T-86.5300 Assignment: Goods based business vs. services based business – key differences

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Goods based business vs. services based bus i ness – key differences

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Abstract

This paper provides a literature review into the differences between goods and services based business. The paper highlights the differences, providing an overview of the issues involved. The issues are discussed more from the viewpoint of services, how services and service management differ from goods and what the peculiarities in services management are. Before moving onto the management issues the traditional dichotomy between services and its recent questioning are contemplated.

1 Introduction

Today, services are an important part of the economy (Gr?nroos, 2000; Fitzsimmons & Fitzsimmons, 2004) and increasingly so (Spohrer, 2006). The dichotomy between goods and services has been in the core of much scientific business literature related to services, at least in marketing. The dichotomy has been used as a justification for legitimacy of having separate scientific disciples for service marketing or management. This would suggest that there are some differences in the goods and services based businesses, their marketing, management, and strategy making decisions. However, the dichotomy has been recently questioned in marketing literature and is a topic of quite hot debate among the marketing science figure heads. It is therefore somewhat open to debate whether there are defendable differences.

This paper will first present the dichotomy along with the claimed unique characteristics of services before briefly presenting the recently cited critique for them. The unique characteristics are however used as a base for presenting the claimed differences in management, marketing, and strategy in services. The discussion mostly describes the services related issues and not as much on how goods companies are managed or how goods are manufactured, for example.

Other viewpoints to the matter are that an increasing number of companies whose main business is selling goods are integrating services into their offerings (Wise & Baumgartner, 1999) and that goods and services actually form a continuum of products. Products have a goods and services dimension (Fitzsimmons & Fitzsimmons, 2004, p. 21; Paloheimo et al. 2004, p. 13). The upshot of this view is that the differences are a matter of degree and not absolutes – although conceptual analysis of the subject is easier if a clear distinction between goods and services is assumed.

2 Objective of the analysis

This chapter presents objectives and goals of this paper.

The objective of the analysis is to first review different definitions of services, and these are many, and some generic characterizations of services to lay grounds for the discussion. Using this as a starting point then to present the differences between goods and services, as discussed in literature, and then subsequently use the differences as a basis in the discussion of the goods- and service-based business and their distinctive characteristics.

The goals of this paper are listed in the following:

· Identify the differences between goods and services in scientific literature.

· Summarize the discussion questioning the dichotomy of goods and services.

·

Identify the main differences in goods and services based business in…

o marketing,

o (operations) management, and…

o strategy.

· In order to provide an overview of the issues to a reader not previously familiar with the differences.

The material used is dominantly scientific. This in part due to the hot and interesting debate going on, especially in marketing literature, that questions the already rather well-accepted differences of goods and services.

3 Services

This chapter first presents some definitions for services and then briefly discusses services in general.

There are numerous definitions of services ranging from “everything that cannot be dropped on your feet” to describing services as processes, acts, deed, performances, etc. Service seems to be a complicated phenomenon and a difficult term to define, partially because it is extensively used in many different contexts. This difficulty has prompted Johns (1999) to write an article called “What is thing called service?” . The following lists a few of the plethora of different service definitions:

· “A service is a process consisting of a series of more or less intangible activities that normally, but not necessarily always, take place in interactions between the customer and service employees and/or physical resources or goods and/or systems of the service provider, which are provided as solutions to customer problems.” (Gr?nroos, 2000, pp. 46)

· “A service is a time-perishable, intangible experience performed for customer acting in the role of co-producer”. (Fitzsimmons & Fitzsimmons, 2004, p. 4)

· “Services are deeds, processes, and performances.” (Fitzsimmons & Fitzsimmons, 2004, p. 4)

· “A service is intangible and perishable. It is an occurrence or process that is created and used simultaneously or nearly simultaneously. While the consumer cannot retain the actual service after it is produced, the effect of the service can be retained.” (Fitzsimmons & Fitzsimmons, 2004, p. 4)

