3 EMERGENCE OF SERVICES

Dr. Puja Waalia Mann

1.0 Introduction

Services are deeds, acts or performance. The complexity to this simple definition is added when we realize that there are no pure services nor pure tangible products.

Philip Kotler defines a service as “any act or performance that one party can offer to another that is essentially intangible and does not result in ownership of anything. Its production may or may not be tied to a physical product.”

There is a growing market for services and increasing dominance of services in economics worldwide. Services are a dominant force in countries around the world as can be seen in the global feature. The tremendous growth and economic contribution of the service sector have drawn increasing attention to the issues and problems of service sector industries. There was a time when it was believe that the industrial revolution was the only solution to the problems of poverty, unemployment and other ills of society. Now, however, the service sector promises to fulfill the task. Services touch the lives of every person everyday.

Around the world, innovative newcomers offering new standards of service have succeeded in markets where established competitors have failed to please today’s demanding customers. Many barriers to competition are being swept away, allowing the entry of eager newcomers, ranging from tiny start-up operations like garden maintenance or baby-sitting services to well-financed multinational firms importing service concepts previously developed and tested in other countries. Established businesses often find it hard to maintain customer loyalty in the face of competition from innovative firms offering new product features, improved performance, price-cutting, clever promotions and the introduction of more convenient, technology-driven delivery systems.

1.1.Learning Objectives

In this module, you will learn:

a)      How service sector evolved

b)      Factors influencing evolution of services

1.2.Key Words:Services , classification , evolution

1.3. The evolving environment of services

Liberalization, Privatization, Globalization (LPG) has brought unprecedented changes in the economic, trade and industrial scenarios. India is fast moving from a protected economy to an open market economy and becoming integrated with the world economy. LPG environment has exposed various organizations including the service sector to the challenges of competition, service quality, cost and the competitive environment will help organizations to modernize. Some of those unable to cope with the changes may have to face the consequences of survival of the fittest.

Growth of service industry can be attributed to the changing life style, changing world, changing industrial economies, changing population and changing technology. There is a drastic change in the industrial environment and inter industry relationship because of two vital components i.e Service and information technology. Depending on the industry and the country in which the service firm does business, the underlying causes of such changes may include any of the twelve forces listed below. Like the factors underlying any revolution, some of the origins of today’s service sector revolution go back a number of years, whereas others reflect a chain of relatively recent events that continues to unfold.

1.3.1Changing Patterns of Government Ownership and Regulation

Traditionally, many service industries were highly regulated. Government agencies set price levels, placed geographic constraints on distribution strategies and, in some instances, even defined the product attributes. Since the late 1970s, there has been a trend in the USA and Europe towards partial or complete deregulation in a number of major service industries.

Further relaxation of regulations on trade in services between members of the European Union has already started to reshape the economic landscape of Europe. Reduced government regulation has already eliminated or minimized many constraints on competitive activity in such industries as airfreight, airlines, railways, road transport, banking, securities, insurance and telecommunications.

Barriers to entry by new firms have been dropped in many instances, geographic restrictions on service delivery have been reduced, there is more freedom to compete on price and existing firms have been able to expand into new markets or new lines of business. But reduced regulation is not an unmixed blessing. Fears have been expressed that if successful firms become too large – through a combination of internal growth and acquisitions there may eventually be a decline in the level of competition. Conversely, lifting restrictions on pricing may benefit customers in the short run as competition cuts prices, but may leave insufficient profits for needed future investments. For instance, fierce price competition among American domestic airlines led to huge financial losses within the industry, bankrupting several airlines. This made it difficult for unprofitable carriers to invest in new aircraft and raised worrying questions about service quality and safety. Profitable foreign airlines, such as British Airways and Singapore Airlines, gained market share by offering better service than American carriers on international routes. Of course, not all regulatory changes represent a relaxation of government rules. In many countries, steps continue to be taken to strengthen consumer protection laws, to safeguard employees, to improve health and safety, and to protect the environment.

