Service economy
Encyclopedia
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
than 20 years ago. The current list of Fortune 500
Fortune 500
The Fortune 500 is an annual list compiled and published by Fortune magazine that ranks the top 500 U.S. closely held and public corporations as ranked by their gross revenue after adjustments made by Fortune to exclude the impact of excise taxes companies collect. The list includes publicly and...
companies contains more service companies and fewer manufacturers than in previous decades.
The term is also used to refer to the relative importance of service in a product offering. The service economy in developing countries is mostly concentrated in financial services
Financial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
, health, and education
Education
Education in its broadest, general sense is the means through which the aims and habits of a group of people lives on from one generation to the next. Generally, it occurs through any experience that has a formative effect on the way one thinks, feels, or acts...
. Products today have a higher service component than in previous decades. In the management literature this is referred to as the servitization of products. Virtually every product today has a service component to it. The old dichotomy between product and service has been replaced by a service-product continuum. Many product
Product (business)
In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...
s are being transformed into services.
For example, IBM
IBM
International Business Machines Corporation or IBM is an American multinational technology and consulting corporation headquartered in Armonk, New York, United States. IBM manufactures and sells computer hardware and software, and it offers infrastructure, hosting and consulting services in areas...
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
Price elasticity of demand
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. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price...
for "business solutions" is much less than for hardware. There has been a corresponding shift to a subscription pricing model
Subscription business model
The subscription business model is a business model where a customer must pay a subscription price to have access to the product/service. The model was pioneered by magazines and newspapers, but is now used by many businesses and websites....
. 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. James Murrdock once said "When GDP are low...the service based economy must be also."
Full cost accounting
Full cost accounting
Full cost accounting generally refers to the process of collecting and presenting information - about environmental, social, and economic costs and benefits/advantages - for each proposed alternative when a decision is necessary. It is a conventional method of cost accounting that traces direct...
and most accounting reform
Accounting reform
Accounting reform is an expansion of accounting rules that goes beyond the realm of financial measures for both individual economic entities and national economies...
and monetary reform
Monetary reform
Monetary reform describes any movement or theory that proposes a different system of supplying money and financing the economy from the current system.Monetary reformers may advocate any of the following, among other proposals:...
measures are usually thought to be impossible to achieve without a good model of the service economy.
Environmental effects of the service economy
This is seen, especially in green economics and more specific theories within it such as Natural CapitalismNatural capitalism
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....
, as having these benefits:
- Much easier integration with accounting for nature's services
- Much easier integration with state services under globalizationGlobalizationGlobalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...
, 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 commodity marketsCommodity marketsCommodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts....
with negative commodity (representing emissions or other pollutionPollutionPollution is the introduction of contaminants into a natural environment that causes instability, disorder, harm or discomfort to the ecosystem i.e. physical systems or living organisms. Pollution can take the form of chemical substances or energy, such as noise, heat or light...
, biodiversityBiodiversityBiodiversity is the degree of variation of life forms within a given ecosystem, biome, or an entire planet. Biodiversity is a measure of the health of ecosystems. Biodiversity is in part a function of climate. In terrestrial habitats, tropical regions are typically rich whereas polar regions...
loss, biosecurityBiosecurityBiosecurity is a set of preventive measures designed to reduce the risk of transmission of infectious diseases, quarantined pests, invasive alien species, living modified organisms...
risk) public badPublic badA public bad, in economics, is the symmetric of a public good. Air pollution is the most obvious example since it is non-excludable and non-rival, and negatively affects welfare....
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 - Easier integration with urban ecologyUrban ecologyUrban ecology is a subfield of ecology which deals with the interaction between organisms in an urban or urbanized community, and their interaction with that community. Urban ecologists study the trees, rivers, wildlife and open spaces found in cities to understand the extent of those resources and...
and industrial ecologyIndustrial ecologyIndustrial Ecology is the study of material and energy flows through industrial systems. The global industrial economy can be modeled as a network of industrial processes that extract resources from the Earth and transform those resources into commodities which can be bought and sold to meet the...
modelling - Making it easier to relate to the Experience Economy of actual quality of lifeQuality of lifeThe term quality of life is used to evaluate the general well-being of individuals and societies. The term is used in a wide range of contexts, including the fields of international development, healthcare, and politics. Quality of life should not be confused with the concept of standard of...
decisions made by human beings based on assumptions about service, and integrating economicsEconomicsEconomics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
better with marketingMarketingMarketing is the process used to determine what products or services may be of interest to customers, and the strategy to use in sales, communications and business development. It generates the strategy that underlies sales techniques, business communication, and business developments...
theory about brandBrandThe American Marketing Association defines a brand as a "Name, term, design, symbol, or any other feature that identifies one seller's good or service as distinct from those of other sellers."...
