Manufacturers forming successful complex business services
Designing an organization to fit the market
The Authors
Wayne A. Neu, College of Business Administration, California State University San Marcos, San Marcos, California, USA
Stephen W. Brown, The Center for Services Leadership, W.P. Carey School of Business, Arizona State University, Tempe, Arizona, USA
Abstract
Purpose – The purpose of this paper was to isolate and characterize organizational factors that enable the formation of high-performing business services in product manufacturing firms.
Design/methodology/approach – This study employed a case research design. In total, 32 depth interviews were conducted with 11 different managers from a Global 100 information technology manufacturing firm. These managers were directly responsible for forming a highly successful business service. All interviews were tape-recorded, transcribed, and the resulting 500 pages of interview data were open-coded in QSR NUDIST. A case report was reviewed by study participants to enhance construct validity.
Findings – The general conclusion is that forming high-performing business services in product manufacturing firms stems largely from managers' ability to create internal alignment among several organizational factors that collectively “fit” conditions in the market.
Research limitations/implications – This study does not provide the statistical generalization to a larger population offered by a large-sample study. In addition, all data were collected from individuals who were directly involved in the formation of the focal business service.
Practical implications – The insights from this study can help managers design within a product manufacturing firm an organization that supports the formation of complex business services.
Originality/value – While product manufacturers' expansion into services is very prevalent in practice, the development has received sparse academic research attention.
Article Type:
Research paper
Keyword(s):
Business formation; Services; Manufacturing systems; Organizational design.
Journal:
International Journal of Service Industry Management
Volume:
19
Number:
2
Year:
2008
pp:
232-251
Copyright ©
Emerald Group Publishing Limited
ISSN:
0956-4233
Introduction
For traditional product manufacturers such as IBM, Pitney Bowes, and General Electric, their expansion into offering business services is extensive enough that one may wonder if they should be classified as service firms. After all, services account for about one-half of total revenue at IBM and Pitney Bowes, and well over 50 percent at GE. By no means are services new to these firms as virtually all product manufacturers have long-provided service as part of their market offerings. Traditionally, firms have provided different types of customer service such as responding to customer inquiries for technical assistance and “free” value-added services that are bundled with tangible goods. In addition, and most relevant to this study, across many sectors of manufacturing there is now the pursuit of “for fee” business services that are unbundled and often provided independent of the firm's tangible goods. Three key factors are contributing to this transition.
First, managers in many product manufacturers need to search for more attractive market opportunities in which firm resources can be used. The need may arise from existing product lines that do not meet objectives for growth or whose market demand is declining or expected to do so in the future. In other cases the firm's tangible goods may be approaching commodity status and, even though revenue may be growing, profit margins are very thin. We have also seen extreme cases in which the search for more attractive opportunities is simply a matter of survival (as was the case with Wang Laboratories).
Second, environmental developments have given rise to attractive opportunities for services. The underlying issue is that factors such as heightened global competition and advances in technology require that managers concentrate on developing a position of advantage in core strategic activities. This concentration then increases a firm's dependence on external suppliers for activities they cannot, or do not want to, effectively develop internally (Quinn and Hilmer, 1994). Managers often look to their suppliers of tangible goods to be a source for some of these activities which often take the form of services.
Third, even among product manufacturers, a significant majority of all employees work in service tasks (Quinn et al., 1990). Therefore, concentrating on developing superior resources and capabilities leads to service activities that are the most treasured links in their value chains and contribute the most to creating customer value (Quinn, 1992). Increasingly, these highly valued service activities are leveraged and sold to other firms.
Despite its prevalence in practice, this phenomenon has received very little academic research attention. Recent empirical research has identified stages through which the transition to business services is carried out and key challenges managers encounter in progressing through the stages (Oliva and Kallenberg, 2003). Other work has examined several attempts to establish business-to-business services in goods-dominant firms (Neu and Brown, 2005). In addition, researchers have identified key underlying behavioral processes displayed by managers and employees in product manufacturing firms that demonstrate a record of successful service development (Gebauer and Friedli, 2005), and organizational arrangements needed to effectively extend a product manufacturer's service business (Gebauer et al., 2005). These organizational arrangements are needed to overcome what Gebauer et al. (2005) label the service paradox in which substantial investments to extend the service business do not provide the expected returns.
This study was guided be the belief that product manufacturing firms that overcome the service paradox will exhibit two overarching principles from organization theory. First, the principle of internal alignment is the basic notion that each element of the organization must be designed to support rather than conflict with each other. The organizational design elements can be classified into five categories – strategy, structure, processes, rewards, and people (Galbraith, 2002). Second, the principle of contingent design maintains that organizational performance depends of the degree to which the set of internal elements is designed to “fit” conditions in the external environment. Characteristics of the external environment have been synthesized across three underlying dimensions – complexity, dynamism, and hostility (Dess and Beard, 1984).
Taken together, these principles suggest that product manufacturing firms that demonstrate successful business service development will exhibit a configuration of supporting organizational elements that effectively fit conditions in the service business unit's external environment. However, very little is known about the organizational elements managers should consider and how they should be designed to enhance performance. In addition, virtually no research attention has been given to exploring relevant conditions in the external environment as managers pursue business services. Therefore, the purpose of this study was to investigate the following three questions: In the context of product manufacturing firms, what organizational factors enable the formation of high-performing business services? How are the factors designed to support each other? And how does the configuration of factors fit conditions in the environment?
