Value and Viability: A viable systems way of transitioning to a service-dominant logic

A lot of this blog deals with value and the way a firm delivers its value proposition for the customer to co-create value. So if you think about it from a service dominant logic point of view, resources of people went towards making or delivering a value proposition and the resources of customers go about realising the value proposition through co-creation to achieve outcomes right?

The reality, as they say, is always a little more complicated. So let's use my favourite example of a phone. The idea is for a customer to be able to talk to someone so the old value proposition was a switchboard with an operator and you pick up the phone in the house, tell the operator who you want to call and the operator connects you and you talk to the person (and hope the operator is not listening in).

That value proposition consisted of the phone in your house, a switchboard operator, a switchboard, a network of phones. The resources of the firm went about delivering that value proposition to allow the customer to co-create value by knowing when to call, whom to call, the number to call. oh - and don't forget the customer has to be at a particular context/location (home) to make the call.

Today's similar value proposition is a mobile phone. pick it up, make a call, talk to someone - in whatever location/context he is in. what has changed? the value proposition of the firm has clearly changed. it used to consist of resources of people+materials+equipment and it has become material+equipment only with the people resources embedded into the material/equipment. in co-creating value, the customer resources has also changed. it used to be 'talk to the operator to connect you', it has now become 'key presses on a mobile'. End to end, it is still competencies for competencies (SDLogic style) but the dynamics of the middle has changed. The dynamics of the middle is often referred to as the market system but from my perspective, it is about boundaries of the market system and the viability of an organisation.

Let me explain.

Say the organisation in the old value proposition world was providing a really really good value proposition. it had thousands of operators, calls were put through quickly and efficiently and the network integrity was good and with good capacity. That means the CORE TRANSFORMATION (CT) of the firm (i.e. what the firm DOES to ensure a good value proposition) is functioning well. It also means all the resources of the firm were configured optimally, effectively and efficiently. From a systems perspective, if means that CT minus 1 (all resources) are supporting CT well and CT plus 1 (all governing/policy/auditing/managing) are managing CT well. A viable system is when CT-1 and CT+1 are doing its job to support CT and whatever the shocks in the environment, CT+1 is able to manage by supporting it with other/more resources from CT-1. Homeostasis is achieved.

Now you go up to the firm and say you've got this new invention that basically automates everything and you don't need operators anymore. You say that customers get better outcomes if they can call whenever they want even when there isn't an operator. The logic is sound, the outcomes are better, customers co-create value for better benefits so this is good right? only snag is - your entire organisation has had resources supporting CT and your board, your departments etc. have been managing CT and CT is now going to change into something else. In fact, the change in CT is pretty drastic. the firm who was a network provider with thousands of operators is now going to be a factory making mobile phones.

In viable systems, there is an O for operations (which is where the CT sits), an M for the metasystem that governs O and an E for the environment (see pic). Together, they define what the boundaries are and most importantly where is the boundary for E as this defines the viability of the firm (ability to achieve homeostasis) as this boundary determines what is outside and what is inside. IF the CT changes, what was previously the environment could now be a resource and the metasystem could be managing something completely different.

In essence, this is what is happening today with technology convergence that mixes customer resources (to co-create) with the firm's value proposition. It is happening because, thanks to SDLogic, we tell firms to see themselves as a cog in a wheel of co-creating value-in-use. Yet, to do so, it becomes harder to tell what the firm's value proposition is, what is the environment, what are the resources to configure (especially if they include customer resources) and what should the metasystem be managing. In other words, to achieve true customer centricity and value-in-use, more is needed than just the will. To walk the talk, structural CT changes are needed. More importantly, if the firm doesn't get it right, it could cease to be viable, even while it's motivations are good. Customer centricity and achieving value in use is beyond traditional marketing and requires marketing to engage fully inside the firm.

So for me the transitioning from a goods dominant logic to a service dominant logic is understanding where the old boundaries are (usually delivering a value proposition that is some exchange value or a tangible product) and moving them to new ones (value-in-use or outcomes). It would then require the reconfiguration of CT, CT-1 and CT+1 for a core transformation that includes co-creation. It requires a careful transitioning programme to realign CT-1 and CT+1 as CT changes to maintain the firm's viability because delivering value-in-use means a much more open, agile and flexible system (nature of E and variety is very intrusive) which in turn requires a relooking at the nature of resources in CT-1 and the nature of firm's governance in CT+1 even while CT deals with a hybrid of old and new value propositions.

Someone asked me why do I take a viable systems approach instead of, say, a resource based view etc. of the firm. The viable systems model (VSM) is the most robust model of a system, be it a human body, an organisation or an economy. It specifies the conditions through which a system can be viable, and can remain viable. Many of the midrange theories (including RBV approaches) tend to be formed through GD lens. Moving from GD logic to SD logic requires going back to fundamentals and VSM is a pretty good fundamental to go back to. Unfortunately, like all systems approaches, they never tell you where the boundaries should be drawn. I draw systems boundaries around contextual value-in-use. But of course, as a value-based systems researcher, I'm totally biased ;p

Facebook.. tsk

I'm interupting my usual academic ramble to blog about facebook, business model and system.

Don't get me wrong. Unlike the many social network bashers out there, I absolutely love facebook. I use twitter and linkedin for my professional life and facebook for my personal and social life.

Here's how I co-create value on facebook:

I update my status at least once a day, to a max of 3 times. I have 30+ family members over 4 continents and it's the means through which I keep in touch with their children, events and general life and they can keep in touch with my life. I have a further 200 friends all over the world and I am grateful that everyone bothers to update and keep in touch as well so we form a good community. We share photos, joys, pains, irritations from big events (such as graduation, births etc.) to menial stuff like what we ate for lunch. We share youtube links, photos and jokes from the downright ridiculous to those that get you on the floor laughing. My three girls (2 teen and 1 adult) are all on facebook as are my mom and dad and my aunts.

Our interactions keep us connected. Some of us just play farmville. Some are just stalkers. Some are too shy to say anything, some (like me) often say too much. Some post political links and opinions and others upload mobile photos from where they're travelling. When my husband created an 'eggs'-plosion because he forgot he was boiling eggs in the kitchen, the photo was online within minutes and family from various parts of the world commented on it. I have 500+ photos online and with my iPad, I pull them down to show photos of my house, kids, garden etc. when I visit family who don't have facebook accounts. The interactions can be many and menial, few and life-changing or a combination. All in all, it makes us all log in at least once a day. The combination of interactions surrounding the big and the menial happenings in our daily lives result in various emergent properties in a social network system - community, comfort and serve to generate further activities outside of the online world and make the world a lot smaller.

What of privacy? There is an old saying - we are only afraid of inventions that happen after we're born. hydrochlorofluorocarbons are in your fridge but we don't seem to cringe when we go to the kitchen. Radio was harmful when it was first introduced. I'm not trying to underplay privacy issues. Rather, I am saying that everything in the world is dangerous if you don't know how to manage it. A hammer, nails - all very dangerous. But we're not threatened by them. We know how to keep it out of reach of children and use it safely because we have the skill set to manage it. So facebooking is a 21st century living skill set that you need to acquire to co-create value in a social network. And if you acquire that skill set, you acquire resources (knowledge) to make wonderful things happen.

What is this skill set?

First, managing privacy.

I have 4 privacy levels - limited profile for people I don't know well; acquaintances for those I know but aren't close. normal for... well, normal friends; close and family friends for the 'inner circle'. With 53 photo albums, my friends have various access rights to view some albums but not others e.g. As an academic, I have public albums viewable by all and family albums viewable by inner circle only. I even have information that is available to 'everyone' and is 'google-able' (horrors!). I don't think everything should be private nor do I think everything should be out there. The skill is to know what information should be private or public depending on what benefit you can get from it. It may sound complicated but its as complicated as learning to programme a VCR back in the eighties and as a 21st century skill set, I believe I have it. Do you?

Second, managing time

How much time do I put into facebook? To many of my friends, they think I spend too much time. Actually, I don't. Usually I am on fb for my downtimes - at airports, waiting for the next appointment, in trains. It can be a distraction (so can my hubby but I'm not getting rid of him) but you just manage it because the benefits are there. Does it require some discipline? probably... i mean do we require discipline to not reach for that third/fourth/fifth glass of wine?

Third, managing effort

I upload photos, comment of friends statuses (statii?).. I have downtimes (when I'm on online once a day) and uptimes (on all day). More importantly, I cajole, persuade and badger other friends and family to come onto facebook because it is the community and interactions that matter - not the size of my network. So my effort is to keep my page active and to badger others to keep theirs active.

