INOM
EXAMENSARBETE INDUSTRIAL ENGINEERING AND MANAGEMENT,
AVANCERAD NIVÅ, 30 HP STOCKHOLM SVERIGE 2018,
Business As Usual, No Business At All?
Exploring the Role of Servitization in the Process of Business Model Innovation
ANDREAS ENGWALL ANTON ÅLUND
KTH
SCHOOL OF INDUSTRIAL ENGINEERING AND MANAGEMENT
INOM
EXAMENSARBETE INDUSTRIELL EKONOMI, AVANCERAD NIVÅ, 30 HP
,
STOCKHOLM SVERIGE 2018
Är en oförändrad verksamhet ingen verksamhet alls?
En utforskande studie om tjänstefieringens roll inom affärsmodellsutveckling
ANDREAS ENGWALL ANTON ÅLUND
KTH
SKOLAN FÖR INDUSTRIELL TEKNIK OCH MANAGEMENT
Business As Usual, No Business At All?
Exploring the Role of Servitization in the Process of Business Model Innovation
by
Andreas Engwall Anton Ålund
Master of Science Thesis TRITA-ITM-EX 2018:165 KTH Industrial Engineering and Management
Industrial Management
SE-100 44 STOCKHOLM
Är en oförändrad verksamhet, ingen verksamhet alls?
En utforskande studie om tjänstefieringens roll inom affärsmodellsutveckling
Av
Andreas Engwall Anton Ålund
Examensarbete TRITA-ITM-EX 2018:165 KTH Industriell teknik och management
Industriell ekonomi och organisation
SE-100 44 STOCKHOLM
Master of Science Thesis TRITA-ITM-EX 2018:165
Business As Usual, No Business At All?
Exploring the role of servitization in the process of business model innovation
Andreas Engwall Anton Ålund
Approved
2018-06-11
Examiner
Matti Kaulio
Supervisor
Maxim Miterev
Commissioner
N/A
Contact person
N/A
Abstract
To survive a technological shift has — on numerous occasions — proved to be difficult for incumbent firms. Quintessential examples can be found in various industries where incumbent firms have suffered financial losses as they have failed to adapt their business model to a new technological paradigm. Despite the troubling history, instead of exploring the process, researchers have more often than not only addressed the outcome of firms' business model innovation, leaving a knowledge gap in the literature. More alarming, in the limited research addressing the innovation process scholars have argued for contradictory purposes. Business model innovation literature has concluded that firms innovate their business model through a trial-and-error process. Conversely, servitization literature has often argued that firms innovate their business model through a series of deliberate and sequential steps along a linear continuum. The thesis aims to contribute with knowledge to bridge this gap by addressing the following purpose: explore the role of servitization in the
process of business model innovation in the face of a potential technology shift.The thesis is anchored in an embedded case study at an incumbent manufacturing firm in the automotive industry. Findings show that the case company is utilizing servitization on a small scale to test multiple business model innovations simultaneously across disperse organizational units. It indicates that servitization can be utilized on a local level within the organization as a tool to change the organizational culture. Furthermore, findings show that the servitized business models can be utilized to create test environments to explore the commercialization of radical technological innovations, enabling an incumbent firm to learn double ambidexterity. Subsequently, findings highlight that engaging in servitization is not simply a way to create complements to products, only important when products reach maturity. Instead, findings suggest that servitization may be a tool allowing firms to understand the importance of a symbiotic interplay between technology and business model innovation, in particular in the face of a technology shift.
The thesis makes three contributions. First, findings from this thesis contribute with knowledge on how an incumbent manufacturing firm is innovating its business model utilizing servitization.
Second, the study contributes with an increased understanding of the innovation process of going from one business model to a new. Third, the thesis makes an analytical contribution by amalgamating the research areas of business model innovation, ambidexterity, and servitization.
Keyword: Business Model Innovation, Servitization, Local Servitization, Double Ambidexterity,
Technology Shift.
Examensarbete TRITA-ITM-EX 2018:165
Är en oförändrad verksamhet, ingen verksamhet alls?
En utforskande studie om tjänstefieringens roll inom affärsmodellsutveckling
Andreas Engwall Anton Ålund
Godkänt
2018-06-11
Examinator
Matti Kaulio
Handledare
Maxim Miterev
Uppdragsgivare
N/A
Kontaktperson
N/A
Sammanfattning
Att överleva övergången till ett nytt teknikskifte har flera gånger visat sig vara en utmaning för etablerade företag. Det finns flera klassiska exempel på företag inom olika industrier som har misslyckats med denna övergång och en av följderna har blivit stora ekonomiska förluster. Trots tidigare misslyckanden så väljer forskarna vanligtvis att beskriva de slutgiltiga resultaten av innovationsprocessen istället för att beskriva själva förloppet. Därtill kan det noteras att den begränsade mängd forskning som berör förändringsprocessen beskriver motstridiga förlopp.
Forskare inom företagsstrategi har argumenterat för att utveckling sker genom ett antal försök och misslyckanden. Omvänt har forskare inom tjänstefiering ofta beskrivit förloppet som en linjär process med avsiktliga utvecklingssteg. Detta examensarbete ämnar till att bidra med kunskap för att klargöra dessa motstridigheter i litteraturen genom att uppfylla följande syfte: att utforska
tjänstefieringens roll under processen för utvecklandet av affärsmodellen inför ett i antågande nytt teknikparadigm.Examensarbetet redogör för tidigare forskning inom tjänstefiering, utveckling av affärsmodeller och tvåhändighet samt förankras i en ingående fallstudie på ett etablerat tillverkningsföretag i inom fordonsindustrin. Detta för att bättre förstå hur företag agerar i utvecklingen av affärsmodeller vid ett stundande teknikskifte. Resultat från fallstudien visar att det undersökta företaget bedriver flertalet affärsmodeller baserat på tjänstefiering samtidigt över flera organisatoriska enheter. Empirin visar att tjänstefiering används på lokal nivå inom organisationen för att förankra en ny företagskultur och underlätta förändringsarbetet. Företaget har använt nya affärsmodeller som plattform för att skapa testmiljöer tillsammans med radikala tekniska innovationsprojekt för att lära sig hur tekniken kan användas i kommersiellt syfte. Empirin bekräftar att tjänstefiering inte nödvändigtvis bara är ett komplement när en produkt uppnått mognad på marknaden. Istället indikerar resultaten att tjänstefiering kan vara ett verktyg för företag att förstå vikten av att teknikutveckling och affärsmodellsutveckling samverkar, i synnerhet inför ett i antågande teknikskifte.
Examensarbetet bidrar till forskningen på tre sätt. För det första bidrar resultatet i denna studie till teorin om hur ett etablerat tillverkningsföretag utvecklar sin affärsmodell genom att använda tjänstefiering. För det andra bidrar studien till att ge ökad förståelse om övergångsperioden mellan gammal och ny affärsmodell. För det tredje bidrar examensarbetet med ett analytiskt resonemang kring behovet av sammanflätningen mellan forskning inom affärsmodellsutveckling, tvåhändighet och tjänstefiering.
Nyckelord: Affärsmodellsutveckling, Tjänstefiering, Lokal tjänstefiering Dubbel tvåhändighet,
Teknikskifte
The Royal Institute of Technology
Industrial Engineering and Management
Master Thesis
Business As Usual, No Business At All?
