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Service sector analysis Report

Executive summary

The research aims at investigating the reason behind participation in the service economy, and the challenges that organisations face when in the industry. In the report, it was found that the internet is one of the major reasons. It facilitates mass consumption of one product and thus transforms industries. Additionally, other entities do it in order to outsource their business functions.

Their intention is to gain efficiency or benefit from focusing on their core activities. Alternatively, others are engaging in the service economy in order to respond to the changing consumer demands in the production process. It was also found that deregulation, market liberalisation and reforms have affected the retail industry by reducing financial restrictions.

It has changed electricity services by allowing entry of specialised providers. Telecommunications have been altered by allowing new entrants thus facilitating lower prices. It was recommended that companies ought to consider the service economy owing to the internet or e-commerce.


The purpose of the report is to determine the main reasons that cause organisations to participate in the service economy and the challenges that they face. The report will begin with the reasons that cause organisations to participate in the services economy.

It will then look into the effects of markets forces such as regulation, deregulation and market liberalisation in the service sector. Finally, the report will examine the future challenges in the industry and give recommendations for participating in a services economy.

Reasons to build a services economy

The internet

The internet is revolutionising the production process in a myriad of industries. It dramatically reduces the supply chain by allowing firms to create one product (such as an online book) and sell it to a mass market. One can see this trend in the art, book, music, newspaper, and software industry.

Companies can thus receive returns for very minimal effort, and this is enough to keep them in the service economy. Additionally, the internet provides a more efficient way of delivering services in some sectors such as internet banking (Kim 2006).

Changing market demands

A number of countries are building service economies because consumer expectations are changing. Most of them have raised their expectations of product quality and their own customer experiences.

As such, manufacturers and other traditional industries have to introduce more service – orientated functions in their production processes. The knowledge-based economy has also caused this orientation because individuals need to understand everything that relates to their purchases.


Numerous organisations in the developed economy are outsourcing their services to other entities. Some of them are doing it for the efficiency that a third party will accord them.

Others are more interested in meeting the divergent needs of their businesses while others simply want to focus on their core competencies. This has perpetuated the need for more service industries such as training, IT, accounting and research (Organisation for Economic Cooperation and Development 2000).

Sectors impacted by market forces


Before liberalisation and regulatory reforms, the telecommunications sector was regarded as a natural monopoly. Most governments justified this mentality by claiming that individuals needed to have universal access to these services.

However, deregulation has allowed many companies to compete with government-backed entities. Now entry costs are low, and this has made pricing more favourable. Additionally, network connections have increased tremendously (Hoj et al. 2011).


In most parts of the world, electricity generation has been a huge monopoly. One company may be responsible for the generation, transmission and billing of electricity in the whole country or a certain region in the country. However, owing to the deregulation in these sectors, some countries have allowed entry of specialised power generators or transmitters, and thus increased competiveness in the industry (Heskett 1986).

Retail distribution

Deregulation and market reforms have impacted the retail distribution sector by minimising restrictions on hours of operations. Additionally, they have allowed greater expansion of retail outlets as fewer restrictions exist on scalability. Price restraints existed in the unregulated retail sector.

Producers would limit prices charged to other members of the supply chain or would engage in exclusive dealing. These patterns have reduced after instating regulatory reform (Vickers & Yarrow 1988).

Future challenges to the services economy

Regulatory challenges

Now that services have become a vital component of business, it is imperative to have appropriate laws and policies to man this sector. Several countries have ill-suited service laws that hamper innovation and growth.

Existence of trade barriers may also come in the way of service-based growth especially because the sector is highly globalised. These regulatory flaws arise from a lack of understanding of the true potential of the service sector.

Proper understanding of consumer demand and supply economics

Many stakeholders in the service sector are yet to come to terms with the changing role of the consumer. It is not enough to offer clients a final product; businesses need to think of buyers as co-creators who can play a crucial role in the supply side. Not all service providers have this in-depth understanding of the demand issue (Inman 1999).

Businesses need to understand supply side economies in service growth before participating in it. Some companies presume that there is a demand for new services hence their provisions. Alternatively, other companies may outsource their products in order to focus on their core competencies. Some organisations may engage service providers without really investigating why they need to outsource.


Organisations should build a services economy because of the importance of the internet. Internet-based trading has transformed the market place and is bound to keep doing so even in the future. New products and functions are getting into business and the more flexible organisations are the ones that survive. The internet will speed up globalisation and other people-centred market activities.

Additionally, because the internet is not limited by people’s geography and time, then companies can fully exploit their potential. They can work twenty four hours a day and do business with people in the opposite end of the earth. This should give organisations enough reasons to focus on the service sector.

However, for fair business to take place, then more effective standardisation should exist. Nonetheless, the atmosphere of transparency and openness is indicative of the promise that is inherent in the services sector.


Heskett, J 1986, Managing in the service economy, Harvard Business School press, Boston.

Hoj, I, Kato, T, & Pilat, D. 2011, ‘Deregulation and privatisation in the service sector’, OECD Economic Studies, vol. 11 no. 25, pp. 37-50

Inman, R 1999, Managing the service economy: prospects and problems, Cambridge University Press, Cambridge.

Kim, H 2006, The Shift to the service economy: causes and effects, Institute for Monetary and Economic Research,

Organisation for Economic Cooperation and Development 2000, The Service Economy, OECD Press, France.

Vickers, J & Yarrow, G 1988, Privatisation – an economic analysis, MIT Press, Cambridge.

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IvyPanda. (2019) 'Service sector analysis'. 10 June.

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