Department of Informatics
Degree Project in Informatics
Master Level, Specialization in Digital Business Development
Product digitalization from the
perspective of an established
manufacturing firm
Author: Adam Tomas
Supervisor: Niclas Eberhagen Examiner: Jan Aidemark Date: 2021-06-16
Subject: Information Systems/Digital Business
Development
Level: Master
Abstract
This thesis set out to investigate what motivates an established manufacturing firm to add smart and connectivity features into its products and what considerations are made when doing so. Such a firm was used as a case study object, a firm that is considering digitalization in one of its product areas but has not yet finalized the strategy on how to move forward. The qualitative study was made using semi-structured interviews which included mostly respondents from this organization, but also respondents representing the customers as small company entrepreneurs.
A literature study was conducted to better define the subject of product digitalization. Previous research on smart and connected products as well as related business and market theories were identified as relevant, as well as literature on digital transformation. Based on the literature study, a theoretical framework was formulated in the form of an iterative model on product digitalization, where the business and market mechanics are included.
A qualitative case study was then conducted in the form of semi-structured interviews, with topics considered relevant based on the literature study. The empirical data shows many similarities compared to the current literature on the topic. The literature study has identified these aspects as relevant to be considered by an established manufacturing firm and compared them with the case study firm:
• Digital vision – with clear intent and outcome for both the business and the customer • Customer intimacy – services related to smart and connected products will increase
the intimacy to the end customer
• Business model – product sales business model will be transformed by servitization • Technology content – smart and connected products need integration of new
technologies, such as hardware, software and data management
Acknowledgments
It has been a great privilege to be able to make an in-depth study into a subject that is super interesting to me, and to put other things temporary aside to do so. I have been repeatedly introduced to new information, insights, and doubt during the process of writing this thesis. Products, the stuff we surround ourselves with, in abundance; useless, useful, helpful, and necessary. No matter what it is, these products are affecting our behavior, thinking and priorities, which fascinates me. When they transform, we transform. When they become smart, what happens to us?
I would like to express my gratitude to the case study firm, its employees, and customers for participating in the study. The interviews and discussion have given me great joy and new insights, proving I am not alone in contemplating on these topics.
Thank you to my supervisor Niclas Eberhagen for giving me help, guidance and encouragement during all the steps of writing the thesis.
Table of Contents
1 Introduction ________________________________________________________ 5 1.1 Introduction and Research Setting ________________________________________ 5 1.2 Previous studies _______________________________________________________ 6 1.3 Purpose Statement and Research Questions ________________________________ 7 1.4 Topic justification ______________________________________________________ 8 1.5 Target audience _______________________________________________________ 8 1.6 Thesis organization ____________________________________________________ 9 2 Review of the literature ______________________________________________ 10 2.1 Smart and connected products __________________________________________ 10
2.1.1 The new technology stack ____________________________________________________ 12
2.2 Digital transformation _________________________________________________ 12 2.3 Business aspects of product digitalization _________________________________ 15 2.4 Resource-based view of the firm theory ___________________________________ 17 2.5 Competitive strategy theory ____________________________________________ 17 2.6 Technology acceptance model (TAM) _____________________________________ 18 2.7 Summary and model __________________________________________________ 20 3 Methodology ______________________________________________________ 22 3.1 Research method _____________________________________________________ 22 3.2 Research setting and participants ________________________________________ 23 3.3 Method for Data collection _____________________________________________ 23
3.3.1 Sampling group ____________________________________________________________ 23
3.3.2 Interview questions _________________________________________________________ 24
3.4 Method for Data Analysis ______________________________________________ 24 3.5 Validity and reliability _________________________________________________ 25 3.6 Ethical considerations _________________________________________________ 25 4 Empirical findings __________________________________________________ 27 4.1 Digital capability ______________________________________________________ 28 4.1.1 Technical abilities ___________________________________________________________ 28 4.1.2 Customer integrity __________________________________________________________ 29 4.1.3 Data analytics ______________________________________________________________ 29 4.1.4 Technical challenges ________________________________________________________ 30 4.1.5 Data security ______________________________________________________________ 30
4.2 Business and market __________________________________________________ 31
4.2.1 Motivation for digitalization __________________________________________________ 31
4.2.2 Servitization _______________________________________________________________ 32
4.2.3 Sales model and channels ____________________________________________________ 33
4.2.4 Financial risks ______________________________________________________________ 33
4.2.5 Market position ____________________________________________________________ 34
4.2.6 Summary of business and market aspects _______________________________________ 34
4.3 Leadership and organization ____________________________________________ 35
4.3.1 Organizational integration and coordination _____________________________________ 35
4.3.2 Digital vision _______________________________________________________________ 36
4.3.3 Organizational risks _________________________________________________________ 36
4.3.4 Summary of leadership and organization ________________________________________ 36
4.4 Technology acceptance and features _____________________________________ 37
4.4.1 Technology acceptance ______________________________________________________ 37
4.4.2 Specific features ____________________________________________________________ 38
4.4.3 Summary on technology acceptance ___________________________________________ 39
5 Analysis and discussion ______________________________________________ 40 5.1 Digital capability ______________________________________________________ 40 5.2 Business and market __________________________________________________ 42 5.3 Leadership and organization ____________________________________________ 43 5.4 Technology acceptance ________________________________________________ 44 5.5 Results discussion _____________________________________________________ 44 5.6 Method discussion ____________________________________________________ 45 6 Conclusion ________________________________________________________ 47 6.1 Future research ______________________________________________________ 47 7 References ________________________________________________________ 49 Appendix A - Informed consent form _______________________________________ 52 Appendix B – Interview Questions _________________________________________ 53
Appendices
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1 Introduction
1.1 Introduction and Research Setting
When mentioning digital business development, what comes to mind is usually organizations and firms that are born digital. These are the Googles and Facebooks, that have a significant virtual presence and a digital DNA.
