What Is The Service Economy?

For many years when the topic of service economy came up, I would cringe in horror at the prospect of the United States GDP being dependent on revenues generated primarily by fast food and retail outlets.

However, I’m coming around to the realization that perhaps my long held definition of a service economy may be too restrictive. At a recent Precision Machined Products Association conference in Dallas, I listened to Dr. Kenneth Preiss (Lehigh University) discuss the evolving nature of the manufacturing enterprise as we move inexorably toward global competition.

Throughout most of the industrial era, the output of manufacturing has been product. The United States led this for more than a century by making more products cheaper than most other producers. Mass production was the key to this success. It has worked well.

Today, our domestic manufacturing base is faced with a host of worthy competitors who can and do make many products as well or better than we can. So what’s a manufacturing base to do in the face of this global democratization of product production?

According to Dr. Preiss, we must change what we manufacture from product to service. We must become part of the service economy. Well, based on my previous definition of a service economy, that meant putting a drive-through window in the shop and re-training machinists to be fry cooks. Obviously, that’s not what he was saying.

No, the critical point here is to redefine what business you are in. Ask many shops what they do, and the answer is, “make good parts for my customers.” If that’s how the business sees itself, the cold hard truth is China or Singapore or India, to name a just few, can make good parts for your customer and probably for much less than you can.

Redefining the business means using the products you make for your customer as a platform to do more for that customer than just make parts. It’s important to take advantage of the “cultural” edge in language, logistics, flexible response time and problem solving capability that we have domestically to overcome the price advantages that international suppliers enjoy.

When you simply sell a product, it’s as easy for your customer to buy Chinese (or others) as it is to buy American. Working with a customer to provide process solutions requires cultural compatibility, which makes it more difficult for a customer to do business with foreign manufacturers.