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Encyclopedia > Servitization of products business model

Service economy can refer to one or both of two recent economic developments. One is the increased importance of the service sector in industrialized economies. Services now account for a higher percentage of GDP than just 20 years ago. If you look at the current list of Fortune 500 companies, more of them are service companies and fewer are manufacturers than in previous decades.


The term is also used to refer to the relative importance of service in a product offering. That is, products today have a higher service compenent 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 The old dichotomy between product and service has been replaced by a service-product continuum. (See service#The service-goods continuum). Many products are being transformed into services. This is a service-centric view of the economy : everything purchased has a significant service component.


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 elastic 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 and most accounting reform and monetary reform measures are usually thought to be impossible to achieve without a good model of the service economy.

Contents

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:

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 say 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 surviving. 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 not 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.


See also

External link

  • EPA Product Stewardship Web site (http://www.epa.gov/epaoswer/non-hw/reduce/epr/) "highlights the latest developments in product stewardship, both in the United States and abroad."

References

  • Levitt, T. (1981) "Managing intangible products and product intangibles", Harvard Business Review, May-June, 1981, pp. 94-102.
  • Vandermerwe, S. and Rada, J. (1988) "Servitization of business: Adding value by adding services", European Management Journal, vol. 6, no. 4, 1988.

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