C-Unit 2

Unit 2.
The Nature Of Services
Nguyen Manh Tuan
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AGENDA
Distinctive Characteristics of Service

Operations
The Service Package
Grouping Services by Delivery Process
Classifying Services for Strategic
Insights
An Open-Systems View of Service

Learning Objectives
 Classify a service into 1 of 4 categories using the

service process matrix
 Describe a service using 4 dimensions of the service
package
 Discuss the managerial implications of the distinctive
characteristics of a service operation.
 Discuss the insights obtained from a strategic
classification of services
 Discuss the managerial implications from an open-
systems view of service.

Distinctive Characteristics of Service Operations
 The distinction between a product and a service is hard to

make
Element Core Goods Core Service
Example Example
Business Custom clothier Business hotel

Core Business suits Room for the night
Peripheral Goods Garment bag Bathrobe
Peripheral Deferred payment plans In house restaurant

Service
Variant Coffee lounge Airport shuttle
(Fitzsimmons
Service/Product Bundlenguyen
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 Distinction between inputs and resources
 Inputs are the customers themselves, and
 Resources are the facilitating goods, employee labor,
and capital at the command of the service manager
 To function, the service system must interact with the
customers as participants in the service process.
Because customers typically arrive at their own
discretion and with unique demands on the
service system, matching service capacity with
demand is a challenge.
 Many of the unique characteristics of services, such
as customer participation and perishability, are
interrelated.

1. Customer Participation
For the customer, service is an experience
occurring in the front office of the service
facility, and the quality of service is enhanced
if the service facility is designed from the
customer’s perspective.
An important consideration in providing a
service is the realization that the customer can
play an active part in the process.
Taking the customer out of the process,
however, is becoming a common practice.

Distinctive Characteristics of Services Operations
2. Intangibility (I)
 Services are ideas and concepts; products are things.
 Therefore, it follows that service innovations are not
patentable.
 To secure the benefits of a novel service concept, the
firm must expand extremely rapidly and preempt any
competitors.
 Franchising has been the vehicle to secure market
areas and establish a brand name. Franchising allows
the parent firm to sell its idea to a local entrepreneur,
thus preserving capital while retaining control and
reducing risk.

2. Intangibility (I) (cont’)
 When buying a product, the customer is able to see it,
feel it, and test its performance before purchase.
 For a service, however, the customer must rely on the
reputation of the service firm.
In many service areas, the government has
intervened to guarantee acceptable service
performances
 Through the use of registration, licensing, and
regulation, the government can assure consumers that
the training and test performance of some service
providers meet certain standards.
 In its efforts to “protect” the consumer, however, the
government may be stifling innovation, raising barriers
to entry, and generally reducing competition

3. Heterogeneity (H)
The combination of the intangible nature of
services and the customer as a participant in
the service delivery system results in variation
of service from customer to customer
The interaction between customer and
employee in services, however, creates the
possibility of a more satisfying human work
experience.
In services, work activity generally is oriented
toward people rather than toward things

3. Heterogeneity (H) (cont’)

 In the limited customer-contact service industries, we
now see a dramatic reduction in the level of labor
intensiveness through the introduction of self-service
technology
 Even the introduction of automation may strengthen
personalization by eliminating the relatively routine
impersonal tasks, thereby permitting increased
personal attention to the remaining work.
At the same time, personal attention creates
opportunities for variability in the service that is
provided.
This is not inherently bad, however, unless
customers perceive a significant variation in quality

3. Heterogeneity (H) (cont’)
 A customer expects to be treated fairly and to be given
the same service that others receive.
 The development of standards and of employee
training in proper procedures is the key to ensuring
consistency in the service provided.
 It is rather impractical to monitor the output of each
employee, thus, customers play a role in quality
control through their feedback
 The direct customer–employee contact has
implications for service (industrial) relations as well
 “In the service business you can’t make happy guests
with unhappy employees.”

4. Simultaneity/ Inseparability (I)
 The fact that services are created and consumed
simultaneously and, thus, cannot be stored is a critical
feature in the management of services.
 The manufacturing facility can be operated at a
constant level of output that is most efficient. The
factory is operated as a closed system, with inventory
decoupling the productive system from customer
demand.
inventory as a buffer to absorb fluctuations in
demand
inventory also can be used to decouple the stages
in a manufacturing process.

