SPRU Masters - Spring 2003 managing innovation in complex products and systems

2. The shift to high-value services and solutions Changing boundaries of the firm High-value activities New business models for services High-value services and solutions in CoPS Drivers Firms responded by building capabilities Challenges

3. Services: intangible activities performed after the product has been handed over to the customer. Services: intangible activities performed after the product has been handed over to the customer.

4. Stagnating product demand & growing installed base Installed-base-to-new-product ratio: cars (13:1); trains (22:1); civil aircraft (150:1) Shift from manufacturing to high-value added services Services are a growing proportion of firm revenues IBM: services 43% & hardware 42% (2001) GE Financial Services: 41% of total revenues (1999) Accumulation of past purchases and longer product life spans Revenues from operational services 10-30 times product sales E.g. rail companies spend $28bn a year maintaining & operating trains, but only buy less than $1.4bn of trains Added-value - difference between value of a firm's output and costs of its inputs Accumulation of past purchases and longer product life spans Revenues from operational services 10-30 times product sales E.g. rail companies spend $28bn a year maintaining & operating trains, but only buy less than $1.4bn of trains Added-value - difference between value of a firm's output and costs of its inputs

5. Embedded services Software in physical product Computer controlled maintenance services Comprehensive services Services to finance, operate and maintain a product through its life cycle Integrated solutions Products and services provided together as solutions to customer's needs

9. Traditional product-centric approach Design, build & manufacture rolling stock New customer-centric approach Solutions for 'train availability' through the product life cycle London Underground Northern Line (1995) Customer did not specify size of fleet. Asked for 96 trains available for service each day for a 20 year period To achieve customer's targets Alstom built 106 trains & set up dedicated mainentance organisations

15. Vertically-integrated manufacturers Components sourced from in-house product divisions (e.g. Thales) Specialised systems integrators Best-in-class solutions Components sourced from external suppliers (e.g. WS Atkins; C&W) Hybrids in-house and externally developed components (e.g. Ericsson and Alstom)

16. Systems integrators Strong position to provide services to operate the product during its life cycle Maintenance, renovation, upgrades, operations, training Integrated manufacturers can feed back lessons learnt into improved product design Virtuous circle of design improvements, increasing system reliability and performance

18. Offer advice on How to plan, design, build, finance, maintain and operate E.g. assist with front-end business plans and later stages Consultancy skills Not 'hard' product-based engineering expertise 'Soft' customer-relationship skills: ability to listen and respond flexibly to customers Understand a customer's entire business operating system Firms building business consultancy capabilities: Alliances with consultancy firms Acquisitions In-house development Firms building business consultancy capabilities: Alliances with consultancy firms Acquisitions In-house development

19. Vendor financing Help with purchasing expensive products E.g. constructing new capital-intensive systems such as mobile phone networks Asset management Help customers reduce the costs and extend the life of an installed base of assets Rolling stock, baggage handling systems, 2G mobile

20. Problem: 'if every solution is unique, the company cannot make much money from them' Galbraith, p203, (2002) Challenge - move from unique to replicable solutions Improving customer-facing delivery of solutions (improve project organisations and processes) Strike a balance between A) reducing costs by standardising products and services - e.g. modular services at Ericsson B) providing tailored solutions Customer experiences. Gain deep understanding of customer's needs, which vary according to their experience: the lower the level of customer's capabilities the earlier in the life cycle they require assistance (e.g. Virgin Trains and Virgin Mobile); more experienced customers require help at later stages Managing fluid boundaries in the value chain:How far can migrate before stepping over the boundary into what a customer regards as its core business. Example: Ericsson traditionally refrained from moving into operations. Now undertaking the technical operation of network, but not crossed final boundary into service provision. High risks: Late delivery, quality problems and cost overruns. Poorly specified projects - liquidated damages can run into �millions. New ways of monitoring service performance: SERVICE LEVEL AGREEMENTS (SLAs). SLAs are drawn up at the contractual stage. Penalties for failure to perform. Clear reward structures Beyond manufacturing or service focus: as manufacturers move into services, have to 'outgrow their old manufacturing shell'. But face difficulties in managing manufacturing & service businesses within the same organisation. Cllash of interests, priorities over resources Customer experiences. Gain deep understanding of customer's needs, which vary according to their experience: the lower the level of customer's capabilities the earlier in the life cycle they require assistance (e.g. Virgin Trains and Virgin Mobile); more experienced customers require help at later stages Managing fluid boundaries in the value chain:How far can migrate before stepping over the boundary into what a customer regards as its core business. Example: Ericsson traditionally refrained from moving into operations. Now undertaking the technical operation of network, but not crossed final boundary into service provision. High risks: Late delivery, quality problems and cost overruns. Poorly specified projects - liquidated damages can run into �millions. New ways of monitoring service performance: SERVICE LEVEL AGREEMENTS (SLAs). SLAs are drawn up at the contractual stage. Penalties for failure to perform. Clear reward structures Beyond manufacturing or service focus: as manufacturers move into services, have to 'outgrow their old manufacturing shell'. But face difficulties in managing manufacturing & service businesses within the same organisation. Cllash of interests, priorities over resources

