15 June 2017

A Systems Perspective on Business Model Evolution

The Case of an Agricultural Information Service Provider in India

By Chander Velu

Business models are complex activity systems that summarise the architecture and logic of a business, and defines the organisation’s value proposition and its approach to value creation and capture. The role of the business model is to act as a mechanism to enable the core value proposition to be transferred as benefits to the customer. This is especially so when new technologies provide the basis for new customer value propositions. However, often new business models need to be altered from the initial version in order to create the design that might be sustainable and profitable. We present a longitudinal and in-depth single case study of a unique, mobile-phone-based information service for farmers in India. The firm was formed by a major global blue-chip company. In particular, the case study examines how the new firm evolved its initial business model from a mobile-phone-based information service for farmers to a transactions platform for agricultural crops between buyers and sellers, and subsequently incorporating an engagement-based solutions provider business model for banks and other agricultural-related businesses.

The study builds on three themes emerging from the systems thinking literature in order to highlight the organisational capabilities that enables business model evolution. The three themes are:
  1. Balanced redundancy refers to the ability of the firm to stretch and create additional overlapping resources in order to perform experiments while running the existing business model.
  2. Requisite variety refers to the extent to which components of the system obtain a variety of information to understand the environment better.
  3. Cognitive discretion refers to the freedom to perceive and construct an idiosyncratic meaning.
We explain how these three constituent organisational capabilities enabled the new firm to innovate its business model in order to explore and develop an appropriate customer value proposition to create and capture value. The lessons from the paper would be helpful for managers as they create new business models and need to evolve them from their original design.

Read our papers:

Velu, C. (2017) A Systems Perspective on Business Model Evolution: The Case of an Agricultural Informational Service Provider in India, Long Range Planning, forthcoming.

10 May 2017

Exploring the Journey to Services

Do you know what your service journey looks like?

By Veronica Martinez, Chander Velu and Andy Neely

Many organisations when exploring their transition to Services ask themselves the question: ‘what does a service journey look like?’  At the Cambridge Service Alliance, this question also emerged when our Industry Partners met to discuss ‘the shift to services’ – among them Presidents, Vice Presidents and Directors of Caterpillar, Zoetis, GEA, IBM, BAE Systems and Pearson. Interestingly, around the table, none of the firms could articulate the lessons from their own service journeys in a comprehensive manner. This is not an uncommon issue in organisations embarking on the journey to provide services.

So, we setup an interdisciplinary team of academic and industrial partners to explore the Journey to Services. The concept itself is not new but certainly largely unexplored. Through 7 years of an in-depth study of three comparable firms and countless sets of workshops and interviews with other firms (for academic details please read our journal paper), we jointly discovered what a service journey looks like:

The Five Key Lessons You Need to Know about the Service Journey are:
  1. The service journey in industrial manufacturers is neither logical nor structured but much more emergent and intuitive in nature.
  2. Similar steps, different journeys. Some organisations followed similar steps but the sequence of these were different. Often the sequence of steps in the service journey is described as a ‘back and forth’ sequence – or trial and error. Exploited by choices, the typical examples include: the services are ready to be sold, but the sales training and/or incentives for selling services are missing. Services are offered to customers, customers buy them, but the accounting systems are set to manage product transactions and not service contracts. Services are designed, as products, consequently the service experience is missed and gradually the services fail.
  3. The evolution and coexistence of different services. Typically, in the first three years of the service journey, organisations incrementally evolve by offering basic to intermediate services. After the fourth year, organisations follow ‘the continuous evolution of the basic and intermediate services and the emergence of complex services’. Then, the coexistence of basic, intermediate and complex services varies across the service continuum.
  4. The pace of change. Once organisations embark in the service journey, they are in continuous ‘change’ (flux) as opposed to punctuated interventions of change. This is the continuous granular change at different functional levels throughout the organisation.
  5. Service Strategy: Seven associated stages of the service strategy model should be considered by organisations to manage their service journeys.
From our perspective, we think the understanding of the service journey has evolved significantly over the last years. This is the first framework that longitudinally maps the journey to services. Firms which have used the framework express more confidence in managing the transition process and are more prepared to handle the issues that they confront. In future, organisations urgently need to focus on the dynamic evolution of their service journeys, particularly on the proactive management of individual lifecycles of their services. As Joseph Schumpeter expressed – the importance to focus on the ‘creative destruction’ within their processes of transformation.