4. Simultaneity/ Inseparability (cont’)
 Services, however, operate as open systems, with the
full impact of demand variations being transmitted to
the system
For services, the decoupling is achieved through
customer waiting, “queuing”
The problems of selecting service capacity, facility
utilization, and use of idle time all are balanced
against customer waiting time
 The simultaneous production and consumption in
services eliminates many opportunities for quality-
control intervention
A product can be inspected before delivery, but
services must rely on other measures to ensure the
quality of services delivered

5. Perishability (P)
A service is a perishable commodity.
Because a service cannot be stored, it is lost
forever when not used.
The full utilization of service capacity becomes
a management challenge, because customer
demand exhibits considerable variation and
building inventory to absorb these fluctuations
is not an option.

5. Perishability (P) (cont’)

Faced with variable demand and a time-
perishable capacity to provide the service, the
manager has 3 basic options:
a. Smooth demand by:
Using reservations or appointments.
Using price incentives (e.g., giving telephone
discounts for evening and weekend calls).
Demarketing peak times (e.g., advertising to
shop early and avoid the Christmas rush).

5. Perishability (P) (cont’)

The manager has 3 basic options (con’t):
b. Adjust service capacity by:
Using part-time help during peak hours.
Scheduling work shifts to vary workforce needs
according to demand (e.g., telephone companies
staff their operators to match call demand).
Increasing the customer self-service content of the
service.
c. Allow customers to wait

6. Non-transferrable Ownership
 From a marketing perspective, services, unlike goods,
do not involve transfer of ownership
One view is that customers gain access or rental of
resources for a period of time
 Service industries share their resources among
customers by allocating the use of them.
 Customers do not purchase an asset but, instead,
have use of the asset for a specific time, whether it is
the use of human labor (e.g., dentist), technology
(e.g., cellular network), or a physical asset (e.g.,
theme park)

Non-transferable ownership of Services

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(Fitzsimmons et al 2014)
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The Service Package
 Service managers have difficulty describing their

product. This problem is partly a result of the
intangible nature of services, but it is the
presence of the customer in the process that
creates a concern for the total service
experience.
 The service package is defined as a bundle of
goods and services with information that is
provided in some environment.

The Service Package
 This bundle consists of the following 5 features:

1. Supporting Facility: The physical resources that must
be in place before a service can be offered.
Ex: golf course, hospital, airplane.
2. Facilitating Goods: The material purchased or
consumed by the buyer, or items provided by the
consumer.
Ex: golf clubs, medical supplies, airline seats
3. Information: Operations data or information that is
provided by the customer to enable efficient and
customized service.
Ex: golf season, patient medical records, seats available on
a flight

The Service Package
4. Explicit Services: Benefits readily observable

by the senses. The essential or intrinsic features.
Ex: golf fanatic, diagnostic value, on-time departure
5. Implicit Services: Psychological benefits or
extrinsic features which the consumer may
sense only vaguely.
Ex: golf fan, nursing skills, security of a well lighted
parking lot

The Service Package
Criteria for Evaluating the Service Package

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The Service Package
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Criteria for Evaluating the Service Package
 Concepts of service management should be

applicable to all service organizations.
 To demonstrate that management problems are
common across service industries, Roger
Schmenner (1986) proposed the service process
matrix
Services are classified across two dimensions
that significantly affect the character of the
service delivery process

Degree of labor Degree of Interaction and Customization

Intensity
Low High
Service factory: Service shop:
* Airlines * Hospitals
Low * Trucking * Auto repair
* Hotels * Other repair services
* Resorts and recreation
Mass service: Professional service:
* Retailing * Doctors
High * Wholesaling * Lawyers
* Schools * Accountants
* Retail aspects of * Architects
commercial banking
5/18/2020 nguyen manh (Fitzsimmons

Service Process Matrix tuan – internal use et al 2014) 25
The vertical dimension measures the

degree of labor intensity, which is defined
as the ratio of labor cost to capital cost.
The horizontal dimension measures the
degree of customer interaction and
customization, which is a marketing
variable that describes the ability of the
customer to affect personally the nature of
the service being delivered

 Service factories provide a standardized service

with high capital investment, much like a line-flow
manufacturing plant.
 Service shops permit more service
customization, but they do so in a high-capital
environment.
 Customers of a mass service will receive an
undifferentiated service in a labor-intensive
environment, but those seeking a professional
service will be given individual attention by highly
trained specialists.

