institutional and operational analysis of services 35e00100 service operations and strategy ari p.j....
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Institutional and Operational Analysis of Services
35E00100 Service Operations and StrategyAri P.J. Vepsäläinen
Why Consider Service Institutions within Supply Chains?
Observation 1
Many changes of operations within a supply chain involve functional activities that need to be specialized and moved across organizational boundaries, replacing internal control, or hierarchy, by different types of external service relationships, or market.
Observation 2
The changes have been addressed only in the operational terms because of at least two reasons:
– Most models and classifications of services and business processes are based on operational factors, such as number of transactions or processing steps, routing flexibility, customer involvement, labor intensity etc.
– The interpretation of the governance structures defined in institutional economics is rather difficult in managerial terms of services and information networks
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Our View to Services Management
• Definition: Service is Work done for someone– Product vs. Service – Quite a mute question
(until IBM sponsors studies in ”Product Science”) – rather, Service is an Arrangement for Coordinating
Production and Consumption
• We are interested in Effective Service Arrangements– there are organizational alternatives, facilities, of service delivery – Operational Efficiency of activities includes global optimization,
risk pooling and incentive mechanisms– Institutional Alignment for mutual value and market power
• Case in Point – Service Delivery within ICT-enabled Channels – Transactions for Real-Time Business – beyond self-service– Facilitate also relationship-based services and experience
business – Success of Customer (or Dignity of People)
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Adam Smith(1723-1790)
Division of Labour and the Invisible Hand
Division of labour would effect a great increase in production. One example Adam Smith used was the making of pins.
“One worker could probably make only twenty pins per day. But if ten people divided up the eighteen steps required
to make a pin, they could make a combined amount of 48,000 pins in one day.”
However, Smith conjectured that a corresponding increasein productivity was not feasible for agriculture nor services.
Should we reconsider the Division of Services?
Learning by workers and development of tools would help standardize the work and the measures of performance,
facilitating competitive equilibrium and Natural Prices for work and resources.
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Background for Institutional Analysis
• Principal-agent models – the employment relationship– the secretary’s choice (Simon 1950s)– team theory, contract theory– mathematical and emprical theories of agency relationships
• Transaction Cost Economics – the boundaries of firm– the limits of organization, bounded rationality– loss of control in organizations, Markets and hierarchies (Williamson 1975)
• Other approaches to institutional strategies– property rights– resource-based view– evolutionary view and routines
• Institutional theory – the sociological view– How organizations adopt similar structures and behavior
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Relationships in Service Institutions
• In the production economy, a transaction occurs when a good or service is transferred across a technologically separable interface
• Continuity and stability of operations are embedded in corporate hierarchy
• For the service economy, the boundaries of the firm are defined in a broader context (Spender 1994):
– ”The organization is no longer a production function seeking internal efficiency.
– It is more of a node in complex network of economic relationships, dependencies and mutual oblications.”
• What will then be the service relationships and the emerging structural foundation for the network-based firms?
• Any problem that can be posed directly or indirectly as a contracting problem is usefully investigated in transaction cost economizing terms
35E00100 Service Operations and Strategy 6
7
Service
The Market Process
MarketProcess
Service
Service
Service
Service
Customer’sQuest
Supplier’sOffering
ServiceGovernance?
35E00100 Service Operations and Strategy
History: Sectoral Division of Labor
1. Evolution of dominant sectors – the bottlenecks of economy? What will be the next ones?
2. Classification code for industrial sectors and sectors of government
3. Manufacturing vs. Service – Baumol’s desease
4. Transaction sector vs. Transformation sector in the US economy (Wallis & North)
5. Product vs. Service augmented with distinction between the object of activities - Material vs. Information (Apte & Karmarkar)
6. Is there a theory to justify any detailed classification?
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Institutional Modelling of Functional Service Channels and Strategies
• Service classification based on type of contract and delivery channel– the type of service contract depends on level of uncertainty, frequency
of transactions, and length of relationship– the type of service channel depends on the number and roles of
organizations involved, asset specificity of and the access conditions, such as information systems used, of the parties to the channel
– matching of services to the channels based on the trade-off between production costs and transaction costs
• Early references: – Vepsalainen A.P.J. and Apte U. (1987) "The Impact of Information Technology on Financial
Services Delivery," OPIM Wharton working paper. – Vepsalainen A.P.J. and Mäkelin M. (1987) "Service-Oriented Systems and the Economics of
Organizational Transactions", The Report of the 10th IRIS Seminar– Apte U.M. and Vepsäläinen A.P.J. (1993) "High Tech or High Touch? Efficient Channel
Strategies for Delivering Financial Services", Journal of Strategic Information Systems, Vol. 2, No. 1, March 1993, pp. 39-54.
