Hybrid Manufacturing Systems and Hybrid Products: Services, Production and Industrialisation
Manufacturing has changed, but our understanding of it has not. The production process of both goods and services has become blurred; service firms increasingly provide service functions that are combined within goods whist goods manufacturers are stretching their value chains to profit from the provision of services. It has become difficult to differentiate between goods and services and, in many instances, the attempt to apply such a distinction distorts understanding of complex production processes. Four processes have been at work that require detailed attention: the shift towards service employment, changes to manufacturing, the blurring of services and manufacturing functions and the rise of hybrid products and production systems and finally alterations in the control systems required to manage complex hybrid production systems.
Studies for Innovation in a Modern Working Environment Edited by Prof. Dr.-Ing. Klaus Henning RWTH Aachen University Center of Learning and Knowledge Management and Department of Information Management in Mechanical Engineering International Monitoring Germany Professor John R. Bryson Hybrid Manufacturing Systems and Hybrid Products: Services, Production and Industrialisation The University of Birmingham School of Geography, Earth and Environmental Sciences, Edgbaston, Birmingham, B15 2TT United Kingdom Preface�������������������������������������������������������������������������������������������������������������������6 I. .A Transformed ›Real‹ Economy?������������������������������������������������������������� 10 II. .Manufacturing Decline or .Transformation��������������������������������������������15 III. .The Shift towards Services����������������������������������������������������������������������� 23 IV. .Interdependencies between Services a. nd Manufacturing�������������������29 V. .Conceptualising Hybrid .Production Systems��������������������������������������� 37 VI. .The Rise of Hybrid Manufacturing .Systems and Products���������������� 44 VII. .Conclusions: Working, Learning .and Developing New Competencies ������������������������������������������������������������������������������������������������������������������������������54 References ����������������������������������������������������������������������������������������������������������� 56 6 Preface Modern Manufacturing: Inside a factory. The global economy is in a constant state of change and transformation. Enhanced competition continues to alter the parameters and dynamics of many industrial sectors. From 2008 national economies have experienced significant turbulence as a crisis of confidence developed in the banking sector reducing the availability of loan finance. This has led to an economic downturn as firms and individuals have found it difficult to access loan finance and ultimately this has reduced consumption leading to a corresponding decrease in productive capacity and enhanced unemployment. This economic downturn is reducing demand for manufactured products and this is impacting on the performance of economies that have retained significant manufacturing capacity, for example Japan and Germany. The economic downturn and the so-called credit crunch highlights the importance of a set of factors that perhaps enhances the ability of a firm and a region to respond to an economic crisis in an appropriate manner. The issue is one of economic resilience. Such resilience is perhaps best found in regional or national economies that have retained or developed economic diversity, a complex mixture of manufacturing and service activities, and also focussed on enhancing learning and skill development at the level of the individual and organisation. A firmâ€™s ability to engage in continuous process and technological innovation is a key contributory factor towards enhancing resilience. One innovation that is becoming 7 increasingly important in maintaining competitiveness is the blending of manufacturing and service processes together to produce hybrid production systems and hybrid products. This development is explored in this study. It is important to remember that this innovation has important implications for working, learning and developing competences. Manufacturing firms have to develop competences in the delivery of services and also work with their existing employees to ensure that they acquire the appropriate skill sets to support the production and sale of hybrid products. Manufacturing has changed, but our understanding of it has not. The production process of both goods and services has become blurred; service firms increasingly provide service functions that are combined within goods whist goods manufacturers are stretching their value chains to profit from the provision of services. It has become difficult to differentiate between goods and services and, in many instances, the attempt to apply such a distinction distorts understanding of complex production processes. Four processes have been at work that require detailed attention: the shift towards service employment, changes to manufacturing, the blurring of services and manufacturing functions and the rise of hybrid products and production systems and finally alterations in the control systems required to manage complex hybrid production systems. First, the shift in employment towards services in all developed market economies reflects alterations in consumer behaviour (both business-to-business and businessto-consumer) and in the structure of production systems. The growth of service functions also reflects alterations in the skill sets required In some accounts this employment shift is considered to indicate the rise of a service economy in which service functions and outputs become increasingly dominant (Illeris, 1996; OECD, 2000; Bryson et al, 2004; Bryson and Daniels, 2007). Such accounts have a tendency to overemphasise the importance of the rise of service employment and under-emphasise productivity differentials that exist between manufacturing and services. Manufacturing employment has declined in many national economies, but productivity improvements have meant that output has risen (Bryson, 2008a). To complicate matters many service jobs directly or indirectly support goods production (MacPherson, 1997; Bryson, 2009). In some cases, service functions that were previously undertaken inside manufacturing firms have been externalised to specialist service suppliers (Goe, 1991; Beyers and Lindahl, 1996; Bryson et al., 2004: 83-85). This type of restructuring produces a statistical anomaly in which service employment appears to grow at the expense of manufacturing jobs (Bryson, 2009). 8 Second, manufacturing has changed, or perhaps our understanding of manufacturing has changed during this century. Academics and policy makers have begun to adopt a more complex definition of manufacturing that has been informed by relatively sophisticated accounts of commodity or value chains (Bryson, 2008b; Gereffi, 2001; Gereffi et al., 2005). In this context, the concept of value chain fragmentation has become an important conceptual tool for understanding the evolving structure and new geographies of production systems. This concept of fragmentation highlights the fact that manufacturing involves more than just fabrication, but also includes service functions that are integral to production processes that are designed to produce goods. This means that academics and policy makers have begun to shift their attention away from a narrow fabrication view of manufacturing to one in which manufacturing includes research and development, design functions, marketing and advertising, services that support production processes and a set of services that have been created to support customersâ€™ experiences of a product. Manufactured goods should now be conceptualised as products that contain different quantities of service inputs; some of these service inputs are wrapped into a good during the production process and some are wrapped around a completed product (Daniels and Bryson, 2002; Livesey, 2006; BERR, 2008). Third, the blurring that has and continues to occur between goods and services implies that these terms are beginning to distort the ways in which academics and policy makers conceptualise production systems (Howells, 2000; Daniels and Bryson, 2002;). This has important implications for academic theory, but also impacts on the ways in which national statistical agencies classify economic activity. It also means that regional policy can no longer be targeted at services or manufacturing sectors, but must become increasingly holistic and be designed to enhance the competitiveness of complex production systems consisting of hybridised manufacturing and service processes and ultimately hybrid production systems that produce hybrid products (Bryson 2008, a & b; Bryson et al., 2008b). A hybrid product contains a complex combination of services and manufactured inputs and both sets of inputs are required for the product to function. All production systems are hybrid systems, but not all hybrid production systems produce hybrid products. Fourth, the development of hybrid production systems has important implications for the science of management cybernetics that have yet to be explored to any great extent. Simple price-based competition has been replaced or supplemented with other forms of competition founded upon the exploitation of new forms of expertise supported by new control systems (Bryson et al., 2008b). The implication is that management systems must be designed to capture profits that come from services that are woven 9 into and wrapped around products. This means that profit does not only occur at the point of sale of some goods, but continues as part of a revenue stream that comes from the provision of a range of related services (Giarini, 2002). Management and control within hybrid production systems is a new area that will require considerable further research. These four processes have important implications for the ways in which firms position their products and services in the marketplace and also for regional and national economic policy. The aim of this Trend Study is to explore the shift towards hybrid production systems and hybrid products. Further detailed research, however, is required in order to explore many of the management and policy implications that come from a shift away from the production of goods towards the creation of hybrid products. It is important to clarify the terminology that will be used in this Trend Study. Three terms are used in the analysis: good, service, hybrid product. The term good is used to describe a manufactured product that is tangible and has a physical presence, for example a car or a mobile phone. The term service is used to describe an intangible product or process, for example consultancy advice or software. The term hybrid product refers to a commodity that combines tangible and intangible elements. It is thus the result of a blending or hybridization of manufacturing and service functions or processes to produce something that only has use and exchange value when both elements are combined and working correctly. A good example is a computer which has no use value without correctly installed and functioning software. Software is continuously updated and some software, for example virus protection, only retains its use value through the provision of a constant stream of service up-dates. 10 I. A Transformed ›Real‹ Economy? Manufacturing still matters within developed market economies (Daniels and Bryson, 2002a; Livesey, 2006; Bryson et al., 2008a; BERR, 2008). Manufacturing has altered over the last twenty years, but our understanding of this sector has been too influenced by associations with declining traditional industries (Fingleton, 1999). The word manufacturing can conjure up images of pollution, heavy engineering, smokestacks and industrial decline. Manufacturing is often considered to be part of the old economy that has been supplanted by the rise of a new economy (Daniels et al., 2006). The debate over the new economy was one constructed rather services and was also one that largely ignored manufacturing (Wood, 2002). This is surprising as the new economy is completely dependent upon inputs created by the old economy or the real economy. The old economy has never gone away and it is possible to argue that the literature on the new economy fails to appreciate that manufacturing has changed; manufacturing has been transformed and continues to evolve, but out understanding has not kept pace with these alterations. The skill sets that are required for competitive manufacturing have altered and many manufacturing companies are reliant on complex combinations of management, production, technical and service skills. This has important implications for working, learning and the development of skills at the level of individual worker and also for organizations. It also suggests that successful manufacturing firms are reliant on their ability to create innovative strategies that will enhance wealth creation opportunities that comes from the sale of manufactured products and attached services. This is an important point in that the skill sets required in manufacturing now include services that are embedded in processes and production systems, but also services that are embedded in products. The latter also include services that are designed to support products, for example the provision of training, product updates, advice centres, the provision of finance packages, etc. All these require skill sets and competencies that are not traditionally associated with manufacturing. In the media the emphasis has been on employment decline in manufacturing and the rise of service jobs; journalists cover factories that are closing in an area, but often fail to provide coverage of firms that are expanding or manufacturing firms that have been recently formed. The image of manufacturing decline in the developed market economies was highlighted by Jim Womack, chair of the US-based Lean Enterprise Institute, a research group, when he noted that »if you told most people in the US that the country was still the biggest manufacturer and is likely to remain so for some time, they would say you were lying […] There’s a lot of negative feeling in the US [about manufac- 11 turing] and this leaves people thinking the country is doing worse than it really is« (Womack, cited in Marsh, 2007). China’s recent rise as an important producer of manufactured goods has tended to draw attention to manufacturing activities located in low-cost developing economies and away from manufacturing activities that are still located in developed market economies. This is unfortunate. The academic literature on the rise and role of service activities in developed market economies has emphasized the heterogeneous nature of services (Illeris, 1996; Bryson et al., 2004). The argument