The transition from products to service and business models
Organization design transition matrix
After having discussed three orders of organization design in the first part of this paper, we will now turn our attention to the transition between each order. The first transition towards service involves product manufacturers engaged in industrial design to employ a service-dominant logic. The second transition is from service to business models via design thinking.
In order to frame the different transitions, we choose to replicate a strategic analysis process. With this purpose in mind, we surveyed multiple practitioner tools that leaders commonly use to reflect upon large business opportunities and ensuing organizational changes.
We went to the root of these tools with Ansoff’s classic diversification matrix first published in 1957. Since then, there have been many different variations on the 2×2 matrix by business consultants (Lowy & Hood 2004). In Appendix 2, we review similar tools that have been adapted for themes such as: brand expansion (1981), types of new product (Booz Allen Hamilton 1982), business strategy popularized by GE& McKinsey (Hax &Majluf 1983), planning new product development mix (Wheelright and Clark 1992), defining business model innovation opportunity (Johnson 2010) and innovation portfolio management (Nagji & Tuff 2012).
To articulate our approach, we choose to return to the origins of this strategic analysis and evolve from Ansoff’s matrix. His initial matrix related products to markets in terms of current and new. This created four quadrants, such as market penetration, market development, product development and diversification. Our adaptation begins by stepping back from products to allow for service and business models. We label that axis organization design. The sense of the y axis is left unchanged and is still labelled markets.
The second adaptation is about adding precision to Ansoff’s quadrant terms in light of the transitions past products that we wish to explore. We evolve the idea of market penetration to enabling financial “growth”. In most cases, insuring financial returns is the first objective of an organization within a current yet evolving market.The second quadrant labelled market development is about finding new markets within the current organization design. Whether with new customers or existing customers, we call this space “focus” as it entitles a profound understanding for the source of the demand. From Ansoff’s third space of product development, we simply rename “innovation”. Innovation brings a broader view on how to develop opportunities which includes activities such as processes, commercializationand management (Robertson 1967). Finally, the upper most quadrant of diversification is a combination of the initial three quadrants. In our case, when an organization seeks growth, focus and innovation, it changes its understanding of “value”. In return, we can also validate that diversification is a change in what is considered of value to the business. Therefore improving its capacity to create, deliver and capture value is the most strategic action an organization should strive for (Kaplan 2012).
Figure 4. (Joyce 2013)
A final validation of this adaptation comes from the fit with Wheelright’s (1984) four dimensions of manufacturing strategy: Cost to growth, dependability to focus, quality to innovation and flexibility to value.
In the following sections of this paper, we first review the general ideas that have lead to the transition towards service and to the transition towards business models. Then we use each of the four spaces to better understand each aspect of the transitions. We conclude the second part the paper by synthesizing the similarities and the differences that influence the transition towards business models with the experience of the transition towards service.
A. Transition towards service
A debate between products and services seems to have been put to rest for a few decades after Kotler (1977) stated that “the importance of physical products lies not so much in owning them as obtaining the services they render”. Although most can agree that service includes product, current teaching, research and practice don’t reflect this approach.
In 2004, a proposal to change traditional thinking shaked up the field of service science. A new logic was proposed to help organizations evolve into what was called a service-dominant logic (Vargo & Lusch 2004). The authors demonstrate that the industrial mindset which emphasizes the sale of products is still widely spread even though the reality of most organizations has now moved to providing services. Their logic states that “all products are part of a greater services delivery”.
In order to defend this radical position, the authors created a list of ten foundational premises that demonstrate how the industrial mindset had become obsolete in the face of a new service led reality (Lusch & Vargo 2008). For example, resources in the goods-dominated logic were mostly operand, like materials and energy. Where as in a service-dominant logic, the resources that are being exchanged are seen as operant. In other words, knowledge and skills can be captured and embedded within tangible goods. Although these premises remain highly conceptual and theoretical, we now review four reasons why manufacturers transition to services. The first and foremost is that offering services can lead to more financial gains.
