a service market segmentation approach to strategic

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A service market segmentation approach to strategic

human resource management

Beth G. Chung*San Diego State University, College of Business Administration, 5500 Campanile Drive,

San Diego, CA 92182, USA

Received 1 March 2001; received in revised form 1 July 2001; accepted 1 September 2001

Abstract

In this article, I present a theoretical framework for devising and implementing a servicemanagement strategy. I propose that using the service management strategy of focusing on a particular

customer market segment, via five functional service quality dimensions, would yield increased

organizational effectiveness through the fit of HRM practices, what was emphasized in those practices

and required employee role behaviors. Examples of how different HRM practices can support different

service strategies are also presented. D 2001 Elsevier Science Inc. All rights reserved.

Keywords: Service management strategy; Market; Segmentation; Service quality; Strategic human resource

management

1. Introduction

The fastest growing segment of the US economy is the service sector. In fact, the service

sector now accounts for 64% of the Gross Domestic Product (Lum & Moyer, 1998). Further, the

Bureau of Economic Analysis estimates that 83% of the American workforce will be in the

service sector by 2025 (Judy & DAmico, 1997). Surprisingly, however, little attention has been

directed toward development of theories on the strategic management of services. This is

unfortunate for two reasons. First, service businesses are now in a phase parallel to the end of the

industrial growth era of the 1960s where manufacturing businesses had to revisit their growth

1084-8568/01/$ see front matterD 2001 Elsevier Science Inc. All rights reserved.

PII: S 1 0 8 4 - 8 5 6 8 ( 0 1 ) 0 0 0 3 4 - 7

* Tel.: +1-619-594-2699; fax: +1-619-594-3272.

E-mail address: [email protected] (B.G. Chung).

www.journalofqualitymanagement.com

Journal of Quality Management

6 (2001) 117138


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plans in a lower growth and turbulent environment. Service businesses enjoyed a boom period in

the last decade as US consumer affluence increased. Now, service businesses are finding thatthey need to consolidate and battle for market share given overexpansion in many service

sectors. Consequently, service organizations are finding that they need to closely examine their

current business strategies (Allen, 1988). Second, service businesses are fundamentally

different from product-oriented businesses and the strategic management principles developed

and shaped in the manufacturing environment have little relevance (Allen, 1988). Services need

specific practices based on the three defining features of services: intangibility, simultaneous

production and delivery, and customer participation in the service (Bowen & Schneider, 1988).

Therefore, this article is an attempt to add to the literature and knowledge of the

management of services and further to provide a theoretical framework for devising a service

management strategy. In particular, I explore a service management strategy based on externalcriteria (i.e., customer market segment expectations), discuss how this focus strategy can be

operationalized through HRM practices and the role behaviors emphasized in HRM practices.

In the following sections, I first discuss the ways in which service firms are different from

manufacturing firms and how these differences lead to different business strategies in the two

types of industries. Then, I describe the few service management strategies currently found in

the literature and the research that supports these strategies. Third, I propose a new service

management strategy framework that seeks to segment customers into target market segments

via their expectations on five dimensions of service quality and a corresponding price index.

Fourth, I discuss how HRM is linked to strategy and how to operationalize strategy throughHRM using role behavior theory. Finally, I present some propositions for future research.

2. The strategic management of services versus products

A services marketing and management field has evolved that views the management of

service firms differently from the management of manufacturing firms. Three distinct

attributes about services define their departure from pure products. Services are intangible,

involve simultaneous production and delivery, and also require some customer participationin the production and delivery of their own service. According to Bowen and Schneider

(1988), these three attributes lie on three continua where pure services lie on one endpoint and

services that involve products lie at the other endpoint.

These continua reveal that, in the extreme, services can be quite different from goods in

what they are, how they are experienced and who produces them. The differences suggest that

the internal design of service organizations may need to be quite different from the internal

design of manufacturing organizations. In particular, the attributes of services make the

relationship between internal and external efficiency much more immediate. In manufactur-

ing, internal efficiency techniques can be used for cutting costs to increase competitiveness

but those techniques can be hidden from consumers. In services, strategies to improve internalefficiency are not so easily buffered from consumers because customers are frequently present

and participating in the production of the service. Due to the continua of services discussed

above, Normann (1984) and others (e.g., Porter, 1980; Shaw, 1990; Thomas, 1978) have

B.G. Chung / Journal of Quality Management 6 (2001) 117138118


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noted that strategic initiatives used for service firms must be different from the strategic

initiatives of manufacturing firms.Table 1 summarizes the fundamental differences between product-oriented and service-

oriented firms with respect to various aspects of corporate planning and strategy. An

inspection of Table 1 reveals why it may be inappropriate to apply standard manufacturing

concepts to service institutions. Take, for example, the concept or strategy of matching supply

and demand, product firms are primarily managed through inventory controls while service

firms are managed largely through changes in behavior. Another way in which service firms

are managed differently from manufacturing firms is in their management of costing and

pricing: manufacturing firms primarily base their pricing on the physical product while

service firms base their pricing more on perceived value. Unfortunately, most service

companies still inappropriately embrace manufacturing strategies due to the absence of anyservice-specific strategic models (Shaw, 1990). Thus, the topic of Section 3 is about the new

emphasis on strategies specific to services.

2.1. Services management philosophies

Typically, few service management strategies applied by service firms have been explicitly

labeled or thought of as service management strategies. However, some authors, as

mentioned above, have expressed an explicit need for the field to recognize service

management strategies as being different from manufacturing strategies.

