T-86.5300 Assignment: Goods based business vs.

services based business – key differences

Lastname, Firstname - 12345X

Goods based business vs. services based business – key differences

12345X, Firstname Lastname

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 (Grönroos, 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.

T-86.5300 Assignment: Goods based business vs. services based business – key differences
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Limousine
”Just a car” Car Leased car service

Service dimension

Goods dimension

Physical Car Car (Car) (Car)

(Goods)

Service Delivery Warranty Lease contract Travel

Service contract

Figure 1 Goods and services continuum of products (adapted from Paloheimo et al., 2004,
p. 13)

• 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

T-86.5300 Assignment: Goods based business vs. services based business – key differences
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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.” (Grönroos,
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 (Grönroos, 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. Grönroos (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 (Grönroos 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, Grönroos (2000, p. 244) sees that services involve the
company giving a promise and fulfilling the promise. The customer actions and expectations can
T-86.5300 Assignment: Goods based business vs. services based business – key differences
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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 Grönroos (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.

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

Table 1
Goods versus services dichotomy (adapted from Grönroos, 2000, p. 47)

Goods Services
Tangible Intangible
Homogenous Heterogeneous
Production and distribution Production, distribution, and
separated from consumption consumption simultaneous
Nonperishable, can be kept in stock Perishable, cannot be kept in stock
A thing An activity or process
Core value produced in buyer-seller
Core value produced in a factory
interactions
Customers do not (normally)
Customers participate in production
participate in production
Transfer of ownership No transfer of ownership
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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.

4.2.4 Challenging inseparability

Vargo and Lusch’s (2004) argument against inseparability is based on the idea that goods
render services, or value, to customers when they use the goods or adapt them to their needs –
hence, the separation is not possible. However, Stauss (2005) argues that even if the idea of
goods as means to render value is accepted, goods and services are still produced in very
different ways and that customer’s use of a good does not pose any problems to its production.
Lovelock & Gummesson (2004), in turn, argue that there are many services that indeed are
produced separately and do not involve the customer directly – hence the production and
consumption need not be simultaneous. Examples of services delivered in the absence of the
customer include freight transport, routine cleaning, and equipment maintenance. They are of
the opinion that inseparability does have important implications for marketing and operations of
services that truly are inseparable – but that it is not a distinctive characteristic to all services.

4.2.5 Challenging perishability

Vargo and Lusch (2004) state that many goods are perishable, foodstuff rots, cars rust, etc.
T-86.5300 Assignment: Goods based business vs. services based business – key differences
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They see that services can be inventoried prior to production, like hotel rooms, flight seats,
university lecturers but services are not inventoried after production. Further, the effect of
services need not perish in an instant either. For example, consider a university course and the
knowledge students (hopefully) accumulate during it. Lovelock and Gummesson (2004) see
perishability to be a multifaceted issue that encompasses productive capacity, the producer’s
output, the performance experienced by the customers and the out they obtain from the service.
Productive capacity is perishable in both goods and services and wasted if not used. In services
with wide demand fluctuation this is can be a big problem. In goods buffer inventories can help
but carry a cost.

4.2.6 Summary

As a conclusion of the above discussion it has to be stated that the IHIP service
characteristics cannot be considered to offer a distinction between all goods and services.
Rather, different goods and services seem to manifest the IHIP characteristics in different
degrees. The idea is similar to one presented in the continuum of Figure 1. The IHIP
characteristics do exist in any case and they can be useful for analysis.

5 Implications of the differences for business

This section provides the main thrust of the paper, mainly the discussion and summaries of
how and where the differences between goods and services cause apparent differences also in
the business and operations of companies. Where applicable, the IHIP characteristics are used as
a basis for analysis.

5.1 Marketing

5.1.1 Effects of intangibility

In their review of service marketing literature Edgett and Parkinson (1993) state that
intangibility does cause customers problems in evaluating a service offering prior to purchase.
This often means that the customers might perceive the risk of purchase higher in services than
in goods (Laroche et al., 2001). Service are said to be lower in search qualities compared to
goods (Bowen & Ford, 2002). There is nothing to show, compare or objectively test prior to
purchase. The goal of marketing efforts should therefore be to make the offering more tangible
to customer, as opposed to approach commonly used in goods (Edgett & Parkinson, 1993).
Possible ways to do this are use of visual cues (like consistent staff appearance, McDonalds
golden arches), image and reputation creation, and branding (Edgett & Parkinson, 1993;
Laroche et al., 2001). On the other hand, Vargo and Lusch (2004) argue that branding does not
increase the tangibility. Rather, branding in their view conveys the intangible benefits related to
the brand. Use of guarantees can also lower the risk associated with purchase (Laroche et al.,
2001). According to Edgett and Parkinson (1993) each of these gives the customer something
tangible with which to associate the service. They also stress the importance of customer-
provider interactions as these are often the only impressions customers retain from the company
– interactions are tangible, at least in the sense they can be observed by senses.
Allowing the customers to observe or monitor the service process may also improve risk
associated with tangibility. For example, UPS lets its customers to track their shipment in the
Internet (Laroche et al., 2001) and McDonalds offers a clear view to their kitchen (and its
cleanliness). Another way to increase mental tangibility could be providing the customers with
“objective” product reviews and references from satisfied clients and free trials to the service
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(Laroche et al., 2004).