A.1 Towards service for enabling growth
The fact that Fortune 20 organizations such as IBM, and GE haven’t turned back to a product-centric approach is an indication that the services provider strategy is still offering positive financial returns (Sawhney et al. 2003). Smaller companies such as Pitney Bowes, who manufactures mailroom equipment, generates about 40% of corporate revenue from services (Neu & Brown 2005).
In terms of generating growth specifically, the transition to services is said to overcome three sources of constraint in business to business product sales: outsourcing trends, saturation of an installed base and commoditization in product markets (Reinartz & Ulaga 2008). Yet theoretically, goods are more scalable than services, therefore the financial returns of service innovation could require more attempts to insure success (Shankar, Berry & Dotzel 2012).
In 2008, Fang studied an organization’s value in terms of Tobin’s q after having generated sales from services. He finds that when a critical mass of 20%-30% of revenues come from services, then there is a positive effect on the firm’s value. Furthermore, Fang (2008) finds a negative effect to a service transition strategy in the following three cases: (1) if the service is strongly related to the firm’s core manufacturing business, (2) when industry growth is sluggish and (3) when the industry is volatile.
As demonstrated, the strategy to transition from manufacturing products to providing services has been profitable to some organizations that still thrive upon it today. This transition offers new opportunities for growth but does not entail success every time. The next section will explore the second motivation for a transition towards service, which is to improve focus.
A. 2 Towards service to focus on customer experience
One of the most pervasive ideas in service science literature is the experience recommendation (Nicolao, Irwin & Goodman 2009). This theory states that individuals will be happier if they purchase intangible experiences as opposed to material possessions. It was initially proven for positive purchases by Van Boven and Gilovich (2003).
But how can a transition towards service take place? We argue that it requires changing the focus from the product to the customer experience. It is by focusing on the entire customer experience that an organization can deliver the quality of its service. The common indicators of quality in services have been popularized by the SERVQUAL scale developed by Parasuraman, Zeithaml & Berry (2003). They propose five indicators of quality: reliability, assurance, tangibles empathy and responsiveness.
To facilitate the improvement of service processes, Glushko (2008) presents a life-cycle framework that reflects the customer experience while representing the inner workings of a service. It outlines three major phases: strategy, design and operation. In Glushko’s article, his goal was to determine when and how various disciplines are involved in service science. However, the call for a multidisciplinary approach remains when organizations undertake the transition towards service (Chesbrough & Spohrer 2006). In Neu & Brown (2005), multiple business units became jointly responsible for providing customers with the experience they desired from a complex system. Also, they stated that a customer-centred orientation focuses organizational efforts on close collaboration with individual customers and satisfying each one’s unique business needs.
The customer experience approach is already underway in service design as reported by Zomerjick and Voss (2010). They studied 17 cases where service organizations are managing customer experiences and propose 6 design principles. They are: (1) Design from the perspective of the customer’s journey and its associated touchpoints. (2) Conduct sensory design. (3) Require front-line employees to engage with customers. (4) Pay attention to the dramatic structure of events. (5) Manage the presence of fellow customers. (6) Closely couple backstage employees and frontstage experiences.
We learn from these studies that by designing quality in an intangible customer experience, an organization incentivizes the different business units to converge and focus their resources towards a common goal. Aside from improving focus, another goal for organizations is to foster innovation. That will be the next rationale discussed in the following section.
A.3 Towards service to foster innovation
Initiating a transition to services changes the relationship with the customer. For example, it allows to increase fidelity by creating a cost to switching providers, but, in the case of a service failure, avoidance grows with time (Gregoire & Fisher 2008). In terms of innovation, providing services produces a closer relationship to the customer where new insights occur (Oliva & Kallenberg 2003). The capacity to anticipate future needs is just one benefit of providing services (Reinartz & Ulaga 2008). On a more controversial note, as the client relies on outsourcing services, he forgets how things are done. Therefore, the onus of innovation falls back on the shoulders of the service provider.
