1 the case for service innovation in advanced economies_dr. jan mischke

8/12/2019 1 the Case for Service Innovation in Advanced Economies_Dr. Jan Mischke

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The case for serviceinnovation in matureeconomies

McKinsey Global Institute

Hamburg, September 6-7, 2011

EPISIS Conference European and National Strategies for

Service Innovation

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited


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McKinsey & Company | 1

Abstract

SOURCE: McKinsey Global Institute

Services are critical for economic growth, jobs, and the trade balance in Advanced Economies (USA, EU-15, Japan): Services accounted for 93% of value added growth between 1990 and 2006, and for 82% oftotal value added in 2006. They constituted 83% of total jobs in 2006, and increased employment by 26%

between 1990 and 2006, while employment in primary resources and manufacturing dropped by 34% and22%, respectively. And, often overlooked, services exports stood at 24% of total exports in 2008, andwere growing at a faster rate than goods exports.

Several persistent mis-conceptions often lead to services not receiving the full attention they deserve anda bias toward manufacturing in terms of innovation and competition policy. One mis-perception holds thatservices create mostly bad, low-paying jobs. In fact, average wages, wage growth and skill levels are ashigh and higher in services than in manufacturing. Another common mis-perception is that economies

escape to domestic services when they fail to sustain competition in manufacturing, sometimes evenleading to protectionist activism in ill-guided attempts to reverse such trends. However, services had apositive trade balance of 0.8% of GDP for Advanced Economies, and particularly knowledge intensiveservices are sufficiently competitive to attract resources for export activities: Advanced Economies addedaround 2 million jobs from 1994 to 2006 embedded in those service exports, partially off-setting 5 millionjobs shifted away from traded labor-intensive manufacturing.

The EU-15 performance in service productivity growth has been weak, leading to a widening distance tothe U.S. even before the crisis. Marked differences across regions allow to apply European successcases to serve as example for economies falling behind. In fact, there are ample opportunities to boostservice innovation, which include both a removal of red tape and increased competition in large-employment sectors, as well as improving the supply-side drivers (skills, financing, public research),demand-side drivers (public demand, customer proximity) and enablers (regulation, standardization,knowledge dissemination) for service innovation. It is important, though, to develop a deep understandingon a sector level to establish the right policies.


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Outline

The importance of services and service innovation

for growth, jobs, trade, and productivity

Drivers, enablers, and examples for serviceinnovation


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Services, particularly business and financial services, have outgrown

other sectors in Advanced Economies

SOURCE: Global Insight; McKinsey Global Institute analysis

421

686

Labor-intensivemanufacturing

Primary resources

Capital-intensivemanufacturing 2,124

Total

R&D-intensivemanufacturing

8,454

Capital-intensiveservices

5,623

Health, educationand public services

29,434

2,204

Labor-intensiveservices

4,602

Financial andbusiness services

5,320

Value Added in Advances Economies, 2006Billion USD, Real 2005 Change 1990-2006Percent

-22

-7

35

34

33

82

12

49

39



... and created all net new jobs, compensating for manufacturing losses

SOURCE: EU KLEMS; McKinsey Global Institute

25

21

63

94

12

8

13

159

Total 395







Primary resources

Capital-intensivemanufacturing

Employment in Advanced Economies, 2006

Million peopleChange 1990-2006

Percent

13

27

54

4

18

-22

-14

-40

-34



... at competitive wages and attractive skill levels

SOURCE: EU KLEMS; Global Insight; McKinsey Global Institute analysis

27

37

48

66

37

59

48

46

56

46

Total






Capital-intensive

manufacturing


Primary resources

Average income in Advanced Economies, 2006

Thousand USD, Real 2005

+13%

Change 1990-2006

Percent

+22%

+13%

+25%

+8%

+13%

+25%

+16%

+14%

Share of high-skilled

employees

US example, 2005

Percent

13

36

35

46

21

47

32

17

20

32



Services constitute a quarter of Advanced Economies exports

SOURCE: OECD; McKinsey Global Institute analysis

0

5

10

15

20

Primary resources

Services

Manufacturing

2008042000971994

Exports of AE sample1 as percent of GDP

Percent; nominal

4.3%

Exports CAGR

GDP CAGR, 1994-2008

Percent

4.7%

3.7%

1 AE sample includes United States, Japan and the EU-15 countries excluding Luxembourg


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McKinsey & Company | 7SOURCE: Global Insight; McKinsey Global Institute analysis

Net exports

Nominal USD billion

33

-5

-42

-23

-30

-80

5

32

-11

70

-1

18

Total



Primary resources

-204

-109

-236

-784

-176



Capital-intensivemanufacturing



-243

251

70

-13

0

-29

-34

-70

1

-36

25

1

4

0

-22

-30

-50

299

-175

1994

2006

55

5

0

35

-16

-99

122

3

6

55

5

110

-3

8

68

290

-62

-360

United States Japan EU-151

1 Excluding Luxembourg

Net service exports contribute substantially to paying the primary

resources bill


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McKinsey & Company | 8SOURCE: OECD; EU KLEMS; Global Insight; McKinsey Global Institute

