Service Design and Delivery

Bill Hefley and Wendy Murphy (Eds.
Service Science: Research and Innovations

in the Service Economy
For other titles published in this series, go to

www.springer.com/series/8080
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Mairi Macintyre Glenn Parry Jannis Angelis
● ●
Editors
Service Design and Delivery

Editors
Mairi Macintyre Glenn Parry
The University of Warwick Bristol Business School
WMG, CV4 7AL Coventry University of the West of England
UK BS16 1QY
m.macintyre@warwick.ac.uk glenn.parry@uwe.ac.uk
Jannis Angelis
The University of Warwick
Warwick Business School
CV4 7AL Coventry
UK
jannis.angelis@wbs.ac.uk
ISBN 978-1-4419-8320-6 e-ISBN 978-1-4419-8321-3

DOI 10.1007/978-1-4419-8321-3
Springer New York Dordrecht Heidelberg London
Library of Congress Control Number: 2011924475
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Foreword
In the 1950s a company formalised a new science. The company was IBM, and the
science was Computer Science.
Computer Science took parts of existing scientific and engineering disciplines
and combined them in a new way. IBM recognised the need for the application of
scientific disciplines to the emerging field of computers, and decided to provide the
impetus itself. Today, we are so familiar with computer science that we don’t think
about how its origins were intertwined with the commercial world.
In 2004 a company formalised another new science. The company was IBM, and
the science was Service Science.
Service Science took parts of existing scientific, engineering and management
disciplines and combined them in a new way. Again, IBM recognised the need for
the application of scientific disciplines in this new field. But as yet we are not
familiar with Service Science. It’s new, strange, challenging, amorphous … just
waiting to be defined and explored!
This book is to help you to start to understand Service Science, its importance
to the world and its potential for the future.
Why should you be interested?
Around three-quarters of the GDP of developed nations is service-related. Many
services are highly complex, bringing together a mesh of organisations, people,
technologies and information to deliver value to their customers. Yet, until recently
there has been relatively little work done to understand how these complex service
systems achieve what they do, and therefore how to establish a systematic approach
to the delivery of service. This is Service Science.
The vision of Service Science is “to discover the underlying logic of complex
service systems and to establish a common language and shared frameworks for
service innovation.”1
This is no easy task. It requires a multi-disciplinary approach that integrates
knowledge from the areas of business, people and information technology, and uses
scientific methods to ensure appropriate academic rigour.
1
Succeeding through Service Innovation, ISBN 978-1-902546-65-0, © University of Cambridge
IfM and IBM Corp, 2008.
v
vi Foreword
But why should you be interested?

Service Science is a new field that is of the utmost importance to the world. With
so much of global GDP being service-related, it is essential that we drive improved
effectiveness, efficiency and sustainability in the delivery of services. The world
cannot afford to continue building services mainly on a foundation of “artistic
thinking” rather than scientific discipline.
There is therefore a need for people who can apply a unique combination of
skills, knowledge and experience to this emerging field; people who can coordinate
global resources of all kinds in the delivery of services, people who can identify and
deliver a continuous stream of innovation in service systems in a repeatable and
scientific way.
University classes on Service Science are springing up worldwide, often encour-
aged and supported by IBM. This book aligns with one of these classes. Its develop-
ment was initiated by IBM and WMG, a successful department at the University of
Warwick with decades of experience in manufacturing research. Therefore, this
book uses that expertise to compare the development of a product and a service. It
takes a lifecycle view of a service in the way that we might view a product, consid-
ering its design, development, delivery, maintenance and eventual replacement.
We believe that this approach is a good route into Service Science for those who
have experience in manufacturing. It is very good for those in manufacturing com-
panies who need to move forward from product-centric to service-centric
thinking.
We hope you enjoy this book, and that it helps to explain Service Science in a
way that you find understandable and stimulating. We are in the early stages of
Service Science research but you will see from this book that there is much value
to be gained from applying what is already known. By building your Service
Science skills you will be preparing yourself for success in today’s service-centric
world.
Peter Ward
Client Technical Advisor Programme Manager
North-East Europe
SMS for Life Project Manager, Tanzania
About the Editors
Mairi Macintyre joined WMG, University of Warwick in 2000 where she has
focused on design and development management. She has led a joint team includ-
ing Warwick, Cardiff, Cranfield, Bristol and Bath to develop master level courses
from emergent service science research. Her interest in combing rigour with rele-
vance has enabled her to repeatedly gain and sustain industry and public sector
engagement in research projects. Mairi has worked collaboratively with the UK
Lean Aerospace Initiative and aerospace companies to develop and deliver lean
insights and practice. She is the Principal Investigator of the EPSRC funded
WIMRC research project Agility in Self Care, with a presence at international con-
ferences in both operations research and in quality improvements in healthcare.
Dr. Glenn Parry is Principal Lecturer in Strategy and Operations Management at
Bristol Business School, University of the West of England and Senior Visiting
Fellow at the University of Bath’s School of Management. His research is industri-
ally focused and he has managed and contributed towards research consortia within
the automotive, aerospace and construction industries. His research interests include
organisational transformation, service, core competence, costing, lean, and enter-
prise software management. His project involvement includes the £16m EU ILIPT
project which led to the book, Build To Order, published by Springer, Agile
Construction Initiative, UK Lean Aerospace Initiative, Lean Flight Initiative, Supply
Chain 21 and S4T. He holds a PhD in Materials Science from Cambridge University,
a BSc in Chemistry and Business and an MPhil in Materials Science from Swansea
University. He has previously worked for British Steel, LEK Consulting, Warwick
Manufacturing Group and the School of Management at Bath.
Dr. Jannis Angelis is an Assistant Professor at Warwick Business School, and an
associated researcher with the Centre for Technology, Policy and Industrial
Development at MIT and the Institute for Manufacturing at Cambridge University.
Following doctoral research at Cambridge which investigated numerical flexibility
at P&G across Europe, Dr Angelis worked in venture capital in London. He has
previously researched strategy for sustainable competitiveness at Harvard, flexibility
and productivity in knowledge-intensive firms at Stanford and Berkeley, the human
side of lean at Cambridge, high performance organisations in aerospace at Oxford
and business development and support at the ILO and ITC/WTO of the UN.
vii
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Acknowledgements
The editors would like to acknowledge the significant contribution made by the
authors who together have made this book possible. We would also like to extend
our thanks and appreciation to the many organisations and people who facilitated
the development of the book with case contributions and their time.
We would like to thank Marc McLening, Aftermarket Director GE Aviation
for his considerable contribution to the work on complex deployed service and the
staff of Dowty Propellers. We would like to acknowledge and thank the RAC for
the time they gave to us; Debbie Hewitt, Managing Director of RAC Roadside,
Dr David Bizley, Technical Director, Ian Laughlin and Tony Loyer. We would also
like to acknowledge the support given by the EPSRC who helped make some of the
contributions to this book possible.
Thanks go also to Hannah Reese and Alison Kakoura who have supported the
production of the book.
Finally, we would like to thank our families, Amber Macintyre, Tsui, Lauren and
Emilia Parry, Jelena and Alexandra Angelis and many supportive friends. Producing
a book with so many authors is always a challenging experience, which takes up a
lot of personal time, and this would not have been possible without their ongoing
support and understanding.
ix
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Contents
1 Understanding Services and the Customer Response............................ 1

Jagdeesh S. Dhaliwal, Mairi Macintyre, and Glenn Parry
2 Goods, Products and Services................................................................... 19

Glenn Parry, Linda Newnes, and Xiaoxi Huang
3 The IBM Story............................................................................................ 31

Charles Loving
4 Rethinking Lean Service........................................................................... 41

John Seddon, Brendan O’Donovan, and Keivan Zokaei
5 Designing Competitive Service Models.................................................... 61

Veronica Martinez and Trevor Turner
6 Shifting from Production to Service

to Experience-Based Operations.............................................................. 83
Jannis Angelis and Edson Pinheiro de Lima
7 Complex Deployed Responsive Service.................................................... 95

Glenn Parry, Marc McLening, Nigel Caldwell, and Rob Thompson
8 A Multi-organisational Approach to Service Delivery........................... 119

Valerie Purchase, John Mills, and Glenn Parry
9 Through Life Costing................................................................................ 135

Linda Newnes, A.R. Mileham, W.M. Cheung, and Y.M. Goh
xi
xii Contents
10 The Practitioner View.............................................................................. 153

Ian Smart, Stuart Bestwick, Neil Jarrett, Richard O’Conner,
and John Gurnett
11 Are You Being Served?............................................................................ 167

Mairi Macintyre, Glenn Parry, and Jannis Angelis
Contributors
Jannis Angelis
OM Group, Warwick Business School, Coventry, CV4 7AL, UK
Stuart Bestwick
Alexander, 5 London Road, Southampton, Hampshire, SO15 2AE
Nigel Caldwell
Research Fellow, University of Bath
W M Cheung
Lecturer in Engineering, Design and Manufacturing Research Group,
Northumbria University, School of Computing, Engineering and Information
Sciences, Ellison Building City Campus, Newcastle Upon Tyne, UK
Edson Pinheiro de Lima
Pontifical Catholic University of Parana, 1155 Imaculada Conceicao Street,
Curitiba 80215-901, Brazil
Jagdeesh S. Dhaliwal
WMS, University of Warwick, CV4 7AL, UK
Y M Goh
Lecturer, TW222, Wolfson School of Mechanical and Manufacturing
Engineering, Loughborough University, Leicestershire, LE11 3TU, UK
John Gurnett
TriloGee Limited, 19 Beamont Close, Lutterworth, Leicestershire, LE17 4GE
Xiaoxi Huang
Department of Mechanical Engineering, University of Bath
Neil Jarrett
CWC (UK) Limited, Warwick House, 25 Buckingham Palace Road,
London, SW1W OPP
Charles Loving
Director of Operations, British Institute of Technology & E-commerce,
London, UK
xiii
xiv Contributors
Mairi Macintyre
WMG, University of Warwick, CV4 7AL, UK
Veronica Martinez
Principal Research Fellow, Centre for Business Performance, Cranfield School
of Management
Marc McLening
Aftermarket Director, Dowty Propellers, GE Aviation
A R Mileham
Professor, University of Bath, Claverton Down, Bath BA2 7AY
John Mills
University of Cambridge
Linda Newnes
Head of Costing Research, University of Bath, Claverton Down,
Bath BA2 7AY
Richard O’Conner
CWC (UK) Limited, Warwick House, 25 Buckingham Palace Road,
London, SW1W 0PP
Brendan O’Donovan
Vanguard
Glenn Parry
Bristol Business School, University of the West of England, BS16 1QY
Valerie Purchase
School of Communication, University of Ulster, Jordanstown Campus,
Northern Ireland
John Seddon
Visiting Professor at both the Universities of Cardiff and Derby
and the Managing Director of Vanguard
Ian Smart
Rob Thompson
Research Associate, Helen Hamlyn Centre, Royal College of Art
Trevor Turner
Former Deputy Head of Detonators, ICI Explosives UK until 1990;
Honorary Research Fellow, Strathclyde Institute for Operations Management,
Strathclyde University
Keivan Zokaei
LERC, University of Cardiff
Service Perspectives
The following perspectives are provided by experts working in practice and
academia. The perspectives provide an illustration of the breadth of offerings
described as ‘service’. They capture the essence of a number of service operations
and bring focus to the variety of value propositions which create a service experi-
ence. On reading subsequent chapters these perspectives can be used as reference
points to reflect upon how different theories may be applied in different contexts
and how value is created through service.
Total Place, efficient public services: Total Place in Coventry Solihull and
Warwickshire is a sub-regional collaboration between public sector partners which
is aiming to reshape services as we face the major reductions that will come in
public sector funding. We’ve been one of 13 nationally funded pilots and our by-
word is “better for less”. Families and friends are pulling together to face the finan-
cial down-turn and they expect the public sector to do the same. We’ve been
working across the system to redesign Children’s Centres to offer a more stream-
lined service and using design principles to make sure that we bring the views of
the parents and children who use services-as well as front- line staff into the heart
of how we specify and procure services. We have been using Lean to reshape the
human resources teams that support schools. Our early experience is that if you use
a systematic and engaging business redesign process and put quality at the heart of
it, you really can improve services and get better value for money.
Mike Attwood
Programme Director
Total Place in Coventry Solihull and Warwickshire
xv
xvi Service Perspectives
EMI, a service that listens to customer. The Consumer Insight team at EMI Music
offers an important service that helps shape the business. We use quantitative
research exploring consumers interaction with music to guide EMI’s various record
labels across more than 20 countries. First we listen carefully to the key business
questions that EMI has. Too often in companies consumer insight misses opportu-
nities to answer the key questions. At EMI we use insight to understand everything
from which new artists we should invest in, where the opportunities lie for our
artists across and within countries and what the strategic opportunities are for the
business (such as new business models and new product / service opportunities
created by shifting consumer preferences). Next we use our rolling program of
c.500,000 interviews per annum to answer those questions. This requires significant
research and data manipulation skills if the program is to be reactive enough to
meet business needs and cost-effective enough to scale globally. Finally we help the
businesses to do something different as a result. This requires drawing simple but
powerful conclusions from the research, communicating them and making them
available to all EMI employees on their desktops so that whatever they are working
on, then can quickly and easily use consumer insight to help make decisions.
David Boyle
Senior Vice President
Consumer Insight and Validation at EMI Music
Service Perspectives xvii
The Carbon Trust is a not-for-profit company with the mission to accelerate the
move to a low carbon economy. We provide a specialist support service to help
business and the public sector cut carbon emissions, save energy and commercialise
low carbon technologies. Since 2001, the Carbon Trust’s Applied Research scheme
has committed a total of £23 million to 188 projects that have demonstrated poten-
tial to develop into viable commercial technologies that could reduce UK carbon
emissions. When the scheme was created in 2002, we initially took a ‘hands off’
approach to project selection and management. However, following an internal
performance improvement review, we have changed the offering so that we are
much more directly involved with the projects and the innovators. This new part-
nered service approach allows us to draw upon our knowledge base and broad
functional capabilities to provide additional value such as introductions to investors,
mentoring on commercialisation, and partnership development.
Partnered service also allows us to better manage the risks associated with sup-
porting early stage R&D by providing us with a much better understanding project
developments and the context of these. Over the last three years, as we have intro-
duced these changes, we have seen the proportion of projects leading to a tangible
commercial outcomes (patents, investment and/or sales) increase from 55%
to 67%.
Dr Robert Trezona
Head of Research and Development
The Carbon Trust
xviii Service Perspectives
L.E.K. Consulting: Helping business leaders make informed decisions. L.E.K. is a

global consulting firm that specialises in strategy, transaction services and perfor-
mance improvement consulting. It advises the largest private and public sector
organisations, private equity companies and smaller, more entrepreneurial busi-
nesses. With a reputation for resolving the most complex commercial issues, L.E.K.
helps business leaders consistently make better decisions, deliver improved busi-
ness performance and create greater shareholder returns.
Companies come to L.E.K. because they know it offers the deep industry
expertise, insight and practical guidance needed to develop and execute the most
effective commercial strategies. L.E.K. works closely with its clients to understand
and address the critical issues they face, asking the hard questions, gathering and
analysing the most relevant information, and developing innovative strategies that
create value. L.E.K.’s ability to resolve its clients’ most complex challenges is
demonstrated by the fact that more than 90% of its work comes from repeat clients
or referrals.
James Lloyd
Head of Marketing
L.E.K. Consulting LLP
Service Perspectives xix
Managers and professional project managers typically draft implementation plans

paying close attention to design for implementation, conformance to technical
specifications, defining key performance indicators and aligning stakeholder inter-
ests. In my experience most companies (and most project managers) are often able
to design the “system” part of change adequately. On paper, plans are most often
technically “correct”. But a large percentage of implementations fail—due to delay,
missed targets or lack of sustainability. The most common pitfall is neglect of the
“soft” side of change. All implementation projects imply change, and success-
ful change requires leadership. What separates leaders from managers is the ability
to engage and excite stakeholders, to lead by example and to drive the change
agenda. In my opinion most people will be part of change if they understand the
need for change, have the adequate competences to perform in their new role and
have the right incentives. Therefore leaders that are able to communicate the need
for change, provide for adequate training and aligned incentives will be most suc-
cessful. In addition, leaders that engage and motivate their employees through role
modelling and personal involvement will not only succeed in implementation – they
will thrive.
Dr Ian Colotla
Vice President
Novo Nordisk A/S
xx Service Perspectives
BAE Systems; providing complex engineering service. We have been challenged

with delivering a very complex service, the repair, maintenance and upgrade of fast
jets, under a new form of contract; the Availability Transformation: Tornado
Aircraft Contract. BAE Systems was a traditional product manufacturer. We pro-
duced aircraft, systems and spare parts then sold them to our customers, our profits
largely based on volume. The new service contract is very different. BAE Systems
role is to provide availability for the RAF Tornado aircraft. That means maintaining
the RAF’s fleet of aircraft providing spares and technical advice so that they are
ready to fly. We don’t deliver this as a separate organisation, but instead we work
with our partners as there are many different skills and resources that are required
to keep the aircraft flying.
That’s not just the Royal Air Force, who provide over 50% of our service techni-
cians. We also work with numerous supply partners such as the MOD, SELEX,
Claverham, Rolls Royce, to name only a few. BAE Systems has learned to work in
a new way to provide service. We have developed an integrated service enterprise
that brings together experts from many different organisations, providing a more
cost effective service solution for the Ministry of Defence and ultimately saving the
tax payers money, and shareholders returns through both volume and innovation.
Steve Debonnaire
ATTAC Program Director
BAE Systems
Service Perspectives xxi
Estimating Through Life Cost is one of the major challenges of the cleantech indus-
try. As clean technologies are mainly found in the energy, waste management and
water management sectors, clean technology companies typically sell products that
are mission critical, have a high degree of customization, and are designed for a
long life of constant use. One of the key questions of customers is how reliable the
technology will be over its life span – in particular, how likely the technology is to
cause unpredictable costs in addition to its upfront cost, such as costs of mainte-
nance or disruption. When an innovation is launched in such a market, reliable
information about the life cost of the novel product is naturally lacking. This has
proven to be a key obstacle to venture capital funded cleantech companies with
innovations that are conceptually proven and that deliver significant improvements
to conventional alternatives, but that lack enough reference installations to provide
reliable data on life costs. One way out of this dilemma that is increasingly dis-
cussed among practitioners is servitization, i.e., the notion that the owner of the
innovation should be an agency that is specialised in using and maintaining the
product, letting the end customer become a buyer of the product’s service (such as
heat) rather than the product itself.
Harald Overholm
Investment Director
Sustainable Technologies Fund
xxii Service Perspectives
Value drives everything we do so let’s look at the dimensions of value. Value is

contextual in terms of both when we experience and evaluate it. So value depends
on the state of the world at the point of use. Value also has an emotional dimen-
sion. If your watch is worth anything more than £10, you bought it for emotional
value because a functional watch may be purchased for £10 or less. There is also
a practical value, an abstract concept that can be described as function. If you
think of a chair, the practical value of a chair is the abstract notion of a seat.
Conversely, there is nothing abstract about logical value. Its value is defined and
purposeful. If you want to buy a tape measure the measurement on the tape mea-
sure must be accurate i.e. logical value is about objective standards. What is inter-
esting to me is not merely that the dimensions exist, but that many firms just do
not design and deliver all dimensions in their value proposition to the customer.
Delivery across all dimensions is hard. There is also expected and perceived value.
When we decide to buy, we weigh the expected value in the future and decide how
much to pay now. When we experience the service we develop a perception of its
value and compare that to what we expected. We then evaluate if we want to
repurchase.
Go to a café and critically evaluate the experience. What is the outcome of your
experience in value terms? People often completely forget their own role in creating
that experience. Customers cocreate value with the café by accessing their own
resources which impact on the experience, such as selecting the people they take
with them to the café.
What does this mean for firms? Well, to service designers out there – how much
of service design includes the design of the customer and the resources they might
need to co-create value?
Professor Irene Ng
Professor of Marketing Science at the University of Exeter Business School,
Senior Visiting Fellow, University of Cambridge, and
Advanced Institute of Management (AIM) Research Services Fellow
Chapter 1
Understanding Services and the Customer
Response
Jagdeesh S. Dhaliwal, Mairi Macintyre, and Glenn Parry
1.1 Products and Services
So why have you picked up this book?

Perhaps you are in a bookshop, browsing through titles and were attracted by its
cover.
Perhaps you bought it on-line and are now reading it in your bedroom.
Maybe you’ve borrowed it from a friend and are browsing its pages during your
coffee break.
Whatever the circumstances, you, evidently, are the customer.
But what of this book?
Its title is ‘Service Design and Delivery’. So is this book a product or is it a
service?
The discipline of Economics has traditionally assumed that there is a distinction
between products and services. This convention can be traced back to Adam
Smith’s landmark work, ‘The Wealth of Nations’ (Hill 1999; Smith 1776).
To view products and services as distinct outputs of a productive process is
ingrained in economics, accounting and operations management (Hill 1999). The
distinction has been considered useful since it is assumed that manufacturing and
service industries need to be organised in distinct ways.
Interestingly, however, the division between products and services is not as stark
as you might initially imagine. Indeed a debate has raged in the literature about how
they might be differentiated. Various authors have proposed their own discrimina-
tory criteria (Smith 1776; Levitt 1981; Hill 1999; Gadrey 2000). The fact that this
debate exists at all demonstrates how difficult it can be to distinguish between
products and services.
Surely it’s easy … you can physically touch a product but services are about people inter-
acting... you can’t touch them … they are more difficult to pigeon-hole …?
J.S. Dhaliwal ()
WMS, University of Warwick, CV4 7AL, UK
e-mail: j.dhaliwal@warwick.ac.uk
M. Macintyre et al. (eds.), Service Design and Delivery, Service Science: Research 1
and Innovations in the Service Economy, DOI 10.1007/978-1-4419-8321-3_1,
2 J.S. Dhaliwal et al.
Introductory textbooks in Economics focus on the idea of tangibility: Products are

physically present whereas services are not.
Therefore, in the sense that it is physically present, we might think of this book
as a product.
However, we can also think of this book as providing a service: as the authors
of this book, our prime aim is to satisfy and ideally, to surpass, your expectations
(our customer) through presenting core ideas about service design and delivery.
It is the intangible ideas that are key and not the tangible, physical nature of the
book. In other words, we have chosen to communicate our ideas through a book.
But we might have chosen to achieve the same outcome via a different medium,
say an audio book, a DVD, through organising a seminar or perhaps through pitching
up at your house and inviting ourselves in for a chat.
To address this issue, Peter Hill (1999) suggests a classification that includes
Tangible Goods, Services and Intangible Goods. According to Hill, intangible
goods originate from a creative source. Creative sources include authors, film makers,
scientists, architects, software writers, orchestras and so on. As they are created, the
original goods do not have physical tangible properties, but rather, they have to be
captured and recorded on physical media such as a paper, a disk, CD or hard drive.
But it could be argued that all products and services start out as a creative idea:
The year 2020s coolest-looking car may today be a nothing more than a newly
coalescing idea in a design-engineer’s head. This idea will need to be ‘recorded’
and translated into a tangible product. Equally, 2020s brave new health service
may currently just exist as policy statements captured in a government paper:
It will need to be translated into a tangible service that patients can experience in
real life.
Both products and services incorporate productive processes, but the point at
which customers interact with this process tends to differ between products and
services.
Consider Fig. 1.1, which illustrates the classic productive process.
Compare this with a productive process for services as shown in Fig. 1.2.
This appears straight forward. But let us consider the ways in which product
manufacturers are increasingly interested in engaging with customers at a much
earlier stage in the productive process, often through using the advantages of
automation offered by the Internet.
Fig. 1.1 A productive process

1 Understanding Services and the Customer Response 3
Fig. 1.2 A productive process for a service
For example, a variety of companies allow you to custom-build your own home
computer (PCSpecialist 2009; ComputerPlanet 2009). Car manufacturers allow
customers to ‘build your own car’ (e.g. Jaguar 2009).
Here, the process is more similar to Fig. 1.2 – the classic process for a service,
than Fig. 1.1 – the classic process for a product.
1.2 Scripted vs Customisable Customer Experiences
We have discovered, therefore, that a rigid distinction between services and products
does not exist. Furthermore, there may be a trend of increasing fuzziness around the
difference between products and services.
Think about the degree to which you can personalise your mobile phone:
• You can choose between numerous varieties of charming (or hideous!) fascia
colours.
• A plethora of tones can ring, wake, alert or remind you.
• You can play with the function buttons so that they are set to open up the particu-
lar functions you want.
• You can customise the software so that it does what you want.
Product manufacturers increasingly seek to establish service relationships with
their customers through offering a range of after-sales add-ons.
Think about car manufacturers and their range of services:
• In-house car insurance
• Maintenance contracts
• Breakdown services
Conversely, some services seek to offer highly scripted, highly standardised ser-
vices that offer a near identical experience wherever or whenever they are pur-
chased. Think about some fast-food businesses and hotel chains:
• Walk into any McDonalds in the world and your experience will be similar.
• Ibis hotels have the same furnishing colours and décor whichever country you
go to and again, your experience tends to be similar.
The Internet offers new possibilities in terms of making services more tangible and
products more customisable.
• NHS, the UK’s national health service, offers an online diagnostic aid, through
NHS Direct, that supports patients in sifting through their symptoms to arrive at
likely diagnoses linked to management plans, self-help guides and contact num-
bers for support services.
• Virgin Wines, an online retailer helps customers to build up a database of their
drinking preferences which is then translated into the delivery of wine cases
customised for each consumer.
• Many products encourage you to register with their websites which offer ser-
vices such as product information, updates, news and competitions.
Considering the above, we conclude that we have historically found it useful to
conceptualise products and services as distinct types of entities in Operations
Management.
There has traditionally been a perception that this distinction will help in our think-
ing around planning product and service businesses in different ways, but this mental
model of ‘products’ and ‘services’ does not appear to be helpful in thinking about
twenty-first century organisations. Perhaps it is time to jettison this mental model
(Lovelock 2004) and move instead to the concept of a continuum of outputs, Fig. 1.3,
ranging from those that are highly customisable to those that are highly scripted.
Fig. 1.3 The continuum of service outputs

1.3 Why Does This Matter?
Reflecting on products and services using the continuum model offers the possibility
of introducing more tangible, scripted elements to services (e.g. NHS Direct) and
unique, flexible elements to products (e.g. Virgin Wines).
Our mental models are important since they provide a context for our ideas. The
mental models (or paradigms) we hold may focus our thinking, but they may also
limit it. Conversely, paradigms may ‘open out’ our thinking, so stimulating creativity,
but failing to ‘lock down’ carries the risk of scattered, unfocused ideas.
Therefore, it is helpful to think about services and products as a continuum.
This model can aid in either focusing thinking (when considering ‘pure’ products
or services) but it also allows ‘fuzziness’ (when considering scripted services or
customisable products).
1.4 How Scripted? How Customisable?
In designing services, exactly how scripted or how customisable should the client
experience be? This of course, will be a question of deciding on the operations
strategy.
Slack et al. (Slack et al. 2006) identifies five sources of competitive advantage.
Quality Being RIGHT
Speed Being FAST
Dependability Being ON TIME
Flexibility Being ABLE TO CHANGE
Cost Being PRODUCTIVE
© Nigel Slack and Michael Lewis 2003
Services have to make a trade-off between these different sources of competitive

advantage.
The following diagram illustrates how an organisation might map out its priorities:
‘Fit’ is concerned with ensuring comprehensiveness,

correspondence, coherence and criticality
Resource Usage
Market Competitiveness
Critical
Performance objectives
Quality Coherence
Speed Correspondence
Dependability Critical
Flexibility Critical
Cost Critical Critical
Supply Process Development

Capacity and
Network Technology Organization
Decision areas
Comprehensive?
And to work through a concrete example, here are some of the factors an airline
will want to consider in determining its operations strategy for different classes of
travel:
First/Business class Economy class

Services First/Business - class cabin, Economy cabin
airport lounges, pick-up
service
Customers Wealthy people, business Travellers (friends and

people, VIPs family), vacation takers, cost-
sensitive business travel
Service range Wide range, may need to be Standardized cabin
customised
Rate of service Relatively low
Relatively high
innovation
Volume of activity Relatively low volume Relatively high volume
Profit margins Medium to high Low to medium
Main competitive Customization, extra service, Price, acceptable service

factors comfort features, convenience
Performance Quality (specification and Cost, Quality (conformance)

objectives conformance), Flexibility, Speed
Different product groups require different performance objectives

It is important to appreciate, however, that high quality-high cost services might

not necessarily choose to offer more flexibility: indeed, the selling point might well
be ‘a consistent, high quality, reliable service’. On the other hand, there may be
circumstances where greater flexibility might enable a service to reduce its costs
through avoiding waste.
The key strategic decision to be taken in designing a service is for an organisation
to define what mix of Quality, Speed, Dependability, Flexibility and Cost it is seeking
to provide. This will constitute its Service Concept. As we will see, this service
concept relates to the underlying emotions that the service seeks to provoke.
1.5 Customer Experience: It’s All About Eliciting Emotions
1.5.1 What Is the Ultimate Goal of Any Service or Product?
Airlines want passengers to enjoy their travel experience with the aim of attracting
positive publicity and repeat business. Theme-park operators want their customers
to enjoy a series of thrilling rides…. with the aim of attracting positive publicity
and repeat business. As authors of this book, we would like you to feel stimulated
by the ideas on these page, with the aim of attracting positive publicity (you’ll tell
your friends) and repeat business (you’ll see our names on other publications and
think about reading them).
The goal is the same: through their services or products, organisations seek to
elicit favourable customer experiences that stimulate the behaviours of repetition
(customers buy the service or product again) and service/product promotion (satis-
fied customers advocate use of the service or product amongst their social
network).
1.5.2 But What Exactly Is a ‘Favourable Customer Experience’?
Let’s consider some common service experiences.

• Think about the last time you had a wonderful meal out at a restaurant.
• The relief you felt when the RAC patrol officer managed to get your car going
again.
• How about an exhilarating day at a theme park?
• A reassuring chat with your doctor.
• Or a refreshing swim in the pool of your local gym.
In each case what made the experience ‘favourable’ (or unfavourable) was the
emotional response that the service elicited in you.
• The positive restaurant experience was the result of triggered feelings of antici-
pation, being cared for, feeling energised (or relaxed) by the lighting and décor
and feeling content at the meal’s end.
• Your relief at having your car fixed was a result of feelings of fear and anger at
the car not starting being assuaged by a confident, courteous patrol officer who
was able to efficiently carry out the repair.
It’s this emotional response that will motivate you to eat at that restaurant again or
subscribe to the RAC again and tell all of your friends about your great
experience.
We can therefore consider an ‘experience’ to be a ‘set of emotions’.
All of the above allows us to arrive at a fundamental conclusion about the nature
of service design and delivery:
The central goal of service design and delivery is to define and elicit favourable customer
emotions.
1.6 The Importance of Emotions to Service

Design and Delivery
Our increasing understanding of the importance of emotions has turned many of

our former assumptions about their role and importance on their head.
The traditional perspective, the view that we are usually taught either formally or
more often tacitly, is that emotions interfere with rational thought. Decision-making,
is seen as a formal, rational, logical process whereas emotions are seen as irrational
and a hindrance to effective decision making. However, over the past few decades
the field of Experimental Psychology has overturned the whole notion of decision
making proceeding as a linear, logical process: Rather, emotions are demonstrated to
be KEY to rational decision making. (Goleman 1996; Ledoux 1998; Damasio 1999,
2006; Swaminathan 2007; Laibson 2005; Salvador and Folger 2009).
In his paper ‘Decisions and Desire’, Gardner Morse (Morse 2006) succinctly
describes the essence of how our human brains operate:
The closer scientists look, the clearer it becomes how much we’re like animals.
We have dog brains, basically, with a human cortex stuck on top, a veneer of civilization.
This cortex is an evolutionarily recent invention that plans, deliberates, and decides. But
not a second goes by that our ancient dog brains aren’t conferring with our modern cortexes
to influence their choices – for better and for worse – and without us even knowing it.
A glance at Fig. 1.4 demonstrates this concept anatomically: In essence, the human

brain is comprised of the brain stem, which takes care of basic life support functions
such as breathing and digesting food, the limbic system, which is the source of our
emotions and the neocortex which represents Morse’s ‘veneer of civilization’.
Damasio and colleagues have studied the cases of over 50 people who have
suffered targeted brain damage to their limbic system as the result of tumours or
accidents (Morse 2006). The intelligence of these patients is unaffected (since they
have not suffered any neocortical damage) but they are no longer able to interpret
the emotional content of situations as a result of their limbic brain injury. For example
these patients comment that emotion-laden pictures that would previously have
provoked an emotional response no longer trigger specific feelings within them.
NEOCORTEX
Higher order thoughts
and actions
LIMBIC SYSTEM
Pre-programmed patterns
of behaviour i.e. Emotions
BRAIN STEM
Automatic. Basic life support
functions
Fig. 1.4 The human brain
The surprising thing is that with normal IQs, but stripped of emotion, these
u nfortunate people are unable to make decisions, particularly individual or social
decisions. In considering the pros and cons of a given situation they try to dispas-
sionately assess every possible ramification in the decision tree, leading to an impos-
sibly large number of permutations. They are unable to rapidly ‘weight’ or ‘give value
to’ the relative importance of the available options. They lack a ‘gut instinct’ which
allows them to filter out low value information and focus on high value information.
This research challenges our traditional view that emotions disrupt decision-
making. Indeed we start to understand that it is emotions that enable us to ‘weight’ or
‘give value’ to different options in the decision-making process (Gladwell 2006).
The concept of value and the importance of the value proposition are discussed
further in the chapter, Designing Competitive Service Models. However, the key
point to appreciate here is that the core essence of ‘value’ depends upon the human
emotions that a service excites (or fails to excite). Neuropsychological research is
revolutionising thinking in Economics and has spawned the growth of a new field
dubbed ‘Neuroeconomics’ (Economist 2005).
In their award-winning paper, Robert Heath and Paul Feldwick (Heath and
Feldwick 2008) discuss the central importance of emotions to successful advertising.
They describe the earlier research of Heath and colleagues (Heath et al. 2006) who
have examined the relationship between the emotional potency of a range of on-air
TV advertisements, their rational content (i.e. specific factual knowledge transmitted

about the product) and brand favourability (i.e. the extent to which research partici-
pants thought favourably of the product after viewing the advertisements). They
found that brand favourability varied with the emotional potency of advertisements
but there was no relationship between the factual content and brand favourability.
In other words, ‘it’s emotion that sells’. We buy on the basis of emotions (i.e. our
‘emotional brains decide’) and we THEN use our logical brains to rationalise or
justify the purchasing decision (Hill 2003). Research using the technique of func-
tional Magnetic Resonance Imaging (fMRI), where subjects undergo sophisticated
brain imaging whilst they make decisions, is increasingly being used to explore the
mechanics of our decision making and the interaction between the emotional and
logical parts of our brains (Knutson et al. 2007; Grabenhorst and Parris 2008).
Heath and Feldwick go on to explore the curious phenomenon that, despite
mounting evidence over the past 40 years that emotions are central to advertising,
the industry has clung to a mental model of the centrality rational content to
successful advertising. As Heath and Feldwick (Heath and Feldwick 2008) state:
It is not that people in advertising don’t believe there is a role for creativity, or that building
brand relationships is unimportant. It is that, in practice, these ‘softer’ values are regarded
as less important than, and subservient to the communication of information.
As we have discussed, the evidence suggests that the relationship should actually
be the other way around.
What are the implications for service design and delivery of this new under-
standing of the central importance of emotions? Do we ‘get things the wrong way
around’ and consider the logical, neocortical aspects of service design first and then
seek to tag on emotions (expressed as ‘value’ or ‘design’)?
In a similar way to advertisers, we need to ensure that our mental map or para-
digm places emotions at the centre of service design. In other words, in designing
a new service, the starting point should be a conscious identification of the mix of
emotions that a particular service is seeking to trigger.
Failure to do so can spell disaster.
The once mighty Woolworths can offer a salutary lesson. The brand name con-
tinued to inspire the affection of UK consumers, many of whom associated it with
their childhood Christmas toys and ‘pick N mix’ sweets, but it collapsed neverthe-
less. Jeremy Baker’s analysis (Baker 2009) on the BBC News website sums up the
views of many customers:
“The in-store environment isn’t that good and you’re not sure what they’re good at”, he says.
“If you want a cheap suit you think of Primark and if you want expensive food you think of
Waitrose, but there are no items to associate with Woolworths. It has no unique qualities”.
“Going into Primark, the whole atmosphere says ‘It’s fine, this is cheap’ but you feel good
about yourself,” he says. “But you feel a loser going into Woolworths”.
Consider these two paragraphs and compare them to another quote from the same
BBC article:
When asked, ‘what are its strengths?’ a spokesman for Woolworths says that the answer lies
in its annual report, which says the chain focuses on ‘the home, family and entertainment’,
although the chairman notes in his statement that it is now less dependent on CDs and has
moved more towards books and computer games.
It appears that Woolworths had identified, in a rational ‘neocortical’ way what its
core business was i.e. ‘the home, family and entertainment’.
The missing piece of the jigsaw however is contained in Baker’s final, emotional
(limbic) comment: ‘But you feel a loser going into Woolworths’.
Thinking with an ‘emotions are central’ paradigm would focus attention on
Baker’s comments first which would then allow a logical selection of products:
This model allows us to understand that the key question to ask is ‘How might
Woolworth’s customers “feel good” again?’ A starting point might be the affection
and nostalgia of UK customers for the brand, for example. This should then lead to
rational decisions around product selection – what products ‘fit with the emotions’
that Woolworths is trying to elicit and in fact, rather than specific products, is it
more about store design and organisation?
Contrast this with the risk of ignoring emotions and starting with ‘which products
to sell, how to organise logistics’ and other rational aspects of service design. What
are the chances of recovery if customers, despite the efforts of any rational, neocor-
tical strategy, continue to ‘feel like losers’ going into Woolworths?
Compare Woolworths with the Virgin Group. Virgin does not have a core set of
products or services. Rather, its website identifies a core set of values – in other
words emotions:
Virgin stands for value for money, quality, innovation, fun and a sense of competitive
challenge.
Virgin.com 2009
Clearly, this organisation has blended together a defined set of emotions and these
lie at the core of its business.
The rational, neocortical side of Virgin’s business is productively focused on
triggering this set of emotions in its workforce and its clients. Virgin has a sense of
how it wants us to feel and how it intends to elicit these limbic responses.
1.7 Service Design and Delivery: Putting It All Together
What are the implications for service design and delivery of our discussion so far?
In considering the setting up of a new service or in analysing an existing one,
managers need to start off with two fundamental sets of questions:
1. LIMBIC: What emotional (limbic) response are we seeking to elicit in our clients
and in our own work teams?
a. How are we going to elicit these limbic responses?
2. NEOCORTICAL: What Service are we seeking to provide? What business are
we in? i.e. are we providing after-care product support, rental services, retail
services and so on.
a. How are we going to provide these services? Addressing this question forms
the basis of the rest of this book.
The interrelationship between these questions is demonstrated in Fig. 1.5.
Further, we can combine our understanding of limbic and neocortical brain
processes, our idea of a continuum of products and services and Slack’s model of
competitive advantage in the following grid (Fig. 1.6).
To see how this might work, let’s consider a worked example.
A water utility company.
First, it needs to consider the limbic response it wants to elicit.
How about this?!
LIMBIC
Key Emotional Drivers: How Do You Want Customers/Clients to Feel about your Service?
They are
‘luxurious’
‘exclusive’
‘unique’
We can instantly see that this ‘jars’ limbically, we see that it doesn’t ‘feel right’.
In fact, the thought of a water company that’s into ‘luxury and exclusivity’ tend to
raise the annoyance and anger levels and you can just imagine the screaming head-
lines about public utility profligacy.
Compare the above with this:
LIMBIC
‘safe and secure’
‘reliable’
‘trustworthy’
‘caring’
Fig. 1.5 Fundamental strategy design questions