is that the service-side of the economy is different to understand as too many disparate activities are haphazardly classified under the term service. This is complicated by the fact that governments have found it difficult to develop adequate classifications of services. Nevertheless, it is possible to argue that the manufacturing sector is as heterogeneous as services. In manufacturing there are many different ways of creating the same product, many different business models and production systems and many different ways of organising production over space. Service activities can be undertaken within manufacturing firms, but the same functions can also be supplied by independently owned specialist service providers. Service activities cannot be delivered without goods whilst goods cannot be produced without services. The difference is that in manufacturing service functions are interwoven into the production process whilst for services goods provide the supporting infrastructure (computers, telephones, office equipment, office machines, etc). It is timely for academics and policy-makers to recognize that both the manufacturing and service sectors are complex heterogeneous and interrelated sectors. A good indication of the perceptional distortions that exist regarding manufacturing is found in a publication produced by the US-China Business Council (2006). This notes that the death of American manufacturing is an »oft-repeated claim from some quarters« and that it would be »easy to get the impression that US manufacturing is dying – and that China is the culprit« (US-China Business Council, 2006: 1). Evidence is then presented that shows that the United States is still the world’s largest producer of manufactured goods; in 2005 the US share of global manufacturing output was 22.4 per cent and this share »has been hovering around 20 per cent since 1982« (US-China Business Council, 2006: 1). In addition, real value output in US manufacturing increased each year since 1987 apart from declines during the 1990–1991 and 2000–2001 recessions. Over the last thirty years (1977–2007) the US lost 3.6 million manufacturing jobs, but over the same time period high-skill manufacturing employment expanded (Deitz and Orr, 2006). On the one hand, globalization, innovation and new technology 12 reduced the number of low-skilled jobs in the American manufacturing workforce but, on the other hand, opportunities developed for high-value added manufacturing activities that are supported by higher-skilled workers. This suggests that the Âťvery nature of manufacturing work is changing. The sector has historically been regarded as one offering employment opportunities for lower-skilled workers. Recent trends, however, provide strong evidence that manufacturing jobs in virtually all industries and regions of the country [the U.S.] will increasingly demand higher skillsÂŤ (Deitz and Orr, 2006: 7). Similar evidence is available for the United Kingdom which shows that there has been a general upskilling in the manufacturing workforce as companies move up the value chain (Fig. 1). Between 2001 and 2006 the share of UK manufacturing earning obtained by people employed in production declined by -4.8â€‰% whilst the majority of production-related service functions, apart from support services, trades, increased their share. This represents a shift in the skill sets and competencies required within manufacturing and also the development of systematic cross-linking of manufacturing and service functions within production systems. The implication is that manufacturing firms must consider the relationship between manufacturing and service functions. Policy-makers must also encourage manufacturing firms to consider integrating services into their production systems, but more importantly transforming manufactured products into products that blend manufacturing and service functions together. This blending is the focus of this Trend Study and highlights the importance for firms of balancing pressures that limit change against pressures that force firms to change rapidly and radically. In this approach to manufacturing, a good no longer remains just a good, but is transformed into a good and service bundle. This represents a new production concept in which standardized products can be customised through the delivery of attached and embedded services. The development of this new production concept has important implications for the skill sets that exist within the real economy. Manufacturing skill sets are still important, but service skill sets are perhaps becoming more important as products are transformed into good and service bundles. Manufacturing has altered and in many respects has been transformed concurrently with the shift towards service employment. This Trend Study explores this transformation by drawing upon a series of studies that I have undertaken in the UK and elsewhere over the last eight years (Bryson, 1997; Daniels and Bryson, 2002; Bryson et al., 2004; Bryson, 2007; Bryson 2008 a & b; Bryson et al., 2008a). The focus is on understanding the profound transformations that manufacturing has experienced in the developed market economies over the last 15 years. Three related transformations are identified. First, the shift towards niche manufacturing and the development and 13 application of various forms of non-price based competition (Bryson et al., 2008b). Second, the rise of hybrid production systems that are based around productions systems that combine manufacturing and service processes in ever more complex ways (Bryson 2008b). Third, products are changing so that they become either service-enhanced or service-driven (Bryson, 2008a; 2009b). In both cases, a hybrid product is produced. Service-enhanced products are those in which a conventional product or process has been redesigned to take advantage of new forms of service expertise or input. A service-driven product is one in which the service element of the product may be more important than the actual physical product. In this case, a company may decide to outsource the manufacturing component of its activities as most of the value may be based on the service, expertise or content elements of the product. Hybrid products have been created that consist of bundles of product and services. Hybrid products consist of complex combinations of services and manufactured product. The manufactured product has no value without the embedded service and the service can only be delivered through the product. Appleâ€™s iPod is a classic example of a hybrid product; without service support the product has limited use and exchange value. An R&D Design trades 5.3 % (+0.6 %) iPodâ€™s use value is only realised through combining the software, applications and content provided by iTunes, with the hardware, the iPod. Similarly a computer combines service-created knowledge Support Services, Professionals 20.1 % (+1.8 %) (the software) with manufactured PRODUCT hardware and a service package; all this might be facilitated by financial and insurance services in the form of finance and warranty packages. phone company, an- nounced that it was going to become a mobile Internet service Production, professional 21.1 % (+2,4 %) Support Services, Trades 7.0 % (-0.8 %) In September 2007 Nokia, the mobile Production, trades 27.5 % (-4,8 %) Logistics & distribution 5.9 % (+0.5 %) Sales & Marketing 13.2 % (+ 0.2 %) provider with the launch of Ovi. Ovi combines the Internet with mobile devices by permitting Fig. 1: Share of UK Manufacturing Earnings across the Value Chain, 2006 (Percentage point change in share from 2001-2006 shown in brackets). Source: After BERR, 2008: 31 14 users to access their existing social networks, communities, content and Nokia services from their Nokia handhelds. Olli-Pekka Kallasvuo, Nokia’s chief executive, argued that »the industry is converging towards Internet-driven experiences. Nokia is the world’s No. 1 mobile devices company. Looking into the future, we will deliver great devices, experiences and services to make it easy for people to unlock the potential of the Internet.«1 This represents a development in Nokia’s business model towards the provision of free services, business services and subscription business models. Microsoft sells its software either by having it pre-loaded on to machines or by shrink-wrapping the product and selling it through conventional retail channels. Over the last five years, however, software-as a service (SaaS) has developed as a competitor to shrink-wrapped software. In this system the software provider develops a web-based application that consumers access over the Internet. In the shrink-wrap model customers purchase a copy of the software and the rights to use it subject to the conditions specified by the vendor, however with SaaS customers do not purchase a copy of the software and the rights to use it, but rather pay for usage; product ownership is replaced by payment for services provided. This is the primary difference between SaaS and shrink-wrapped software. In the SaaS software delivery model the customer never becomes involved in the deployment or maintenance of the software. The software provider is no longer providing a product, but a service that is delivered via the effective and efficient management of hybrid production system. This represents a shift away from the consumption of a product (packaged software) to the consumption of a service. In this case the customer is not concerned with ownership of the software, but with access to software that will perform a set of tasks. Microsoft is a technology company that creates software products that provide services. The products are sold as conventional goods, but with supporting service upgrades and other forms of service support. This represents one type of business model based on the development of a good service bundle. Microsoft is perhaps a less than representative example, but this company’s activities highlights some of the alterations that have been made to production processes and to business models. It is to the changing nature of manufacturing production systems that we now turn our attention. 1 http://nokian95phone.wordpress.com/2007/09/06/nokia-ovi/ , accessed 25th November 2008 II. Manufacturing Decline or Transformation From manufacturing to transportation logistics: Eurogate at the harbour Hamburg, Germany. Production processes continue to change rapidly and radically. The implication for firms, employees, working learning and development skills and national economies are far-reaching. Indeed, the capitalist economic system is founded upon processes and practices that are fundamentally dynamic. The pace of social and economic change has accelerated over the last thirty years in response to a number of major technological revolutions, but also economic restructuring and radical alterations to the organisation of production systems. Many of these changes can by subsumed under the term globalisation. Discourses of globalisation or internationalisation, however, perhaps hide more than they reveal. It is important to identify the drivers behind alterations in firm behaviour and for the development of new productions systems, or alterations to existing systems, that are intended to exploit new markets or differential comparative advantage. Some of the drivers are well-established processes related to competition and the evolving division of labour (Walker, 1985: Sayer and Walker, 1992) while others represent radical alterations to production systems, for example the increased importance of technology-enabled service activities and functions in production systems. Since the formation of a capitalist economic system human society has been founded upon the creation of wealth and subsequently taxation systems that are intended 15 16 to overcome market failure though the provision of public goods and services. Wealth creation is a complex evolving process in which individuals come together to create or access wealth though employment, self-employment and also various forms of state benefit. Wealth creation is founded upon the production of goods and services that are exchanged in markets and this process of market-based exchange is a pervasive aspect of all capitalist economic systems. The economy has within itself many different alternatives; different ways in which wealth or value is created (Whitley, 2000; Aoyama and Castells 2002). It is possible to argue that there is no such thing as capitalism but a range of different forms of capitalism that are embedded in different political, social, cultural, ideological and economic formations. This is to argue that different varieties of capitalism exist. An analysis, for example, of the so-called G-7 countries (United States, Japan, Germany, France, Italy, the United Kingdom and Canada) proposed that two different paths to an informational society appeared to exist (Castells and Aoyama, 1994: 546-547). A serviceeconomy model that applies to the United States, the United Kingdom and Canada and is characterized by a rapid decline in manufacturing employment after 1970s and the development of an entirely new employment structure dominated by various forms of service activities. An info-industrial model that includes Japan and to some extent Germany in which manufacturing jobs are reduced but manufacturing activity is reinforced. In this model business services appear to be more directly linked to the production of manufactured goods. More recently, Gadrey has identified three models of national economy and services: Âťthe Anglo-Saxon, Nordic and continental European ModelsÂŤ (2007: 45). All this implies that capitalism is an extremely flexible system that has within it processes that encourage diversification and difference. Firms and individuals acquire access to wealth by identifying, developing and exploiting niches in marketplaces based upon differential competitive advantage. The point is that the nature of firm-based comparative advantage alters over time and this produces alterations in production systems and resultant products. The varieties of capitalism literature (Whitley, 1999; Hall and Soskice, 2001; Amable, 2003; Whitley, 1999) draws attention to the dangers of adopting a simple conceptual framework when considering the ways in which wealth is created under capitalism. National and regional economies are structured in different ways but most, if not all, have within them a complex mix of different types of economic activity. Nevertheless, bias can develop in both policy and academic debates. In the context of the United Kingdom it is possible to argue that academic debate and policy formulation has placed too much emphasis on services and in particular on financial services and that this has been to the detriment of manufacturing. In 2007 Richard Lambert, Director- 17 General of the Confederation of British Industry, noted that »the press have started writing articles about manufacturing success, rather than failure. […] It is noticeable how they [Government