Coevolving Innovations

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Science of service systems, service sector, service economy

Posted on May 06, 2008 by daviding

As Service Science, Management and Engineering (SSME) has been developing, I’ve noticed a refinement of language. Rather than just abbreviating the long clause to service science, I’m now careful to use the phrase of a science of service systems, following Spohrer, Maglio et. al (2007). There’s a clear definition of service system in the final April 2008 revision of the report by the University of Cambridge Institute for Manufacturing.

What is a service system?
A service system can be defined as a dynamic configuration of resources (people, technology, organisations and shared information) that creates and delivers value between the provider and the customer through service. In many cases, a service system is a complex system in that configurations of resources interact in a non-linear way. Primary interactions take place at the interface between the provider and the customer. However, with the advent of ICT, customer-to-customer and supplier-to-supplier interactions have also become prevalent. These complex interactions create a system whose behaviour is difficult to explain and predict. [p. 6]

I’ve been sorting through the significance of this service system orientation, and have reached the following personal points-of-view.

  • 1. The definition of a service system as a system is earnest
  • 2. A service system creating and delivering value emphasizes a value constellation perspective over a value chain perspective
  • 3. Research into service systems is muddled in the ideas of coproduction and (value) cocreation
  • 4. A service system creates value with an offering as a platform for co-production
  • 5. The constraints on service systems are changed with advances in technology
  • 6. The (new) service economy is not the same as the service sector

Each of these points-of-view require some elaboration. (If the content that follow isn’t detailed enough, there are footnotes, too!)

1. The definition of a service system as a system is earnest

Most people use the word “system” without thinking about what it. Since I’ve had a long involvement with the systems sciences. I need to be sure that the choice of word isn’t arbitrary. The background on SSME draws on systems engineering as a source, with Tien and Berg (2003).

[A] system [can be defined as] an assemblage of objects united by some form of regular interaction or interdependence … A system can be natural (e.g., lake) or built (e.g., government), physical (e.g., space shuttle) or conceptual (e.g., plan), closed (e.g., chemicals in a stationary, closed bottle) or open (e.g., tree), static (e.g., bridge) or dynamic (e.g., human). In regard to its elements, a system can be detailed in terms of its components, composed of people, processes and products; its attributes, composed of the input, process and output characteristics of each component; and its relationships, composed of interactions between components and characteristics. [pp. 23-24]

… thus, service systems engineering is “A multidiscipline that addresses a service system from a life-cycle, cybernetic and customer perspective”. In this regard, the underlying concepts of service systems engineering are the same as those identified in Table 8, with the added concept of services as defined and discussed in Section 2 (Services).1 [p. 26]

Since the article cites Ludwig von Bertalanffy and Norbert Wiener, it’s in the right ballpark for system scientists.

2. A service system creating and delivering value emphasizes a value constellation perspective over a value chain perspective

The definition of a service system as a “complex system” is a deep statement. The value chain perspective sees a series of handoffs from provider(s) to customer(s). Including customer-to-customer interactions and supplier-to-supplier interactions directly relates to the idea of value constellations, as described by Normann and Ramirez (1994).

From [the] value constellation perspective, value is co-produced by actors who interface with each other. They allocate the tasks involved in value creation among themselves and to others, in time and space, explicity or implicitly. This opens up many opportunities for defining relationships between actors and reassigning activities. If we look at a single relationship in a co-productive system (for example, that between customer and supplier) this view implies that the customer is not only a passive orderer / buyer / user of the offering, but also participates in many other ways of consuming it, for instance in its delivery. Etymologically, consumption means value creation, not value destruction; this sense of consumption is inherent in the “value constellation” point of view. Furthermore, as actors participate in ways that vary from one offering to the next, and from one customer / supplier relationship to the next, it is not possible to take given characteristics for granted: co-producers constantly reassess each other, and reallocate tasks according to their new values of the comparative advantage each other to have. [p. 54]

Co-production is further contrasted to value chain in Normann (2001).