Fig. 1.6 Service emotion, competitive advantage and degree of pliability

You could also add the word ‘seamless’ in the sense that most of us don’t want
much interaction with the water company! Rather the preference would be that
water supply and sewage drainage continued to operate quietly in the background,
seamlessly supplying water and removing effluent.
This then translates into the following service transaction:
They are Offering a Dependability Scripted Electricity

‘safe and secure’ consistent Consistent customer experience service
‘reliable’ experience Low level, scripted human
‘trustworthy’ interaction – ‘friendly,
‘caring’ efficient, safe, secure, service’
In other words, in case a customer did need to contact the water company, the
nature of the transaction should be efficient, friendly but quick and seamless.
An upbeat service where the water company representative ‘wants to become
friends with you’ and seeks to take up your time jars with the emotional colour that
this utility is aiming to paint.
Contrast the above with a visit to a Disney theme park, which would seek to
stimulate a different mixture of emotions:
LIMBIC
Fun, exciting, fast
But still safe and secure
This could translate into the following model:
They are Offering a consistent Dependability Scripted

‘Fun, exciting, experience Consistent customer
fast but still experience
safe and Scripted human
secure’ interaction –
‘high energy, fun,
relaxed yet, safe
and secure’ but
flexible enough to
offer spontaneity.
Some services might want to elicit a powerful positive limbic response by pitching
for emotional drivers that are odds with customer expectations.
Consider car insurance.
The expectation, no doubt, would be this:
LIMBIC
They are
‘efficient’
‘no nonsense’
‘give me just want I need’
‘cut out the waste’
An example of this might be the Endsleigh Insurance’s website (Endsleigh 2009).
Contrast this with another approach:
LIMBIC
They are
FUN
‘efficient’
‘no nonsense’
‘give me just want I need’
‘cut out the waste’
And now look at Elephant.co.uk’s website (Elephant 2009).
The thought of car insurance being ‘fun’ seems anomalous but this is clearly part
of the limbic response this company is seeking to create.
In a similar vein, one popular Italian restaurant in the West Midlands thrives not
because of the excellence of its food, but the renowned rudeness and indifference
of its waiters! People love to talk about the antics of the waiters and their over-the-
top snootiness!
Much of the remainder of this book will concentrate on the practical, logical
issues surrounding service design and delivery i.e. question 2.
2. NEOCORTICAL: What Service are we seeking to provide? What business are
we in? i.e. are we providing after-care product support, dental services, retail
services and so on
a. How are we going to provide these services?
But in discussing the importance of emotions in this first chapter and the neuro-
logical basis for emphasising their importance, we hope you will continue to keep
question 1 at the forefront when analysing or designing a service.
1. LIMBIC: What emotional (limbic) response are we seeking to elicit in our cli-
ents and in our own work teams?
a. How are we going to elicit these limbic responses?
Getting this question order the right way round appears to be critical to designing
and delivering successful services.
Having read through this chapter, practise identifying and assessing your limbic
and neocortical responses to services you encounter:
Exercises
What mixture of limbic responses are WE aiming to elicit from this book?! Take a
look at the cover, the colour scheme, the style of writing, the fonts used, the
diagrams included ….
Take a look at your bank’s website, visit a branch and talk to its employees … is
there consistency in the underlying emotional messages? If the emotional fla-
vour is ‘safe and discrete’ does this carry through? If it’s about being friendly,
open and plain-speaking, is this reflected?
The next time you are annoyed by a service, consider your underlying limbic and
neocortical responses … was it specifically WHAT they did that upset you (i.e.
the rational or neocortical aspect of the service) or was it HOW they did it (the
limbic aspect … typically to do with how a member of staff interacts with
you)?
References
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2009
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Damasio AR (1999) The Feeling of What Happens. Heinemann, London
Damasio AR (2006) Descartes’ error: emotion, reason and the human brain. Vintage, London
Economist (2005) Mind Games. Economist. 374(8409): 71
Elephant (2009) http://www.elephant.co.uk/?media=adwo5. Accessed 15 February 2009
Endsleigh (2009) http://www.endsleigh.co.uk/car-insurance.html. Accessed February 2009
Gadrey J (2000) The characterization of goods and services: An alternative approach. Review
of income and wealth. 3(3): 369–387
Gladwell M (2006) Blink: The Power of Thinking Without Thinking. Penguin, London
Goleman D (1996) Emotional Intelligence: Why it Can Matter More Than IQ. Bloomsbury
Publishing PLC, London
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cortex. European Journal of Neuroscience 28(9): 1930–1939
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by attention. Journal of Advertising Research. 46(4): 410–419
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Journal of Market Research. 50(1): 29–59
Hill D (2003) Tell Me No Lies: Using Science to Connect with Consumers. Journal of Interactive
Marketing. 17(4): 61–72
Hill P (1999) Tangibles, intangibles and services: A new taxonomy for the classification of output.
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Jaguar (2009) http://www.jaguar.co.uk/uk/en/xk/build/buildyourown.htm. Accessed 13 February
2009
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Laibson D (2005) Impatience and Savings. NBER Reporter Fall
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Weidenfeld and Nicolson, London
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Frontiers2004FutureofServicesMarketing.pdf. Accessed 31 October 2004
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5pgCFcST3wodg33ibw. Accessed 15 February 2009
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19(1):131
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aspx. Accessed 16 February 2009
Chapter 2
Goods, Products and Services
Glenn Parry, Linda Newnes, and Xiaoxi Huang
2.1 Introduction
Defining terminology is a useful starting point when reading or writing on the

subject of service to prevent any confusion or assumptions that we all understand
the terms to mean the same thing. So, what do we mean by goods, products and
services? This is a book about service, but what is a ‘service’ and how is it different
to ‘goods’ or ‘products’? Whilst most people intuitively know the difference
between a product and service, actually defining this difference with clarity and
accuracy of text is not straight forward. The terms ‘goods’ and ‘products’ appear to
be used interchangeably in much of the literature, but even here we can find debate
about meaning (Araujo and Spring 2006; Callon 1991, 2002). However, for the
sake of brevity we will here accept that they both refer to the same thing and focus
on attempts to differentiate goods and services. This quest is far from straightfor-
ward. Since the early eighteenth century academics and scholars from different
domains have attempted to define these terms explicitly (Say 1803; Levitt 1981;
Hill 1999; Gadrey 2000). In this chapter we will attempt to illustrate their findings
in order to provide some background to the debate.
2.2 Goods
In the eighteenth century Adam Smith (1776) stated that goods have exchange-
able value and so a characteristic of a good is that its ownership rights can be
established and exchanged. Goods can be considered as embodying specialised
G. Parry (*)
e-mail: glenn.parry@uwe.ac.uk
20 G. Parry et al.
knowledge in a way that is highly advantageous for promoting the division of

labour (Smith 1776; Demsetz 1993). Nassau Senior (1863) described goods as
material things, meaning that goods are tangible and have physical dimensions.
These concepts were still accepted over 100 years later when The System of
National Accounts (SNA) (1993) defined goods as physical objects for which a
demand exists, over which ownership rights can be established and whose owner-
ship can be transferred from one institutional unit to another by engaging in
transactions on markets. Hill (1999) summed up the major characteristics of
goods as an entity that exists independently of its owner and preserves its identity
through time; his definition supporting of that of the SNA. Following these defini-
tions we can outline a set of attributes for goods:
• Physical objects for which a demand exists
• Their physical attributes are preserved over time
• Ownership rights can be established
• They exist independently of their owner
• They are exchangeable
• Unit ownership rights can be exchanged between institutions
• They can be traded on markets
• They embody specialised knowledge in a way that is highly advantageous for
promoting the division of labour
These attributes are broadly accepted by academics and reflect 200 years of
ongoing debate.
2.3 Services
Although we have found a long standing agreement over the definition of products/
goods and their characteristics, the definition of services has never reached consen-
sus. Consequently it is hard to obtain full acceptance about the distinction between
goods and services. Here we will present some of the different perspectives on
service from the literature.
2.4 Intangible, Heterogeneous, Inseparable & Perishable

(IHIP) Characteristics
As marketers began to recognise and emphasise the importance of services (Fisk

et al. 1993) they consequently called for services to form a separate part of a com-
panies’ marketing strategy (Lovelock 1983). A major contribution to the services
debate was a classification consisting of four features:
• Intangible
• Heterogeneous
2 Goods, Products and Services 21
• Inseparable
• Perishable
These features of what makes a service, referred to as ‘IHIP’ characteristics, have
formed the basis of a consensus in most of the marketing literature. But what do
they mean in this context and do they provide a strong differentiator? Each charac-
teristic is discussed below.
2.4.1 Intangible
Intangible things are not physical objects and only exist in connection to other
things. Examples include a brands image, or goodwill. Harker (1995) humorously,
though usefully described services as ‘something that you cannot drop on your
foot’, which vividly illustrates the intangible characteristics of services. Although
the habit of describing services as intangible goods comes from the economics lit-
erature (Hill 1999; Miller 2000), this view is common in management and market-
ing sectors (Chase and Aquilano 1992; Bowen and Ford 2002).
However intangibility may have failings as a differentiator between service and
product. What is music, a book or a film? A product or a service? Hill (1999) identi-
fied this group of intangible products in the form of entities that are recorded and
stored on media such as paper, film, tape or disk. Intangible products include the
stories generated by authors, music created by composers or software games
designed by software engineers. Although these have no physical dimensions of
their own, Hill (1999) argues that in their saleable form these intangible products
have the salient economic characteristics of goods and little in common with ser-
vices. Therefore he suggests this type of intangible product should be recognised
and marketed as a type of good rather than a service. The intangible nature of ser-
vice is a useful characteristic to employ, but an ambiguity remains.
2.4.2 Heterogeneous
A common service varies according to the context, nature and requirements of each
customer. It may be varied according to different quality standards associated with
different costs; services can be varied across regions or cultural background; services
can also be fluctuated by different characteristics of providers. Therefore heterogeneity,
referring to the multifaceted different experience that may be had from a single type
of service is considered as a factor to distinguish goods from services.
However, numerous exceptions can be invoked to counter this distinction. For
example, some tangible goods can be heterogeneous. For example in the automotive
sector, the Mercedes E Class car is offered with 1024 variations and the claim on the
production line is there has never been two the same (Schaffer and Schleich 2008).
In contrast, services can be standardised. McDonald’s produces food under highly
22 G. Parry et al.
automated and controlled conditions (Levitt 1972) and customers receive the same
taste and quality of a certain type of burger all around the world – a homogeneous
offering. Yet most would consider a car to be a product and fast food a service.
2.4.3 Inseparable
Services may be said to be inextricably linked with customers in terms of

production and consumption and so it is said that service is inseparable. For
instance, a service provider may not provide their services until the customer
engaged. In contrast, a manufacturing company can still manufacture and deliver
goods through channels of distribution without knowing the end customers.
However, this characteristic is also open to challenge and interpretation. Automated
services such as an ATM allow customers access to a predefined set of services,
such as to check bank account balances and withdraw money, without the pre-
knowledge or assistance of banking staff. It could be argued that here the production
and consumption must be separated in order for the service to be mechanised.
2.4.4 Perishable
Using technical criteria to define services, Smith (1776) states a service will
‘perish in the very instant of its performance, and seldom leave any trace or value
behind them for which an equal quantity of services could afterwards be
procured’. Here Smith shows one of the important features of services, which is
perishability. It may be said that services are not a stock of fixed assets and it is
not possible to store services in inventories (Hill 1999; Gadrey 2000). For
example, when operating an airline a seat on a plane may be offered for a Sunday
night flight. If that seat is not sold, it cannot be stored and sold in the future – it
has perished. Likewise, if a traveller buys the seat and flies to their destination,
once the contract ends, the client is no longer entitled to stay in the seat or to
acquire any further services from the airline. Hence, the services provided perish
in the very instant of the contract termination and may be described as leaving no
trace or value behind them.
Jean Gadrey (2000) argued that services were not necessarily perishable, using
the example of the servant to illustrate his point. If it is the servant’s task to clean
and tidy the premises, then the output of their efforts does not vanish when the work
is done. In fact, the visual result is used to evaluate the quality of the work.
Therefore perishability is not a definite feature for all service sectors, but certainly
may be a useful characteristic to recognise in many service domains (Fisk et al.
1993; Hill 1999; Zeithaml et al. 2006; Araujo and Spring 2006).
Whilst IHIP characteristics are useful to the discussion on services, the charac-
teristics of a service offering they propose cannot be used to distinguish all goods
and services because we can find exceptions in each case.
2.5 Experience
The notion of service as experience is provided by Pine and Gilmore (1998), who
suggest: ‘Experiences occur whenever a company intentionally uses services as the
stage and goods as props to engage an individual’. For instance, when a ticket for a
rock concert is bought the buyer is provided a particular seat and is entertained by
musicians. It may be argued that they did not wish to buy a ticket or a seat but in fact
their purchase relates to their desire for a memorable and unique experience. Tangible
goods and intangible services are brought together to create a memorable experience
for customers at a point in time. Following Pine and Gilmore (1998) we can suggest
that the value of experience is a significant intangible characteristic of a service.
2.6 Quality
Customer service and service quality are key issues facing many service operations
managers. For a tangible product, customers can visualise its physical attributes
before purchase (Zeithaml 1981). For example, even though they perform a similar
‘transport’ function one can easily justify why a Rolls Royce is more costly than the
basic Tata Nano motor car from their aesthetic characteristics (Bowen and Ford
2002). However, it is relatively more difficult to compare the banking service pro-
vided by two similar UK based high street banks such as HSBC plc and NatWest plc
objectively. We may, for example, be heavily influenced by our own or our friends
experience. Chase and Dasu (2001) conclude that ultimately a customer’s perception
will be a determining factor on the effectiveness of a service organisation. Therefore
managers of service operations would usefully have a methodology to evaluate cus-
tomer satisfaction and loyalty subjectively (Heskett et al. 1994; Bowen and Shoemaker
1998; Paulin et al. 2000). Lundberg noted that more often than not, the quality and
value for a particular service can depend wholly on the customer’s judgement at that
particular instance (Lundberg 1991). For example, two people sat together can easily
have different views on a music concert and even the same person can have different
opinions of the service experience if asked at different times (Bowen and Ford 2002).
One commonly cited method that has been developed to assess the subjective quality
of a service is named SERVQUAL which is based on the gaps between expectation
and the perception of the service delivered (Parasuraman et al. 1988). SERVQUAL
enables service and retailing companies to evaluate consumer perceptions of service
quality and helps to identify areas requiring managerial action (Parasuraman et al.
1988). The approach divides the notion of a service into five factors that address a
customer’s perception of quality. The factors are:
• Tangibles – physical facilities, equipment, staff appearance, etc.
• Reliability – ability to perform service dependably and accurately
• Responsiveness – willingness to help and respond to customer need
• Assurance – ability of staff to inspire confidence and trust
• Empathy – the extent to which caring individualised service is given
24 G. Parry et al.
Quality is measured for each factor by the gap between the expectation and the
perceived service delivered. Using this method it is possible to gauge how well a
service offered meets the expectation of a customer. Using this model suggests that
manipulation of individual customer expectation through marketing or brand man-
agement can alter perception and hence the quality of the service.
2.7 Tradability
The producer of a certain product is its first owner, but the ownership can be trans-
ferred in terms of money or goods exchange during trading. According to Rathmell
(1966), compared to goods, a service is an act rather than a thing. When a service
is purchased the buyer pays out his money without establishing an ownership right
because there is no actual asset to establish ownership of. In contrast, when a good
is purchased the buyer acquires an asset where he can establish his ownership right.
As such goods and services may be defined with reference to their tradability. The
SNA (1993) definition mentioned earlier defined services as outputs produced to
order and which cannot be traded separately from their production; ownership
rights cannot be established over services and by the time their production is
completed they must have been provided to the consumers. From this definition,
two ways to distinguish goods and services are tradability and ownership rights,
with goods often seeming more tradable than services. This is because goods
such as clothes and electronics have a physical presence and therefore may
prove relatively easier to distribute globally, providing sufficient funds and resources.
In the days of Adam Smith it would have appeared near impossible to produce
services in one country and subsequently export them to another country. However,
as a result of the rapid development of technology, such as the internet and telecom-
munication channels, services can now be provided in a way similar to goods. It is
not unusual, for example, to set up a telephone call centre in India and to provide
services back to the UK (Araujo and Spring 2006). Companies adopting this
approach may take advantage of the cheaper labour of one country whilst gaining
the higher price of providing that service in another. Due to this, Hill (1999) con-
cluded that services can be, and are, exported, but only by resident producers pro-
viding the services directly to non-resident consumers.
2.8 A Change of Condition
Hill (1977) defined service as a change in the condition of a unit or a person, or of

goods belonging to some economic unit, which is brought about as a result of the
activity of some other economic unit, with the prior agreement of the former person
or economic unit. Hill emphasises that the institutional structure of production is
essential for the definition of services. Gadrey (2000) then built the service triangle
involving producer-user interaction. The concept of the triangular relationship is

illustrated by Gadrey’s garage example. Someone (A) owns a car (B) and the owner
(A) requests a garage (C) to repair the car. Ownership rights are not exchanged, but
value is created for both the owner in terms of having the car fixed and the garage
in terms of financial reward. Gadrey (2000) points out services always involve a
triangular relationship between A, B and C. This main contribution clarifies the
nature of services and places producer-user interaction at the centre of attempts to
distinguish between goods and services.
2.9 Goods and Services, or Is It All Service?
From the analysis so far, it is found that there is no perfect definition for separating
goods from services, though scholars have been trying for a very long time. In their
attempts to identify the differences between goods and services the similarities
between them are often neglected. Firstly, both goods and services can be tradable
which means both entities must at least have one provider and one customer. The
customer often pays an agreed fee to the provider in order to acquire the ownership
of a certain good or gain services for a certain period of time. In addition, there is
always a reason and motivation behind the act of providing certain goods and ser-
vices. It could be the provider who wants to make profit or improve their reputation.
Secondly, the characteristics of goods and services often overlap each other.
It is believed that there are actually very few pure goods and pure services. Instead
they may form a spectrum from pure goods on one side to pure services at the other,
with tangibility as the differentiator, joint entities in between having variations of
joint characteristics (Shostack 1977, 2001). Commodity items which are traded
globally based solely on price may be thought of as a pure form of tangible good
e.g. wheat, gold, crude oil. A purely intangible service may be teaching as each
person in the class will gain something different from the experience. John Rathmell
(1966) took a sculpture as an example of a pure good as ‘no act is performed’ –
though as a sculpture has aesthetic value, which could be seen as intangible, this
may be questioned. He also suggested that the benefit or utility arising from legal
counsel represented a pure service. With these forming the extreme, most goods,
whether consumer or industrial, require supporting services in order to be useful;
most services require supporting goods in order to be useful. Hence they will sit at
a point along this spectrum. It may be more appropriate to take a goods-services
continuum view point rather than defining goods and services explicitly.
Vargo and Lusch (2004, 2006, 2008) develop this line of thinking further and
contend that all products and services only realise their value through their use. All
products and services exist to provide ‘service’ to a customer, hence everything is
a service. They have developed this into a concept they describe as ‘Service
Dominant Logic’ or SD-logic. SD-logic focuses upon the concept of value creation
rather than ‘production’ and places value creation as an interactive process where
the firm and their customer must be considered within their relational context.
26 G. Parry et al.
Firms work in value creation networks, in dialogue with their partners co-creating
value. They state that ‘innovation is not defined by what firms produce as output
but how firms can better serve’. They make a clear distinction between competing
with offerings called services, which reflects a product/service distinction and com-
peting through service to provide value and positive experience for all parties.
We can see the rise of ‘service’ within industry as manufacturing firms provide
more complex product service combinations so that they do not need to compete on
the basis of cost along (Neely 2010). Servitization is the term becoming more
commonly used to describe this process, where companies increase revenue by
offering service options in addition to their products, such as guaranteeing
availability or providing service for the products life (Vandermerwe and Rada 1988;
Oliva and Kallenberg 2003). This integration of products and services has been
labelled a ‘product and service system’ [PSS]. PSS are described as offering ‘value
in use’ (Baines et al. 2007), which means their value is only realised through their
utility – which takes us back towards the concept of service as experience (Pine and
Gilmore 1998).
2.10 What Are Products/Goods and Services?
Despite many years of research clear definitions of product and service has eluded
researchers. Figure 2.1 shows the timeline for some of the debate in the literature,
covering more than 200 years.
From this work the ambiguity of any single definition of service and how any
perspective taken may influence process or value should be recognised. What we
have seen is that the thinking has shifted from a pure service or pure product focus
to a combination or product-service system (PSS). This recognises the offering of
a combination of product and service for which greater revenue may be generated.
Taking a pragmatic view, we should work with the customer to understand how
goods and services best create a service value proposition, meet market require-
ments and generating sustainable profit for the firm and the customer.
Exercises
• Identify three different services that you have used and are familiar with.
° Why are the three cases you chose services and not products?
° How is the service delivered?
° What contribution do you as a client have to make to access value from the
service?
▪ E.g. fill in forms, make decisions etc.

° Could you improve on the design of one of these services to deliver a better
experience for the client and greater profit for the provider?
2 Goods, Products and Services
27
Fig. 2.1 Defining goods and service: over 230 years and counting
28 G. Parry et al.
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Chapter 3
The IBM Story
Charles Loving
This chapter explores an actual transition from a product-based company to one

where services dominate. That company is IBM and the transition started in the
early 1990s. As you will see, the changes do not happen overnight in a “big bang”
apocalyptic event but more gradually in a series of phases; indeed, at the time of
writing (2009), we are almost 20 years into the transition and we know that we are
not finished yet. Underneath the headline change from products to services, there
are a myriad of other process and procedural changes that have to be made to sup-
port the business and allow it to change dynamically in order to meet the needs of
its clients, its shareholders and its suppliers. In this chapter, we will show how IBM
has responded to these requirements and how it is applying the lessons learnt in this
process to create an agenda for innovation in service creation and delivery to
address global problems.
3.1 The IBM Story Until 1990
The current IBM company was first incorporated in 1911 as the Computing-
Tabulating-Recording Company (C-T-R) but its origins can be traced back to
developments in time recording machinery at the close of the nineteenth century.
C-T-R was a merger of several companies including the Tabulating Machine
Company, formed in 1896 by Herman Hollerith to provide the U.S. Census
Bureau with Punch Card Tabulating Machines to measure the rapidly expanding
population.
In 1914, Thomas J. Watson, Sr. joined the company as general manager and
within 11 months he had became its president. The company focused on providing
large-scale, custom-built tabulating solutions for businesses, and within 4 years,
C. Loving (*)
Director of Operations, British Institute of Technology & E-commerce, London, UK
e-mail: charles@bite.ac.uk
32 C. Loving
revenues more than doubled to $9 million and Watson had expanded the company’s
operations to Europe, South America, Asia and Australia.
In the years following World War I, C-T-R’s activities expanded both function-
ally and geographically, including the completion of three manufacturing facilities
in Europe. In 1924, the name was formally changed to International Business
Machines Corporation.
The requirements of World War II helped lead to the development of various
computational machines, eventually producing a computer built with vacuum
tubes in 1952. In 1957, IBM introduced the FORTRAN programming language
and, by the end of the decade, transistors were replacing valves in the computers.
These computers were monolithic with no upgrade path; a need to increase com-
puting capacity would require a completely different computer, peripherals and
software.
However, in 1964, IBM introduced the System/360, the first large “family” of
computers to use interchangeable software and peripheral equipment; it offered a
choice of five processors and 19 combinations of power, speed and memory.
Improved technology produced higher performance and reliability; Fortune maga-
zine dubbed it “IBM’s $5 billion gamble.”
At the end of the 1960s, IBM changed the way it sold technology. Rather than
offer hardware, services and software exclusively in packages, it “unbundled” the
components and offered them for sale individually. Unbundling gave birth to the
multibillion-dollar software and services industries, of which IBM is today a world
leader.
Through the 1970s and 1980s, IBM machines appeared in supermarkets,
banks and department stores in the guise of checkout tills and cash dispensers.
IBM technology was at the heart of business data processing; IBM mainframes,
IBM operating systems, IBM applications, IBM peripherals and IBM network-
ing products were the mainstay of many major corporations. IBM’s own busi-
ness performance reflected this and, as we shall see, revenues continued to
increase.
In the early 1980s, IBM brought the IBM PC to the market, heralding a new
phase in the business and bringing the IBM brand to homes, small business and
schools. Advances in networking technology allowed PC users to exchange infor-
mation and share printers and files within a building or complex. Meanwhile,
IBM’s significant investment in research produced four Nobel Prize winners in
physics, achieved breakthroughs in mathematics, memory storage and telecommu-
nications, and made great strides in expanding computing capabilities. IBM was
seen as an exemplar by the press and industry commentators, appearing top of
Fortune magazine’s list of “America’s most admired corporations” from 1983 to
1986.
At the end of the 1980s, IBM’s business was looking good (see Fig. 3.1).
Revenues had been increasing year-on-year for 20 years and profits had been on an
upward trend. The IBM PC has spawned a whole industry of complementary as
well as competing products and was opening the IT market to new generations of
users. What could possibly go wrong?
3 The IBM Story 33
Revenue Net Income

($billions) $8 ($billions)
$90
$80
$70 $6
$60
$50 $4
$40
$30
$2
$20
$10
$0 $0
`70 `72 `74 `76 `78 `80 `82 `84 `86 `88 `90 `70 `72 `74 `76 `78 `80 `82 `84 `86 `88 `90
Fig. 3.1 Revenue and net income of IBM Corporation 1970–1990
3.2 A Crisis of Confidence 1990–1993
We now approach a new period in IBM’s history. The charts in Fig. 3.2 present a
very different story to what we have seen before. Something has clearly happened.
In 1991, IBM posted its first ever annual loss of $2.8 billion and also its first decline
in revenues since 1946. At that time, the world economy was in recession and many
corporations were reporting reduced revenues and incomes. Many analysts saw this
as a temporary setback, although some warned of systemic problems within the
industry and within IBM in particular.
However, the following year, IBM had to announce the largest annual loss in US
corporate history so far – $4.97 billion. It seemed that the problems were more
systemic than transitory and that some drastic remedies were needed. A week after
posting those results, the CEO announced he was stepping down.
In April 1993, after a 3-month interregnum, Louis V Gerstner took up the position
of CEO. He became the first CEO since Thomas J Watson Sr to come from outside
IBM’s own executive ranks, having most recently been the chairman and CEO of RJR
Nabisco, Inc. During the rest of 1993, Gerstner set about changing the way IBM did
business, which meant major restructuring and therefore more costs. As a consequence,
the losses in 1993 reached $8.1 billion. Gerstner had prepared the market for these
figures but still the analysts were divided on whether he was doing enough or even
whether he was doing the right thing. In May 1993, Fortune magazine again highlighted
IBM’s performance but this time not as an admired leader but as a “dinosaur.”
Thirty years earlier, Thomas J Watson Jr had bet the company on the move to
S/360; the stakes were again that high for Gerstner as he shifted IBM into position
for the 1990s and beyond. As ever, only time – and the market – would decide how
successful those moves would be.
34 C. Loving
Revenue Net Income

90 ($billions) 9 ($billions)
80
6
70
60 3
50
0
40
30 -3
20
10 -6
0 -9
`90 `91 `92 `93 `90 `91 `92 `93
3.3 Recovery and Restatement 1994–2001
Did Gerstner succeed? Take a look at Fig. 3.3 which shows the financial results for
the whole period 1970–2001. After the restructuring in 1993, IBM returned to
reporting positive annual incomes in 1994 and by 2000 had reversed the record $8.1
billion loss into an $8 billion profit. What had Gerstner done to achieve this
remarkable turnaround?
The simple answer is that he redirected the company from one determined to
sell products to one that provided services; however, the simple answer masks a
massive undertaking to change the way a company of around 250,000 people
conducts its business. Gerstner (2002) tells the story in his own words and is the
best reference on the series of events necessary to effect this transformation. In
his view, the uninterrupted financial success generated by the mainframe business
had led IBM away from satisfying its customers requirements; instead, the com-
pany concentrated on producing the products that it could make rather then
the products that its customers needed. But now, as Gerstner put it, “a customer
is running IBM.”
3.4 A New Strategy?
So how did Gerstner do it? He is famously quoted as telling analysts soon after he
took over that “the last thing IBM needs right now is a vision.” Instead of creating
that vision statement on day one, he spent time talking to customers, employees and
business partners to understand their perspectives and to determine how IBM
should best support them.
3 The IBM Story 35
Revenue Net Income

($billions) ($billions)
$9
$90
$80
$6
$70
$60 $3
$50
$0
$40
$30 –$3
$20
–$6
$10
$0 –$9
`70 `72 `74 `76 `78 `80 `82 `84 `86 `88 `90 `92 `94 `96 `98 `00 `70 `72 `74 `76 `78 `80 `82 `84 `86 `88 `90 `92 `94 `96 `98 `00
The information technology landscape had changed significantly in the late

1980s. As we noted earlier, the IBM PC had started a whole new market segment.
Many competitors had entered the hardware market, offering IBM-compatible PCs.
Moreover, many other companies had entered the software market offering
PC-compatible applications and operating systems. In fact, this ability to mix and
match hardware and software was available throughout the range of computing
power – from PCs through to mainframes. In principle, a customer could have a
mainframe from one supplier running software applications from another, with a
third supplier of departmental machines running yet another supplier’s applications
and a whole host of IBM-compatible PCs running whatever the users wanted. From
today’s vantage point (in 2009), this might seem commonplace – but, at the time,
this was in the historical context of having all hardware and software from a single
supplier. However, such changes inevitably brought problems and Gerstner, with
his strategy team, identified two key areas where customers needed help.
The first area concerned the effects of having a multiplicity of suppliers. A fun-
damental question was being asked inside and outside IBM as Gerstner took over.
Across the whole range of IT products from PC hardware through to mainframe
applications, many of the niche suppliers had become very successful. In reaction
to IBM’s poor results in the 1990s, proposals were put forward to break IBM into
many small companies with the expectation that these small niche players would
thrive against their competition and provide better overall returns to the sharehold-
ers. Gerstner’s view was that there was a better way to return value and it needed
IBM to stay together and take advantage of the multiplicity elsewhere.
Gerstner’s view arose from his time as an IBM customer with several other IT
suppliers. His experience was that the implementation and management of systems
from several suppliers was almost always problematic. He felt that customers were
looking for systems integrators that would take responsibility for putting the sys-
tems together and then running them and fixing them when required. In other
words, he was proposing to expand into the IT services market with a whole new
range of offerings, including complete IT outsourcing. The success of this part of
the strategy can be seen by noting that services revenue increased from $7.4 billion
36 C. Loving
in 1992 to $30 billion in 2001, representing 23.2 and 42.1% of their respective
annual revenues.
The second area of the strategy concerned communications. In 1992, the internet
did not exist outside a few research establishments. Corporations tended to have
their own networks connecting their own computers and only in very specific cir-
cumstances would customers allow their computers to communicate with those of
their business partners. This was not just a question of business privacy but more a
question of technological difficulty. In general, the corporate networks were unable
to connect and communicate with each other without major changes on each side.
Even if the networks could connect there were problems in getting the applications
to communicate and for the data to be recognised on each side. It was clear that
there were many advantages to supporting transactions between customers and sup-
pliers over a network, if only the technical hurdles could be overcome.
Gerstner’s strategy team coined the term “e-business” to represent these transac-
tions between businesses. However, technology had to be updated if the business
benefits were to be realised. Therefore, IBM embraced the move to open standards
where the interfaces between different manufacturers’ products would be standardised.
Using these well-defined standards, two businesses would know that not only would
their own networks be able to send messages to one another but also the format of the
data within the message would be well-defined in each application. In the fullness of
time, this move to standards allowed the growth of the internet which today (2009)
routinely supports the transfer of data between huge numbers of computers of all types
of configuration and complexity for both business and social purposes.
The move to standards also had to be supported within IBM’s own product lines and
also within its own internal processes. We have already noted that the mainframe heri-
tage had produced systems that relied on a single manufacturer supplying hardware and
software that worked together – and this was true for all the main IT manufacturers in
the 1970s. Removing this reliance on proprietary products and architectures would
increase competition but would also generate the potential for interconnectivity and
interoperability, which IBM’s new service offerings could then support.
Moreover, by implementing such solutions successfully within IBM itself, the
company would then have the best reference for offering those solutions elsewhere.
The effects of the business transformation within IBM were dramatic, as seen in
Fig. 3.4.
1992 2003
CIOs 128 1
Host Data Centers 155 10
Web Hosting Centers 80 7
Network 31 1
Applications 16,000 4,839
Fig. 3.4 The transformation of IBM’s internal IT infrastructure

3 The IBM Story 37
3.5 Moving into the Twenty-First Century
In March 2002, Gerstner announced his intention to retire and that Sam Palmisano
would succeed him. Palmisano had been closely involved with the growth of the
services business and that growth continues, as can be seen from Fig. 3.5. However,
there are two interesting features in that figure and both contribute to the story of
IBM’s continued transformation during the first decade of the new century.
The first feature is denoted by the lines above the columns in years 2000–2001.
These show the results that were originally reported, whereas the columns represent
revised numbers. So why were they revised? In 2000–2001, a number of high profile
companies were involved in financial scandals, most notably a US energy company
called Enron. As a consequence of the subsequent investigations, new regulations
and legislation were enacted in 2002 that changed various accounting practices and
reporting procedures. These changes are reflected in the revised accounts shown
here, applied to the earlier years to allow comparison with results post-2001.
There were further effects of the investigations into Enron and the other high
profile cases. Accountancy firms were being pressed to clearly separate their audit-
ing functions from their advisory and consulting businesses and, in order to comply,
several decided to split into two distinct companies.
At this point, IBM bought the consultancy interests that had been part of the
PricewaterhouseCoopers accountancy firm. The costs of this acquisition are
reflected in Fig. 3.5 by the reduced income in 2002, the second feature of note.
So why did Palmisano spend several billion dollars on this company? It was a
continuation of the move from a product-based company to one centred on services.
To a successful technology services portfolio, IBM was now able to add a business
services capability. It allowed IBM to provide a complete range of services to its
clients; giving advice on business processes and how to implement them, then
being able to implement and operate the technical solutions and then providing the
Revenue Net Income

($billions) ($billions)
120 14
100 12
10
80
8
60
6
40
4
20 2
0 0
'00 '02 '04 '06 '08 '00 '02 '04 '06 '08

