The Product Is Dead Long Live the Product-Service!

The Product Is Dead Long Live the Product-Service! In the emerging blend q1's vice with tangible product, ing necessary for success. the customer receiver ever Fred Phillips. Lyle Ochs and Mike Schroek ovsavit.w : To optimize product cycle time, producers of _ nng ago began marketing before they had the product. Now, they may no longerjlnalize fully spec itied the pbyncal .specdieation at all. Gfe can thus proclaim, "The product is dead, " which implies the substitution of expert service for features . information, and capabilities that used to be intrinsu to the tangible product. Companies arefinding that dispensing with the idea g1'product remains one of the few wavs-ifnoi the on1v nay-ol c ompressing the technology cycle still further . By adapting to customers' needs and by reducing information overload, a comprehensive package of tangible goods, service and information can serve customers better than a traditional product.

Fred Phillips is professor of management and head of the Department of Management in Science and Technology at the Oregon Graduate Institute of Science and Technology, m Portland . He is also an affiliate staff scientist at Battelle-Pacific Northwest Laboratories . He is a senior research fellow at the IC Institute at The University of Texas at Austin, and has been vice president of MRCA information Services, a market research Finn . He attended The University of Texas and Tokyo Institute of Technology, earning the Ph.D. at Texas in mathematics and management science . He is associate editor of Technological Forecasting & Social Change, and editor of several books for managers and researchers . fphillipsta)admin.ogi.edu Lyle Ochs is president of Technology Innovation and Management, Inc., in .Aloha, Oregon, and an adjunct faculty member at Oregon Graduate Institute of Science and Technology . With 20 years of management experience in high-tech industry, he recently served as vice president of CAChe Scientific, Inc ., and directed the technology planning and commercialization for the Tektronix corporate R&D laboratories . He received his M .S . in mathematics from the University of Oregon . loehs@admin .ogi.ed u Mike Schroek is a customer support manager for Mentor Graphics Corporation, in Wilsonville, Oregon . He has 25 years experience in the computer-aided design/ manufacturing/engineering industry, and has held both field and headquarters positions in customer support, sales and customer training. He has over eight years experience managing software application support and customer training groups . He was an adjunct faculty member in the Mathematics and Computer Science Department at Villanova University for nine years prior to joining Mentor Graphics. Schroek received an M.S . in computer science from Villanova University, and is about to complete his M.S. in management in science and technology at Oregon Graduate Institute . michael_ schroek(p>mentorg.co m 0395-631,1 ~> S

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The recent demonstration we witnessed at a large high-technology company was perhaps more revealing than intended . The capability we were shown provided clear benefits for customers, was being sold in a shrink-wrap box containing a circuit board and some software, and had a brand name. However, one marketing manager called it a "set of products," another called it a "technology," and a third remarked, perhaps inadvertently, that it was "going to be a product." After the demonstration . one of us gently asked a marketing executive, "If the marketing group doesn't agree on whether this is a product or not, how will the customer possibly comprehend it?" The executive replied, "Yes, but by the time we all agree on it, the next release will be out, and we'll be back where we started." Product life cycles have been, and continue to be, getting shorter than ever, particularly for high-technology products ( .1--3). Compression of sales cycles (and the attendant compression of development cycles) is driven by rapid introductions of successive releases and new and substitute products . It is not because of a short span of enthusiasm on the part of customers ; indeed, technology may change much faster than consumer psychology and needs . This explains why some technology marketers have begun to market earlier in the technology cycle, often before a product has been specified concretely (Figure 1). "Vaporware" is one of the less salubrious results. Rather more constructive was AT&T's "You Will" campaign. The AT&T ads featured a leading question concerning future ways of communicating ("Have you ever attended a meeting from the beach" nposed on a machine with indeterminate features . g line, "You Will," was meant to wane customers to the idea of communicating in this new fashion-even though AT&T clearly did not have a product ready for market. Almost every tangible product has a service component (4, p . 239) . For high-tech products requiring much user learning, the service component is a significant fraction

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of the total package. That package includes the physical product, its packaging and advertising message, its distribution, its setup, its after-sale support, and much more. The increasing role of the service component is evident to consumers, for example, in the form of telephone support for software and PC products. It is evident to industry executives in the outsourcing of data processing services, for example . The perceptive marketing executive quoted above acknowledged that the whole question of product identity could be bypassed if the benefits were delivered directly to industrial customers by knowledgeable service consultants. Indeed, the brand could then be associated with the benefit rather than with the particular circuit board, giving the company greater leverage from the brand name . The obstacle to this is the shortage of knowledgeable service consultants. "The average street-confer VAR [Value .Added Reseller]," said the executive, "is not sufficiently knowledgeable . The Big Six accounting firms [specifically, their systems integration divisions], while knowledgeable, are too few and too much in demand as resellers . . ." If there were no shortage of service consultants growing service component of the high-tech tangible product could be allowed to dominate the tangible component, from the end-user's point of view . We could then proclaim that the product as a discrete set of tangible features is dead- -a watershed event in business management (J-8) . Dispensing with the idea of product is one of the few ways-if not the only way-to continue compressing the technology cycle. It has been said that customers do not need quarter-inch drills ; they need quarter-inch holes (9). With the demise of the tangible product, customers can have "quarter-inch holes" when and where they need them . The holes-that is, the benefits once provided by

