INNOTRAIN IT
IT Service Management
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Chapter 6
2011
IT Service Management
I
Authors
Dr. Mariusz Grabowski, Universität der Wirtschaft Krakau
Dr. Claus Hoffmann, Beatrix Lang GmbH
Philipp Küller, Hochschule Heilbronn
Elena-Teodora Miron, Universität Wien
Dr. Dariusz Put, Universität der Wirtschaft Krakau
Dr. Piotr Soja, Universität der Wirtschaft Krakau
Dr. Janusz Stal, Universität der Wirtschaft Krakau
Marcus Vogt, Hochschule Heilbronn
Dr. Eng. Tadeusz Wilusz, Universität der Wirtschaft Krakau
Dr. Agnieszka Zając, Universität der Wirtschaft Krakau
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6 Innovation management The INNOTRAIN IT innovation method not only allows medium-sized enterprises to optimise
business processes, it also creates the basis for new products and services by freeing up company
resources. But how can new business ideas be developed pragmatically and in a targeted way for
SMEs? We already introduced the topic of "IT-based innovation management" in Chapter 3. The
following chapters build on this, showing how freed-up resources can be used and provide the
framework for what is known as the blue ocean strategy, which systematically sketches out the
most important steps of innovation management. As a practical example, let's now leave Charly's
world and devote our attention to Apple‘s iPhone as a real-world instance of one of the best-known
innovations of recent years.
6.1 Blue Ocean Strategy: idea and concept
As mentioned briefly in Chapter 3, the term "innovation" - in contrast to "invention" - means that a
company is capable of implementing its ideas in such a way that they are marketable (e.g. as a
product, service etc.). The success of innovators is based partly on solid partnerships in the area of
technical development, skilful selection of innovative ideas while taking into account the potential
market size and financial opportunities, powerful and routine procedures for time and budget
planning and one-of-a-kind products that stand apart from what the competitors offer.
The INSEAD Business School in Fontainebleau, France came to this realisation when investigating
150 successful companies of the last century. Based on that, INSEAD developed a method of
innovation in which many existing innovation methods were integrated in a novel way. The
objective of this approach consists in distinguishing oneself from the competition with the products
and services offered and thereby finding mass markets that still have not been developed. These
as yet untouched mass markets were called "Blue Oceans," and the associated innovation strategy
was labelled accordingly as the "Blue Ocean Strategy" (BOS, see also
http://www.blueoceanstrategy.com). A large advantage of this approach consists in the use of a
consistent method from the time the technical product development begins until the new ideas are
implemented in the organisation structures of companies. The BOS innovation process consists of
three main steps:
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Figure 26 – BOS innovation process
1. A value curve analysis based on customer opinion of a current, average product concept in
a certain sector compared to a product concept planned for the future
2. A creative method, which is helpful when researching new markets and adapting product
concepts and is called the "Six Paths Framework"
3. A control method, in which the following is checked:
• Customer benefit
• Pricing structure
• Costs
• Implementation effort
In SMEs, upper management usually controls the development of new product/market
combinations. However, IT managers should also be familiar with the bases of innovation
management, since they can make valuable contributions in the innovation process owing to their
knowledge and experience. The following chapters provide a basic introduction to the BOS
method.
6.2 Blue Ocean Strategy: Value curve method
The basic idea of the value curve method within the BOS consists in making the limitations and
opportunities of the existing and future product concepts transparent. In the following, application of
this method is described using the example of the Apple iPhone.
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Figure 27 – Product offer vs. expectations of smart phone users
When Apple entered the market for mobile phones in 2007, the value curve of the sector looked as
it does in Figure 27 – . On the one hand, there were inexpensive telephones which were frequently
sold via discount supermarket chains like Aldi or Lidl. They had only telephone functions and a
simple user interface and were offered at a favourable price to less affluent consumers almost
without any marketing expenses. On the other hand, at that time there were already premium-class
smart phones such as the Nokia Communicator and RIM Blackberry. These slowly began to
replace the still existing PDAs (Personal Digital Assistants), which were used in addition to
conventional mobile phones in order to be able to achieve a minimum of office work while on the
road. Thus there was a separation between the private and business use of the mobile phone. At
the same time this meant that it was not particularly attractive for personal telephone users to
decide on a phone for the business area, and vice versa. For this reason, in addition to using their
phones for business, most business users used MP3 players (usually an iPod) or digital cameras
for personal purposes on their business trips.
