There are five essential differences between services and goods. The first is that a service is an intangible process that cannot be weighed or measured, whereas a good is a tangible output of a process that has physical dimensions. This distinction has important business implications since a service innovation, unlike a product innovation, cannot be patented. Thus, a company with a new concept must expand rapidly before competitors copy its procedures. Service intangibility also presents a problem for customers since, unlike with a physical product, they cannot try it out and test it before purchase.

The second is that a service requires some degree of interaction with the customer for it to be a service. The interaction may be brief, but it must exist for the service to be complete. Where face-to-face service is required, the service facility must be designed to handle the customer's presence. Goods, on the other hand, are generally produced in a facility separate from the customer. They can be made according to a production schedule that is efficient for the company.

The third is that services, with the big exception of hard technologies such as ATMs and information technologies such as answering machines and automated Internet exchanges, are inherently heterogeneous—they vary from day to day and even hour by hour as a function of the attitudes of the customer and the servers. Thus, even highly scripted work such as found in call centers can produce unpredictable outcomes. Goods, in contrast, can be produced to meet very tight specifications day-in and day-out with essentially zero variability. In those cases where a defective good is produced, it can be reworked or scrapped.

The fourth is that services as a process are perishable and time dependent, and unlike goods, they can't be stored. You cannot “come back last week” for an air flight or a day on campus.

And fifth, the specifications of a service are defined and evaluated as a package of features that affect the five senses. These features are

• Supporting facility (location, decoration, layout, architectural appropriateness, supporting equipment).

• Facilitating goods (variety, consistency, quantity of the physical goods that go with the service; for example, the food items that accompany a meal service).

• Explicit services (training of service personnel, consistency of service performance, availability and access to the service, and comprehensiveness of the service).

• Implicit services (attitude of the servers, atmosphere, waiting time, status, privacy and security, and convenience).

THE GOODS–SERVICES CONTINUUM

Most any product offering is a combination of goods and services. In Exhibit 1.4, we show this arrayed along a continuum of “pure goods” to “pure services.” The continuum captures the main focus of the business and spans from firms that just produce products to those that only provide services. Pure goods industries have become low-margin commodity businesses, and in order to differentiate, they are often adding some services. Some examples are providing help with logistical aspects of stocking items, maintaining extensive information databases, and providing consulting advice.

Core goods providers already provide a significant service component as part of their businesses. For example, automobile manufacturers provide extensive spare parts distribution services to support repair centers at dealers.

Core service providers must integrate tangible goods. For example, your cable television company must provide cable hookup and repair services and also high-definition cable boxes. Pure services, such as may be offered by a financial consulting firm, may need little in the way of facilitating goods, but what they do use—such as textbooks, professional references, and spreadsheets—are critical to their performance.

GROWTH OF SERVICES

The dominance of services throughout the world economies is clearly evident in Exhibit 1.5. Looking first at the United States, in 1800, 90 percent of the labor force was working on farms doing agriculture production. Today only 3 percent of the U.S. labor force is involved in agriculture production. This represents over a one-million-times productivity increase in about 200 years. Manufacturing peaked in the 1950s and, due to automation and outsourcing, now employs only about 27 percent of the U.S. labor force.

The shift toward services is not simply a U.S. phenomenon, or a developed nation's phenomenon—the chart shows the top 10 nations of the world by size of their labor force: China is 21 percent of the world's labor force, and Germany is 1.4 percent of the world's labor force. China has seen its service sector grow by 191 percent in the last 25 years. Germany has seen its service sector grow by 44 percent in the last 25 years. The shift to services represents the single largest labor force migration in human history. Global communications, business and technology growth, urbanization, and low labor costs in the developing world are all responsible for this dramatic shift. The world is becoming a giant service system, composed of six billion people, millions of businesses, and millions of technology products connected into service networks.