The service paradox: Retailing in the service economy

ByJensGregersen:Ideveloplongtermcompetitiveadvantagesbasedonconsumerorientedstrategiesan approachwhichIhaveimplementedindiverseculturalmarketsacrossEurope,theMiddleEastandAsia. StayconnectedLinkedIn

Theamountofbusinessesintheservicesectorthatrelytheir futureprofitsonlowskilledanddirectionlessemploy eesismindboggling.Thisarticledescribesthestruc turalchangesandreasonsbehindtheserviceecon omy,howithasmaturedovertimeintermsof customersserviceexpectations,andfinallythe generalproblemsinservicedesignsarebriefly discussedandanalternativeprovided. Firstaquestionforbusinessesowners; howmanyofyourcustomersleftyour shoporstorefeelingvaluedtoday?Well, chancesarethat60%ofyourcustomers hadabadserviceexperience.Ofthere maining40%,howmanyhadanexperi encegoodenoughtorecommendyour business?Strangelyenoughmostbusiness ownersareincapableofprovidingevena slightlyqualifiedanswertothesetwoes sentialquestions. Themostfamousdefinitionofserviceisprovidedby TheEconomist;Serviceiseverythingthatcantfallon yourfeet.Thisdefinitionisascorrectasitissimple.Simple becauseserviceisacomplexsetofeconomicactivitiesrangingfromlabourintensivelowskillareassuchasre tailtoadvancedknowledgeintensivesectorslikesoftwaredevelopment.Thefocalpointofthisarticleinterm ofserviceisretailtradethoughitsfindingsandconclusionscanwithadvantagebeusedacrossotherservice sectors.

Theserviceeconomy
Injustaboutalldevelopedeconomiesaroundtheworldtheservicesectoristheprincipalpartoftheeconomy. Forexample,intheEU15countriestheservicesectorconstitutedanastonishing73.2%ofGDPin2010signifi cantlylargerthanthatofthetwootherbasicGDPsectors;industry(25%)andagriculture(1.8%). AccordingtotheWorldBankanincreasedservicesectorisanaturalprocessasaneconomydevelopsthat beingascapitaincomerisespeoplewilldemandmoreindustrialproductsoveragriculture,oncethismaterial demandissatisfiedpeoplewillbegindemandingmoreservices.Theinterestingquestioninthiscontextiswhat consequencesthisshiftwillhaveoncustomerpreferenceastheservicesectormaturesovertime. Theoreticalinsight:Theriseoftheserviceeconomy Since1935academicshaveresearchedthereasonswhyasocietysbasiceconomicsectorschangeovertime; thereasonscanroughlybecategorisedintothreecategories:(1)Demand,(2)supply,anda(3)divisionofla bour. Demandside:WhileindustryandagriculturewerestilltheleadingsectorsoftheeconomiesFisher(1935)was

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continued:Theriseoftheserviceeconomy amongthefirsttodiscusstheservicesectorasafunctionofincome.Inotherwords,aspeoplehavemore disposableincomeandtheirmaterialisticneeds(foragriculturalandindustrialproducts)aresatisfiedtheywill demandmoreservices.ThoughsupportedbymanysuchastheWorldBankthisdemandsideviewhasbeen challengedasresearchhasnotbeenabletoshowapositivecorrelationbetweenthelevelofincomeandthe proportionoftheservicesectore.g.bySchettkatandYocarini(2005). Supplyside:Thedemandsideexplanationhasforemostbeenchallengedbyasupplysideinterpretationpri marilyrepresentedbyBaumol(1967,1992and2001)whoexplainsthecontinuousincreaseintheservicesec torasaresultoflowerproductivityinthissectorrelativetoagricultureandindustry,andnotbecauseofa changingdemand.Inotherwords,asproductivityinthetwootherbasiceconomicsectors(agricultureand industry)increasestheshareofemploymentintheservicesectorwillincreaseproportionallymorethatbe ing,thecostoflabourincreasesatthesamerateinallthreebasicsectorsregardlessoftheproductivity.The validityofthisperspectivehasbeenverifiedbyFuchs(1980)anothers. Changesininterindustrydivisionoflabour:Thefinalandthirdperspectiveisbasedonaninterindustrydivi sionoflabour.Ascompaniessplittheirdifferentdivisions,thatcouldforexamplebeacarproducercreatinga separatecompanytohandlemarketingorfinance,orthecarcompanyoutsourcethesefunctionsaltogether, thenumberofpeopleemployedintheindustrysectorgoesdownastheformerindustryemployeesarenow countedintheservicesector.Thisperspectivehasbeensupportedempiricallybye.g.Schettkat(2003).