Even if services are often defined as being intangible, a service often includes a tangible component, i.e. goods like in car maintenance (Fitzsimmons & Fitzsimmons, 2004, p. 21; Paloheimo et al., 2004, p. 13), see Figure 1. According to Jiao et al. (2003) service is understood in literature along two main streams: as an activity or as an output of a system. When understood as an activity a service is performed for others, usually the customers. As an output a service is “a deed”, “a performance”, “an offering”, or “a benefit”. This kind of dual view echoed by Jiao et al. (2003) is presented in (Gr?nroos, 2000, pp. 51, 63). From the service provider’s view, much of the service management deals with the process and outcome consumption. A satisfactory outcome, i.e. what a customer receives in interactions with a company, in other words a result of a process, is necessary and a prerequisite for a good perceived quality of a service. However, how a customer receives the service and experiences the service process has a great influence on the customer’s satisfaction with the service. Gr?nroos (2000, pp. 63-4) argues that the service quality seen by customers has two dimensions: a technical (what received, outcome) and functional (how received, interactions, process) quality. Thus, managing the service process is important.

Usually a service process includes interactions of the service personnel and customers. Therefore both the personnel and customers influence service quality. The interpersonal interaction the personnel provide has the biggest impact on customer satisfaction (Johns, 1999) at least in labour intensive services. However, the parts of the process not visible to the customers do influence the customer satisfaction with the service also. For example, the quality of a restaurant meal is usually the responsibility of the chef, and the meal is prepared in the kitchen out of sight of the customer. The customer participation has an effect on the process: customers can provide resources needed as inputs in the process (Fitzsimmons & Fitzsimmons 2004, p. 331). The inputs they give and the actions they take may vary in general and in quality. This means that the service company faces difficulties in delivering quality service, both process and outcome wise, because of the varied actions and inputs of the customers. Educating and informing the customers about how they should act in the process is a way to make their actions more predictable and less varied (Gr?nroos 2000, p. 221; Johns, 1999).

The customers’ expectations of the service may be unclear and even unrealistic (Fitzsimmons & Fitzsimmons, 2004, p. 104). The customer expectations can be managed with putting effort to communicating clearly what the customers can realistically expect from the service, before and during the service process (Fitzsimmons & Fitzsimmons, 2004, p. 331). Related to communicating expectations, Gr?nroos (2000, p. 244) sees that services involve the company giving a promise and fulfilling the promise. The customer actions and expectations can be managed with the promise, specifying beforehand what the customer can expect to receive and needs to do in order to receive the service. How the promise is then actually fulfilled results in a service experience perceived by the customer.

4 Differences between goods and services

4.1 Traditional goods vs. services dichotomy

Fitzsimmons and Fitzsimmons (2004) and Gr?nroos (2000, p. 47) list distinctive characteristics of services, see below. The four first ones, namely intangibility, heterogeneity, inseparability of production and consumption, and perishability are the most often mentioned unique service characteristics. The dichotomy is also described in Table 1.

· Intangibility: Services lack the palpable or tactile quality of goods. Services are more or less intangible processes whereas goods are tangible things. Laroche et al. (2001) divide intangibility to three dimensions. First is physical intangibility or inaccessibility to senses. Second is generality or how general or specific a customer perceives a (service) product to be and if he/she has difficulties in precisely defining and describing a (service) product. A service is general if a customer cannot refer to precisely identifiable definitions, features, and/or outcomes (e.g. a hotel is a place where one can sleep - general). A service is specific if it generates numerous clear-cut definitions, features, and/or outcomes on the customer’s mind (e.g. a hotel is a lodging facility that provides a lobby, a front desk, rooms, cleaning services, a restaurant, a gift shop, room services, etc. - specific). Third dimension is mental intangibility, which refers to the difficulties of a customer to mentally grasp a product - to produce a mentally tangible representation of an object, especially if he/she lacks experience with it. For example, a car engine or PC is probably mentally intangible for most people who do not have sufficient knowledge of their internal workings. Same applies to insurance. It should be noted that service literature usually speaks of physical intangibility when referring to intangibility, and so does this paper unless specifically stated otherwise. Intangibility means that a customer cannot easily evaluate a service beforehand, as opposed to goods. One can test drive a car, for example, but testing a restaurant evening is more difficult.

