Service Management Operations, Strategy, and Information Technology Fifth Edition James A. Fitzsimmons Wiliam H. Seay Centennial Professor of Business University of Texas ot Austin Mona J. Fitzsimmons a Boston Bur Ridge, IL Dubucue, IA Madison, WI NewYork Sanfrancisco St. Lovie angkok eget Caracas Kuale Lumpur ‘Lisbon London Madiid Mexico City Mian Monreal New Delhi Sansago Seou Sogepcra Syorey Tipe! TorontoTo Our Farnily Michael, Kate, and Colleen Gary ‘Samantha, Darwin, and Jordan ‘Melba Jett In Memory of William H. Seay i tt SERVICE MANAGEMENT, FIFTH EDITION Inertial Eton 2006 ‘Biclusive sighs ty MeGrnw-Al Eaneton (Asa), for mamsfactue and export. Tie bok aot be sported om th cous o whieh iol by MoCo il Tos Iateratoea! Elton ao svalblein Noch Ames, Pobisos by MoGray-HVirr, a bsiness unit of The McCraw ill Compan ne. 122 ‘Avenue ofthe Amuries New You NY 1002. Copyright © 06,2008, 201, 198,199 by ‘The MeGraw-iil Compares, le All rights ered Nop of hs pttaton may be ‘eprodoed a sted in any fam or by any meas, ore na dtabass ore) sys, without the pcr writen consent f Te Metrao-Hl Compaen, sling, but Sot limite, in any network or ther elacveie storage o transmission, bende for ‘Sans leasing. Some sti cluding eecwonic and pix componos, sy et be avsiale to curse uid the Unie Sas, 10 08 08 07 06 0 29 09 08 OT OS cr Bre Liaty of Gongs Coatl Number: 2005055002 ‘When ordering thsi, wee ISBN 0071244409 Priced ia Singapore svat som‘The McGraw-Hill/Irwin Series LOPPRATIONS MANAGMENT Bowie Con aret Sepiy Chain Logue Nanapoat hse, sod Ate ‘eran Mazen Cpe jane ‘Opertne Mangement: grag Msacrng a Series ih Ean Manin Seies Dirt Fecha Sop Manage! Sisson Operon Fateny {hoa peraies Maran Fie Son Serie sean Pit een et persons Manatee Cases ey mL Pret Maeroene Flatsanon ‘etela Magee Fable ma Danvtaarng Seat? Tst eeu Been tise Soe bdte ‘aad be ‘yoy ener Kaedan Steet ‘peresansaet Lemberg tick Sts ag Wane Prschsog aut Sept Cala Manson Se oe “ec vic Opens Masogemest avs Sats, nde "nt Operon Management Stree a Prodan ant Operation Ansys Fis Eon Competitve Mansnetres Manageme PrarBlor cen Theda te Ifermnes Systems je Mangement SinProje: A Proje Managenent Simson or Coro lreton Opantnee Managemen: Contemporary iene Cs Seppe Kaas od Chis ‘Proce Anata and Improvement Sen Le Kai, nd Sc Lat Dakin Mend Srey Serena Cperaee management bia Bann ‘anaes Bary Whyte a she DanstartriogPansag& Cons} Pi Bdioe Zia oendnns orton MansgsnestAbout the Authors lames A, Fuzsinmons received a B.S.B. in industial engineering from the Univesity ‘of Michigan, an MBA from Western Michigan University and 2 PhD. with distinction ‘Rom the University of California at Los Angeles. His research in the area of emer- ‘gency ambulance location won the Stan Hardy Avard in 1983 fo the best peper pub- lished in the field of operations management. A computer program, referred to a8, ‘CALL, hes been used by major cities worldwice to plan emergency ambulance sys- ‘ems. Consulting assignment include the RAND Corperstion; the US. Ai Fore; the cities of Los Angeles, Denver, Austin, Mefbouree, and Auckland; the Texas compical= Jar, General Motors; La Quinta Motor Inas; Greyhound; TRICON Restaurants Inter. ational; and MeDaailes, Teaching experience includes faulty sppoiniments at the University of California at Los Angeles, California State University #t Note, the ‘University of New Mexico, Boston Univesity Overseas Graduate Program, California. Polytectnie State University at San Luis Obispo, and the Helsinki School of Eeoeomics and Business, Ho isa registered professional engineerin te sate of Michigan and bas Deld industrial engineering postions at Corning Glass Works and Hughes Aircraft Com- ‘pany He served ia the US, Air Force as an officer in charge of base construction peaj- fects. He eld the position of PhD. graduate adviser for eight year in the Department of ‘Management at the University of Texas and was nominated for six teaching awards. ‘Wit Mona Fitzsimmons e edited New Service Development: Creating Memorable Ex. _perienose published in 2000 by Sege Publications. He curently eerves at tervice oper- ‘tions area editor for Production and Operations Management and member of the ‘editorial review board ofthe Journal of Service Research Mona J. Fitzsimmons, a gradusto ofthe University of Michigan, received her under. ‘raduate degres in journalism sith major supporting workin chemisiy end psycho! gy, Her graduate work was in geology and she las taught in public and private schools, ‘and athe university level. She has done waiting and editing forthe Encyclopaedia Bri= tannica Education Corporation and for various professional journals and organizations ‘With James Fitzsimmons she edited Now Service Development: Creating Memorable ‘Experiences published in 2000 by Sage Publications. Her nonprofessional activites, Ihave included volunteer wosk forthe Red Cross aquatics program and in wildlife re- ‘habitation. She has particular interests in the areas of envizonmestal issues and the responsibilities of patents and plysicins in halts car,Table of Contents Preface xii Overview of the Book xiv PART ONE UNDERSTANDING SERVICES 1 Chapter 1 ‘The Role of Services in an Economy 3 Learning Objectives 3 Chapter Preview 4 Service Definitions 4 ‘Dependency of Manufacturing on Services 4 Economic Evolution 5 Stages of Feonomie Development 7 Preindutia! Society 7 Indust Soiesy 8 Postnducriel Sociey 8 [Nature ofthe Service Sector 9 New Experience Eoonomry 11 Sources of Service Sector Growth 12 Inaoseion 12 ‘Social Trends 13 Serviee Benchmark: Wal-Mart is Number ‘One.0a the Fortune SOO List 14 Summary Id Key Terms and Definitions 15 ‘Topics for Discussion 15 Interactive Exercise 15 Selected Biliogrephy 15, Endnotes 15 Chapter 2 ‘The Nature of Services 17 Learning Objectives 17 Chapter Preview 18 tion 18 The Service Package 19 Distinctive Characteristics of Service Operations 21 Customer Parpaton inthe Service Process. 21 Simadeanciy 23 Pevihabliy 24 Inara 24 Heserogenci 25 CCassifying Services for Static Insights 25 Mane ofthe Serie et 26 Relationship with Customers 27 Curtomiation and Judgment 27 Nase of Demand and Supply 28 Maho of Service Debvery 29 Aa Open-Systems View of Services 28 Service Benchmark: Outside the Box 31 Summary 31 Key Tes and Definitions 32 ‘Topics for Discussion 32 Interactive Exercise 32 Case: Village Volo 33, Case: Xpresso Lube 34 Seleced Bibliography 35 Endaotes 35 Chapter 3 Service Strategy 37 Learning Objectives. 37 Chapter Preview 38 The Strategic Service Vision 38 ‘Understanding the Campedive Environment of Services 40 Competitive Service Suatogios 41 Overall Cost Leaderstlp 40 Digerentaon #2 Fons 8 Winning Customer ia the Marketplace 44 Qualifiers 4 Senice Viners 46 Senice Lovers 46 ‘The Competitive Role of Information in Services 46 Crsation of Baris 0 Briry 46 Revenue Generation 47 Database set 48 Produtiey Enhancement ‘The Vireal Value Chain St Fort Sage (Vbily) 51 Second Suge Mimoring Capebiliy) 3} Third Sage (New Customer Reladonhipd) 52 Limits in the Use of Information 52 ‘Anicompetve 52 Reims 52 Iwasion of Privacy 52 Dats Security $3 Reliiliy 53 sing Information 20 Categorize Customers 53 Stages in Service Fim Competitiveness 53 silable for Service 35 ®Tale of Contents douneman 55 Dissnsve Competence dehieved 55 World-Class Service Dalvry 56 ‘Service Benchmark: Cental Market Stuns Conventional Wisdom and Big-Name Products $7 Suumary 58 Key Terms and Definitions 58 Interactive Exercise 59 ‘Topies for Discussion 59 (Case: America West Aiines 59 Case: The Best Litle Cookie Howse Around 60 Case: The Alamo Drafthouse 62 Chapter 3 Supplement Data Envelopment Analysis (DEA) 64 Measuring Service Productivity 64 The DEA Modelo DEA and Soategic Planning 70 Exereises 71 (Case: Mid-Atlantic Bus Lines 71 Selected Bibiograpty 72 Endnotes 73, PART TWO DESIGNING THE SERVICE ENTERPRISE 75 Chapter 4 New Service Development 77 Learning Objectives 77 Chapter Preview 78 New Service Development 78 Service Design Elements 80 Service Bluoprinting 82 Strategic Positioning Through Process Structure $4 Taxonomy for Service Process Design 86, Degree of Dnergence 85 Objectof he Service Process 87 ‘pe of Customer Contact 87 Generic Approaches i Servio Sysiom Desig 88 Prodecton-Line Approach 88 Customer as Cooder 96 Customer Concer pproach 92 Information Empowerment 93 Castomes Value Equation 95 eoults Produced jor the Customise 95 Process Quality 95 Price tothe Cstoner 95 Cast fAcpring the Service 95 Service Benchmark: A Betee Mousetp 96 Summary 96 Key Terms and Definitions 96 ‘Topies for Discussion 97 Interactive Exercise 97 Case: 100 Yen Sushi House 98 Case: Comvaater Cleaning-A New Veoture Proposal 98 Case: Golfsmith 101 Selected Bibliogrphy 102 Endnotes 104 Chapter 5 ‘Technology in Services 105 Learning Objectives 105, Chapter Preview 106 ‘Technology inthe Service Encoweser ‘The Emergence of Self-Service 107 ‘Avtomation in Services 108 Internet Services 110 Comming of ge for che Incermet and Web tes Insornes Models 113 Btecronic and Traditional Services 114 Busines Models 11 Sonioe Produt Dimensions IS ‘Sense Prosss Dimensions 115 [Bconomics of Scalability 116 Technological Imovation in Services 117 Challenges of Adopting New Tecnology in Soroes 17 Managing th New Tecnology Adoption Process 117 Service Benchmeric Mirosoft, Ford Drive Web Deal 119 ‘Summary 120 key Terms ane Definitions ‘pies for Discussion 120 Intoractive Exercise 120, Case: Amazon.com 120) (Case: Evolution of B2C E-Commerce in Japan Selected Bibliograpay 125 Endnotes 125 106 uo 120 122 Chapter 6 Service Quality 127 Learning Objecdves 127 Chapter Preview 128 Defining Service Quality 128 Dimension of Service Quay Gaps Serie Quality 129. Measuring Service Quality 131 SERVQUAL 132 Scape of Service Quality 133 Quality Service by Design. 