Archive for February, 2009

Changing the dominant logic

Monday, February 9th, 2009

Dominant logic is a mind set or a world view or conceptualization of the business and the administrative tools to accomplish goals and make decisions in that business. It is stored as a shared cognitive map among the dominant coalition. It is expressed as a learned, problem solving behavior. The dominant logic can be considered as both a knowledge structure and set of management process. Dominant logic is defined as the way in which managers conceptualize the business and make critical resource allocation decisions. The dominant logic of an organization filters and interprets information from environment, attenuates complexity and guides strategies, systems and behavior of the organization .

The dominant logic that a enterprise utilize is difficult to change, like the shift from the Ptolemaic view of the universe (earth-centered) to the Copernican view of the universe (sun-centered). As we mentioned in our previous post, the economy is shifting from goods to service. We are used to have a goods view of the economy, looking from the glass of a Goods-Dominant (G-D) logic. Now a service mindset called Service-Dominant (S-D) logic is available to serve as a foundation in Service Science.

The G-D logic, establishes that the goal of the economic activity is to make and distribute units of output, preferably tangible (goods). Where the goal is to maximize profit through the efficient production and distribution of goods, which are embedded with utility (value) during manufacturing. In G-D Logic, services are just value-enhancing add-ons for goods or just a particular (somewhat inferior) type good, characterized by: Intangibility, Heterogeneity (non-standardization), Inseparability (of production and consumption) and Perishability. This kind of thinking points service scientists toward a primary concern with efficient production of intangible goods, rather than the effective creation of value trough service.

In Service-Dominant (S-D) Logic, service has a process orientation. Service is defined as the application of competences (knowledge and skills) for the benefit of another entity, rather than the production of units of output. These benefits are always manifested in the context of the customer, rather than in the production of its offering by the provider. The contextual perspective suggests that what firms provide should not be understood in terms of outputs with value, but rather as resource inputs for a continuing value-creation process.

Goods remain important in S-D logic, as vehicles for resource transmission (tools and appliances), rather than containers of value. We can see this logic working in Software-as-a-service (SaaS) and Software Oriented Architecture, where the value is not in the software, but in the service that they offer.

In G-D logic, value creation happens with resource acquisition. The firm specializes in the production of a type of good, the household specializes in a type of labor, and the money the household obtains from its labor is exchanged for the goods produced by organizations. In this case, one acquires the resource of the other: the firm seeks the labor from the household and the household seeks the goods the firm possesses.

In the Service era we shift the focus from “Producing” (in G-D logic) of goods that are value enhancing add-ons, where the value creation happens with resource acquisition, to “Resourcing” (in S-D logic), where value creation that happens when a potential resource is turned into a specific benefit. Resourcing allows value creation through collaborative value co-creation, not only involving the provider and the beneficiary but all parties in a value-creation network (suppliers, competitors and customers working together).

The G-D logic views the firm as the production of tangible (goods) and intangible (services) outputs to be sold to customers, where the service firms are “service factories” that tried to standardize services with manufacturing concepts. Instead of assembly lines, there were lines or stations that customers visited to receive services. Because production efficiencies could be obtained from employee specialization, even customer service became specialized.

In S-D logic, the focus is in the interaction between the firm and the customer. The significance of that interaction is found not in the transfer of ownership of output (as in G-D logic), but in the interaction itself, in servicing the needs of the customer, as experienced by the customer. S-D mind set would focus on understanding the customer’s experience of waiting in line and moving from station to station, on the experience of waiting on a call line and then being transferred multiple times, on the experience of talking to an employee who is not empowered to provide service. It would focus on the effectiveness of responding to the customer’s purpose for contacting the firm, rather than the efficiency of producing the services. In other words, efficiency should follow effectiveness. This perspective prompts the organization to consider not only its employees’ productivity but also the ‘‘productivity’’ and experience of the customer.

Fig1. Diamond Rio delivered value through the acquisition of the product.

The change of mindset from product to service can drive the Service Innovation . For example : the iPod wasn’t the first mp3 player in the market, the Diamond Rio came first. Diamond focused in the product (G-D logic), where the value is generated through it’s acquisition (Fig.1). Many years later Steve Jobs, the CEO of Apple, had the vision to create compelling experiences for the customer through the use of technology, integrating the software and the hardware into a seamlessly customer experience. The focus on a simple user interface based on a click-wheel in a sleek device made the iPod famous. The user experience was not only present on the device itself, but in the whole process of listening music, including the purchasing and loading of songs to the device through the iTunes store, delivering a true integrated experience provided by iPod+iTunes (Fig.2). In S-D logic the customer is always a co-creator of value. when you purchase an iPod, you don’t purchase a good. You purchase the experience that the iPod delivers. So, the iPod by itself do not have value, you co-created it when you experience it. The value is in the experience, that means the sum of all interactions.

Fig2. iPod+iTunes delivers a complete experience to the customer, where the value is co-produced.