There are three main differences between fostering innovation in terms of products or services: (1) It is not the service itself that is produced but the pre-requisites for the service. (2) New services require integrating the needs of new service operations and processes with those of existing business activities. (3) R&D investments are more strongly associated with successful manufacturing than service innovation (Nijssen et al. 2006).
More importantly, developing a new service imposes a broader view of innovation. First of all this can be done by adding another venue for discoveries other than in an R&D laboratory. Managers can find more discontinuous innovation in the entire service process and from the point of view of the customer experience (Michel, Brown & Gallen 2008).
According to Shankar, Berry & Dotzel (2009), innovation success depends on establishing the right mix of products and services in what is called bundles in order to provide proper solutions to customer needs. In parallel, Shelton (2009) suggests a combination of six sources of innovation to arrive at a winning bundling formula: Target customer, value proposition, value chain, product & services, process technologies and enabling technologies. The first three refer to sources of business model innovation where as the latter three are considered for technological innovation. Moreover, Shelton states that apart from product and process, the remaining four levers to innovation are “severely underleveraged”. This kind of approach is exactly the broader view that generates innovation when orchestrating a transition to services.
To sum up, we have seen that organizations transition towards service to foster innovation by getting closer to the customer and by having a broader view on their activities. When moving from products to service an organization can first focus on the customer experience, then foster innovation which ends up redefining value.
A. 4 Towards service for to redefine value
Little is known about the process of value creation: “when it starts, what it includes and when it ends” (Sanchez-Fernandez and Iniesta-Bonillo 2007). Having already covered the financial value that services can provide, we now propose three ways to redefine value when transitioning towards service. First, for the customer, second with itself and third with partners.
First and foremost, value creation is defined by Gronroos (2008) as a process through which the user becomes better off after having been supported by the service provider. Similarly, Lusch & Vargo (2008) emphasize that working towards the customer’s well being is creating value. Thus services redefine value by allowing customers to co-create. They go on to argue that value is fundamentally derived and determined in use and not in exchange.
Before, organizations and consumers had distinct roles of production and consumption while value was exchanged. The second piece of co-creating value comes from within the organization. From the organization’s perspective, they must provide the processes that allow for customers to create value in use. The basic building blocks of value co-creation combine the four following elements: dialogue, access, risk assessment, and transparency (Pralahad & Ramaswamy 2004).
When transitioning towards service, the organization needs a new perspective to redefine itself in order to engage in co-creation with customers. This has been one of the central tenants of a service dominant logic as initially proposed by Vargo & Lusch in 2004. In Day et al. (2004), Day comments: “the crux of Vargo & Lusch’s argument is that a service perspective is superior to a goods-centered view because it emphasizes solutions and “points to opportunities for expanding the market by assisting the consumer in the process of specialization and value creation.”
In the same approach to generating value, a transition towards service requires new organizational principles, structures and processes. This shift involves valuing new capabilities, through different metrics and incentives. In all, the intrinsic understanding of value within the organizations moves from a transaction-based to relationship-based perspective (Oliva & Kallenberg 2003).
Another approach to generating value is for organizations to lay the foundations well before the customer enters into a relationship with the company. For traditional manufacturers, this type of effort refers to their value chain. In a transition to a service dominant logic, the idea of value constellations represents the more complex networking and partner relationships that are made possible thanks to, for example, the internet (Normann 2003).
In retrospect, a transition can redefine value in three ways. First, downstream by supporting the customer’s well being. Second, intrinsically by redefining itself. Third, upstream in networking its value constellation.
B. Transition of service towards business models
Now that we have seen the strategic analysis tool describe the transition towards service, we apply it a second time to describe the transition towards business models. As we have seen earlier, many well respected scholars, such as Christiensen and Chesbrough, research the capacity of organizations to rethink their business models. However, they don’t speak of a business model perspective as a transition from service in their research. Same goes for the most precocious practitioners of a business model approach described inMitchell & Coles (2004). From our literature review, this notion of transition has just recently surfaced with respect to service science (Merli 2013).
