COURSES 3&4

SERVICES: DEFINITION, CHARACTERISTICS, TAXONOMY

DEFINITION OF SERVICES

The concept of « services » is surprisingly complex.

Services comprise an extremely heterogeneous array of economic activities,

characterized by:
- differences in the way they are produced or delivered
- different consumer or producer behavior
- different market structures.

Consequently, services have most often been defined as what they are
not.

The earliest attempt to define services was made by Hill (1977) who proposes
the following definition, which has been taken as a reference point by many
service economists
A service may be defined as a change in the condition of a person, or of a
good belonging to some economic unit, which is brought about as the result
of the activity of some other economic unit, with the prior agreement of the
former person or economic unit.

Hill also operates a distinction between service production and its result: the
output of the service activity is the actual change in the condition of a
person or good, which is different form the production itself, as being the
activity that determines the change.
The fact that the production process if transient or ephemeral should not lead
us to believe that the output will necessarily have similar characteristics (a
software, a TV show, an architectural design, a movie)

Goods are tangible products that can be defined in terms of functionalities or

technical specifications.
Services can be defined in terms of the changes in the condition of the
client/consumer.

Using Hill’s criteria as a starting point, Gadrey proposes the following

definition of services: operation/activity aimed at transforming the state of a
reality R (owned or used by a consumer C), performed by a supplier S upon
request from C and in relation to him, that does not have as result the
production of a good able to circulate (from an economic point of view)
independently of its support R.

So, a service is a process related to a person, a good or a piece of

information. In order for this process to be conducted there is a need for an
exchange relationship with a user.

Gadrey’s definition emphasizes the following three aspects:

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  the supply occurs through direct interaction between producer
and consumer
 the activity aims at transforming/maintaining/restoring a
reality
 the service exists only through its effect over a reality (person,
good, piece of information), which makes its identical
reproduction impossible, result-wise.

Services comprise a wide range of disparate economic activities, with

heterogeneous properties and various consequences in terms of
market characteristics.
The role they are playing in shaping the modern economies makes the
understanding of their characteristics crucial.

CHARACTERISTICS OF SERVICES

1. INTANGIBILITY

One of the most prominent theoretical interests regarding services sector was
the comparison between its characteristics and those of goods.
The problem of “tangibility” even though it appeared in the works of Adam
Smith and David Ricardo, has become the object of a more profound and
detailed analysis only at the beginning of the 20 th century, with the works of
the socialist economists, Marks disciples.

The materialist analysis on merchandise was founded on two main criteria –

utility and tangibility – that were the basis of productive labor concept.
The merchandise had:
- social utility – some value for others, as opposed to self-production
or own production;
- exchange value – the labor employed to obtain it.
The two characteristics were compulsory for the exchange – utility was
decreasing in order to obtain increased exchange value.
This utility that could be exchanged was characterized by its tangibility
Goods disappear through consumption (final or intermediate) and they have
to be replicated in order to be consumed again. Their utility depends on the
qualities that define its use. This is called divisibility.

Services, on the other hand, are intangible.

„The Economist” described services as „anything that can be traded
and that you cannot drop on your foot”.

The clear distinction tangible-intangible appears even today, but it is used

mainly for a specific analysis of services. Otherwise, is it outdated because,
depending on the amount of tangible and non-tangible elements, we can distinguish the
following combinations:
 The supply of service implies an intermediate consumption of tangible origin or
the use of tangible components;
 The intangible activity has a tangible outcome that is easy to multiply;

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  The tangible products includes specific information
 The tangible products include, apart from information needed to produce them,
some intangible intermediate consumption

Tangibles and intangibles are, thus, complementary and undissociable

elements of compacks.
Unlike goods, services cannot be described based on physical parameters.
They can be, however, expressed in quantity terms (time units, speed,
coverage – telecommunications services, audiovisual services) or in quality
terms (attractiveness, impact, accomplishment – advertising services,
tourism services)

2. INSEPARABILITY

3 conclusions (common features) can be drawn from most definitions of

services:
- the service operation is realized through the interaction between
supplier and consumer;
- it involves transforming the status of a reality;
- the service exists only through its effect over some reality (person, good,
information), meaning that it is difficult to replicate in terms of result.

