• Tweet

  • Mail

  • Share

  • Salve

  • Get PDF

  • Buy Copies

  • Print

Many managers of service businesses are aware that the strategic management (past which I mean the full process of selecting and implementing a corporate strategy) of service businesses is unlike from that of manufacturing businesses. This commodity discusses how pure service businesses are different from product-oriented businesses and why they require different strategic thinking. A pure service business is i in which the service is the primary entity that is sold.

That distinction is important because anybody in every type of business sells some element of service. In pure service businesses whatsoever transfer of a physical or concrete product is incidental to the service—for example, the written report of a management consultant. Examples of pure service businesses include airlines, banks, computer service bureaus, law firms, plumbing repair companies, motion motion-picture show theaters, and management consulting firms.

Top managers should ask themselves half-dozen questions almost strategic management. The questions are fairly common, simply the answers for service businesses are often unique. Each question volition be raised here and discussed in depth later.

ane. Practice we fully sympathize the specific type of service business we are in? Although service-oriented businesses are different from production-oriented businesses, the nature of the deviation depends a great deal on the specific type of service business. I will present a nomenclature scheme to aid distinguish between service businesses along some important strategic dimensions.

ii. How can we defend our business from competitors? Every business must consider how it can build and protect a strong competitive position. To do this, the economics of the concern must be carefully analyzed. Service businesses often require unlike competitive strategies from those of product-oriented companies. If an enduring institution is to be created, some attention must be given to the direction of economies of scale, proprietary engineering, and reputation of the company.

3. How can we obtain more cost-efficient operations? Manufacturing companies tin improve operating leverage by, for case, purchasing faster and more reliable machinery. But about service businesses are not able to follow this approach. Other methods must be explored.

4. What is the rationale for our pricing strategy? The pricing of services is a nebulous expanse. Cost-based pricing is ofttimes hard to decide, and in that location are few formulas for effective value-based pricing. It is important to expect at pricing strategy and think almost the economical and psychological effects of a modify in that strategy.

5. What process are we using to develop and examination new services? Every visitor depends on an ability to renew its franchise in the marketplace. The service-oriented company must pay item attention to this area because of the difficulty of developing protectable competitive positions. The procedure of new-service development and testing must recognize the abstruse, perishable nature of services.

half-dozen. What acquisitions, if any, would make sense for our company? Once the nature of the current concern is understood, the acquisition question tin can be faced. The acquisition game in the service sector can exist unsafe. More than ane company has acquired a service business using merely criteria that would be used in the acquisition of a production-oriented company. As several of these companies accept learned, this type of analysis, although necessary, is bereft.

Describing Services

In product-oriented businesses, the physical reality of the product provides a simple but powerful base on which to build a business description. The question is far more than difficult for service-oriented businesses to answer considering services are more abstruse than products. For case, information technology may be difficult to depict management consulting equally a business concern to someone who has never experienced the consulting relationship. What does a consultant do?

One way to deal with the difficulty of describing services has been to talk about them as if they were products. K. Lynn Shostack, a vice president in accuse of business planning and analysis at Citibank, has noted:

"Banks oft devote significant resource to an activity they call 'new product development.' The phrase is so alluring that groups are regularly gear up to create these 'new products.' The realization seldom seems to occur to such banks that they are not in the production evolution business organization at all. In fact, many banks do not seem to have arrived at the insight that things are non the ground for their industry. Fifty-fifty marketers in such banks plain practise non understand that they are engaged in mayhap the nearly difficult and dimly understood realm of business endeavor—the development and marketing of financial services." i

The predominant mental paradigm about "the way things work" in business is a product-based image. This image leads to a product-oriented language, and the language in turn constrains communication in such a way that one cannot develop actually innovative approaches to managing the service business organization.

Because they are often lumped together, service businesses can exist misunderstood. As we shall see later on, they differ greatly, and an agreement of their differences can assist the thoughtful director to understand the nature of the strategic opportunities in each.