What is new is not co-production, but the way it now expresses itself in terms of role patterns and modes of interactivity. The characteristics of today’s economy naturally reshape co-productive roles and patterms. The distinction between”producer” and “consumer”, or “provider” and “customer” is ever less clear as the business landscape takes more of a “service” mode. [p. 96]

In systems theory, coproduction (as in a value constellation) is contrasted to producer-product (as in a value chain). Coproduction is expressed as “the most critical concept” in Ackoff and Emery (1972, p. 23). It’s not sufficient for a business to just produce a product. A customer has to participate in the process, at least by receiving it. Metaphorically, a bus system can operate its routes without picking up any passengers, failing to serve its essential function. A taxi system can’t operate unless the passenger is a coproducer, giving the driver a destination. The make-and-sell model is contrasted with the sense-and-respond model by Haeckel (1999).

3. Research into service systems is muddled in the ideas of coproduction and (value) cocreation

There’s some confusion in language and definitions around coproduction and cocreation. Coproduction was introduced into the Service-Dominant Logic discussion as foundational premise 6 by Vargo & Lusch (1994).

FP6: The Customer Is Always a Coproducer
From the traditional, goods-based, manufacturing perspective, the producer and consumer are usually viewed as ideally separated in order to enable maximum manufacturing efficiency. However, if the normative goal of marketing is customer responsiveness, this manufacturing efficiency comes at the expense of marketing efficiency and effectiveness. From a service-centered view of marketing with a heavy focus on continuous processes, the consumer is always involved in the production of value. Even with tangible goods, production does not end with the manufacturing process; production is an intermediary process. As we have noted, goods are appliances that provide services for and in conjunction with the consumer. However, for these services to be delivered, the customer still must learn to use, maintain, repair, and adapt the appliance to his or her unique needs, usage situation, and behaviors. In summary, in using a product, the customer is continuing the marketing, consumption, and value-creation and delivery processes. [pp. 10-11]

At the same time, the phrase “cocreation of value” was coming into use. This sparked a request for response in Prahalad (1994).

The Cocreation of Value
[....] I want to congratulate the authors on challenging the dominant logic for marketing by suggesting that services ought to be at the core, and therefore consumers become coproducers. My concern is that V&L do not go far enough. [....]

What is meant by customers as coproducers? [...] Although work and risks increasingly are shared, the firm decides how it will engage the customer. It is this premise, a firm-centered perspective on how to engage the customer, that needs to be debated. [....]

The central ideas revolve around the individual consumer, the experience, the cocreation of value, the criticality of consumer communities, and the need for a network of firms. [....] We find that when we escape the firm and product-/service-centric view of value creation, which is the dominant logic for marketing and strategy (see Kotler 2002; Porter 1980), and move on to an experience-centric cocreation view, new and exciting opportunities unfold. [p. 23]

Unfortunately, the language on Service-Dominant Logic has shifted from coproduction to cocreation in Vargo & Lusch (2008).

Table 1. Service-dominant logic foundational premise modifications and additions (excerpt)

FPs Original foundational premise Modified/new foundational premise Comment/explanation
FP6 The customer is always a co-producer The customer is always a co-creator of value Implies value creation is interactional
FP10   Value is always uniquely and phenomenologically determined by the beneficiary Value is idiosyncratic, experiential, contextual, and meaning laden

[p. 7]

FP6: The customer is always a co-producer
[...] Clearly, S-D logic is primarily about value creation, rather than “production,” making units of output. The emphasis was intended to be on the collaborative nature of value creation, but that emphases could easily become lost in the connotations of “production.”[pp 7-8]

However, we believe that co-production, though distinct from (but nested within) co-creation of value, has a place in S-D logic. [...] In short, we argue that co-production is a component of co-creation of value and captures “participation in the development of the core offering itself” (p. 284), especially when goods are used in the value-creation process.

[...] Our argument is that value obtained in conjunction with market exchanges can not be created unilaterally but always involves a unique combination of resources and an idiosyncratic determination of value (also see FP10) and thus the customer is always a co-creator of value. On the other hand, the involvement in “co-production” is optional and can vary from none at all to extensive co-production activities by the customer or user. [p. 8]

From a systems perspective, “production” doesn’t necessarily mean participation in the manufacturing of a good. The passenger in a taxi service system is a coproducer when he or she gives the destination to the driver. While reifying the premises towards co-creation of value moves the idea of a service system closer to marketing, it moves it farther away from systems science. Digging into value more deeply could lead systems reader into a discussion of appreciative systems by Sir Geoffrey Vickers.

