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:
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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.

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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”

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

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II. What is a Service?

A. 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.

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B. Scale of Market Entities

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.

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

III. Framing the Service Experience: The Service Model

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A. 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.

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B. 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

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 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? PowerPoint Slide: #10

A. 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.

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 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.

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V. The Services Revolution: A Change in Perspective
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A. 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

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 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.
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1. The service's triangle provides the framework.

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

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 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.

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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.

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 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. Better-
trained 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.

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