Exploring the Role of Servitization in the Process of Business Model Innovation
Authors:
Andreas Engwall Anton ˚ Alund
Examiner :
Matti Kaulio
Supervisor :
Maxim Miterev
June 11, 2018
Contents
Acknowledgement vi
1 Introduction 1
1.1 Background . . . 1
1.2 Problem Formulation . . . 3
1.3 Purpose . . . 4
1.4 Research Questions . . . 5
1.5 Scientific Contribution . . . 5
1.6 Delimitations . . . 5
1.7 Thesis Sponsor . . . 6
1.8 Disposition . . . 6
2 Literature Review 9 2.1 En Route to Business Model Innovation . . . 10
2.2 Servitization of the Manufacturing Industry . . . 14
2.3 Ambidexterity: A Strategy for Surviving a Technology Shift . . . 21
3 Theoretical Framework 26 3.1 Understand Changes in the Business Model Elements . . . 26
3.2 The Role of Servitization . . . 27
4 Method 31 4.1 Research Design . . . 31
4.2 Data Collection . . . 35
4.3 Data Analysis . . . 39
4.4 Quality of the Research . . . 41
5 Empirical Settings 44 5.1 Business as Usual in the Industry for Heavy Commercial Vehicles . . . . 44
5.2 In the Face of a Technology Shift . . . 49
6 Findings & Analysis 55 6.1 Addressing a Technology Shift Utilizing Servitization . . . 55
6.2 Simultaneous Business Model Innovation . . . 58
6.3 Simultaneous Business Model Innovation at Different Organizational Units 67 6.4 Coupling Technology Innovation with New Business Models . . . 71
7 Discussion 75 7.1 Academic Implication . . . 75
7.2 Manging the Process of Business Model Innovation by Utilizing Servitization 83 7.3 Managerial Implications . . . 84
7.4 Sustainability Implications . . . 87
7.5 Revisiting the Research Process . . . 88
8 Conclusion 92 8.1 Future Research . . . 93
References 94
Appendix A: Thematic Interview Protocol I
Appendix B: Interviewed Informants IV
List of Figures
1 Schematic illustration of how the different research streams in the thesis relates to each other. . . 10 2 The product-service continuum (Oliva and Kallenberg, 2003). . . 20 3 The matrix divides technology innovation on one axis, business model
innovation on the other, and by the use of ambidexterity theory these dimensions are further divided into explore and exploit (Kaulio et al., 2017). . . 24 4 Servitized value proposition and service focus (Based on Coreynen et al.
(2017)). . . 29 5 Schematic illustration of the research process defining the thesis. . . 31 6 The empirical setting, comprising the current situation and the pressure
from a potential technology shift, as described by informants across Com- pany A. . . 44 7 Actions initiated by Company A, to address the potential technological shift. 55 8 Use Case A, Use Case B and Use Case C as well as current service
offerings oriented (based on Coreynen et al. (2017) servitization pyramid). 66 9 Placement of Use Case A and B together with platooning and autonomous
driving in the double ambidexterity matrix (based on Kaulio et al., 2017).
Illustrating their movement into the explore-explore quadrant when being combined. . . 73 10 Use Case A, Use Case B and Use Case C oriented on the product-service
continuum (based on Oliva and Kallenberg, 2003) to highlight that Com- pany A occupy multiple positions along the trajectory simultaneously. . . 78
List of Tables
1 The disposition of the thesis, outlining the chapters and a brief description of its content. . . 7 2 Conducted interviews during the first phase in the data collection, cate-
gorized according to their business units at the case company, or external entity . . . 36 3 Conducted interviews during the second phase in the data collection, cat-
egorized according to their business units at the case company . . . 37 4 Matrix construction as outlined by the framework approach. . . 40 5 The actions taken throughout the study with the aim to achieve high
quality of the research. . . 42 6 Comparing the traditional business model with the business model Use
Case A . . . 60 7 Business model comparison between the traditional product centric strat-
egy and the business model of Use Case B . . . 63 8 Business model comparison between the traditional product centric strat-
egy and the business model for Use Case C . . . 65 9 Juxtaposition of the analyzed Use Cases in accordance to the theoretical
frame of reference. . . 74 10 Interviewed stakeholders during the first series of interviews. Presented
by title, description of role, and interview date. . . IV 11 Second round of interviews, presented by their title, description of role,
and date for the interview. . . VI
Nomenclature
ACE Autonomous, Connectivity and Electrification HCV Heavy Commercial Vehicles
ICE Internal Combustion Engine
ICT Information Communication Technology
OBC Outcome Based Contract
OEM Original Equipment Manufacturer P BC Performance Based Contract R&D Research and Development SLA Service Level Agreement T CO Total Cost of Ownership
T RM Technology Roadmap
U CA Use Case A
U CB Use Case B
U CC Use Case C
Acknowledgement
First and foremost, sincere gratitude to our supervisor at KTH, Ph.D. Maxim Miterev for your great support and enthusiastic engagement throughout the research process.
You have always challenged us during vivid discussions allowing us to strengthen our argumentation. Furthermore, we would like to raise our gratitude to our seminar leader and examiner, Assistant Professor Matti Kaulio and our peers at KTH for challenging discussions, which have greatly contributed to our master thesis.
We would also like to express our appreciation to the investigated company, without the contribution and support from various actors our study would not have been made possible. We would especially like to highlight the great support and interest from our supervisor as well as informants who took an active part in discussions related to the thesis, thank you. Your insights and support have largely contributed to our conclusions.
Furthermore, we would like to send our gratitude to the Integration Transportation Re- search Lab (ITRL) at KTH for supporting our work, contributing with insights and thoughtful aspects.
Finally, we would like to thank our beloved friends and families for your engagement and support in the execution of this thesis and the entire degree program in mechanical engineering and industrial management.
Andreas Engwall & Anton ˚Alund Stockholm, 20180611
1 Introduction
In this chapter we introduce the important aspects related to how firms act when faced with a potential technological shift. Subsequently, these aspects lay the foundation to the background of the thesis, highlighting the conflicting discourse in literature related to how firms innovate their business model. The purpose and entailing research questions are then deduced from this context. The chapter terminates by introducing the discussion on the thesis’ scientific contribution and its delimitations, a presentation of the thesis sponsor, and finally outlining the disposition of the thesis.
1.1 Background
Throughout history technology innovation have been the creator and annihilator of firms as it has dramatically changed the landscape of various industries. In the face of such a paradigm shift in any industry, predominant scholars conclude that incumbent firms usually struggle to maintain their position on the market (Arthur, 1989; Utterback, 1994; Christensen and Rosenbloom, 1995). Even though a few firms have experienced increased value capture (Bergek et al., 2013; Kaulio et al., 2017), multiple examples across industries highlights that incumbent firms struggled immensely during technolog- ical changes. For instance, few manufacturers of typewriters survived the introduction of personal computers, in similarity, the introduction of steamships made manufactures of sailing ships obsolete, and companies operating in the ice excavation industry went out of business with the rise of refrigerators as a viable substitute (Utterback, 1994; Tidd et al., 2005). Evidently, disruptive technological changes have had a strong impact on industrial leadership, and discontinuities seem increasingly difficult for incumbent firms to address (Tushman and Anderson, 1986; Christensen and Rosenbloom, 1995).