Customers also have troubles in assessing the monetary value of the service transaction both
prior and after purchase. This has important implications for service pricing (Edgett &
Parkinson, 1993). Customers may only be able to compare services along their prices – and base
their expectations and judgements of perceived quality on the price. Price, thus, can become an
important standard. Advertisement is affected as well. It is more difficult to communicate to the
potential customers the firm’s willingness and ability to provide a service and the value of the
service to the customer (Edgett & Parkinson, 1993). Service advertisement could try to create
vivid mental images of service benefits, use narratives focusing on subjective human
experiences and service episodes (e.g. IF insurance commercials of unusual claims), and
depiction of service processes.
Edgett and Parkinson (1993) also cite studies that indicate that service customers rely more
on word-of-mouth when purchasing services than in goods and that they require more
information about services than about goods.

5.1.2 Effects of heterogeneity

As services are more difficult to standardize, customers tend to expect more inconsistent
delivery from service companies and thus perceive purchasing services to be more risky than for
goods. This is especially true in labour intensive services (Edgett & Parkinson, 1993). For
automated services this difference does not necessarily hold. Lowering the perceived risk can be
done by offering guarantees (Laroche et al., 2001). Internal marketing efforts to promote service
quality and culture throughout the organization are proposed as a way to improve consistent
delivery (Edgett & Parkinson, 1993).

5.1.3 Effects of inseparability

The main effect for marketing from inseparability is that the company must market the
service successfully to the customer before he/she has had any experience with it (Edgett &
Parkinson, 1993). Another effect is that the service personnel often act both as producers and
marketers for the service, making customer contact people key personnel for the service
company (Edgett & Parkinson, 1993). The inseparability brings also benefits in form of
immediate and continuous feedback from customers (Edgett & Parkinson, 1993). Marketing
services should also strive to educate customers to participate in the process according to the
company’s wishes (Grönroos, 2000, p. 221; Johns, 1999). Consider any fast food restaurant that
expects the customers to clear their own tables, there usually is a sign saying Thank you! on the
places where the trays should be taken to. In Subways there are clear step-by-step instructions
on how to order their baguettes.

5.1.4 Effects of perishability

Main result from perishability for service marketing is that it should aim for smoothing
demand as production capacity is wasted if not used. Means to do this are using peak and off-
peak period pricing & price incentives, charging different rates for different types of customers,
developing non-peak demand & demarketing peak times, and creating reservation systems
(Edgett & Parkinson, 1993; Fitzsimmons & Fitzsimmons, 2004, p. 24; Lovelock &
Gummesson, 2004).

5.2 Management and operations

The discussion of differences in service management and operations in this chapter relies
T-86.5300 Assignment: Goods based business vs. services based business – key differences
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heavily on the literature review on differences of services and goods operations of Bowen and
Ford (2002).

5.2.1 Service organization assessment

The assessment of service organization effectiveness and efficiency relies only on the
subjective assessment of the customer on the intangible service. Objective measurement is thus
difficult and has to be supplemented with subjective measures for assessing service experiences
(Bowen & Ford, 2002). Measurement of effectiveness, i.e. thing done right, in services must rely
on assessment of customer satisfaction and loyalty, both subjective measures. Service quality is
perceived and experienced (Bowen & Ford, 2002). To be able to create lasting relationships with
loyal customers, service companies must be able to continuously spend considerable time and
effort in discovering and monitoring the past, present, and future expectations of the customers.
Intangibility makes this difficult.
Measuring efficiency, i.e. ration of inputs to outputs is also more difficult in services than in
goods. Due to inseparability, service delivery systems are not ‘closed systems’ when compared
to goods-producing factories. Measuring tangible, physical inputs and outputs in goods is
relatively easy. On the other hand, service customers and their actions act as inputs and can vary.
Their motivation, knowledge, expectations, and skills can be diverse and difficult to capture
(Bowen & Ford, 2002). Therefore, the service delivery system has to be flexible enough to cope
with the variability in (customer) inputs. The outputs also differ. Consider two parties of
restaurant quests, the other having other plans later in the evening and leaving in 1 hour, and the
other expecting to dine through four courses and spend a few hours doing it. Both parties might
be satisfied with the output even if the objective time measurement is quite different (Bowen &
Ford, 2002). There is a potential pitfall in using objective manufacturing measures for efficiency
in services. For example, in a help desk call centre measuring average call times would probably
not be a measure of satisfied customers whereas measuring problems solved in a one call (no
returning callers with the same problem) might be.

