Competitive Challenges for Service Businesses

Introduction

Once the forgotten stepchild of the manufacturing and industrial economy, the services sector has grown in importance over the last half of the 20th century until it now accounts for a sizeable percentage of the developed world's gross domestic product (GDP).

In the United States, services have grown from 68 percent of GNP — the measure then in use — in 1986 to more than 82 percent of GDP by 2000. Employment in services has also kept pace; from 71 percent (1986) through 76 percent (1990) up to a total of 79 percent (1999). Just as manufacturing and goods production transformed the established agrarian society over the last half of the 19th century, services have displaced industrial activity in the 20th. Even within the manufacturing sector, some 65–75 percent of employees perform service tasks such as research, logistics, maintenance, and design rather than make the goods.

Similar trends showing the growing role of services in the economy can be found in the countries of the European Union. As a percentage of GDP, Luxembourg enjoys the highest rate at 76 percent with the U.K. a close second at 73 percent. Employment levels also show the importance of services, with countries like Sweden having 74 percent of its work force active in such businesses. Even countries that are still more agricultural show services labor participation rates well over the halfway mark, with Greece at 59 percent and Portugal at 60 percent.

Another forgotten aspect of services is that they are not as marginal in purchasers' hierarchies of needs as products, although the converse is generally held to be true. During recessions, consumers will often defer product purchases while continuing to make services purchases. Medical care, education, travel, and personal care do not necessarily represent choices that people can put off. Statistics show that the services sector as a whole does not suffer as much contraction during a recession as does the goods-producing sector.

Given the obvious importance of services, why then do perceptions of services' marginality and lack of importance in the overall economy persist? Some of the reason, no doubt, rests in the nature of service businesses, which tend to be smaller in size, although large, global service firms do exist. Another reason is that services outputs are harder to measure and often involve subjective elements, such as goodwill, which does not lend itself to quantification.

These and additional factors, which will be discussed below, perhaps explain why there are also so few consistent definitions of just what is a service business. In fact, a search of business books, both famous and not-so-famous, indicates a lack of definitions, period. Even venerable classics, such as In Search of Excellence, do not even have the term "service business" or "service industry" in their indexes. Those books that do attempt some definition of services tend to offer discussions rather than precise, neat descriptions.

This lack of a definition or willingness to focus on the service business extends to the literature devoted to competition and competitive intelligence (CI). Most of the models, case studies, discussions, and research strategies recommended in these works focus on goods-producing businesses. Perhaps this is the final manifestation of the nature of service businesses; those involved in competitive intelligence want to avoid tackling the issue of CI precisely because the "beast" is untameable. It is much easier to discuss manufacturing and goods.

Defining the Service Business

Even books that do introduce the concept of competition in services do so only sparingly. Michael Porter, in his 1980 classic, Competitive Strategy, has but four references to service industries in the index. From these we can glean some indication of how Porter defines a service business. He sees services as an industry that is fragmented, where no firm has significant market share nor can any one organization influence industry outcomes by setting the agenda for the industry (which does occur in goods-producing sectors, such as beer or steel, where one or two behemoths dominate). Such service industries he describes as being populated by a large number of small and medium-sized companies. Later in his book, Porter cites issues arising from where the service is performed, such as at the customer's premises or requiring the customer to come to where the service is produced, as further characteristics separating service businesses from goods-producing entities. The final characteristics are the close local or personal control of the ownership and the personal service, approach of the service provider.

This latter description is echoed by Ian Gordon in his book, Beat the Competition, where a service business is described as being characterized or differentiated on the basis of the service provider and the key role of relationship management. This changes the focus of competition for the service firm; factors such as recruitment of personnel and training may prove of greater significance in gaining competitive advantage than they would for a goods-producer; conversely, goods producers may be concerned about manufacturing throughput and capacity utilization, which have no relevance for the service firm.

Another facet of service business that helps define them is that they often deal with concepts and ideas. And concepts and ideas are easily replicated. Operators of service businesses do not have the protection of patents; at the very most, they can take out a trademark or servicemark on the name of a service or "package" of activities they have invented.

This particularly places the pioneers or innovators in services at a disadvantage. Those consultants who truly were the first to introduce the concept of Total Quality Management to the American marketplace soon found a host of copycats claiming to offer the same processes. Apart from any numerical competition this created, as more and more consulting firms jumped on the quality bandwagon, there was also the equal competitive threat of dilution or degradation of the service offering. It is one thing to say or advertise that you offer a quality process; it is another to be able to deliver results. Botched delivery by another service provider...