Drawing on the general assumption in technological innovation literature — that tech- nologies develop along linear trajectories (Dosi, 1982) — can contribute to an increased understanding of incumbent firms’ struggles. As incumbent firms tend to build their core competence closely related to the current paradigm they are increasingly prone to encounter difficulties during the uprise of new technologies developing along new tra- jectories (Tushman and Anderson, 1986; Christensen, Raynor, et al., 2015). Scholars have identified that such path dependence may encourage product-centric firms to ad- just their businesses to include new offerings constituting a relatively high degree of service content (Oliva and Kallenberg, 2003; Gebauer, Fleisch, and Friedli, 2005). As a result, many product-centric firms find themselves transitioning from a traditional busi- ness model based on products, towards business models based on services (Kowalkowski, Gebauer, and Oliva, 2017; Baines, Ziaee Bigdeli, et al., 2017; Foss and Saebi, 2017).
This servitization phenomenon was introduced by Vandermerwe and Rada (1988) and refers to firms that not only enhance their products with additional services, but instead develop new offerings in which services, not products, are the focal point of the value proposition. A transitional process more often than not describing how firms are mov- ing along a linear product-service continuum, towards more advanced service offerings
(Oliva and Kallenberg, 2003; Baines and W. Lightfoot, 2013; Baines, Ziaee Bigdeli, et al., 2017). Services have been identified as a prominent strategic response as products and industries mature (Teece, 1986). For instance — in addition to more classical exam- ples such as Rolls Royce and Xerox — Toyota Materials Handling and Atlas Copco have for some time been turning to new business models based on various forms of rental agreements, maintenance activities as well as financing solutions. As a result, these two firms have reported a significant growth in revenue originating in service contracts (Kindstr¨om, 2010; Visnjic, Van Looy, et al., 2013).
Therefore, many incumbent manufacturing firms have launched initiatives in order to develop organizational capabilities and processes that create value for customers uti- lizing service-based business models (Storbacka, 2011; Visnjic, Van Looy, et al., 2013;
Kowalkowski, Windahl, et al., 2015). However, product-centric firms may turn to servi- tization under different circumstances and not only as a response to industry maturity (Cusumano et al., 2015). IBM’s introduction of the mainframe computer may serve as a compelling illustration; when launched the computers were expensive and based on a new, unknown technology, making customers reluctant to purchase the product (Attewell, 1992). Thus, IBM turned to various leasing contracts bundling pay-per- use contracts and maintenance in order to entice customers adopt the new technology (Cusumano et al., 2015).
Under these circumstances, servitization could, in fact, be conceptualized as a form of business model innovation (Kindstr¨om and Kowalkowski, 2015; Foss and Saebi, 2017).
Anchored in the aforementioned dynamics related to technological innovation as they often allowing firms to expand their service offerings. However, in the face of a disruptive technology shift technology innovation alone is insufficient and must thus be pursued in parallel with business model innovation (Chesbrough, 2007; Baden-Fuller and Haefliger, 2013). Some researchers have even stated that to survive under a new technological paradigm, it is essential that firms couple technology innovation with business model innovation (Christensen, 2006; Wirtz et al., 2016; Foss and Saebi, 2017). An endeavor sometimes referred to as double ambidexterity (Tongur and Engwall, 2014; Kaulio et al., 2017). Failing to adhere to such measures can contribute to the explanation why technological disruptions have time and time again been annihilator of incumbent firms e.g. Kodak and Nokia.
To address these challenges organizational theory have suggested ways for incumbent firms to prepare for disruptive change, namely developing ambidextrous organization (O’Reilly III and Tushman, 2008; Raisch and Birkinshaw, 2008). More specifically, stressing that long-term success is achieved by the firm’s ability to balance the para- doxical relationship of conducting incremental and radical innovations simultaneously (Tushman and O’Reilly III, 1996). Historical cases illustrate how industry leaders in- ability to manage this duality have been a key aspect of their failures in the advent of disruptive technology. Despite devastating outcomes, the number of exploratory studies on incumbent firms’ transitional process, of moving from one business model to another remains limited (Foss and Saebi, 2017; Hossain, 2017), leaving the process extremely
hard to imitate. Instead, previous research have often described the outcome from the business model innovation, from an ex-post perspective (Magretta, 2002; Markides, 2006;
Teece, 2010; Chesbrough, 2010).
A current example of a turbulent business environment combining the above discussed paradoxical strategies can be found in the automotive industry. Decades of commit- ment and investments into the combustion engine have, through path dependence, seen incumbent firms becoming more and more reliant on one particular technology. Subse- quently becoming more vulnerable to a potential change in the underlying technology driving the industry forward. Over the past years, incumbent automotive firms have been increasingly aware that new disruptive technologies may be on the verge of signif- icant commercial impact. Thus, technologies such as electrification, connectivity, and autonomous driving have been framed as the most disruptive technological trajectories for the future (Daimler, 2015; Daimler, 2016; Scania Group, 2016; Volvo Group, 2017;
Scania Group, 2017). Technologies that in a traditional product-centric sector open the door to intensified competition, including new entrants and new product functionally (e.g. autonomous and electrified vehicles) potentially causing severe disruption.
It can be concluded that the advent of disruptive technologies is challenging incumbent firms in any industry, as their business models and core capabilities may be left at the verge of extinction. Turing to ambidextrous strategies as well as strategies for business model innovation may be the solution for an effective approach to the ambiguous transitional phase. Incumbent manufacturing firms have recently started to explore servitization, as a way to innovate their business model. However, the fact that many incumbents fail to address the process of business model innovation successfully calls for additional research. The limited research exploring how firms act in their search for a new business models leave scholars as well as managers blindfolded in this challenging environment. Thus, the thesis aims to add to the growing body of literature focusing on how incumbent manufacturing firms are exploring new business models in the face of a new technological paradigm.
1.2 Problem Formulation
In recent literature reviews, scholars have identified a gap in the research exploring the process of business model innovation (Foss and Saebi, 2017; Hossain, 2017). The limited research on the process of business model innovation makes it problematic for scholars as well as practitioners to understand how to achieve a successful transition process moving from one business model to another. Especially, as the limited research on the topic argues for contradictory processes.
The limited amount of scholars that have investigated this transition process, argue that successful business model innovation occurs in an unstructured series of trial-and- error actions (Magretta, 2002; Sosna et al., 2010; Chesbrough, 2010; Foss and Saebi, 2017). Along with classical cases like Dell and IBM, only a few modern examples have highlighted the phenomenon, including the dietary industry (Sosna et al., 2010), the
newspaper industry (Smith, Binns, et al., 2010), venture businesses (Andries et al., 2013), and the telecommunications industry (Kaulio et al., 2017). Providing empirical evidence of how firms have adjusted their business models and organizational structures by utilizing new technology through a trial-and-error approach.
Conversely, servitization literature more often than not rest on the assumptions first brought forth in Oliva and Kallenberg’s (2003) pioneering article. Arguing that business model innovation — moving from a product-oriented business model to a service-oriented business model — is a process of sequential, deliberate, and well-structured actions along a linear continuum. Few scholars have questioned this acumen and instead argued that firms may innovate their business model along parallel service trajectories (Kowalkowski, Windahl, et al., 2015; Jovanovic, 2018). However, close to no scholars question Oliva and Kallenberg’s (2012) underlying assumption. Instead, researchers have outlined dif- ferent forms of service-based business models (Baines, Lightfoot, Evans, et al., 2007;
Storbacka, 2011; Kindstr¨om and Kowalkowski, 2014; Hou and Neely, 2017) or investi- gated organizational tensions during the transitional phase — when firms move from a product-centric to a service-centric business models (Gebauer, Fleisch, and Friedli, 2005;
Brax, 2005).
