Chapter 1: An Introduction To Services

CHAPTER 1: AN INTRODUCTION TO SERVICES

PowerPoint Slide: #1

"Economic value, like the coffee bean, progresses from commodities to goods to services to experiences." Joseph B. Pine II & James H. Gilmore, The Experience Economy

Chapter Objectives: This chapter provides an introduction to the field of services marketing. The chapter discusses the basic differences between goods and services and the factors necessary for the creation of the service experience. In addition, the chapter establishes the importance of the service sector in the world economy and the need for services marketing education.

Learning Objectives:

PowerPoint Slide: #2

After reading this chapter, you should be able to 1. Understand the basic differences between goods and services. •

In general, goods are defined as objects, devices, or things, whereas, services are defined as deeds, efforts, or performances (The term product refers to both goods and services and is used in such a manner throughout the remainder of this text).

2. Appreciate the factors that create the customer's service experience. •

The Servuction model is constructed of two parts: that which is visible to the consumer and that which is not. The visible part of the Servuction model consists of three parts: the inanimate environment, the contact personnel/service providers, and other customers. The invisible component of the model consists of the invisible organization and systems.

3. Comprehend the driving forces behind the increasing demand for services marketing knowledge. •

The demand for services marketing knowledge has been fueled by: (1) the tremendous growth in service sector employment; (2) increasing service sector contributions to the world economy; (3) a revolutionary change of managerial philosophy in how service firms should organize their companies.

Chapter 1 An Introduction to Services

1

4. Understand the two organization models used in service firms: the industrial management model and the market-focused management model. •

Organizations which follow the industrial model believe: (1) location strategies, sales promotions, and advertising drives sales revenue, and (2) labor and other operating costs should be kept as low as possible. In sum, the industrial model focuses on revenues and operating costs and ignores or at least forgets the role personnel play in generating customer satisfaction and sustainable profits.

•

In contrast to the industrial model, proponents of the new market-focused management model believe that the purpose of the firm is to serve the customer. Consequently, logic suggests that the firm should organize the firm in a manner which supports the people who serve the customer. By following this approach, service delivery becomes the focus of the system and the overall differential advantage in terms of competitive strategy.

Opening Vignette: Private Escapes

PowerPoint Slide: #3

•

Private Escape is a worldwide destination club with a business model similar to a private country club where a limited number of members have virtually unlimited access to a global portfolio of exquisitely maintained, luxurious vacation homes complete with five-star concierge services.

•

Private Escapes understands the bundle of benefits provided to its members through the effective management of the member’s service experience.

Lecture Outline: I.

Introduction A.

Traditional goods producers are turning to the service aspects of their operation to establish a differential advantage in the marketplace

B.

New “global services era” 1.

Characterized by the emergence of new service industries and the “service imperative”

Chapter 1 An Introduction to Services

2

-Reflects the view that the intangible aspects of products are becoming the key features that differentiate the product in the marketplace. II.

What is a Service? A.

PowerPoint Slide: #4

The distinction between goods and services is not perfectly clear. Examples include General Electric and IBM, generally thought of as major goods producers, who now generate more than half of their revenues from services. 1. Goods - is described as objects, devices, and things. 2. Services - is described as deeds, efforts, and performances. 3. Product-is described as either a good or a service.

B.

Scale of Market Entities

PowerPoint Slide: #5

1. Helps illustrate how products fall along a continuum that ranges from tangible dominant to intangible dominant. -Tangible dominant: products that possess physical properties that can be felt, tasted, and seen prior to the consumer’s purchase decision. -Intangible dominant: products that lack the physical properties that can be sensed by consumers prior to the purchase decision 2. Defining service businesses too narrowly, firms can develop classic cases of marketing myopia. -is the practice of too narrowly defining one’s business.

C.

Molecular Model

PowerPoint Slide: #6

1. A conceptual model of the relationship between tangible and intangible components of a firm’s operations.

Chapter 1 An Introduction to Services

3

2. Understanding the importance and components of the service experience is critical. III.

Framing the Service Experience: The Service Model A.