So the currency of facebook isn't money. I don't pay money for it. Yet I do ' pay' for it in effort, time and privacy so as to attain the joys, connectedness, company from my friends and love from my family. At the loneliest place in the world (i.e. airports), I am still connected. If you see a woman smiling at her iPhone in the middle of an airport, that would be me - seeing the latest photo of my nephew, or laughing at a link posted by my daughter.

Note that the three skill sets above are the (operant) 'resources' I put in to co-create value. There are revenue model implications here if fb wants to charge a subcription because they would then be making me add a fourth resource - my money; mmm....you can, but you need to think about how.

Which of course leads me to the facebook business model. Which is? capitalising on the size of the network which in turn generate the eyeballs and click throughs on ads. Are you feeling something is not right? of course...here's where the problem is.

Misalignment of value in the Business Model

Think about google. What is the value of google for a user? Ads and information that is tailored for my needs as precisely as possible when I use the search engine. How does google make money? through ads and information tailored more precisely for the customer's needs. See the match? The value I co-create with Google is the same value Google is deriving revenues for (even if paid by advertisers).

Facebook? the value I co-create above is obviously NOT the same value Facebook derives revenue for. Sure, if I get more people onto facebook I get a bigger network which is great for facebook - but getting people onto facebook is for me a means to an end. I don't really get a whole lot of value from just getting my friends on facebook. I get it when they interact with me. So obviously, there is a whole misalignment of the value I co-create and the value facebook derives revenue from.

This misalignment poses a huge challenge on the viability and sustainability of facebook as a system. At it's current state, it is barely viable, even though the network is growing. Long term sustainability becomes an issue. I have seen many companies who don't recognise that the customer value from their offering is not the value they derive revenues from. It usually ends tragically. An organisation core competence must come from its capability to effect core value transformations which are the same transformations that is co-created with customers and which are valued by the same customers. The alignment becomes valuable for revenues to the extent that customers may not even have to a penny for it. While there can be revenues from other sources (as it is for Google), primary revenue should come from that alignment. Until facebook achieves alignment of core value transformations, it's unsustainable, at least, from my point of view.

Emergent Properties

This value that I attain from facebook is an emergent property. It's community, it's perceived connectedness, it's company - all of which are emergent from interactions. If you've been reading my blog you would understand that you can't determine emergent properties - merely intervene where it could catalyse, faciliate and enable the system to achieve the properties. And how does facebook do that? asking you to click through more targeted ads. wow. really? actually, i would argue they are NOT interested in the emergent properties. they just want more eyeballs - a bigger network - more, more, more! someone should tell them about roman empire...which part of hearts and minds did they not get?

Also, emergent properties, systems and interactions are a new science. i guess i can just call them uneducated. but again, if they don't get their act together, big systems can fail. big time.

OK, so what should facebook do (aside from hiring me that is, but I'm too busy facebooking, sorry..)

Focus on transforming information - not just harness information - facebook spends too much time with the analytics guys and not enough with value guys. If they know how to assist facebookers in transforming their information better, they would have a much more robust revenue model.

Focus on enabling quality interactions - it's not the people ...s****d! it's their interactions! Quality interactions generate quality information and great emergent properties. Help your facebookers transform interactions and information and you're on the right road.

I decided to write this blog (and give fb some free advice) because this morning, something happened that p****d me off. My darling nephew, only 7 months old, had a facebook page. It was my sister who created it because she wanted to keep her identity separate from his. I visit this site often as my sister would update his activities, teething problems, crawling, smiling. Loads of photos and videos and i love it. 'Marcus is feeling cranky this morning'; 'Marcus misses his dad who is away for the weekend'.... it was a wonderful way to watch Marcus grow up. I show it on my iPad to family as well. All of us family around the world love the page.

Facebook closed it this morning because you need to be 13 and above to have a facebook page. I understand why. With the number of nasties stalking the internet, we need to protect the young and vulnerable. But shutting it down? could you not create a better mechanism design for this that protect privacy but allow for interactions? Well, fb would probably think - nah... we should just close him down coz he's not going to click on any ads and he's not going to generate more friends, and we can show we care about the vulnerable users.... as long as fb has this current business model, they will continue to struggle with privacy issues and business model sustainability...this is because misalignment of value transformations would result in decisions made that would change the dynamics of value in the system ..

From my read of facebook, these guys probably have a good idea how they became successful (analytics will tell you that) but are completely oblivious to why..... without understanding the core value transformations that made facebook what it is today they would need to be very careful what they tweak, because a system that spirals upward can easily spiral downwards (think myspace) if the interventions are wrong and if you focus on the wrong transformation. Facebook - listen and learn and for heaven's sake, give me my nephew's page back!

How to innovate in value co-creation - part 1

I have just finished writing the paper for the Forum on Markets and Marketing - the meeting in Cambridge with Bob Lusch and Steve Vargo entitled 'Value Co-creation in Complex Engineering Service Systems: Conceptual Foundations'. Don't be put off by the word 'engineering' in the title. the paper is intended to integrate the engineering service research and the management service research streams. In the paper, I had 5 propositions and I thought I'll expand on each managerially in my blog because my blog would probably explain it better than a dry academic paper. (and it IS dry - starts with philosophy and ends with engineering design.... enough said). Also, I do think the 5 propositions set the stage for innovation that is value based.

So... on to proposition 1

Proposition 1: A perfect system for the co-creation of use-value makes endogenous all co-creators use-values.

Yikes...where do i start.

If you've been following my blog, you should have read all about co-creation and use value (http://value-basedservicesystem.blogspot.com/2010/02/value-in-use.html) and (http://value-basedservicesystem.blogspot.com/2010/01/value-co-creation-and-service-systems.html). You would need to read those to understand this post.

lets say, very simply, a firm is in the business of producing cups. so the CEO will say, what do customers want from cups? lets do market research. needs analysis. requirement analysis. focus groups. dance the salsa...la di da..

you come up with a spec list.

1. cups should have handles

2. it should hold x ml of fluid

when you brainstorm on the research you realise - wait, some people want hot beverages, some people drink a lot, some people drink very little, some people want it pretty, some people want lids/covers etc. etc. so you go to the marketing department and say - find me the segment of market i should target if I made cup type A, cup type B, cup type C and so on.... and tell me which should be my target market segment...so the clever marketing chaps do their rocket science and comes up with ta-da! cup type A would give you £A in revenues, cup type B gives you £B revenues and then you sit down and make a decision on which cup types you can make, how many types and how to make them as efficiently as possible. That was how the world worked.

Marketing folks like to match the type of person with what they buy. so you buy a pretty cup type B and they say - aha... woman age X of this type of behaviour and lifestyle would buy cup type B because they are concerned with selling to you. Actually, I would like many types of cups for many different uses and different contexts. So, mr marketing, my cup-using behavior is actually more important than my myers-briggs score (not that you use it)...also, my cup-using behavior is driven by whom i'm with, what time of the day etc. etc. so .....could you go design and make a multi-context cup please?

firms don't, and i'll try to explain why.

My training now tells me I have to use a mathematical word so forgive me. What that whole process above says is that value has been determined exogenously. This means it's OUTSIDE the use and co-creating system. it means the firm has decided to determine what the value is, make it and then deliver it. it means that when the cup is used by the customer, it can no longer be changed (its exogenous remember?).

but wait. how do i really value my cup? when i take my cup to the garden, i want a lid to keep the bugs away. when it holds water, i want more of it and when it holds expresso, i need less of it. so what I value about my cup is use-value i.e. a cup that understand my context of use which can change but if my use-value is not endogenous to the firm's, how would they even think of designing a cup for my ever changing context?

they don't. instead, it's easier to exogenously determine use-value for many contexts and construct their value propositions around them. so they produce many different cups. of course they go through the whole process of determining value. they call it a 'value-driven approach' (*irony*) and its step one in the lean handbook - 'first determine what the customer values'......(i will blog about about this in the next post)

its the world that has existed because we don't interrogate our assumptions. because its just easier to make different cups to fit different contexts. but by doing it that way, the determination of value will always be exogenous to the use of value and when use-value is co-created, which is contextual. firms are fixated on the idea that one has to come first. so value determination and specification is exogenous to use. So when I co-create value with a cup i.e. use it to drink stuff etc. etc. I am actually co-creating with a value proposition of a firm that have already decided and determined what I wanted from this cup and in what context and I, as user of cup, would then co-create value when I am in the context that has been predetermined... meaning, I make sure I, in my own world and own system 'fit' the cup context that has been predetermined. that is why i buy many cups. because i have many contexts of cup use. and dont even get me started on contextual emotional value-in-use.

