CHAPTER 19

ee Useful words and concepts

service productivity labor

businesses (2) grocery
quest provision
productivity gains concentrated
seek few
output competitors
yielding wages
advanced economies automate
service sector self-service
devote revenue
designing wage rates
automated processes counterpart
executives Ltd
wealth factory
outcome assembly line
strategic decision variable robots
business (1) incidences
technology zoning restrictions
customer satisfaction spectrum
efficiency high-wage societies
optimal productivity level service employees
likely high-end restaurants
margins outsourcing
Co. offshore call centers
Inc. evidence
supermarket chains offset
upscale labor dollars
retailer balance
incentive enhancing

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  Management

Instructions For Study

1. Turn to the definitions following the text Service Productivity. They refer to the specialist
terms printed in bold type in the list of Useful words and concepts. Study them closely
and pinpoint them in the text.
2. Use an English language dictionary to check the meanings (in context) of the other words
in the list.
3. Do the exercises to improve your language skills.

Service Productivity
Many contemporary businesses are on a quest for productivity gains. They seek to maintain quality
and quantity of output at ever-decreasing cost, yielding higher profitability. As advanced economies
move more into the service sector, that means many managers devote a lot of attention to designing
automated processes that reduce the need for people — typically their most expensive resource.
Executives think about productivity as something to be maximized. After all, at a macroeconomic
level, more productivity always means more profit and ultimately more wealth. But at a micro level,
instead of seeing productivity as an outcome to be maximized, it is better for service companies to view
productivity as a strategic decision variable that depends on the business and the technology used.
A company needs to choose the right level of productivity, neither too high nor too low, to maximize
its profitability.
The key to making decisions about productivity is considering two factors: (1) the state of the
technology and (2) the relative importance of customer satisfaction. In particular, the importance of
customer satisfaction is too often underestimated. When customer satisfaction is more important than
efficiency, a service company’s optimal productivity level should probably be comparatively lower.
Intuitively, this makes sense: Satisfying the customer in a service business is all about anticipating
needs, and the greater the number of people available to satisfy those requests, the more satisfied the
customer is likely to be.
When should customer satisfaction be given more weight than efficiency? When margins are higher.
The Kroger Co. and Whole Foods Market Inc. are both U.S.-based supermarket chains, but Whole
Foods, a more upscale food retailer chain based in Austin, Texas, has an incentive to use more labor
to serve grocery customers. In other words, the same factors that encourage the provision of better
service quality also encourage a lower level of productivity.

When to emphasize service productivity

On the other hand, there are businesses where, in effect, “your call is not all that important to
us.” If the company’s industry is highly concentrated (in other words, there are few competitors)
and the customers have fewer alternatives, customer service tends to be less of a priority. Customer
satisfaction may be less important, because customers will choose from among fewer competitors. In
such a condition, a service company might reduce its labor (increase its productivity) and not worry
about losing the customer. With less need to compete, productivity should be higher.
Second, if wages are higher, it becomes more expensive to provide good service. In such a case,
the company may wish to automate more, pushing its customers to self-service. Customer satisfaction
may suffer somewhat, but the loss of revenue might be made up for by the reduction in costs. So if
wages are higher, productivity should be higher.

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 Service Productivity

In order to figure out what productivity level to seek, it is better to compare the company strategically
to its competitors. For example, does it have higher prices and/or higher margins than its competitors?
If so, this suggests the company should have a lower level of productivity than its competitors. Wage
rates can also be analyzed in this way. For example, if a U.S. company is competing against a Chinese
company, the U.S. company should probably seek to use less labor (be more productive) than its
Chinese counterpart. In the late 1990s, at a time when Chinese wage rates were still very low, a factory
belonging to Nissan Motor Co Ltd located near Guangzhou had an army of workers making each car.
At the same time, at the company’s Altima assembly line in Japan, where wages were high, the car
was manufactured almost entirely by robots.
One can get a better intuitive sense of how to manage service productivity by considering
coincidences of high productivity and low productivity. Imagine a fast food restaurant in Santa Barbara,
California. This is a low-price, low-margin industry located in a wealthy town, where wage rates are
high. Zoning restrictions may limit the number of such restaurants, resulting in low competition. Under
such conditions, the restaurant should minimize its usage of labor and automate as much as possible.
This is the perfect high-productivity situation.
At the other end of the service spectrum, consider an expensive French restaurant in Shanghai,
China. Prices and margins are high. At the same time, wages are relatively low and there are many
competitors. Under these conditions, the restaurant should use as many employees as it takes to satisfy
the customer. In fact, that is often what you see: Visitors from high-wage societies are frequently
astonished by the number of service employees in high-end restaurants in cities like Shanghai and
Beijing, but they shouldn’t be. That is the perfect low-productivity situation.

