Although the sectors analysed in the previous chapters are diverse in their characteristics and development (see chapter two), this chapter assesses the commonalities and differences between the sectors, by analysing the strengths, weaknesses, opportunities and threats (SWOT).
7.1 Strengths
The common strength of all service sectors is that they have been able to develop in a way that fits their clients’ needs. In most of the sectors large European companies are among the top players in the world. Larger companies have been able to do this mainly by diversifying their services (notably in technical engineering, cleaning, and design): they do not only provide their core expertise to the client, but also provide other services in the value chain, thereby enabling their clients to focus more on their core activities. The increased multidisciplinarity of the business service providers also makes them less vulnerable in times of crisis.
Smaller firms sometimes also offer multidisciplinary services through co-operating with other companies but their main strength is their close relation with clients. There are also (often small) firms that are highly specialised in certain market niches.
Trust is important for business services, especially if the service is provided in close co-operation which is the case for many of the knowledge-intensive services (co-production). This trust is created by close relations with the client (especially for small firms), by reputation (e.g. the UK and Italian design sector benefit from a strong design reputation, but also individual companies), or by initiatives to promote quality in the sector. With respect to the latter, private security services have for example taken several initiatives for professionalisation (training programmes, development of quality schemes) which can be considered a strength.
A strength of the knowledge intensive sectors is the level of innovation and the role they play in their clients’ innovation.
7.2 Weaknesses
The market structure is considered for many sectors to be a weakness. For most sectors, this is reflected in the prevalence of micro and small companies. These companies are often not able to serve large clients, have limited scope for quality and productivity enhancement, and can also suffer from a lack of business skills. In advertising and market research, this is also an issue but at the same time the increased level of concentration and scale enlargement is considered a
weakness as it results in low competition. In most sectors there is a ‘missing middle’ (see also chapter 2), which is explicitly noted in the technical consulting study: middle-sized companies are too small to provide multidisciplinary services but too large to be a niche player.
Market fragmentation also reduces competition in business services. This can be due to cultural and linguistic barriers (as noted for the design sector), and differences in national legislation and
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regulations (particularly relevant for the private security services), which limits internationalisation of the sector.
For industrial cleaning and private security services the low wage levels and often unfavourable working conditions (e.g. working times outside office hours) are a weakness, making the sector unattractive to work in. Especially in industrial cleaning an additional weakness is the grey market and also the illegal working practices by some service providers, which leads to unfair competition and has negative social consequences.
Although all business services are sensitive to the business cycle, this appears to be a particular problem for advertising and market research and private security services, probably because these have a less direct effect on the production process-production can continue without these services.
For design and engineering consulting services the visibility of the sector and the ability to promote themselves are considered to be disadvantages, as client sectors do not seem to be fully aware of the positive contribution these services can make to their performance.
The limited awareness and ability to protect intellectual property rights has been highlighted in the studies on design and advertising and market research.
7.3 Opportunities
Despite the current economic situation, there are a number of developments that provide opportunities for the sector to expand.
For some sectors, the economic downturn may cause clients to seek cost savings from outsourcing of certain services. They may also prefer to outsource activities to be more flexible in terms of costs. This may be the case in sectors like industrial cleaning and advertising and market research. Especially in less developed and peripheral Member States there seems to be scope for further expansion of the services sectors due to this outsourcing. For example, market penetration of industrial cleaning providers is much lower than in larger Western European Member States, which suggests there is room for catching up. Client companies can also be induced to outsource more activities if service providers can offer specialised services or offer multiple services, a trend already observed over the last years. In addition, new services can be provided. The introduction of evidence based marketing consultancy based on real-time and online market research and consumer involvement possibilities in response to the advent of ICT is a case in point.
The internationalisation and globalisation of clients provides opportunities for larger service providers who are able to provide their services internationally.
For many sectors, technological developments and innovation (have the potential to) increase the value added of the services provided and hence benefit clients. For example the use of social media in market research makes it possible to better target consumers for clients. Digital advertising is increasing and this is for a large part additional demand (rather than replacing existing demand through other types of advertising). Increased co-operation between service providers and universities in engineering consulting create opportunities for innovation and using the acquired knowledge for clients. Technological developments may also alter the way a service is provided, e.g. in industrial cleaning it may be possible to work during the day due to more silent vacuum cleaners. More generally, the increased importance of (non-technological) innovation and
increased awareness of the role of knowledge intensive services especially can play in this respect is increasingly recognised.
