The economy can be analyzed using both market-driven and production-driven approaches to industry classification. The North American Industry Classification System (NAICS) uses a market-driven approach; the older Standard Industrial Classification (SIC) uses a production-driven approach.
Under a market-driven approach, the economy comprises goods-producing and service-providing industries. Goods-producing industries include: natural resources and mining, construction, and manufacturing; service-providing industries include: wholesale and retail trade, transportation (and warehousing), utilities, information, financial activities, professional and business services, education and health services, leisure and hospitality, and public administration.
Under a production-driven approach, the economy comprises product-driven and service-driven industries. Product-driven industries comprise enterprises that manage inventories available for sale as primary activities (regardless of whether they transform them or not). Under this approach, the retail, wholesale, and food service industries are product-driven. (The kitchens of food service providers are equivalent to factories.) Product-driven enterprises may have extensive cost accounting and operations practices for inventory management.
Industry classifications can be applied to an enterprise as a whole (the primary industry), and to the establishments within it, which may be in differing secondary industries. Establishments are facilities that include plants (factories and warehouses) and branches (retail and wholesale outlets).
For example, the hospitality industry is service-driven; under the production-driven approach, the bar and restaurant establishments within a hotel are product-driven. The entertainment industry is service-driven; under the production-driven approach, the retail and bar establishments within a theater are product-driven. The health care industry is service-driven; under the production-driven approach, the retail pharmacy establishment within a hospital is product-driven. Under the market-driven approach, all of these establishments are service-providing.
For example, a manufacturing enterprise is goods-producing under a market-driven approach, and product-driven under a production-driven approach. If it also operates a retail delivery system, the stores are service-providers under a market-driven approach, and are product-driven under a production-driven approach. If all sales revenue is sourced from its own products, the enterprise is in two primary industries. However, if forced to decide, its selection should be based upon core competencies – activities that it performs well. The enterprise can be divided into two separate business units: manufacturing and merchandising. The merchandising unit is an internal customer of the manufacturing unit. However, depending on strategy and policy, the manufacturing unit could sell products to wholesalers and other retailers, and the merchandising unit could buy products from other manufacturers and wholesalers. Under a market-driven approach, the manufacturing unit is goods-producing and the merchandising unit is service-providing, whereas under the production-driven approach, the merchandising unit is product-driven.
The make-up of the economy changes overtime as newer industries emerge and grow and older industries mature and decline. For example, the manufacturing industry is shifting from vertically integrated to strategically outsourced. Strategic outsourcers may manufacture specialized components and assemble finished products. However, by outsourcing the manufacturing of utility components to specialty scale manufacturers, strategic outsourcers can lower their production costs.
Biotechnology and nanotechnology are emerging industries. The information industries are growing as technology becomes more ubiquitous, and as knowledge is packaged in digital products. Knowledge is information that has been learned and retained. In the future, knowledge will be retained extensively in electronic form.
Products and services…
The term “product” is associated with something that is tangible – the resulting inventory from agricultural, mining and drilling, construction, and manufacturing activities. Outputs are either end-products, or components that are assembled into end-products in downstream processes within the enterprise or in its customers.
The term “service” is associated with something that is intangible – capabilities either delivered at the point or time of sale, or shortly thereafter, or as a supporting service. Supporting services can be purchased at the time of sale for downstream use, or later, and consist of such items as warranties beyond those bundled with the product, preventive maintenance, and routine cleaning and repairs.
Functions and features of products are easier to discern than those of services, which are event or activity driven, and may occur in the future.
The term “time of sale” means when a contractual or non-contractual agreement between a buyer and a seller is made, and does not necessarily mean when revenue is recognized and earned. Revenue is recognized and earned according to the accounting principles that fit the service offering, which may be over a period of time.
A commodity is a product or service that is indistinguishable and interchangeable with another of the same type because there is little to no value added. Many commodities are natural, such as produce, minerals, oil, and gas. Services can be commoditized too. The distinguishing factors of a commodity provider include convenience, quality of service, and price.
Product-driven enterprises also offer delivery and supporting services. Delivery services include arranging for transportation, dealer preparation, training, and gift wrapping. Supporting services include cleaning, repairs, and maintenance. To remain competitive over time, enterprises have to add services with their product offerings that exceed customer expectations. However, if customers require such services, then they must become part of the basic offerings. For example, bathroom facilities and color TV are included in modern hotel rooms, even though the primary purpose is providing a place to sleep.
Although services are intangible, their effects are not. Transportation services move people, cleaning services remove dirt and stains, and repair services restore items to working order. Services require facilities, equipment, and supplies that are bundled in. When products are bundled in, the enterprise pays sales or use tax, if applicable; when products are sold with services, the customer usually pays sales or use tax, if applicable.
Service-driven enterprises can produce tangible deliverables. For example, dry cleaners produce clean and pressed clothes; professional service firms, such as architects, accountants, attorneys, and consultants produce reports; and engineers produce design drawings that can be transformed into facilities, equipment, or other tangible products.
The recording and movie industries employ technologies that can capture sound and pictures. Starting in laboratories, these industries transform science into art. Hence, live entertainment performances (services) can be transformed into recorded products. As a consequence, an event or activity can be reproduced, duplicated, distributed, and repeated to the public-at-large indefinitely. Digital products are impacting traditional manufacturing, distribution, and consumer buying behaviors, and placing intermediaries at risk.