The conflicting discourses surrounding servitization and business model innovation makes it problematic for researchers to understand how firms act in order to innovate their busi- ness model. Why additional research on incumbents’ business model innovation process is needed. By not addressing this knowledge gap, it will be increasingly difficult for researchers to understand the process of business model innovation and its relationship with technology innovation. Thus, leaving it ambiguous why some firms succeed whilst others fail to adhere to a new technological paradigm, as well as understand how in- dustries transform in the face of technological change. The limited and contradictory research makes it difficult for managers to achieve a successful business model innova- tion. Leaving them to operate blindfolded — without guidance — in the process of how to realize a targeted market position and develop a corresponding business model. A particular misguidance that is likely to continuously devastate incumbent firms in the face of a technology shift.
Anchored in an embedded case study, the thesis aims to address the identified research gaps by examining the paradoxical dynamics in the intersection of servitization as a business model innovation and technology innovation. This will be done by exploring how an incumbent original equipment manufacturer of heavy commercial vehicles acts in order to innovate their business model in the face of technological change.
1.3 Purpose
The purpose of this thesis is to explore the role of servitization in the process of business model innovation in the face of a potential technology shift.
1.4 Research Questions
To fulfill the purpose of the thesis we aim to address the following main research question (MQ) and entailing sub questions (SQ).
MQ: How can an incumbent manufacturing firm manage the process of business model innovation by utilizing servitization in the face of a technology shift?
SQ1: Why may an incumbent manufacturing firm utilize servitization to innovate its business model in the face of a technology shift?
SQ2: How can an incumbent manufacturing firm utilize servitization to address a technological shift?
SQ3: How can servitization help an incumbent manufacturing firm to un- derstand the interplay between radical technology innovation and business model innovation in the face of a technology shift?
1.5 Scientific Contribution
To date, a limited number of studies have been conducted exploring firms’ transitional process of moving from one business model to another. Instead, existing studies often present the outcome of the process from a historical perspective after a technology shift has occurred (cf. (Teece, 2010; Chesbrough, 2010)). Anchored in a single embedded case study, the thesis aspires to contribute to the theory on how firms innovate their business model in the face of a technology shift, in particular, the role of servitization in this process. Effectively, adding empirical evidence to the accumulated pool of knowledge on the process of business model innovation, applying an ex-ante perspective of a potential new technological paradigm.
Furthermore, with a few exceptions (cf. Fischer et al., 2010; Tongur and Engwall, 2014) there has been limited interaction between the research areas of: servitization, business model innovation, and ambidexterity. Instead, these research streams have often been discussed and developed in silos. With the purpose to grasp how the process to prepare for a new technological paradigm takes place within an incumbent firm, the thesis com- bine these three research areas. By analyzing the process of business model innovation from a new angle based on these three research streams, the analysis of the findings makes an analytical contribution (Yin, 1994; Blomkvist and Hallin, 2015). Meaning, the amalgamation of theories provides a new way of understanding the empirical data, effectively leading to an increased understanding of the phenomenon.
1.6 Delimitations
The primary focus of this thesis is on the functional level of Blomkvist and Hallin’s (2015) system perspective. Meaning, the firm’s business model innovation introduced to
meet a new technological paradigm will be assessed from an organizational point of view.
However, both the industrial and individual level will be addressed whenever significant implications are identified. An in-depth technical description of the technological drivers that appear to be in the center of the industry transition will be left out of this the- sis. Instead, these technologies will act as drivers to describe the turbulent industry dynamics. Thus, technological descriptions will facilitate discussions on a conceptual level, going into detail if a deeper understanding is required. In addition, the thesis is delimited to an embedded case study at Company A. Effectively, limiting the scope of the investigation to selected business units, within a single firm, that are assumed to possess knowledge of how the firm acts in the face of technological change.
1.7 Thesis Sponsor
This master thesis sponsor is an incumbent original equipment manufacturer (OEM) active in the industry for heavy commercial vehicles, from here on named Company A.
Company A is an international organization with production sites and market presence in multiple countries spread across the globe. The organization boasts an excess of 45 000 employees and over 100 subsidiaries. Company A is operating in the business-to-business market, where they develop, manufacture, and sell heavy-duty vehicles exceeding 16 tons as well as engines for industrial and marine applications.
1.8 Disposition
The disposition of the thesis coupled with a brief description of the content of each chapter is outlined in Table 1. Providing a theoretical background, leading up to the problem statement followed by the deduced purpose and research question. Thenceforth, the theoretical disposition and frame of reference are outlined followed by the method defining the thesis. The second half of the thesis then covers the exploration and analysis the findings and discusses its implications on different stakeholders.
Table 1: The disposition of the thesis, outlining the chapters and a brief description of its content.
Chapter Chapter Description
1. Introduction Provides a background to the problem formulation, the de- duced purpose and research questions. It later on describes the aspiration for scientific contribution, the delimitations, as well as a description of the thesis sponsor.
2. Literature Review Explores previously conducted research with the purpose of theoretically placing the thesis in its context. Explores area of technology innovation, business model innovation, servitization, and lastly ambidexterity research.
3. Theoretical Framework Outlines the theoretical frame of reference used for un- derstanding the empirical data. Describes how the thesis utilizes concepts from the literature review to understand the role of servitization in the process of business model innovation .
4. Method Describes the research design and data collection used for the gathering of empirical data. It later on describes how the data have been analyzed and outlines the actions taken with the purpose of to achieve qualitative research.
5. Empirical Setting Describes the traditional business model of the case com- pany and the challenges they are facing entering into a potential new technological paradigm.
6. Findings & Analysis Outlines the findings from the collected empirical data to- gether with the analysis drawn on the data.
7. Discussion Discusses the scientific implication of the findings from this thesis, thenceforth the managerial implications and sus- tainability implications. Ends with a review of the research process and its limitations.
8. Conclusion Concludes the thesis by outlining the main arguments, end- ing with presenting three proposed future research ques- tions.
Chapter Summary
In this chapter, we presented a brief introduction to the field of research of which the the- sis aims to explore. In the background, it has been described that the advent of disruptive technologies is challenging for incumbent firms in any industry — as the core of their business model is challenged. Turning to ambidextrous strategies as well as strategies for business model innovation may be the solution for an effective approach to the ambigu- ous transitional phase. Incumbent manufacturing firms have recently started to explore servitization, as a way to innovate their business model. However, limited research on the process of business model innovation has been conducted. Subsequently, it is prob- lematic for scholars as well as practitioners to understand how to achieve a successful transition process moving from one business model to another. Especially, as the limited research on the topic argues for contradictory processes: a trial-and-error approach ver- sus sequential, deliberate, and well-structured actions along a linear continuum.
Based on this problematic setting, the purpose of this thesis has been deduced to explore the role of servitization in the process of business model innovation in the face of a po- tential technology shift. By addressing the purpose the thesis aims to make a theoretical contribution delimited to the functional level.
