SBP 4c: The Server-Ownership Perspective

This principle occurs because all production occurs to meet the needs of the customer. Customers only purchase based on needs. (Avoid trivializing that important truism.)

This principle states that manufactured goods are simply service providers that the customer takes ownership of. The manufacturing process is not said to be a service process. However, when the customer uses the manufactured good to meet a need, that is a self-service process! (What might be considered a “post-production process” as defined in the Defining the Process Service Business Principle.) Therefore, manufacturers do not serve the customers directly, but serve them through their products. Manufacturers are wise to assure that customers will be able to use the product to serve themselves and fill their specific need(s).

Here is a useful approach to understanding the commonalty between many manufactured goods and substitute services. For any good or service, ask the question “Why is it necessary?” You may have to ask the question a few different times before you arrive at the root reason why the good or service is necessary. This root reason why a good or service exists is what some call the “core benefit.” You will see that the core benefit of goods and substitute services is the same.

With the plunger versus plumber example, we observe the same core benefit. Why is a plunger necessary? Because we have a plugged drain? Lets say it is a sink drain. Why does it need to be unplugged? Because we want to use the drain again? Why do we want to use it again? Because eventually we will have a physical need, such as washing our hands, that the drain will facilitate. Why do we need to wash our hands? Because we believe we will be ill or disgusted if we do not wash our hands? Why don't we want to be ill or disgusted? Because we think that will prevent us from being happy (or from feeling good, or whatever you call it).

Now we really did not need to go through that many “Whys” to get to a root reason for the plunger that is in common with the plumber. In fact, right off of the bat we would see a commonality in why we would employ one or another. So, why do some people choose one over the other? This Service Business Principle indicates that much of the decision comes down to advantages and disadvantages of ownership.

There are a number of reasons in favor of employing the plunger (that we would own). The plunger typically costs a lot less than the plumber, even if you only use it once. The plunger is self-serve drain unclogging, and thus is available twenty-four hours a day, seven days a week. Plumbers may also be available over such a time span, but the cost differential is dramatically increased. Since you own the plunger, you know where it has been used in the past, which may bring peace of mind. Perhaps best of all, the plunger is available on a second's notice, whereas even the speediest plumber will take perhaps thirty minutes to get to your house.

In defense of plumbers, there are a number of advantages to not taking ownership of the service provider (the plumber). For one, the plumber is free to serve the needs of many different people, thus experience economies of scale to study and learn much more about plumbing. One would expect that employing a plumber would require much less effort on the part of the customer than employing the self-serve plunger. (Which is what you hopefully are paying for.) Some plumbers guarantee the result, but plungers don't come with such a guarantee. Finally, the plumber is equipped to serve a greater variety of needs than a plunger. (The plumber may find and fix a plug caused by a bent pipe, which the plunger will not fix.)

In some cases, a product with a common core benefit is not as obvious. For example, we may hire a lawyer to write us a real estate contract. Why? Because we want security in knowing that an agreement is enforceable. Why? Because agreements that are not enforceable can lead to foreclosed property. Why is this bad? Because if we did not have the property, we would be unhappy (or something like that). Well, ultimately we are seeking a benefit of not just a legal document (the contract) but of security by hiring a lawyer. We could get the same security if we knew everything about real estate law ourselves. And for that, we could purchase books and get our own security by doing it ourselves and becoming a legal expert. But perhaps that would be a bit costly in time and effort. (I don't think lawyers feel too threatened by books, but perhaps they do by the recent “do-it-yourself” legal software.)

Capital expenditures (ownership) often trade off against hiring (employing service); the decision to make a capital expenditure should consider the benefits and costs of ownership. Managers need to know what ownership implies.

The following example was brought up by the North American Industrial Classification System committee in a document defining service businesses¹⁾: In what sense is a painter different from a paint manufacturer? (or a painting equipment manufacturer) A person can hire a painter to paint a house, or can purchase the equipment and paint and do it himself. They both can meet the same core need. The primary difference is in ownership and implications thereof.

Buying a music CD and going to a concert both fill the need for music entertainment. The music CD is a manufactured good that the customer uses. The concert is a service that requires customer-self inputs in order to produce. (It would be pointless to have a concert without any listeners present.) With a CD, the customer takes ownership of the service provider. With the concert, the customer does not take ownership of the service provider–the music group. There are certainly advantages and disadvantages to each, and each can meet slightly different needs.

What about a CD that a person would rent from a music store and return a few days later? Who owns that service provider? In that case, the customer of the CD manufacturer is the music store. The music store takes ownership of the CD to use it to provide a service of attracting customers. The music store provides a service to the customer by making the CD available. Music stores cannot rent out CDs unless customers arrive and present their tastes. Finally, the customer uses the rented CD to serve their own need until the rental period is over.

Note that the Service Business Principle includes the phrase “or extended possession.” This is because some manufacturers, such as automobile manufacturers, have disguised the sale of their goods into long-term leases. There are tax and cash flow advantages to leases. Since the leases are long-term, the company does not have to be too involved in the service process of managing the day-to-day use of the vehicle. (Not nearly as much as a car rental company, with short-term rentals).

An airline provides passenger transportation, but is there a reasonable substitute product that the customer could take ownership of? Is it reasonable for the typical airline customer to instead purchase an airplane and learn to fly to meet his or her air transportation needs? Probably not. However, there are substitute manufactured products that compete with air service. An executive from a very successful discount airline told a group of my students that they considered their primary competitor to be the family car! What he was observing was that a family may choose to drive to a National Park or other recreation to “get away,” or they may fly to a city of interest. So, their objective would be to make air transportation as convenient and cost effective as making payments on, say, a Sport Utility Vehicle (or even just driving the station wagon already owned.) There are common core benefits between air transportation and taking a driving vacation in a vehicle one owns.

We could also look at the options for goods or services to the airline itself. An airline founded in Salt Lake City, Utah, Morris Air, began doing business by offering flights to various locations. The airline owned none of the jets, but chartered them from other (service) companies and sold the seats to their customers. Eventually the company was bought out and shifted to jets which were owned by the company (purchased from manufacturers or purchased used). As you might imagine, there are dramatic advantages and disadvantages of either approach.

1. (These questions should be asked about a manufacturing process, perhaps one that provides facilitating goods for your service process.)
2. Is there a substitute service for that good?
3. Why would one purchase the good instead of using the service provider? What are the advantages of ownership? Cost? Convenience? Control?

Is it possible for customers to buy a manufactured good or goods as a substitute for the service process? What would those goods be? What are some of the costs to the customer of that self-serve approach? Consider costs of the goods, costs of inconvenience, costs of skill acquisition, costs of quality control, etc. Attempt to quantify those costs by estimating what a customer would be willing to pay to avoid each. (For example, how much would a customer be willing to pay to avoid the inconvenience of doing it herself?) Compare that cost with the cost of having you provide the service. What costs of ownership and self-service are most likely to keep customers coming to you for the service?