the new business focus *

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The New Business FocusLeif EdvinssonPublished online: 28 Jul 2006.

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The New Business Focus*

by Leif Edvinsson

Muscle and machine power will shortly be replaced mainly by thoughtpower. The transformation of society means a new business logic not based o n the traditional factory perspective. Clearly there is a strategic challenge to develop business strategies where thoughtware and soft assets (especially human capital) are very much the basis for increased value-adding and productivity growth. Consequently, it is information processing which is becoming much more dominant in the value-adding process. This requires more investment into software intensive human resources and new indicators (such as returns o n human capital) as well as mapping or identification systems. This new business focus requires much more attention to costs, value and profitability. The commercial challenge lies partly in information usage and design of profitable service packages and delivery systeins, not to mention the evaluation and investment in packaging, pricing and organisation of these soft entities. This article offers a systematic and novel approach to increasing turnover with high value added.

CHALLENGES OF THE 1990s

To look into the future requires another perspective. Traditionally we have been looking at the economy as well as at business with one eye. The focus has been on the industrial production of goods. Now a new vision of the significance and importance of services is appearing. A new business environment is manifesting itself. Consider the new employment structure: more than 50 per cent of jobs are in service functions and these new jobs involve more and more information-processing. More and more industrial companies are also adding service offerings to their hardware as well as forming separate business units for service functions.

We are facing a situation that will influence business as well as individuals to the same extent as when the agricultural society became

* This article was presented at the Second Annual Seminar on the Services Economy, Geneva, June 1986.

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196 THE SERVICE INDUSTRIES JOURNAL

transformed into the industrial society. Muscle- and machine power are going to be replaced mainly by thoughtpower. We are at a crossroads for a new business logic, not based on the traditional factory perspective. Already there is a new economy and a new business environment around us challenging us:

to make the invisibles visible and to see the new business flow; to make more profit out of the new hidden 'soft' assets such as thoughtware and 'gold collar' workers; to develop new organisational formats for delivery of information flows and skill combinations through new technology.

This calls for a new strategic focus as well as a new mag around which to create the new business concepts, where the thoughtware and soft assets are the basis for increased value-adding and productivity growth. As a paradox it might also turn out that development of this invisible thoughtware capital will decrease the need for the more visible financial capital.

THE CONSULTUS GROUP

The Consultus group has been concentrated on these issues as a speciality for the last 15 years. Today there are different task forces working with service management development concerned with:

quality and services research search for leadership development of board of directors and executive service management information internationalisation

One of the innovations is how to extract the hidden soft values of thoughtware and services and develop it into commercial entities for creation of persistent income flows, especially for overseas trading of services.

'SOFTNOMISATION'

A characteristic part of the structural transformation in advanced economies as well as companies is the increase in invisible service functions. This process has already been labelled 'softnomisation' in Japan so as to emphasise the soft economics. It is said to be characterised by four major dimensions:

intensified information and knowledge content of organisational output; changes in social values into a search for more soft properties; shift away from large scale to small scale and multilocation of business units; shift in the composition of the macro-economic structure.

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THE NEW BUSINESS FOCUS 197

To illustrate this we might look at the modern factories that are becoming more and more information- and service-intensive. On average between 50-75 per cent of the labour costs in Swedish mechanical industry goes into thoughtware and information functions. Within Digital Equipment only 6 per cent is working with direct production. Within IBM it is about 10 per cent. consequently it is the indirect production, ie information- processing, that is becoming more and-more dominant in the value-adding

I process. According to the Institute of Softnomics in Japan, to increase the

value-added ratio of products it is necessary to increase the rate of 'softnomisation' by inputting more information and non-material resources, that is, externalising specialised activities and functions. In short, to increase the value-added ratio of products it is necessary to invest more into software intensive human resources as well as equipment.

It is no longer a flow of hardware but a 'soft flow' of information, skill and services that needs our attention. For this we need both new indicators (such as value addedtworker, investment per worker and return on human capital) as well as mapping systems for the flow. A major proportion of the investment is also within the 'soft' sectors. In Sweden, in 1983,64 per cent of the total tangible investment was within the service sector; to this should be added the intangible investments regarding retail and distribution as well as market investments.