5.2.2 Service production strategy

In goods, the company can have a separate testing unit that ensures quality of the
manufactured products and flawed ones can be discarded before the customer ever sees the
failure. The testing can be done against objective specifications and flaws are usually repaired
by a dedicated repair specialist. Due to inseparability, services fail in real time customer
interaction – in the presence of the customer and the customer is the only one who knows the
service failed to meet his/her expectations (Bowen & Ford, 2002). In services, it is the customer
contact people that have to both notice the service failure and unsatisfied customer (if possible)
and to repair the failure – immediately. Remembering that customer contact people also have
marketing tasks the demands on different kinds of skills for the service employee are high
(Bowen & Ford, 2002). The picture gets more complicated for management for several reasons.
Customers may blame themselves for the failure (not wanting to complain). The cause for the
failure may be the contact people charged with noticing and repairing the failure (causing
potential role conflicts). Fixing a service is also different, due to intangibility and perishability.
A broken TV can be brought back to working order but how does one fix a roll of film ruined
during processing? Compensations that customers are willing to accept and perceive as fair will
vary (Bowen & Ford, 2002).
Due to inseparability and perishability, buffer inventories cannot be used to match capacity
with demand or smooth capacity utilization by producing for inventory (Bowen & Ford, 2002).
Smoothing demand by marketing actions was discussed in 5.1.1 and 5.1.4. The management
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challenge in services is to match demand and capacity. Excess capacity costs money, too little
capacity and the company risks losing business and customers who refuse to wait for service.
Part-time employees can used to provide flexible capacity during peak times, waiting can be
made more pleasant, and alternative ways to receive the service can be offered (e.g. self-service
in Internet).

5.2.3 Service production process

The presence of the customer (and fellow customers) in the service production process is the
main cause for differences compared to goods production process. The implications are that the
customer participation must be accommodated, planned and designed into the process (Bowen
& Ford, 2002). As customers provide heterogeneous inputs to the process, the service workers
cannot necessarily rely on past procedures and ways of doing things. They must be able to
generate novel and appropriate solutions to customer requests. Services are information rich and
require much information processing capability from the service personnel and service
technology. The customers may be required to provide a great deal more information input to
the service before delivery can begin than is necessary for goods (Bowen & Ford, 2002).
Customer involvement creates uncertainty and customer contact people will have to bear
most of it. The organization must develop methods to help them carry the burden. A factory
worker never sees a customer. Customers can be detached from the technical core of the service
delivery system. Consider claims handling in insurance which is mostly separated from the
customer to the back-office.
The setting where the service is simultaneously produced and consumed has a significant
effect on the customer’s service experience; compare e.g. a Michelin star gourmet restaurant
with luxury interiors to any McDonalds. This includes also the service worker appearance. In a
factory, these issues do not pop up (Bowen & Ford, 2002).
Supervision of manufacturing workers differs from that of service workers. As touched
upon earlier, a service worker has to be skilled in production tasks and have interactive skills
due to customer interaction. Employee selection needs to focus on customer relationship skills.
A service company needs to hire for service attitude and train for skills. Manufacturing
companies tend to hire for skills only. Teaching the service attitude is unlikely to succeed
(Bowen & Ford, 2002). Service workers need to display more initiative, cope with stress (also of
emotional), be interpersonally flexible and sensitive and be cooperative than manufacturing
workers. It is more difficult to manage service worker behaviour during service encounters via
formal obtrusive methods than in goods. The service company has to instil norms, values, and
culture that foster desired behaviour of workers (Bowen & Ford, 2002).
Service workers have to be managed in emotional labour. Proper expressions and body
language have an effect on the customer experience, not common in goods. This can be draining
and stressful on the service worker and has to be managed (Bowen & Ford, 2002). Another
cause for worker stress is the potential role conflicts. Customer expectations may exceed the
worker’s abilities or the company policies may conflict with customer expectations. Customer
contact people also have to act as part-time marketers (e.g. waiter describing a dish) and service
repairers (Bowen & Ford, 2002), which means they must be provided with the necessary
information to be able to do response to customer inquiries. Customers must be also managed as
they are co-producers in the service production process. This implies customer training, e.g.
through physical cues (e.g. signs) or observation of other customers (Bowen & Ford, 2002).