PowerPoint Slide: #7 Benefit concept -the encapsulation of the benefits of a product in the consumer’s mind 1. Services deliver a bundle of benefits through the experience that is created for the consumer. 2. For example, most consumers of Tide will never see the inside of the manufacturing plant where Tide is produced; they will most likely never interact with the factory workers who produce the detergent nor with the management staff that directs the workers; and they will also generally not use Tide in the company of other consumers.

B.

PowerPoint Slide: #8-9 Servuction Model -a model used to illustrate the factors that influence the service experience, including those that are visible to the consumer and those that are not 1. Consists of four factors that directly influence consumers’ service experience: (visible) servicescape, contact personnel/service providers, other customers, and (invisible) organizations and systems

C.

Servicescape -the physical evidence used to design service environments. 1. Plainly visible to consumers. 2. Consists of ambient conditions, inanimate objects, and other physical evidence.

D.

Contact Personnel/Service Providers -Contact Personnel - employees other than the primary service provider who briefly interact with the customer. -Service Providers - the primary providers of a core service, such

Chapter 1 An Introduction to Services

4

as a waiter or waitress, dentist, physician, or college instructor 1. Plainly visible to consumers. 2. Interaction between consumers and contact personnel/service providers are commonplace. E.

Other Customers 1. Plainly visible to consumers. 2. Many services serve multiple customers simultaneously. The influence of other customers can be active or passive.

F.

Invisible Organization and Systems -reflects the rules, regulations, and processes upon which the organization is based. 1. Invisible to consumers. 2. Have a very profound effect on the consumer’s service experience.

IV.

Why Study Services? A.

PowerPoint Slide: #10

Service Sector Employment 1.

In 2004, the following labor statistics a. 73% of GDP in Japan (compared to 58% in 1990) b. 70% of GDP in the European Community (compared to 60% in 1990) c. 81% of workforce in the United States (compared to 74% in 1984)

2.

The bulk on new jobs created in America over the last 30 years have been white-collar jobs, in higher-level professional, technical, administrative, and sales positions.

Chapter 1 An Introduction to Services

5

B.

Economic Impact 1. Worldwide economic growth has fueled the growth of the service sector. 2. Individuals trade money for time and buy services. 3. The majority of U.S. industries do not produce, they perform. PowerPoint Slide: #11

V.

The Services Revolution: A Change in Perspective A.

PowerPoint Slide: #12 The Industrial Model -an approach to organizing a firm that focuses on revenues and operating costs and ignores the role personnel play in generating customer satisfaction and sustainable profits. 1. Assumes sales revenues are a function of location strategies, sales promotions, and advertising. 2. Overlooks or forgets the importance of personnel. 3. Believes labor and operating costs should be kept as low as possible. a. better to rely on machines than humans b. jobs should be narrowly defined to leave little room for discretion c. believes most employees are indifferent, unskilled, and incapable of completing complex tasks d. performance expectations are low e. wages are kept low f. few opportunities for advancement 4. Places a higher value on upper and middle managers. 5. Replaces full-time personnel with part-time personnel to reduce costs. 6. Consequences of the industrial model

PowerPoint Slide: #13

a. Produce dead-end front-line jobs, poor pay, superficial training, no opportunity for advancement, if any, access to company

Chapter 1 An Introduction to Services

6

benefits. b. Has led to customer dissatisfaction, flat or declining sales revenues, high employee turnover, and little service productivity. B.

The Market-Focused Management Model -is a new organizational model that focuses on the components of the firm that facilitate the firm’s service delivery system. 1. The service's triangle provides the framework.

PowerPoint Slide: #14

Service triangle- is the framework that supports the market-focused management model by depicting the relationships among the systems, the service strategy, and the people, with the customer in the center of the triangle, interacting with each group. 2. Six key relationships

PowerPoint Slide: #15

i. Firm’s service strategy must be communicated to its customers -Firm’s commitment to excellence ii. Firm’s service strategy must be communicated to the firm’s employees -Good service starts at the top and management must lead by example. iii. Consistency of the service strategy to run the day-to-day operations iv. Impact of organizational systems upon customers v. Importance of organizational systems and employee efforts vi. The customer/service provider interaction 1. These interaction represent critical incidents or “moments of truth” -is the customer/service provider interaction that is often the key in customer satisfaction

Chapter 1 An Introduction to Services

7

evaluations.