This might be due to the change in orders. It ensues many differences in motivations when designing, validating and implementing a novel business model. According to Johnson et al. (2008), there are times when creating new growth requires venturing not only into unknown market territory but also into unknown business model territory. The authors observe that there are five circumstances when organizations need to redesign their business model. They are: (1) Address large groups of current non-customers, (2) Capitalize on new technology within a new business model (3) Bring a job-to-be-done focus where focus is on products (4) Fend off low-end disrupters. (5) Respond to a shifting basis in competition. Henceforth, we inspire the notion of a transition in the following analysis while based on the literature on business model innovation.
B.1 Towards business models for enabling growth
Attributing the success of businesses, like Amazon, Google or Zipcar, solely to the way they used new technologies to make their operations more efficient would undermine the fact that they created new business models altogether.
The idea that firms can compete through various business model is recently explored by Casseus Masanell & Ricart (2010). They provide insight into the difference between strategy, business models and tactics: “the object of strategy is the choice of business model, and the business model employed determines the tactics available to the firm to compete against, or cooperate with, other firms in the marketplace.”
According to Magretta (2002) a business model can change the economics of industry. At a smaller scale, a new business model can result in superior value creation for the organization (Morris et al. 2005). In all, a business model represents a potential source of competitive advantage. If organizations can compete according to their choice of business model, the next logical question is what drives performance?
In 2006, an MIT working paper by Weil et al. surfaced concerning the financial performance of business models. They categorized business models based on what asset rights are sold “Creators, Distributors, Landlords and Brokers” and based on what type of assets are involved “Financial, Physical, Intangible, and Human” . The most common business models for large US companies involve selling ownership of assets to customers (e.g. manufacturers and distributors). The authors proceed empirically to find that some models have a better performance than others. For example in the fiscal year 2000, a manufacturing or distribution business models performed less well (in terms of both profitability and market value) than business models in which customers engage in a service such as with landlords, lenders, publishers, and contractors. Giesen et al. (2007) report that each type of business model innovation can generate success.
The most compelling data on the financial performance of business models comes from consultancies and practitioners. IBM’s study found that firms that financial high performers put twice as much emphasis on business model innovation as did under performers (IBM Global Business Services, 2006). In their 2009 survey, the Boston Consulting Group and BusinessWeek claim that business model innovators earned an average premium that was more than four times greater than that enjoyed by product or process innovators (Lindgardt et al 2009). Furthermore, the practice of business model innovation delivered returns that outperform competitors and product innovators even after ten years.
No matter how convincing consultancy studies might seem, business model innovation remains a complex variable that is difficult to single out when measuring performance across competitors, across sectors or in longitudinal studies. Case and point, there are complementary practices to business model innovation such as product market strategy. When studying the fit amongst such strategic activities, Zott and Amit (2008) find that novelty centred business models, when coupled with product market strategies that emphasize differentiation, cost leadership, or early market entry, can enhance firm performance.
To conclude on the capacity of business models to enable growth, there is no financial certainty in any business venture. As with any new field, early research tends to justify itself by searching for positive financial outlooks. Then again, one could argue that the past demonstrations of a successful transition to generating growth through services (in section A1) does not happen without a form of business model innovation.
There will surely be more research on the financial performance of business models in the years to come as it has been added to the list of future research in to grow the field (Zott, Amit & Massa 2010). Until then, it is clear that designing business models can include a large financial potential. This often means creating new markets with, for example, a focus on the job-to-be-done.
B.2 Towards Business models to focus on the job-to-be-done
Unlike service, the focus of a business model is not centred on the customer experience. A business model revolves around the notion of a job-to-be-done (Christiensen & Raynor 2003). This theory professes that customers buy services to get a job done. In other words, customers “hire” products to do specific “jobs”. Therefore, organizations must segment their markets to mirror the way their customers experience life. Knowing what job a product gets “hired” to do can give organizations a much clearer value proposition for improving their business model.