But for most established firms, especially those with a significant physical presence, there is a need to transform and increase their digital presence. They have factories, distribution networks, aftermarket responsibilities and their sales result are calculated from number of products sold. These firms watch the steady trend of digitalization and must choose when and where to include digital technologies into their business and their products.
The trigger for decisions like this might be different. Maybe the competition starts offering novel products or services. Maybe new actors show up in the marketplace starts competing with you, your customers, or your sales network. Or the impulse originates from ideas about how the offer to the customer can be improved using digital technology. Ideas might be plentiful, but the challenges to implement them costly, or even seem insurmountable. And can these costs be motivated?
Organizations that have been able to implement successful digital strategies were 26% more profitable than their competition (Westerman, Bonnet & McAfee, 2014). But the profits might not be the main motivator for digital transformation. Data from Standard & Poor shows that opposite to the increase in expected life span in humans, the expected life span of current S&P500 companies are declining (Desmet, Duncan, Scanlan & Singer, 2015). And it’s by a lot. Companies on the list in 1958 are expected to survive an average of 61 years, while companies listed 2011 are expected to survive an average of 18 years. Today, three quarters of them will be gone within ten years (Loonam, Eaves, Kumar, & Parry, 2018).
Product digitalization is an on-going trend that is moving from one product area to the next. Digitalization of products can be defined as making products smart and connected (Porter & Heppelmann, 2014). Smart and connected products have IT embedded in the product itself and gives the product the ability to collect, communicate, process and produce information (Zheng, Wang, Chen & Khoo, 2019).
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The automotive industry is a good example of this evolutionary process. Having evolved from purely mechanical product the early stages of transitioning into a smart product was through control systems for dedicated systems, such as engine control, anti-lock brakes and transmission control. The first step towards connectivity was a MtM-interface (machine to machine) for diagnostics. For the consumer, the ability to connect the smartphone was moving from exclusive to expected within a few years. The transition is on-going, and advances are being made within driver assistance, connectivity services, over the air updates and vehicle electrification is forcing hydraulic powered systems to be electromechanically actuated.
To investigate how an established company takes on the challenge of product digitalization, the focus area of this thesis is a business unit within a Swedish power equipment firm. This business area is one that is considering a digital transformation through product digitalization. The products are within the area of handheld power equipment and are offered both as petrol powered versions as well as electric powered ones. The business unit can currently be described as having a traditional product-oriented business model, where product sales is the main source of revenue. As part of an overall long-term plan within the firm of becoming a solution-provider instead of a product provider, the goal is to enable a service-oriented business model for the products within the business unit. The motivation for this is a part of an on-going trend towards circular economy to proactively address sustainability and meet environmental and social objectives.
Although the product group that is considered has a mechanical background, the transition from a pure mechanical product to a smart and connected one have already begun in some way. Driven by innovation, efficiency and in some part component cost, the petrol-powered variants already contain sensors and microprocessors for engine control. The electric powered versions obviously have smart systems for battery and motor control. Now, the roadmap for this product going forward is being made with digitalization and servitization in mind.
1.2 Previous studies
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McAfee, 2014). This research captures the mechanics of the transformation and offers some guidance into the dos and don’ts. In the case of Westerman, Bonnet and McAfee (2014) this is done by surveying many companies from many industries that have made some kind of digital transformation.
Even though it is highly relevant to know what capabilities are needed within the company (Porter & Heppelmann, 2013) and what characteristics other companies have that have made a successful digital transformation (Westerman, Bonnet and McAfee 2014), there are other things that must be considered before even getting started. Such as the fact that digital features might cause the customers to reject new features enabled by digital technology, so research within technology resistance is relevant (Mani & Chouk, 2017). And in order to choose among all the technological possibilities and deciding what must be considered in order for customers to accept the digital version of the product, research within technology acceptance is helpful (Davis 1986, 1989; Caine et al 2006).
1.3 Purpose Statement and Research Questions
In order to know what must be considered by an established manufacturing firm when digitalizing one or all of its products, it’s not really sufficient to study successful examples in retrospect. This thesis aims at clarifying what an established manufacturing firm is considering a product digitalization strategy. The business area within the firm has an intention to digitalize and enable servitization of a product group used mostly by professionals and entrepreneurs within green space.
This case study aims at exploring the considerations and workings within an existing firm considering product digitalization within one of its product areas. In finding out what motivates them to do this and what is seen as challenges and opportunities, this research can be of interest for future research within the field of digital transformation through product digitalization.
The research questions are formulated as:
RQ1: What aspects are considered by an established product manufacturing firm when considering product digitalization?
RQ2: What is the main motivation for an established product manufacturing firm for considering product digitalization?
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1.4 Topic justification
Product digitalization plays an important role and offers opportunities in terms of functionality, increase in reliability and much higher product utilization (Porter & Heppelmann, 2014). Even though smart and connected products offer possibilities for additional revenue and servitization, traditional and incumbent product-based businesses need to evaluate the possible benefits from this.
This thesis is based on a product area within green space and is considered one of the market leaders in its field. It is in the interest of the firm to get an overview on the current state of knowledge regarding product digitalization. From an academic point of view, it is relevant to know what an incumbent form such as this are considering to be the most important aspects when considering product digitalization. The view of an incumbent firm within the manufacturing industry is especially relevant since:
• Incumbent manufacturing firms tend to score low when it comes to digital capabilities as well as leadership capabilities (Westerman, Bonnet & McAfee, 2014).
• The trend of product digitalization and servitization will put incumbent firms in many industries in the same position.