From the BOS perspective, Apple's development department considered which functions they
could eliminate, reduce, raise or create (ERRC method): to achieve innovation with the overall
product concept and market (refer to Figure 28). Apple increased the value of a central function:
the user interface of smart phones, which was a weak point at that time. In 2007, most phones
used for business had a mechanical keyboard, which was usually too small for normal-sized
fingers. In those cases where the keyboard was large enough, the size and weight of the phone
increased to such an extent that no one wanted to carry it around for very long. Aside from this, the
mechanical keyboards offered only static functions and thereby limited the use of the mobile
phones.
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Figure 28 – Product offer vs. expectations of smart phone users vs. iPhone offer
With the obvious idea of transferring the software-based user interface of the iPod to the phone,
Apple achieved a genuine breakthrough with the radical reconfiguration of the smart phone world.
In addition to the software-simulated keyboard, Apple also greatly enhanced the phone with an
MP3 player function. The iPod software was transferred to the iPhone for this purpose and enabled
access to the world's largest online music store, iTunes. 70 % of the software that runs on an
iPhone was taken over from the iPod. However, Apple also created completely new value for
customers within the framework of the product concept. This included, for example, applications
(apps) for consumers with which the iPhone—in conjunction with the software-based user
interface—can be used with great flexibility. Together with the App Store, a counterpart to iTunes
for applications, Apple introduced a powerful platform with which the possibilities for using the
iPhone have been continuously expanded. With this system-oriented approach, Apple also
addressed new types of customers, for example programmers of apps and individual
telecommunication companies, which received the exclusive marketing and sales rights for the
iPhone. This also contributed to Apple being able to reduce its own marketing costs, while
nonetheless reaching a large number of end customers.
But how could all of these ideas for creating values (functions highlighted in blue on the x-axis of
the second figure) be implemented? The BOS makes available a method with which such solutions
can be systematically achieved: the "Six Paths Framework."
6.3 Blue Ocean Strategy: Six Paths Framework
What kind of innovations can IT managers provide to change the value curve of a product or
service? New IT services can be developed which significantly reduce the effort and/or expense for
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providing a product with additional value. For example, product marketing can be supported by
hosting a social network, using viral marketing methods instead of traditional channels of
advertising, such as radio or TV commercials. In terms of the product being advertised, this IT
service reduces the costs of the existing advertising function while also making it possible for the
customers to give interactive feedback. A similar effect can be achieved, for example, by devising
new navigation and scheduling systems to reduce the costs for companies with large sales
departments.
The Six Paths Framework can be regarded as a creative way of thinking, which supports the
product developer in drafting innovative product ideas and solutions. Ultimately there are six
questions to ask in order to find the right "paths" in the context of this framework:
Path 1: Can the product concept be placed in another sector?
Taking Apple into consideration, you can see that this company was able to transfer the product
concept of the iPod. This consisted of a software-based user interface and a music store and was
taken over in the smart phone area with a similar user interface and an app store. Even the pricing
model in which the music industry has to pay 30% for each unit sold was transferred into the world
of the application programmers.
Path 2: Are there strategically important user groups in the market that still have not been taken
into account, for example people who do not use the product?
Level 1: Future customers who will soon enter the market.
Business customers who were persuaded by the possibility of being able to use entertainment
functions even on their business trips, and who already used an iPod.
Level 2: Neglected customers who decided not to enter the market. The availability of millions of
applications used to solve everyday problems (navigation in unfamiliar cities, workflow solutions for
standardised business processes in companies, such as travel applications etc.) produces
pressure to use these environments.
Level 3: Inexperienced non-customers who appear as consumers in various markets.
Customers who previously used MP3 players and webcams separately, but were not in a position
to use, or saw no additional benefit to using, a phone designed for the business user. Today they
use the iPhone environment as a kind of integrated platform for personal use and entertainment.
In addition to the consumers, Apple found other customer groups that were ready to pay for the
products. They also contributed to the business success of Apple in this way:
! Application developers have to pay 30% of their revenue in the App Store to Apple. On the
other hand, Apple makes a high-quality development environment available to them. This
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makes it possible to transfer the code very easily to other Apple platforms, such as MacBook
and iPad. In 2011 Apple projected revenues of 15 billion US dollars from programmers of
apps.
