Service economy
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Service economy can refer to one or both of two recent economic developments: * The increased importance of the service sector in industrialized economies. The current list of Fortune 500 companies contains more service companies and fewer manufacturers than in previous decades. * The relative importance of service in a product offering. The service economy in developing countries is mostly concentrated in
financial services Financial services are the Service (economics), economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, acco ...
,
hospitality Hospitality is the relationship between a guest and a host, wherein the host receives the guest with some amount of goodwill, including the reception and entertainment of guests, visitors, or strangers. Louis, chevalier de Jaucourt describes ...
,
retail Retail is the sale of goods and services to consumers, in contrast to wholesaling, which is sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturers, directly or through a wholesaler, and ...
,
health Health, according to the World Health Organization, is "a state of complete physical, mental and social well-being and not merely the absence of disease and infirmity".World Health Organization. (2006)''Constitution of the World Health Organiza ...
,
human services Human services is an interdisciplinary field of study with the objective of meeting human needs through an applied knowledge base, focusing on prevention as well as remediation of problems, and maintaining a commitment to improving the overall qua ...
,
information technology Information technology (IT) is the use of computers to create, process, store, retrieve, and exchange all kinds of Data (computing), data . and information. IT forms part of information and communications technology (ICT). An information te ...
and
education Education is a purposeful activity directed at achieving certain aims, such as transmitting knowledge or fostering skills and character traits. These aims may include the development of understanding, rationality, kindness, and honesty ...
. Products today have a higher service component than in previous decades. In the management literature this is referred to as the servitization of products or a
product-service system Product-service systems (PSS) are business models that provide for cohesive delivery of products and services. PSS models are emerging as a means to enable collaborative consumption of both products and services, with the aim of pro-environmental ...
. Virtually every product today has a service component to it. The old dichotomy between product and service has been replaced by a Service (economics) service–product continuu

Many product (business), 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 Environmental full-cost accounting (EFCA) is a method of cost accounting that traces direct costs and allocates indirect costs by collecting and presenting information about the possible environmental, social and economical costs and benefits or ad ...
and most
accounting reform Accounting reform is an expansion of accounting rules that goes beyond financial measures for both individual economic entities and national economies. It is advocated by those who consider the focus of the current standards and practices wholly ...
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.