38 C. Loving
infrastructure to support those solutions from the IBM product catalogue, as well
as other manufacturers as required.
The success of this strategy is shown by the business results through the decade.
We’ve already seen that the move into technology services increased the services
contribution to annual revenue from 23.2% in 1992 to 42.1% in 2001; having added
business services, that share moved to 57.2% in 2008.
Another indicator of how successful the move to services has been is the annual
global survey of brand value produced by Interbrand. In 1994, about a year after
Gerstner’s appointment, IBM was ranked 284th most valuable brand; in 2008, IBM
was 2nd overall and the highest placed technology brand.
3.6 Looking to the Future
So where does IBM go now? The financial results show that the move from prod-
ucts to services has been a business success. Both Gerstner and Palmisano made
clear that the major decisions to branch into technical and business services were
made because clients needed those services; therefore, IBM’s business transforma-
tion was driven by those clients’ requirements. In two recent speeches made to the
Council on Foreign Relations, Palmisano has reiterated that IBM’s business
transformation will continue to be driven by client requirements.
In 2006, his speech described the Globally Integrated Enterprise. This addresses
the way in which a multinational company must change in order to function effec-
tively in a truly global market. In the closing decades of the twentieth century, IBM
was operating as a typical multinational organisation. Many of the IBM companies
in various countries were essentially copies of each other; all with similar back
office functions and support processes. In a Globally Integrated Enterprise, those
functions will be performed in the most effective locations and each process should
support the entire global organisation, not just one or two countries. In setting IBM
on this track to become a Globally Integrated Enterprise, Palmisano was continuing
the internal transformation that had started some years previously by, for example,
reducing the number of CIOs from 128 to 1.
In 2008, Palmisano’s speech outlined IBM’s Smarter Planet agenda. This con-
tinued the transformation of IBM’s relationship with its clients and continued to be
driven by their needs. Since 2004, IBM had hosted a programme of meetings under
the banner of Global Innovation Outlook where representatives from clients, gov-
ernments and academia would discuss key issues that affected them and the world
at large. Topics that were discussed include healthcare, transportation and water
management and the resulting reports provided a launchpad for innovations in
those fields.
By 2008, it was clear that many of these topics affected not only individual cli-
ents but nations and continents as well. For example, congested roadways in the
U.S. cost $78 billion annually, in the form of 4.2 billion lost hours and 2.9 billion
gallons of wasted fuel; distributing electric energy through the currently inefficient
3 The IBM Story 39
grid systems can waste as much as 40–70% around the world; and the planet’s
water supply is drying up. On the other hand, the world was getting more instru-
mented; for example, during 2009–2010, it is expected that there will be a billion
transistors per human, four billion mobile phone subscribers and 30 billion Radio
Frequency Identification tags. The world is also getting more interconnected: very
soon there will be two billion people and around a trillion devices connected to the
internet. Moreover, these devices are getting more intelligent in the sense that they
can produce an enormous amount of data that can then potentially be analysed to
make decisions.
Given these parameters, it would appear that the basic technology exists to help
solve some of these overarching challenges. For example, congestion charging
schemes have been implemented in several cities such as Stockholm and London.
However, in both those cities, the technical solution was only part of the whole;
there had to be a complete service delivered on that technology base, as well as a
political will to provide the necessary legislation to support it.
Moving to a smarter planet entails producing and successfully implementing
smarter solutions – such as smart healthcare, smart energy and smart cities. Each
solution will require a complex technological infrastructure and will need to be
delivered through an easy-to-use interface. Moreover, the scale of these solutions
means that a coalition of interests will be required to build and deliver them.
More recently, in January 2010, Palmisano extended these ideas in a speech
made at London’s Chatham House. Within his speech, he introduced the decade of
“Smart” where he stated that, for the foreseeable future, we will be faced with
addressing many pressing global issues with less, rather than more, resources.
Indeed, applying smarter technologies to drive cost out of legacy systems and insti-
tutions – doing more with less – will be critical to near-term and long-term eco-
nomic prospects. The smart approach will be to extend the infrastructure’s useful
lifetime and to ensure that next-generation systems are inherently more efficient,
flexible and resilient. This will apply to IBM, its clients and those coalitions of
interest that will arise to meet the challenges through the coming decade.
3.7 Summary
In 2011, IBM will celebrate 100 years of its existence. Having built up a business
that was lauded, envied and copied throughout the world, it almost disappeared at
the end of the 1980s. The company was concentrating on enhancing its products
when its clients were looking for services. With the change of leadership came a
change in business focus and a change in business direction. IBM was now in the
service business. From regaining customer and shareholder confidence during
the early 1990s to building a new model for growth in the twenty-first century,
IBM has had more than a decade of deep experience in business transformation.
The services portfolio now includes both business consultancy as well as technol-
ogy consultancy, with the ability to deliver the service. The acquisition of more
40 C. Loving
than 70 companies in the past 5 years means that the product catalogue is still
thriving – but the products are now components of the service rather than the other
way round.
The challenges of building a smarter planet are creating the business landscape
that faces IBM and its competitors into the 2010s – the decade of “Smart.” How
well IBM can manage its continued transition into this environment will determine
how successfully it will start its second century of trading.
Reference
Gerstner LV (2002) Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround.
HarperCollins Publishers
Chapter 4
Rethinking Lean Service
John Seddon, Brendan O’Donovan, and Keivan Zokaei
4.1 Introduction
Ever since Levitt’s influential Harvard Business Review article ‘Production-Line

Approach to Service’ was published in 1972, it has been common for services to
be treated like production lines in both the academic literature and more widely in
management practice. The belief that achieving economies of scale will reduce
unit costs is a common feature of management decision-making. As technological
advancement has produced ever more sophisticated IT and telephony, it has
become increasingly easier for firms to standardise and off-shore services. The
development of the ‘lean’ literature has only helped to emphasise the same under-
lying management assumptions: by managing cost and workers’ activity, organi-
sational performance is expected to improve. This chapter argues that through
misinterpretation of the core paradigm ‘lean’ has become subsumed into the ‘busi-
ness as usual’ of conventional service management. As a result, ‘lean’ has become
synonymous with ‘process efficiency’ and the opportunity for significant perfor-
mance improvement – as exemplified by Toyota – has been missed.
By revisiting the development of service management and in particular the
moves to industrialise service, we articulate a ‘core paradigm’ for service manage-
ment to account for what might be described as conventional service management.
We then explain how ‘lean’ emerged and became codified, and as ‘lean’ extended
its reach to service organisations, how the two – ‘lean’ and conventional service
management – share the same (false) assumptions. Building on the literature about
the differences between manufacturing and service management, it is argued that
services should be treated differently to manufacturing organisations. Going back
to the origins of the ‘Japanese miracle’, it is argued that service organisations must
be understood and managed as systems. The inspiration for ‘lean production’,
J. Seddon (*)
Visiting Professor at both the Universities of Cardiff and Derby
and the Managing Director of Vanguard
e-mail: john@vanguardconsult.co.uk
42 J. Seddon et al.
Taiichi Ohno’s Toyota Production System (TPS), was developed through an

understanding of counter-intuitive truths, a series of challenges to convention.
It is then argued that similar counter-intuitive truths are to be found in services
when they are studied as systems, with subsequent redesigns resulting in dramatic
performance improvements. A ‘systems’ service management archetype is developed
as an alternative to conventional service management. Finally, it is argued that
the means by which such change should be made ought to be experimental,
empirically-based and emergent (as change was for Taiichi Ohno) in contrast to
‘project managed’ or predetermined change.
4.2 From Manufacturing to Operations Management
Until the 1980s, the study of business and management was primarily concerned
with the manufacturing sector and the marketing, production and management of
physical goods (Johnston 2005). The methods of mass production, applying
Taylor’s ( 1911) ‘scientific management’ principles, had led industrial engineers to
break work down into simple, standardised tasks, with wasteful motion stripped out
and work set to the pace of the production line. Workers at plants that evolved from
the Ford Motor Company’s mass production approach to manufacturing had
narrowly defined, compartmentalised tasks, sometimes of only 30 s duration but
performed nearly a thousand times per day (Krafcik 1988). ‘Factory management’,
as these studies collectively became known (Lockyer 1962), was the application of
Taylor’s philosophy more broadly to operations: the use of method study techniques
to areas of capacity management, production planning and control had already
begun to spread out of ‘pure’ manufacturing to include examples from distribution,
transportation, hospitals, libraries, and publishers (Johnston 2005). Thus the field
of ‘factory management’ was extended to become ‘operations management’ in the
1970s, with works by Johnson et al. (1972) and Buffa (1976) making at least
passing reference to the management of services as well as manufacturing.
4.3 Industrialised, Standardised Service
In 1972, Levitt wrote a seminal Harvard Business Review article entitled

‘Production-line approach to service’. In it, he encouraged managers to pay the
same attention to improving the design and management of services as was paid to
manufacturing operations:
In sum, to improve the quality and efficiency of service, companies must apply the kind of
technocratic thinking which in other fields has replaced the high-cost and erratic elegance
of the artisan with the low-cost, predictable munificence of the manufacturer.
(Levitt 1972, pp. 43–44)
4 Rethinking Lean Service 43
Levitt used the example of fast-food production and service in McDonald’s as one
example of how factory methods could be profitably employed in a service. The
method by which McDonald’s achieved their market domination was through mas-
tery of a ‘system’ which is ‘engineered and executed according to a tight technologi-
cal discipline that ensures fast, clean, reliable service in an atmosphere that gives the
modestly paid employees a sense of pride and dignity’ (p. 45). Levitt believed that
McDonald’s had successfully applied ‘a manufacturing style of thinking to a people-
intensive service situation’ (p. 45). Service organisations were thus encouraged to
employ the manufacturing approaches of industrialisation through standardisation.
Perhaps the next seminal building-block in industrialising service was Chase’s
HBR article which led to the separation of ‘front’ and ‘back’ offices in service
organisations (Chase 1978). In essence, his argument for ‘back-office’ service pro-
duction was that as the back office has no contact with the customer, it offers
greater potential to operate at peak efficiency. Chase argued that service systems
with high customer contact are more difficult to control and more difficult to ratio-
nalise than low contact systems; so decoupling front from back enabled what he
saw as the ‘technical core’ to operate as a factory, decoupled from outside influ-
ences, following a resource-orientated schedule and thus optimising efficiency
through batch scheduling, forecasting, inventory control and work measurement.
These ideas continue to form the conceptual foundations for the way that ser-
vices are designed and managed today.
4.4 The ‘Core Paradigm’ of Current Service Management
The ‘Core Paradigm’ for conventional service management (Seddon 2008) is

derived from the philosophy underpinning ‘factory thinking’. The three questions
that make up the core paradigm are the questions that preoccupy managerial deci-
sion-making in transactional1 service organisations:
• How much work is coming in?
• How many people have I got?
• How long do they take to do things?
In line with Chase’s ideas about efficiency (Chase 1978), managers think of their
job as a resource-management problem. The core paradigm leads managers to do
the following types of things in pursuit of improving service operations:
• Reduce average activity time (through procedures, job aids, call coaching and
targets)
• Use I.T. to replace, support or control the service agent
For example: financial services, telecommunications, IT services, police, local authority, govern-
1
ment agencies and housing services.

44 J. Seddon et al.
• Outsource activity to lower-cost organisations/economies

• Increase functional specialisation (to reduce training costs)
• Standardise work processes
• Put similar work into back-office factories
All of the above managerial tactics are essentially concerned with managing cost.
To manage customer service, managers focus on service levels, how long it takes to
pick up the telephone or respond to a letter; how many things are done in three, five
or however many days. Workers’ activity is managed in line with anticipated ‘stan-
dard’ times and their work is inspected to achieve quality control. These features
are now common-place, representing a factory view of service work. Managers
assume that people need to be commanded and controlled (Seddon 2003). Scripts,
procedures, targets, standards, inspection and compliance govern the way these
organisations work. We represent this factory view of service work as an arche-
type as shown in Fig. 4.1.
The archetype is a high-level representation. In practice, service organisations
are much more complex but the complexities, nevertheless, follow this quintes-
sential logic. Managers schedule resources according to the volumes of work com-
ing into the system. Usually, the first step in the flow is to ‘sort’ the work by, for
example, using interactive voice response [IVR] systems in telephony (‘press 1 for
x, 2 for y’) and with incoming mail the work is typically scanned and sorted into
pre-determined electronic work queues, often breaking one customer demand into
a variety of sub-tasks, allocating each to its own queue. When work is done it is
managed by ‘standard times’, the assumed time it takes to complete each task and
resources are devoted to inspection to control the output to the customer. Often a
customer demand into such a system is fragmented into many sub-tasks and con-
sequently the flow of work crosses functional, organisational and geographic
All demand Sort by type Queue

is treated as
‘work to be done’
Work to standard
Inspect
time
Key measures: Activity and cost
Fig. 4.1 The industrial archetype for factory service management

boundaries. Following Chase (1978), efficiency is assumed to be associated with

the costs of activities.
We shall return to the systemic problems found in this archetype and offer
an alternative archetype for transactional service design later, but it is into this
environment that ‘lean’ and then ‘lean service’ arrived.
4.5 The Emergence and Codification of ‘Lean’
Whilst service operations grew into its own field of study from the late 1970s, the
greatest innovation in manufacturing – the ‘Japanese miracle’ – was beginning to
excite interest in the West. Study tours to Japan led to the adoption of ‘TQM’ on
the assumption that the tools associated with quality control and the involvement of
people through suggestion schemes were the secrets of the ‘miracle’. Tuckman
(1994) gives an account of the folly that followed.
It was only in 1990 that the broader explanation of the reasons for superior per-
formance was brought to widespread Western attention. In ‘The Machine that
Changed the World’ (Womack et al. 1990), the authors – inter alia – told the story
of the Toyota Production System’s ‘TPS’ creation and the ‘genius’ behind it,
Taiichi Ohno. Through necessity, Ohno had developed a contrasting approach to the
mass production methods of US car firms. Ohno’s innovation represented a chal-
lenge to manufacturing management conventions. First published in 1990, Womack,
Jones and Roos’ book used the label ‘lean’ to what had occurred at Toyota; giving
it a label had begun the codification of method.2
The success of their first book led the authors to articulate ‘a better way to organ-
ise and manage customer relations, the supply chain, product development, and
production operations’ in their subsequent book ‘Lean Thinking’ (Womack and
Jones 1996, p. 9). Womack and Jones set out to answer the question posed by many
who had read their work: ‘How do we do it?’, and offered five lean principles as the
secret to Toyota’s success:
Precisely specify value by specific product, identify the value stream for each product,
make value flow without interruptions, let the customer pull value from the producer, and
pursue perfection.
(Womack and Jones 1996, p. 10)
The third step in the codification of method quickly followed: the articulation of the
tools employed in the TPS. The TPS had developed new methods to manage uncon-
ventional ideas: balancing demand, managing flow, materials being ‘pulled’
through the system. The associated ‘tools’: standard work, takt time, 5S, value
The first published use of the term ‘lean production’ was by John Krafcik (1988) a researcher
2
with Womack, Jones and Roos on the International Motor Vehicle Program (IMVP) at
Massachusetts Institute of Technology (MiT). However, it was Womack, Jones and Roos’ book
which brought the term ‘lean’ into widespread use.
46 J. Seddon et al.
stream mapping, kanban, poke yoke, etc., were documented and promulgated
by many, promising that managers could replicate Toyota’s remarkable success by
applying the TPS tools to their workplaces. The applicability of tools was assumed to
be universal, applying to all types of manufacturing and service organisations. One
central feature of the TPS which has particular relevance to the argument in this
chapter is standardisation. The conventional desire to standardise and industrialise
service organisations had only been reinforced by the promulgation of ‘lean’; it was
an easy (conventional) argument to accept.
4.6 But Is Service the Same as Manufacturing?
Returning to the development of factory and service management, from the 1970s
onwards discussion continued amongst academics over whether there were differ-
ences between management of services and manufacturing. The new fields of
‘services marketing’ and ‘service operations’ evolved as a direct result of the per-
ceived need to treat services as different to manufacturing (Johnston 2005).
Grönroos was a leading critic of treating the two as the same:
Managers of service organizations may be making a mistake in following methods similar
to those used by their colleagues in manufacturing.
(Grönroos, C 1990, p. 12)
Normann (1984) wrote an early book in the area entitled ‘Service Management’,
quickly followed by others (Lovelock 1988; Bowen et al. 1990). Lovelock, writing
on ‘service marketing’ (which despite its label encompasses much more than
marketing), wrote:
Are the marketing skills developed in manufacturing companies directly transferable to ser-
vice organisations? I think not. It is my contention that marketing management tasks in the
service sector differ from those in the manufacturing sector in several important respects.
Among the characteristics distinguishing services marketing from goods marketing are the
nature of the product, the greater involvement of customers in the production process, greater
difficulties in maintaining quality control standards, the absence of inventories, the relative
importance of the time factor, and the structure of distribution channels.
(Lovelock 1984, p. 4)
These publications represented a ‘backlash’ against the limited treatment of ser-

vices in the operations management literature and the assumed universalism across
service and manufacturing (Johnston 1994).
Grönroos (1990) offered a distinction between services and manufacturing
management:
A service management perspective changes the general focus of management in service
firms as well as manufacturing firms from a product-based utility to total utility in the
customer relationship. (p. 117)
And Grönroos also provides a working definition of the components of a service:

‘For most services, four basic characteristics can be identified:
1. Services are more or less intangible.
2. Services are activities or a series of activities rather than things.
3. Services are at least to some extent produced and consumed simultaneously.
4. The customer participates in the production process at least to some extent’
(Grönroos 1990, p. 29)
Bowen and Jones (1986) argued that the main difference between service and
manufacturing is that ‘service organisations experience a high degree of input
uncertainty, because of the participation of customers in service exchanges’.
Bowen also contributed to the other side of the argument, when, with
Youngdahl, he revisited and updated Levitt’s work in an article entitled ‘“Lean”
service: in defense of a production-line approach’ (Bowen and Youngdahl 1998).
The authors described three case examples of service organisations: a hospital
providing a single treatment, an airline renowned for efficiency and a fast-food
chain. The latter, Taco Bell, was compared with Levitt’s original case, McDonalds,
and argued to be the new exemplar of production-line fast food (Schlesinger and
Heskett 1991). Bowen and Youngdahl argued that the cases were representative
of ‘lean’ ideas in service and suggested that ‘lean’ ideas transfer well from
manufacturing to service provided they were employed with minor alterations,
for example training employees in customer service skills and training customers
in how they contribute to quality service. Employing techniques such as ‘service
blueprinting’ and ‘value analysis’, would, they argued, remove waste from
processes and, hence, ‘lean’ would work in service organisations. The authors
also argued that service and manufacturing were converging towards what they
called ‘mass customization’.
Johnston (2005) charts the history of the service/manufacturing debate and the
development of the ‘large-scale, worldwide academic movement concerned with
the management of services’. He appeals for the development of frameworks and
techniques to provide greater rigour to this field. It is an appeal that remains both
relevant and urgent.
4.7 ‘Lean’ Arrives in Service Organisations
Despite this lack of a sound knowledge-base ‘lean’ (as tools) took off in service
organisations. Today, if you search for ‘lean service’ on Google, you will receive
over 21 million hits. While the spread of lean tools in service organisations has no
doubt been driven by providers marketing ‘benefits’ and, in the public service sec-
tor, centrally-determined obligations to adopt ‘lean’, academics have also fuelled
the growth. In 2006 Radnor et al., in a report commissioned by the Scottish
48 J. Seddon et al.
Executive, proclaimed as successful the adoption of ‘lean tools’ in the Scottish

public service sector:
Analysis from the research with organisations in the Scottish public sector, together with
evidence from the literature, indicates that Lean is transferable to the public sector …
(Radnor et al. 2006, p. 5)
Consistent with the commercial protagonists, Radnor et al. conceptualise ‘lean’ as

a set of tools:
A toolkit of methods for practical use at the operational level has been developed to support
lean thinking. Tools include, for example, value stream mapping which is used to analyse
the flow of resources, highlight areas where activities consume resources but do not add
value from the customer’s perspective.
(Radnor et al. 2006, p. 1)
Discussing the differences between service and manufacturing organisations, the

authors wrote:
In manufacturing, the emphasis is on a set of management tools and techniques that are
used to standardise processes. Within the public sector, however, there is engagement with
the principles of Lean, but less with the full range of tools and techniques. Most organisa-
tions, for example, used just a few tools, such as value stream mapping. This implies that
many of the tools and techniques used in a manufacturing context are currently not imme-
diately and obviously applicable to service environments. Instead, some of the tools need
to be adapted to cope with the need for greater process flexibility that are found in the
public sector to meet the needs of the customer. In some cases, the limited range of Lean
tools in use in the public sector may be because the service sector has yet to understand
the value, relevance or purpose of the tools being applied from within the toolkit.
(Radnor et al. 2006)
Similarly, Ahlstrom (2004), despite acknowledging an important methodological

weakness (participants were presented with descriptions of ‘lean’ concepts and
asked to translate them for service organisations; the participants were all from
‘communications’ positions, thus unlikely to be familiar with service operations),
claimed that the principles of ‘lean’ manufacturing principles were applicable, with
‘contingencies’, in service operations.
Neither of these studies used objective measurements. It is insufficient to argue that
evidence of use is evidence of efficacy and it throws no light on the reasons for effi-
cacy. Both studies suggest lean tools will be usefully applied with adaptation but we
learn little about what adaptations might be necessary and why they may be needed.
Radnor instead places academic validation for the application of lean production
principles to services on Bowen and Youngdahl’s work (Radnor et al. 2006, p. 9).
However, Bowen and Youngdahl had described successful service organisations
which could be described as possessing lean attributes. None was presented as hav-
ing employed lean tools.
Swank’s (2003) article in the Harvard Business Review described the applica-
tion of ‘takt’ time to new business processing in a financial services organisation.
Takt time is the measure used in the Toyota system to achieve a heart-beat through
material flow (an essential component of the system). Swank’s use of the same term
was to describe the use of ‘standard time’ in processing insurance documents, an

entirely different (and more familiar) concept (to managers of conventional service
organisations).
In recognition of the doubts being expressed about the lean tools movement, Jim
Womack rationalised what had occurred:
The focus turned to how organizations everywhere could transform themselves from mass
producers into lean exemplars. Given the magnitude of the task and its many dimensions,
it’s understandable that lean tools came to the foreground – 5S, setup reduction, the five
whys, target costing, simultaneous and concurrent engineering, value-stream maps, kan-
ban, and kaizen. Indeed, I think of the period from the early 1990s up to the present as the
Tool Age of the lean movement …
(Womack 2006)
Womack went on to argue that what was missing was ‘lean management’ and
acknowledged that he was unable to articulate its elements (Fig. 4.2).
The TPS was, and is, first and foremost, a management issue. The tools were
developed to solve problems associated with making cars at the rate and variety of
customer demand; in other organisations management’s first task is to know
whether or not they are solving the same problems. We shall return to this.
Womack’s explicit acknowledgement that lean had become enrapt in the use of
tools came at what many see as a low point for the ‘lean’ movement. In January
2007, the movement hit a nadir with press headlines of ‘Is this banana active?’
relating to the implementation of a ‘lean’ efficiency drive in Her Majesty’s Revenue
and Customs (HMRC) (The Times 2007).3 The staff union criticised the lean pro-
gramme as ‘demeaning and demoralising’, saying that it ‘reduced staff to little
more than machines, on the whim of consultants’. Workers had been reorganised
into more detailed specialist functions (hence had to do more repetitive work); the
work processes had been standardised and were controlled through activity mea-
surement. The ‘lean’ intervention in HMRC was having the same effect on workers
as mass-production had on the workers at Ford in the 1930s: alienation and demor-
alisation (Berger 2001).
4.8 Back to the Beginning
To unpick the development of lean service we need to go back to the ‘Japanese

miracle’ and travel forward again through this history. As Tuckman (1994), com-
menting on the industrial tourists sent to study the ‘miracle’, observed:
A major discovery of the early missionaries, however, was also that the Japanese miracle
had been created by — to mix religious metaphors — western gurus.
(Tuckman 1994)
See http://www.timesonline.co.uk/tol/news/uk/article1289640.ece for the coverage in the Times

3
on January 5th 2007.

50 J. Seddon et al.
Design and Consumer

redesign research
Suppliers of
materials and Consumers
equipment
A
Receipt and
B test of
materials Production Assembly Inspection Distribution
C
D
Tests of processes,
machines, methods,
costs
Fig. 4.2 Deming’s famous ‘Figure 1’ diagram: production viewed as a system (Deming 1982)
The guru most associated4 with the ‘miracle’ and one of the most important crit-
ics of conventional modern management was W. Edwards Deming. Following his
significant contribution (using statistical techniques to improve manufacturing
quality) to the US war effort, Deming had been sent to Japan to help with statistical
approaches to population surveys. By chance he had the opportunity to present to
Japanese top management (Neave 1990). His influence on Japanese manufacturing
led to recognition by the Japanese Emperor in 1960, with the award of the Second
Order Medal of the Sacred Treasure.
It is perhaps ironic that Deming’s teachings were assumed by his audience to be
the best of American management, for his message to managers in his home coun-
try was quite different:
Most people imagine that the present style of management has always existed, and is a fixture.
Actually, it is a modern invention – a prison created by the way in which people interact
(W. Edwards Deming 1994)
His point was simple: we (mankind) invented management, we should re-invent it.
His book (‘Out of the Crisis’ 1982) included a scathing and detailed critique of
western management assumptions. The better alternative, he argued, was that we
should understand and manage our organisations as systems (Fig. 4.3). His famous
‘figure 1’ from the book – a picture capturing the flow of work through a manufac-
turing organisation – achieved its notoriety because it was often the only visual aid
he would use to orientate his Japanese audience as to what to pay attention to when
considering their work as leaders. He viewed constancy of purpose to improve the
system as the cornerstone of management’s efforts; his figure served also for discus-
sions of method and measures: Management’s focus, argued Deming, ought to be
with the flow of work through the system as opposed to measuring and managing
work in functional activities. Operating at this ‘system’ level achieves far more than
focussing on the refinement of individual functions and/or processes.
While Deming was not the first or only ‘guru’ associated with the Japanese miracle, he became
4
the most well-known, following his appearance in the (US) nation-wide airing of a television
programme entitled ‘If Japan Can Why Can’t We?’ in 1980.
Fig. 4.3 Understanding Two types of demand on service organisations:

demand: an economic lever
Failure
Service
organisation
Value
Predictable failure demand is preventable
In his criticism of what he called the ‘present style of management’ Deming

illustrated how targets and all other arbitrary measures sub-optimised systems. He
pointed to the absurdity of failing to understand that workers’ performance was, in
fact, governed by the system; as a result appraisal practices were at best irrelevant
and at worst drove sub-optimisation. These and other ideas were direct affronts to
prevailing beliefs: to accept them would be to accept that much that was considered
normal was flawed and would have to go. Deming’s descriptions of sub-optimisa-
tion created by the prevailing style of management were larger than mere produc-
tion costs (such as poor quality or excess inventory), as they also incorporated
human and societal costs. He argued that the greatest costs of sub-optimisation are
‘unknown and unknowable’ (Deming 1982, p. 98).
Deming’s figure depicts manufacturing. We can look at it and imagine the
Toyota system: cars being produced for consumers at the rate and variety of
demand, the flow of work through the system – all the way back to suppliers –
operating at the heart-beat created by the customers ‘pulling’ cars. But we can’t so
easily envisage a service organisation while looking at Deming’s ‘figure 1’
(Fig. 4.2). Following Grönroos (1990), we have to build our understanding of
service organisations as systems by studying what occurs at the point of transaction,
we need to understand more about customer demand – what customers want – and
how the system responds to those demands.
To echo Ohno, our first step has to be concerned with understanding. It was
Ohno’s favourite word:
I believe it [understanding] has a specific meaning – to approach an objective positively and
comprehend its nature. Careful inspection of any production area reveals waste and room
for improvement. No one can understand manufacturing by just walking through the work
area and looking at it. We have to see each area’s role and function in the overall picture.
(Ohno 1988, p. 57)
4.9 Understanding Service Organisations
To return to transactional service organisations, when we set out to comprehend them

as systems, we learn, as Deming argued, that what he called the present style of man-
agement (described here as based on the ‘Core Paradigm’) has fundamental flaws.
52 J. Seddon et al.
One flaw is the assumption that all demand is ‘production’ – work that has to be
done. By studying the demands customers place on transactional service systems,
from the customer’s point of view, you learn that much of the demand is waste and,
worse, it creates further wasteful activity.
4.10 Value and Failure Demand
At the highest level, there are two types of customer of customer demand: ‘value’
and ‘failure’ demand. Value demands are the ones companies want customers to
place on the system, the reason that the company is in business is to serve these
demands. Failure demands are: ‘demands caused by a failure to do something or do
something right for the customer’ (Seddon 2003, p. 26). When service organisa-
tions do not do something that the customer has been expecting, customers call
back, turn up again, or otherwise create more demand and hence more work. These,
and failures to do something right from the customers’ point of view – not solving
a problem, sending out a form that a customer has difficulties with and so on –
represent a significant means to improve service delivery and reduce costs. Treating
failure demand as though it is indistinguishable from all demand is to fail to see a
powerful economic lever for improvement.
In financial services, for example, failure demand can account for anything from
20 to 60% of all customer demand. In police forces, telecommunications and local
authorities it is often higher (Seddon 2003, 2008). If we were to use Deming’s
language, failure demand is a form of sub-optimisation. In Ohno’s language it is a
type of waste.
It is noteworthy that failure demand is not among the ‘seven types of waste’
promoted by the lean tools literature. Failure demand is a systemic phenomenon
that is peculiar to service organisations; it is, also, the largest form of waste in
transactional service systems when managed according to the present style of man-
agement. Given the economic leverage its removal provides, it is a poignant illus-
tration of the general argument against ‘lean’ as tools. Starting an intervention with
tools is to ignore the priority to know first your problem(s).
Ohno saw the purpose of the TPS as the eradication of waste:
The most important objective of the Toyota system has been to increase production effi-
ciency by consistently and thoroughly eliminating waste
(Ohno 1988, p. xiii)
And:
The preliminary step toward application of the Toyota production system is to identify
wastes completely.
(Ohno 1988, p. 19)
Failure demand is waste. Predictable failure demand is preventable, a ‘common

cause’ in a system, to use Deming’s language.
The notion that demand is predictable conflicts with Bowen and Jones’ (1986)
argument that service organisations experience a high degree of input uncertainty.
A more accurate argument would be that service organisations experience a high
degree of variety rather than uncertainty. In the authors’ experience all transactional
service organisations have largely predictable demand. By understanding demand
from the customers’ point of view management’s attention is drawn to the advan-
tage of designing the organisation to absorb this variety. While Ohno’s (TPS) pur-
pose was to build cars at the rate and variety of demand, a transactional service
system’s purpose is, we argue, to absorb the variety of customer demand.
Understanding the problem leads to tools (or methods) with which to solve it.5
Waste cannot be removed without understanding its causes. It is axiomatic that
the primary cause of failure demand is the failure of the system to absorb the variety
of customer demands. The single greatest reason for service systems to fail to
absorb variety is standardisation. To the prevailing style of management this reali-
sation comes as a significant shock. To give just one example of the impact of
standardisation on performance, we return to HMRC, where the standardisation of
taxation services has created failure demand not only back in to HMRC6 but also to
many organisations ‘down-stream’ that are consuming resources dealing with the
failure of the primary service(s) to work: local authorities, housing associations,
advice centres, voluntary agencies, legal services and the courts are filled with
demand created by the failure of HMRC (and the Department for Work and
Pensions) to provide the primary service effectively (Advice UK 2008).
In transactional service organisations, standardisation, central to the present
style of management and valued by managers as a way of managing costs, can often
drive costs up. Customers can ‘see’ the waste: they know how many times they
need to call to get service, they are irritated by IVR systems that fail to get them to
someone who can help them and hence mean they have to repeat themselves, they
are infuriated by service workers who follow their scripts or procedures and thus
fail to listen to or solve their problem.
While we have explored the genesis of standardisation in service management
literature and practice and the fit with the lean tools movement, it is worth pausing
to reflect on the lean-tools promoters’ arguments for starting any intervention with
standardising the work. They often argue that Ohno said ‘first you must standardise
before you can improve’. While this is essential in manufacturing, in a service
organisation to standardise would diminish the system’s ability to absorb variety.
Fitting with the top-down conventions this means, in practice, that standards are
determined by the hierarchy and/or experts and imposed upon workers (a common
feature of tools-based interventions). In contrast, Ohno placed importance on
workers writing their standards themselves:
5
Methodological principles for studying and acting on failure demand are summarised in: ‘Failure
demand – from the horse’s mouth’ (Seddon 2009).
6
Yet the extent remains unknown in HMRC. In presentations of their lean tools initiative, HMRC
personnel demonstrate no knowledge of failure demand on their system.
54 J. Seddon et al.
Standards should not be forced down from above but rather set by production workers
themselves.
(Ohno 1988, p. 98)
It is a central feature of the TPS that improvements are made by workers adhering
to a scientific method, an essential component in organisational learning (Spear and
Bowen 1999) (Fig. 4.4). Missing this essential emphasis, Womack et al. (2007)
placed the responsibility for standardisation with management:
The work process itself, along with the management process, must be absolutely standard-
ized by managers, and by manufacturing and industrial engineers as well, before a work
team can have any hope of improving it. Standardization in this context means creating a
precise and commonly understood way to conduct every essential step in every process.
(Womack et al. 2007, p. 290)
This merely reinforces the present style of management. In service organisations

work typically has been standardised and industrialised from an internal, cost-
focussed point of view. Managers dumb-down the first point of contact (or out-
source it) to employ cheaper labour and fragment the flow of work (again, to reduce
training time and lower labour costs). The consequences are more handovers; more
handovers means more waste, and an increasing likelihood of failure demand (fur-
ther waste). The more work is fragmented – sorted, batched, handed over and
queued, the more errors creep in. Every time a file is opened, it has to be re-read
(duplication). These problems are exacerbated as workers are working to activity
targets.
This is a further flaw in the ‘Core Paradigm’: holding workers accountable for
their work activity. Managers pay attention to activity statistics, monitoring workers
and doing ‘one-to-ones’ with those who fail to meet their activity targets. As
Deming pointed out, this is to focus on the wrong things:
I should estimate that in my experience most troubles and most possibilities for improve-
ment add up to proportions something like this: 94% belong to the system (responsibility
of management) 6% special.
(Deming 1982, p. 315)
Deming instead encouraged managers to study variation and its causes – for exam-
ple, things that would make the calls longer or shorter. Imagine the potential causes
Causes of failure demand
Activity Management
Failure
Functional specialisation
Standardisation
Fig. 4.4 Understanding the
causes of failure demand
of variation in a call-centre worker’s performance: the nature of the call, the type of
customer, whether processes have been designed from a customers’ point of view
(and as managers do not frequently study demand as a matter of course, that is
unlikely), whether the IT system works today, whether people in other departments
have told customers things they did not tell people in the call centre, the knowledge
of the worker and so on. These are the things that affect performance and are the
things managers should be focused on (the ‘94%’ in Deming’s terms). Managing
peoples’ activity is an incredible waste of management resource; worse, this style
of management demoralises workers. Workers are taught their goodness or badness
will be judged by whether they meet their activity statistics; they usually learn how
to cheat their numbers to avoid attention (driving further waste into the system).
The workers’ focus is survival not contribution and improvement; their ingenuity is
driven by the system to work against its purpose. Managers find it hard to see things
this way. When close monitoring of people gives managers evidence of people
cheating, they claim it as evidence of the need for the controls (or more controls).
Managers develop a jaundiced view of their people. When, on the other hand,
management’s attention is on the system (the 94%), significant performance
improvement follows (see, for example, Pyke 2008) .
The prevailing style of management keeps failure demand and its causes invisi-
ble. Management’s view of their system is limited by the management information
in use, all of which relates to activity and cost. The phenomenon is systemic: failure
demand can only be removed when managers change the way work is designed and
managed.
4.11 The Better Alternative
Following Deming and Ohno, the better way to design and manage service
organisations is to understand and manage the organisation as a system. The
systems archetype below describes a design for managing service in such a way
as to see and remove waste continuously (a feature that it shares with the TPS)
(Fig. 4.5).
By understanding the demands from customers, it is possible to train workers
against the high frequency, predictable value demands (things we know we are
going to get a lot of) that are hitting the system. The consequences are shortened
training times (for example from 8 weeks to 2 weeks in financial services) and more
productive employment of the worker. When the worker receives a customer
demand for which he or she is not trained, the required expertise is ‘pulled’ as
needed. In this way worker training is directly related to the requirements of the
work. The worker aims to achieve single piece flow (to deal with each demand as
it enters the system right through to resolution for the customer, before beginning
with another demand) or, if the work has to be handed on to a flow, then the worker
is focussed on passing it ‘clean’: it must be in such a state that the next person has
everything they need to take the next step. Workers have measures which relate to
the customer’s purpose in their hands (one-stop capability, measures of end-to-end
56 J. Seddon et al.
Train against HFPVD∗
‘Pull’ support
Understand demand Work as single Measure actual

by ‘type and frequency’ piece flow; ‘close’ time
Or put ‘clean’ Measure actual

in to flow performance in
(prevention) customer terms
Key measures: Capacity and capability (knowledge)
∗ HFPVD = High Frequency Predictable Value Demand
Fig. 4.5 The systems archetype for transactional service systems
flow) and hence, like Ohno’s workers, have the latitude to experiment with and
improve the work design.
Training workers against demand and ensuring they are responsible for what
they do is preventative (the better alternative to inspection). All arbitrary measures
(standard times, cost, targets, standards) are removed from the system and instead
real measures are used to help managers and workers alike understand and improve
the work. It is better to know the actual time it takes to complete transactions as
‘one-stop’; this improves resource planning. Similarly it is better to know the true
experience of the customer for any work that goes through a flow (end-to-end time
or on-time-as-required) in order to improve the flow and, consequently, reduce
costs. There are many examples of these principles in use, published examples
include ODPM (2005), Jackson et al. (2007), Pyke (2008), McQuade (2008), and
Zokaei et al. (2010).
At its heart, the systems archetype is concerned with designing against demand,
managing value rather than cost. And this is the heart of the paradox: when manag-
ers manage costs, costs go up; when they learn to manage value, costs fall. It is a
counter-intuitive truth.
4.12 Counter-Intuitive Truths
Ohno discovered a series of counter-intuitive revelations in creating the TPS. The

most notable of these was to discover that costs were contained in the flow of work,
not in creating economies of scale:
To think that mass-produced items are cheaper per unit is understandable, but wrong
(Ohno 1988, p. 68)
This can be re-written for service organisations as follows:

In service organisations to think that service activity is equivalent to cost is
understandable but wrong.
Ohno’s innovation might be termed ‘economy of flow’ (Seddon and Caulkin
2007) as compared to economy of scale. We have shown here how ‘economy of
scale’ actually creates waste which is kept hidden by management’s practices.
Commenting on this distinction H Thomas Johnson said:
It is time to raise awareness of how production systems designed along the lines of Toyota’s
system turn scale-economy thinking completely on its head, making it possible to build
manufacturing capacity on a much smaller scale than ever before thought possible.
(Johnson 2003, p. 7)
Elsewhere, he went further and said that ‘scale economy, beyond very small volumes, is
a concept that should be discarded’ (Johnson 2008, p. 102). Grönroos similarly says:
Scale economies may or may not be a strategically reasonable objective, but it is never
sound, and it is always dangerous to automatically consider economies of scale as a source
of profitability. Rather, an uncritical pursuit of large-scale production and the potential
benefits of scale economies easily turns an operation into disaster.
(Grönroos 1990 p. 120)
In this chapter we have explored further counter-intuitive truths concerning the

design and management of services: that demand is the greatest lever for improve-
ment, that current managerial controls create waste rather than control, that giving
the workers control over their work (using measures derived from the work)
achieves greater control and that managers should work on the system (not their
people). Together, these truths represent a different, ‘systems thinking’ philosophy
of management, comparable to the philosophy behind Ohno’s TPS, and in opposi-
tion to the prevailing style of management.
4.13 Change as Emergent, Not Planned
Ohno placed high value on the need for gaining an understanding of an organisation
as a prerequisite for making any changes. This too is an affront to convention.
Managers are taught that change should be planned, starting with a business case,
a cost-benefit analysis or targets for improvement. It is to assume knowledge; and
as Deming would often point out, experience is not the same as knowledge. To
make the fundamental change that moving from the present style of management
to managing the organisation as a system requires managers first to understand their
problems. As they study their organisation as a system, managers discover the
problems they thought they had are not their real problems.7
A method for studying transactional service organisations as systems is provided in Seddon 2003
7
and 2008.
58 J. Seddon et al.
It is worth pointing out this is also true for manufacturing organisations, for not
all manufacturers make cars. John Darlington and Kate Mackle of Cardiff
University’s Lean Enterprise Research Centre share the view that the tools devel-
oped in Toyota were responses to particular problems; the tools were a means to an
end, not ends in themselves (Mackle 2005). Darlington argues that car manufactur-
ing is just one type of manufacturing, and each different type has different problems
to solve. Thus the first question a manufacturing organisation needs to ask itself is
‘what type of manufacturer am I?’ before implementing any tools (Darlington et al.
2008).
In this chapter we have presented an archetype for transactional service systems.
The problems to be solved are quite different from those to be solved in fast-food
services such as Levitt’s McDonald’s example (where standardisation of production
is essential). In response to Johnston’s appeal, it is a useful first step to articulate
differences in service archetypes – different systems solving different problems.
Two further archetypes not discussed here are ‘break-fix’ systems and ‘preventa-
tive’ systems (Seddon 2003).
4.14 Ohno Said: Do Not Codify Method
The ‘lean tools’ movement is directly in conflict with the beliefs of the architect of
the TPS. Taiichi Ohno asserted that method must not be codified:
While most companies focused on stimulating sales, Mr. Ohno believed just-in-time was a
manufacturing advantage for Toyota. And for many years, he would not allow anything to
be recorded about it. He claimed it was because improvement is never-ending – and by
writing it down, the process would become crystallized.
(Ohno 1988, p. xi [foreword])
To codify method is to impede understanding, thus lessening the chance that people
will challenge any underlying preconceptions they may hold.
Writing about the differences between what Henry Ford intended (for Ohno saw
Henry Ford as a fellow ‘flow’-thinker) and what subsequently occurred in the Ford
Motor Company, Ohno said:
As in everything else, however, regardless of good intentions, an idea does not always
evolve in the direction hoped for by its creator.
(Ohno 1988, p. 100)
The same could be said for Ohno’s ideas.
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Chapter 5
Designing Competitive Service Models
Veronica Martinez and Trevor Turner
This chapter discusses the design of competitive service models through the analysis of
companies’ value creation. In the study of value creation, the value propositions provide
an innovative way to analyse companies’ value creation from the customers’ perspectives.
This chapter is divided into two complementary parts; the first part called “the story” and
the second one called “the theory”. In the first part, this chapter starts with the illustration
of a case study “the ICI Explosives” case. This case shows how the company has trans-
formed its value proposition, business model, service delivery and capabilities and skills
from the 1960s to the 1990s. Then in the second part, the theory underpinning the case
study is analysed and explained. This second part provides to the reader some model,
frameworks and toolkits for the analysis and design of other competitive service models.
5.1 The Story
5.1.1 ICI Explosives UK
The explosives developed in Europe in the late nineteenth and early twentieth
century by the famous Swede and patron of the world peace prize, Alfred Nobel,
were extremely durable and, apart from the introduction of the electric detonator,
have remained in use with minor modifications for almost a century (Fig. 5.1a). In
the 1970s a new invention started a process of change that has transformed the
explosives business from being a supplier of products to a provider of a service.
Survival very much depended on the agility of ICI Explosives UK, hereinafter
referred to as “ICI Explosives,” in adapting to the new competitive environment.
Manufacturing excellence was not a solution. Innovative thinking was required to
sustain the business as changes in technology reduced the complexity that had
protected the business from serious competition for over a century.
V. Martinez (*)
Principal Research Fellow, Centre for Business Performance, Cranfield School of Management
e-mail: v.martinez@cranfield.ac.uk
62 V. Martinez and T. Turner
initiator initiator
initiator
quarry surface
primers
single
primer
a b c
Fig. 5.1 Bore holes in a quarry surface with different blasting explosive types (not to scale)
With the introduction in the 1970s by a small company in the USA that patented
a blasting explosives manufacturing process that did not use nitro-glycerine, the
explosives business was opened to newcomers. All the ingredients used in this new
process were non-explosive and could be purchased and transported without a
licence. The new formulation only became an explosive when the non-explosive
ingredients were mixed together into viscous water-based slurry. This slurry was
then made into long sausages (Fig. 5.1b), with plastic skins like salami, on a
sausage-making machine for packing and transportation (Turner 1998).
5.1.1.1 The Slurry Era
By using ingredients that were non-explosive and could be purchased and

transported without a licence, the old licensing, transportation and safety procedures
became obsolete. This new process of mixing non-explosive ingredients with water,
making the slurry, also eliminated the large capital outlay and know-how involved
in running a nitro-glycerine-based blasting explosives manufacturing plant. The
governmental licensing problems were reduced because the non-explosives
ingredients did not require licensed stores and could be stored near the manufacturing
units. Slurry manufacturing units are less complex and relatively inexpensive to set
up. The whole manufacturing process from raw materials to packaged explosives
could now take place under the same roof rather than in separate buildings. As a
consequence, slurry explosive manufacturing and packaging units could now be
5 Designing Competitive Service Models 63
sited nearer to large areas of population and did not require the vast areas of land
in remote regions normally associated with traditional nitro-glycerine-based
explosives manufacture. Slurry plants began to appear in all parts of the world in
countries not previously involved in explosives manufacture. The response by the
major companies in the U.K. was to try to force the new entrants out of the market
with a price war. They failed to do so. The newcomers had operating costs that were
so low, that as the price fell they managed to survive.
The comfortable, relatively stable, days of explosives businesses with large
export markets in the nitro-glycerine era were over. Traditional explosives
businesses had to change the way they operated or become extinct.
5.1.1.2 The Emulsion Era
The next technological development had an even greater impact on explosives

businesses. Although the slurry explosives were easier to make, they were still sold
as packaged explosives and, in order to satisfy customers’ demands, required manu-
facturing units and depots with large stocks of explosives to be located near
customers.
As with the introduction of emulsion explosives in the 1980s, the “sausage skin”
packaging of the explosives were no longer needed. Moreover, the ingredients were
different and much cheaper than the packaged explosives. Emulsion explosives also
allowed formulations to be created for use in small diameter, hence cheaper, bore
holes. Nitro-glycerine explosives were no longer needed for quarrying and nitro-
glycerine plants were not required.
Initially emulsion explosives were used as packaged explosives in the UK
because, except for very large quarrying operations, it was not worthwhile setting up
manufacturing units in quarries. The majority of quarries in the UK are small and do
not carry out blasting operations every day. However, it was recognised by explo-
sives businesses that the advantages of pumping bulk explosive directly into bore
holes were considerable (Fig. 5.1c). It eliminated the packaging and storage activi-
ties. Also, if the explosives could be made reliably at the point of use from non-
explosive ingredients and then used, the problems of manufacturing and storing
large quantities of explosives and the related licensed distance problems would be
overcome. Large manufacturing plants and depots would no longer be required.
This led the way in the 1990s to the use of mobile manufacturing units that car-
ried the non-explosive ingredients separately and mixed them as they were pumped
into bore holes.
First one and then other major manufacturers began to use mobile manufacturing
units to deliver and pump blasting explosives directly into customers’ bore holes.
As the number of mobile manufacturing units increased, the manufacture of pack-
aged explosives within the traditional manufacturing sites declined.
It marked the beginning of the end of the manufacture of packaged explosives.
5.1.1.3 The Blasting Service Era: From Supplying Explosives

to Providing Rock on the Ground
The move from nitro-glycerine to slurries and then the introduction of emulsion
explosives led to a complete restructuring of the explosives businesses. The core
competence of managing complex manufacturing plants was no longer required.
New skills and systems had to be developed to respond to customers’ demands for
lower prices and better service.
This led ICI Explosives, one of the major businesses in the U.K., to consider
how profit margins could be maintained by offering the customer a new concept.
This concept was to sell “rock on the ground” to the customer, rather than
explosives. ICI was already employing mining engineers who provided a technical
service to mines and quarries on best practice concerning the use of explosives to
blast rock safely and economically. These engineers were also used to liaise with
customers to develop customer loyalty by advising them on how to satisfy
explosives legislation and introduce new blasting techniques to improve yield from
the quarries. The quarries purchased explosives and accessories, stored them at the
quarry and then used their own personnel to carry out the routine drilling of bore
holes, loading of bore holes with explosives, and shot-firing. They called in the
mining engineers as advisors if problems such as misfires, fly-rock, or low yield
occurred.
Whenever blasting activity in the small UK quarries occurred, about once or
perhaps twice a week, a team of people had to be pulled from their normal activities
of digging and grading rock to load and fire the blast. Before the introduction of mobile
manufacturing units, the explosives and accessories for the blast needed to be ordered
and stored in secure, often remote, licensed magazines overnight prior to the day of the
blast. Personnel had to be trained to satisfy government legislation for the use and
handling of explosives. In the event of weather conditions becoming adverse and the
loading not being complete during a day, personnel had to be employed to “guard” the
shot overnight to prevent theft of explosives and accessories. The introduction of
mobile manufacturing units meant that the storage and loading of blasting explosives
on site was no longer required. Personnel from the explosives business travelled with
the truck to load the bore holes and worked with the shot-firer and his team until the
shot-firer took over to carry out the blast (Fig. 5.2).
In the “rock on the ground” proposition, mining engineers and truck operators
were taking over the blasting activity from customers. Rock on the ground was
selling to customers the rock of the correct size distribution, in a mound of rock
created during the blast of the correct profile and location to be easily dug and
hauled by the quarry operator for further processing.
With the introduction of quarry services, all the previous blasting activities were
taken out of quarry managers’ hands and placed into the hands of experts who carried
out these activities as part of their core competencies. There were enormous benefits
for the busy, and often harassed, quarry manager. The quarry services team turned up
on the day of the blast with the explosives mixing unit and accessories, carried out the
blast, and left behind a pile of rock for the manager to dig and process.
Mobile
Manufacturing FlexibleHose
Unit
boreholes
QUARRYSURFACE
QuarryFace
ROCKPILE
Fig. 5.2 Mobile manufacturing unit operating in a quarry
The explosives business had transformed itself from making and selling explo-
sives to providing quarry services. These services could be in the form of a contract
to provide an agreed tonnage of rock over an agreed time scale. The services could
be blasting only or could include drill and blast or even rock face profiling, blast
design and layout, as well as drill and blast. As long as the quarry management
were getting value for money from this service, then the explosives business could
run the blasting side within the customer’s premises and by so doing protect their
profit margins.
This change in emphasis from manufacturing and selling a product to providing
a service required considerably fewer people and facilities. Large numbers of peo-
ple who made explosives had to be re-deployed to other activities both inside and
outside the organisations. Large manufacturing operations and depots were no
longer needed and had to be closed down or reduced in size.
ICI Explosives had a policy of no enforced redundancy for its employees. This
meant that the manufacturing personnel needed to acquire new skills to become
service providers inside customers’ premises. Quite a different skill set was
required, such as training people who had been “blue-collar” factory workers to
drive heavy goods vehicles or to man the mobile manufacturing and shot-firing
units to carry out blasting operations. All personnel involved with customers
needed customer care training because they now had direct contact on a daily basis
with quarry managers and other quarry employees.
A resettlement team based in the Human Resource function was set up to
facilitate the transfer of manufacturing personnel to the new jobs in Quarry Services.
Selling Selling Selling Selling Customised

Products Products Products Blast Services
plus a
“Nitro - “Slurry” “Delivering mounds
Service
glycerine of rock ready to use”
Cartridge” “Emulsion”
Fig. 5.3 The changing explosives business
All manufacturing and depot personnel were given the opportunity to apply for the
new jobs and a very systematic approach was used in the selection process. The
resettlement team broke the new jobs down into eight elements and identified
competencies required to carry out these elements. Applicants were interviewed and
tested to determine whether they had or could develop these competencies.
Personality profiling and critical thinking tests were used. About 60 people were
selected to transfer to the new jobs from manufacturing sites and depots from around
the country. Some elements of the jobs required the applicants to obtain certificates
before they could take up the positions. In particular HGV (Heavy Goods Vehicle)
driving certificates were required as also were shot firing certificates. Successful
applicants were given assistance in obtaining these certificates, required by law,
before starting their jobs. Assistance with relocation was provided.
In a relatively short period of time, ICI’s explosives had moved from being
manufacturing experts to service providers. Technological and other changes in the
marketplace had determined the new activities within their business. For companies
in this arena, competitive excellence – and even survival – meant following a train
of development similar to that becoming more and more common in many industry
sectors (Fig. 5.3).
ICI’s competitive criteria had changed from product functional excellence and
on-time delivery performance to customer service excellence.
5.2 The Theory
5.2.1 Value Proposition
The introduction of the concept of value propositions also called value delivery
systems by Bower and Garda, in 1985, changed the way many practitioners and
scholars analyse the value creation of organisations. Their concept highlights the
need for companies to change their traditional view of value from the functional
view of activities to an externally oriented view, as a form of value delivery. This
can only be achieved by looking at the business from customers’ perspective. The
“value proposition” is defined as
… the implicit promise a company makes to its customers to deliver a particular combination
of values.
(Treacy and Wiersema 1993, 1996)
The customers’ perspective brings an external dimension to the value propositions,

which makes organisations aware of continuous changes in the business environ-
ment. The perception of value could change due to five main factors; first, custom-
ers are becoming more sophisticated and demanding; second, co-production is
increasing innovation; third, competitors are raising expectations, fourth, increase
of customers’ business understanding and fifth, new technology allows new forms
of customer contact (Huff et al. 2009). As Ramirez (1999) highlights, the external
customers’ perspective brings a dynamic element that distinguishes the value
propositions from other business frameworks.
In ICI explosives there are three main value drivers of change. First the techno-
logical innovation around the explosives’ production; e.g. the transformation for the
1970s to the 1980s and from the 1980s to the 1990s. Second, the application of
customers’ understanding and knowledge from the technical support team. Finally,
the marketing analysis of different configurations of product-service offers.
Payne and Holt (2001) argue that to revitalise the stakeholders’ value, organisa-
tions should follow the theory of the creative destruction from Joseph Shumpeter.
ICI explosives creatively destroyed its manufacturing propositions to become a
total service provider. Its value proposition was re-invented three times in a 30
years window. Kim and Mauborge’s (1999) and Woodruff’s (1997) rationale also
suggests that since value is in a permanent status of change, organisations should
continuously re-invent their propositions of value to customers because they are the
main source of competitive advantage.
The value propositions place emphasis on the creation of mutual value; this is
what some marketing authors called co-creation (Vargo and Lusch 2004). It can be
achieved as a consequence of a reciprocal relationship between organisations and
stakeholders in a network (Bower and Garda 1985; Normand and Ramirez 1993).
Treacy and Wiersema (1996) proposed three generic value propositions where
organisations operate. They are: Operational excellence which proposes standard
products to their customers, at the best price with least inconvenience. These
organisations offer the best price for their products within their competitors’ radius.
Product leaders propose new technologies and product designs to their customers
at the right time. They offer the leading technologies and products; price is not a
priority issue for their customers. Customer intimacy which operates with limited
number of customers and offers the best total solution. These companies focus on
delivering the best customised product, technology and/or service.
5.2.2 The Value Matrix
Despite the clarity and functionality of Treacy and Wiersema’s value proposi-
tions, they are insufficient to understand how tangible and intangible value is
HARD SOFT
Product
Innovators Brand Managers
Leadership
Operational
Excellence Price Minimisers Process Simplifiers
Customer
Technological Integrators Socialisors
Intimacy
Source: Martinez and Bititci (2006)
Fig. 5.4 The value matrix
created in organisations. The value matrix suggests that there is an additional

dimension of value creation called the “hard and soft value dimension”
(Martinez 2003; Martinez and Bititci 2006). Organisations that operate in the
“hard value dimension” place strong focus on the delivery of tangible elements
of the offering. For example, the delivery of value through new technology
embedded in the product or a customised solution- based product. Conversely,
organisations that operate in the “soft value dimension” place strong focus on
the delivery of intangible elements of the offerings such as, building trust, sta-
tus or creating an inimitable experience for the customer on the consumption of
the offering. The value matrix takes a customer delivery approach to analyse
companies’ value creation processes (Fig. 5.4). It has six value propositions.
Innovators, price minimiser and technological integrators focus on the hard
value creation; meanwhile, brand managers, process simplifiers and socialisers
focus on the soft value creation.
Innovators continuously provide innovative technologies, embedded on product-
service offerings. These organisations offer the state of the art in product-service
design to their customers and customers keep coming back for the upgraded
offerings.
Price minimisers propose good quality, reliable products and services at sen-
sible prices to their customers. They strengthen the efficiency of their production
process to drive operational costs down.
Technological Integrators propose continuous total solutions. First, they
understand the customers’ businesses and needs, then they tailor product-service
offerings for carefully selected customers.
Brand Managers focus on the brand image, quality and style of the
product-service offering. They strive on the creation of a distinctive pre-, during
and post- customer experiences. These organisations propose and deliver status,
lifestyle and superiority feelings such as, feeding ego though the acquisition of the
product-service offerings.
Process Simplifiers provide easy availability and convenience to the product-
service offering; by making customers’ lives uncomplicated and warranting
hassle free experiences. They build streamlined processes in a novel and
profitable way.
Socialisers propose flexible and reliable services on the basis of long-term
relationships with customers. These organisations focus their efforts on the service
delivery, building trust and inter-personal relationships with customers.
Table 5.1 explains the value propositions from the customer and from the com-
pany perspectives. These value positions are used at the business unit level when
organisations have more than two strategic businesses in different market segments
or at the company level when the business has a single strategic direction for a
single market.
5.2.3 Transformations Path of the ICI Explosive

Business: In Search of New Value Propositions
Before explosives became a non-profitable business in the late 1960s, ICI

Explosives capitalised on the exploitation of the nitro-glycerine embodied on the
classical nitro-glycerine explosives cartridges. ICI Explosive’s products were
considered the best in the market; in this way ICI Explosives positioned itself as an
innovator. The creation of value was reduced to the economical transaction prod-
ucts [explosives] for money. This initial value propositions was purely based on the
tangible attributes of the products. The success of this early business model was
protected by highly complex, specialised, risky and expensive operational pro-
cesses. These processes included manufacturing, storage, transportation and deliv-
ery. They provided a natural barrier that protected the business from competitors
and new entrants.
5.2.3.1 The First Change Trigger
The first trigger was initiated by an external force, a competitor called “Ireko.”
Ireko changed the nature of the explosives with the introduction of a new product
innovation, the “viscous water-based slurry” made from non-explosives ingredi-
ents. The new non-explosive ingredients of the product minimised the production,
transportation and inventory risks. The reduction of risks drove operations, insur-
ance and licensing costs down. In the same way, the expensive manufacturing and
technical facilities were no longer required. Therefore, the competitive advantage
relied on the operational excellence of the processes. This is how ICI Explosives
competed as price minimiser.
70
Table 5.1 Value propositions – what the customers get and what the companies need to do (Martinez 2003)
Company needs to do
Value proposition Customers get Strategic objectives Operational objectives
Innovators New innovative designs, Provide breakthrough through Long-term vision, robust R&D and
products never seen before. generations of continuous product development, capacity
new designs, new features to innovate within short
within technological basis. product lifecycles.
Brand Managers Status from the product, they Expand the market reinforcing Superb brand recognition. Focus
get lifestyle, a feeling of the solid brand image of the market sector. Superior control
superiority. product and the company. over the product styles, quality
and promotion.
Price Minimisers Ordinary, reliable products Production growth reaching high Strong order fulfilment sustained by
and services at lowest price quality levels in the most cost- efficient and effective production
possible. They get security on effective way and waste free. processes within tight quality
the product. processes controls.
Process Simplifiers Convenience and availability Building streamlined processes Strong availability. Superb order
of the products. Hazard free to make life simple and fulfilment–distribution by
experience. uncomplicated for customers conventional and un-conventional
in a novel and profitable way. resources (networking, IT, etc.).
Technological Integrators Tailored products and services. Tailor specific and continuous Strong relationship with customer.
They buy total solutions. solutions for carefully Knowledge of customers’
selected customers on businesses, products and
the basis of permanent operations. Capacity to configure
relationships. any specific need. Able to adopt
the customer’s strategy.
Socialisers Flexible services and inter- Build confidence and trustiness Sensitive fulfilment of customers’
personal relationship because on the customers. needs supported by careful
they trust in the company. deliver, reliability, and honesty.
Excellent personal service.
V. Martinez and T. Turner
This new value proposition of the 1970s still heavily relied on the tangible product
“slurry” as main source of value creation. New comers and competitors started
operating at very low costs that drove the explosives’ prices down and originated a
price war among competitors. ICI Explosives managed to survive, however its
large, stable international market was completely destroyed. Value was created
through the physical proximity to customers by setting up hundreds of depots with
large stocks of explosives.
5.2.3.2 The Second Change Trigger
The second trigger of change was advocated to innovative product delivery, the
“emulsion-based explosive” also called the “sausage skin.” Emulsion explosives
were cheaper and more effective than slurry. For large quarries, the emulsion could
be offered as free of package by pumping bulk of emulsion explosive into the bore
holes. For small quarries, the emulsions could be offered as sausages. Emulsion could
be used in slender holes, thus reducing mining operating costs, and eliminating pack-
aging and storage costs. ICI Explosives’ value proposition adopted process simplifier
as a way to facilitate the use and performance of the explosives to customers.
This new value proposition of the 1980s made the large manufacturing plants
and depots unnecessary and eliminated the storage and package activities. Despite
the tremendous effort to increase the service delivery, this value proposition was
still based on product delivery with few elements of service delivery.
5.2.3.3 The Third Change Trigger
The third trigger of change was leaded by the technical marketing, mining service
and quarry service teams. In the 1990s the company changed its value proposition
from selling pure products to sell blasting services to selling a total solution “the
rock in the ground.” The mobile units were operated by a wide range of explosive
experts. This new value proposition technological integrators required fewer people
and facilities and less manufacturing technology; conversely it required more experts
in mining, chemistry, geology and quarry. The new service value proposition
required the acquisition of new skills such as customer care training.
The ICI Explosives’ transformation’s path from the 1960s to the 1990s is sum-
marised in Table 5.2. It highlights the evolution of value propositions, value drivers,
key capabilities, service delivery and drivers of change.
5.2.3.4 Mapping the Value Propositions into the Value Matrix
Over time, ICI Explosives has demonstrated a continuous trend towards

servitization.
Table 5.2 The ICI Explosives transformations path
72
Nitro-glycerine cartridges ….
Offerings 1960s Slurry 1970s Emulsion 1980s Blasting service 1990s
Value proposition Innovator: Product excellence Price Minimiser: Process Simplifier: Product Technological Integrator: In-situ
Manufacturing delivery total service solution
excellence
Value driver Product novelty: Exploitation Manufacturing Effective product & its Completed tailored & sustainable
of the nitro-glycerine process: New production delivery: Direct pumping services solutions: Value-in-
technology process: mixing non- bulk explosive into holes use: tailored service by the
explosives with water mobile units’ experts. Killed
package & storage
Ardeer operating service business
Key capabilities Leadership in blasting Operational excellence. Effective product. Formulation More effective blasts
practices-quarrying Depots with large created for smaller
and mining storage to satisfy diameters of holes
demands located near therefore cheap ingredients
to customers. Lean
production supported
by MRP II, ISO 9000
Highly specialised & unique New service skills: simulation and
Factory operations risk analysis, scenario planning
ERP, rock laser profile, rock size
distribution, blasting services &
customer care training
Value offerings “Product excellence”– expensive “Commoditized “Blast effectiveness” – Customers Tailored solutions leading into
and highly specialised products”– cheaper did not need to manage their 2–3 years partnerships with
products plus products own explosive storage customers
mining guidance Improve safety magazines Customers’ hassle free security
legislation and operation costs
Barriers to entry High. Remote and expensive Low. Manuf plants not Medium technology barrier. If Highly specialised and multi-
manuf. Facilities of nitro- longer required, set blast was not completed fast disciplinary technology
glycerine. Highly skilled up locations were enough and rain-water was coordinated to provide
chemical engineers established near filtered in the hole, it led to individual, tailoring services
quarries inefficient blast
Risks Manufacturing, transportation Price war competition. Raw material were easily stolen Operations risks are reduced.
& storage of raw materials Finished products for other purposes Build strong and long term
(nitro-glycerine) and. transport customers’ relationships
cartridges
Operations’ Line- long & ineffective supply Line- short supply chain Line Project
processes chain. High volume & stock
Service delivered Mining engineers mainly sell Mining engineers assist Professional mining engineers Complete in-situ tailored services.
the product customers to use the directly fill emulsion into the Designing team: simulating,
5 Designing Competitive Service Models
product holes to facilitate the blast Mining team: methods

to distribute the blasting
effectively
Customization Mining engineers to help with Mining engineers – Blast service customisation to fit
the use of the product converted the nitro- with customers needs
glycerine customers
to slurry customers
Major challenge Improve the nitro-glycerine use Slurry too cheap and very Rain-water trapped into holes Updated and coordinated experts’
few law restriction with explosives, lead to skills
to produce it inefficient blasts
Operating costs High capital costs Very Low Low Low- led good revenues
Insurances of depots Transport, Depots Manufacturing, depots and Mobile units: investment
production, transport near to key packaging activities were and maintenance
& handing customers eliminated
Government Licensing Emulsion delivery Customer care training
Units experts training: mining
engineers, truck operators,
and quarry service team
73
(continued)
74
Table 5.2 (continued)
Nitro-glycerine cartridges ….
Offerings 1960s Slurry 1970s Emulsion 1980s Blasting service 1990s
Prices High Very Low Low High. Payment based on rock
weight per blast
Market Global distribution Europe and Mainly UK UK Europe and Mainly UK
Competition Close to inexistent in Europe High. It took over local Medium Low
UK distribution
(Slurry plants arose in
all parts of the world)
Driver of change “Ireko” Competitor invented Solution to technology Technology was easier for different people to do it and better
the new “viscous water- problem “emulsion customer understanding total service- rock in the ground
based slurry” from non- explosive.” Now, rain-
explosive ingredients. water no longer affects
Expensive chemical the effectiveness of
plants not required. Skills blasts. “integrated
sets in operations had P-S”
changed Terrorism steeling
material
HARD SOFT
Product Innovators Brand Managers

Leadership
ICI Explosives 60’s
Cartridges
Operational Price Minimisers Process Simplifiers

Excellence ICI Explosives 70’s ICI Explosives 80’s
Slurry Emulsions
Technological Integrators Socialisors

Customer -
Intimacy ICI Explosives 90’s
Blast Services
Fig. 5.5 The ICI Explosives servitization journey mapped in the value matrix
ICI Explosives has moved away from being an innovative product-centric manu-
facturer “Innovators” to become a total service provider “Technological Integrator.”
ICI Explosives has not been alone in adopting a servitized strategy, however it was
a pioneer in this type of transformation. Fifty-eight percent of US manufacturers
operate a combined service-manufacturing model, and this approach is growing
across other Western nations (Neely 2007). This servitization growth is driven by
the increasing global competition and commoditisation in product markets
(Martinez, Neely, Ren and Smart 2008).
Servitization is occurring across many industry sectors and has implications
across all organisational functions (Gebauer, Fleisch and Friedli 2005). The value
creation analysis of servitized organisation has shifted – from looking at the busi-
ness from the suppliers’ perspectives to customers’ perspectives (Treacy and
Wiersema 1993. This new view is highly focused on the offerings’ utilisation
(Gummesson 1995; Silvestro et al. 1992).
The analysis of the ICI Explosives’ value propositions shows a servitization
journey moving from being “innovators” to “price minimisers,” from “price mini-
misers” to “process simplifiers” and from “process simplifiers” to “technological
integrators.” Figure 5.5 shows the servitization journey mapped into the value
matrix.
From Innovators to Price Minimisers
In the early 1960s, the proposition of value of ICI Explosives, “innovators,”

focused on the novelty of the tangible attributes of the product through the explora-
tion of the nitro-glycerine. The entire operations, including manufacturing, logistics
and procurement, revolved around the exploitation of this nitro-glycerine.
In the 1970s, the ICI Explosives’ value proposition moved to “price minimiser,”
but this time it focused on the tangible attributes of the product and price reduction.
This innovation was externally pushed by the introduction of a new production
process based on non-explosive ingredients. This innovation secured the reduction
of cost, particularly storage, transport and materials handling and increased the
market competition. However this business model was not sustainable in the longer
term.
From Price Minimisers to Process Simplifiers
In the 1980s, ICI Explosives was urged by its extensive competition to offer a new
value proposition. Therefore, the new ICI Explosives’ value proposition process
simplifiers focused on the delivery of the product “slurry.” The new process imple-
mentation eliminated manufacturing, depots and packing. The mining service pro-
vided an efficient delivery and performance of the explosives. Customers were
focused on planning the quarries rather than focusing on drilling and loading the
explosives. This model was not economically sustainable; the key competitive
advantages of this model drove revenues down.
From Process Simplifiers to Technological Integrators
Toward the 1990s, ICI explosives gauged a new window of opportunities to reduce
competition and increase partnerships with key customers. Its new propositions
focused on the delivery of customised solutions following technological integrator
value proposition. This new service approach fundamentally changed the compa-
ny’s operations, customers’ approach and competencies. Its major investment
resided on the development of blasting experts and mobile units to deliver the ser-
vice. This value proposition positioned again the company in a profitable and
unique market niche.
Over 40 years, the qualitative analysis of the ICI Explosives’ product-service
offerings shows a continuous decrease of tangible products and an increase of ser-
vices on the value propositions offered to customers. Professor Michael Cusumano,
from the Massachusetts Institute of Technology, identified similar patterns in the
US information telecommunications’ industry (Cusumano 2004, 2008). The ICI
Explosives’ analysis illustrated in Fig. 5.6, confirms the consistent trend toward the
servitization of the company.
Nowadays, the ICI Explosives “technological integrator” value proposition
created in the 1990s is still a very profitable business model. Attempts were made
by competitors to replicate it but they found it difficult, particularly in the quarry
services. Although, the ICI Group decided to divest from the explosives business
because of the Oklahoma bombing experience, this business model and value
proposition model was sold to Orica. Currently Orica is in business in a profitable
and competitive position.
Products Services
Product based nitro- Customised solution-

glycerine mobile units
Manufacturing Pump emulsion into
process holes
Process delivery- Proximity of depots to
explosives into holes customers
Product embedded Almost inexistent
in the solution services
... 1960 1970 1980 1990 Product Trend

Time Service Trend
Fig. 5.6 ICI Explosives’ products and services transformation over time
5.2.4 Value-in-Use
ICI Explosives has been one of the few multinationals that recognised the need to
understand “What customers value from the use of the product-service offerings.”
It was then when it re-designed a new proposition of value to the customers. The
revised foundational premises of service-dominant logic from Vargo (2008) high-
light that service is the fundamental basis of exchange. In the exchange, the cus-
tomer is always a co-creator of value. While value is created in the customer space,
organisations cannot deliver value, but only offer “value propositions.” Hence in
designing a new value proposition it is an imperative to assess the value-in-use that
the customer gets out of the offering’s consumption.
The “technological integrator” value proposition of ICI Explosives proved to be
the most profitable and difficult model to replicate by its competition. It embraced
the tailored service approach to the key customers’ needs.
Servitized organisations appear to be divided into two distinct groups: those that
thrive under a servitization model with service margins up to eight times those in
product sales, and those who are struggling to break even because they are unable
to convince customers to pay for their services (Reinartz and Ulaga 2008).
5.2.4.1 Understanding Customer Value-in-Use
Value has several meanings in management literature. Frequently, customer value

is defined from the supplier’s perspective. For example, the customer value concept
defines value as the economic worth to a firm of a customer, while the value-added
concept allows sellers to think of bundles of attributes and seller-controlled vari-
ables (Woodruff and Flint 2006). Vargo and Lusch (2004) have inspired much
recent discussion on this topic, proposing in particular an emphasis on value-in-use,
but they neither define this term nor develop an argument as to how it can be cre-
ated. Building on Vargo and Lusch (2004), Woodruff (1997) and Woodruff and
Flint (2006), Value-in-use is defined as a customer’s functional outcome, purpose

or objective that is directly served through the product/service consumption.
Macdonald, Martinez and Wilson (2009) propose that value-in-use may provide
a missing link in assessing the customer perception of value in product-service
offerings. A value-in-use perspective may be superior to the existing embedded
value perspective which is defined as: the presence of product//service attributes,
and performances against those attributes, for which the customer is prepared to
pay (Vargo and Lusch 2004). Vargo and Lusch (2006) highlight that there is no
value until an offering is used.
A company has control over the design of attributes of its products or services;
however, “value is not created in a factory or in the back office of a service firm”
(Gronroos 2006). Value cannot be embedded in goods created by the supplier; instead,
goods are distribution mechanisms for value creation (Vargo and Lusch 2006). The
customer uses the supplier’s product-services offerings as a means of satisfying their
ends. In this process, value emerges as the consumer uses the offering.
Indeed the evidence from the operations and marketing literatures show that
existing customer insight measures do not accurately predict customer satisfaction
or firm performance. They suggest that better understanding of the co-creation of
value-in-use that gets closer to the customer, may be appropriate. Research in this
gap is currently being carried out by Cranfield University; it aims to shade some
light on the understanding of value-in-use, as a media to redesign innovative and
successful value propositions to customers.
The success of the current ICI Explosives’ value proposition “technological inte-
grator” resides on the analysis and understanding of the value-in-use. This value-in-use
analysis came unconsciously when the mining, technical and marketing teams started
discussing the real value that the customers appreciate out of their jobs. The teams
concluded that customers’ value some aspects of the product service offering such as,
the simulation analysis of blasts lay out, the explosion effectiveness and hassle free
contracts renewals among others. Table 5.3 shows the value-in-use that customers
appreciated from the ICI Explosives’ offerings.
Table 5.3 Customer value-in-use and ICI Explosives response

Customers value-in-use ICI Explosives full fill the customers’ value with
Simulation analysis Simulation of blasts Engineering team
of blasts lay out
Explosives effectiveness Customised formula Engineering and mining
teams
Particles size analysis Mining team
Hassle free explosive ICI took the ownership of the explosive Marketing team
licence product, processes and licences
Explosives risk adverse Explosives’ transport and material Engineering and mining
handling and storage teams
Hassle free contracts: Created partnerships through Marketing team
renewals and reviews long term contracts
Drill hole process Subcontracted the drilling This was supervised by the
mining team
By identifying the sort of attributes and performance the customers value from
the offering, ICI Explosives was able to customise a solution. Then the solution was
tested with other customers. In this way, the company managed to create the mobile
units complemented with the analysis of the particle size ground, simulation of
the blast and quarry analysis. By providing a service, ICI absorbed ownership of
the technology, material and skills.
This change was partially pushed by the customer’s desire to compete in econo-
mies of scales in an Australian site; where the transport of the slurry was highly
ineffective to cope with the daily blasting demands.
5.2.5 The Strategic Value Creation Road Map
This chapter demonstrates the importance of the definition of the value proposition
as a means to establish a sustainable and profitable business model. The strategic
value creation road map (Fig. 5.7) highlights the series of analyses that need to be
carried out to understand the company’s competitive position and realise offerings
that better suit the customer’s value-in-use.
New
Business
Suppliers Markets
Model
Competitors Economy EMERGENT STRATEGY
New Entrants PESTEL
Customers Analysis
VALUE-IN-USE Assessment
Analysis of External
Environment
Gap Re-definition:
Analysis Value
Business Proposition
Model Redesign to meet
Analysis of Internal Benchmark A. future needs
Environment
CURRENT STATE OF BUSINESS Plan
Mission, vision Capabilities Strategy
and ambitions
Skills Alignment:
Deliberated/
current strategy Core competencies operations, mgmt
Value drivers Technology and customers
Products & services Processes STRATEGIC THINKING
STRATEGIC LEARNING
Fig. 5.7 The strategic value creation road map

The strategic value creating road map starts with an analysis of the external
environment, including a stakeholder analysis and the crucial customers’ “value-in-
use” analysis. Once the customer value-in-use and the external environment are
understood, the analysis of the internal environment is carried out. This includes the
analysis of the current state of the business including the business objectives,
ambitions, capabilities, skills, technology (R&D) and competitive processes.
The internal and external analyses are compared and contrasted. The resulting
analysis points out the gaps on the current business model, and potential new ways
to do business. The current business proposition and potential new opportunities to
deliver value are mapped in the value matrix. In the value matrix, the transforma-
tion from one value proposition to other are mapped and analysed. The result of this
analysis will point out a new business model. The operationalisation of the new
business model comes to life when the current resources, capabilities and skills are
re-aligned with the new value proposition in a form of a new business model.
5.3 Conclusions
This chapter discusses how organisations could compete as services through the
re-direction of the value propositions. The chapter demonstrates through the illus-
tration of the ICI Explosives case that this could only be achieved by understanding
the customers’ value and transformation paths that organisations could take towards
a servitized journey. The first part of this chapter the “ICI Explosives” case shows
how the company has transformed its value proposition, business model, service
delivery, capabilities and operating models from the 1960s to the 1990s. The
second part of the chapter provides some model, frameworks and toolkits for the
analysis and design of other competitive service models. An innovative and crucial
element in this analysis is “the customer value-in-use analysis.” The better under-
standing companies have on the value that their product/services provide to the
customers, the better the operating business model could be.
Acknowledgment The authors would like to acknowledge the support of the EPSRC/IMRC
under grants numbers [IMRC 154 and 144], which is supporting the Product Service Systems
research.
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Chapter 6
Shifting from Production to Service
to Experience-Based Operations
Jannis Angelis and Edson Pinheiro de Lima
6.1 From Production to Service …
This chapter covers the shift in focus of value added business operations from
production to services, and in turn, to experience-based operations where customer
involvement itself becomes part of the offering. The shift has significant implica-
tions for how businesses are managed. The greater service focus affects the firm’s
unique value proposition, which necessitates considerations on strategy, supplier
relations, post-sale offerings and so on. Meanwhile, the inclusion of customer
experiences affect the way operations are designed and employed so that these are
structurally systematically captured and capitalised.
Services can be defined as activities or performance provided to satisfy customer
needs, whereas goods are tangible products or stable intangible assets. The mix may
range from pure tangible good, through hybrid goods and services, to pure service.
While the typical manufacturing company has a total offering of tangible goods with
accompanying services, the trend is toward hybrid offerings. Traditionally manufac-
turing is defined as the transformation of material into a finished product. However,
the boundaries between products and services are increasingly blurred (Heineke and
Davis 2007). Many manufacturers offer services in support of their products.
Also, the goods/services separation has become somewhat of an artificial dis-
tinction as demand for services as an input to the production of goods has grown
steadily. For instance, traditional manufacturing firms such as aerospace engine
maker Rolls Royce, now derive substantial income from post-sale service and
maintenance to the engine users. Similarly, healthcare companies are recognised as
service firms while many of the healthcare processes employed rely heavily on
manufactured products. Indeed, health care was one of the earliest sector adopters
of the principles of scientific management and industrial engineering. Barnes’
motion and time study from 1937 describes ‘operating-room setup showing tables
J. Angelis (*)
OM Group, Warwick Business School, Coventry,
CV4 7AL, UK
e-mail: jannis@angelis.se
84 J. Angelis and E.P. de Lima
for instruments and supplies designed to facilitate the work of the surgeon, his
assistants and the nurses’ (1980,p.177).
So care needs to be taken when using the traditional industrial classifications for
production and service. For instance, McDonald’s main competitive advantage is
its knowledge in operating restaurants with high customer turnover. Application of
scientific management to its operations was the key factor underlying McDonald’s
early success (Chase and Apte 2007). Today, it arguably exhibits process applica-
tions to a greater degree than do many manufacturers in its main operating princi-
ples, such as standardisation and reduction of product variety, simplification and
automation of processes and performance monitoring and control.
Technological progress in information and communication technologies have
both enabled and hastened the pace of change in the way products and services are
made and offered, Apt and Mason (1995). For instance, use of information systems
makes business process outsourcing viable to many companies. To this effect sev-
eral concepts have emerged that encompass the reality of manufacturing and ser-
vice firms, ranging from product-service systems, servitization and high value
manufacturing. There has also been a significant research interest in service opera-
tions. Table 6.1 lists the main ideas developed in respective decade. It reveals an
Table 6.1 History of research in service operations (Adapted from Chase and Apte 2007)
Time period Key theoretical and practical ideas
1900–1950s Application of scientific management to services
Walt Disney: industrialised fantasy
Holiday Inns: consistency in multi-site services
1960s McDonald’s: production-line approach to services
Service economy and operations in health care
1970s Industrialization of services
Match supply and demand in services
Customer contact model
Data envelopment analysis
1980s Classify services to gain marketing and operational insights
Gap model of service quality and SERVQUAL
Psychology of queues
Yield management
1990s Service profit chain
Using fail-safe methods in service systems
Globalisation of information-intensive services
Emergence of experience economy
2000s Behavioural science in service operations
Information technology in services and e-services
Global business process outsourcing
Service design
2010s Process driven behavioural operations
Experience-based operations
6 Shifting from Production to Service to Experience-Based Operations 85
extension of the process-focused shift towards greater customer involvement