The balance of this paper is organized as follows. First, we explain the case study research method which is used as the basis for our work. This is followed by a discussion of results. We then summarize our contributions, limitations of the study, and future research opportunities
Method
For this study, we employed case research design (Miles and Huberman, 1994; Perry, 1998; Yin, 1994). Case research is an appropriate methodology since forming new revenue producing business services in product manufacturing firms is a relatively recent development and for which very little academic research has been published (Parkhe, 1993). In addition, our investigation explores the questions of “what” organizational factors and “how are” they designed, and both types of questions are well suited for case research (Yin, 1994).
A Global 100 manufacturing firm – which we will refer to as Information Technology Corporation (ITC) – provided our context. We selected ITC because the firm has a long history of providing technology hardware and was known to have high-performing business service programs. A senior-level manager from ITC assisted in selecting the unit of analysis – the formation of a service program we refer to as TechServ. TechServ is a bundle of 35 distinct service elements designed to support business customers' mission critical information technology systems (systems critical to achieving the firm's mission), and its selection was based on four criteria. The program is a:
- highly successful;
- business service that was;
- recently; and
- organically developed (TechServ was the firm's highest performing service program).
In total, 32 semi-structured interviews were conducted with 11 different ITC managers.
A total of 17 of the interviewees were conducted with TechServ's general manager, marketing manager, and product manager. These individuals were our primary informants for market conditions, strategy, strategy formulation, and structure. As the case study progressed the marketing manager helped identify and secure the participation of other personnel from a variety of functions who were either directly responsible for designing key organizational factors or had insight into their design. For example, TechServ's Launch Manager was the source of data for strategy implementation, a European Account Support Manager provided data on human resource policies, and a director of customer experience measurement was our source of information for measurement and rewards. All interviews were conducted over the telephone and typically lasted from 60 to 90 minutes. One interview lasted three and one-half hours.
A case study protocol was developed to guide our research and strengthen reliability (Yin, 1994). The protocol consisted of data collection procedures and an interview guide that included three types of questions. We included general questions about the informant's position in the firm and background, as well as the role he/she played in developing TechServ. Unstructured questions were included to give the informant freedom to tell the story of their experiences (e.g. What were the key external challenges facing managers at ITC? What factors enabled TechServ's success?). Probing questions were then used to flush out details regarding specific factors. Questions selected from our interview guide were e-mailed to each interviewee prior to the scheduled interview to inform the individual of topics to be covered. Shortly after each interview key insights, impressions, and follow-up questions to ask in future interviews were recorded on a contact summary form (Miles and Huberman, 1994).
All interviews were tape-recorded, transcribed, and the resulting 500 pages of interview data were imported into QSR NUD*IST® and open-coded (Straus and Corbet, 1998). Detailed written accounts, tables, and figures were also developed to integrate findings across informants and to answer our focal research questions. Since internal alignment and contingent design were overarching principles that guided the study, we allowed specific organizational factors and environmental conditions to emerge inductively from fieldwork. As they did, we turned to several streams of research to help conceptually define factors and develop our understanding of how factors supported each other and how collectively they fit conditions in the environment.
Over 18 months, a 55-page case report evolved. The process involved developing a preliminary draft summary of each section of the report. Follow-up questions intended to clarify and extend content were inserted directly into the draft summary. The summary was then e-mailed to an interviewee and he/she was asked to review the content to ensure the summary accurately described reality. The interviewee's perceptions of the content were discussed during a follow-up interview and changes were made when needed. In addition, the follow-up interview addressed questions that had been inserted into the draft summary. In effect, to enhance construct validity several different interviewees reviewed sections of the written summary and two individuals reviewed and validated the entire case report (Eisenhardt, 1989; Yin, 1994). This iterative process lead to the insights that follow.
Results: designing an organization to fit the market
Our general conclusion is that TechServ's success stems largely from managers' ability to create internal alignment among several organizational factors that collectively “fit” conditions in the market. In essence, factors of strategy were adapted to align with emerging market conditions and then several additional factors of organization were designed to support the newly formed strategy. We start by discussing the concept of market complexity as the key environmental factor and how its emergence brought about an attractive opportunity for a new business service. Then we discuss a collection of internal factors that enabled ITC to successfully pursue the market opportunity.
The emergence of a complex market for business services
Environmental complexity deals with the heterogeneity and range of factors that are relevant to the organization's activities (Dess and Beard, 1984). While several factors can contribute to complexity, the key factor facing managers at ITC was the emergence of a market for data center support that had become highly complex and the complexity emerged across 2Ds (a data center consists of the IT systems that are critical to achieving the firm's mission such as telecommunication, billing, materials requirement planning, and customer relationship management). First, in the mid-1990s, an organization's data center evolved from a closed system – the entire system was provided by a single vendor and there was little flexibility to integrate technology from other firms, to an open system – one in which a firm integrated a diverse collection of geographically dispersed IT hardware, software, and technologies provided by several different vendors. The underlying issue is that an organization's highly integrated, diverse collection of IT resources is a complex system, and developing, supporting, and managing that system is a very complex task. One interviewee described the complexity as follows:
It's the combinations or permutations you can have with various components from various vendors. You get indefinite permutations of how you can combine things. For example, there is no such thing as a best practice or a standard way of running a billing system because you already have five or ten different billing software applications available; you can run it on anybody's UNIX box, anybody's database, with anybody's storage device.
