Macro Trends In Global Economy

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

2

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


3

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


4

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)


5

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


6

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


7

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


8

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


9

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)



10

Among B2B Service Categories, Professional and Business Services Show Highest Growth Rates


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


11

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



12

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


13

Omega Healthcare: New B2B Services from Outsourcing in Healthcare


14

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


15

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


16

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 …


17

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


18

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

Macro Trends In Global Economy

Education

public safetyvaries

maintenance

supply chain

key growth

service sector

software maintenance

b2b services

economic analysis