In the capitalist system, production was focused on goods with the capacity
of being standardized, for which technical progress has allowed large
productivity gains.
This tendency was accompanied by a separation between production and
consumption, between producer and user.
Services production questions this separation – we are dealing with the
creation of a direct relationship between supplier and consumer.

Co-production means interaction and complementarity (not

substitution).
It means, in the same time, that the supplier and consumer are exchanging
information necessary for the production of the service and assistance in the
use of that information.
The involvement of the consumer can be physical, intellectual,
emotional and occurs in 3 distinct phases:
- development of the specification for the product to de realized
- participation to the actual process
- participation to the performance control
For the information-service, the consumer contributes as supplier of data in the creation,
use and control of information. This relationship with the user that is directly involved in
its creation is a prerequisite of the existence of the service.
Consumer’s involvement - servuction
Consumers’ opinion is taken into consideration - cooperation -> A. Toffler -
prosumer

3. HETEROGENEITY

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As a consequence of the fact that consumers differ from one production cycle
to another, the quality of services supplied will also be different. This is why
services are considered to be heterogeneous and difficult to standardize.
Each production process will generate different outputs. Consequently, the
possibility to obtain brand services is more the effect of producer’s reputation
than a result of tangible components that are easy to standardize.
The need to reduce consumer’s uncertainty and to obtain a constant level of
quality forced producers to identify ways of standardizing services output by
attempting to standardize the inputs through technical norms
(telecommunications services, construction services), procedures (accounting
services), standards (communication services, tourism services), similar
education, training of the labor force.

4. PERISHABILITY

As a direct consequence of the intangibility of services and of the fact that

their existence is dependent upon their consumption, services cannot be
stored. The production factors do not produce value unless they are
consumed (ex: in the absence of students a course cannot take place – the
information still exists, but it is not delivered).

IMPOSSIBILITY OF APPROPRIATION

The impossibility appropriation is not a characteristic per se, but a

consequence of the characteristics mentioned. Because of the intangibility
and perishability of services, we cannot speak about ownership of services
(consumers do not have “possession”). The transfer of rights refers to either
intangible assets (in which case we are confronted with intellectual property
rights) or to intangible artifacts (in which case full ownership is possible).

The characteristics of services have an impact on their economic properties.

Miles used the term «peculiarities » to differentiate those specific properties.
The table includes properties which could be attributed to different types of
services and that are common to most services.

Service-  Immaterial/intangible
product  Information-intensive
 Non-storable
 Great diversity
 Custom-made
 Valuation = labor inputs
 Non-rival
 Product quality dependant on consumer
quality
 Processes and products difficult to separate
 Intellectual property difficult to protect;
easy to replicate
 Reputation is crucial

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Service o Footloose
productio o Craft-like production
n o Labor intensive
o “On demand” production
o Limited scale economies
o Material intermediate inputs either very
high or very low
o Bundled with other production
o Apparent weak incentives to change
o Interaction with the consumer –
heterogeneity
Service Services have use-value, but not exchange-
markets value
User-producer integration making
production, transaction and consumption
indistinguishable
Distribution in closed networks
Un-transportable
Appropriation difficult
Perishable
Duplication easy: marginal cost of
production negligible;
No usual market price
Price as direct compensation of labor inputs
Public and professional regulation
Service  Trust in user-producer relations
consumpti  Consumed while produced
on  Consumed where produced
 Consumer specific utility
 Satisfying psychological needs
 Producer integrated

TAXONOMY OF SERVICES

The heterogeneous nature of the service sector means that, in order to trace
through and analyze changes within the sector, it is necessary to
disaggregate it in some way. As Miles argued: “… the service sector is not
one sector at all; it is comprised of extremely heterogeneous activities, which
play very diverse roles in overall economic performance”.
Understanding the service sector is, in large part, a problem of gaining a
better conceptual and empirical understanding of this complexity and its
implications.
However, devising a useful classification system for a sector encompassing
such a diverse range of activities presents a number of challenges.