This approach is different from a needs based approach because when asking “what do you need?”, customers create wishes and when asking “What are you trying to get done?”, customers share both functional and emotional objectives (Bettencourt 2010).
According Ulwick’s Outcome-driven innovation (2005), businesses should work towards finding the job-to-be-done because “the job the customer is trying to get done will offer the stable, long-term focal point around which value creation should be centred”. Organizations need to precisely match their business model with the job-to-be-done (Johnson et al. 2008). This requires to focus and to avoid diluting of efforts.
In Seizing the white space, Johnson (2010) proposes three indicators when focusing a business model on a job-to-be-done: (1) how important the job-to-be-done is to customers, (2) how satisfied customers are with the current solutions and (3) how well the new offering gets the job done, relative to the other options. Moreover, the most common barriers that keep customers from getting the job done are insufficient wealth, access, skill or time. Therefore, understanding the job-to-be-done sets a clear standard that defines the structure, content and relationships of the business model. It is a fundamental building block in a business model when designing possible value propositions.
In Business model generation by Osterwalder and Pigneur (2010), they go one step further by affirming that for an organization to create, deliver and capture value, it has to go further to the job-to-be-overcome. In other word, to allow the customer to get a job done that he presently can not. This suggests a value proposition, based on unmet needs, should solve customer problems with a newly selected bundle of products and services. It can be an aggregation of existing combined in new ways or a new, sometimes disruptive offer. The opportunity of a new market relates to what Christensen (1997) calls the innovators’ dilemma where discontinuous innovations are often discarded by market leaders because the revenue projections from the current customer base is not compelling.
No matter if it is a product, service or business model, job-to-be-done are central to innovation by understanding how to satisfy unmet needs. This approach contributes to value creation either in the form of performance and novelty.
B.3 Towards Business models to foster innovation
The same way pioneering manufacturers did their own industrial design intuitively, today all organizations including governmental, health and non-profits are carrying out a business model (Kaplan 2011). However, they may not have a strategy to help choose the right business models according to the evolution of their context (Casadesus Masanell & Ricart 2011). Therefore the capacity to design new business models is not only a means to foster innovation, but a means to fight for survival (Chesbrough, Di Minin & Piccaluga 2013).
In the 2009 report on business model innovation by the Boston consulting group, the authors argue that a business model perspective is especially valuable in times of instability (Lindgardt et al. 2009). Business model design develops another level of innovation that can break out of intense competition and then remain difficult to copy. In contrast, product or process innovations are easily imitated and a competitive advantage is short lived. This argument is the same as the one presented in the beginning of service science by Shostack (1977).
Also making the case for business models as a source of innovation are prominent service science figures who request future research on the subject. Birgit Mager a professor of Service Design at the University of Applied Sciences in Cologne suggests in Ostrom et al. (2010) that design thinking can improve service systems which will support the “integration of service design into business models”. Another call for business model design comes from Saco and Goncalves (2008) when they state that “to be effective, service innovation systems must first identify, deconstruct and reconstruct business models.” In the same article, they refer to the well versed Jeneanne Rae who asserts that the term service innovation should be reserved for initiatives that produce viable new business models as opposed to a new service or service system that executes the current business model effectively. These three views attest to how business model design fosters innovation. Moreover, these views have in common the idea that service design can’t happen without affecting the overarching business model. This reaffirm the model we presented earlier where service is contained within the business model.
B.4 Towards Business models to redefine values
Earlier in this paper, we synthesized that business models are a means to create, deliver and capture value. These three value interactions happen in different spaces of the business model canvas. First, by creating value propositions for market segments by building distribution channels and customer relationships. Second, by delivering the value proposition by undertaking activities, setting up resources and leveraging partnerships. Third, by capturing the value by balancing costs and revenues. This last capacity of a business models to capture financial value has been covered in the growth space, therefore we will focus on the two previous means by which business models redefine value.