Previous studies tend to look at successful or unsuccessful examples of digital transformation, and score them into categories (Westerman, Bonnet & McAfee, 2014). Studies into smart and connected products is highly relevant but tend to also investigate successful digitalization of products for specific industries. Due to differences in competition, product attributes and customer behavior and relationship between industries, it might be hard to find guidance in theory or examples based on unfamiliar industries. This study attempts to bring a better understanding on what an established manufacturing company might be taking into account when considering product digitalization, and what aspects are considered most important. Identification of key aspects contributing to successful product digitalization via a literature review in order to guide the qualitative study. using these key aspects on a specific organization and gauge the considerations and actions of this firm. By analyzing the viewpoints of an established manufacturing firm with the perspective of current literature, the results can be used to guide future research in the field of digital transformation and product digitalization
1.5 Target audience
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1.6 Thesis organization
This thesis document contains six chapters. Starting with an introduction to the topic, some background to the problems and two more specific research questions. Added to this is the scope and limitations chapter and this chapter describing how the report is organized. The second chapter contains the literature study. The ambition is to describe the current state of knowledge. Relevant theoretical models are listed here and their relevance to the research questions are discussed.
In the third chapter, the method is developed and discussed. Specifics surrounding the methods used is included here, such as data gathering methods and analysis. The findings from the analyses are then presented in chapter four.
Any results from the analysis are then presented in chapter five while chapter six offers summarized conclusions and recommendations for future research.
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2 Review of the literature
This chapter introduces the literature related to the topic of product digitalization and digital transformation. Since this thesis is focused on a specific organization considering a digital transformation of its products, the literature must be relevant to an established organization considering product digitalization through transformation. Previous research on smart and connected products, digital transformation, servitization, and technology acceptance are included. In addition, relevant theories related to business and competitive strategy are added.
2.1 Smart and connected products
Digitalization of products can be defined as making products smart and connected (Porter & Heppelmann, 2014). Smart and connected products have IT embedded in the product itself and gives the product the ability to collect, communicate, process and produce information (Zheng, Wang, Chen & Khoo, 2019). Miniaturization and energy efficiency makes low-cost processing, data storage and communication possible (Porter & Heppelmann, 2014) which motivates and enables introduction into new product areas. There are also breakthroughs in technologies not directly related to the products, such as tools for software development and data analytics that help shortening development cycles and benefit from the collected data. This enables increase in functionality, greater reliability, and higher product utilization (Porter & Heppelmann, 2014).
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connecting the product to a product system. This might involve peripheral products or services. In step five, the product system is then connected to other external systems. As example, this might be business related systems, after market or maintenance systems (Porter & Heppelmann, 2014). This “system of systems” can include external systems as well, such as service eco-systems or public systems. An illustration of these steps can be seen in Figure 2.
The later steps in the evolutionary process described by Porter and Heppelmann (2014) resembles what in recent literature is described as smart product-service systems (Zheng et al, 2019; Chowdhury, Haftor & Pashkevich, 2018). Such a smart PSS is characterized by the interactions between smart technologies, physical products, services and business models (Chowdhury, Haftor & Pashkevich, 2018).
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2.1.1 The new technology stack
Smart and connected products require a wide range of technologies and competences in order to utilize the potential. Porter and Heppelmann (2014) are using “the new technology stack” to give an overview of this, see Figure 3.
Figure 3. The new technology stack, based on Porter and Heppelmann (2014).
Looking at the “product” section of the technology stack, we see the must-haves when considering the product itself, hardware, and software (Porter and Heppelmann 2014). Early strategic design decisions regarding user interface and embedded operating systems might be necessary. According to Porter and Heppelmann (2014) the most successful firms use a combination of both. Internalizing key skills and infrastructure means greater control and might improve a competitive advantage at the cost of a steeper learning curve. As a general recommendation, most companies should maintain device design, user interface, systems engineering, data analytics and application development in-house (Porter & Heppelmann, 2014).
2.2 Digital transformation
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organization eventually (Porter & Heppelmann, 2015). Traditional, mechanical born products require mainly mechanical and electrical engineering, while smart and connected products will require interdisciplinary systems engineering. According to Porter and Heppelmann (2015) it is not unlikely that the research and development organization will shift from a majority of mechanical engineers to a majority of software engineers. This increase in internal collaboration is termed boundary spanner by Chowdhury, Haftor and Pashkevich, 2018. This include richer inter-organizational knowledge flow and new knowledge sharing practices that is typically followed by challenges and that little is known how to overcome them (Chowdhury, Haftor & Pashkevich, 2018). The friction created in digital transformation in manufacturing companies is described by Bilgeri, Wortmann & Fleisch, (2017) as the challenges related to integrating the physical world with the digital world. In transformation of large manufacturing companies, Bilgeri, Wortmann and Fleisch (2017) have identified a number of specific organizational issues related to digital transformation which are related to new functions added, a change in IT functions, culture and leadership, and necessary partnerships.
The organizational transformation is also likely to be more evolutionary than a rapid transition. Examples from manufacturers of aircraft, medical equipment and agricultural equipment shows that smart and connected products will co-exist with traditional counterparts for an extended period of time (Porter & Heppelmann, 2015). A survey conducted by Oxford Economics (2014) shows that companies in the process of digitalizing its products are initially motivated by product quality and innovation. The information gathered about their products is first used mainly for maintenance and support, but the same information is later used to re-imagine the product and develop new business. In a literature review of smart PSS in industrial firms, Chowdhury, Haftor and Pashkevich (2018) highlights that data from product usage in the firms’ installed base is a critical resource for added service offerings.
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They have identified two critical elements for digital mastery, leadership capability and digital capability. This theory states that having one of them is not sufficient for utilizing the benefit from digital technology. Using these two dimensions companies from these various industries are separated into four categories, see Figure 4.
Compared to other industry categories, the manufacturing industry is among the worst performing, with most of them in the beginner quadrant, 45% of the fall into this category. Conservatives and fashionistas are 26% and 17% respectively. Only 17% are identified as digital masters.
Some key aspects are pointed out when it comes to digital transformation:
• Envision how digital technology can be used in your specific industry before someone else does (Westerman, Bonnet & MacAfee, 2014).