Information flows and access to information are critical for application values and productivity growth. Therefore, informationalisation could also .be regarded as deregulating .traditional organisational boundaries. Information has to flow freely between units as well as between countries, to be extracted where needed. Furthermore, increased intensification on knowledge-intensive activities relies on access, usage and processing of information. These activities are, however, based on investment in training as well as information equipment.

The backbone of the knowledge-intensive factory is the competence and skill of its human capital. These are the real 'soft assets' of the company, though only the physical capital is shown in the balance sheet. Stock values in 1985 of the human capital in the computer business sector. were on average $0.1-0.3 million per employee ('gold collar' workers). A traditional return on asset calculation would give challenging aspects.

A NEW MAP

As modern business is being restructured it is essential to find a way to describe these soft non-material flows. It is not a question of opposition to the hardware. It is rather an enlarged focus, a search for a methodology to describe the critical intangible manufacturing components both in the economy as a wKole as well as on the company level. This description has

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to start at company level and then be aggregated on the national accounting level.

However, many of these service functions are hidden in our traditional accounting and statistical systems, as well as the value-added from them. The immense flow of information and its value, such as telecommunica- tions and education, are not explicitly measured. To be able to realise the new environment we need to invent new approaches that will help us to see and give us the right 'map' for the future.

FIGURE 1A

PRODUCER-RELATED SERVICE FUNCTIONS

PRE SERVUGE

eg : - R&D - sales promotion - market research - delivery services

- adm services - technical services

Source: Consultus, Stockholm, Sweden

If we focus on traditional industry and the related services we might see this as a flow system (see Figure 1). In this system we classify the services into three major categories:

input services such as market research, R&D (research and development); services in the core process, such as CAD/CAM (Computer Aided DesignIComputer Aided Management), mail, clerical work; intermediary services, such as sales promotion, after-sales service.

Most of these services seem to be in-house operations with an invisible statistical consequence. These internal services in an average Swedish

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FIGURE 1B

FLOW OF SERVICES

Before During After 11.4 8.1 19.3

Shares of:

Internal purchase B a t n r a m w I n t a l t u r n o v e r s e r v i c e s

mkr 2.0 11.4 5.6 19 8 36

External purchase mkr 0.6 8.1 0.2 9 4 17

Inhouse empl. rnkr

Total services mkr 4.4 38.8 9.7 53 23

Share % of total 8 73 18 100 % of turnover 2 17 4 23

industry seem to account for 49-75 per cent of the cost structure. The total semice'content of the turnover might be around 25 per cent. The external purchased part of that seems to be around 5 per cent compared with an average of 15 per cent within the Organisation. for Economic Co-operation and Development (OECD).

Through this model developed within the Consultus group we have been able to describe some aspects of the 'softnomisation' and to start a

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fruitful dialogue around the business implications. For obvious reasons the traditional supervisory systems are focused on the core process, not the flow system. Critical tools such as quality and efficiency/productivity ratios are not related to the soft flows. This production focus rather than a value-adding focus is very much related to the inherent culture and tradition. However, the increased competition is resulting in accelerating changes. Unfortunately it seems that the major motives for noting the service functions in the flow are based on a search for rationalisation, not value-adding. It is still a cost-centred focus on services, not a profit-centred vision.

A growing number of companies today are looking into the possibilities for profit-centred solutions such as developing service divisions, service partnerships and commercialising existing know-how and resources externally.

The continuing evolution of a more knowledge-intensive core process will also require an increased upgrading of the human capital and support technology. This will call both for upgrading the whole systems flows of qualified competence and accessibility as well as a new professional return on substance approach to include also the human capital in the calculations.

One step along these lines is shown in the model from the Institute of Softnomics (see Figure 2). This model shows a chain of internal cost, a chain of value flows and new ratios to observe the significance of the 'soft' components in the calculations. Successful companies have been able to make these cost maps as well as manage the inter-linkages, such as People's Express and Nippon Electronics. The result has been both cost leadership and service differentiations.

The new business focus seems to need even more attention to these cost and value maps. As the value of the service does not originate at the production centre but rather at the consumption centre it is of the utmost importance to perceive and understand the value chain from the buyer's viewpoint. What activities and costs can he and will he perform, and how do these affect his cost and value map?

A BUSINESS SHIFT

To be able to do business in this new environment we have to learn to understand where the information flow is as well as where the value-processing is done. We have to learn to observe both the underlying physicaYtechnica1 infrastructure as well as the service relationships that exist in the system. The major input in this system is information and human capital. Examples of this may be seen in banking, insurance, aviation and engineering.