Table 1

Product firms versus service firms on aspects of corporate strategy

Impact on

Concept-strategy Product firms Service firms

Standardization Provides focus Misplaces focus from the customer

Costing and pricing Based on physical product Based on perceptions of value

Productivity Can be measured Cannot be measuredMatching supply

and demand

Managed through inventory Managed largely through changes

in behavior

Economies of scale Permit unit costs to

decline permanently

Permit unit costs to decline temporarily

Experience curve Reduces unit costs through

cumulative production

Improves quality and value

Growth/size/share Directly influence profitability Indirectly influence image

Risk of launching new

product/service

Lower as a result of market testing Higher as a result of greater reliance on

customer trust

Barriers to entry Based on product and/or

technology focus

Based on human capital, customer base,

and/or networkImplementation of change Requires relatively few people Requires widespread consensus

and commitment

Source: Adapted from Shaw (1990). The service focus: developing winning game plans for service companies .

Homewood, IL: Irwin.

B.G. Chung / Journal of Quality Management 6 (2001) 117138 119


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A few authors have conceptualized strategies specific to service firms. Thomas (1978)

proposed service strategies involving value engineering, pricing, proprietary technologies,and differentiation through reputation. Lovelock (1983, 1991) posited classification schemes

based on segmenting services into clusters that share certain relevant marketing character-

istics. Still others (Gronroos, 1990; Heskett, 1990a, 1990b; Kurtz & Clow, 1998) have spoken

of strategies such as focusing on geographic area, service provider groups, internal

capabilities, price, image, superior resource, and technical quality. Unfortunately, many of

these service strategy themes have been developed only on a very basic theoretical level with

little empirical evidence to support them.

In the absence of specific service strategies, some service firms have tried to adapt the

generic competitive strategies first forwarded by Porter (1980) to their unique situation. For

example, McDonalds has used the cost leadership strategy to revolutionize the food industrywhile other service organizations such as Nordstrom have embraced the differentiation

strategy by making its customer service unique. Lastly, firms such as Shouldice Hospital have

adopted the focus strategy to achieve its goals. The focus strategy, applied in service settings,

is especially noteworthy because it is in essence the application of overall cost leadership and/

or differentiation to a particular market segment (Fitzsimmons & Fitzsimmons, 1994). Each

of the examples as described by these authors is application of traditionally manufacturing-

oriented strategies. Despite the ingenuous adaptations of manufacturing strategies by these

exceptional service firms, there are no theories or conceptual frameworks for most service

organizations to use. Davidow and Uttal (1989), however, use these novel applications ofexisting manufacturing strategies to forward a needed conceptual framework for service

firms. They have a three-step approach to business strategy focus which includes segmenting

the market to design core services, classifying customers according to the value they place on

service, and setting expectations slightly below perceived performance.

Their customer segment focus theory is not new in an absolute sense since it is reminiscent

of Porters focus strategy and is similar to a typical marketing plan incorporated in business

strategy plans. However, it is novel in the sense that Davidow and Uttal (1989) advocate it as

a primary business strategy and relate it specifically to service businesses.

Davidow and Uttal (1989) propose that an organization must either focus or falter andthat customer segments are the best focus to choose. They argue that focus promotes good

customer service by allowing firms to more precisely meet customer needs. Focus is also

said to lead to a better match of supply with demand because it helps organizations to

forecast demand more accurately, to alter demand, and to expand the role of customers in

producing service. They emphasize choosing an optimal mix and level of service elements

or facets for different customer segments. Provide too little service, or the wrong kind, and

customers will leave. Provide too much, of even the right kind, and the company will fail

through pricing itself out of the market. They suggest that the way to achieve a balance

between too much or too little service is to have a customer service strategy that segments

customers. The best way to segment is to isolate a reasonably homogeneous set ofcustomers that can be served at a profit.

Taking the focus or falter viewpoint, Nayyar (1992) conducted an empirical study of the

performance effects of three foci adopted by service firms: serving selected customer



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segments, capitalizing on distinctive internal capabilities, and serving particular geographic

regions. According to Nayyar, a focus on customer segments would result in superiorperformance for a service firm for three reasons. First, it would facilitate identification of the

elements of service operations that are of strategic importance and concentration of the firms

efforts, investments, and controls. Second, a focused strategy yields benefits from stream-

lining operations, resulting in improved productivity and service quality. Third, a focus on

customer segments would prevent employee confusion that may arise from conflicts among

behaviors required to satisfy customers with differing needs.

His results from a study of 198 service firms showed that only a focus on selected

customer segments was associated with higher performance and that a focus on either internal

capabilities or geographic regions was associated with lower performance. Nayyars (1992)

line of research supports the focus or falter arguments put forth by Davidow and Uttal(1989) mentioned above.

Nayyars (1992) research, however, does not specify how, or on what basis or bases,

organizations segmented their markets. He only states that once an organization has chosen

a customer segment and focused on that segment then the organization can offer multiple

facets of services targeted to that particular segment.

Although a few researchers in the services field (e.g., Davidow & Uttal, 1989; Heskett,

1986; Nayyar, 1992) do talk about focusing on customer segments, little concrete modeling

or research has actually been done on how to segment and what kinds of management

practices have to be taken into consideration when an organization decides to focus. Thus, inthis paper, I present a services management strategy framework which seeks to advance ways

(the how) to segment a service industry into different market segments.

3. Proposed services management strategy framework

The service management strategy framework proposed here seeks to segment a service

industry (e.g., hotels) by breaking down the how of service. Gronroos (1990) calls this the

functional quality of the service. Functional quality is how service providers perform theirtasks, what they say and how they do it. Gronroos asserts that functional quality is the aspect

of service that differentiates one service firm from another. He argues that a technical quality

advantage (referring to the core service) is short-lived because competitors can introduce

similar technical solutions rather quickly so it is up to functional quality how the service is

delivered to create a distinctive advantage for the long term. Thus, the framework is based

on five dimensions of perceived functional quality. Section 3.1 will explain how the five

dimensions were derived.