but it doesn't have to be like that. especially if you're thinking of innovation. .

why dont firms look at use value as endogenous? because traditional marketing looks at exchange value and choice and once you choose, they aren't really very bothered with the different contexts on how you use the thing (because you paid for it already). So they push the problem (and risk) of contexts to you. Let you decide what your most common context is and let you choose which cup to buy.

but that's a little unfair. in return for my use-value of a cup, i give you, the firm, money. so you get money, i get cup. but my use-value of the cup is limited to the contexts you predetermined whilst your use-value of the money is... oh wait.. infinite in context (don't you just lurrve the acontextual use-value of money? ha ha..). So mr firm, i am actually probably quite happy to give you more money if you could give me greater degrees of contextual freedom of my cup. In fact, we could design a perfect system of co-creation where you give me different cup for every context i might want a cup and I could pay you a lot of money for it. let's just call it a multi-cup carrying butler.

a perfect system for value co-creation is when every co-creator's use value is endogenous in the system. the firm's use value (money, which has use-value across infinite contexts) and your multi-contextual use-value of the thing. It probably is too expensive but hey, a great starting point to think about innovation and its a great way to think about the role of technology. and it's starting to happen as well.

take a good look around you. there are some companies out there who no longer make value exogenous to use. simplest example is the phone. it used to be a phone. to talk, to communicate. today, its not a phone anymore. yes yes they call it a smartphone or somethingphone but it's become a platform onto which you can use it for whatever you need at the context you wish to have. so my iPhone can be a compass at the context where a compass suddenly became necessary. its not just technology driven. its a mindset change in understanding use-value and contextual co-creation in design and delivery - the understanding that value is always use-value within changing contexts and value propositions do not have to be exogenous in the co-creation process.

so where's my smart cup?

Value-in-use and exchange value

I've been meaning to blog about this for some time now because I get asked this question a lot. What's the relationship between value-in-use and exchange value? Everyone is talking about value co-creation but what about price (exchange value)?

I think maybe because I've actually written an entire book on pricing of services that I seem to get asked about this. Rather than say 'well, I'm covering that in my second edition which is coming out next year', I thought I'll blog about it. Much of it I've already covered in the book although I don't explicitly use exchange value and value-in-use (I will in the next edition).

Service dominant logic and many of the gurus in management have been talking a lot about value co-creation right? that it's experiential, phenomenologically derived and co-created between the individual and the firm either directly through activities and interactions or indirectly through a good, or an item purchased from the firm. I give quite a number of examples of this on the lecture circuit, as well as the potential opportunities for innovation surrounding this concept. So value-in-use is the value in context, experienced by the customer. However, this often happens after purchase, or at least, after the contract to purchase. That means there is a separation of time between purchase and the experience. This happens whether you buy a phone, beer, TV, stay in a hotel or go to the gym. At the time of purchase, you haven't experienced it yet. You may not have any idea what that experience might be like,..... but you are asked to buy. at a certain price.

So..... at a certain price or exchange value, the firm is asking the customer to do a few things at the point of purchase.

First, the firm is asking the customer to imagine what the co-creation experience might be like. That's uncertainty no. 1 for the firm in pricing - I call this the uncertainty from a lack of imagination (economists call it bounded rationality see Herb Simon). Example: If you're trying to sell a concert ticket, your customer will not pay if he has no imagination for what it might be. £100 an hour is now worth... maybe £50 because of your customer's lack of imagination? ouch..

If this is his/her repeat purchase, it's a lot easier BUT the context of experience might still change. That means the context/state of the experience may still change even on repeat purchase. I call this the uncertainty of context. Example: your concert is perfectly well imagined BUT your customer doesn't think the weather is going to be good. A discount of £70 to persuade him/her? more ouch..

Also, the value from the experience is co-created - meaning it depends on the resources of the firm in its proposition, but also the resources accessible to the individual to co-create that value. This is the uncertainty of resources. Example: Your customer has a great imagination and the weather will be good BUT he thinks he may not have time on that day. £100 an hour is now worth £30 or less? even more ouch...

Finally, the fourth uncertainty - that of the uncertainty from cognitive discounting. Remember that exchange value (price) is at the point of purchase and value-in-use is at the point of experience? And that there is a separation of time? Well, finance people are well acquainted with the notion net present value and cognitive discount is principally the same. We discount the value of the future value in different ways. The gradient of the discount changes for different people - those who are more risk averse may discount more, the income effect (how expensive is it) may change that gradient as well. I actually mathematically modeled spot and advance prices in a paper last year where I investigated capacity effects of the firm as well and the role of refunds. (click here for it).

These four uncertainties contribute to a valuation risk at the point of purchase - meaning that the person's idea of value-in-context or value-in-use will not just be what is promised by the firm (through advertising and promotion) but contributed by all these four uncertainties i.e. exchange value carries the risk from these four uncertainties inherent in value-in-use.

Often, the firm only like to promise what they can deliver - which usually mitigates the uncertainty of firm's resources in co-creation for the customer. There are a few more uncertainties in there though - mostly from the customer side. And firms wonder why they can't get the price they want.

All that said, exchange value (price) bears very little resemblance to value-in-use after all that. In layman terms, from a value and value co-creation perspective, don't think your price is necessary a good reflection of your offering.

Emergence and Customer Experience

You have to forgive me for this post as I'm moving into much more complex ideas and articulating it is a challenge.

In my last post, I discussed the notion of variety in a system and the fact that delivering contextual value means inviting a whole lot of customer variety of contextual use into the system. This may render the system to be non-viable as the firm isn't able to absorb it. Either that or the firm attenuates the customer variety of use contexts which may result in an unhappy customer.

In some of my work, I am beginning to see that customer experience is emergent (I posted this earlier but will expand on it here). What do I mean?

1. Emergent properties of a system are properties that exhibited at the system level, which does not exist at the component level. That is the very nature of customer experience. Customer experience does not sit with the firm, or the customer. It emerges from the interactions between the 2.

2. Emergent properties exist because of the interactions. This means that interactions themselves are an asset, a unit of analysis. In a system of A+B+C, the '+' between A and B and the '+' between B and C (could be different interactions) hold the key to the emergence. Customer experience is a result of interactions between the components. Thus customer experience is an emergent outcome, even while a system is tasked to deliver functional outputs.

3. Emergent properties is the reason why a system is greater than the sum of its parts. That is why even when functional value is delivered (or not), customer experience still exists. It is emergent from the system. It makes the system greater (or not).

4. Emergent properties can not be deterministically designed (its emergent... doh)

So back to my ATM example.

Case A. You walk up to an ATM and you want to withdraw £200 and you wish to have 20 £10 bills (value of the ATM in context). You know you cannot get an ATM to do that so you attentuate your own variety and live with the 10 $20 bills that came out. You get a functional output you're not that satisfied with but you live with it. Your customer experience is just so-so (come on, its an ATM machine!)

Case B. You decided to go the teller to withdraw £200 and asked for 2o £10 bills.

(a) The teller smiles very nicely at you and say 'sorry sir, but i just don't have that many £10 bills today. But if I did, i would certainly give it to you!' You leave the bank again with a functional output you're not that satisfied with, but you had a nice experience.
OR
(b) The teller gives you a surly look, pulls open a drawer, counts the bills and gives it to you and continues to chat with the teller next to her, ignoring you. You leave the bank with a functional output you're satisfied with, but didn't have a good experience at all.

There are two thoughts here (and this stems from some of my own research). First, functional value seem to be a different construct from customer experience. Secondly, both constructs are achieved differently. Functional value could be achieved through deterministically designing a service and delivering on outputs. Customer experience, however, can only be achieved through a system of interactions resulting in emergent outcomes. By implication, delivering to FV could result in satisfaction (or dissatisfaction) but its the interactions that result in CE. That means the system that delivers functional value is not the same system that delivers customer experience.

Some firms do think that if they deliver functional value accurately and all the time, they would have happy customers. They probably would. But they may not have designed the interactions to have good customer experiences. That means they probably have designed only half the system. Or they could have accidentally delivered good interactions. Or they think that designing to functional value and to customer experience is the same system. It's not. One is deterministic, the other is emergent.