· Heterogeneity: Heterogeneity is the result of service typically being co-produced by service company employees and customers, many of whom have never worked together. Moreover, each customer subjectively evaluates the outcome of service meaning that a similar and consistent service performance from the company may result in different evaluations from different customers and even from the same customer on another service encounter. On the other hand, goods are homogenous. There is therefore a relative inability to standardize service outcomes in comparison to goods.

· Inseparability of production and consumption: Services are simultaneously produced and consumed contrasted to the sequential nature of production, purchase, and consumption that characterizes goods. In other words, in goods the production and distribution are separated from consumption, in both time and space, whereas in services these happen simultaneously and are inseparable.

· Perishability: Services cannot be stored or inventoried as compared to goods. Therefore services cannot be saved, stored for reuse on a later date, resold, or returned. This implies that unused service capacity is wasted. If a seat on a flight is left unoccupied that specific seat on the flight cannot be sold again. Inventory problems exist in goods as well but in services carrying costs are related to idle production capacity.

· Customer participation: The customer is often an active co-producer in the service process. Usually the customer has to be present at least in some point during the service delivery. In goods, the customer usually just receives the finished product, although he might have participated in the design or specification, which is often the case in e.g. mass customization.

· Transfer of ownership: The ownership of goods can be transferred whereas a service usually doesn’t result in an ownership of anything, even if the customer can own a right to receive a service.

· Value production: In services, the company produces the core value for the customer in buyer-seller interactions. In goods, the company produces the core value in a factory.

4.2 Challenging the traditional dichotomy

4.2.1 General

The traditional dichotomy has been recently challenged in services (marketing) literature, with relation to the four most commonly cited differences, intangibility, heterogeneity, inseparability, and perishability - sometimes called the IHIP characteristics. This section presents the reasoning behind the challenge and discusses it. The challenge to the dichotomy is presented in (Vargo & Lusch, 2004) and to a degree in (Lovelock & Gummesson, 2004) as well. There has been a critical response to the challenge by Stauss (2005). The debate has been going on in several other papers – however, these three sources are used in this paper. The discussion takes place one characteristic at a time. One of Vargo and Lusch’s (2004) main thrusts is that the IHIP characteristics have presented services as inferior to goods and that the IHIP bring among them difficulties to services marketing and management not present in goods – this is a view they want to dispel. Both they and Lovelock and Gummesson (2004) present a strong case for the IHIP characteristics to be abandoned as unique characteristics that offer a generalized distinction of all services from goods.

4.2.2 Challenging intangibility

Vargo and Lusch (2004) argue that services often have tangible results, like a haircut. Lovelock and Gummesson (2004) in turn argue that much of the intangibility is related to the difficulties of customers to evaluate services before purchase, either mentally or physically. However, they continue that the same can be true for goods too and that some services can be evaluated before purchase, e.g. a customer can turn away at the door from a restaurant if he/she does not like the attitude of the employees, the atmosphere of the place, etc. In fact, tangibles often have a significant effect on services, like in restaurants.

4.2.3 Challenging heterogeneity

Both Vargo and Lusch (2004) and Lovelock and Gummesson (2004) critique of heterogeneity stems largely from the fact that it is inherently related to labour-intensive services. There are many services where automation by machines or IT has enabled homogenous (or standardized) service output, although the customer experiences and expectations may still vary form customer to customer. However, this variation applies to goods as well. Humans can also be involved in production of goods which implies a degree of heterogeneity in goods too. Vargo and Lusch (2004) further argue that customers actually would prefer to receive a (service) product that is customized (i.e. heterogeneous) to their individual needs, instead of a standardized one (i.e. homogeneous). They also state that heterogeneity concept as a negative aspect mostly relates to manufacturing output and whether it meets the specifications – however, the quality and value perceived by the customer might depend on entirely different issues. This is relevant for marketing efforts and heterogeneous, customized products should be the normative goal from the customer and marketing perspective.