3.1. Service quality dimensions

The conceptualization and measurement of service quality has been an elusive concept

given the attributes of service (intangibility, simultaneous production and delivery, and

customers as co-producers). However, significant progress was made when Parasuraman,



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Zeithaml, and Berry (1985) qualitatively found 10 dimensions of service quality and later

empirically found that these 10 dimensions collapsed into 5 core dimensions of servicequality (Parasuraman, Zeithaml, & Berry, 1988). That is, five dimensions were found to be

important to customers in their evaluations of the quality of the service they received. These

five dimensions were labeled as tangibles, reliability, responsiveness, assurance, and

empathy. Table 2 shows a comparison of the original 10 dimensions and the later 5

dimensions that were retained.

Over time, these five dimensions have been investigated in numerous service industries

including retail banking, credit card, securities brokerage, product repair and maintenance,

telephone repair, insurance (Parasuraman et al., 1988; Parasuraman, Zeithmal, & Berry, 1991),

hotel and restaurant (Knutson, Stevens, & Patton, 1995; Knutson, Stevens, Wullaert, Patton, &

Yokoyama, 1991), retail tire, placement center, and dental service (Carmen, 1990). In most ofthese studies, the five dimensions seemed to remain relatively consistent. However, Carmen

(1990) found that some of the original 10 dimensions should be added initially depending on the

industry involved. Two dimensions that Carmen suggests retaining for the measurement of

service quality are courtesy and access. Thus, in total, seven factors seem to be important for

service quality (tangibles, reliability, responsiveness, assurance, empathy, courtesy, and access).

As mentioned previously, services should seek to achieve distinctiveness or a long-term

competitive advantage based on the how of service or functional quality. Based on this

criterion, five dimensions were selected for the present framework (reliability, responsiveness,

assurance, empathy, and courtesy). The other two dimensions of tangibles and access are notdimensions that relate directly to functional quality and were not included. Tangibles refers to

the physical facilities and equipment as well as the appearance of personnel. Access refers to

convenient hours of operation and accessibility. These two dimensions are not included in the

framework since they are not necessarily under the employees control nor are they about the

actual delivery of service by employees.

Table 2

Dimensions of service quality

PZB (1985) PZB (1988)

Tangibles Tangibles

Reliability Reliability

Responsiveness Responsiveness

Communication Assurance

Credibility

Security

Competence

Courtesy

Understanding Empathy

Access

PZB denotes Parasuraman, Zeithaml, and Berry.



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The five remaining dimensions and their definitions are described below:

Reliability: ability to consistently perform the promised service dependably and

accurately. Responsiveness: willingness to help customers and provide prompt service. Assurance: knowledge and competence of employees and their ability to convey trust

and confidence. Empathy: understanding and tailoring service to customers specific needs, providing

individualized/customized attention. Courtesy: providing tender loving care, warmth, friendliness, courtesy.

I propose that service organizations should try to maximize service quality throughattention to these five dimensions in that for pure service organizations (where quality is

isomorphic with delivery), the functional quality or how of service is most important to

the customer. Thus, I advocate focusing on the delivery piece of service quality (functional

quality) which exists in all services versus focusing on total or global service quality parts

of which may or may not be important for different kinds of services and therefore may dilute

resources. Further, I will focus my discussions of each dimension only in terms of the service-

oriented pieces of the dimension versus any product-oriented applications.

In addition to the five functional attributes of service quality, I propose that price is another

factor to be considered as it provides expectations for perceived value. Therefore, if price setsexpectations for the level of service required, then a mismatch between service levels on the

five factors and price will lead to unmet expectations and poor service quality evaluations. In

other words, price is always on the other end of the service quality equation.

In order to illustrate this framework, Table 3 provides an example of a few typical

market segments with their appropriate corresponding price index in the hotel industry. It

is proposed that customers have different combinations of expectations for different kinds

of services. There is no one answer to the question of what customers expect of service

(Schneider & Bowen, 1995). Further, there are different expectations for different services

Table 3

Market segment typology

Examples of service market

segments within hotels * Reliability Responsiveness Assurance Empathy Courtesy = Price

Budget hotels (e.g., Motel 6) + = $

Business hotels (e.g., Marriott Courtyard) + + 0 /0 = $

Family/extended-stay suite hotels

(e.g., Residence Inn)

+ 0 0 0/ + 0/ + = $

Luxury hotels (e.g., Ritz Carlton) + + + + + = $Bed and breakfast inns + 0 0 + + = $

Any organization can choose to be low (), average (0), or high (+) on the five factors. Price drives value

perceptions, therefore, successful firms will price according to the levels of service they provide.

* List of market segments is not exhaustive.



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within the same service industry. Therefore, it is imperative for a service business to

understand the frequently subtle differences in expectations that customers in differentmarket segments have. It is the above five dimensions of expectations that can serve to

categorize those differences. These five dimensions, or criteria of expectations, combine

to make a number of different potential customer market segments within an industry

(e.g., hotels).

Any particular service organization can decide to be low, average, or excellent on any one

or all of these service factors. As Table 3 shows, minus signs () indicates minimal

performance, zeros (0) indicate average or moderate performance while pluses (+) indicate

excellent performance on a factor. For example, a hotel that is focused on the budget lodging

segment would aim to achieve excellence in terms of reliable service in that it delivers on its

promises and is consistent but would not spend many resources on the other four factors in aneffort to contain costs. In Table 3, all segments are indicated as needing to be high on

reliability as this dimension has consistently been shown to be important to all customers of

all segments and is repeatedly hierarchically ranked as being the most important dimension.

In fact, research has shown that the dimension of reliability is often in a tier by itself (Knutson

et al., 1995; Knutson, Stevens, Patton, & Thompson, 1992). For example, Knutson et al.

(1995) found that the distance between reliability and the number two ranked dimension is

greater than the sum of the gaps between all of the other dimensions.