Identifying an optimal level of productivity

As executives at service companies, you should compare your company with your competitors. If
your prices and margins are lower, and your employees have higher wages, then a higher productivity
strategy is in order. Try to automate more than your competitors. If the opposite is true, focus on
providing the best service in your industry, even at the expense of productivity. Where you can get
higher customer satisfaction, use labor where other companies use automation. Think carefully before
outsourcing services, for example, through offshore call centers, by seeking evidence that the probable
decline in customer satisfaction will be offset by increased productivity in labor dollars.
Service companies shouldn’t maximize productivity. Rather, they should find the most profitable
level of productivity. By managing service productivity as a strategic decision variable, a company
can balance efficiency with customer satisfaction, enhancing the long-term health and profitability
of the company.

Excerpt from: Ming-Hui Huang & Roland T. Rust, Should Your Business Be Less Productive?
MIT Sloan Management Review, Spring 2014.

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  Management

ee DEFINITIONS eee
RRservice productivity the measurable efficiency of a business in converting input resources
into value for customers
RRbusinesses (2) commercial or industrial organizations that aim at making a profit through
their activities; business enterprises, firms
RRproductivity gains increased efficiency achieved by an organization through a more effective
use of labour and capital
RRoutput the quantity of goods or services produced over a given time period by a firm or
industry
RRadvanced economies highly-developed economies in which sectors of industry use the most
modern and recently developed technology and methods in producing goods or providing
services
RRservice sector companies that provide intangible products and services; service industry
RRautomated processes methods of using machines and computers in the workplace aimed
at reducing labor costs; automation
RRexecutives individuals in a company in charge of deploying resources and making policy
decisions by planning, organizing, staffing, directing, coordinating and budgeting the activities
of the firm
RRwealth the sum of tangible and intangible assets that make an individual or an organization
better off
RRstrategic decision variable factor that shapes the success of a company’s long-term plans
RRbusiness (1) type of activity taking place in a profit-oriented organization such as a company
or a shop
RRtechnology information or scientific knowledge used in the design, production and utilization
of goods and services and in the organization of human activities
RRcustomer satisfaction the fulfillment of customers’ requirements or needs
RRefficiency achieving the desired results with little waste of resources
RRoptimal productivity level the level of productivity required, neither too high nor too low,
to maximize profitability
RRmargins net profit from operations divided by net sales and expressed as a percentage; profit
margins
RRCo. abbreviation of the word company, used to designate an entity as a company but carrying
no specific legal meaning and referring to no particular legal structure
RRInc. abbreviation standing for Incorporated, placed after the name of a company in the US,
to show that it is a separate entity from shareholders who cannot be held liable for any fiscal
obligations
RRsupermarket chains big self-service retail stores, which have branches spread across the
country and which sell a large variety of food and household items
RRupscale expensive and designed to attract customers with money to spend; upmarket
RRretailer a business at the end of the distribution chain, which generally buys a product from
a wholesaler in order to sell it to the final consumer
RRlabor the human factor of the production process; workers
RRconcentrated dominated by a few large firms
RRcompetitors firms that are rivals in business; business rivals
RRwages workers’ remuneration for the services of their labor; pay
RRrevenue the total amount of money received by a business in a specified period before any
deductions are made for costs, raw materials or taxation; sales revenue, sales turnover

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 Service Productivity

RRwage rates amount of workers’ pay based on units or periods of working time
RRLtd abbreviation standing for limited, placed after the name of a company to show that the
company is a limited liability structure with independent corporate identity
RRfactory the equipment, including the fixtures, machinery, tools and buildings necessary to
carry on a manufacturing business
RRassembly line a production tool in which a conveyor belt carries the work in progress along
a line of machines, robots and/or workers performing a specific task repeatedly until the
product is finished
RRzoning restrictions limits set by the law specifying the urban areas in which residential,
industrial, recreational or commercial activities can take place
RRhigh-wage societies countries or economies in which labor costs are high
RRservice employees the lower echelons of personnel serving customers in shops and
restaurants
RRoutsourcing contracting or sub-contracting to other firms in order to free up human and
financial resources, time and facilities for other activities
RRoffshore call centers telephone service companies based in other countries from which they
handle a large number of calls on behalf of other companies at a much lower cost
RRlabor dollars labor productivity computed in dollar terms

ee EXERCISES eee

ee EXERCISE 1 Comprehension
Circle the correct statement (a), (b) or (c)

1. Contemporary businesses aim at higher profitability by

(a) reducing costs continuously
(b) maintaining the quality and quantity of their output
(c) automating their working methods
2. From a macroeconomic vantage point,
(a) lower productivity levels generate more wealth
(b) higher productivity levels generate more wealth
(c) constant productivity levels generate more wealth
3. Viewing productivity as a strategic decision variable means
(a) maximizing productivity levels to maximize profits
(b) minimizing productivity levels to maximize profits
(c) optimizing productivity levels to maximize profits
4. Customer satisfaction in a service business requires
(a) a greater number of workers
(b) a lower number of workers
(c) a constant number of workers

