Service Industry PDF

“West Texas Intermediate” (WTI) oil is another benchmark used by oil markets, representing oil produced in the U.S. It is based on oil at a large tank and pipeline hub in Cushing, Oklahoma. Like Brent oil, WTI is priced as a light oil, but it doesn’t have the same global reach. One reason is that, w...

“West Texas Intermediate” (WTI) oil is another benchmark used by oil markets, representing oil produced in the U.S. It is based on oil at a large tank and pipeline hub in Cushing, Oklahoma. Like Brent oil, WTI is priced as a light oil, but it doesn’t have the same global reach. One reason is that, with few exceptions, the U.S. prohibits the export of crude oil. Another reason is that WTI supplies are produced in landlocked areas, and nowadays need to be transported to the coast, where most refineries are located. An important benchmark price in Canada is known as Western Canada Select (WCS). WCS rep-resents a stream of conventional heavy (high viscosity) oil mixed with some blends of bitumen and diluents. To break down prices further, the theoretical price of bitumen is determined once you deduct the transportation costs. (This includes the diluent cost used to make the bitumen flow in the pipeline and the pipeline cost.) The resulting price is known as the “bitumen netback”. Producers’ revenues and royalties are based on the “bitumen netback” price. The amount of value depends on the price we receive for our resources, and what it costs to produce and transport them. The lower the prices we receive for our resources, the less value there is. And the prices we actually receive for our oil products are lower than the “Brent” and “WTI” prices typically quoted in business reports. The oil Alberta produces is simply of a lower quality than Brent or WTI, and is located further away from customers. The easier it is to move our oil to refineries around the world, the less the price discounts will be. LECTURE 11. THE SERVICE INDUSTRY. The service economy is many things, ranging from fast food, to heart surgery to consulting, there are different definitions, but it includes things like education, health care, tourism and finance. Services are intangible. Advice to experience, to attention. Currently, the service sector is 50% of all employment, and 67% of global GDP (gross domestic product). In Canada, half of the population worked in agriculture in 1867, down to only 4% in 1987. In 1911, two thirds of workers produced goods and one third worked in the service sector, by 1987 that had reversed. It is easier to boost productivity by making things more efficient than it is to make services more productive. It might also be easier to trade those goods and products. Many believed that services were not important for developing countries to focus on, but that's not a longer widely held view. The reason is because technology changes things. It is easier every year to trade services and they’re likely to become more important with time, not less. From manufacturing to service: Long history of the service sector. Role in industrialization. Ties to urbanization. Even in the pre-industrial economies we’ve always had services like education, healthcare or trade, and even the services were often concentrated in cities, but it tended to be a small part of an economy devoted to agriculture and raw material. For the most part beginning in places like Great Britain and the U.S, there was a shift from farming to industrialization with the Industrial Revolution. As more people lived in cities, demand for all kinds of services increased. Beginning in the 1950s and taking place in the 1970s, there was a process of deindustrialization, where industry made up a smaller portion of the economy. Deindustrialization is the flip side of the rise of the service sector. Deindustrialization: When a country or region experiences a decline in its manufacturing industries, such as factories that produce cars, textiles, or steel. New technology like mechanization and mass production made farming and manufacturing much more productive and freed up labor to work elsewhere, especially as demand for those who outpaced supply. Example: Detroit, Detroit is famous as the birthplace of the automobile industry and the big three automakers: Ford, Chrysler and General Motors. It is also famous as the poster child for deindustrialization. But perhaps it's equally as famous as the poster child for deindustrialization. And the story here, the big theme is really about depopulation as a result. In 1908, years before the model T was introduced, Detroit had a population of 285,000 people. By 1950 just 50 years later, the heyday of auto manufacturing, it had grown to 1.8 million making it big enough for fourth largest in the US. By 2010, it had declined to about 700,000. The common story that's often told here is that in the seventies and eighties, U.S. automakers didn't pay attention to competition from Japan like Toyota or Honda and that's true. But already in the 1940s and 1950s, the auto industry was already seeing job losses, in line when manufacturing more generally began to slow down. Detroit is also a clear if painful example of costs associated with industrialization with widespread poverty, inequality and other social issues that culminated with the city itself going bankrupt in 2013. As Detroit was with the cars, Pittsburgh was the steel. In 1875 Andrew Carnegie opened Edgar Thomson Works, which later opened the Steel Corporation, like Detroit the city’s population between 1870 and 1910 jumped from 80,000 to 530,000. That same year, in 1910 Pittsburgh was manufacturing 60% of America’s steel and the U.S. Steel Corporation which Carnegie owned, was once the largest private company on the entire planet. For reasons like the 1970s recession, the oil crisis right around then Pittsburgh began to rapidly lose steel jobs. A process that accelerated in the 1980s, by the end of the decade, 75% of Pittsburgh’s steel