This document provides an overview of the service economy. It defines services and differentiates between goods-producing and service-providing economic activities. Services make up the largest percentage of employment across most developed nations. The stages of economic development progress from agricultural to industrial to post-industrial societies as services become more prominent. The document outlines the central role of services in modern economies and classifies different types of services. It also discusses concepts like the service-dominant logic and distinctive characteristics of service operations. Examples are provided to illustrate service packages and how services can be classified.

1. WELCOME TO
SERVICE ECONOMY
THE SERVICE ECONOMY
Chapter 1
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

2. Learning Objectives
• Describe the central role of services in an economy.
• Identify and differentiate the five stages of economic activity.
• Describe the features of preindustrial, industrial, and
postindustrial societies.
• Describe the features of the experience economy contrasting
the consumer (B2C) with the business (B2B).
• Explain the essential features of the service-dominant logic.
• Identify and critique the six distinctive characteristics of a
service operation and explain the implications for managers.
• Describe a service using the service package dimensions.
• Use the service process matrix to classify a service.
1-2

3. Service Definitions
Services are deeds, processes, and
performances.
Valarie Zeithaml & Mary Jo Bitner
A service is a time-perishable, intangible
experience performed for a customer acting in
the role of a co-producer.
James Fitzsimmons
1-3

4. Definition of Service Firms
Service enterprises are organizations that facilitate the
production and distribution of goods, support other firms
in meeting their goals, and add value to our personal
lives.
James Fitzsimmons
1-4

5. Nation % of World
Labor
% Ag % Goods % Services
China 21.0 50 15 35
India 17.0 60 17 23
USA 4.8 2 20 78
Indonesia 3.9 45 16 39
Brazil 3.0 23 24 53
Russia 2.5 12 23 65
Japan 2.4 5 26 69
Nigeria 2.2 70 10 20
Banglades
h
2.2 63 11 26
Germany 1.4 3 28 69
Percent Employment in Services
1-5

6. Role of Services in an Economy
INFRASTRUCTURE SERVICE
· Communications
· Transportation
· Utilities
· Banking
PERSONAL SERVICES
· Healthcare
· Restaurants
· Hotels
CONSUMER
(Self-service)
GOVERNMENT SERVICES
· Military
· Education
· Judicial
· Police and fire protection
DISTRIBUTION
SERVICES
· Wholesaling
· Retailing
· Repairing
FINANCIAL SERVICES
· Financing
· Leasing
· Insurance
MANUFACTURING
Services inside company:
· Finance
· Accounting
· Legal
· R&D and design
BUSINESS SERVICES
· Consulting
· Auditing
· Advertising
· Waste disposal
1-6

7. Stages of Economic Activity
Primary (Extractive): Agriculture, Mining, Fishing, Forestry
Secondary (Goods-Producing): Manufacturing, Processing
Tertiary (Domestic Services): Restaurants, Hotels, Laundry, Maintenance
Quaternary (Trade and Commerce):
Transportation, Communications, Retailing, Finance, Government
Quinary (Extending Human Potential):
Health, Education, Research, Arts, Recreation
1-7

8. Trends in U.S. Employment by Sector
Agriculture:
Value from
harvesting nature
Goods:
Value from
making a product
Services:
Value from enhancing the
capabilities and interactions
among people
2012
Year
Percent
1-8

9. Stages of Economic Development
Pre- Use of Standard
dominant Human Unit of of Living
Society Game Activity Labor Social Life Measure Structure Technology
Pre- Against Agriculture Raw Extended Sub- Routine Simple hand
Industrial Nature Mining muscle household sistence Traditional tools
power Authoritative
Industrial Against Goods Machine Individual Quantity Bureaucratic Machines
fabricated production tending of goods Hierarchical
nature
Post- Among Services Artistic Community Quality of Inter- Information
industrial Persons Creative life in terms dependent
Intellectual health,
education,
recreation
1-9

