Welcome to

Chapter 1
The Service Economy

1
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 Learning Objectives
◼ Describe the central role of services in an economy.
Identifyanddifferentiatethefivestages of economic
activity.
◼

Describe the features of preindustrial,industrial,and

postindustrial societies.
◼

Describe the features of the experienceeconomy

contrasting the consumer (B2C)with thebusiness (B2B).
◼

◼ Explain the essential features of theservice-dominant logic.

Identifyandcritique thesixdistinctivecharacteristics of a
serviceoperation andexplain theimplicationsfor
◼

managers.
◼ Describe aCopyright
serviceusing the servicepackage dimensions. 2
◼ Usetheservice process matrix to classify a service.
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 Table1.1: Sector Employment in TopTen
Nations by 2015 LaborForce Size
Nation %ofWorld % Agri % Goods % Services
Labor
China 21.2 33.6 30.3 36.1
India 13.9 49.0 20.0 31.0
European Union 6.4 5.0 21.9 73.1
UnitedStates 4.3 0.7 20.3 79.0
Indonesia 3.4 38.9 13.2 47.9
Brazil 3.0 15.7 13.3 71.0
Bangladesh 2.3 47.0 13.0 40.0
Russia 2.1 9.4 27.6 63.0 3
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 Service Definitions
Services are deeds, processes,and
performances.
Valarie Zeithaml, Mary Jo Bitner,&Dwayne
Gremler

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 Service Definitions - continued
Services areeconomic activitiesofferedby one partyto
another, most commonly employing time-based
performances to bring aboutdesired results in
recipients themselves or in objects or other assets for
which purchasers haveresponsibility.In exchangefor
their money,time,and effort, servicecustomersexpect
to obtain valuefromaccess to goods,labor,professional
skills,facilities,networks,andsystems;butthey do not
normallytakeownershipof any of thephysical elements
involved.
Christopher Lovelock andLauren Wright
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 Service System Definition
A service system is a value-coproduction
configuration of people, technology, other
internal and external service systems, and
sharedinformation (such as language,
processes, metrics, prices, policies, and laws).
JimSpohrer, Paul Maglio, John Bailey,andDaniel Gruhl

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Figure 1.1:Role of Services in an
Economy

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Figure 1.2:Stages of Economic
Activity

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Figure 1.3: Trendsin U.S.
Employment by Sector, 1850-2015

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 Table 1.2:Comparison of
Societies
Features
Pre- Useof Standard
dominant Human Unit of of Living
Society Game Activity Labor Social Life Measure Structure Technology
Pre- Against Agriculture Raw Extended Sub- Routine Simplehand
ndustrial nature Mining muscle household sistence Traditional tools
power Authoritative
ndustrial Against Goods Machine Individual Quantity Bureaucratic Machines
fabricated production tending of goods Hierarchical
nature
Post- Among Services Artistic Community Quality of Inter- Information
ndustrial persons Creative lifein terms dependent
Intellectual health,Global
education,
recreation
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Figure 1.4:Distribution of U.S.
Employment by Industry,2014

11
Table 1.3:Language of Economic
Evolution
Economy Agrarian Industrial Service Experience
Economic Food Packaged Commodity Consumer Business
Offering goods service services services(B2B)
(B2C)
Function Extract Make Deliver Stage Co-create
Nature Fungible Tangible Intangible Memorable Effectual
Attribute Natural Standardized Customized Personal Growth
Methodof Storedin Inventoried Deliveredon Revealed Sustained
Supply bulk demand overtime overtime
Seller Trader Producer Provider Stager Collaborator
Buyer Market Customer Client Guest Collaborator
Expectation Quantity Features Benefits Sensations Capability 12
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Experience Design Principles
◼ Themethe Experience(Forum shops)
HarmonizeImpressions with Positive
Cues (O’Hareairport parking garage)
◼

EliminateNegativeCues
(Cinemarktalking trash containers)
◼

Mix in Memorabilia (ClubMed group

pictures)
◼

Engage all Five Senses (Junglesounds

and mistin RainforestCafe)
◼

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Figure 1.5:The Four Realms of an
Experience

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Table 1.4:Typology of Services in
the 21st Century
CoreExperience Essential Feature Examples
Creative Present ideas Advertising,theater
Enabling Actas intermediary Transportation,communications
Experiential Presenceof customer Massage,theme park
Extending Extendandmaintain Warranty,healthcheck
Entrusted Contractualagreement Service/repair,portfoliomgt.
Information Accesstoinformation Internet searchengine
Innovation Facilitatenewconcepts R&Dservices,product testing
Problemsolving Accesstospecialists Consultants,counseling
Qualityof life Improvewell-being Healthcare,recreation,tourism
Regulation Establishrules andregulations Environment,legal,patents 15
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 Table1.5: Foundational Premises
(FPs) of Service-Dominant Logic
1. Service isthe fundamental basisof exchange.
2. Indirect exchangemasks thefundamental basisof exchange.
3. Goods aredistribution mechanisms forserviceprovision.
4. Operant resourcesarethefundamental sourceof competitiveadvantage.
5. All economies areservice economies.
6. Thecustomeris alwaysa co-creator of value.
7. Theenterprisecannot delivervalue, but only offer valuepropositions.
8. Aservice-centered viewisinherentlycustomer-oriented and relational.
9. All economic and social actorsareresourceintegrators.
10.Value isuniquely and phenomenologically determinedbythebeneficiary.