Referring back to the examples of segments in Table 3, different organizations can be in

the same business (e.g., lodging) but have a different combination of attributes thatcorrespond to a different set of customer expectations. Take as an example a business-

oriented hotel. This kind of hotel would survive and prosper if it delivers adequately on what

the market segment expects. This market segment is looking for excellence in reliability

a consistent and dependable service each time, excellence in responsiveness as business

travelers often have the time is money mentality, moderate levels of competence and

confidence in the hotel, less customization is acceptable and sometimes preferred, and

tender loving care or the dimension of courtesy is a minimal factor as most travelers would

not want to spend too much time chatting and exchanging niceties. As a result, the

appropriate amount to charge for this service mix will be in the midrange level. This kindof establishment can be just as successful as a luxury hotel, or any other kind of hotel, given

that the price to expectations quotient is equal and the level of service provided is equal to the

expectations of the market segment served. The key is in providing the right kind and level of

service expected. More of everything is not always better. As Rafaeli and Sutton (1990) and

Wiley (1991) have found, actually giving too much interpersonal attention in a speedy

service such as a convenience store or fast-food restaurant may not prove beneficial to the

organization such that profits may actually be lower. This is because customers are expecting

speed and efficiency, not conversation.

As Table 3 shows, a service industry (e.g., hotels) can have several customer service

segments based on these five factors. Although the market combinations (e.g., types ofhotels) are all common to providing lodging, they each appeal to different customers with

different sets of expectations and hence survive when they set and manage these expectations

accordingly. This is similar to the concept of distinctive competence and strategy as discussed



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by Snow and Hrebiniak (1980). They make the point that substantially different forms of

strategy can be used contemporaneously in environments that are generally similar. Theframework in Table 3 is suggesting that different strategies (and therefore different HRM

strategies and behaviors emphasized, discussed later) for different market segments can be

equally beneficial and profitable for organizations in the same environment (e.g., the hotel

industry). It is also important to keep in mind that customers with different sets of

expectations can even be the same customers but at different points in their lives or at

different times of the day (Schneider, 1994).

Service organizations must decide what service business they are in or want to be in, who

their target market is, and what the target market expects and then deliver against those

expectations (Schneider & Bowen, 1995). As previous research has established (Parasuraman

et al., 1985, 1988) there are expectation dimensions of service quality common to all services.However, it is in knowing the specific expectations of a particular market segment on the five

proposed dimensions of expectations and setting an appropriate matching price that allows an

organization to deliver against those expectations and thus achieve the perception of

superiority relative to the competition. As Schuler and Jackson (1987a) advocate, deciding

on which strategy is the best strategy to pursue depends on several factors certainly

customer wants and the nature of the competition are key factors.

Proposition 1: Customer markets can be segmented by their expectations on five

functional service quality dimensions. Focusing on customer market segments can bethe foundation for a core service business strategy.

3.2. Applicability of framework

The framework is a generic one that is conceptually useful for all service industries. It is

not limited to restaurants, hotels, or airlines but can include insurance companies, banks,

accounting firms, and so on. I propose that the framework can be useful for devising a

comprehensive strategic services management plan, a plan that would integrate the efforts ofMarketing, HRM, and Operations Management such that the expectations of the market

segment targeted by management can be maximally satisfied.

However, it is important to keep in mind that this framework may be an oversimplification

of the real world given that other, more tangible expectation dimensions are also involved in

market segmentation issues. However, the framework is useful as a basis for starting to

develop a comprehensive theory around the management of services especially in terms of

developing specific service delivery competencies which are harder to replicate.

The framework should also be considered in terms of the costs and benefits of focusing on

a particular market segment. For example, is company growth limited as a result of having a

specific focus? There is nothing in this framework that would suggest that growth would be alimitation associated with focusing on a customer segment. Expansion and growth for any

company should be controlled and based on good market analysis. The proposed model

would suggest that if companies do decide to expand, the growth should be in areas that are



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compatible with the current customer segment focus. Take for example, Southwest Airlines.

Southwest recently decided to expand their operations. Their expansion is both controlledand well researched. They decided to expand to more destinations. To their credit, the

destinations they have chosen are smaller commuter cities thereby allowing them to maintain

their focus on low cost/value for short-flight-segment customers. In contrast, Peoples

Express is an example of an airline that expanded and lost sight of its primary market

segment. Peoples Express initially prospered because of its tight focus on budget travelers.

When they expanded, they decided to target business travelers as wella very different

market segment with a very different set of needs. A conflict with the old budget-minded

strategy occurred and blurred the strategic focus of the firm. Eventually its demise came with

a net loss of US$300 million and a sale to Texas Air. Overall then, there are few costs

associated with having a market segment focus as long as this strategic focus is systematic-ally carried into all aspects of organizational planning and operations. There are, however,

tremendous benefits as discussed previously.

When applying this model to different industries, a number of issues should be considered.

First, for some industries, certain service quality dimensions may not be distinguishing

factors for different market segments within the industry. For example, in the case of airlines,

no customer market segment will want to fly an airline that is minimal on the dimension of

assurance. Because of the level of risk involved, most customers will expect the service

personnel to be adequately competent and able to convey safety and trust. Second, different

industries may require modification of items and factors to reflect their unique situation.Carmen (1990) recommends that different service industries add dimensions or items that

they believe are particularly important or unique to the industry in question.