136 “Incorporation of Qual in he Service Package 136 28‘Taguchi Methods 138 PotaYole Fallefirg) 138 Quay Function Deplemt Banchmertng 142 ‘WalkcThrough Audit 143 Devigning 0 Wak-Through Audie 146 Inplications fer Managoman!_ 144 ‘The Walk-Tarough Audit asa Diagnostic Tastrument 146 Achieving Service Quality Cont of Qulity 168 Senize Process Conval 140 Stacol Process Como! 150 Unconditional Service Guarantee 154 Service Recovery 135 “Approcoheso Service Recovery 157 Stages in Quality Development 157 Service Beachmar: Service, Baueation, and Health CCace Winners ofthe Malcolm Baldrige National Quality Award 159 Summary 160 Key Terms and Definitions ‘Topies for Discussion 161 Interactive Exercise 161 Solved Probleass 161 Exercises 163 Case: Clean Sweep, ine. 167 Caso: The Complaint Leter 169 Case: The Museum of Art and Design Chapter 6 Supplement 173 Continuous Improvement 173, Quality and Productivity improvement Process Foundation of Continuous Improvenext 173 Plan-Do-Checksder (PDCA) Cycle 173 Probie Solving 174 (Quality Tools for Avalyss and Problers Solving 174 (Check Sheet 174 Ban Chart 176 Hisgran 176 Peto Char 177 Flowchart 177 Cause ond Bfoct Diagram 177 Seater Diograr 179 Cont Chart 172 Programs for Organizational Quality Improvement 180 ‘Perconnel Prograns fr Quai Azswrance 180 ‘Quali: Imarvemant Program to Acie Zero Defecs 81 Deming’ H-Potnt Program 182 “0 18 160 un iB Teble of Contents Malcolm Baldrige National uakioyAverd 183 4380 9000 184 ‘SteSigma 185 (Case: Moga Bytes Restaurant Selected Bibliograpty 192 Endrowes 195 188 Chapter 7 ‘The Service Encounter Learning Objectives 197 Caapter Preview 197 ‘The Service Encounter Triad 198 “Encounter Dominated by the Service Organization 199 Conte: Persome!-Dontnated Encounier 199 GurtomerDominated Brounter 199 ‘The Service Organization 200 197 Gre 200 Empowerment 202 Cone Sens 201 Contac Personnel 202 Selection 202 Training 204 ‘The Customer 205 spectrin and Atiudes 205 The Customer os Coproducer 208, Summary of Service Encounters 207 (Creating a Customer Service Orientation 207 Service Profit Chain 209 Sommary 211 Service Beoshmark: Miss Manners oa Complaint Handling 212 ‘Key Terms and Definitions 213 ‘Topics for Discussion 213 Iteractve Exercise 213, ‘Case: Amy's Iee Cream 214 Case: Enterprise ReairA-Car 215, Selesed Bibliography 217 Endnotes 220 Chapter & ‘The Supporting Facility 223 Learning Objectives 223, Chapter Preview 226 Servicoscapes 224 ‘Behaviors in Servicscapes 225 Enironmenal Dinersions of Sericescapes 226 Facility Design 227 ‘Natie and Objectives of Service Organizations 228 Land Availabilty and Space Rsqiromenss 228 Flexibility 229Secsriyy 229 esthetic Factors 230 The Conpunity and Emironment 230 Process Analysis 231 Process Terminology 251 Facility Leyout 233 Product Layout en the Mork Aloction Proslam 233 Prooes Layout end the Blane Location Probl 235 Environmental Psychology and Orientation 239 Service Benchmark: Waere, Ob Where Shall We Go? 240 ‘Summary 240 Key Terms and Defiitions 241 ‘Topics for Discusion 241 Interactive Exercise 241 Solved Problems 242 Exoreises 243 (Case: Health Maintenance Organization (A) 247 (Case; Health Maintenance Organization B) 247 Case: Esquire Department Store 248 (Case: Central Market 249 Selected Bibiograpby 250 Endnotes 251 Chapter 9 Service Facility Location 283 Lesmning Objectives 253, Chapter Preview 254 Location Considerations 258 Gecgraphic Representation 255 Manber of Facilites 256 Optiization Creria 256 Estimation of Geographic Demand 257 Define te Terges Population 258 Selecta Uniteférea 238 Estimate Geographic Demand 258 Map Geographis Demand 258 Facility Location Techniques 259 Single Fastiy 260 Centr of Gravy 263 Locating @ Revi! Oulet 266 Muliple Facies 265, Site Considerations 267 Breaking the Rules 267 CCompective Clustering 2658 Sanuation Marketing 258 ‘Mrkeng inermediores 268 Geographic Information Systems 271 Summary 272 Service Benchmark: Here a Bun, There a Bua, Everywhere a Bur-Bun 273 Key Terms and Definitions 273, ‘Topies for Discussion 274 Interactive Exercise 274 Solved Problems 274 Exercises 275, (Case: Health Maintenance Organization (A). 279 Case: Athol Furniture, Inc. 280 ‘Selected Bibliograpiy 282 Endaotes 282 Chapter 10 Managing Projects 283 Learning Objectives 283, Chapter Preview 283 ‘The Nature of Project Management 284 Chareteistis of Projects 284 Project Management Process 254 Seleing the Project Manager 285 ‘Butldng the Project Team 286 Principles of Efeeive Projet Menagenent 287 Techniques for Project Management 287 Gant Project Charts 28? A Griique of Gont Charts 289 Consrusing a Projet Nework 289 Criica! Pak Method 290 Mra Proje for Windows Analysis 202 Resource Constraints 295, Activity Crashing 299 Incorporating Uncertaintyin Activity Times 302 vimaing Activity, Duration Disrtons 302 Projet Completion Time Distribution 303 A Griigu ofthe Project Completion Tne Anais 306 Problemos with Implementing Critical Path Analysis 305 Monitoring Projects 306 Eomed Yue Chart 307 Projo Termination 307 Project History Report 308 Summary 308 Service Beuchmarkc The House That Warren Built 308 Key Terms and Definitions 209 ‘Topics for Discussion 309 ‘Subtituion of Conmnication fer Transportation 269 Interactive Exercise 310 “Impact of te Ieerntom Service Location 270 ‘Separation of Frnt ftom Back Office 270 Solved Problems Exercises 312 310Case: lofo-Systems, Inc. 317 Case: Whittiee County Hospital Selected Bibliography 319 Endnotes 320 318 PART THREE MANAGING SERVICE OPERATIONS 321 Chapter 11 Forecasting Demand for Services 323 Learning Objectives 323 Chapter Preview 323 Subjective Models. 324 Delphi Method 324 CGrosminpact Arable 326 Flssorical Analogy 326 Causal Models 327 ‘Regression Mode’ 327 Ezonomovi Models 329 ‘Time Series Models 329 ‘N-Parod Moving Average 329 ‘Simple Exponential Smoothing 331 Relationship beeen and 333 Forecast Error 336 Exponential Smoothing wie Trond djusinont 334 Exponential Smoothing with Seasonal Adjurment 338 Exponential Smoothing with Trend and Seasonal Adjustments 538 ‘Smmary af Exponential Smoothing 540 Summey 340 Service Benchmark: LL, Bean Improves Call Center Forecasting 341 Key Terms and Definitions 344 “Topics for Discussion 344 Interacve Exercise 344 Solved Problems 344 Exercises 346 (Case: Oak Hollow Medical Bvaluation Center. 348 ase: Gromial Functions, In. 349 Selected Bittiogrepby 350 Endnotes 350 Chapter 12 ‘Managing Capacity and Demand 351 ‘Learning Objectives 351 Chapter Preview 352 Strategies for Managing Demand 352 Segrowing Donand 353 (Offering Price Icemies 354 “Rete of Conarts Promoting Of-Peak Domand 335 ‘Developing Complementary Senices 385 Reser Sytens and Overbcoking 356 Strategies for Managing Capacity 358 ‘Daily Bolo Sckodutng 358 Welly Works Scheduling with Deys-OF Consaint 361 Increasing Customer Porcipaion 382 Creating Ausable Capacity 362 Shoring Capeciy 368 (Crase-Traning Empleyess 368 rng Pare Tome Empagces 303, Scheduling Par Tine Taller a2 Drive In Bank 363, Yield Management 3 eld Managemen: Appictions 308 Summary 370 Service Benchmark: Yield Management stAmerican Airlines 371 Key Terms and Definitions 373 ‘Topics for Discussion 373 Interacve Exercise 393, Solved Problems 373 Exercises 375 Case: River City National Bank 379 (Case: Gateway Intemational Airport 380 (Case: The Yield Management Analyst 382 Case: Sequoia Airlines 385 Selested Bibliograpty 386 Endnotss 388 Chapter 13, ‘Managing Waiting Lines 389 Leaming Objectives 389 Chapter Proview 392 Queuing Systems 392 ‘The leviablty of Waiting 392 The Peychology of Waiting 393 That Oa Empty Feeling 39% A Foot in the Doar 336 Tha Light ofthe End of he Tunnel 395 Browse Me but ls Noa 395 They Also Sarve, Who Stand Beis 395 ‘The Economics of Waiting 396 ‘Essential Features of Queuing Systems 397 ‘Calling Population 398 Arroal Preeass 398 ‘Quen Configsration, 402 ‘Quowe Discipline 496 Serce Process $05 Sommary 407x Tibet Contents Service Benchmark: Five Minutes in Line is Longer Than Five Minutes at Hard Labor 408 Key Terms and Definitions 408, ‘Topics for Discussion 408 Interactive Exercise 408, Case: Teifty Car Rental 409 Case: Eye'll Be Seeing You 410 Chapter 13 Supplement Computer Simlation 412 Systems Simulation 413 ‘Simulation Methodology 413 ‘Morte Caro Siration 414 Genorcng Random Vericbles 415 Discretes Sinaation 418, ServiceModel Simulation Sofware 419 Demonstration: Customer Service Call Center 422 Process Analysis: Manufacturing Cell 423, Build a Model: Order Processing Sym Tuorial 425 Case: Pronto Pizza 432 Case: Renaissance Clinic (A) 422 Solved Problems 433 Bxercios 436 Selected Bibliography 440 Ensnores 441 Chapter 14 Capacity Planning and Queuing Models 443 Learning