The Information and Services Economy
a.k.a.
Business Architecture and Services Science
IS210
Profs Bob Glushko & Anno Saxenian
UC Berkeley School of Information
Fall 2006
Outline: Week of August 29-31
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Why study ISE?
What is ISE?
Early commentators on ISE
Definitional challenges
Explanations for growth of ISE
Globalization of ISE
Why study the service economy?
 Service sector is largest sector of most economies
Services represent over 78% of US GDP
> 70% of GDP in other developed countries
> 52% in developing nations
 Rapid growth of service sector in recent decades
Fastest employment growth in service sectors
 Professional & business services #1
 Health & education services #2
 Leisure & hospitality services #3
Manufacturing employment stable or falling
What is the services economy?
 A residual in economic analysis
Primary sector: agriculture & extractive industries
Secondary sector: manufacturing industry
Tertiary sector: services (everything else)
 What is included in the service sector?
Structural theories of development
US employment, % share
80
70
60
50
Services
Manufacturing
Agriculture
40
30
20
10
0
1850 1880 1900 1925 1950 1975 2000
The fate of manufacturing?
 Share of manufacturing in US GDP has
remained relatively stable since 1980, if
measured in constant dollars
 America is world’s largest manufacturer, Japan
is #2, China #3 (measured by output)
 But, China has six times as many manufacturing
workers as the US
 China, South Korea, Taiwan, Singapore have all
lost manufacturing jobs since 1990
Early observers of service economy
 Daniel Bell, The Coming of Post-Industrial Society: A
Venture in Social Forecasting ,1973.
 Rise of white-collar information and service jobs, liberation from
drudgery of manual work, professionalism & creativity
 Robert Reich, The Work of Nations: Preparing Ourselves
for 21st c. Capitalism, 1991.
 Inherent inequality of 21st c. economy: Routine producers, inperson servers & symbolic analysts
 Peter Drucker, “The Age of Social Transformation” 1994.
 Knowledge work requires not only new forms of work
organization (teamwork), also social and political innovation
Defining the service sector, I
1992 SIC-based service sector, US census
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Finance, Insurance, Real Estate Industries (FIRE)
Retail Trade
Services Industries
Transportation, communications, and utilities
Wholesale trade
Defining the service sector, II
1997 NAICS-based service sector, US Census
 Accommodation and Food Services (Sector 72)
 Administrative and Support, Waste Management, Remediation
Services (Sector 56)
 Arts, Entertainment and Recreation (Sector 71)
 Educational Services (Sector 61)
 Finance and Insurance (Sector 52)
 Health Care and Social Assistance (Sector 62)
 Information (Sector 51)
 Management of Companies and Enterprises (Sector 55)
 Other Services (Except Public Administration) (Sector 81)
 Professional, Scientific and Technical Services (Sector 54)
 Real Estate and Rental and Leasing (Sector 53)
 Retail Trade (Sector 44-45)
 Transportation and Warehousing (Sector 48-49)
 Utilities (Sector 22)
Defining the service sector, III
 Proposals for additional categories
Quarternary sector: information-based or informationoriented services (v. people-oriented services)
Quinary sector: health, education, culture, research
 Re-definition of sectors
Limits of goods v. services
Tangible goods, intangible goods, services (Hill)
 Data challenges
Inadequate, incomplete statistics
Blurring of manufacturing and service employment
Difficult to define and measure output of services
Quality and productivity changes misinterpreted
Explanations for services growth
1.
2.
3.
Growing final consumer demand for services
As incomes rise demand for “luxury” goods rises
and increases demand for service output (high
income elasticity of demand)
Lower productivity growth in service sector
Productivity of labor in service sector fails to keep
up with productivity growth in mfg. so services
employ larger % of labor relative to other inputs
Globalization of trade
Manufacturing jobs go overseas disproportionately,
while service jobs are more locally tied
Explanations (cont.)
4. Growth of intermediate demand
Role of services as intermediate input providers, due
to both outsourcing/externalization of functions
(design, legal) and rise of innovative new services and
service providers/producers (software, e-commerce)
Irrelevance of old categories
 Agriculture, manufacturing, services distinction (and
its counterpart distinction, goods v. services) is
outmoded—a barrier to understanding economy
 Peter Hill’s categories:
tangible goods
intangible goods
services
 Dramatic growth of intangible goods in recent decades
due to advances in information technologies
Hill’s distinction: goods v. services
 What distinguishes goods from services?