making capacity was closed. Rapid deindustrialization. Between 1980 and 1983 approximately 95,000 manufacturing jobs were cut from a labor force of 1 million. Unemployment spiked to 27% in some places and by 1990 half of the population of the Pittsburgh region disappeared. Older population remained and the healthcare system started to develop over the course of the 1980s and the 1990s, due to the need of the older people who were still in Pittsburgh. Even as the regional economy declined steadily as hospitals and nursing homes expanded, they usually hired women who were seeking to make up for the lost wages of their husbands. In 1980 healthcare surpassed steel as the largest employer in the area. In 2010, healthcare grew as large as steel had been in its 1950s peak. The biggest difference between the steel and healthcare industries is that where much of the steel industry was unionized, stable and fairly well paid full time jobs, healthcare jobs tended to be much more precarious, often part-time, generally non-union and typically not paid much above the minimum wage. This reflects part of the rise of the surplus economy which is a large trend of the care economy which is often poorly paid work performed by women. Pittsburgh is an example of the link between industrialization and the service sector, but also what is often lost and the social effects that can come with the transition. Interestingly, Pittsburgh in recent decades has once again grown. Its population in large part by being a hub for service sector industries like health care, but also education and finance. Global cities in the 1980s: One common feature of service dominated economies is that the returns are often u shaped rather than bell curved. So instead of a large middle section of the bell curve, service work tends to be either very well paid or not well paid at all. So in Pittsburgh, as we saw while many care workers didn't make much. There were some doctors and some hospital administrators who were very high earners and the high earning side of that curve is the focus of our last example. The rise of New York, London and Tokyo as what came to be known as global cities in the 1980s, they weren't the only three, but they were the big three at the time in each of these countries, the fastest growing sectors in the economies in the 1980s were advanced services like law, accounting and finance. As phone faxes, the early internet made communication easier and the world economy became significantly more complex. Most of the decisions about investment, production and trade came to be made in global cities where face to face interactions among executives, lawyers, consultants and so on are made possible. As multinational corporations grew and expanded over multiple different countries, a group of centralized and specialized workers servicing those firms became necessary. Much like in Pittsburgh, there was not much in the middle besides expert knowledge, workers, global cities needed low wage workers to clean, cook, provide child care and so on. Another big change that came about with this is that New York might have once looked to the rest of the United States or London to the rest of the United Kingdom. Globalization by this point had taken effect with such force that these global cities tended to look towards one another in many ways, culturally, but also in economic terms, where they tended to be more affected by the global economy and each other than by the national economy of the country they were in. The past, present and future of offshoring: Offshoring: “The location of productive facilities outside a firm’s home market, for the purpose of making goods to be sold in that home market.” Ex: A company producing something outside of Canada for the product to be sold inside of Canada. Different, but related to outsourcing. Outsourcing occurs when a company purchases goods or services from an independent foreign supplier that could have been procured domestically. The primary difference lies in corporate control. Offshoring involves a company establishing and managing its own facilities in a foreign location, while outsourcing relies on an external supplier in that location. In practice, outsourcing and offshoring often overlap with one another and one can lead to another and vice versa. In some cases both practices overlap within the same industry or in the same area. In one way that it differs from FDI (Foreign Direct Investment) is that offshores facilities aren’t built to produce goods for sale in the country where they are located. Instead, the goods are typically part of a global production process where offshore production, distribution and sales are often managed entirely within a single multinational enterprise rather than through transactions between independent parties. Offshoring of banking, finance and the creation of tax havens. This was most famous in Panama, where the Panama papers leak in 2016 was a huge scandal, in business terms it's quite different from the offshoring production, but the two came about for very similar reasons. So how are they related? The first is that manufacturing jobs moved offshore to places with lower labor costs, advanced economies experienced deindustrialization, more service sector jobs and economies reoriented towards things like finance, healthcare, education and IT. The second is that the competitive pressures created by offshoring and manufacturing were also applied to services, so companies would outsource things like non core functions of customer service, it supported payroll processing and things like that to reduce costs. How did offshoring become a thing? Institutions Technology Communications Starting in the 1500s, Europeans began to grow and ship many things from the Americas in Asia, like sugar, from the Caribbean, cotton from North America or later on, oil from the Middle East. They did that because they couldn’t produce those commodities at home, due to things