(Sower et al. 1997; Roth and Menor 2003; Sprague 2007). Research on service
operations has also incorporated behavioural considerations, as discussed by
Boudreau et al. (2003); Bendoly and Hur (2007) and Heineke and Davis (2007).
The distinction between high- and low-contact customer systems provides a
basis for classifying service production systems. Following Chase’s (1978) cus-
tomer contact model of services, the less direct contact the customer has with the
service system, the greater is the potential of the system to operate at peak efficiency
since the transformation of products is easier to manage when customer interaction
is limited. This may result in the practice of decoupling services into front-office
and back-office operations, with the former responsible for the high-contact ele-
ments of work and the latter taking care of the low-contact elements (Metters et al.
2006). An additional advantage of such decoupling services is that the back-office
work can be detached from the physical locations that deal with the customers and
moved to less expensive locations, including foreign countries.
The services can be categorised into three distinct types: professional services,
service shop, and mass services (Schmenner 1986). Professional services, as clas-
sified by Silvestro et al. (1992) and further explored by Ng et al. (2007), are organi-
sations with relatively few transactions, highly customised, process oriented, with
relatively long contact time. Most value is added in the front office, where consider-
able judgement is applied in meeting customer needs. Examples include manage-
ment consulting and corporate banking. Mass services are characterised by a large
number of customer transactions that involve limited contact time and little cust-
omisation. Offerings are predominantly product-oriented, with most value being
added to the back office and little judgement applied by front office staff. The ser-
vice shop category falls between professional and mass services. Service industries
are distinct from manufacturing in the required immediacy of response. After all,
as a rule hotel rooms must be available for occupancy when and where travellers
want them. This necessitates a managerial emphasis on balancing supply and
demand (Chase and Apte 2007). Expanding on this distinction, Haywood-Farmer
and Nollet (1991) define service in terms of intangibility, heterogeneity, perishabil-
ity and customer participation in the production process.
6.2 … to Experiences
But as services and products become commoditised, customers derive greater value
from experience. And for the product and service providers, offering such experi-
ences enhances their value proposition and hopefully also improves their competi-
tiveness (Fitzsimmons and Fitzsimmons 2005). This means that the customer’s
experience becomes an integral part of the offering, and that least part of the produc-
tion design explicitly aims at the emotional engagement of the customer (Sampson
and Froehle 2006; Heineke and Davis 2007; Hartsuiker 2008). It also means that
value is determined not only through the products and services themselves, but by
the value they create (or offer), as perceived by their customers. This requires that
managers understand the value proposition of both, and capturing this interactive
process is important for successful product definition, development and delivery.
Pullman and Gross (2004) emphasise the customer loyalty effect caused by
emotional connections made because of the experience. Apple and Nike concept
retail stores, or indeed the visit-your-car-being-built schemes many automakers
employ are examples of such pursuit. Using the passive/active and absorption/
immersion axis classification of Pine and Gilmore (1999) to differentiate various
customer experiences, experience-based operations fit in the immersive and active
category. Customers must actively participate in and be an integral part of the offer-
ing. Researchers Prahalad and Ramaswamy (2004) call the business offering of
such experiences co-creating. The customer engagement enables the product or
service they receive. Moreover, according to Hartsuiker (2008), experience-based
operations have two distinguishing criteria that separate them from traditional prod-
ucts and services: there is an explicit aim of the production process to emotionally
engage customers in a personal and memorable way; and a concurrent customer
presence in the production process.
But unlike traditional product and service offerings, experience-based opera-
tions typically involve several interaction points with customers. This provides
many opportunities for value added activities, but also many opportunities for not
fulfilling customer expectations. This means that organisations need to, and often
do, pay a lot of attention to their front line staff and the services they are providing.
This can be experienced just by comparing the service differences when flying first,
business or economy class with the same airline.
As shown by Martin and Pranter (1989), experiences are also influenced by
other customers, who may through crowding, unruly or unanticipated behaviour
negatively impact on the perceived service quality. Thus, to be successful, employed
process must take into consideration a range of factors that may influence the
customer experience. For instance, in many services, the customer is present in the
delivery process. This means that the perception of quality is influenced by out-
come as well as its process.
6.3 Implication for Business Models
The shift towards greater service content has resulted in a variety of new business
models, such as servitization, product-service systems, experiential services, services
sciences and service-dominant logic. This has made business decisions for both
manufactures and service providers converge as strategies and operations increas-
ingly face similar demands and solutions. Manufacturers tend to view services as a
means to differentiate their manufactured offerings. The services are treated as fea-
tures of the product. Such strategy of non-technical differentiation may include
service elements at pre-purchase, at-purchase and after-sales services. Figure 6.1
illustrates these changes in business focus in manufacturing and services.
Fig. 6.1 Shifts in the supply chain for manufacturers and service providers
The intangibility of service offerings means that they can be purchased separately
from other transactions. For instance, a manufacturer can offer a service product
that supports the products of competitors on the customer’s site as well as the
manufacturer’s own supply. As described by Sawhney et al. (2004), typically,
manufacturers’ service ventures take new positions in the value chain by adding
services to the chain (i.e. temporal expansion), controlling activities previously
performed by customers (temporal reconfiguration), or introducing related chains
(spatial expansion and reconfiguration). The integrated solutions business model
means that firms expand their value-adding transformations. However, while manu-
facturing companies expand their operations downstream and pursue the after-sale
market, service companies increase their operations upstream, towards the product
manufacture, to ensure greater reliability in the integrated offerings.
Facing similar environmental considerations as the manufacturers, service pro-
viders must build competitive capabilities such as consistent quality, convenience,
accessibility to channels, customization, and low costs and ensure that these con-
tribute to the required offering. The attainment of quality in products and services
became a pivotal concern in the 1980s. Quality in services is measured by the
SERVQUAL survey developed by Parasuraman et al. (1988) for managing the gap
between expected and perceived service delivery. It is extensively used for measur-
ing service quality in both operations and marketing. In addition, in services, yield
or revenue management plays an important part. For instance, effective seat inven-
tory control by an airline depends on forecasts of future bookings, the revenue
values associated with each fare type, and an ability to make systematic tradeoffs
between booking requests so as to maximise total flight revenues.
As services and products are becoming commoditised, experience has become
important whereby firms add value by providing offerings that create memorable or
valued experiences for the customer. Businesses such as Disney theme parks and
Starbucks coffee shops have been successful largely because their business models
have incorporated the creation and sustain of service experience.
In services one can make a distinction between intended and realised service
offerings. The intended service is the planned customer offering. Realised service
is the service actually perceived or purchased by the customer. In successful ser-
vices it is important that the linkage between the intended and realised is close. In
experience based operations, the two may be identical.
Customer awareness and understanding that was previously hidden from

back-office personnel is now often a requirement. This in turn places pressure on
supporting facilities, such as selection and training of the personnel. Also, decisions
include customer contact touch points, such as number and types of distribution
channels (e.g. traditional stores, Internet).
Customer expectations and perceptions need to be understood to better person-
alise their experiences. For general application, especially in a global context, service
firms are finding that what sells in some countries or indeed local regions may have
little appeal elsewhere. This affects the degree of standardisation that realistically
and successfully can be employed. In turn, on corporate level it has an impact on
how centralised the service design should be. One solution is to keep the offering
highly standardised, and seek to influence demand through indirect means such as
marketing or price. Firms with global products, such as Coca-Cola and Procter
&Gamble with its Pringles chips, are examples of such an approach. Another
solution is for firms to employ mass-customisation, whereby products and services
offered appear unique or customised to the customer while the operations and transforma‑
tions needed to make the offering have been both modularised and standardised.
6.4 Implication for Operations and Management
The service profit chain developed by Heskett et al. (1997) links profitability and
revenue growth of a service firm with the satisfaction and loyalty of its employees.
Hence, a key issue for any service operations is selecting the target market.
Companies usually segment potential customers into groups based on common
attributes or characteristics, such as age, income and location. However, for
processes, customers are often divided into operational attributes, such as degree of
customer contact, process labour intensity, or degree of customisation.
To successfully provide experiences that customers desire, relevant components
that impact the experiences must be incorporated deliberately and from the outset
(Pine and Gilmore 1999). Hence, in addition to the components required in services
provision, such as appropriate physical environment, implemented processes and
sufficient staff, managers must also incorporate behavioural components. As
argued by Fynes and Lally (2006), these can be clustered into emotions and partici-
pation activities. These two components require particular emphasis in the develop-
ment and implementation of experienced-based operations.
Service industries ranging from call centres to the healthcare services are well
positioned to apply processes. The main limitation is the variation inherent in
human interactions. Such processes include TQM and agile operations. All share
many concepts and techniques and can successfully be applied in a service environ-
ment despite having originated in manufacturing. For instance, Lean operations and
its use of poka-yoke fail-safe methods to prevent human error during work tasks is
found in the indented trays for surgical instruments in hospitals which assure that
instruments do not go missing.
Mistakes are often inevitable in any business environment, but in a service

context creating dissatisfied customers must be avoided. This is partly done through
proper offering, and partly through recovery from service failures. The latter may
also turn dissatisfied customers into loyal ones (Hart et al. 1990). An additional
advantage in including the customer in the service provision is that it provides an
excellent opportunity for product and process innovation (Voss et al. 2006; Voss
and Zomerdijk 2007). This means that design choices are based on substantial and
systematic data collection on both customer preferences and their experience. In
this, customer-based operations have the advantage over traditional products and
service offerings in that feedback can be captured relatively easily and with less
time lag. The increased customer involvement also necessitates the use of fool-
proof design to ensure that their own actions do not inadvertently affect experiences
negatively. If employed correctly, techniques such poka-yoke provide the benefit of
reduced customer discretion while simultaneously retaining their feeling of control.
The former is necessary to ensure that quality standards and in turn customer
expectations, are met. Such expectation management is vital in the design and
management of operations in a service context.
Human error cannot be managed out of a process, so businesses relying on cus-
tomer interaction as part of their offering may have to make changes in staff job
roles to ensure that quality standards are consistently met. This may require a dif-
ferentiation of work roles according to task discretion. In their study of process
implementation in a service context, Ritchie and Angelis (2008) categorise roles
into role-centric job families, identifying skill type based on extent of training and
qualification, and varied autonomy levels (see Table 6.2). These skill categories are
Table 6.2 Job families (Ritchie and Angelis 2008)

Autonomy
Low discretion High discretion
Little or no choice Medium or high choice in which skills to
in the skills employ to fulfil task
employed in Low governance High governance
fulfilling the task
Environment has Medium or high
little or no external external influence
Skill type governance applied on working practices
High-skilled specialist Nurse Actuary GP
Specialist qualification
>36 months
High-skilled generalist Control Officer Senior Manager Company Director
>36 months accredited
training
Semi-skilled Corgi-Gas Fitter Software Policeman
Accredited training Developer
Low-skilled Call Centre Agent Porter Financial Product
On the job training Sales
further separated into high-discretion and low-discretion types. Discretion is the

freedom or authority to make judgements and to act as one sees fit, understood as
the role holder’s ability to make procedural decisions (the independence from others
when making those decisions). For instance, nurses are identified as ‘low-discretion’
roles. They are expected to assess the situation and respond with set procedures set
by professional bodies without deviation. In contrast, a manager may decide that
current processes being run are not efficient and may decide to commission a new
process. Those with high-discretion are categorised into either high levels of gov-
ernance or low levels of governance. Governance refers to the degree of external
control that is applied to the role.
In a normal product or service context such categorisation of job families is use-
ful because it clarifies where operations can be standardised and where highly
skilled staff are needed. However, in an experience-based environment staff of all
levels interact with customers. Indeed, it is often the lowest trained (and paid) staff
that have the greatest degree of customer involvement. And in this interaction the
degree of task discretion may be difficult to fully take out, which may necessitate
investments in higher skilled workers or more training. Both are costly and time
consuming, especially in a context with many atypical or temporary workers. Of
course, automation can be employed to reduce discretion, for instance, through the
use of scripted responses to customer requests. But such deskilled tasks do not fully
utilise staff, nor does it help in attracting skilled employees.
In a manufacturing context, Hootegem et al. (2004) explain how the team work
system at Volvo Ghent operates. The system relies on horizontal and vertical
assembly line task integration. It combines the benefits of non-discretionary on-line
work tasks with off-line improvement projects that require active operator involve-
ment. The former is achieved through various design-for-manufacturing and poka-
yoke techniques, while the latter employs projects where the participating team
members seek to improve the existing processes. Each member rotates from limited
discretion on-line tasks to off-line improvement tasks i.e. work packages focused
on particular areas (e.g. quality or safety). The system provides the quality benefits
of low task control with the social and individual benefits of greater task control
and captured worker insights. Operator focus on improving the process rather than
the product is beneficial since the latter is better achieved through dedicated prod-
uct design teams (Angelis and Fernandes 2007). The system at Volvo Ghent pro-
vides substantial transfer of tasks and responsibilities from line management and
staff departments to the shop-floor.
In a service context a similar approach to participation and improvement can be
employed, with customers acting as operators. In an experience-based context the
operators also play the part of the product. So the system remains valid, with the
note that customers generally cannot be relied upon to participate in off-line
improvement projects. Hence, their insights and expertise must be captured in a
different manner. In a way, this means that the distinction between front- and
back-office operators remains, as illustrated in Fig. 6.2. Back-office staff support
front-office staff (1) who themselves provide direct customer service (2). Customers
act as front-office participants in the operations (3) and associated improvement
Fig. 6.2 Off- and on-line customer involvement
projects (4). In addition, select customers may be invited to participate in off-line

projects, to ensure that their perceptions and views on possible improvement are
captured (5).
In experience based operations, the closer interaction between customers and
staff also means that the link between internal and external service quality is more
direct. The two may even be difficult to distinguish, making it unfeasible to have
too great a disparity between back- and front office and customer conditions. For
instance, staff minimum wages and poor work conditions may affect customer
consumption behaviour less when buying a pair of sneakers than when eating in an
expensive restaurant. And the more value the customer places on the experience,
the less gap customers may accept.
For services to generate maximum value, the psychological side must be taken
into account (Bendoly et al. 2006). For instance, people tend to value the peak and
ending in a sequence of events higher in their recollection of an experience. Unlike
the manufacturing of goods, services require processes that motivate the customer
to undertake service co-production. Also, unlike most industrial goods, services
need to be adjusted to different cultures and support the customers’ business goals
and practice. For experience-based operations, the consideration of subjected cus-
tomers and their perceptions are similarly important, but extending to the opera-
tions as a whole rather than merely the downstream operations. Hence, customers
naturally play a greater co-producing role in the delivery of experiences than for
products or services. In the initial design stages of an experience-based operation,
select customer representatives need to be included, to ensure their perceptions are
captured and preferences recorded. This is similar to design stages of end-user
value focused processes such as lean, where the customer is an integral part of the
early design stages to ensure that perceived value is accurately captured in the final
product or service.
Operations with a greater degree of customer interface also necessitate particular
consideration of the physical environment. Bitner (1992) calls such environments
created by supporting facilities ‘servicescapes’. They are designed to influence

customer and employee behaviour and their perceptions. For instance, significant
efforts are made in automotive products to give cabin materials a particular feel
when touched, and sounds when doors are closed or buttons pressed are also given
consideration. Similarly, bright colours in fast food outlets to hasten meals, or calm
music in elevators to keep anxiety levels down are designed to improve the cus-
tomer experience.
Once developed and fully functioning, an experience-based operation will
require customer involvement as part of the offering itself as well as a means of
capturing ideas and suggestions for improving the offering (Voss and Zomerdijk
2007). Such suggestions may be a combination of explicit and implicit techniques.
For the former, suggestion boxes and feedback forms may be employed. This also
signals that their views matter, which in itself may enhance the customer experi-
ence. For the latter, tracking movement or purchases offer data on customer prefer-
ences and hence act as a proxy for their experiences. But, as stated earlier, to ensure
offerings meet customer expectation, the customer participation must be combined
with techniques for task discretion to prevent human error (Conti and Warner
1997). This is even more important in a complex system environment where actions
of one operation impacts on other operations.
6.5 Conclusion
To conclude, this chapter has discussed the shift from manufacturing to services
and the increased operational emphasis on customer experience as part of the
business value proposition. This transformation has several implications. For
select business models or strategies, this means that significant value-add will
continue to be found downstream combined with greater customer interaction
being incorporated upstream. For the employment and management of opera-
tions needed to realise these offerings, the emphasis on customer experience
means that customer empathy and participation activities will require particular
consideration. Operations need to be designed with customer perception and
experience in mind, with corresponding performance measures and management.
The split between front- and back office becomes less distinct, with greater cus-
tomer involvement throughout the supply chain and stages of product or service
life cycles.
The experience-based operations do, by default, mean that we all, as custom-
ers become part of companies’ value proposition. On the positive side, it does
mean that we are increasingly involved in the design of our own experience. This
may lead to higher quality experiences, as defined by the eye of the beholder. But
whether this also leads to greater control of the experiences as well only time
will tell.
Try the following exercises, to test and cement your learning.
Exercise
How do experience-based operations impact on positional value along the supply

chain, and what are the implications for first and second tier suppliers?
How can patients be integrated and involved in a healthcare environment, including
primary and acute care?
What should such a designed healthcare process consider to ensure maintained
service quality?
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Chapter 7
Complex Deployed Responsive Service
Glenn Parry, Marc McLening, Nigel Caldwell, and Rob Thompson
7.1 Introduction
A pizza restaurant must provide product, in the form of the food and drink, and service
in the way this is delivered to the customer. Providing this has distinct operational
challenges, but what if the restaurant also provides a home delivery service? The
service becomes deployed as the customer is no-longer co-located with the production
area. The business challenge is complicated as service needs to be delivered within a
geographic region, to time or the pizza will be cold, and within a cost that is not
prohibitive. It must also be responsive to short term demand; needing to balance the
number of staff it has available to undertake deliveries against a forecast of demand.
Pizza is a relatively simple product. How do you manage when you are looking
at repair and maintenance of a mechanical product such as an aircraft or even ‘fixing’
a person? A complex product adds to the challenge of meeting this service demand.
This chapter will explore the nature of ‘complex deployed responsive service’
(CDRS) – providing examples and exploration of the challenge of taking service
out to the customer. We shall explore just three core business challenges; providing
geographic coverage, responding to dispersed customer bases and dealing with
variability of demand. Three case examples are used to illustrate real examples
from the automotive, health and aerospace sectors.
7.1.1 The RAC
The Royal Automobile Club (RAC) was selected for study as is has been ranked as
the number one roadside assistance service provider within their segment for the
years 2006 and 2007 (JD Power 2007). The survey of over 3,000 UK motorists
showed that it received the highest ratings for all three factors driving customer
G. Parry (*)
e-mail: glenn.parry@uwe.ac.uk
96 G. Parry et al.
satisfaction: timing (time taken for help to arrive and time taken at the scene),
operator/dispatcher (including time taken to answer the phone, friendliness and
reassurance) and mechanic/vehicle driver (includes appearance, courtesy and the
ability to do what was needed). The study also highlighted that the use of subcon-
tractors by the RAC is one of the lowest in the industry, which was recognised as a
key element of satisfaction for the motorist.
7.1.1.1 The Business
RAC is part of Aviva, the world’s fifth-largest insurance group (based on gross world-
wide premiums for the year ending 31 December 2005) and the biggest in the UK,
where it operates under the Norwich Union brand. The RAC brand offers a range of
motoring products and services including breakdown cover, windscreen replacement,
car insurance, loans, driving schools and vehicle HPI checks. Its primary business is
a road-side assistance service that utilises a network of patrol vehicles to attend vehicle
breakdowns on the roadside – which will form the focus of this case example.
The service offered in its most basic form operates thus; when a customer of the
RAC has a problem with their vehicle, such as a breakdown on the road, he or she
phones the RAC who sends out a trained technician in a van to assist the individual
wherever they are in the UK and get them back on the road again.
The RAC customers pay an annual fee that allows them to access an agreed level
of service – the more they pay, the greater the range of services on offer. The services
range from basic roadside assistance to packages that guarantee completion of
journey, provide a replacement vehicle or hotel accommodation and offer recovery
of the vehicle to a garage for repair etc.
7.1.1.2 Providing Geographic Coverage
Of the 2.7 million breakdowns per annum that RAC attended, 91% of these were
by RAC directly and 9% were attended by contractors. They have 1,900 of their
own patrols, a number of ‘specialist’ patrols, such as the 100 VW specialist assis-
tance, and prestige services for vehicles including Porsche, Lexus, Lamborghini
and Bentley. They have 50 dedicated recovery vehicles. Each patrol effectively acts
as its own business. They work from home and each has their own fully equipped
patrol vehicle, though the larger recovery trucks are not located with individuals.
10–15 patrols are grouped together under a ‘lead’ patrol. The lead is an ‘active’
patrol, but would spend a couple of days per week on management and admini
strative duties that support their patrols. Service delivery managers have 10–15 lead
patrols reporting to them. They operate nationally in the UK and divide the country
into geographic areas, the size depending on the number of patrols, which is in turn
dependent on population and vehicle traffic density. There are 230 distinct operational
‘cell’ areas across the UK. Cell size depends on population and demand, many
within London that may be only 2 miles by 2 miles; some may be up to 50 miles,
such as one that covers Norfolk.
7 Complex Deployed Responsive Service 97
7.1.1.3 Responding to Customers
A call is received by the RAC and routed to a call centre. The safety of the customer
is the sole priority of the service and it responds accordingly. The delivered
response to calls is prioritised only on this basis.
The RAC operates three call centres, entitled ‘Breakdown Assistance Centres’,
which are located in Stretford, Glasgow and Bescot. The three centres provide
regional coverage for the whole country. Each builds up specialised knowledge of
responding to their geographic area. However, the IT employed allows all three
centres to provide national coverage and act as a single centre, able to seamlessly
route calls between themselves during busy periods. The three separate centres
provide physical resilience to the service at an optimal economic level.
For service provision there are three key pieces of information that need to be
established. Firstly, is the caller entitled to service? Secondly, what is the vehicle?
Thirdly, what is their location?
Systematic questions and call centre computer databases are used to establish
the answers to these questions. The RAC has access to DVLA data and registration
details are used as a key that draws information to populate a customer data screen
that helps determine both customer right to service and also vehicle data. The ser-
vice has developed a bank of contextual questions to facilitate vehicle diagnostics
over the phone. This ‘expert system’ of questions may allow them to diagnose
the problem. As such, the patrol person arrives at the scene with knowledge of the
problem they are facing and how long the job may take. It also means that ‘simple’
problems may be remedied by the customer themselves from the driver’s seat. This
provides a dual benefit – RAC does not incur the expense of a patrol attending and
the customer is moving again more quickly, as well as the customer having a posi-
tive emotional response with the satisfaction of ‘fixing’ their own vehicle.
The expert system allows them to ascertain a percentage probability of a patrol
being able to fix the problem at the roadside. If a roadside fix is not possible, a
secondary tow would be required. It is better for both the utilisation of the patrol
fleet and the customer if the correct vehicle is sent out first time – either a patrol
for roadside or a recovery vehicle if a tow is required.
Location is established using digital maps which have over 14 million local
landmarks on them. These are used with customers to establish where they are
based on what they see around them. It is possible, with the customer’s permission,
to establish a ‘fix’ on their position using their mobile phone. However, within the
limits of current technology this is not very accurate, but is used when the customer
doesn’t know what region of the country they are in.
The command and control centre knows exactly where each patrol vehicle is, as
each vehicle has a gps tracking device. Coupled with knowledge of the likely repair
required, this allows the centre to estimate job times, travel times, customer loca-
tions and can thus give the customer an estimated time of arrival for assistance. If
changes occur and the system shows that the service will arrive earlier than pre-
dicted, either a phone call or an automated SMS text message will be issued. If the
service is lagging, a phone call is made. Bad news is always given over the phone
as this personal contact is experienced more positively by the customer.
98 G. Parry et al.
7.1.1.4 Customer Demand
Customer demand is highly variable and follows cyclical patterns of greater car use,
linked to key holiday dates, seasons and the weather. In bad weather, more people
use their cars. A cold work and school day Monday in the winter may lead to
10,000 calls being received in a morning. Monday is a key day as a customer’s car
may not have moved for a few days and, coupled with cold weather, leads to greater
call out numbers – the common fault a flat battery. During a sunny mid-week in the
summer only 5,000 calls may be received all day. Weather is a key driver of the
business. Weather patterns are very localised, as is response. The service needs to
forecast and plan accordingly. To operate effectively the workforce needs to be
adaptable to meet the demand patterns.
Our business is highly variable in terms of the demand at the roadside. It varies with the
time of day, with the day of the week, with the time of the year – and then those volumes
are themselves influenced by things like the weather and also by one off events, you know
if Manchester United were playing at home, then there’s going to be a lot of people driving
along that area, and that will create local peaks in demand.
In March breakdowns peaked at 11,300 in a day, but the lowest was 6,000. Peaks
may reach 15,000 and troughs may be at 5,000 leading to a threefold variability.
These effects are amplified as demand will also peak at specific times during the
day in question, for example, during the rush hour.
7.1.1.5 Meeting Customer Demand
Meeting variability is dependent on the area of operation as one additional call out
in a highly populated area will not increase the percentage workload, whereas in
sparsely populated areas each job has a more significant effect on demand and
hence resource required.
In Carlyle if you get one additional breakdown you probably increased [demand] by 100%
in that hour. In Corey, you get one additional, which probably increased by 7% and that’s
just the scale that we have to cope with.
The RAC has a system that forecasts its potential demand on a daily basis. The
demand forecast model includes numerous variables such as long term weather
forecasting, holidays and major events and over its years of operation, the RAC has
developed and fine tuned their advanced rostering system. A great deal of effort has
been focussed on developing the power of their models as their ability to predict
demand determines the efficiency of their operations. Typically a greater number of
patrols are rostered for a Monday and a greater number of patrols are rostered for
a winter Monday than in the summer.
Most patrols are contracted to complete a basic 40 h week. It is then possible
for a patrol to take on additional hours from an hours ‘pool’, up to a maximum of
48 h. This floating availability gives the RAC greater productivity from their
patrols, and importantly, increased ability to rapidly meet unexpected peaks in demand
and hence provide greater customer satisfaction. The patrols also benefit as they are
rewarded for the extra work that they perform. In addition, call centre staff
are incentivised through pay structures so that they may also be rapidly mobilised
to add capacity. A ‘tree structure’ of contact details allows the RAC employees to
rapidly contact colleagues and request additional support during spikes in demand.
The RAC has found that this system works very well as many of their employees
work flexible hours and live close to their call centres.
Having discussed RAC, we will now examine the NHS ambulance service. Like
the RAC they respond to telephone calls for assistance from customers who are
geographically dispersed. However, their requirement to prioritise customers by
need and respond quickly is literally a matter of life and death, and the volume of
demand placed upon their operations is significantly greater.
7.1.2 NHS: Ambulance Service
In 1948 the Government of the United Kingdom set up a National Health Service
(NHS) with slight variations across the four components of the UK (England,
Scotland, Wales and Northern Ireland). Prior to 1948 healthcare was largely paid for
by individuals, the introduction of the NHS created a system of publically funded free
healthcare for the first time. The NHS is responsible to the Department of Health and
accounts for most of that department’s expenditure of £98.7 billion in 2008–2009.
The NHS is divided into Primary and Secondary care providers. Primary care
providers are the first point of contact for patients and are responsible for the gen-
eral health of the population e.g. local doctors, pharmacies, opticians and dentists.
Secondary care providers (acute hospitals and ambulance services) deliver elective
(planned) or emergency services. Whereas planned health care interventions are
delivered within the acute hospitals, emergency interventions usually start at wher-
ever the patient is.
7.1.2.1 The Service
Hospitals began operating a dedicated ambulance service to transport sick and

injured people in the eighteenth century. Patients were transported to and from hos-
pital by cart and horse-drawn carriage up to about 20 miles. Patients from rural areas
were transported by train and collected from the station. The main advantage of
motor-powered vehicles, developed in the 1900s, was the ability to transport patients
more quickly and over greater distances. Their adoption accelerated throughout
World War I as demand for ambulances increased. Motorised ambulance fleets were
established in urban areas and distributed around towns and cities. Initially, ambu-
lances were staffed by drivers with limited first aid training. Ambulance services
have gradually progressed from simply conveying patients to and from hospitals, to
delivering medical capability into the community and treating patients on-scene.
100 G. Parry et al.
The ambulance service has traditionally provided emergency care, focusing on

transportation of patients to hospitals. With recent changes in the NHS (including
the creation of a new role, the Emergency Care Practitioner or ECP) the ambulance
service is attempting to move away from emergency care and towards urgent care,
by providing treatment and discharging patients in their own homes. Such initia-
tives bridge the gap between the primary and secondary healthcare sectors.
Finally whilst the emergency journey is the headline grabber, the bulk of the
work of the ambulance service in terms of journeys is more mundane. Planned/
non-emergency patient journeys – include all other patient journeys by the Trust.
These are for any patients not given emergency, urgent or special priority e.g. most
journeys for outpatient’s appointments, hospital admissions and discharges of a
routine nature, including transport to and from other healthcare facilities. In 2007/8
this figure was 9.51 million journeys.
In England, NHS Ambulance Trusts are responsible for providing emergency

access to NHS healthcare services and in some cases provide transport for patients
to get to hospital. There are currently 12 Ambulance Trusts, defined by geographic
location, shown in Fig. 7.1.
National performance standards are managed by a prioritisation procedure intro-
duced in April 2001. These have nationally set response times which act as key
performance indicators for the service. There are three categories for prioritisation
of response, defined below:
• Category A: presenting conditions, which may be immediately life threatening
and should receive an emergency response within 8 min irrespective of location
in 75% of cases. Presenting conditions which require an ambulance vehicle
capable of transporting the patient to attend the incident must be on the scene
within 19 min in 95% of cases.
• Category B: presenting conditions, which though serious are not immediately
life threatening and must receive a response within 19 min in 95% of cases.
• Category C: presenting conditions which are not immediately serious or life
threatening. For these calls the response time standards are not set nationally but
are locally determined.
Response time starts when details of the telephone number of the caller, the exact
location of the incident and the nature of the chief complaint have been ascertained.
Response time ends when the first emergency response vehicle arrives at the scene
of the incident. A response within 8 min means 8 min 0 s or less. Similarly, 19 min
means 19 min 0 s or less. This standard is itself being tightened so that the clock
will start when the call is connected to the control room. For example East Midlands
Ambulance Service attended 79% of life threatening (category A) calls within
8 min and 94% of urgent (category B) calls within 19 min in 2007/08.
Fig. 7.1 Map of ambulance trusts by geographic region
In 1937, London launched the first dedicated emergency telephone number.

