Business Models and Architecture

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The servitization of products business model

Service economy can refer to one or both of two recent economic developments. One is the increased importance of the service sector in industrialized economies. Services now account for a higher percentage of GDP than just 20 years ago. If you look at the current list of Fortune 500 companies, more of them are service companies and fewer are manufacturers than in previous decades.

The term is also used to refer to the relative importance of service in a product offering. That is, products today have a higher service component than in previous decades. In the management literature this is referred to as the servitization of products. Virtually every product today has a service component to it. The old dichotomy between product and service has been replaced by a service-product continuum. (See service#The service-goods continuum). Many products are being transformed into services. This is a service-centric view of the economy : everything purchased has a significant service component.

For example IBM treats its business as a service business. Although it still manufactures computers, it sees the physical goods as a small part of the "business solutions" industry. They have found that the price elasticity of demand for "business solutions" is much less elastic than for hardware. There has been a corresponding shift to a subscription pricing model. Rather than receiving a single payment for a piece of manufactured equipment, many manufacturers are now receiving a steady stream of revenue for ongoing contracts.

Full cost accounting and most accounting reform and monetary reform measures are usually thought to be impossible to achieve without a good model of the service economy.
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