! Telecommunication companies: Owing to Apple's strategy of having only a single provider sell
the iPhone in the initial years, telecommunication providers with the exclusive sales rights
have to pay Apple 30% of their earnings from the contracts.
Path 3: Can I change the chain of buyers in order to change my own profit margin?
With the App Store and the strategy of allowing only one provider exclusive rights, Apple was able
to change the profit margin of the chain of buyers and the chain of buyers itself.
Path 4: Can I change my product portfolio by adding product objects from different sectors?
Apple, for example, added access to iTunes to the iPhone. This increased the degree of utility for
consumers in market segments.
Path 5: Can I change the value of a product for the customer by changing the proportion of
functions to emotions?
With the specific Apple design and the typical presentation of the iPhone by Steve Jobs, the iPhone
brought the familiar Apple philosophy to the smart phone sector. Therefore, no other product in this
sector could compete with the emotional factor of the iPhone. The design and philosophy of user-
friendliness that defines the entire product concept could be considered a real unique selling
proposition on the part of Apple.
Path 6: How will the value dimension of the ERRC grids change in future? Can I assess the
change?
Apple determined that along with the increasing success of the iPhone, the significance of the App
Store would also increase, having a lasting impact on the area of commercial applications.
Therefore, Apple began by introducing the applications from ERP systems from SAP or Oracle that
support top management in their work and ultimately, also in purchasing decisions.
What types of innovations can an IT manager provide starting with the Six Paths Framework? If the
value curve analysis focuses on the quality of a product function and the question of whether it is to
be eliminated, increased or reduced, new solutions and strategies can be developed, for example
using IT services. The following examples from traditional companies demonstrate the strengths of
the questions asked by the Six Paths Framework.
Are there strategically important user groups in the market that still have not been taken into
account, for example people who do not use the product? (Path 2)
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A network of tradespeople from different trades could specialise in particular complete services,
such as renovating balconies. Earlier, if a household customer wanted to obtain these services, he
or she had to hire a blacksmith, a bricklayer and a painter and co-ordinate the various providers
himself or herself. However, because it was a small job, the tradespeople did not have any
particularly great interest in it. After weeks of waiting, many customers withdrew their request for
quotation to take over the renovation themselves. The network of tradespeople was conscious of
this situation and developed a standardised service that included their respective individual
abilities, specific products and processes. To publicise and co-ordinate this solution, the network's
IT experts developed a platform that combined an online store, product configurator and CRM
function. This platform not only advertised the service offer under the network's brand name, but
also took care of all project co-ordination between the customer and the various tradespeople
electronically. Moreover, the network developed a number of additional services that were not of
specific benefit for the individual company, but for standardising and professionalizing these
services. In this way, the business model showed excellent growth, with each tradesperson seeing
an annual increase in profit of 30% due to the services provided by the network. With their specific
services, they succeeded in winning over non-customers as new customers who had previously
carried out this work themselves, even if often in poor quality.
Can one change the chain of buyers in order to change one's own profit margin? (Path 3)
A company of the INNOTRAIN IT analysis sold its products via a personnel-intensive direct sales
channel and via middlemen who offered the products to the end customer. After the analysing the
actual situation of the process for transacting orders, the company reached the realisation that the
sales costs were twice as high as production costs of the product. To survive in this market with
truly standardised products, the customer implemented an online store, as a survey of customers
found that they were willing to make use of a substantially more convenient method of ordering
products via the Internet. After implementing the online store, the company because one of the
most profitable companies in this sector, as the middlemen were no longer necessary and a portion
of the sales staff could be moved to other product groups, significantly increasing their productivity
in sales.
Can I change my product portfolio by adding product objects from different sectors? (Path 4)
A good example for a change of this type is the network of tradespeople described above who
combine services from various sectors to offer the customer a new type of service. Another
example is the combination of a machine tool manufacturer's tools with a special software program
that improves the features of the machine or the service quality. Today, many manufacturers offer
IT server and network solutions that link their machines to other ones in process chains. These, in
turn, can be controlled and adapted using the tool manufacturer's software. In addition, the
machines have an internal memory with a telematics function which, if necessary, transmits alarm
messages about required maintenance measures. As soon as an alarm is received, a service
technician can access the machine remotely via the Internet to determine the level of urgency. If
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necessary, he or she can drive the required spare parts directly to the customer's facility to remedy
any imminent problems, even before they occur. This provides the customer with a high degree of
value, as the desired level of availability of his or her production resources is ensured. Thus
information systems, software and consulting services complement each other optimally to provide
customers with a high degree of additional value. This means that the entire hybrid product of the
availability of the network and the server services and a good version management of the control
software.
