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06 October
Integration of Products
and Services
Taking the Single Market into the 21 st Century
Three factors combine to reshape the foundations of the modern economy. First, the digital revolution
dramatically augments the reach, flexibility and agility of companies, big and small, creating new economic
actors, such as ‘micro-multinationals’: technology-intensive companies that are born global. Second,
international competition draws millions of new workers and consumers into what is increasingly a ‘race
to the top’, rather than a ‘race to the bottom’, with emerging countries becoming champions of innovation,
engineering ingenuity and skills acquisition. Third, cultural and structural trends change the nature of socio-
economic interactions by transforming people’s aspirations and preferences, such as the expectation of
instant gratification offered by one-click services or the seamless interoperability between products and
electronic devices.
EPSC Strategic Notes are analytical papers on topics chosen by the President of the European Commission. They are produced by the European Political
Strategy Centre (EPSC), the European Commission’s in-house think tank.
Disclaimer
The views expressed in the EPSC Strategic Notes series are those of the authors and do not necessarily correspond to those of the European Commission.
1
EPSC Strategic Notes
Future historians may well look at our time as equally determinant in redesigning the economic rules
of the game as the 19th century industrial revolution. The consumer and user is ever more central to
the new economy, by virtue of being more active and responsive, hence shaping the manufacturing
value chain and leading the way towards tailor-made, personalised ‘production on demand’ and the
emergence of hyperconnected services. If the industrial age was marked by standardisation, the
digital era is about customisation. These tectonic shifts go hand in hand with other developments of
seismic proportions: the blurring distinction between products and services; the birth of the ‘prosumer’
who combines elements of consumption and production; and the growing importance of investments in
intangibles – such as software or design - which increasingly outstrip investments in tangibles - such as
machines or buildings - in the leading economies.
1995 2011
Sweden
India
Figure 1: Share of Manufacturing and United States
Slovenia
Services in Total Business R&D, 2012 Estonia
100 Russia
Cyprus
Manufacturing Services Luxembourg
Norway
Czech Republic
80 Greece
Lithuania
Germany
Slovakia
Latvia
60 Italy
Malta
France
Poland
40 Portugal
Ireland
Belgium
Denmark
United Kingdom
20 Brazil
Finland
Romania
Bulgaria
0 Austria
China
France
Czech Republic
Belgium
Italy
Austria
Finland
United Kingdom
Slovenia
Sweden
Germany
Hungary
Denmark
Netherlands
Spain
Slovak Republic
Portugal
Poland
Norway
Estonia
Spain
Hungary
Croatia
Netherlands
Iceland
Switzerland
Source: STAN Research and Development Expenditure in Industry
0 5 10 15 20 25 30 35 40 45
Database, OECD.
Source: Trade in Value Added (TiVA) 2015 Database, OECD
With the blurring line between goods and services, The slow adoption and use of digital technologies has
international and national, on- and offline, an entirely been a drag on Europe’s productivity growth, not to
new economic paradigm is emerging, powered by three mention its ability to innovate and move up the global
transformative developments. value chain. And it has impacted manufacturing and
services alike, particularly the integrated, high value-
Technological Revolution added segment. But the EU is starting to address this
challenge: completing the Digital Single Market will
The internet and digital communications are general incentivise technology adoption through higher network
purpose technologies, transforming economies as effects, while prioritising areas where competitive
profoundly as the printing press, steam engine or advantages can still be reaped, such as Industry 4.0. At
electricity have done in the past. Against this backdrop, the same time, formulating a unified data framework
it is important to understand that there is no such for a market of half a billion consumers can set a global
thing as a ‘digital economy’ – the economy standard, provided it is user-friendly and workable.
is digital. Far from being the exclusive domain of Speed of delivery and implementation is of utmost
technology startups, every company, particularly in importance if Europe is to regain lost ground, and
traditional industries, needs to prepare for digitisation. the high-end nexus of integrated manufacturing and
Yet, on balance, European companies have been slow to services is of particular importance for future growth,
adapt: 41% of enterprises are still classifiable as ‘non- sustained innovation and quality jobs.