The traditional image of the service business is that the service is "invariably and undeviatingly personal, as something performed past individuals for other individuals."2 This perspective is erroneous. Automatic car washes, automated banking services, and figurer time-sharing are only three of the many examples of service businesses in which the service is provided by automatic equipment. The strategic requirements for these businesses are patently quite different from those in which individuals perform services for other individuals.

The Exhibit shows one mode to split up service businesses into general types, with dissimilar strategic management requirements. At the pinnacle of the pyramid is the service that is provided past the business. To place a specific business organization on the spectrum in the showroom, it is necessary to answer 2 questions: (1) How is the service rendered? (two) What type of equipment or people render the service?

Exhibit A Spectrum of Types of Service Businesses

Placement of a specific service business along the spectrum may be difficult, merely two general observations may ease the difficulty: (1) every bit service businesses evolve, they often motility along the spectrum from people-based to equipment-based or vice versa, and (2) many companies are in more than one blazon of service business organization. Virtually all banks, for example, operate multiple-service businesses. Some of these are equipment-based, as in the transfer and storage of funds. Others are people-based, as in the financing of a home, car, or concern, because they require judgment almost the financial direction of funds.

Edifice Barriers

In production-oriented companies, capital is the virtually commonly used barrier to the entry of competition. Equally a product-oriented visitor grows, it can accept advantage of economies of scale in producing the production, invest in engineering science that will become proprietary, and offer a differentiated product through product development and marketing. These efforts pay off largely because they are centered on a uniform product that has concrete dimensions and is sold as a packet. They are made possible by the fact that the production, distribution, and sale of the product can be uncoupled, often being accomplished past different companies.

Service businesses rarely have this luxury. The service, considering it is an abstract, perishable quantity, must be produced and delivered by a unmarried company, often by a single unit of equipment or people. The effect is a decentralization of the service production process to the local level and a reduction in the opportunity for developing economies of scale. As a result, location decisions are oft very important and multiple locations can serve as a barrier to entry. One instance is the car rental business concern, where a large number of airport locations is very important.

Economies of Scale

Managers of service businesses should not conclude that they have no opportunities for scale economies and the resulting upper-case letter barriers to entry. On the contrary, there are many examples of scale economies, particularly in equipment-based service businesses. The introduction of broad-bodied jets by the airlines enabled them to wing twice as many passengers with the same number of high-salaried pilots and flight engineers. Although not on the same scale, other reductions in maintenance and footing handling personnel were possible.3

A 2nd example of economies of scale is the multiple-unit motion motion-picture show theater that can be constitute in most suburban locations in the United States. These facilities may have four or five theaters, some of which may be fairly small. The refreshment stand and the ticket selling booths are centralized, thus requiring both less flooring infinite and fewer people to operate them. In some cases, there is a single project room for more than than one theater, and the equipment is most completely automated. Central heating and air conditioning are provided for the entire edifice. Plain, the cost to operate this type of facility is much lower than the cost for an equal number of separate theaters.

Advertisement clout is the tertiary example of an economy of scale that service businesses can utilise equally a barrier to entry. Once information technology achieves a size that makes regional and/or national advertizement economically viable, a service business can use advertisement every bit a competitive weapon to build and maintain marketplace share. O.J. Simpson's advertisements for Hertz are an obvious example, but other companies such equally Orkin, John Hancock, and FinanceAmerica also use advertising effectively. Smaller companies simply do not have the capital required to mount a competitive advertising campaign.

With the probable exception of advertisement ascendancy, the economies of calibration that may provide a barrier to entry be primarily in equipment-based, and not in people-based, service businesses. Where economies of calibration cannot be developed easily, two other barriers to entry tin can be used: proprietary technology, and/or service differentiation.

Proprietary Technology

In equipment-based service businesses, proprietary applied science is perhaps near commonly used as a barrier to entry. In the computer services industry the set of "canned" programs that a time-sharing company offers is crucial to the sales effort for the company's services. So-called raw computer time is a commodity product supplied past many vendors. The purchaser of time-sharing services is interested in knowing what other services the company has which are technologically avant-garde over the contest. The software provided past the time-sharing visitor must exist technologically advanced in both what it will do and how efficient it is.