Serviceeconomyandproductivity
Academicscontinuestoresearchthereasonsforthestructuralchangesinthebasicsectorsoftheeconomybut onethingisclear,societiesarebecomingincreasinglymoredependentontheservicesector.Thefollowing paragraphswillinvestigatethechallengesfacedbyservicedependenteconomiesandhowthesechallenges mighthavechangedovertime. Thein1968publicationofTheServiceEconomybyFuchdescribeshowtheUSAwastheworldsfirstcountryto becomeaserviceeconomy,meaningthatby1967morethanhalfoftheemployedpopulationisnotinvolvedin theproductionoffood,clothing,housing,automobiles,orothertangiblegoods. Fuchdidanothertwofindings;hisresearchconcludedthattheservicesectorhadprimarilygrownfasterthan thoseofagricultureandindustrybecauseofalackinproductivityintheservicesector(supplysideperspective). Heexplainedthislagofoutputwitha[m]uchmorerapidincreaseinthequalityoflabourintheindustrythanin service.FuchconcludedfurtherthatTheupgradingoflabourqualityinindustryisalsorevealedbythefaster growthofprofessionalandmanagerialoccupationinthatsector.(ibid).Inotherwords,theagriculturaland industrialsectorshavebeensubjecttoahigherdegreeoftrainingandprofessionalismthanintheservicesec tor. In2000OECDpublishedareportconcludingthatthereisaneedforhighlyskilledwhitecollarworkersinthe servicesectorthroughoutthememberstatesandthatgrowthanddevelopmentdependsprofoundlyonhuman capital;Alackofskilledworkers,aswellasalackofflexibility,frequentlyactsasasevereconstraintfordevel opment.Thereportalsoresearchedtheissueofproductivityandconcludedthat[...]labourproductivityshow thatservicesmakeacontributiontooverallproductivitygrowththatisrelativelylimitedcomparedwiththesize ofthesector.Though,itshouldbementionedthatOECDgenerallyfindsitdifficultmeasuringproductivityin theservicesectorinthesamewayasdoneintheagriculturalandindustrialsectors.Butincertainservicesec torstheincreasedproductivityisevidentforexampletelecommunications,transport,andfinanceindustryhas

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experiencedsignificantproductivityimprovements. TheOECDreportwasfollowedbyaMcKinseyGlobalInstitutepublishingin2010;Beyondausterity:Apathto economicgrowthandrenewalinEurope,whichdemonstrateshowimprovingproductivityintheEuropean servicesectortobestpracticecouldincreasetheregionsoverallproductivityby20%. Hence,thedemandforhighlyskilledprofessionalsintheservicesectorapparentlystillexistssome43years afterthissectorbecametheleadingbasicsectorintheUSA(andafewyearslaterintheEU).Thoughonesignifi cantdifferencebetween1968and2010isthemeresizeoftheservicesector,thusasmallchangeinproductiv itywillhaveanimmenseinfluenceontheoverallGDPasdemonstratedbyMcKinseyGlobalInstitute.Another differencebetweentheservicesectoranno1968andtodayisthattheservicesectorhasbecomefarmorespe cializedandservicesandproducts/goodsexistsymbioticallyanexampleofthisiscomputersandsoftware makingitmorecomplextoseparateonebasicsectorfromanother.

