the purchase decision.

The importance of the service is considered either high or low depending upon the relationship of
the service to the firm’s core business activity.

This is obvious for sensitive areas such as product testing, medical care, public relations, and
advertising.
Other services such as laundry, waste disposal, plant security, and travel booking might be
considered less important to a firm’s core business.
Kraljic’s Supply Matrix

Strategic items:

• Importance to customer
experience
• Price is a large portion
• a single supplier
• long-term partnerships with
suppliers
Leverage Items:

• high impact on profit

• Many suppliers
• cost savings
• competition between suppliers

Kraljic, P. (1983). Purchasing must become supply management. Harvard business review, 61(5), 109-117.
 Kraljic’s Supply Matrix

Bottleneck components
• Suppliers have power position
• Ensure continuous supply, even
possibly at a premium cost
• long-term contracts or by
carrying stock (or both)

Non-critical items
• Simplify and automate the
procurement process as much
as possible
• Use a decentralized
procurement policy with no
formal requisition and approval
process

Kraljic, P. (1983). Purchasing must become supply management. Harvard business review, 61(5), 109-117.
Taxonomy for Outsourcing Business Services