minister] want to engage today with the manufacturing sector« (Lambert, 2007: 1). In this speech Lambert argued that the CBI needed to work on raising public and political awareness of the importance of manufacturing to British society and economy. He argued that the financial services sector was »brilliant at collating data showing its critical importance to the national economy« and that manufacturing should try to do the same to demonstrate that manufacturing »[…] creates a mixed economy, not reliant on any single sector. It builds regional diversity with strong local economies. It offers a preponderance of jobs in the middle income bracket, rather than a few top earners supported by lots of low value jobs, so allowing for upward social mobility. And of course, it sustains the national science base« (Lambert, 2007: 3). The popular misconception is that manufacturing is in decline (BERR, 2008:7), in fact it has declined, and wealth creation in the UK relies on services and especially financial services. This popular misconception does not match the actual level of manufacturing activity that exists in the UK. This can be explained by three processes: the invisibility of manufacturing in society, structural realignment within national economies, and the changing nature of manufacturing. These three processes will be examined in turn. First, manufacturing has become largely invisible within British society. Large factories have closed and being replaced by retail parks, offices and housing development and employment in manufacturing had declined dramatically. This has meant that very few individuals are directly involved in manufacturing as the past thirty years have seen major shifts and improvements in manufacturing productivity, bringing greater output but fewer jobs (Bryson and Daniels, 2007a: 7-9; Mahajan, 2005). As a result manufacturing is less visible in apparently post-industrial societies, except as inventory in transit on road systems, and beyond the purview of the majority of the population (Bryson et al., 2008: 173). Second, economies are engaged in a constant process of structural realignment as mature sectors decline and new sectors and firms form around technological or process innovations. It is very difficult for governments and academics to keep up-to-date with these structural transformations and this implies that it is impossible for national statistical agencies to ensure that their economic statistics are an adequate reflection of current economic activity. This has always been the case. The UK Standard Industrial Classification of Economic Activity (SIC) is a measure of economic activity, but 18 essentially it is a backward looking measure; the SIC cannot be constantly amended to take into consideration on-going developments in the division of labor. New functions are created that lead to the establishment of new firms and the SIC and academics take time to adjust to understanding the altering economy. The United Kingdom first introduced the SIC in 1948 and the classification was revised in 1958, 1968, 1980, 1992 and 1997. Constant structural realignment undermines the ability of the SIC to provide an adequate representation of economic activity. A good example of this misalignment was evident with the rise in importance of business and professional services. Initially academics working on the growth of business services had to rely on SIC 8395 (»other business services not elsewhere specified«) as the primary measure for business services. In the UK the number of employees in this category doubled in only six years, 1981– 1987 (up by 160 000 workers, to 316 000 in 1987). At this time, this SIC code was problematic as it included an heterogeneous assortment of activities including management consultants, market research and public relations consultants, document copying, duplicating and tabulating services and other services »primarily engaged in providing services to other enterprises« such as employment agencies, security services, debt collection, press agencies, freelance journalists, translators and typing services. A similar trend has been revealed during an analysis of alterations in manufacturing employment by industry in America over the period 1983 to 2002. This analysis of twenty SIC two-digit industry codes found that the fastest growing sectors were furniture (+36.9 %) followed by miscellaneous manufacturing (+30 %). Both sectors had also »experienced extraordinarily large gains in the share of high-skilled workers« (+170.8 % and +178.2 % respectively) (Deitz and Orr, 2006: 3). The SIC might hide more than it reveals especially in relation to new types of economic activity. Thus, it is important for academics and policy makers to explore the miscellaneous or residual categories in the SIC code. The previous history of the SIC makes it possible to argue that the residual categories contain activities that might eventually be identified as innovative and dynamic new industries. The residual categories might also include activities that are nationally unimportant, but locally important. A similar point was made in 1948 when it was noted that the classification of industries adopted by the then Ministry of Labour lumped »many industries that are usually distinguished into a single somewhat mixed bag. The worst examples of this occur in the metal group; and many industries well known to be localized in the Conurbation [the Birmingham Conurbation, UK], such as gun-making, sheet-metal working, drop forging, lock and key, needles and pins, pens, chain and anchor, springs, bedsteads, hearth furniture, appear under the title ›Metal Industries not Separately Specified‹« (West Midlands Group, 1948: 107). 19 The development of new and unfamiliar activities that are not traditionally associated with manufacturing has been identified by the Department for British Enterprise and Regulatory Reform as one of the reasons behind the distorted popular misconception of manufacturing that exists in the UK (BERR, 2008). These new activities remain largely invisible as they do not fit the traditional image of manufacturing as firms have been established in »silicon design, Bluetooth technology, in-flight refueling systems, fuel cells and plastic electronics, or they are developing frontier technologies, such as information and communications, biotechnology and nanotechnology« (BERR, 2008: 7). Third, it is important not to underestimate the sophistication and knowledge-intensity of manufacturing activities. Fingleton argues that, »those who advocate postindustrialism overestimate the prospects for post-industrial services, but they greatly underestimate the prospects for manufacturing. A major problem with the argument of the post-industrialists is that they do not understand how sophisticated modern manufacturing truly is« (1999: 3). The Department of Industry (UK) make a very similar point, suggesting that »The modern manufacturing product cycle can now encompass functions from market research to distribution, branding and after-sales service, through to end-of-life disposal. The boundary between manufacturing and services is becoming increasingly blurred. For every factory producing machine tools, there is demand for collaboration with designers, software specialists, financial experts, caterers and other service providers. As new manufactured products are constantly introduced and upgraded, so new services are generated around them« (DTI, 2004: 11). The point is that the manufacturing value chain does not solely consist of shop floor or fabrication activities, but now includes a complex blending of production and service functions with the later including design, engineering, sales and marketing and after sales services. In this context, it is important to distinguish between productionrelated and product-related services. The former include all business and professional services or producer services or in other words providers of intermediate inputs. The latter include service functions that directly and indirectly support consumers in their purchase and use of a product (Fig. 2). In the UK, manufacturing is responsible for a sixth of national output and, in 2004, it accounted for around two-thirds of exports and directly employed 3.5 million people (Mahjan, 2006: 24). Total Gross Value Added (GVA) for manufacturing in the UK at current basic prices was £115.4 billion in 1992 and £147.5 billion by 2004. In 1999, the manufacturing industries contribution to 20 PRODUCTION GVA fell below 20 per cent for the first time, and by 2004 stood at 14�1 per cent� The implication is that manufacturing GVA and related outputs have been gro- Design Production-related services wing, but employment has continued to decline while at the same time other sectors of the economy have grown at Research & Development much faster rates (Mahajan, 2006: 23)� These changes reflect an on-going proPRODUCT Product-related services cess of structural readjustment� This adjustment takes too forms� First, there have been alterations in the compositi- Production & Fabrication on of the economy, with a shift in emSales & Marketing Logistics & Distribution ployment and output towards finance and business and professional services and, second, there have been changes in the processes of production and the products made by manufacturing Figure 2 : The Elements of the Manufacturing Value Chain companies (Daniels and Bryson, 2002)� The focus of much of the academic literature has been on services to such an extent that Livesey has recently argued that »[…] manufacturing has evolved but our understanding of it has not, manufacturing firms turn ideas into products and services� In today’s globally competitive landscape manufacturers are inventors, innovators, global supply chain managers and service providers� What was once seen just as production is now production, research, design, and service provision« (2006: 1)� Alterations to the employment structure of the advanced economies and of production systems have been identified over the last thirty years� Many of these observations have been incorporated into metanarratives or grand narratives in an attempt to provide a comprehensive account of economic change� Many of these metanarratives address the shift away from manufacturing to service employment� Such accounts posit, for example, the rise of a post-industrial economy (Bell, 1974), a service economy (Illeris, 1996), a knowledge economy (Drucker, 1969; Roonery et al�, 2005), an information economy (Webster, 2006), a shift towards informational capitalism (Castells, 2000), the experience economy (Pine and Gilmore, 1999) or the rise of a service world (Bryson et al�, 2004)� These metanarratives tend to be constructed around the analysis of employ- 21 ment rather than output data and all overemphasis the shift away from manufacturing towards services or from a manufacturing- to service-based economy. All developed market economies have experienced a growth in employment in service activities, but manufacturing employment and more importantly output still remains an essential component of all economies. In these terms, it is possible to argue that manufacturing still matters. The emphasis placed in academic and policy discourses on the shift towards service employment has, in some national contexts, led to manufacturing being overlooked or neglected both by academics and the policy making community. Inimitability and Competitiveness The on-going international division of labour driven by differential comparative advantages does not imply that developed-market economies will no longer be involved in manufacturing. Two processes are at work. First, companies develop blended production systems that are designed to capitalise on place-based differential competitive advantage (Bryson, 2007a: 34). In this business model elements of a company’s value chain remain in high-wage locations and parts are distributed across low-wage locations. In effect, this is a spatial reordering of Chandler’s three pillars of corporate form – management, marketing and production (1962, Chandler et al., 1997). While management and marketing (including R&D and design) stay in high cost, developed economy locations, elements of the production process may be shifted to low wage locations. This strategy may also take issues of country risk into consideration to avoid over-dependence on one national context. It may also be designed to enhance flexibility, with plants and offices located near to market to enhance the ability of a firm to respond to client demands. The shift of manufacturing functions to Eastern Europe or China may reflect investment decisions that are intended to provide capacity in new markets. Second, companies located in high-cost locations can withdraw from price-based competition and compete on other variables related to design, brand and place (Rusten, et al., 2007). Central to non-price-based competition, and drawing in part on the resource-based view (RBV) of the firm and the concept of »inimitability« (Rugman and Verbeke 2002, Hoopes, et al., 2003, Taylor 2006) are seven related strategies that firms can adopt: 1. Production of customised products that require close contact between producer and consumer. 2. Production of bundled products or products that hybridise products and services, for example, selling products with cradle-to-grave services attached. This is espe- 22 cially important for machine tool manufacturers as the profitability of their clients is partly determined by the reliability of the tools. 3. Develop skills and expertise that are difficult to replicate or transfer. 4. Creation of production processes that are difficult to replicate and are often protected by patents and registered designs. 5. Continuous and on-going process and product innovation. 6. Flexibility in responding to customersâ€™ require-ments. 