In both the marketing and management literature, there is substantial support for the view that value creation for customers is the ultimate goal of business and marketing (Gronroos 2011). Most recent research coming from a service science perspective is arguing the capacity of business models to create greater value (Cinquini et al. 2013). For example, Zott and Amit (2007) have analyzed the value implications of business model design in entrepreneurial firms by looking at two distinct effects: the total value creation potential of the business model design and the firm’s ability to appropriate that value. They argue that business models can be designed for efficiency or novelty.
After having acknowledged the idea that “business model thinking helps to consistently plan, analyze and communicate the value creation of an organization”, Bieger et al. (2011) go on by stating that it bridges the gap between strategic and operational planning. But then, they add an Aristotelian sense to value with the plural “values”. Henceforth, they claim that business models can be values-based. This provides managers with a means to analyze new avenues even though they challenge financial logic. For example, in a values-based business model, ideas that favour sustainability will find traction. This would not be possible when solely thinking of services because the business model creates a larger systemic understanding of the relationships at hand.
When it comes to delivering value, Giesen et al. (2007) report that innovation in business models that focuses on external collaboration and partnerships is particularly effective in older companies as compared to younger ones.
Lastly, the activity of redefining value generates potential business models. In the case of Xerox, potential business models arose by translating the technical requirements and the social needs, by selecting and filtering options and packaging them into particular configurations to be offered to the market (Chesbrough 2002). Another example is the one-for-one business model that is growing in popularity. Glasses (Warby Parker), shoes (Toms), bikes(Kona) and even laptops (MIT) are sold to first world customers with a promise that another product will be delivered to those in developing countries. In such cases of a higher purpose, analogous to the thought that the medium is the message (McLuhan 1964), the business model is the value ( Joyce 2013 🙂 .
Comparing and contrasting transitions
At first view, the major difference between the transition towards service and the transition towards business models is in the focus quadrant that emphasizes new markets. On the one hand, the focus of service is on the customer experience. On the other hand, the focus of business models is the job-to-be-done. This is probably due the existing presence of service and the need to improve upon a concrete experience. Inversely, business models remain abstract and so they are not a subject of improvement in the customer’s mind. Then again, a job-to-be-done approach allows for an organization to find new insights into how to build a new business model that includes a service relationship with a future customer base in a new market.
Before looking at the differences in terms of fostering innovation, we should make clear the distinctions in the meaning of service innovation. As we discussed earlier, some restrain the meaning of a service innovation to a process, others describe a new service as a complete with a business model (Saco & Goncalves 2008). This discrepancy between views comes from a lack of understanding a business model as a system that creates and also captures value.
In the case that service refers to the process, there are more similarities than differences. Both transitions pay more attention to the relationships and seek opportunities from a multidisciplinary approach that focuses on the customer. The difference is mostly in scale. A business model, as a system, is farther reaching than just the service. It implements aspects concerning the entire organization strategy. It also includes a profit formula. Simply put, a profit formula balances costs and revenues (Johnson et al. 2008). For example, we can refer to a new retail design that can completely change the customer experience, but wasn’t thought out in terms of a new business model.
The next difference between the two transitions comes from the growth creation. It remains difficult to determine the return on a new business model because service is an integral part of any business model. The debate between the financial returns between selling a product or providing services is in fact two different business models. Therefore we conclude that when comparing the returns of two value propositions (i.e. products or services), one actually compares two different forms of service, and of course two different business models.
The underlying cause that motivates the will to change differs for both transitions. This aspect mixes growth and innovation. As discussed, the business case to initiate a transition from products towards service has demonstrated a financial potential for returns. And, more importantly, many companies still thrive from the transition today. In a study on products which should transfer to services, White (1986) determines that a cost leadership activity reduces uncertainty as a differentiation strategy. In contrast, building a business case for a new business model can entitle creating a new market. This makes it more risky and more difficult to convince senior executives of a return on investment (Kaplan 2012). This refers to the willingness to cannibalize thatChandy and Tellis (1998) introduced as a critical driver of a firm introducing radical innovations.