4. A service system creates value with an offering as a platform for co-production

One way of thinking of systems is inputs, operators and outputs. (Adding a guarantor as a fourth part, the model becomes an inquiring system as described by C. West Churchman). With this in mind, while goods are thought of as outputs from a manufacturing system, an offering in a service system is seen as an input — rather than as an output — by Normann & Ramirez (1994).

[... the] production, or rather co-production, of value in the emerging service economy is manifested in offerings, to which several actors contribute by performing specific activities. The offering is the physical and “in-person(s)” embodiment of assets made up of knowledge and experience, in themselves the result of myriad activities performed by many people dispersed in time and space. Assets and resources imply the storage of activities which have been configured for a particular purpose, for a particular actor in a given location at a given time. Some of these activities have secured access to natural resources in increasingly refined forms; others have created complex transformations of such resources, making products and subsystems possible; yet others have developed knowledge of basic technologies and sciences; all these having been combined in a systematic way, in the end ensuring access to them for users. Thus, in the final analysis, whether customers buy a “product” or a “service”, they really buy access to resources. [pp. 49-50]

The access to resources — as an output from a service system — is easily confused with an offering as an input, or a platform. This is true whether the output is tangible or non-tangible, in the example of telephone services by Normann & Ramirez (1994).

While the ownership of physical manifestations of past activity is still significant in the coproductive economy, ganing access to use of offerings (as in the case of car hire) is becoming increasingly important. Thus there are service activities in which most of the knowledge transferred to the customer is embodied in a good, but only access to the good is transferred, not its ownership. Take certain public telephone services: when making a phone call, we do not buy the whole telephone network but simply the right to access it, and we pay for the particular use we make of it. Ownership of the physical products comprising the telephone system remains with the provider. [pp. 51-52]

Although it’s possible to build a service system from the ground, up, there’s advantages to not reinventing the wheel every time, and having a base upon which to build. It’s a platform for learning, in Normann (2001).

The offering thus elevates the user in two ways. First, it gives the user a platform for providing access to an inventory of past activities in frozen form. Second, it liberates the user from this platform of past, accumulated knowledge, stimulating the user by giving him a “code” for value-creating activities and stimulating co-production and relationships. The effectiveness of an offering depends both on to what extent is is a good inventory of past knowledge and on to what extent it contains a good genetic code. [p. 119]

An offering should therefore be seen as a beginning point, not an end point. A provider can create an offering as a foundation for coproduction, but it will take a customer — and possibility also alliance partners — to create an output that has value.

5. The constraints on service systems are changed with advances in technology

A driver for a new science of service systems is advances in technology. Economic progress is related to technological progress, in Normann (2001).

The effect of technology is — and always has been — to loosen constraints. As a result of technological development, what was not possible becomes possible. Or what was not economically feasible becomes so. [p. 27]

Technology has had different impacts in different eras. Technological development broadly mean mechanical tools in the late 1700s, electromechanical machines in the late 1800s, and information and communications technologies in the late 1900s, in Tien and Berg (2003).

Table 1 A Nation’s Economic Evolution (excerpted)

Characteristics Stages in an Nation’s Economic Evolution
Mechanical Electrical Information
Economic Focus Agriculture; Mining Manufacturing; on-Construction Services
Productivity Focus Farming Factory Information
Underlying Technologies Mechanical Tools Electromechanical Machines Information / Communication
Impact Scope Family/Locale Regional/National Global
Onset in U.S. Late 1700s Late 1800s Late 1900s

As information and communications technologies have gone digital, service systems can play in new dimensions, as in Normann (2001).

