Principles of service marketing and management lovelock

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Services Marketing: People, Technology, Strategy

Brief Contents

About the Authors About the Contributors of the Case Studies Preface Acknowledgements

PART I: UNDERSTANDING SERVICE PRODUCTS, CONSUMERS, AND MARKETS 1. Creating Value in the Service Economy 2. Understanding Service Consumers 3. Positioning Services in Competitive Markets

PART II: APPLYING THE 4 PS OF MARKETING TO SERVICES 4. Developing Service Products and Brands 5. Distributing Services Through Physical and Electronic Channels 6. Service Pricing and Revenue Management 7. Service Marketing Communications

PART III: MANAGING THE CUSTOMER INTERFACE 8. Designing Service Processes 9. Balancing Demand and Capacity 10. Crafting the Service Environment

11. Managing People for Service Advantage

PART IV: DEVELOPING CUSTOMER RELATIONSHIPS 12. Managing Relationships and Building Loyalty 13. Complaint Handling and Service Recovery

PART V: STRIVING FOR SERVICE EXCELLENCE 14. Improving Service Quality and Productivity 15. Building a World-Class Service Organization

PART VI: CASE STUDIES

Glossary Name Index Subject Index

Contents

About the Authors About the Contributors of the Case Studies Preface Acknowledgements

PART I: UNDERSTANDING SERVICE PRODUCTS, CONSUMERS, AND MARKETS

1. Creating Value in the Service Economy Why Study Services • Services Dominate the Global Economy • Most New Jobs are Generated by Services • Understanding Services Offers Personal Competitive Advantage What Are the Principal Industries of the Service Sector? • Contribution to Gross Domestic Product Powerful Forces are Transforming the Service Markets B2B Services as a Core Engine of Economic Development Outsourcing and Offshoring Often Work in Tandem What Are Services • The Historical View Benefits Without Ownership • Defining Services • Service Products versus Customer Service and After-Sales Service Four Broad Categories of Services – A Process Perspective • People Processing • Possession Processing • Mental Stimulus Processing • Information Processing Services Pose Distinct Marketing Challenges The 7Ps of Marketing

The Traditional Marketing Mix Applied to Services • Product Elements • Place and Time • Price and Other User Outlays • Promotion and Education The Extended Services Marketing Mix for Managing the Customer Interface • Process • Physical Environment • People Marketing Must be Integrated with Other Management Functions The Service–Profit Chain A Framework for Developing Effective Service Marketing Strategies • Understanding Service Products, Consumers and Markets • Applying the 4 Ps of Marketing to Services • Managing the Customer Interface • Developing Customer Relationships • Striving for Service Excellence

2. Understanding Service Consumers The Three-Stage Model of Service Consumption Pre-purchase Stage • Need Awareness • Information Search • Evaluation of Alternative Services • Purchase Decision Service Encounter Stage • Service Encounters are “Moments of Truth” • Service Encounters Range from High Contact to Low Contact • The Servuction System • Theater as Metaphor for Service Delivery: An Integrative Perspective • Role and Script Theories • Perceived Control Theory Post-Encounter Stage • Customer Satisfaction • Service Quality • Customer Loyalty

3. Positioning Services in Competitive Markets Customer-Driven Services Marketing Strategy • Customer, Competitor and Company Analysis (3 Cs) • Segmentation, Targeting and Positioning (STP) Segmenting Service Markets • Important versus Determinant Service Attributes • Segmentation Based on Service Levels Targeting Service Markets • Achieving Competitive Advantage through Focus Principles of Positioning Services Using Positioning Maps to Plot Competitive Strategy • An Example of Applying Positioning Maps to the Hotel Indsutry • Mapping Future Scenarios to Identify Potential Competitive Responses • Positioning Charts Help Executives Visualize Strategy Developing an Effective Positioning Strategy

PART II: APPLYING THE 4 PS OF MARKETING TO SERVICES

4. Developing Service Products and Brands Creating Service Products • What are the Components of a Service Product? The Flower of Service • Facilitating Supplementary Services • Enhancing Supplementary Services • Managerial Implications Branding Service Firms, Products and Experiences • Branding Strategies for Services Tiering Service Products with Branding Building Brand Equity Delivering Branded Service Experiences New Service Development • A Hierarchy of New Service Categories Achieving Success in New Service Development

5. Distributing Services Through Physical and Electronic Channels

Distribution In a Services Context

What Is Being Distributed? How Should A Service Be Distributed? • Customers Visit the Service Site • Service Providers Go to their Customers • The Service Transaction is Conducted Remotely • Channel Preferences Vary among Customers • Channel Integration is Key Where Should a Service Facility be Located? • Strategic Location Considerations • Tactical Location Considerations • Locational Constraints • Innovative Location Strategies When Should Service be Delivered? The Role of Intermediaries • Benefits and Costs of Alternative Distribution Channels Franchising The Challenge of Distribution in Large Domestic Markets Distributing Services Internationally • Factors Favoring Adoption of Transnational Strategies • How does the Nature of a Service Affect International Distribution? • Barriers to International Trade in Services • How to Enter International Markets?

6. Service Pricing and Revenue Management Effective Pricing is Central to Financial Success • Objectives for Establishing Prices Pricing Strategy Stands on Three Foundations • Cost-based Pricing • Value-based Pricing • Reducing Related Monetary and Non-monetary Costs • Competition-based Pricing Revenue Management: What It Is and How It Works • Reserving Capacity for High-yield Customers • How can we Measure the Effectiveness of a Firm’s Revenue Management? • How does Competitor’s Pricing Affect Revenue Management? • Price Elasticity • Designing Rate Fences

Fairness and Ethical Concerns in Service Pricing • Service Pricing is Complex • Piling on the Fees • Designing Fairness into Revenue Management Putting Service Pricing Into Practice • How Much to Charge? • What Should be the Specified Basis for Pricing? • Who Should Collect Payment and Where Should Payment be Made? • When Should Payment be Made? • How Should Payment be Made? • How Should Prices be Communicated to the Target Markets?

7. Service Marketing Communications Integrated Service Marketing Communications Defining the Target Audience Specifying Service Communication Objectives • Strategic Service Communications Objectives Tactical Service Communications Objectives • Promote Tangible Cues to Communicate Quality Crafting Effective Service Communication Messages • Problems of Intangibility • Overcoming the Problems of Intangibility The Services Marketing Communication Mix • Communications Originate from Different Sources • Messages Transmitted through Traditional Marketing Sources • Messages Transmitted Online • Messages Transmitted through Service Delivery Channels • Messages Originating from Outside the Organization Timing Decisions of Services Marketing Communication Budget Decisions and Program Evaluation Ethical and Consumer Privacy Issues in Communications The Role of Corporate Design Integrated Marketing Communications

PART III: MANAGING THE CUSTOMER INTERFACE

8. Designing Service Processes What is a Service Process?

Designing and Documenting Service Processes Developing a Service Blueprint • Blueprinting the Restaurant Experience: a Three-Act Performance • Identifying Fail Points • Fail-Proofing to Design Fail Points out of Service Processes • Setting Service Standards and Targets • Consumer Perceptions and Emotions in Service Process Design Service Process Redesign • Service Process Redesign Should Improve Both Quality and Productivity Customer Participation in Service Processes • Levels of Customer Participation • Customer as Co-creators • Reducing Service Failures Caused by Customers Self-Service Technologies • Customer Benefits and Adoption of Self-Service Technology • Customer Disadvantages and Barriers of Adoption of Self-Service Technology • Assessing and Improving SSTs • Managing Customer’s Reluctance to Change

