Factory or theater? The economy of the future

Services constitute the predominant portion of advanced economies. In fact, services normally account for over 70% of the GDP in all Western economies, in Japan, and in many developing countries as well. So in terms of the wealth generated by services, we can affirm that the world’s economy is primarily a service economy. In many cases this is because services integrate, enrich, or actually transform the business model of the product economy.

But we have to resist the temptation of imagining that this spells the end of goods. Instead, goods are becoming both vehicles for new services, and the indispensable elements embodying the content of the intangible value generated by those services. In fact, we can safely say that in the very near future we’ll have a hard time distinguishing between the product economy and the service economy. The reason is that along with product servitization, we are seeing the reverse: service productization. In other words, services are being shored up with products to realize value creation processes for customers.

The digital transformation of most production processes and service provision can truly be called service industrialization, the primary aim of which is to enhance the efficiency of service production processes. Service industrialization also contributes to creating actual “service factories.” Yet unlike what happens in the world of manufacturing, service industrialization is not limited to production processes, because a service is only complete when it is provided to the customer. So without the customer, there can be no service provision. This means that real dilemma of service industrialization is ramping up the capacity and efficiency of the “factory” while preserving the emotional and relational dimension of customer interaction. From an operating standpoint, we can call this “service theatricality.”

Service industrialization, at first glance, is an attempt to reconcile the operating paradigms of the “service factory” and the “service theater,” combining the effects of digitalization and the adoption of models with management techniques borrowed from manufacturing.

But taking a deeper dive, a number of critical questions emerge regarding this phenomenon. For example, in the same company, are the two paradigms irreconcilable, or can they co-exist? Are there sectors where one paradigm is a better fit than the other? Can we find common trends in the same sector? What factors can explain these trends?

Several authors gave their answers to these and other questions in the book, Managing Consumer Services. Factory or Theater?, which I edited along with Uday Karmarkar and published in 2014.

The book, which provides unique insight into the issue of service industrialization, is themed around the characteristics of the two architypes mentioned above: the service factory (centered on standardization and efficiency) and the service theater (where the focus of production and distribution is variety, experientiality, and improvisation). A partial convergence is occurring, merging these two models, and empirical evidence maps out the ideal pathways toward service industrialization, depending on whether management’s strategy is to adopt one or the other option.

Four focal points underpin the book’s central message: 1) the convergence between front office and back office; 2) the position of the customer as essential input in the production process and service provision; 3) the right combination of inputs needed to configure, produce and deliver the service, with an eye to engineering the customer experience; 4) the adoption of new technologies and the transfer of managerial practices, as appropriate, deriving from the world of manufacturing.

Our work, the result of a joint research project conducted by SDA Bocconi and UCLA Anderson School of Management, culminated in a conference held in 2018 in Los Angeles. There, for the first time, we presented the theoretical model that forms the basis for designing and engineering a customer experience.

The process of service industrialization has gained momentum because of the pandemic. This we can see for instance with the unavoidable evolution in public services, and the growing popularity of food delivery and e-commerce in general.