• Leadership capability is necessary for a successful transformation, communicating a compelling digital vision top down. This vision should include both customer experience and business model with a clear intent and outcome (Westerman, Bonnet & McAfee, 2014).
• Engage employees at scale. Focus on coordination and sharing across organization (Westerman, Bonnet & McAfee, 2014).
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It is important to use the business model as a motivator for digital transformation (Loonam et al, 2017). This involves using a business perspective in contrast to driving change as a technology solution (Loonam et al, 2017).
While offering guidance on how to make a digital transition is helpful, Porter and Heppelmann (2014) give some advice by pointing out common mistakes and misconceptions to avoid:
• Avoid functionality that customers don’t want to pay for or see the usefulness of • Underestimating security and privacy risks
• Failing to anticipate new competitive threats • Waiting too long to get started
• Overestimating internal capabilities
Iansiti & Lakhani (2014) points out that the transformation is not a traditional disruption scenario with displacement and replacement but a connectivity and recombination one. This enables incumbents to use their existing assets and increase their value and defend against entrants.
2.3 Business aspects of product digitalization
With product digitalization it can be possible to add additional sources of revenue or change the business model surrounding the product (Porter & Heppelmann, 2014). This includes things like servitization, where instead of selling products as units, the customers rent or pay as they use the product. During a transitional phase, a hybrid solution is most likely (Porter & Heppelmann, 2014). This transforms the requirement of the product, since the cost of maintenance and down-time stays with the manufacturer. Durable products with a minimal maintenance need would fit such a business model best (Porter & Heppelmann, 2015). A term used for the bundling of physical products with a digital service is a smart product-service system (Smart PSS) (Zheng et al, 2019; Chowdhury, Haftor & Pashkevich, 2018)
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The increase in complexity results in higher entry cost for the competition. Porter and Heppelmann (2014) points this out as the threat of new entrants decreases, especially incumbents who act early and get a first mover advantage.
Another relevant aspect of product digitalization is that it makes the manufacturer more intimate with the end customer (Porter & Heppelmann, 2014). Normally, there are intermediates in between such as service networks and distribution channels, and the need for these intermediates might decrease, going from B2B2C to a B2C relationship. There is likely several activities done by partners that can be either eliminated or managed directly by the manufacturer.
Previous research regarding product servitization and circular business models have many commonalities with digitalization. Frishammar and Parida (2019) have made case studies to provide a roadmap for incumbent firms. The focus is more on the transformation of the business model and less on the technology, and that this transformation can be motivated by social, environmental, and financial objectives (Frishammar & Parida, 2019).
Even if social trends and environmental awareness in customers might be hard to quantify, legislators are staking out a path toward a circular economy (European commission, 2020). A few specific areas in which regulation is being considered are (European commission, 2020):
• Product durability, reusability, upgradability and repairability • Enabling remanufacturing and high-quality recycling
• Incentivizing product-as-a-service or other models where producer retains ownership
These would have direct impact on product-based manufacturing firms. The Swedish government is also considering regulation along the same lines, looking into policy instruments to incentivize circular products and services (Swedish Government, 2020). The transformation is likely to be incremental, meaning the organization will operate with several business models in parallel (Frishammar & Parida, 2019). Servitization of products is separated into two categories with the first one being use-oriented and the second one results-oriented, meaning the customer either pays for using the product or pays for a specific outcome. Since the organization is likely assumes a lifecycle responsibility for the product this will increase its maintenance commitment and the ability to reuse, refurbish and recycle the product becomes more important (Frishammar & Parida, 2019).
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Frishammar and Parida (2019) has the perspective that digital technology could act as an enabler for servitization. Other research highlights the interconnectedness between digitalization and servitization, combining them in the term smart product-service systems (Zheng et al, 2019; Chowdhury, Haftor and Pashkevich, 2018), which encompasses the business and technological aspects of servitization of smart products.
2.4 Resource-based view of the firm theory
Wernerfelt (1984) argues that the resources of a firm enable the firm to have a competitive advantage. The resources are categorized and valued differently. Resources that are of great source of value and at the same time is rare gives the possibility of long-term competitive advantage, they form a resource position barrier (Wernerfelt, 1984). In contrast to product-based focus, resources can be used as from position barriers across several products (Wernerfelt, 1984). The VRIO framework is a tool that can be used to assess resources and capabilities, considering value, rarity, imitability, and the organizations ability to utilize them (Barney, 2014). It is the characteristics of a resource that determines what competitive advantage they might offer, see Table 1.
Table 1. The VRIO-framework, based on Barney (2014).
Valuable? Rare? Costly to imitate? Exploited by organization? Competitive implications Firm performance No - - No Competitive disadvantage Below average
Yes No - Yes Competitive
parity
Average
Yes Yes No Yes Temporary
competitive advantage
Above average
Yes Yes Yes Yes Sustained
competitive advantage
Consistently above average
A resource, or a capability, that is very costly, or even impossible, for the competitors to imitate will offer a sustained competitive advantage. Even if a resource is valuable, rare and exploited by the organization it only offers a competitive advantage until the competitors have had the chance to imitate it.
2.5 Competitive strategy theory
18 • Threat of new entrants
• Bargaining power of suppliers • Bargaining power of buyers
• Threat of substitute products or services • Rivalry among existing competitors
This is used to assess a firm’s competitive advantage in a specific industry (Porter, 2008). The importance of entry barriers is highlighted and different kinds of entry barriers for new entrants are listed (Porter, 2008). The key takeaway is being able to isolate aspects which would help elleviate or even eleminiate the pressure competition has on profitability.