9. Balancing Demand and Capacity Fluctuations in Demand Threaten Profitability • From Excess Demand to Excess Capacity • Building Blocks of Managing Capacity and Demand Defining Productive Service Capacity Managing Capacity • Stretching Capacity Levels • Adjusting Capacity to Match Demand Understanding Patterns of Demand Managing Demand • Marketing Mix Elements Can be used to Shape Demand Patterns Inventory Demand Through Waiting Lines and Queuing Systems • Waiting is a Universal Phenomenon • Managing Waiting Lines • Different Queue Configurations • Virtual Waits • Queuing Systems can be Tailored to Market Segments Customer Perceptions of Waiting Time

• The Psychology of Waiting Time Inventory Demand Through Reservation Systems • Reservation Strategies Should Focus on Yield Create Alternative Use for Otherwise Wasted Capacity

10. Crafting the Service Environment Service Environments – An Important Element of The Service Marketing Mix What is the Purpose of Service Environments? • Shape Customer’s Service Experience and Behaviors • Signal Quality and Position, Differentiate and Strengthen the Brand • Core Component of The Value Proposition • Facilitate the Service Encounter and Enhance Productivity The Theory Behind Consumer Responses to Service Environments • Feelings are a Key Driver of Customer Responses to Service Environments • The Servicescape Model – An Integrative Framework Dimensions of the Service Environment • The Effect of Ambient Condition • Spatial Layout and Functionality • Signs, Symbols and Artifacts • People are Part of the Service Environment too Putting It All Together • Design with a Holistic View • Design from a Customer’s Perspective

11. Managing People for Service Advantage Service Employees are Extremely Important • Service Personnel as a Source of Customer Loyalty and Competitive Advantage • The Frontline in Low-Contact Services Frontline Work is Difficult and Stressful • Service Jobs are Boundary Spanning Positions • Sources of Role Conflict • Emotional Labor • Service Sweatshops? Cycles of Failure, Mediocrity and Success • The Cycle of Failure • The Cycle of Mediocrity • The Cycle of Success

Human Resource Management – How to Get it Right • Hire the Right People • Tools to Identify the Best Candidates • Train Service Employees Actively • Internal Communications to Shape the Service Culture and Behaviors • Empower the Frontline • When are High Levels of Empowerment Appropriate? • Build High-Performance Service-Delivery Teams • Integrate Teams Across Departments and Functional Areas • Motivate and Energize People • The Role of Labor Unions Service Culture, Climate and Leadership • Building a Service-Oriented Culture • A Climate for Service • Qualities of Effective Leaders in Service Organizations • Leadership Styles, Focus on the Basics, and Role Modelling • Focusing the Entire Organization on the Frontline

PART IV: DEVELOPING CUSTOMER RELATIONSHIPS

12. Managing Relationships and Building Loyalty The Search for Customer Loyalty • Why Is Customer Loyalty So Important to a Firm’s Profitability? • Assessing the Value of a Loyal Customer • Worksheet for Calculating Customer Lifetime Value • The Gap between Actual and Potential Customer Value • Why Are Customers Loyal? The Wheel of Loyalty Building A Foundation For Loyalty • Target the Right Customers • Search for Value, Not Just Volume • Manage the Customer Base through Effective Tiering of Service • Customer Satisfaction and Service Quality Are Prerequisites for Loyalty Strategies for Developing Loyalty Bonds with Customers • Deepen the Relationship • Encourage Loyalty through Financial and Non-financial Rewards • Build Higher-Level Bonds Strategies for Reducing Customer Defections

• Analyze Customer Defections and Monitor Declining Accounts • Address Key Churn Drivers • Implement Effective Complaint Handling and Service Recovery Procedures • Increase Switching Costs Enablers of Customer Loyalty Strategies • Customer Loyalty in a Transactional Marketing Context • Relationship Marketing • Creating “Membership-Type” Relationships as Enablers for Loyalty Strategies CRM: Customer Relationship Management • Common Objectives of CRM Systems • What Does a Comprehensive CRM Strategy Include? • Common Failures in CRM Implementation • How to Get CRM Implementation Right

13. Complaint Handling and Service Recovery Customer Complaining Behavior • Customer Response Options to Service Failure • Understanding Customer Complaining Behavior • What Do Customers Expect Once They Have Made A Complaint? Customer Responses to Effective Service Recovery • Impact of Effective Service Recovery on Customer Loyalty • The Service Recovery Paradox Principles of Effective Service Recovery Systems • Make It Easy for Customer to Give Feedback • Enable Effective Service Recovery • How Generous Should Compensation Be? • Dealing with Complaining Customers Service Guarantees • The Power of Service Guarantees • How to Design Service Guarantees • Is Full Satisfaction the Best You Can Guarantee? • Is It Always Beneficial to Introduce a Service Guarantee? Discouraging Abuse and Opportunistic Customer Behavior • Seven Types of Jaycustomers • Consequences of Dysfunctional Customer Behavior • Dealing with Consumer Fraud

PART V: STRIVING FOR SERVICE EXCELLENCE

14. Improving Service Quality and Productivity Integrating Service Quality and Productivity Strategies • Service Quality, Productivity, and Profitability What is Service Quality? Identifying and Correcting Service Quality Problems • The Gaps Model in Service Design and Delivery • Key Ways to Close the Gaps in Service Quality Measuring Service Quality • Soft and Hard Service Quality Measures Learning from Customer Feedback • Key Objectives of Effective Customer Feedback Systems • Use a Mix of Customer Feedback Collection Tools • Analysis, Reporting, and Dissemination of Customer Feedback Hard Measures of Service Quality Tools to Analyze and Address Service Quality Problems • Root Cause Analysis: The Fishbone Diagram • Pareto Analysis • Blueprinting — A Powerful Tool for Identifying Fail Points Return on Quality • Assess Costs and Benefits of Quality Initiatives • Determine the Optimal Level of Reliability Defining and Measuring Productivity • Defining Productivity in a Service Context • Measuring Productivity • Service Productivity, Efficiency, and Effectiveness Improving Service Productivity • Generic Productivity Improvement Strategies • Customer-Driven Approaches to Improve Productivity • How Productivity Improvements Impact Quality and Value Integration and Systemic Approaches to Improving Service Quality and Productivity • Total Quality Management • ISO 9000 Certification • Six Sigma • Malcolm-Baldrige and EFQM Approaches • Which Approach Should a Firm Adopt?

