Transcript Understanding Service Businesses Service Business Principles

Understanding Service Businesses
Service Business Principles
SBP 1a: The Unified Services Theory
"With services, the customer provides significant inputs into the
production process. With manufacturing, groups of customers may
contribute ideas to the design of the product, however, individual
customers' only part in the actual process is to select and consume the
output. Nearly all other managerial themes unique to services are
founded in this distinction."
SBP 1b (semantic): Defining by Customer Content
"With services, an effective means of understanding, analyzing, and
comparing processes is on the basis of customer content. There are
three general types of customer inputs into service processes: the
customer's self, the customer's belongings, and/or the customer's
information."
SBP 1c (semantic): Identifying the Customer
"With services, ‘the customer’ is sometimes not clearly defined.
Generally, the customer is the individual or entity who directly or
indirectly decides whether or not the firm shall be compensated for
production. The actual paying customer may desire a non-paying
"critical audience" to be satisfied with production, qualifying the critical
audience as an indirect customer."
SBP 1d (semantic): Identifying the Production Process
"With services, the company's production process is defined as
company effort to add value to customer inputs. Company effort in
preparation for production is the pre-production process. When the
production process concludes, and the customer may use the
production outcome to continue to add value. This post-production
process is primarily based on customer action. Often, well-designed
service outcomes will enable the customer to create value in the postproduction process."
SBP 1e (semantic): The Unit of Analysis
"With services, the unit of analysis is a process segment. A process
segment is a sequence of steps of production. When processes are
dissected into smaller segments, the presence or absence of service
principles becomes more pronounced."
SBP 1f: Weighting the Mixture
"With services, different process segments have different degrees of
customer input, and some may have none (acting as manufacturing).
The weight, or significance, of specific process segments is most often
determined by the amount of value in the overall service contributed by
specific segments. This can be approximated by contribution to
"willingness to pay." Some other segments are important for
accounting, regulatory, or risk-control reasons."
SBP 2: Services Fundamentals: Planning
"Many authors have discussed characteristics of service businesses other than
customer inputs. Ask yourself this question: Are there other relevant
characteristics of service businesses that exist independently of the customer
inputs which are specified in the Unified Services Theory? You will find that
what many people consider the "characteristics of services" are in fact merely
symptoms coming out of the Unified Services Theory. This is because the
Unified Services Theory exists at a more basic level than other characteristics
of services. We will see that if we ask why other characteristics of services exist
the answer is generally "because of customer inputs." If we ask why customer
inputs exist in a particular process, the answer is "because it is a service."
Therefore, the Unified Services Theory is fundamental, and defines services.
The various characteristics of services are not generally present in
manufacturing because of the lack of customer inputs. Nevertheless, in some
manufacturing cases the characteristics (or symptoms) of services occur for
reasons besides customer inputs. (This will be discussed later in the
"Manufacturing in Sheep's Clothing" Service Business Principle.)
In this unit we will discuss various symptoms or characteristics of services
which result from the Unified Services Theory. In particular, we will focus on
those pertaining to planning."
SBP 2a: Simultaneous Production and Consumption
"With services, production (making the service "product") and
consumption (customer demand or delivery) often occurs
simultaneously, making the exact timing of production a critical issue."
SBP 2b: Time-Perishable Capacity
"With services, capacity is usually time-perishable, meaning that
capacity without corresponding demand is lost forever. This is true even
though the service product is often not perishable."
SBP 2c: Customer Proximity
"With services, the production location is often dictated by the location
of the customers who supply their inputs. To keep inconvenience costs
down, the location where customer inputs enter the production process
needs to be near the customer."
SBP 2d: Labor Intensity
"With services, there are often forces that restrict automation.
Therefore, the service production process tends to be more laborintensive than manufacturing processes."
SBP 2e: Perishable Output Illusion
"With services, "perishable output" is often an illusion not because the
output perishes, but because the customer need is changing over time.
Some needs increase over time and others become obsolete."
SBP 3: Services Fundamentals: Execution
"This unit continues the discussion of various symptoms of service
businesses which result from the Unified Services Theory. In particular,
we will look at some symptoms that pertain to the day-to-day
production of services."
SBP 3a: Customers in Inventory
"The idea of being unable to inventory services is a common
misconception. The correct concept is that it is impractical to inventory
service production. With services, keeping work-in-progress inventory
for extended periods of time will enrage the customer, and we rarely
need to keep finished good inventory. Therefore, with services,
managers do not generally assume the luxury of hiding poor
management practice under inventory, as manufacturing managers do."