Traditional approach
The traditional classification is industry based.

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Broadly speaking, this involves grouping together economic entities that
produce similar products.
The United Nations International Standard Industrial Classification of All
Economic Activities (ISIC) forms the basis upon which most countries collect
and publish data on their economies.
The ISIC definition of services, and that adopted by the OECD, excludes
utilities (electricity, gas and water) and construction services.
The traditional approach is more and more criticized due to its focus on the
tangible result of production – it is based on grouping together economic
entities that produce similar products. The information that can be obtained
from the ISIC classification offers a deformed image of the structure and
functioning of economies.

Alternative classification systems

1. consumer/producer services
One of the more common approaches to reclassifying services involves
grouping them according to the markets they serve — that is, whether they
meet final (consumer or household) or intermediate (producer) demand.
Under such a classification, consumer services cover all services sold
directly to consumers for their personal use — entertainment and recreational
services and personal services such as hair and beauty treatments.
Producer services cover all services provided to producers of goods and
services and include, for example, office cleaning, computing, consulting and
other business services.
2. tradable/non-tradable services
This classification is based on the capacity to trade services: tradable
services can be traded on commercial basis on the internal or on the
international market, while non-tradable services are public services. More
and more services have the tendency of becoming tradable, through massive
privatization.
3. standardized/individualized services
Services with a high inseparability degree are difficult to standardize, which
restrains the capacity of the producer to control the supply process. It is
especially the case of labor-intensive services.
With the development of technology, the inseparability degree of services
could be reduced, especially through the use of communication networks for
the long distance transmission of services.
4. PPS/LDS services
Based on the degree of interaction supplier-consumer, services can be:
- PPS – physical proximity services – simultaneous presence of both the
supplier and the consumer, in the same location, through
o movement of the producer towards the consumer
o movement of the consumer towards the producer
- LDS – long distance services – do not require the simultaneous presence of
the consumer and the producer or their spatial interaction.
5. physical / person-centered / information services
Miles (1993) also proposed a classification scheme to facilitate analysis of the
use of technology and innovation in services.
 Physical services primarily maintain or transport facilities, goods or
people. This group covers transportation and storage, wholesale and retail

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trade. This group of services is mainly influenced by innovations in
manufacturing.
 Human or person-centered services span social and community services
(health, education and welfare) as well as many private consumer services
(personal services, hotels and restaurants). Some of these services have
specific links to their own set of technologies (for example, health services to
pharmaceutical and surgical innovations).
 Information services cover three types of service activity:
- mass media, mainly distributing standardized data on a large scale
(cinemas, broadcasting);
- organizations distributing large volumes of non-standard information to
specific recipients (telecommunications, financial services); and
- knowledge services that produce and interpret specialized information
(accountancy firms, advertising, marketing and consultancy companies).
6. B2B / B2C services
B2B – producer services
B2C – consumer services

A classification of economic activities was realized by Singelmann, based on

the functionality criterion – 6 economic sectors, out of which 4 of services:
producer, distributive, personal and social services.
This taxonomy reflects a combination of economic functions of
services, markets served and nature of dominant supply (public or private).
Elfring (1988), based on Singelmann’s classification, regrouped those
activities in 4 subsectors. OECD uses presently this system to analyze labor
force distribution in services.