Dispensing with the idea of product is one of the few ways to continue compressing the technology cycle. "products"---are delivered by professional service providers who are knowledgeable about the product technology and in the customer's business . We call these people "Expert Service Providers (ESPs) . This article presents further evidence for the end of the ,ible high-tech product, and explores the implications ae thesis . The evidence is based on trends reported in the literature, and on a survey conducted by the authors. The implications include the benefits to producers and customers of eliminating the tangible product, the economics of the ESP profession, and the imperatives for educating ESPs . Our title, "The product is dead," is of course, hyperbole ;e companies still think of themselves as vendors of products. But the balance of tangible vs . service offerings is tilting toward service more sharp] n ever, and this is true in a wide range of indust (particularly mid-range industrial and consumer technology products justifying, vase believe, the dramatic headline . Signs of the Shift

The tilt toward service is ma: itself evident in the vocabulary of industry salespec videoconfereneing provider PictureTel speak "desktop solution" to distinguish it from the company's "full -we offerings." Gross and Cod note the growing use of the word "architectures" to define grand schemes for integrating many products into smoothly functioning systems (10) . Words like "platform," "standard" and "environment" are frequent substitutes for "product. The same authors not:, "To help counter [illegal copyin, by consumers], software publishers know they must give customers something more than a platter of bits. Makers of mainframe software are stressing customization or 24-hour maintenance agreements." Smaller software ing sufficient marketing resources to keep their unique packages salable, instead use them as internal resources to back niche consulting businesses (II

1 -fts product and technologP c vcles get shorter, producers must start marketing prior to theJul/ specj/icatiox of a product concept. 1

As for hardware . says Roger N . Nage, deputy director of Lehigh University's Iacocca Institute, "Those who offer attractive packages can virtually give away their hardware . . . . Tomorrow's factories "ill sell customer at things" (10) Notable in this regard, but

hardly unique, are the cellular phone companies using the "Kodak strategy" to give away phone i and make money on air time, paging servic calling plans. Mentor Graphics, in Wilsonville, Oregon, sells approximately 250 software tools for the design of integrated circuits and printed circuit boards . Mentor also integrates numerous third-party tools. Several years ago, according to one of its managers, the customers cried "Uncle!" after Mentor produced over 100 "release events" in one year . "We have since backed off," he says, "but customers still have trouble keeping up with the new versions." One of Mentor's responses has been to develop a Professional Services Division, which includes consulting, training and custom design services . Since its beginning six years ago, PSD's revenue has grown to more than S56 million (about 13 percent of total revenue) . It is one of the fastest growing segments of Mentor's business . At Mentor Graphics, a concept called "The Whole Product" goes far beyond what is traditionally meant by "product ." It includes not only the tangible product, training, hotline support, marketing, sales, etc., but the many other features that constitute the relationship with the customer . Phil Robinson . vice president and general manager of the Customer Support Division, believes that what Mentor provides to customers is the very ability for them to build their products. This includes ongoing tool and database compatibility, coalitions among vendors to solve customers' problems, and the knowledge to recommend products and services, even if they are competitors' offerings.

The Professional Services Division is one of the fastest-growing segments of Mentor Graphics' business. Explaining Product `Death' Several converging trends involving life-cycle effects, heightened competition, and advances in information technology herald "the death of the product": " The commoditization or maturing of electronics and semiconductor technology, and the resulting squeeze on margins, mean that the quest for "value-added" has migrated to expert service. " The basis of competitive advantage has shifted from the individual product to its underlying architecture and a firm's ability to flow new technology into its subsystems and rapidly tailor them to the needs of specific customers (Fig . 2). 'Today, the battlefield is product platforms and not single products (12) . " Evidence accumulates from many industries that companies that focus and organize around the customers' needs are more successful than companies that cling to an internal focus in which the product is the organizing principle for the business . increasing their emphasis on relationship marketing and alliances, companies aim to lock customers into streams of products (13,14). A recent study of industrial purchasing suggests that satisfaction

Traditional Implementation/Commercialization Path Competence (general) Domain knowledge and integrative skills applicable to scientific, engineering, and business processes .