1.3.2Privatization

The term ‘privatization’ was coined in Great Britain to describe the policy of transforming government organizations into investor-owned companies. Led by Britain, privatization of public corporations has been moving rapidly ahead in a number of countries across Europe, as well as in Canada, Australia, New Zealand and, more recently, in some Asian and Latin American states. The transformation of such service operations as national airlines, telecommunication services and utilities such as gas, electricity and water into private enterprise services has led to restructuring, cost-cutting and a more market-focused posture. When privatization is combined with a relaxing of regulatory barriers to allow entry of new competitors, as in the British telecommunications or water industries, the marketing implications can be dramatic. The privatization of utilities has led to a trend towards international ownership, which many authorities see as irreversible.

Privatization can also apply to regional or local government departments. At the local level, for instance, services such as refuse collection and cleaning have been shifted from the public sector to private firms. Not everyone is convinced, however, that such changes are beneficial to all sectors of the population. When services are provided by public agencies, there are often cross-subsidies, designed to achieve broader social goals.

With privatization, there are fears that the search for efficiency and profits will lead to cuts in service and price increases. The result may be to deny less affluent segments the services they need at prices they can afford. Hence the argument for continued regulation of prices and terms of service in key industries such as healthcare, telecommunications, water, electricity and passenger rail transportation.

1.3.3Technological Innovations

New technologies are radically altering the ways in which many service organisations do business with their customers ,as well as what goes on behind the scenes. Perhaps the most powerful force for change today comes from the integration of computers and telecommunications.

Companies operating information-based services, such as financial service firms, are seeing the nature and scope of their businesses totally transformed by the advent of national (or even global) electronic delivery systems, including the Internet and its bestknown component, the World Wide Web. For instance, Amazon.com delivers the same product to customers as a traditional bookshop, but in a very different context. Although booklovers may complain that it cannot offer the chance to browse the shelves of a friendly bookshop and leaf through a book, Amazon.com offers far more choice and convenience, global access and often lower prices. The launch of Amazon’s Kindle e-reader, followed by Apple’s iPad, enabled the download of books, starting a transformation in the way people consume literature. Although people had been downloading music for years, the success of Apple’s iPod and iTunes store made this means of consuming music commonplace, with a far-reaching effect on the music industry.

Technological change affects many other types of services, too, from airfreight to hotels to retail stores. Express courier firms such as TNT, DHL, FedEx and UPS, for instance, recognized that the ability to provide real-time information about customers’ packages had become as important to success as the physical movement of those packages. Technology does more than enable the creation of new or improved services. It may also facilitate reengineering of such activities as delivery of information, order-taking and payment, enhance a firm’s ability to maintain more consistent service standards, permit the creation of centralized customer service departments, allow replacement of personnel by machines for repetitive tasks and lead to greater involvement of customers in operations through selfservice and the Internet.

1.3.4Growth of Service Chains and Franchise Networks

More and more services are being delivered through national or even global chains. Respected brand names such as Burger King, Body Shop, Credit Suisse, Hertz, Ibis, Lufthansa and Mandarin Oriental Hotels have spread far from their original roots. In some instances, such chains are entirely company-owned; in others, the creator of the original concept has entered into partnerships with outside investors.

Franchising involves the licensing of independent entrepreneurs to produce and sell a branded service according to tightly specified procedures. It is an increasingly popular way to finance the expansion of multi-site service chains that deliver a consistent service concept. Large franchise chains are replacing (or absorbing) a wide array of small, independent service businesses in fields as diverse as bookkeeping, car hire, dry-cleaning, hairdressing, photocopying, plumbing, fastfood restaurants and estate agency services. Among the requirements for success are the creation of mass media advertising campaigns to promote brand names nationwide (and even worldwide), standardization of service operations, formalised training programmes, a never-ending search for new products, continued emphasis on improving efficiency and dual marketing programmes directed at customers and franchisees, respectively.