The second dimension of market complexity stems from the heterogeneity of needs and wants that exists among customers. That is, ITC's business customers had different support needs since their IT systems were unique with respect to the collection of IT resources and size. In addition, the market was comprised of businesses that spanned a variety of industries, were globally dispersed, and differed greatly on the degree to which they wanted to rely on outside vendors for support.
A market opportunity for data center support rapidly emerged since many businesses were increasingly dependent on IT to achieve their missions, but unable or unwilling to acquire or develop the resources and capabilities needed to effectively develop, support, and manage their systems. The central challenges for managers at ITC were that many businesses in the market for data center support wanted one single vendor to assume responsibility for the entire complex task and, at the same time, tailor a support program to accommodate their individual needs. In other words, the key challenge was to configure an organization within the product-manufacturing firm to align with both dimensions of a highly complex market (Figure 1).
Strategy
Strategy is the first component to be addressed because it establishes the criteria for other design decisions (Galbraith, 2002). During fieldwork, three key factors of strategy emerged as key to TechServ's success.
Position in the value chain
A fundamental yet significant shift in strategy occurred when managers defined the value proposition in terms of a differentiated customer experience, one that focused on the outcomes customers desired from their complex IT systems. At the core of the differentiated experience was a commitment to provide the highest level of system availability in the industry, thereby minimizing business losses due to downtime. Just as important as focusing on the customer's experience was management's decision to assume responsibility for the entire complex task of providing that experience. Assuming ownership for the entire task was different from competitors who would, as one manager explained:
[…] disaggregate how they went to market. In other words, a big six would come in and do design work. They'd hire subcontractors who had built a relationship with somebody, to integrate. Then he'd go out to a third party to provide support.
Assuming ownership for the complex task guided the design of 35 distinct service elements to prevent problems before they occur and fix them fast when they do occur, and motivated the redesign of ITC's tangible products to facilitate the support program.
At the same time, managers had to accommodate the heterogeneity of needs and wants that exist among customers; in doing so they designed a semi-flexible support program. That is, TechServ was in part rigid or fixed since all customers were required to purchase a base package of service elements designed to provide customers with the performance they desired from their IT systems. Then, the service program was treated in a flexible manner and tailored for individual customers in three ways. First, TechServ consists of a number of optional features that can be added to the base package. The optional features were designed to accommodate known differences that exist among customers. Second, during the sales cycle individual service elements are frequently adapted to accommodate individual customer preferences. Third, customers can increase or scale, beyond the baseline package, the amount of a service feature they purchase. Adapting and scaling service features enables ITC to accommodate the unexpected differences that exist among customers.
Orientation toward the market
While ITC was considered a product or sales-oriented firm, those responsible for forming TechServ adopted both a market (Kohli and Jaworski, 1990) and a customer-centered orientation (Pine et al., 1995) toward the market. Combined, the orientations appear to provide a philosophy that fits both dimensions of a complex market. A market orientation directs organizational activities toward understanding the complex needs of business customers and then forming a support program to address those needs. Several interviewees emphasized the shift in orientation and how important it was to forming TechServ. For example, one interview explained that while ITC did not “have a reputation for listening to our customers that well, frankly,” one of the key changes in forming TechServ was “to break down the silo mentality and really try to listen and understand the requirements of the customer.” Furthermore:
Why we were successful really came down to designing around an experience, not around features. Certainly, features came out of that but […] we were talking about a customer and their problem.
The market orientation was also reflected by the process through which managers formed their marketing programs. As explained in the “Processes” section, managers relied heavily on the acquisition, transmission, and utilization of external and internal information during the formation of TechServ.
A market orientation is a philosophy that directs organizational activities toward understanding the needs of a target market and then designing marketing programs to satisfy those needs (Kohli and Jaworski, 1990). As previously explained, the complex market was comprised of business customers that differ considerably on several attributes and whose needs and wants differ as well. Therefore, in addition to a market orientation, we found that a customer-centered orientation (Pine et al., 1995) was adopted to direct organizational activities toward close collaboration with individual customers to understand each one's business needs and then tailor TechServ to satisfy those needs.
Core competence
ITC's ability to effectively deal with market complexity provides the core competence upon which the firm's competitive position in data center support is built. Managers touted their ability to access from within the firm a full complement of resources needed to deliver an end-to-end service program and do so consistently across the diverse market. Three key elements provided the foundation of this capability.