Objectives 443, Chapter Preview 444 Capacity Planing 445 Sratape Roe of Capacity Decisions 445 ‘Avalytical Queuing Models 445 ‘Standard MIMI Model 448, Standard Mile Mode! 450 MOGI Medel 454 Gonerel SepSenice MIGIeo Model 454 Fonte Quese WAM! Medel 455 Finte-Queve Wile Mods! 456 General Relationships Between System Chaecterisics 457 Capacity Planning Ctieria_ 457 “Avoge Customer Weng Time 58 Probability of Excessive Walting 459 Minimizing the Seon of Cartomar ting Cote tn Serie Cats 4650 Probability of Soler Loet Because of Inadeuate Wing Area 461 Requirement That Sepeced Profit on Last Unit of Cepaciy Should Jus Bezced Pspected Lats 462 Summary 463 Service Benchmark: Simulation Modeling for Process Reengineering inthe Telecomuuniations Industry 464 ‘Key Terms and Definitions ‘Topies for Discussion 467 Interactive Exercise 467 Solved Problems 467 Excrcises 469 (Case: Houston Por Authority 473 (Case: Freedom Express 473, (Case: Renaissance Clinic (B) 474 Selected Bibliograpiy 475 Endnotes 475 Chapter 15 Service Supply Relationships Learing Objectives 477 Chapter Preview 478, Supply Coain Management 478, Denson Model 478 Managing Uncerainyy $79 Sipply Chin Sratsic Planing 480 Service Supply Relationships 482 ‘Cutiomer Suter Duality 482 ‘Managerial implications of Bidirectional Relationships | 483 ‘Sonice Surely Reletonsipe Ar Hus, Not Chine “a Serice Capac Is Analgons to lmentory 83 Customer Supplied inputs Can ary in Quality 483 Sourees of Value in Service Supply Relationships 484 Bigieconal Optimization 48¢ Management of Producing Capacity 434 Management of Perthabilisy #85, Outsourcing Services 486 Benfis and Rsk of Ousourcng Sevces 487 Clesfcation of Busines Servicer 485. Managerial Considerstions with Service Ousoureing 488 ‘cli Sport Service Propery.ow Importancs) 490 Equipmen Support Savice (Properpigh importance) 190 Enplayce Suppor Service PeopleLow Jimporance) 90 Employee Development (Peopefigh Inparans) 480 Facliatr Service Procee/Low Importerce) #99 Professional Service Preeasilgh mporiance) 491 Secviee Bonsbmack: Citizens Come Fist inkynchburg 491 467 4Summary 491 KeyTerms and Definitions 492 ‘Topics for Discussion 492 Interactive Exercise 492 Case: Peapod-—Smart Shopping for Busy People 493 Case: Mertgage Service Game 495 Chapter 15 Supplement Vehicle Routing 498 Field Service 498 A Manual Routing System 505 Solved Problems 506 Exercises 508 (Case: The Daley Monthly Car Pool su (Case: Aiport Services nc. 51 Selected Bibliography 512 Endaotes 513, Chapter 16 Managing Facilitating Goods S15 Learning Objectives S15 Chapter Preview ventory Theory 517 “Role of menory i Sersces 317 CharacteisisofIventary Stems 519 elevans Cate of an ientory Stem 520 Order Quantity Models 520 Economie Order Quantity $21 Imencory Mode with Quantiy Discounes 524 Inventory Model with Flamed Shorts 327 Inventory Management under Uncertainty 529 Inventory Consol Systems 531 Continuous Review Sten $31 Periodic Review Sytem 533 TheABCe of Ivetory Control 334 ‘Single-Period Model for Perishable Goods 535 ExpecedVelue Anais S36 Marginal Analysis 537 Retail Discounting Model 538 Service Beuchmark: & Chip in Time Isn't Ste 539 Summary $0 Key Terms and Definitions 540, ‘Topies for Discussion $41 Interactive Exercise 541 Solved Problems 541 Exercises 543 Case: A.D. Small Consulting $49 (Case: Last Retort Restaurant 549 (Case: Elysian Cycles 350 “lle of Carts x Selected Bibtiograpty 551 Endnotes $51 Chapter 17 Growth and Globalization of Services Learning Objectives 553, Chapter Preview 554 Domestic Growth and Expansion Suategics 554 Foowed Sevice 555 Focused Network 335 (Chstred Service 556 Diversified Nemork $57 Franchising $57 The Nan of Franchising $37 Bunfits 10 the Pronckzee 338 ‘sues forthe Pranchser 538 Globalization of Services 360 Generic nerationalSoatgles 560 The Nanwe ofthe Bordericss Word $61 Planing Transnational Operations 563 Global Service Strategies 565 Mulicounty Rspansion 565 importing Cstomare 557 ‘alloing Your Cattomer 567 Service Ofsharing 58 Beating the Clock S66 Service Benchmark: Small Woeld and Other Myths 569 Summary $70 Key Terms and Definitions 570 ‘Topics for Discussion 571 Interactive Exercise 371 (Case: Goodwill Industries International, nc (Case: Federal Express: Tiger Intemational Acquistion 574 Selesed Bibliography $77 Endnotes 578 553 2 Appendix A: Areas of Standard Normal Distribution 579 Appendix B: Uniformly Distributed Random Nambers 0,1] 580 Appendix C: Values of L forthe MMe Queving Model 581 Appendiy D: Equations for Selected Queuing, Models 583 Namelndex 586 Subject Index 590Preface Services touch the lives of every pertan inthis coun lay every day: food services, communication serv- fees, and emergency services, to name only 2 few. (Our welfare and the weifae of our economy are now based on services. The activities of manufacturing and sqriculture will always be necessary But we can ext only so much food and we can use only so many goods. Services, however, are largely experiential, and we wil always havea limitless appetite for them, ‘Service operations management is firmly estab- lished as fleld of stad that embraces al ervice in ddstres, For example, under the leadership of the senior author of this tent, the discipline was recog nized as an academic field and designated a a sepu- rate track by the Decision Sciences Institute (DSI) at its 1987 Boston meeting, In 1989 the Intemational Journal of Service Industry Management Was ina: ‘ted, Finally, the First International Service Re search Seminar in Service Management was held in France in 1990, drawing participants for the fields ‘of operations management, marketing, and organiza- tional behavior. This eonfetence recognized the mul: tidisiplinary nature of services and dropped the adjective “operations” in order to emphasize the inte~ agrative nature of service management. Following the 1996 Orlando DSI service mini-conference, 2 Web site (tpsampson.byu.edu} was established to sup- port faculty and students who are interested i the Feld of service management. Inthe second edicon of this text, chapters on prol- ect management and managing service inventories ‘yore added to make the te appropriate for use in ia ‘rodectory courses in operations managemens. The text afforded all students of business the opportunity to study operations from the prospective of thei far ‘ue employment ina service economy: ‘The thee edition recognized the emergence of a new experience esonomy that takes us beyond the transaction-based service toa slaged and memorable ‘experience. Delivery of serves via the Interaet was also an emerging phenomenon creating considerable ‘excitement as a new channel witha global reach. A ‘ew supplemeat on compete simolation was added to ‘the waitingline chapter, and a popular computer simulation software package called ServiceMode! was provided on a CD-ROM supplicd withthe text. ‘Tae fourth edition recognized the impact of the Intemet on service delivery with @ new chapter on E-Service that explored the concept of scalability. A new chapter on service supply telationships re= ‘ognized the unique customer-supplier duality thet tite in servoe iterations. Anew feature wes the inchsion ofthe Mortgage Secvice Gans, an interac tive computer simulation that models service supply relationships. “his edition continue to acknowledge and eragha- ‘Sze the esoential uniqueness of service manageret ‘These ar some kay feases: + The book is writen in an engaging literary style, makes extensive use of examples, and is based on the research and consulting experience of the authors. + The theme of managing services for competitive advantage is emphasized in cach chapter and pro- vides 2 fecus for each management topic. +The integration of marketing, operations, and ‘man behavior is recognized as central to effective service management + To displ the common belief that manufacturing ‘management principles can be applied to services without recognition ofthe diffrent operating exe ronments, the role af services in. sosiery and the uniqueness of service delivery ystems ae stressed. + ‘Thc information technologies of yield management, daa evelopment analysand computer sim tion ar inciuded as ilasravions of three of the strategie roles of information in managing services. + Emphasis is placed on the need for continuous im- provement in quality and productivity in onder to compere effectively na global environmen, + Tomotivate the reader, a vignete of «well-known, ‘company starts each chapter, illustrating the strate- gic nature ofthe topic to be covered + Bash chapter as a previow, closing uramary, key terms and definitions, service benchmark, topics for discussion, an interactive exercise, solved prob Jems and exercises when appropriate, and one or + Pectaged with the text is a CD-ROM containing PowecPoint leenze ides, Service-Modelsimlationsoftware, Mortgage Service Game, a fect location Excel spreadsheet, chapter quizes, and Web sits, + The instructors manual contains ease analyses, ex reise solutions yield manegement game, obostve test banks, and liss of supplementary materials. “This edition includes the following pedagogical fea. tures im each chapter earning Objectives beip students focus on the key concepts inthe