Critically discuss why service businesses sector has grown, but the businesses are often barley profitable?

The right service strategies for product companies?

Essay, 2012

16 Pages, Grade: 1,7


Critically discuss why service businesses sector has grown, but the businesses are often barley profitable? The right service strategies for product companies?

1. Introduction and Overview

This assignment deals with the issue of service management for organisations that essentially sell products, the various aspects of service management in such organisations, and the impact of service delivery on the growth, market share and profitability of these organisations. Use is made of the case of Whitbread plc, the UK’s largest operator of budget hotels, to discuss the issue of service provisioning and its management in the budget hotel environment.

Business organisations that sell products have traditionally restricted their dealing with customers to the essential transaction of selling the product to the customer, delivering it and collecting the payment due against such product. Sales have thus been by and large restricted to the carrying out of simple transactions (Normann, 2007).

Recent decades have however witnessed significant changes in this approach of product companies towards marketing, sales and the establishment of relationships with customers. Competition has increased enormously over the years, with newer entrants coming into established business areas with differentiated products (Normann, 2007). The area of mobile phones is a stark example of the way in which a simple communication device has evolved over the years into an all purpose instrument with features for sending letters, examining the web, listening to music and even watching movies (Normann, 2007). The entry of China into global business in the 1980s and the leveraging of its economic manpower by both international and local companies resulted in the sharp drops in product prices, along with the introduction of various new product features, and threatened the very survival of numerous business organisations and even complete business sectors in the western economies; which had become accustomed to global market dominance on account of their product quality, technical and scientific skills and expertise and resource availability (Normann, 2007).

Competition among businesses has also intensified on account of enormous increases in customer awareness (Pereira, 2009). Whilst customers in the past had severely restricted information about available products and services and their knowledge about product availability and product quality was restricted to media reports and company pamphlets, the emergence and growth of the Internet has resulted in an explosion of available information on various products and services, bolstered by expert analysis and comments (Pereira, 2009). Modern day customers can access information about numerous competing products, including their prices, their features and their quality, make their own comparisons, and thereafter arrive at purchasing decisions (Pereira, 2009).

Such intensification of competition has in turn resulted in encouraging manufacturers and marketers of products in providing a range of services, which include warranties of different types, after sales services, and various other facilities, to customers in order to make their buying experience satisfactory and urge them to come back for repeat purchases (Fitzsimmons & Fitzsimmons, 2001). Automobile manufacturers now not only provide warranties for specific periods but also entitle customers to specific numbers of free checks and services. Some organisations establish large service departments, which provide both free and paid services and look at these services as profit centres and revenue drivers (Fitzsimmons & Fitzsimmons, 2001).

It is now often seen that competition in product areas is resulting in the development of better services by companies, in order to enhance competitive edge in the local and international arena. Many product companies no longer think of services as add-on activities but rather as important business ingredients that exist during the complete product lifecycle (Auguste, et al, 2006). Such focus on providing services has certainly resulted in greater innovations and in the bundling of services and products. Dell Computers for example does not only sell customised computers through online channels, but also provides security services (Auguste, et al, 2006).

The ServQual Model developed in the 1980s by Zeithaml, Parasuraman and Berry is a service quality framework that has 5 features for measurement of services namely, (1) reliability, (2) assurance, (3) tangibles, (4) empathy and (5) responsiveness. This abridged form of the original ServQual model, which had 10 features and was considered to be too subjective and unwieldy, is better known by the acronym RATER (Buttle 1996). The Gronroos service quality model states that the service quality that is experienced by customers has two primary dimensions, i.e. technical quality and functional quality. Gronroos emphasises upon 7 important criteria for service quality, namely (a) professionalism and skills, (b) attitudes and behaviour, (c) accessibility and flexibility, (d) reliability and trustworthiness, (e) service recovery, (f) servicescape and (g) reputation and credibility (Groonroos, 2007).

Such focus on services, whilst essentially undertaken for the enhancement of competitive edge, brings with it a number of operational, management and profitability issues for the provider company (Filiatrault, et al, 1996). It needs to be understood that most product companies are geared towards the production and delivery of specific products. Whilst the bundling of services with products certainly adds to customer benefits, satisfaction and appreciation, its delivery is associated with a number of challenges (Filiatrault, et al, 1996).

It is however often seen that product companies are very often unable to achieve scale and cost efficiencies in the delivery of services, primarily because of its add on nature and the pressure of competitive forces on the prices of products. Market forces often discourage organisations from charging a fair amount for their services, especially if such services are provided by competitors and do not really help in product differentiation. The inability to achieve appropriate revenues for services often results in such services becoming a financial strain on product companies.

The provisioning of specific services and the management of such activities is clearly an additional activity, which is also very often complex in nature. The provisioning of services with efficiency thus calls for specific managerial abilities, skills and processes, which may not in the first case, be available with specific product companies (Normann, 2007). Whilst the intention behind provisioning of services, is no doubt aimed at enhancement of organisational business, profitability and competitive advantage, its actual provisioning very often calls for the sources and skills that are not internally available with product manufacturing companies and thus have to either be internally developed or to be purchased from external suppliers (Normann, 2007).

Such arrangement of services, both from internal and external avenues, is also very obviously associated with the incurrence of specific costs, which can be multifaceted, complex, variable and also substantial in nature. The provisioning of these services thus not only requires significant skills, expertise and effort, but also involves significant costs (Bundschuh & Dezvane, 2003). Organisations in their quest for profitability very often charge for these services and establish specific operational and profit centres for this purpose. Most vendors of consumer durables, like refrigerators, televisions, washing machines, and air conditioners, not only provide free services during warranty periods but also extend paid services under maintenance contracts after the expiry of such warranty periods (Bundschuh & Dezvane, 2003). The provisioning of such services thus assumes very specific commercial and economic dimensions, with associated revenues, costs and profitability. Inadequacies, inefficiencies and errors in the management of these services can very often result in organisational stress, both in the provisioning of services and in their costs, and can thereby adversely affect organisational efficiencies and profitability (Bundschuh & Dezvane, 2003).


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Critically discuss why service businesses sector has grown, but the businesses are often barley profitable?
The right service strategies for product companies?
University of Edinburgh  (Business School )
Catalog Number
ISBN (eBook)
ISBN (Book)
File size
492 KB
Service Management, Product companies, service strategies, Gronroos, Budget Hotel, Premier Inn
Quote paper
Alexander Schmithausen (Author), 2012, Critically discuss why service businesses sector has grown, but the businesses are often barley profitable? , Munich, GRIN Verlag,


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