2.6 Technology acceptance model (TAM)
Product digitalization involving adding novel technology to an existing product is dependent on the acceptance from its customers. A summary of the research in the field of acceptance of high technology products made by Caine et al (2006) shows that there is an increase in research starting in the 1980s with the widespread availability of the microcomputers and have been increasing since. One of the most widely used theories from this period is the technology acceptance model, abbreviated TAM, established by Davis (1986, 1989). TAM, mainly used for IT-systems, focuses on the consumers perceived usefulness and perceived ease of use when it comes to acceptance of new technologies, in contrast to evaluating the actual system use.
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Acceptance is measured in the perception of the user, not a designer or a manager and relevant factors in user perceptions to be considered are (Caine et al, 2006):
• Perceived usefulness • Perceived ease of use • Perceived compatibility • Perceived complexity
• Perceived fun and enjoyment • Perceived image
• Perceived newness • Perceived privacy
• Perceived relative advantage • Perceived risk
It is pointed out that there is a need to identify which variables are most predictive of acceptance (Caine et al, 2006).
Although the research has been focused mainly on acceptance and adoption of new technology, research within technology resistance shows that customers motivations is conflicted between rejection and adoption (Heidenreich & Handrich, 2015). Some aspects of rejection are driven by different motivators than acceptance.
If the perceived usefulness of a novel technology is low, it will increase consumer resistance in adopting the technology (Mani & Chouk, 2017). Technology perceived as novel, meaning different and unique, are more likely to be adopted, but things like functional barriers might decrease adoption (Mani & Chouk, 2017). Some of these barriers can be (Ram, 1989):
• Usage barrier – not compatible with existing workflows, practices, or habits • Value barrier – weak performance-to-price
• Risk barrier – physical, economic, functional, or social risk • Tradition barrier – forced cultural change
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2.7 Summary and model
There is a balance between being too specific or too general when studying the literature in this case. Digital transformation borders with literature regarding for example change management, sustainability in the form of economic circularity and the research regarding the innovations and tech that makes all this possible.
These conclusions from the literature study are summarized in a model (see Figure 6) illustrating the technology steps and what implications each step might have on the organization, the market or the customer. The key takeaway is that the formulated strategy will need to take into account several or all of these steps, even though the specifics of the later steps cannot be formulated. The columns A-E in the model is based on Porter and Heppelmann (2014).
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3 Methodology
This chapter presents the design approach and the design methods used for this thesis. The data collection methods, discussions around their validity and ethics of this research are also considered. The organization of the case study is also presented in this chapter as research setting.
3.1 Research method
This thesis revolves around the discovery of insights involving product digitalization and can best be described as explorative research (Arunangshu & Debasish, 2018), starting with a review of the literature in order to guide the empirical study and analysis of the results. The research questions focus on the perception of product digitalization by an incumbent firm. This problem involves the experience of a certain subject by several individuals within an organization. It also involves complexities and social aspects that can be captured using a qualitative approach, which in this case involves semi-structures interviews. The research is done to understand the nature of a problem and to give insight into a given situation (Arunangshu & Debasish, 2018). A quantitative approach would not be as useful in capturing the research situation and how a phenomenon is experienced by people, especially since the topic revolves around future scenarios. Using observations as a complement to the interviews was considered but was not included since the research subject is a topic or a problem that the organization is possibly facing in the future, making observations of the current state less valid.
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3.2 Research setting and participants
The research setting for the empirical part of the thesis is a business unit within an incumbent firm specializing mainly within power equipment. The specific business area is within power equipment for green space and the firm is considered one of the market leaders globally in this area. This organization is suitable since it is a business unit considering product digitalization. Product digitalization is well known within the organization; it has been discussed in a broader sense and have involved most of the stakeholders in some way. There are several products withing the company that have been given smart and connectivity features already.
3.3 Method for Data collection
After the literature study and the iterative model derived from this, the data collection for this research is done through semi-structured interviews with mostly individuals from the organization (the focus firm), but also entrepreneurs who are customers using the products. These one-hour interviews have been performed using videoconferencing and is conducted with one person at a time. The interview topics and questions have been based on the outcome of the literature study. The interviews have then been transcribed and coded into themes to help analyze the results.
The interviews were conducted in Swedish, or English based on the preference of the person who was interviewed. The interview subjects were instructed not to discuss the contents of the interview with their colleagues until all the interviews were completed.
3.3.1 Sampling group
24 The participants in the interviews are listed in
Table 2.
Table 2. Respondents interviewed.
Role Work experience
at company
Product specific or function specific role
Director, marketing 20+ years Product
Director, product management 20+ years Product Product manager, product 10-20 years Product
Product manager, services 1-5 years Function/product VP innovation & robotics 5-10 years Function
Manager R&D 1-5 years Function
Professional product user 10-20 years Customer Professional product user 1-5 years Customer
3.3.2 Interview questions
The interview questions are based on the different aspects of product digitalization identified in the literature study (see chapter 2 of this thesis). These aspects have been used to categorize the questions into five topics:
• Introductory information and questions • Digital capability
• Leadership and organization • Business and market aspects • Technology acceptance
All the questions, as well as the reference to relevant literature can be found in Appendix B. All questions and topics were asked to all interviewees except for a few cases where it was clearly irrelevant. For instance, it is difficult for a respondent representing the customer to elaborate on the inner workings of the company selling the product. In some cases, follow up questions are used to steer the discussion or to get the interviewee to elaborate on relevant topics.
3.4 Method for Data Analysis
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The initial themes are determined by the topics for the questions, but additional themes are added as needed. Each statement can be categorized as more than one theme is the statement is touching on several topics.
3.5 Validity and reliability
In a traditional scientific manner, the attributes of validity, reliability and replicability are used to assess the quality of the research (Schwartz-Shea and Yanow 2011). Validity is determining the relevant of an observed variable, reliability assesses the measurement method itself and replicability concerns the outcome of repeated research. In an interpretive qualitative study, the traditional attributes for assessing validity and reliability could be considered ill-suited, since it’s bases on an assumption on stability in the social world (Schwartz-Shea & Yanow 2011). The interpretive understanding of social phenomena as dynamic are inconsistent with requirements of reliability and replicability.
