Service Design and Delivery

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”
a­ pocalyptic 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 (*) 31
Director of Operations, British Institute of Technology & E-commerce, London, UK
e-mail: [email protected]

M. Macintyre et al. (eds.), Service Design and Delivery, Service Science: Research
and Innovations in the Service Economy, DOI 10.1007/978-1-4419-8321-3_3,
© Springer Science+Business Media, LLC 2011

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
$90 ($billions) $8 ($billions)

$80 $6
$70
$60 $4
$50
$40 $2
$30
$20 $0
$10
`70 `72 `74 `76 `78 `80 `82 `84 `86 `88 `90
$0

`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

90 Revenue `93 9 Net Income
80 ($billions) 6 ($billions)
70 3
60 `91 `92 0 `91 `92 `93
50 -3
40 -6
30 -9
20
10 `90

0
`90

Fig. 3.2  Revenue and net income of IBM Corporation 1990–1993

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)

$90 $9
$80
$70 $6
$60
$50 $3
$40
$30 $0
$20
$10 –$3

$0 –$6
`70 `72 `74 `76 `78 `80 `82 `84 `86 `88 `90 `92 `94 `96 `98 `00
–$9
`70 `72 `74 `76 `78 `80 `82 `84 `86 `88 `90 `92 `94 `96 `98 `00

Fig. 3.3  Revenue and net income of IBM Corporation 1970–2001

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.

CIOs 1992 2003
Host Data Centers 128 1
Web Hosting Centers 155 10
Network 80 7
Applications 31 1
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

80 10
8

60
6

40 4

20 2

0 '00 '02 '04 '06 '08 0 '00 '02 '04 '06 '08

Fig. 3.5  Revenue and net income of IBM Corporation 2000–2008

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 (*) 41
Visiting Professor at both the Universities of Cardiff and Derby
and the Managing Director of Vanguard
e-mail: [email protected]

M. Macintyre et al. (eds.), Service Design and Delivery, Service Science: Research
and Innovations in the Service Economy, DOI 10.1007/978-1-4419-8321-3_4,
© Springer Science+Business Media, LLC 2011

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

1 For example: financial services, telecommunications, IT services, police, local authority, govern-
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’

Inspect Work to standard
time

Key measures: Activity and cost
Fig. 4.1  The industrial archetype for factory service management

4  Rethinking Lean Service 45

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

2 The first published use of the term ‘lean production’ was by John Krafcik (1988) a researcher
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)

4  Rethinking Lean Service 47

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

4  Rethinking Lean Service 49

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)

3 See http://www.timesonline.co.uk/tol/news/uk/article1289640.ece for the coverage in the Times
on January 5th 2007.

50 J. Seddon et al.

Suppliers of Design and Consumer
redesign research

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.

4 While Deming was not the first or only ‘guru’ associated with the Japanese miracle, he became
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.

4  Rethinking Lean Service 51
Two types of demand on service organisations:
Fig. 4.3  Understanding
demand: an economic lever

Failure Service
Value organisation

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
s­ ervice 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.

4  Rethinking Lean Service 53

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

Failure Activity Management

Functional specialisation
Standardisation

Fig.  4.4  Understanding the
causes of failure demand

4  Rethinking Lean Service 55

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,
m­ anagement’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)

4  Rethinking Lean Service 57

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

7 A method for studying transactional service organisations as systems is provided in Seddon 2003
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
c­ entury 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 b­ usiness as changes in technology reduced the complexity that had
p­ rotected the business from serious competition for over a century.

V. Martinez (*)
Principal Research Fellow, Centre for Business Performance, Cranfield School of Management

e-mail: [email protected]

M. Macintyre et al. (eds.), Service Design and Delivery, Service Science: Research 61
and Innovations in the Service Economy, DOI 10.1007/978-1-4419-8321-3_5,
© Springer Science+Business Media, LLC 2011

62 V. Martinez and T. Turner

initiator initiator initiator
quarry surface

primers

ab single
primer

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
s­ ausage-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 e­ xplosives
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
b­ usinesses 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.

64 V. Martinez and T. Turner

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
e­ xplosives. ICI was already employing mining engineers who provided a technical
s­ ervice 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
e­ xplosives 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
p­ erhaps 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.

5  Designing Competitive Service Models 65

Mobile FlexibleHose
Manufacturing QUARRYSURFACE
Unit

boreholes

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.

66 V. Martinez and T. Turner

Selling Selling Selling Selling Customised
Products Products Products Blast Services

“Nitro - “Slurry” plus a “Delivering mounds
glycerine Service 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
c­ ompetencies 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

5  Designing Competitive Service Models 67

… 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

68 HARD V. Martinez and T. Turner
Innovators SOFT
Product Brand Managers
Leadership
Process Simplifiers
Operational Price Minimisers
Excellence

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
p­ roduct-service offering. They strive on the creation of a distinctive pre-, during
and post- customer experiences. These organisations propose and deliver status,

5  Designing Competitive Service Models 69

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
h­ assle  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.

