Macro Trends in the Global Economy: The Role of B2B Services
Christopher LovelockYale University
Jochen WirtzNational University of Singapore
Frontiers in Services 2007 Conference San Francisco, 4-7 Oct 2007
Slide © 2007 Christopher Lovelock & Jochen Wirtz
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Overview
Discuss underlying reasons for fast growth of B2B services sector
Present macro economic data that shows B2B services to be fasted growing component of economy
Show model of B2B’s role as key growth engine for the modern economy
Conclude that increasing specialization of economies around world has important implications for capturing value
Present future research opportunities
Slide © 2007 Christopher Lovelock & Jochen Wirtz
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Service Sector is 60% of World GDP,Dominates Economy in Most Nations
Services as Percent of GDP
Poland (66%), South Africa (65%)
Japan (74%), France (73%), U.K. (73%), Canada (71%)
Saudi Arabia (33%)
China (40%)
India (48%)
Brazil (54%), Argentina (53%),
Panama (80%), USA (79%)
Luxembourg (83%)
Cayman Islands (95%), Jersey (93%)
Bahamas (90%), Bermuda ( 89%)
Mexico (69%), Australia (68%), Germany (68%)
Israel (60%), Russia (58%), S. Korea (56%)
70 30 40 50 60 80 902010 100
Source: World Factbook, 2007
Slide © 2007 Christopher Lovelock & Jochen Wirtz
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Service Sector Growth Varies by Country:USA vs. 11 Asian Economies, 1980-2005
Sources: EIU Country Data
0102030405060708090
Hong K
ong
Japa
nSing
apore
Taiwan
South
Korea
Phillip
ines
Thaila
nd
India
Malays
iaInd
ones
ia
China
USA
% of GDP
1980 1990 2000 2005 (forecast)
Slide © 2007 Christopher Lovelock & Jochen Wirtz
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Factors Transforming the Service Economy
GovernmentPolicies
BusinessTrends
Social Changes
Advances inIT
Globalization
Innovation in service products & delivery systems, stimulated by better technology
Customers have more choices and exercise more power
Success hinges on:Understanding customers and competitorsViable business modelsCreation of value for customers and firm
New markets and product categoriesIncrease in demand for servicesMore intense competition
Slide © 2007 Christopher Lovelock & Jochen Wirtz
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Service Industries Can Be Broadly Categorized by Type of Customers Served
B2B – Great majority of customers are businesses and organizations, e.g.,
Professional and business services (incl. consulting, engineering, accounting, advertising, IT services), logistics and supply-chain related services
B2B/B2C – Sales are split between customers and households/individual consumers, e.g.
Finance and insurance, telecommunications, hospitality services, real estate-related services and rental and leasing
B2C – Great majority of customers are households/ individuals, e.g.,
Healthcare, arts, entertainment and recreation services, education, and retailing
Slide © 2007 Christopher Lovelock & Jochen Wirtz
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Share of US Service Sector (Valued at $8.5 Trillion) Accounted for by Different Industry Categories
Other (except government) 3.6%Accommodation and food services 4.0%
Arts, entertainment, and recreation 1.5%Healthcare and social assistance 10.4%
Educational services 1.3%Professional and business services 17.3%
Wholesale trade 8.9%Retail trade 10.3%
Transportation and warehousing 4.4%Information 7.1%
Finance and insurance 12.6%Real estate and rental and leasing 18.7%
Source: Bureau of Economic Analysis, Survey of Current Business, May 2005, Table 1
Legend: Blue font = predominantly B2B ServicesRed font = predominantly B2C ServicesGold font = mix of B2C & B2C Services
Slide © 2007 Christopher Lovelock & Jochen Wirtz
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Macro Economic Data Show B2B Services Account for Increasing Share of Growing GDP
Source: Bureau of Economic Analysis, Industry Economic Accounts
Share of United States GDP, 1990-2006
0%10%20%30%40%50%60%70%80%90%
100%
1990 2000 2006
Year
% o
f Tot
al B2B/B2CB2CB2BGoods
Slide © 2007 Christopher Lovelock & Jochen Wirtz
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Model of How B2B Acts:A Key Growth Engine for Service Sector
Product Design
Product Design
Service Industries(e.g., communications, transportation, utilities, health care, banking, etc.)
Service Industries(e.g., communications, transportation, utilities, health care, banking, etc.)
R&DR&D
External services directly embodied in products
ManufacturingManufacturing
Services provided inside company: design, legal, accounting, advertising, etc.
Logistics & Distribution
Services(e.g., supply chain mgmt,
transport, wholesale,
retail)
Logistics & Distribution
Services(e.g., supply chain mgmt,
transport, wholesale,
retail)
Commercial Users
Commercial Users
ConsumersConsumers
Government Support Services*(e.g., waste disposal, infrastructure, education,
health, public safety*varies by country
Government Support Services*(e.g., waste disposal, infrastructure, education,
health, public safety*varies by country
Business Services Supporting Manufacturing
(e.g., accounting, legal, consulting, software maintenance, etc.)