Astheservicesectormatures
Thusfaritisclearthattheservicesectorcontinuesstrugglingwiththesameunderlyingchallengesoffillingkey managerialpositionswithskilledworkersin2010asthesectordidin1967whenitfirstbecamethelargestof thethreebasicsectorsintheUSA.Besidesfromastructuralunderstandingoftheservicesectoritisimportant tolearnhowthesectorhaschangedovertimeintermofoperationsinotherwords,whatcustomersexpectin termsofservice.Butwhatconstituteservice?Walker(Lock1998)definesserviceasbeingapersonalexperience [...]Mood,cultureandtiming,aswellasthecustomerspreviousexperienceallaffectthewayserviceisper ceived.Accordingtothewriterssuchvaguedefinitionandconceptisachallengetobusinessoperations. Exactlythiscouldexplainwhyitseeminglyissodifficultforbusinessestoprovidegoodservice.Forone,service isperformedandevaluatedbyindividualsindividualsoftenwithdifferentopinionsofwhatconstitutegood service.InspiredbyWalkersservicedefinitionitcanbearguedthatserviceprovidedissubjecttothemood, trainingandinterpretationoftheindividualperformingtheserviceaswell.Thisobservationissupportedbythe factthatserviceiscreatedandconsumedsimultaneouslyandcannotbestored. 30yearsafterthepublishingofTheServiceEconomyPineandGilmoreintroducedthetheoryoftheexperience economyin1998,whichdescribesachangeinsocietywherecustomerstakeproductsandserviceforgranted anddemandexperienceswhichappealstotheirsensesandinvolvement.Thus,providingexperiencesisnota matterofjustaddingexperiencestotraditionalofferingstheexperiencemustberealandengagethecustom ers.CustomerengagementisapersonalmatterthusPineandGilmoreconcludethat[...]notwopeoplecan havethesameexperience.(ibid).Thewritersseeproductsandservicesasintegratedsteppingstonesinprovid ingexperienceshence,products,servicesandexperiencesinteractsymbiotically.Itisinterestingtolearnthat PineandGilmoresconclusionofexperiencesbeingsubjecttoindividualinterpretationandevaluationcorre spondswithWalkers(1998)understandingofservice. 21yearshavepassedsincetheexperienceeconomywasfirstarticulatedanditisclearthatanincreasingnum berofcompanieshaveembracedtheideaofcompetingonexperiences.Todayawiderangeofproductshave storytellingassociated,mostretailbusinessesputsignificantresourcesintotheshoppingenvironmentor stagebutserviceseemstobetakenforgranted,atleastbybusinesses.Withmorethanhalfofcustomersfeel ingthattheyhadapoorserviceexperience,themostlikelyexperiencebusinessesprovideisthroughmediocre servicenotexactlytheexperiencehopedforbythecustomersandnotexactlytheexperienceoutlinedbyPine andGilmore.Asthewritersnotice;Nocompanysellsexperiencesasitseconomicofferingunlessitactually chargesguests(customers)fortheeventsthattheystage....Aneventcreatedjusttoincreasecustomerprefer enceforthecommoditizedgoodsorservicesthatacompanyactuallysellsisnotaneconomicoffering.

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 Asmentioned,manycompaniesaretryingtostageexperiencesintermsofshopdesigns(stagethemes),they upgradethepackaging,theyapplystorytellingtotheirproductsetc.inotherwords,companiestriestoobtain customersatisfactionandperhapsevenloyaltybycreatingtheframeworkforexperiences,theonlyproblemis thattheseattemptsarebasedontraditionalmarketinginitiatives,arehalfheartedanddonotworkiftheser viceprovidedfails. Onecouldthinkthatcompaniesareattemptingtobuytheirwaytocustomersatisfactionviatraditionaland functionalmethodsbutitmightjustbethattheconceptandthetaskofprovidingserviceisatoocomplexand indefinableconceptasarticulatedbye.g.Walker(1998).Thereasoncouldalsobeduetoalackofhighskilled andqualifiedemployeesinthesectorasobservedbyOECD(2000)andconfirmedbytheMcKinseyGlobalInsti tutein2010.Intermsofretailthissectoristoaveryhighdegreecrowdedwithbylowskilledemployeeswho mightlackthenecessarymood,trainingandinterpretationofthecompanysservicedefinitionandrequire mentsorthecompanysservicedesignisperceiveduntrustworthyandfeignedbytheserviceemployees. Regardlessofthereason,inaworldwheremassproductionandglobalisationhaveerasedproductfunctional itiesandpricesdifferencescompaniesareinvestingheavilyintomarketing,thebestpossiblelocationsandfan tasticinteriordesignfromwhichtheyoffertheirproducts.Theproblemisthatthemajorityofcustomersgeta disappointingexperiencewhenactuallyinteractingwiththebusinessesoperation.