– Tinnilä M. and Vepsäläinen A.P.J. (1995) "A Model for Strategic Repositioning of Service Processes", Intl Journal of Service Industry Management, Vol. 6, No. 4. pp. 57-80.
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The Institutional Model of Organizing (Posing, Doing and Ruling) Services
CustomService
NormalService
MutualHelp
SystemReordering
Transactioncosts
Production costs
PublicSpace
AgentClub
EncounterArena
PrincipalUnit
Type of Facility
Type of Activity Pervasive
RoutineRegular
OperationContingent
ProcessEmergentAffairs
RequirementsPlanning
AlternativesTesting
Experi-menting
PerspectivesChanging Delegation &
Integration
ProcessControl
Peer Guidance
GovernanceReformation Patronizing
Abandoning
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Basic Question on Business Functions as the Service Platform
Why functions?– standard processes (BPR and benchmarking)– market-level efficiencies (scale and scope) – core competencies and outsourcing (also customer)
How we look at business functions?– service organizations, systems, market structures– integrated via functional protocols
Which are the core functions?– basic types of functional services & roles of intermediaries– specific customer addresses and relationships– specialized functional systems & network applications– differentiated function-based legislation & regulation– career paths, education and research associations are
based on business functions
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The problem: A minor change in operative routines may require considerable repositioning of decision rights and redesign of technical interfaces and incentive mechanisms among the parties of the supply chain, leading to unforeseen challenges of SC design and failures of implementation.
Usually the aim is to achieve economies of scale, coordination via better forecasts and incentives, or risk pooling with arrangements such as vendor managed inventory or logistics integrators.
The solution: To use a normative framework of services to trace the institutional changes in different cases of operational redesign of logistics processes.
Previous experiences and studies in service industries help to estimate the time and resources required to establish the desired institutional change.
Application of the Service Model in Institutional Analysis of Supply Chains
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PublicSpace
AgentClub
EncounterArena
PrincipalUnit
Type of Facility
Type of Activity
Pervasive Routine
Regular Operation
ContingentProcess
EmergentAffairs
Productioncosts
Transaction costs
Internal Routines
General Services
1
Partnership-basedExpert Service
2
Transaction-basedSelf Service
3
Kemppainen & Vepsäläinen (2002)
1
2
3
Outsourcing
Partnering
Purchasing
Typical Evolution of Internal Services
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PublicSpace
AgentClub
EncounterArena
PrincipalUnit
Type of Facility
Type of Activity
Pervasive Routine
Regular Operation
ContingentProcess
EmergentAffairs
Kemppainen & Vepsäläinen (2002)
Case: Introducing New Service Concept
at Kone Elevators
Productioncosts
Transaction costs
Regularinspections
Access=search in
process
Access routines
Service contract with customer
Service rate
Pre-authorizedm-access
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Redesign of Supply Chain Operations
• Vendor Managed Inventory– incentive alignment and risk pooling
• Moving Push-Pull Boundaries within Supply Chains– incentive alignment, risk pooling, and global optimization
Typically the projects emphasize operational goals of achieving economies of scale or improved coordination via better forecasts.
Usually the implied changes in decision rights and incentive structures have not been addressed in advance, and will often lead to difficulties of implementation.
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PublicSpace
AgentClub
EncounterArena
PrincipalUnit
Type of Facility
Type of Activity
Pervasive Routine
Regular Operation
ContingentProcess
EmergentAffairs
Institutional Changes Required to Streamline and Outsource Standard Operations
Productioncosts
Transaction costs
Delivery of supplier services
Internal purchasing and process management
Servicecontracts
SCOPE
Strategicmanagement
Control routines
Coordinationand develop-
ment
Deliveryprocess
Access routinesSCALE
Traditionalsupplier relations
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Other Examples from Supply Chain Operations
• The role of Service Integrators in logistics, administration, sales, purchasing, payroll and billing, finance, etc.– incentive alignment, risk pooling, global optimization, and market
power
• Open Protocols for order management and scheduling– why the scheduling experts would accept a standardized approach?
