At the end of a four-hour brainstorming session to come up with new product ideas for a midsized California company, the marketing vice president suddenly turned to me, shook his head as if the entire session had been a waste of time, and said, "You know, what I really want us to come up with are new services that go along with the products. We need to get more into services!" I was immediately struck with a feeling of mirror-image deja vu. Barely three weeks earlier, a young brand manager at a top financial services company had complained that the firm had services up the wazoo: what it really needed was some products to put into the mix.
What's going on here? Product companies — terrified that their most successful products are rapidly devolving into profitless commodities — don't just want to invent better and cheaper widgets. They want to figure out ways to wrap new services around their products. Service companies, scared witless by the popular notion that their most precious assets go home every night, aren't looking to devise even more clever and innovative services: they're looking to create new products. They want to figure out how to "productize" their expertise and sell it.
In other words, product companies want to become service companies and service companies want to become product companies. Each feels the other has the necessary ingredients for innovation, competitiveness, and growth. Each fears its own business is caught in the death spiral of declining margins and commoditized relationships.
Is this just a perverse commercial twist on the theatrical cliche that the great tragedians all want to do comedy while the comedians all want to play Hamlet? (Calling Jerry Lewis!) Is this desire just an innovation by-product of charismatic consultants and ultrapersuasive investment bankers? A short time ago, companies were relentessly pruning their operations to focus on only those processes and operations that they could be best at. Are we now witnessing a radical reversal of strategy, a drive for companies to identify and compete on their noncore noncompetencies? Actually, what's happening is an extraordinary trend accelerated by technology and market forces. What we're seeing is less a frantic, paranoiac frenzy to diversify into new markets than a pragmatic response to the new reality that the traditional distinctions between "products" and "services" are dissolving. Increasingly, the separation between "product" and "service" qualifies as a false dichotomy.
The World Wide Web neatly illustrates the issue; in fact, the emerging technology of the Web is one of the drivers. When a financial services company — say, a mutual fund — offers a Web site that details past performance while offering computational resources to help investors better analyze their portfolios — is that a product or a service? When a computer company lets you go to its Web site to download that lets you manage your computer better, is that a product or a service? If an accounting firm has a Web site that lets clients submit their spreadsheets for either automated or human-supervised audits, is the firm selling a product or a service?
To dismiss those questions as mere "semantics" is to misunderstand completely one of the most important dynamics facing business today. Product companies today are now offering more and more "provices" — products flavored by services. Need a specific, enormously profitable example? Look at how Oracle http://www.oracle.com/ , the multibillion-dollar database giant, has leveraged its products into creating a consulting business for itself. It is one of the firm's major sources of margin and growth.
How about General Motors http://www.gm.com/ — or, indeed, any of the world's major auto companies? These days, auto giants don't just sell cars — they sell leases. An automobile is no longer a stand-alone product; it comes to the market wrapped in warranties, service guarantees, and financing structures-each and every one of which has become part of the profit model these companies run themselves on. As cars incorporate even more information technology, with online directional devices and interactive media as built-in features, the vehicle itself will embody a range of personal services.
And beyond that, Ford http://www.ford.com/ and other automakers are examining the prospect of completely redefining the nature of their business. What if they didn't sell you a car? What if they offered you a "comprehensive mobility package" — a contract to provide you with a series of vehicles, none of which you own, all of which you have access to, each of which corresponds to a particular need you have at that time? When you can change effortlessly between a weekday nonpolluting electric car, a weekend off-road vehicle, an evening luxury car, and a getaway sports car — are you buying a product or a service?
Similarly, service companies are pushing to repackage their skills in profitably provocative ways; call them "serducts." Look at the megabillion-dollar global industry the investment banks have created in derivatives and synthetic securities like options and floaters. Their services skills in trading have been neatly — and lucratively — complemented by their willingness to invest in and invent new financial instruments. Remove these serducts from the global financial community and not only is the world a different place, but also the power and influence of the investment banks are radically diminished.
At the opposite end of the developing business-power spectrum are the once-potent advertising agencies. Why has their influence dwindled lately? One reason is that they have almost no serducts: agencies sign away the intellectual property they help create for clients. But remember the early days of advertising when the big agencies were rich, fat, and sassy? What was the difference? The agencies then often had equity in the shows they helped create for clients. The agencies were — literally and figuratively — radio and television producers.
This kind of hybridization represents the true destiny of innovation. Products will become provices and services will invariably evolve into serducts. Drawing the line between them will be a task for academics and accountants, not customers and clients. Why? Because this is what the marketplace wants.
Customers and clients — especially smart customers and clients — are looking for value. Provices and serducts represent a legitimate, important, and successful design sensibility for generating value-added innovation. Indeed, provices and serducts will ultimately become the building blocks of tomorrow's business models. Tomorrow's business plans will revolve around product-service hybrids — not one or the other. Trick Question: Is Netscape (http://www.netscape.com) a product or a service company? How can you tell?
As technology makes it ever easier to craft new product-service hybrids, customers and clients will increasingly determine which blends make the most sense. Innovators will determine which blends will make the most money. Either way, organizations that focus more time and creativity on their products and their services — rather than the interaction between them — misunderstand the marketplaces they're trying to serve.
A reasearch associate at MIT, Michael Schrage (firstname.lastname@example.org) is the author of "No More Teams! Mastering the Dynamics of Creative Collaboration" (Currency/Doubleday, 1995.
A version of this article appeared in the August/September 1996 issue of Fast Company magazine.