Sub-sector Service activities - Elfring’s sub-groups

Singelmann
Distributiv Transportation and storage 1. Retail trade
e services Communication 2. Wholesale trade
Wholesale trade 3. Transport services
Retail trade 4. Communications
Producer Banking and other financial 1. Business and
services services professional services
Insurance 2. Financial services
Real estate 3. Insurance services
Engineering and architectural 4. Real estate services
services Accounting and
bookkeeping
Legal services
Miscellaneous business services
Social Health services 1. Government
services Education services
Welfare and religious services 2. Health services
Postal services 3. Education services
Government 4. Miscellaneous social
Miscellaneous professional and services
social services

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Personal Domestic services 1. Hotels, bars,
services Hotels and lodging places restaurants
Repair services 2. Recreation,
Laundry and dry cleaning amusement, cultural
Barber and beauty shops services
Entertainment and recreational 3. Domestic services
services 4. Miscellaneous
Miscellaneous personal services personal services

Services Sectoral Classification List - GATS

1. Business services
A. Professional services
B. Computer and related services
C. Research and development services
D. Real estate services
E. Rental/leasing services without operators
F. Other business services

2. Communication services
A. Postal services
B. Courier services
C. Telecommunication services
D. Audiovisual services
E. Other

3. Construction and related engineering services

4. Distribution services
A. Commission agents’ services
B. Wholesale trade services
C. Retailing services
D. Franchising
E. Other

5. Educational services

6. Environmental services
A. Sewage services
B. Refuse disposal services
C. Sanitation and similar services
D. Other

7. Financial services
A. All insurance and insurance-related services
B. Banking and other financial services
C. Other

8. Health related and social services

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(other than those listed under 1.A.h-j.)
A. Hospital services
B. Other human health services
C. Social services
D. Other

9. Tourism and travel related services

A. Hotels and restaurants
B. Travel agencies and tour operators services
C. Tourist guides services
D. Other

10. Recreational, cultural and sporting services

(other than audiovisual services)
A. Entertainment services (including theatre, live bands and circus services)
B. News agency services
C. Libraries, archives, museums and other cultural services
D. Sporting and other recreational services
E. Other

11. Transport services

A. Maritime transport services
B. Internal waterways transport
C. Air transport services
D. Space transport
E. Rail transport services
F. Road transport services
G. Pipeline transport
H. Services auxiliary to all modes of transport
I. Other transport services

12. Other services not included elsewhere

GOODS – SERVICES INTERACTION

SERVICES-LED ECONOMIC GROWTH

The importance of goods and services, together with their interaction have
been the subject of economic debate for quite a long time.
Some economists consider that the decline of goods production and the shift
towards services are not sustainable on a long term basis, given the fact that
services are dependant for their existence on services.
Others argue that services are shaping economic growth. Instead of being a
consequence and a support of goods production, services will lead and
determine goods production, in the sense that production facilities will be
established in locations with developed services infrastructure.

A widely discussed theme is the interface between goods manufacturing and

services; in the strategic management literature (Quinn, 1992), in economics

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and analysis of structural change (Pascal, 1986) and in analysis of the role of
specific service functions towards manufacturing industries (Porter 1990).
As is generally acknowledged, it is impossible to conceive manufacturing
industries without taking into consideration a huge amount of services; to
apprehend manufacturing production without considering a substantial
service component.

Manufacturing is becoming increasingly services dependent and an

increasing share of service companies are integrated into networks with other
economic sectors. There are also strong linkages between goods and services
arising out of the complementarities of demand. This integration implies that
separating the two is increasingly becoming an artificial division that is not
reflected in the characteristics of production processes.
As an example, Marshall (1994) points to the difficulty that applies to existing
terms coined to describe structural change in the economy, such as post-
industrialism, de-industrialization, etc.
Pousette and Lindberg 1989 show that manufacturing is becoming
increasingly services dependent. Nonetheless, there was no significant
correlation between service intensity and profitability in manufacturing. One
of the main conclusions is that we are witnessing a shift away from
standardized factory production to services production in manufacturing; in
terms of cost structures, at least half of manufacturing activities are services.
All observations are, however, hampered by the poor quality of available
data.