SBP 3b: Intangibility Myth
"With services, the delivery and "product" are generally no less tangible
than produced goods. In fact, substantial supporting facilities and
facilitating goods can render the service more tangible than a substitute
manufactured good."
SBP 3c: Heterogeneous Production
"With services, the output (or service-product or service-result) is often
heterogeneous, meaning each unit of production is somewhat unique."
SBP 3d: Difficulty in Measuring Output
"With services, although the output can be identified, it often cannot be
easily quantified. Therefore, it can be hard to measure productivity."
SBP 3e: Difficulty in Maintaining Quality
"With services, quality measurement tends to be subjective and difficult
to scale. The standards by which quality is defined are often
ambiguous. These unique specifications of quality, coupled with laborintensiveness and inconsistent customer inputs, make it difficult to
provide consistent quality."
SBP 4: Understanding Non-Services (manufacturing)
"Many non-service (manufacturing) processes can be better
understood in light of service process concepts. By understanding what
makes non-services different from services, we can identify different
ways of looking at non-services to potentially apply service
management principles."
SBP 4a: Supply Chain Linkages
"Manufacturing supply chains involve all of the steps from raw materials
to finished goods. A supply chain can involve many different
companies, such as raw material processors, component
manufacturers, assemblers, distributers, and retailers. An integrated
supply chain is one where the different entities work together to
increase responsiveness and synchronize efforts. This necessitates a
continual flow of information from customers to suppliers, causing the
supply chain to take on some Services properties.
Manufacturing supply chains include the firms that participate in the
process of converting raw materials to finished goods and getting those
finished goods to the end customer. A supply chain can involve raw
material processors, component manufacturers, assemblers,
distributers, and retailers. Service processes often occur at the
interfaces between the various firms. An integrated supply chain is one
where the different firms work together to increase responsiveness and
synchronize efforts. This necessitates a continual flow of information
from customers to suppliers, causing the supply chain to take on more
Services properties. In a pure Service setting, customers and suppliers
have multiple roles in the supply chain."
SBP 4b: The Custom Manufacturing Oxymoron
"With manufacturing, the introduction of custom processes represents
customer-information input, therefore causes the process to behave
like a service. The paradigms and systems for successfully managing
custom manufacturing are dramatically different from those warranted
for non-custom manufacturing."
SBP 4c: The Server-Ownership Perspective
"With manufactured goods, the customer takes ownership (or extended
possession) of the service provider. Therefore, manufacturers are
typically service-provider providers."
SBP 4d: Manufacturing in Sheep's Clothing
"All manufacturing is not alike. Manufacturing where most of the value
is added in product development is often mistaken for services. Other
manufacturing is mistaken for services because of service symptoms
not caused by the Unified Services Theory."
SBP 5: Identifying Strategic Opportunities
"In this unit, we will consider strategic issues which follow from the Unified
Services Theory and which give companies strategic advantage. There are two
ways to view strategic advantages. The traditional perspective is to gain
"competitive advantage"--or the ability to excel above the other companies who
serve the same customer needs. A new perspective is to gain "contributive
advantage"--which is an ability to contribute in a way that you were not able to
previously. These two perspectives are related, but different. For example, the
"competitive advantage" paradigm requires the presence of competition, and
breaks down in monopolistic situations such as governments. This is because
competitive advantage focuses on besting the competitor--and no impending
competitor means no need for advantage. The "contributive advantage"
focuses on increasing one's ability to serve, recognizing that both the service
provider and the customer benefit from better serviceability. (For example,
employees are generally happier and more conscientious when they feel they
are contributing more.)
The Service Business Principles outlined in this unit have application under
either a contributive advantage or a contributive advantage objective, and thus
are not limited to competitive situations."
SBP 5a: Likening a Service
"With services, significant strategic insights come from defining the
process and identifying services with similar processes."
SBP 5b: Identifying Key Production Elements
"With services, the key production process elements are often identified
by understanding (a) how their presence or absence motivates the
customer, and (b) how we are performing on each of those elements."
SBP 5c: Positioning Amid Customers and Competitors
"With services, the service provider can attain competitive positioning
by defining the relationship with the customer relative to competitors."