15. Building a World Class Service Organization Creating a World-Class Service Organization • From Losers to Leaders: Four Levels of Service Performance • Moving to a Higher Level of Performance Customer Satisfaction and Corporate Performance

PART VI: CASE STUDIES Case 1 Sullivan Ford Auto World Case 2 Dr. Beckett’s Dental Office Case 3 Bouleau & Huntley: Crossselling Professional Services Case 4 Uber: Competing as Market Leader in the US versus Being a Distant Second in China Case 5 Banyan Tree: Designing and Delivering a Branded Service Experience Case 6 Kiwi Experience Case 7 The Accra Beach Hotel: Block Booking of Capacity during a Peak Period Case 8 Aussie Pooch Mobile Case 9 Shouldice Hospital Limited (Abridged) Case 10 Delwarca Software Remote Support Unit Case 11 Red Lobster Case 12 Raleigh & Rosse: Measure to Motivate Exceptional Service Case 13 Singapore Airlines: Managing Human Resources for Cost-effective Service Excellence Case 14 Dr. Mahalee Goes to London: Global Client Management Case 15 Royal Dining Membership Program Dilemma Case 16 Starbucks: Delivering Customer Service Case 17 LUX*: Staging a Service Revolution in a Resort Chain Case 18 KidZania: Shaping a Strategic Service Vision for the Future Case 19-32 Additional Cases Available for Educators

Glossary Name Index Subject Index

About the Authors

As a team, Christopher Lovelock and Jochen Wirtz provide a blend of skills and experience ideally suited to writing an authoritative and engaging services marketing text. Since first meeting in 1992, they’ve worked together on a variety of projects, including cases, articles, conference papers, and two books — Services Marketing: People, Technology, Strategy and Essentials of Services Marketing.

Jochen Wirtz is Professor of Marketing at the National University of Singapore (NUS), an international fellow of the Service Research Center at Karlstad University, Sweden, and academic scholar at the Cornell Institute for Healthy Futures (CIHF) at Cornell University, USA.

Professor Wirtz was the founding director of the dual degree UCLA–NUS Executive MBA Program (ranked fourth globally in the Financial Times 2015 EMBA rankings, and third in the EIU 2015 rankings) from 2002 to 2014, an Associate Fellow at the Saïd Business School, University of Oxford from 2008 to 2013, and a founding member of the NUS Teaching Academy (the NUS think-tank on education matters) from 2009 to 2015.

Professor Wirtz’s research focuses on service marketing and has been published in over 200 academic articles, book chapters, and industry reports. He is author or co-author of more than 10 books, including Services Marketing — People, Technology, Strategy (World Scientific, 8th edition, 2016), co-authored with Professor Lovelock, which has become one of the world’s leading services marketing textbook, translated and adapted for more than 26 countries and regions, and with sales of some 800,000 copies. His other books include Flying High in a Competitive Industry: Secrets of the World’s Leading Airline (McGraw Hill, 2009), Essentials of Services Marketing (Prentice Hall, 3rd edition, 2016), and Winning in Service Markets: Success Through People, Technology and Strategy (World Scientific, 2016).

In recognition of his excellence in teaching and research, Professor Wirtz has received

more than 40 awards, including the prestigious Academy of Marketing Science (AMS) 2012 Outstanding Marketing Teacher Award (the highest recognition of teaching excellence of AMS globally), and the top university-level Outstanding Educator Award at NUS. He was also the winner of the inaugural Outstanding Service Researcher Award 2010, and the Best Practical Implications Award 2009, both by Emerald Group Publications. He serves on the editorial review boards of more than 10 academic journals, including the Journal of Service Management, Journal of Service Research, Journal of Service Science, and Cornell Hospitality Quarterly and is also an ad hoc reviewer for the Journal of Consumer Research and Journal of Marketing. Professor Wirtz chaired the American Marketing Association’s biennial Service Research Conference in 2005 when it was held for the first time in Asia.

Professor Wirtz was a banker and took the banking exam at Chamber of Commerce and Industry in Munich. He has since been an active management consultant, working with international consulting firms, including Accenture, Arthur D. Little and KPMG, and major service firms in the areas of strategy, business development, and customer feedback systems.

Originally from Germany, Professor Wirtz spent seven years in London before moving to Asia. Today, he shuttles between Asia, the United States, and Europe. For further information, see www.JochenWirtz.com.

The late Christopher Lovelock was one of the pioneers of services marketing. He consulted and conducted seminars and workshops for managers all around the world, with a particular focus on strategic planning in services and managing the customer experience. From 2001 to 2008, he had been an adjunct professor at the Yale School of Management, where he taught services marketing in the MBA program.

After obtaining a B Com and an MA in economics from the University of Edinburgh, he worked in advertising with the London office of J. Walter Thompson Co., and then in corporate planning with Canadian Industries Ltd. in Montreal. Later, he earned an MBA from Harvard and a PhD from Stanford, where he was also a postdoctoral fellow.

Professor Lovelock’s distinguished academic career included 11 years on the faculty of the Harvard Business School and two years as a visiting professor at IMD in Switzerland. He has also held faculty appointments at Berkeley, Stanford, and the Sloan School at MIT, as well as visiting professorships at INSEAD in France and the University of Queensland in Australia.

http://www.JochenWirtz.com
Author or co-author of more than 60 articles, 100 teaching cases, and 27 books, Professor Lovelock saw his work translated into 16 languages. He served on the editorial review boards of the Journal of Service Management, Journal of Service Research, Service Industries Journal, Cornell Hospitality Quarterly, and Marketing Management, and was also an ad hoc reviewer for the Journal of Marketing.

Widely acknowledged as a thought leader in services, Professor Lovelock has been honored by the American Marketing Association’s prestigious Award for Career Contributions in the Services Discipline. This award has been renamed the SERVSIG Christopher Lovelock Career Contribution Award in his honor. His article with Evert Gummesson “Whither Services Marketing? In Search of a New Paradigm and Fresh Perspectives” won the AMA’s Best Services Article Award in 2005. Earlier, he received a best article award from the Journal of Marketing. Recognized many times for excellence in case writing, he has twice won top honors in the Business Week’s “European Case of the Year” Award.

About the Contributors of the Case Studies

Karla Cabrera is a senior researcher at the Service Management Research & Education Group at EGADE Business School, Tecnologico de Monterrey, Mexico.

Mark Colgate is a professor at University of Victoria, Canada.

Lorelle Frazer is a professor at Griffith University, Australia.

Roger Hallowell is affiliated professor of strategy at HEC Paris and former professor at Harvard Business School, US.

Christopher W. Hart is a former professor at Harvard Business School, US.

Loizos Heracleous is a professor at Warwick Business School, UK.

James L. Heskett is an Emeritus Professor at Harvard Business School, US.

Ron Kaufman is founder and chairman of UP! Your Service Pte. Ltd.

Sheryl E. Kimes is a professor at the School of Hotel Management, Cornell University, US.

Suzanne Lowe is President, Expertise Marketing LLC, US.

Michael Mahoney is a former writer at Harvard Business School, US.

Youngme Moon is Donald K. David Professor of Business Administration at Harvard Business School, US.

Paul E. Morrison is a professor at Boston University, US.

John A. Quelch is Senior Associate Dean and Lincoln Filene Professor of Business Administration at Harvard Business School, US.

Javier Renoso is the Chair of the Service Management Research & Education Group at EGADE Business School, Tecnologico de Monterrey, Mexico.

Roy D. Shapiro is a professor at Harvard Business School, US.

Robert Simons is a professor at Harvard Business School, US.

Christopher Tang is a UCLA Distinguished Professor and the Edward W. Carter Chair in Business Administration at the Anderson School of Management, UCLA, US.

Rohit Verma is a professor at School of Hotel Management, Cornell University, US.

Lauren K. Wright is a professor of marketing, California State College, Chico, US.

Preface

Services dominate the expanding world economy like never before, and technology continues to evolve in dramatic ways. Established industries and their often famous and old companies decline, and may even disappear, as new business models and industries emerge. Competitive activity is fierce, with firms often using new strategies and technologies to respond to changing customer needs, expectations, and behaviors. This book has been written in response to the global transformation of our economies to services. Clearly, the skills in marketing and managing services have never been more important!