Central in ITC's competence is the ability to apply technology to deliver customer support. Engineers developed a workstation that resides at the customer's site and monitors and collects data about a customer's installed technology. Data are remotely analyzed to detect the presence of potential system failures so corrective actions can be taken before a system failure actually occurs. Data are also analyzed to diagnose problems after they occur so reactive support can be provided quickly. A key underlying advantage of the workstation is that it monitors a diverse range of hardware and software across a customer's IT system, and does so across the diverse, globally dispersed market. As a marketing manager explained, “I think that's where, as I look back, we actually had an advantage over others; we did apply technology to what we were trying to do.”
ITC's global service organization is also a key factor that enabled the formation of TechServ. The organization consists of over 25,000 people located in approximately 160 countries and “that's a definite advantage that is hard for anybody else to duplicate.” An advantage exists because there are significant differences among customers due to geographic location and local presence enables individuals from ITC to develop a learning relationship with customers (described in the following section) and effectively adapt marketing programs to meet each one's individual needs. As one interviewee explained:
To be effective you needed to be close to your customers, you need to be local[…] you need to be able to understand the customer's political environment on top of the technical environment. So proximity was important.
The target market also included several global companies that wanted one global end-to-end service program and ITC's service infrastructure enabled the firm to provide that program.
Third, while discussing the external environment for TechServ, one individual explained that other “companies had an increasingly difficult time hiring or requiring their own resources to be effective in this ever-increasingly more complex environment.” At the same time, ITC had accumulated a critical mass of human resources that possessed a foundation of technical expertise and behavioral competencies needed to deal with that “ever-increasingly more complex environment.” The critical mass accumulated through ITC's prior experience of delivering other services for business customers. While managers met initial human resource needs by leveraging existing employees, human resource policies needed to be designed to produce the skills and mind-sets necessary to fully implement the chosen strategy.
People
This case study indicates that pursuing a strategy aimed at serving the needs of a complex market requires human resource policies to accumulate and retain the people needed to deal with that complexity. These policies include aligning the roles of front line service employees to deliver the chosen strategy, then selecting, developing, and retaining individuals who can perform those roles.
Front-line roles
The design of human resource policies began by adapting four key roles performed by field service engineers. First, the role of field service engineers changed from just fixing problems after they occur to serving as a trusted advisor. That is, they needed to be become trusted by the customer to provide unbiased advice on how to achieve the desired performance from their complex IT system. Second, the field engineer's role changed from supporting a relatively simple IT system to supporting a highly complex system. As such, the individual became a single point of expertise and responsible for delivering most of the elements defined in the support program. At the same time, dealing with the entire IT system is too complex for any one individual. Therefore, a third key role of the field engineer was to coordinate the resources needed to perform all service elements and truly provide an end-to-end support program. As one interviewee explained:
This is very complex. He cannot be the expert on all of these products and software solutions so he needs other people. That's why there's a team […] these guys typically work with several people to deliver the full set of services.
Finally, a field service engineer needed to develop and maintain a learning relationship with individual customers. A learning relationship is an ongoing connection that becomes smarter as a front-line service employee and the customer interact with each other, and collaborate to meet the customer's business needs over time (Pine et al., 1995). Through a learning relationship a field service engineer develops the in-depth customer knowledge needed to effectively carry out their roles. As one individual explained:
These [field service engineers] need to be able to develop a relationship with customers. They need to understand the customer's business, they need to understand the environment, they need to understand the company, and they need to understand the strategies.
Characteristics needed to perform the roles
Since service employees were expected to perform the aforementioned roles, they needed requisite knowledge and behavioral competencies to perform those roles. That is, individuals needed a high level of expertise across a number of areas of information technology. Such a complex knowledge set was needed to serve as a single point of expertise, deliver most of the elements defined in the support program, and serve as a trusted advisor. Individuals also needed in-depth customer knowledge in areas such as their IT infrastructure, operating processes, business strategies, and business problems. Customer knowledge was essential to perform the role of a trusted advisor and tailor a support program to align with individual customer needs.
Behavioral competencies were considered equally important to effectively carry out the newly defined front line roles. Specifically, an individual needed to be highly collaborative in nature to lead a collaborative support performance. They needed to have highly developed listening and communication skills to develop learning relationships with customers. And, they needed to possess the ability and motivation to learn quickly since extensive training and development are needed to develop and update the required breadth of knowledge needed to perform their roles.
Developing the characteristics needed
ITC invested very heavily in programs to develop the knowledge and behavioral competencies needed to perform the roles of a field service engineer. For example, an extensive classroom training program provides a broad foundation of IT-related knowledge and forms a “mission critical mindset.” A formal post-training assessment ensures that an individual possesses the knowledge needed to begin working in the mission critical environment. Then, ongoing formal classroom training on an “incredibly broad” collection of topics further develops and updates an individual's breadth of expertise.
A great deal of formal and informal collaboration among field service engineers also plays a key role in an individual's development. A formal mentoring plan outlines the service activities a new engineer will observe being performed, and the activities they will perform while being observed. Field service engineers also develop by working collaboratively with other engineers during service delivery, and attending informal seminars on current IT topics and best practices delivered by other engineers.