SBP 5d: JIT Information
"With services that process information, strategic advantages can be
gained by using technology to switch from batch processing to delivery
on demand (JIT - or "Just In Time"). JIT information is a "pull" system,
meaning that information is processed as the customer requests it. This
switch to JIT information can in fact convert an information
manufacturing process into an information service process."
SBP 5e: Service Exporting
"With services, exporting sometimes involves importing customers,
their belongings, or their information. Another form of service exporting
is to export the production process, which can limit the amount of
operating profits that can be returned to the home country. Companies
who export a production process need to carefully consider the cultural
specificity of customer inputs."
SBP 6: Identifying Strategic Threats
"In the last unit, we considered potential strategic opportunities for
service firms. This unit continues by looking at sources of potential
strategic threats that are drawn from the Unified Services Theory. One
good thing about the many strategic threats to service firms is that if
they are overcome by effective management, the threats can be turned
into great opportunities that cannot easily be replicated. This is to say
that while establishing and implementing an effective services strategy
can be very difficult, those who effectively meet the challenge will have
extraordinary opportunity to contribute."
SBP 6a: Swaying Divided Loyalties
"With services, customers often have a greater opportunity to be
disloyal when each opportunity for service is a separate transaction.
However, producers often have a greater opportunity to build loyalty by
personalization."
SBP 6b: Competing With Customers
"With services, often the chief competitor is the customers who can
provide the service themselves. Customers' typically have competitive
advantage in controlling their inputs and providing maximum
personalization (they get it exactly how they want it). Self-serving
customers have fixed cost disadvantages due to low economies of
scale, and quality disadvantages due to lack of specialization. They can
have a variable cost advantage or disadvantages depending largely on
the value of their time."
SBP 6c: Technological Depersonalization
"With services, customers will often react negatively to technologies
which depersonalize (or standardize) the service. The exception is
when "customer cost" savings are valued. (Generally, customers will
react positively to technologies which increase the level of
personalization.)"
SBP 6d: Mass Alliances
"With consumer services and some industrial services, the number of
customers (i.e. customer-suppliers) is so great that it is impractical to
establish close alliances with each. However, other means can be
employed to create a perceived relationship with the customer."
SBP 6e: The Ephemeral Secret Service
"With services, competitors posing as customers can study not only the
service product, but often also the production process. Since most
service processes cannot be patented, it can be difficult to keep the
secrets of competitive advantage."
SBP 6f: Lowered Entry Barriers
"With services, the relevance of various barriers to entry is generally
lower than corresponding barriers in manufacturing situations.
However, in most cases the lower barriers can be fortified."
SBP 7: Cost Issues
"In this unit, we will consider cost issues that are important to consider
in managing service processes, all of which are an outcropping of the
Unified Services Theory."
SBP 7a: The Costs of Utilization
"With many services, the variable costs of production are minute.
Simultaneous production and consumption implies that even "direct"
labor is often a fixed cost. Thus, cost advantage can also be realized
through increased volume and utilization. However, the variable cost to
the customer is typically higher than for a substitute goods product,
which inhibits utilization of the service provider."
SBP 7b: Potential Operating Objectives
"With services, the potential objectives of the production process is
limited by the types and amounts of customer content. The potential
operating efficiency will be inversely related to the amount and variety
of customer-self content."
SBP 7c: Cost Savings by Service-Manufacturing
"With services, companies can gain cost advantage by converting
portions of the process to manufacturing by eliminating customer inputs
or shifting the customer input point to later in the process."
SBP 8: Human Resources Management
"The Unified Services Theory has major implications for the Human
Resource functions of organizations. In this unit some of these
implications will be explored."
SBP 8a: The Choice of Employees
"With services, a critical employee skill is the ability to exercise
judgment in divergent processes. When the consequences of poor
judgment are great, judgment ability often requires years of training and
experience and the employees tend to be very costly. However, even
complex rule-governed systems can be trained or automated. Good
employee selection is much more important for divergent processes
than for complex processes."
SBP 8b: Culture Compensation
"With services, a significant part of employee compensation can be the
organization's culture."
SBP 8c: Who is in Control
"With services, the production process can be controlled by the
organization, the employees, or the customers, depending on who is
qualified to meet the company objectives. Nevertheless, the customers
and employees need to buy into this."
SBP 9: Marketing in Services
"In some ways the marketing of services is similar to the marketing of
manufactured goods, but in some ways different. The Unified Services
Theory reveals some of those differences, as discussed in this unit."
