The tertiary sector of industry, also called the service sector or the service industry, is one of the three main industrial categories of a developed economy, the others being the secondary industry (manufacturing and primary goods production such as agriculture), and primary industry (extraction such as mining and fishing).
The tertiary sector of industry involves the provision of services to other businesses as well as final consumers. Services may involve the transport, distribution and sale of goods from producer to a consumer as may happen in wholesaling and retailing, or may involve the provision of a service, such as in tourism or entertainment. The goods may be transformed in the process of providing the service, as happens in the restaurant industry. There may not even be any goods involved, as in the sex industry. However the focus is on people interacting with people and serving the customer rather than transforming physical goods. For the last 20 years there has been a substantial shift from the other two industry sectors to the Tertiary Sector in industrialised countries.
The service sector
The service sector consists of the "soft" parts of the economy such as insurance, tourism, banking, retail and education. Others include:
Public utilities are often considered part of the tertiary sector as they provide services to people, while creating the utility's infrastructure is often considered part of the secondary sector, even though the same business may be involved in both aspects of the operation.
Economies tend to follow a developmental progression that takes them from a heavy reliance on agriculture, toward the development of industry (e.g. automobiles, textiles, shipbuilding, steel, mining) and finally toward a more service based structure. Whereas the first economy to follow this path in the modern world was the United Kingdom, the speed at which other economies have later made the transition to service-based, sometimes called post-industrial, has accelerated over time.
The term service economy, in contrast, refers to a model wherein as much economic activity as possible is treated as a service. For example IBM treats its business as a service business. Although it still manufactures high-end computers, it sees the physical goods as a small part of the "business solutions" industry. They have found that the price elasticity of demand for "business solutions" is much less elastic than for hardware. There has been a corresponding shift to a subscription pricing model. Rather than receiving a single payment for a piece of manufactured equipment,many manufacturers are now receiving a steady stream of revenue for ongoing contracts.
Manufacturing tends to be more open to international trade and competition than services. As a result, there has been a tendency for the first economies to industrialize to come under competitive attack by those seeking to industrialize later, e.g. because production, especially labour, costs are lower in those industrializing later. The resultant shrinkage of manufacturing in the leading economies might explain their growing reliance on the service sector.
Issues for service providers
Service providers face obstacles selling services that goods-sellers rarely face. Services are not tangible, making it difficult for potential customers to understand what they will receive and what value it will hold for them. Indeed some, such as consulting and investment services, offer no guarantees of the value for price paid.
Since the quality of most services depends largely on the quality of the individuals providing the services, it is true that "people costs" are a high component of service costs. Whereas a manufacturer may use technology, simplification, and other techniques to lower the cost of goods sold, the service provider often faces an unrelenting pattern of increasing costs.
Differentiation is often difficult. How does one choose one investment advisor over another, since they (and hotel providers, leisure companies, consultants, and others) often seem to provide identical services? Charging a premium for services is usually an option only for the most established firms, who charge extra based upon brand recognition.
Last updated: 05-13-2005 07:56:04