Read our monthly paper,  journal paper ‘Exploring the journey to services’ or listen to our podcast.


28 February 2017

Customer Loyalty Analytics

Customer loyalty is a strategic priority for organisations. We did some work with one of our industrial partners to build a data-driven method to better assess and predict customer loyalty. Organisations still use single-question customer metrics, such as the Net Promoter Score (NPS), which is popular despite recent studies arguing that customer loyalty is multidimensional, and therefore firms require to combine behavioural and attitudinal data sources. One of the reasons why organisations rely on NPS is the simplicity to administer measuring customer loyalty. However, the picture now gets complicated because customers interact with firms that are leveraging new technologies such as mobile applications, social media platforms, virtual reality, drones and the Internet of Things to provide smart services and enable a seamless customer experience. The complexity of using these technologies within an organisation’s myriad touchpoints has led to a data explosion across touchpoints in the entire customer journey. Thus, it is more difficult to rely on single metrics like the NPS. In the Cambridge Service Alliance, we investigated this area and built a novel customer loyalty analytics method that demonstrates an approach to utilising data more effectively to assess and predict customer loyalty in complex business-to-business (B2B) service organisations.

To acquire a holistic view of customer loyalty, we integrated data across multiple systems. The data was classified into three categories: attitudinal, behavioural and demographics. The attitudinal data was collected from the customer survey, which includes structured (NPS rating) and unstructured data (verbatim comments). The behavioural data was collected from the financial system. This data consists of sales (new, used, lease), product support (parts and service transaction types) and customer service agreement (CSA) transactions (parts and service transaction types). Two groups of customers were identified: those who have a maintenance contract with the company, referred to as Customer Service Agreement (CSA) customers; and those who deal in a transactional setting, referred to as Product Support (PS) customers. Demographic data, which contains the regional locations of customers, was included. In total, we collected 1,044,512 transaction records over a three-year period.

Our predictive model used:
  1. RFM to transform customer transactional data into profitability scores, facilitating the categorisation of customers based on their purchasing behaviour
  2. The K-means clustering model technique to segment data points into groups, each containing data points similar to one another and dissimilar to data points in other groups. In our work, we divided customers into 11 groups based on their RFM scores. This was accomplished using the K-means segmentation algorithm
  3. Active Customers Predictive-We have identified active customers who had not churned and had company dealings in the form of transactions
  4. Demographic- we used the geographical location of customers, which appears within a transaction record.
  5. Text-mining Model- We developed a linguistic-based text-mining model to analyse the open-ended customer comments in the survey. A sentiment score for each comment was then calculated.
Our customer loyalty model enabled us to classify customers as either churners or loyal customers based on these predictive indicators. Our predictive model was built using neural and Bayesian network classification techniques. The accuracy results of these two algorithms were compared. The steps employed in the model’s construction are three-fold. First, a training set, 60 per cent of the entire data, was used to develop a training model. Then we tested the model against new data in the construction stage, which formed 30 per cent of the original data. Here the model was fine-tuned to decrease the error of false predictions. Finally, the model was validated against the remaining 10 per cent of customer data. These three steps are performed to ensure the repeatability and validity of the prediction model.