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Challenges for Service Managers (Fitzsimmons et al 2014) 28
Classifying Services for Strategic Insights
 Strategic insights that transcend industry

boundaries are needed
 Nature of the Service Act
 The service act can be considered across two
dimensions: who or what is the direct recipient of the
service, and the tangible nature of the service
 Thinking creatively about the nature of the service
may identify more convenient forms of delivery or
even a product that can substitute for the service
 This creates 4 possible classifications

Direct Recipient of the Service

Nature of
the Service Act People Things
People’s bodies: Physical possessions:
Health care Freight transportation

Passenger transportation Repair and maintenance
Tangible actions Beauty salons Veterinary care
Exercise clinics Janitorial services
Restaurants Laundry and dry cleaning
People’s minds: Intangible assets:
Education Banking
Intangible actions Broadcasting Legal services
Information services Accounting
Theaters Securities
Museums Insurance
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Nature of the Service Act (Fitzsimmons & Fitzsimmons 2006)
 Relationship with Customers

Service firms have the opportunity to build
long-term relationships because customers
conduct their transactions directly with the
service provider, most often in person.
In contrast, manufacturers traditionally have
been isolated from the eventual end user by a
distribution channel consisting of some
combination of distributors, wholesalers,
and/or retailers

 Relationship with Customers

Knowing your customers is a significant
competitive advantage for a service
organization.
Having a database of customers’ names and
addresses and their use of the service permits
targeted marketing and individual treatment of
customers.
Customers benefit from membership because of
the convenience of annual fixed fees and the
knowledge that they are valued customers who will
receive occasional perks (e.g., frequent flyer
awards)

Type of Relationship between Service Organization and Its Customers
Relationship with
Customers “Membership” relationship No formal relationship
Insurance Radio station
Telephone subscription Police protection
Continuous delivery Electric Utility Lighthouse
of service Banking Public Highway
Long-distance phone calls Restaurant

Theater series tickets Pay phone
Discrete
Transit pass Toll highway
transactions
Sam’s Wholesale Club Movie theater
Airline frequent flyer Public transportation
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Relationship with Customers (Fitzsimmons & Fitzsimmons 2006)
 Customization and Judgment
 Because services are created as they are consumed
and the customer is often a participant in the process,
an opportunity exists to tailor a service to the needs of
the customer
 Customization proceeds along 2 dimensions: either
the character of the service permits customization, or
the service personnel have the discretion to modify the
service
Within a particular industry, every quadrant could
be occupied by different segments of that industry
A strategic choice of offering more customization
and allowing service personnel to exercise
judgment, however, has implications for the service
delivery system

Extent to Which Service Characteristics Are Customized

Extent to Which
Personnel Exercise
Judgment in Meeting
Customer Needs High Low
Surgery Preventive health programs
High Taxi services Education (large classes)
Gourmet restaurant Family restaurant
Telephone service Public transportation
Hotel services Spectator sports
Low Retail banking Movie theater
Cafeteria Institutional food service
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Customization and Judgment (Fitzsimmons & Fitzsimmons 2006)
 Nature of Demand and Capacity

The time perishability of service capacity
creates a challenge for service managers
because these managers lack the option of
producing and storing inventory for future sale.
Even so, the extent of demand and supply
imbalances varies across service industries

 Nature of Demand and Capacity

 To determine the most appropriate strategy in each
case, it is necessary to consider the following
questions:
1.What is the nature of the demand fluctuation? Does it
have a predictable cycle (e.g. daily meal demand at a
fast-food restaurant) that can be anticipated?
2.What are the underlying causes of these fluctuations in
demand? If the causes are customer habits or
preference, could marketing produce a change?
3.What opportunities exist to change the level of
capacity or supply? Can part-time workers be hired
during peak hours?