Retaining employees who possess the needed characteristics
A very high rate of retention among field service engineers was critical to ITC's ability to successfully form TechServ. Long-term employees develop the breadth of knowledge needed to perform several key front-line roles. That is, the breadth of technical expertise and customer knowledge accumulate over time through an individual's training and experience. In addition, earning the role of a trusted advisor and developing a learning relationship with a customer evolve over time as the front-line employee and customer interact with each other and collaborate to meet the customer's needs. As one interviewee explained:
Within support, they can start as a junior engineer but they are not going to deliver support in a mission-critical environment. For those who are going to deliver in a mission-critical environment, they need to build some expertise, they need to build this experience, they need to understand the business; it takes time to do so.
Structure
Structure deals with the way an organization is divided into discrete units and, as Chandler (1960) long ago noted, structure follows strategy. Given a strategy aimed at serving the needs and wants of a complex market, TechServ's success was supported by structural elements – decentralized decision-making authority, integrated business unit responsibilities, and intra-firm collaboration – designed to cope with the uncertainty of a complex market.
Decentralized decision-making authority
Centralization-decentralization deals with the delegation and control of decisions. In the formation of TechServ, senior managers granted considerable decision-making authority to a cross-functional strategy development team comprised of mid-level managers from several functional areas at headquarters and regional field offices. While a program champion acted as the “hub,” decision making was then, in large part, a highly collaborative effort among members of the team. Senior managers' role then became one of visibly endorsing changes to strategy and other factors of organization proposed by managers at lower levels of the firm, and facilitating the flow of resources to support those changes.
Integrated business unit responsibilities
A major structural element conflicting with the formation of TechServ involved the way in which responsibilities were assigned to organizational subunits. ITC was comprised of two major business organizations and each was chartered with discrete responsibilities. That is, one organization consisted of several divisions that were chartered with responsibility for ITC's tangible goods and software, and a customer support organization was chartered with discrete responsibilities for servicing the installed base of products. But, even the customer support organization was comprised of two divisions, one of which supported ITC-installed tangible goods while the other supported ITC-installed software. Software support then further segmented their responsibilities by assigning proactive and reactive support to different units within the division. As a general manager explained:
You talk about things that make it really hard to do the right thing for a customer. It was a very bad organizational situation to be in, in terms of how ITC had the business organized for what we were trying to do.
The underlying issue was that managers at ITC were forming a complex product comprised of a broad range of proactive and reactive service features and hardware designed to facilitate those services. ITC's structure was, as the general manager explained, a “bad organizational situation” because elements of that product were the responsibility of different autonomous business units. Therefore, central to the success of TechServ was the degree to which the highly discrete responsibilities of multiple business units were integrated to pursue the newly chosen strategy. As a director explained:Due to the breadth of issues, to really truly create a mission-critical environment it was really critical that we did create an organizational structure with the responsibility to address them all and empower that group to do so.
Intra-firm collaboration
The integration of business unit responsibilities motivated the need for a high degree of collaboration among multiple subunits and, as a general manager explained, “that became obvious right away.” The intra-firm collaboration began when senior vice presidents of the product and support organizations agreed to pursue a more “holistic” approach to satisfying customer needs. That “holistic approach” was cross functional in that several “front-stage” activities such as hardware support, software support, and sales, and “back-stage” activities such as finance, pricing, marketing, product R&D, and production were involved. We also found a high degree of multi-level collaboration between the corporate service development group and field service delivery personnel. Field service personnel were actively involved in designing the program features, and that, as a product manager stated, “is not the way it used to work.” Instead, the way it used to work was that headquarters would conduct research, design a new services program, and then, as one manager stated, “throw it over the wall” to field teams that would implement the program:
With [TechServ] we definitely changed the approach that had been used in the past […] I think if we would have just thrown it over the wall and let the field take it and run with it, it would have flopped.
Rewards
An organization's rewards system specifies policies regarding salaries, bonuses, profit sharing, stock options, etc. These policies provide incentive for the formation of a chosen strategy and are only effective when they are consistent with other design decisions (Galbraith, 2002). The way in which these policies should be designed depends on the desired level of collaboration among business units. When organizational structure consists of integrated business unit responsibilities and intra-firm collaboration, managers' financial bonuses should emphasize performance of the interdependent business units (Hill et al., 1992).
A major challenge at ITC's was a system that measured and rewarded managers' for their own business unit's discrete responsibilities, only. That is, financial bonuses were based on a business unit's actual revenue and profitability relative to targets set for the individual business unit. Furthermore, managers within the customer support organization were measured and rewarded for the performance of their business unit. Part of customer support was rewarded for the performance of proactive service while the other part was rewarded for the performance of reactive service. The system, in essence, motivated managers to focus on their own business unit's responsibilities which did not support structural changes explained in the prior section. As a general manager explained:
There was not a single measure that would cause the GMs to say, “Okay, what do I need to do to synergistically work with somebody else?” They were measured only on their individual piece of the pie.
A key change that supported the formation of TechServ was the development of a financial bonus system that rewarded managers for the financial performance of the manager's business unit, the financial performance of the firm, and customers' subjective assessment of their total experience with ITC. Interviewees explained that the new system motivated mangers to “work together towards a better customer experience and greater customer loyalty.” In addition, “You need to have a reward and recognition system that supports that intra-organizational cooperation and teamwork.” In other words, ITC needed a reward system that was consisted with other organization design decisions.