Our model shows how firms can compare NPS scores with repurchasing behaviour as a loyalty assessor, using predictive variables such as the RFM model, demographics, active customers and textual customer complaints, while the most popular performance measure, the NPS, completely disregards this. Clearly, customer loyalty measurement requires holistic loyalty-tracking initiatives. Based on the amalgamation of data sources, the actual underlying customer loyalty can be fully assessed and interpreted through the use of big data analytics. Furthermore, our model has the predictive ability to determine whether customers are likely to churn, thereby increasing the model’s functionality. Over the three years, if the organisation used NPS as an indicator for customer loyalty, over half of the customers were considered to be completely satisfied. However, using our analysis, we identified many misclassified NPS categories, which has misled the company. For example, in 2013 and 2014 we found that approximately 500 customers were considered to be detractors when they were classified as promoters according to the NPS classification. Thus, NPS alone is not sufficiently accurate for organisations. If organisations want to understand why their customers churn, the answer could come from the verbatim comments provided in survey data or social media. Our text-mining model enables us to analyse the root causes of customer complaints, which, expressed in these free verbatim comments, uncover potentially vulnerable customers that NPS would have considered loyal and not requiring intervention strategies.

If you want to read more about this work, please read our paper or listen to my webinar

6 September 2016

Looking at the future of business models for global manufacturing companies as they make the switch to services in an age of digital disruption

September 2016

Professor Andy Neely answers some key questions about the Cambridge Service Alliance business partners and its recent research. [PODCAST interview available here]

  • Who are your partners in industry and how have you been working with them on that all important ‘shift to services’ for manufacturing industries?

We have a variety of partners in industry. Our two founding partners are BAE systems and IBM and we also work with Caterpillar, Rolls-Royce, Pearson and Zoetis. Zoetis is an animal health company which used to be part of Pfizer. It is interested in services because it wants to build links with its end customers. Caterpillar is a big construction and mining Equipment Company and it is interested in services because it wants to maintain links with its customers over the 30 year life of the product. It is important for its business model.

  • What kind of changes are manufacturing firms making to ensure they are in tune with their customers’ needs in what is an increasingly technologically driven global market place?

The changes manufacturing firms are making are really varied. Caterpillar has traditionally made most of its money on spare parts and servicing equipment but increasingly its customers are saying ‘we want to work with you to contract for outcome or capability’. It is no longer about just making sure the equipment works, its customers want help to minimize the cost per ton of earth extracted in a quarry.  These days the manufacturing firm is helping its customers to deliver the outcome the customer wants. In some cases, it is helping the customer deliver the outcome the customer’s customer wants. It is all about helping your customer do a better job.

  •  How is technology changing how manufacturing firms operate?

Technology is fundamentally changing how manufacturing firms operate. What you see is more and more devices getting connected to the internet. The data coming back from those devices and machines is then being used to work out what is going on.

For example if Caterpillar has the GPS position of a truck, and you know the weight of the material and the weight of the bed of the truck, then you can tell when the truck has been filled at the rock face. If the truck doesn’t start to move straight away you are losing production time, and if it sits at the rock face for a minute once it has been filled, that would be a minute of lost production and in a quarry and it is a big deal. If you can use the data to improve the efficiency of the operation, you can in turn minimize the cost per ton.

  • The Cambridge Service Alliance puts emphasis on knowing what your end customers’ needs are. Why is that and can you give us an example?

We talk a lot about getting inside the minds of your customer, or the customer’s customer. The reason we use that language is because most organizations have to think about how to provide for their customers. You can use the equipment to allow your customer to do a better job to service their customer. If you understand what the customer’s customer wants then you can think about changing the design of your equipment or service to help ensure your immediate customer does a better job. If they are more successful and their business grows then yours does too, it is in your interest.  Technology helps this relationship in all sorts of ways by monitoring the equipment so you can now see remotely what is happening and you can track where assets are in the world.

We have also been doing some work on customer analytics. We are looking at both quantitative and qualitative data, things like customers’ comments, to understand what those comments actually mean and say. You can then see what advice they are giving you about improving your organization. Lots of firms use a Net Promoters Score as a measure of customer loyalty, and that is really the difference between the number of customers who say they would promote your business and recommend it to friends versus the numbers who say they wouldn’t. But that is just a numerical number. If you look at the customer survey forms, often you get statements from customers where they might say there is something wrong, like the technician turned up late in scruffy overalls. We have been working on a methodology of taking those sentences, deconstructing them and understanding the statements in them to better inform firms about how they can deliver a better quality of service to their customers.