Nature of Demand for the Service Relative to Capacity

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(Fitzsimmons & Fitzsimmons 2006)
 Method of Service Delivery

The method of service delivery has both a
geographic component and a level-of-
customer-interaction component
Services with multiple sites have significant
management implications for ensuring quality
and consistency in the service offering

Method of Service Delivery

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An Open-Systems View of Service

Service organizations are sufficiently unique in
their character to require special management
approaches that go beyond the simple
adaptation of the management techniques
found in manufacturing a product.
The distinctive characteristics suggest
enlarging the system view to include the
customer as a participant in the service
process.

Open Systems View of Services

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(Fitzsimmons & Fitzsimmons 2006)
The role of the service operations manager

includes the functions of both production
and marketing in an open system with the
customer as a participant.
The traditional manufacturing separation of
the production and marketing functions,
with finished-goods inventory as the
interface, is neither possible nor
appropriate in services.

 Marketing performs 2 important functions in daily-

service operations:
(1) educating the consumer to play a role as an
active participant in the service process and
(2) “smoothing” demand to match service capacity.
 This marketing activity must be coordinated with
scheduling staff levels and with both controlling and
evaluating the delivery process. By necessity, the
operations and marketing functions are integrated for
service organizations.

 For services, the process is the product.

The presence of the customer in the service
process negates the closed-system
perspective that is taken in manufacturing.
Techniques to control operations in an isolated
factory producing a tangible good are
inadequate for services.
 No longer is the process machine-paced and the
output easily measured for compliance with
specifications.

Instead, customers arrive with different

demands on the service; thus, multiple
measures of performance are necessary.
Service employees interact directly with the
customer, with little opportunity for
management intervention.
This requires extensive training and
empowerment of employees to act
appropriately in the absence of direct
supervision.

 Further, customer impressions of service quality
are based on the total service experience, not
just on the explicit service that is performed.
A concern for employee attitudes and training
becomes a necessity to ensure that the
implicit service is also appreciated by the
customer.
When viewed from the customer’s
perspective, the entire service process raises
concerns ranging from the aesthetic design of
the facility to pleasant diversions in waiting
areas.

 An open-system concept of services also allows

one to view the customer as a co-producer.
 Permitting the customer to participate actively in
the service process (e.g., providing a salad bar
at a restaurant) can increase productivity, which
in turn can create a competitive edge.
 The management of an open system requires
techniques and sensitivities different from those
of a closed system.

SUMMARY
 Service managers are faced with non-routine
operations in which only indirect control is
possible.
 In services, it is the human element that is
central to effective operations.
For example, the unavoidable interaction
between service provider and consumer is a
source of great opportunity, as in direct selling.
However, this interaction seldom can be fully
controlled; thus, service quality may suffer. For
this reason, the attitude and appearance of
personnel in service organizations are
important considerations.

SUMMARY
For services, the presence of the customer
in the process materially alters what is
viewed as the product.
In many respects, the service manager

adopts a style of management that
incorporates the functions of marketing and
operations.

THE END

C-Unit 2

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Unit 2.

The Nature Of Services

Nguyen Manh Tuan

5/18/2020 nguyen manh tuan – internal use 1

Distinctive Characteristics of Service

5/18/2020 nguyen manh tuan – internal use 2

 Classify a service into 1 of 4 categories using the

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 The distinction between a product and a service is hard to

Business Custom clothier Business hotel

Peripheral Deferred payment plans In house restaurant

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3. Heterogeneity (H) (cont’)

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5. Perishability (P) (cont’)

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5. Perishability (P) (cont’)

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Non-transferable ownership of Services

 Service managers have difficulty describing their

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 This bundle consists of the following 5 features:

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4. Explicit Services: Benefits readily observable

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Criteria for Evaluating the Service Package

 Concepts of service management should be

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Degree of labor Degree of Interaction and Customization

5/18/2020 nguyen manh (Fitzsimmons

The vertical dimension measures the

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 Service factories provide a standardized service

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nguyen manh tuan – internal use

 Strategic insights that transcend industry

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Direct Recipient of the Service

Health care Freight transportation

 Relationship with Customers

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 Relationship with Customers

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Type of Relationship between Service Organization and Its Customers

Long-distance phone calls Restaurant

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Extent to Which Service Characteristics Are Customized

 Nature of Demand and Capacity

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 Nature of Demand and Capacity

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Nature of Demand for the Service Relative to Capacity

 Method of Service Delivery

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