chapter. Inveracitve Exercises for clas participation. Service Bonchonarks illustrate outstanding exam- ples of excellence in service, Key Terms end Defotions at the conclusion of ‘each chapter serves asa quick reference and reminder ofthe new vocabulary just presented. Solved Problems before the enerises(n selected ‘chapters lstrat in deal tbe steps taken to revolve a quantitative problem, ‘We wero very fortunate to have the first edition re= viewed by several colleagues—all people of intogrisy, ‘wig and vision. Their detailed comments, insights, and thought-proveking suggestions were gratefully re- ceived and incorporated in the text in any places ‘Special hanks and ackowledgment go t0 the fe lewing people for thei valuable reviews ofthe fs edition: Mohammad Ala, California State Universit ‘Los Angeles; Joanna R. Baker, Virginia Polytech Institute and State Universi; Mark Davis, Bentley College; Maling Ebrahimpavt, University of Rhode Ibland; Micsas! Gloosom, Indiana University; Ray Haynes, California Polytechnic State University at Sea Luis Obispo, Art Rill, the University of Min~ nesote: Sheryl Kimes, Comell Univesity; and Richard Reid the University of New Mexico “The second edition benefited from the constructive comments of te folowing roviewers: Kimberly Bates, New York University; Avi Dechtr, California Stats University, Nordidge; Scott Delana, East Cacia University, Shery| Kime, Cornell University; Lary LeBlanc, Vandetbil University; Robert Lucas, Mezo- politan State Collegeof Denver; Barbara Osyk, Uni- ‘yersty of Alzon; Michael Showalter, Florida State ‘Uaiversiey; and W Sridbaran, Clemson Universi. The following reviewers contbuted their exper- ‘ence and wisdom f0 te third edition: Sidhartha Das, George Mason University; Avi Dechter, California State University at Northridge; Byron Finch, Miami Fretace a University of Ohio; Rdward M. Huff Je, Metropoli- tan State College of Denver; Ken Klassen, California State University at Northridge; Richard Reid, Univer- sity of New Mexico, Albuquerque; Ishpal Reki, California State University at San Marcos; and Ronald Satterfield, University of South Flarids ‘We wish to acknowledge two students who assisted us, ang Wa, PhD. student at the University of Texas at Austin, assisted in the development of some exe cies and preparation of the PowerPoint lecture pre= sentation forthe sevond edition. Edmond Gonzales, aa MBA student at Texas, prepared the chapter (quizzes forthe third edition CD-ROM. A special ‘hanes is extended to Rob Bateman of the FoModel ‘Corporation forthe preparation of the Pronto Pizza simulation case and asistance in our adoption of the ServiceModel software “The fourth edition reflects the insights and sugges tions ofthe following reviewers: Sajeev Bordotoi, College of William and Mary; Sid Das, George Ma ton University; John Goodale, Ball Stat: University, Ken Klasson, California State University, Northridge; Pegay Lee, Penn State University; Matthew Muter, California Stats University, Noridge;Jadesp Mot- wani, Grand Valley State University, Blabieta Trybs, California Stato University, Northridge; Rohit Verma, University of Uta; and Janet Sayers, Massey Univer- sity, New Zealand. A spocal thanks to colleagues Bd ‘Anderson and Dosg Mortice for permissioa to in- Clude their Morigage Service Game and to Mark [Linford an MBA student tthe University of Texas at Austin, for preparing the computer software ‘The fifth edition benefited from insighs gathered st a focus group session in Washington, DC, atthe 2003 Decisioa Sciences instiute annual mecting We are grateful fr the many suggestions provided bythe following percipants: Uday Apte, Southern Methodist University; Sanjety Bordaioi, College of ‘William and Mary, Joe Felan, University of Arkansas a Little Rock; Richard Franze, Kennesaw State Unk verity; Craig Froele, Univesity of Cincinnati; Ying She Lee, St. Mary's College of California; Katherine ‘MeFadden, Norther Ilnois University; Mary Meix- cll, George Mason University; Eliot (Chip) Minor, ‘Virginia Commonwealth University, and Jake Simons, Georgia Southern University. We are also indebied 1 ‘Mos. Margaret Seay who continues her generous spor. ‘We expross special appreciation to all our frends ‘who encouraged us and tolerated our sovial lapsesiv Quan eth Book while we produced this book: In particular, we are in ‘debted for the support of Richard and Janioe Reid, ‘who have provided lively and stimulating conversa: tions and activites over many years, and wo geuer ‘ously allowed us the use of their mountain retest. ‘The beginning of the first edition was written in the splendid isolation oftheir part ofthe Jemez Moun tains of New Mexico, No authors coeld want for ber= ter inspiration James. Fitzsimmons Mone J. Fzsimmons Overview of the Book Part One begins with a discussion of the role of services in an economy. We first look at the historic evolution of societies based on economic activity and conclude with 2 discussion of the emerging expe- rence economy. Next, we consider the distinctive charactristes of service operations inching #clas- sification for strategie insights. The strategie service vision begins te final chapter in thie section. Generic competitive service strategies are discussed with an ‘emphasis on the role of information a illustrated by the viral valve chain. The stages in service frm competitiveness eauchudes the chapter, Designing the service emerpise to support the competitive stategy ib tho topic of Patt Two. New servioes are developed using techniques such as a service blueprint that diagrams the flow of activity occuring onstage ckove a line of visibility and backstage funetions cat are not seen by the castomer A new chapter on techaology in services explores the emerging use of solf-service and the Internet delivery of services. The challenge of delivering exceptional Service quality i addressed in the content of compa- risoa of customers’ peeceptions aad expectations. A ‘new supplement tothe quality chapter describes the tools and programs for continuous improvement, The notion ofa service encounter desexibes the interaction ‘beween service provider and customer in the context of a service organization, The sttegie rle of the supporting flit is dsoaseed in the context of how the serviscape impacts the customer and employee Detavior Process flow diagramming is row rated in depth with botleneck ieatification and calculation of performance metrics such as tought time, Using ‘analytical models, the critical decision of where to locate the service facility ie determined, This section ‘concludes with the topic of project management using Microsoft Project software asthe foundation. ‘Management of dxy-t-day operations is addressed in Part Three. We begin with models to forecast service demand, an important input to service op- ‘rations decisions. Because the nature of services provides a challenge n matching capacity with de- rand, strategies are didbussed including the concept of yield management. The question of managing waiting lines is adéressed from a psychological viewpoint. A supplement on computer simulation prepares students to use the ServiceMode! animated simuition software. Capacity planaing using queu- ing models is addressed next. A revised chapter on te topic of service supply relationships includes the ‘controversial topic of services outsourcing. Man- aging facilitating goods follows, and the book con- ‘lus with the tpie of growth and globalization of‘We begin cur study of service management in Chapter 1 with an appreciation ofthe central role that services playin the economies of ations and in world commerce. No ‘economy can function without he infrastructure that services provide ia the form of ‘sangporiation and communications and without government serves such a8 ‘education an heal cre, As an economy develops, however, services become even more importa, and soon th vast majority ofthe population is employed in service sot, ‘Chapter 2 addresses the nature of service operations and identifies their distinctive characterises, Pechap the most mmporantcharacorito of serve operations isthe presence ofthe customer in the service delivery sytem. Focusing onthe customer and serving his orher needs has abvays been an impertant daly aoivity for tervice provider. An effective competitive strategy is particularly important for service firms because they compete in an enviroament where there are relatively low barriers to entry. We begin Chapter 3 with a discussion ofthe strategic service vision, a feamework ia the form of questions about the purpose and place of a service frm in its market The ‘well-known generic compatitivestategies—overall cost eadorsip, differentiation, and focus—are applied to services. The chapter concludes with a discussion ofthe ‘competitive rote of inforaaton in services. A supplement othe chapter deseibes data cexvelopment analysis (DEA), a method of measuring service productivity, and ite strategic usin improving th performance of service daivered through mulpe sites,Chapter The Role of Services in an Economy Learning Objectives Atte completing this chapter, you should be abl to 1. Daseiba the canal role of smices in an economy. 