Volume 7, Number 2 – June 2010

Rethinking Services

While many may not admit it, most economic developers are still fixated with manufacturing.   Many of the sexiest and most desirable projects, such as the recruitment of large auto plants, tend to be manufacturing focused, and the most-used support programs, such as tax incentives and customized technical training, are also manufacturing-centric. Meanwhile, lots of interesting activity is occurring elsewhere—within the service sector.  As we’ll see below, it’s time to rethink how we think about services and their role in our local economies.

It’s no secret that the service sector is the most important part of most regional economies.   Many communities acknowledge this reality by focusing on supporting “Eds and Meds,” capitalizing on local strengths in higher education and health care.  Others recognize that service jobs are the bulk of local employment, but that other sectors, like manufacturing or technology, drive local prosperity and create most high-quality jobs.  A new McKinsey Global Institute study suggests this view is outdated.  The study found that the service sector is the key driver of job creation.  In fact, service sector productivity improvements account for all net job growth in developed economies between 1995 and 2005.

The McKinsey study further suggests that national economies cannot maintain high growth without continued improvements in service sector productivity.  New sectors such as cleantech or life sciences are simply too small to drive an economy.   Instead, large established sectors, like retail trade, are more important factors in promoting prosperity. 

So, it makes sense to pay more attention to service sector productivity.  By itself, that is not very useful policy guidance.  After all, the service sector is huge, and includes the cashier at McDonald’s, the hair stylist, and the globe-trotting IBM consultant.   This process is further complicated by the ongoing revolution in services—the subject of an interesting new study from researchers at the Berkeley Roundtable on the International Economy (BRIE).

The BRIE researchers assess the impact of the information technology revolution on services.   The basic story is one of unbundling—where activities and processes can be separated with ever finer degrees of granularity.  The emergence of cloud computing is instructive.   In the past, firms sold computers or software as products.  Today, they offer “software as a service” where customers purchase computing power, applications, or other support on a “pay as you go” basis.  An analogous process has occurred with the decomposition of manufacturing into complex integrated supply chains.

What are the implications of this unbundling and deconstruction?  At the most basic level, it means that traditional distinctions between manufacturing and services are irrelevant.  It also means that the nature of business innovation will also change.   Some innovations will come in the form of new products, services, and technologies, but major innovations will now come via transformations in business models themselves where individuals and firms combine these unbundled activities in new and distinctive ways.  People, firms, and communities who can continuously develop and adapt new business models will enjoy significant competitive advantages.

What does this mean from a policy perspective?  At the most basic level, workers, managers and entrepreneurs will need to be more flexible, creative, and adaptive.   A capacity to absorb and adapt new ideas will become more important than a specific skill set or body of knowledge.  New business models for education and training institutions must emerge in the process. 

Economic development efforts will also need to place greater focus on business model innovations.   Current business support programs focus on helping entrepreneurs do their business more efficiently, effectively or profitably.  New approaches will encourage them to do business in a new way—to totally rethink how they operate and to be willing to blow up old business models that are no longer relevant.   
How might this work in practice?   While it’s far too early to identify “best practices,” some interesting models are in place.  In Rhode Island, the Business Innovation Factory operates a series of learning labs where teams collaborate to rethink how to they do business and to experiment with new approaches.   Current learning labs are focused on the elder experience, the student experience, and green energy.   In the UK, 100% Open is a new agency focused on open innovation and the development of new business models.  Larger consulting firms, like the Boston Consulting Group, are also beginning to place greater emphasis on business model innovation.  Meanwhile, many business training programs, like the Eureka Ranch, are also focused on this topic. 

Finally, the use of innovation competitions is yet another potentially useful means to spur business model innovation.  These competitions and prizes work best when they pay less attention to the best business plan, and more focus on providing the best solution to a pressing challenge, such as X Prize focus on space flight.  The growing interest in innovation prizes is but one indicator of booming market demand for new business models.  In fact, one website, Innovation Prize Central, has compiled a partial list that includes dozens of innovation prize competitions with potential awards totaling more than $150 million.

As we move forward, local leaders should maintain a healthy bias in support of any initiative that spurs experimentation, triggers new thinking, and encourages the development of new skills and talents.   Creating this environment for transformation will be the most important function for future economic development efforts.  Success in services is going to depend less on our ability to develop new programs that target these sectors, and more on our ability to create an environment where business model innovations can develop and  thrive.

Cited Reports

John Zysman, Stuart Feldman, Jonathan Murray, Niels Christian Nielsen, and Kenji Kushida, “The Digital Transformation of Services:  From Economic Sinkhole to Productivity Driver,” BRIE Working Paper, April 6, 2010.  Available at http://brie.berkeley.edu/

What’s New at EntreWorks Consulting?

We continue to provide more regular news and updates at the EntreWorks blog (http://blog.entreworks.net).  Recent postings have focused on youth entrepreneurship, business finance programs, and suggestions for interesting reads.  We’re in the process of finishing up projects in Reading, Pennsylvania and Southeast Virginia.    We’re also looking forward to a busy and productive summer, which will include new projects and engagements with the City of Racine, Wisconsin, the North Carolina Rural Development Center, and Carroll Community College, located in Westminster, MD.  Hope to see you soon.