A final note on variety, to tie it back to my first paragraph of this post. Customer contextual variety is not necessary a bad thing. In fact, I would say the variety existing in customer contextual value is an opportunity for the firm to improve customer experience, since it means having interactions. A customer whose contextual value has little variety (e.g. taking the same bus every day) probably doesn't have much to say about his/her experience. So the greater the variety of contextual value, the more a firm has to design for both functional value and interactions with human resources (since human resources can absorb variety best), and the greater the opportunity for a great customer experience. I might just write a paper about this some day.

So, the bottomline is that a system can only be greater than the sum of its parts if you factor in the interactions. So my current fascination is on interactions. My work now is building a taxonomy of interactions, developing the notion of interactions as assets (within a collaborative system). With a taxonomy of interactions, we can discover what interventions can impede or facilitate what type of interactions (since interactions drive emergence, and since emergence can't be deterministically achieved, we need to work on interventions). Some might call this the co-creation of value. But in this work, I avoid the co-creators or the value that is co-created. I am interested in the 'combustion process', the 'chemical reaction', the 'glue', the 'interstitials', the 'dark matter'. And yes, you can call me mad.

Designing for value and outcomes - dealing with variety

I've been hearing this a lot nowadays... engineers, computer scientists, designers, organisation science... all telling the world we must design for value. So you then go in and check how they actually do it and in almost all cases, you hear them start with 'understand what the customer needs'. or 'find out what the customer wants'. In engineering, it's about specifying the customer requirements.

In a world where the product is a tangible one, it would probably be ok. But in the case where the 'product' is a combination of physical asset and intangible human activities, this has to be a major challenge. I'll give an example. Checking in at an airport. Our 'needs' in checking in may be quite consistent if we travel frequently. so there may be some pattern to this. Yet, if tomorrow i decide to travel with the family (perhaps with my baby nephew in tow), those 'needs' change. the value of the airport service is now perceived differently and experienced differently. The context has change and the value of some of the airport services to me has changed. Bear in mind this isn't the same as the market segmentation problem because market segmentation typically talks about buyer types and buyer profiles. in this case, its use-types and use-profiles which are usually not a description of an individual i.e. one individual could have several use profiles. In the extreme, an individual could have infinite use profiles.

So... when you design an airport or a complex system, how do you design for context variety? how should variety be designed in terms of processes and a system architecture to better 'serve the customer'. Which customer is this? the customer that has the baby or the same customer that is the frequent flyer?

In my previous post, I discussed endstates. When a firm wants to deliver endstates or outcomes, it immediately inherits customer variety. You have no choice. How can you claim to deliver me outcomes if you don't also immediately promised me these outcomes at any of my experiential state? How can you claim to deliver me value-in-use if you don't immediately inherit all the various contexts of my 'use'? Do you even know the various context of my use? I get annoyed when firms think 'outcome-based' contracts or performance is a marketing spiel. The reality is that designing and delivering outcomes is a lot more challenging than firms realise.

Traditionally, when designing goods or equipment, the context of use by the customer does not change the delivery system quite immediately e.g. how a customer uses a TV, a car or a cup does not immediately change the design and manufacture of the TV or car (although may serve as inputs and feedback for future design). In service activities, customer ‘use’ of an activity in a context has a direct impact on the design and delivery of the activity, which makes it a challenge for the firm to decide how much variety to tolerate in its initial design and resource inputs.

I'll give you an example. Say I want to withdraw £250 from an ATM machine. On that day, I would like to have 10 £10 notes (instead of 5). That's a contextual use variety that the machine cannot tolerate. I know that, so I attenuate my own variety (Ashby's law says only variety can absorb variety) by living with it. I don't get what I want but I know an ATM can’t deliver it anyway so I'm not necessarily unhappy. Let's say, on that same day I decide to withdraw the £250 from a bank teller and request for 10 £10 notes. Will I get it? Well, it depends on the design of the service isn't it? If the teller absorbs my variety, that's 3 minutes additional time to serve me. Efficient process designers don't really like that. In aggregate this would have an impact on resources. Alternatively, the teller can tell me politely that this is not possible so my variety is attenuated. Interestingly, I get the same outcome as the ATM machine but in this instance, I am not happy. You now get a feel of the depth of the problem.

So how much variety should a firm tolerate? how should a service be designed for variety?

(Phil Godsiff, our PhD student at the institute and who has decided to dedicate his research life to variety, has written a nice paper on variety in the latest issue of service science here)

Contextual value is therefore a moving goal post. it doesn't mean it can't be designed, it just means you can't design with the assumption that value is static. Because if you do, you are making a whole load of assumptions around the context that you probably didn't realise. what we need is intelligent design. that means a redefinition of 'service excellence' to mean the ability of an organization to deliver to moving contextual value goal posts. that's a tough one. see next post.

Actually, I believe the problem is more than merely variety because we need to understand where customer experience sits in all that. As a lead in to my next post (and a reminder to self), I will blog next about variety, emergence and customer experience in a system.

outcomes, competitive advantage and sustainability

I thought I'll share some of my thoughts about the work I'm doing in outcome-based contracts.

Outcome-based contracting (OBC) is a contracting mechanism where the firm is tasked to deliver outcomes rather than merely assets or activities. This is the case for Rolls Royce “Power-by-the-hour®” contracting for their aerospace engines, where the continuous maintenance and servicing of the engine is not paid according to the spares, repairs or activities rendered to the customer, but by how many hours the customer gets power from the engine.

It's not really easy, if you think about it. Imagine buying a power drill but only paying for holes in walls. Imagine English lessons being paid by how many English words come out of the student's mouth. There is the determination challenge (which outcomes?). There are measurement challenges (how do I measure the outcomes?), there is the revenue challenge (how do I pay for these outcomes?), there are skill challenges (the teacher needs skills in psychology, or counselling to get the student to be motivated to learn, rather than just teach). But overall, it's a nice idea. I've written an exec briefing on it so you can check it out here.

They are many types of outcomes of course, and it really depends on how far up to endstates you want to go. But its important to start from the ultimate end state. Customers won't tell you of course, because they probably are not sensitized about their endstates. It took us half a day (using a particular method we developed) of triangulating information of various employees before the National Library Board (Singapore) endstate was finally revealed - Literacy of the Nation. It might sound so obvious now but believe me it isn't obvious when you start to think about contracting and procurement of books on the basis of achieving literacy. Remember, a system endstate comes from both customer and firm and when a customer contracts, they are often not sensitized to their roles and their resources to achieve the endstate. Did you ever realise, when you drink coffee at the cafe, that you have the resource of being able to smell and taste to realise the endstate of 'good coffee'? you probably just think the cafe's good right? Now you see the problem when you talk to customers about endstates.

Well, that's where we always have to start from - the ground zero of endstates. Probably not measurable but its the axis on which proxies and measurements further down the endstate ladder are developed and the axis is crucial because all proxies and measurements have to consider the incentives, alignments and mechanism design of the parties involved in achieving outcomes. But then I get too technical so lets move on.

To me, the pursuit of outcomes and the capability to derive the right outcomes and how to achieve them is the pursuit of capability for value co-creation. Can you guarantee the 99% of IT systems even if a user could stick a virus infected usb stick into his computer? can you guarantee a clean washing load even if the user abuses the machine? The challenge of value co-creation is the challenge of managing/changing behaviors and integrating resources of the customer. Not many companies are up to the task. In fact, most firms would usually say 'well, we cant help it if they killed the system/dont know how to use it/dont know when to use it/abuse it'? They draw a strong boundary of what is us and them. It then gets relegated to 'high risk'. end of story. Well, imagine if your competitor can.

Here's a picture for you. If a firm can't achieve end states, they are basically saying they dont have the capability to manage a crucial system resource - the customer. To achieve desired endstates (see pic), the resources to achieve them is less dependent on the firm's resources and more dependent on customer resource (size of arrow depicts the level of resource to achieve which stage). Solve that, and you'll be dancing to outcome-land. Solve that, and you'll become a better English teacher, a better organization.

If you can't, this means that you have failed to understand what resources are contributed by both customers and the firm in order to achieve the benefits realized within the customer experience. Only by understanding the resources contributed by both parties in value co-creation can we achieve the best outcomes for customers in the target market, at the lowest costs. The substitutability of resources contributed by the firm, by the customer, and by technology must therefore be evaluated not merely from the cost perspectives, but with the possibility that it could also lead to better outcomes, resulting in the firm being able to either increase price or demand for the service. How's that for competitive advantage.