Goods are entities
Goods can be owned
Goods are tradable
Goods can be distributed to different locations
and at different times but preserve identity
 Separation of production/distribution from
use is not possible for services
Tangible v. intangible goods
 Intangible goods have all of the economic
characteristics of tangible goods, but no
physical dimensions or spatial coordinates
Intangibles have always existed, but have
become far more economically significant
Originals that can be stored, transmitted,
manipulated, replicated, distributed.
Blueprint, legal brief, software, musical score
 Intangible goods: information- and culturebased goods (NAICS 51)
What distinguishes services for Hill?
 All services involve relationships
Services cannot be produced without the
agreement and co-operation of the consumer
Outputs of services are not separable from the
consuming unit; no independent existence
 Need for interaction between producer and
consumer (customer and supplier) in service
provision constrains location/scale of producer
 e.g. surgery, massage, advertising,
How do advances in IT change things?
 All services no longer locally bound: can
provide services for remote customers
Medical screening via web
Custom application software development
Customer-specific research
Computer maintenance
 Services transformed into intangible goods
Codification and re-use of information or
cultural/artistic modules developed for individual client
E.g. software, accounting , consulting, architecture
Professional, scientific & technical services
(NAICS 54)
 Fastest-growing sectors (employment, output and
productivity) in advanced economies
 Includes finance, accounting, insurance, legal,
consulting, graphic design, surveying, testing, etc.
Once a service, performed by individual
practitioners, now can gain scale through re-use of
components/modules of info or artistic output
 About 45% of gross output by these sectors is
intermediate output rather than to final customers
 Aggregate services value-added to final
manufacturing output now close to 25%
An alternative view of services
Rapid growth of “services” sector result from reorganization of production and economy due to
technological change and intensification of global
competition.
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Organizational changes are blurring boundaries of
firms and sectors as supply chains open up
Web-based platforms and new software tools allow
formalization and relocation of activities once
considered local
Changing organization of production
Intensification of global competition and pace of
innovation destabilizing old organizational models
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Shift from large-scale, vertically integrated
companies to networks of specialized producers
Shift from mass production of standardized
commodities to more highly differentiated output
=> Need to revisit theories of firm and economic
behavior as well as management, law, finance
Dramatic growth of information-based goods
IT allows unprecedented codification of knowledge
and large scale storage, transfer, manipulation of
info, even to geographically distant locations
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New web-based platforms and reusable software
components enable productivity gains that
transform services as well as goods (e.g. Wal-mart)
Information systems allow geographic separation
of production and consumption of services (e.g.
global supply chain management, accounting)
Globalization of services?
 1st wave: Outsourcing and offshoring of IT/
software services--maintenance, Q/A, testing,
porting, customization of applications, data
processing
 2nd wave: Outsourcing and offshoring of ITenabled services (e.g. legal and medical
services, R&D) –potentially far more
expansive
Information technology-enabled services
 Research and development
 Legal services
 Accounting & financial services
 Market research & management consulting
 Architecture & technical consulting
 Advertising
 Manpower services (search, recruitment, etc.)
 Engineering services
 Industrial design services
Computer and software services trade
Trade in business, professional &
technical services
Drucker’s “knowledge society”
 Growing importance of specialists and specialized
knowledge (applied knowledge) v. generalists
 Shift from knowledge to knowledges
Requires knowledge workers to work in teams –
teams, not individuals, as work units
If not employee, knowledge worker must have
affiliation with an organization
 “…the knowledge investment . . .determines whether
the employee is productive or not, more than the
tools, machines and capital ...”
Drucker on management in the
knowledge society
 Management is the distinctive organ of all
organizations, even if they don’t use the term
 Management is taught in business schools
as a bundle of techniques & procedures (e.g.
budgeting, personnel relations)
 “The essence of management is to make
knowledges productive.”
 Management is a social function—and in its
practice it is truly a liberal art
Management for Drucker
 Management brings people together for joint
performance—it is making human strengths
productive in performance and human weaknesses
irrelevant
Requires definition of objectives
Requires explicit assumptions about what
organization does and doesn’t do
Requires strategy—means for achieving objectives
Requires organizational values, system of rewards
and punishments, spirit, and culture
 Twentieth century is century of organizations, will
require social and political innovations