In his seminal work, The Wealth of Nations (1776), Adam Smith distinguished between the outputs of what he termed “productive” and “unproductive” labor. The former, he stated, produced goods that could be stored after production and subsequently exchanged for money or other items of value. But unproductive labor created services that perished at the time of production and therefore didn’t contribute to wealth.
Today, the list of 500 largest companies by revenue, includes more service companies than manufacturers. The service industry contribution to global GDP is increasing every year and reached 65% in 2019 (Worldbank).
What is driving this transition from manufacturing to services?
Since the days of Adam Smith there have been many changes that have resulted in a growth of the service industry. The most recent change, and one of the most significant, is digital transformation.
Digital transformation allows companies to offer products as a service, instead of selling it as a physical object. This is especially true for software products, which were previously distributed on floppy-disks or CD’s, and are now available as a cloud service.
Digital transformation uses technology to create possibilities that did not exist before. The simultaneous availability of cloud computing, mobile technology, big data analytics, social media, IoT and artificial intelligence enables companies to collect, store and share information across diverse platforms, make better and faster decisions based on real-time data, or access data and applications anytime and anywhere.
By concentrating on the desired customer outcome, businesses are using these technologies to offer their products “as a service”. For example, a truck manufacturer sells trucks to transportation companies who use these trucks to transport freight from one location to another. The value of a transportation company is to reliably transporting freight, not to own and maintain trucks. The truck manufacturer can therefore offer the transportation company to use their trucks without having to buy them, and pay only for the actual usage. Using technology the truck manufacturer can collect and analyze data from all their trucks and use this to provide value-added information such as for preventive maintenance or fuel optimization. This way both companies can concentrate on what they know best (trucks and logistics).
The cost and complexity of MRI scanners, radiology systems and other advanced healthcare systems is constantly increasing, placing a considerable burden on hospital budgets and staff. Manufacturers of these systems such as Philips are therefore transforming their business models from transaction based (selling products) to relationship based (selling outcomes). Philips used advanced digital technologies to completely transform their internal processes to meet customer expectations and provide real-time, measurable benefits such as increased utilization rates and systems availability. Philips now offers their systems “as-a-Service”, taking care of image processing, data storage, system maintenance, and so on. This takes away a large burden from the hospital staff who can instead dedicate more time with their patients.
These are just two examples of technology being used to offer a service instead of selling a product. There are many more examples whereby a service is successfully competing with a product to offer customers the same outcome.
Every smartphone app offers a service without needing to purchase software or hardware (in some cases a recurring fee is charged). While technology enables these companies, the result is a service. Companies that understand the need for digital transformation should understand that the technology plays an important role, but that the objective is a service transformation.
Read more about Huawei’s digital service solutions for enterprises.