Less commonly, proprietary technologies have been adult by people-based service businesses, peculiarly those that provide professional services. The Boston Consulting Group has developed several proprietary technologies around its experience curve concept, including market place segmentation and strategic portfolio analyses.

Service Differentiation

Production differentiation, or as I have called it, service differentiation, is another barrier to entry. In product-oriented companies, the product is developed and marketed in such a way that it attains a brand proper name identification in the market place. In the more successful efforts, the product'south brand becomes an almost generic name for the course of products—Bic, Coke, and Xerox, for case. Very few services have adult a brand name identification. Instead, a service business concern develops a reputation for the type and quality of service information technology produces. The more abstract and complex the service is, the greater the need and potential for developing a reputation that volition serve as a bulwark to entry.

Consulting firms illustrate how a reputation can be a barrier to entry. There are many direction problems that any one consulting house could solve effectively. However, the large ones accept unique reputations and thus each tends to be called in on unlike kinds of problems. Such reputations provide some bulwark to the entrance of other consulting firms.

Historically, the executive recruiting business organisation, or "headhunting" as it is often chosen, has had a terrible reputation as a business concern. At that place are virtually no capital barriers to entry. All that is needed is a desk-bound and a telephone. Recruiters work on a fee plus expenses basis, with the fee to the employer based on a percent of the first year's full bounty to the person recruited. As a result, the business is highly fragmented and somewhat specialized past industry.

Building barriers to entry in service businesses is mostly more difficult, or at least must be done in less traditional ways, than in product-oriented businesses. Managers must recollect less about make identification and more about the reputation of the visitor. They must look for areas in which the advantages of economies of scale are bachelor. Finally, they must seek ways to develop and protect proprietary applied science.

Cutting Costs

A common misconception near service businesses is that information technology is almost impossible to obtain operating leverage and thus to better profit margins. Operating leverage exists in a business when, through a modify in operations, the relative toll per unit of the product or service decreases.

Substitution of capital for labor is the archetype method of obtaining operating leverage in both product- and service-oriented businesses. Capital letter is used to buy mechanism which tin produce a product or service at a faster rate with more consistent quality. Many service businesses have followed this path of development. Twenty years ago, nearly all automobile washes used unskilled labor; today, most are automated.

When the tasks cannot be automated because homo judgment must be exercised, cheap labor can often be substituted for expensive labor as a means of obtaining operating leverage. This is often the example in people-based service businesses, and law firms are expert in the practise. A large percentage of the tasks are routine and require little legal expertise. For example, routine and time-consuming research and the preparation of briefs can, in many cases, be washed by contempo graduates of police force school or by paralegal assistants, whose time is less expensive, while partners in the business firm work on client relationships, develop legal strategies, and so on.

Other service businesses use the aforementioned basic technique in unlike ways. Consulting firms use teams of consultants who perform different tasks, depending on their skills. Many insurance companies break the sales chore into its component parts of initial contact, presentation, and endmost the deal, and accept unlike people perform each function. In each example, the service is further broken downward, and the aspects that tin be performed by less expensive labor are identified. The expensive labor is then free to do those crucial tasks that bring profits to the company.

Value Engineering

The process of value engineering has become popular in many manufacturing companies in the terminal decade to determine what changes in design and/or manufacturing process can be made to reduce the cost of manufacturing a product without reducing its utility.

A like process tin can exist used for services. Once more, the service provided must be broken into its component parts. This time, however, the purpose is not to determine how the service is rendered, just rather what service is provided. The goals are to determine what parts of the service are essential, what parts tin can exist eliminated, and what minor additions could greatly enhance the service.

Although they accept not called it value technology, a number of service businesses have used the technique. Perhaps the best electric current instance is provided by Holiday Inns. This company has promoted the service equally ane that has no surprises. The quality of service has been set at a level that does not provide the extras that one would discover at an expensive hotel. The service is guaranteed to exist of consistent quality throughout the country. The company believes that consistent quality with no surprises is more than of import to its customers than swimming pools and other added services; therefore, the emphasis is on maintaining the quality of the primary service.

