How Can Service Businesses Survive and Prosper?

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Presently the service sector of our economy is characterized by both profusion and confusion. By profusion, I mean that it has done wonderfully well at generating jobs, for new kinds of services are sprouting continually. By confusion, I mean that service businesses seem to rise and fall from Wall Street grace with regularity. Moreover, as many are markedly entrepreneurial in spirit, they all claim to have idiosyncratic operations. For example, while manufacturing management enjoys the benefits of various professional societies (i.e., those for materials management, manufacturing engineering, industrial engineering, and quality control) whose roles are to find management principles that apply across many different kinds of manufacturing enterprises, service business management does not enjoy such cooperation. All too often, service companies view themselves as unique, and consequently they do not promote service operation management techniques with the same vigor as does the manufacturing sector.

Some manufacturers, of course, also claim that they are unique. However, over the years, manufacturers have been unified by their acceptance of certain terminology to describe generic production processes — job shop, batch flow, assembly line, continuous flow process. This not only helps to solidify manufacturers of sometimes widely divergent product lines, but it also helps to reveal the challenges manufacturers face.

The Characteristics of a Service Business

The confusion surrounding service operations can be lessened in part by looking at key aspects of service businesses that significantly affect the character of the service delivery process. Specifically, there are two elements that can be used to classify different kinds of service businesses. These elements will serve later as a springboard for investigating the strategic changes of service operations and the challenges that lie ahead for managers.

Labor Intensity

The first key element is the labor intensity of the service business process. Labor intensity is defined as the ratio of the labor cost incurred to the value of the plant and equipment. (Note that the value of inventories is excluded because the concept seems “cleaner” without taking inventories into account.) A high labor-intensive business involves relatively little plant and equipment and considerable worker time, effort, and cost. For example, professional services are typically a high labor-intensive business. A low labor-intensive business, on the other hand, is characterized by relatively low levels of labor cost compared to plant and equipment. Trucking firms with their break-bulks and other kinds of terminals, trailers, and tractors are an example.


1. R.B. Chase, “The Customer Contact Approach to Services: Theoretical Bases and Practical Extensions,” Operations Research 29 (1981): 698–706;

R.B. Chase, “Where Does the Customer Fit in a Service Operation?” Harvard Business Review, November–December 1978, pp. 137–142;

R. B. Chase and D.A. Tansik, “The Customer Contact Model for Organizational Design,” Management Science 29 (1983): 1037–1050;

R.B. Chase and N. Aquilano, Production and Operations Management (Homewood, IL: Richard D. Irwin, 1985), ch. 3.

2. Chase (1981).

3. D.H. Maister and C.H. Lovelock, “Managing Facilitator Services,” Sloan Management Review, Summer 1982, pp. 19–31.

4. W. Skinner, “The Focused Factory,” Harvard Business Review, May–June 1974, pp. 113–121.

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