The last area of difference is in creating value. Because it requires systems thinking, the business model allows for a greater reflection on the purpose and the means of the organization. The business model is directly linked to implementing the organization’s strategy (Osterwalder 2004). Therefore, a transition to a business model approach can be values-based which overarches a service-dominant logic that can not have ulterior motives than the service of its customers. This is why we argue that recent ideas to improve the capitalist system such as Creating shared values (Porter & Kramer 2012) Conscious capitalism (Mackey, Sisodia & George 2013) would only be possible by changing the business model of an organization and would not be possible simply by rethinking the notion of service.
Lessons from service having included products
The service-dominant logic permeated the marketing research field (Day et al. 2004). However, decades after Levitt’s appeal that customers do not buy products, there has been little traction of service-dominant logic in practice (Gronroos 2011). We postulate that this lack of momentum might be possible because the main argumentation rests on the ten foundational premises which have little to do with a practice or managerial perspective. Our understanding is that they are founded on highly theoretical or conceptual arguments. The authors themselves have had to better define their terms and further explicit their ideas (Lusch & Vargo 2008). Then again, we agree with the logic of a transition but to engage with the field of practice, another set of reasoning would be more convincing. To initiate a change, a more practical argumentation could provide both the means and the ends (Lave 1988). The lessons learned here is to make sure that the transition comes from a practical approach with a strong rationale and concrete tools for change.
The consequence of not having this practical approach is that we observe some cases where the orders of management and design don’t correspond. For example, Karpen et al. (2012) defends that a service-dominant logic as can function as a strategic business logic. Another example in applying a service-dominant logic to the business’s strategy can be seen in Lüftenegger et al. (2012). The authors propose a visual representation in the form of a canvas that integrates current definitions of a service-dominant strategy to confront them with traditional strategies. Their motive comes from a change in the way of doing business. In both cases, a better understanding of the orders at stake and of a business model approach would better frame the reflections on strategy and the future design of the organization.
Inversely, some key principles of design thinking have been matched with service-dominant logic to see if they intersect (Edman 2009). The conclusion is that both are concerned with the creation of value and the importance of understanding the customers. In our view, a mismatch of orders subsides. As design thinking intersects with a practical approach to business models, the comparison to service dominant logic is out of sync with the orders of both design and management.
For business models to include service
The discussion on a service-dominant logic is still evolving. Vargo & Lusch have written subsequent articles to defend their concepts. Notably, the notion of service in the singular form as opposed to services in the plural (Lusch & Vargo 2006). Again, this small distinction makes a big difference.
The service-dominant logic authors adjust their earlier thoughts on services that Gronroos (2011) describes as activities or interactive processes that lead to an outcome. The original authors defend that service is the correct term, capturing the essential meaning of the use of resources for another party’s benefit. However, this direction of service for “another party’s benefit” is what we see as the meaning of the organization, yet it remains void of a greater system and context. We argue that in most cases the overarching system that gives context and purpose to the service is the business model.
In fact, we witness that the evolution in the service-dominant logic is slipping into another order of organization design. The transition towards service emphasized in service-dominant logic is rising up into a discussion on the second transition towards business models. We offer two pieces of evidence that are indicative of a shift into a second transition from service towards business model.
Firstly, influencers of future research in service sciences point towards business models as means to assure service innovation. Here are two quotes from the research priorities for the science of service (Ostrom et al. 2010). Notice that one is a scholar, the other a practitioner. They reinforce the shift from service to business models in organization design.
“To begin, an overarching need is the development of appropriate business models for service-led growth. Such models do not exist today, and so by default, firms often use long-standing goods-based frameworks. […]How can innovative business models for services be crafted within traditionally goods-based organizations?” Stephen W. Brown, PhD, Professor of Marketing Arizona State University
“Although many senior leaders recognize the need to adopt a services strategy and to create a services business model, the execution of the strategy in many firms failed or did not achieve durable success. […] Sustainable success experienced by firms such as IBM and General Electric can be attributed to the recognition that product and services businesses each need to be managed by different business models.” Tom Esposito, CEO, The INSIGHT Group
Also, we must reiterate that the most recent research is specifically building bridges between service and business models (Cinquini et al. 2013).