6.4 Blue Ocean Strategy: Control methods
After the Six Paths Framework has been used for developing new product and market ideas, the
BOS offers a number of control methods to check the customer benefit and advantages for the
company. The methods include four different analysis tools, which are described in the following
chapter.
Figure 29 - Analysis tools of the Blue Ocean Strategy
Analysing the customer benefit
The customer benefit of a product concept can be analysed by looking more closely at the following
criteria.
Product focus: The product provides customer benefit if it is focused. This means that the product
costs should be low and the business plans for the product should be simple.
Product differentiation: A product is one-of-a-kind if:
! Its value curve differs significantly from the average in the respective sector
! The product strategy differs significantly from a "Me too" strategy
! The product concept is positioned outside existing markets
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! It offers exceptional customer benefit
To ensure that exceptional customer benefit is being offered, the "Buyer Utility Map" method can
be used. The idea is to reconcile the criterion of a product's customer benefit with the buyer's
experiences over the entire lifecycle, from the purchase of the product to its disposal.
Figure 30 - Six utility levels
The six utility levels allow you to check your product for the various phases with the following
questions:
! Does my product have the ability to increase buyers' productivity?
! Can my product be used as easily as possible?
! Does my product increase users' comfort?
! Can my product decrease buyers' level of risk?
! Can my product have a positive impact on the buyers' fun and image factor?
! Is my product environmentally friendly enough so that buyers can use it with a good
conscience and no additional costs for disposal are incurred?
How can the IT department assess its contribution to the exceptional customer benefit? This
question, which arises of each of the company's functions, can, of course, also be directed with
regard to their IT service by the IT department. The example described earlier of the company that
uses an online shop for selling its largely standardised product in the cell with number 2. This is
due to the fact that business customers find it more convenient to order to products as needed with
just a few mouse clicks instead of having to wait for the next visit from the salesperson and fill out
order forms.
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Figure 31 - Six utility levels, example
In the cell with number 1, we discover that an online store and simple configurator make it
significantly easier for the customer of the tradesperson network to convey more detailed
information about the renovation work (square metres, colours of the balcony, length of the
baluster, type of damage to the floor covering) and placing the order compared to co-ordinating the
three different companies. In the cell with number 3, the contribution of the IT service which has
been engaged after the sales services and reduces the customer's risk of failure of the production
line. However, the Buyer Utility Map provides a unique contribution when specifying and designing
IT services, which not only have a positive effect on the customer's business, but also ensure
additional benefit for the product shipped by the company.
If we deal with pricing and cost model of a new product concept, IT services can provide a
significant reduction of both factors. Many innovations in the pricing structure can be introduced by
strategic purchasing of IT services. If we return to our example of selling standardised products
using a web shop, this reduces the process costs for the sale of goods dramatically—while
providing complete flexibility with regard to who hosts the application and service. However, if the
company's in-house IT employees are inexperienced or their number is insufficient, outsourcing
may be useful. In this case, the online store service is leased from a strong partner and integrated
into the network of their partners if the company is in a position to control and manage the service.
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Analysing the pricing
Figure 32 – Analysing the pricing
"Blue oceans" have to be capable of winning over mass markets. Therefore, the price should be
affordable for customers on the mass market. Innovations are frequently targeted only to niche
customers, which means a high price for customer in the market niche. In this case, Settlers can
use techniques from the "me too" companies to make investments in the development of pioneers.
Analysing the costs
The cost analysis of the product concepts in BOS is specified first and foremost by the price that
the customer is willing to pay for a revolutionary product. This price can sometimes differ
significantly from prices for comparable products in the entry-level market. The desired profit is
subtracted from this price to determine the target costs. To implement this cost structure, cost
reduction initiatives can be used, for example to make corporate processes less expensive. It is
worth a try to select new materials or service suppliers with whom the price structure can be newly
negotiated.
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Figure 33 - Analysing the costs
Analysing the implementation effort
To implement the changes and turn the development into an innovation, a good method of change
management is required (for more detailed information, refer to Chapter 5).