SBP 9a: The Marketing of Properties
"With services, the products tend to be high in experience properties
and low in search properties. Highly divergent services are often high in
credence properties."
SBP 9b: The Who's Who of Marketing
"With services, the most influential marketing employees are production
employees. The focus of marketing departments is to attract new
customers, but production employees often have the primary
responsibility of retaining current customers."
SBP 9c: Price Guessing
"With services, pricing can be a bewildering process. Traditional costbased, market-based, and value-base pricing strategies often fall apart
with services, requiring pricing decisions to be made by less certain
means."
SBP 9d: Give Them Something New
"With services, perceived value and marketing opportunities can
sometimes be enhanced by giving customers something tangible that
they did not already own."
SBP 10: Production and Inventory Control
SBP 10a: Inadvertent JIT
"With services, the primary inventory system is often called a queue.
Time in such inventories is measured in minutes, not months. The
production process lends itself to just-in-time (JIT) inventory."
SBP 10b: Customer Inventory Costs
"With services, the primary inventory costs are costs to the customer,
including psychological costs of being inventoried in a queue and good
will costs of being unable to receive appropriate service."
SBP 10c: Detailed Production Tracking
"With services, keeping track of production and inventory can mean
tracking details about every customer. This often requires highly
complex information systems."
SBP 11: Defining Service Quality
SBP 11a: Swaying the Customer-Judge
"With services, quality "specifications" come from multiple simultaneous
sources, including the company and the individual customers. The
company presents specifications as standard operating procedures.
The customer presents specifications based on their need-driven
expectations for changes to their process-inputs. Misalignment
between company- and customer-specifications for the service process
leads to dissatisfaction, even when the process goes exactly as it was
designed. The misalignment of specifications can be avoided through
communication. However, if the service performance does not address
individual customer needs, the customer will not require the service."
SBP 11b: Uncertain Expectations
"With services, expectations are often subjectively acquired and
subjectively defined. Therefore service providers need to be careful
when attempting to define expectations for customers. Too low
expectations can lead to lost sales. Too high expectations can lead to
disappointment and lost future sales."
SBP 11c: What We Value Today
"With services, customers usually purchase based on present needs,
unless given the opportunity to defer delivery."
SBP 12: Challenges in Delivering Service Quality
SBP 12a: Everyone Thinks They're an Expert
"With services, the customer often provides product specifications
(what to make) and process design (how to make it), often without the
invitation of the service provider."
SBP 12b: The Unreliable Supplier Dilemma
"With services, the customer-suppliers often provide unreliable inputs."
SBP 12c: Capricious Labor
"With services, customer-labor may ignore, avoid, or reject
technologies or process improvements which are intended to increase
quality and productivity. As a result, customer buy-in to process
changes must be carefully addressed."
SBP 13: Service Recovery
"Ambitious manufacturers strive for a quality goal known as "zero
defects," which is an effort to eliminate all defects. Implied in the zerodefects philosophy is the idea that defects are avoidable, and that if the
company removes the causes of defects, the defects will cease to
occur. This may be true in manufacturing processes, but generally not
true of service processes. Why not? Because of problems described in
the Service Business Principles of the last few units. Customer content
makes even the most well-thought-out and well-executed service
process subject to occasional "defects." In this unit we will consider
issues surrounding defect management."
SBP 13a: The Unforgiving Product Syndrome
"With services, the customer-product is averse to rework, and
remembers any experience with inspection and rework."
SBP 13b: Rework Plus
"With services, "product rework" often involves more than just bringing
the product into specifications. When the product is the customer, there
is also a need to rework the customer's attitude, which is an uncertain
specification."
SBP 13c: Early Communication/Early Recovery
"With services, communication with the customer throughout the
service delivery process can decrease the magnitude and expense of
service failures. Conversely, failure to communicate early in the service
process can allow small customer concerns to grow into large
problems."
SBP 14: Measuring Service Quality and Productivity
SBP 14a: Measuring Customers
"With services, we often measure quality by measuring customers.
Unfortunately, customer measurement is often far from precise."
SBP 14b: A Measure of Motivation
"With services, employee motivation will often deteriorate to the level at
which employees are measured."
SBP 14c: Comparing Apples and Oranges
"With multi-location service companies, varying clientele may make
production difficult to compare across locations.