Why are outcomes important? Remember the English teacher and the change in skill set so that she can be more effective for student learning rather than teaching? Outcomes changes the boundaries of the firm. It shifts the boundaries of what is service, as that rendered not only by people but also by assets (see service dominant logic). It shifts the skills sets and capability of the firm (and therefore increases risk) and to get the firm to focus on effects of what they make/do and the effects of what customers do in combination for achieving endstates. It redraws a system to focus on joint system capability of customer and firm – rather than drawing a boundary and sub-optimizing. It makes all parties think of a better re-configuration of resources and substitutability of resources. For a UK economy that has lost so many jobs in manufacturing, it refocuses us to think about the future capability and skill sets that sits in our companies, indeed all companies to achieve outcomes and endstates of society, whether its living longer in our homes, or effective washing loads.

Most importantly, it shifts the focus from manufacturing/production to complex service systems – human, processes, assets – to achieve outcomes/effects/endstates call it what you will. If engines to fly longer - even if every component would have changed after 10 years, we would stop the make-buy-consume-break-buyagain model of production. If washing machines could last forever even it could change colour, component etc. along the way because the revenue models support it, we would be on a road towards a more sustainable future. If we worked hard to get our firms to develop capabilities to achieve outcomes, we make them motivated to innovate and outperform each other to achieve better outcomes and higher endstates of customers. That's a future that is surely worth working for.

Value-in-use

I've recently returned from the New York, where I was visiting for a month. During the month, my iPhone was on wi-fi and I rarely used the data roaming. However, I did forget to turn my auto data-roaming off. So when I got slapped with a £560 bill I decided to use this as an example to illustrate value-in-use and how the concept is not as easy as it seems.

When we use the word 'use', we immediately think of physical use like using a car, a stove, a TV. Actually, the word 'use' is much broader. The better word is of course 'consumption' but even then, with consumption, we conjure images of using up something. Not necessary. As I have explained before, a ferrari sitting on your driveway gives you value-in-use even if you are not driving it. This is because you are still consuming the benefit of the ferrari on your driveway - the status and pride it gives you. So when it comes to emotional value, value-in-use is derived from the 'consumption' of the emotional attributes of the good or activity. A piece of art, an antique on your mantel - these give people great pleasure and such pleasures are still value-in-use because every day the piece of antique sits there, you are 'consuming' (or experiencing) it.

It gets a little more complicated and less obvious in certain offerings. In the case of my telco service, my iPhone did not 'use' the data service in New York (whether directly or indirectly through roaming). I was on the house wifi. Yet, one can argue that I did 'use' it, because the mere provision of availability of use by the telco is of value to me. In this case, one must differentiate between the actual use of the data and the use value of the availability of the data.

Let's try another example. I work with the defence industry and one of the most used words in maintenance and service contracts is availability e.g. delivering 85% availability of a missile, or some other equipment. If I were to promise you the availability of a piece of equipment, it doesn't matter if you use it or not - my job is to make sure that all the parts are in good condition and the equipment works.

'Use' would affect the availability of course, so if I 'use' it badly, the parts would fail often and this would make repair more frequent and threaten availability (and therefore the design and delivery of the service - one of my papers on value co-creation in outcome based contracts actually discusses this) but the point I'm trying to make is that as a customer, availability for use is of value, even if i don't actually use it (of course, i have no intention of educating my telco on this - I only asked for my money back since i did not use it :p).

Still not convinced? Think about the servicing and support of a nuclear weapon to achieve value-in-use for the customer. It is the availability-for-use of the weapon that is prized and paid for. We all hope it would never actually be used.

So pop quiz - what's the pricing, design and delivery of 'availability-for-use' as value and how is this different from 'actual-use' value? There are huge pricing implications in this (and for me personally, a £560 question). Think hard about this and you would really be pushing the boundaries of pricing, value, design and delivery....

Systems thinking, Customer Experience and Business Schools

At business schools, knowledge is firmly discipline specific. Strategy, Marketing, Operations Management, OBHRM, Finance - each discipline is a component in the knowledge of business.

When businesses were making cereals, cars, computers and lamps, the disciplinary components and the domain knowledge embedded within them were quite amenable to being transferred to students (MBA etc.) in a component fashion. The old Porterian value chain, value stream and value mapping were reasonably effective in practice, and there were clear boundaries between customers and firms. So students could learn marketing, OBHRM, ops mgt, strategy etc. as discipline/component knowledge and then go out into the world and apply them. From a systems perspective, the interactions between components, even in practice, were sufficiently weak (although still there) and it allowed firms and business schools to construct departments and disciplines respectively to some degree of success.

As we move to service, my argument is that it all starts breaking down. Although we like to imagine there is still 'a service' delivered to a customer like there is a cup and a lamp, the truth is that this 'service' has very fluid boundaries. Customer 'touchpoints' are many and they are part of the co-creation process, indeed, that is the experience of the service. In the goods dominant world, our 'experience' with what we buy was private. How we use the TV, enjoy the oven or eat our cereal didn't have anything to do with samsung, belling or kelloggs. In the service world, our 'experience' such as banking, maintenance, telecommunication includes contact with the firm, whether directly or indirectly. As business schools, do we have the necessary knowledge to help practitioners deal with this?

As an illustration, I asked a provocative question in twitter, and asked the same of my colleagues in operations management. Who is responsible for the customer experience? In the case of tangible offerings (goods), customer experience is entirely in the customer's hands. For intangible offerings, customer experience, from a systems perspective, is an emergent property. So you think as a firm, we can make a very good TV, we should be able to 'make' a very good customer experience right? Think again. The knowledge to make a good TV profitably (six sigma, lean and all) is not the same knowledge as delivering a good restaurant experience profitably. The former is very much a 'click and play' integration of non-interactive component based knowledge. And a good TV is not an emergent property. It is a property of manufacturing and we can control it to such a great degree that we have terms such as six sigma to measure the logical value of the TV. Customer experience is an emergent property of a system of interactions with the firm, with other customers etc. etc.

So let's ask some rather basic questions about this emergent property.

Who is responsible for customer experience? The answer is, of course, everyone and every discipline, but we know what happens when we say everyone - it basically means no one. Just like public goods. No ownership means no one will do anything about it. Business Schools haven't even come round to discussing this yet - simply because no discipline owns the problem, the problem doesn't exist right? Ops discusses the process of delivery, but does not go anywhere near the psycho-social aspects of the customer experience. Marketing will discuss psycho-social aspects to death, but won't go near the actual delivery of what has been promised (seen as an ops domain). OBHRM still treat employees as though they are assets to the company, rather than valued by the customer. Strategy is still living in the Porterian world and has not even yet acknowledge that the new resource within the firm is that of the customer's. The best part is... here comes the punchline... if we had all the knowledge of marketing, ops, OBHRM, strategy and finance, we assume they would somehow all came together to have the knowledge to deliver a customer experience - plug and play right? (like the community example below?) No....... Sigh. You know what is scary? Customer experience is what the customer pays for, the source of firm's revenues.... we are in so much trouble...

How should the customer experience be designed? This is a tricky question. It is clearly not fully an adaptive system, unlike swarms of bees or other ecological systems. The firm clearly does design something. So we are looking at a system that has some aspect of deterministic structure, but- I will keep arguing this - the deterministic structures do not determine the emergent property of customer experience - it determines a secondary component that interacts with the customer to arrive at that emergent property. If any firm thinks they can design customer experience, they are dead wrong. What they can design, though, is how the system could be regulated, stabilized, and design interventions for better adaptation to customer consumption behaviors (for more on such tools, read up on cybernetics).

What is the knowledge required to design and deliver customer experience? Now this is interesting. If you've read my previous post, my criticism of component based understanding is that they implicitly assume elements of the whole are the same when examined independently of the whole as when they are examined as a whole. So if you take a service business as a system inclusive of the customer with the emergent property as customer experience, are business schools teaching the right thing by teaching component based knowledge as though they can be learnt without the interactions with other disciplines/functions in the system they need to function in? Is our disciplinary knowledge wrong as more offerings in the service economy become more integrated and more complex? I don't think I'm that much a heretic. To say that it is all wrong would be too drastic. There are some good tenets of component knowledge in there but disciplines have to get out of feeling too full of themselves and the 'legacy knowledge' they hold and start teaching component and interactive knowledge. Business schools are missing the parts of the component knowledge that really really need adapting for systems thinking to understand service.