like climate or soil. There are some differences on why it is not all the same. Offshoring really took off after World War II and it was driven by a combination of several factors and it first took off in the U.S. The first of these is institutions, so the general agreement on tariffs and trade facilitated reductions in trade barriers. The IMF promoted currency stability and encouraged international capital flows. The World Bank supported economic development in countries of the Global South, the end of Bretton Woods. Technology also played a significant role in improving transportation and communications. So, in transportation post-war improvements in shipping, things like better ship design, streamlined port logistics, air travel with jet planes and radar overall created a faster and more efficient global freight network. In communications, advances in telecommunications made managing overseas operations easier. Improvements in undersea cables, teletype technology, direct dialing and transatlantic telephone cables reduced communication costs and increased reliability. By the 1960s, satellite technology further expanded international phone networks. It all laid the groundwork for businesses to manage operations across borders more effectively and efficiently and enabling production to spread across the globe. Offshoring electronics production: U.S. companies offshoring production in East Asia beginning in the 1960s. Japan led the way to this, starting with consumer electronics like radios and semiconductors. Japanese companies began setting up factories in East Asia, particularly Hong Kong, later in Taiwan where wages were much lower than the U.S. Sony and Sanyo took advantage of British Colonial trade preferences to export products to the U.S. by millions. By the mid 1960s other countries followed, with Taiwanese companies assembling radios from components made from Japan in Japan. For example, transair, a small american radio maker set up a factory in Hong Kong in 1962 and quickly expanded as the success of offshoring grew. Other U.S. Electronics companies followed suit setting up plants in other low wage countries. This shift to offshore manufacturing became a standard practice in many electronic sectors by the 1970s. The semiconductor industry, which started offshoring in 1963 expanded rapidly with many American semiconductor companies setting up operations in East Asia overall. By the 1970s, a clear global production model had been established with high tech tasks like design and fabrication remaining in developed countries. Over time, more and more complex tasks like testing some amount of design work moved offshore to countries like Taiwan, South Korea and Singapore. By the 1980s, companies had shifted to more complex international production strategies. While some still relied on traditional methods like backward integration and establishing facilities in low wage countries, many firms embraced something called global production. What this meant was a strategy of spreading different stages of production across multiple countries. Often based on that country's market conditions, their politics, their stability and the technology available in that country. The goal overall was to make the production process more efficient by placing each phase in the most suitable location for it. It resulted in this disbursement of the process. It's not always so simple or so easy as just offshoring production, spreading it out and lowering costs. There's a tough choice to be made. Should they run one big global production system or should they keep separate factories for different markets? A global system sounds very efficient but it can also be fragile. If something goes wrong in one part of the process, like a strike or a plant breakdown, it can mess up the whole thing. Plus even though paying low wages can boost profits, splitting up production stages can cause inefficiencies. And it's really hard to coordinate. It's also very difficult to do offshore research and development. Especially when products are new. Most high value things like research and development tend to stay in the home country as we see more and more of it is being done abroad to find the best talent, but it's still mostly done at home. Another factor is that many companies prefer being close to their customers. Some companies go abroad not to find cheap labor, but to tap into specific skills or technology that aren't available at home. There's also more and more focus on custom products and variety instead of mass producing the same thing. And when quality and customization matters, labor costs aren't always the biggest factor in choosing where to set up shop. And again, you see another issue with the idea of spreading production around. It sounds great to lower labor costs, but it can make other things more expensive. Like it makes it harder to use the same technology in every factory to be consistent. “Global production in the 1980s”. Effects of offshoring: It is a very controversial practice. Many critics of the practice say that companies use this practice to cut costs by lowering wages, weakening unions and avoiding all kinds of regulations. Some countries like Taiwan and Hong Kong have benefited from offshoring with higher wages, but often at the cost of poor working conditions. The idea behind global production was that higher skilled jobs would stay in rich nations and lower skilled jobs in poorer countries. But that didn't always happen. In reality, most offshoring has only happened in a few countries and many developing nations have failed to benefit from this. The US lost millions of manufacturing jobs. Some wages rose for skilled workers but inequality has increased overall. Offshore Finance: De Beers case, 1906. De Beers operated globally, using offshoring strategies to maintain its monopoly in the diamond market. In the early 20th century, including the 1906 case, the company controlled the supply