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A device made salable by addition of reliability and customer testing, design, packaging, positioning, and, increasingly, service.

with the purchase process-which arises from excellent has more of an influence on the likelihood that e customer will buy future products from the same supplier than does satisfaction with the product itself (15). " Mass customization, using computers and automated production to provide individually tailored products at costs consistent with mass-produced products, enables companies to differentiate their offerings (16). But if every customer receives something different, how can a "product" be advertised? " The introduction of object-oriented technology means that software components can be assembled rapidly into an enormous variety of functional capabilities, making it harder for any one of these functionalities to assume a firm identity as a product. " The short market life cycle of individual products is leading producers to emphasize brand over product in order to economize on corporate communications and to avoid overloading customers with information about product changes (17,18) . As one observer noted, "This industry was built on product advertising" (19). Nevertheless, a recent survey reveals an increased emphasis on brand marketing within the high-tech sector (20) . N The evolution of knowledge-based business, according to Davis and Botkin, means that "businesses will come to think of their customers as learners and of themselves as educators" (21). Businesses, say Davis and Botkin, profit from making smarter products (like self-diagnosing fuel injectors and home appliances that communicate via the Internet) that better help customers . Smart products "both oblige and help" customers to learn. If the delivery of the needed knowledge is not yet automated, it must be delivered by human service providers_ Results of a Local Surve We surveyed 41 managers and engineers at technology firms in the "Silicon Forest" corridor near Portland, Oregon, an area currently outstanding in the export strength of its semiconductor, electronics, software, and transportation/shipping industries . The respondents all held positions with responsibility for technology management, though in various senses of that phrase, and all were asked to respond with reference to "a particular product and its successive releases and upgrades." The survey's purpose was to confirm and measure the momentum of the trends that indicate the "death" of the product in high-tech industry . Twenty-three respondents said successive releases were coming out with increasing frequency, and 14 felt this rate was "faster than the rate that would let the customer fully comprehend the feature changes and added

benefits." Twelve said they were commencing marketing activity for each release earlier in the development cycle than was the general case three years ago, while nine said "later in the cycle," perhaps indicating that early marketing effort is now focused on the brand or standard rather than the individual product release . When asked, "Does your company attempt to compress the time between releases by redesigning the service component for successive releases, while minimizing actual hardware/ software changes?" 16 responded "yes" and I 1 said "sometimes"; 29 said this was happening more frequently than three years previously. Four years ago, 28 respondents used ESPs to help customers use products ; today, 34 do. Sixteen respondents agreed that, "More than was true three years ago, the identity of my product is now defined by the service component rather than the tangible component ." Twenty-four place more importance today on brand awareness than on a customer's awareness of a given product, although 27 reported that the status of product managers relative to brand managers at their company was "about equal." Sixty-two percent of the products were industrial products (half of these were self-rated "high priced"), and 38 percent were consumer products (60 percent of these "high priced"). Primary customers were Original Equipment Manufacturers (23 percent), large industrial end-users (23 percent), small''medium industrial end-users (38 percent), and individual consumers or households (15 percent) . Twenty-three respondents said they market through VARs, but none use VARs without also using other channels; nor do any use retail stores as their only channel . Twelve use major account teams, and eight use only customer direct (mail, phone, online) channels; 20 use more than one channel . Use of ESPs was highest among producers of low-priced industrial products, consistent with the effect of eommoditization, and was highest among those selling to industrial end-users . Presumably, OEMs employ specialists to understand the components they are buying. Experiences Elsewhere Sola International, Inc . manufactures spectacle lenses, many of which combine new materials with advanced lens design . Sola's VP of R&D remarks that, "The company runs the risk of overwhelming customers with a wide range of new products. At trade shows, customers sometimes don't even realize a new product has been launched. While we have two or three major products c been able to communicate well, in general we are introducing products faster than they can be effectively promoted," Netscape's chief technology officer, referring to the