Service Innovation at Rollys Royce : Engine as a Service

Friday, February 6th, 2009

Traditional manufacturing industries are having hard times, selling goods in our current economic environment is not sufficient. The shift from a goods to service is strategic. Rolls-Royce knows that. In a airline industry in trouble they already had to cut some jobs, but because of the way in which it has melded technology and service they will be able to weather an economic downturn better than its rivals.

Fig 1. Rolls Royce civil-aircraft engines

“Rolls-Royce’s biggest business is the civil-aircraft engines (Fig.1.) that once felled the company in 1971, became its salvation two decades later. The turbine blades that make up the heart of the giant engines slung beneath the wings of the world’s biggest planes. These are not the huge fan blades you see when boarding, but are buried deep in the engines. Each turbine blade can fit in the hand like an oversized steak knife. At first glance it may not seem much more difficult to make, they cost about $10,000 each.Turbine blades are difficult to make because they have to survive high temperatures and huge stresses. Each blade is grown from a single crystal of alloy for strength and then coated with tough ceramics.Making the blades is merely the entry ticket to the market. Both Rolls-Royce’s main rivals have also mastered the art. In such a competitive field an incremental advance by one manufacturer is usually matched by the others within a couple of years” (The Economist*)

Rolls Royce “prospered by pursuing technical advances and by keeping close to its airline customers. The big pay-off from getting engines under more wings comes from selling spares and servicing them” (The Economist*). Like the Razor and Blades business model, the concept of either giving away a sellable item for nothing or charging an extremely low price in order to generate a continual market for another, generally disposable, item. The concept was pioneered by King C. Gillette inventor of the disposable safety razor and founder of Gillette Safety Razor Company.

“This is because selling aircraft engines is like selling razors. The razor and engine make little if any profit; that comes later, from blades or spare parts and servicing (Fig 2). Gross margins from rebuilding engines are thought to be about 35%; analysts at Credit Suisse, an investment bank, estimate that some makers of jet engines get about seven times as much revenue from servicing and selling spare parts as they do from selling engines. Many analysts suspect that Rolls-Royce (and others) sell engines at a loss. Judging this is hard, though, because of the way Rolls-Royce accounts for long-term contracts, often by booking a profit on the sale for income that will be received only over many years. Rolls-Royce says that, on average, engines are sold at a profit”. (The Economist*)

Fig 2. Rolls Royce turbine blades service

“The modern Rolls-Royce earns its keep not just by making world-class engines, but by selling power by the hour—a complex of services and manufacturing that keeps its customers’ engines burning. If it did not sell services, Rolls-Royce could not earn enough money from selling engines. As you can see in the figure 3, the revenue that sustains Rolls Royce comes after the sale.” (The Economist*)

Fig.3 Rolls Royce revenue growth driven by Service (by The Economist)

“This is where Rolls-Royce has melded its technology with service to make it more difficult for competitors to pinch its business. Rather than simply giving away razors to sell razor blades it has, if you will, offered to shave its clients every morning. Instead of selling airlines first engines and then parts and service, Rolls-Royce has convinced its customers to pay a fee for every hour that an engine runs. Rolls-Royce in turn promises to maintain it and replace it if it breaks down. “They aren’t selling engines, they are selling hot air out the back of an engine,” says an investment analyst. The idea is not unique to Rolls-Royce; the other big makers of aircraft engines do much the same. But Rolls-Royce has adopted it with greater gusto. It has been offering the service for more than a decade; more than half of its engines in service are covered by such contracts, as are about 80% of those it is now selling”. (The Economist*)

“Rolls-Royce’s global operations room in Derby, with 24-hour news channels, banks of computer screens and clocks showing the time around the world, looks and feels like a currency-trading floor. It seems far away from the grubby manufacturing that Derby has pioneered since the dawn of the industrial revolution. In fact, a few hundred yards down the road, furnaces roar, cutting tools whine and giant workhorses of the air take shape. The operations room is the heart of a vast industrial enterprise”. (The Economist*)

“The operations room in Derby, for instance, continuously assesses the performance of 3,500 jet engines around the world, raising an almost insurmountable barrier to any rival that hopes to grab the work of servicing them. A torrent of data is beamed from the aircraft to Derby. Numbers dance across screens, graphs are drawn and technicians scratch their heads. Before the plane lands, word comes that the engine is running smoothly. The aircraft can take off on time.The data collected can be invaluable to airlines: it enables Rolls-Royce to predict when engines are more likely to fail, letting customers schedule engine changes efficiently. That means fewer emergency repairs and fewer unhappy passengers , helping to make a great consumer experience. The data are equally valuable to Rolls-Royce. Spotting problems early helps it to design and build more reliable engines or to modify existing ones. The resulting evolution of its engines has steadily improved fuel efficiency and over the past 30 years has extended the operating life of engines tenfold (to about ten years between major rebuilds). “You could only get closer to the customer by being on the plane,” says Mike Terrett, the company’s chief operating officer”. (The Economist*)

*This article contains extracts from : “Britain’s lonely high-flier” at The Economist. (link)