What makes the century old Mayo clinic one of the world‘s most successful health care facilities? When the mayo clinic comes up with a new approach to health services, do they execute a service-dominant logic? Or could their success stem from a larger business model approach?
These practical questions raise the idea that service is an integral part of a system that is the business model. This paper is structure to demonstrate this idea. We begin by retracing the directions of two fields: management research and design research. Then we recounthow they both started by progressively studying products, then services and now business models. We end the literature review with an illustration of their trajectories towards organization design. Then we build upon many authors to propose a model of the orders of hierarchy in organization design.
In the second part, we use a practical approach to further understand the transitions between the orders of organization design. In effect, moving from products to service, and then from service to business models. Our resulting analysis provides answers to why organizations undertake theses transitions. A rationale is provided in terms of enabling growth, fostering innovation, creating focus and redefining value. Then, we discuss the differences in perspective that each transition offers which reinforces our understanding of the orders amongst products, service and business models. In the end, we conclude by underlining the importance of this shift to remediate society’s larger challenges.
Part one: Orders of organization design
In this first section, we review how management and design researched the manufacturing of product goods. Then came the idea of service, which was inspired by the process of better answering needs. In a third phase, research arrives at business models to create different forms of value.
Our goal is to demonstrate how these three elements of organization design – products, service and business model – are in fact embedded into each other. Thus translating the model presented in Buchanan’s four orders of design (1992) into a management perspective. This hierarchy should prove to be a useful construct for all disciplines involved in better understanding services.
Unlike physics or chemistry, management is a normative science and thusly it prescribes a form of practice. In this sense our interest in management research has come from what is called organizational theory. This science began with the quest for the best way led by Taylor’s scientific organization of work. We find evidence of this quest in Thompson’s (1914) writings, where scientific management research was applied to industrial activities. This refinement of practice is still present in assembly line improvements as we know them today.
In the midst of the mass industrialization era of the 1950s, Herbert Simon states that rationality is bounded by the perspective of the individual in decision making. That creates a new goal where deciders aren’t taking decisions in accordance with the best way, but the most satisfying way while entrapped by their bounded rationality.
As the economy of developed nations shifts away from relying on industrial manufacturing, management research has evolved to cater new areas of research. Contemporary organizational theory has adapted by studying networks, conventions, power and other themes almost removed from practical managerial implications (McKinley 2010). In the case of this paper, we choose to bring back a sense of practical output to the management research by better understanding its growing relationship with design research.
Still today, Herbert Simon is recognized as having provided a starting point when defining design. He stated that design was “moving from existing situations to preferred situations” (Simon 1969). In fact, this way of reasoning the designer’s approach can be linked to Simon’s work on the decision making process when he coins “bounded rationality”. As the designer works to better comprehend how to deliver the function of the object, he is bounded by his own understanding and biases. Jones (1992) states this phenomena well: “The design profession is no longer to be limited nor represented by the capacity of a single expert mind or team augmenting such a mind. A single mind trying to design for the variety of one million minds has to reduce us all to numbers and not people.”
The notion of a multidisciplinary process and the importance of a shared outcome shifts the field of design into a contemporary approach. Refocusing design as a process allows to move past the necessity of creating an outcome in the form of a tangible product.
Figure 1. (Joyce 2013)
New product development
The field of new product development is born from the will of manufacturers to manage their future product offerings in coordination with their present offer. New product development is the management of the process that bring ideas to market in what is called a product (Cooper 1983). A product is defined as a set of benefits, most often tangible, offered for exchange. This process involves marketing to translate the demand for engineering to produce an offering (Souder 1988). The new product development process thus combines these two potentially conflicting activities into distinct development phases, such as the Stage-Gate process (Cooper 1990) which enables multidisciplinary teamwork.
From the perspective of management, product manufacturing strategy has been described as consisting of four dimensions: (a) cost (b) quality (superior products) (c) dependability of supply (availability of product) and (d) flexibility (willingness to offer product variations) (Wheelwright 1984).
New product development is itself a form of transition, at a smaller scale, where management prepares the change towards new products.
As the new product development field grew, industrial design was still a rather young field of research (Cross 1981). Most can agree that it started in the 1950s with the spreading of the industrialization movement that came after World War II. A french ex-patriot, Raymond Loewy, is often considered to be the first industrial designer. He seduced large american corporations with his approach to design which is encapsulated by the title of his book “La laideur se vend mal”(Loewy 1963).
In the very beginning, the activity of design was understood as mostly an effort of styling (Read & Read 1966). Then came the application of the “form follows function” mantra, where the design process was striving for a rational approach to create products. This became the starting point of functionalism. The goal of design was to reify the function which would then suggest a choice in materials which in turn would determine a proper shape (Heskett & Giorgetta 1980). Such an undertaking had reductionist objectives to rationalize elements of design that dealt with emotion, beauty and human values (Jones 1992). Then on, industrial design was to be understood as a process that leads to the creation of new products.