2. Discus the evluton ofan economy fram an agratan society toa service society, 3. Describe the features of preindustil,indurr) and postindurtal soit. 4, Describe the feaues ofthe new experience econo. Services lie atthe very hub of economic activity in any society Infrastructure services, such as transportation and communication, are the essential inks among al sectors of ‘the economy, including the final consumer. In 9 complex eecnemy, both infasructare ‘and distlotion services function as intermediaries and as the channel of disibution tw the final consumer. Infrastructure services are @ prerequisite for an economy t ‘become industrialized: therefore, no advanced society can be without these serves Inn industrialized economy, specialize firms can supply business savices to man- ‘facturing firms more chesply and efficiently than manafactusing firms can supply these services for themeelves. Thus, more and more often we find advertising, consulting, and ‘ther business services being provided forthe manufscrsing sector by servic firms, Except for buse subsistence Living, where individual houscholés ae sel?- sufficient, service activites are absolutely necessary forthe economy to function and to eakance the quality of life. Cossider, for example, the importance of a banking industry 10 ‘transfer fonds anda transportation industy to move food products to areas that cannot produce them. Moreover, a wide variety of personal services, suchas restauras, lodg- ing, cleaning, and child care, have been created to move former househeld functions into the economy. Government services play a eitial roe in providing a stable environment for in vvestment and economic growth, Services such as public education, health cae, wel: smaintained roads, safe ning water, clean ar, and public safety are necessary for any nation’s economy to survive and people to prosper. ‘Thus, tis imperative to recognize that services ae not peripheral activities bt rather integral pars of society. They ate central to 2 functioning and healthy economy and ie atthe heart ofthat economy. Finally, the sevice sector not only facilitates but alzo makes possible the goods producing activities ofthe manufacturing sectors. Services are the crucial force for today’s change toward a globel econony.4 Pico Uncnong Fes Chapter Preview Ina cisewsson of economic development, we lam that modern indestalized economies ‘are dominated by employment in the service sector inusuies. This represents 2 natural evolution of economies fom preindustria to indastral and Fcally to postindustial soe ‘cs, Furthermore te economic aciviry of society determines the natre of how people live and how the standard of living is roeasuod, The manure of the service sector it Ex. plored in tems of employment opportunities, contributions to econornie stability, td Source af economic leadership. The ida tha: & new experience exonomy will supersede ‘ur postincustrat society is considered. We begin witha selection of service definitions Service Definitions Many definitions of serve ae available but al contain a common theme of intangiblity snd simultaneous coasampton, The fellowing representa sample of service definitions Secvies ae deus, procests, and pecformancts. (Valais A. Zeithaml asd Macy fo ‘Biter, Servicer Merteing New Yore: MGmaw Hl, 1996,p.5) A stevie is an activity or series of civites of mare o es intangible nse that ‘orally but not acces take pice in interatons betcen este and service ‘employes andlor ysis resources or goods andlor syste ef he servos proce, ‘which are provide a soluons to customer problems. (Chrsian Grosoos, Serce Management and Markeing. Lexington, Mase: Lenngion Boots. 1990, . 37) Mos authorities consider the services sector tilde all conemic atts whose ‘output is ata physical produet ar construction, is generally consmed a thet is roves and provides added vale in fom (sacha comenience, amusement, ‘Seles, comfor, or halt) a are eseally intangible concerns of ese rchar (James Bran Quin, Jordan Baruch and Peany Cushran Pact, ‘Scientific American, ol, 257,20. 2, Decetber 19, p. 50) ‘A presse definition of gods and service shold dninguish them on the basis of hie _mibutes.A god sa tangle physial obec or product hat canbe crsiod und ‘cansfored has an exitnce over ine and thas can be ected and used ten A service is into and perishable isan cccurence ar toes tat is tetod and se simukancouly or nee siulancusly, Wale te consumer cao ean te otal service atest is produced te effect of he service cea be retained. (Et Sass, ‘R Paul Oise, sd D. Daryl Wyckoff Management o Sevice Operators, Boson ‘Allyn and 8scon, 1978p 8.) ‘A seevie is time pershable, intangible experience pecformed fo estore sting in ‘he role of co-producer. (Hames Pesinmcts) Dependency of Manufacturing on Services Figure 1. illustrates tie interdependency ofthe services and manufeeturing sectors of the economy: Many service industries provide transportation, banking, avers ‘ng, repair, or communication in support ofthe distribution of manufactured goods Even as manufeoturing moves offshore, many of these sare services will conte be noeded. Furthermore, the success of manufacturing requires rapid feedback from the marketplace, ability to customize products, and fas delivery —all af which are <éependent on integration of downstream services,FIGURE 1.1 Role of Serves in an Benaomy = Secon th: Soames Chapter: Thee nen onary Increasingly; the profitability of manufacturers depends on exploiting value-added services. For example, automobile manufuctsrers have discovered that financing andor leasing automobiles can achieve significant profits. Os Elevator long ago found thet revenues ftom aftersales maintenance contacts far exceed the profits from elevator ‘equipment sales. As personal computers become a commodity product with very low ‘margins, fim tira to network nd communication services to inprove profits, Economic Evolution Inthe cat 190s, only 3ofovery 10 works inthe United States were emplayed inthe services sector The remaining weker were acve nares and industry By 1950, smploymentin services accosted for 50 percent of he workforce, Toy, serves ply about out of every 10 workers. During tho past 90 years, wobave wiessed a mae Jor evolution in ou society from being predominantly manofacuring based being predominantly service-based Economists studying economic growth are not surprised by these events. Colin (Ca ergucs thats ations become industalize, tee is an eiabe sR OF ploymest fom one sector of ts economy to athe As product nesses inne Secor, the iabos force moves into another. This obexvato,kngem ashe Clark Fisher Jnpothecs leeds toa classification of ceoneais ty noting the acti of te matty ofthe workforce Table 1 describes five stages of economic scdvty. Many economiss aching Cts limited heir analyses only tree sags, of wach he teary stage aes Diy sevies. We have taken the sugeeston of Nelson N, Foote and Pal K. Hat 208 bubdivided tho service tage into thos categoria” “Today; an overveming number of counties ae stil in a primary stage of deve opment. These economies ere based on extracting naturel resources fom the landnaan | TABLET ‘Stages of Reovomie ‘Activity TABLE 1.2 Percent Employment in Serves for Selected Nations, 1980-2000 Fy ao aan in ear oa cons Mining exating a [Stn bad Odie mica Cot scandy Gaon) uta tin sd Ee Hanan an ima ae ws on eee teen x Tertiary (Domestic Services) Restaurants and hotels Barber and beauty shops Laundry and dry clearing Maincarance ond repeir Country 1980 1987 1993 2000 United states oa no 743 742 Canada 672 708 748. 741 ‘ae 633. 860 680 735 Japan 545 581 589 ny France 563 635 654 na hay 487 577 602 ee. Bra 462 500 313 565 Cina 131 v8. 22 206 ‘Their productivity is low, and income is subject to uctoations based onthe prices of ‘commodities such as sugar and copper. In mech of Afrcx and pars of Asia, more an 70 percent ofthe labor force is enanged i extractive activities Based on the work activity of tei populations, however, many of the so-called ae ‘vanced industrial ations would be better described as service economies, Tele 4 partial list of counties ranked in order of the perventage of those employed in secvice-producing jobs. This table contains some surprises, such as finding that CCatada, knovi for is mining industry, is high onthe list and that China's economy is becoming more sophisticated, Several observations can be made: Global exo” ‘nomic development i progressing in unanticipated directions, successful industrial ‘sconomies are built om a stiong service sector, and just as ft has in mantfacturing, ‘competition in services will become global. Infact, many ofthe largest commercial ‘banks inthe word at present are owned by the Japanese, Trade in services remains a challenge, however, because many countries erect besriers to protect domestic, Firms. For example, India and Mexico, ameng others, prohibit the sale of insurance by foreign companies. As Figure 1.2 shows, the service sector now accounts for mare than 80 percent of ‘otal employment in the United Stes, which contiones a trend that began moze thatFIGURE 1.2 ‘Treadsio US ‘Employment by Seetu, 1850-2000 fieoss eit ener Cupar: Retake Smiesinontcnany 7 Proportan ttl empayment, 5 Tash Taio Wooo 195) ad 