Changing the financial bonus system was described as a “huge” challenge because managers perceived that they were being measured on and rewarded for the performance of business units that were beyond their own responsibilities. In addition, one interviewee explained that there existed a general mindset of, “As long as I'm meeting my financial measures why do you care about anything else?” and a general skepticism regarding the firm's ability to accurately measure subjective variables such as customers' assessment of their total experience. According to one interviewee, the main factor in overcoming the challenge was “the force of [the CEO]” in changing the mindset and behavior of the organization and “hold[ing] people accountable for ITC's overall performance, not just their business unit performance.”
Processes
Processes through which managers formulated and implemented marketing strategy emerged during fieldwork as fundamental to TechServ's success. Formulation is the process through which strategy content is developed – e.g. value proposition, service product, service delivery processes, etc. and implementation is the process through which strategy is realized and includes both actions taken within the firm and actions taken in relationships with external constituencies (Varadarajan and Jayachandran, 1999). Both processes need to be designed in a way that is supportive of other organizational design decisions (Galbraith, 2002), and the way in which they should be designed stem from two different schools of thought.
A rational strategy formation paradigm emphasizes formal analysis and planning of marketing programs and then, after they are fully formulated, the deliberate implementation of those programs (Mintzberg, 1994; Mintzberg et al., 1998). On the other hand, an incremental paradigm gives little if any attention to formal analysis and planning. Instead, marketing programs emerge over time in small steps while an organization interacts with and learns about its environment (Quinn, 1980). We found that TechServ was formed through processes that were both rational and incremental and their integration appears to be an appropriate design when forming a strategy to serve the needs of a highly complex market.
Information processing as rational strategy formulation
When formulating strategy in a complex market, managers face a greater diversity of relevant information than when faced with a simple market (Lawrence and Lorsch, 1967). Prior research indicates that effective organizations tend to cope with the diversity of information by increasing their information processing capabilities (Galbraith, 2002; Lawrence and Lorsch, 1967). We found the formation of TechServ to be quite rational in that managers relied heavily on information processes (Moorman, 1995) to formulate marketing programs and changes to factors of organization to support those programs.
First, interviewees emphasized the significance of inter- and intra-firm acquisition and transmission of information. Internally, information was gathered from several key business owners across the product and support divisions. Interestingly, one high-level manager highlighted how corporate structure threatened this internal flow of information. Personnel in ITC's highly autonomous business units did not trust the way in which members of other business units would interpret and use data, yet overcoming the lack of trust and increasing the flow of information was essential to forming an understanding of the current situation and formulating strategy.
Throughout the formation of TechServ managers at ITC also invested heavily in formalizing and institutionalizing processes through which they acquired information from, and shared information with, a globally dispersed collection of customers. The information flows were developed at multiple levels and occurred through a variety of forums. While there was a great deal of emphasis on gathering information managers also very openly shared information such as their proposed strategies and progress in forming those strategies. As one individual explained, “I do think that our being so close and listening that well to customers was very important. In this program, compared to others, it's pretty outstanding.”
We also found that managers relied on similar information processes with industry analysts. Individuals from ITC openly share with analysts their perspective on market opportunities and plans to align strategies with those opportunities, and analysts provided their feedback on the degree to which they thought ITC's strategy aligned with market needs. Analysts also provided an unbiased source of information that shaped market perceptions about the importance of mission-critical services and ITC's ability to provide those services. As a product manager explained:
[Industry analysts provided] a sounding board. They talk to customers and they do research all the time too. If we come up with a new idea we run it by them, “Do you think this is going to work?” If they say “Are you crazy? This is not something you want to do,” we are going to think twice about it and want to hear more. So they influence us in our development of strategy, too.
The acquisition and transmission of information enabled individuals across multiple organizational units to form during the early stages of program formation a shared understanding of several key issues. That is, organizational members first learned just how complex the market had become and the fundamental misalignment between ITC's existing support programs and emerging market needs. There also became a shared understanding of the need to adapt several internal factors to deliver the newly formed strategy. Arriving at a common understanding was, in itself, a considerable challenge due to the “language problem” that existed between individuals from the product and support divisions. In essence, organizational members arrived at different interpretations of qualitative and quantitative data. For example, one interview explained that during an in-person interview with a customer, the customer might say “When I buy this stuff from ITC, I'm expecting it to be supported.”:
Well, as soon as the word “support” was mentioned, the product people would interpret that as, “Well, that's the service side of ITC that's supposed to take care of that because that's support.” But a lot of times the customer might use the word to mean the critical documentation that I got or the troubleshooting tools I got. The support people see it as primarily the responsibility of the product organization to develop those things – the tools that came embedded in the product and the product documentation, etc.
The shared understanding “kind of woke up a sleeping giant” and played an instrumental role in formulating TechServ's marketing programs and changes to several factors of organization. However, even with the high degree of information processing during the formulation of TechServ, managers did not fully formulate marketing programs and changes to organizational factors and then implement them in a “lock step” manner. Instead, managers used that which was learned from information to formulate their initial programs, and then implemented those programs through a process that was consistent with the incremental paradigm. We found that process to consist of three key aspects of improvisation.