[....] Today’s new technology — and here I stick conservatively to information technology without speculating about what possible new dimensions genetic technology and other round-the-corner breakthroughs might bring — liberates us from constraints particularly in terms of:

  • Time: When things can be done
  • Place: Where things can be done
  • Actor: Who can do what
  • Constellation: With whom it can be done. [p. 28]

All of this adds up, cumulatively, to the issue of what can be done. [p. 29]

In economic language, changes in technology move the production possibility frontier. In systems language, changes in technology enable the customer to obtain the same or better function with an alternative structure of action. Clearly, information and computer technologies enable new strategies in Normann (2001)

The density opportunity is driven primarily by new technology, but also to a great extent by our imagination and our mind-sets. The major thrust of today’s new technological break-throughs is in the opportunities to restructure activity sets — or “reconfigure” them — in ways that were hitherto impossible. Such restructuring implies two basic proceseses. The first is achieved by shattering activity sets and assets which used to be closely linked to each other, and the second comes from being able to re-link activities and assets that used to be impossible or difficult or very time consuming or too expensive to put together. The first of this set of driving forces, thus, is related to the ability to “break up”, or to unbundle; the second to the ability to “link” and to “put together” or to rebundle. [p. 27]

Reconfiguration in an information/communication dimension is different from that possible in a physical dimension. This is played out in reconfigurable patterns of coproduction involving the provider, customer and/or alliance partners.

6. The (new) service economy is not the same as the service sector

Today’s network-form businesses and outsourcing complicates internal with external, goods with services. The counting of outputs in agricultural, manufacturing and services sectors isn’t as helpful as looking at activities and processes, in Normann and Ramirez (1994).

In the early 1930s the world of business was neatly divided by researchers trying to make sense of industrialization into three types of activities, which came to be known as “sectors”….2

This “sector” notion has survived until today, and is widely understood to encompass economic activities characterized according to their output (Norman, 1984, 1991). The weakness of this categorization is that it has become increasingly evident that the outputs of the secondary and tertiary sectors, goods and services, respectively, can no longer be neatly separated. The original differentiation between goods and services was simply that the former was a “tangible” output (like a car), while the later was an “intangible” output (e.g. health). [p 9]

[...] in terms of employment, and as we propose here in terms of value creation, with the economy that is now emerging, this goods/services distinction no longer holds, causing the “sectorial” model on which it is based to be inaccurate, unhelpful and misleading.3 [p. 10]

In the model as drawn in Figure 3.1, activities in the service “economy” take place as much within the “primary” agriculture and extraction, and in the “secondary” industrial manufacturing sectors as within the “tertiary” service sector itself — an observation consistent with the research cited above.

  Agricultural sector Manufacturing sector Service sector
Agricultural economy      
Manufacturing economy      
Service economy      

Figure 3.1 The three-sector model

If “sectors” refers to fields of activity defined by its output, “economies”, on the other hand, are based on type of activity or process — specifically, the mode of operating and the way of organizing and structuring value-creation activity. [....] [p. 11]

Seen in this way, services do not comprise a set of value-creation activities different from manufacturing. Services will never replace goods, hence our opposition to labelling the current economic age “the service economy” in a “post-industrial” sense, which would imply that all activity is going to be service-centred. However, as the manufacture of goods becomes more service-intensive, the concept of sectors becomes outdated, and thus irrelevant and misguiding. This is certainly the case in business, and may quickly also be the case for statisticians cataloguing national economies. [p. 12]

If we’re going to talk about economics, let’s consider the species of capital underlying the agricultural, manufacturing and service “economies”.

With the “economies” view of value-creation activity, the agricultural economy is seen to depend on rent economics. The industrial manufacturing economy is based on scale economics, characterized by mass production and markets, standardiziation and specialization. It is captured conceptually in the “value chain” concept, which depicts the assembly line, this economy’s most typical form. Here value-creation activity is sequential and linear, with actors “adding” value to what they receive “upstream” and passing it “downstream” to the next actor.

In this book, we describe the emerging service economy: here the provider helps the customer to create value, and does not simply sell them products or services made previously. [p. 12]

The title of “The Service Economy in OECD Countries” 2005 report doesn’t help clarify the above. Certainly, the shifts in the service sector are significant.4 Looking at the OECD database, though, the STAN industry list follows the international standard industry classification (ISIC) as defined by the United Nations. If we following the ISIC, the impact of information and computer technologies (ICT) — e.g. the Internet, mobile phones — would be limited to the “business sector services” (ISIC 50-74), and not agricultural/extractive (ISIC 01-14), nor manufacturing (ISIC 15-37), nor community, social and personal services (ISIC 75-99). This doesn’t follow the spirit described above. Farmers certainly use mobile phones and the Internet, as do manufacturers, and government services.