recurring three-to-four month upgrade cycles of his company's web software, said, "So much, so fast, with whizzy-cool features, has left customers with battle fatigue" (22). In 1998, Sun Microsystems planned to slow its Java upgrade cycle for the same reasons (22); Microsoft said its Windows NT Version 5 .0 would not be released until it was fully debugged and tested, and "customers, partners, and software vendors have reacted positively to the move" (22). Sola, Netscape, Sun, and Microsoft have had to decide whether to slow their product introductions (risky, if competitors learn to satisfy customers' new needs faster and with less confusion) or acknowledge the death of the product, deemphasizing the identities of individual releases and building the profitability of product-service packages . General Electric will realize 62 percent of its income from services in the year 2000, compared to 38 percent in 1996 (23) . CompUSA, OfficeMax, and Tandy Computer City discovered that customers are willing to pay to install and upgrade their PCs (24). In fact, they will pay $80 to $100 per visit-with a profit margin of up to 50 percent-and return fewer computers . A service venture of Xerox and OfficeMax earns "several million" annually serving these markets. Other electronics retailers emphasize training classes, phone help lines, or free installation of upgrades in the store. Implications for Managers Clearly, we do not overwhelm customers with product releases in order to serve customers better . By considering the idea of the death of the product, those of us who are producers can examine our motives: Are we overloading the customer due to fear of competition? As an attempt to accelerate revenue or establish industry standards? To compensate for a shortage of trained ESPs? Is this the right way to go, how will customers respond, and what are the long term consequences'? Buyers of very expensive industrial equipment have always expected high levels of service. Our survey shows that this expectation or need now applies also to mid-range industrial products and also to some consumer technologies. Our survey respondents rated on a 5-point scale (I = strongly disagree, 5 = strongly agree) a number of potential benefits to the producer of bringing the product's benefits directly to the customer via ESPs. These were "reduce the need to communicate (to the customer) the features and benefits of new releases"; "reduce the time needed to prepare a new release" : "reduce the need to crisply define the `product' "; and .'reduce the time needed to recover the investment in a new release." Agreement and disagreement were evenly split among all these (means between 3.00 and 3 .04) except the last, for which the mean rating was a slightly higher 3,34 .

As R&D managers, we must now focus on, and actively shape, our firms' value delivery process. ESPs help implement the expanded concept of product that is necessary for today's technology company. ESPs should be trained to:

N Increase customer satisfaction . At Mentor Graphics, ESPs have contributed to the company's high ratings on customer satisfaction surveys . " Convey good ideas for newprodum.Significantly, Mentor's ESPs bring customer ideas and needs back to the software designers and are active members of the integration teams .

N Create good ideas for- nerv products . Exposure to the customer's environment gives the ESP ideas for new products to solve the customer's problems . " Create neiv applications within the customer's environment that will increase pull for the tangible product(s) . " Deliver customers value that bridges individual product releases . ESPs provide the customer with greater benefits from earlier (or beta) product releases, as well as during those difficult times when the final release is delayed. To fulfill these roles, an ESP must be creative, flexible and skilled in the industry's research and applications . Issues still to be addressed satisfactorily at Mentor and other firms include finding and training good ESPs, managing the knowledge they hold, making sure the knowledge is shared with fellow ESPs, automating this established knowledge so the Ii$PS Can le\ crage their time to stay or, the leading edge of new knowledge, and maintaining the application domain knowledge that eventually erodes among_ ESPs who have been hired from domain nuns into Mentor . Because fe leave college knowing how to do customer service, is an opportunity for universities to deNelop courses "customer en4 Summit) managers-

we see three broad irrrolicalions for

I . The scope of product and technology devclopmen expanding, driven by the increasing N glue of customer service in the total product offering_ Indeed . as R&D managers, we must now, focus on, and actively shape, our firms' "value delivery process," a process that encompasses the traditional product de\ elopnnent process and its underlying technologies, along with the firm's customer service and support processes t2 ?) fins

demands excellent cross-organization ties and teaming, close working relationships with customers, knowledge of the customer's key business processes, and application domain expertise to deliver distinctive customer value in the area of service . It necessarily demands engineering customer service with the same degree of attention that we have historically paid to product capabilities and performance specifications (25, chapter 11) . R&D must instruct customer service representatives not only about what is currently offered, but also about what is possible .

2. Moving new capabilities quickly to market has become an imperative for R&D . But if rapid

commercialization means overwhelming the customer with product releases, then it is not good for the company . This is true even, or perhaps especially, if your competitors are confusing customers with rapid product upgrades . fit such cases, it is better to transfer the innovation initially to the brains of the ESPs rather than to the customer directly.

3.

Through much of this century, we have sought to replace skilled labor with less expensive factors of production . Qualified engineers are indeed in short supply, but analysis of the technology cycle shows that time is even scarcer . The pendulum swings back, and we see the relative advantage of relying on ESPs . "Product," in the past, meant something that a company makes, puts in a box, ships to a customer and, barring defects in material or workmanship, never sees again . What is proposed to replace "product" is a new meld of service component and tangible component, the latter having a feature set with a fuzzy definition . In this way, the customer receives everything necessary to be successful .

Acknowledgments The authors gratefully acknowledge the creative input of Joe Ellertson of Tektronix, Inc . We benefited also from conversations with Deb Chatterji of the BOC Group and Peter Coldrey of Sold International, Inc. An earlier version of this paper appeared in PIC14ET '97,

Proceedings of the Portland International Conference on Management of Engineering and Technology, July, 1997 .

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