Technology is restructuring many manufacturing and services industries

(Guile, 1988). Barriers between industries are disappearing and
interdependencies are strong, “[…] services such as communications,
finance, transportation, and health care are large, capital intensive industries
responsible for commercial application of some of the most sophisticated
technologies available.” (Quinn 1988)
Equally, manufacturers become service producers. The content of services in
the manufacturing industry is growing and technology dependent (Quinn,
1986, 1990, 1992). Concrete policy issues (Quinn and Doorley 1988) arising
from this may be summarized as follows:
i) macroeconomic and tax policies focused on improved capital formation
rates, lower cost of capital, and lengthened investment time horizons,
ii) increased and better-targeted national investments in both hard and soft
infrastructures supporting services,
iii) restructured regulatory practices to improve the efficiency and
innovativeness of the services sector,
iv) a focus on employment and human resources development policies more
appropriate to the mobility and intellectual skills required for a services-
dominated society,
v) stronger recognition and exploitation of services-manufacturing interface
potentials in international trade measurements and in trade negotiations.
Information technologies applied in services change the structure of domestic
and global competition in both goods and services industries (Quinn, 1992).
The manufacturing and service sector are interdependent, with the share of
services in manufacturing growing.

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Through the impact of new generic technologies in services,
* new economies of scale appear, leading to larger institutions, often with a
decentralized structure,
* new economies of scope, created by new technologies, have often
unintended and beneficial second order effects,
* increased complexity can often be handled more efficiently with new
technologies.

New economic paradigm

The service society

Economic growth over the last decades has therefore been strongly affected
by development of service sectors. This has opened up for characterizing
contemporary society as a ‘service society’, or to emphasize the role of
information and knowledge, as an information society. The use of such
terminology has connotations to a service or information revolution; a new
industrial revolution, marking the watershed between the industrial society
that emerged over the last 150 years, and the new service society.

Therefore, we will end this section by asking if the label service society is
appropriate as a characterization of ongoing structural change. To do that, we
will start with the concept of an ‘industrial society’ as a benchmark.
When the manufacturing industries matured during the nineteenth century,
through the complementary processes of market growth, technical change
and organizational development, the industrialization lead to an overall
productivity and income growth, dominated by these industries. They were
the economies’ productivity leaders and they also had a strong influence on
productivity in other sectors, primarily in the second large sector, agriculture.
As the manufacturing industries grew in size, they increasingly affected and
shaped the society in which they were embedded. The development of new
organizational forms and formalized relations between workers and capitalists
and managers affected the social roles of the different classes, the growth of
the industries ensured a rapid diffusion of these roles in industrialized areas.
As the nineteenth century drew to a close, quite a few countries had emerged
as industrial societies, several others followed quickly after. Even though
manufacturing industries never attained a share of employment compared to
the one of agriculture previously, and the share ascribed to service sectors
today’s, the social development in this period is so intimately linked to these
industries that the epithet ‘industrial society’ is pertinent.
The modern period of studies of the emerging economy started in the
mid-1960s. In The New Industrial State (Galbraith 1967), Galbraith described
what he regarded as the main structural reorganization of economic
production in the new era. He saw a new industrial organization emerging,
replacing the capital-based and owner-managed industrial organization that
was completed in the first post-war period. What John Galbraith saw as the
fundamental new feature of industrial production and value creation was the
emergence of a new governance structure in large scale industries, viz., a
knowledge-intensive management structure with a different set of interests
than the previous ‘owner-manager’. Combined with increased abundance of