8 eS one century ago, Therefore, based on employment figures, the United States can n0 longer be characterized 2s an indaseial society; instead it ea postindustal or ser fee, sovieny Stages of Economic Development Describing witere ou society bas bee, its Curent condition, and is most likely fare is he task of social histories, Daniel Bell «professor of sociology at Harvard Univer- sity has written extensively a tis topic, and the material that follows is based on bis ‘work Te place the concept of a pstindastral society in perspective, we must compare its feasres with those of preindusrial and industrial societies. Preindustrial Society ‘The condition of most of the world’s population today is one of subsistence, or @ preindustrial socter. Lifes characterized a8 a geme egninst catre, Working with muscle power and tradition, the labor force is engaged in agrcaltare, mining, and ‘ishing, Life fs conditioned bythe elemens, such as the weather, the quality ofthe toil andthe availabilty of water. The rhythm of life is shaped by nature, and the ‘pace of work varies with the seasons, Productivity is low and bears litle evidence of technology. Social life revolves around the extended household, aad thiseombizaton© Pan Gre Undead sme ‘flow productivity and nse population ress in high ates of underemployment (Gorka ot fly ulzedy Many eek postons im services, bt of te persooal ot Socsohold varie Prondustral societies ate agatan and ractated aun adh, Sion ostine, end sate Industrial Society ‘The predominant activity in an indi soctetis the production of goods. The focus ‘of atentioa is on making more with las. Energy and machines multiply the output por labor-bour and structure the nature of work. Division of labor is the operational “law” thar creates routine tasks and the notion of the semisklled worker, Work fs eccom+ plished in te artificial environment ofthe factory, and people tend the machines. Life becomes a game thats played against a fabricated natare—a world of cites, factovies, snd tenements. The rhythm of life is machine-pacod and dominated by rigid working ‘hours ané time clocks, ‘An industrial society js ¢ world of schedules and acute awareness ofthe value of time. The standard of living becomes measured by the quantity of goods, but ate that ‘he complexity of coordinating the production and distbation of goods results the creation oflage bureaucratic and hierarchic organizations. These organizations ae de- signed with cern oles fr their members, and their operation teads tobe imipersoral, ‘with persons treated as things. The individual isthe unit of social life in «soviet that is considered tobe the sum total of al the individual decisions being made in the mar- Ketplace. Of course, the unrelenting pressure of industri lifts softened by the cou texvailing force of labor unions, Postindustrial Society ‘White an indus oct defines to standard of living bythe quant of gods the estinsrial society enesracd withthe quay of ie as measured by services 2h ‘ss healt, education, and eeeatin, The coal figure isthe profesional person, use rahe than energy or physical strength, inforzaion isthe ey resource, Life bow isa game played among persons, Soil ls becomes more cies borese plea claims and social cights malipy. Soiey becomes aware tat the independent ations of individuals can combine to esate havoc for everyone, as seen in uaic congestion ad enviconmentalpolltion. The commurity rather than the individae becomes the social unit - Bell suggests tat tke tansfoematin tom an indus ta pstindstil society 0 corsin anyways. Fist thr isa ntl developmen: of evs suchas transportation sd ilies, to suppor industrial development. As labor-saving Gevices ae introdaced fat the production proces, more workers engage in noamaaufacing ees, such s ‘Baintesnce and repaiz Second growth ofthe ppuleton and mass consmption of goods increase holst ard ret! rade, long wits banking, el eat and iasurance Ta ‘income increases the proportion spent oa the neces of food and home decease, ‘nthe remsindrcenes «daraand for ables aad thn for serces Ent Bagel Prussian statscian of the 19th cans, observed tht as family ia- comes ineeae, the percentage spent on food and durables rope while consumption oF services that refet a desire for« mor enriched life aerate correspondingly Tis phenomenon is analogous the Maslow berry of needs, which says tat ce the basic requirements of food and sales ae satisfied, people seck physical goods and finaly, personal development. However, a necessary condition forthe “good lie" Is health and education. in or timp to elninate disease and increase he an off, health services become a crcl feature of meder sci,Grapes Theta evtsinen ey 9 TABLE 1.3 Compartson of Societies Feature Pre Use of Standard dominant Human Unitof_ of ving Society Game Activity” Labor” Socal Life Measure Structure Technology Pre Against Agtcuture Raw Extended Sub-———Routing Simple hand Industial netore Mining muscle “Rowwenald stance Tradtonal ‘tals ower ‘Authoritative Industial Against Goods Machine Individual Quanty —_Streaueratic Machines fabrcated production tending of goods Hierarchical Pos: Among Services Artic —Community Qualtyet tere Information Indusval persons Creative fein dependent Intec temsof Gla! heath, education, recreation Higher ofucation becomes the condition for entry intoapostindustal society, which requires professional end technical sls of is population. Also, claims for ore services ‘nd soca justice lead to 2 growth in government, Cancers for environmental protcticn require goverment intervention and lustrate the iterdependeat and even global char- ‘acter of postindusral problems, Table 1.3 surmarzes tho features that characterize the reindustra, industrial sd postindustial stages of economic development Nature of the Service Sector or many people, serve i synonymous with servitude and brings to mind workers ‘ipping hamburgers and waiting on ‘ables. However, the service sostar that bas grown significantly over the past 50 years cannot be accurately described as composed only ‘of low age or Tov-skil jobs in department stores and fast-food restaurants. Instead, as Table 14 shows, te fstest-growing jobs within the service sector ar in misella- neous services (e.g, healt, education, professional services). Note that job areas ‘whose growth ates were les than the ate af increase in otal jbe (les than 20.82, percent) lost marketshare, even though they showed guns in their absolute mambers. ‘The exceptions are in mining, manufacturing, and federal government, which lot in absolute numbers and thus showed negative growth rats, Changes inthe pater of employment will hve implications on where and how ‘people live, on educational requirements, and, consequently, on the kinds of organi- zation tat will be important to that society, lndustrialization ereated the neod fr the semisklled worker who could be tained ia a few weeks to petform the routine rachine-tending tasks. The subsequent growth in the service sector bas caused a shift to white-collar occupations. Inthe United States, the year 1956 was turing point For the frst time in the history of industria! society, the aumber of white-collar ‘workers exceeded the number of blue-collar workers, and the gap has boon widening since then. Toe most interesting growth has been inthe managerial and professional- technical fields, which are jobs that require a college education.TABLE 1-4 Growth of US. Nonfarm Jobs 1992-2002 Jobs ‘Growth 1992 1992 1999 2002. of obs (in 1,000) 8) Gn F,000) GH) ) (Goods. preducing inausres: Teal aa a9 24273 18.50 449 Mining 535 8 ‘363 3-13 Construction 4492 ans 6787 517, 31.09 Manurecuring: ‘Durable goeds 1277 9.46 1.08 766 =223 "Nondurable gocas 7837 721 6875 524-1216 Service producing industries Tatoh 553707861 105939. 81.80 25.26 “Transporation and puke utes 578 327 6,098 526 2064 wholesale rae 5997 532 6933 528 1561 Retail ade 193581782 Bae 1784 2094 ange, insurance and ‘ealestate 5,602 6.08, 7.638 5.82 15.70 service v0s2 2675 09923824 aio Government: ‘State and local 1443 14631407 Federal 273 2.607 139 Teta 131212 ‘Sep je ac ence lon hiraeSvasoesaeno anne ‘Today, service industies are the source of economic leadership. During the past 30 years, more than 44 million ew jobs have been created inthe service sector to atthe ila of women into the workforce and to provi an alteratve fo te lack of job opportunities ia mannfacturing. The service industries now account for spproe!