Instead, an interpretive qualitative research should aim at establishing trustworthy research through other methods, such as identification of research sites and intertextuality (Schwartz-Shea & Yanow 2011). Intertextuality refers to mapping the research setting and the information sources to give multiple perspectives on the research focus (Schwartz-Shea & Yanow 2011). An attempt at achieving intertextuality in this study is to achieve diversity in the sampling group in terms of professional field and years of experience. However, there are limitations in what can be achieved within the time limitations and scope of the thesis, so the sampling group still must be limited to a number of individuals.
The validity of the information source could be strengthened by the fact that the business unit within the focal firm have made some considerations and planning in order to digitalize the product but are remaining in a traditional product-oriented business model.
3.6 Ethical considerations
Some ethical considerations have been made during the study. First, regarding identifiability of the organization, although this does not have to be kept secret, was chosen to be kept from the thesis. Identifiable information about the specific firm or the business area used for the study, have been considered not to be of relevance and could therefore be excluded without issues. Information about the current state of the firm in terms of business strategy, product road maps and profitability are not disclosed in any way and does not provide much relevance to the research topic or research questions.
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Personal information remained anonymous, such as name and work title. Some information is disclosed in the presented data, such as years of experience within current role, if they are a manager or not and years within the company. Participants were given the opportunity to read and approve the transcripts of the interviews. The transcripts are not disclosed in this thesis, only the coded results are presented.
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4 Empirical findings
This chapter contains the empirical findings based on the data collection method described in the previous chapter. The presentation of the empirical data is separated by the identified themes. The quotes are taken from the transcripts or translated from them when necessary and to keep the respondents anonymous, the quotes do not indicate which respondent is responsible for each quote.
The interviews are coded into themes in order to summarize the results for each topic. For practical and privacy reasons the individual statements are not cited in any exact way, but the findings are listed as true to the transcriptions as possible.
The interviews were transcribed, and the content of the transcription was coded into 4 categories and 16 themes as listed in Table 3.
Table 3. Overview of the empirical data; categories, themes, number of statements made for each theme as well as word count.
Category Theme No of
statements
Word count
Digital capability Technical abilities 11 1 457
Customer integrity 10 1 374
Data analytics 7 1 325
Technical challenges 6 713
Data security 5 688
Business and market Motivation for digitalization 27 3 784
Servitization 24 3 020
Sales model and channels 14 2 348
Financial risks 9 1 468
Market position 7 505
Leadership and organization
Organizational integration and
coordination 28 3 883 Digital vision 15 1 662 Organizational risks 6 907 Technology acceptance and features Technology acceptance 35 5 437 Specific features 14 2 146 207 29 260
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is “Sales model and channels” which indicates that this is a topic given consideration and thought by the respondents. Another one is comments on specific features enabled by embedded processing or connectivity.
4.1 Digital capability
The responses related to digital capability is listed in this chapter. Each theme is presented separately followed by a summary.
4.1.1 Technical abilities
When discussing technical abilities, respondents from within the organization generally states that specific abilities are available within the company. In each specific area, such a product development, software development and services operations, the current abilities, and the ability to develop them are considered good, at least when compared to other manufacturing companies. A few respondents express concern that compared to other industries, the internal abilities might not compare as good.
”I think it’s pretty significant for a company like this, when you come from being an engineering-driven and product-based company with physical products to get into working more with services. No matter
what it is it’s a challenge for an organization like this.”
The challenges discussed are on a system level, how to combine the technologies from different part of the company into one integrated product. How to successfully coordinate all the competences required.
There are also concerns mentioned about the ability to ensure commonalities in products from different product and customer segments. The product strategies are at the risk of being conflicted between adapting each product to specific customer needs and adapting the products to have similarities between segments. An issue related to this is cost optimization of the hardware needed for digital features. When optimizing for cost for each product, commonalities between products are lost. There were also concerns about different technology or services being implemented in different products, resulting in a fragmented image towards the customer.
“But the issues we run into is linking it all together. The struggle I think a lot of companies have as this transition is taking place is not so much the technology, it's more how to make it work, how to get different siloed
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There are even concerns in the lines of; maybe we were so focused in being superior in some technological areas, we neglected the specific needs of some of our products.
“The developers might be a little too far from the market, in our eagerness to build well-functioning operations with working architecture. So, too generic and a little less specific considering
specific applications.”
4.1.2 Customer integrity
When commenting on customer integrity, most respondents mention legal compliance as one main aspect of consideration, especially GDPR (General data protection regulation). Even though some respondents mentions that they use data use agreements with end users for specific services, most emphasize that they don’t store user data that they don’t need. Reasons for this is not only legal, but several respondents also mention ethical reasons and respecting the customer.
“We almost take it to the extreme that we give up on possibilities if we are unsure how to handle integrity, rather than the other way around.
We are very conservative in our interpretations.”
To be able to keep as much data as possible, the product data is then anonymized and connections between a specific product and a specific user are removed and cannot be recovered even if they want to.
“We care about customer integrity when analyzing the data. We never include any individual data; we never track any users. We don’t know who is using the product, we can’t recover that even if we wanted.”
In summary, customer integrity is an aspect well considered from different areas of the organization, and efforts goes beyond legal compliance.
4.1.3 Data analytics
On the topic of data analytics, there are commonalities among all interviewees from the organization, and the responses are similar both from function-oriented individuals and for product-oriented ones. There is a great deal of product data available that have been collected through some of the service offerings as well as data collected from the product itself, made available when servicing.
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The data is however currently not analyzed in any useful way to any great extent. Respondents highlights that there is a potential to make better products by analyzing this data, both to help make the products better and to understand customer behavior better.
“What I'm interested in, is how do we take this data that we collect and use it for development of our products.”