digital’ – meaning they do not use digital technologies
and have no digital strategy – while only 2% take full
advantage of digital opportunities.3
Source: United Nations Statistics Division These three factors – digitisation, globalisation and
socio-cultural transformations – combine to produce a
Behavioural and Structural Change more versatile, creative and interactive economy
where value increasingly lies in the interoperability
The rationale of the emerging new economy is greatly between products and services. Combining products and
influenced by ongoing cultural and structural shifts, some services has become the new normal as design, marketing,
of which are induced by technology, while others result insurance and after-sale servicing are inseparable parts
from broader societal trends. Their effect is profound, of the offering that the consumer demands and expects.
from the changing nature of work and its growing fluidity As a result, manufacturing firms have incorporated strong
to the emergence of a sharing economy. In particular, the service components into the way they operate while
consumer and user perspectives – already central to services firms have sought to benefit from economies of
current economic relations – will become dominant scale, traditionally more characteristic of the manufacturing
even in business-to-business transactions. world. Business models that contribute to the integration
of products and services are increasingly crucial for
Products are increasingly tailored to individual competitiveness and productivity (Figure 4).
consumers’ needs and desires through processes such
as ‘additive manufacturing’. Consumers will move from
being objects of economic exchanges to active agents.
This trend is already underway, as exemplified by the
Implications:
growing importance of ‘prosumers’. To illustrate, the
energy system is shifting from a centralised, supply-
Disrupt or Be Distrupted
side approach to a demand-oriented model. New
digital products and technologies are progressively From Static to Interactive
modernising the energy system by easing the way
The fusion of product and service markets will continue
for a novel nexus between production, transportation, to have a profound impact. The world economy will
distribution and consumption. Increasingly, energy will move from static products and services to smart
become a service and not just a supplied commodity, and interactive ones. This means that new ways need
providing new opportunities for energy service to be explored with respect to the design and labelling
providers and aggregators, and giving life to new digital of products. Products are becoming ‘smarter’, more
products, such as smart meters. These developments capable of autonomously addressing and responding
will transform the business model of energy utilities, to evolving consumers’ needs. ‘Smart’ coffee machines,
bringing new, innovative and disruptive companies to for example, have built-in sensors that automatically
the fore.
signal to the local brand store the need for repair. The
user therefore does not only purchase a product – a
coffee machine – but also a service, the promise of
maintenance whenever necessary.
4 EPSC Strategic Notes - Integration of Products and Services
EPSC Strategic Notes
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
Republic
Ireland
Spain
Greece
Italy
United States
Slovenia
Denmark
Finland
Iceland
Switzerland
Estonia
Hungary Czech
Germany
Belgium
Austria
United Kingdom
Canada
Australia
Norway
Portugal
Slovak Republic
Notes
1. OECD Publishing, ‘Manufacturing or Services – That is (not) the 6. OECD Publishing, ‘Manufacturing or Services – That is (not) the
Question’, Policy Paper No. 19. Question’, Policy Paper No. 19.
2. Nordas and Kim, ‘The Role of Services in Competitiveness in 7. ‘Rede von Bundeskanzlerin Merkel anlässlich des Tags des
Manufacturing’, OECD Trade Policy Papers, 2013. deutschen Familienunternehmens am 12. June 2015.’ http://www.
3. European Commission, Enterprise and Industry, ‘Digital bundeskanzlerin.de/Content/DE/Rede/2015/06/2015-06-15-merkel-
Entrepreneurship’, http://ec.europa.eu/enterprise/sectors/ict/digital- familienunternehmen.html
enterpreneurship/index_en.htm 8. McKinsey Global Institute, ‘Manufacturing the Future: The Next Era
4. Cited in Gapper, John, ‘Software is steering the car industry’, of Global Growth and Innovation’, November 2012.
Financial Times, 18 February 2015. 9. Financial Times, ‘UK’s official statistics out of date, says Bean‘
5. Holslag, Jonathan, ‘Unravelling Harmony: How Distorted Trade. August 5, 2015. http://www.ft.com/intl/cms/s/0/69b31022-3ac1-
Imperils the Sino-European Partnership’, Journal of World Trade, 11e5-bbd1-b37bc06f590c.html#axzz3k1rHpBXO
April 2012.