1.3.5Internationalization and Globalization

The internationalization of service companies is readily apparent to any tourist or business executive travelling abroad. Airlines and airfreight companies that were formerly just domestic in scope today have extensive foreign route networks. Numerous financial service firms, advertising agencies, hotel chains, fast-food restaurants, car hire agencies and accounting firms now operate on several continents. This strategy may reflect a desire to serve existing customers better, to penetrate new markets, or both.

The net effect is to increase competition and encourage the transfer of innovation in both products and processes from country to country. Many well-known service companies in Europe are foreign-owned; examples include Citicorp, McDonald’s, Andersen Consulting, TNT, Harrods and Four Seasons Hotels. In turn, Americans are often surprised to learn that Burger King and Holiday Inn are both owned by British companies. A walk round many of the world’s major cities quickly reveals numerous famous service names that originated in other parts of the globe. Franchising allows a service concept developed in one country to be delivered around the world through distribution systems owned by local investors.

Internationalization of service businesses is being facilitated by free trade agreements – such as those between Canada, Mexico and the United States (NAFTA), between the South American countries comprising Mercosur or PactoAndino, and, of course, between the current member states of the European Union. However, there are fears that barriers will be erected to impede trade in services between free trade blocs and other nations, as well as between the blocs themselves. Developing a strategy for competing effectively across numerous different countries is becoming a major marketing priority for many service firms.

1.3.6Pressures to Improve Productivity

With increasing competition, often price-based, has come greater pressure to improve productivity. Demands by investors for better returns on their investments have also fuelled the search for new ways to increase profits by reducing the costs of service delivery.

Historically, the service sector has lagged behind the manufacturing sector in productivity improvement, although there are encouraging signs that some services are beginning to catch up, especially when allowance is made for simultaneous improvements in quality. Using technology to replace labour (or to permit customer self-service) is one cost-cutting route that has been followed in many industries. Re-engineering of processes often results in speeding up operations by cutting out unnecessary steps. However, managers need to be aware of the risk that cost-cutting measures driven by finance and operations personnel without regard for customer needs may lead to a perceived deterioration in quality and convenience.

1.3.7The Service Quality Movement

The 1980s were marked by growing customer discontent with the quality of both goods and services. Many of the problems with manufactured products concerned poor service at the retail point-of-purchase and with difficulties in solving problems, obtaining refunds or getting repairs made after the sale. Service industries such as banks, hotels, car hire firms, restaurants and telephone companies were as much criticized for human failings on the part of their employees as for failures on the technical aspects of service.

With the growing realization that improving quality was good for business and necessary for effective competition, a radical change in thinking took place. Traditional notions of quality (based on conformance to standards defined by operations managers) were replaced by the new imperative of letting quality be customer-driven, which had enormous implications for the importance of service marketing and the role of customer research in both the service and manufacturing sectors.10 Numerous firms have invested in research to determine what their customers want on every dimension of service, in quality improvement programmes designed to deliver what customers want, and in regular measurement of how satisfied their customers are with the quality of service received.

1.3.8 Expansion of Leasing and Rental Businesses

Leasing and rental businesses represent a marriage between service and manufacturing businesses. Increasingly, both corporate and individual customers find that they can enjoy the use of a physical product without actually owning it. Long-term leases may involve use of the product alone – such as a lorry – or provision of a host of related services at the same time. In road transport, for instance, full-service leasing provides almost everything, including painting, washing, maintenance, tyres, fuel, licence fees, road service, substitute vehicles and even drivers. In the UK, as the home improvement and the do-it-yourself markets have grown, many entrepreneurs have gone into business to rent electrical and mechanical equipment ranging from carpet cleaners and hedge trimmers to power tools, wallpaper strippers and cement mixers.

Personnel, too, can be hired for short periods rather than employed full-time, as evidenced by the growth of firms supplying temporary workers, from secretaries to security guards (whom Americans sometimes refer to jokingly as ‘rent-a-cops’). Europe is following practices that have long prevailed in Canada and the United States, with more students becoming part-time workers.