  • Your CSA members are some of the largest companies operating in the world today, how do they begin to make change happen?

We believe that detail matters when it comes to making change in a large global company. We have a research project which is looking at unmasking the important hidden detail in making services work. You have to understand the detail but you also have to understand the bigger picture about how to make that change and make that shift to services.

In another research project we have completed recently we have looked at the Seven Critical Success Factors or CSFs for making the shift to services. Number one in that list is the readiness of the organization. Is it ready and are its customers ready to make that change? Unless you get both sides in place there is no way you will make the shift to services.

  • How important is this interface of academics and managers working together in the CSA?

The Cambridge Service Alliance really does three things for our partners:
  1. We provide an environment where there is an interface between academics and industry managers. We have deliberately chosen non-competing firms as partners, and we have very open and honest conversations about the way you might design your organization, the business model you use, how you design contracts for services and so on. The reality is that firms learn an enormous amount from each other.
  2. We also hold events and forums where we can communicate ideas to the partners and the wider public. This year we are running a Service Week conference on how you successfully grow your service business in the digital economy.
  3.  As well as the broader knowledge exchange we also carry out individual research projects that are designed to unpack and explore topics that matter to the partners in the Service Alliance. Caterpillar has been very involved in a programme called: ‘Across the Table’. A major part of it was about looking at the future of its customer service needs and how Caterpillar might meet them. We had direct input into the change programme in that organization. We are keen for our partners to pick up and adopt these results.  With BAE Systems we have been talking a lot about eco-systems in order to understand the Defense eco-system and how that is changing. For each individual firm in the Service Alliance there are specific projects we are working on with topics that are of general interest and also producing results that are directly relevant to that firm.
  • Is the CSA helping to map the future out for others too in the manufacturing sector?

Yes. If I go back five years or so and I talked about servitization people would say they had never heard of that, it was relatively small scale. Now more and more organizations are talking about the importance of servitization and what it might mean for the future of their business and how they have to change their business model and what role technology might play. There is a general take up of the ideas to try and influence the way manufacturing firms think.   

  • Is the link between products, services, technology and the need to innovate creating better products and services? 

One of the changes you see is a shift from supply chains to network partners. Increasingly it is not a question of how to configure the supply chain but these days firms need to think about who they want to partner with and what skills and capabilities they bring together to deliver a particular outcome. Often you can find that people are collaborating on one contract but competing on another. BAE systems in Portsmouth works very closely with Babcock to run the naval base but just down the road they compete on other contracts. You end up with very complicated organizational relationships. Learning when and how to partner and also when and how you are going to compete is crucial if you want to get the balance right.    

  •  Are new collaborations and partnerships developing?

We see a lot of new collaborations and partnerships amongst all sorts of organizations, not just old rivals. One of the interesting things is the way that barriers between different sectors of the economy are changing. If you look at the IOT (Internet of Things) we can see that more and more devices are getting connected to the internet, and that the data that comes off those is giving real insight into how your products and services operate. New technology is playing a key part in this shift to services.

You then have to ask who else to involve? AT&T and GE have said they want to work together; Siemens is working with Atos; IBM is also working in this area. You have equipment manufacturers a software consultancy firm, a broader consultancy firm, and a telephone company all competing for the IOT space. Some of these organizations are coming together and building new capability, and some are finding they have new competitors too, like Google or Amazon. The small start-up Trackunit, which monitors the stress and strain put on assets, has been taken over by Goldman Sachs, an investment bank now working in asset management. There are some interesting dynamics at work.  

  • How helpful has it been to identify seven Critical Success Factors or CSFs in the switch to services. You have called it a road map?

We looked at Pearson, Zoetis, and Greer, and we mapped out the steps they had gone on as they changed their business models in the switch to services. We then built a framework with these Seven Critical Success Factors, CSFs. The full report is on our website http://cambridgeservicealliance.eng.cam.ac.uk/news/SevenCSFBriefing

We mentioned the readiness of an organization and how outcome focused it is. There are issues around how you get the right mindset in an organization, and it is also about people and how you get them ready, not just technology and data. There are issues about processes and design, but sometimes there is not enough focus on designing services. The CSFs really do outline a road map for thinking about the steps you need to go through if you are going to transform your business.