~ rately 70 percent of the national income in the United States. Given tha there sa Himit ta how many cars a consumer can use and how much ons Ban eat and drink, this should not be surprising. The appetite fr services, however, especially innovative ones, is ix- satable, Ameng the services presently in demard are those that eflest an aging popt- lation, suchas geriatric health care, and otbers that reflect a Swosincome family, such 3 daycare. ‘The growth of the serve sector lan produced les oyelic national evonomy, Dar ing the past four recessions inthe United States employment by service industries has actually increased, while jobs in manufacturing have been lost. This suggests that con- sumer ae willing to postpone the purchase of products but will not sacrifice essential fervices like edusatian, telephone, banking, health cae, and publi services such as Fre and police protection, Several reasons can explain the recession-esstant nature of services, Fis, by their nature, services cannot be inventoried as isthe case for products. Because cousump- tion and produetion occur simultaneously for services, the demand for them is more ‘rable than thet for manufactured goods, When the economy falters, many services ‘continue to survive. Hospitals keep busy as usual, and, while commissions may drop in realestate, insurance, and security businesses, employees need not be laid of.CT: Mek Sean ery ‘Second, during a recession, both consumers and business firms defer capital expen- ut aadsou09 anyos ain sao ‘paponnuo> 34 80> ‘sawoisn op mon, OH {s10un0 fg ope 29 sau fe suSen OKA _suanbas mower esue8 ue URL HOH, ‘upsseu un Aa ipaenussu0> 26 u0y0 Uwoubss toew | Senator | Sow aun HOI CO, pradewourtss | pw mon, | 264 20 £9 panoomad ‘piydesbowea "2901 posed ovo ‘eapew wou asait ave moe sonnose) ueuinis sap qwouiBos 01 pasn | —__»- duee2 e010 29 ue> ORURUID UA sopuas uj rome) ueoduy 3 UM Tsai BMAD Sayan Coney wats Aronyocs 31095 WHASADS AES MNO HOMTE Ve HAVL4 feo nseontg Ses + Target markt sogmant, Mask to interstate business savers with cay-on lug age who ae curteally diving by auto andor are fustated by te poor sevice of the major sisines serving Teas + Service concept. Once pecformance and fequent departures ae cia! and reals are unecessary on ese short figs (., les than an hou). + Operating sate. aicpor gat tnarouné mast be fastto make productive use of aurora and provide Requent departares. Purchase of aircraft is the mos significant inverment, Although Southwest will seek to be te lov-cos producer, passeages ‘illenjoy se relaed ying experience and enployees wil ee Southwest 2520 co Jeyable place work + Service delivery yam. Cabin crows wll be those who have the interpersonal skills to creat a “fun azsosphore sboars the strat and help differentiate Southwest fiom the major cartier No assigned seaag wal facia fas gue tarzaround ad simplify ker sales. Aine quality measures soch as on-tite performance and ost, Tuggage wil be aainable with ete because ofthe short pot-o-pint Might and paseongere who only have car)-onIuggtge Understanding the Competitive Environment of Services In general, service firms compete in a difficult economic environment, and there are many reasons for this difficulty: + Relosvely low overall entry barriers. Service innovations are not patentable, ard in st cases, services are ct capital-itensive. Thus, imovations can easily be copied by competitors. However, other types of entry bariers exist, such as locating re- sort hotel onthe best beach ofan islnd (eg, the Club Med locaton on te island (of Moorea ia Freach Plyuesia). + Minimal opporseniis for economies of scole, Recall from Chapter 2 that bosause of the simultaneous production and consumption of services, te customer must ‘eavel tothe service facility or the service must ravel tothe custome The necessity (of physical ravel limits the market area and results in small-scale outlets. Fran- {hited firms ean realize some economies of scale by sharing purchasing or adver- ising costs; i other instances, electronic communications can be substituted for physical rave (eg, ordering fom LL. Bean by telephone). + Brrate sales fucuations. Service demand varies a5 a function of the time of €ay and the day ofthe week (and sometimes seasonally), with random arrivals. Can you ‘think of some exceptions? + No advancage of size in decling wich buyers or supplier. The small size of many ‘service firms places them at a disadvantage in bargaining wit powerful buyers or ‘suppliers, Many exceptions should come to mind, hovever, such as MeDonalé’s Doying boef and Marrots buying mattresses. + Product shesttion, Proce innovations can be a suite for services (@g, the home prognancy tat) Thus, service firms must not only watch other service com petiters but leo encipatepotetial product imovations tht might make their eerw- fees obsolete, + Customer loyal Established firms using personalized service create 2 loyal sus- tomer base, which becomes a barrie to entry by new services, For example, a hos- pital supply firm may place its own ordering computer terminals at customers’Ccapter ss Sone Sat 41 sites Those terminals then fasiltate the placement of new orders the exten that compesirs are effectively excloded. 1+ Exit barriors. Marginal service firms may eostiaus to openite despite fow, or even ‘nonexistent, profits, For example, a privtely held firm may have employment of family members rather than maximizing profits is goal. Other service firms, such 1s antique stores or scuba diving shops have hobby or romantic appeal that pro- “vides their orners with enough job satisfaction to offset low financial compensa tion. Thus, profit motivated comspetiors would find it dificult i drive these privately held firme from the marc, For any pusticular service industry, there ae firms that have overcome these competi- tive dificltes and prospered. For example, MeDonald' has achieved a dominant po- sition inthe fastfood industry by overcoming many ofthe difiultis sted here. New ‘entrants, owever, must develop a service srategy that will adacess the important com- petitive features oftheir respective industrios, Taree generic strategies have been soc- cessfil in providing « competitive advantage, and ilustrations of how service firms ‘have sed these strategies willbe our next topic. Michael Porter bes argued persuasively that three generic compte strategies exis: ‘overall cost leadership, diforentition, and focus? Each straiegy will be deserbed in tur, with examples of how service firme use them to outperform theix competition. ‘Overall Cost Leadership ‘An overall cost leadership strategy requires effcient-scale facilities, tight cost and ‘overhead contro, and often innovative technology as well. Having a low-cost position provides 2 defense against competition, because less efficient competitors will suffer Sint from competitive pressures, roplementing a low-cost strategy usually requires high cepital investment in siato-of the-art equipment, aggzessive pricing, and start-up Tosses to build market share, A cost leadership stateey sometimes can revolutionize 2a Industry, as ilustrated by the success of MeDonalds, Wal-Mart, and Federal Express. Moreover, service fins have been able to achieve low-cost leadership using a variety of approaches, Seeking Out Low-Cost Customers ‘Some customers cost las to serve than oters, and they cane targeted by the service provider For example, United Services Automdbile Association (USA) occupies apre~ ‘eminent postion among automobile insurers because it serves only milkary personnel and thei fries. This group also entails loner cost because its members, who are rela- tively noma, are willing to do basiness by telepbone, mal, or online and are acs tomed te doing o. Consequently, USAA is able to eliminate ny need fo the exceusive sales foree employed by tradional insures. Another example ofthis strategy is provided by low-cost retallers such as Sam's Wholesale Chub and Costo, which tnget customers ‘wo ae wiling to buy in quantity, do without fils and seve wemselves. Standardizing @ Custom Service ‘Typically, income tax preparation is considered to be a customized service. H & R lock, honever, bas been successful in serving customers nationwide wien only routine42 fetone: Ueda onto sax preparation is tequired. Also, storefont legal services and fini healthcare cents are atvactive moans of delivering routine professional services at low cost, The key sword here is routine Reducing the Personal Element in Service Delivery ‘The potentially high-risk strategy of reducing the personal element inservice delivery ‘canbe acoepted by customers i increased convenience results. For example, conven int acess to ATMS bas weaned customers from personal interaction with Ive tellers and, consequently, has reduced transaction cots for barks. Reducing Neework Costs ‘Unusual start-up casts are encountered by service fms that require @ network to knit together providers and customers, Blectric utes, which have sobstanvial Fixed costs in transmission ines, provide the most obvious example. Federal Express conceived 2 unique approach to reducing network costs by using & hib-and-spokneswork. By Io- cating a hub ia Memphis with state-of-the-art sorting technology, the overnight ai package carrer was able to serve the United Sues with no direct routes berween the cites that it served. Each time a new ety i added tothe network, Federal Express only needs to add one mare rout to and from the hub instead of adding routes between all the cities eerved. The efficiency ofthe hub-end-spoke network sirategy has not been loston passenger airline operators, citer Taking Service Operations Offline Many services, such as hairetiing and passenger transportation, ae inherently “on- Jino;* because they can only be performed with te customer present, For services in \which the customer need not be present, he service transaction can be “decoupled” With some conten performed “offline” For example, a shoe rai service could