1.3.9 Manufacturers as Service Providers

Service profit centres within manufacturing firms are transforming many well-known companies in fields such as computers, motor vehicles and electrical and mechanical equipment. Supplementary services once designed to help sell equipment – including consultation, credit, transportation and delivery, installation, training and maintenance – are now offered as profit-seeking services in their own right, even to customers who have chosen to purchase competing equipment.

Several large manufacturers (including General Electric, Ford and Mercedes) have become important players in the global financial services industry as a result of developing credit financing and leasing divisions. Similarly, numerous manufacturing firms now seek to base much of their competitive appeal on the capabilities of their worldwide consultation, maintenance, repair and problem-solving services. In fact, service profit centres often contribute a substantial proportion of the revenues earned by such well-known ‘manufacturers’ as IBM, Hewlett-Packard and Rank Xerox.

1.3.10 Pressures on Public and Nonprofit organizations to find new income

The financial pressures confronting public and nonprofit organizations are forcing them not only to cut costs and develop more efficient operations, but also to pay more attention to customer needs and competitive activities. In their search for new sources of income, many ‘nonbusiness’ organisations are developing a stronger marketing orientation, which often involves rethinking their product lines, adding profit-seeking services such as shops, retail catalogues, restaurants and consultancy, becoming more selective about the market segments they target and adopting more realistic pricing policies.

As the costs of staging soccer matches has risen (not least because of the sharp rise in players’ salaries), many football clubs across Europe have become highly marketing-oriented. A growing number engage in significant merchandising activities, with shops selling goods from replica football strips to babywear. New or renovated stadia now feature restaurants and special spectator boxes that can be sold or rented to companies.

1.3.11 Hiring and Promotion of Innovative Managers

Traditionally, many service industries were very inbred. Managers tended to spend their entire careers working within a single industry, even within a single organization. Each industry was seen as unique and outsiders were suspect. Relatively few managers possessed graduate degrees in business, such as an MBA, although they might have held an industry specific diploma in a field such as hotel management or healthcare administration. In recent years, however, competition and enlightened self-interest have led companies to recruit better qualified managers who are willing to question traditional ways of doing business and able to bring new ideas from previous work experience in another industry. In retail banking, for instance, senior managers in fields such as marketing are sometimes recruited from fast moving consumer goods companies. And within many firms, intensive training programmes are now exposing employees at all levels to new tools and concepts.

1.4 Other reasons for growth of services

1.      Consumer affluence: Due to the fast rise in the income of consumers, they are attracted towards the new areas like clubs, health clubs, domestic services.

2.      Working women: During the recent times a large number of women have come up in a variety of professions. In short, women are getting involved in almost all male dominated activities. Due to this the demand of various services has increased.

3.      Greater life expectancy: According to the World Development Report and world human resource index, the life expectancy of people has increased significantly all over the world barring few developing countries. This results into the requirement of medical services.

1.4 Conclusion

It is now obvious that most economies, the world over, are increasingly becoming service economies and, therefore, there is a need to manage service economies and , therefore, there is a need to manage services in the best possible way.The service sector has now surpassed the manufacturing sector in term of contribution to GDP.Liberalization, Privatization,

Globalization (LPG) has brought unprecedented changes in the economic, trade and industrial scenarios. Customers needs are changing so considering various consumer needs and changing structure of industry has put various pressure on the service marketer to better understand the consumer and market face.Several forces are driving sector today. There are various important factors that influence the service industry such as privatization, service quality movement, pressure on public and private organization to generate income, and so on. None of the industries in the service sector find themselves untouched by some of the factors described above. Service industries has to understand these factors and develop strategies accordingly.

Learn More

1. Ravi Shanker, ‘Services Marketing: The Indian Perspective’, Excel Books.
2. Lovelock, ‘Services Marketing: People, Technology, Strategy’, Pearson Education.
3. Zeithaml and Bitner, ‘Services Marketing: Integrating Customer Focus Across the Firm’, Tata McGraw Hill.
4. Rust, Zahorik, and Keiningham, ‘Service Marketing’, Addison Wesley.
5. Fitzsimmons and Fitzsimmons, ‘Service Marketing: Operations, Strategy, and Information Technology’, McGraw Hill.