Implementing Servitization: investigating the hurdles to overcome in Product Lifecycle Management

Implementing Servitization: investigating the hurdles to

overcome in Product Lifecycle Management

Tutor: Koen van der Gaast Date: 23.12.2016

Words: 7156 (excluding Abstract, References and Appendix)

Authors: Name Student-ID Major

Louise van Britsom 10270183 Sociology

Maud van den Eijnde 10764437 Business Management Antonie Kuhlmann 10736247 Planning

Mart van der Marel 10752919 Arti8cial Intelligence

Abstract: Servitization is an important concept of the Circular Economy. It is assumed that it has the potential to disconnect economic growth from resource consumption through the application of more sustainable business models. This interdisciplinary research focuses on identifying the potential hurdles to overcome in enabling the practical implementation of servitization. The following research question is posed: ‘What are the hurdles to overcome in Product Lifecycle Management to achieve the implementation of servitization?’. To be able to answer this question, the concept of Product Lifecycle Management (PLM) is used to bring together relevant concepts from di<erent disciplines and induce interdisciplinary integration. The resulting hurdles are then organized around the stages of PLM and arranged according to the most relevant actor involved. These insights are then applied and compared to the hurdles identi8ed in a case study. Finally, possible solutions and policy recommendations are provided and future implications are discussed.

Keywords: Circular Economy, Servitization, Product Lifecycle Management, Wicked problems, Ownership, Digitization.

Introduction

Unsustainable practices in the economy as well as in society require a shift in managing the world’s scarce resources; the Circular Economy (CE) is a concept that is receiving much attention as an alternative to the current linear economic system: It aims at decoupling economic growth from resource consumption through new business strategies, innovative product design and extensive recycling processes. To facilitate the realization of these practices, signi8cant changes in both consumer and policy-maker mentality are imperative. And new technological means are required to meet the correspondent logistical challenges (MacArthur, 2013).

By decoupling economic growth and resource consumption, the CE could contribute to mediating - if not resolving - complex and trans-boundary problems the global community is currently facing: Natural resources are getting scarcer while the global population rapidly increases and becomes wealthier (ibid). The consumption of natural resources is especially marked in wealthier countries: on average the inhabitants of the 28 EU-countries produced 475 kg per capita of municipal waste in 2014 (Eurostat, 2014). To reduce the accompanying consumption of fresh natural resources and limit the

amounts of waste that have to be dealt with, the CE proposes closed physical loops: the products are not discarded at the end of their lifecycle but reused or recycled (see Figure 1).

To implement such closed physical loops, important changes in Product Lifecycle Management (PLM) are required. However without incentives or regulations to facilitate these changes for businesses, such radical changes to PLM, let alone an outright transition to a CE, seem unlikely.

Figure 1 - The circular material ows of non-renewable resources in a theoretical CE (adapted from Ellen MacArthur Foundation (2016), page 19).

Hence why this research project focuses on a promising building block of the CE that could possibly avoid the dilemma: The concept of servitization refers to the marketing of services based on products as opposed to the sale of the products themselves: The ownership of the products remain with the business while the consumer enjoys the service provided by the products. This in return for a periodic payment that is typically much lower than the products’ purchasing prices.

Because of the di<erent relationship between business and consumer, servitization strongly encourages modular product design to facilitate the recycling/reuse of products, and high quality products to extend the period of time that the product can be used by the consumer. Servitization as a renewed business model might therefore contribute to an increasingly sustainable economy and society (MacArthur, 2013).

Remarkably, the possible e<ects of servitization have been known for decades. In fact, servitization is a concept coined in the 1980’s and has since undergone various changes in de8nition. However until now no widespread systematic shift towards servitization has taken place. Possibly because only limited academic research has been done on the hurdles concerning servitization. Scienti8c literature about servitization is focused on

businesses or technology and does not include wider societal relationships and regulatory strategies. Moreover - even though servitization is a building block of CE - it is often only swiftly covered in integrated reports.

This research project thus aims at focusing on servitization from a broad interdisciplinary perspective. It proposes to: a) critically reEect upon the assumptions made by the concept of servitization. And b) investigate the hurdles that have to be overcome for a large-scale implementation. This will be accomplished by answering the following research question: What are the hurdles to overcome in Product Lifecycle Management in order to achieve the implementation of servitization? To be able to answer this question and capture all its interactions and interrelations - from a businesses and technological, as well as a wider societal and public administrative perspective - an interdisciplinary approach is needed. Ergo the research question will be analyzed from four di<erent perspectives: 1. Arti8cial Intelligence to identify technological rami8cations, 2. Business to 8nd corporate limitations, 3. Sociology to discover societal issues, and 4. Planning to clarify obstacles in the policy making process.