2 Literature Review
To add depth to the theory constituting the thesis, a review of previous research was con- ducted. In this chapter, we provide a recollection of findings from this review, outlining the evolution of innovation research from technology innovation towards business model innovation, the trend of servitization in the manufacturing industry, as well as research on organizational ambidexterity.
It is well known that firms may need to adjust their strategy and working process in the face of a technological shift. Scholars have for decades described how an increasing number of incumbent firms have failed to effectively address various paradigm shifts, and for this reason experience a significant loss of business (Utterback, 1994; Tidd et al., 2005; Sandstr¨om, 2010). However, firms failures have usually been described from a his- torical perspective (cf. Kodak, Xerox, and Nokia) highlighting multiple aspects of their inability to act on challenges in ambiguous surroundings. Subsequently, it is increasingly interesting to understand how incumbent firms act in the face of a new technological paradigm in order to remain successful.
Under these circumstances Teece (1986) and Chesbrough and Rosenbloom (2002) argues that technological innovation must be coupled with business model innovation to effec- tively address the challenges related to a new technological paradigm. Subsequently, scholars have identified that such arguments may encourage product-centric firms to extend their business model with new offerings constituting a relatively high degree of service content (Vandermerwe and Rada, 1988; Oliva and Kallenberg, 2003; Gebauer, Fleisch, and Friedli, 2005). Various product-centric firms thus find themselves in a tran- sitional process moving from a transactional business model towards a servitized business model (Kowalkowski, Gebauer, and Oliva, 2017; Foss and Saebi, 2017).
During the transitional phase, some scholars have recognized that firms may need to balance multiple business model initiatives simultaneously (Helander and M¨oller, 2007;
Kowalkowski, Windahl, et al., 2015). Why it has been recognized that organization must orchestrate their strategy and processes to manage ambidextrous organizations in order to maintain their competitive advantage in the business environment (Tushman and O’Reilly III, 1996; Raisch and Birkinshaw, 2008). Recent discussions on the topic have highlighted the need for a symbiotic interplay between business model innovation and technology innovation (Chesbrough, 2007; Baden-Fuller and Haefliger, 2013; Wirtz et al., 2016), sometimes referred to as double ambidexterity (Tongur and Engwall, 2014).
Consequently, in order to fully understand how an incumbent manufacturing firm act in the face of technological shift, practitioners as well as researchers need to possess knowl- edge in the above outlined research fields. Therefore, the thesis combines significant research conducted in the field of technological innovation, business model innovation, servitization, and organizational ambidexterity, see Figure 1. The amalgamation of these research avenues will contribute to the increased understanding of the process of busi-
ness model innovation initiated by an incumbent manufacturing firm in the face of a technological shift.
Figure 1: Schematic illustration of how the different research streams in the thesis relates to each other.
2.1 En Route to Business Model Innovation
For decades literature has described product and technological innovation as a key driver for value creation. On the basis of technological change, Visnjic, Van Looy, et al. (2013) refers to the arguments of Schumpeter that in 1942 stated that innovation is the pro- cess of creative destruction. Meaning, that it is the process of diminishing existing value in order to create new, superior value (Visnjic, Van Looy, et al., 2013). Following Schumpeter’s line of thought, Tushman and Anderson (1986) argued that technological innovations are either competence enhancing or competence destroying. Concluding that discontinuous innovations are competence enhancing when it adds to existing know-how without making the skills required to master the established technology obsolete. On the other hand, discontinuous innovations are competence destroying if the innovation alters the required capabilities making previous knowledge obsolete. Thus, in some cases, turn- ing the previously core competence into a core rigidity that hinders the adaptation to a new paradigm (Leonard-Barton, 1992). Competence destroying innovations are more often than not pursued by new entrants whom are unconstrained by path dependencies, whereas competence enhancing innovations are usually pursued by incumbents whose core competence is empowering success (Tushman and Anderson, 1986).
Even though, countless examples of how technological innovations have caused severe disruption across various industries can be identified. Technology innovation has also been a significant success factor for firms experiencing increased revenue streams, where a quintessential example include incumbents early success in the disk drive industry (Christensen, 1997). Christensen (1997) outline how not far from every case of sus- tained technology innovation in the industry where led by incumbents, most notably
IBM. Only a few entrants attempted to enter the market by applying new technology in their products, most of which collapsed shortly after entry. Similar cases where success- ful technology innovation has instead opened up new markets can be identified in other industries, for instance when Apple launched the iTunes and the Ipod (Johnson et al., 2008). Johnson et al. (2008) explain Apple’s success of creating a new market space in the music industry by innovative utilization of new technology — combining hardware, software, and services. An innovative combination that effectively reconfigured the un- derlying mental model of how business was conducted in the music industry.
Subsequently, disruptive innovation was initially a phenomenon closely coupled with technology innovation (Christensen, 1997). Over time, these logics have been embraced by scholars and applied on various disruptive innovations. However, despite generat- ing early success Markides (2006) argue that theories from the technological innovation domain should not be applied to business model innovation. Engaging in disruptive technological innovation is a fundamentally different endeavor from a disruptive business model innovation. These two types of innovations arise in different ways, have differ- ent competitive effects, and require different responses from incumbent firms (Markides, 2006). Evidently, the phenomenon disruptive innovation constitute theories related to both technology innovation as well as business model innovation. Though, based on the work of Zott and Amit (2007), Visnjic, Van Looy, et al. (2013) recently acknowledged that the interdependences between different types of innovation have not been explored extensively enough.
Following this line of reasoning and drawing on quintessential examples from firms like Xerox (the personal computer) (Teece, 2010), Kodak (digital photography) (Chesbrough, 2010), scholars argue that lone technology innovation is not sufficient to achieve financial success or maintain competitive advantage (Teece, 1986). Instead, Teece (1986) and Chesbrough and Rosenbloom (2002) argues that in order to achieve successful product development, technological innovation should be accompanied by the development of the firm’s business model. However, these scholars argue from the perspective of a static business model, where firms see the concept as a blueprint to enable technological innovation. Conversely, Zott and Amit (2007) and Teece (2010) argue that the business model concept is to be considered a subject potentially receptive to innovation and change.
2.1.1 The Business Model Concept
There is a stream of research that has coupled the business model concept with firms’
challenge to manage disruptive technological change (see Markides, 2006; Christensen, 2006; Chesbrough, 2010; Tongur and Engwall, 2014). Highlighting that a pioneering business model is the backbone of any competitive business as it allows the firm to turn technological potential into economical realization (Chesbrough and Rosenbloom, 2002;
Baden-Fuller and Haefliger, 2013). Effectively, the business model terminology has been widely discussed, often interchangeably with the firm’s strategy (Porter and Gibbs, 2001;
Magretta, 2002).
Magretta (2002) argued that even though the concepts are closely connected, there is a clear distinction between the two; the business model describes how the components of the business fit together, whilst the firm’s strategy includes how the firm differentiate from its competitors. Using examples from the supermarket store Wal-Mart and the computer manufacturer Dell Magretta (2002) describe the difference. Wal-Mart used a mature business model (low budget retail) and targeted a new geographical market — far from its competitors — to achieve competitive advantage. Whereas Dell altered its business model and targeted customer through direct interaction, allowing for a signifi- cant reduction of supply chain costs contributing to an increased competitive advantage.