Overall then, a primary assertion of this paper is that within the same service industry (e.g.,

hotels), different firms can appeal to different market segments (e.g., luxury vs. bed and

breakfast) at a profit by uncovering specific customer expectations, managing those expect-

ations, setting price appropriately, and delivering on the expectations. Management must first

be clear about the market segment(s) they want to serve or are serving, then they must go

about discovering specific customer expectations by using a modified form of the service

quality index. Second, expectations need to be managed by organizational policies,advertisement, behavior of personnel, price, and so forth. Last, organizations need to deliver

on these expectations by structuring their HRM practices in a strategic manner to fit the

particular market segment they have chosen to serve. Different target market segments are

hypothesized to have different characteristics that require an organization to employ different

HRM practices and/or to employ similar HRM practices but in different ways to appropriately

serve the market segments needs.

In the remainder of this paper, I will discuss how to effectively use HRM practices to

successfully implement a service management strategy based on a focus toward target market

segments. HRM is critical for implementing a focus strategy given that employees in a

service firm are the primary producers in service delivery. HRM practices are also ofparticular interest for this strategy framework given that the dimensions for a focus strategy

are based on functional quality attributesservice quality attributes that relate directly and

only to employees.



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4. The strategyHRM link in service organizations

Over the years, many schools of thought have developed regarding the importance of

HRM to strategy especially in service organizations. All these viewpoints are similar in theme

but are abstracted here as separate philosophies for purposes of explication. The first school

of thought believes that human resources (employees) represent tremendous assets and that

the way these assets are managed can easily make or break the profitability and growth

potential of an organization (Normann, 1991). Normann (1991) contends that people are

essential in analyzing and interpreting what is happening in the marketplace, their creative

capacities are required to design and refine the product offerings and the service delivery

system, their discretionary capacities construct the fit between the product offering and the

customers needs, and they are the face of the service organization at the moments oftruth. Similarly, Lengnick-Hall and Lengnick-Hall (1990) assert that people can provide a

significant source of service quality or distinctiveness that cannot be duplicated by even the

most sophisticated machines. Findings by Schnell et al. (1991) support these assertions. They

found that high overall financial performance and business strategy were all associated with

the core HR philosophy that human resources are central to the firms success and that they

are an asset to be invested in rather than a cost to be minimized.

A second philosophy suggests that because employees and customers are psychologically

close (Schneider & Bowen, 1985), HR policies, practices, and procedures inadvertently affect

customers and thus the achievement of future strategic objectives. That is, if a serviceorganization pursues a market-oriented strategy one that seeks to meet or exceed the

expectations of its particular market segment then customers attitudes toward service

quality would be an important criterion on which to evaluate the success of an organization.

In addition, if customers attitudes are affected by employees attitudes toward internal HRM

practices, then the strategy of meeting customers expectations would likely be integrated

with the HRM practices of the firm.

Support for this viewpoint comes from many sources. First, Schneider and Bowen (1985)

and Tornow and Wiley (1991) have found that organizations in which employees describe the

HRM practices under which they work in more positive terms, have customers who reportthey receive superior service quality. Further, Schneider and Bowen found that customer and

employee attitudes were related to their own and one anothers turnover intentions.

If a climate for service is conceptualized as employees perceptions of one or more

strategic imperatives manifested through work place routines and rewards, then the work of

Schneider, Wheeler, and Cox (1992) also attests to the necessary link between HRM and

service strategy. Their research showed that some of the strongest correlates of a service

strategy imperative were HRM issues such as hiring procedures (r= .64), performance

feedback (r= .46), internal equity of compensation (r=.43), and training (r=.40).

The last viewpoint found in the literature is the role behavior perspective. This perspective

is both a rationale for the link between HRM and strategy as well as a theory for explaining theprocess orhow integration takes place. The role behavior perspective is one of the original and

more popular theoretical models used in the strategic HRM literature (Wright & McMahan,

1992). The theory focuses on employee behavior as the mediator between strategy and firm



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performance. It assumes that the purpose of various HR practices is to elicit and control

employee attitudes and behaviors. The specific attitudes and behaviors that will be mosteffective for organizations differ depending upon various characteristics of organizations,

including the organizational strategy. Thus, these differences in role behaviors required by the

organizations strategy require different HRM practices to elicit and reinforce those behaviors.

A good example of the role behavior perspective is Schuler and Jacksons (1987a) model

for linking HRM practices with competitive strategies. In their article, they adopted Porters

(1980) competitive strategies (innovation, quality enhancement, and cost reduction) and

discussed how each strategy would require different HRM practices. The rationale they used

for these linkages was that employee role behaviors are instrumental in the implementation of

competitive strategies.

Another example of the role behavior perspective can be found in Miles and Snows(1984) description of the different types of behaviors necessary for strategies within the Miles

and Snow (1978) organizational type framework. These authors compared the strategy types

of defenders, prospectors, and analyzers with regard to the different types of HR practices

required. The authors did not explicitly address the role behaviors that are associated with the

different strategy types. However, akin with the role behavior perspective, they assumed that

HR practices differ among strategy types due to the different behaviors and skills necessary to

carry out the strategy.

Proposition 2: The strategy of a service organization defines the role behaviors needed by its employees. Specifically, a service strategy based on customer expectations will

require employee role behaviors that correspond to these expectations.

Although all the above philosophies make the same point, that HRM practices should

indeed be linked to strategic planning and implementation in service organizations, role

behavior theory, in particular, offers an integrative conceptualization that is both

behavioral and testable. As such, I adopt it as a basis for hypothesizing specific

HRMstrategy links.

