Service Sector

A transaction transferred from the buyer to the seller.

The service sector, the tertiary sector, is the third component of the three traditional economic sectors. It is an intangible product, essentially a transaction transferred from the buyer to the seller.

The focus of this sector is on providing services rather than manufacturing or producing commodities, as in the case of primary and secondary sectors.

Some of the activities covered in this sector are retail, hotels, banks, real estate, health, education, social work, recreation, computer services, communication, media, gas, electricity, and water supply.

Over the past century, there has been a rapid expansion in this sector. It has eclipsed the retail and goods manufacturing sector to become the largest sector of the economy of the 21st century in most developed economies.

Over the past few decades, the exponential increase in knowledge has led to a massive explosion in the sector. As a result, a shift from a manufacturing-based economy has been observed due to increased automation.

Automation has led to improved performance and quality of service delivery to the nation's consumers as it helps businesses to remain competitive by contributing to greater output at a lower cost. 

For example, an Automated Teller Machine(ATM) automates tedious and time-consuming tasks, provide faster and more convenient banking services to the public, and allows workers additional time to assist customers with more complex issues.

It can be characterized as:

  • Intangibility

It is not a physical product that can be either touched or seen. The receiver or the buyer experiences it. The quality aspect can be judged only once the consumption is done.

  • Inconsistency

The absence of perfect standardization and quality differences sometimes makes it inconsistent.

  • Inseparability

Unlike goods, which can be separated from the manufacturer by storage, services cannot be separated from their provider. 

  • Storage

Since these are intangible transactions, one cannot hold the inventories or store them.

Significance

1. Share in Net National Product

It contributes the maximum share of a country's net national product at cost or the national income. According to reports, a 48.5% share of national income and employment of 22.9% of the total working population comes from here.

2. Helps Industrialization

The development of industries is based on the performance and improvement of electricity, banking, transport, etc., which provides a broader industrial goods market and flourishes initiatives in remote areas. 

3. Expands Agriculture

It helps to develop agricultural production by providing easy movement of raw materials, finished goods, finances, and equipment from one place to another without any hindrances or barriers.

Agriculture

4. Removes Regional Imbalances

The problem of regional imbalances and disparities in an economy is resolved with the expansion of medical facilities, education, communication, and transportation in the backward regions of the country.

5. Growth of Market

The tertiary sector provides different types of services to both the agricultural and industrial sectors, helping the markets to grow appropriately for the finished goods, semi-finished goods, and raw materials.

6. High Quality of Life

The efficiency of this sector helps a country to lay down the path for economic development by enhancing the quality of life or the standard of living of the people within a country, thereby improving the Human Development Index.

Efficiency

7. Increase Productivity

This sector benefits the working force by providing proper medical facilities and technical education. In addition, well-organized communication and transportation networks encourage increases in mobility and information.

Facilities provided to the laborers make them more efficient and skillful, thereby simultaneously increasing the productivity of a country.

8. The rise in International Trade

Transportation, communication, banking, etc., help expand international trade. It also facilitates an increase in the foreign exchange reserves within an economy.

Types of services

A. Business services

In the most basic terms, it supports any business's daily activities and functioning. It helps any business enterprise to function smoothly and manage its activities. It is a recognizable subset of economic services.

It believes in delivering value to its customers. It includes banking, warehousing, insurance, transportation, communication, etc.

It aligns information technology assets with the needs of the company's employees and customers and supports the business goals, facilitating the company's ability to be profitable.

Business Services

B. Personal services

These are commercial activities provided to individuals keeping their individualistic needs in mind. These are non-uniform as the provider alters them according to the needs of each customer. It includes hotel and accommodation, catering, medicines, etc.

C. Social services

These are provided by the government or soon-profit of its organizations to achieve social equality by providing help to the backward section of society. This includes the educational sector, sanitation, medical facilities, housing, etc.

Social Services

Sub-categories of services

1. Banking 

Banks provide facilities to attract customers like giving loans, credit and debit cards, overdraft, discounting of bills of exchange, cheque payments, consultancy, remittance of funds, home banking, online banking, private banking, accepting deposits, etc.

Bank

2. Insurance

This is a protection against loss. Companies offer them for individuals as well as organizations. For example, there are contracts to protect property, furnishings, vehicles, health care costs reimbursement, death benefits, etc.

3. Management

This caters to various aspects of managing independent activities. Event management accounts are an essential part of any organization and require a third-party agent with specialization.

