Business growth in the knowledge economy has been characterized by exponential growth in the service sector/industry; proliferation in the rate of mergers, acquisitions, and strategic alliances; and the rise of the start-up business model. Examination of each of these characteristics, and the growth strategies of the knowledge economy, will show how they are driven by and based on IC-enabled dynamics.
Diversify into the Business of Service: The High-Growth Sector
In 1999, the service sector generated three-quarters of the U.S. gross domestic product (GDP) and employed 80 percent or more of the workforce. The situation is not much different in other developed economies. Organizations, regardless of the industry they are in, have found it necessary to diversify into providing services and solutions, along with manufactured goods. Whether supplying computers, cars, apparel, or kitchen appliances, the organization will not be able to retain customers for long unless it also provides service. Service can be provided as an ancillary product to the main product lines, or it can be the basis of an independent business for providing solutions to a certain segment of customers. Once organizations master manufacturing and other technical processes, they can grow by offering their expertise in the form of professional/technical service. Employing this strategy has proven to create high growth rates for many mature lines of business.
see also about how to investIt seems to be the only survival/growth strategy for mature lines of business and for traditional industries. Diversification into provision of services, such as customer services, finance, maintenance, training, and consulting, have offered the most profitable growth area for conglomerates and those in mature businesses or industries. This is because knowledge, as a commodity, never really matures. Its continuous change and development through circulation internally and externally makes it both a limitless resource and a renewable product.
General Electric (GE) adopted this strategy early on, and has demonstrated how service provision can offer the highest return to an organization. It was so successful that GE continues to acquire service companies to solidify its market position. In 2000, GE Capital announced that it would acquire Franchise Finance Company for $2.2 billion and merge it with its commercial equipment financing business to become the nation's biggest commercial lending operation. GE's finance leasing business has grown to encompass 90 equipment types, ranging from airplanes to much smaller equipment and machines.
Another example is Boeing. In 2000, Boeing suffered from a plateauing of its profits and growth. The company adopted GE's strategy of diversifying into the service sector, by creating and providing a variety of services to its customers. Boeing started with providing maintenance and repair services for the airplanes it sold to its airline customers. Then, Boeing provided a service of training pilots on the use of the planes it made. With the need for increased security, Boeing now offers security training for pilots to cope with hijacking attempts. With stagnation in the aircraft industry and the pressure from its main competitor, Airbus, diversification into the service industry offered Boeing the best survival and growth strategy.
Even in businesses that are not as mature and where new processes or products are developed on a continuous basis, provision of service is a proven revenue generator. An example from the chemical industry is Dow Chemical (Dow). Dow Contract Manufacturing Services (CMS), a business formed in 1995, offers solutions and advice to manufacturing customers on process development and optimization. CMS is not a totally new business, as it has been providing custom manufacturing solutions for more than 20 years for Dow subsidiaries. Now these solutions are offered to companies outside Dow. After having excelled in a certain manufacturing process, CMS offers its know-how and expertise to customers. In an interview with then Director of Business Excellence, David Near, Mr. Near explained that "this business offers manufacturers state of the art processes as well as technical assistance and advice on which processes are more suitable for the client's needs, market, size, and strategy. Dow still maintains its competitive advantage by developing advanced and improved processes at the same time for its own use."
For Dow and other organizations employing this strategy, the interest lies not only in the financial revenue stream but the intellectual revenue as well. Intellectual revenue is realized by directly or indirectly receiving input from customers on how to improve existing, or develop new, products. Thus, the need to grow through service provision is not merely to implement a successful business strategy but to tap into customers' (suppliers, consumers, and distributors) IC. This provides businesses with a source of competitive advantage that should not be overlooked.
The need to connect with customers as an enhancer and supporter of an organization's IC is better portrayed in the high-tech industry. Even in the high-tech industry with its fierce price wars and quick pace of innovation, service is a source of both growth and stability. Technologically sophisticated customers of the knowledge economy will display higher loyalty rates to an organization if they are served and more involved in the development of the product. This brings us to the second IC-enabled business growth strategy.
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