7. Delivery times and nearness to markets. These are not mutually exclusive strategies and, depending on circumstances, firms can combine them in different ways. This study explores the bundling or hybridization strategy (strategy 2) (Daniels and Bryson, 2002) while other sources of inimitability have been recently explored in Bryson et al. (2008a). Inimitability strategies are part of the resource-based view (RBV) of the firm (Penrose, 1959; Rugman and Verbeke, 2002) which conceptualises the firm as a set of resources that play a vital role in the ability of a firm to develop and retain competitive advantage. These competitive resources need to be rare, difficult to copy, imitate and substitute and be relatively durable. They should also provide a firm with tangible or intangible products that have value in the marketplace. Imitable resources ideally should create economic returns above normal profit or provide a firm with protection against firms producing lower cost, but potentially competing products. Inimitability shifts competition away from price towards a range of other resource-based and often intangible features of a product or service. Companies located in developed-market economies have shifted up the value chain in order to ensure that they do not compete directly on price with companies located in countries like China (Rusten et al., 2007, Bryson et al., 2008a). The shift is towards high-value added products and services and towards business models that are increasingly founded upon bundling services and products together in such a way that a process of hybridization occurs. This process transforms a product or service so that both inputs are woven, fused or hybridized together; the product becomes the service and the service becomes the product and in many respects the tangible becomes intangible and the intangible becomes tangible. In the next chapter we shift the focus towards identifying some of the inimitability features that are associated with the hybridization of services and manufacturing functions. III. The Shift towards Services During the 1960 and 1970s the shift in employment away from manufacturing to services was noted by a number of academics (Greenfield, 1966; Bell, 1973). A complex process was occurring in which developed market economies where experiencing a process of structural realignment that involved a manufacturing crisis and the growth of service activities and employment. The growth of service employment reflected the development of new competencies and skill sets. Individuals and firms had to learn and develop new competencies that would support service focussed business models. It is important to note that manufacturing declined in employment terms but not output. Productivity improvements in manufacturing ensured that output continued to increase whilst at the same time employment declined. Service functions grew at a much faster rate than manufacturing and this growth combined with productivity improvements in manufacturing has led to the apparent shift towards a service economy. In output terms manufacturing never declined. It is worth noting that the shift towards a service economy was also associated with the development of services that were intended to support the consumption of goods. Thus, manufacturing firms introduced telephone help lines and various forms of technical advice that were intended to support final consumers. The growth in service employment led to services being considered as an object of study by a number of academic disciplines including economics (Hill, 1977), geography (Daniels, 1982, 1985) and marketing (GrĂśnroos, 1982). Service marketing emerged as a separate sub-area of marketing whilst geographers focussed on the spatial and organisational dynamics of service industries (Illeris, 1996; Bryson et al., 2004). Hill in his classic 1977 paper attempted to develop an operational definition of services. He argued that services are not goods and that they differ fundamentally from goods. Part of the difference revolves rather the immateriality and intangibility of services, however a service should not be conceptualised as an immaterial products. Hill argued that a service is provided when Âťsome change is brought about in the condition of some person or good, with the agreement of the person concerned or economic unit owning the good. Secondly, the change is the result of the activity of some other economic unit. These two points provide the key to the concept of a service. A service may be defined as a change in the condition of a person, or of a good belonging to some economic unit, which is brought about as the result of the activity of some other economic unit, with the prior agreement of the former person or economic unitÂŤ (Hill, 1977: 318). 23 24 Furthermore »[w]hatever the producer of a service does must impinge directly on the consumer in such a way as to change the condition of the latter« (1977, 318). If no change occurs than no service is actually produced. This implies that the production and consumption of a service cannot be separated; in many cases the consumer is actively part of the production process. Two important points follow from this. First, because a service is a change in an individual or thing then services cannot be traded in the same way as goods. This is nothing to do with the perishability of services or their intangibility rather it is because »[s]ervices cannot be put into stock because a stock of changes is a contradiction in terms« (ibid. 319). The changes can be permanent as well as irreversible (for example a haircut, surgery) and cannot be transferred between individuals or products. It is important to distinguish between services consumed by individuals – these that produce a change in physical or mental condition and services consumed by a good – these that change the good in some way. Second, in the same way that Marx (1973) considers consumption to be an integral part of the process of production, Hill argues that the production and consumption of a service must always take place at the same time. This is equally true for services provided to goods as well as individuals. Geography is important here in that usually the production and consumption of services will occur in the same place or in places that are linked together by some form of technological network – telephone, web-based, e-mail, fax, etc. The important point is that for services provided to individuals the service production process and the quality of the service provided depends on the active participation of the consumer. For example, the production of live entertainment – plays, opera, ballet, pop concerts, football, clubbing etc. – depends on the active participation of the audience (Bryson et al., 2004; Bryson, 2007b). If members of the audience sleep through these events then the intended change in the mental condition of these spectators will not have occurred and no service will have been consumed. The spectator may have experienced a change in that they are no longer tired, but this change is unlikely to have been that planned by the service producer. A similar event occurs when students fail to attend classes or when students do not put enough effort into study. In both these cases the change in the condition of the student expected by the teacher will not have occurred and no service will have been experienced. There is a related problem here in that the evaluation of these types of services is problematic; measurements of the effectiveness of a service needs to take into account both the expertise and abilities of service providers and consumers The emphasis placed by Hill on the co-production of services by producers and consumers is echoed in the development by Grönroos (1982) of the concept of the interactive marketing function. This concept draws attention to the interactions that occur 25 between a consumer and a service supplier’s systems, physical resources and employees. The distinctiveness of this interactions led Langeard and Eiglier (1987) to formulate the concept of servuction as a term that describes the co-production of a service. Servuction combines the words service and production. There is an important argument for the development of a new terminology to describe alterations in economic processes and in the economy more generally. The application of old terms to new processes leads to confusion and can also obscure understanding (Daniels and Bryson, 2002). The concept of servuction goes someway towards developing a term that describes a pure service relationship. However, the term has its limitation as it foregrounds the service elements in production processes. The complex interrelationships that occur between production and consumption have been understood for some considerable time. Marx was aware of this issue and he argued that »[p]roduction, then, is also immediately consumption, consumption is also immediately production. Each is immediately its opposite« (Marx, 1973: 91). Marx suggested that the term productive consumption could be used to describe the relationship between these activities. Marx’s point is that the relationship between production and consumption is a »mediating moment« (ibid, 91). Production creates the objects for consumption, but »consumption also mediates production, in that it alone creates for the products the subject for whom they are products. The product only obtains its ›last finish‹ in consumption« (ibid, 91).This is a vital point in that a product only becomes a real product when it is being consumed. Marx provides the example of a railway on which no trains run arguing that this is only a potential railway, a garment only becomes a real garment by the act of being worn and a house that is not lived in is not a real house. In the same way, a service only becomes a service when it is coproduced in a relationship between a service provider and consumer. The delivery of a service provides an opportunity for a firm to develop a relationship with a consumer. This can be a relationship that is formed during a face-to-face meeting or one that is facilitated by information communication technologies. The relational element that is central to a service production process represents a relational asset that can provide a firm with a competitive advantage in the marketplace (Srivastava et al., 2001). The manufacture and sale of a standard good that is not wrapped around with services provides limited opportunities for the producer to develop longterm relationships with consumers. Relational assets are not owned by a company, but they are available to a firm and can be managed and developed. Such assets include customers, suppliers (parts, raw materials, finance) and strategic partners. Relational assets are formed around dyadic relationships based on face-to-face contact, direct experience, reputation and ultimately trust. The issue is that »the potential exists for 26 any organization to develop intimate relations with customers to the point that they may be relatively rare and difficult for rivals to replicate« (Srivastava, 2001: 779). To create value relational assets can be translated into customer-connecting and noncustomer-connecting processes and this classification mirrors the distinction between product-supporting services and production-supporting services that is used in this Trend Study. It would be perhaps conceptually beneficial to alter the former to include people and customer by changing the description of this process to product/ customer-supporting services. The argument is that a firm selling a simple good has limited opportunities to develop relational assets whilst firms that provide product/ customer-supporting services have much greater opportunities. Relational assets represent an important opportunity for firms to develop new product and service bundles that could be sold to existing consumers. Developing and exploiting relational assets, however, requires firms to learn and develop new competencies. It also implies that employees and firms must be sensitive to service quality as well as service experiences. Firms must increasingly learn from their consumers through a process of enduser innovation. A firm and its employees must be receptive to end-user inspired innovation and be willing to create new forms of service competencies that would enable a firm to provide new services to existing and new consumers. The relational aspect of a service is evident in the process of co-production, but it is equally evident in Pine and Gilmore’s (1999) argument that firms are moving away from competition based on the provision of services towards competition based on the provision of experiences. They note that the business press constantly repeats a mesmerizing mantra of competition based upon firms that are »customer-centric, customer-driven, customer-focussed, customer-yadda-yadda-yadda« (Pine and Gilmor, 1999: ix). They pose the question »What is new?« and their answer is that expe- 27 riences are a new form of economic output. They argue that firms are able to supply four types of product or economic offering: a commodity, good, service or experience. To confuse matters they argue that an experience is something that is separate and distinctive compared to a service. This is to take the argument a step too far as the supply of a service is commonly accepted to be a dramaturgical act (Hochschild, 1983; Wellington and Bryson, 2001; Bryson and Wellington, 2003; Bryson et al., 2004). The distinction between the four economic offerings is explained by the example of coffee. Coffee is sold as a true commodity when coffee beans are traded, it can be sold as a good when a manufacturer grinds, packages and sells processed coffee to a retailer, it is transformed into a service when coffee is sold in coffee shops or as an experience when it is sold in an Âťespresso bar, where the ordering, creation, and consumption of the cup embodies a heightened ambience or sense of theatreÂŤ (Pine and Gilmore, 1999: 1). The point is that companies that enwrapped their products with experiences are enhancing their relational assets and this might provide such firms with competitive advantage in the marketplace. It is important to accept that service relationships are suffused with experiential moments, and that most goods are sold by attempting to persuade consumers that their lives will be transformed or enhanced. This is the purpose of advertising, product styling, product placement and celebrity endorsement (Williamson, 1978; Rusten, et al, 2007). Many services and goods are sold by deploying similar marketing strategies; potential consumers are informed that the purchase of the product or service will be a life-transforming moment. This suggests that there are important similarities between services and goods and that there are also important interdependencies between service and manufacturing functions. It is these interdependencies that we now turn our attention. IV. Interdependencies between Services and Manufacturing Many services cannot be delivered without the support of material goods, and vice versa. This dependency or interrelationship has led Barcet (1987) to suggest that a goodsservices continuum exists consisting of five levels: 1. Pure goods that have a use value that is independent of any service. One example of this type of good might be food, but even this product is usually accessed via a service transaction (retailing). Food also increasingly comes with cooking instructions, suggested recipes and help lines. Thus, it would be possible that many manufacturers of food are distorting the boundary that exists between the delivery of a pure good and the provision of additional services. 2. Mixed goods with use values that are only realised through the application of service products. A good example would be a machine that can only be effectively used by reading an instruction manual; instruction manuals are the product of a set of service functions. 3. Goods-service complexes in which both elements are mutually dependent on one another. A mobile phone has no use value without access to mobile telephony services or a computer has limited value without software. 