Process control and information technologies have enabled seamless integration between designers and manufacturers. The “design-to-construction” process becomes ubiquitous as computer-aided design and manufacturing technologies (CAD/CAM) enable a designer in one location to transmit specifications to manufacturers in others. The designs are virtual, and result in instructions that control manufacturing equipment in both local and remote locations. As a consequence, manufacturing can be outsourced strategically to any manufacturer that can accept electronic designs anywhere at any time. Because the process is seamless, the precision is higher.
As more enterprises adopt the design-to-construction model, dramatic changes will occur in the structure of industries. For example, in the publishing industry, books can be printed on demand from electronic files upon receipt of orders placed over the internet, eliminating the need for physical inventory available for sale at printers, publishers, and bookstores. The electronic files represent a virtual finished goods inventory from which physical products can be made when necessary. As a consequence, inventory carrying costs are lower.
Both product-driven and service-driven industries render service from centers that receive inbound and place outbound service and telemarketing calls. Call center activities can be outsourced in a similar fashion to manufacturing.
The notion of strategic outsourcing can be applied to almost every function in an enterprise provided intellectual property is protected. However, although management consultants may be used in the development of strategy, the ultimate responsibility for planning, deployment, execution, and performance remains in-house with the governance function.
Products and/or services…
The term “products and/or services” describes collectively all types of products and services.
Service-driven industries are evolving into providers of both “product-oriented” and “service-oriented” services. In order to differentiate product-oriented services from the delivery and supporting services, the term “service-oriented” products provides more clarity. Service-oriented products must be definable, duplicable, and repeatable. They are intangible outputs of processes that are represented by tangible items, packaged in a definable form. Technology plays a major role in the delivery through hardware, software, and both voice and data telecommunications. “Hard” products are tangible and “soft” products are intangible.
For example, traditional land phone line services were offerings with few differentiating features, primarily in the style of equipment. As the telephone system migrated from electro-mechanical to electronic, the offerings were transformed into service-oriented products with features such as call forwarding, caller identification, call waiting, and voice mail. Cell phone offerings are service-oriented products with more extensive functions and features than land lines. Cell phone service-oriented products have cameras built-in, and have delivery and supporting services bundled in such as account information, internet access, and application software for calculators, calendars, contact information, notes, games, music, pictures and movies. Cell phone and computer technologies are converging.
In the financial and business and professional services industries, service-oriented products are packaged with such items as accounts, agreements, brochures, contracts, databases, documents, equipment, facilities, policies, procedures, and statements.
In the leisure and hospitality industries, service-oriented products such as flights, hotel rooms, car rentals, and limousine services are packaged with facilities, equipment, and supplies. The types of facilities and equipment define specific offerings. For example, an Airbus A380 renders a different experience from a Douglas DC3 even though the principal service is the same: providing air transportation. A hotel room with a view of the ocean renders a different experience from one with no windows at all, even though the principal service is the same: providing accommodation. The quality of the accoutrements such as blankets, pillows, towels, newspapers, cable TV, internet access, and fruit baskets can affect the overall experience. A Cadillac renders a different experience from a Chevrolet, even through the principal service is the same: providing a rental car to drive, or a limousine.
Travel-related service-providers bundle air, hotel, car rental, and limousine services into packages to make the buying decisions easier for consumers. Event planners bundle travel-related services with conference and convention services for enterprises.
Consumables, durables, and facilities…
Manufactured products consist consumables and durables.
Consumables are products change or wear out as they are used and comprise food, clothing, personal care, health care, household supply, and office supply items. Media such as books, records, audio and video CDs, and DVDs are classed as consumables – the intellectual property is worth far more than the media.
Durables are long lasting equipment items such as appliances, furniture, and vehicles.
Digital products may involve no media if they delivered electronically other than the server of the publisher and the electronic device of the user.
Facilities are the outputs of construction activities and are made of durable materials.
Contractual or non-contractual products and/or services…
Agreements are contractual or non-contractual based depending upon the type of offering, and the nature of the relationship between buyers and sellers.
Consumable products can be sold with the right to return for exchange or refund within a certain period of time. Durable products can be sold with agreements that define warranties and maintenance.
Service-oriented products and services can be sold with agreements that specify exactly what is to be delivered and when, with procedures for reporting problems or complaints.
In negotiations, discussions should embrace the specific functions and features of hard and soft products, and the delivery and supporting services. Experienced negotiators pay attention to both the tangibles and intangibles because the total cost of ownership comprises both.
Digital-construction and digital-manufacturing…
As technology continues to develop, service-oriented products will become more common because it makes intangible items definable. New knowledge-based industries will emerge.
The reproduction of software on physical media is classified as goods-producing, and all other development and publishing activities are classified as service-providing under NAICS. However, software and other digital products are durable because they can last indefinitely, even if they have to be transferred among storage media. Software products are developed by service-providers such as business and professional services firms, publishers, and “in-house” developers. Nevertheless, software development activities require the project management disciplines of goods-producing industries, such as construction and manufacturing, to be successful.
The “digital-construction” and “digital-manufacturing” industries are evolving: digital construction delivers software; digital manufacturing delivers soft service-oriented, information, and knowledge-based products. However, through CAD/CAM processes, software delivers hard products too. In the future, almost all hard and soft products will result from digital-construction and digital-manufacturing processes.
Defining product and/or services is an enterpriship (entrepreneurship, leadership, and management) competency.
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