The institutional alignment – change of information systems and services, education, professions, and legislation – will take time and may undermine the efficient redesign of operational processes
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Need for Community-based Modeling of Service Networks
• The conventional metaphor of services has assumed – IHIP: intangibility, heterogeneity, inseparability and perishability – focus on customer interfaces and work processes.
• Measurement and positioning of customer services– standardization of service and participation of customers – may have sufficed for the in retail stores and banking offices
• New community-based and technology-driven services being commercialized
– interactive marketing communication, logistic delivery networks, – open-source development, therapies based on tissue engineering
• We discuss the classification, efficiency and positioning of community-based services in general
• Service Capability = Servicability
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Behavioral and Operational Aspects of Business Models
• Options or choices, different information requirements
• Coordination and integration media
• Classification variables – process stages, labour intensity– customer participation, options, control
• Level and nature of interdependence within communities– Pooled interdepedence – resource sharing, routine integrated– Sequential interdepedence – Priority-driven resource allocation
and routines– Reciprocal interdepedence – Knowledge-driven incentives,
cultural integration
• Measures – process structures, coordination methods
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Typical Interdependencies within Functional Service Communities
Sequential
PooledTransactionand quality costs
Production costs
Reciprocal
Hybrid
PublicSpace
AgentClub
EncounterArena
PrincipalUnit
Type of Facility
Type of Activity Pervasive
RoutineRegular
OperationContingent
ProcessEmergentAffairs
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Community Structures
• Two extreme structures– Large, open and dynamic communities – stable, predictable
routines and scope of engagement– Small and closed communities – unpredictable routines and
scope of engagement
• Operational aspects relate to process structures – Information, material and people flows– Consist of several services – production, transfer, ordering etc– One service may contribute to several processes– Similarly one community participates in several services and
thereby processes
• More direct relationship between processes and communities?– service mapping is a feasible mechanism
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Range of Community Structuresin Functional Services
CustomService
NormalService
MutualHelp
Re-Organizing
Transactionand quality costs
Production costs
Large size of populationHigh variability of users
On-lineCommunities
Fewactions
ExecutiveCommunities
PublicSpace
AgentClub
EncounterArena
PrincipalUnit
Type of Facility
Type of Activity Pervasive
RoutineRegular
OperationContingent
ProcessEmergentAffairs
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Case: Management Events
How to get from seminars and trade fairs to services for finding and persuading new business partners?
Case of Functional Selection:Evolution of an Operations/Organizing Service
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The Evolution of Service?Case Management EventsOlli Muurainen & Claudio Nava
Evolution of Event Services
15,0
10,0
5,0
0,0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Kontaktimessut Ltd. Kontakti.NET Ltd. Management Events Ltd.m.€
Trade show business
Tailored events, conferencesand training
Invitation only events
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Analytical Framework for Persuasion Services
PublicSpace
AgentClub
EncounterArena
PrincipalUnit
EvidencingService
PromisingService
Messaging Service
ValuingService
Align Values& Norms
JustifyEvidence
ExchangePromises
TransferMessages
Type of Facilities
Type of Activity
PervasiveRoutine
Regular Operation
ContingentProcess
EmergentAffairs
Ceremonies and Rituals
Ceremonies and Rituals
False ProphetsFalse Prophets“WEB 2.0”
Nature
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Kontaktimessut Era, 1994-1999
PublicSpace
AgentClub
EncounterArena
PrincipalUnit
Transfermessages
Exchangepromises
Justifyevidence
Align values& norms
“EXHIBITION”“EXHIBITION”
Networking
Stands
Presentation
Type of Activity
Type of Facility
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Kontakti.Net Era, 2000-2004
PublicSpace
AgentClub
EncounterArena
PrincipalUnit
Transfermessages
Exchangepromises
Justifyevidence
Align values& norms
“SUMMIT”“SUMMIT”
Dining
Trade show
Casepresentation
Exhibitionstands
Type of Activity
Type of Facility
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Management Events, 2005 -
