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:

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Developed country country with a developed industry and infrastructure

A developed country, industrialized country, more developed country, or more economically developed country (MEDC), is a sovereign state that has a developed economy and advanced technological infrastructure relative to other less industrialized nations. Most commonly, the criteria for evaluating the degree of economic development are gross domestic product (GDP), gross national product (GNP), the per capita income, level of industrialization, amount of widespread infrastructure and general standard of living. Which criteria are to be used and which countries can be classified as being developed are subjects of debate.

<i>Fortune</i> 500 Annual list compiled and published by Fortune magazine

The Fortune 500 is an annual list compiled and published by Fortune magazine that ranks 500 of the largest United States corporations by total revenue for their respective fiscal years. The list includes publicly held companies, along with privately held companies for which revenues are publicly available. The concept of the Fortune 500 was created by Edgar P. Smith, a Fortune editor, and the first list was published in 1955. The Fortune 500 is more commonly used than its subset Fortune 100 or superset Fortune 1000.

Financial services economic service provided by the finance industry

Financial services are the 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, accountancy companies, consumer-finance companies, stock brokerages, investment funds, individual managers and some government-sponsored enterprises. Financial services companies are present in all economically developed geographic locations and tend to cluster in local, national, regional and international financial centers such as London, New York City, and Tokyo.

The old dichotomy between product and service has been replaced by a service-product continuum. Many products are being transformed into services.

In marketing, a product is an object or system made available for consumer use; it is anything that can be offered to a market to satisfy the desire or need of a customer. In retailing, products are often referred to as merchandise, and in manufacturing, products are bought as raw materials and then sold as finished goods. A service is also regarded to as a type of product.

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.

IBM American multinational technology and consulting corporation

International Business Machines Corporation (IBM) is an American multinational information technology company headquartered in Armonk, New York, with operations in over 170 countries. The company began in 1911, founded in Endicott, New York, as the Computing-Tabulating-Recording Company (CTR) and was renamed "International Business Machines" in 1924.

Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price when nothing but the price changes. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price.

The subscription business model is a business model in which a customer must pay a recurring price at regular intervals for access to a product or service. The model was pioneered by publishers of books and periodicals in the 17th century, and is now used by many businesses and websites.

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.

Accounting reform is an expansion of accounting rules that goes beyond the realm of financial measures for both individual economic entities and national economies. It is advocated by those who consider the focus of the present standards and practices wholly inadequate to the task of measuring and reporting the activity, success, and failure of modern enterprise, including government.

Monetary reform

Monetary reform is any movement or theory that proposes a system of supplying money and financing the economy that is different from the current system.

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 revolution and 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:

<i>Natural Capitalism</i> book by Paul Hawken

Natural Capitalism: Creating the Next Industrial Revolution is a 1999 book 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 Business Review summary.

Product stewardship or product take-back are words for a specific requirement or measure in which the service of 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 product lifecycle and the 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 toxic waste if not disposed of properly. It is most familiar as the container deposit 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 or recycling. If not, one has paid the fee, and presumably this can pay for landfill or litter 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 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, law requires attention to the comprehensive outcome 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, there have been many 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 public sector or be haphazardly assigned one issue at a time to companies via lawsuits, many accounting reform efforts focus on achieving full cost accounting. 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 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. [2] 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). [2] 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. [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:

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, although has encountered a 60% drop in the number of locomotives sold between 1999 and 2002, it didn't turn out disastrous thanks to the revenue from services that has tripled from $500M to $1.5B from 1996 to 2002. [3] According to an AMR Research (1999) report, although representing only 24% of revenues companies earn over 45% gross profits from the aftermarket services. 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] Moreover, 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 mainly focus on gaining and securing the competitive advantage by the company. In order 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, as the producer has the superior knowledge and experience in the product functioning. Moreover, services are less visible and require more labour, therefore, prove to be more difficult to imitate. Last but not least market 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 the 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.

See also

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Inventory or stock is the goods and materials that a business holds for the ultimate goal of resale.

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References

  1. Victor R., Fuchs. Who Shall Live?: Health, Economics and Social Choice.
  2. 1 2 3 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
  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