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  Management

5. The comparison between Kroger Co. and Whole Foods Market Inc. shows that customer
satisfaction can be achieved by
(a) maintaining high labor productivity
(b) reducing labor costs
(c) increasing service staff
6. In a concentrated market, however, a service business
(a) can easily automate to satisfy customer needs
(b) requires a greater number of workers to satisfy customer needs
(c) customers can choose from many other service businesses to satisfy their needs
7. In a situation of market concentration,
(a) higher profit margins lead to a higher optimal productivity level
(b) higher wage rates lead to a higher optimal productivity level
(c) higher prices lead to a higher optimal productivity level
8. A perfect high productivity situation is one in which
(a) competition, prices and margins are low but wage rates are high
(b) competition, prices, margins and wage rates are high
(c) competition, prices, margins are high but wage rates are low
9. A perfect low productivity situation is one in which
(a) competition, prices, margins and wage rates are high
(b) competition, prices, margins and wage rates are low
(c) competition, prices and margins are high but wage rates are low
10. To choose the most profitable level of productivity, it is advised to consider competitor
practices before
(a) automating or outsourcing
(b) outsourcing or offshoring
(c) increasing labor dollars

ee EXERCISE 2 Vocabulary
(A) Use the list of definitions above to select the appropriate term to fit each sentence

1. In service businesses, .......... are not always easy to make without sacrificing perceptions
of quality.
2. Information and communications technologies have made it possible for companies to
develop close relationships with customers without a large increase in ..........
3. In the tertiary sector, unlike on the assembly line, increased .......... may not always lead
to increased profitability.
4. Advances in online technology have enabled online travel services to increase their
productivity with no damage to ..........
5. In a service business, productivity must be treated as a ..........
6. Higher .......... discourage investment in the service sector.
7. The search engine industry in America is highly concentrated given that three major
.........., namely Google, Yahoo and Microsoft share the market.
8. Today, the .......... accounts for about 80% of the US economy.
9. Robots have replaced servers and kitchen staff in a lot of restaurant chains in Japan, due
to the growing reliance on ..........
10. In a financial downturn, the natural impulse of .......... is to cut costs drastically.

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 Service Productivity

(B) Replace the words or expressions in italics with equivalent ones from the text
1. Satisfying the customer is a must for a service company to remain competitive.
2. The search for higher margins requires a radical rethink of company policy.
3. Service businesses should focus their strategy on finding the most profitable level of
productivity.
4. Well-to-do tourists enjoy dining at high-end restaurants in the select districts of Paris.
5. To boost customer satisfaction a company has every reason to take on more service
employees.
6. Salaries tend to be higher in advanced economies than in emerging ones.
7. Toyota opened a manufacturing plant in the North of France in 1999.
8. Humans are not the only workers to be found on a production line nowadays.
9. Companies can reduce costs by contracting or subcontracting non-core activities such as
recruitment or cleaning to specialized service companies.
10. In some service companies, diminishing customer loyalty may be made up for by greater
cost efficiency.

ee EXERCISE 3 Grammar
Comparisons

Complete the sentences below with the expressions of comparison in the list

compared to / faster / faster .......... than / fewer .......... than / lower .......... than / higher (2x)
/ higher than / less .......... than / more .......... than (2x) / smarter .......... than / unlike

1. Between 2007 and 2009, Alaska Airlines experienced an 18% improvement in labor
productivity, a percentage that was significantly .......... the industry average at the time,
after it had deployed a new check-in system at Anchorage International Airport.
2. Workers are generally .......... productive .......... robots on automobile assembly lines.
3. Online tracking in the express delivery business has resulted in increased labor productivity
at FedEx Corp, where in 2003 it cost $2.40 for a customer service representative to track a
package for a customer who called on the phone .......... just four cents to track a package
online.
4. As a result of automating the delivering and serving of sushi plates by conveyor belts, Kura,
a restaurant chain in Japan, needed .......... servers and kitchen staff .......... before to
serve a 196-seat restaurant.
5. Jetstar Airways Ltd, the Qantas budget airline in Asia-Pacific, has adopted a production-
oriented high efficiency strategy, which enabled it to attain .......... turnaround times and
.......... scheduling .......... competitors.
6. Singapore Airlines Ltd is highly efficient in non-customer facing operations but as it
lavishes attention on its customers, the company maintains .......... prices and a ..........
profit margin with .......... productivity .......... its Asian competitor China Eastern Airlines
Corp. Ltd.
7. Managers erroneously think that they will make money .......... by increasing short- term
productivity .......... by building long-term projects.
8. The temptation to increase productivity by reducing labor is huge for managers of large
companies, for whom economies of scale seem to make automation .......... attractive
.......... it is for managers of small service businesses.

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  Management

9. Following the tragedy of September 11, 2001, almost all major US airlines instituted massive
layoffs to cut costs except Southwest Airlines, which, with high customer satisfaction scores,
thrived throughout the ensuing decade, .......... some of its competitors.
10. According to the Ford Marketing Institute, grocery shoppers are .......... satisfied when
dealing with a human being .......... with self-serve checkouts in supermarkets.

ee EXERCISE 4 Assignment
Case study

Choose a service business and identify a task it has automated. Discuss the advantages
and/or drawbacks related to the introduction of the automated process for both the company
and its customers. Assess the impact of automation on the company’s workforce and on its
service productivity.
Report back to the class in a 15-minute oral presentation.

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