Epilogue

As much as the above writing may feel like a research paper, it’s really only the foundation for a research paper. I needed to get some ideas straight in my own mind, before I could move forward. The above content may (or may not) be helpful to others. It’s a personal view that may (or may not) be shared by others, and could serve as an entry point for discussion. To repeat, the six things that I think I’ve learned are:

  • 1. The definition of a service system as a system is earnest
  • 2. A service system creating and delivering value emphasizes a value constellation perspective over a value chain perspective
  • 3. Research into service systems is muddled in the ideas of coproduction and (value) cocreation
  • 4. A service system creates value with an offering as a platform for co-production
  • 5. The constraints on service systems are changed with advances in technology
  • 6. The (new) service economy is not the same as the service sector

Comments are welcomed.


Footnotes

1 Table 8 illustrates that systems engineering is a general case of service systems engineering, in Tien and Berg (2003).

Table 8 Systems Engineering: Underlying Concepts

Concepts Definition Attributes
System An assemblage of objects united bysome form of regular interaction or interdependence.
  • Types (natural or built, physical or conceptual, closed or open, static or dynamic)
  • Elements (components, attributes, relationships)
Engineering Applied science
  • Definition
  • Synthesis
  • Analysis
  • Design
  • Test
  • Evaluation
Life-Cycle Series of stages of a system between successive recurrences of the initial stage.
  • Needs Assessment
  • Design/Development
  • Production/Construction
  • Utilization/Support
  • Phaseout/Disposal
Cybernetics Kybernetics is the Greek word for steersman or governor.
  • Feedback (through evaluation of performance relative to stated objectives)
  • Control (through communication, self-regulation, adaptation, optimization, and/or management)
Customer A consumer (i.e., individual or entity) of
goods and/or services.
  • Needs/Requirements
  • Expectations
  • Satisfaction

[p. 23]

2 A description of the three sectors is provided by Normann & Ramirez (1994).

…the primary sectors was defined as agriculture and mining, the original raw material extraction and access-based type of industries that have existed since the beginnings of economic activity. The secondary sector was defined as industrial manufacturing, which covered the transformation-based production industries with specialization, standardization and mass production / mass markets described above. A diverse group of activities not fitting the characteristics of these first two sections, including activities such as transportation, distribution, restoration and healing, were “lumped” into a third category or “sector”, which was called “services”, and which in effect had no cohesive logic except that its activities did not fall into the other two sectors. [p. 9]

3 The service activities inside and outside a company’s legal boundaries shouldn’t be considered differently, in the view of Normann & Ramirez (1994).

While industrialization was epitomized in the assembly-line manufacturing of tangible goods such as Henry Ford’s Model T, it has gradually been recognized that industrial production necessarily included services, such as accounting, purchasing, insurance for workers, materials and equipment, and delivery of finished products. All of these “production costs” are “service activities”; as emerging economic patterns make their “outsourcing” common, the “teritiary” nature of these “secondary” production costs is rendered more visible. The core “secondary” sector thus becomes tied to the “tertiary” one. Thus, instead of thinking that goods-based wealth from the secondary manufacturing sector allows society to enjoy tertiary “services”, it is now becoming evident that efficient “tertiary” activities make or break the “secondary” sector. Researchers on the other side of the Atlantic have also shown that the greatest growth in teritiary activites, services, takes place in the secondary economic sector, manufacturing. [p. 10]

4 The OECD report should have been called “Service Sectors in OECD Countries”.

The service sector has become the quantitatively most important sector in all OECD economies…. By 2002, the share of the service sector amounted to about 70% of total value added in most OECD economies, and this has increased considerably since the 1970s. [....]

The services sector is, however, composed of a wide variety of different activities ranging from fast food to brain surgery. [....] The increase in the share of the service sector in total value added can mainly be attributed to the growth of business related services…. In particular, finance, insurance and business services have experienced a strong increase in value added shares. These industries now account for about 20%-30% of value added in the total economy, while their respective shares were between 10% and 20% in 1980. These service industries are primarily driven by market forces, which typically imply greater pressure to improve productivity.