4.1. Human resources practices elicit needed role behaviors

Role theory has served as a valuable conceptual and theoretical framework for the

study of individual behavior in organizations (Kahn, Wolfe, Quinn, Snoek, & Rosenthal,

1964; Katz & Kahn, 1978). Roles have been seen as the boundaries between individuals

and organizations. More specifically, roles have been viewed as conveyors of information

to individuals in the organization. It has been suggested that role behavior theory can be

applied to improve understanding of HRM practices used in the service sector (Jackson &

Schuler, 1992). In fact, Jackson and Schuler (1992) found that there were indeed

differences between service and manufacturing firms in terms of HRM practices. Forexample, employees in service firms had more formalized performance appraisals, more

input from clients, and their performance appraisals were more likely to be used to

determine compensation, etc. Based on these data collected from 267 organizations, they



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suggest that a role behavior theory perspective holds promise as an explanation for HRM

practices used in service firms.One of the desired goals of this paper then is to develop and forward a service management

strategy framework that can be used to explain individual behavior in and across organ-

izations by providing an explanation for interorganizational variations in the HRM practices

that presumably shape behavior. The role behavior theory perspective (Dougherty &

Pritchard, 1985; Naylor, Pritchard, & Ilgen, 1980) provides useful insights for understanding

and explaining interorganizational differences in HRM practices and consequent employee

and organizational behaviors.

In applying the role theory perspective specifically to this paper, it is suggested that (1)

HRM practices are used by organizations to convey role information to produce actual role

behaviors; (2) different HRM practices convey different role information; and (3) the roleinformation an organization needs to send (thereby defining needed role behaviors) is in

part a function of the business as determined by such characteristics as whether it is

manufacturing or service and the market segment to be served. In this case, the specific

characteristics are a market segments expectations for reliability, responsiveness, assurance,

empathy, and courtesy.

Overall then, business characteristics, such as strategy, dictate what role behaviors are

needed by employees; HRM is then used to stimulate, reinforce, and send information about

those behaviors leading to actual exhibited role behaviors. This model assumes as previously

mentioned that employers use HRM practices to elicit needed role behaviors. Based on therole theory perspective, correspondence between needed and actual role behaviors is expected

to be associated with effective organizations while lack of correspondence is expected to be

associated with ineffective organizations. However, in order to get desired role behaviors or

congruence between needed and displayed role behaviors, it will be important not only to

have the right kinds of general HRM practices in place but to also emphasize the right kinds

of behaviors in those HRM practices. In Section 4.2, I describe what I regard as the missing

link the gap between an HRM practice and desired role behaviors.

4.2. The missing link

The present paper has a symbiotic relationship with past work done by Schuler and

colleagues (Jackson & Schuler, 1992; Jackson, Schuler, & Rivero, 1989; Schuler, 1987, 1989;

Schuler & Jackson, 1987a, 1987b). In their studies, they asked these kinds of questions: What

kinds of HRM practices are used with different strategies? Are role behaviors a necessary

rationale for linking strategy to HRM practices? That is, are role behaviors assumed to be

instrumental in the implementation of competitive strategies? In order to answer these kinds

of questions, they used the Human Resource Management Practices Menu developed by

Schuler (1987), which lists continua of practices under each major HRM component. For

example, the HRM component of Planning Choices has continua of practices such asinformal/formal, loose/tight, short-term/long-term, etc. Schuler and colleagues theorized that,

depending on what employee characteristics are needed (e.g., low risk orientation versus high

risk orientation, concern for process versus concern for results) based on organizational



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strategy, choices can be made about the kinds of general HRM practices that should be used.

For example, if the corporate strategy is of an entrepreneurial nature, then Schuler posits thatemployees would need to have characteristics of being innovative, cooperative, risk-taking,

etc. From this, corresponding HRM practice choices for staffing would be broad paths,

multiple ladders, and open and implicit criteria.

Although the line of work pursued by Schuler and colleagues is the first step in uncovering

how strategy is related to HRM and necessary role behaviors, in this article, I propose another

level of distinction. In the present model, it is proposed that assurance of eliciting necessary

role behaviors for realizing the strategy is not only in the general HRM practices used (e.g.,

internal/external staffing) but in the behaviors that are actually emphasized within these

practices. In other words, the model underlying the work by Schuler and colleagues is at a

higher level of abstraction in that they propose that organizations will make different strategicchoices about HRM practices that fit the organizational strategy based on the role behaviors

needed. Certain HRM practices (e.g., behavioral vs. results criteria used in performance

appraisals), in turn, are thought to directly elicit specific role behaviors. In the current model,

it is proposed that organizations should emphasize specific market-oriented behaviors within

those HRM practices that are clearly aligned with organizational strategy. In other words, I

propose that within those HRM practices chosen for supporting a particular strategy, different

role behaviors should be explicitly emphasized and elicited. For example, if long-term

training is used for luxury hotels, within this type of training, specific behaviors regarding

individual attention and customization should be taught and emphasized. Similarly, ifbehavioral criteria in performance appraisals are used, within these performance appraisals,

attentive and customized behaviors should serve as criteria for ratings.

The difference between Schuler and colleagues model and the present proposal is that the

former focused on which HRM practices to use while the latter focuses further on what to

emphasize. Although, Schuler and Jackson (1987b) show that there is a relationship

between organizational strategy and HRM practices, they also note that organizations

sometimes vary on HRM practices regardless of strategy. Thus, the present model proposes

that, regardless of the general HRM practice chosen, it is the specific behaviors emphasized

within those practices that are important for eliciting needed role behaviors. In this way, thetheoretical link between HRM practices and the role behaviors they purport to elicit is made

more explicit. I believe that this may be the missing link that ties actual role behaviors to the

behaviors general HRM practices are thought to elicit.

Proposition 3: HRM practices and the behaviors emphasized in those HRM practices

communicate and elicit needed role behaviors.

Proposition 4: The better the fit between strategy and HRM practices including

behavioral emphases, the more effective the organization will be in terms of success

indicators such as service quality, customer loyalty, and profits. Proposition 5: The better the fit between employee role behaviors displayed and the

market segment served (strategy), the more effective the organization will be in terms of

success indicators such as service quality, customer loyalty, and profits.