4. Services that can only be delivered with the support of goods. 5. Pure services, for example management consultancy or a range of technical services. This approach highlights the complementarities that exist between production processes that are designed to produce goods and those developed to create services. The Barcet approach to understanding the relationship between goods and services was an important conceptual breakthrough. It was, however, a breakthrough that was largely ignored outside the French academic community. This was unfortunate as Barcetâ€™s conceptual contribution was extremely sophisticated and well ahead of its time. There is a developing theoretical literature into the relationship between services and innovation (for a review see Bryson and Monnoyer, 2004) and much of this literature reflects many of the conceptual points made by Barcet (1987). The literature on services and innovation can be classified into three basic types: technologist; serviceorientated and integrative (Gallouj, 2002:1). These approaches represent the ways in which social scientists have conceptualised service innovation over the last 25 years. Technologist approaches reduce or equate innovation with the introduction of new technologies into service firms and organisations (Barras, 1986). This is a technology determinist perspective in which service firms are conceptualised as responding to innovations that are developed elsewhere in the economy. This approach also privileges technological innovations over other forms of innovation for example process Modern Manufacturing: A high speed CNC laser cutter at work 29 30 innovations; both process and technological innovations are important dimensions of service innovation. Service-orientated approaches attempt to identify particular forms of innovation in services (Gallouj, 2002: 19). These studies try to develop innovation theories that try to identify differences between manufacturing innovation and service innovation. This approach attempts to construct theories that are designed to address innovation in specific service industries. A key problem with this approach is that the focus is on services and to an extent on identifying service innovation processes that are different to manufacturing. The integrative approach explores the blurring of the boundaries between goods and services and is perhaps better suited to understanding innovation processes in todayâ€™s economy. This approach is similar to the hybrid approach to conceptualising production systems that is developed in this Trend Study. The difference between the integrative and the hybrid approach is one concerning the level of integration. The integrative approach focuses on boundary blurring whilst the hybrid approach begins from the position of assuming that services and goods production systems are integrated to such an extent that, in many instances, hybrid production systems, hybrid products and hybrid business models have been created. Gallouj argues that these three approaches can be considered to represent a Âťnatural life cycle of theoretical concernsÂŤ (2002: 19). The first technologist phase is the obvious starting point for research into the relationship between services and innovation, but this phase declined and was gradually replaced by attempts to identify the specific characteristics of service innovation. This phase may even have overstated such differences. This second stage represents a mature approach to studying services and innovation, but this is gradually being replaced by a theoretical perspective that is currently attempting to combine goods and service production innovative systems. In some respects this model of the development of service innovation studies reflects a tension that exists between the mainstream manufacturing orientated innovation literature and the literature on service innovation. The latter has developed outside the former and ultimately these two approaches to innovation must merge. If we accept this classification of the innovation literature it is possible to argue that different countries and even researchers are at different stages of this life cycle approach to understanding the development of innovation research. There are obvious dangers in this analysis in that the shift towards an integrative approach should not undermine the importance of studies that still take a technologist or integrative approach. Changes in the production system are wrapped up with alterations in the types of goods and services that are produced and consumed. Physical goods are becoming 31 cleaver as they incorporate into their design and production increasing quantities of knowledge and expertise, from copyrighted software embedded in the product to the design and management knowledge required to manufacture a good as cheaply and effectively as possible. Manufacturing still matters, but manufacturing and services have become increasingly complementary and mutually supporting activities. The recent history of IBM, the computer hardware and service supplier, illustrates this point. Thirty years ago most of this company’s profits were derived from manufacturing computer hardware and information systems. Today, two-thirds of the profits come from IBM’s service activities (information, software and management including contingency planning) (Barfield and Thum, 2001:1). The incorporation of increasing quantities of knowledge into products may enhance product life, as the intangible softer components can be updated. Ultimately, the softer elements may lead to product obsolescence as existing products are unable to cope with the demands placed upon them by new operating systems. Manufacturing companies are becoming difficult to distinguish from service companies. Ford, for example, has been involved in the provision of finance, maintenance and automotive components, but has recently moved into car insurance, after-sales care and web-retailing. General Electric (GE) has a major finance and leasing company while GE Aircraft Engines is able to rent an engine for as short a period as 24 hours (Howells, 2002; 9). This is an important point in that the social science literature has concentrated on understanding manufacturing as a production activity and service functions as either contributing to the production process or as only servicing local needs. This is a too simple conceptualisation of the production process that suffers from dividing a holistic production process into its component parts. The definition of manufacturing functions needs to be reconceptualised or extended to include the creation, manufacture, after-care and service support, redesign or recreation of the product and disposal and recycling. The increasing knowledge content driving the design of physical products is shifting the emphasis away from physical production to the knowledge and expertise aspects of the product. This distinction is extremely important in fragmenting and enhancing the complexity of value chains. Production can be performed in locations with relatively cheap labour and lax environmental and labour controls, whilst the most important parts of the process – the knowledge elements – are located in developed market economies. Manufacturing is a process peopled by knowledge workers – engineers, designers, marketing experts, production managers – and a group shrinking in size, of people who actually produce the goods – the manufacturing workers (Daniels and Bryson, 2002: 983-4). 32 Howells (2000b: 15) identifies two different methods by which manufactured products are not offered to consumers in their own right, but rather as part of a package that includes service components: 1. Manufactured products provided with closely aligned services, for example finance, insurance maintenance warranties, repurchase clauses and service agreements. Encapsulation: Manufacturing —— Services Encapsulation: Service —— Manufacturing Services Services Manufacturing Producing services – Knowledge information intermediates Encapsulation: Manufacturing —— Manufacturing Manufacturing Producing services – Knowledge information intermediates Encapsulation: Service —— Service Manufacturing Services Manufacturing intermediaries Figure 3: Service Encapsulation. Source: After Howells, 2002 Services intermediaries 33 2. The manufactured product is supplied to consumers as a vehicle for accessing services. In this case the product is not the end point of the transaction, but only the beginning of the relationship between the consumer and producer. The second strategy is the more complex. Consumers are increasingly offered not the manufactured product but rather the outcomes that would come from owning such a product (Howells, 2002). Good examples of this type of service product relationship are car leasing where the consumer benefits from the use of the car, but does not own it and does not have to insure and service the car or computer companies that provide processing time rather than equipment to consumers. In this case, the computer company will take over the provision of in-house computing services whilst the client no longer has to be concerned with computer obsolescence or the problems of running a computer division. The argument in this Trend Study, however, is that companies have moved beyond this to the creation of hybrid products rather than the production of products that are developed to act as vehicles for the delivery of services. These types of service product relationship represent forms of what Howells terms service encapsulation (Howells, 2000). In this conceptualisation services are wrapped around or embedded in products and services produce innovations in other sectors of the economy. New services can be developed to increase the profitability of physical products and increasingly manufactured goods are not offered to consumers in their own right; they can only be purchased with associated services. The increasing importance of service encapsulation highlights the on-going transformation of the capitalist production process as it tries to develop ways of enhancing profitability. In this new world, consumption is not a one-off transaction between the consumer and producer but is the beginning of a long-term relationship (Bryson and Daniels, 2002). It is through these types of long-term relationships that trust is developed and the producer may be able to lock consumers into their technology and their services. This is not a new process as machines have been sold or leased to consumers on service agreements for over a hundred years, for example telephones and reprographic machines, but maybe what is new is the opportunities that this offers to lock consumers into a long-term relationship with a provider of linked service and manufactured products. (Fig. 3) Encapsulation is an interesting concept as it highlights the increasing interdependencies and blurring of the boundaries that exist between different industrial sectors. At least four types of encapsulation can be identified with each type representing a different way in which services are being positioned into the production process to create innovations (Figure 3). First, new products, existing products or alterations to existing 34 products can create service innovations or possibilities for the delivery of new services. A new type of computer system can introduce a different way to deliver a service. Products are been designed, for example washing machines, with embedded software that can be upgraded to meet changes in washing technology, but this upgrade can only be undertaken by the manufacturer’s technicians. Second, the interaction between the service and manufacturing sectors of the economy leads to innovations in the manufacturing process and in the development of new physical products. In this case, a market research company may identify a product alteration that feeds into the production process. A good example of this process is the design of Jaguar sports cars (Bryson, 1997). Market research identified that up to 25 % of the firm’s sports cars would be purchased by women and that in the important American market this figure rose to 33 %. The design team for new cars was altered to include both male and female designers and the car’s ergonomics altered to produce a comfortable drive for males and females. Thus, door clearances were designed so that a woman wearing a skirt or dress could get in and out without difficulty, and door pulls, release catches and switches designed so that they could be used without breaking long fingernails (Bryson, 1997: 380). Rather than engineers being fully responsible for the design of cars, designers, market researchers and marketing experts are instructing engineers in what they should design. Third, the development of new physical products stimulates the 35 alteration or development of new physical products that may produce new services. Encapsulation is not just about service informed innovations. Fourth, new services can inspire the development of new services. All these forms of encapsulation include intermediaries, producer service firms, service providers and manufacturing companies, who operate as bridges to new forms of thinking and new knowledge and information. It is important to note that producer service firms have a major advantage over in-house staff. They work for many different clients and are able to identify client innovations that they than transfer to other clients. They can be conceptualised as a form of knowledge transfer agent with clients gaining knowledge, but at the same time losing knowledge. Recent studies (Bryson, 1997; Howells, 2000; Daniels and Bryson, 2002, Bryson 2008b) have drawn attention to the issue of the shifting boundaries that exist between services and manufacturing functions. Classifying activities as manufacturing or services is an increasingly pointless exercise as new ways of combining services and manufacturing functions are developed. A shift has occurred towards the creation of hybrid production systems that create products (services or goods) and sometimes hybrid products (goods and service blended together in complex ways). It is to this that we now turn our attention. V. Conceptualising Hybrid Production Systems The development of hybrid production systems represents a challenge for academics, firms and policy-makers. Hybridity in this context requires new languages, new theoretical frameworks and new policy tools. In the past, economic and regional policy has tended to be constructed around the needs of particular industries. This type of industry-specific policy can undermine rather than enhance competitiveness. What is required is the development of languages, approaches and policy tools that highlight the complex interactions that are occurring between a set of service and manufacturing functions. Here it is important to remember that considerable confusion exists over the terms service and manufacturing. These terms tend to be applied in isolation from the value or production systems of which they are apart. This is