The following research project is structured as follows: in the next section the theoretical framework that lies at the basis of this research will be discussed. Thereafter, the methods that will be used to conduct the research are explained. Then the results will be presented and illustrated by means of a case study. After that, possible solutions and policy recommendations are presented. And in conclusion, 8nal remarks and future implications of this research are considered.

Theoretical Framework

This section has the purpose to analyze and present the existing theories and concepts related to the topic of servitization. After clarifying and de8ning the term servitization itself, PLM will be introduced and examined in detail. This is followed by a theoretical discussion on servitization as a business model and the role of Public authorities in stimulating these changes.

Servitization

Servitization is a business strategy, whereby a mix of tangible services are designed and combined so they are jointly capable of ful8lling customer needs (Tukker, 2015; Manzini & Vezzolli, 2002). It is also an often-used theory describing the innovation of processes and capabilities within the business model of manufacturing organizations. Since servitization can take on several forms (Neely, 2008), this research project will focus speci8cally on use-oriented servitization. Which is commonly de8ned as an economic system with closed material loops (Preston, 2012). It is characterized by creating a shift from selling products to selling services delivered by the products. (Baines et al., 2009, Mentink, 2014 & Steunebrink, 2012). Due to changes in PLM, such as part reuse and recycling, it can be seen as a system, in which waste of materials is minimized (Kastelli and van Looy, 2013). Within the scope of this research project, servitization is de8ned as a theoretical business model characterized by selling services delivered by the products (by means of a paid subscription, leasing or renting) that can lead to a longer and more sustainable product life cycle.

From a business perspective, use-oriented servitization products and services are combined to satisfy a client’s need. The relationship between the product and service is as follows: in the act of meeting the customer's needs the product is a tool through which the company provides a service. In use-oriented services, the services are delivered through the product. It is not the product that is sold but the temporary right to use it, i.e. the service it provides (Hirschl et al., 2002). The ownership of the tangible product is retained by the service provider, who sells the functions of the product via modi8ed distribution and payment systems such as paid subscriptions, sharing, pooling, renting and leasing (Neely, 2008).

Since the 1990s, these use-oriented service-systems are present practically in businesses and theoretically in scienti8c literature. This development arose as a solution to overcome the similarity of products in the market and the limited ability for product di<erentiation due to high product quality (Tukker, 2015). Services were a new way for businesses to: improve one’s position in the market, increase the utility for the customer, and add value to the products with the intention of improving customer value (Visnjic, 2012). However, the purpose of services changed from merely attaining more competitive advantage and economic growth, to incorporating this economic growth with environmental sustainability (Mont & Plepys, 2003). Moreover, the role of services changed from just adding value to products to becoming a replacement for ownership of products (Baines et al., 2009 & Mont & Plepys, 2003). This change in the role of services then, could potentially lead to a CE with servitization as the underlying and facilitating economical framework.

Product Lifecycle Management

Implementing closed physical loops - paramount to the CE - requires a radical change of PLM and aspects of the business model such as: processes, activities, resources, capabilities and the revenue model (Mentink, 2014). PLM is a theory that “considers the product lifecycle as a whole and optimizes the interaction of product design, manufacturing and lifecycle activities” (Westkamper et al., 2000, p. 1). Westkamper et al. (2000) describes a conventional linear lifecycle that consists of the following stages: Production, Use, Disposal. The inEuence of lifecycle assessments on environment, resource base and working environment are substantial. However, taking environmental aspects into account leads to a di<erent product lifecycle. Lifecycle Engineering (LCE) focuses on the designing of a product whilst keeping sustainable development in mind. LCE creates a lifecycle that suits the concept of servitization: Manufacturing, Usage, Recycling/Reuse (Westkamper et al., 2000). Moreover, this lifecycle achieves closed physical loops as the materials from which a product is made re-enter the lifecycle after usage. Ping and Jia (2010) describe reducing, reusing and recycling resources as follows:

"Reducing of resource refers reducing consumption of resource and generation of waste during the processes of production, circulation and consumption. The so-called reusing of resource means that the waste products are directly served as product and then to be used again by repairing, renovation, and re-manufacturing, or that making all or part of the waste products be components of other products to be used again. Recycling of resource refers directly making use of waste as the raw materials to recycle the waste” (Ping & Jia, 2010: p. 356).

