Service economy

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GDP Composition By Sector and Labour Force By Occupation

Service economy can refer to one or both of two recent economic developments:

The old dichotomy between product and service has been replaced by a Service (economics) service–product continuum [1]. Many products are being transformed into services.

For example, IBM treats its business as a service business. Although it still manufactures computers, it sees the physical goods as a small part of the "business solutions" industry. They have found that the price elasticity of demand for "business solutions" is much less than for hardware. There has been a corresponding shift to a subscription pricing model. Rather than receiving a single payment for a piece of manufactured equipment, many manufacturers are now receiving a steady stream of revenue for ongoing contracts.

Full cost accounting and most accounting reform and monetary reform
measures are usually thought to be impossible to achieve without a good model of the service economy.

Since the 1950s, the global economy has undergone a structural transformation. For this change, the American economist Victor R. Fuchs called it “the service economy” in 1968. He believes that the United States has taken the lead in entering the service economy and society in the Western countries. The declaration heralded the arrival of a service economy that began in the United States on a global scale. With the rapid development of information technology, the service economy has also shown new development trends.[1]

Environmental effects of the service economy

This is seen, especially in

green economics and more specific theories within it such as Natural Capitalism, as having these benefits:[citation needed
]

waste disposal
is included in the distribution chain of an industrial product and is paid for at time of purchase. That is, paying for the safe and proper disposal when you pay for the product, and relying on those who sold it to you to dispose of it.

Those who advocate it are concerned with the later phases of

comprehensive outcome
of the whole production process. It is considered a pre-requisite to a strict service economy interpretation of (fictional, national, legal) "commodity" and "product" relationships.

It is often applied to paint, tires, and other goods that become

homeless people in U.S. cities. Legal requirements vary: the bottle itself may be considered the property of the purchaser of the contents, or, the purchaser may have some obligation to return the bottle to some depot so it can be recycled
or re-used.

In some countries, such as

class action suits that are effectively product stewardship liability
- holding companies responsible for things the product does which it was never advertised to do.

Rather than let liability for these problems be taken up by the

moral purchasing
more attractive, as it avoids liability and future lawsuits.

The United States Environmental Protection Agency advocates product stewardship to "reduce the life-cycle environmental effects of products." The ideal of product stewardship, as administered by the EPA in 2004, "taps the shared ingenuity and responsibility of businesses, consumers, governments, and others," the EPA states at a Web site.

Role of the service economy in development

Services constitute over 50% of GDP in low income countries and as their economies continue to develop, the importance of services in the economy continues to grow.

secondary goods. As a result, employment is also adjusting to the changes and people are leaving the agricultural sector to find work in the service economy. This job creation is particularly useful as often it provides employment for low skilled labour in the tourism and retail sectors, thus benefiting the poor in particular and representing an overall net increase in employment.[2]
The service economy in developing countries is most often made up of the following:

The export potential of many of these products is already well understood, e.g. in tourism, financial services and transport, however, new opportunities are arising in other sectors, such as the health sector. For example:

  • Indian companies who provide scanning services for US hospitals
  • South Africa is developing a market for surgery and tourism packages
  • India, the Philippines, South Africa and Mauritius have experienced rapid growth in IT services, such as call centers, back-office functions and software development.

Servitization drivers

The trend of servitization is very visible while looking at the growth of the service shares in the United States and European countries GDP than 20 years ago. Services are becoming an inseparable component of the product, as the supplier offers them jointly with the core to improve its performance (IBM, 2010). However, what are the key drivers for reshaping the business model of the company? Baines, Lightfoot, & Kay (2006) name three main sets of factors that motivate companies to expand into services sectors: financial, strategic and marketing.