Creating and marketing value in today’s increasingly service and knowledge-intensive economy requires an understanding of the powerful design and packaging of “intangible” benefits and products, high-quality service operations, and customer information management processes, a pool of motivated and competent frontline employees, building and maintaining a loyal and profitable customer base, and the development and implementation of a coherent service strategy to transform these assets into improved business performance. This textbook provides this knowledge. Specifically, its main objectives are to:

1. Provide an appreciation and understanding of the unique challenges inherent in the marketing, management, and delivery of service excellence at a profit. Readers are introduced to and have the opportunity to work with tools and strategies that address these challenges.

2. Develop an understanding of the “state of the art” of services marketing and management thinking.

3. Promote a customer service-oriented mind-set.

As the field of services marketing has evolved, so too has this book, with each successive edition representing a significant revision over its predecessor. The new eighth edition is no exception. You can be confident that it captures the reality of today’s world, incorporates recent academic and managerial thinking, and illustrates cutting-edge service concepts.

Preparing this new edition has been an exciting challenge. Services marketing, once a tiny academic niche championed by just a handful of pioneering professors, has become a thriving area of activity for both research and teaching. There’s growing student interest in taking courses in this field, which makes good sense from a career standpoint, as most business school graduates will be going to work in service industries.

WHAT’S NEW IN THIS EDITION? The eighth edition represents a significant revision. Its contents reflect ongoing developments in the service economy, dramatic developments in technology, new research findings, and enhancements to the structure and presentation of the book in response to feedback from reviewers and adopters.

New Structure, New Topics • Almost all chapters are now structured around an organizing framework that provides a pictorial overview of the chapter’s contents and line of argument.

• New applications of technology are integrated throughout the text, ranging from apps, M-commerce, and social networks, to robots, artificial intelligence, and biometrics.

• Each of the 15 chapters has been revised. All chapters incorporate new examples and references to recent research. Significant changes in chapter content are highlighted below.

• Chapter 1 “Creating Value in the Service Economy” now explores the nature of the modern service economy more deeply and covers B2B services, outsourcing and offshoring. The Service–Profit Chain, featured in Chapter 15 in the previous editions, was moved here to serve as a guiding framework for the book.

• Chapter 2 “Understanding Service Consumers” covers the post-consumption behaviors, including service quality, its dimensions and measurement (SERVQUAL), and how quality relates to customer loyalty. This was in Chapter 14 in the previous edition.

• Chapter 7 “Service Marketing Communications” is now tightly organized around the 5 Ws model, a new section on the services marketing communications funnel was added, and the coverage of new media (including social media, mobile, apps, and QR codes) is significantly expanded.

• Chapter 8 “Designing Service Processes” has a new section on emotionprints, and covers service blueprinting in more detail.

• Chapter 11 “Managing People for Service Advantage” has new sections on a service- oriented culture and how to build a climate for service, a section on effective leadership in service organization and leadership styles. Part of this content was previously covered in Chapter 15 in the previous editions.

• Chapter 14 “Improving Service Quality and Productivity” now integrates key concepts in the main body of the chapter instead of including them in the Appendix as seen in the previous editions. They are TQM, ISO 9000, Six Sigma and the Malcolm- Baldrige and EFQM.

• Chapter 15 “Building a World-Class Service Organization” was completely restructured to provide a recap and integration of key themes of this book. It now features an auditing tool to assess the service level of an organization. It emphasizes on the impact of customer satisfaction on long-term profitability and closes with a call to action.

FOR WHAT TYPES OF COURSES CAN THIS BOOK BE USED? This text is designed for advanced undergraduates, MBA and EMBA students. Services Marketing places marketing issues within a broader general management context. The book will appeal to both full-time students headed for a career in management and to EMBAs and executive program participants who are combining their studies with ongoing work in managerial positions.

Whatever a manager’s specific job may be, we argue that he or she has to understand and acknowledge the close ties that link the functions of marketing, human resource, and operations. With that in mind, we’ve designed this book so that instructors can make selective use of chapters and cases to teach courses of different lengths and formats in either services marketing or service management.

WHAT ARE THE BOOK’S DISTINGUISHING FEATURES?

Key features of this highly readable book include:

• A strongly managerial perspective, yet is rooted in solid academic research, complemented by memorable frameworks. Our goal is to bridge the all-too-frequent gap between theory and the real world.

• Text that is organized around an integrated framework that the reader immediately can relate to. The framework cascades across the entire book. Each chapter also provides a succinct chapter overview in pictorial form.

• Text that is clear, readable, and focused. • A global perspective, with examples carefully selected from America, Europe, and Asia.

• A systematic learning approach, with each chapter having clear learning objectives, an organizing framework providing a quick overview of the chapter’s contents and lines of argument, and chapter summaries in bullet form that condense the core concepts and messages of each chapter.

• Opening vignettes and boxed inserts within the chapters are designed to capture student interest and provide opportunities for in-class discussions. They describe significant research findings, illustrate practical applications of important service marketing concepts, and describe best practices by innovative service organizations.

We’ve designed this textbook to complement the materials found in traditional marketing management texts. Recognizing that the service sector of the economy can best be characterized by its diversity, we believe that no single conceptual model suffices to cover marketing-relevant issues among organizations ranging from huge international corporations (in fields such as airlines, banking, insurance, telecommunications, freight transportation, and professional services) to locally owned and operated small businesses such as restaurants, laundries, taxis, optometrists, and many business-to-business services. In response, the book offers a carefully designed “toolbox” for service managers, teaching students how different concepts, frameworks, and analytical procedures can best be used to examine and resolve the varied challenges faced by managers in different situations.

Acknowledgments

Over the years, many colleagues in both the academic and business worlds have provided us with valuable insights into the marketing and management of services through their publications, conference or seminar discussions, and stimulating individual conversations. In addition, both of us have benefited enormously from in- class and after-class discussions with our students and executive program participants.

We’re much indebted to those researchers and teachers who helped to pioneer the study of services marketing and management, and from whose work we continue to draw inspiration. Among them are John Bateson of Cass Business School; Leonard Berry of Texas A&M University; Mary Jo Bitner and Stephen Brown of Arizona State University; David Bowen of Thunderbird Graduate School of Management; Richard Chase of the University of Southern California; Bo Edvardsson of University of Karlstad; Pierre Eiglier of Université d’Aix-Marseille III; Raymond Fisk of the Texas State University; Christian Grönroos of the Swedish School of Economics in Finland; Stephen Grove of Clemson University, Evert Gummesson of Stockholm University; James Heskett and Earl Sasser of Harvard University; A. “Parsu” Parasuraman of University of Miami; Roland Rust of the University of Maryland; and Benjamin Schneider formerly of the University of Maryland. We salute, too, the contributions of the late Eric Langeard, Robert Johnston, and Daryl Wyckoff.