misleading, confusing and unfortunate. One implication is that policies can be developed that break value chains apart on in other words policies that focus on one element within a complex value chain. This process of policy isolation of elements within a value chain can operate at two levels. First, a region can develop and apply policies that are regionally specific. The danger is that such policies isolate elements of a value chain from the national economy and ultimately may reduce competitiveness. At a national level an awareness and appreciation of distortions that can result should exist and some mechanism should be applied to ensure that polices that are constructed regionally work together to enhance the productivity and competitiveness of a value chain. This requires that contiguous regional authorities work together to develop and apply policy frameworks to address value chains that cross regional boundaries. It also means that integrated regional and national policies are developed that take into consideration the complex interrelationships that exist between service and manufacturing functions (Bryson et al., 2008b). Second, within a region policies designed to support business and professional services (BPS) may ignore client demand and fail to appreciate that much of the value created by a BPS firm is located in client firms. The same argument can be made for manufacturing. Thus, an automotive regional policy may ignore the BPS firms that are an integral part of an automotive value chain (Bryson et al., 2008b). To overcome confusion, it is important to remember that the production process consists of a number of elements: manufacturing or fabrication, the provision of services that support fabrication and customer-targeted services. There is a danger that manufacturing is equated with production rather than conceptualized as one element of a production process. The production of products and services should be conceptualized as a process that consists of a complex and evolving blending of manufacturing and service processes. Some of these service functions (production-related services) directly support the manufacturing or fabrication process whilst others support the 37 38 consumption process (product-related services). Production can be conceptualized as a simple equation in which: Production (P) = Manufacturing Processes (M) + Production-Related Services (PRS) + Product-Related Services (ProRS) This is a simple equation to describe a very complex process. Profit is created from the differential that must exist between the exchange value of the product (service/good/ hybrid product) and the cost of production. It is not as simple as this and other profit moments exist that are directly related to the shift towards the creation of hybrid products. The production equation must be reformulated to take into consideration time and this results in a set of linked equations; linked by the same customer and the identification of two or more profit moments in a transaction or a series of linked transactions. These equations are as follows: Time 1 Profit = Exchange value â€“ (Manufacturing Processes (M) + Production-Related Services (PRS) + Product-Related Services (ProRS) + cost of finance + cost of labour + cost of material inputs). Time 2 Profit = Exchange value â€“ (post sale product-related services (ProRS) + cost of finance + cost of labour + cost of material inputs). The point is that hybrid products provide their producers with more than one moment to obtain profit from a transaction. These can be considered as incremental profit creation moments that reflect the value that can be acquired from developing and exploiting relational assets. This is an important point modifications and improvements to the intangible expertise that is either incorporated directly into a hybrid product or to the intangibles that surround the product (training support, help desks, servicing, etc) provides additional revenue generating opportunities. They also represent moments during which employees and firms have to work, learn and develop new service-orientated competencies. It is important to make the distinction between hybrid production systems and hybrid products. It is possible for every production system to consist of complex combinations of manufacturing and service tasks, however not all products are hybrid products. Thus a hybrid production system may not produce hybrid products. This highlights the fact that products can be placed along a hierarchy that ranges from hybrid products to products that exhibit all the characteristics of standard mass produced goods that do not contain service elements designed to develop a service relationship between the producer and the consumer. Low-value added production systems tend towards the production of standard goods whilst high-value added systems are more 39 likely to produce hybrid products. A hybrid production system enhances the effectiveness of producing a standard good, but also has the opportunity to create hybrid products that capture additional value and result in a long-term relationship been formed between the producer and consumer. The service concept is very valuable in retailing, in the leisure and hospitability industries and in the provision of regular and routine repairs. However, confusion occurs when it is applied to complex production systems. In this application, the word service can devalue the expertise provided by service workers as it associates it with so many other meanings of the word and these meanings tend to be equated with relatively low-value activities. What is required is a new language for describing and theorizing the manufacture of both goods and services (Daniels and Bryson, 2002). In fact, perhaps what is required is not a new language, but a return to an older language based around understanding the creation of value in production systems. This approach builds upon a recent attempt to develop a relatively simple theory of production systems that would overcome many of the problems associated with the distinctions that are made between a set of manufacturing and service functions (see Bryson 2008b). It is important to establish a set of principles that can be used to develop a theory of production. The first principle is the blending of manufacturing and service functions within production processes and within products to produce hybrid production systems and hybrid products. The second principle is that it must be acknowledged that many services are increasingly the product of a complex manufacturing process. This principle acknowledges that services can be engineered or manufactured products (Fähnrich and Meiren, 2007) that are not that dissimilar to the products engineered and created in factories. The primary difference is that employees are more visible in the service production process. In this context it is possible to draw upon Goffman’s work on micro-sociology. Goffman (1984) argues that people perform roles (sister/ brother, son/daughter, parent, teacher, management consultant, etc) and that these roles are performed in back and front regions. A role is the product of interactions they occur in back and front regions, but in most cases the consumer will only be aware of what is occurring in the front region (Goffman, 1984: 109-140). To Goffman the term front region refers to places where performances are given, whilst back regions are places that are »relative to a given performance, where the impression fostered by the performance is knowingly contradicted as a matter of course« (Goffman, 1984: 114). In the back region the performance may be created, illusions and impressions will be openly constructed and props and equipment stored. 40 The service literature has tended to concentrate on understanding the front regions of service production systems (Hochschild, 1983) and neglected to explore back regions. Facing services tend to be consumed and partially produced in front regions but planned, designed and partially delivered in back regions. The shift towards the manufacture of services is a shift towards a blending of front and back regions in the production and consumption of services. Similarly, the development of hybrid products is partly about enhancing the visibility of a product’s front region. Older manufacturing systems were based upon workers who were largely invisible to consumers as they were positioned in back regions. Today, manufacturing workers are becoming more visible and this process is partly being driven by corporate social responsibility, the Internet, television and partly by the enhanced service components that are contained within and wrapped around manufactured products. The first two principles highlight the importance of treating the production process holistically. This is the third and last principle. The increasing complexity of the production process means that academics must begin to identify and conceptualise the interrelationships that occur between different elements that come together to create value. This coming together can occur within the same company or can be part of a co-ordinated value chain of independent companies that are managed by a company or even an individual to create a product (physical product, service, hybrid product). A value chain is a collection of companies – suppliers, financers, manufacturers and distributors – that are brought together sometimes consciously and sometimes unconsciously to create and sell a completed product. The concept of a value or a commodity chain (Gereffi, 2001; Gereffi et al., 2005) provides a methodological tool for understanding groups of people or firms that come together in front and back regions to create products. There are problems with this term and arguably one of the most important difficulties is the distortion that comes from the linear metaphor of a ›chain‹. Value is not created through the articulation of simple linear networks of relationships. Production is much more complex and could perhaps be better described as a matrix, a very complex web or a set of linkages that spread out like tree roots. Very few value or commodity chains appear to be similar to chains (Walker, 2000: 116). Another difficulty comes from the application of the over-used word network. The word network has too many different associations. Perhaps the most important association is that related to a network of broadcasting stations or a railway or road network. These are planned technical systems that do not evolve rapidly. The key question concerns the ways in which a company creates value through the development of a set of production relationships that may be global in extent. This is an important point. Production occurs as a result of complex relationships that 41 develop between people and firms. These relationships can link different places together and the relationships can be informal or be established through a process of formal negotiations that are enshrined in a legal contract (Taylor and Bryson, 2006). At issue is whether firms produce value through networks of relationships or via complex bundles of contractual (formal and informal) relationships. An alterative conceptualisation is to focus the analysis not on understanding value chains, commodity chains or global production networks, but rather to focus the analysis on production projects. This is my approach to understanding the production of value through the manufacture of products (physical products, services, hybrid products). This approach avoids using words that are established metaphors and instead develops a layered approach to understudying value creation (Daniels and Bryson, 2002). The first layer is the focus on production rather than manufacturing or services. There are obvious problems with the word production as it is closely associated with the production of physical products, but it is also associated with the production of service experiences, for example, films and theatrical events. The first layer begins with a product, an economic sector or a firm and begins by trying to identify and understand the ways in which value is created. The focus is on value creation in the production of manufactured hybrid products and the geographies of such value creation. The second layer involves a focus on tasks. Every product is created through the orchestration of a range of tasks and each task contributes costs as well as profits. The creation of value in a production process involves the bringing together of a range of different tasks and each task may have its own geography. Some tasks may be mechanised or computerised and some will also require face-to-face contact either within a production unit or between producers and consumers. Some tasks can be provided within a firm and some can be outsourced or be delivered by foreign providers. This represents the creation of a product via a production process that blends or bundles separate but related tasks together that are undertaken in different locations and at different times. This is perhaps a methodological rather than a theoretical approach to understanding value creation. Such an approach, however, foregrounds value creation and the production process first rather than focussing on manufacturing or service activities. It highlights the interactions that occur in an economy to produce wealth and does so by developing a holistic approach to identifying and conceptualising value creation. It does not assume that services are different and distinctive to manufacturing processes but assumes that services are produced or manufactured to create added value or wealth. 42 The Production Projectâ€‰/â€‰Task (PPT) approach to understanding the economy is not driven by geography and thus does not foreground spatial relationships, global relationships or service over manufacturing tasks. Firms create value by blending different ways of delivering tasks together in the same production project. Tasks can be developed by the firm, be outsourced to local firms or foreign subsidiaries or third party suppliers. Thus, firms in a production project are joined together by various forms of backward and forward linkages that include contract-based market-mediated transactions, dependent relationships in a heavily controlled supply chain, complete vertical integration and cooperative relationships, for example those found in a fully functioning industrial district. A PPT approach needs to be cognizant of the difficulties in determining the boundaries of a production project. There are two difficulties here and each difficulty also provides opportunities for further detailed research. In a PPT methodology the boundaries must be determined by the time and resources available to the research team and by the difficulty of obtaining information. The first difficulty is that it is important to note that a firm is not the same thing as a production project and that many firms will consist of combinations of different degrees of involvement with different production projects and tasks. This means that a PPT firm-based approach might mean that the researcher would have to begin to unravel many different production projects. The PPT approach is not a firm-based approach, but rather an approach founded upon the identification of value creation through the development and management of production projects and tasks. By themselves firms do not create value; value is created via projects and tasks. 