Dialling 999 from a telephone triggered a red light and buzzer in the operator
exchange. By the 1970s this service was available from every telephone in the
UK The European Union (EU) adopted 112 as a common emergency telephone
number in 1991. This service works alongside each country’s local emergency
number and can be called free of charge from landlines and mobile telephones.
Each year there are around 100 million medical emergencies reported in the EU.
In the UK the ambulance service receives more than six million emergency
telephone calls each year; twice as many as a decade ago.
The Advanced Medical Priority Dispatch System (AMPDS) is used to triage 999
calls by the ambulance service call taker. It is made up of a sequence of questions
that help to assess how urgent a medical problem is. First of all, the call taker will
establish the location of the caller. BT landlines automatically let the call taker
know the address of the caller. This information ensures that an ambulance can be
dispatched, should it be required. Then a general explanation of the problem is
required. This determines an initial level of response that is appropriate and hence
medical dispatch requirements.
102 G. Parry et al.
The expert system is based on 32 chief complaints – chest pain, breathing

difficulty, falls and so on – each of which has a different set of questions. As the
call progresses computer software updates the relevant questions and the severity
of the call. To ensure that Category A calls are reached within the allotted 8 min,
ambulances are dispatched almost immediately and then downgraded if it becomes
apparent that the 999 call is less serious than first thought. For example, certain
types of call, such as a fainting, may begin as a Category A, because the person is
unconscious, but is rapidly downgraded as they regain consciousness. Of the 5.9
million calls received in 2007/8 calls resulting in an emergency response, 31% (1.8
million) were classed as category A – immediately life threatening incidents and
42% (2.5 million) were classed as category B – serious but not immediately life-
threatening incidents (NHS 2008).
Information received by the call taker is transferred to a medical dispatcher. The
computer system highlights the nearest available vehicles on a control screen, pos-
sible as each has GPS tracking, and it is then up to the dispatcher to identify the
most appropriate vehicle/s. This might be determined by the type of call, if for
example a crew member has paediatric expertise and a child is the patient. The
dispatcher logs the times of acceptance by a crew and arrival on scene. It is also up
to the dispatcher to manage the availability of the crews and their rest breaks.
999 calls that do not require an ambulance, but have a medical requirement, may be
transferred for telephone advice by NHS Direct. This is a 24 h telephone service
that provides urgent care services, response to health scares and support for patients
with long-term conditions, out of hours support for GPs and dental services, pre and
post operative support for patients and remote clinics via telephone.
There were 7.2 million emergency and urgent calls in England during 2007/08, 5.9
million of which resulted in an emergency response and 4.26 million required a
patient journey.
Demand for emergency services show a very stable pattern over time with huge
spikes in demand on Friday and particularly Saturday nights with a large number of
alcohol related calls. Boxing Day, 26 December, is another peak and generally the
emergency service is less used in the early hours of the morning. Weather conditions
are less of a factor in driving up demand than outbreaks of serious conditions
(e.g. vomiting and diarrhoea). Although it is clearly not possible to predict the exact
location of an incident, demand models can indicate areas where incidents are most
likely to occur. Historical data is used to prepare rosters and match demand against
resources. Additional planning is put in place for large events that may require
a higher level of cover and risk assessments are undertaken for each event to
determine the potential resources required from the ambulance service.
The importance and hence demand for ambulance service is expected to increase
in coming years. The case for delivering urgent healthcare in the community, as
opposed to hospital settings, has been strengthening. Those aged over 65 are
healthier and are living longer, and 75% of NHS users are now aged 65 and over
(Health Development Agency 2005). By 2031 the number of people over 65 will
grow to 15.8 million; a 60% increase (Government Actuary Department 2007).
These individuals have a great deal to gain from the community delivery of urgent
care via ambulance because they are less mobile and more dependent on commu-
nity support than their younger counterparts. Furthermore, there is growing concern
regarding systemic pressures on the UK health care system. A 2001 report
(Department of Health 2001) found that emergency admissions in the UK had risen
by 20% in the previous 10 years. This pattern of increasing emergency admission
is the result of a complex arrangement of factors; for example, local doctors are no
longer required to provide out of hours services.
This section discusses meeting customer demand at two levels of analysis, macro
and micro. At the macro level there are social changes and cost pressures which
favour treating people in the community instead of at hospitals and at the micro
level strategies are employed to provide capacity flexibility.
Increasingly the NHS and the Ambulance Trusts in particular are being forced
to examine ways of reducing demand at key pressure points in the healthcare sys-
tem, one of these being Accident and Emergency admissions. Most 999 calls do not
lead to hospital admission, and many patients currently conveyed by ambulance are
discharged from the emergency department within 4 h of arrival. A substantial
proportion of these patients could be successfully treated in the community and
closer to home if the correct services and supporting technologies were in place.
There were 6.3 million 999 calls made in England during the year 2006/07, an 8%
rise on the previous year and almost double the number of calls received 10 years
previously. As mentioned above, in 2007/8 this rose again to 7.2 million. This
inexorable rise in demand will lead to a corresponding rise in hospital emergency
department attendances and emergency hospital admissions unless steps are taken
to prevent this. Once admitted as an emergency, patients stay in hospital for an
average of 6.8 days at a cost of around £7,000 to the NHS. The emergency ambu-
lance service is therefore undergoing a transformation from an organisation
designed to convey patients to hospital, to a professional group that is capable of
assessing urgency and delivering the appropriate treatment to the patient providing
the right response, first time, in time (Department of Health 2005).
At the micro level, all managers at Ambulance Trusts have to maintain their
paramedic skills, such that in an extreme incident such as a multiple motorway pile
up or major fire etc the entire management team can be called to provide additional
capability. To add immediate capacity ambulance trust managers carry ambulance
kit in their personal vehicles. In addition the Armed Forces maintain their own
emergency healthcare specialists and this is another potential resource.
Having discussed two national providers of responsive service, we shall now
examine a service that responds to customers call for assistance anywhere in the
world, a truly global support service provider Dowty Propellers Field Service
Support, part of GE Aviation.
104 G. Parry et al.
7.1.3 Dowty Propellers Field Service Support
GE is the world’s leading provider of aviation services, providing customers with

the experience and resources they require to keep their aircraft flying. Dowty
Propellers, part of GE Aviation, is a leading supplier of all-composite propeller
systems. Dowty Propellers supplies most of the modern generation turboprop
engines.
All-composite blade propeller systems feature advanced aerodynamics for opti-
mised take-off, climb and cruise performance and low noise. The modular control
system ensures excellent maintainability and low lifecycle cost. The over 19,000
all-composite blades produced to date have accumulated more than 270 million
propeller flying hours, with lead propellers achieving in excess of 40,000 h flying
time. Designs offer low noise with minimal vibration. The propellers’ modular
configuration allows ease of maintenance and coupled with their high reliability,
provide users with low through life costs. Service is driven by lean processes
focusing on value added activities by eliminating waste and an economical and
environmentally sound ‘repair first, replace last’ philosophy. Dowty Propellers
manufactures the original equipment and completes scheduled repair and overhaul
services within their facilities. In addition they also provide a global field repair
service which will be the focus of this study (Fig. 7.2).
The Field Service Repair (FSR) team’s work is predominantly focussed on sup-
porting six different aircraft types, representing approximately 1,000 aircraft in
Fig. 7.2 C130J Aircraft shown with composite Dowty Propellers

operation around the world. This includes the global fleet of Bombardier Q400s, a
70-seater regional aircraft used by airlines including Flybe UK, Tyrolean, Japan Air
Commuter, Air Philippines, Horizon US, as well as the military Lockheed C130J
transport aircraft used by national air forces including the RAF (UK), RDAF
(Denmark), RAAF (Australia), USAF (USA), AMI (Italy).
7.1.3.1 The Field Service Repair Business
Dowty Propellers (DP) Field Service Repair business is primarily operated from
their manufacturing centre in Gloucester, UK. The service operates 24 h a day, 365
days a year and responds to aircraft operators across the world.
Two different business models operate to provide field service support.
A Dowty Propeller Field Service Representative (FSR) may be permanently placed
at the customer’s facility responding to local needs and requirements. The second
option is a responsive service whereby the aircraft operator may telephone with a
repair request and an FSR representative will travel to a location where the repair
will take place.
The urgency of a potential repair will depend on a number of factors, including
the availability of spare propellers. An aircraft operator is able to remove a dam-
aged propeller and replace it with a functional spare. He can then contact DP and
schedule an FSR to come and repair the damaged propeller. An airline operator
with five spare propellers and ten aircraft flying would not have the same urgent
requirement for a repair as an airline with 60 aircraft flying and only five spare
propellers.
As an example of cost, should a civil aircraft operated by an airline be unexpect-
edly grounded due to a lack of available spares, referred to as an AOG (aircraft on
ground), the potential economic cost to an airline may run into the tens of thou-
sands of pounds. This includes not just the cost of lost business, but also the poten-
tial cost of providing a replacement aircraft or compensation for customers and
potential loss of future custom.
The decision over which service is most appropriate to the aircraft operator will
be made based on fleet size, their capability to perform repairs themselves, their
spares availability and likely urgency and cost impacts of potential repair required.
The majority of permanent FSRs are assigned to military contracts.
To meet global demand for responsive service DP locates FSRs in key locations
around the world based on the demand in geographic regions. FSRs have been
placed in Australia, Canada, Denmark and France with the remaining technicians
based in the UK.
Despite the need to provide global coverage the number of individuals in the
field service repair team is relatively small, numbering in the 10s. This is due to
106 G. Parry et al.
factors including operator capability in repairing their own propellers, global

competitors and the option, if spares are available, to send the damaged propeller
to a repair and overhaul facility; this is equivalent to taking your car to a garage vs.
calling out the RAC.
The number of global field service technicians is also limited due to the highly
skilled nature of the repair work and the requirement for the technician performing
the repair to have the necessary qualifications to provide a guarantee that the work
performed is of sufficient standard to allow the safe operation of an aircraft.
The challenge facing the FSR management team is sending an FSR, the neces-
sary tooling and materials required to complete a repair to a location. This raises a
number of challenges:
• The individual FSR may require a work visa to enter the country where the air-
craft is located to carry out the repair. The nationality of the individual FSR will
also have an impact on the ability to gain visas and for them to travel.
• The location of the repair has a bearing on whether the FSR will drive or fly.
This decision has implications for the transportation of tooling and the materials
used for the repair of composite propellers.
• The tooling required to carry out propeller repairs can be relatively large,
depending on the repair required. To reduce response time some tooling has
been strategically located with customers. If it is necessary to fly to the loca-
tion, the tooling will require air freight to be organised as it cannot be carried
on board.
• Repair materials may include adhesives and composites that are classed as
hazardous. This presents another set of challenges in transporting them across
the world. Allowance must be made in predicted response times due to delays
caused by import/export regulations and compliance.
Initial contact is made by telephone to the DP Product Support Department. Some

customers have highly skilled technicians on site who are able to accurately describe
the nature of the repair required. In such cases a repair schedule is rapidly agreed
with the operator. Other customers do not have this capability and a dialogue between
a DP technician and the customer will begin that may include the emailing of digital
images of the damage so that the nature of the repair required may be diagnosed.
Based on the customer description of the problem and the photographic image of the
repair a judgement will be made on whether to send additional materials to site to
mitigate the risk of delays caused by any possible additional work required.
The Product Support Department must identify the appropriate individual for a
repair dependent on individual FSRs training and capability to carry out the
required repair, their availability and the geographic location of the propeller. The
Product Support Department then puts travel arrangements in place to transport
the FSR to the location required.
FSRs have their own tool suites for repairs and major tooling, parts and materials
required to complete the repair are picked from the Dowty Propeller store by
Product Support. These are then given to the Dispatch Department who package
and prepare the required paperwork for transportation across the world.
As Dowty Propellers is the original equipment manufacturer they usually have
immediate access to the materials and tooling required for repairs which gives them
a competitive advantage over other companies who have to order materials and
tooling from their supply chain.
The FSR responsive service currently receives approximately 200 calls per year.
Patterns of demand appear stable over a year as the volume of work is linked to the
operating hours undertaken by the aircraft. This is dictated by the winter and
summer operating schedule of the airlines, as more flights are undertaken during
the two main holiday seasons. The routes the aircraft fly also influence the service
requirement. Aircraft operating in and out of European airports are less likely to
require unscheduled maintenance than those landing in airports that do not have
smooth runways, are not as well controlled or where the propellers may be subject
to airborne abrasion from dust or sand.
Due to the low number of responsive calls, statistical analysis is difficult.
Spikes in demand occur when any unforeseen technical issues occur with the
propeller, due to accidental damage or changes made in the maintenance practice
or supplier.
Responsive services are dealt with based on need. Aircraft on Ground (AOG) takes
priority over other requests in the airline industry. The global airline community is
small, with most operators knowing their equivalents in other airlines personally.
There is an understanding between parties that AOGs take priority and there is a
great deal of co-operation and some joint contracts between airlines to help each
other with spares and support to keep their aircraft flying safely.
Typically response times are 5 days from receiving the call to attending site.
However, average response times do not make much sense in this context as they
can vary from a local repair that may be responded to and the FSR returned to base
on the same day, to a time of a week or more, typically caused when hazardous
materials are held up by customs. A factor is also the current location of the FSR,
in some cases it may be the same day and others longer if they have to make a long
haul flight.
Politics adds an additional challenge to global service operations. GE Aviation
is a US owned company. As such, certain trading restrictions apply to the business
so that they are unable to service aircraft that may belong to or operate in countries
108 G. Parry et al.
that fall outside permitted US trade agreements. Attention must also be paid to the
geo-political stability of any region that a field operative is sent to and travel advice
from governments is sought.
The business is currently running at full capacity and is seeking to expand and
grow through recruitment and training of skilled technicians. As such the FSR’s
time is at a premium. If there is any ‘dead time’ then the FSR’s will contribute to
analysis of reliability data or may be used to add capacity to OEM production.
7.1.3.6 Service Management
The three business models described all provide services that are responsive to
customer demand, though each on a different scale. The ambulance service
responded to over seven million calls in 2007/8, over twice that of the RAC at
2.7 million and both vastly greater than Dowty Propellers’ 200 service requests.
The ambulance service is effectively a monopoly and has to provide total national
coverage. In contrast, both the RAC and Dowty Propellers operate in a competitive
market and to a certain extent can select the areas in which they chose to offer their
service – the limits being customer demand, their capability and ability to access
the area, and the financial viability of providing that service.
7.1.3.7 Managing Geographic Coverage
The scale of geographic coverage offered by the services is also markedly differ-
ent. Dowty Propellers offering an almost global service, limited by customer
demand, current political tensions and international trading legislation. In contrast
both the RAC and ambulance service offer national coverage. However, to provide
appropriate management of geographic coverage all of the services described have
divided the area they cover into regions. Both the RAC and Dowty have defined
their regional boundaries and located their personnel based solely on customer
demand within the geographic markets in which they provide service. The
Ambulance trusts have followed a similar strategy, though their boundaries are
derived from both customer and service provider – in this case the hospital – loca-
tion. This is because there is a criticality in the service they provide in that they
must be able to reach both their patients and hospitals within a given timescale
and so their ability to specify coverage boundaries are linked by two separate
drivers.
All three services locate their individual service repair assets strategically to
facilitate rapid response. Dowty place a permanent individual at the location of
customers likely to have a large volume of work and then act responsively to the
rest of their market. When not on a repair, both the RAC and Ambulance service
strategically locate their responsive vehicles on standby in places where they are
likely to be required and are also able to quickly respond to and reach a customer
e.g. motorway junctions, railway stations (Black and Davies 2005).
7.1.3.8 Managing Customer Contact
All of the case examples use telephones as the primary customer contact. All
advertise a single customer phone number and then route calls appropriately. Due
to differences in volumes of calls there are differences in how calls are handled.
The lowest volume of calls are to Dowty Propellers responsive service where
customers are all directed to a single point, the location of the Field Service team
in Gloucester, UK. The caller speaks directly to an agent who is able to assess the
issue and gather the required data from the caller. It is likely that the caller is an
engineer from an airline and so will have specific and detailed knowledge of the
repair required. If they are not, experts at Dowty can diagnose the problem through
discussion and may also use digital images sent by the customer to ascertain the
problem faced. Whilst potentially a time critical service, it is important that time is
spent identifying the problem so that the correct materials and tooling are taken to
site as sending further materials across the world could add significantly to the time
taken to complete a repair. Aircraft served will all be at airfields and so identifica-
tion of exact customer location is not an issue as with the other cases. However, the
nature of the airline customer operation may give rise to other challenges. A request
for service may be received from a number of different sources including an airlines
head office, its engineering function or from the aircraft itself. Contact may be
necessary with all three and each may be located in a different country. This may
lead to complications in communication that the service operator has to handle
including the nature of the repair required, any contractual obligations between the
airline and Dowty, the responsibility to sign off any invoices generated, and differ-
ences in time zone and hence availability of required individuals.
The larger call volumes handled by the RAC and Ambulance services utilise
routing technology to place calls through call centres. Both utilise ‘expert systems’,
a structured series of key questions, to allow them to diagnose the nature of the
problem and appropriate service response required. This approach alleviates the
need for expert knowledge on the part of either the caller or operator. Further tech-
nology allows the dispatcher to identify where their assets are and to contact them
and direct them to the necessary location.
All of the services are time critical and the prioritisation of customers in
terms of response is an important factor. None of them operate a queuing system
leading to a First In First Out (FIFO) strategy as all have customer safety as a core
principle. Both the RAC and Ambulance service prioritise calls based solely upon
the safety of their customers. The RAC examines the location and nature of the
caller to judge the potential danger the customer may be in – with those on the
motorway hard-shoulder and single females or vulnerable individuals prioritised.
The Ambulance service uses an expert system of questions to assess caller criticality
and dispatches appropriately. Both are able to contact their service operatives in the
field and rapidly divert or reassign them should a critical incident arise. Whilst
Dowty Propellers service is safety critical in terms of the operation of the aircraft,
a grounded plane (AOG) does not necessarily pose a danger to individual clients.
Instead, Dowty must prioritise its responsive services based on the financial impact
110 G. Parry et al.
that the customer is likely to face. It is able to do this without alienating other
customers who may be waiting service repair through the tacit recognition that,
should others be in a position of having an AOG, they would be prioritised. This
situation is also facilitated by their specific market context, in that this is a small
global market and many of the airline operators and engineers know each other
personally and cooperatively support each other to keep their planes flying.
7.1.3.9 Managing Variable Demand
Whilst the services examined are all responsive to customer contact there is a
significant difference in the scale of variability of demand against that which may
have been predicted.
Despite the very large volume of calls received by the Ambulance Service, the
volume of calls they receive follows a very stable pattern allowing them to plan and
roster staff as required. Major events are analysed and if required additional
resources are built into the roster. For serious incidents or when the country is hit
by epidemics additional capacity can be mobilised by drawing upon senior
managers or the military services. Despite having a relatively small customer base
Dowty does not have flexibility of scale and its service is currently run almost to
capacity. It is able to rapidly meet priority demands when airlines experience AOGs
due to the context of the market in which it operates and the close relationships
described above. However, AOGs are described as ‘rare events’. The majority of
the ‘higher priority’ work is in response to airlines recognising they have a low
availability of spares and the potential for an AOG should those spares run out. The
RAC faces a potential threefold variation in demand in any one day, from 5,000 to
15,000 calls and many potentially being received around the same time in that day.
Management of this is made even more difficult as the demand is linked to weather
patterns which, whilst predictions improve every year, add a random variable to
their demand patterns. To help mitigate for ‘spikes’ in demand, they have developed
incentivised systems which allow them to rapidly increase and decrease their
available capacity both in their call centres and in the field which, critically, are
supported by their staff. When capacity is reached any priority calls will be dealt
with first and an agent may be taken off a current job, if it is not deemed critical, if
they are required to deal with a customer who may be in danger.
7.2 Theoretical Perspectives
7.2.1 Social and Mechanical Repair
There is much written about service culture and behaviours and the contrast with a
manufacturing culture (Anderson et al. 1997; Bowen et al. 1989; Bowen and Ford 2002)
but it is in tangible examples of good service that the essence of a service culture
can be discerned. The services presented provide more than mechanical or physical
repair as the customer will be calling on the service due to a physical failure and
may be in some state of distress which must also be addressed. For example the
RAC patrol not only solves the technical problem but also repairs the social damage
caused by the failure of the product (Brown and Duguid 1991). They may calm the
individual down, providing a sense of relief from their frustration or fear caused by
their vehicles failure. Representatives may also build their organisational brand by
providing relief to the customer and could even rebuild trust in a third party brand
by providing a rapid repair or support to the customer. For the services competing
in markets, the financial value of this combination of social, brand and product
repair will be reflected in the contract price negotiation.
7.2.2 Implications of Flexible Capacity
Ferdows et al. (2004) highlighted the fundamental rule of queuing models, which
shows that waiting time increases exponentially when capacity ‘gets tight’. In their
work with clothing company Zara, lower capacity utilisation in factories and distri-
bution centres is tolerated to react to peak or unexpected demands more quickly
than rivals, conferring competitive advantage. The relational model between capac-
ity utilisation, waiting time and demand variability was described by Ferdows
(2004) et al. in the context of clothing manufacturing and retail operations, and is
shown in Fig. 7.3.
The model shows that, as capacity utilisation increases at lower levels,
waiting time increases gradually. As capacity reaches certain limits, waiting
times accelerate rapidly. With increased variability this acceleration occurs at
lower levels of capacity utilisation. This holds true in the context of the services
described.
From the literature and figure we can see that as capacity utilisation increases,
waiting times increase. To explore this mathematically, we can take a simple case
Fig. 7.3 Capacity utilisation

vs. waiting time model
(Adapted from
Ferdows et al. 2004)
112 G. Parry et al.
of a single operator who works at a constant service rate and people arrive randomly
(Hendrickson 1998). In our equation w is the average waiting time and l the aver-
age arrival rate of customers, and x the service rate (in customers per unit of time).
The expected average waiting time for a customer in this situation is given by the
equation:
l
w=
 l
2 x2 1 − 
 x
We can define the average utilisation rate of the service, u, as a ratio of the average
arrival rate and the constant service rate:
l
u=
x
Then, we can redefine our equation for expected average waiting time in the
queue as:
u
w=
2 x (1 − u )
If the average arrival rate approaches the service rate the waiting time can
become very long. If arrivals equal or exceed the service rate then the queue
expands indefinitely.
In our case examples we can assume that customer arrivals are at best random,
but more likely volumes will be driven by specific events such as weather, rush hour
traffic, holiday seasons or attendance at an event. As such people seeking to access
the services are likely to arrive more frequently at specific times as opposed to their
demand for service being evenly spread over time. This means that service demand
is, at certain key moments, likely to exceed service rate and bottlenecks will occur
unless extra service capacity is planned and made available to accommodate these
spikes in demand.
All of the case examples are time critical in their approach to customer service.
From the literature we could infer that they should tolerate high levels of low capac-
ity utilisation to cope with the peaks in demand. This would make the service busi-
ness model very expensive. To maintain a rapid response at reasonable cost,
demand prediction analysis and flexibility of staff and staffing hours to meet unex-
pected demand spikes is required.
A services ability to rapidly vary their capacity utilisation coupled with their
experience of demand changes allows them to operate their business more cost
effectively, and closer to the limit of capacity, before the point that waiting times
increase exponentially. Being able to mange resource capacity operation close to the
limit when waiting time increases exponentially confers competitive advantage.
In the case examples given all resources employed (ambulances/medics, RAC
patrols, field service engineers) are costly to maintain and employ. Maximising the
return on these key assets is therefore a business priority and achieving this involves
operating a process near to full capacity whilst ensuring that the customer’s expec-
tations are met. The NHS Ambulance service does this through rostering against
fairly stable demand, RAC uses powerful forecasting models and Dowty Propellers
operates at capacity, but is able to manage customer expectation as the market
accepts priority is given to a customer with an AOG.
7.2.3 Complexity
The examples presented represent complex systems in operation. Complex systems

stem from the work on non-linear systems in the sciences to understand and
describe the function of the living world. A complex system may be described as
one made of a large number of interdependent parts which together make up a
whole that is interdependent within some larger environment (Anderson 1999).
The idea of complex systems is brought into focus by the concept of complex
adaptive systems. Four tests for whether a system is complex adaptive are proposed
(Pascale 1999). First there must be many agents acting in parallel. Second, there are
multiple levels of organisation. Third, the system is subject to the laws of thermo-
dynamics and must be replenished with energy to prevent it slowing down. Finally,
pattern recognition is employed by the system to predict the future and learn. Many
systems are complex (they meet some of the criteria), but not all are adaptive, meet-
ing all of the criteria. The problem of analysis of a business is different to a natural
system as service systems are largely constructed. We move from understanding the
system, to understanding the system under control (Taylor and Tofts 2009). In the
context of industry production and process it is proposed that complexity may be
measured along three dimensions (Daft 1992). The vertical axis shows the number
of levels in an organisation, on the horizontal is the number of departments or job
titles and on the third axis is the spatial complexity, perhaps of different geographi-
cal locations.
All three case studies may be described as complex adaptive. For Pascale’s
definition we find in all the case examples that there are many agents acting in
parallel to provide service. They are supported by a multi-tiered organisation with
departments providing scheduling, forecasting, materials and equipment support,
telephone call centres etc. They are human systems and so require constant re-
energising. They all employ, to a greater or lesser extent, demand forecasting and
pattern recognition to facilitate their capacity scheduling or personnel rosters. With
regards to Daft’s definition, the organisations are all geographically dispersed in
their operations. They are part of larger organisations that have great depth and
breadth of departments, but all minimise this for their specific operations to facili-
tate management.
Emergent complexity, illustrated by the combination of simple shapes to form
complex fractal patterns, is driven by a few simple objects that combine to gener-
ate infinite variety (Pascale 1999). Inherent in this natural phenomenon is the
114 G. Parry et al.
finding that it is not possible to see the final outcome at the start as there are infinite
possibilities (Kao 1997). When applied to production processes, the challenge for
managers is to set the direction for the future and adapt to environmental changes
(Santos 1998). When managing complex services like those described in the case
examples, macro levels of adaptation are critical to meet the market demand and
micro levels to deal with the customer requirement faced by the service provider
when they arrive at the customer location. Any rigid, linear process or mechanical
system would be unable to meet the variety of different customer requirements that
the service provider may face or the variability of demand placed upon the system.
The flexible process structures the case study companies utilise allow them to func-
tion successfully in their markets. Maintaining quality through management rigour,
without losing control of the process is the key challenge. Generative complexity
takes place in the boundary between rigidity and randomness – applied to process
management, if applied processes are too rigid a company will fail owing to a lack
of creativity or flexibility, too random and a company may lose direction or lose
control of its function – there are numerous examples of failed companies who could
not find a balance (Pascale et al. 2000; Santos 1998). These boundaries are where
change in the company processes are managed and these are set out in procedures.
Procedures are defined as organisational design statements and capture the meth-
ods or process to execute a task (Rogers 1995). These are written by organisations to
manage aspects of operations and many procedures in place today are still dominated
by hierarchical command-and-control structures from the past (Brodbeck 2002;
Mercer 1999; Rogers 1995). Rigid, rule bound structures are incapable of adaptation
to meet new situational requirements but provide management with a sense of control
(Stacey 2000). As organisations introduce rigid procedural structures they often
depersonalise the social elements and practices that had developed (Rogers 1995)
and create instead a rule based system that neutralises adaptability and innovation
thereby inducing a state of ‘trained incapacity’ in the employees (Stacey 2000).
Complexity theory can influence the design and development of procedures
which place a greater emphasis on the impact of natural human behaviour – the
natural drivers to ‘get the job done’. In this regard, procedures could be developed
to promote self organising frameworks utilising natural laws which in turn drive
simplicity and generate greater influence without the need for ‘force’ or through
detailed bureaucratic dictat (Anderson et al. 1999; Harald et al. 1999; Sherman and
Schultz 1998). This approach uses the language of complexity theory and describes
how things ‘fit’ into business landscapes of market opportunities and competitive
dynamics (Kauffman 1995). Self-organisation is seen as a default natural state,
which sets a new aim of aligning the formal organisation so that structures, systems
and processes fit the goals, rewards and structure of the informal organisation
(Coleman and Henry 1999). Managers often get in the way of activities that self
organise and could self correct (Weick 1979). The behaviour of individuals is self-
organising when people (or agents using the language of complexity) are empow-
ered and free to network with others and cross organisational boundaries to pursue
their goals (Coleman and Henry 1999). Most procedure is routed in a linear cause-and-
effect theory, but an approach could be taken that utilises inherent self motivational
desire. Increased effectiveness can be achieved through identifying formal and

informal organisational structures and employing processes that fit within each in
terms of goals, rewards and structures (Brodbeck 2002; Drago 1998).
Complexity theory identifies the gatekeepers of an organisation as those that
stand at its boundaries and translate information between the internal and external
world (Lissack 1997). It is the nature of these gate keepers interactions with other
business units, suppliers and customers that we wish to standardise without resort
to the application of rigid procedures that would destroy the evolutionary nature of
the system. Furthermore, competitive advantage may be gained through creating
the capability to continuously adapt and co evolve within the environment thereby
embedding a system capable of undergoing continuous metamorphosis in order to
respond to a dynamic business landscape (Brodbeck 2002; Lewin et al. 1999).
Within the context of developing such a dynamic response it is recognised that time
to market is critical, though it is maintained that managing quick-response product
development is difficult (Gupta and Wilemon 1990; McDonough III and Barczak
1992; McDonough III and Spital 1984; Thomke and Fujimoto 2000). This difficulty
demands that gate keepers develop procedures which allow them to quickly integrate,
to take action both internally with other business units and externally with different
customers and suppliers. This speeds up the creation of an operating system and
infrastructure which will facilitate the manufacturing and delivery of the product to
its required specification and quality standard.
Organisations may increase their effectiveness if they are able to achieve good
‘fit’ between their structures and organising mechanisms and the context in which
they operate, including such factors as environmental volatility, company size and
age (Drago 1998). Fitness for purpose is therefore closely related to the flexibility
of procedures or a procedures capability to encourage employees to self-organise
as change occurs. Such procedures, modelled on complexity theory, would suggest
an improved capability to adapt and also to provide continuous fit between structure
and context (Brodbeck 2002).
Two aspects of procedural design have been identified within the literature and
can be divided into procedural requirements (form of conduct) and process require-
ments (method of doing) (Anderson 1999). Three main requirements are proposed
for procedure: the presence of a reward and penalty mechanism; consistency within
the business setting (standards); fairness in application (transparency). With regard
to process requirements the following conditions are pre requisite: relevant and
timely performance measurement; strong communication and staff involvement;
authority to act. Clearly these are requirements for success in the responsive ser-
vice case examples provided. The staff of each business must provide a coherent
consistent service offering whilst being empowered to act appropriately to meet the
customer requirement they are faced with at their location. If they became
restrained by rigid process their ability to respond to unforeseen customer require-
ments would be diminished and hence their service offering. The authors are of the
view that these requirements, which include authority, communication, and trans-
parency have resonance with the upper hierarchy needs in the motivational litera-
ture (Alderfer 1969; Kanfer 1998; Maslow 1954) and that benchmarking against
116 G. Parry et al.
industry standards is portrayed as a natural desire for self appraisal that both
encourages greater competition and fulfils esteem and self-actualisation needs
(Anderson 1999). Steve Miller, a Managing Director for the Royal Dutch Shell
Company remarked ‘The leaders provide the vision and are the context setters. But
the actual solutions about how best to meet the challenges of the moment have to
be made by the people closest to the action’ (Pascale 1999). The authors hope that
the case studies presented illustrate these theoretical concepts and provide diverse
leading examples of the management of complex deployed services.
Exercises
Having read through this chapter, try the following exercises to cement your
understanding.
Identify another service that faces a similar set of challenges?
What other elements than those highlighted here may be a challenge to the provision
and management of such a service?
What solutions could be provided to meet those challenges?
Is it appropriate to divide the service area covered into regions and if so, what are
the drivers for regional boundary positioning?
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Chapter 8
A Multi-organisational Approach
to Service Delivery
Valerie Purchase, John Mills, and Glenn Parry
8.1 Introduction
Who is involved in delivering a service? There has been growing recognition in a

wide variety of contexts that service is increasingly being delivered by multi-rather
than single-organisational entities. Such recognition is evident not only in our expe-
rience but in a number of areas of literature including strategy development, core
competence analysis, operations and supply chain management, and is reflected in
and further facilitated by ICT developments. Customers have always been involved
in some degree in the process of value delivery and such involvement is increasing
to include complex co-creation of value. Such interactions are challenging when
they involve individual customers, however, this becomes ever more challenging
when the ‘customer’ is another organisation or when there are multiple ‘custom-
ers’. Within this chapter we will consider some of the key drivers for a multi-
organisational approach to service delivery; examine the ways in which the parties
involved in service co-creation have expanded to include multiple service providers
and customers; and finally, identify some of the challenges created by a multi-
organisational approach to service delivery.
8.2 Key Drivers for Multi-organisational Service Enterprises
Why are organisations adopting a multi-organisational approach to delivering

value? In this section we will examine some of the key drivers for the adoption of
a multi-organisational approach to service delivery. Several inter-related factors
will be considered including: the trend for organisations to narrow the scope of their
activities and outsource all non-core activities; the growing requirement of customers
V. Purchase (*)
School of Communication, University of Ulster, Jordanstown Campus, Northern Ireland
e-mail: vc.purchase@ulster.ac.uk
120 V. Purchase et al.
to have holistic solutions; and the need to work collectively with others in the value
chain to both reduce costs and improve performance.
Key drivers for the development of multi-organisational service enterprises
include the following trends:
The increasing trend towards a focus on core competence and outsourcing non-
core competence – Individual organisations are increasingly adopting a strategy of
identifying and focusing on their core competence. This leads to a narrowing of
capability and increased specialisation. A core competence perspective states that
companies should differentiate between their competencies as ‘core’, those that are
essential to compete in the market and the firm is extremely good at, and ‘non-core’
those that are not essential to compete in the market (Lonsdale and Cox 2000).
Basically, organisations are focusing on and investing in what they do best.
The objective of this approach is that firms should strengthen and leverage their
core competencies (Ellram and Billington 2001) and outsource non-core competen-
cies. This is particularly the case when ‘the total costs of owning [them] are demon-
strably higher than sourcing externally, and the associated risks of market failure or
market power are not excessive’ (Lonsdale and Cox 2000). Only those competen-
cies that are non-core should be performed externally by a third party company.
This trend is now well established in many sectors where prime contractors are
increasingly relying on ‘full service’ suppliers for whole subsystems (Gadde and
Jellbo 2002, p. 43), as well as being in charge of managing and designing their own
supply chain (Doran 2003).
The need for holistic customer solutions which cannot be delivered by individual
companies – While individual organisations have been that narrowing of their
strategic focus onto certain technologies, services or processes, customers are
moving in the opposite direction, increasingly seeking total solutions and services.
For example, in the Opel Automotive Plant in Ruesselsheim, Germany, a separate
company, MAN Ferrostaal, has a sequencing and logistics centre. This service
organises many of the vehicle components into the correct sequence for production
and delivers them to the production line side. Their order sequencing and line deliv-
ery operation is completely integrated within the Opel production facility, with
Opel arranging delivery of parts and components to them and then accepting the
sequenced products from them on the line.
To meet this customer need, organisations increasingly seek to offer total, sys-
temic product or service solutions. However, since the trend has been to outsource
non-core activities, fewer organisations are able to provide a one-stop solution
utilising their own resources alone. This problem has driven organisations in all
sectors toward greater collaboration. The strategy deployed is to offer the customer
a complete solution and to achieve this integration of each of the elements via close
collaboration with a network of specialist external providers (Moller and Halinen
1999). The proposition that it is collaborations of companies that now compete
rather than single companies, is well supported in the literature (Akkermans et al.
1999; Lawrence 1999; McAfee et al. 2002).
Need for collaborative cost reduction and performance improvement – a further
key driver for multi-organisational collaboration is the need to reduce overall
8 A Multi-organisational Approach to Service Delivery 121
service costs. Globalisation and customer demands for better products and services
at lower costs has led companies to seek ways to reduce the overall cost of deliver-
ing customer value. While individual company costs might be reduced by a single
company approach, the systemic impact of such cost reductions may be detrimental
to the whole service. Therefore a multi-organisational service enterprise perspec-
tive is needed to achieve significant cost reduction. Inter-organisational cost man-
agement techniques, including the use of target costing, may deliver significant
benefits if they are adopted in an integrated manner (Slagmulder 2002).
In the same vein, performance improvement in the overall service to customers
is similarly only possible from a service enterprise perspective, in order to avoid
‘islands of excellence’ in an otherwise dissatisfactory service.
8.2.1 Multi-organisational Solutions for Service Delivery
Individual organisations can be difficult to delineate and define. ‘Organizations are

social entities that are goal-directed, are designed as deliberately structured and
coordinated activity systems’ (Daft 1992). Such organisations may have multiple
divisions and locations and yet still be seen as single organisations providing a
product or service. Within this section, we will examine the organisational solutions
developed to deliver service, which can be delivered by ‘multi-organisational enti-
ties’ which may be functionally, or geographically and legally distinct. Such multi-
organisational enterprises are, nevertheless, also goal directed and designed as
deliberately structured and coordinated, activity systems to deliver customer value.
As you will see, however, there are many challenges in managing such systems.
Starting from the simplest standpoint, service delivery involves at least two
parties – the service provider and the customer. Considering only two parties
enables organisations to design their service offerings and processes within a basic
dyadic framework (Fig. 8.1). Customers will clearly undertake some of the process
element in service delivery including establishing their need for a service and their
willingness to accept and pay for the value delivered.
For example, a patient walks into the health centre to have a routine asthma
review with a nurse. In this example, it would seem clear that a single provider
Fig. 8.1 Service delivery by a single provider organisation showing the limits of the service
enterprise
organisation has delivered a service through their employee. On the provider side,
even within this simple framework, it is often the case that a variety of distinct
organisational sub-units coordinate their various functional activities with varying
degrees of success to deliver service. However, service delivery is often and
increasingly more complex than this dyadic framework suggests. Even in this
seemingly simple example of service delivery, there may be a more complex
organisational solution for delivering basic healthcare. The receptionist who made
the appointment may be employed by the local health centre; the nurse may be sup-
plied by a separate agency or specialist asthma unit within the nearby hospital; the
premises where the service was located may belong to the local community centre.
In such cases several organisations have come together to provide a much needed
accessible service. In the following sections, we will examine how service enter-
prises have expanded to include, firstly, more involvement from other service pro-
viders and secondly, greater involvement of customers in co-creating value.
8.3 Moving Beyond Single ‘Service Provider’ Boundaries
As highlighted earlier, organisations increasingly need to look beyond their own

boundaries for the capabilities necessary to deliver customer value in terms of both
delivering services and products. Evidence of this trend towards multi-organisational
collaboration is found in a number of areas of the literature, and has led to a prolifera-
tion of multi-organisational concepts. A number of brief case study illustrations will be
presented including examples from both within and across the private and public
sectors.
At a strategic level companies have been encouraged to consider how they might
work with others to deliver customer value. In an important early paper, Normann
and Ramirez (1993) suggested that in today’s volatile competitive environment,
strategy is no longer a matter of individual companies positioning a fixed set of
activities along a value chain, and argued instead for value constellations where the
task for firms is the reconfiguration of roles and relationships among a constellation
of actors to deliver value. They move our thinking away from a focus on individual
organisations by
beginning with the simple observation that any product or service is really the result of a
complicated set of activities: myriad economic transactions and institutional arrangements
among suppliers and customers, employees and managers, teams of technical and organi-
zational specialists. In fact, what we usually think of as products or services are really
frozen activities, concrete manifestations of the relationships among actors in a value-
creating system.
(Normann and Ramirez 1993, p. 68)
In taking this perspective, organisations are then free to consider what activities
companies were able to provide to deliver products or services and where they can
link with others to provide other elements of value. A number of other writers simi-
larly took this stance and suggested that companies identify capabilities and
compete together to deliver customer value. The concept of ‘value nets’ (Parolini
1999; Bovet and Martha 2000) similarly emphasises the notion of systems of activi-
ties performed by a set of different economic players involved in delivering a total
customer solution. For example, a food court in a shopping mall has a number of
competing suppliers operating food outlets. The outlets must provide complemen-
tary offerings to support the service variety demanded by the mall owner to attract
the maximum number of customers to their mall. They will co-operate in sharing a
space where their customers consume their food, and provide a shared third party
cleaning and clearing service to minimise their individual costs and keep the eating
environment pleasant. Whilst they compete, they also work together to provide
customer value.
To create an effective multi-organisational value net, Parolini strongly empha-
sises the primacy of designing to meet customer needs, rather than starting with
existing company functions and competence as the starting point for strategic
analysis and the involvement of the customer in the value chain. In the value net
approach to strategic analysis the elementary units are activities which it is argued
‘allows us to begin by identifying the activities leading to the creation of customer
value and describing their characteristics, before moving on to explore how these
activities are divided among the various economic players involved in carrying
them out’.
A further group of writers, based at the Sydney Graduate School of Management
in Australia, have also advocated adopting a multi-organisational approach to
delivering value, describing the organisations as being part of a ‘value chain’
which delivers products and services to customers. In similar ways to earlier writ-
ers, this group advocate that companies should examine what they do best from
both a strategic and operational perspective, and look for ways in which all parties
could benefit from collaborating to deliver value (Walters and Lancaster 2000;
Walters 2004; Rainbird 2004). Rainbird (2004) further recommends that compa-
nies need to ‘understand the industry value chain context that it operates in and
should seek to maximise it’s place in the industry value chain by positioning itself
in that chain based on its resources and capabilities’. Thus, managing your posi-
tion in multi-organisational service enterprises becomes an important task for
companies.
The relationships between partners in a multi-organisational collaboration can
vary in formality and status. Partners may operate together through a traditional
supplier customer relationship where a focal company contracts to deliver services
and simply contracts with the suppliers to deliver certain elements of the product/
service (Fig. 8.2).
On the other hand relationships between partners can be much closer than those
developed between contractor and supplier. Often referred to as Strategic Partnering,
this relationship can involve an up-front agreement between parties who see eco-
nomic advantage and risk-sharing benefits in working together (Veludo et al. 2006).
These relationships can be highly formal. Both parties have ownership or some
proprietary claim on the product or service, though this may not necessarily be
50/50 (Cox et al. 2001).
Fig. 8.2 Moving beyond single entity to multi-organisational delivery of service by extending the
part played by a number of provider organisations in delivering a total service solution
In the context of this book on service design and delivery, the multi-organisational
entity will be called a ‘multi-organisational service enterprise’ and this will comprise
all the key parties in delivering service including the key supplier and their constituent
organisational units, and core elements of the supply chain.
Supply chain companies are being encouraged to more closely align their strate-
gies and operations to support the delivery of customer value. This process of closer
integration has been evolutionary beginning with an operational focus.
Initial supply chain integration efforts have focused on achieving high levels of transparency
and visibility of inventory and information throughout the supply chain, and utilizing tech-
nology that enables the trading partners to “see” the relevant operational transactions of
their other supply chain members. Companies such as Dell and Hewlett Packard have
demonstrated the effectiveness of such practices in generating leaner inventories, lower
working capital, higher profits and productivity, and better customer service.
(Spekman et al. 2002, p. 414)
However, the concept of extended enterprises has moved beyond sharing opera-
tional information. Different tiers of the supply chain are integrated through com-
mon objectives in order to facilitate both improved operational and strategic
performance; knowledge sharing is emphasised to allow customers and suppliers to
adapt readily to changing needs and circumstances (Coughlin et al. 2003).
There are many challenges to achieving such co-orientation in the supply chain,
as outlined in a later section of this chapter. Nevertheless, despite the implementa-
tion challenges, the rewards for companies who can build this collaborative enter-
prise culture seem to be considerable. As a study by Spekman et al. (2002)
highlighted, companies who value a culture of collaboration and learning across the
supply chain, tend to be more responsive, adaptive and flexible; report lower inven-
tory levels, greater customer account penetration, improved cycle time and faster
new product development. Hence service provider organisations would seem to
Fig. 8.3 Moving beyond strategic partnerships by providers, to a ‘service ethos’ in the supply
chain
need their suppliers to move away from simply seeing themselves as supplying
products, towards viewing their role as providing a ‘service’ of which the product
may be part of that service. In this way the whole supply chain can better support
the delivery of value to the customer (Fig. 8.3).
8.4 Beyond Provider Organisations to Greater ‘Customer