Although it’s impossible to mention everyone who has influenced our thinking, we particularly want to express our appreciation to the following: Tor Andreassen, Norwegian School of Management; Steve Baron of University of Liverpool; Ruth Bolton of Arizona State University; John Deighton, Theodore Levitt, and Leonard Schlesinger, all currently or formerly of Harvard Business School; Michael Ehret of Nottingham Trent University; Dominik Georgi of Lucerne School of Business; Loizos Heracleous of University of Warwick; Douglas Hoffmann of Colorado State University; Irene Ng of University of Warwick; Jay Kandampully of Ohio State University; Ron Kaufman of UP! Your Service College; Sheryl Kimes of Cornell University; Tim Keiningham of Rockbridge Associate; Jean-Claude Larréché of INSEAD; Jos Lemmink of Maastricht University; Kay Lemon of Boston College; David Maister of Maister Associates; Anna Mattila of Pennsylvania State University; Ulrich Orth of Kiel

University; Chiara Orsingher of University of Bologna; Anat Rafaeli of Technion- Israeli Institute of Technology; Ram Ramaseshan of Curtin University; Frederick Reichheld of Bain & Co; Jim Spohrer of IBM; Bernd Stauss formerly of Katholische Universität Eichstätt; Christopher Tang of UCLA; Rodoula Tsiotsou of University of Macedonia; Charles Weinberg of the University of British Columbia; Lauren Wright of California State University, Chico; George Yip of London Business School; Ping Xiao of the National University of Singapore; and Valarie Zeithaml of the University of North Carolina.

We’ve also gained important insights from our co-authors on international adaptations of Services Marketing, and are grateful for the friendship and collaboration of Guillermo D’Andrea of Universidad Austral, Argentina; Harvir S. Bansal of University of Waterloo, Canada; Jayanta Chatterjee of Indian Institute of Technology at Kanpur, India; Xiucheng Fan of Fudan University, China; Miguel Angelo Hemzo, Universidade de São Paulo, Brazil; Hean Tat Keh of the University of Queensland, Australia; Luis Huete of IESE, Spain; Laura Iacovone of University of Milan and Bocconi University, Italy; Denis Lapert of Telecom École de Management, France; Barbara Lewis of Manchester School of Management, UK; Xiongwen Lu of Fudan University, China; Paul Maglio of University of California, Merced, USA; Annie Munos, Euromed Marseille École de Management, France; Jacky Mussry of MarkPlus, Inc., Indonesia; Javier Reynoso of Tec de Monterrey, Mexico; Paul Patterson of the University of New South Wales, Australia; Sandra Vandermerwe of Imperial College, London, UK; and Yoshio Shirai of Takasaki City University of Economics, Japan.

It’s a pleasure to acknowledge the insightful and helpful comments of reviewers of this and previous editions: David M. Andrus of Kansas State University; Charlene Bebko of Indiana University of Pennsylvania; Michael L. Capella of Villanova University; Susan Carder of Northern Arizona University; Frederick Crane of the University of New Hampshire; Harry Domicone of California Lutheran University; Lukas P. Forbes of Western Kentucky University; Bill Hess of Golden Gate University; Ben Judd of the University of New Haven; P. Sergius Koku of Florida Atlantic University; Robert P. Lambert of Belmont University; Martin J. Lattman of Johns Hopkins University; Daryl McKee of Louisiana State University; Terri Rittenburg of the University of Wyoming; Cynthia Rodriguez Cano of Augusta State University; and Lisa Simon of California Polytechnic State University. They challenged our thinking and encouraged us to include many substantial changes. In addition, we benefited from the valued advice of Sharon Beatty of the University of Alabama and Karen Fox of Santa Clara University, who provided thoughtful suggestions for improvement.

It takes more than authors to create a book and its supplements. Warm thanks are due to

the editing and production team who worked hard to transform our manuscript into a handsome published text. They include Chua Hong Koon, Publishing Director; Karimah Samsudin, Desk Editor, Munira Alhad and Shirley Ng, Graphic Designers. Thanks also to Shanti Venkatesh, Associate Professor of Marketing at Loyola Institute of Business Administration, author of the eighth edition test bank.

Finally, we’d like to thank you, our reader, for your interest in this exciting and fast- evolving field of services marketing. If you have any feedback, interesting research, examples, stories, cases, videos, or any other materials that would look good in the next edition of this book, please contact us via www.JochenWirtz.com. We’d love to hear from you!

Jochen Wirtz Christopher Lovelock

http://www.JochenWirtz.com
The Services Marketing Framework

Figure I Organizing framework for services marketing

UNDERSTANDING SERVICE PRODUCTS, CONSUMERS, AND MARKETS

Part I lays the building blocks for studying services and learning how one can become an effective service marketer. It consists of the following three chapters:

CHAPTER 1

Creating Value in the Service Economy Chapter 1 highlights the importance of services in our economies. We also define the nature of services and how they create value for customers without transfer of ownership. The chapter highlights some distinctive challenges involved in marketing services and introduces the 7 Ps of services marketing.

The framework shown in Figure I on the facing page will accompany us throughout as it forms the basis for each of the four parts in this book. It describes systematically what is involved in developing marketing strategies for different types of services. The framework is introduced and explained in Chapter 1.

CHAPTER 2

Understanding Service Consumers Chapter 2 provides a foundation for understanding consumer needs and behaviors related to services. The chapter is organized around the three-stage model of service consumption that explores how customers search for and evaluate alternative services, make purchase decisions, experience and respond to service encounters, evaluate service performance, and finally, develop loyalty.

CHAPTER 3

Positioning Services in Competitive Markets Discusses how to develop a customer-driven services marketing strategy and how a value proposition should be positioned in a way that creates competitive advantage for the firm. This chapter first links the customer, competitor, and company (commonly referred to as “3 C”s) analysis links to a firm’s positioning strategy. The core of the chapter is then organized around the three key elements of positioning —segmentation, targeting, and positioning (commonly referred to as ‘STP ’) — and shows how firms can segment a service market, position their value proposition, and finally focus on attracting their target segment.

Creating Value in the Service Economy

Ours is a service economy and has been for some time. Karl Albrecht and Ron Zemke,

Thought leaders in business and service

In today’s marketplace, consumers have the power to pick and choose as never before. From the article “Crowned At Last”,

published in The Economist, 31 March 2005

It’s never enough to just tell people about some new insight… Instead of pouring knowledge into people’s heads, you need to help them grind a new set of eyeglasses so that they can see the world in a new way. That involves challenging the implicit assumptions that have shaped the way people have historically looked at things.

John Seely Brown, Thought leader on innovation

LEARNING OBJECTIVES (LOs)

By the end of this chapter, the reader should be able to:

LO 1 Understand how services contribute to a country’s economy.

LO 2 Know the principal industries of the service sector.

LO 3 Identify the powerful forces that are transforming service markets.

Figure 1.1 Tertiary education may be one of the biggest service purchases in life

LO 4 Understand how B2B services improve the productivity of individual firms and drive economic development.

LO 5 Be familiar with the difference between outsourcing and offshoring of services.

LO 6 Define services using the non-ownership service framework.

LO 7 Identify the four broad “processing” categories of services.

LO 8 Be familiar with the characteristics of services and the distinctive marketing challenges they pose.

LO 9 Understand the components of the traditional marketing mix applied to services.

LO 10 Describe the components of the extended marketing mix for managing the customer interface.

LO 11 Appreciate that the marketing, operations, and human resource management functions need to be closely integrated in service businesses.

LO 12 Understand the implications of the Service–Profit Chain for service management.

LO 13 Know the framework for developing effective service marketing strategies.