A second case is provided by commencement-class service on the airlines. The quality divergence betwixt beginning-class and coach service was significant x years ago. Today, although the incremental fare is in excess of 50% for first course, the traveler receives a slightly larger seat, two free drinks, and marginally better food. Yet first-class seats still sell. First-form customers are plainly buying condition, not personal service.

Value engineering is somewhat more difficult for a service than for a product, since the physical nature of a product allows a checking of its continued advent and function. For a service, it is ofttimes hard to know which aspect is most important to the client's purchase determination.

In sum, it is probably more difficult to obtain operating leverage in service businesses, peculiarly those that are people-based. The opportunities for finding operating leverage are in that location, only they require different means of thinking about operations.

Competing on Price

Virtually all production-oriented companies have means of determining their product'south cost per unit of measurement at various volumes. Part of their strategic game is to become the depression-cost producer and use this position as a competitive weapon.4 Other pricing strategies are of course available, such as the premium-price strategy for a premium-quality production.

In service-oriented businesses it is often difficult to determine what a unit of measurement of a given service is, much less its toll. In full general, it is easier to determine costs in equipment-based service businesses than in people-based businesses. To exist converted to an equipment-based service in the start place, the service usually has some routine character that can exist analyzed. People-based service businesses, notwithstanding, are much more circuitous. Until the theorists and practitioners who work with human resource accounting can refine the art sufficiently, information technology will exist difficult to determine the cost of people-based services accurately on annihilation just an aggregate basis.

The pricing of services is thus often based on value rather than on cost. Value is more often than not determined by the customer and to some extent by contest. Customers tend to get a full general feel for what they will have to pay for a particular service, but the source of this feeling is often unclear, considering comparison shopping is frequently hard. Customers will pay whatever they think the service is worth; thus pricing in many service businesses is based on any the market volition bear.

An interesting game is played in the pricing arena. I have never heard a businessman brag that he had just hired the least expensive consultant bachelor. People-based service businesses that rely on professionals to provide the service can, by pricing the service too low, create an image that is counter to that necessary for a professional operation that expects to remain competitive. Any good consultant knows that it is easier to sell a recommendation for which the customer has paid a significant amount than when the fee was quite low.

Prices tin be set besides depression in equipment-based service businesses as well. At about every airport, ane can find a fixed based operator (FBO) who performs one or several functions necessary to the operation of general aviation aircraft. Ane FBO at a busy municipal airdrome tried to increase the usage on the aircraft that he rented to local pilots past reducing prices by 5% to seven% throughout his fleet. The effect was a subtract in volume. Somehow a rumor had started that the FBO had been able to reduce prices because he had cut back on the maintenance on the airplanes.

Probably less is known almost the use of price as a strategic weapon in service businesses than about whatsoever of the other strategic variables. One fact, withal, is articulate. The general manager of a service business must use marketing methods that volition enhance the perceived value of the service.

Developing New Services

Nigh all product-oriented companies have some form of research and development effort that is responsible for designing and testing new products and/or modifications to current products. The R&D task in service-oriented companies is different because it is complicated by the lack of a concrete product. A service, particularly in people-based businesses, can be a little bit unlike each time information technology is rendered.

The entire process of creating such services deals with concepts rather than concrete objects. The testing procedure varies depending on whether the service is equipment-based or people-based, but in either instance it is hard to practice examination marketing or other types of market research on the new service. Customers must be enticed into experiencing the service, and this often requires major marketing efforts. Thus the cost of introducing a successful new service may exist quite high because it is difficult to predict what service concepts will exist understandable and attractive to the customer.

An example of a new-service development that nearly observers agree has stalled—at least for the adjacent several years—is that of electronic funds transfer. Why has it faltered? The reasons are obviously circuitous and include political, legal, and economic factors. Perhaps most of import, however, is consumer resistance rooted in fears virtually reckoner errors, invasion of privacy, and changes in lifestyles. It should exist made clear that the failure is non 1 of engineering. The technology is bachelor to create the and then-called cashless society, but consumers practice not desire the service.

The example illustrates a major departure betwixt R&D in product-oriented and in service-oriented companies. A product can be shown to a customer who tin make some crucial decisions almost whether he or she is interested in trying the product. But how exercise yous test-market the concept of a cashless lodge?