Involvement’ in Service Delivery
In the healthcare case described previously, we examined how a number of strategic

partners delivered service to customers as a ‘multi-organisational service enter-
prise’. Such enterprises can be made up of a variety of provider organisations and
also have the customer play a significant role in value co-creation. The developing
prominence of the customer’s involvement in co-creating value has been high-
lighted by many writers within academic literature. As previous chapters have
highlighted services generally involve at least some proportion of customer involve-
ment. This involvement may be minimal, such as when you purchase your coffee,
select your drink and add your own milk, sugar etc. or more extensive as the next
case study will illustrate. This section will examine how customers have become
increasing involved in the service delivery process.
Normann and Ramirez (1993) used the example of IKEA to illustrate their dis-
cussions on how companies were operating as part of larger systems or ‘constella-
tions’ for creating value. They described how customers were becoming a
fundamental part of ‘value co-creation’. IKEA challenged our understanding of the

role of customer in a number of ways, including their role in delivering their own
value – literally.
IKEA offers customers an opportunity to be involved in getting well-designed
products at substantially lower prices. Within their business model, the customer
helps to reduce costs by agreeing to undertake certain activities which would have
traditionally been undertaken by the manufacturers and retailers including selection
from the warehouse, delivery and assembly.
IKEA wants its customers to understand that their role is not to consume value but to create
it. IKEA offers families more than co-produced furniture, it offers co-produced improve-
ments in family living – everything from interior design to safety information and equip-
ment, insurance, and shopping as a form of entertainment. To call these services amenities
is to underestimate their central significance to IKEA’s strategic intent: to understand how
customers can create their own value and to create a business system that allows them to
do it better
(Normann and Ramirez 1993, p. 67)
Certainly in our everyday experience, we can see examples of situations where as

customers, we are undertaking some of the service roles once provided by the service
provider companies. In the past, when you wanted to go on holiday, a travel agent
provided a full service of organising holiday packages, booking service and providing
tickets and travel schedules. Many holiday makers now book their own flights,
arrange hotels and transport using a single or multiple IT platforms. The service
providers provide the infrastructure which enables the customer to take part in the
‘co-creation of value’ (see Fig. 8.4).
This shift in view, where customers are part of the value creating enterprise
has been highlighted by many writers. Vargo and Lusch (2004, 2008) described
Fig. 8.4 Moving beyond single entity to multi-organisational delivery of service by extending the
part played by customers in value co-creation
the shift as one where moving from a traditional goods centred or ‘product-
dominant logic’ to an emerging ‘service dominant logic’. In the former way of
thinking, the customer was seen as the passive recipient of goods, whereas
recent thinking has recognised that the customer is co-producer or co-creator of
value. Prahalad and Ramaswamy (2000, 2003) argued that companies should
encourage the customer to be proactively involved in co-creation of value. They
describe customers as being ‘co-opted’ into the design and delivery of services.
Indeed, they suggest that the co-creation of value has shifted our ways of think-
ing about products and services and the boundaries between provider and
customer.
Boundaries for multi-organisational service enterprises are set to get more com-
plex! (Prahalad and Ramaswamy 2003, 2004; Prahalad and Krishnan 2008) high-
lighted that providing an active role for customers in the co-creation of value went
beyond simply allowing customer access to a technology base or input in new
product or service development. They argued that the ‘centre of gravity’ needed to
shift from the provider to the customer’s experience and the consumer community
as a source of innovation. They illustrated this shift through the example of a busi-
ness selling pacemakers. Rather than simply selling the pacemakers, this business
could focus on the patient’s experience.
The value of the pacemaker to the patient could be significantly enhanced if it could be
remotely monitored and if the patient and doctor could be simultaneously alerted to any
deviations from the norms jointly established for that patient. Further, if the patient is
travelling and he experiences any abnormality, his doctor could suggest a nearby hospital
to go to. His doctor could establish a conference with the doctors in the remote hospital to
develop a treatment modality. All these additional steps would be very welcome to cardiac
patients
(Prahalad 2004, p. 171)
However, as Prahalad points out, this would require all parties to be connected over
a network, the entire experience would require multiple organisations and individuals,
and experience would be influenced by the quality of all the interactions in both
provider and consumer communities. The increasing involvement of consumer and
broader external communities in product and service development and delivery is
evident through the concept of ‘open innovation’. Within this model of innovation
businesses are open to both the outward and inward flow of entrepreneurial ideas
and technologies from both customer communities and other institutions and sectors
(Chesbrough 2006).
In the world of networked video gaming, increasingly it is the customer com-
munity who create the worlds the characters explore and link together to form
teams. The service providers give the customers the tools for them to build their
worlds or additional gaming levels, and the IT platforms for communication, but
the forums and groups that link the communities together are frequently created by
the user communities, co-creating value (Fig. 8.5).
The challenges involved in achieving value delivery in such complex and ever
expanding service enterprises are explored in the next section.
Fig. 8.5 Moving beyond customer to consumer communities in service delivery
8.5 Case Study: A Complex Multi-organisational Service

Enterprise in Action
In the case study which follows, the co-creation of value is ably demonstrated as
public and private sector partner organisations work together to deliver value in
terms of support services for the Tornado aircraft fleet to ensure availability for the
Royal Air Force. The case study demonstrates how multiple organisations and
sub-organisations are required to work together in various complex patterns to
deliver value.
ATTAC: Supporting Tornado Availability

The UK Ministry of Defence is increasingly opening the support of military
systems to private companies, and working in partnership with multiple
organisations to deliver support. One example is ATTAC (Availability Trans-
formation: Tornado Aircraft Contracts), a 10-year, whole-aircraft availabil-
ity contract where BAE Systems take prime responsibility to provide
Tornado aircraft with depth support and upgrades, incentivized to achieve
defined levels of available aircraft, spares and technical support at a target
cost.
The support contract is delivered through a complex ‘multi-organisational
service enterprise’ comprising a variety of on-base organisations at RAF Mar-
ham, supported by off base organisations acting in partnership (Mills et al.
2009). The drivers for the adoption of this partnered approach was the need
(continued)
(continued)
for reductions in cost of providing this service and the belief that the service
could be more effective through closer working between public and private
sector partners. In this case study, a simplified version of the service is
described and the main organisations, their role in service delivery and their
interdependence are illustrated.
From the time an aircraft is recalled for servicing, to the time it becomes
available again for further duties, a wide variety of organisations and sub-or-
ganisations have collaborated in providing this ‘availability service’.
BAE Systems are the prime service provider and perform many key roles
either directly or through managing RAF personnel to deliver their services.
Managed by BAE Systems, a ‘Fleet management’ organisation provides the
planning activities that translate the RAF Squadron requirements for Tornado’s
into the schedule of aircraft through the maintenance hangers. BAE Systems
then manage the hanger activity, staffed by both BAE Systems and the customer
RAF Air Command personnel, where the operational services are delivered.
Engineering support is managed by BAE Systems based at both RAF Mar-
ham and their other sites. This activity resolves technical queries and safety
issues and is similarly staffed by RAF and industry personnel.
The Defence Equipment & Support managed Tornado IPT (Integrated
Project Team) contains solely RAF staff covering administration, engineer-
ing, logistics, and commercial support of ATTAC on behalf of the Ministry of
Defence. This organisation is responsible for airworthiness and procurement
and monitoring of contract performance.
Following maintenance, the aircraft may need to be repainted. A third
party company provides a painting service, one of the later inline processes in
the delivery of maintained aircraft and therefore a significant dependency.
None of the support services would be possible without the a variety of sub-
organisations within RAF Air Command who both provide and are responsible
for the hangars themselves, and their electrical / hydraulic power and
information technology infrastructure.
A number of the supply chain organisations are also a critical part of this
multi-organisational service enterprise. Spare components and systems are
provided by both the prime and sub-tier supply organisations which may
deliver to the prime, to the customer or directly to the RAF squadron for air-
craft on duty. Finally, a further organisation, the Defence Storage and Distri-
bution Agency, is the sole provider of transport and off base storage of Tornado
parts.
Clearly the ATTAC services are co-created by a complex and inter-depen-
dent multi-organisational service enterprise, which must align and coordinate
activities to support delivery of the service for the RAF. Managing such com-
plex interactions is a significant achievement needing to overcome a range of
challenges highlighted in the next section.
8.6 What Are the Challenges in a Multi-organisational

Approach to Service Delivery?
While there are a number of clear drivers for multi-organisational collaboration in

delivering services, adopting such an approach is not without significant challenges
for all parties involved. This section will address some of the identified challenges
in a multi-organisational enterprise approach including risks, obstacles and the
need for a series of new capabilities.
8.6.1 Risks Encountered
As we have seen in the case studies outlined, in order to collaborate across multiple
organisations to deliver value, there is a need for greater openness, transparency and
coordination. This creates an external dependency and hence risk, caused by the
firm’s limited control over the resources it needs to operate but which come from
third parties, such as specific parts, products or services, land, labour, capital, and
information (Parry and Roehrich 2009). A firm’s key resources are related to their
critical or core competence(s) and are often discussed in the context of outsourcing
decisions to try to ensure they are not undermined. In developing closer supplier
relationships that facilitate outsourcing the exchange of proprietary information
becomes more likely and hence also the potential loss of core competences (Parry
et al. 2006). As a result, outsourcing has become an increasingly complex and vital
issue for many organisations, offering significant benefits whilst posing potential
future risks. In opening their operations to multi-organisational collaborations,
companies can run the risk of losing control of critical and versatile resources and
competences (Mills et al. 2004). Hence, the need for organisations to understand,
maintain and protect their core competences is even greater in a ‘service enterprise’
environment.
Yet despite these challenges services enterprises are expanding to involve ever
greater openness and innovation across a wide spectrum of parties. As outlined
earlier, companies are looking to the consumer communities for innovation in ser-
vices and beyond their service delivery partners to other sectors and research insti-
tutions for transferable ideas and technologies. This brings new challenges
including competitive, intellectual property, and communication issues that must be
addressed (van de Vrande et al. 2009).
8.6.2 Potential Obstacles
Obstacles to effective enterprise collaboration include the strength of the single

company perspective and practices. Organisations may see themselves as indepen-
dent entities in a chain, separate from customers, suppliers and other external
stakeholders. This can also be reflected in performance measures and reward

structures which tend to be company- rather than enterprise-centric, and therefore
not conducive to strategic alignment for the deliver of customer value. Some writers
have also highlighted that traditional supply chain management precepts of vantage
point and customer superiority, appear to contrast with enterprise concepts of col-
laboration and transparency (Lamming 1996; Spekman and Davies 2004). It may
therefore be difficult to forge new relationships that call for awareness of interde-
pendency and joint responsibility for service quality.
8.6.3 The Need for Enterprise Level Management
The challenge for companies within a multi-organisational service enterprise is the

design and redesign of organisational solutions for service delivery from an enter-
prise rather than single company perspective.
Delivering services through multi-organisational enterprises requires organisa-
tions to move beyond their own narrow concerns and efficiencies to take an enter-
prise wide perspective. Brandt (1998) describes enterprise level management as
focusing on the whole process regardless of ownership and includes consideration
of all customers at all levels within the service value chain.
8.6.4 Managing Multiple Values and Communication
As the examples presented in this chapter have illustrated, service enterprise part-
ners often differ in terms of their strategic interests, motivations and status within
the service enterprise (Keyton et al. 2008). Yet little attention has been paid to
understanding and improving communication and collaboration which are key
business enablers. Both communication and collaboration are impacted upon by
relational power differences, situational manipulation and self-interest by the part-
ner organisations involved (Hardy Lawrence Phillips 2006). Multi-partner value
systems can be especially complex to co-manage in the Defence, Health and
Construction sector where the value system involves both public and private sector
partners with different needs, goals and power (Klijn et al. 2008).
All of these challenges require intensive interaction that needs to be effectively
managed especially as the multi-organisational enterprise learns to work as interde-
pendent partners. Recent research has also shown that communication plays a criti-
cal mediating role in high performance, not only in individual organisations, but in
complex multi-organisational enterprises. However, while the need for more effec-
tive enterprise communication has become evident, there is little detailed under-
standing of appropriate roles, processes and forms of communication to bridge the
organisational gaps (Paulraj et al. 2008).
8.7 Conclusions
In this chapter, we have explored the ways in which organisations come together to
collaborate in delivering customer value. There are many drivers for such collabo-
rations including the growing requirement of customers to have holistic solutions;
the trend for organisations to narrow the scope of their activities and outsource all
non-core activities; and the need to work collectively with others in the value chain
to both reduce costs and improve performance. Information Technology develop-
ments have opened up huge possibilities for inter-organisational and supplier/cus-
tomer interaction. Companies, their supply chains, customers and consumer
communities can now network more effectively and this is leading to service
innovations.
The development of multi-organisational service enterprises has also created
many challenges for the participant organisations and the individuals within such
organisations. The preceding sections have highlighted that organisations cannot
operate alone in a service environment, yet there are risks and significant inter-
dependencies which need to be managed effectively. Perhaps the most critical chal-
lenges lie in supporting multi-organisational service enterprises to take a holistic
perspective and to move away from the adversarial relationships of provider/cus-
tomer to a true partnership for value co-creation.
There is therefore an urgent need to better understand service enterprise level
design, implementation and management. Whole value system business tools are
required to support leaders of multi-organisational service enterprises in co-orientating
the interdependent partners for improved value delivery.
Have a go at the following exercises to test and help embed your learning from
the chapter.
Exercises
Identify examples of other services that are delivered by ‘multi-organisational

service enterprises’
What are the key drivers for their multi-organisational approach?
What challenges are faced by this ‘multi-organisational service enterprise’ and how
have these challenges been addressed?
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Chapter 9
Through Life Costing
Linda Newnes, A.R. Mileham, W.M. Cheung, and Y.M. Goh
9.1 Introduction
This chapter introduces the issues of Through Life Cost (TLC) Management.
The industrial example used to illustrate the challenges of providing cost estimates
for the total life of a product/capability will focus on the aerospace and defence
sectors, where in general the products produced are highly complex, long-life and
of low volume. The challenges faced to predict the TLC for these products/services
will be introduced.
To develop a product there are a number of life cycle phases that occur, for
exaple; concept, assessment, development, manufacture, in use and re-use/disposal.
Furthermore, it is common knowledge that in each phase of the development of a
product, a company spends money and also incurs a set of costs (Ullman 2002). The
cost of a product is typically related to its technical performance, in other words
‘cost’ is a design factor. Indeed, when the design of a product is complete, although
only 20–30% of the total cost has been spent, 70% of the costs will have been com-
mitted (Ullman 2002). This is depicted in Fig. 9.1, in the cost-commitment curve
from Rush and Roy (2000).
The more the project is advanced the greater the difficulty of reducing the final cost
because of the high costs of modification and change (Kawauchi and Rausand 2002).
It is thus essential to understand the value of these design parameters as early as pos-
sible in the design cycle and preferably in the conceptual design stage. However, this
is also the point in the design process where there is very little concrete information
and data available to perform accurate cost estimation. This is particularly the case for
innovative low volume products where insufficient statistically significant data could
reduce the level of accuracy of the estimation (Newnes and Mileham 2006).
An area of activity that is of interest to many industries is Through Life Costing
(TLC). Estimating the TLC of products encompasses predicting the cost of a prod-
uct from the initial concept stages until it is re-used/disposed. This enables one to
L. Newnes (*)
Head of Costing Research, University of Bath, Claverton Down, Bath BA2 7AY
e-mail: L.B.Newnes@bath.ac.uk
136 L. Newnes et al.
Fig. 9.1 Cost commitment curve (Rush and Roy 2000)
assess whether this is the correct product, is it at the right cost, what is the most
appropriate concept to select/product design which will meet my customer require-
ments as well as reduce the overall cost through the whole life cycle.
Hence, the question to ask yourself is – Why should I be interested in the TLC
of a product? The example below illustrates why this is something you should be
interested in.
9.1.1 Example: How to Provide an Armoured

Vehicle for Soldiers
What happens if you have been asked to design a new product such as a vehicle for
army use to transport soldiers in freezing and wet conditions? Your boss states
that you want to make a 50% profit. So,
What costs do you need to calculate and why?
If you have a number of concept designs – which design do you select and why?
Would you select the concept which is cheapest to manufacture, or would you
select a design that is more expensive to manufacture but would last longer?
The answers to these questions depend on how you are planning to sell the
vehicle to the Army. Imagine a few scenarios.
(a) You wish to sell the vehicle outright.
In this particular scenario you sell the vehicle to the customer and that is the only
transaction you have. To make a 50% profit you would need to estimate the
amount you could sell the vehicle for and then calculate the cost for manufacturing
9 Through Life Costing 137
the product and apply overheads to cover costs such as design, administration, raw
materials ordering parts, manufacturing yield etc.
To do this you could use a cost model that adds all the costs together such as
manufacturing time, raw material, assembly etc. Assuming this could provide
you with an estimate that is close enough to the final cost of making the vehicle,
you could then use this model to compare alternative designs.
The aim of the model would then be to use it as means of selecting the vehicle
design which meets the customer requirements and provides you with the maxi-
mum profit. This could then be optimised (e.g. by redesign, outsourcing,
improved processing) to provide your 50% profit. You may also build into the
model expected spares, consumables etc and the profit you may make on this. In
some cases the spares and consumables markets are where companies make
their money. A good example of this is inkjet printers – cheap to buy as most of
the money is made from the consumables – the ink cartridges.
(b) You wish to lease the vehicle.
For this scenario you design and manufacture the vehicle, but, rather than sell it
you charge the customer a monthly fee over a set time period (e.g. 5 years). For
this monthly charge your company provides all the maintenance as part of the
monthly charge. The agreement would also involve e.g. a repairer arriving
within 24 h of a breakdown occurring, repairing or providing another vehicle if
for example the vehicle could not be fixed within seven working days. So the
costs you would need to calculate are the costs of manufacture, overheads
(design, administration, yield etc.). However, you will also need to ascertain the
costs of planned maintenance, unplanned maintenance (i.e. breakdown, repair),
retrieval, re-use/disposal over the 5 year period.
The difficulty with this model is you have to predict events that may happen
such as a breakdown and undertake a trade-off between using more reliable parts
within the design. The challenges here are that you would not want to have the
vehicle costing too much as you may not be able to charge a high enough
monthly fee to make adequate profit. In modelling this, you also use for exam-
ple, probability analysis. In other words you cannot say that every 6 months the
vehicle will break down; this would be a random event.
(c) You wish to manufacture the product and be paid for availability.
For this scenario, the army just needs the vehicle to be operational and ready when
they need it. An example may be that the army requires ten vehicles to be available
for use at anytime and they must be able to undertake journeys lasting 24 h.
In this particular scenario if the army try to use all the vehicles and they are
not ready then you do not get paid/incur a penalty –resulting in loss of profit. So
the costs you would need to calculate are the costs of manufacture, overheads
(design, administration, yield etc.). You would also need to understand in detail
criteria such as; the expected running time of a vehicle, repair, breakdown etc.
This differs from scenario (b) as the agreement is that a set number of vehicles
must always be ready for use when required. However, in scenario (b) you have
agreed that the vehicle can be repaired within a time frame. Although much of
the modelling would be similar to that of (b), you have to have a model that can
assess the reliability, repair times and so forth with confidence.
So, the task of designing and selling a product to make 50% profit is no longer
simple. It all depends on the business process model you are using and how you
intend to sell the product. Is it a straight sale, are you leasing or are you providing
availability? To further complicate the decision, some markets will set a price.
In other words the army may only wish to pay £35,000 to buy the product outright,
scenario (a). For scenarios (b) and (c) there may be an upper monthly/yearly price
they are willing to pay. Hence, not only do you have to work within a market buy-
ing price, but you then have to use this as the upper limit, still make your 50% profit
whilst maintaining reliability and so on.
To help explain how important this is, the following sections will describe what
this means in terms of the aerospace and defence sectors; the challenges these
approaches provide for designers and cost modellers; and how they try to predict
the ‘real costs’ of such activities so they can maintain profits and still meet the
customer requirements.
9.2 Industrial Context: Defence and Aerospace
The defence and aerospace sector has a turnover of £20 billion with the UK
Government committing 5.8% of all its expenditure on defence in 2006/7 and allo-
cating over £16 billion for defence procurement activities in their 2007/8 expendi-
ture plans (MOD 2009). Unfortunately the National Audit Office (NAO) has
highlighted major issues with large MOD projects, such as late delivery and over
budget (NAO 2007) as well as stating that for 20 of the largest projects the average
delay was 96 months and an average of over £205 million over budget. To add to
this current challenge Deloitte have also identified that cost overruns in the defence
and aerospace sectors may increase to 46% (up 26%) in the next 10 years. However,
these challenges are also evident in many projects including construction such as
the Scottish Parliament Building where the outturn costs increased to £430 million,
compared with the initial cost estimate of £40 million and the 2012 Olympics
which are already three times the estimated costs (BBC 2008).
To further complicate the challenges of estimating the TLC of a product, indus-
trial business processes have moved from delivering spares and parts to total care
packages through the whole lifetime of the product, i.e. to provide a service. The
in-service costs for the Defence Equipment and Support arm of the MOD was £10
billion in 2007–08 excluding new equipment (UKMoD MOD Accounts 2008).
In effect products such as aircraft are now being leased and the customers pay
per hour of flying time. Rolls Royce used to refer to this as ‘Power by the Hour’
but it is now branded as Total Care packages. For example, in aerospace engines,
55% (£4.265 billion) of Rolls Royce’s sales were from aftermarket service in 2007
(Rolls Royce 2007). They have estimated that by 2028 the after sales market for
civil engines will be worth US$550 billion and for military engines US$300 billion.
Hence, modelling through-life costs and making a decision at the concept design
stage to save 1% on in-service costs would save taxpayers US$3 billion – just on
military engines.
With these changes in business processes, the question that many companies
are attempting to address is how they estimate the TLC for their products. In par-
ticular how do they predict the in-service costs for the products at the concept
design stage to enable informed decision making? The major challenges for esti-
mating the TLC of a product include; limited/dispersed information on current
products, estimates have to be made before the product is in-service, with the
further challenge being that these estimates often occur years before the aircraft
are in-service.
These are some of the major challenges for cost modellers. The traditional mod-
elling used to predict the cost of a product (i.e. in general the design and manufac-
ture of that product), are no longer suitable. With this change and the importance
being placed on TLC there are a plethora of acronyms to describe cost modelling,
commercial packages are continually being introduced and industry have been
focusing on building their own cost models, with many being based on excel files
(ref industrial survey) (Cheung et al. 2007a, b).
The next section will describe the definitions of TLC and the many acronyms/
views that are used in this domain. This will enable you to ascertain what these
acronyms mean and the commonality between them.
9.3 Definition and Terminology of Through Life Costing
This section summarises the different definitions of TLC across a number of indus-
trial sectors. By the end of this section you should:
• Be aware of the varying definitions/names of TLC.
• Understand what categories are used to make up a TLC.
• Be able to discuss TLC in terms of a sectorial vision.
The term Life Cycle Cost (LCC) is used across many industries such as aerospace,
oil and chemical, railway systems and construction (Followell 1995; Ehlen 1997).
However, Cheung (2007) found that LCC is identified by numerous names such as;
Whole Life Costing (WLC), Through-Life-Costing (TLC), Total Cost, Total-
Life-Costing, Total-Cost-Of-Ownership, Costs-In-Use and Ultimate Life Cost. Due
to the number of different terms that are used this section will describe the most
commonly used terms.
Cole and Sterner (2000) summarised LCC as ‘a set of methods that consider not
only product life cycle costs but also the environmental and social aspects in the life
cycle’. This however is not the same as the definition used by others such as
Bradley and Dawson (1999). In their view the term WLC encompasses the whole
cost of owning the product i.e. from its initial conception all the way through to
disposal/reuse. Bradley and Dawson take all cost categories into consideration for
their modelling e.g. design, manufacture and training. Within the military sector the
cost of ownership is presented by the Ministry of Defence (MOD 2009). The MODs
definition of TLC is the aim of identifying the total Cost Of Ownership (COO) i.e.
what will it cost them to own an aircraft, tank etc. Their particular approach is simi-
lar to that used in the construction sector where the COO consists of various levels
of cost such as the in-service but also the training, staff, and energy costs.
In the USA, terminology definitions in reporting cost data is a standard practice
and legally binding process for defence contracts. The UK construction sector
(National Audit Office 2005), has relied on recognised standards for capital costs
in procurement for many decades. One of the challenges here is that there are no
construction industry accepted standards for TLC, neither does the construction
industry have the regulations to perform TLC consistently in practice.
It is not surprising that one of the key barriers identified by the National Audit
Office to transform construction procurement to include TLC is that, ‘the first
hurdle to overcome must be eliminating confusion over terminology and providing
a common data structure and method for predicting and reporting TLC’.
Although TLC standards are now more established in the construction industry
in the UK (ISO 2007), this is not the case in other areas of product development
such as electronics, mechatronic or mechanical products. ISO standards in this area
have been developed mainly for life cycle analysis in a variety of different applica-
tions such as Product Lifecycle Management (PLM) Weber (2003) and Standard
for the Exchange of Product Model Data (STEP) Eurostep (2008).
In summary, terms such as Through Life Costing, Cost of Ownership, Life Cycle
Costing are used interchangeably. The key difference between them depends on
how they are used and what factors they consider. The construction industry is mov-
ing towards attempting to provide standards, although there is no ‘common/stan-
dard’ approach used between companies. So, when discussing TLC, WLC, LCC,
COO etc., you should ensure that the boundaries of what is included in the cost are
identified.
However, identifying what you should model and what is the most appropriate
approach to use for modelling has achieved much attention in academic research
and commercial systems.
9.4 Cost Modelling Research and Commercial Tools
There are various ways in which cost can be modelled. These range from spread
sheets to neural networks. However, deciding what to use and when is an answer
all cost modellers would like to have! To achieve this ideal situation many researchers
have examined different modelling approaches and there are many commercial
software packages for modelling cost. Within this section we will present some of
the current research activities being undertaken today and describe some of the
commercial cost modelling systems on the market.
9.4.1 Research on Cost Modelling
As with the previous sections when modelling TLC for a product, researchers have
different viewpoints, use different terminology and there is no standard approach
which everyone agrees on. This is evident from the work of Sandberg et al. (2005)
who conclude that if companies are moving from supplying products to supplying
a service such as total care there is a greater need to model the lifecycle of the
product from concept to end of life. Within the research they presented, a jet engine
was used as their exemplar, hence they focussed on the aerospace industry. Nicolini
et al. (2000) examined the use of target costing, for estimating TLC within the
construction sector. The main aim of the work they were undertaking was to pro-
vide innovative approaches within the construction sector to improve the value-
chain management for the design and delivery of e.g. a building. Within their
approach they proposed the use of target costing through the whole value chain and
reducing the TLC whilst maintaining quality, reliability etc. In the oil and chemical
sector, Kawauchi and Rausand (2002) propose an approach that can be used for
TLC. In their proposed model Markov chains (Susova and Petrov 1997) are utilised
as well as probability distributions to ascertain the TLC. Their model proposed
three levels for the analysis component, sub-systems and integrated systems. If one
was modelling an intergrated system you could for example plug and play different
subsystems and examine the costs of different intergated systems.
Davis et al. (2003), have a particular view of LCC in that it should provide an
overall cost of the product. This overall cost should, in their view, include all the
costs such as health and safety, energy etc. Their main aim was to provide a model
which would enable users to follow a structured approach to provide a cost versus
benefit comparison. Within their work, Davis et al. (2003) classified the LCC into
phases and then presented these under three categories (see Table 9.1) namely:
• Producers (those that make the product/provide the service)
• Users (e.g. people who use the product e.g. the MOD for a fighter jet)
• Society (waste disposal, recycling, fumes)
Researchers such as Ugwua et al. (2005) have focused on the need to predict the
maintenance requirements of a bridge. For their research, their aim was to predict
the requirements at the concept design stage so they assessed alternatives in terms
of TLC, in particular the choices of materials, construction methods and durability.
Although their research focused on the construction sector, the same processes can
be applied in the aerospace sector for providing through life support. For example
if your company was asked to design and maintain an aircraft engine and you were
paid by flying hour, you would want to know maintenance costs, reliability and so
on. You would then use these predictions/models to help you select the most appro-
priate solution to minimise the TLC.
Although the industrial sectors the researchers have focused on in this section
are varied, the common theme that underpins all their activities is to provide reli-
able and robust models/rules/methods to undertake TLC from the product/system
Table 9.1 Life cycle phases and example costs (Adapted from Davis et al. 2003)
Life cycle phase Cost to the producer Cost for the user Cost for society
DESIGN (concept, Market recognition, Contract Technological
development & Research & negotiation, development,
assessment) Development, Design Design Grants and other
stages, Legislation, requirements/ support
legal requirement market need
Health and safety, Sales analysis
MANUFACTURE Facilities, Process Health and Safety,
development, Logistics Employment.
design, Energy, Environmental
Legislation waste, energy
usage etc.
OPERATION Service support, Warranty, Parts and Storage, Emergency
(in-use/ Spares, Production Maintenance, services, Waste
in-service) and Distribution Support, Managements,
Operations Environment Health
END OF LIFE Buy-Back, Recycling/ Decommissioning, Waste Management,
(recycle, Disposal Recycling/ Environment Health
disposal, re-use) Disposal
inception through to in-use/disposal, in particular to enable the estimation of these

costs at the concept design stages enabling informed decision making and design
selection.
Table 9.2 summarises some of the research presented in this section in terms of
the aims of the research, the industrial focus of the research and the functional
characteristics of the research activities.
9.4.2 Commercial Cost Estimation Systems
To be successful in business one has to make a profit. Hence, being able to model
the cost of products/services and compare alternatives is important and can enable
you to make the most appropriate decision at that point in time.
This section introduces some of the commercial systems on the market at the
time of this review. These are summarised in Table 9.3.
The systems were identified and analysed using the following criteria:
• Literature from the software vendors describing their systems.
• On-line web searches of the software applications and the vendor websites.
• Analysis of the software systems identified that the majority of the commer-
cially available packages focused on the design and manufacturing aspects of
TLC Acquisition Operating Framework (2008). What was not evident was any
clear modelling of the in-service costs and looking at alternatives on how to
model and manage the in-service costs.
Table 9.2 Research summary

Research works System characteristics Functional characteristics
Nicolini et al. To addresses of whether target Development of innovative practice
(2000) costing and whole life costing within the construction industry
can be applied in the construction to improve supply-chain
industry management in the design and
delivery of major capital assets
El-Haram et al. A generic approach to minimising Development of a WLC
(2002) WLC in the Construction industry breakdown structure
for a building
Kawauchi and A system to support production The approach is based on Markov
Rausand regularity assessment in LOC modelling and probability
(2002) analysis for oil and chemical distributions throughput
process industries capacities of subsystems
Seo et al. (2002) A system using ‘learning algorithms’ Aritificial neural networks are
to train to use the known trained to generalise product
characteristics of existing attributes and life cycle cost
products to estimate the life cycle data from pre-existing LOC
cost of new products during the studies
conceptual design phase without
the overhead of defining new
LOC models
Hochschorner A paper presents preliminary Using existing LCA data or create
and Finnveden suggestions of how to integrate life- new LCA data coupled with
(2003) cycle assessment in the acquisition databases technology to achieve
process of defence material the assessment
Sandberg et al. A methodology uses in design A parametric cost estimation
(2005) support of jet engine components technique is utilised with a
that can simulate LOC in early knowledge-based engineering
phases approach to couple the
geometry definition process to
the cost estimation on activity
Ugwua et al. A framework for integrating An object-oriented (OO) framework
(2005) durability factors and facilitates in decision-making for design
achieving the objectives of for durability to achieve the
durability design that account for objectives of durability and
LOC and sustainability of design minimum maintenance costs at
options in the bridge domain project level
However, a few systems do model some of the in-service and maintenance costs.
Two systems, namely, LCCWare and Relex LCC, offer modelling capability
through the whole lifecycle of the product.
LCCWare. This software was developed with the aim of providing a package
that could undertake life cycle cost modelling. Within this model the cost elements
are represented in the form of a tree structure that is created interactively. The
objects at the bottom level of the tree represent cost functions that can comprise
both local and global variables and constants. Libraries of frequently used cost
functions allow rapid development of the model.
Relex LCC was also developed to calculate the cost of a product over its lifetime.
Relex is also capable of utilising user-defined cost breakdown structures, net pres-
ent values calculations, inflation factors, calculations of over multiple time interval
and sensitivity analysis.
However, although these packages are designed for through life cost modelling,
there is little emphasis on modelling in-service costs at the concept design stage to
enable you to make a decision that will minimise the through life cost of the prod-
uct. Although the packages can be adapted to include these they require further
enhancement to meet the challenges required in for example costing for an aircraft
from concept to disposal under an availability agreement.
Of the thirteen systems shown in Table 9.3, SEER-DFM, SEER-H, from
Galorath (Golorath 2008), and PRICE-H from PriceSystems (PRICE 2008) are the
commercial models that appear to be dominant in the market. Both SEER and
PRICE utilise historical data and are particularly good at estimating costs for simi-
lar products. In other words they are very useful for costing product families and
products with incremental changes in their design. In terms of details they do not
focus on the non-recurring costs (e.g. to set up a service, design time) and life cycle
costs. However, they do take account of the costs for disassembly and re-use.
9.5 Acquisition Cycle: Low Volume, Long-life,

High Value Products
As described in Sect. 9.4, there are various models and approaches that can be used
to estimate the TLC for a product. Estimating these costs is becoming even more
important to sectors such as aerospace and defence due to the move to product
service systems, where the product is effectively leased to the end user (similar to
the vehicle example – but a lot more complicated!). In these cases the end user pays
for product availability, such as number of hours of flight etc. This creates further
challenges for the cost modelling, especially if you have noted how the majority of
the commercial cost models and the current research activity focus on the earlier
stages of the design and manufacturing focus. Very few have detailed in-service and
design for in-service capabilities, although some are now attempting to enter this
domain and provide in-service cost models.
When you are selling a product your aim is to reduce the cost of the product
through to in-service. In general you are not optimising the in-service part of the
process because this is where you can also make your profit. For example, this
could be through the selling of spares, upgrades etc (vehicle scenario (a)). However,
the move to PSS may mean that the seller may be responsible for the product
through its whole life. In this case you want to spend less on spares and mainte-
nance whilst being paid for providing the capability, service (vehicle scenario (c)).
To understand the impact of this and how it can be modelled the following section
will describe the acquisition cycle for low volume, long life products such as those
used in the aerospace/defence sector and the modelling that you need to undertake
in each phase.
Table 9.3 Commercial costing system – application domains and stages
Design Manufacturing Operation End of life
Facilities, process Service and Disposal and
System providers and product name Domains of applicability Concept Detailed and logistic maintenance recycling
http://www.galorath.com/SEER modules Electronic and SEER-H SEER-H SEER-DFM – –
Mechanical Hardware
http://www.pricesystems.com/PRICE-H Electronic and PRICE-H PRICE-H PRICE-H PRICE-H –
Mechanical Hardware
http://www.valerdi.com/cosysmo/ Aerospace COSYSMO COSYSMO COSYSMO – –
COSYSMO (2007); Isograph
LCCWare (2007)
http://www.dfma.com/Boothroyd and General Design and DFMA DFMA DFMA – –
Dewhurst (DFMA) Manufacturing
http://www.t-systems-ts.com.br/CAPPe Automotive – – CAPPe – –
http://www.cognition.us/products/ca_ Standard Manufacturing Cost Cost Cost Advantage – –
proddesc. htm Cost Advantage Processes and Advantage Advantage
Electronic Assembly
http://www.engineous.com/product_ Aerospace – FIPER FIPER – –
FIPER.htm FIPER
http://www.aceit.com/(Automated Cost Aerospace and Defence – ACEIT 7.0 ACEIT 7.0 ACEIT 7.0 –
Estimation Integrated Tools) ACEIT
Family
http://www.deccansystems.com/DeccaPro Any Industry – – DeccaPro DeccaPro –
http://www.mevatec.com/FasTrack IT organisations to – – FasTrack ABM TM FasTrack ABM TM –
ABMTM manufacturing and
distribution
http://www.kapes.com KAPES Electronics, Aerospace – KAPES KAPES – –
and Automotive
http://www.estimatingsystems.com Pulsar Construction and Building – – Pulsar Pulsar –
http://www.isograph-software. Building, Ship, Weapon 1ccWare 1ccWare 1ccWare 1ccWare 1ccWare
com/1ccWare system and Power
Any Industry – Relex Relex Relex Relex
Fig. 9.2 CDDMIP cycle
The acquisition cycle for defence products consist of six stages, CADMID
(http://www.aof.mod.uk/aofcontent/tactical/ppm/content/lifecycles/cadmid.htm) as
summarised in Fig. 9.2, namely:
Concept – At this stage a user requirement need is acquired i.e. what is it that the
customer wants the piece of equipment to do? This can be expressed in terms of
capability e.g. to have access to remote desert locations. In the concept stage prom-
ising technological and procurement options are considered and planning is made
for the development/assessment phase. The cost modelling at this stage is normally
at a high level (i.e. based on e.g. cost estimating relationships such as overall
weight). Paradoxically, this is where the available information is limited, yet where
the majority of the costs are built in. Due to this, accurate cost models are usually
extremely difficult. The other challenge at this stage is misunderstandings/clear
requirements being specified. In some of the large defence contracts the early stage
decisions/understanding of requirements were attributed to causing later delays and
cost overruns.
Development/Assessment – Here the concepts may include solutions to meet the
customer requirements which could be via, air, land vehicles etc. The key require-
ment being for the concept to meet the military need (capability) within an accept-
able cost and a reasonable time frame. As part of this due to the long life of
products where some sub systems may include for example new technologies, risk
is also considered and a procurement strategy decided upon. At this stage the cost
models can incorporate greater detail, as some of the technologies have been
selected and prototypes examined.
Demonstration – At the demonstration phase the cost models can utilise proof of
concept costs and future manufacturing expectations for the solution. Here the risk
is being reduced as a demonstrator of key technologies and interfaces is produced.
These findings can also enable the cost models to incorporate actual results/costs
and not just theoretical expectations. The emphasis is on demonstrating the inter-
faces to illustrate that the solution’s ability to produce an integrated capability.
Manufacture – When the manufacturing phase is underway the emphasis is to
maintain delivery on time and on budget, whilst ensuring the capability is delivered.
At this stage the cost models can be very detailed as the design is complete, the
manufacturing process selected and the volumes known.
Fig. 9.3 Balance of cost expenditure for the lifecycle phases
In-Service – The In-Service phase of the lifecycle is when the capability has been
passed to the customer, e.g. land vehicles to operate in cold and harsh terrain. It is
at this point that the predicted in-service costs and reliability are compared with
what actually happens. The cost models will also be used to ascertain ways in
which the in-service costs can be reduced. The cost models can utilise maintenance
expertise, feedback to the concept design for failure and real in-service data to
inform future concept designs and cost models.
Disposal/Re-use – This stage is where the safe and efficient re-use/disposal of
equipment occurs. The cost models on actual re-use/disposal will enable feedback
into the concept design to assist in future decision making. For example, design for
re-use/disassembly/disposal at the concept stage may reduce the costs encountered.
Cost models can incorporate expected costs for disassembly etc.
However, this cycle assumes that the outcome is a product and not a service. To
overcome this, the defence community have examined the use of a cycle called
CADMIT. Where the ‘M’ is described as migration and the ‘T’ means termination.
http://www.aof.mod.uk/aofcontent/tactical/ppm/content/lifecycles/cadmit.htm.
So, how would you model the cost of a service. In at Fig. 9.2, everything appears
well spaced out and equal. However, in reality much of the costs associated with a
defence capability are at the in-service stage (Fig. 9.3) up to 75% (Clark et al. 1999;
Asiedu and Gu 1998).
The next section presents a scenario for you to assess and decide how you would
predict the service costs for a product.
9.6 CADMID
How would you model the cost for avionic displays?