OPENING VIGNETTE Introduction to the World of Services Marketing

Like every reader of this book, you’re an experienced service consumer. You use an array of services every day, although some — such as talking on the phone, using a credit card, riding a bus, downloading music, using the Internet, or withdrawing money from an ATM — may be so routine that you hardly ever notice them unless something goes wrong. Other service purchases may involve more thought and be more memorable — for instance, booking a cruise vacation, getting financial advice, or having a medical examination. Enrolling in college or graduate school may be one of the biggest service purchases you will ever make. A typical university is a complex service organization that offers not only educational services, but also libraries, student accommodation, healthcare, athletic facilities, museums, security, counseling, and career services.

On campus you may find a bookstore, a bank, a post office, a photocopying shop, Internet cafes, a grocery store, entertainment, and more. Your use of these services is an example of service consumption at the individual or business-to-consumer (B2C) level.

Organizations use a wide array of business-to-business (B2B) services, which usually involve purchases on a much larger scale than those made by individuals or households.

Nowadays, organizations outsource more and more tasks to external service providers in order to focus on their core business. Without being able to buy these services at a good value, these organizations can’t hope to succeed. Unfortunately, consumers aren’t always happy with the quality and value of the services they receive. You too may not always be delighted with your service experiences; in fact, at times, you may be very disappointed.

Both individual and corporate consumers complain about broken promises, poor value for money, rude or incompetent personnel, inconvenient service hours, bureaucratic procedures, wasted time, malfunctioning self-service technologies (SSTs), complicated

websites, a lack of understanding of their needs, and various other problems.

Suppliers of services, who often face stiff competition, appear to have a very different set of concerns. Many owners and managers complain about how difficult it is to find skilled and motivated employees, to keep costs down and make a profit, or to satisfy customers, who, they sometimes grumble, have become unreasonably demanding.

Fortunately, there are service companies that know how to please their customers while also running a productive and profitable operation, staffed by pleasant and competent employees, and accessible through user-friendly SSTs, websites, and apps.

You probably have a few favorite service firms you like to patronize. Have you ever stopped to think about the way they succeed in delivering services that meet and sometimes even exceed your expectations? This book will show you how service businesses can be managed to achieve customer satisfaction and profitability.

In addition to studying key concepts, organizing frameworks, and tools of services marketing, you will also be introduced to many examples from firms across the United States and around the world. From the experiences of other firms, you can draw important lessons on how to succeed in increasingly competitive service markets.

Figure 1.2 Happy people on a cruise vacation

Figure 1.3 Introduction to services marketing.

Figure 1.3 provides an overview of Chapter 1. In this chapter, we describe today’s ever-changing service economy, define the nature of services, and highlight some challenges involved in marketing services. We conclude the chapter with a framework for developing and implementing service marketing strategies. This framework also establishes the structure for this book

WHY STUDY SERVICES?

LO 1 Understand how services contribute to a country’s economy.

Consider this paradox: While we live in a service-driven economy, most business schools continue to teach marketing from a manufacturing perspective. If you have already taken a course in marketing, you would have most likely learned more about marketing manufactured products, especially consumer goods, rather than marketing services. Fortunately, a growing and enthusiastic group of scholars, consultants, and educators, including the authors of this book, has chosen to focus on services marketing and build on the extensive research conducted in this field over the past four decades. This book aims to provide you with the knowledge and skills that are necessary and relevant in tomorrow’s business environment.

Services Dominate the Global Economy The size of the service sector is increasing in almost all countries around the world. As an economy develops, the relative share of employment between agriculture, industry (including manufacturing and mining), and services changes dramatically1. Even in emerging economies, the service output is growing rapidly and often represents at least half of the Gross Domestic Product (GDP). Figure 1.4 shows how the evolution to a service-dominated economy is likely to take place over time as the per capita income rises. In developed economies, knowledge-based services — defined as having intensive users of high technology or relatively skilled workforces — have been the most dynamic component2. Figure 1.5 shows that the service sector already accounts for almost two-thirds of the value of the global GDP.

Figure 1.4 Changing structure of employment as an economy develops

Source International Monetary Fund, 1997

Figure 1.5 Contribution of services industries to GDP globally

Source The World Factbook 2015, Central Intelligence Agency, www.cia.gov, accessed January 22, 2015.

Figure 1.6 shows the relative size of the service sector in various large and small economies. For most of the highly developed nations, services account for 65–80% of the GDP. One exception is South Korea, a manufacturing-oriented country with its

http://www.cia.gov
service sector contributing only 58% to the GDP. Which are the world’s most service- dominated economies? The answer would be Jersey, the Bahamas, and Bermuda — all small islands with a similar economic mix — which are equally service-dominated. Luxembourg (86%) has the most service-dominated economy in the European Union. Panama’s strong showing (78%) reflects not only the operation of the Panama Canal, which is widely used by cruise ships as well as freight vessels, but also related services such as container ports, flagship registry, and a free port zone, as well as financial services, insurance, and tourism (Figure 1.7).

Figure 1.6 Estimated size of service sector in selected countries as a percentage of GDP

On the opposite end of the scale is China (46%), an emerging economy dominated by a substantial agricultural sector, booming manufacturing and construction industries. However, China’s economic growth is now leading to an increase in demand for business and consumer services. China’s government is investing heavily in service infrastructure, including shipping facilities and new airport terminals. Among the relatively affluent countries is Saudi Arabia with its oil-dominated economy, where services account for only 36% of the GDP.

Most New Jobs Are Generated by Services Since the service sector is growing so rapidly in virtually all countries around the

world, new job creation comes mainly from services. In fact, this shift in employment to the service sector has been seen as one of the longest and most stable of economic trends3. Service jobs do not just refer to relatively lowly paid frontline jobs such as in restaurants or call centers. Rather, some of the fastest economic growth is in knowledge-based industries — such as professional and business services, education, and healthcare4. These jobs tend to be well-paid, require good educational qualifications, and offer attractive careers.

Many manufacturing firms too have moved from just bundling supplementary services with their physical products to marketing certain elements as standalone services. See Service Insights 1.1 to find out how Rolls-Royce achieved that transformation.

Just like Rolls-Royce, IBM was also previously known mainly as a manufacturer. The company made the transformation to a service provider and has become the world’s largest business and technology services provider offering management consulting, systems integration, and application management services as part of IBM Global Services5. Not only has IBM moved into delivering services, it is also at the forefront of the movement to ensure that it trains workers for the service economy. Reflecting the ever tighter integration of value creation in the service economy, IBM coined the term Service Science, Management and Engineering (SSME), often called service science for short, which integrates key disciplines required to design, improve, and scale service systems. To be effective in today’s service-driven economies, IBM believes future graduates should be ‘T’-shaped. That is, they need a deep understanding of their own discipline such as business, engineering, or computer science (the vertical part of the T) as well as a basic understanding of service-related topics in other disciplines (the horizontal part of the T)6.

Figure 1.7 The Panama Canal forms the backbone of Panama’s service economy

SERVICE INSIGHTS 1.1

Rolls-Royce Sells Power by the Hour

Many manufacturing firms increase their competitive edge by providing superior value to their customers in the form of service. Rolls-Royce is one such example. Rolls-Royce, which makes world-class aircraft engines, is a successful company because it focuses on technical innovation. Rolls-Royce engines power about half of the latest wide-bodied passenger jets and a quarter of all single-aisle aircrafts in the world. A very important factor for its success has been the move from manufacturing to selling “power by the hour”— a bundle of goods and services that keeps the customers’ engines running smoothly.