And just in case you're thinking practice is where integration happens and what they (students) need to learn are the theories back in the business school, I would suggest you go back to my systems post again. Component level theories could be wrong if interactivity within a system is not factored in. In the old days, I would agree that disciplinary knowledge can be learnt in school and our students go into the firm and integrated all they knew with what they did and it helped. In the modern economy, some of the component knowledge could set them back. We are just simply not giving our students enough knowledge to operate in the modern economy.

I'm in the midst of writing a book on my learning development from practitioner to academic - a 14 year journey from a CEO running a cruise line with a turnover of USD250m to a Professor on research projects. Given that this rather autobiographical account is probably of interest to an audience of 1 (and I don't even count my husband), I'm doing it as a hobby. But I find it interesting as I write because I realize much of my transdisciplinarity comes from a practice legacy. I believe business schools have not developed enough pedagogical tools to harness practice experience into theoretical domains, particularly around business as systems. I believe, as baby boomers retire, many practitioners could help business school academics learn the art of transdisciplinarity - not in practice, but in theories - just as I have learnt it. But the politics of academia would most likely push them away (after all, they do come from 2 different power bases and each base is a threat to the other). Still, even as a lone voice, I will keep trying. Wish me luck.

Systems thinking and outcomes

I'm going to talk about systems. We tend to use this term so casually that we forget that it really requires a big change in the way we think. What do I mean? well, let's start from the beginning and use an example of a community.

You move into a village and you really like it. On weekends, people go to the village green, have picnics, everyone knows everyone else and they welcome you as a local. Someone knocks on your door and tells you that your headlights are on, and they invite you to a party at the village hall. You think, wow, this is really nice and you become part of the village, the unwritten 'norms', the friendliness, the sense of ownership and responsibility to your neighbours and other villagers.

The village becomes popular and more houses get built. Pretty soon, 8000 people become 10,000 and then 30,000 and in a short span of 10 years, you suddenly feel the village has lost its community feeling. There's graffiti on the walls, no one smiles much anymore and there are hardly any village get togethers. What happened? was it because there is more antisocial behavior from the young? is it because of the size? it's easy to say 'well, we went from 8000 to 30000, that's what happened' but that's not a reason. what is it that held a community together at 8000 that cannot hold at 20,000? what if you had to design a village, a city and a community? how would you do it?

Community, is a typical example of an emergent property. The scary bit about emergent properties is that its the property of the whole, and only exists as a whole, not a property of the component bits. you can throw people, pond, playground, houses, village hall, shops and schools together but that does not make a community. community is about the interactions between the components. In other words, its not about people and playground and houses and shops but the word and in between those words.

Health is an emergent property too. It's about our diet, our fitness, our genes, our lifestyle, all interacting with one another. How do you design health? or community? the scientific thinking we've been taught is so component based that i can bet you're thinking... ok... let's see what components go into that system and design it accordingly. er... no...emergent properties cannot be deterministically designed (it's 'emergent'?)That's the problem.

System thinking is not intuitive. Our scientific education have taught us to be reductionist in that the division of a complex problem into separate components is acceptable and that the elements of the whole are the same when examined independently of the whole as when they are examined as a whole. Think about the way we go through our lives - the whole 'plug and play' mentality has made us troubleshoot systems by taking out bits at a time, look at it, change it, fit it back and expect things to work. This is fine if the linkages between the components are weak but disastrous if the linkages are more important than the components - the case of a community.

Systems thinking is important in understanding VALUE and OUTCOMES because it radically changes the way we think and we really have to start thinking in this way. The world we are currently operating in is becoming more complex, where components cannot be analysed on its own, but within their ‘whole’, as the interactions between components are key to achieving system level outcomes. Our world is evolving towards complex systems where offerings are interconnected. The nature of the interdependencies are accelerated by technologies moving towards convergence resulting in the involvement of multiple stakeholders and multiple customers all contributing resources into the system and paying for different facets of the system and deriving different benefits. Emergent properties such as community, health etc. are starting to be key outcomes to society and yet because the design is not one of cause-and-effect, is not one of modularity (plug and play), we need to think differently. During the industrial era, outcomes were achieved with inventions such as steam engine (transportation), TV (entertainment) and these are designed and produced in a reductionistic, component-driven way. Our future in the modern economy wants critical systems-based outcomes such as community, sustainability, health and yet the knowledge to achieve such outcomes is still so lacking.

A final word about emergent properties. If you don't know what caused the emergence, they can be very fragile. Sometimes the wrong interventions disrupt the entire property. i like to use newscorp's monetization of myspace (see economist article here) as how their intervention is destroying the myspace community. The economist attributes it to the neglect of technology. my opinion is that it goes much deeper than that. the emergent property of community in myspace was a result of interactions between users. myspace just never knew how the outcome was achieved and what resulted in that emergence. They now run the risk of ruining that property for good (i happen to know a little about newscorp and I gather that they really want to develop their own content for the community, rather than have the community develop the content. good luck). And I dont buy the 'ubiquity first, revenues later' argument either for developing online communities. The community can go down at 6m, 60m or 600 million if the interventions are wrong.

Online communities give the illusion that we have data for all the interactions - online right? so we can get loads of data, the kind of data we couldn't get from a village community. right? maybe..... but the science and thinking is still the same. systems thinking is to think about interactions and emergent properties (and from the design angle, its about interventions and feedback (see comments in my blog post below on nokia and value). Quite different from component-based design that we're used to.

Value Co-creation and Service Systems

I am finally going to post the reason why this blog is called value-based service systems but I have a few final words on value co-creation.

To reiterate, the concept of value co-creation surround the idea that firms do not really provide value, but merely value propositions and it is the customer that determines value and co-creates it with the firm at a given time and context best for the customer achieve the outcomes they want. So a firm’s product offering, whether they are goods or activities, are merely value unrealized i.e. a ‘store of potential value’, until the customer realizes it through co-creation and gains the benefit. As I mentioned previously VCC implies customer resources to realize the value become central towards achieving end benefits.

We are seeing value co-creation gaining a more prominent role with healthcare (with greater customer empowerment), with mobile telecommunication and the internet (with user generated content), education (with self study courses). That is the world we're going towards. Customer resources as central to value, benefits and outcomes.

Actually, I like to flip it around. Think about yourself as a 'firm'. You would ordinarily do everything yourself but that would be hugely inefficient and impossible. So you would 'outsource' certain aspects. Take an extreme view - you could drink water from a tap but that is not effective so you buy a cup to hold the water to drink it. You have just outsourced that function to a cup. So all goods and services are offerings to make your life better, more effective and improve your quality of life. I like to say this to the NHS - 'your service is an interruption to my quality of life. How are you interrupting me today?' - it gives an 'outside-in' perspective and if you read some of the VCC literature (Payne, Gummesson, Prahalad), they talk about the need to balance out the system to understand VCC better - Evert Gummesson calls it 'balanced centricity'. (By the way, for UK people, Evert is coming to Cambridge and London on 11/12 Mar so let me know if you'd like to attend his seminar.)

So if you think about the customer as a 'firm', you will understand VCC as a partnership with shared resources. Steve Vargo has a real nice paper out on 'It's all B2B...' forthcoming in the industrial marketing management. Really a good read. So as a 'customer/firm', what are our resources? There is currency in our time, our ‘eyeballs’, our effort, our loyalty and all type of resources accessible only to us which we can trade off with money (price) and firm’s propositions - all to co-create value. But do we know how to measure this VCC? or price it?

The answer, I think, means we need to extend the logic a little further coz most of us who come from the cause-and-effect world, the Porterian 'value chain' world, don't necessarily look at the right unit of analysis to find the answer.

It's nice to think of the firm and the customer in partnership, sharing resources, co-creating value and then think of the price the firm can charge for the service (that includes customer resources) and then try to compute customer long term VCC-informed value, VCC-informed customer equity and the like. It's nice to think of it like that because we can see the cause, and the effect, and it makes it all nice and neat.

The truth, like life, usually gets a little bit more complicated.

In today's world of outsourcing, firms' value propositions can sometimes be a network of propositional value e.g. server farms from Amazon, social media from facebook, search engine from google, all work together in one click, or on one web page. On top of this, content can sometimes be from other customers, so consumption (and the realisation of value-in-use) is derived from multiple customers consuming and providing value propositions with the firms. This is starting to get really murky.... and it's not just online either - whether you're talking about an airport, transportation, olympics, value is being co-created in systems now, by multiple stakeholders - customers, suppliers, firms. In such systems, it’s hard to tell who’s the provider and who’s the customer. Also, who pays whom for what is also unclear. The future resides in a service system of resources proposed, consumed and value co-created by a web of stakeholders, including customers themselves, all of whom have something to gain and something to give to the system.