The new business logic is very much directed by the soft content, the infrastructure and the capacity costs. As it is mainly the indirect production that creates value-added, the economies of scale should be searched within these areas as well as R&D and marketing/distribution.

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C.09anaus Sector tndopmous Sector

V a l w Added' Cnloqenous Sector

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One interesting case is the Italian textile company Benetton. During the last 10 years it has grown into a leading position in Europe. This family company has eight factories in high-cost Europe but also 4,000 franchise outlets. In the factow both laser scissors and CADICAM are used. But the most essential coiponent is the information flow that is initiated each night from the 4,000 boutiques and sent to Italy. This amounts to a daily market research of customer reactions and trend signals of tastes. Based on this the company can develop new seasonal packages within 25-30 days. As a consequence Benetton may attain seven seasons instead of only two, which is the tradition in the textile business.

What is also seen in this case is that it is not merely the technology network that is essential, but rather the possibilities of generating an information-flow, of processing information and thereby gaining an increased value-added or higher productivity. The commercial challenge lies in using the information either to improve the quality of the delivery dimension or to upgrade the value of the user (application development). Economies of scale lie very much in the formation infrastructure and network. This calls for investment both into technical networks such as datad highways and teleports but also in human capital in the form of training and development. A tremendous investment boom is under way.

The business leverage will then come from business on these networks as well as the human capital/thoughtware. It will take this invisible capital/substance, package it into visible and perceptible service formats, and make them accessible through the technology networks. This might be a new organisational pattern. One example is the data and information network SWIFT (Society for Worldwide Interbank Financial Telecom- munications), which is linked up with 1900 banks in 60 countries 24 hours a day.

These new types of service packages and delivery systems will then form a new type of international business and trade structure, much more soft and intangible but with a very high value-flow.

Perhaps the most challenging revolution now is in the value-adding process of information flows, human capital and services. Today we lack widely accepted methods for evaluation, packaging and pricing of these soft entities; in other words, a trading methodology for services.

VALUE-ADDING

Why is value-adding so important related to services and thoughtware?

As we have noticed above, more and more of the cost structure is related to the soft entities. Furthermore your competitive strength will be related to how you can satisfy the customers by selecting your skill and loading your delivery with thoughtware. Just think of how Yves St Laurent and IBM are loading their deliveries with services and thoughtware (such as trade mark, design, software and networks).

The most important dimension might be that your business success will

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be related to how you commercialise your services, skill and information infrastructure into tradeable items. One illustration of this is how McDonnell Douglas, the traditional airline factory, has also become a world leader in advanced factory systems around CADICAM. Since 1984 they have built a specific company structure called McDonnell Douglas Information Systems, with more than 1400 employees. Growth of 70 per cent outside the USA was forecast for 1986 through mergers and acquisition, i.e. information and infrastructure investment for the local establishment trade of services. Another illustration might be how the real estate business is trying to increase the value-added of properties by thoughtware development that increases the value per square metre.

Companies with a strategic focus on commercialising the soft assets and opportunities will be the winners in future. Some of these new heroes are SAS, SEARS, City Bank (according to Fortune the most innovative company in the USA) as well as American Express (the third largest merchandise dealer in USA, based on its network).

To simplify, value-adding in services is very much concerned with making more money out of the invisibles. This is already gaining increased attention and might be a new trend. The value-adding from the service sector is already twice as large as for traditional industry. Within the industry the thoughtware and indirect service component accounts for more than 50 per cent. The thoughtware share of the invoiced turnover is, however, less visible (around only 25 per cent).

What gives a higher value-added then? As I see it, it is:

the existing skill, competence and networks the indirect activities such as R&D, information-processing and market relationships loading the delivery by packaging the services into complex packages such as car safety or washing machine programmes, ie assembling the skill into new tradeable packages. making this skill accessible and visible to the buyer by a service touch such as Business Class on airlines. sharing the application value and customer benefits by another pricing relationship, such as success fees.

All this calls for a new focus, a new investment pattern, a new trading strategy, a new organisational set-up, a new accounting approach. In short, a new business methodology is needed.

One basic condition for this methodology is that the value of the services is usually generated in the moment of application, not in the factory. The value generation could then be seen as a chain, where the value is built up in the production unit and the intermediary unit as well as with the final user/customer. The softer the delivery the more essential it is to focus on customer benefits and have a clear perception of customer values.