These cases provide an eloquent example of Zott and Amit (2008)’s findings that there is a close interrelation between a firm’s strategy and business model, arguing that they should be considered complements to each other.
However, Porter and Gibbs (2001) and Shafer et al. (2005) have instead criticized the business model for misguiding managers into financial failure. They argue that the business model concept provides an all too vague representation of how business is con- ducted — resulting in what Porter and Gibbs (2001) described as ”faulty thinking and self-delusion”. Despite such criticism, scholars have argued that the business model’s key impact on firms performance if managed accordingly (Weill et al., 2005; Zott and Amit, 2008), stressing its importance as a management guiding practice (Demil and Lecocq, 2010; Zott, Amit, and Massa, 2011; Wirtz et al., 2016). Arguing, that it may be used to evaluate each individual components as well as utilizing it as an abstraction to be able to draw more general conclusions (Demil and Lecocq, 2010).
For these reasons scholars have developed frameworks and debated what elements to include when discussing the business model (Birkinshaw and Ansari, 2015; Massa et al., 2016). Wirtz et al. (2016) and Massa et al. (2016) highlight that scholars tend to have a distinctly different interpretation of the phenomenon. Subsequently, leaving the business model concept ambiguous and vaguely used, making it difficult to draw general conclusions (Massa et al., 2016; Wirtz et al., 2016). In this debate, perhaps the most recognized conceptualization of the business model may be the nine elements in the Business Model Canvas outlined by Osterwalder et al. (2004). In contrast, others have followed an aggregated notation of the concept referring to value proposition, revenue model, and cost model (Teece, 2017). Though a more common definition has been used continuously by several scholars, recognizing three elements as key to the business model concept: value proposition, value creation, and value capture (Chesbrough and Rosenbloom, 2002; Tongur and Engwall, 2014; Birkinshaw and Ansari, 2015; Foss and Saebi, 2017). These concepts have been described as follows (cf. Chesbrough and Rosenbloom, 2002; Tongur and Engwall, 2014; Birkinshaw and Ansari, 2015; Foss and Saebi, 2017): the value proposition is the backbone of the business model. It defines the firm’s offering to the market to fulfill customers’ demands in a competitive way. Value creation describes the supporting processes, resources, structures and actions to carry out the development or deployment of value. Finally, value capture outlines how value is retained from the market, the profit formula.
2.1.2 Business Model Innovation
In an extensive literature review Foss and Saebi (2017) traced the discussion on busi- ness model innovation to the work of Mitchell and Coles (2003) expressing the idea that managers purposefully innovate the business model to achieve competitive advantage.
Zott and Amit (2007) stated that business model innovation represents a transformation the components of the firm’s business model i.e. the value proposition, value creation and value capture. Further, Zott and Amit (2007) argued that extensive value can be accessed by innovating each individual component rather than to solely focus on product innovation.
Arguably, researchers have started to recognize the role business model innovation em- bodies in order to unlock new value in industries under severe pressure from technological change (Desyllas and Sako, 2013; Visnjic, Van Looy, et al., 2013). For instance, Xerox transition to a pay-per-copy business model serves as an exquisite example of how busi- ness model innovation has had a positive impact on the firm’s success (Chesbrough and Rosenbloom, 2002). Additional notable examples where business model innovation have been enabling factor to achieve greater financial success include firms such as Amazon and Southwest Airlines (Markides, 2006). Markides (2006) argued that is important to acknowledge that business model innovation does not explicitly entail that firms discover new products or services, instead they redefine what an existing product or service is or how it is provided to customers. Thus, Amazon did not discover that selling books was a profitable strategy, they rather redefined how the customer perceives the service by altering how the service was provided to customers. Consequently, business model innovation has been identified as a driver for competitive advantage in times of uncer- tainty (Chesbrough, 2010; Desyllas and Sako, 2013).
Business model scholars have recognized that many of the incumbents collapsing in the aftermath of technological disruption, ironically, often were in possession of the new technology (Chesbrough and Rosenbloom, 2002). Instead, what brought about their downfall was that they were unable to successfully innovate their business model to cap- ture value from the technology. The aforementioned struggles of Xerox and Kodak in the advent of a new technological paradigm may also serve as eloquent illustrations of how leading incumbents historically have failed to adapt their business model to new in- dustry dynamics (Christensen, 1997). Given the different and conflicting requirements, a new business model brings Markides (2006) argues it should come as no surprise that incumbent firms, initially, have little or no obvious incentive to change. However, an increasing number of scholars have expressed the need for practitioners to engage in business model innovation to address environmental disruptions (Mitchell and Coles, 2003; Teece, 2010; Sandstr¨om, 2010; Baden-Fuller and Haefliger, 2013).
In this process, researchers have expressed the need for organizations to develop patterns for experimental learning in order to foster an iterative relationship with its environment (Chesbrough and Rosenbloom, 2002; Sosna et al., 2010; Foss and Saebi, 2017). Both Chesbrough (2010) and Sosna et al. (2010) makes compelling cases arguing that compa-
nies must experiment with multiple business models knowing that some must to fail for others to succeed. Notably, as highlighted in these cases, failure is a natural process of experimentation as it provides a new set of knowledge and experiences — summarized in a statement by Sosna et al. (2010) ”organizations learn by doing”. Drawing on these arguments, researchers of late have outlined successful business model exploration may be a necessity for firms in order to prosper in a new market space, or under a new technological paradigm (Tongur and Engwall, 2014; Kaulio et al., 2017). Further proof is presented by Sosna et al. (2010), who identified a trial-and-error approach to business model innovation as one of the main factors to successful international growth for a small dietary company.
Albeit prominent scholars have outlined compelling arguments for what may be described as a trial-and-error process of business model innovation (Magretta, 2002; Sosna et al., 2010), a limited stream of researchers have observed how firms operate during the process of business model innovation (Foss and Saebi, 2017; Hossain, 2017). Classical examples include the transformation of IBM and Dell, whereas some modern investigations cover TeliaSonera (Kaulio et al., 2017) and Naturehouse Sosna et al. (2010). Despite these examples, the phenomenon has received an insufficient amount of attention in the face of a technology shift. Consequently, additional empirical evidence is required to fully embrace the complexity of business model innovation.
2.2 Servitization of the Manufacturing Industry
Over the past decades, the value adding activities in the manufacturing sectors have drifted downstream in the value chain, from production and R&D closer towards the cus- tomer by being more service-oriented (Wise and Baumgartner, 1999; Jovanovic, 2018).
Wise and Baumgartner (1999) identified that even though a significant portion of the manufacturing sector has declined in the US over the past decades, the service sector has experienced a significant increase, from 16% to 40% of the gross domestic product.
The shift from product to service has often been seen as a strategic move to achieve competitive advantage and capture higher profit margins (Teece, 1986; Vandermerwe and Rada, 1988). For instance, the elevator manufacturer KONE enjoy a 25% - 30%
profit margin on their after-sales services in comparison to 10% on sales of new prod- ucts (Kowalkowski, Gebauer, and Oliva, 2017). Another profitable example is Xerox’s per-per-use model, teetering on the brink of bankruptcy, Xerox successfully transformed their business model towards service contracts — in 2013 accounting for over 84% of their annual revenue (Brax and Visintin, 2017).