Growing attention for and investments in sustainable growth provide opportunities for design services and engineering consulting services, as these sectors can play a role in finding solutions that contribute to sustainability (e.g. energy efficiency in buildings, minimising the amount of material required in product design). But also in other sectors the focus on sustainability offers opportunities, e.g. in industrial cleaning it may involve the use of environmentally friendly products or reduced water use.
There are also opportunities that are more sector specific.
For the creative sectors, opportunities are provided by a deepening of the ‘experience’ economy where authenticity, creativity and the story behind the good or service have gained importance. This has increased the demand for personal luxury goods, and in turn has had positive effects on the available budgets for design and advertising and market research. This also increases the demand for these services in emerging economies, including in Central and Eastern European Member States.
For security, a decline in the public capacity to provide security services leads to outsourcing and the development of public-private partnerships for security provision.
For both design and security, social developments are considered to provide opportunities. E.g. the need for security may increase with developments like the individualisation of society and migration flows. With regards to design the EU’s commitment to tackle societal problem like climate change provides opportunities.
7.4 Threats
Threats to the business services can probably be better called challenges: if companies find a way to deal with these challenges they are likely to be successful in the market.
The current economic situation can be considered a challenge, given the sensitivity of business services to the business cycle. It also leads to reduced access to finance, needed for companies to innovate and/or expand. Another trend that is partly related to the economic situation is found in marketing and advertising: clients are less willing to enter into long-term contractual agreements but prefer to have more flexibility. This can be because of cost reasons and because of a desire to get fresh ideas.
In a number of sectors, competition has increased and is likely to increase further. This can be competition from abroad as well as competition from other sectors, which also seek new markets to counter the economic downturn or that can enter the market because of technological
developments (e.g. ICT companies in digital security). Although sector stakeholders may consider this a threat, it should be noted that this is especially true for the position of the incumbents – at the same time it may also bring benefits to newcomers.
Especially in design services there is increased competition from the emerging Asian economies, where partly as a result of increased local markets for design, the number and quality of designers is increasing. In advertising and market research, EU turnover is growing at a slower pace than in other parts of the world, which is likely to affect the market position of EU companies. Some sectors
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are also affected by the fact that the European industrial base is declining and production and innovation activities are relocated outside Europe. As most services require some kind of proximity of the service providers to their clients, this reduces their market unless they are able to follow their clients abroad by opening offices locally.
Increased competition from other services is taking place in several sectors: e.g. management consulting companies compete with design companies in strategic design, ICT companies focusing on ‘digital security’ with private security providers.
Procurement conditions have also been identified as an area that may affect the sectors. There is often a strong emphasis on the lowest price rather than the best value for money (combination of price and quality), especially in public procurement, and many sector stakeholders indicate that this affects the quality of the services they provide and/or the level of innovation in their services. The extent to which this is really the case is difficult to judge. For clients a focus on price may be a valid argument as cost considerations may be the primary reason to outsource certain services
(especially in areas like industrial cleaning). In addition, there has been extensive discussion in literature on the trade-off between lower prices and innovation, but the common idea is that competition may also induce innovation (especially in the absence of scale economies), e.g. as witnessed in the diversification of services provided by some companies over the last years.
With respect to labour, especially the industrial cleaning and private security sectors face a challenge in attracting and retaining employees, mainly as a result of the relatively low wage levels, the part-time nature of the work, and the poor image of the sector. Demographic developments may exacerbate the problem with an expected decline in the available workforce in the near future. This is closely related to the need for professionalisation of these sectors through training and career development.
Also in engineering consulting a labour shortage may affect the sector: there is a lack of certain types of engineers and in certain countries also a skills shortage in STEM (Science, Education, Technology and Math). In the design industry there is no shortage of labour and in some markets even an oversupply of design graduates. Nevertheless, there appears to be a growing mismatch in education and required skills as the current education still focuses on design as a ‘technical’ subject and pays less attention to developments like ‘design thinking’ which requires a more diverse set of skills.
In a number of sectors there are other specific issues that limit the scope for expansion. For example, in private security services current public attitudes and regulations limit the use of private security services in sensitive areas. In design and engineering consulting there is too little
knowledge about the value added of design in client companies and this hampers the development of a good policy framework, e.g. to promote the sector better.