Service economy

From CEOpedia | Management online

Services economy is an economy where most of economic activities includes service sector rather than production of goods. The share of service sector has grown rapidly since 1960’s and has become the most important sector in economy. It has been the major feature of structural change in the developed market economies during the last decades. The perfect example of that could be the USA because most of the growth of the U.S. economy is tied to services. It accounts for about 70% of employment and continues to grow.

Driving forces

A number of factors affect the size of services economy. The possible explanations are are:

  • Contractual labor arrangements ( the best example of that is outsourcing )
  • Technical changes and increased importance of specialized high-skilled labor force
  • Increases in construction activity (at least potentially fuel growth in engineering, architectural, surveying, and landscaping and horticultural services.)
  • Slower growth of labor productivity (which was the major reason of the shift in the employment into service sector)
  • The growth in consumers demand of services

Sectors of Service Economy

In service economy the following sectors may be defined:

  • Healthcare and Beauty
  • Education
  • Financial services
  • Tourism
  • Distribution
  • Legal services
  • Entertainment , recreation and amusements
  • Engineering
  • Business services
  • Household services
  • Membership organizations
  • Communication services
  • Design

According to Hermine Vidovic research: traditional services activities such as trade, transport and telecommunications dominate while segments with higher value added, especially business services, are yet lagging behind.

Services Marketing

An increasing importance and share of the service sector in the economies of most developed and developing countries may be now easily observed. Due to that, the provision of services is playing one of the most valuable role in the marketing strategies. Manufacturing goods companies seek do differentiate their offerings by including special services components.  Clearly, skills in marketing and managing services have never been more important.

Marketing Mix of services (7P) Marketing Mix is one of the most widely accepted mix in the discipline of marketing. It is a set of essential tools and activities undertaken and put together by companies to create and encourage exchange with customers. It also helps to satisfy target markets and obtain companies objectives.

In Services Marketing Mix we can distinguish elements as listed below:

Elements that appear in regular Marketing Mix ("4P")

  • Place (physical distribution, supplies, inventory, transportation, storage, etc. )
  • Promotion ( advertising, sales, web sites, merchandising)

And the "additional P's" in Marketing Mix of Services :

  • Process (The actual procedures, sequence of actions taken by service provider, specific order and time)
  • Personel ( All human who play a part in service, people directly involved in consumption, appropriate staff and customers in service environment)
  • Physical evidence or Proof ( tangible aspects of service delivery, the environment in which the service is assembled)

Examples of Service economy

  • Financial services: Financial services such as banking, financial planning, insurance, and investment advice are important parts of the service economy. Banks provide services such as savings accounts, loans, credit cards, and other financial products to consumers and businesses. Financial planners help people make decisions about their money, investments and other financial issues. Insurance companies provide coverage for health and property, and investment advisors help people make decisions about stocks, bonds, and other investments.
  • Healthcare: Healthcare is another important part of the service economy. Doctors, nurses, and other healthcare professionals provide medical services to patients. Hospitals, clinics, and other healthcare facilities also provide services such as medical tests, surgeries, and prescription medications.
  • Retail: Retail stores are another part of the service economy. Retailers provide goods and services to consumers, such as clothing, food, electronics, and home furnishings. Retailers may also offer services such as delivery and installation of products, as well as customer service.
  • Education: Education is also a major part of the service economy. Schools, universities, and other educational institutions provide services such as courses, lectures, and research. Educational institutions also provide services such as counseling, career advice, and job placement.
  • Entertainment: Entertainment is another important part of the service economy. Movie theaters, music venues, and other entertainment venues provide services to consumers, such as live music, movies, and other performances. Many entertainment venues also provide services such as food and drinks, as well as event planning and promotion.

Advantages of Service economy

  • It creates jobs and increases economic activity
  • It provides consumers with goods and services
  • It encourages innovation and entrepreneurship
  • It provides a platform for the exchange of ideas and information
  • It reduces poverty and inequality by providing better access to resources, services, and employment opportunities.

Limitations of Service economy

The service economy has several limitations. These include:

  • High labor costs: Service-based industries often require a high level of labor input, resulting in higher labor costs than those associated with goods-producing industries.
  • Low productivity: The productivity of service workers is often lower than that of workers in the goods-producing industries. This means that the same amount of output is produced with more labor input, leading to higher costs.
  • Low wages: In many service industries, wages are lower than in goods-producing industries. This has been linked to the lower productivity of service workers, as well as the fact that service businesses often have lower profit margins than goods-producing ones.
  • Difficulty in measuring output: It can be difficult to measure the output of service industries, as it is often intangible and subjective. This can lead to problems when it comes to pricing services and estimating their value.
  • Low capital investment: Service industries typically require less capital investment than goods-producing industries. This can limit the ability of service businesses to invest in new technology and innovation.

Other approaches related to Service economy

  • Service Dominant Logic: A service dominant logic is an approach to understanding services in the context of value creation and exchange in markets. It is based on the idea that services are the basis for value creation for both the customer and provider.
  • Experience Economy: The experience economy is a service economy that emphasizes the importance of providing customers with memorable experiences. It focuses on creating an emotional connection between the customer and the service provider through unique experiences.
  • Sharing Economy: The sharing economy is a type of service economy where goods and services are shared or rented out to customers instead of being purchased. It is based on the idea of collaborative consumption, where people can borrow, rent, or share services and goods.
  • Platform Economy: The platform economy is a type of service economy where companies use digital platforms to facilitate transactions and interactions between customers and producers. It is based on the idea of building a digital marketplace that can easily connect customers and producers.

In conclusion, the service economy is an important part of the modern economy, with services accounting for a large share of economic activity. Other approaches related to the service economy include Service Dominant Logic, the Experience Economy, the Sharing Economy, and the Platform Economy. All of these approaches are based on the idea of providing customers with unique and memorable experiences and connecting customers and producers in new and innovative ways.


Service economy — recommended articles
Commercial sector — Capital resource — Secondary activities — Domestic market — Knowledge capital — Innovation — Economic factor — Product structure — Innovative systems

References

Author: Beata Seweryn

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