The fundamental misunderstanding about products, services, and value creation

It is popular to speak about product-led organizations. They shall be able to solve customer problems better because teams in this kind of organization have full accountability for product success.

An enterprise organized around products

The basic idea sounds fantastic: Instead of organizing an enterprise functionally (e.g., developers apart from designers), the ultimate dream of any Agilist shall come true: Cross-functional teams, organized in products which are as close as possible to the customer. This approach implies that full-fledged product teams master all the necessary skills and roles to build great products that users love. Ideally, they anticipate the future.

The deadly pitfall of a product-led organization

All these aspects mentioned above sound sweet in theory, but in practice, it is easily possible to lose the focus on the most import factor in the calculation: the user/customer of the product. Instead of working for the user, the product team takes its name too seriously and is only focused on the product itself.

Why does this happen?

There are different possible explanations of how this toxic behavior emerges. The most obvious: Tech people fall in love with tech, so all aspects related to technology dominate the focus (aka featuritis). Another typical reason can be a lack of resources, mostly also in the tech area. If a team has not enough capacity to build the tech part of a product, then groups tend to go into a “survival mode”. Only the necessary stuff is done and often only by building workarounds. This firefighting mode creates technical debt, which makes it even harder to implement new features for the user/customer. The fear of losing a certain level of stability kills innovation.

Many more causes are possible, but the most dangerous one is the common misunderstanding of the nature of products, services, and how value is created. Luckily, this cause can be tackled because it lies inside of everyone.

The ontological confusion about products and services

As stated in the introduction, a product-led organization is in its original idea, a structure, which is market/customer-focused. To repeat it: The product shall solve a customer’s problem – or help to achieve a goal. That is the only reason why a product exists.

Often it is forgotten that the product itself is useless when a user does not use it. This insight sounds so simple, but matters of common sense are always well hidden in “normality.”

Unfortunately, it is ignored that the producer can not define the value of a product. The user determines it. It is about the value-in-use, which is crucial and not the production of the product. In other words:

The solution to the problem is never a product itself, but the application of the product.

One could say that a product is just the transporter of an inherent service. Therefore: The act of using the product is the single point of truth. This is where value is created. Nothing else matters.

Example: Let’s imagine there is a wholesale company that focuses on the hospitality sector, like restaurants, hotels, or caterers. It seems to be a typical B2B business, where for example a restaurant owner (or cook) buys potatoes, and the company gets money for it. If you follow the simplistic economic idea of an exchange of goods, the story will end here. But in the S-D logic, you continue and would like to know if the customer can cook a nice dinner out of the potatoes. Even this is not enough because the cook will only be successful if the guest appreciates the quality of the dish – that is the real feedback that counts. Insofar it must be in the interest of the wholesale company to understand which kind of quality the customer needs for the best “value-in-use.” This said, the company is not in the B2B sector but B2B2C.

If one takes the idea of value-in-use seriously, it is clear that at the very end every economic act is NOT about the transaction of money for a product. The job is NOT done by taking money from the customer at the cashier’s desk – which is, by the way, an entirely linear way of thinking. It needs a different understanding of how value is co-created in a network structure that exchanges services. Buzzword alarm: I am talking about ecosystems.

Service Dominant Logic

The S-D logic is my favorite scientific foundation to understand the idea of value co-creation. Developed by Vargo and Lusch (2004ff), the S-D logic provides a framework to tackle this context systematically.

The following illustration integrates two typical loops of S-D logic. It is the most comprehensive way to explain the foundation of value co-creation.

S-D logic in a nutshell

Without commenting on it too much, I just want to recommend starting with the outer loop at the Actors element, while the inner loop should be started with Market Practices.

Additionally, Vargo and Lusch have created a set of eleven foundational premises.

S-D logic foundational premises

1. Service is the fundamental basis of exchange.

2. Indirect exchange masks the fundamental basis of exchange.

3. Goods are a distribution mechanism for service provision.

4. Operant resources are the fundamental source of strategic benefit.

5. All economies are service economies.

6. Value is co-created by multiple actors, always including the beneficiary.

7. Actors cannot deliver value but can participate in the creation and offering of value propositions.

8. A service-centered view is inherently customer oriented and relational.

9. All social and economic actors are resource integrators.

10. Value is always uniquely and phenomenologically determined by the beneficiary.

11. Value co-creation is coordinated through actor-generated institutions and institutional arrangements.

Integration of perspectives

After this excourse into the world of S-D logic, it is time to put it all together. How could a customer-focused and product-led organization look like? Which organizational paradigm might help keep the focus?

Some readers might expect that I will use the Viable System Model, and I will not disappoint you. Of course, the VSM is the foundation, but this time I am using another idea to serve an integrated view. It starts with the so-called Orbit-Model, which puts the customer in the center of an onion model. The environment is the center of gravity. By doing so, the term customer-centric becomes something self-evident – this is precisely the point I am trying to make.

Secondly, the product-led approach is also part of the following illustration. Specifically, it is represented by the four spheres of Problems, Touchpoints, Products, and Product Teams.

Lastly, the VSM comes into play by adding the three essential management levels of any viable system: Tactical Planning, Strategy and Norms.

A customer-centric, product-led organization

Conclusions

• Product-led organizations are great if they never forget why they exist: Solve customers problems or by helping them to achieve a goal.
• Overcome the classical transactional paradigm. It’s all about services and value co-creation. A product is nothing more and nothing less than a promise, that shows its value-in-use when used.
• Viability can be achieved by maintaining the tactical, strategic, and normative control levels.