Environmental effects of the service economy

This is seen, especially in
green economics A green economy is an economy that aims at reducing environmental risks and ecological scarcities, and that aims for sustainable development without degrading the environment. It is closely related with ecological economics, but has a more politi ...
and more specific theories within it such as
Natural Capitalism ''Natural Capitalism: Creating the Next Industrial Revolution'' is a 1999 book on environmental economics co-authored by Paul Hawken, Amory Lovins and Hunter Lovins. It has been translated into a dozen languages and was the subject of a Harvard ...
, as having these benefits: *Much easier integration with
accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...
for nature's services *Much easier integration with
state services A public service is any Service (economics), service intended to address specific needs pertaining to the aggregate members of a community. Public services are available to people within a government jurisdiction as provided directly through pub ...
under
globalization Globalization, or globalisation (Commonwealth English; see spelling differences), is the process of interaction and integration among people, companies, and governments worldwide. The term ''globalization'' first appeared in the early 20t ...
, e.g. meat inspection is a service that is assumed within a product price, but which can vary quite drastically with jurisdiction, with some serious effects. *Association of goods movements in raw materials and energy markets with the related negative environmental effects (representing
emissions Emission may refer to: Chemical products * Emission of air pollutants, notably: **Flue gas, gas exiting to the atmosphere via a flue ** Exhaust gas, flue gas generated by fuel combustion ** Emission of greenhouse gases, which absorb and emit rad ...
or other
pollution Pollution is the introduction of contaminants into the natural environment that cause adverse change. Pollution can take the form of any substance (solid, liquid, or gas) or energy (such as radioactivity, heat, sound, or light). Pollutants, the ...
,
biodiversity loss Biodiversity loss includes the worldwide extinction of different species, as well as the local reduction or loss of species in a certain habitat, resulting in a loss of biological diversity. The latter phenomenon can be temporary or permanent, de ...
,
biosecurity Biosecurity refers to measures aimed at preventing the introduction and/or spread of harmful organisms (e.g. viruses, bacteria, etc.) to animals and plants in order to minimize the risk of transmission of infectious disease. In agriculture, thes ...
risk)
public bad A public bad, in economics, is the symmetrical opposite of a public good. Air pollution is the most obvious example since it is non-excludable and non-rival, and negatively affects welfare.For current definitions of public bads see: Charles D. Ko ...
s so that no commodity can be traded without assuming responsibility for damage done by its extraction, processing, shipping, trading and sale - its
comprehensive outcome Paul Gerard Hawken (born February 8, 1946) is an American environmentalist, entrepreneur, author, economist, and activist. Biography Hawken was born in San Mateo, California, and grew up in the San Francisco Bay Area, where his father worked at ...
*Easier integration with
urban ecology Urban ecology is the scientific study of the relation of living organisms with each other and their surroundings in an urban environment. An urban environment refers to environments dominated by high-density residential and commercial buildings ...
and
industrial ecology Industrial ecology (IE) is the study of material and energy flows through industrial systems. The global industrial economy can be modelled as a network of industrial processes that extract resources from the Earth and transform those resource ...
modelling *Making it easier to relate to the
Experience Economy The Experience Economy is the sale of memorable experiences to customers. The term was first used in a 1998 article by B. Joseph Pine II and James H. Gilmore describing the next economy following the agrarian economy, the industrial economy, an ...
of actual
quality of life Quality of life (QOL) is defined by the World Health Organization as "an individual's perception of their position in life in the context of the culture and value systems in which they live and in relation to their goals, expectations, standards ...
decisions made by human beings based on assumptions about service, and integrating
economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...
better with
marketing Marketing is the process of exploring, creating, and delivering value to meet the needs of a target market in terms of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emph ...
theory about
brand A brand is a name, term, design, symbol or any other feature that distinguishes one seller's good or service from those of other sellers. Brands are used in business, marketing, and advertising for recognition and, importantly, to create ...
value e.g. products are purchased for their assumed reliability in some known process. This assumes that the user's experience with the brand (implying a service they expect) is far more important than its technical characteristics
Product stewardship Product stewardship is an approach to managing the environmental impacts of different products and materials and at different stages in their production, use and disposal. It acknowledges that those involved in producing, selling, using and dispos ...
or product take-back are words for a specific requirement or measure in which the service of
waste disposal Waste management or waste disposal includes the processes and actions required to manage waste from its inception to its final disposal. This includes the collection, transport, treatment and disposal of waste, together with monitorin ...
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
product lifecycle In industry, Product Lifecycle Management (PLM) is the process of managing the entire lifecycle of a product from its inception through the engineering, design and manufacture, as well as the service and disposal of manufactured products. PL ...
and the
comprehensive outcome Paul Gerard Hawken (born February 8, 1946) is an American environmentalist, entrepreneur, author, economist, and activist. Biography Hawken was born in San Mateo, California, and grew up in the San Francisco Bay Area, where his father worked at ...
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
toxic waste Toxic waste is any unwanted material in all forms that can cause harm (e.g. by being inhaled, swallowed, or absorbed through the skin). Mostly generated by industry, consumer products like televisions, computers, and phones contain toxic chemi ...
if not disposed of properly. It is most familiar as the
container deposit Container-deposit legislation (also known as a container-deposit scheme, deposit-refund system or scheme, deposit-return system, or bottle bill) is any law that requires the collection of a monetary deposit on beverage containers (refillable or ...
charged for a deposit bottle. One pays a fee to buy the bottle, separately from the fee to buy what it contains. If one returns the bottle, the fee is returned, and the supplier must return the bottle for
re-use Reuse is the action or practice of using an item, whether for its original purpose (conventional reuse) or to fulfill a different function ( creative reuse or repurposing). It should be distinguished from recycling, which is the breaking down of u ...
or
recycling Recycling is the process of converting waste materials into new materials and objects. The recovery of energy from waste materials is often included in this concept. The recyclability of a material depends on its ability to reacquire the p ...
. If not, one has paid the fee, and presumably this can pay for landfill or
litter Litter consists of waste products that have been discarded incorrectly, without consent, at an unsuitable location. Litter can also be used as a verb; to litter means to drop and leave objects, often man-made, such as aluminum cans, paper cups ...
control measures that dispose of diapers or a broken bottle. Also, since the same fee can be collected by anyone finding and returning the bottle, it is common for people to collect these and return them as a means of gaining a small income. This is quite common for instance among homeless people in U.S. cities. Legal requirements vary: the bottle itself may be considered the
property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, r ...
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
Germany Germany,, officially the Federal Republic of Germany, is a country in Central Europe. It is the second most populous country in Europe after Russia, and the most populous member state of the European Union. Germany is situated betwe ...
,
law Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has been vario ...
requires attention to the
comprehensive outcome Paul Gerard Hawken (born February 8, 1946) is an American environmentalist, entrepreneur, author, economist, and activist. Biography Hawken was born in San Mateo, California, and grew up in the San Francisco Bay Area, where his father worked at ...
of the whole extraction, production, distribution, use and waste of a product, and holds those profiting from these legally responsible for any outcome along the way. This is also the trend in the UK and EU generally. In the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, there have been many
class action suit A class action, also known as a class-action lawsuit, class suit, or representative action, is a type of lawsuit where one of the parties is a group of people who are represented collectively by a member or members of that group. The class actio ...
s 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
public sector The public sector, also called the state sector, is the part of the economy composed of both public services and public enterprises. Public sectors include the public goods and governmental services such as the military, law enforcement, infra ...
or be haphazardly assigned one issue at a time to companies via lawsuits, many
accounting reform Accounting reform is an expansion of accounting rules that goes beyond financial measures for both individual economic entities and national economies. It is advocated by those who consider the focus of the current standards and practices wholly ...
efforts focus on achieving
full cost accounting Environmental full-cost accounting (EFCA) is a method of cost accounting that traces direct costs and allocates indirect costs by collecting and presenting information about the possible environmental, social and economical costs and benefits or ad ...
. This is the financial reflection of the comprehensive outcome - noting the gains and losses to all parties involved, not just those investing or purchasing. Such moves have made
moral purchasing Ethical consumerism (alternatively called ethical consumption, ethical purchasing, moral purchasing, ethical sourcing, or ethical shopping and also associated with sustainable and green consumerism) is a type of consumer activism based on the conc ...
more attractive, as it avoids liability and future lawsuits. The
United States Environmental Protection Agency The Environmental Protection Agency (EPA) is an independent executive agency of the United States federal government tasked with environmental protection matters. President Richard Nixon proposed the establishment of EPA on July 9, 1970; it be ...
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.Massimiliano Cali, Karen Ellis and Dirk Willem te Velde (2008
The contribution of services to development: The role of regulation and trade liberalisation
London: Overseas Development Institute
The service economy is also key to growth, for instance it accounted for 47% of economic growth in sub-Saharan Africa over the period 2000–2005 (industry contributed 37% and agriculture 16% in the same period). This means that recent economic growth in Africa relies as much on services as on natural resources or textiles, despite many of those countries benefiting from trade preferences in primary and 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. The service economy in developing countries is most often made up of the following: *
Financial services Financial services are the Service (economics), economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, acco ...
*
Tourism Tourism is travel for pleasure or business; also the theory and practice of touring (disambiguation), touring, the business of attracting, accommodating, and entertaining tourists, and the business of operating tour (disambiguation), tours. Th ...
*
Distribution Distribution may refer to: Mathematics *Distribution (mathematics), generalized functions used to formulate solutions of partial differential equations * Probability distribution, the probability of a particular value or value range of a vari ...
*
Health Health, according to the World Health Organization, is "a state of complete physical, mental and social well-being and not merely the absence of disease and infirmity".World Health Organization. (2006)''Constitution of the World Health Organiza ...
, and *
Education Education is a purposeful activity directed at achieving certain aims, such as transmitting knowledge or fostering skills and character traits. These aims may include the development of understanding, rationality, kindness, and honesty ...
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. Recently, Visnjic, Jovanovic, Neely, and Engwall recognized value drivers, such as efficiency, novelty, lock-in, complementarity, and accountability.