Type of Activity
Type of Facility
PublicSpace
AgentClub
EncounterArena
PrincipalUnit
Transfermessages
Exchangepromises
Justifyevidence
Align values& norms
ME Industry ForumME Industry Forum
DiningWork-shops
1-on-1meetings
Present-ations
Networking
Invitation only event
Ceremony
Brandadvertising
35E00100 Service Operations and Strategy 29
Invitation-only event
OperationsProcessesSkills and capabilitiesKnowledgeRelationships
Value for DELEGATEs
1. Meeting with solutions providers
2. Keynotes, cases
3. Networking with colleagues
4. Entertainment and dining
Value for PARTNERs
1. Meeting qualified prospects
2. Delegate profile* number of meetings
3. Presentations, learning
4. Brand building and awareness
Subsequent meetings and business relationship
A new kind of service institutiton; someone has organized this to happen = a service
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ME service product - 600 MINUTES
Sponsor sales
Expensive
Align Values& Norms
JustifyEvidence
ExchangePromises
TransferMessages
Type of Persuasion Activity
Type of Facility
Delegate profile
EmergentAffair
ContingentProcess
Regular Operation
PervasiveRoutine
Type of Organizing Activity
Insufficient Support
Delegatecommitting
PrincipalUnit
AgentClub
EncounterArena
PublicSpace
Dealmaking
Delegateresearch
1-on-1meeting
Groupdiscussion
Keynotepresentation
Casepresentation
Workshop EVENTPresentation
screening
Delegateselection1
3
4
62
5
Assistedpre-bookedmeetings
35E00100 Service Operations and Strategy 31
Evolution of the Service Portfolio
Kontaktimessut Kontakti.NetManagement Events
Specialization Infrastructure
Event logistics
Process management
Marketing
Delegate research
Partner acquisition
Positioning Unqualified contacts and visibility
Selected target group
Qualified business leads
Portfolio dynamics
Incremental industry
Governed improvements
Focused events development
Sequential event strategy
Parallel capabilities development
Focus
Era
35E00100 Service Operations and Strategy 32
Business Development by Evolution or by Economic Design?
1. Business constitute of portfolios of institutionalized activities• First the ”non-productive labor” can be identified by ABC (Activity
Based Costing) studies • Then, standard services can be determined by separation of service
institutions, and these may be bundled based on TCE • Finally, rational contracting and compensation schemes can be
found with Principal-Agent models
2. Outsourcing and purchasing of services allows for economies of scale and scope by specialization of activities and facilities• In general, hierarchy (internal business processes) will be replaced by
market (mutual & commercial services)
3. Global markets emerge for Extra-Industrial Business Institutions• Eventually, New Industrial Divide will be established
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“What is service science?”
From Saul Griffith, winner of a MacArthur Fellowship
• In the old days, most people on Earth lived off the land, with only a little contact with others.
• As populations increased more people lived in cities, and started depending on others for things they needed.
• Today, because of technology, billions of people can now interact, information service offerings are common and there are a lot more people who are customers of new types of service offerings.
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Stages of Scientific Maturity
Carl Linnaeus, the father of moderntaxonomy and ecologya pioneer of the scienceof biology
Early Stage:Collect and Classify(Biology)
Mature Stage:Unify and Mathematize(Electro-Magnetism)
35E00100 Service Operations and Strategy 35
The Periodic Table of Elements
35E00100 Service Operations and Strategy 36
Towards a Classification of Functional Entities:
The Origin & Elements of EST Institutions
• We explore the principles and implications of a systematic all-inclusive Classification of Functional Entities.
• We start with theoretical frameworks and empirical case studies addressing both institutional and operational aspects of Economic, Social and Technological aspects of society.
• Looking at the variations of economic and social institutions and matching those with the variations of operational environment we define repeating organizational and technological structures of different types and levels of Functional Entities.
• Assuming continuing functional specialization of economic activities, driven by both evolving global geo-physical constraints and by organizational opportunities for socio-technical leverage, we’ll expect the Functional Selection to enforce the “regular” entity structures.
• The systematic analysis of the elements of functional entities allows us to trace the evolution of different EST institutions from private and public activities and functional operations into the commercial processes of emerging Extra-Industrial Society.
