pet.jpgGet ready for China's coming services revolution. The services sector now accounts for 70% to 80% of the west's economy and it required 25 years for the transformation to take place. China's own transition from manufacturing to service may well be even faster.

This services revolution was a key topic at the Fourth Annual Executive Forum held recently for students of the Shanghai-based MBA programme of the WP Carey School of Business.

While China's rapid rise as an export-oriented manufacturing nation has been formidable, the next stage of innovation will involve a move from a primarily manufacturing economy to a more service-oriented one.

Robert Mittelstaedt, dean of the WP Carey business school, argued that history has shown that the manufacturing cost advantages that China currently enjoys are not sustained very long, and so it will need to look for ways to “create value beyond manufacturing.”

China's government has apparently come to the same realisation. It issued an innovation initiative more than a year ago, citing the need for creative thinking in everything from steel processing to speciality retail boutiques.

MBA students love case studies and the one chosen to illustrate this services thesis was PetSmart, the US-based pet store chain.

PetSmart began operating in 1987 and it originally adopted the “category killer” format, using a large variety and low prices to move products. For a while, the strategy worked.  But the formula began to wear thin and a decade later the company was in need of a complete turn-around.

Under Philip Francis, current chairman and chief executive officer of PetSmart, the company was transformed from a low-cost retailer to a speciality store that downplays price and instead seeks to attract a more affluent and aspirational customer base.

PetSmart made the stores more attractive to visit. Most importantly, it added services to what had been a product-driven business model. PetSmart began to offer essential services for pampered pooches, including dog grooming, obedience training, day camps and boarding in high-end “pet hotels”.

The moral of the story is that as incomes rise, consumers start to care about more than just price. The more onerous or less enjoyable tasks get outsourced to others, and this trend will happen in China too. “As you look ahead at the rising affluence in China, you see that time is becoming more important to people,” says Francis.

The second case presented was that of a western “services” business which already has a strong presence in China: Microsoft. At first sight, Microsoft seems to fit more in the “category killer” camp rather than the services sector. But Microsoft is taking a much more sophisticated and long-term view of the China than is often assumed.

For, the service Microsoft wants to bring to China is innovation.

For example, Shanghai is home to the only Microsoft campus that comes close in size to that of its Seattle home and it could one day play an equally important role. To this end, Microsoft hopes to recruit a large number of skilled Chinese professionals to fill it and create the same Seattle-style innovation culture. Microsoft's Chinese offices host monthly “Innovation Days” for example, during which they can even participate in global conversations with Bill Gates himself.

Innovation is often held to be the key to success in the manufacturing sector, but it could play an equally important role in developing China's services economy.

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