Imagine this — high above the Pacific, passengers doze on a long-haul flight from Tokyo to Los Angeles. Suddenly, there is a bolt of lightning. Passengers may not think much of it, but on the other side of the world in Derby, England, engineers at Rolls-Royce get busy. Lightning strikes on jets are common and usually harmless, but this one has caused some problems in one of the engines. The aircraft will still be able to land safely and could do so even with the affected engine shut down. The question is whether it will need a full engine inspection in Los Angeles, which would be normal practice but would also inconvenience hundreds of passengers waiting in the departure lounge.

A stream of data is beamed from the plane to Derby. Numbers dance across screens, graphs are drawn, and engineers scratch their heads. Before the aircraft lands, word comes that the engine is running smoothly, will not need a physical inspection, and the plane will be able to take off on time.

Industry experts estimate that manufacturers of jet engines can make about seven times the revenue from servicing and selling spare parts than they do from just selling the engines. Since it is so profitable, many independent servicing firms compete with companies like Rolls-Royce and offer spare parts for as low as one- third of the price charged by the original equipment manufacturers (OEMs). This is where Rolls-Royce has used a combination of technology and service to make it more difficult for competitors to steal its clients. Instead of selling engines first and parts and service later, Rolls-Royce has created an attractive bundle, which it branded TotalCare®. Customers are charged for every hour that an engine runs. Its website advertizes it as a solution ensuring “peace of mind” for the lifetime of an engine. Rolls-Royce promises to maintain the engine and replace it if it breaks down. The operations room in Derby continuously monitors the performance of

some 3,500 engines, enabling it to predict when engines are likely to fail and let airlines schedule engine changes efficiently, reduce repairs and unhappy passengers. Today, about 80% of the engines shipped to its customers are covered by such contracts! Although Rolls-Royce had engines troubles on its A380, they fixed the problem quickly and bounced back from the incident with many more orders for their engines.

Leading research centers have followed IBM’s call and have increasingly focused on the integration of key disciplines to better equip future service professionals. Some of the leading centers that have embraced service science include (in alphabetical order): the Center for Excellence in Service of Robert H. Smith School of Business at University of Maryland (www.rhsmith.umd.edu/ces), the Center for Services Leadership at the W. P. Carey School of Business at Arizona State University (http://wpcarey.asu.edu/csl), and The Service Research Center at Karlstad University in Sweden (www.ctf.kau.se). Recently, even an academic journal called Service Science has been launched to provide a publication outlet for service science research7.

Understanding Services Offers Personal Competitive Advantage This book is in response to the global transformation of our economies towards services. Learning about the distinctive characteristics of services and how they affect both customer behavior and marketing strategy will give you important insights and

http://www.rhsmith.umd.edu/ces
http://wpcarey.asu.edu/csl
http://www.ctf.kau.se
perhaps create a competitive advantage for your own career. Unless you are predestined to work in a family manufacturing or agricultural business, the probability is high that you will spend most of your working life in service organizations. You may also find yourself serving as a volunteer or board member for a nonprofit organization. The knowledge gained from studying this book may even encourage you to think about starting your own service business!

WHAT ARE THE PRINCIPAL INDUSTRIES OF THE SERVICE SECTOR?

LO 2 Know the principal industries of the service sector.

What industries make up the service sector and which are the biggest? The latter may not be the ones you would imagine at first, because this diverse sector includes many services targeted at business customers, some of which are not very visible unless you happen to work in that industry. National economic statistics are a useful starting point. To provide a better understanding of today’s service-dominated economy, government statistical agencies have developed new ways to classify industries. In the United States, the manufacturing-oriented Standard Industrial Classification (SIC) system, developed in the 1930s, has been replaced by the new North American Industry Classification System (NAICS)8, with Canada and Mexico adopting it too (Service Insights 1.2).

SERVICE INSIGHTS 1.2

NAICS: A New Way to Classify the Economies of North America

The North American Industry Classification System — developed jointly by the statistical agencies of Canada, Mexico, and the United States — offers a new approach to classifying industries in the economic statistics of the three North American Free Trade Agreement (NAFTA) countries. It replaces previous national systems, such as the SIC codes formerly used in the United States.

NAICS (pronounced “nakes”) includes many new service industries that have emerged in recent decades and also reclassifies services as “auxiliary”

establishments that provide services to manufacturing industries — examples include accounting, catering, and transportation. Every sector of the economy has been restructured and redefined. NAICS includes 358 new industries that the SIC did not identify, 390 that are revised from their SIC counterparts, and 422 that continue substantially unchanged. These industries are grouped into sectors and further subdivided into subsectors, industry groups, and establishments.

Among the new sectors and subsectors devoted to services are: Information, which recognizes the emergence and uniqueness of businesses in the “information economy” Health Care and Social Assistance; Professional, Scientific and Business Services; Educational Services; and Accommodation and Food Services; and Arts, Entertainment and Recreation (which includes most businesses engaged in meeting consumers’ cultural, leisure, or entertainment interests).

NAICS uses a consistent principle for classification, grouping businesses that use similar production processes. Its goal is to make economic statistics more useful and to capture developments that encompass applications of high technology (e.g., cellular telecommunications), new businesses that previously did not exist (e.g., environmental consulting), and changes in the way business is done (e.g., warehouse clubs).

NAICS codes are set up in such a way that researchers can drill down within broad industry sectors to obtain information on tightly defined types of service

establishments. For instance, the NAICS code 71 designates arts, entertainment and recreation. Code 7112 designates spectator sports, and code 711211 designates sports teams and clubs. By looking at changes over time in “real” dollars (adjusted for inflation), it’s possible to determine which industries have been growing and which have not. The NAICS codes are also being used to categorize employment statistics and numbers of establishments within a particular industry. And a new North American Product Classification System (NAPCS) thus defines thousands of service products. If you want to research service industries and service products, NAICS data is a great place to start.

Source Economic Classification Policy Committee, “NAICS—North American Industry Classification System: New Data for a New Economy”. Washington, DC: Bureau of the Census, October 1998; North American Industry Classification System, United States 2002 [Official NAICS manual], Washington, D.C.: National Technical Information Service, PB2002101430*SS, 2002. http://www.census.gov/eos/www/naics/, accessed January 22, 2015.

Contribution to Gross Domestic Product To see how much value each of the major service industry groups contributes to the U.S. GDP, take a look at Figure 1.8. Would you have guessed that real estate and rental and leasing would be the largest for-profit service industry sector in the United States, accounting for 13% in 2013, almost one-eighth of GDP? Over 90% of this figure comes from activities such as renting residential or commercial property; managing properties on behalf of their owners; providing realty services to facilitate purchases, sales, and rentals; and appraising property to determine its condition and value. The balance is accounted for by renting or leasing a wide variety of other manufactured products, ranging from heavy construction equipment (with or without operators) to office furniture, tents, and party supplies. Another large cluster of services provides for distribution of physical products. Wholesale and retail trade accounts for about 11.8% of GDP.

Other substantial industry sectors or subsectors are professional and business services (11.8%), finance and insurance (7.2%), and healthcare (7.1%). Accommodation and food services constitute 2.7%, while the arts, entertainment, and recreation services — which includes high-profile consumer services such as spectator sports, fitness centers, skiing facilities, museums and zoos, performing arts, casinos, golf courses, marinas, and theme parks — collectively represent a mere 1.0% of GDP. Nevertheless, in an

http://www.census.gov/eos/www/naics
economy with an output of over $17.1 trillion, this last group of services was still valued at an impressive $164 billion in 2013.