  • When others talk about manufacturing they wistfully harp back to the past and production lines but are the criteria by which we measure the success of firms and the sector changing? 

It is still important to optimize what goes on inside a factory.  People get quite excited about the digital economy and they say it is all going to be virtual but you still need your iPhone to access your laptop, so we are still going to make things. You still have to optimize the factory but that is a relatively small part of the overall ecosystem you are operating in. We are now looking beyond the boundary of the factory to optimize the end to end enterprise. Productivity still matters and organizations need to make sure the things they are doing are as efficient as possible to ensure they are not wasting resources, whether that is material or the time of people.

The data allows you to identify where you might improve productivity. It is still a valid measure for part of the agenda but you also have to think about the outcomes that you are delivering for the customer. Productivity can be more an efficiency type measure, to see if you are using your assets well, but you also have to think about effectiveness, and if you are doing the right things with those assets. Balancing both efficiency and effectiveness is central in manufacturing these days.

  • In today’s fast moving world what is your ultimate goal at the Cambridge Service Alliance? 

People always say the pace of change is fast, if you go back to when there were buggy whips it still probably felt quite fast in those days so I think that at any point in time there is lots of change going on in the World. One of the challenges for leaders of organizations is to understand what change is both happening today and what change is coming in the future. You then have to think of the best way to respond and configure your organization to respond to that change. The boundary of your organization is undoubtedly changing; it is much more about networks and collaborations. People get too excited about some of these changes; things like the IOT or Industry 4.0 are not going to change the World in the next six months. These things take a long time to do. Undoubtedly the direction of travel is more connected devices, more data coming off them, and making smarter decisions. You do need to think about how you optimize systems rather than individual machines or individual supply chains so undoubtedly that is the way the World is going but there is a lot of work to do to get there.

Firms are spending a lot of time trying to get data from different devices, and they then have to try to reconcile that data, so there is an enormous amount of effort that needs to go into some of these things. I think it is a fascinating time to be involved in this because in many ways the foundations of what some have termed a new fourth industrial revolution are being laid now and being involved in that is just a wonderful privilege.    

  • Is it best to be the first or the last in the sector to make a new innovation or change, presumably you can learn a lot from the success and failures of others? 

Organisations have to take different views and think about where they want to position themselves. It is rarely about being the first or the last to make a change or innovation because incremental change in all sorts of organization is going on at the same time. As one organisation pushes forward with one type of innovation another organization will be pushing forward with a slightly different kind of innovation. You can’t afford to fall too far behind because if you do you will end up losing your place in the market, However, organizations can’t afford to stay still, they have to constantly think about how to adapt to the changing World and the changing circumstances. You need that continuous process of innovation going on, it is not about first or last it is about what is the right innovation for us in the evolution of our organisation at this point in time.

If you look at Uber in the taxi business, or some of the low cost airlines, or if you think about what is happening in newspapers with all of the online content, or with Google and Amazon and Facebook, these are organisations that are babies really but they have grown up incredibly rapidly and changed the way organisations work. It would be very dangerous to sit there and say ‘it’s OK we will be safe and immune from these changes’, because you have to watch what is going on.

In October our Alliance conference is discussing: Growing your Service Business in an age of digital disruption. Uber is going to speak about the way they are growing and how they expand. Trackunit which is now part of Goldman Sachs is going to talk about developing technology and why they are getting involved in the asset monitoring business. Siemens is going to discuss the digital factory, and the whole industrial internet Industry 4.0 and how that is changing the Siemens business model. These are all themes around platforms, services, data and the way the World is changing.

In research you need to be a specialist but as you drill down into a specific area you find there is enormous breath to that area and a lot of the changes that are going on in the world influence the way we think about things.

On Tuesday 11 October the Alliance will be holding its Industry conference on ‘Growing your service business in an age ofdigital disruption’ at the Moller Centre, Cambridge, UK.