Second, we must return to the crux of our analysis of how value is created in both levels of transition. Basically, Lusch and Vargo (2008) propose that service should be viewed as a perspective on value creation. In this marketing view of service, there is not the notion of a reoccurring strategy that makes it an organization devoted to evolve for a higher purpose.
Consider the Mayo clinic. At the service level, the Mayo clinic is infused with a mission focus on patient care: “the needs of the patient come first”. According to Berry & Seltman (2008), the key value drivers lies in the organization’s patient-centred culture. Now at the business model level, Christiensen, Grossman & Hwang (2009) demonstrate that the Mayo has a different model than most typical hospitals who “try be everything to everyone”. The describe the Mayo Clinic model as:
“Patients there are processed through solution shops whose specialists, equipment, and procedures are knitted together across each of the potentially relevant organ system specialties, in order to provide the best possible diagnosis as fast and at as low a cost as possible.”
At last, the difference between the Mayo clinic and another health service is that the design of their organization is centred upon a mission of excellence at the service level while driven within a not-for-profit business model that pays attention to a healthy profit formula. We learn from this example that a service creates value through meaning, and service is only complete within the purpose of a business model.
When describing the opportunities and barriers of business model innovation, Chesbrough (2010) sells the case best when he states that “a mediocre technology pursued within a great business model may be more valuable that a great technology exploited via a mediocre business model”. In our view, the same logic holds when substituting the word technology with service in the previous sentence.
In essence, an organization design transition requires a system’s view to adapt to the evolving context. Similarly in Gummesson (2006), the network context in which service provision is contained increases clarity for analysis. That network context should be understood as the business model and all the relationships it entitles.
To conclude the second part of this paper, a managerial contribution is having adapted a strategic analysis tool to identify the issues at stake in transitions of organization design. By forming an appraisal of the opportunities for growth, focus, innovation and value, we were able to determine the similarities and differences in moving towards service and moving towards business models. From this perspective, we find that when an organization reaches for a higher purpose than excellence in service to its customers, the business model becomes the value. We also recognize many differences between the two transitions to reinforce how they fit into the orders of organization design.
Then, we seek to infuse the transition towards business models with a practical approach which is lacking from the service-dominant logic. Ultimately, we demonstrate that the business model includes the service in theory and practice. First, we observed how service scholars and practitioners are shifting towards business models in their research. Second, we stated the case for the Mayo clinic which has a larger system’s perspective from their business model approach. This allows them to take into account the changing context and realign their purpose when designing the future of their organization.
This paper presents answers the call formulated by Yadav (2010) for conceptual articles in the development of knowledge in the marketing discipline. To do so, we have followed down the path laid by of Zott & Amit (2011) when they calling for theoretical foundations to business model innovation. Our approach was to distinguish products, service and business models within the orders of organization design.
From reading the future research ideas that are already in motion, we have no doubt that business models and design thinking will influence the field of service science. Likewise to the appeal formulated by Deighton and Narayandas requesting of marketing scholars to learn more from the marketplace (Day et al. 2004), we see great promise in practice-based research. It is both a source of rich insight while simultaneously demonstrating the capacity of organizations to improve.
From design thinking and managing business models, we hope to see the field of organization design re-emerge. Although the initial formulation by Gailbraith has been left aside, the need to provide more meaning to organizations is ever present in the management challenges we face in the 21st century (Shrivastava & Paquin 2011).
The industrial mindset was focused on a providing goods to answer society’s needs. As society enters the next century, our collective needs are changing. Climate change, mass poverty, struggling or booming economies, digital communications are just a few of the challenges of our time. And consequently, theses challenges are internalized by organizations. They too become more complex, global and even unequal. Organizations, which includes business but also governments, non profits, health providers, will be expected to redesign their business models by adapting to these challenges and answering new needs.