Many of the initial firms to realize the potential of services were manufacturing compa- nies, similar to KONE and Xerox, providing complex engineering products for capital equipment products with a high installed base (Wise and Baumgartner, 1999; Davies et al., 2007; Storbacka, 2011) — often referred to as the installed base argument (Neely, 2008). Meaning, products that have a long product life-cycle in a mature market space have been suggested to be particularly attractive for service contracts (Cusumano et al., 2015), as they provide a stable inflow of additional revenue (Oliva and Kallenberg, 2003).
Thus, for each unit sold there is a significantly greater amount already in operations e.g.
for each civil aircraft sold there are already 15 in operations (Wise and Baumgartner, 1999); for escalators and elevators that ratio is 1 to 19 (Kowalkowski, Gebauer, and Oliva, 2017). These are characteristics that have been used to link service contracts to vertical integration (Schmenner, 2009).
In academia, a trend that in colloquial terms often is referred to as servitization (Van- dermerwe and Rada, 1988), though a significant portion of scholars use adjacent terms such as: product-service systems (Tukker, 2004), system or solution selling (Davies et al., 2007) and service infusion (Kowalkowski, Gebauer, and Oliva, 2017). Common for all these terminologies is that they refer to a business model centered around service propo- sitions (Rabetino, Harmsen, et al., 2018). Vandermerwe and Rada (1988) described services offerings as a strategy not just intended to enhance the value of the product, but rather create new superior value through services, and as a consequence reduces the value of the product itself (Oliva and Kallenberg, 2003). Consequently, it has been suggested that a service-centric offering changes core elements in the firm’s current busi- ness model i.e how value is proposed, created, and captured (Visnjic, Van Looy, et al., 2013; Kindstr¨om and Kowalkowski, 2015; Brax and Visintin, 2017; Eggert et al., 2018;
Jovanovic, 2018).
2.2.1 The Defining Features of a Servitized Business Model
Recent efforts have seen a research stream describing servitization from a business model perspective emerged. Defining the value attributes in a service based business model
— or servitized business model — related to value creation, value capturing, and value proposition (Baines and W. Lightfoot, 2013; Kindstr¨om and Kowalkowski, 2015; Fork- mann et al., 2017; Jovanovic, 2018).
Firstly, in traditional product manufacturing firms value is created and transferred into the product to then be communicated and delivered to the customer, described as value- in-exchange (Eggert et al., 2018). In this view, the customer is considered a mere passive recipient of value. Conversely, a service provider rather co-create value together with the customer as it is being delivered (Kindstr¨om and Kowalkowski, 2015). The service sup- plier can choose to either create value by a greater emphasis on customer relationship to enhance the customer experience or expand the value creation to value-in-use, allowing the outcome to be shared between supplier and customer (Kindstr¨om and Kowalkowski, 2015; Eggert et al., 2018). Consequently, Gebauer, Fleisch, and Friedli (2005) and Ulaga and Reinartz (2011) argues that core capabilities in this domain may increase customer-centricity, customer intimacy, and customer engagement. Effectively, firms tend to become more front-end oriented as they increase their service orientation in con- trast to the traditional back-end product orientation for value creation.
Secondly, scholars have recognized that the transition into services requires a different value capturing strategy, a transition in its own moving from transactional to relation- ship based (Ulaga and Reinartz, 2011; Eggert et al., 2018). Traditionally product and
basic service (spare parts) have been priced based on a markup of the cost structure, then sold through a single transaction (Oliva and Kallenberg, 2003). Oliva and Kallenberg (2003) outlines as service suppliers expand their offering to include repair and main- tenance contracts, the pricing strategy shifts towards long-term contracts with a fixed price. Additionally a service provider may include a premium as a mean to compensate for the increased risk (Nordin and Kowalkowski, 2010). Furthermore when a firm com- mit to advance services offerings, scholars subsequently suggest they need to adopt the utmost form of relationship based selling, referred to as value based selling (Storbacka, 2011; Liinamaa et al., 2016). A pricing strategy originating from the idea that the price is based on the added value generated from the outcome of the delivered solution (Ng et al., 2010). Findings from Liinamaa et al.’s (2016) work indicate a major success factor to value based selling is to utilize different earning models, customized in accordance to the added value.
Thirdly, anchored in the value proposition scholars have identified three distinct cat- egories to define services (Ulaga and Reinartz, 2011; Baines and W. Lightfoot, 2013;
Coreynen et al., 2017): product-oriented services (basic services), user-oriented services (intermediate services), and results-oriented services (advanced services). Ulaga and Reinartz (2011) described the basic services to be add-on services aimed at increasing the value of the physical product, traded in a transactional way e.g. spare parts, user training, installation, warranty, upgrades (Goffin and New, 2001). The intermediate services are intended to support the product and extend its life-cycle i.e. in terms of maintenance contracts (Baines and W. Lightfoot, 2013). These services are usually connected to high install-based machinery to ensure its functionality throughout its life- cycle (Ulaga and Reinartz, 2011). The intermediate value proposition is often targeted at industries where actors are constantly aiming for a low total cost of ownership or life cycle cost to achieve competitive advantages (Rabetino, Kohtam¨aki, et al., 2015;
Kambanou and Lindahl, 2016).
The most advanced services are directed towards the customer process and achieved result (Mathieu, 2001; Hou and Neely, 2017), this is a research area that have been a popular topic of among marketing research of late (cf. Kindstr¨om, 2010; Ng et al., 2010;
Visnjic, Van Looy, et al., 2013; Baines and W. Lightfoot, 2013; Visnjic, Jovanovic, et al., 2017; Hou and Neely, 2017). These offerings have sometimes also been referred to as ser- vice level agreements (SLA), outcome based contracts (OBC) (Ng et al., 2010), solutions or system providers (Helander and M¨oller, 2007). Hou and Neely (2017) defines three key elements for advanced services contracts; (1) customized value is delivered instead of single components, (2) the service is charged for based on delivered value, and (3) the relationship between supplier and customer should be relation based. Kohtam¨aki and Helo (2015) recognize the advanced service contracts often target industries where the customer’s process or production downtime are highly critical aspects e.g. mining, forestry, paper and pulp industry.
Classical example of an advanced service offering include Rolls Royce’s Power-by-the- hour contract from the 1960s (Rolls Royce, 2012; Hou and Neely, 2017). In the contract,
Rolls Royce guaranteed the performance of their engines by including any maintenance service, repair, support service, or render activity connected to the engine. Subsequently, charging the customer based on how many hours the engine produced power (Ng et al., 2010). An additional example is provided by Kowalkowski, Windahl, et al. (2015), de- scribing the business model of a mining company. They identified how some customers valued productivity more than operational cost. Therefore, the company extended their availability service to also include performance in their contracts, in terms of pay-by-ton delivered, guaranteeing uptime and results. Similar examples of advanced services can be drawn from Michelin with pay-per-kilometer, Electrolux with pay-per-wash, and the aforementioned Xerox with pay-per-copy (Kowalkowski, Gebauer, Kamp, et al., 2017).
2.2.2 Drivers for Servitization
Scholars have over the years discussed the underlying drivers why product-centric firms have been attracted by servitization. The discussion originated from having the firm as a focal point — which the majority of the research streams have been focused on — to later also consider concerns for sustainability and technological advancement as reasons for why firms enter the servitization field.