What is cause, and what is effect? And when you really can't tell cause from effect, what technologies should we use? As a social scientist, an economist, a consultant, this problem intrigues me. Yes, and this is the reason why this blog is called value-based service systems. The interplay between processes and outcomes within a service system which are non-linear and multi-directional in nature suggests that our current instruments of analysis may not be as effective. Miller and Page (2007) calls it, “understand running water by catching it in a bucket”. The future will see the development of more dynamic system level tools, with the system as a unit of analysis in measuring value co-creation, stakeholder (including customer) equity... think about how this could work for hybrid public-private sector collaboration.. which of course leads to ..........ta-da! my NHS project starting this April.

But I will talk more about systems.......

Value Co-creation

So finally I come to the subject most talked about in contemporary discussions on value. Value Co-creation.

Here's the way I teach it to the MBAs. I ask them to go to a cafe and with 'new eyes' (ala Kuhn), evaluate the experience by critically looking at all the attributes (features) of the cafe. They go out, have nice coffee/tea, come back after 45 minutes, notebooks in hand. So I go on the white board and on the right hand side I ask them to give me the outcome of the experience (value). I wanted the emotional and functional outcomes so they will say 'relaxed', 'feel good', 'got updated on the gossip', 'chilled', 'cosy and warm'. Then on the left hand side of the board, I ask them to give me a list of all the attributes of the cafe. This part is easy. they usually say 'music', 'ambience', 'good coffee', 'not crowded', 'good seats', 'good heating'. Between the attributes and the outcomes, I create a blank column and I ask them a simple question - how the hell did 'ambience' become 'chilled'? how did 'music' become 'relaxed'? They usually look puzzled, and not understand. Until I say - 'what if you can't hear'? would 'music' still lead to 'relax'? what if you are there to sort out a problem with a girlfriend, would 'ambience' still lead to 'chilled'?

They suddenly realise that they have completely forgotten their own role in creating that experience. That they, as customers, co-created the value with the cafe. They realise that for attributes to become outcomes, they realise the value proposition of the cafe to achieve benefits. And more importantly, and this is a key point - they needed to access their own resources to co-create that value whether these resources are their ability to choose the right company to go to the cafe, or even their basic resource of being able to see, hear and feel. The customer designed themselves and their context so that they can co-create value with the firm.

It's fun to watch the penny drop. The looks on their faces are priceless. I honestly believe I teach for that moment. But being smart MBA students... they get it and when they do get it, they fill up that middle column with lots of very interesting things about themselves and their resources to get the left hand side attributes over to the right hand side outcomes. Makes me cheer...

Back to the previous point. In essence, it's a lot about whether the customer is able to access the resource to achieve the best benefit and whether the firm takes for granted what the customer is able to access. BMW i-drive. Have you tried it? In its early days, you could sit inside the state-of-the-art BMW and feel really stupid because you don't know how to work it (they've tried to make it easier but I haven't tried it recently). In my world, you just didn't have the right resources to co-create value. So the best value proposition in the world (iPhone) is useless if you didn't know how to use it. And it would give you the greatest value if you did. What does this mean for firms? Well, to service designers out there - how much of service design includes the design of the customer and the resources they need to co-create value? And to achieve what types of outcomes?

Oh, just to clarify. Value co-creation isn't co-production. Co-production is helping the firm shape its value proposition (users helping nokia with the next phone, or better software, or even a better cafe). Value co-creation is bringing in your own contextual resource to achieve the beneficial outcomes with the firm at the point of consumption/experience (remember, we are still talking about value-in-use?) There is a difference.

So pop quiz... how does one co-create emotional value? what resources are needed by the customer? and what's the value proposition of the firm? what fun...

Segmentation by Value

It's amazing how people just LOVE to label people, things, and box them up to neat little packages and expect everyone to fall nicely into place. So Gen NEXT are the younger ones, vs GEN X, the thirty somethings vs baby boomers.. but what do they MEAN? What do these labels say about what they value in the services and goods they purchase and consume?

If a firm has to design for value, it has to design for the segment of customers they want to target, and you would need to know what is the value upheld by the target segment. The cardinal rule of marketing 'you can't sell to everyone' still hold true today.

Segmentation in Marketing is as old as segments exists. In the old days - everyone stayed in their boxes (or so we are led to believe). If you stayed in a certain location, it said something about you, which class of society you are, which brand of cereal, juice or clothing you'd buy. Segments neatly fell into nice demographics, income and social classes. And by inference, marketers knew what each segment would value from a good or service and the firm could design and deliver accordingly.

Of course that is no longer true... today, it's really hard to box people up. This then leads to how hard it is to cut the market up into segments for firms to target. How should markets be segmented? Marketing has leaned towards behavioral segmentation, which is close to value segmentation but the focus is still on purchase segmentation vs consumption segmentation. In the mobile phone world, most firms have given up on traditional segmentation and now segment on value-in-use e.g. phone users are 'Life Jugglers', 'Technology Leaders' or 'Simplicity Seekers' (see Economist article)

If you want to think about how mixed up segments can be, just take me, for example. I declare my age, where I live and what I do for a living to Yahoo and for fun, I turn on Yahoo radio to see if they 'get' me. They run ads on kitchen towels and toilet paper. My facebook ads are about weight loss (maybe they should ask me my weight), skin care and credit ratings. Such is the extent of their sophisticated data mining software.

To be honest, I'm pretty hard to box up. I've got 3 kids and my eldest is in university. But I'm much more into social media than my girls. I use linkedin, twitter and facebook (facebook is all personal with very defined privacy settings), and I play MMORPG/PvP, with a level 42 defender. I'm glued to my iPhone and my laptop. Yes, I'm a geek. Worse, I'm a geek mom/gal of the bossy variety. But I also play golf to a handicap of 25, drive a BMW 318, own a house, am a consultant and an academic. On top of that, I cook for the family. Maybe the kitchen towels and toilet paper isn't far off the mark after all.

Understanding Value Part 3

And if life cannot get more complicated, let's talk about expected and perceived value.

I use the example of buying mobile phones... don't you just love it when they ask you if you want 500 minutes and 500 texts or 1000 minutes, 100 texts etc. etc. etc. when you buy mobile phone packages..? Yes, OF COURSE I know how many I need. I know for certain I texted 236 times last month and can foresee needing to go up to 268 texts next month..! And why dont you ask me when I need to text as well? mmm... let's see... 215pm, 340p, 5pm and only on tuesdays and thursdays....

Get real... If I truly can predict this, I might as well predict the lottery. What I pay for is really the availability of use. The idea that IF I need it, it's available because NOT being available is a terrible thought and being availability at a more expensive rate is a slightly less terrible thought. Human beings seek to minimize costs (and maximize net value i.e. benefit minus costs) even if the benefit is in the future. So when we decide to BUY, ie. at point of contract, we weigh the EXPECTED VALUE in the future and decide how much to pay NOW. When we actually consume the service, we develop a PERCEPTION of the value and we compare that to what we expected when we purchased. And then evaluate if we want to renew the contract. Could there be a more efficient way of doing this? Of course! Mobile phone companies are hopelessly inept at designing contract mechanisms for information revelation. It's pay-as-you-go (prepaid) or contract (pay monthly)....there are so many ways they could increase revenue if they knew better how to incentivise segments to reveal their use patterns - in mathematical terms, we are no where near the pareto boundaries for the most efficient contract. Want to know what is a good pareto optimal pricing design? look at the oyster card and learn.....or read my book.

Understanding Value Part 2

While value is contextual and temporal, it is also multi-dimensional. Work by Hartmann (value theory), Haglund (who attempted to validate Harmann's work) and Mattsson (who brought the thinking into service research) is conceptually interesting although philosophically challenging. If you want to go further back (and get your brain tied in philosophical knots), GE Moore talks about the science of value. For me, who like to keep things simple, value has emotional, practical and logical dimensions (that's Jan Mattsson's words, not mine).