Financial drivers

The financial driver is reflected in improved profit margins and stable income, that come with servitization. In the increasing price competition among product offering, companies can use services to recover the lost potential revenue. GE's transportation division encountered a 60% drop in the number of locomotives sold between 1999 and 2002 but did not turn out disastrously because the revenue from services has tripled from $500M to $1.5B from 1996 to 2002.[3] According to an AMR Research (1999) report, companies earn over 45% gross profits from the aftermarket services although they represent only 24% of revenues. It also shows that GM earned more profits in 2001 from $9 billion after-sale revenues than it did from $150 billion income from car sales.[4]

Also, the servitization levels the seasonality of the product and increases life cycles of the complex products, examples of which one can see in the aircraft industry, whereby companies stop focusing on the pure product delivery but start introducing maintenance and other aftermarket activities.[5]

Strategic drivers

Strategic drivers focus mainly on gaining and securing the competitive advantage by the company. For the company to be able to achieve sustainable competitive advantage, its resources should be valuable, rare, difficult to imitate and organised. Servitization might not be the ultimate and only guarantee for the company of achieving it. However, it shows to be valuable as it is not provided by many suppliers, and it facilitates the usage of the product by the customer. It is also rare and difficult to imitate as not too many companies have capabilities of providing service to the customer since the producer has better knowledge and experience in the product functioning. Moreover, services are less visible and require more labour, therefore, prove to be more difficult to imitate. Finally, commoditisation is pushing the prices down, forcing companies to constantly innovate. However, adding services to the product enhances its value to the customer making it more valuable and perceived customised as service delivery can be done in a more individual way answering the customer needs on a more ad hoc manner.

Marketing and sales drivers

As services are provided on a long-term basis rather than one-time sale they offer more time to build the relationship with the customers and allow supplier to create the brand. Moreover, it enables the sales team to influence the purchasing decisions, by giving them opportunities to upsell additional product extension or other complementing parts of the product. Growing needs for services in the B2B industry comes from the customer and his need for not universal but custom-made solutions and this requires understanding his scope of work. This kind of work requires time and meetings of both sides during which trust and understanding are developed, which further leads to loyalty.[6] Last but not least working closely with customer and having opinions from a different perspective provides the supplier with valuable insights about the industry enabling him to innovate with a more customer-centric approach.

Designing a proper go-to-market strategy (aligned with an operations strategy) is key success factor for the PSS to be successfully introduced on the market. The 5Cs marketing framework analysis shall be applied:

  • Context (
    PESTEL
    analysis)
  • Customer
  • Competition
  • Collaborators (suppliers and distributors)
  • Company (Internal capabilities, for instance with a
    VRIN
    test)

Perticularly important is the pricing approach, that to be successful shall adopt a Total Economic Value approach supported by a conjoint analysis to determine customer preferences and price sensitivity. Servitization contracts are typically based on fixed-fee schemas with increasing level of risks:

  • fixed-fee for Product oriented PSS have the lowest level of risks
  • level of risks increase moving versus usage-based oriented PSS, as an agreed uptime level is the base of pricing
  • highest risks is captured with fixed fee for result-based PSS.

TEV analysis shall identify how the repositioning of such risks from customers to supplier creates value for the client and shall be used in pricing strategy

See also

References

  1. ISBN 9789814365642
    .
  2. ^ a b c Massimiliano Cali, Karen Ellis and Dirk Willem te Velde (2008) The contribution of services to development: The role of regulation and trade liberalisation Archived 2020-09-23 at the Wayback Machine London: Overseas Development Institute
  3. ^ Sawhney, M. S., Balasubramaniam, S., & Krishnan, V. V. (2004). Creating Growth with Services. MIT Sloan Management Review. https://doi.org/10.1080/13552600410001470973
  4. ^ Cohen, M. A., & Agrawal, N. (2006). Winning in the Aftermarket. Harvard Business Review, 84, 129–138. https://doi.org/Article
  5. ^ Ward, Y., & Graves, A. (2007). Through-life management: the provision of total customer solutions in the aerospace industry. International Journal of Services Technology and Management, 8(6), 455. https://doi.org/10.1504/IJSTM.2007.013942
  6. ^ Vandermerwe, S., & Rada, J. (1988). Servitization of Business: Adding Value by Adding Services. European Management Journal, 6(4), 314–324. https://doi.org/10.1016/0263-2373(88)90033-3

Further reading

  • Vandermerwe, S. and Rada, J. (1988) "Servitization of business: Adding value by adding services", European Management Journal, vol. 6, no. 4, 1988.
  • Christian Girschner, Die Dienstleistungsgesellschaft. Zur Kritik einer fixen Idee. Köln: PapyRossa Verlag, 2003.

External links
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