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
Product stewardship is a concept whereby environmental protection centers around the product itself, and everyone involved in the lifespan of the product is called upon to take up responsibility to reduce its environmental impact. For manufacturers, this includes planning for, and if necessary,...
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
Toxic waste
Toxic waste is waste material that can cause death or injury to living creatures. It spreads quite easily and can contaminate lakes and rivers. The term is often used interchangeably with “hazardous waste”, or discarded material that can pose a long-term risk to health or environment.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
Recycling
Recycling is processing used materials into new products to prevent waste of potentially useful materials, reduce the consumption of fresh raw materials, reduce energy usage, reduce air pollution and water pollution by reducing the need for "conventional" waste disposal, and lower greenhouse...
. If not, one has paid the fee, and presumably this can pay for landfill
Landfill
A landfill site , is a site for the disposal of waste materials by burial and is the oldest form of waste treatment...
or litter
Litter
Litter consists of waste products such as containers, papers, wrappers or faeces which have been disposed of without consent. Litter can also be used as a verb...
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
Property is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
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
Recycling
Recycling is processing used materials into new products to prevent waste of potentially useful materials, reduce the consumption of fresh raw materials, reduce energy usage, reduce air pollution and water pollution by reducing the need for "conventional" waste disposal, and lower greenhouse...
or re-used.
In some countries, such as Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
, law
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
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
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
and EU generally. In the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, there have been many class action suits that are effectively product stewardship liability
Legal liability
Legal liability is the legal bound obligation to pay debts.* In law a person is said to be legally liable when they are financially and legally responsible for something. Legal liability concerns both civil law and criminal law. See Strict liability. Under English law, with the passing of the Theft...
- 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
Public sector
The public sector, sometimes referred to as the state sector, is a part of the state that deals with either the production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal.Examples of public sector activity range...
or be haphazardly assigned one issue at a time to companies via lawsuits, many accounting reform
Accounting reform
Accounting reform is an expansion of accounting rules that goes beyond the realm of financial measures for both individual economic entities and national economies...
efforts focus on achieving full cost accounting
Full cost accounting
Full cost accounting generally refers to the process of collecting and presenting information - about environmental, social, and economic costs and benefits/advantages - for each proposed alternative when a decision is necessary. It is a conventional method of cost accounting that traces direct...
. This is the financial
Financial capital
Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc....
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
United States Environmental Protection Agency
The U.S. Environmental Protection Agency is an agency of the federal government of the United States charged with protecting human health and the environment, by writing and enforcing regulations based on laws passed by Congress...
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 continue to grow. 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). The 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 servicesFinancial servicesFinancial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
- TourismTourismTourism is travel for recreational, leisure or business purposes. The World Tourism Organization defines tourists as people "traveling to and staying in places outside their usual environment for not more than one consecutive year for leisure, business and other purposes".Tourism has become a...
- DistributionDistribution (economics)Distribution in economics refers to the way total output, income, or wealth is distributed among individuals or among the factors of production .. In general theory and the national income and product accounts, each unit of output corresponds to a unit of income...
- Health, and
- EducationEducationEducation in its broadest, general sense is the means through which the aims and habits of a group of people lives on from one generation to the next. Generally, it occurs through any experience that has a formative effect on the way one thinks, feels, or acts...
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
See also
- Information revolution
- Services marketingServices marketingServices marketing is a sub field of marketing, which can be split into the two main areas of goods marketing and services marketing...
- Service systemService systemA service system is a configuration of technology and organizational networks designed to deliver services that satisfy the needs, wants, or aspirations of customers.- Scope of the term :...
- Precarious workPrecarious workPrecarious work is a term used to describe non-standard employment which is poorly paid, insecure, unprotected, and cannot support a household. In recent decades there has been a dramatic increase in precarious work due to such factors as: globalization, the shift from the manufacturing sector to...
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 at "Science of service systems, service sector, service economy" on the Coevolving Innovations web site
- An input-oriented approached based on Richard Florida's work at "Talent in the (new) service economy: creative class occupations?" on the Coevolving Innovations web site