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5. Operationalization of the service strategy framework

The best way to envision how HRM practices can support the service strategy framework

is to work through an example. By way of demonstration, I picked four HRM topics

(selection, training, performance appraisals and rewards, and level of supervision needed) and

compared how these HRM practices might differ on what is emphasized depending on the

hotel segment in question. The examples show how different market segments might use

market-oriented HRM practices and emphases differently to support a strategy based on the

framework of market segmentation as specified by this paper.

In terms of selection, a luxury hotel, based on the fact that they would attempt to achieve

excellence on all 5 dimensions of service quality, would have more stringent requirements than

all other segments listed in Table 3. A luxury hotel might select employees based on extensivehospitality experience, knowledge of luxury hotels, degree requirements specifically,

attendance at a first-rate school for hospitality management, dependability, oral communica-

tion skills in which to better explain the service, strong interpersonal skills, high levels of

conveyed confidence, service-orientation, etc. This type of hotel might tend to use more

selection instruments in order to appropriately test for all the knowledge, skills, and abilities

(KSAs) that are important. A family/extended-stay hotel might have different selection

practices or emphasize different KSAs in the selection process. For example, this type of

hotel might select based on some hospitality experience, experience working with children,

degree requirements that may focus on either hospitality businesses or topics related tochildren, dependability, and patience. Obviously, job analyses of different jobs in these

different market segments could identify the precise KSAs and levels of KSAs required for

each job. Furthermore, the methods used for making hiring decisions would also likely differ.

For the family/extended-stay hotel, an application, interview, and reference check might be

appropriate while for the luxury hotel, an assessment center type of selection device might be

needed to accurately assess the KSAs needed on the job. Even if the same number and type of

selection instruments were used, different questions and scenarios would be need to be applied

within each instrument.

Similarly, differences in training frequency and content would also vary across hotelsfocusing on different strategies. For family/extended-stay hotels, training might focus on

child safety, tips on interacting with children with the philosophy that keeping children happy

keeps parents coming back, child CPR, providing information on the types of issues/services

that are important to families (e.g., ability to heat bottles, access to high chairs, etc.). For

business hotels, training might focus on expediency of front desk services, accuracy of

billing, professionalism in answering phones, etc. All of these training content issues

correspond to the market being served and the level and type of expectations customers

have for each dimension of service.

The frequency of training may also be different between various hotel segments. Although

more continuous training is always desired, a budget hotel may do fine with having just initialcompany and job training, followed by some basic skills training. A luxury hotel, on the other

hand, would benefit by having frequent and continuous training on multiple service-oriented

topics to achieve a high consistent level of service.



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Different segments might also differ in the source and content used in performance

appraisals. For example, some segments (e.g., bed-and-breakfast inns) may use customercomment cards while another segment may use quantity of check-outs during crucial times

(e.g., business hotels). However, one practice should remain the same across all segments. In

order to maintain market focus, all segments should use performance appraisals based on

critical market-oriented behaviors. That is, the performance appraisals should be behaviorally

based and should focus on the behaviors of importance for that type of hotel. For example,

business hotels might emphasize behaviors related to responsiveness while bed-and-breakfast

inns might emphasize behaviors related to the personal touch.

Lastly, the level and type of supervision needed across segments may be different. An

employee at a luxury hotel may require more discretion when dealing with patrons. These

employees may need to make on-the-spot adjustments based on customers needs withoutchecking with a supervisor first. Work, then, becomes less formally supervised the more the

service requires excellence on all five service quality dimensions. In this case, empower-

ment and participative decision making would need to be heavily emphasized. Supervisors

would act more like facilitators of service than enforcers of rules. In contrast, a budget

hotel with its primary customer expectation on the dimension of reliability will probably

have tighter controls and emphasize enforcement of policies to ensure delivery of

excellence on reliability.

As the examples demonstrate, focusing on a particular market segment requires HRM

practices that are quite particular to the customers in that segment in order to survive and be successful. It is important to note that these differences in HRM practices are not

based solely on the overall level of service expected but the types of behaviors and

dimensions of service quality that are important for each market segment. That is, HRM

practices for each segment should focus on dimensions that are important to that

particular market segment. As Knutson et al. (1995) showed, different market segments

did not vary only in terms of overall level, where a lower segment (e.g., fast food) just

expected lower service across all dimensions. Instead, she found that segments differed

based on the dimension in question. Sometimes fast food customers had lower service

expectations on a certain service quality dimension and other times they had higherexpectation on a service quality dimension than consumers of fine restaurants. Therefore,

organizations need to choose the service elements that they are going to achieve

excellence on and deliver, via HRM practices, on those elements focusing resources in

that area. A focus strategy is important given that there is only a limited amount of

resources available in any given organization.

6. Organizational effectiveness and the feedback loop

When HRM practices and what is emphasized in those practices are in alignment withthe strategy chosen, employees are more likely to exhibit the actual role behaviors

necessary to realize the strategy. In turn, when these role behaviors are exhibited, service

organizations are likely to be successful on a number of fronts (e.g., organizational



17/22

competitiveness, increased profits, increased service quality). First and most obviously,

there will be increased service quality especially if the strategy is to focus on a specificcustomer markets needs. That is, if employees are displaying necessary role behaviors as a

result of market-oriented HRM practices and whats emphasized, then a natural con-

sequence would be increased customer service quality views. Service quality views, in turn,

have been shown in previous studies to be correlated with organizational performance

measures (Zeithaml, 2000).

First, there is evidence from the PIMS (Profit Impact of Marketing Strategies)

database, which contains information about strategy and performance on 2600 busi-

nesses worldwide. Their compiled information demonstrates that service quality is linked

to six performance indicators: (1) customer loyalty, (2) repeat purchases, (3) reduced

vulnerability to price wars, (4) ability to command high relative price without affectingmarket share, (5) lower marketing costs, and (6) market share improvements (Buzzell &

Gale, 1987).