To decrease the consumption of resources, it is important to address the issue already at the manufacturing stage: the degree of reusability and recyclability of products determine the amount of fresh resources required to build new products. Lasi et al. (2014) support this view and argue that Eexible production methods are necessary in order to guarantee the production of easily disassembled products. This Eexibility is a prerequisite to a successful implementation since development and innovation periods are becoming shorter and the demand for individualized products increases. It is a predominant view that this Eexibility can be achieved through the application of digital technologies (Coreynen et al., 2016; Ellen MacArthur Foundation, 2016; Kagermann, 2015; Lasi et al.,2014; Spiess et al., 2009; Westkämper et al., 2001; Zhang et al., 2010). And that this will lead to the optimization of resource use in manufacturing (Coreynen et al., 2016; Ellen MacArthur Foundation, 2016; Kagermann, 2015; Lasi et al.,2014; Spiess et al., 2009; Thomas & Trentesaux, 2014; Westkämper et al., 2001; Zhang et al., 2010). In particular, Lasi et al. (2014) note that advances in digitization, networking, miniaturization and computer performance enable new forms of optimized and self-organized manufacturing. In addition, Zhang et al. (2010) remark that the Internet of Things (IoT) could be used to manage component-information throughout a product's lifecycle. Which would provide feedback to producers that can consequently use this data to optimize their products and material-Eows. This will allow businesses to continuously add value to their products throughout the product’s lifecycle (see Figure 2 below).

Business & Government

When it comes to servitization in businesses, it can best be implemented by means of a business model that is based on the product lifecycle of manufacturing, usage and recycling/reuse. According to Lozano & Witjes (2016), a business model is an understanding of how a company trades and creates value. The development of a more service directed business model includes changes throughout the value chain where the di<erent stakeholders are better connected. Furthermore, the business model shifts from transaction-based to relationship-based (Oliva & Kallenberg, 2003). The process of thinking about alternative systems for implementing services in businesses caused the establishment of service-based business concepts (Lay et al., 2009). The combination of ‘functional sales’ and ‘selling functionality’ provides a business concept that will be likely to achieve servitization. The concept of ‘functional sales’ as well as the concept of ‘selling functionality’ is about selling the performance/function of the product. ‘Functional sales’ focusses on the circular aspect of servicing through including remanufacturing as part of the lifecycle (Sundin & Bras, 2005). Conversely, ‘selling functionality’ is concentrating more on improving the lifecycle itself by means of constant ownership by the providing business (To<el, 2002).

Figure 2 - Stages of value creation in the product lifecycle, dotted line without digitization (taken from Westkämper et al., 2001, page 6).

Public authorities play a major role when it comes to implementing these changes, regarding a more general concern for sustainability. However, public planning is faced with planning issues that are complex to such a degree that they can be de8ned as ‘wicked problems’ (Webber & Rittel, 1973). Policy change is de8ned by Hall (1993) as a cognitive struggle between di<erent groups to improve their understanding of the causes of policy problems or the suitability of particular instruments to act as solutions. Thereby the policy change can occur as a matter of three di<erent orders (ibid). The 8rst and second order refer to policy change as a process of social learning, thus an incremental change in the political landscape, as de8ned by Lindblom (1959). The third order, however, regards policy change, which includes a shift in policy paradigms and happens rather spontaneously (through discontinuity) and not incrementally (by patterns). A policy paradigm is a:

“framework of ideas and standards that speci=es not only the goals of policy and the kind of instruments that can be used to attain them, but also the very nature of the problems they are meant to be addressing” (Hall, 1993, page 279).

A shift in such a policy paradigm is the result of an accumulation of anomalies and goes in hand with policy failure and experimentation. In this context another implication of planning issues being ‘wicked problems’ is relevant: Public authorities and the policies they procure are majorly being formed by them being path dependent. Further the complexity that is inherent to wicked problems leads to the resulting policies being - by de8nition - not coherent (in any case not from the perspective of every actor) (Webber & Rittel, 1937). According to Webber & Rittel (1973) the only solution to address planning is to embrace its problems complexities. In practice a large scale of instruments exists to activate or propel wanted developments. Howlett (1991) de8nes such policy instruments as the myriad of techniques at the disposal of governments to implement their policy objectives. The instruments that are relevant for changes in connection to increasing sustainability are identi8ed and organized by Jordan, Wurzel & Zito (2003) into four categories. These include common regulation (often in the form of command-and-control), market-based- instruments, voluntary agreements and informational devices.

Method

Based on the research methods described in this section, the insights from the theoretical framework above will be integrated, processed and critically analysed in order to be able to provide an answer to the research question.

A well-informed and well-de8ned method for integrating the di<erent perspectives guarantees: the validity of the essay, and the reproducibility of the results. In addition it improves: the degree to which a test measures what it should measure, the reliability of the test, and the extent to which a test is free of measurement errors (Boeije, 2010 & Walliman, 2011).