35E00100 Service Operations and Strategy 37
Question on Functional Entities as the Institutional Reference
Why functions?– standard processes (BPR and benchmarking)– market-level efficiencies (scale and scope) – core competencies and outsourcing (also customer)
How we look at EST functions?– service organizations, systems, market structures– integrated via functional protocols
Which are the core functions?– basic types of functional activities & roles of intermediaries– specific addresses and relationships– specialized functional systems & network applications– differentiated function-based legislation & regulation– career paths, education and research associations are
based on business functions
35E00100 Service Operations and Strategy 38
Different Facilities for Different Services
Encounter Arena
Agent Club
Principal Unit
Public SpaceMark
et
Hierar
ch
y
35E00100 Service Operations and Strategy 39
The Scope of Operational
Service Models
Natural Order of Econ-Social-Tech Institutions
based on Pure Functional Entities
Public SpaceAgent Club Encounter Arena Principal UnitType of Facility
Type of Activity Pervasive Routine Regular Operation Contingent ProcessEmergent Affairs
Production Redesign
ManufacturingPhysical
ConstructionNaturalGrowth
Production Institutions
RelocationProject
ModularTraffic
Cargo Transit
Homing Flow
TransferInstitutions
SystemReordering
NormalService
CustomService
MutualHelp
Organizing Institutions
GovernanceReformation
ProcessControl
Delegation &Integration
Peer Guidance
PerspectivesChanging
AlternativesTesting
RequirementsPlanning
ExperimentingPosing
Conduct
Ruling
OwningDuties
LendingDerivatives
BackingPaying
InvestingInstitutions
BeliefsFormation
PromisingEvidencingOpinion
ExpressionMinding Institutions
35E00100 Service Operations and Strategy 40
35E00100 Service Operations and Strategy
Extra-Industrial Functional EntitiesMay Look (and Sound) Strange
41
Relational Theory of Economic, Social and Technological Institutions based on
Functional Entities
42
Social
TechnologicalEconomic
Hierarchy
Market
NetworkRoutines
ResourcesIncentives
Three Levels of Reference:
1.Societal Practices2.Governance Structures3.Action Media
Functional Entities
Production Services
Organizing Services
Investing ServicesPersuasion Services
PhysicalConstruction
Manufacturing
NaturalGrowth
Production Redesign
Transactioncosts
Production costs
PublicSpace
AgentClub
EncounterArena
PrincipalUnit
Type of Facility
Type of Activity Pervasive
RoutineRegular
OperationContingent
ProcessEmergentAffairs
Cargo Transit
ModularTraffic
Homing Flow
RelocationProject
TransactionCostsCost of Scope
Production costs
Cost of Scale
PublicSpace
AgentClub
EncounterArena
PrincipalUnit
Type of Facility
Type of Activity
Pervasive Routine
Regular Operation
ContingentProcess
EmergentAffairs
CustomizedTransit
United Passage
ItemDelivery
SpecialTransfer
Transfer Services
CustomService
NormalService
MutualHelp
SystemReordering
Transactioncosts
Production costs
PublicSpace
AgentClub
EncounterArena
PrincipalUnit
Type of Facility
Type of Activity Pervasive
RoutineRegular
OperationContingent
ProcessEmergentAffairs
RequirementsPlanning
AlternativesTesting
Experi-menting
PerspectivesChanging Delegation &
Integration
ProcessControl
Peer Guidance
GovernanceReformation
DerivativesBacking
Lending
Paying
OwningDuties
Transactioncosts
Production costs
PublicSpace
AgentClub
EncounterArena
PrincipalUnit
Type of Facility
Type of Activity Pervasive
RoutineRegular
OperationContingent
ProcessEmergentAffairs
Evidencing
Promising
ExpressOpinion
BeliefsFormation
Transactioncosts
Production costs
PublicSpace
AgentClub
EncounterArena
PrincipalUnit
Type of Facility
Type of Activity
Pervasive Routine
Regular Operation
ContingentProcess
EmergentAffairs
Align Values& Norms
JustifyEvidence
ExchangePromises
TransferMessages
EST OPTIM Reference Model 1.0
Ruling
Posing
Now
Pending F&PHorizons
F&PHorizons
ProductStructure
RelativeImpact
Concepts &Contracts
Material &Spatial Resources
ValueAppropriation
ValueRealization Value
Creation
ValueCapture
Market Anomaly:
Cultures, C
lusters
Market Anomaly:
Price bubbles,
Bullwhip
Market Anomaly:
Price bubbles,
Fashions
Market Anomaly:
Push/Pull boundary
Doing
Conclusions
1. Functional Selection Is a Test of Efficiency– specialization & standardization of capabilities– market-level efficiencies (scale and scope) – so we all work for the markets – by using them, by
developing them, or just by living within them
2. Endogenous Modeling of Institutional Evolution– all capabilities and integration options instrumental for the
existence, creation and destruction of economic institutions are included in the Classification of Functional Entities
– research and management are functional institutions, too
3. Emphasis on Institutional Reality– the wealth of evidence should not be overridden by even the
cutest of theories– research frameworks and official statistics should be
compatible with the Classification of Functional Entities– functional differentiation of all institutions
35E00100 Service Operations and Strategy 44