The difficulty of test marketing tin can, however, be turned into an advantage. Service concepts, especially in people-based service businesses, are malleable and tin can be changed even after they have been introduced in the market, and the price of such a alter is oftentimes quite low.

Any business must develop new services if it is to survive. This task is quite different from new-product development. It is highly abstruse, and the services that are developed require difficult and expensive testing in the marketplace. Thus there is petty existent innovation and a not bad deal of imitation of services. For example, airlines and banks are well known for their imitative practices.

Growing Through Acquisition

What is bought when a service business is acquired? In that location are several answers to this question, depending on the type of service business that is under consideration.

Many managers, specially those with production-oriented feel, feel virtually comfortable when acquiring an equipment-based service business. And then the conquering includes physical assets that tin be quite valuable if bought for less than comparable new assets, if there is a limited supply of the assets, or if the business is in strategic locations (for example, a car rental business, or a string of self-service laundries). Unless one of these conditions exists, information technology is often less expensive to buy new assets than to buy those of an existing service concern.

In people-based service businesses, the acquisition is more than risky considering people and their skills are the major purchase item. Regardless of the employment contracts and benefits that may exist offered, there is always the take a chance that people volition get out and take their skills with them. When concrete assets are purchased, they are owned when the papers are signed. Decisions virtually their utilize and disposition can be made by the acquiring company. The same is not true of people; they may decide to depart at whatsoever fourth dimension later on the purchase is completed.

This lesson was learned by a well-known consulting firm. The firm had been quite successful in the northeastern United states. Beingness an astute observer of current trends, its president noted that business activeness was increasing rapidly in the southern half of the country. Rather than spend several years and a significant amount of money developing a field role, he decided to acquire a pocket-size consulting firm in Dallas that had an excellent client list. The acquisition was made, and the president and two vice presidents of the smaller business firm were given employment contracts. Unfortunately, four of the better young consultants regarded the president of the new parent house equally a "Yankee carpetbagger." They left, formed their own firm, and within 18 months had acquired forty% of their former employer's clients as their own.

Whenever acquisition of a people-based service business is existence contemplated, information technology is important to ask: "What is the business worth without the key people?" There are some instances where the "franchise" in a market is worth the price of the business organization. In other instances, the services provided have some proprietary characteristic that is valuable fifty-fifty without the people in the company. Ofttimes, notwithstanding, the reply to the question is that all one is buying are people. When this is the example, it is unremarkably less expensive simply to hire away the best of these people.

Growth through conquering in service businesses is a risky proposition, merely the gamble varies. Information technology is mostly riskier every bit one moves downwardly the spectrum toward people-based businesses, and inside people-based businesses the risk increases when the service is provided by professionals or highly skilled persons. Any company that wants to acquire service businesses must make sure that it tin can attract and go on skilled service-oriented managers to run them.

Concluding Comment

Because manufacturing has been the dominant economic force of the last century, almost managers take been educated through experience and/or formal instruction to recall near strategic management in production-oriented terms. Unfortunately, a large function of this experience is irrelevant to the management of many service businesses. The full general director of a service business must develop a healthy skepticism most his and others' approaches to strategy.

One of the best means to change managers' thinking patterns and thus to avoid the trap of force-fitting production-oriented management techniques into a service-oriented business is to change the language organisation in the company. If managers talk about services instead of products, they too recall about services and those characteristics that make services unique.

1. G. Lynn Shostack, "Banks Sell Services—Not Things," The Banker'southward Magazine, Winter, 1977, p. 40.

2. Theodore Levitt, "Product-Line Approach to Service," HBR September–October, 1972, p. 43.

3. See West. Earl Sasser, "Matching Supply and Demand in Service Industries," HBR November–December, 1976, p. 133.

iv. Run across Patrick Conley, "Feel Curves as a Planning Tool" in Corporate Strategy and Product Innovation, ed. Robert R. Rothberg (New York: Free Press, 1976), p. 307.

A version of this article appeared in the July 1978 outcome of Harvard Business Review.