The Service Economy is Here to Stay

The President in his State of the Union address stressed the importance of returning manufacturing jobs to the American economy.  The only problem is that not only has the economy structurally moved away from manufacturing but economic goals have fundamentally shifted.  The big new ideas like cloud computing are fundamentally about how to provide a service not having something.

A piece from the Economist highlights the fundamental changes in the American economy. The decisions both conscious and unconscious in the late 70s and 80s laid the groundwork for a shift in away from manufacturing.  Asian supply chains enjoy not just a cost advantage but an entire ecosystem that has developed around manufacturing. The Asian supply chain is not only close spatially but has a similar mindset from working together repeatedly.  The scale of the supply chain also drives education decisions for workers in China and other developing economies in the region which reinforces the productivity of system creating a virtuous cycle.  Rebuilding this ecosystem would be hugely expensive and isn’t going to happen on the governments dime.

But innovation isn’t just about how to make things though, it’s about what to make.  What to make is only a small part of the overall value in manufacturing. The developed economies have realized that it is the functionality or service component that is truly desired.  GE and Rolls Royce don’t make engines, they sell engine up time.  SalesForce sells sales and support organization services not software.  Customers don’t care how these services are provided, what engines are used or how many servers back up the data, the functionality is king.

No company exemplifies service over device more than Apple.  Although a hardware maker, Apple’s margin comes from it’s ability to revolutionize the way we consume services.  Any song any time music consumption is a reality not because of the iPod but the iPod/iTunes ecosystem.  The iPhone was ahead of its time technically but maintains its dominance because of the App Store provides the widest variety of ways to actually harness the computer in your hands.  The iPad strips down to the modern computer to what users actually want videos and the consumer internet. Design, Apple’s trademark, is after all about the user experience.

The economy isn’t about things anymore its about ideas.  We need to figure out how to provide a more equitable workforce in services. We need to figure out what those semi-skilled position in the middle ground for services will be. But we need to focus on the future rather than try to recreate the past.

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