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capital, and hence a weakened power base for it in initiating and organizing
commercial activity, this paved the way for the technostructure as the critical
factor that would shape progressive industries.
Thus Galbraith clearly saw the vital role that knowledge and expertise would
play in organizing future economic activity, but he chose to interpret it as a
reorganization of manufacturing industries, with large scale, technology-
intensive industries as ‘vanguards’ of the new industrial restructuring. But
what he did not take into account was that the underlying processes he used
as a basis for his predicaments about manufacturing industries, also opened
up for a restructuring of vital services and the relation between these service
functions and manufacturing activities. Hence we will regard John Galbraith
primarily as a beaming culmination of previous analytical approaches to
structural change in capitalist economies, rather than as an approach that
establishes a genuinely new ‘mind-set’. This is not to deny, however, that
Galbraith’s analysis definitely points forward and renews old approaches, but
his manufacturing ‘bias’ lets him by-pass at least one of the characteristic
dimensions of the restructuring of economic systems during the last decades.
Almost simultaneously with the publication of Galbraith’s book, Victor Fuchs
published the first modern approach to the emergence of the ‘service
economy’ (Fuchs 1968). In contrast to Galbraith, Fuchs took as a starting
point that the characterizing feature of the development of the capitalist
system in the modern era is the emergence of a complex of services. The
analysis was substantiated by considerable use of statistical data to identify
characteristics and drivers of change processes. Fuchs followed the lead of
Colin Clark (Clark 1957); ‘tertiarisation’ is the next stage of economic
development in industrialized countries. Fuchs hypothesized and elaborated
explanations of structural change in modern economies and the concomitant
employment growth in services.
The overall ‘service content’ of the economy grows, with a shift towards
higher skilled white collar employment in most industries, away from low- or
un-skilled blue collar employment. This is accompanied by an increase in
flexible, service-like production methods in several manufacturing industries,
the evolution of ‘post- Fordist’ production. As the structure of labor markets
and work relations have a strong Fordist heritage, there are strong
contingencies between the dominant modes of production organization on
the one hand and work organization and governance structures on the other.
Increased flexibility of work arrangements and dissolving barriers between
work and leisure, between education/training and knowledge and skill use
suggest new forms of work relations in several functions. These processes
could lead to increased externalization of service functions, and hence
contribute to increased service employment.

Hypothesis: we are witnessing a transition process towards a new

development stage that implies a new economic paradigm – the appraisal of
the service society or information society

Demonstration:
The notion that global economic growth occurs in a series of long waves of
more or less than fifty-year duration is generally associated with the works of
the Russian economist N.D. Kondratiev in the 1920s, although he did not

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invent the idea. The same “model” of economic development appears in the
works of Schumpeter – the main drive of development is the technology that
is determining major changes at the level of production, management and
business organization.

Four complete K-waves were identified, with the implication that we are now
in the early stages of a fifth. Each wave lasts for approximately fifty years and
appears to be divided into four phases: prosperity, recession, depression,
recovery.
Each wave tends to be associated with particularly significant technological
changes around which other innovations – in production, distribution and
organization – cluster and spread through the economy.

The post-industrial extensive growth phase corresponds to a new “economic

model”, a new type of society. We moved from a society based on energy to
one based on information.

1. Services-led economic growth - CAUSE

What was interpreted in the ‘’70s-‘80s as a problem of the limits of economic

growth is, in fact, a critical period than could be explained by the confusion
created by two centuries of classical industrial growth. It is not about the
ending of economic growth per se, but the ending of a certain type of
economic growth, based on tangible investments and products, on
“hardware” more than on investments in organization, communication,
conception, innovation, “software”
This service-led economic growth implies that any economic activity,
through diversification (content, supply, result, shape) represents a new
function, not an increase in the number of identical activities.
This new stage of economic development appears through the increase in
services participation to GDP, emergence of new services and the increased
dependency of all economic activities on services.
Orio Giarini says that an ever decreasing part of labor is linked to
manufacturing activities (less than 20%). Complementarity and inseparability
are increasing, together with differentiation and personalization – this
determines new economic growth patterns.

In an era of information where “knowledge”, “managing for value”,

“customer services” have become the primary levers of competitive
advantage, the task of maintaining “cost discipline” and gaining “economic
profit” are becoming increasingly difficult as many corporations are already
performing at a “near to level” of optimum efficiency through the adoption of
new technology, scale processes, knowledge leadership and management
techniques (Porter, 1996). Hence, for many organizations, the challenge is to
find additional and yet effective means to ensure cost discipline, while
enhancing quality of service and /or product delivery capacity. Within such a
scenario, it is strongly argued that appropriate sourcing of organizational
activities is providing the additional leverage to better realize profitability,
while striving to improve market delivery capability.