For example, if you think of weather information, the value is inherent in the various uses of the data. If you are going on holiday or if you are a

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pilot the weather data have different implications for you. But they are still the same weather data, though with different economic values.

Value-adding of services especially has to take into account:

that the value chain or the main value comes from the application unit; 8 the packaging, to make the invisibles tradeable.

METHODOLOGY - SERVICE LOADING AND SERVICE TOUCH

The methodology developed within the Consultus group is based on working sheets to generate a mental management approach for the business development of services and thoughtware. It is a simple methodology. The trick is to get the mind moving around two assets: your customers and customer relationships; and your skill.

It is very much a question of assembling know-how, system information, applied experience etc. and packaging it around tradeable items/contracts, to end up with clear delivery formats and a clear application perception.

Some of the major steps in this systematic process are:

a business understanding of customer functions/applications; a description and targeting of actual business related to the degree of 'softnomisation';

8 a business chronology as an evolving marketing programme for fine-tuning customer perceptions and applications;

8 a segmentation or resegmentation built on a systematic delivery approach and an increasing customer interaction.

The process contains among others the following working situations:

8 together with a number of groups you start development of application objectives for actual deliveries/products/skill or services to generate profile areas to make your capacity more visible for customers.

8 together with the same groups you will work on upgrading options for various customers and relate your packages of today with visions of tomorrow to reach the new application packages that could be delivered.

Consequently the process of service loading involves two dimensions: clear profiles of skill and application areas, and clear delivery formats to make the soft entities tradeable.

The next step in the process is to rank and give priority to various dimensions to obtain a strategic map containing budgeting dimensions; technical dimensions; staffing dimensions; key account dimensions. With this strategic map it is possible to lay out the route for transfer of skill to a customer and to reach a higher degree of solution for the customer with a higher application value and therefore a better pay-off for both parties but also with an option for the supplier for a more lasting customer relationship.

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This service loading or packaging process is critical for the customer relationship as well as the possibilities for customer participations, but also for the pricing dimension. To end up with a higher value-added from your services it is necessary to develop an approach that can build over time an increased acquired taste and relationship of the customer. For this you need a systematical delivery and time-related scheme for continuously increased interaction and customer involvement. Based on that you may develop an escalating continuous cash-flow.

For the pay-off it is necessary to have a service touch that appeals to the customer's expectations. This implies a very serious fine tuning of customer perceptions into a solution transfer with a high visibility content.

To summarize, this service loading process will result in a higher value-adding of services through:

improved perception of customer applications; upgraded customer applications, e.g. by golden packages; shared customer benefits and application values.

This systematic approach also implies that you work through and with your customers, not towards them. However, this will lead to the following consequences:

segmentation consequences (look for focus customers to build and maintain a relationship with over time); organisational consequences (look for development and application centres, linking up with customers through symbiotic approaches or federations, and separate externalised profit centres for human capital investment growth); pricing consequences (look for another approach related to application values).

Successful business development of services should be not only a big smile (good customer relationships) but also a big price tag (income flows related to the growth of customer relationship). This could be built around:

a clear cost mapping of various transactions both within the production unit as well as the application unit; return on investment, both the hardware and the increasing human capital investment; application values and usage pricing.

RESULTS AND FUTURE POSSIBILITIES

Some of the results that have been gained by this systematic approach are:

a freeing of hidden soft assets and human energy; sales growth, both domestically and internationally;

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customer interactions and new customer participation styles; increased pay-off on soft investments and human capital; attractiveness in recruiting skills; increased profit and escalating continuous cash flow.

Future benefits for the next few years of the service sector growth include:

continued technologisation of different service activities to reach a higher productivity and efficiency; structural changes due to deregulations and creative innovations that will give a more dynamic climate for service business; improved mapping and descriptive ratios for improved understanding of the value-adding process of business on information and soft entities; cross fertilisation of thoughtware and human capital through social networking over national, cultural and organisational borders.

If you start on this route you are likely to gain some 20-50 per cent increased turnover with a very high value-added (net profit contribution approximately 50 per cent). You can also benefit from this new business environment by:

enlarging focus to the new soft investment and value flows; translating hidden soft assets and services into clear packages; sharing customer applications by another commercial relationship networking and pricing approach.

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the new business focus *

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