4. Software

These are required for upgrading and enhancing features and meeting the security requirements of the software. In addition, as Information Technology is making its way extensively, the software has become an integral part of every electronic device. 

5. Communication 

It comprises both postal and telecom services. Postal includes financial facilities and mail facilities. Telecom comprises cellular mobiles, radio, pager, fixed-line, cable, VSAT, direct-to-home (DTH) connections, etc.

Emails

6. Transportation and warehousing

Transportation deals with overcoming barriers of place. Roads, railways, ports, etc. facilities facilitate easy commuting of people, raw materials, and goods.

The produced goods need to be stored generally in the lag time between production and consumption.

This systematic storage and maintenance of goods and raw materials are known as warehousing. Warehouses can be private, public, or bonded.

Transportation

7. Information technology

This component is the growth engine of any economy and contributes to a substantial increase in gross domestic product, employment, and exports. 

Information Technology, along with business process outsourcing, engineering services, research and development, and software, contributes significantly to the service sector.

8. Consulting 

Many organizations use these for financial projects, business expansion projects, and particular business sectors. Consultation is an integral part of corporate giants. 

Organizations require these during acquisitions and mergers to understand the nature of business and industry. They also enable us to understand the nature of competition and specifics in an industry.

9. Legal

It makes lawyers competent without additional training to undertake everyday legal work like patent registration, contract vetting, and reviewing documents. 

10. Training and Education

Many companies require training agencies to train their employees in soft skills and other unrelated technicalities the company needs. The essential part of training is a knowledge check. 

11. Financial 

Every organization requires these for purposes like valuation, taxation, depreciation, expansion, and stock market decisions.

Finance

Generally, financial management is done by any organization's finance department. Still, the purposes above are resolved with the help of financial advisors, who also help organizations make investment decisions.

Investment decisions include deciding the amount to invest, the sector, and the return on investments.

12. Marketing 

This includes creative advertising and marketing work performed by the marketing agencies. These agencies provide their clients with innovative ideas, faster suggestions, and efficient implementation of marketing campaigns.

This third party or the outsourced marketing department gets the work done quicker than the company's in-house marketing department. 

13. Travel

Since organizations often travel, this involves proper people who help in travel booking with reasonable charges, undeniably economically effective and professionally efficient. 

14. Hospitality 

It deals with providing lodging and boarding, proper stay, transportation facilities, and arrangement of local travel for individuals.

15. Catering 

This looks for food and beverages along with the maintenance of proper authentic hygiene. Since everyone has shown tastes and preferences irrespective of being culture-specific, food is an essential parameter for everyone.

Catering

16. Distribution and supply chain 

Courier is a part of supply chain management, widely used for sending bills and important letters. Distribution activities involve transporting a product from one place to another or warehouses to the distributor or customer.

17. Waste management 

Since industries have been polluting the ecological societies and systems, this deals with ensuring that waste generated by the industries is least or non-toxic and, in turn, proves it to be the least harmful to the environment.

18. Security 

This includes the physical presence of a person to secure the premises to protect the data or goods. This is essential in the research and development department, which deals with discovering the latest products.

Protection is needed to avoid information leakage and for personal transactions, including cash transfers.

Security

Factors contributing to the growth of the service sector

1. Government policies

Privatization is the government policy of transforming companies. The transformation, like telecom, airlines, etc., has led to restructuring costs and making the market more focused. This leads to an increase in efficiency and profits. 

2. Social changes

We need to hire individuals to perform tasks that used to be completed by household members, like child care, laundry, and food preparation, as both male and female members work.

These changes are a combination of changing lifestyles like higher income, mobile phones, increased imagination into countries, and a decline in the price of many high technology products made for people.

3. Business Trends

Franchising has become a widespread phenomenon in many industries. 

Licensing of independent entrepreneurs to sell and produce according to tightly specified procedures.

Business Trends

4. Advances

Changes in the service sector result from the integration of communication and telecommunication. Power software enables firms to create databases about customers, predict new trends, and segment the market and new market opportunities.

Sales and customer service personnel get in touch with the creation of wireless networks and the transfer of electronic equipment.

5. Internationalization and Globalization

An expansion on an international level may be driven by the need to respond to existing customers or a sector of new markets. When companies set up operations in other countries, they often deal with few international suppliers. 

The net effect is to increase competition and encourage the transfer of innovation in both process and product from country to country.

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Researched and authored by Parul Gupta | LinkedIn

Reviewed and Edited by Aditya Murarka | LinkedIn

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