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 2. Solutions offered by the new paradigm: CONSEQUENCES

a. Intensified competition, profit squeeze, slackened growth - force the

company to concentrate on the major source of value added – services,
especially post-production services

Services:
- provide linkages between the segments of production within a
production chain and linkages between overlapping production chains;
- bind together the spheres of production and circulation
- integrate and coordinate the atomized and globalized production
process

The production chain is a transactional linked sequence of functions in which

each stage adds value to the process of production of goods and services

b. Limitations of hierarchical departmentalization overcome by a new type of

production cycle, proper to the new service-led growth – buyer-driven chain

„Mass production” => „Lean production”

Producer-driven chain Buyer-driven chain

 A. Producer-driven chain – refers to those industries in which TNC or

other large integrated companies play the central role in controlling
the production system (including its backward and forward linkages).
This is most characteristic of capital and technology intensive
industries like automobiles, computers, aircraft, electrical machinery
 B. Buyer-driven chain – refers to those sectors in which large retailers,
brand-name merchandisers and trading companies play the pivotal
role in setting up decentralized production networks in a variety of
exporting countries.

The boundary between internalization (governed by the firm hierarchical

system) and externalization (governed by the market) is continually shifting,
as firms make decisions about which functions to perform in-house and which
to out-source to other firms.

In the first case (A) – the entire production chain is performed within a
single firm, as a vertically integrated system; the links in the production chain
are a series of internalized transactions. Transactions are organized
hierarchically through the firm’s internal organizational structure (in-house).

In the second case (B) – each function in a specific production chain is

performed by individual, independent firms, so that the links in the chain
consist of a series of externalized transactions. The transactions are
organized through the market (out-source).
The buyer-driven businesses do not own any production facilities.
They are not manufacturers, because they have no factories. Rather, these
companies are “merchandisers” that design and/or market, but do not make,
the branded products they sell. These firms rely on complex tiered networks

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of contractors that perform almost all their specialized tasks. The main job of
the core company in buyer-driven commodity chains is to manage these
production and trade networks and make sure that all the pieces of the
business come together as an integrated hole. Profits in buyer-driven chains
thus derive not from scale economies and technological advances as in
producer-driven chains, but rather from unique combinations of high-value
research, design, sales, marketing, and financial services that allow buyers
and branded merchandisers to cat as strategic brokers in taking overseas
factories and traders with evolving product niches in their main consumer
markets.

We have in reality a large spectrum of different forms of co-ordination which

consist of networks of relationships within and between firms structured
by different degrees of power and influence. Such networks consist of a mix
of intra-firm and inter-firm structures. They are dynamic and in a continuous
state of flux.

The boundary between internalization (governed by the firm hierarchical

system) and externalization (governed by the market) is continually shifting,
as firms make decisions about which functions to perform in-house and which
to out-source to other firms.

c. The inflexibility of dedicated assembly-line and process plant are overcome

by flexible manufacturing systems, networking and economies of
scope.

From
Oligopolistic competition; transnational corporations based on FDI and
multiplant locations; competitive subcontracting on „arm’s length” basis or
vertical integration; increasing concentration, divisionalization and
hierarchical control; techno-structure in large corporations.

To
Networks of large and small firms based increasingly on computer networks
and close cooperation in technology, quality control, training, investment
planning and production planning. Downstream services become the main
source of competitive advantage and value-added in production.

Commercial subcontracting involves the manufacture of a finished product

by a subcontractor to the principal’s specifications. The subcontractor plays
no part in marketing the product, which is generally sold under the principal’s
brand name and through its distribution channels. The principal firm, in this
case, may either be a producer firm or a retailing or wholesaling firm, whose
sole business is distribution.

Industrial subcontracting involves the carrying out of specialized functions

which the principal chooses not to perform himself, but for which the
subcontractor has special skills and equipment (specialty subcontracting) or
the extension of production capacities (complementary subcontracting).

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