Figure 1.8 Value added by service industry categories to US GDP.

Source Adapted from: U.S. Department of Commerce, Bureau of Economic Analysis, GDP by Industry Accounts for 2013, 2007, www.bea.gov; accessed January 22, 2015.

POWERFUL FORCES ARE TRANSFORMING SERVICE MARKETS

LO 3 Identify the powerful forces that are transforming service markets.

What are the factors causing this rapid growth of the service sector? Government policies, social changes, business trends, globalization, and advances in information technology (IT) and communications in particular, are among the powerful forces transforming today’s service markets (Figure 1.9). Collectively, these forces reshape demand, supply, competitive landscape, and even the way customers buy and use services.

Of these forces, the dramatic development of IT and communications is perhaps the most important at the moment. Innovations in big data, cloud computing, user-generated content, mobile communications, networking technologies, artificial intelligence, and increasingly app-based SSTs bring their own service revolution. These technologies enable firms to deepen the relationships with their customers, offer multi-way

http://www.bea.gov
information flow and more personalized services, improved analytics, and increase productivity and profitability9. More importantly, these new technologies also lead to a vast array of highly innovative business models, ranging from peer-to-peer services (e.g., Airbnb for short-term accommodation and Lending Club for personal loans), integrators (e.g., Uber connects passengers with independent drivers through apps), to crowd-based services (e.g., crowdSPRING, a leading provider of logo and graphic design services).

B2B SERVICES AS A CORE ENGINE OF ECONOMIC DEVELOPMENT10

LO 4 Understand how B2B services improve the productivity of individual firms and drive economic development.

A key driver of successful economies is their ecosystem of advanced, competitive, and innovative business services. You may ask, “Why would business services improve the productivity of a manufacturing firm and an economy as a whole?” Consider the following example: a large manufacturing firm runs its own canteen with 100 workers, who in the national statistics are classified as “manufacturing employees” producing “manufacturing output” (their output is captured in the added value created by their employer, i.e., the manufacturing firm). However, how good is a manufacturing firm in buying food ingredients, cooking, designing and running kitchen processes, supervising chefs, and controlling quality and costs in a canteen? The general answer is that the firm would probably not be capable of producing fantastic food. As the operations that take place in the canteen are low volume and of little importance to the overall business, they will justify neither greater management attention, nor significant investments in process improvements and R&D.

Many manufacturing firms have recognized this problem and outsourced their canteen operations, most likely via a tendering process with a renewal period of every few years. The winning bidder is likely to be a firm that specializes in running canteens and kitchens across many sites or branches. That company makes “operating canteens” its core competency. As such, the operation is managed with an emphasis on the quality of the services and food provided, and the efficiency of its cost structure. Branches can be benchmarked internally, and the overall operation has economies of scale, and is way down the learning curve.

Figure 1.9 Factors stimulating the transformation of the service economy

It also makes sense for the firm to invest in process improvements and R&D as the benefits can be reaped across multiple sites. What used to be a neglected support activity within a manufacturing firm has become a management focus and core competency of an independent service provider. The same logic applies to almost all non-core activities, assets, goods, and services a company can source more cost- effectively from third-party providers (Figure 1.10). McKinsey estimates that such service inputs to manufacturing output are about 20–25%, offering much potential for

further outsourcing11. This development leads to an increasing specialization of our economies with significant gains in overall productivity and living standards.

OUTSOURCING AND OFFSHORING OFTEN WORK IN TANDEM

LO 5 Be familiar with the difference between outsourcing and offshoring of services.

Will service jobs be lost to low-wage countries? New communications technologies mean that some service work can be carried out far from where customers are located12. Offshoring here refers to services that are conducted in one country and consumed in another (Figure 1.11). Prior to the turn of the century, offshoring was mostly confined to the manufacturing sector, offshore services have since emerged as a dynamic global sector over the past two decades, driven by the rise of information and communication technologies, the international tradability of services, and the evolution of global business services models.

Figure 1.10 Outsourcing is an important driver for the growth of the service sector.

Source Jochen Wirtz and Michael Ehret, ”Service-Based Business Models: Transforming Businesses, Industries and Economies,” in Raymond P. Fisk, Rebekah Russell-

Bennett, and Lloyd C. Harris, eds. Serving Customers: Global Services Marketing Perspectives (Tilde University Press, Melbourne, Australia), 28–46.

Figure 1.12 shows different business models that can develop in the outsourcing and offshoring of services13. The first scenario (Arrow 1) describes a firm’s decision to outsource services domestically. Arrow 2 describes a situation where a firm switches from a domestic supplier to a foreign supplier. In some cases, firms make the decision to outsource and to offshore to a foreign supplier simultaneously (Arrow 3). The fourth scenario is when firms source from foreign locations by establishing a subsidiary abroad (Arrow 4). This is often referred to as “captive offshoring.” Finally, combining outsourcing and offshoring implies shifting the service provision from a foreign affiliate to a foreign-owned supplier (Arrow 5).

Figure 1.11 Many services today can be outsourced to lower cost destinations

A study by the international consulting firm McKinsey & Company estimated that 11% of service jobs around the world could be carried out remotely. In practice, however, McKinsey predicted that the percentage of service jobs that could actually be “offshored” will prove to be much more limited — only 1% of the total service employment in developed countries14. Of course, loss of even that small percentage can affect a large number of workers, including some well-paid professionals whose work can be performed much more cost-effectively by, say, highly qualified engineers working in India, the Philippines, or Belarus15.

Figure 1.12 Outsourcing and offshoring are independent, but often work in tandem.

Source Jochen Wirtz, Sven Tuzovic, and Michael Ehret (2015), “Global Business Services: Increasing Specialization and Integration of the World Economy as Drivers of Economic Growth,” Journal of Service Management, Vol. 26, No.4, pp. 565--587.

WHAT ARE SERVICES?

Thus far, our discussion of services has focused on different types of service industries and their development. But now it’s time to ask the question: What exactly is a service?

The Historical View Attempts to describe and define services go back more than two centuries. In the late eighteenth and early nineteenth centuries, classical economists focused on the creation and possession of wealth. They contended that goods (initially referred to as “commodities”) were objects of value over which ownership rights could be established and exchanged. Ownership implied tangible possession of an object that had been acquired through purchase, barter, or gift from the producer or a previous

owner, and was legally identifiable as the property of the current owner.

Adam Smith’s famous book The Wealth of Nations, published in Great Britain in 1776, distinguished between the outputs of what he termed “productive” and “unproductive” labor16. The former, he stated, produced goods that could be stored after production and subsequently exchanged for money or other items of value. Unproductive labor, however “honorable, useful, or necessary,” created services that perished at the time of production and therefore didn’t contribute to wealth. Building on this theme, the French economist Jean-Baptiste Say argued that production and consumption were inseparable in services, coining the term “immaterial products” to describe them17.

Today, we know that production and consumption are indeed separable for many services (think of dry cleaning, lawn mowing, and weather forecasting)18 and that not all service performances are perishable (consider video recordings of concert performances and sports events). Very significantly, many services are designed to create durable value for their recipients (your own education being a case in point). But the distinction between ownership and non-ownership, which we will discuss in the next section, remains a valid one, emphasized by several leading service marketing scholars19.