Figure 9.4 depicts an example of an avionic display. The displays are used by
pilots to assess the status of the aircraft e.g. altitude, speed, fuel. The display units
consist of both mechanical and electronic components and naturally have to be
readable and in working order. Your company supplies one of the display units,
enlargened in Fig. 9.4 and is proposing to enter a service contract with the customer.
Scenario C, in Sect. 9.1 ‘You wish to design and manufacture the product and be
paid for availability’. The questions to be addressed are
How would you predict the cost of such a unit? What should you charge?
Some of the issues you will need to consider are that the cost estimate may have
to include the management of these long-life low volume products, which have a
through life of 30+ years (both civil and defence) and various sub-systems. Based
on what we know about these systems how do you predict the expected through life
cost and in particular how do you estimate the cost of in-service?
The key features and challenges include:
• Limited data at the concept design stage relying on best ‘guesstimates’ for cost
predictions.
• Due to long-life of the products many design changes occur – how can you pre-
dict these at the concept design stage?
• Impact of technology refresh on the system/artifact – how do you predict the
cost of these for a long-life product?
The three previous bullet points all relate to uncertainty in terms of design, technol-
ogy etc. An example of how the technology has changed in the last 20 years is
described by Monfret (2009). He describes the use of Cathode Ray Tubes (CRTs)
and how the avionic systems have, since the early 1990s been upgraded to Liquid
Crystal Displays (LCDs). These are now incorporating LED backlights to improve
reliability, colour etc. Currently research is investigating Organic Light-Emitting
Diode (OLED) technology. Kopp (1998, 2005) also describes trends in display
technology, illustrating how the market is driven from innovation and advance-
ments in the display sector such as televisions.
From these trends you may decide that:
Fig. 9.4 Avionic display sub system

• You can predict when technology will be ready for use within avionics.
• You can estimate when design refresh will occur.
• Based on historical data, you can estimate expected repairs.
Using historical data you can undertake trade-off analysis in terms of increasing
reliability and initial costs to availability costs/repairs required.
9.7 How Do You Model This Uncertainty?
For all of the information provided the results are still uncertain. Some will be alea-
tory uncertainty (i.e. part of the system and not changeable unless you alter the
system) and others will be epistemic uncertainty mainly due to the lack of knowl-
edge, complexity and imprecision. To model this in your cost models you may
place weightings to represent technology readiness ranges to indicate a range of
costs (Cheung 2009) or probability analysis to represent Mean Time Between
Failure. Many people use three point estimates, most likely, best and worst case
scenarios. However, this is not always enough and some researchers are proposing
the use of probability bounds analysis (Goh 2010) to represent the imprecise prob-
abilities that occur. This would allow the decision maker to have further detail to
assist in their decision making. For example with a standard PDF, you may calcu-
late that there is a 90% probability that the cost will be less than £20 million.
However, using probability bounds you may know that there is a 90% probability
that the cost will be between £19 and 21 million.
9.8 Conclusions
This chapter has presented some of the challenges for modelling through life costs.
A review of the current approaches to TLC have been described as well as an intro-
duction on the impact of costing in terms of providing a service.
The main points to understand about estimating for long life products are that
the design always changes; technology is refreshed; capability demands change
over time, obsolecense occurs and you have to try and account for all of these things
when predicting costs.
In summary, know your data and assumptions, understand the strengths and
weaknesses of your model and build in uncertainty.
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Chapter 10
The Practitioner View
Ian Smart, Stuart Bestwick, Neil Jarrett, Richard O’Conner,

and John Gurnett
Several leading practitioners who are currently helping organisations transform to

successful service providers have created the following chapter. They have exten-
sive experience between them in the public and private sectors and offer excellent
insight into the ‘how to’ for effective sustainable, service implementation.
10.1 Creating the Message1
The burning platform shows us why we need radical change and the blueprint
shows us what it looks like.
The challenge is so big that it’s beyond what we as leaders can change on our
own. Everybody needs to understand it and get behind it. We need to communicate
all the time so that we maintain a shared vision of our future; one that will sustain
us through the tough decisions that we will need to take. We must also make our
organisation ready for change. We must understand and then build the capacity and
capability to succeed. Only then can we mobilise to deliver.
Often when we think about transformation we do what we have mostly done before.
We think about new structures and infrastructures – shared management, shared ser-
vices, outsourcing, new computer systems. We want to jump straight on the vehicle for
delivery. We should remind ourselves that it is easy to create these new structures with-
out changing the thinking and behaviour we need to make the change sustainable.
In real transformation, collaboration is just one ingredient in the recipe. The full
menu will require change to the way people think about, design and provide ser-
vices. We must mobilise all the intellectual assets across our organisations to create
services that focus on prevention, reduce demand and provide only what our com-
munities need and value, right first time, every time.
Smart
1
I. Smart (*)
e-mail: ian.smart@alexander-ecc.com
154 I. Smart et al.
Change to organisational structures and ICT will still play a big part, but it will be
how our people think, work and behave that will underpin the coming transformation.
Our decisions about what and how to do things must follow a deep understanding of
what our communities and service users most need us to do. This type of change
means that we must use all the intellectual resources we have to achieve more with
much less. We will need our people to be active and willing participants. To make
this happen this we will need to help our people to understand and share in the owner-
ship of the problems we all face, so that they have a reason to change what they do.
Leaders will need to create a shared vision of the future, one that is based on com-
mitment not compliance. Your shared vision will need describe a detailed picture of
who the organisation will serve and what it will look like. Being ‘excellent’ is great
ambition, but it’s not a clear enough description for most people to grasp and make
real. A shared vision will only be sustained if you make it clear for everyone who
needs to understand it and continually reinforce it with enthusiasm and commitment.
In periods of radical change, only those organisations and people that think and
behave flexibly, are adaptable and more productive will excel. To be successful we
need to tap into our people’s ability to understand the problems they experience and
to allow them to innovate and develop solutions. Our current management struc-
tures, with their historic and cultural roots in command and control, will not serve
us well in the future.
In the old world managers did the thinking and staff did the doing. In the new
world leaders will need to develop a more enabling style, less inclined to want to
be on the pitch and more inclined to stand on the side cheering their side along.
Empowered people and teams will be essential in tomorrow’s police services.
But, and it’s a big but, many of our managers and staff do not have the tools and
the guiding principles to deliver what we will need. We have developed and invested
in talented professionals who understand the technical aspects of their work but who
may lack the necessary understanding of managing productivity. And increasing pro-
ductivity will only help us if we are rigorous about realising the gains – ‘cashing’ the
efficiency through redeployment of people to do more in areas of higher priority for
our communities and service users, or reducing the numbers of people we employ.
In the future we will need to shift people’s thinking from seeing just their part
of the organisation to seeing the whole. In a public sector environment social prob-
lems are rarely within the gift of one organisation to solve and therefore our chal-
lenge is to better understand the customer and see our organisations in the context
of their life events and journey.
Systems Thinking will be another driver of transformation in the future. The chal-
lenge with our current thinking and approach is that we often think that cause and effect
are close. We should try to stop short term thinking because it always costs more in the
long run. Part of the problem is the sort of performance feedback loops we create. The
performance management compliance frameworks, in which we have invested heavily,
could be of little use in the future because they are focused on outputs. We need to
understand the cause and effect relationships that link activities with outcomes and
remove any delays in reporting. We need performance management frameworks that are
decentralised so that our people have their finger on the pulse of what they do locally.
10 The Practitioner View 155
The best organisations understand this. In one global technology company the
business analysts have developed a system model that shows, amongst other things,
the statistical relationship between staff satisfaction, operational productivity and
the resulting customer satisfaction. Business intelligence and knowledge manage-
ment of this kind should become a core competence.
10.2 Leadership During Service Transformation2
Whenever an organisation embarks on a fundamental redesign of its services, the

role of leadership plays a significant part in the successful implementation, as it will
inevitably involve a degree of transformation. If you are introducing new ways of
working or principles such as Lean it will usually challenge existing management
styles, culture and performance management as well as requiring different relation-
ships between suppliers, customers, management and staff.
Many organisations overlook this and embark on a programme that is flawed
from the beginning. The Executive Board of the organisation often appoint some-
one to ‘Lead’ the programme and then try to manage the transformation from the
comfort of their office. In doing so they underestimate the size of the challenge and
absolve themselves of their responsibility in making the change happen.
The challenge is so big that it’s beyond what the leaders can change on their
own. Everyone involved needs to understand the reason for the change, the impact
on them and their role in making it a success. Approaches such as Lean involve a
bottom up approach to redesign, based on direction and support from above. In a
growing market, where the improved efficiency is redirected to improved quality or
capacity, this virtuous circle is easy to sell to the staff involved. They can see the
benefits of improved customer service through better use of resources.
In the current environment getting buy in to the transformation is particularly
difficult. Both for the public and private sector, improved efficiency is inextricably
linked to the need to reduce cost and in service industries this will mean jobs. The
staff involved need a compelling reason to contribute to a bottom up approach of
service redesign that puts themselves or colleagues at risk.
Although not an exhaustive list, I have set out below some common issues that
can have a significant impact on successful transformation.
10.2.1 Provide the Vision
I believe the role of the Leader is to provide a vision for the organisation that sets
out what it is trying to achieve, why it is necessary, what the journey will be like,
how the organisation will change and what the impact is likely to be. The vision
Bestwick
2
156 I. Smart et al.
provides the route map and reassurance for people and allows them to see their role.
If there is likely to be an impact on people’s jobs it should also set out how the
oranisation will support those involved. As it says in a certain book ‘Without a
vision the people will perish’ (Proverb s 29 v 8).
10.2.2 Make Sure You Are Visible
It is often said that people judge their leaders commitment to change 10% by what
they say and 90% by what they do. The role of Leader is to inspire and empower
and in doing so they release talent from those around them. This cannot be done
from behind a desk and so they should commit the time to be involved, to com-
municate the vision and reinforce the change by demonstrating the right behav-
iours. Tim Leahy of Tesco understands this all too well:
Leahy makes all his senior staff do it. Last year, 1,000 store managers worked in other stores
and 1,000 staff from head office did the same … Leahy takes trading places to a different
level. Each week he swoops on Tesco stores, wandering around, talking to staff and custom-
ers. ‘I don’t go to check on things. I talk to people – I can smell how things are’ he says.
10.2.3 Focus on the Priorities
I often see organisations embark on transformation without weeding out some of

the existing projects, activities and service responsibilities. It is an ideal time to take
stock and weed out those activities or projects that do not contribute to the vision
and as such will divert valuable resources.
If change to the culture is required then you need to understand how the existing
structure and systems reinforce it. In most organisations Budget = Power and if you
start to apply systems thinking to the way services are provided then many budget
holders will feel their power base is threatened. The existing performance manage-
ment system, including how people are rewarded, will also need to be aligned to
reinforce the right behaviours.
10.2.4 Communicate
It is essential to communicate all the time so that you maintain a shared vision of
the future; one that will sustain the organisation through the tough decisions that
will need to be taken. There is too much reliance on passive communication such
as Newsletters, email and intranet. These can only support face to face communication
that allows discussion and feedback. Although this requires a significant investment
of time, without it the message will not be heard.
Communications is often seen as a separate activity and a plan is duly drawn up.
It should be seen very much as part of the day job and included in every interaction.
In this way you begin to live and breathe the message and it becomes part of the
actions by which your people judge your commitment to the transformation.
10.2.5 Empower
An easy thing to say, but more difficult to realise. Especially in an organisation that
is used to the old fashioned command structure. One where managers think it is
their responsibility to come up with the ideas and then tell people what to do;where
those managers will feel exposed and threatened if they allow others not only to
provide solutions but also have full ownership of implementation.
Creating an empowered workforce is a two way street. It requires managers and
leaders who are willing to allow and nurture it and people who are willing to try
and exercise their freedoms. The managers must be prepared to give people the
space to make mistakes and, in a risk adverse culture, do not themselves revert to
type and impatiently interfere. That is why the performance management and
reward systems are designed to encourage the new culture and behaviours associ-
ated with it.
10.3 The Essential Tools for Transformation3
The current drivers in public spending all relate to Value for Money. The Building
Schools for the Future Programme, Public Housing and Highway Maintenance are
all affected by the drive to reduce cost at the same time as maintaining quality and
improving customer satisfaction. This means using less resource and money to
achieve more and it can only be achieved through an integrated programme of con-
tinuous improvement.
The Lean Sigma approach is a development of tried and tested methodologies
from other sectors and provides a structured approach to an ongoing programme of
change. It is a new concept to construction and it has taken some years for CWC to
integrate these processes with the principles of Open Book Cost Management so
that savings based on real costs can be identified. Quality management theory has
existed in one form or another for a century (see Fig. 10.1). Historically the
Japanese led the world in process improvement and ‘Lean’ manufacturing has led
to principles that are employed throughout the world today.
The construction industry has only really embraced quality theory in the last
generation and the drive to change, pioneered by Sir Michael Latham, led to the
establishment of CWC as a leading organisation in construction industry thinking.
Jarrett
3
158 I. Smart et al.
Fig. 10.1 The progression of quality
Bringing together leading academics and process improvement experts from the
retail and manufacturing sector with a team of senior construction professionals has
enabled CWC to create a unique model based on the tried and tested theories of
‘Lean’ and ‘Six Sigma’ but with the key added elements of cost management and
involving people in change.
The methodology is straightforward and involves working with a core team
through a series of logical stages. By working collaboratively with Client staff there
is a natural transfer of knowledge and Clients’ own staff will develop skills that may
ultimately lead to formal qualifications; this can be a great incentive for participants.
A lot of hard work and commitment is needed to make sure that the right things
are being measured and analysed at the outset so that when improvements are made
through a wide range of techniques the outcomes can clearly be seen.
After a programme of several months a savings register identifies where and
how processes have improved and shows their value. Ultimately the development
of in-house capability and the continued commitment of staff makes the process
sustainable so that public services continue to improve.
10.4 Engaging Teams for a Transition4
My perspective stem from the experience I have gained over 15 years of working with
teams at all levels of a business and throughout the value chain when carrying out
improvement activities ranging from redesign of the extended value stream through
to ‘local’ process improvement. This has been across the range of business sectors.
O’Conner
4
First thing to say is that there is ‘more than one way to skin a cat’. In other
words, one approach doesn’t fit all situations. Whilst there are many methodologies
and structured approaches that can be followed, and in fact I give an overview the
basic PDCA structure below, it must be realised that a key success factor for sus-
tainable improvement, is how well the people in and around a process or system,
are engaged in, and buy into the process of change. People are different and moti-
vated by different things. When leading an improvement or transition activity you
have to be prepared to flex your approach. Being too rigid in approach and not flex-
ing approach to accommodate the softer people and psychological aspects of
change, can often lead to a situation of disengagement.
My comments therefore centre on the key factors related to ‘engaging teams for
a transition’, and apply to teams engaged in change at any level of an organisation
or position within the value chain.
The following points are important factors to consider:
10.4.1 Team Composition
It is important to involve staff from the process which is the focus of the improve-
ment activity, as well as representatives from other processes or functions which are
either a supplier to, or a customer of the process. A multi-discipline team (and
multi-organisation if considering a supply chain improvement activity or extended
value stream transformation), should be established, as this will enable any
improvement or transition activity to be considered from multiple perspectives.
Team organisation needs to be considered. Roles and responsibilities within a
team must be clearly defined. Typically a team lead or ‘champion’ will help plan,
co-ordinate, facilitate and manage an improvement team. If team roles are not clear
and/or the team is not effectively led, then engagement in improvement activities
may faulter.
10.4.2 Clarity of Purpose
The need for change must be clearly defined. The transition or improvement activ-
ity may be part of an overall transformation programme where the organisation has
defined a vision for the future, and/or it may be in response to a failure in the pro-
cess, poor performance or changing market conditions that has created a ‘burning
platform’. Whichever, it is important to clarify the purpose of the transition – why
is it necessary, how does it fit into the overall strategy for the business, what are the
objectives and expected outcomes, how will those people involved be supported in
making the change.
The use of a ‘Project Charter’ that clearly defines objectives, success criteria,
time scales, etc and which the team sign-up to deliver, can help.
160 I. Smart et al.
10.4.3 Creating the Environment for Change
The team has to feel as though their efforts in the improvement activity will be
worthwhile, and that they have strong backing and support from senior manage-
ment. This should not only be verbal endorsement, but ideally senior managers
should be actively involved in the improvement activity. Where this is not possible,
senior managers should help create the environment for effective change, and this
includes providing the headroom for staff to be involved, empowering staff, putting
in place the required support processes, and dealing with any ‘barriers to success’.
Additionally, the team must possess the capability and capacity in the appropri-
ate tools and techniques for carrying out an improvement or transition activity.
Establishing a ‘common approach’ to improvement within the organisation will
help engagement. Proven success and familiarity of transition processes used across
the organisation will help team members accept and align to the process of
change.
10.4.4 It’s About the Process Not the People
Often poor or sub-optimal performance occurs because all of the processes within
the overall system are not well designed, integrated or synchronised. Generally
most people do not go to work to do a bad job. In fact many people will try to find
the most efficient way for them to carry-out their role and related tasks. This is an
important point to stress when engaging a team in an improvement activity, and is
of particular relevance when it is necessary to get a quantifiable measure of process
performance or where productivity appears to be an issue. Here, the time to com-
plete a process would enable the level of process waste to be established and the
level of potential improvement to be estimated. This should be sold as a study of
the process, and not a time study. Work with the team, getting them to accept that
by quantifying wastes, issues, etc, this will provide the ‘ammunition’ for change
and help them prioritise where to improve first.
10.4.5 Create the Desire for Change
Through all stages of a transition it is important to ‘enthuse’ the team. Whilst a

‘burning platform’ may be sufficient to motivate some team members, it is also
important to put the need to improve into the context of the processes and tasks that
the team carry-out. The use of relevant improvement examples and case studies will
show to team members that the process which they will go through will produce
improved performance and provide benefits for all concerned. Get endorsements
from colleagues or peers, better still get colleagues who have already been through
a similar transition activity to tell their story.
Try to make the transition relevant to the team members, and use ‘language’
which they understand.
At the start of a transition activity, work with the team to identify the how well
the current system is working. Ask them who is their Customer, what does the
Customer ‘value’ and what are the things within the system that prevent ‘value’
being delivered right first time in the most effective and efficient manner. Identify
what are the things or issues which cause them to be inefficient. Aim to quantify
these ‘issues’. Ask the team at this early stage what success might look like.
Explain that by being involved in the transition activity, that this is their opportunity
to deal with the things which cause them to be inefficient. Ask the team, if it was
your business, what would change or improve? What would success look like?
People become enthusiastic through success. So, aim to implement some ‘quick
wins’ and where possible, improvements that resolve some of the issues or ineffi-
ciencies whish team members experience themselves. This may be as simple as
providing the ‘right tool for the job’. By implementing a number of small but help-
ful improvements, the team should start to see that they can make a difference.
It is also important to make improvement ‘fun’ and make sure that any success
is celebrated.
10.4.6 Applying a Structured Approach
Make sure that there is a clear and structured approach, which actively engages
team members through all stages of the transition activity. Many different
methodologies exist. A common framework for achieving sustainable improvement,
and one which teams can readily follow, is the Plan-Do-Check-Act (PDCA)
improvement cycle. Work with the team through each stage, getting members to
collate and analyse data, identify and quantify issues and opportunities, prioritise
improvements (quick wins, short, medium, long term – process improvements
through to system re-engineering).
Team members should be involved in the implementation of any improvements.
The ‘new’ process needs to be ‘hand-held’ and any refinements made if required.
Once the new process has been proven, team members should help create standard
operating procedures to ‘standardise’ the process. The aim is to create ownership.
Once in place, another useful way to engage team members is to establish an audit
process, where members take it in turns to check whether the ‘new’ process is
working to the defined standard.
Through all stages, work with the team documenting outputs on flip chart to
grow the transition story. This will help team members buy into and own any
improvements. By quantifying improvements team members will be able to see the
fruits of their efforts. Recognition of success by senior management is an important
part of the approach. Not only because of the motivational impact this will have for
team members, but also because the team need to see that any improvements will
be supported through to successful.
162 I. Smart et al.
10.5 Project Management and Delivery for Service Industries5
Any project, the results of which are designed to provide either goods or services,
needs some considerable thought and planning before starting the work of design-
ing, implementing and providing an end product. It could be argued that this think-
ing and planning forms part of the project, though both political and cultural
reality often considers that the project does not actually start until the ‘project
launch’ gate is passed because from that point, what might be considered to be
serious activity can begin. So there are five elements that must be understood,
‘sold’ to and agreed by all project team and stakeholders as part of the start up
process. These are:
• Agreed specification of requirements (subject to planning) – objectives/scope/
deliverables
• Definition of method of delivery (which design will we pursue from a list of
alternatives)
• Business process – for project monitoring and requirements delivery
• Organisation – program/portfolio/project/communications/ownership &
responsibility
• Identification and planning of constraints – time/cost/resources
• Risks – to time/cost/resources/success of the project
10.5.1 Specifying Requirements
The importance of a clear specification of requirements can’t be emphasised

enough. It is the ‘womb’ from which all other aspects of the project including
organisation, planning and implementation are ‘birthed’. So the following aspects
of those requirements need to be considered:
• Objectives: what are we actually trying to achieve – and in a service industry this
needs to be quantified in specific terms of:
• Level/quality of service
• Focus group/target for provision of service
• A definition of value – any expected return on investment/financial/environ-
mental/cultural/social – e.g. if a better health service does not ultimately yield
tangibly better health then there is no ROI and therefore no value
• Scope: what are the boundaries/extent of this service?
• How broad is this scope e.g. geographically, culturally, type & severity of the
need being served?
Gurnett
5
• Who, what and how will it serve?

• Who, what and how will it not serve?
• How do the ‘boundaries’ affect other interfacing parts of the organisation?
• Are there phases which embrace parts of the scope and not others?
• Is it part of the project to ensure sustainability?
• Deliverables: what are the required outputs for project completion? What will be
the actual outcome/tangible provisions of this service, and what elements con-
stitute its completeness?
• Risks and assumptions: what are the known risks at this time? How might they be
mitigated or managed? Are they worthwhile taking or should they be avoided?
• Constraints: targets & CSFs for ROI, KPIs, time, cost, quality.
10.5.2 Definition of Design and Delivery Method
How will we provide this service to meet the specification and standards required?
This definition will emerge from a well constructed list of alternatives based upon
research, feasibility and conceptual methodology. In principle, the greater the num-
ber of alternatives that can be identified, the greater is the likelihood of reaching an
optimum solution.
Alternatives should be weighed against success criteria, advantages, risks and
constraints and the best selected on the basis of value, suitability, flexibility, and
capability.
10.5.3 Business Process
How will we actually do this? What will be the checks and balances that ensure
consistency, quality, standards, safety, reliability, legality? How will we monitor
progress to time, cost and quality and drive the project forward? What will the
criteria be for passing the project to the next stage/phase and release of further funding
and resources? It is important to optimise/trade-off elements of the process to:
• Meet agreed metrics for these elements
• Avoid driving time and cost into the project unnecessarily
10.5.4 Organisation
How the project is organised should be dictated by the specification together with
the availability of key stakeholders and resources to plan and implement the project.
164 I. Smart et al.
Firstly, is this in fact a portfolio or a program of projects contributing to a single

business/service goal? In which case, one or more additional layers of authority
may be needed above the several projects, to ensure adherence to overall business
goals, process, and cross project communication.
How else will the project be structured to ensure best communication and under-
standing of ownership, authority, accountability, availability and task performance
demarcation? Will there be a steering committee of stakeholders? How much will
the actual ‘customer’ be part of the organisation/communication & feedback?
10.5.5 Constraints Planning
Elements of the planning of time, costs and resources should be considered before,
during and following completion of the project specification and organisation. During
the planning process, both specification and organisation are subject to change. The
planning process will reveal areas of high and low, desirable and undesirable time,
cost and resource commitment elements which will inevitably require trade-off.
Planning (initially of timescale) should be done:
• Following best practice project planning processes
• In as much detail as possible
• As early as possible
• With all parties present, including (where appropriate) all stakeholders and
external agencies
• Using proprietary software
Constraints planning is an iterative process. It will not cease until the project ends,
the specification and organisation also need to be constantly ‘available’ for formal
adjustment as the project proceeds.
10.5.6 Risk Identification and Planning
Some sponsors and stakeholders can choose to be unsympathetic to the likelihood

and level of risks and can exhibit cognitive dissonance and denial when it comes to
any kind of hazard planning for any project. This is in itself poses a huge risk.
Threats to the success of the project need to be identified and declared as early as
possible in the project lifecycle, further risks should receive similar treatment as
they continue to emerge throughout the project. The following process of consider-
ations needs to carried out for each risk:
• Choice of strategy – manage/mitigate/move/ignore
• Probability of occurrence – How likely/how quickly
• Impact – on time/cost/quality/resources
• Capability – competence/time/budget/materials
• Plan of action – what/how/who/by when
• Monitoring – plan progress/results
• Communication – all of the above – to whom?
One additional word of warning is important here. In addition to risks which are
largely quantifiable and can be planned for, there are also uncertainties. Most of
these we cannot plan for though we may know that they may happen, but still there
are some things that will occur completely unexpectedly.
… there are known knowns; there are things we know we know. We also know there are
known unknowns; that is to say we know there are some things we do not know. But there
are also unknown unknowns—the ones we don’t know we don’t know.
Donald Rumsfeld
10.5.7 Action and Implementation
Throughout the project lifecycle we are ‘managing activities and risk within a pro-
cess’. The business or project process, together with events both predicted and
unforeseen, will therefore largely dictate how the project progresses. Despite due
diligence employed in arriving at an agreed project specification and project plan,
there is always an element of unknown factors. That is why it is essential to:
• Maintain planning and updating routines to time and cost– especially since we
can only plan what we know in detail at any given stage of the project
• Continuously review requirements specification, scope and deliverables in the
light of changes occurring
• Identify, analyse, apply strategies and action plans to all emerging risks
• Maintain good (defined) levels of communication across all elements of the
project organisation
Potentially a huge part of the project lifecycle is taken up with testing products
where often stringent, multi-faceted tests are required to get a product to its desired
standards of functionality, durability, reliability, safety, legal etc. These tests and the
subsequent re-working/redesigning of goods are almost always conducted prior to
launch, before any customer has had sight or use of the product.
Once the product is launched, any ‘failings’ or dissatisfaction with the product can
actually provide opportunities for new project s. These will launch enhancements,
‘new’ models and releases of the product ultimately generating further revenue.
For both products and services the real test of how well they perform are almost
always subject to the customer, environment, policies, operation and management of the
organisations that are responsible for operating them. Some of these aspects are unpre-
dictable, but in most cases they can be simulated prior to a product launch. Not so for
many services. They can really only be tested once the service is being used, since they
are reliant on one or more of the following unpredictable aspects which in most cases
cannot be simulated well enough prior to some significant use or abuse of the service:
166 I. Smart et al.
• Operator mood, behaviour, level of commitment

• Interpretation of how ‘good’ the service should be
• Customer demographics: geography, culture, ethnicity, background etc.
• Customer reaction
• Pressure of over demand
• Choice to not implement all of the service elements
• Degradation over time of service in one or more aspects or parts
It would be wise therefore to introduce a strictly planned and monitored Change
Management phase to aid implementation and roll-out. So we might need to con-
sider (preferably at the beginning of the project), is this part of this project, or is it
part of the operational requirement for introducing a new/improved service? This is
one reason why the project definition is so important. Was ensuring and proving
that the system would operate under different, varying/adverse conditions part of
this project brief or was it simply to design and deliver a service? What does deliver
mean here?
Projects are not generally remembered in the light of how they conformed to
time and cost, but rather:
• How they were implemented
• How they were received by the user organisation
• How much change was imposed and how quickly
• How much the user organisation was involved in planning
• How much support was available from and for those implementing
• What was/is the customer perception of the service?
• How does it perform under pressure?
Poor implementation of e.g. a manufactured product can be hidden behind that
product, since if it is good enough it will be well received. A service industry does
not usually have that luxury. The psychological and cultural effects of a badly
implemented service project on a user organisation would automatically reflect on
the service provided and on the customer receiving it.
Chapter 11
Are You Being Served?
Mairi Macintyre, Glenn Parry, and Jannis Angelis
This book came about as the growing community of practitioners and academics
were progressing the area of services to new levels of understanding. Servitization
was first introduced as the trend in which corporations offer fuller market packages
or bundles of customer-focused combinations of goods, services, support, self-
service and knowledge. As production becomes increasingly commoditised in the
eyes of the end user, companies have pursued value downstream through greater
customer involvement and interaction. This change in business focus, and indeed
strategy, has presented new challenges and opportunities to all involved with it.
Throughout this book various elements of design and delivery elements of effec-
tive services have been explored and discussed in depth. We started by considering
what was really at the heart of effective services, responses one can elicit from a
customer or user of the service. We then traced the history and development of the
service industry and the importance it has played in generating economic and social
value. For the latter, the science underpinning service offerings is one that needs to
consider the sociological context.
IBM was presented as a case demonstrating how enterprises can successfully
reinvent and transform themselves to meet the ever changing needs of its custom-
ers. The case shows how business offerings can change from a focus on products to
services. It also illustrates that change does not happen easily or overnight. It takes
time for the appropriate processes to develop and take root.
Consideration is also given to the lean principles and techniques initially origi-
nating from Toyota. Lean service is a growing area of both research and application,
covering relevant principles and techniques, and their implementation in a new
contextual paradigm. The chapter explores how principles and techniques that have
been developed for the efficient and effective manufacture of high quality vehicles
may be adapted to fit within a service context.
M. Macintyre (*)
WMG, University of Warwick, CV4 7AL, UK
e-mail: m.macintyre@warwick.ac.uk
168 M. Macintyre et al.
The ICI case study presents the value proposition of an enterprise, covering how
it is designed, managed and presented to the market. The chapter provides an
example of a company undertaking the transitional journey from product to service
provision. From this servitization a range of tools are derived which may be useful
in such business development.
We then turned to the emerging discussion of experience or output oriented
value propositions and the relationship between the two areas. This is an issue that
can only grow in its importance as strengthened competition and budget constraints
demand an ever increasingly sophisticated understanding of customer and end user
value.
Case studies exploring the complexity of deploying services were considered
next. Service offerings frequently require the provider to go out the customer. Three
cases were presented to illustrate the challenges faced by such value propositions.
The chapter employs the cases to explore in further the complex theoretical and
practical aspects of service delivery.
As firms specialise and focus on their core competences, they must collaborate
with partner firms to be able to provide product and service offerings. This is an
important element, and to this effect the added complexity of multi-organisational
service delivery was explored. This raises a particular challenge for managers, as
they must take a holistic approach. They must see beyond their individual business
units and company structures and manage the whole system as an integrated enter-
prise. It is this enterprise that in the end delivers the service experience.
The following chapter considered the issue of service costing and pricing. The
main challenges for modelling through life costs were presented and an overview
of the current approaches described. We believe that the understanding of service
costs is a challenging but critical issue for businesses, and one that will receive
significant attention over the coming years.
Throughout the book we have sought to provide a strong business focus, remain-
ing pragmatic in the presentation of challenges and issues faced by energetic man-
agers seeking to add value to their existing product offerings. We have presented
solutions to challenges faced by those currently delivering services which hopefully
may prove insightful. As an aid we have incorporated the experiences of a number
of leading practitioners, which we hope generates further understanding of the
service challenge – the illusive ‘how to’ – for public as well as private sector
institutions.
So what does the future hold for services?
Service industries dominate the world economy today in terms of the revenue.
However, most of the insights and best practice examples presented in the business
and management domain, both academic and practical, have been drawn from the
manufacturing sector. Currently many organisations, including successful large
manufacturers, are making the transition towards becoming service providers – the
process described earlier as servitization. This may be considered both as a system-
atic plan designed to achieve a particular long-term strategy as well as a trend.
11 Are You Being Served? 169
Will this trend continue? What are the indicators of a successful transition?
Where does the value lie? How transferable are manufacturing concepts in realising
value in the service context?
We hope that this book provides a base camp for those interested in and keen to
actively address these challenges. We also aim to help stimulate thoughts and
reflections which will enable us to learn more about service in practice and subse-
quently develop new supporting theory, helping those engaged in the development
of leading service businesses in the years to come. We hope that the development of
understanding may enhance the value we all derive from our service experience.

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Bill Hefley and Wendy Murphy (Eds.

Service Science: Research and Innovations

For other titles published in this series, go to

Service Design and Delivery

ISBN 978-1-4419-8320-6 e-ISBN 978-1-4419-8321-3

Library of Congress Control Number: 2011924475

© Springer Science+Business Media, LLC 2011

Printed on acid-free paper

Springer is part of Springer Science+Business Media (www.springer.com)

But why should you be interested?

1 Understanding Services and the Customer Response............................ 1

2 Goods, Products and Services................................................................... 19

3 The IBM Story............................................................................................ 31

4 Rethinking Lean Service........................................................................... 41

5 Designing Competitive Service Models.................................................... 61

6 Shifting from Production to Service

7 Complex Deployed Responsive Service.................................................... 95

8 A Multi-organisational Approach to Service Delivery........................... 119

9 Through Life Costing................................................................................ 135

10 The Practitioner View.............................................................................. 153

11 Are You Being Served?............................................................................ 167

L.E.K. Consulting: Helping business leaders make informed decisions. L.E.K. is a

Managers and professional project managers typically draft implementation plans

BAE Systems; providing complex engineering service. We have been challenged

Value drives everything we do so let’s look at the dimensions of value. Value is

Jagdeesh S. Dhaliwal, Mairi Macintyre, and Glenn Parry

1.1 Products and Services

So why have you picked up this book?

Introductory textbooks in Economics focus on the idea of tangibility: Products are

Fig. 1.1 A productive process

Fig. 1.2 A productive process for a service

1.2 Scripted vs Customisable Customer Experiences

Fig. 1.3 The continuum of service outputs

1.3 Why Does This Matter?

1.4 How Scripted? How Customisable?

Quality Being RIGHT

Speed Being FAST

Dependability Being ON TIME

Flexibility Being ABLE TO CHANGE

Cost Being PRODUCTIVE

© Nigel Slack and Michael Lewis 2003

Services have to make a trade-off between these different sources of competitive

‘Fit’ is concerned with ensuring comprehensiveness,

Cost Critical Critical

Supply Process Development

© Nigel Slack and Michael Lewis 2003

First/Business class Economy class

Customers Wealthy people, business Travellers (friends and

Main competitive Customization, extra service, Price, acceptable service

Performance Quality (specification and Cost, Quality (conformance)

Different product groups require different performance objectives

It is important to appreciate, however, that high quality-high cost services might

1.5 Customer Experience: It’s All About Eliciting Emotions

1.5.1 What Is the Ultimate Goal of Any Service or Product?

1.5.2 But What Exactly Is a ‘Favourable Customer Experience’?

Let’s consider some common service experiences.

1.6 The Importance of Emotions to Service

Our increasing understanding of the importance of emotions has turned many of

A glance at Fig. 1.4 demonstrates this concept anatomically: In essence, the human

Fig. 1.4 The human brain

1.1 Products and Services

1.2 Scripted vs Customisable Customer Experiences

1.3 Why Does This Matter?

1.4 How Scripted? How Customisable?

1.5 Customer Experience: It’s All About Eliciting Emotions

1.5.1 What Is the Ultimate Goal of Any Service or Product?

1.5.2 But What Exactly Is a ‘Favourable Customer Experience’?

1.6 The Importance of Emotions to Service

1.7 Service Design and Delivery: Putting It All Together

2.4 Intangible, Heterogeneous, Inseparable & Perishable

2.8 A Change of Condition

2.9 Goods and Services, or Is It All Service?

2.10 What Are Products/Goods and Services?

3.1 The IBM Story Until 1990

3.2 A Crisis of Confidence 1990–1993

3.3 Recovery and Restatement 1994–2001

3.4 A New Strategy?

3.5 Moving into the Twenty-First Century

3.6 Looking to the Future

4.2 From Manufacturing to Operations Management

4.3 Industrialised, Standardised Service

4.4 The ‘Core Paradigm’ of Current Service Management

4.5 The Emergence and Codification of ‘Lean’

4.6 But Is Service the Same as Manufacturing?

4.7 ‘Lean’ Arrives in Service Organisations

4.8 Back to the Beginning