4.1.4 Technical challenges
From a product perspective, there are some practical technical challenges mentioned. One is the fact that the products are operated in tough environments, and how to really build in sensitive electronics pose issues with durability. Another is that some of the products are made up of mainly mechanical components, and in order to be able to gain any diagnostic or monitoring functionalities, many of the mechanical components must be monitored in some way.
“Considering the number of mechanical components working separately and unmonitored. It would require a number of additional sensors built
in to be able to monitor and get the data that we want.”
Another issue related to the digitalization of mechanical products that have been mentioned is the challenges related to power the electronics, i.e., battery power.
From a digitalization perspective, there are challenges mentioned surrounding the incumbent back-end systems. For some digital features envisioned, integration with these systems is a must, which have been known to cause compatibility issues in the past.
Cost is also seen as a technical challenge. The challenge is to optimize the cost of implementing digital features so that these can be carried by the product without significantly increasing the prize.
4.1.5 Data security
There are statements made on the importance of data security, the reason for this being that it is the customers data and that it must be protected. The details on how this is done will not be publicly shared, but it is a mix of internal procedures and technologies combined with relying on the security of external cloud services used for storing and processing data.
4.1.6 Summary of digital capability
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In summary, most functions related to digitalization is either in place and under development or in a stage considered mature.
An interesting aspect not captured by the content of the comments itself, is the fact that when asked about technological challenges, several respondents diverge from commenting on the capabilities themselves to commenting on challenges regarding cross-functional coordination instead.
“The struggle I think a lot of companies have as this transition is taking place is not so much the technology, it's more how to make it work, how
to get different siloed parts of the organization to work together, to bring together a more cohesive offering to the customer.”
This could support the view that there are strong digital capabilities in place and when responding on challenges, the integration and coordination challenge is given attention.
4.2 Business and market
The themes related to business and market aspects of digitalization is presented in this chapter. Each theme is listed separately, starting with what motivates the organization to consider digitalization of this product group, ending with a summary.
4.2.1 Motivation for digitalization
Most of the respondents establishes that there is a high degree of motivation for product digitalization within the organization. Some even mentions that digitalization is pushed forward even though it’s not clarified how it would benefit the product users or them as a company.
“It is definitely something the company wants to do, but my impression is that we are a bit immature when it comes to what, why and how we
should create customer value with it.”
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The value to the customer is mentioned mostly in terms of features and services offered by connectivity. Several interviewees mention the possibility of creating an ecosystem, where you, through digital services, get the customer to buy more and other products of the same brand since they are supported by the same system.
The respondents who are actual users of the products have a more skeptical view on what would motivate digitalization of these products. They would mention that since they don’t know any details about what it would mean in terms of features that would benefit them, it’s hard to see the upside.
“It needs to be very good at what it does, and connectivity is not required for that. It should do what it does with exactly as little buttons
as possible.”
4.2.2 Servitization
There is generally a positive view on servitization such as in product-as-a-service. A few respondents mention the fact that most products are probably not used much at all, which would motivate the customers to buy these products as a service instead. For professional products, the customer base might expand into non-professional users. In terms of business perspective, respondents mention that in a product-based business model, when you sell a product, the transaction and interaction with the customer is more or less completed, but in service offerings, that is not the case.
“It’s a completely different business model versus traditional product development. You sell a product and then the next in a few years. You can forget the old one. If they brake, we support with maintenance. No,
we need to do continuous updates, add functionality, analyze data. A completely different perspective.”
Product-as-a-service is not considered to be the first step of servitization, and that it is more likely to start with service offerings as an addition to the product sales.
Some of the respondents mentions the environmental benefit. The fact that they wouldn’t need to produce as many units is seen as positive, as long as the financial impact from this can be covered with service sales.
“One thing that is positive is that we don’t have to produce as many new products for the same number of products in circulation. In that sense
it’s more sustainable.”
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From the respondents representing the customer side, the answers are in line. But they also mention that, as using the products professionally, the product cost is almost negligible and that private consumers might be the main target for offering professional products as a service. Ethical considerations when keeping ownership of the product are mentioned, such as responsibility for proper training, usage of protective equipment and so on.
4.2.3 Sales model and channels
This theme emerged from the discussions about the network of dealership the company uses for aftermarket services and product sales. Some of the digitalization solutions discussed involves direct to consumer sales and e-commerce, both for products and spare parts. This would put them into a competitive position to their dealers.
“A lot of the dealers also see a threat in these products. Because if you improve the products and make them so that they are not failing as
much or make it so that the dealer can't work on them as easily.”
Most respondents mention integrating the dealers or working closer to them in some way. Many emphasizes how important the dealers are and that really is no option than to integrate them, however, the opinion on this is different between respondents.
When asking the respondents who are customers about the importance of the dealership vs the manufacturer, they say that the dealers are quite useless and that they much rather deal directly with the manufacturer of the product. However, they also say this might be true for professional users, but that private consumers might rely more on the dealers.
“The dealers are generally pretty useless, not all of them. I would rather deal directly with the manufacturer if that were possible.”
The different consumer behaviors are confirmed by the respondents from the organization emphasizing the separation of customers into distinctive customer groups with fundamentally different behavior.
4.2.4 Financial risks
Most of the respondents highlight the uncertainty when it comes to return on investment. Compared to the traditional product-oriented business model where it is easier to calculate the cost and revenue impact from an investment. For digitalization it is considered more difficult to accurately predict the revenue impact, especially short term. One respondent points out that the financial gain from digitalization might not be enough for one product, but long term, the ecosystem it creates might motivate the cost.
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The respondents that are oriented in services and/or software focus more on the maintenance cost. The risk is pointed out that it’s not only sunk cost that must be taken into account, but that you also commit to keeping a service up and running. This will result in maintenance cost in the form of development for updates and keeping the system up and running for an extended period of time. When selling a product, the aftermarket commitment is limited to warranty, services and spare parts, but is limited in scope and time and does not require the same commitment in resources.