Theserviceparadox
In1985CEOofSASJanCarlsonphrasedthetermTheMomentofTruth,whichreferstothemomentwhenthe customerinteractswithanemployeeofthecompanythisisthemomentwhenallthehardworkandre sourcesputintotheproducts,marketing,location,decorationetc.isbeingevaluatedbythecustomer.Failure byanyemployeetomeettheexpectationofthecustomerswillre Themomentoftruth! ducetheseresourcestoasunkcost. Itisactuallyaparadoxthatcompaniesbasetheirinvestmentintoproducts,marketing,locationetc.onlow skilledandpoorlytrainedemployeesemployeeswhowillmakeorbreaktherelationshipbetweencompanies andtheircustomers;[...]onaverage40%ofcustomerswhosufferthroughbadexperiencesstopdoingbusiness withtheoffendingcompany.accordingtoDoughertyetal.2009.Onecanonlywonderhowmanyofthere maining60%willacceptasecondorthirdmediocreserviceexperiencebeforetakingtheirbusinesselsewhere. Asmassproductionandglobalisationhaserasedproductandpricedifferencesithasalsogivencustomersan unlimitedamountofsimilarbusinessestochoosefrom. Somemightthinkthatgoodserviceisreservedexpensiveandhighendbusinesses,butthatisnotthecaseas demonstratedbyBregman(2009).Onecouldalsothinkthatbadservicemostlyoccursinlargeorganisation,but thisisnotthecaseeither.TwooutofthreeprivatesectorjobsintheEUareprovidedbysmallandmedium sizedenterprises(SME)suchasbars,bakeries,clothingstores,restaurantsetc.;chancesarethatyouhavebeen interactingwithaSMEmorethanacoupleoftimesthepastfewdaysastheseconstitute99%ofallEuropean businesses.Thentryaskingyourselfthefollowing;howmanytimesthepastweekdidyouhaveagreatorjust goodserviceexperiencewithoneoftheseSMEs? Asdescribedearlierinthisarticle,serviceissubjecttoindividualevaluationsotryaskingthefollowinginstead; howmanyoftheseplacesgaveagoodenoughoverallexperienceforyoutorecommendthisortheseplacesto yourfriendsandfamily?Theideaofasmallbusinessownerbeingclosetoandpayingspecialattentiontohis customersisinmostcasesnothingmorethananillusionthus,sizeseemsnottomatter. Thetwomostlikelyreasonsforpoorserviceisthevaguenessoftheconcept,whichconsequentlymakesitun

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Emotionalbondsbetween companiesandcustomers aredifficultforcompetitors tobreak.

Carboneetal.(2002)

manageable.Inanattempttoovercomethisandsimplifytheserviceconceptdobusinessesimplementmeasur ableinitiativesbutmanyofthesearetoofunctionalandreveallittleoftheimpactonabusinesssbottomline suchasthenumberofphonecallsansweredwithinagiventimeetc.Inotherwords,anythingservicerelated becomes,perhapsunintentionally,discursivelyconstructedascostcentres. Tomanybusinessesitcanmakegoodsensetosimplytheconceptofservice,andtomeasureandanalyseit continuously,butinsteadofmeasuringandbasingqualityserviceonfunctionalinitiativescompaniescouldde fineandmeasureserviceontheextendofcustomerloyaltyasdefinedbye.g.theNetPromoterScore(NPS), Reichheld(2003).TheNPStakestwofactorsintoaccount;buyereconomics(thevalueofthecustomer),and referraleconomies(theirpotentialvaluethroughreferral).Thefirstfactormeasuresacustomersownchoices, andthelatterhowthosechoicesinfluenceonothersthedifference(thenet)istheresultcompaniesshould paycloseattentionto.Customersareaskedaverysimplebuthighlyprofitinfluentialquestion;towhatextent theywouldrecommendCompanyXtofriendsandfamily10beingextremelylikely. TheincreasedpopularityoftheNetPromoterScoreprogramislikelybecauseofitssimplicitycomparedto manyothercustomerloyaltyprogramsbutthissimplicityisalsoitslimitation.AstheNPSasksageneralques

tionitalsogeneratesageneralanswer.ThoughsimpleandrevealingthesuccessoftheNPSdependstoahigh degreeonhowitisimplementedandhowcompanieschoosetointerpretandespeciallyreactontheresultgen erated. Oftencompanieswillrealizetwothings,first,thattheirexistingservicedesignisfocusedonmeasuringfactors thatmatterlittletocustomersinanattempttobuildloyalty,asmostservicedesignsareveryfunctionaland rigid.Asdescribedearlier,serviceisperformedandevaluatedbypeopleanddifferentpeoplehavedifferent criteria.Thus,arigidservicedesignappliedpersistentlyandwithoutconsideringtherealneedsoftheindividual customersisalikelywaytogiveapoorserviceexperience.Thesecondreasonwhyservicetendstofailisdueto lackoftrainingandmotivationwiththeserviceemployeesthisisveryoftenrootedinthecultureofthecom panyandmanagementinconsistency. Describingaservicedesignaspartofthecorporatecultureisneitherwithinthescopenorfocalpointofthis articlebutitshouldbementionedthatforanorganisationtobecometrulycustomercentricservicemustbe basisforalldecisions,beflexibleandsupportedandawardedbymanagementonewayofdoingthisisby buildingexperienceintotheservice.

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