Through a comprehensive review of the literature Baines, Lightfoot, Benedettini, et al. (2009) identified three major strategical drivers connected to the individual firm;
(1) competitive advantage, (2) revenue opportunities, and (3) marketing opportunities.
Firstly, in early literature Vandermerwe and Rada (1988) argued that firms mainly adopt servitization to achieve competitive advantage, creating a lock-in effect and increased level of differentiation. Both Oliva and Kallenberg (2003) and Gebauer, Fleisch, and Friedli (2005) argued that the intangible capabilities of the service elements, the embed- ded knowledge, and customer relationship, makes the business model hard to imitate — contributing to sustainable differentiation. Scholars have argued that these aspects may be of significant importance when firms find it increasingly difficult to differentiate based on product innovation, technological superiority, lower margins, and thus face the risk of commoditization (Mathieu, 2001; Oliva and Kallenberg, 2003; Gebauer and Fleisch, 2007).
Secondly, a trend that is often mentioned in the literature is the strive for enhanced prof- itability through an additional revenue stream (Wise and Baumgartner, 1999; Mathieu, 2001; Gebauer, Fleisch, and Friedli, 2005; Baines, Lightfoot, Benedettini, et al., 2009).
Scholars argued that downstream services can create a steady source of revenue as it does not follow the same economic cycles as ordinary products (Wise and Baumgartner, 1999; Oliva and Kallenberg, 2003; Gebauer and Fleisch, 2007). Wise and Baumgartner (1999) argued that services have the potential to add more than 10 times the revenue than transactional sales with almost no additional costs, making it a highly profitable business.
Thirdly, product-oriented firms have for decades used services as a way to increase the
value proposition to market products (Baines, Lightfoot, Benedettini, et al., 2009). On the contrary, service-oriented firms have extended this view to revise the marketing op- portunity, meaning ”better services for selling more products” (Gebauer, Fleisch, and Friedli, 2005). Through long-lasting contracts, services have thus been seen as a way to encourage customer loyalty, making the customer dependent on the service supplier (Wise and Baumgartner, 1999; Mathieu, 2001). Subsequently, encouraging repeated sales or influencing the purchase decision.
In contrast to the above mentioned firm-specific drivers, other scholars have discussed servitization as a necessity for firms to meet increasing sustainability demands (Tukker, 2004; Gaiardelli et al., 2014). Tukker (2004) argued that since servitization encourages customers to repair instead of purchasing a new products, it can come to reduce the environmental impact throughout the product life-cycle. Even though a few scholars have recognized that increased level of service infusion can result in a less sustainable utilization of material (Lockett et al., 2011), most have argued in accordance to Tukker (2004) that it enables a more efficient use of resources (Gaiardelli et al., 2014; Pigosso and McAloone, 2016). An industry that is aiming to leverage the potential environ- mental benefits of a servitized business model is the automotive industry for personal transport (Gaiardelli et al., 2014). Through various types of leasing contracts and car- pools, automotive manufacturers have started to explore new business models where the aim is to enable a more efficient use of the car, arguing for a less environmental impact.
A growing stream of literature has started to discuss the relevance of technological ad- vancement of information communication technology (ICT) as an enabler to develop servitized business models (Chesbrough and Spohrer, 2006; Kowalkowski, Gebauer, and Oliva, 2017). Contemporary researchers have discussed how ICT has fostered new forms of business models, where connected products create increased service opportunities (Porter and Heppelmann, 2014; Coreynen et al., 2017; Kowalkowski, Gebauer, and Oliva, 2017). Porter and Heppelmann (2014) highlights how ICT enables the firm to collect data about the usage of the product, making it possible to customize the value proposition based on the customer’s requirement. The authors exemplified this by de- scribing the reconfiguration John Deer’s business model, from tractor manufacturing to agricultural related services. By the utilizing ICT, John Deer was able to bypass the risk of product commoditization to instead open up a service for analyzing data, suitable for farming operations e.g. seed quality, water irrigation, and soil quality. Kindstr¨om (2010) and Kowalkowski, Windahl, et al. (2015) argues that a challenge for traditional product-centric firms in such transition is to have the value proposition and value cap- turing as its focal point when developing the business model, instead of the traditional product innovation.
Despite the aforementioned arguments for adopting a servitized business model, there are notable examples of firms that have failed to capture the potential of services. Gebauer, Fleisch, and Friedli (2005) coined the terminology Servitization Paradox to describe the phenomena when the bundling of services fails to be operationalized in a successful way and instead leads to financial decline. For instance, D¨urr, a German manufacturer of
finish painting systems for the automotive industry was one of the first to introduce a pay-per-use service (Fischer et al., 2010). However, Fischer et al. (2010) highlight that D¨urr failed to estimate the operation cost, which effectively drove them out of business.
More recent examples can be drawn from the IT-sector were both Siemens’s and Intel’s hundred million dollar investment in web-based service units were shut down only after a few years (Benedettini et al., 2015). Arguably, researchers have concluded the transition from a product to services is far from easy (Gebauer, Fleisch, and Friedli, 2005; Neely, 2008; Baines, Ziaee Bigdeli, et al., 2017).
2.2.3 The Transition Towards a Servitized Business Model
As discussed in previous sections, since Vandermerwe and Rada (1988) first argued that servitization holds the potential to increased revenue growth, manufacturing firms have realized that they can no longer differentiate from its competitors by just only offering excellent products, traditional after-sales services, and financial solutions (Kowalkowski, Witell, et al., 2013). The majority of previous servitization research has thus described the successes experienced by manufacturing firms extending their service offerings to become full-scale service providers (Gebauer, Paiola, et al., 2013; L¨utjen et al., 2017).
Though these studies have brought light to variables of the transition process, few have actually put emphasis on how the transition occurs as firms turn to servitization looking for success (Martinez, Neely, et al., 2017). Interestingly, both scholars and practitioners early emphasized the importance to understand the opportunities and the difficulties associated with transitioning from a product-centric business to a service-centric busi- ness (Gebauer, Fleisch, and Friedli, 2005; Brax, 2005). Yet, studies highlighting how firms act and undertake the transitional phase — as part of the servitization strategy
— remains scarce (Baines, Ziaee Bigdeli, et al., 2017). Surprisingly, when considering the number of firms that struggle to provide extensive service offering (Neely, 2008;
Benedettini et al., 2015).
Most previous research describing the transformation when firms move to infuse their value proposition with a greater level of services have been based on the underlying assumption introduced by Oliva and Kallenberg (2003). At its core, the service tran- sition — as established in Oliva and Kallenberg’s (2003) pioneering article — assumes that firms undertake a deliberate and sequential repositioning along a product-service continuum. Transitioning from basic, product-centric services towards more customized, process-centric service, to ultimately provide complete solutions, see Figure 2. As a re- sult of these assumptions, the further firms move along the product-service continuum, the relative importance of services increase and the importance of tangible products decreases (Matthyssens and Vandenbempt, 2010). Implying, that the nature of the de- velopment process does not stay homogeneous along the transition (Visnjic, Van Looy, et al., 2013). From a business model perspective, this entails that the transition towards servitization starts in a product-centric business model e.g. spare part offerings, then expand with the inclusion of product-related services e.g. maintenance contracts. To finally, facilitate a full transition into a customer-centric business model adding more and more result-oriented service offerings to improve customer operations.