“There is a constant, a yearly cost, that you must include in the budget for the future, as long as you have the service up and running.”
Another risk pointed out is that of being over-ambitious. Adding features that does not motivate the price increase, hurting sales.
4.2.5 Market position
When asked about the current market position for the product group, the answer is number on or number two. This can be explained by the strong domestic market. This is emphasized by the (domestic) customer respondents; they are number one.
From product-based managers, in terms of sales, they are number two on the market globally. In a few specific segments, like battery product, the market position is stronger in most markets.
4.2.6 Summary of business and market aspects
When commenting on motivators for digitalization, there are some divergences among the responses. Some respondents point out the opportunities of added service sales on top of product sales, while other see it as an expectation from the customer that must be provided. None of the respondents from the organization says they are not motivated to pursue digitalization of the product group, but there is some hesitance in what the right features are that will give the best advantage vs the competition.
Although there is some mentioning’s of urgency in digitalization of this product group, there is no competitor offering digital features on this specific market. There are mentions that their competition is probably working on something.
“We should act yesterday, because our competition is not standing still.”
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The respondents are aware of the financial risks related to digitalization, some concerned about the up-front investment and others concerned about the operational costs of digital services that are launched.
Regarding sales channels, the customer respondents say that they rather deal directly with the manufacturer, while some comments from the organization points out that the current organization is not suited for direct-to-customer contact. Many respondents say the dealers are important and must be integrated into any digitalization efforts.
4.3 Leadership and organization
The themes related to leadership and organization is presented in this chapter, ending with a summary.
4.3.1 Organizational integration and coordination
Most respondents give insights into the challenges in coordination and integration between functions in the organization. The historical way of working is confirmed by most: that the organization is separated by product groups and that each product is self-contained when it comes to product development and product management. It is highlighted that this way of organizing the company have been successful so far.
“That work is initiated, to integrate different units within R&D for example and also on-going projects to integrate more when it comes to
product management and product ownership that have been separated islands since far back.”
However, it is apparent that digitalization of products requires a higher degree of cross-functionality. But the respondents do not point to the coordination itself at being the only issue, but that it also more coordination needed when it comes to decision making in product roadmaps. Battery technology that has been developed and launched previously have forced the organization into working more cross-functional, but that further integration is needed for digitalization to avoid a fragmented product portfolio. With a lack of an overarching strategy or vision it is basically up to each business unit if they want to engage in product digitalization or not. A few respondents highlight the fact that it is not only coordination between different functions and product groups within the company that is necessary, but that suppliers and external partners must be included to a greater degree.
“What we're missing, from a technological point of view, is pulling this all together, linking this all together, making all of this work from different hardware developed in different areas, different software,
different suppliers.”
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group, there is an established coordination for both development and service operations, while other products have little interaction with the functions responsible for digital solutions.
4.3.2 Digital vision
Most respondents express a lack of detail when it comes to digital vision within the company. There is generally a high degree of digital awareness within the company and there is a general strategy that involves the ambition to digitalize in many areas, the products themselves being one of them. But when it comes to what the product digitalization should result in it is up to the separate business units. There is no overarching vision about what the digitalization should enable in the long term and how it involves the different product and customer groups.
“I would say that there is a digital vision, but I think it’s just a vision saying ‘we should have connected products’, not more than that. I know
there is work going on, but far from finished.”
Some respondents indicate there have been some attempts in the past in creating a digital vision, but that it turned out too loose and vague to actually be useful for the organization.
4.3.3 Organizational risks
The risk of not being able to find and attract the competence needed for digitalization is highlighted. Respondents mention that this might be less of a risk at the main office but could be more of an issue among sales representatives and dealerships.
Another risk is how the organization can handle a change in relationship to the end customers. Offering digital services will bring the company to have more direct contact with the customer and that this is something they are not currently equipped for.
Some respondents mention that the mindset in the organization consists of making small adjustment and improvements while monitoring the outcome from these. Introducing digitalization in the products will require more innovative thinking. This contrast in leadership is seen as an organizational risk.
4.3.4 Summary of leadership and organization
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be needed. The required changes are not limited to functions needing to be more collaborative, but that new functions might be needed. Risks related to leadership and organization can be summarized as not being able to successfully perform the necessary changes.
4.4 Technology acceptance and features
The themes related to technology acceptance is presented in this chapter, ending with a summary.
4.4.1 Technology acceptance
From a company perspective, respondents mention the challenge in finding smart and connectivity features that would bring value to the customers, and then convincing them how this would benefit them enough to motivate the added cost.
“I would say that the acceptance is there, then it is up to us to find the actual value, which according to me is the key to everything that has to
do with connectivity. To find the added value for the customer. Otherwise, they will not pay for it.”
This is especially true for professional customers that are not charmed by cool features, but instead need features that will improve the quality or efficiency of their work performance. Differences among customers are pointed out, such as the fact that some customers are more conservative than others, and thus might be more skeptical to built-in microprocessors and connectivity in their products.
“They don't like that, they don't want those products, they want the old, classic ones that they can screwdrive around and work on.”
From the customer respondents, they point out zero tolerance for a reduction in durability or robustness in the product. The products operate in a harsh environment, and the built-in technology for digitalization must be protected to accommodate for that. They point out that they use digital technology in their work, such as smartphones and wireless headphones. A difference in the response from the company perspective and the customer perspective can be noted. That is that the product user tends to be more focused on smart features to a greater extent. They see that smart technology built into the product could improve the safety and quality of the product. When it comes to connectivity, the customers don’t see any obvious benefits from this.
“Digital features, if you consider some kind on connectivity, it’s hard for me to the benefit of that now. However, there should be technical features for the product, like built in laser or level indicator, those kinds