of diamonds by consolidating mining operations in South Africa and selling diamonds through international distribution channels. IMF definition of an Offshore Financial Center: “A country or jurisdiction that provides financial services to nonresidents on a scale that is incommensurate with the size and the financing of its domestic economy”. Around 8-10% of global GDP is held offshore. Offshoring finance essentially means moving banking out of the control and regulation of the country it was in. It was often for minimizing or avoiding taxes and escaping regulations on any number of things. One formal word for this, the way it's organized by tax is tax neutral. Meaning that let's say the Cayman Islands that when money goes there and then leaves that country doesn't levy any corporation taxes, no duties or any withholding taxes as the money goes out. Because this gets complicated in practice to say who is, which country is an offshore financial center. Example: Panama, where it is not a huge country but it is a huge financial center, mostly to service foreign money, not domestic. What are the effects of offshoring finance? It is a very controversial practice. It has happened to cause losing tax revenue to governments around the world, because one advantage of offshore banking is often secrecy. One estimate for the U.S. is that 55% of U.S. foreign corporate profits are earned in low tax countries with the help of accounting maneuverings, resulting in 130 billion dollars in lost corporate income tax each year. Worldwide is something like 500-600 billion. Offshore finance most infamously controversy sparked in 2016 with the Panama Papers which was millions of leaked documents from a Panamanian law firm that serviced this industry, and it showed how all kinds of wealthy individuals, corporations and political figures worldwide used these offshore entities to hide assets, evade taxes and launder money. There was an investigation that implicated over 140 politicians and public officials from 50 countries and the result was a global debate on financial transparency and tax justice. How are the two “offshores” related? Technology/communications Timing End of Bretton Woods Decolonization Offshoring is about moving work or production to another country. An offshore finance center is about managing finances in a favorable jurisdiction, often for tax or regulatory benefits. They’re connected because companies might use offshore finance centers as part of broader offshoring strategies, but the two concepts serve distinct goals. Both of these offshoring practices really accelerated at the same time in the 1970s with the end of the Bretton Woods system of currency controls, as well as the end of a process of decolonization in much of Africa and Asia. Where De Beers had simply moved their directors headquarters to South Africa which was British territory at the time. In the 1970s, few imperial possessions remained and companies found new places like the Channel islands that were very small former possessions to serve a similar purpose. The other connection is that many people from newly independent countries were now seeking tax havens of their own. Both versions of offshoring were affected by the same currents of history. The service sector – The World Counts (Article 1): $61 trillion worth of transport, insurance, restaurant visits, maintenance and repairs etc. is produced globally every year - that’s $116 million every minute. The service (or tertiary) sector of the economy is characterised by “non-material” activities such as transportation, a haircut, or hotel and restaurant visits. Sometimes also called "intangible goods". The service sector is over twice as big as the industrial and manufacturing sectors combined and makes up 63.6% of the global economy. The US has by far the largest service sector in the world and is accountable for 30% of the total global output of the sector! This is more than the next four countries combined (China, Japan, Germany, UK). The 5 I’s: Intangibility: Services are not manufactured and cannot be transported. No physical goods are transferred from the seller to the buyer. Inseparability: Delivery and consumption of a service cannot be split up. They are produced and consumed at the same time (you cannot save a haircut for later). Inventory: Services cannot be stored for future use. Inconsistency: Each service is unique (two haircuts are never exactly the same). Involvement: Both the service provider and the service consumer must participate in the service provision. Even though services involve economic activity that does not result in any physical ownership, supplying and consuming services can have serious social and environmental consequences. The tourism industry, for example, is a heavy polluter and degrades local natural resources. Another example is transportation that makes up over 14 percent of global greenhouse gas emissions. The largest cruise ships carrying over 7,000 people can in one week generate over 200,000 gallons (10 small swimming pools) of human sewage and 1 million gallons (40 more swimming pools) of greywater (water from sinks, baths, showers, laundry and galleys). Often this waste is dumped directly into our oceans. And this is just from one ship. The world has more than 220 large cruise ships carrying 25 million passengers every year. Because it’s cheap, cruise ships burn large amounts of wastes at sea. This includes hazardous wastes such as oil, sewage sludge, and biohazardous waste. It also includes solid wastes such as plastics, paper, metal, glass, and food. An estimated 84,000 people die worldwide each year as a result of under-regulated shipping air emissions. The average bunker fuel used by cruise ships has almost 2,000 times the sulfur content of the fuel used by buses, trucks, and cars on land. As a result ONE single ship can cause as much smog-producing pollution as 350,000 cars! Traditionally, the service sector included