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. 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. 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.


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.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 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 In business analysis, PEST analysis ("political, economic, socio-cultural and technological") describes a framework of macro-environmental factors used in the environmental scanning component of strategic management. It is part of an external envi ...
analysis) * Customer * Competition * Collaborators (suppliers and distributors) * Company (Internal capabilities, for instance with a
VRIN Vrin () is a village and a former municipality in the Lumnezia. It belonged to the circle of Lugnez/Lumnezia in the district of Surselva in the canton of Graubünden in Switzerland. The municipalities of Cumbel, Degen, Lumbrein, Morissen, ...
test) Perticularly important is the pricing approach, that to be successful shall adopt a Total Economic Value approach supported by a
conjoint analysis Conjoint analysis is a survey-based statistical technique used in market research that helps determine how people value different attributes (feature, function, benefits) that make up an individual product or service. The objective of conjoint an ...
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

* Circular economy *
Information revolution The term information revolution describes current economic, social and technological trends beyond the Industrial Revolution. Many competing terms have been proposed that focus on different aspects of this societal development. The British polymat ...
*
Product-service system Product-service systems (PSS) are business models that provide for cohesive delivery of products and services. PSS models are emerging as a means to enable collaborative consumption of both products and services, with the aim of pro-environmental ...
*
Services marketing Services marketing is a specialized branch of marketing which emerged as a separate field of study in the early 1980s, following the recognition that the unique characteristics of services required different strategies compared with the marketi ...
*
Service system A service system (or customer service system, CSS) is a configuration of technology and organizational networks designed to deliver services that satisfy the needs, wants, or aspirations of customers. "Service system" is a term used in the serv ...
*
Servicizing Product-service systems (PSS) are business models that provide for cohesive delivery of products and services. PSS models are emerging as a means to enable collaborative consumption of both products and services, with the aim of pro-environmental ...
*
Precarious work Precarious work is a term that critics use to describe non-standard or temporary employment that may be poorly paid, insecure, unprotected, and unable to support a household. From this perspective, globalization, the shift from the manufacturing s ...


References

*


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


EPA Product Stewardship Web site
"highlights the latest developments in product stewardship, both in the United States and abroad."
Coalition of Service Industries Web site
"The leading trade association representing the U.S. service industry in international trade negotiations." * The (new) service economy is not the same as the service sector, described a
"Science of service systems, service sector, service economy" on the Coevolving Innovations web site
* An input-oriented approached based on Richard Florida's work a
"Talent in the (new) service economy: creative class occupations?" on the Coevolving Innovations web site

Measuring value for the customer using conjoint analysis
a blog around servitization, impacts on marketing and operations strategy {{DEFAULTSORT:Service Economy Business models Services sector of the economy Interdisciplinary subfields of economics