Improvisation as incremental strategy formation
Improvisation is a process of introducing changes to an initial model while maintaining continuity in the performance (Preston, 1987). In the context of jazz, the model on which musicians improvise is called a tune which consists of a melody and chord changes (Preston, 1987). In the context of this case study, we found the implementation of TechServ to be an ongoing process of introducing changes to initial marketing programs, or in the language of several different interviewees, “building,” “evolving,” “extending,” “tweaking,” “refining,” “tuning,” “improving,” “reconstructing,” and “adapting” their programs. For example, managers started with a “one-size-fits-all” service product and then tailored or “tweaked” the product “to get it right” for customers. Adaptations were first made for individual customers and, as patterns emerged, they became the basis for developing additional service elements that were added to the TechServ portfolio. Changes were also introduced to the service product by extending it horizontally across the IT infrastructure. That is, ITC introduced new service elements to address a broader range of customer issues, products, and business functions.
A second feature of improvisation deals spontaneity, or the degree to which changes are introduced “in the moment” or “on-the-spot” versus carried out in the future. At the limit, a spontaneous act is one in which its composition and execution converge in time (Moorman and Miner, 1998). Just as jazz musicians compose and introduce changes to an underlying tune in real time (Berlinger, 1994), we found that organizational members introduced changes to TechServ in a real time way. For example, the pilot implementation of TechServ was to a great extent a process of delivering a semi-developed service program for select customers, evaluating the degree to which actual service delivery aligned with customer needs, and then introducing changes to marketing programs and factors of organization while the service program was being delivered to customers.
A third key characteristic of improvisation deals with the extent to which decisions rely on intuition. An intuitive decision is made without formal analysis, or a set standard, policy, or procedure. Instead, it is an unconscious decision-making process based on one's expertise or patterns of experience (Behling and Eckel, 1991). In the context of jazz, musicians draw on their pool of musical knowledge to compose changes during the performance. In the context of this case study, changes to TechServ were composed as managers drew on the knowledge they accumulated from the experience of delivering TechServ for customers. In the words of one marketing manager, the “really intense use of what we were learning” involved delivering a service program to customers:
[…] learning what was important to customers and then repackaging, versus saying, here's a classical customer need, I'm going to build a product now, I'm going to stock shelves and sell this. It's the process of how you learn the services business.
Contributions
In several ways, this study contributes to the understanding of how some product manufacturing firms overcome the service paradox (Gebauer et al., 2005) and demonstrate a record of successful business service development. We summarize these contributions by presenting the 13 propositions listed in Table I. Each of the propositions is discussed in the paragraphs that follow.
The study leads to the general belief that P1 overcoming the service paradox in product manufacturing firms is more likely when managers identify and target a deep profit pool. Profit pools form when total profits earned in an industry are distributed among the industry's value chain activities (Gadiesh and Gilbert, 1998) and “a company that can recognize the variability of profit and can exploit the deepest pools will earn superior returns” (Gadiesh and Gilbert, 1998, p. 145). We also expect that P2 a complex market for business services will form a deeper profit pool than a simple market for business services (shown in Figure 1). Complex business systems place high demands on a firm's human resources since people have to develop, support, and manage the diverse collection of highly integrated resources. As managers increasingly concentrate on developing a position of advantage in their own firm's core strategic value chain activities, they cannot or do not want to develop internally the resources needed to effectively develop, support, or manage such systems. Instead, they stimulate market demand for other firms that have the needed resources. However, we expect few competing firms to have the capabilities needed to cope with such complex systems and, at the same time, accommodate the heterogeneity of needs and wants that exists among customers. As such, high demand for service and few competitors capable of providing the service leads to a deep profit pool.
The initial strategic decision in the design framework then deals with the firm's position in its industry's value chain. That is, managers at ITC were faced with the decision of whether to target the entire complex business system or focus on part of the system and participate in a network of service players as suggested by Oliva and Kallenberg (2003). Managers were also faced with the decision of whether to target a market with heterogeneous needs and wants or narrow the focus to a subset of customers with homogenous needs and wants. These decisions have major implications because performance is contingent on the capacity of the organization to cope with uncertainty that emanates from the environment (Lawrence and Lorsch, 1967). Uncertainty increases with higher levels of complexity and effectively dealing with the increase requires a different organizational configuration (Duncan, 1972; Galbraith, 1973; Pennings, 1975). Therefore, P3 given the intent to serve the needs and wants of a highly complex market, the degree to which managers in product manufacturing firms will realize the expected returns from business services depends on their ability to design within the firm a configuration of organizational elements that fits both components of that complexity. Our fieldwork highlights several elements of an organizational configuration that emerged within ITC.
Orientation toward the market is perhaps one of the most important design elements. Our findings suggest that P4 when forming a strategy to serve the needs of a complex market, performance will be enhanced by adopting both a market and a customer-centered orientation. A market orientation should direct organizational activities at aligning marketing programs to fit the complex needs of individual customers, while a customer-centered orientation should direct activities toward designing programs to accommodate the heterogeneity of needs and wants that exist among customers. We do not imply that the orientations will be consistent across the firm, but rather the philosophies will be embedded among those responsible for formulating and implementing the services strategy.