In the 1970s, management researchers began pointing to the predominance of services in the market and the void in research on the subject. This gave way to the field of service sciences.
Among the first was Theodore Levitt at Harvard. It is said that he would try to convince his students that “people don’t want to buy a quarter-inch drill, they want a quarter-inch hole”. He later wrote a paper in 1976 entitled the Industrialization of services where the main idea was to approach services with the same processes with which products are developed, scaled and commercialized. Soon thereafter, Shostack (1977) proposed a different, almost opposite, view. When commercializing a new offering, she suggests to market the tangible aspects of a service and inversely, the intangible aspects of a product. In retrospect, her contribution was to make explicit the continuum, from tangible to intangible, that can separate products from services.
According to Hill (1977) a service is “a change in the condition of a person, or a good belonging to some economic entity, brought about as the result of the activity of some other economic entity, with the approval of the first person or economic entity.” Near the end of the 80s, the distinction between products and services was made clear with four distinctions: intangibility, perishability, simultaneity and heterogeneity (Parasuraman, Berry & Zeithaml 1988).
Whenever a new field arises in academia, questions as to its pertinence as a discipline in itself is never far behind. If it is not a discipline, then the second question is under what discipline does it fall? There have been arguments for insuring that service science remains a multi-disciplinary field or even transdisciplinary (Gluschko 2008). As of today, service science still remains rather undefined as a field. Hope comes from growing the interdisciplinary effort around a common set of problems (Chesbrough & Spohrer 2006).
Although, one could argue that marketing has shown most interest in bridging the gap. On the other hand, design research has also manifested much interest in what has become service design.
Starting with the early writings of Papanek (1972), there was a debate as to wether the designer works within the confines of the manufacturing capacity or he works to answer the users’ needs. This debate lasted until the end of the 1980s, when an industrial design firm by the name of IDEO popularized a different take on the design process. More precisely, the objective of design was to create products for the users. And to do so, more approaches were required to fully understand the users’ need. This philosophy is now referred to as user-centred design (Sade 2001).
By putting the user at the centre of the design activity, industrial designers begin to look beyond the function of the object and concentrate on the overall outcome referred to as the user experience (Findeli & Bousbaci 2005). The design process remains a quest for adapting the form to the function, but this goes past the confines of the product by taking into account the relationships that users live. With this broader view on the design activity itself and with a sensibility for the user experience, the scope of design has opened to address more than tangible products in what has become service design.
With early works of Manzini (1993), there was an attempt to differentiate service design from other fields. Yet even today, service design is not unanimously defined in literature. What is more, it is practiced by many design firms. The leading UK firm in the field, live|work (2010), define service design as “the application of an established design process and skills to the development of services. It is a creative and practical way to improve existing services and innovate new ones.”
Another piece of the puzzle to understand service design is to infuse design methods with other fields of practice. In their seminal book called This is service design thinking, Stickdorn & Schneider (2011) devote a section for each disciplinary approach within service design: product design, graphic design, interaction design, social design, strategic management, operations management and design ethnography. This inter-disciplinary approach puts even more importance on the process of design and the relationship between the user and the service than simply on the tangible outcomes.
Business model innovation
The “theory of a business” is an old way of referring to a business model employed by Drucker (1955). Since then, the term business model in popular speak has often been reduced to a revenue model, which is the way an organization generates revenue. The distinction between revenue model and business model comes from a larger understanding of the creation of value by an organization. Therefore a business model includes the financial dimension but is not simply reduced to it. This is an important distinction that we will return to in our discussion because we notice that the revenue model seems to be avoided when speaking of service such as in health care or governmental services.
Since the early 2000s, a growing field of research has been devoted to the study of business models. Zott & Amit (2011) revisited the past literature to compare and contrast the different definition of a business model. Their table is reproduced in Appendix 1.
As is often the case with new approaches, a prominent figure personifies the field. The main proponent of business models innovation is without a doubt Alex Osterwalder. His doctorate dissertation (2004) also combed through existing definitions and ended up describing a business model as an abstract conceptual model that represents the business and money earning logic of a company. Also, Osterwalder (2004) situates the business model in a layer between business strategy and processes. His complete definition is the most robust:
“A business model is a conceptual tool that contains a set of elements and their relationships and allows expressing a company’s logic of earning money. It is a description of the value a company offers to one or several segments of customers and the architecture of the firm and its network of partners for creating, marketing and delivering this value and relationship capital, in order to generate profitable and sustainable revenue streams.”
A more synthetic definition is found in his subsequent bestseller Business model generation (Osterwalder & Pigneur 2010) where they state that “A business model describes the rationale of how an organization creates, delivers and captures value.” Moreover, the widespread publication of the book has crystallized which elements can best describe a business model. The authors determined nine building blocks as the parts that make up the whole. They are: Customer Value Proposition, Segments, Customer Relationships, Channels, Key Resources, Key Activities, Partners, Costs and Revenues.