10. Distribution of U.S. Employment, 2009
Transportation and utilities 19%
Other services 4%
Financial services
6%
Leisure and hospitality
9%
Health care
and social assistance
11%
Professional and
business services
12%
Construction
5%
Manufacturing
9%
Federal government 2%
Information 2%
Agriculture and mining
2%
State and local government
13%
Self employed and
unpaid family workers
6%
Educational services
2%
Retail and
wholesale trade
14%
1-10

11. Projected U.S. Job Growth, 2008 – 2018
1-11

12. Economic Evolution
Economy Agrarian Industrial Service Experience
Economic
Offering
Food Packaged
goods
Commodity
service
Consumer
services
Business
services
Function Extract Make Deliver Stage Co-create
Nature Fungible Tangible Intangible Memorable Effectual
Attribute Natural Standardized Customized Personal Growth
Method of
Supply
Stored in
bulk
Inventoried Delivered on
demand
Revealed over
time
Sustained over
time
Seller Trader Producer Provider Stager Collaborator
Buyer Market Customer Client Guest Collaborator
Expectation Quantity Features Benefits Sensations Capability
1-12

13. The Four Realms of an Experience
Customer Participation
Passive Active
Environmental
Absorption Entertainment
(Movie)
Education
(Language)
Relationship Immersion Esthetic
(Tourist)
Escapist
(ScubaDiving)
1-13

14. Experience Design Principles
• Theme the Experience (Forum shops)
• Harmonize Impressions with Positive Cues
(O’Hare airport parking garage)
• Eliminate Negative Cues
(Cinemark talking trash containers)
• Mix in Memorabilia (Hard Rock T-shirts)
• Engage all Five Senses (Mist in Rainforest)
1-14

15. Typology of Services in the 21st Century
Core Experience Essential Feature Examples
Creative Present ideas Advertising, theater
Enabling Act as intermediary Transportation, communications
Experiential Presence of customer Massage, theme park
Extending Extend and maintain Warranty, health check
Entrusted Contractual agreement Service/repair, portfolio mgt.
Information Access to information Internet search engine
Innovation Facilitate new concepts R&D services, product testing
Problem solving Access to specialists Consultants, counseling
Quality of life Improve well-being Healthcare, recreation, tourism
Regulation Establish rules and regulations Environment, legal, patents
1-15

16. Foundation Premises of Service-
Dominant Logic
1. Service is the fundamental basis of exchange.
2. Indirect exchange masks the basis of exchange.
3. Goods are distribution mechanisms for service provision.
4. Operant resources are the source of competitive advantage
5. All economies are service economies.
6. The customer is always a co-creator of value.
7. The enterprise can only offer value propositions.
8. A service-centered view is customer oriented and relational.
9. All economic and social actors are resource integrators.
10. Value is uniquely determined by the beneficiary.
1-16

17. Distinctive Characteristics of Services
• Simultaneity: opportunities for personal selling,
interaction creates customer perceptions of quality
• Perishability: cannot inventory, opportunity loss of idle
capacity, need to match supply with demand
• Intangibility: creative advertising, no patent protection,
importance of reputation
• Heterogeneity: customer involvement in delivery process
results in variability
• Customer Participation in the Service Process:
attention to facility design, opportunities for co-production,
concern for customer and employee behavior
1-17

18. Non-ownership Classification of
Services
Type of Service Customer value Examples Management Challenge
Goods rental Obtain temporary right to
exclusive use
Vehicles, tools, furniture,
equipment
Site selection and
maintenance
Place and space
rental
Obtain exclusive use of
defined portion of a
larger space
Hotel room, seat on
airplane, storage unit
Housekeeping and
achieving economies
of scale
Labor and
expertise
Hire other people to do a
job
Car repair, surgery,
management
consulting
Expertise is a renewable
resource, but time is
perishable
Physical facility
usage
Gain admission to a
facility for a period of
time
Theme park, camp
ground, physical
fitness gym
Queuing and crowd control
Network usage Gain access to participate Electric utility, cell phone,
internet
Availability and pricing
decisions
1-18