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 Distinctive Characteristics
of Service Operations
Customer Participation: attention to facility design,
opportunities forco-production
◼

Simultaneity: services created and consumed

simultaneously, cannot be stored
◼

Perishability: cannot inventory, opportunity loss of idle

capacity, need to match supply with demand
◼

Intangibility: services are ideas and concepts, service

innovations are not patentable, franchising, importance
◼

ofreputation
Heterogeneity: customerinvolvement in delivery
process results in variability
◼

Nontransferrable Ownership: services do not involve

transfer ofownership
◼

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 Table 1.6:Nonownership
Classification of Services
Type ofService Customer Value Examples Management
Challenge
Goods rental Obtaintemporary Vehicles,tools, Site selection and
rightto exclusive use furniture,equipment maintenance
Place and space Obtainexclusive use Hotel room, seaton Housekeeping and
rental ofdefined portionof a airplane,storage unit achieving economiesof
largerspace scale
Laborand Hire other people to Car repair,surgery, Expertise isa
expertise do a job management renewable resource,
consulting buttime isperishable
Physicalfacility Gain admissionto a Theme park,camp Queuing andcrowd
usage facility for aperiodof ground, physical control
time fitness gym
Network usage Gain access to Electric utility,cell Availability and pricing
participate phone,Internet decisions
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Figure 1.6:Service Package

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The Service Package
Supporting Facility: The physicalresources that must be
in place before a service can be offered. Examples are
◼

golf course, ski lift, hospital, airplane.

Facilitating Goods: The materialpurchased or
consumed by the buyer, oritems provided by the
◼

consumer. Examples are golf clubs, skis, food items,

replacement auto parts, legal documents, and medical
supplies.
Information: Data that is available from the customeror
providerto enable efficient and customized service.
◼

Examples are patient medicalrecords, seats available on

a flight, customerpreferences, GPSlocation ofcustomer
to dispatch a taxi, and Google map link on hotel website.
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The Service Package (cont.)
ExplicitServices: Benefits readilyobservableby the
senses andthat consistof the essential or intrinsic
◼

featuresof theservice. Examples are the absenceof

pain when a tooth is repaired, smooth-running
vehicle after a tuneup, andresponsetime of a fire
department.
Implicit Services: Psychological benefits that the
customer may senseonly vaguely, or extrinsic
◼

featuresof theservice. Examples are the status of

an IvyLeaguedegree, theprivacy of a loan office,
andworry-freeauto repair.
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Figure 1.7: TheService
Process Matrix

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22
Figure 1.8:Challenges for Service
Managers

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23
Figure 1.9:Open Systems View of
Services

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 Discussion Topics
1. Illustratehow thetypeof workhe or shedoesinfluencesa person’
slifestyle.
schoolteacher.For example,contrasta farmer,a factory worker, anda
2. Isitpossiblefor an economy to bebasedentirely onservices?
3. What is thevalueofself-servicein an economy?
4. Determine iftheservicesector iscurrentlyexpandingor
contracting basedupon theNon-Manufacturing Index(NMI)foundat
theISMReport onBusinesson theInstituteofSupply
website: http://instituteforsupplymanagement.org/ISMReport/ Management
5.regulation,
What arechallengesofthesharing
insurance, andtrustissues? economywith respectto
6.arguing
Critiquethatthedistinctivecharacteristicsof serviceoperationsby
the characteristics ofcustomer participation,
simultaneity,perishability, intangibility, heterogeneity, and
nontransferable ownershipmightapply to goodsaswell. 25
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Interactive Class Exercise
The class breaks into small groups. Each
groupidentifies service firms that should
belistedin the andplaces
them in rank order of estimatedannual
revenue.
http://fortune.com/fortune500/list/

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Case 1.1: Village Volvo
1. Describe Village Volvo’s service package.
◼ Supporting Facility
◼ Facilitating Goods
◼ Information
◼ ExplicitServices
◼ ImplicitServices
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Case 1.1: Village Volvo
2. How are the distinctive characteristics of a
service firm illustrated by Village Volvo?
◼ Customer Participation
◼ Simultaneity
◼ Perishability
◼ Intangibility
◼ Heterogeneity
◼ Nontransferrable Ownership
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Case 1.1: Village Volvo
3. HowcouldVillage Volvo manage its
backoffice(repairoperations)likea
factory?
4. Howcan Village Volvo differentiate
itself fromVolvo dealers?
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Case 1.2: Xpresso Lube
1. Describe Xpresso Lube’s service package.
◼ Supporting Facility
◼ Facilitating Goods
◼ Information
◼ ExplicitServices
◼ ImplicitServices
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Case 1.2: Expresso Lube
2. How are the distinctive characteristics of a
service operation illustratedby Expresso Lube?
◼ Customer Participation
◼ Simultaneity
◼ Perishability
◼ Intangibility
◼ Heterogeneity
◼ Nontransferrable Ownership
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Case 1.2: Xpresso Lube
3. Whatelements of Xpresso Lube’s
location contributeto its success?
4. Given theexample of Xpresso Lube,
whatother services couldbe combined
to “addvalue” for thecustomer?
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