43 The second difficulty concerns the requirement of the PPT approach to take into consideration the affiliated or supporting infrastructure that lies behind a production project or task. Here it is important to consider equipment producers, information/expertise providers, banking and financial institutions, education systems, transportation systems and ICT. The supporting infrastructures are the outputs of other production projects. This means that each project may be part of an extremely complex array of intermeshing production projects. Some of these projects, however, will be more or less important to the PPT case under investigation. The PPT approach highlights the combinations of manufacturing and service functions that co-exist in hybrid production systems. It is an approach that emphasises function over industrial sector and alerts academics and policy-makers to the dangers of being too over-reliant on simple industrial classifications. Industrial classifications obscure the complexity of the economy as they assign firms to manufacturing or service categories and ignore the ways in which service and manufacturing functions are woven together to produce complex hybrid production systems. The identification of combinations of service and manufacturing functions that co-exist within the same company alerts policy-makers and firms to the requirement to develop new skills and competencies in the workforce. Manufacturing workers are not just manufacturing workers, but are also service workers. This implies that firms and employees must develop new working practices and also appreciate that manufacturing and service innovation should be conceptualised as part of the same innovation system. There is a danger in assuming that service innovation is a separate function to manufacturing innovation and vice versa. In the next chapter the survey evidence for the existence of hybrid production systems is explored and four case studies are examined. 44 VI. The Rise of Hybrid Manufacturing Systems and Products 1. Survey Evidence The argument presented in this Tread Study is that manufacturing has and continues to alter and that many of these alterations are based around inimitability strategies that involve the provision of services. Many of these transformations represent strategies that are intended to shift companies located in developed market economies away from price-based competition towards competition based on customization and service delivery. Part of this transformation involves firms transforming their business models to develop and exploit relational assets. The key element of this transformation is the identification and management of intangibles that differentiate a firm and its products in the marketplace. Here it is important to remember that a firm’s reputation is based on the quality of its goods or service products, but also on consumer experiences of delivery speeds, responsiveness to customer expectations, after-sales services, etc. The evidence for this transition comes from many different countries and includes both quantitative and qualitative analysis. The blurring of the boundary between manufacturing and services has been explored by Neely in an investigation of what he terms the »servitization of industry« (Neely, 2007). This is one of the first papers to provide an empirical investigation of servitization. His analysis is based upon a database of 10,827 publically listed manufacturing companies with over 100 employees that was constructed from the OSIRIS database. This database contains a field that provides a description and history of each firm and this field was coded to identify the different services provided by each manufacturing firm. The first 50 firms were coded initially to create a list of the types of services that were provided by these firms. This analysis identified that 29.52 % of the firms offered a combination of manufacturing and services, while 1.78 % appeared only to provide services. The most common services to be provided was design and development services (21.92 %) and systems and solutions (15.70 %) (Table 1). The former highlights the shift towards customization and suggests that this is one of the most important drivers in the development of hybrid production systems. The firms in Neely’s analysis were located in 23 countries. Firms that combine manufacturing with services tended to be located in developed market economies (United States (58 %), Finland (51 %), Malaysia (45 %), the Netherlands (40 %) and Belgium (37 %) (Neely, 2007: 4). This reflects economies in which manufacturing firms have increasingly moved up the value chain to compete on quality, design, customization, services rather than on price. It is interesting to note that China had the highest number of manufacturing only firms (97.8 %). Much of China’s manufacturing economy is 45 constructed around price-based competition and also anonymous manufacturer in which firms produce goods for companies with long-established brands. Anonymous manufacturing prevents a firm from establishing brand creditability amongst consumers and also limits their ability to add product-supporting services to their business model. Neely’s analysis is one of the first attempts to provide an empirical analysis of servitization. This is an interesting study as it provides one indication of the scale of the shift towards hybrid production systems. There are obvious problems with Neely’s research design as it is dependent upon the ability of companies to provide accurate and comparable information. Two other surveys have been undertaken that explore the ways in which manufacturing firms are integrating services into their business models (Deloitte Research, 2006; CBI, 2007). Deloitte Research undertakes an ongoing global service and parts benchmarking survey of nearly 80 companies and business units with 62 % of the firms being based in Europe, 34 % in North America and 4 % in AsiaPacific (Deloitte Research, 2006: 17). In October 2007, the Confederation of British Industry (UK) (CBI) undertook a stand-alone survey of over 1500 companies (CBI, 2007). This was supplemented by data obtained from a Business Trends survey undertaken in June 2007 by the Engineering Employers Federation (EEF) (CBI, 2007). Both surveys highlight a shift in the importance of services within manufacturing value chains. The Deloitte study found that on average service business accounted for nearly 26 % of the revenues across the industries in the sample and for 19 % service business Service provided No. of Firms % of Firms Tranportation and trucking Services 22 0.20 Leasing Services 116 1.07 Procurement Services 125 1.15 Outsourcing and Operating Services 182 1.68 Consulting Services 291 2.69 Property and Real Estate 415 3.83 Financial Services 421 3.89 Installation and Implementation Services 552 5.10 Maintenance and Support Services 1 293 11.94 Retail and Diustribution Services 1 319 12.18 Systems and Solutions 1 700 15.70 Design and Development Services 2 373 21.92 Table 1: Services offered by a sample of manufacturing firms. Source: After Neely, 2007 46 accounted for 50 % or more of total revenue (Deloitte Research, 2006: 3). The average profitability of the service and parts operations of the firms in the study was 75 % higher than overall business unit profitability. Deloitte’s differentiates between a company’s captive and noncaptive markets. The captive market represents a firm’s existing installed base of products and this provides a firm with opportunities to sell service contracts, to persuade existing customers to upgrade and also to provide spare parts. Many companies fail to maintain market share in their captive market as other companies develop products and service offerings. The non-captive market represents customers that did not purchase a product from the firm and the Deloitte study estimates that this market is typically 2 to 10 times larger that the captive market. The CBI (2007) study identified that 86 % of firms offered some type of services to their customers and that larger firms were more likely than small and medium-sized enterprises to provide services. Businesses appear to be moving beyond offering services as an extension to the sale of a good towards the deliver of full service solutions or hybrid products. Over the next five years, firms were planning to increase the supply of product utility services in which a customer hires a product rather than purchases it and the development of integrated service solutions in which a company is responsible for a distinct element of a customer’s business. According to this study »service provision is taking on an increasingly important role within modern manufacturing. The service side of a business is an important means of capitalising on the captive market of the existing customer base, becoming closer to the customer, and differentiating a firm’s offer from that of a low-cost competitor« (CBI, 2007). Companies were requested to rank their main source of competitive advantage now and in 5 years time. Design and development (28 % of firms) were most commonly ranked as the most important source of competitive advantage, followed by service provision (25 % of firms) and then production and assembly (19 % of firms). In five years time, firms anticipated that service provision would become their most important source of competitive advantage (32 % of firms), followed by design and development (20 % of firms) and production and assembly. Only 11 % of firms considered service 47 provision as their first source of competitive advantage five years ago and only 12 % of firms planned to have no service provision in five years time. The firms in this survey appear to be adopting a set of inimitability strategies based around relational assets and the provision of services to a captive market and also the enhanced importance of customization through design. The CBI study identified six types of services currently being provided by the firms in the survey (maintenance, upgrades, customer training, product result, product utility and integrated solutions). The most common service provided by the firms was product result (55 % of firms) or a product that is provided by a supplier that guarantees performance levels and the provider engages in the necessary activities required to achieve the agreed performance level. Second, was product maintenance (52 % of firms) and then customer training (48 % of firms). Particularly strong growth was anticipated in the provision of more complex services including product result and product utility. The latter involves the hiring or leasing of goods. The quantitative studies have begun to highlight the growing importance of services within the manufacturing production system. It is important to explore some of these processes through the analysis of detailed case studies and it is to this that we now turn our attention. 2. Case Studies Hybrid production systems and products are being developed by all types of small and large firms. Some firms have developed complex hybrid production systems while other firms are just beginning to explore the service or goods aspects of their production systems. It is useful to explore four case studies of firms that have developed hybrid manufacturing systems and are creating hybrid products. The case studies are Rolls-Royce engines, a machine tool company located in the West Midlands (UK), an American manufacturer of industrial pumps and a provider of customized fitted furniture. 48 Rolls-Royce Rolls-Royce is one of the most frequently citied examples of a firm that has shifted towards a service based business model. In the financial year 2006 – 07, 55 % of this firm’s revenues was derived from the delivery of services (Rolls-Royce, 2007: 15). In 1987 Rolls-Royce »supported our engines in service by offering repair and overhaul arrangements which often failed to align our interests with those of our customers« (Rolls-Royce: 2007: 14). At this time, services were considered as a supporting set of functions rather than as an integral element within the firm’s business model. Since 1987, Rolls-Royce has transformed itself into a provider of power rather than a provider of engines. This transformation has occurred in the firm’s core market segments ranging from civil aviation to defence aerospace and marine engines. The transformation has involved the company in developing »comprehensive through-life service arrangements in each of our business sectors. These align our interests with those of our customers and enable us to add value through the application of our skills and knowledge of the product. In 2007, underlying aftermarket service revenues grew by nine per cent and represented 55 per cent of Group sales. This growth has been achieved partly as a result of the introduction of new products, but also because our ownership of intellectual property enables us to turn data into information that adds value to our customer« (Rolls-Royce, 2007: 14). A good example of this shift is the mission ready management solutions (MRMS®) package by Rolls-Royce. MRMS provides the military with customised solutions that include total support packages and Power By the Hour®. With the latter package, major airline and defence customers pay a fixed warranty and operation fee for the hours that an engine runs. Contract performance is measured against the performance of the fleet and in terms of ready for issue engine availability. Rolls-Royce offers three types of service solution. First, TotalCare is based upon an agreed rate per engine flying hour and this enables customers to engage in accurate financial forecasting. This package is designed for airline fleet and it transfers the technical and financial aspects of fleet maintenance from the customer to the service supplier. At the same time it converts Rolls-Royce into a service provider or more precisely a provider of hybrid products. Second, CorporateCare is intended for corporate and business jet customers and is designed to ensure that the aircraft is available when required and also may result in increased residual value. Third, MRMS is targeted at defence customers and provides them with engine management and maintenance to ensure 27/7 operational capability. These types of hybrid products have transformed 49 Rolls-Royce from a company that designs and manufactures engines to a provider of turn key engine power (Table 2). To maximise profitability, Rolls-Royce must now focus on the effective management of an extended manufacturing value chain or its hybrid production system. This includes the design and development of