There has been very little change in the value added shares of trade, restaurants and hotels as well as transport and communications services over the past decade. In the case of transport and communications services, trends in prices and quantities have moved in opposite directions. The demand for these services increased in the 1990s, notably in the case of telecommunication services. [p. 7]


References

Russell L. Ackoff and Fred E. Emery, On Purposeful Systems, Aldine-Atherton, 1972.

Stephan H. Haeckel, Adaptive Enterprise: Creating and Leading Sense-and-Respond Organizations, Harvard Business School Press, 1999.

Ifm and IBM, Succeeding through Service Innovation: A Service Perspective for Education, Research, Business and Government, University of Cambridge Institute for Manufacturing, Cambridge, UK, 2008.

Richard Normann and Rafael Ramirez, Designing Interactive Strategy: From Value Chain to Value Constellation, Wiley, 1994.

Richard Normann, Reframing Business : When the Map Changes the Landscape, Wiley 2001.

C.K. Prahalad, “Invited Commentaries on ‘Evolving to a New Dominant Logic for Marketing’”, Journal of Marketing, volume 68, number 1 (2004), pp. 18-27.

Jim Spohrer, Paul P. Maglio, John Bailey, and Daniel Gruhl, Steps Towards a Science of Service Systems, Computer, volume 40, number 1, pp. 71-77.

James M. Tien and Daniel Berg, “A Case for Service Systems Engineering”, Journal of Systems Science and Systems Engineering, volume 12, number 1, pp. 13-38.

Stephen L.Vargo and Robert F. Lusch, “Evolving to a New Dominant Logic for Marketing”, Journal of Marketing, volume 68, number 1 (2004), pp. 1-17.

Stephen L.Vargo and Robert F. Lusch, , “Service-Dominant Logic: Continuing the Evolution”, Journal of the Academy of Marketing Science, volume 36, number 1 (2008), pp. 1-10.

Anita Wölfl, The Service Economy in OECD Countries, Directorate for Science Technology and Innovation, Working Paper 2005/3, Organization for Economic Co-operation and Development.

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4 to “Science of service systems, service sector, service economy”

  1. Jim Spohrer says:

    You make many excellent points, especially around service sector versus service economy.

    I do think making the distinction between value co-production and value-cocreation is an important distinction. Perhaps saying “there is only value in interaction” is a clearer way of expressing the core idea in value-cocreation. Normann describes value-cocreation between current-self and future-self, as what many people mean by creating value while interacting with the environment or things.

  2. Valtteri Kaartemo says:

    Hi David,

    Thanks for the blog and your comments in SEM2008.

    I noticed that you had used the definition for service system from page 6 of the IfM&IBM report. In their executive summary, they however provide a definition which includes also “other stakeholders” which “create and deliver calue”. Further analysed, I think these two definitions are fundamentally different when considering the “co-creation”.

    best regards, Valtteri

  3. Michael J says:

    In case you haven’t seen it, I think you might find Manuel Castells The Rise of the Network Society. Especially chapter 4.
    The distinctions he makes are between

    “producer services, the providers of information and support for the increase in the productivity and efficiency of firms.”

    Distributive services combine transportation and communication with wholes and retail trade.

    Personal services.

    Social service.
    He then does a pretty rigorous cross national comparison to follow how the interaction plays out in America, German, France and Japan.

    From my very quick read of this post, my sense is that you and Castells would agree on many things.

  4. Michael J says:

    I still have to print out, highlight and mull the many points you’ve put on the table. Perhaps the following will be useful in disentangling what’s happening.

    Suppose the bins were energy, time and space. It eliminates the notion that information creates stuff. Actually making stuff starts with stuff that moves through a process. Information makes the process require less time and energy. But without the input of stuff, we still don’t get to more stuff.

    In this schema, re energy, we get people power. Tool assisted people power. Then biomass based power. The next stage would be solar or renewable power sources. Input stuff might be framed as time/energy that has been fixed in space. The system structure can then be framed as the emergent structure of time/energy in time/space.

    Three variables make for much simpler models.



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