Table 5.1  Value propositions – what the customers get and what the companies need to do (Martinez 2003) 70 V. Martinez and T. Turner

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
Process Simplifiers and services at lowest price quality levels in the most cost- Strong order fulfilment sustained by
Technological Integrators possible. They get security on effective way and waste free. efficient and effective production
the product. processes within tight quality
Building streamlined processes processes controls.
Convenience and availability to make life simple and
of the products. Hazard free uncomplicated for customers Strong availability. Superb order
experience. in a novel and profitable way. fulfilment–distribution by
conventional and un-conventional
Tailored products and services. Tailor specific and continuous resources (networking, IT, etc.).
They buy total solutions. solutions for carefully
selected customers on Strong relationship with customer.
the basis of permanent Knowledge of customers’
relationships. businesses, products and
operations. Capacity to configure
Socialisers Flexible services and inter- Build confidence and trustiness any specific need. Able to adopt
personal relationship because on the customers. the customer’s strategy.
they trust in the company.
Sensitive fulfilment of customers’
needs supported by careful
deliver, reliability, and honesty.
Excellent personal service.

5  Designing Competitive Service Models 71

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 V. Martinez and T. Turner

Offerings Nitro-glycerine cartridges …. Slurry 1970s Emulsion 1980s Blasting service 1990s
Value proposition 1960s Technological Integrator: In-situ
Value driver Price Minimiser: Process Simplifier: Product
Key capabilities Innovator: Product excellence Manufacturing delivery total service solution
excellence
Value offerings Product novelty: Exploitation Completed tailored & sustainable
of the nitro-glycerine Manufacturing Effective product & its services solutions: Value-in-
technology use: tailored service by the
process: New production delivery: Direct pumping mobile units’ experts. Killed
package & storage
process: mixing non- bulk explosive into holes
Ardeer operating service business
explosives with water More effective blasts

Leadership in blasting Operational excellence. Effective product. Formulation New service skills: simulation and
practices-quarrying Depots with large created for smaller risk analysis, scenario planning
and mining storage to satisfy diameters of holes ERP, rock laser profile, rock size
demands located near therefore cheap ingredients distribution, blasting services &
Highly specialised & unique to customers. Lean customer care training
Factory operations production supported
by MRP II, ISO 9000 Tailored solutions leading into
2–3 years partnerships with
“Product excellence”– expensive “Commoditized “Blast effectiveness” – Customers customers
did not need to manage their
and highly specialised products”– cheaper own explosive storage Customers’ hassle free security
magazines legislation and operation costs
products plus products

mining guidance Improve safety

Barriers to entry High. Remote and expensive Low. Manuf plants not Medium technology barrier. If Highly specialised and multi- 5  Designing Competitive Service Models
manuf. Facilities of nitro- longer required, set blast was not completed fast disciplinary technology
Risks 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
Operations’ quarries inefficient blast
processes Manufacturing, transportation Operations risks are reduced.
& storage of raw materials Price war competition. Raw material were easily stolen Build strong and long term
Service delivered (nitro-glycerine) and. Finished products for other purposes
cartridges transport customers’ relationships
Customization
Line- long & ineffective supply Line- short supply chain Line Project
Major challenge chain. High volume & stock
Operating costs Mining engineers assist Professional mining engineers Complete in-situ tailored services.
Mining engineers mainly sell customers to use the
the product product directly fill emulsion into the Designing team: simulating,

Mining engineers to help with Mining engineers holes to facilitate the blast Mining team: methods
the use of the product converted the nitro-
glycerine customers to distribute the blasting
Improve the nitro-glycerine use to slurry customers
effectively
High capital costs Slurry too cheap and very
Insurances of depots few law restriction – Blast service customisation to fit
to produce it with customers needs
production, transport
& handing Very Low Rain-water trapped into holes Updated and coordinated experts’
Government Licensing Transport, Depots with explosives, lead to skills
inefficient blasts
near to key Low- led good revenues
customers Low Mobile units: investment

Manufacturing, depots and and maintenance
packaging activities were
eliminated Customer care training
Units experts training: mining
Emulsion delivery
engineers, truck operators,
and quarry service team 73

(continued)

Table 5.2  (continued) 74 V. Martinez and T. Turner

Offerings Nitro-glycerine cartridges …. Slurry 1970s Emulsion 1980s Blasting service 1990s
Prices 1960s Very Low Low High. Payment based on rock

Market High Europe and Mainly UK UK weight per blast
Competition Medium
Global distribution High. It took over local Europe and Mainly UK
Close to inexistent in Europe UK distribution
(Slurry plants arose in Low
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-
based slurry” from non- problem “emulsion customer understanding total service- rock in the ground
explosive ingredients.
Expensive chemical explosive.” Now, rain-
plants not required. Skills
sets in operations had water no longer affects
changed
the effectiveness of

blasts. “integrated

P-S”

Terrorism steeling

material

5  Designing Competitive Service Models 75

HARD SOFT

Product Innovators Brand Managers
Leadership
ICI Explosives 60’s Process Simplifiers
Cartridges ICI Explosives 80’s

Operational Price Minimisers Emulsions
Excellence
ICI Explosives 70’s Socialisors
Slurry
-
Customer Technological Integrators
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.

76 V. Martinez and T. Turner

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.