5.3 Strategy

This chapter discusses strategy in services.

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One part of strategy relates to building barriers for competitors to entry the market. In
goods, capital is a common entry barrier (Thomas, 1978). Service companies rarely can use
capital as a barrier as services are abstract, perishable and must often be produced and delivered
by single unit of equipment or people. The upshot is that service production process
decentralizes to a local level (when customer presence is required) and a reduction in the
opportunity for developing scale economies. Location decisions, though, are important and
multiple locations can serve as a barrier to entry (Thomas, 1978). Consider Subway in Finland.
McDonalds and Hesburger have an impressive clout of locations creating a barrier to entry for
Subway. Starbucks would probably have difficulties in entering Finland for the same reason.
Roberts Coffee and Wayne’s Coffee and individual cafes have established locations already.
There are opportunities for scale economies in services too, especially in services where
equipment or setting plays a role. Larger airplanes fly more people at the same time and do not
require as many maintenance personnel as two smaller planes with equal passenger capacity.
Multiple-unit film theatres can also leverage scale economies in ticket handling, candy selling
etc. compared to smaller theatres (Thomas, 1978). In people-based services the opportunities to
use scale economies as entry barriers is limited, with the exception of advertising clout (Thomas,
1978). Overall opportunities for scale economies in services are low (Fitzsimmons &
Fitzsimmons, 2004, p. 42). Proprietary technologies can be used as a barrier in services as well,
again more commonly for equipment-based services (Thomas, 1978). Differentiation can be
used in services as a barrier. In services this often relies on reputation (Thomas, 1978). A good
example is provided by consulting firms. In general, building barriers to entry is more difficult
in services than in goods, the barriers are relatively low (Thomas, 1978; Fitzsimmons &
Fitzsimmons, 2004, p. 42). Imitation is rife in services. There is not much protection for service
innovation e.g. in form of patents (Thomas, 1978).
Many service firms are small, meaning they have limited bargaining power with suppliers
(Fitzsimmons & Fitzsimmons, 2004, p. 42). There is also fear of technologies rendering some
services obsolete or at least entry as competition (Fitzsimmons & Fitzsimmons, 2004, p. 42). In
Finland Igglo has entered the real estate business via new technology. Customer loyalty plays an
important role in services. A loyal customer base acts as an entry barrier (Fitzsimmons &
Fitzsimmons, 2004, p. 42). Such can be created with e.g. frequent customer programs. Many
services also have exit barriers. Family restaurants may stay operational even with very low
profit margins. Keeping a record shop may be a hobby more than a business. These kinds of
private firms may be hard to drive from the market (Fitzsimmons & Fitzsimmons, 2004, p. 42).
In services it is more difficult to determine what a unit of service costs. The pricing in
services is therefore more often based on value than cost (Thomas, 1978). Because of the
difficulties of comparison-shopping, customers will pay whatever they think the service is
worth. Pricing in services is thus often based on what the market will bear (Thomas, 1978). In
expertise based services like consulting, price may be a part of the image of the company. It is
easier to sell advice that the customer has paid a hefty price for instead of too low fee (Thomas,
1978). Growth through acquisitions is more risky in services because it is the people that are
acquired and they can leave with their skills (Thomas, 1978).

6 Limitations of the study

The literature review for the paper cannot be considered anywhere near exhaustive.
However, in the scope the paper the reliance on few review type articles has probably produced
the best results in identifying most of the issues. The strategy part relies much on (Thomas,
1978), risking negligence of newer scientific knowledge.
T-86.5300 Assignment: Goods based business vs. services based business – key differences
Lastname, Firstname - 12345X

7 Conclusions

Differences between goods and services and goods and services based businesses do exist.
However, these are more a matter of degree than two extremes. Some services may have more
in similar with some goods than other services. This is due to the broad range of services that are
also delivered through a plethora of different means.
This paper has aimed to identify relevant differences in goods and services based business.
Due to the limited scope of the paper and its literature review success in meeting the objective
cannot be declared with any kind of credible confidence. Nevertheless, the paper has identified
many differences and as such can provide a starting point for reading into the matter for the
interested and not familiar with the subject before.

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