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Tuesday, 21 December 2010

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