In addition, independent studies have been done by numerous authors (e.g., Anderson,

Fornell, & Lehmann, 1994; Tornow & Wiley, 1991) that also establish relationships

between service quality and organizational performance outcomes. For example, Tornow

and Wiley (1991) showed that customer satisfaction was related to contract retention

(r= .37) while others have shown relationships to customer retention and higher profits

(Deshpande, Farley, & Ibster, 1993; Narver & Slater, 1990; Rust & Zahorik, 1993). Further

there is evidence to show that employee attitudes and behaviors are directly related toorganizational effectiveness and profits (Denison, 1990; Ulrich, Halbrook, Meder, Stuchlik,

& Thorpe, 1991).

6.1. Feedback from customers

Ultimately, customer service quality evaluations will have to be monitored and fed

back into the strategy since customer expectations may change over time. As Schneider,

White, and Paul (1998) showed, there is a reciprocal relationship between customers

perceptions of service quality and service climate. That is, not only did internal serviceclimate affect customer service quality perceptions but customer perceptions also affected

organizational practices. Customer needs are bound to change over time with changes in

society (e.g., less time to cook), therefore, it is up to service companies to listen to their

customers and make adjustments to improve and hopefully retain customers. Over time, a

service firm may find that the characteristics and expectations of the market segment they

once served has changed dramatically and may have to choose between altering their

strategy accordingly or finding another segment to serve. In any case, there must always

be a feedback loop; this is true for any organization but especially for service

organizations since their foundation and continued success greatly depends on the externalenvironment (i.e., customers).

Proposition 6: In successful organizations, customer service quality views are fed back

into the strategic formula and affect decisions about market segment focus.



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7. Summary and model

Fig. 1 depicts a model that encapsulates Propositions 1, 2, 3, 4, 5, and 6. Fig. 1 shows that

focusing on a specific market segment as a service management strategy defines role

behaviors needed by employees to serve that market. HRM practices and behavioral

emphases should then be carefully chosen to communicate this role information to employ-

ees. In turn, employees will display needed role behaviors which leads to organizational

effectiveness. However, there needs to be a continual feedback loop from service quality

evaluations to strategy so that strategy may be altered depending on the changes in the

environment (e.g., different customer expectations).

8. Implications

8.1. Implications for research

The model proposed is one which lends itself to hypothesis testing. In fact, I have

conducted a preliminary empirical study of a modified version of the model. Overall, I

recommend two levels of analyses the individual and the organizational level. Role

behaviors should be measured at the individual level while strategy, fit indices and

organizational effectiveness should be measured at the organizational level. HRM practicescan be measured either at the individual or the organizational level. At the individual level,

individual employees would be asked to describe their HRM practices and what is

emphasized in the HRM practices; these results would then be aggregated to the organiza-

tional level. HRM practices can also be measured at the organizational level by asking the

HRM manager to describe their current HRM practices and emphases.

Fig. 1. A market-oriented services management model.



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Several other key considerations are also necessary in the operationalization of the

variables. First, it is necessary to find organizations, which have clear target markets anduse distinctive service as a strategy. Second, it will be important to not only identify the types

of HRM practices used but also the kinds of behaviors emphasized. For example, a training

class should be analyzed both in terms of the type of training provided (e.g., skill-building vs.

policy) and the behavioral content that is taught. Similarly, resulting role behaviors displayed

by employees should be examined on a behavioral level, by a number of different sources: the

employee, supervisor and customer. I believe that analysis on a behavioral level helps to

ensure consistency of measurement between behaviors that HRM practices are thought to

elicit and the actual role behaviors displayed. In turn, there should also be consistency in

measuring service quality views in behavioral terms as well.

8.2. Implications for practice

This model clearly has some important implications for practice. As anecdotal evidence

suggests, organizations that focus on their target customer market segments are leaders in

their field (e.g., Nordstrom, Shouldice Hospital). They are already doing many of the

things suggested by the model. Instead of trying to match best practices with those of other

firms, especially manufacturing firms, they are creating their own best practices. These

firms are able to do that because they understand and focus all of their energy, resources,

policies, and rewards, on their particular set of customers. It is by making the strategy clearto all, having a market-oriented perspective, implementing a systemic effort, coordinating

all departments, and emphasizing and rewarding the right kinds of behaviors that are

crucial to success. The framework presented can be a useful tool in helping organizational

leaders and service employees to understand the often subtle differences between

customers expectations in their market segment versus other market segments. Knowing

these differences is crucial in providing the right mix of service for the organizations

particular set of customers.

9. Conclusion

With services now dominating the GDP and the experienced maturation of the market, it

has become imperative for the services management field to develop theories that pertain

specifically to the operation of service firms. Unfortunately, available research and theory on

services has been scarce. Much of the services literature is of an anecdotal nature and much of

the research that has been done is largely in the marketing field. Therefore, I believe that this

article fills a greatly needed gap in the advancement of the services management field.

In service firms, customers, employees and their interactions are the keys to success.

Therefore, any theory on service must include all three elements. I believe that the currentmodel is one of the first steps in establishing a theoretical framework for the management of

services that incorporates all three elements. The present article adds to the literature by

providing some theoretical grounding for the formulation and implementation of strategy in



20/22

service firms by proposing the link between the external environment (customer expectations

of service quality) to strategy, strategy to HRM practices, HRM practices to role behaviors,and role behaviors to organizational effectiveness. Further, this model contributes to the

literature by revealing what may be a missing piece of the puzzle in HRM studies. I suggest

that what is emphasized in HRM practices on the five dimensions of service quality in

addition to how it is carried out is important for the delivery of service quality. Therefore, I

propose that HRM practices are a useful tool for communicating and achieving strategic goals

through guiding role behaviors provided that both the what and how of HRM practices is

consistent in their message sent.

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