engines, installation, after-sales maintenance, repair and overall and overall services and parts availability and management. Machine tool company This case study concerns a small manufacturer of machine tools located in the West Midlands, UK. During the 1960s this company had been acquired by a much larger firm and the machine tool company eventually became a dead company. Eventually, an individual purchased the firm’s brand name and intellectual property with the intention of reviving the company by exploiting the firm’s existing intellectual property that had accumulated over a period of fifty years. This firm’s business model is based around integrating new Japanese technology with the firm’s existing designs. Thus, »We’ve got 50 years of drawings which are on AO paper, microfilm, microfiche, everything going back … The machines that we build … we put the drawings down and build them, they’re probably 1950 drawings and it looks like it. We use Japanese technology because our experience is there, Service Delivery of Power Good Delivery of Engine Traditional Support Enhanced Support Spare Parts Repair Data & forecas& Overhaul ting services Advanced Support Total Support Extended Support Comprehensive package integrating elements of basic and enhanced support Complete, availability based services. Can cover all off aircraft, and some one aircraft activity Partnered capability Technical & logistics support Customer training Turn key service Spares inclusive Repair & Overhaul contracts Configuration management and reliability enhancements covered Customer responsibility Table 2: The transformation of Rolls-Royce from a provider of a good to a provider of hybrid products. Source: After Rolls-Royce, 2006 Non-propulsion related support solutions Service provider responsibility 50 so I want to drag the designs up to, sort of, the 20th century, hence the reason for the computers so we’ve got computer-aided design, we’ve got nine stations now and that’s where we put our money in to design new products, to piggyback onto the X name« (Interview with managing director). The firm began designing machine tools, but fabrication was subcontracted to other companies. The primary source of competitive advantage was held in a well-established brand name, the intellectual property and the quality of the firm’s service. A manufacturer of machine tools has been converted into a service company designing tools, handling the client relationships and subcontracting the production of the tool/machine, but installing it for clients. The company has grown rapidly on the basis of the quality of the service it provides. The firm designs, installs and commissions machine tools and these can be extremely large machine tools including complete production lines. The business model is based around quality of product combined with quality of services to ensure that the machine tools and production lines function effectively. The difficulty is that if a large firm’s »track stops it costs them millions of pounds a minute … So we do look after our customers« (Interview, managing director). The company designs, installs and maintains the machine tools and maintenance involves service contracts. Value is created at two moments: the design and installation of the machine tools and through the provision of service contracts. Flowserve Corporation: An American manufacturer of industrial pumps Companies that provide machine tools and parts that are an integral part of a customer’s production system must compete on quality of product, service and reliability. The Flowserve Corporation is an American company that specialises in the design, manufacture, marketing and servicing of flow-handling equipment. The company sells engineered pumps, precision mechanical seals, valves and a range of related services to the petroleum, chemical and power industries. Flowserve can trace its origins back to 1872 and like all manufacturing companies it has had to cope with intensified competition. Since 1997 the firm has focussed on core areas and also has engaged in a cost-cutting programme that has involved transferring production of pumps from a high-cost plant located in Belgium to two factories in the Netherlands and also opened a value production plant in Bangalore. The manufacture and sale of pumps and valves responds to periods of economic growth and decline and profitability is thus influenced by macro-economic trends. Flowserve realised that the service and repair of existing equipment amongst its captive customers was an activity 51 that was not subject to cyclical downturns. In 1997, the company established a Service Repair Division which focussed on providing services to already installed equipment. According to Flowserve’s Chief Executive Office, Bernard Rethore, »we saw an opportunity to give new emphasis and focus to the service business so that we’d go beyond just manufacturing and what had been done before by each company in repair and maintenance and get into the service business in a whole new way« (Rethore and Greer, 1999). The service division became the Flow Solution Division in early 1999 in order to create a single, world-class vehicle for the delivery of integrated services. This division operates from a network of 75 service and quick response centres to provide 24/7 customer support. The company has also produced smart sealing products that contain built-in microprocessors and equipment-monitoring software. Flowserve has become a cradle-to-grave company that designs and manufactures flow-handling equipment, but also provides long-term services. The company has realised that one of its most important assets is existing installed equipment and this is now seen as an important captive market. The company’s Chief Operating Officer, C. Scott Greer, noted that the supply chain was shifting and one example of this shift »is evidenced in the service aspect of our business. Traditionally, our customers had done much of their own service while we supplied the parts. Many of these customers are starting to say, ›Wait, we want to move upstream to get closer to the consumer, identify products that differentiate us. We’re going to let the maintenance of pumps and valves go to those people who are the experts.‹ I think you’re going to see, because of this basic change in focus, double-digit growth in our service business. You should think of Flowserve as a ›cradle-to-grave‹ type of company. We’re focussing on the entire life cycle of the product« (Rethore and Greer, 1999). A good example of this cradle-to-grave approach has been the introduction of 10-year standard warranties for some of the company’s products. This provides the customer with a long-term relationship with Flowserve based around the provision of original equipment manufacturer produced spare parts, guaranteed Flowserve field and shop maintenance, a reduced risk of downtime and protection from the costs associated with the failure of a piece of flow-handling equipment. 52 A provider of customized fitted furniture The final case study is a company that designs, manufactures and installs bespoke furniture and fittings for kitchens, libraries, bedrooms and gyms. Halstock Cabinet Makers (UK) was established in 2001 when three small kitchen design companies merged. In 2008 the firm had 31 employees and a turnover of £1.6 million. This is a manufacturing company that considers itself to be a service company, but it designs and manufactures a physical product. The company has improved its production systems and in 2007employed consultants to improve the productivity of its traditional working practices and also to strengthen the firm’s management systems (MAS, 2008). The firm was introduced to lean manufacturing techniques including project teams, daily project management meetings and the application of techniques to identify and remove bottlenecks. This consultancy project reduced project overrun hours by 60 per cent and reduced the distance goods were moved around the factory by 20 per cent. All this suggests that this is a manufacturing company. Richard Miller, the firm’s co-owner considers that Halstock is »a service industry, but that doesn’t mean we have to be subservient«. Furthermore he argues that »We sell time. We are like any other professional practice – it’s all about economies of scale […] But we are demand led. My aim is to maximise the chargeable time of the staff« (Miller cited in Smith, 2008: B9). The company works to a net margin of between 10 per cent and 20 per cent and considers itself to be a service firm as it sells customised high value-added products. Thus, it sells two types of time. First, consultancy time that involves liaison with clients to develop and agree a design. The design team produces three-dimensional drawings so that clients can easily visualise the completed and installed product. Second, its sells production time or the time required to fabricate the pieces. The firm’s profitability rests on its ability to manage the time required to complete a project. Halstock differentiates itself on the quality of its products, design experience and the services that it provides to customers. The firm sells two types of time. First, service time in which a design is co-produced with a client whilst the second type of time is production time. Even during this stage, however, clients are encouraged to visit the workshop during any stage of the production process. Conclusion: New Skills and New Competencies The case studies have been deliberately chosen to represent different sectors and companies. They illustrate the complex ways in which firms are combining service and manufacturing functions together to create new business models. These hybrid production systems represent a radical alteration in the ways in which some manufacturing firms innovate through developing product-related services. In some cases, a manufacturing firm is transformed into a service firm as the primary source of profitability is acquired from service contracts. Nevertheless, these are still manufacturing firms as the service element has limited value without the manufacturing function. This is not to argue that these firms must manufacture goods in their own right. There is nothing to prevent a manufacturing firm from designing, marketing and developing product-supporting services for goods that are manufactured under sub-contract. This is an interesting issue as it becomes difficult to classify such a firm and this raises the question: is such a firm a manufacturing firm or a service firm? The answer is simple. These are firms that have developed a hybrid production system. In all cases the development of a hybrid production system has important implications for working, learning and developing competencies. Higher education courses that are intended to train manufacturing workers must also include training on service functions that could be incorporated into product development, design and innovation. The skill competencies required for successful manufacturing have been transformed to include complex combinations of manufacturing and service competencies. 53 54 VII. Conclusions: Working, Learning and Developing New Competencies This Trend Study has explored an important trend that is altering the ways in which goods, products and services are produced and consumed. The development of hybrid production systems and hybrid products represents a radical alteration to the ways in which products are produced and consumed. At one level, this represents a breakdown of the long-standing simple bi-polar distinction that is made between services and manufacturing. This division is increasingly no longer helpful as manufactured products acquire many of the characteristics of services. This has five important implications that need to be considered. 1) Economic theory needs to alter to take into consideration the demise of the manufacturing and service divide. This has important implications for the ways in which the creation of profit is theorised. Profit should not be conceptualised as something that is created by a single transaction involving the transfer of ownership of a product from a producer to a consumer. Instead, profit occurs through multiple moments of exchange. The physical good may have limited value while profit is created and acquired through the sale of embedded services, spare parts or consumables. 2) The way in which governments collect statistical data about the economy will have to alter. Too many service functions are hidden within manufacturing firms and many manufacturing firms are really providers of hybrid products. The SIC code may have to move towards a system in which firms are categorised on the basis of an analysis of jobs, functions and tasks. Alternatively, new SIC codes could be developed to identify firms in particular sectors that have developed hybrid production systems and products. 3) Economic policy will have to alter to take into consideration the shift towards hybrid production systems. This means that policies must embrace complete value chains rather than being targeted at manufacturing or service elements. Manufacturing firms should be encouraged to develop service expertise and explore ways in which services can add value to their existing business models. 4) Services and their hybridization with manufacturing processes provide an important source of inimitability. This process of hybridization requires further detailed study. This Trend Study has identified this process and begun to develop a framework for conceptualising hybrid production systems and their products, but much more research is required to identify and explore this process. 5) National competitiveness appears to be closely associated with the ability of a national educational system to develop competencies in the wider population (Castells and Himanen, 2004). Competencies can range from elementary skills to advanced 55 skill sets. The development of hybrid production systems that produce hybrid products have important implications for working, learning and developing competencies that urgently requires further research. The skill base of a national economy must consist of groups of individuals that have developed complementary skill sets. The key word here is complementary in that manufacturing and service competencies must be combined in an innovation system that encourages firms and employees to identify and exploit product-related services and hybrid products. It is important to remember that all production systems have become hybrid production systems, but that not all hybrid production systems produce hybrid products. Manufacturing firms must become more service orientated and must begin to exploit both their captive and non-captive markets. The former requires the development of additional services that are targeted at existing consumers whilst the latter involves identifying new customers and markets. The skill sets that support manufacturing must be revisited through detailed research. 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