If you don't believe in emotional value, take a look at your watch. If it's worth anything more than £10, you bought it for emotional value because if you truly only bought it for functional reasons, you wouldn't have bought any watch above £10. So the ferrari that is sitting in my driveway (I wish) gives me great emotional (ownership, status) value even if I don't drive it. Practical value is an abstract concept that can be described as function. If you think of a chair, the practical value of a chair is the abstract notion of a seat. Conversely, there is nothing abstract about logical value. Its value is defined and purposeful. If you want to buy a tape measure, it must be a correct tape measure i.e. the measurement on the tape measure must be accurate. If it's a hotel, you want it to have a bed, a bathroom, i.e. logical value is about objective standards.

What is interesting to me about these dimensions of value is not merely that they exist, but from an organization's perspective, many firms just do not design and deliver all dimensions of value to the customer. Often, they reduce it to some six-sigma of practical or logical value but to be truly able to deliver value to the customer, the organization must be able to deliver all dimensions of value, not merely one or two. This is hard, because design and delivery of services often do not design and deliver emotional value because the transformation required to deliver that value is the transformation of the customer itself. I discussed this in my recent paper (submitted to Management Science and to La Londe Service Conference). Question then: How should we design and deliver emotional value? We could, of course, go back to Marketing and talk about brands but marketing usually talks about creating the brand and do not usually talk about delivering on the brand promise....operations management? the ops chaps would run a mile...strategy? strategy organizes the firm, they don't get their hands dirty with delivery... have I made the case for transdisciplinarity yet? When you truly line value towards design, delivery and evaluation, you can really see where the gaps are...

Next up: Perception and expectations of value

Understanding Value part 1

Quite a lot of people have asked me about the concept of value. So I thought I'll pen down some of my thoughts. I'm actually in New York now helping my sister with her new baby and it's 9am, poor parents are exhausted and sleeping and I've got an infant sleeping on my chest as I type this on my iPhone. I mean, if you can't blog on your iPhone with a baby on your chest, what's an iPhone for right?

Back to value. I see the world in terms of value. Value drives everything we do. We buy stuff because we value them, we collaborate because there is value in the collaboration. We marry, have kids, do smart things and stupid things because at that point in time, we felt there was value in doing them. If you subscribe to the views of Richard Dawkins book (selfish gene), we even sympathize and empathize because we see value in them. I don't subscribe to it because I think it's internally inconsistent but that's another story.

There have been many scholars researching into value. Woodruff, Zeithaml, Payne, Haglund - a simple google scholar search will give you loads. What I hope to pen here is a condense version of many years of work in value. I have to stress, that I am not attempting to discuss value according to the meaning, interpretation and how it's constructed Internally - I leave it to the social constructionists and structuralists for that. Rather, I shall be crass and state that, as a business economist, I am interested in value the way it can be captured in an exchange, monetarily or otherwise. This does not mean I believe in value as exchange value. Value to me is always value-in-use. But I am interested in how use value translate to exchange value. There is a subtle, but important difference.

CONTEXTUAL AND TEMPORAL VALUE
Value is contextual (state dependent) both in terms of when we consume it and when evaluate it (to buy). This means it depends on the state of the world at the point of use. I value the USE of this iPhone right now in this context because I would be bored to death lying here with baby on chest otherwise. Between 10 to 6 last night when i was asleep, I did not value the functional use of the iPhone but I valued it's AVAILABILITY for functional use, which is a use-value as well, but an emotional use. I know I'm tied to my phone. How sad is that.

But when I BOUGHT this phone, I might not have envisaged this particular context or all contexts where I would have valued the use of my phone. Indeed, the context in which I purchased my phone would have influenced the price i was willing to pay for it at that time. It also means that I have to imagine the future use value contexts to develop a present value of the phone. My book covers this in more detail and the latest Journal of product and brand management paper where i modelled advanced demand goes into more theoretical and mathematical detail on how firms price for such value.

Up next (baby stirring): Value has emotional, practical and logical dimensions; Value is perceived on use, expected on purchase and evaluated on recommendation or repurchase

Location:Lefferts Ave,Brooklyn,United States

Exeter PhD Scholarship

Those who are following my blog might be interested in Exeter's scholarships:

http://admin.exeter.ac.uk/academic/scholarships/search/scholarship.php?id=416

There are two major themes that are in line with my work - Value, and the interface between strategy, operations and marketing; and of course healthcare.

Essentially, the student would get a stipend of £13290 per annum and a waiver of the fees. It's a good opportunity to get into the service research space with a team of researchers in service system, service operations and service marketing. Andi and Rog are the editors of IJOPM and we have a huge interest in service systems research.

If there is interest to work with me, then please read the research section of my website at

http://people.exeter.ac.uk/icln201/research/index.htm

I have a different philosophy from some of my colleagues in the UK on PhD so if you are interested to work with me, make sure you read this!

Nokia and value

This article intrigued me:

http://www.economist.com/businessfinance/displaystory.cfm?story_id=15213843

Being a close follower of developments in UGC (User-generated Content), the notion of value in handsets seem to have evolved. Functional value (making calls, communication), social value (texting, status), emotional value (style, look-and-feel) and now the value from content generated by externalities - UGC. Delivering value that is evolving is clearly a challenge for Nokia. Where Apple stumbled into UGC quite by accident through the iphone (talk to people in O2 in UK - they can tell you how unexpected it was), Nokia is now having to design to that value. How do you design for a value that is clearly an emergent property of a complex system of user interactions? a complex system, by its nature, is complex because the property exhibited by its components (the parts) is not the same as the property exhibited by the system (the whole). Can emergent property be deterministically designed? Is that not a contradiction?

The only way I see a system can be controlled is through interventions. The focus on Nokia should be to design the interventions, rather than trying to design the components. Yet, I see their focus is still on components - the perennial myth that if I get the components right and stick them together, the system would function beautifully. Sorry, Nokia, you would get Terminal 5. Focus on the right unit of analysis. It's the system, s*****!

Assembling the team

In my conversations with Addenbrookes Hospital, I mentioned that I would like to pull together a team so I've been busy the last few weeks assembling the team.

Team building is one of the things I've been doing these past few years. It's quite an art I realise because unlike corporate life, you don't just hire people with the right skill sets. Team members are basically those who are enthusiastic about the research and they could be potential PhD students, consultants, practitioners, academics, postdocs and many of them may not be directly funded by the project. Also, there could be institutions interested in this research as well so pooling resources is key to team building and one has to be rather enterprising to pull like minded stakeholders (and to know where pots of money are located) to construct a good team.

So... once I get a project, I think about who else might benefit from this - which company, institution? if they contributed funds to complement this project, could it fund a postdoc/phd student/fellowship? What would they get in return? What are their expectations? Can we meet their needs and get the funding to fund a bigger team and create opportunities for new researchers? Pooling the funding can create marginally higher resources than the cost to deliver everyone's expectations (yes, that's me thinking like an economist). So if I got money from ESRC, I will try to get money from a company, the school, anyone who could potentially benefit from the knowledge.

Then there are the individuals. Often i have people who email me or in my travels meet others who are interested to get involved in my research. Some are potential students who are smart, experienced but have no funding to do their PhD. Others want a change in career. There are usually a few criteria to be a team member of a project. First the individuals must get something back for themselves personally. That usually means data for a PhD, experience, learning from the research, opportunity to get access to good data for publication etc. Second, the individuals must give something to the project. That means they must have a skill that the project can use - a methodology, knows all the literature, has experience in the industry, has project mgt skills, is him/herself an expert in a complementary field etc. So bringing in the individual would mean a win win for the project and the individual. Third, of course, we must be able to get along. As the project gets long, the third point is really important. There must be trust between team members as mistakes and misunderstandings are bound to happen. Sometimes the difficult thing is to find the money. Sometimes it's to find the right individuals.

For this project, I've found 2 who are suited (they haven't joined me yet so I'm using initials till they do)

SS - new PhD student - S is a consultant, runs his own firm and crazy enough to pack up his family and move from Denver, Colorado to the UK to study with me. He has great enthusiasm for service research. He's expertise as a consultant and his conjoint methodological abilities would be useful for the project. I'm at the stage of finalising Sid's funding (a PhD student requires £23k funding per year and £69k in total to fund).

WM - postdoctoral researcher. WM and I have been discussing her doing her postdoc with me so this project would be ideal to sink her teeth into. She is postdoctoral and has written academic papers so she would be helpful in getting the literature together, helping me write the reports for the work. In the process, we hope to gather good data to publish in tier 1 journal, something that would greatly boost her career.

I'm in discussion with Addenbrookes and the Clinical school on visitorship status for both of them so that they can be based in Cambridge working with me.

I expect to have a team of 2 or 3 working on this project.