Implied change in jobs 1994-2006 in Advanced Economies embedded in changes in

trade1

Millions of jobs

ROUGH ESTIMATE... attracting ~2 million net jobs to service exporters

-0.7

-0.1

-0.3

0

0

0.4

Total shift of resources fromexporting to domestic activities


-3.6 ~ -3.0

Financial and

business services

-1.6 ~ -1.4




Capital-intensive

manufacturing

1.7 ~1.9


Mining

-3.9 ~ -3.3

Agriculture

1 Range for impact of trade on jobs calculated by dividing 1994-2006 change in net exports by 1994 and 2006 productivity

Equal to ~1% of 1994employment


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1 Expressed in $ at 2009 EKS (Elteto-Koves-Szulc) purchasing power parities (PPP).

SOURCE: The Conference Board; International Monetary Fund; OECD; McKinsey Global Institute analysis

Specifically in Europe, labour productivity stopped catching up with the

US in the mid-1990s

Labour productivity,1 indexed to the United States

60

65

70

75

80

85

90

95

100

1970 1975 1980 1985 1990 1995 2000 2005 2010


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Outline

The importance of services and service innovation

for growth, jobs, trade, and productivity

Drivers, enablers, and examples for serviceinnovation


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McKinsey & Company | 12SOURCE: McKinsey Global Institute

EXAMPLES

Key barriers for productivity, innovation and growthSector

Product market regulation like restrictions onassortment, opening hours Advertising restrictions and price fixes for pharmacies Land market regulation Labour regulation

Retail

Setup of (public) (pre-)procurement hindering innovation

Informalities and fragmentation Lack of standardization and pre-fabrication

Construction

Price fixes for lawyers, accountants, notariesProfessionalservices

Postal services monopolies or dominant incumbents Passenger rail monopolies or dominant incumbents

Network

industries

Largely publicly planned health care sector Ownership restrictions for dentistsHealthcare

To lay a foundation for innovation, red tape in services needs

be removed


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Technology can then help further innovation and transformation in

services

New insights,

New ways of

operating

4. Internet of Things

5. Experimentation and big data6. Wiring for sustainable world

1. Distributed co-creation

2. Networks (incl social) asorganizations

3. Collaboration at scale

Managing

talent, workand life

10. Producing public goods onthe grid

Social goods

7. Anything-as-a-Service

8. Multi-sided business models

9. Innovating from bottom of thepyramid

Innovating

business

models

Deployed online customer

communities to addresscustomer questions

Examples

Leveraging Web 2.0 tofacilitate inputs togovernment

Presence-basedadvertising

Smart logistics (e.g., RFIDchips) to reduce energyconsumption in transport

Computing platform-as-a-Service (cloud)

Created Connect andDevelop to findinnovations from the crowd

10 tech-enabled trends



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Example Big Data: Significant innovation and value creation potential

across sectors

Europe public sector

administration

250 billion value per year ~0.5 percent annual

productivity growth

US health care

$300 billion valueper year

~0.7 percent annualproductivity growth

US retail

60+% increase in netmargin possible

0.51.0 percent annualproductivity growth

Global personal

location data

$100 billion+ revenue forservice providers

Up to $700 billion value toend users

SOURCE: Hilbert and Lpez, The worlds technological capacity to store, communicate, and compute information,Science, 2011; McKinsey Global Institute analysis

200

20000

2007

250

19931986

50

300

150

100

Exabytes

Global installed, optimally

compressed, storage

Rise of Big Data creates innovation and value potential across the economy


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McKinsey & Company | 15SOURCE: Literature survey; McKinsey Global Institute

Market

efficiency

Supply-

side

drivers

Demand-side

drivers

Enablers

Financing & accounting

Removal of red tape

Fostering competition

Public research

Skills

Public demand

Customer proximity

Standardization

Knowledge dissemination

Property rights

Regulation

Service innovation policies need to be tailored to the industry


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BACKUP


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Sector classification used for industry analysis


Primary

resources

Manufacturing

Services

Agriculture Mining

Textiles Wood & related products Recycling

Primary resources

Labor-intensive

manufacturing

Labor-intensive Capital-intensive Knowledge-intensive

Capital-intensive

manufacturing

Food, beverages & tobacco Coke & refined petroleum Rubber & plastics Non-metal minerals

Metals Paper & printing

R&D-intensive

manufacturing

Chemicals Electric/electronic products Machinery Transport equipment

Construction Wholesale & retail trade

Hotels & restaurants Transport and storage Social & personal services Private households

Labor-intensive

services

Utilities Communication

Real estate

Capital-intensive

services

Finance Business services

Financial and

business services

Health, education

and public services

Health & social services Education Public admin and defense

1 the case for service innovation in advanced economies_dr. jan mischke

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