activities such as transportation, haircuts, hotels & restaurants and so on. It still does, of course, but the so-called quaternary and quinary (sub)sectors now make up the main part of the service economy. The quaternary sector consists of the knowledge-based part of the economy including information technology, consultation services, research & development, education, financial services, design, culture, media & entertainment and so forth. If seen as a sector, quaternary activities make up the largest sector of the economy - at least in developed countries. Already in 1985 over 40 percent of all activity in the US economy was estimated to derive from knowledge based activities. The quaternary sector is knowledge-based and its activities require a high degree of education. People in this field rely on their intelligence to provide highly specialised services and develop and make use of advanced technologies. It includes programmers, designers, entrepreneurs, consultants, scientists, lawyers, and researchers. The quinary sector is much smaller than the quaternary sector and is made up of activities that involve top-level decision making. The quinary sector mainly consists of CEOs and top-executives from Government. Contrary to research and consultancy services who provide recommendations, the activities of the quinary sector involves taking final far-reaching decisions/actions affecting a large number of people, entire countries or even the whole world. People working in this industry are sometimes referred to as "gold collar" professionals. In Australia, the two sectors have been estimated to make up 59% of the economy in 2015 (quaternary 47.6 % and quinary 11.6 %). Get Ready for the Next Supply Disruption – Article 2 (MITSloan). THE COVID-19 PANDEMIC HAS USHERED in an era of supply chain disruption and unpredictability that has severely challenged many companies' planning and processes, and revealed how far prevailing practices are from the ideal. The problem with crisis-driven supply chain initiatives that are focused on protocols and tools is that they are only as effective as the ability of the organization to use them. Having that ability requires the systematic development of capabilities to manage supply disruptions. These capabilities are combinations of people, policies, processes, and technologies that ensure companies can not only plan for and respond to known business and operating risks but also - and more importantly - manage unknown-but-knowable threats and their associated consequences. We've identified six capabilities that fill this bill: Anticipate, Diagnose, Detect, Activate resources for, Protect against, and Track threats. Together, they constitute the ADDAPT framework, which is based on our research into how public agencies and private enterprises experience and respond to supply disruptions like the COVID-19 pandemic. The ADDAPT capabilities help companies understand the causes of supply disruptions and their immediate and long-term effects. Executives at Loblaw, like the leaders in many major organizations, became aware of COVID-19 through the Canadian news media in January 2020 and reacted to it as a health concern. The company did not recognize COVID-19 as an operating concern and a potential supply disruption trigger until early March 2020. To manage the supply chain disruption, the task force needed to activate resources on an exceptional basis, often manually overriding the demand management system to reset order volumes and stocking level targets for stores and distribution centers. Trucks were rerouted and volumes increased through greater coordination with carriers, but the storage and picking capacity of Loblaw's distribution centers remained a constant constraint on product volumes and flow paths. Like many companies dealing with COVID19, Loblaw had internal performance metrics (such as missed or delayed shipments) that tracked the effects of supply disruption. But it did not have the dedicated people, processes, and systems to monitor evolving external conditions, which would have enabled not only an early warning but also faster mitigation during the pandemic. For instance, pinging suppliers about their operating capacity and sourcing uncertainties to anticipate delivery shortages at distribution centers was not a routine practice at the company, but it became one during COVID-19. The ADDAPT Framework The framework is built on the presumption that the number of known and unknown-but-knowable risks that can interrupt the planned flow of goods in the absence of mitigation plans is infinitely large. These risks are potential supply disruption triggers, and they vary from routine problems, such as output defects and equipment breakdowns, to malicious acts, such as cargo thefts and terrorist attacks, and acts of God, such as earthquakes and hurricanes. Importantly, the ADDAPT framework encourages companies to invest in describing unknown risks and, by doing so, transitioning unknown risks so that they become unknown but knowable threats. This may take organizations out of their comfort zones in that they might need to engage with external experts and viewpoints that pose uncomfortable questions that begin with phrases like "What if...?" or "Have you thought about...?" The six ADDAPT capabilities are interrelated. Together, they make supply chains more resilient by conditioning companies to anticipate, diagnose, detect, activate resources for, protect against, and track both known and unknown-but-knowable threats. In the best-case scenario, they enable companies to avoid interruptions in physical flows of products. In a suboptimal scenario, they help companies experiencing supply disruptions to recover faster and limit their losses. Companies that master the capabilities outlined in the ADDAPT framework will have the best chance of weathering future supply disruptions with minimal impact on their critical customer, employee, and supplier relationships.