21. How far to migrate along the value stream Boundary with customer has to be managed Overcome problems of channels to markets Training companies in flight simulation Business consultants in global telecoms High-risks & financial exposure Service level agreements (SLAs) Create new business models Beyond manufacturing & service-centred models Customer experiences. Gain deep understanding of customer's needs, which vary according to their experience: the lower the level of customer's capabilities the earlier in the life cycle they require assistance (e.g. Virgin Trains and Virgin Mobile); more experienced customers require help at later stages Managing fluid boundaries in the value chain:How far can migrate before stepping over the boundary into what a customer regards as its core business. Example: Ericsson traditionally refrained from moving into operations. Now undertaking the technical operation of network, but not crossed final boundary into service provision. High risks: Late delivery, quality problems and cost overruns. Poorly specified projects - liquidated damages can run into �millions. New ways of monitoring service performance: SERVICE LEVEL AGREEMENTS (SLAs). SLAs are drawn up at the contractual stage. Penalties for failure to perform. Clear reward structures Beyond manufacturing or service focus: as manufacturers move into services, have to 'outgrow their old manufacturing shell'. But face difficulties in managing manufacturing & service businesses within the same organisation. Cllash of interests, priorities over resources Customer experiences. Gain deep understanding of customer's needs, which vary according to their experience: the lower the level of customer's capabilities the earlier in the life cycle they require assistance (e.g. Virgin Trains and Virgin Mobile); more experienced customers require help at later stages Managing fluid boundaries in the value chain:How far can migrate before stepping over the boundary into what a customer regards as its core business. Example: Ericsson traditionally refrained from moving into operations. Now undertaking the technical operation of network, but not crossed final boundary into service provision. High risks: Late delivery, quality problems and cost overruns. Poorly specified projects - liquidated damages can run into �millions. New ways of monitoring service performance: SERVICE LEVEL AGREEMENTS (SLAs). SLAs are drawn up at the contractual stage. Penalties for failure to perform. Clear reward structures Beyond manufacturing or service focus: as manufacturers move into services, have to 'outgrow their old manufacturing shell'. But face difficulties in managing manufacturing & service businesses within the same organisation. Cllash of interests, priorities over resources

22. Supliers of CoPS are building capabilities to deliver services and solutions Wider challenges What is the strategic focus? Fuzzy boundaries with customer? Organisational forms? Learning and improving performance? Customer experiences. Gain deep understanding of customer's needs, which vary according to their experience: the lower the level of customer's capabilities the earlier in the life cycle they require assistance (e.g. Virgin Trains and Virgin Mobile); more experienced customers require help at later stages Managing fluid boundaries in the value chain:How far can migrate before stepping over the boundary into what a customer regards as its core business. Example: Ericsson traditionally refrained from moving into operations. Now undertaking the technical operation of network, but not crossed final boundary into service provision. High risks: Late delivery, quality problems and cost overruns. Poorly specified projects - liquidated damages can run into �millions. New ways of monitoring service performance: SERVICE LEVEL AGREEMENTS (SLAs). SLAs are drawn up at the contractual stage. Penalties for failure to perform. Clear reward structures Beyond manufacturing or service focus: as manufacturers move into services, have to 'outgrow their old manufacturing shell'. But face difficulties in managing manufacturing & service businesses within the same organisation. Cllash of interests, priorities over resources Customer experiences. Gain deep understanding of customer's needs, which vary according to their experience: the lower the level of customer's capabilities the earlier in the life cycle they require assistance (e.g. Virgin Trains and Virgin Mobile); more experienced customers require help at later stages Managing fluid boundaries in the value chain:How far can migrate before stepping over the boundary into what a customer regards as its core business. Example: Ericsson traditionally refrained from moving into operations. Now undertaking the technical operation of network, but not crossed final boundary into service provision. High risks: Late delivery, quality problems and cost overruns. Poorly specified projects - liquidated damages can run into �millions. New ways of monitoring service performance: SERVICE LEVEL AGREEMENTS (SLAs). SLAs are drawn up at the contractual stage. Penalties for failure to perform. Clear reward structures Beyond manufacturing or service focus: as manufacturers move into services, have to 'outgrow their old manufacturing shell'. But face difficulties in managing manufacturing & service businesses within the same organisation. Cllash of interests, priorities over resources