The popularity of this new approach can be explained by the business model canvas. This is a design tool that elegantly places these nine building blocks on a single page. The canvas creates a sense of wholeness to fully understand the business model and more importantly, graphically demonstrate the relationships between the different elements as shown in Figure 2 below.
Illustration of the business model canvas
Figure 2. From Osterwalder & Pigneur 2010
Some criticism has surfaced regarding this condensed description of a business model. This canvas comes from an innovation bias and doesn’t account for other aspects of managing an organization, such as corporate structure, business objectives, performance measurements, strategy management and competition analysis (Rosenberg et al., 2011). To that list, we would add corporate social and environmental responsibility in creating multiple forms of value. Nonetheless, this approach to understanding and describing a business model allows to focus on the relationships between the elements. This systemic perspective has proven useful in ensuing research including our own.
In 2008, a new avenue for the design process emerged in the management journals oriented towards practitioners. Instead of applying itself to the creation of material products, design methods are used to rethink any type of business problem. Called design thinking, this movement was captured by management to solve their seemingly dialectical problems by using creativity and empathy for the customer (Brown 2009). Designer Marty Neumier (2008) calls them “Problems you can’t manage your way out of.” By rejecting a closed choice between two options, design thinking creates new solutions starting from consensual forms of reasoning. This was coined as integrative thinking (Martin 2009). Creating a third way requires new approach that can combine the analytical approach taught by management schools and the situational understanding taught in social science schools (Collopy 2004). Although design thinking was popularized in a business setting, it is now being applied by many types of professionals such a health experts, community organizers, participatory political workers, social workers and teachers of all kinds.
Design thinking remains an intuitive approach taught in industrial designer schools. Like a reflex or a part of their DNA, designers use these methods tacitly. Moving from analysis to synthesis in successive iterations, the design practitioner evolves his understanding of the situation. A design thinker can critique his own practice and adjust it in reaction to the dynamics of the context. Complex problems require designers to create ways into them by conducting empirical experiences situated in the context of real life conditions. This approach is the essence of design thinking.
A debate remains as to whether design thinking remains part of industrial design. Modernist industrial designers ask how is the designer’s knowledge of materials, colours and technology put to good use in design thinking? When still attached to the outcomes of product development, design thinking can be understated as fashioning business solutions. Sometimes that still means a tangible product close to industrial design’s historical strengths. Sometimes business solutions can mean an intangible service where the experience is the product. Better still, when unlimited by a corporate setting, design thinking can become a means to address the larger systemic problems that society faces.
Building on the four orders of design
Buchanan (1992) describes design in four broad areas, he calls “orders”. These are communication (signs and words), construction (things), strategic planning (action) and systemic integration (thought). Buchanan then intersects these orders with designer abilities, which are inventing, judging, deciding and evaluating. He proposes his matrix as an interpretative lens for investigating the “shifting debate about design in the contemporary world”. The matrix can also serve as a historical account of the disciplines of design formed through encounters with new problems.
Even though Buchanan (2008) suggests not to see the four orders as areas of traditional disciplinary practice or specific outcomes, a strong correlation remains. These orders link directly to graphic design, product design, interaction design and design thinking. Akin to Prahalad & Bettis’ dominant logic (1986), Buchanan considers the orders to be broad approaches to design that are common to all design professions and applications.
Buchanan’s matrix is further developed by Golsby-Smith (1996) whom illustrates that the orders do not replace each other but rather build on each other. This embededness is described as a widening of the design domain.
Our main contribution is the idea not only can goods be understood as a part of service, but service can also be understood as a part business models. We plot the course of management research to intersect with design research in creating the field of organization design.
Of course the idea of designing the organization is not new. It has been described in the works of Gailbraith in terms of information systems (1977) and later in terms of innovation (1984). Moreover, he approaches organization design as a means to become a customer-centric instead of product-centric. This view could step over the debate between products and services as constructed outputs. Put differently, we can interpret Gailbraith’s dialectic as distinguishing the object from the process in moving from products to service. The difference that Lusch & Vargo (2006, 2008) make between services in the plural form and service in the singular form is that services represents an outcome where as service refers to a process and interaction. See Appendix 2 for a complete table of the different transitions.
The following diagram illustrates a synthesis of many ideas: Buchanan’s last three orders of design, Golsby-Smith’s inclusion of design, Vargo & Lusch’s service-dominant logic, topped of with Gailbraith’s organization design. The end result is that an organization can design its business model to manage a service which proposes products or services to customers.
Figure 3. (Joyce 2013)
Conclusion to part one
We started this paper with the idea that there is more to service than what is found in the current understanding of a service-dominant logic. We tracked back to the origins of management research and design research to study the progression of both fields. They are both have shifting their focus from products to service to business models in the same pattern described by Buchanan’s four orders of design. The point where both fields intersect officially happens with the avenue of design thinking that seeks to influence the way managers go about their business. This collision gives a new meaning to the phrase organization design. We redefine it as the practice of designing the business model that frames the service process that proposes products or services to customers.
To better understand the shifts that are required to move up the orders of organization design, we devote the second part of this paper to the transitions involved.