Sources of service sector growth

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Service sector growth is fueled by advances in information technology, innovation, and changing demographics that create new demands. Information technology has a substantial impact on the growth of digital services. Figure 1.7 shows how information (digital) services have grown to the point that this “information sector” dominates the U.S. economy, contributing 53 percent to the GDP (Gross Domestic Product). The arrows on the two axes show the direction of projected growth in the services and information components of the economy. Notice how information services (quadrant D) is growing at the expense of physical products (quadrant A).

Information Technology
The drive to miniaturize information technology equipment such as the Blackberry for Internet connectivity removes the need for physical proximity for service delivery and permits alternative delivery formats. Banking, for example, has become an electronic service with online access to personal accounts for transfer of funds or payment of bills. In health care, X-rays are digitized and transmitted off-shore for interpretation by a radiologist. Information technology has thus impacted the process of service delivery and

created new service value chains with new business opportunities as creative intermediaries.
Uday Karmarkar and Uday Apte make the following three propositions:

• In the future, the major part of the United States GDP is going to be generated by “information chains” and not supply chains, and most managers are going to be employed in the information sectors.
• The management of these information chains and sectors has a great deal to do with process economics and its impact on the configuration and operation of information chains and processes.
• Technological developments underlie and drive the economics of processes and value chains.

Innovation
The product development model that is driven by technology and engineering could be called a push theory of innovation. A concept for a new product germinates in the laboratory with a scientific discovery that becomes a solution looking for a problem. The 3M experience with Post-it notes is one example of this innovation process. The laboratory discovery was a poor adhesive, which found a creative use as glue for notes to be attached temporarily to objects without leaving a mark when removed.

The introduction of new product technology, however, does have an ancillary effect on service innovation. For example, the DVD player spawned a video rental business and created a renewed demand for old movies. The next innovation was the creation of Netflix to deliver the DVD to your home by mail. The Internet and World Wide Web were developed as a robust network of linked computers for military and scientific file sharing. It became the essential enabler for e-commerce and more recently the platform for social networks such as Facebook and LinkedIn and, of course, the ability to search the world with Google.

For services, the Cash Management Account introduced by Merrill Lynch is an example of the pull theory of innovation. During the period of high interest rates in the 1980s, a need arose to finance short-term corporate cash flows because individual investors were interested in obtaining an interest rate that was higher than those currently available on passbook bank deposits. A new service concept often originates with an observant contact employee who identifies an unmet customer need. For example, a hotel might institute an airport shuttle service because the concierge noticed a high demand for taxi service.

Service innovation also can arise from exploiting information available from other activities. For example, records of sales by auto parts stores can be used to identify frequent failure areas in particular models of cars. This information has value both for the manufacturer, who can accomplish engineering changes, and for the retailer, who can diagnose customer problems. In addition, the creative use of information can be a source of new services, or it can add value to existing services. For example, an annual summary statement of transactions furnished by one’s financial institution has added value at income tax time. Service innovators face a difficult problem in testing their service ideas. The process of product development includes building a laboratory prototype for testing before full-scale production is initiated. One example of an effort in this direction is provided by Burger King, which acquired a warehouse in Miami to enclose a replica of its standard outlet. This mock restaurant was used to simulate changes in layout that would be required for the introduction of new features such as drive-through window service and a breakfast menu.

Changing Demographics
The French Revolution provides an interesting historical example of how a social change resulted in a new service industry. Before the revolution, only two restaurants were in existence in Paris; shortly afterwards, there were more than 500. The deposed nobility had been forced to give up their private chefs, who found that opening their own restaurants was a logical solution to their unemployment.

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