The Information and Services Economy a.k.a. Business Architecture and Services Science IS210 Profs Bob Glushko & Anno Saxenian UC Berkeley School of Information Fall 2006

Outline: Week of Sept 5-7 Drucker & management in the ISE Economic paradigms and the ISE Defining services (revisited) Services: front stage v. back stage The experience economy

Drucker on the knowledge economy “The essence of management is to make knowledges productive.” Industrial economy the scarce resource is fixed assets (capital, expensive machinery, tools) Knowledge economy scarce resource is talent: quality of knowledge & productivity of knowledge Value of talented people goes beyond predefined tasks: building brands, relationships, reputations, and other intangibles (high value)

What is management in ISE? Management brings people together for joint performance—makes human strengths productive and human weaknesses irrelevant Management is a social function—and in its practice it is truly a liberal art. The 21 st c. organization will have to put as much effort into developing talent as to recruiting it  Replace silo-based hierarchies with talent markets  Allows workers to find challenging new opportunities & managers to identify talented people for new roles

Paradigms of the economic growth Mainstream economics  Adam Smith and perfect competition  All firms have access to same “recipes”  Allocation of resources via invisible hand  Productivity growth via specialization and division of labor; no intangible assets  Main threat is monopoly=>government’s role Posits equilibration and equalization of returns; no role for innovation / creativity

Paradigms of the economy Schumpeter’s creative destruction  Entrepreneurs and technological change as main drivers of growth  Incentive to innovate: short term monopoly rents, enforced created by copyrights and patents  Continuous innovation creates losers in a “continuous gale of creative destruction”  Network effects (increasing returns) amplify costs Challenge of continuous displacement of older firms, products, regions, workers, and inherent inequality

Economic categories and services The Economist: “Services are anything sold in trade that cannot be dropped on your foot.” Key limit to standard tripartite classification is it lack of attention to intangible assets  Services are products that cannot be stored and that are consumed at the time of their purchase (U.S. Bureau of Economic Affairs )

Browning-Singlemann classification Services Sectors  Producer business & marketed services  Personal domestic, hotel, dry cleaning, repair, entertainment  Distributive logistics, communic, wholesale and retail trade  Non-marketed health, welfare, govt. Two other sectors:  Transformative mfg/food/construction  Extractive agric, mining

Beyond classification schemes We’re all in services now, more or less... “There are no such things as service industries. There are only industries whose service components are greater or lesser than those of other industries...”  Theodore Levitt, 1972

Beyond classification schemes (Teboul) Pure product: raw materials transformed by capital and labor into finished product Pure service: customer transformed by an experience provided by capital and labor  Customer is integral to service  Service delivery requires interaction/contact with customer  e.g. hospital, education, restaurant services Product involves transformation Service involves performance, interaction

Front stage: performance

Back stage: transformation

Information as another raw material Data and information of any sort can be considered raw materials When in physical form (paper, books) it takes great effort to search, retrieve, store, manipulate, transform information When digitized, information is:  Easily stored and processed – databank, data warehouse, data mining  Easily customized, enriched, accumulated, transformed  Easily distributed - infinite scalability

Industry v. services: a matter of degree

Teboul: we shall be more in services... Any activity is a composite of front-stage and back-stage elements  The service aspect involves interaction, the product aspect involves material transformation As front end and back end become more differentiated the challenge is to align and coordinate them  Conflict between product logic and customer relationship approach

Services: The front-stage experience

Industrializing services Teboul: “Industrializing services means simplifying the front stage and focusing on the product in the back stage.” Why industrialize services? What are advantages? Who has an incentive to industrialize services?

Two different worlds Back stage Product excellence and scale  Division of Labor  Standardization Limits Controlled Product Process Zero Defects  Scale economies Front stage Solutions and customer experience  1-off: Moment of truth  Seamless interaction & integration  Proximity to customers  Zero defections  Co-production  Scope economies

The service triangle

How to link front and back stages? Back and front stages closely interwoven: back-stage exists to support front-stage 1.Ask customers to be more reasonable (Model T) 2.Develop flexible production lines, workshops, or modular designs 3.Have same people do both back & front 4.Integration mechanisms (coordination meetings, marketing councils, etc.) 5.Focus on workflow processes linking the two

The experience economy B. Joseph Pine II and James H. Gilmore The Experience Economy (HBS Press, 1999) What is the experience economy? How does it differ from the service economy? What is the relationship between the service and the experience economy?

What is the experience economy? Commodities – extraction, natural resources, bulk storage, fungible Goods – make, standardized, inventory after production, tangible Services – deliver, customized, on demand supply, intangible Experiences – stage, personal, revealed over time, memorable

The experience economy “Work is theatre & every business a stage” Extract commodities Make Goods Deliver Services Stage Experiences Pricing Competitive position Needs of customers MarketPremium Relevant Irrelevant Undifferentiated Differentiated

The progression of economic value In the shift from goods to services: What is the role for customization What is the role for commoditization? How about other stages in the progression?

What comes next? Commodities: Noise Goods: Data Services: Information Experiences: Knowledge Transformations: Wisdom

The Silicon Valley story 1960s: Defense manufacturing 1970s: Semiconductor manufacturing 1980s: PC design & manufacturing 1990s: Software & Internet design 2000s: Information services delivery 2010s: ???