C.

A Comparison of the two approaches

PowerPoint Slide: #16

1. Market-focused management model recognizes that employee turnover and customer satisfaction are clearly related. a. Ties pay to performance b. Focus on selection and training of personnel 2. Market-focused management model employs more full-time employees. a. Refuse to sacrifice competent and motivated full time personnel in the name of lower operating costs 3. Market-focused management model attempts to utilize innovative data to examine the firm’s performance by looking beyond generally accepted accounting principles. New accounting measures: a. The value of customer retention as opposed to obtaining new customers b. The costs of employee turnover c. The value of employee training d. The monetary benefits associated with service recovery VI.

Summary Ultimately, service marketing is about managing the compromising relationships that must exist among marketing, operations, and human resources. Services permeate every aspect of our lives; consequently, the need for services marketing knowledge is greater today than ever before.

Chapter 1 An Introduction to Services

8

DISCUSSION QUESTIONS: 1. Define the following terms: goods, services, products. In general, goods are defined as objects, devices, or things, whereas, services are defined as deeds, efforts, or performances. The term product refers to both goods and services. 2. Why is it difficult to distinguish between many goods and services? Use the scale of market entities and the molecular model concept to explain your answer. The distinction between goods and services is not always perfectly clear. In reality, most services contain some tangible components, while most goods also contain intangible components. It is difficult to say whether a pure service or a pure good even exist. The scale of market entities helps us understand whether the product under consideration is tangible-dominant or intangible-dominant. 3. Discuss the relevance of the scale of market entities to marketing myopia. Firms that define their businesses too narrowly suffer from market myopia. Often manufacturing firms overlook the service aspects of their product offering when attempting to differentiate themselves from competitors. Similarly, service firms often neglect the tangible aspects of their product which become key indicators of consumer perceptions of quality. The scale of market entities helps us understand whether the product under consideration is tangible-dominant or intangible-dominant and recognize all aspects, both tangible and intangible, of the product offering. 4. Develop a molecular model for your College of Business. Answers will vary, but at the core should be education (intangible) which could then be connected to academic advising (intangible), career advising (intangible), faculty and staff (tangible), building (tangible), etc.

Chapter 1 An Introduction to Services

9

5. Utilizing the servuction model, describe your classroom experience. How would your servuction model change as you describe the experience at a local restaurant? Answers will vary, but at the core should be a description of the visible servicescape, contact personnel/service providers, other customers and invisible organization and systems. 6. Discuss the consequences of the industrial-management model. Consequences of the industrial model affect employees and customers. Employee consequences include the following: (1) Produce dead-end front-line jobs, poor pay, superficial training, no opportunity for advancement, if any, access to company benefits. (2) Has led to customer dissatisfaction, flat or declining sales revenues, high employee turnover, and little service productivity. 7. What benefits are associated with better-paid and better-trained personnel? Companies that pay their employees more than competitors often find that as a percentage of sales, their labor costs are actually lower than industry averages. Better paid personnel tend to be more knowledgeable, more available, and more motivated to satisfy customers. Similarly, the benefits of training are clear. Bettertrained and better-paid employees provide better service, need less supervision, and are more likely to stay on the job. In turn, their customers are more satisfied, return to make purchases more often, and purchase more when they do return. 8. Discuss the relevance of the services triangle to the market-focused management model. The service triangle depicts six key relationships that tie the firm's service strategy, the systems it operates, the firm's customers, and the firm's employees together. Similarly, the market-focused management model promotes that the purpose of the firm is to serve the customer, while the purpose of how the firm is organized is to support the employees that serve the customer. The linkages that form the services triangle should flow logically from one another and support the firm's overall mission of providing superior service delivery that differentiates it from its competitors.

Chapter 1 An Introduction to Services

10