iocate Aispersed Kiosks for customer drop-o/pick-up, thus consolidating orders for delivery to am ofFste repair factory, which could even be located orTshere, Performing services fle represets significant cost savings because of economics of scale fom coasol- ‘dation, low-cost facility location (eg, Amecican Airlines has one of its S00-number reservations cents located inthe Caribbean), and absence ofthe customer in the sys- term. In shor, te decoupled service operation is ran like afacory. Differen ‘The essence ofthe difirensaton strategy lis in exeting a sevice tht is perceived as being unique. Approaches to differoatiaion can take many forms: brand image (@.., ‘MeDonald’ golden arches), technology (e.g. Sprint's flberopies network), features (ep Amerioan Express’ complete travel services), customer sence (e.g, Nerdstroms ‘epuation among department stores), dealer network (e. Century 21° nationwide ral state presence), and other dimensions. A differentiation setegy docs not ignore cos, but its peimary thrust lies in reating custome loyalty. As illustrated here, diferent tion io enhance the service often is achieved at some cost chat the tagered customer is willing o pay. Making the Intangible Tangible By their very nature, services offen ar intangible and leave the customer with no phys cal reminder of the purchase, Recognizing te need o remind eusiomers of thei lay, ‘many hotels now provide complimentary toileny items with ‘be hovel name promi nantly affixed. The Hartford Steam Boiler Inspection and Insurance Company writesGrape 3: sewesonegy 48 insurance on industrial power plans, but this company has enkanced its service to inchude regula inspeetions and recommendations to managers for voiding potential problems, Customizing the Standard Product Providing a customized touch may endear» firm to its customers at very lite cost A hotel operator who is able to address a guest by name can make an impression that sranslates into repeat busines. Hair salons have added many personalizing features (Gog personal stylist, juice bar, relaxed surroundings, rood rausic) to ditferentits shemselves from barbershops, Burger King's efforts to promote a made-to-order policy| {san atempt to differentiate itself from McDonald cassie make-tostack approach 0 asf service. Reducing Perceived Risk Lack of information about the pucchase of a servi cretos a sense of risk-taking for ‘many customers, Lacking knowidge or selPconfidence abot services suchas auto re- pir, customers will seek out providers who take the exe time to explain the work to be done, preset clean and organized facility, and guarantee their work (eg, Vilage Voko). Customers often se the “peues of mind” that is engendered when this rusting, lationship dovelops as being worth the extra expense Giving Attention o Personnel Training Investment in persoonel development and taining that results in enhanced service quality isa competitive advantage satis dificlt to replicate. Firms that lead thet n= Aostries are knowm among competitors forthe quality oftheir taining programs. In Taling operations ofine allows for conzlidstng orders and performing the sevice ta Iowan fectrythe oeton 9 M. Matera rage Hs4 Pet One Und Sen some cases, these firms have established collegelite training comers (e.2, McDonald’ Hamburger University in Oak Brook, Iiinois, near Chicago), Controlling Qualisy Delivering consistent lve of serve quality at mulipe sites with a labor intensive sys ‘emis significant challenge. Firms have approached ths problem in a vaiety of ways, including personnel traning, explicit procedures, technology, mits onthe scope ofthe service, direct supervision, and peor pressure, among others. For example, to ensure con- sistency, he Magic Pan chain of resturants designed a foolproof mackie to produce is famous cxépes, The question of service quality is further complicated by the potential gap between customer expectations and experiences Influencing castomer quality expect ‘ions thus becomes an issue, which is explored in Chapter 6, Service Quality. Focus ‘Tha focus sraegy is built aroand the idea of servicing a particle target matt very well byaddesing customer’ peifc needs. Toe market segment could be aparics- Jar buyer group (eg, USAA and the miliary communin), service (eg, Shouldice Hospital and pions with inguinal hemias, Motel § and budget travelers, Federal Express and people who need guarantee overnight package delivery), or geographic region (€g,coxsmunity collage or neighborhood rerura), The focus suatoy fst on the premise ta he Fm can serves arow target market mers efcovely andor efficiently than other firms eying to sere broed mask AS a result, che fim achieves compedtive advange i is market segment by mesingspeific exomer needs andor by lover costs throagh specialization. Thus, te focus sete isthe ap- pliowion of lifrenaion andor overall cot eadarehip a parcular market sagen? father thas the enizemncket Deviow and ital arus bow important customer selection ito achieving a suc cxisfil foous suategy* They relate how one bank ia Palo Alto, California, targets ‘wealthy individuals and discourages oters by policies such as losing an account alle to cheeks have bounced. Davidow and Urals three-step approach *9 foots Jnclaes segmenting the ariel o design core services, lasing customers ecced- Jingo the valu they place on sevice, and setting expecations slg below perceived performance Winning Customers in the Marketplace Depending oa the competition and persooal needs, customers soles service provider using criteria listed here. This lists wot intended tobe complet, because the very aé- dijon of a new dimension by fim represeus an attempt to engage ina stategy of ieretiation. For example, iitiation ofthe frequen fiver program “AAvantage” by American Airlines was an aterpt to add the cimension of customer loyalty to comps. tition smong airlines, + Availabiln, Flow accessible is the service? The use of ATMs by banks has created 24-hour availabilty of some banking services (Le, service beyond the tdtional “banker's hour”). Use of 800-nurabers by many service firms facilitates access af- ter normal working hots. + Comenience, The location ofthe service defines comvenicnce for customers whe mast wave! fo tat service, Gasoline stations, fas-food resaurants, aad dey cleaner re ex amples of services that must selet locations on basy ste: if they 2 to succeed.Chopter ds Senesngy 45 + Dependabilgy How relsbl is the service? For example, once the exterminator is ‘gone, how soon do the bugs rerum? A major complaint regarding automobile repair ‘services isthe failure to fix th problem on the fist vist For airlines, on-time per- formance isa statistic collected by the FAA. + Pereonalization, Aze you teated 28 an individual? For example, hots have dis: ‘covered that repeat castomers respond to being greeted by their name. The degree of customization allowed in providing the service, no matter Low slight, ean be ‘viewed as more personalized servie. + Price. Comporng on price is not as effective in services as it is with products, ‘because it often is dificult to compare the costs of services objectively. It may be ‘easy to compare costs in the delivery of routine services suchas anol change, butin professional services, competition on price might be considered counterprodutive ‘because price often is viewed as being a surrogate for quality + Quali, Service quality is 2 function ofthe relationship between a customer’ prior ‘expectations ofthe service and his or her perception ofthe sevice experience bot daring and after the fact. Unlike product quality, service quality is judged by both ‘the process of service delivery and the outcome ofthe service + Reputation, Toe uncertainty Qt is associated with the selection of a service [provider often i resolved by talking with others about their experiences before a Gocision i made. Unlike a procur, a poor service experience cannot be exchanged forretumed fora different model. Positive word-of-mouth i the most effective form of advertising + Safety. Well-being and secarity are importent considerations because in many services, such as air travel and medicine, the customers ee putting thei ives inthe bands of the service provider, + Speed, How long must I wait for service? For emergency services suchas fire and police protection, response sme ie the major exterion of performance. [nother ser¥= sees, waiting sometimes may be considered 2 wade-off for oceiving more personal fod services, such as roducod rates. ‘Writing shout manvfactoring strategy, Tery Hil used the teem onder-tnning cite~ ria ta refer to competitive dimensions that sel} products He further suggested that some criteria could be called qualifiers, Because the presence ofthese dimensions is _neceteary fora product to enter the manlatplace, Finally, Hil said hat some qualifiers could be considored order losing sensitive ‘We wil usa similar ogi andthe service eters listed eater o dessribe the service purchase decision. The purchase decision sequence begins with qualifying potential Service firms (eg, must the dacter be an my PPO list), followed by making a Final se lection fom this subset of service firms using a service winner (eg, which ofthe PPO