This case study also suggests that P5 when forming a strategy to serve the needs of a complex market, product manufacturing firms that demonstrate successful business service development will exhibit a high degree of distinctive resource synergy (Cooper and Edgett, 1999) and P6 distinctive resources will consist of those that enable the firm to effectively cope with uncertainty that emanates from the complex market. Distinctive resource synergy deals with the degree to which a product manufacturing firm possesses existing organizational resources that fit the demands of the service business unit's external environment. Interviewees from ITC touted their ability to access and integrate a full complement of existing resources to successfully pursue their chosen strategy. On the other hand, managers in product manufacturing firms who do not realize the expected returns from services could be overestimating the comparative advantage of existing resources or overestimating the transferability of those resources (Collis and Montgomery, 1998).
While having the right existing resources may be a key factor in overcoming the service paradox, structural factors must also be designed to facilitate the flow of needed resources. We propose that P7 when forming a strategy to serve the needs of a complex market, product manufacturers that form high-performing business services will exhibit integrated business unit responsibilities and P8 foster a high degree of intra-firm collaboration to carry out those responsibilities. An underlying issue is that high-performing organizations tend to establish a high degree of role specialization among organizational subunits to effectively cope with the diverse information of a complex environment (Lawrence and Lorsch, 1967). We found that ITC's business units were historically autonomous in carrying out their specialized responsibilities. While specialization may have enabled ITC to cope with the diverse information of a complex environment, the formation of TechServ depended on the transition from specialized to integrated business unit responsibilities and from autonomy to intra-firm collaboration.
Management's financial incentive system is then a key design element that facilitates desired structural changes. Financial incentives can be based on criteria that focus on the performance of a single business unit, a collection of interdependent business units, or the corporation as a whole. Prior research indicates that the appropriate focus is contingent on the desired level of collaboration among business units (Collis and Montgomery, 1998; Hill et al., 1992). When business units are autonomous and there is little need for collaboration, incentives should emphasize individual business unit outcomes. Alternatively, as we found at ITC, when business units form an interdependent cluster and success depends on cooperative linkages across units, incentive criteria should focus on corporate, or business cluster, outcomes. Therefore, P9 when forming a strategy to serve the needs of a complex market, product manufacturers that demonstrate successful business service development will base management's financial incentives on criteria that focus on the performance of an interdependent cluster of organizational subunits.
While structural factors and management's financial incentive system need to be designed to facilitate the flow of existing resources, this case study suggests that P10 when forming a strategy to serve the needs of a complex market, product manufacturers that demonstrate successful business service development will design policies to select, develop, and retain human resources to cope with that complexity. The underlying issues is that front line employees will be chartered with the complex task of developing, supporting, or managing the highly integrated, diverse collection of resources that comprise a complex system; they will also need to understand and cope with the heterogeneity of needs and wants that exists among customers. Our fieldwork with ITC sheds light on key front line roles needed to pursue a services strategy aimed at a complex market, and highlights design policies needed to accumulate and retain the knowledge and competencies needed to perform those roles.
Finally, P11 given a highly complex market, decision-making authority for strategy formation will tend to be vertically decentralized. Managers at lower levels of the firm are closer to and better able to cope with the diversity of information that stems from a complex market. Then, managers to whom decision-making authority has been granted should develop a strategy formation process that fits market conditions. More specifically, P12 given the highly complex market, successful business service development in product manufacturing firms will be more likely when managers integrate a high degree of information processing during strategy formulation with an improvisational performance during strategy implementation. The acquisition, transmission, conceptual utilization, and instrumental utilization of both internal and external information helps cope with the diversity of factors that must be considered when formulating marketing programs. Then, introducing changes to marketing programs in an intuitive, spontaneous way during strategy implementation helps managers respond to the many unanticipated events and conditions that arise while interacting with and learning about the market. However, improvisation is by definition a collaborative process during which individuals introduce changes to an underlying model in real time (Berlinger, 1994; Peplowski, 1998). As such, we expect that P13 when forming a strategy to serve the needs of a complex market, product manufacturers that demonstrate successful business service development will foster a high degree of inter-firm collaboration to support the integrative strategy formation process.
Limitations and future research opportunities
As with any research, this study is not without its limitations. This study does not provide the statistical generalization to a larger population offered by a large-sample study. However, case study research relies on analytic generalization in that results are generalized to a broader theory rather than a larger population (Yin, 1994). Even though concerns about generalization reflect a common misconception about case study research rather than a limitation (Parkhe, 1993), we do encourage additional research to investigate if market complexity is a characteristic that consistently distinguishes complex business services from other market offers, and if there are other environmental conditions for business services that require different strategy-organization configurations. We also believe that investigating the generalization of several factors in the strategy-organization-market fit provide promising research avenues.
In addition, all data were collected from individuals who were directly involved in the formation of TechServ. Involving individuals with extensive first-hand experience with the service development process was deemed essential to gathering in-depth qualitative data on which the findings of this study are based. Future research could benefit from insights from other sources including customers of the focal service program and industry analysts.
Figure 1Designing an organization to fit the market
Table IPropositions
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Corresponding author
Wayne A. Neu can be contacted at: wneu@csusm.edu