19. Implications of Rental/Usage
Paradigm
• Creates the option of renting a good upon demand
rather than purchase.
• Service often involves selling slices of larger physical
entities.
• Labor and expertise are renewable resources.
• Time plays a central role in most services.
• Service pricing should vary with time and availability.
Question: Can services in general be described as
customers sharing resources?
1-19

20. Service Package
1-20

21. The Service Package
• Supporting Facility: The physical resources that must
be in place before a service can be sold. Examples are
golf course, ski lift, hospital, airplane.
• Facilitating Goods: The material consumed by the buyer
or items provided by the consumer. Examples are food
items, legal documents, golf clubs, medical history.
• Information: Operations data or information that is
provided by the customer to enable efficient and
customized service. Examples are patient medical
records, seats available on a flight, customer preferences,
location of customer to dispatch a taxi.
1-21

22. The Service Package (cont.)
• Explicit Services: Benefits readily observable by the
senses. The essential or intrinsic features. Examples are
quality of meal, attitude of the waiter, on-time departure.
• Implicit Services: Psychological benefits or extrinsic
features which the consumer may sense only vaguely.
Examples are privacy of loan office, security of a well
lighted parking lot.
1-22

23. The Service Process Matrix
Degree Degree of Interaction and Customization
of labor Intensity Low High
Service Factory Service Shop
* Airlines * Hospitals
Low * Trucking * Auto repair
* Hotels * Other repair services
* Resorts and recreation
Mass Service Professional Service
* Retailing * Doctors
High * Wholesaling * Lawyers
* Schools * Accountants
* Retail banking * Architects
1-23

24. Open Systems View of Services
1-24

25. Village Volvo’s Service Package
• Supporting Facility
• Facilitating Goods
• Information
• Explicit Services
• Implicit Services
1-25

26. Village Volvo’s Distinctive Service
Characteristics
• Intangibility
• Perishability
• Heterogeneity
• Simultaneity
• Customer Participation in the Service Process
1-26

27. Managing Village Volvo
• How could Village Volvo manage its back office (repair
operations) like a factory?
• How can Village Volvo differentiate itself from Volvo
dealers?
1-27

28. Xpresso Lube Facility
1-28

29. Xpresso Lube’s Service Package
• Supporting Facility
• Facilitating Goods
• Information
• Explicit Services
• Implicit Services
1-29

30. Xpresso Lube’s Distinctive Service
Characteristics
• Intangibility
• Perishability
• Heterogeneity
• Simultaneity
• Customer Participation in the Service Process
1-30

31. Beyond Xpresso Lube
• What elements of Xpresso Lube’s location contribute to its
success?
• Given the example of Xpresso Lube, what other services
could be combined to “add value” for the customer?
1-31

32. Discussion Topics
• Illustrate how the type of work he or she does influences a person’s
lifestyle. For example, contrast a farmer, a factory worker, and a school
teacher.
• Is it possible for an economy to be based entirely on services?
• What is the value of self-service in an economy?
• Determine if the service sector is currently expanding or contracting
based upon the Non-Manufacturing Index (NMI) found at the ISM Report
on Business on the Institute of Supply Management website:
www.ism.ws/ismreport/
• What are some management problems associated with allowing service
employees to exercise judgment in meeting customer needs?
• Critique the “Distinctive Characteristics of Service Operations” by
arguing that the characteristics of customer participation, simultaneity,
perishability, intangibility, and heterogeneity may apply to goods as well.
1-32

33. Interactive Class Exercise
The class breaks into small groups. Each group identifies
service firms that should be listed in the Fortune 100 and
places them in rank order of estimated annual revenue.
http://money.cnn.com/magazines/fortune/fortune500/2012/f
ull_list/
1-33