Business Services Supporting Manufacturing
(e.g., accounting, legal, consulting, software maintenance, etc.)
Post-sale Services
(e.g., maintenance
repair upgrades, recycling/disposal)
Post-sale Services
(e.g., maintenance
repair upgrades, recycling/disposal)
Slide © 2007 Christopher Lovelock & Jochen Wirtz
Slide © 2007 Christopher Lovelock & Jochen Wirtz
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Among B2B Service Categories, Professional and Business Services Show Highest Growth Rates
Source: Bureau of Economic Analysis, Industry Economic Accounts
Value Added - B2B Services
0500,000
1,000,000
1,500,0002,000,000
2,500,000
3,000,000
3,500,000
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Year
Am
ount
in m
illio
ns
Professional and business services Wholesale trade Information Transportation and Warehousing
Slide © 2007 Christopher Lovelock & Jochen Wirtz
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Trade in Services: U.S. Service Trade Dominated by B2B Services
Total in Exports for Services
0%
20%
40%
60%
80%
100%
1990 2000 2005
Year
Expo
rts
in % Both
B2C
B2B
Total in Imports for Services
0%
20%
40%
60%
80%
100%
1990 2000 2005
Year
Impo
rts
in % Both
B2CB2B
Source: Bureau of Economic Analysis, Industry Economic Accounts
Slide © 2007 Christopher Lovelock & Jochen Wirtz
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India’s and China’s B2B Exports Are Growing Faster than B2C Exports (i.e. Travel)
05,000
10,00015,00020,00025,00030,00035,00040,00045,000
2000
2001
2002
2003
2004
Year
Expo
rts
in m
illio
ns Travel Services
TransportationServices
CommericalServices
India’s B2B Services Exports
010,00020,00030,00040,00050,00060,00070,000
2000
2001
2002
2003
2004
Year
Expo
rts
in m
illio
ns Travel Services
TransportationServices
CommercialServices
China’s B2B Services Exports
Source: World Trade in ServicesExport Development Canada, 2006
Slide © 2007 Christopher Lovelock & Jochen Wirtz
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Omega Healthcare: New B2B Services from Outsourcing in Healthcare
Slide © 2007 Christopher Lovelock & Jochen Wirtz
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Omega Healthcare
Among India’s largest offshore service providers to the U.S. healthcare industryIncorporated in the U.S, operations are located in Bangalore andChennai (Madras) in India, and Pittsburgh in the U.S.All three senior management members have had extensive experience in the US healthcare industry.Services include:
Medical codingBilling and accounts receivable managementClaims processingClinical support services, e.g., radiology
Value proposition to customers includes30-40% lower cost compared to US-based operationsHigh levels of quality through rigorous systems managementImprovement of cash flow & increase in revenue
Slide © 2007 Christopher Lovelock & Jochen Wirtz
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Omega Healthcare: Services Based on Information Can Be Delivered from Anywhere
24-hour operation:Day-time in India is night-time in the US, and vice versa
Slide © 2007 Christopher Lovelock & Jochen Wirtz
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Growth of B2B Services Reflects Fundamental Change in Approach to Value-creation
Nestlé
OneWorld
BMW
HSBC
Cu
sto
mer
Co
nta
ctC
en
ters
IT S
erv
ices
Secu
rity
Serv
ices …
Slide © 2007 Christopher Lovelock & Jochen Wirtz
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Conclusions and Implications
Growth of service sector is strongly B2B drivenTrend likely to continue globally for foreseeable future:
increasing focus on core competenciesresulting outsourcing of many services
Through outsourcing, both manufacturers and B2C service firms contribute to growth of the B2B services
Specialization through outsourcing has important implications for capturing value.
Owning the customer relationship is a key enabler for extracting value and reflects such activities as:
servicing the customerowning the brand (often a consumer brand)obtaining data on customer transactions and relationships
If applicable, owning the technology and/or infrastructure can be important value drivers
Slide © 2007 Christopher Lovelock & Jochen Wirtz
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Research Opportunities
Explore categorization of B2B and B2C services in more depth, e.g.,
Detailed analysis of NAICS data to refine categorization
Impact of home-based businesses-are they B2B or B2C?
Better understanding of organizational buying behavior:
Determine how companies make outsourcing decisions, set criteria, and choose between alternative suppliers
Relationship management between outsourcers and clients
Explore causal links between specialization, growth of the B2B services and competitiveness of an economy
Identifying international market opportunities in B2B
Exploring “rental/access” vs “ownership” in an international B2B context