Previous to the integration e<orts in this research project, disciplinary literature research has been conducted as a starting point: theoretical insights were gained into the relevant concepts connected to the implementation of servitization and the possible hurdles. Not only disciplinary concepts were detected, but contrasting viewpoints - between the disciplines - on comparable concepts as well. A notable conEict manifested concerning the changes in ownership brought by servitization; whereas from a business perspective no signi8cant e<orts in changing consumer behaviour were expected, from a sociological perspective the loss of direct ownership over a product proved to be a signi8cant hurdle. The combined concepts provided a general idea of the hurdles within the disciplinary 8elds of research. And were used as a basis for the following interdisciplinary integration process: The integration took place by organizing these hurdles around the steps in PLM (manufacturing, use, and remake/reuse). This organisational integration method allowed for the conformity of the di<erent hurdles to be identi8ed and subsequently rede8ned and reorganised. This way the links between the hurdles has been mapped and set within a new interdisciplinary system. See Figure 3 for an illustration of the disciplinary concepts integrated around the stages in PLM.

PLM was thus the fundamental theory in enabling the creation of common ground: Organizing the disciplinary hurdles around the PLM steps allowed fruitful integration between the four disciplines required to exhaustively investigate the concept of servitization. Considering the absence of a shift towards servitization over the past decades - possibly because of limited and non-interdisciplinary academic research into the subject - the disciplines included in this research were expanded: Compared to previous research which failed to include wider societal relationships and regulatory strategies, the present research also includes insights from Sociological and Planning theories. This is an addition to the conventional set of disciplines investigating only the business perspective and technological aspects.

Figure 3 - Interdisciplinary Product lifecycle and the relevant aspects to hurdles (Own illustration).

Overall, the examined issue of implementing servitization is complex. Not only because several disciplines are connected to this problem, but also because the system around the concept of servitization is path dependent due to being strongly connected to earlier developments. A deep hierarchy is involved when regarding the hurdles, in which the di<erent levels react towards each other's behaviour. Due to this path dependency but also the deep hierarchy this complex system is quite robust. The integration of the relevant disciplines can o<er deeper insights to this robustness and detect its origin. The thus conceived theoretical insights are applied to the selectively chosen case study of the business model, motivation and consumers of Philips, focussing in particular on Philips Circular Lighting. This case study was selected because the setup of this research project necessitates a business that is familiar and has practical experience with the concept of servitization. This case study is employed to test the validity of the hurdles derived from the theoretical framework. By conducting mixed methods data research, information about the business’ hurdles in implementing servitization is connected, analysed and integrated. Qualitative interviews are coded and subsequently analysed to gain an understanding of the business’ model and motivations.

Results

In preliminary inquiries, several disciplinary hurdles were identi8ed that have been found to hinder the implementation of servitization as a business model. The following three sections are the result of these disciplinary insights and concepts being integrated into a coherent and holistic structure. The integrated hurdles are arranged according to the relevant stakeholders and the three phases of PLM (manufacturing, use,

recycle/reuse).The literature showed that the relevant stakeholders are business, government and consumer. Several articles argue that the disciplinary hurdles are connected, as they are part of the same system (Morelli, 2002: Mont & Plepys, 2003). An interdisciplinary approach of these processes is thus necessary to understand its full e<ects. The resulting table that summarizes all the hurdles that were identi8ed in the theoretical research of this research project can be found at the end of this section (see Table 1, page 11).

While some hurdles concerning a shift towards servitization can easily be assigned to a certain stage of PLM, other hurdles concern not a certain stage, but the concept of servitization in general. These general hurdles will explicitly be discussed in the 8rst stage of PLM.

Manufacturing

Often services are based on a product in a way that a product is necessary in order to provide the service. The design of a product in a service-based business will di<er from that in a product-based business. When considering the manufacturing stage in a product-based business it is essential to create a product as eOciently as possible; there are no incentives to create the product in such a way that disposal of the product can be avoided. In the service-based manufacturing stage, production eOciency is equally important as durability of the product including reusability and recyclability (Mentink, 2014). This extension of PLM can be achieved by creating sustainable products consisting predominantly of recyclable resources (Mentink, 2014, Sundin & Bras, 2005). Additionally, the higher recovery rates realize the reduction of waste and the required amount of new resources (She and Zhang, as cited in Lozano & Witjes, 2016).

These preconditions necessary for the extension of PLM limit the scope of possible materials, and thereby con8ne the possibilities and opportunities of product design and enhance the necessary e<ort and initial investment. In addition to this, it is essential that products are designed in such a way as to facilitate disassembly or recycling. Together these factors of initial e<ort and investment concerning the durability of products in the form of materials and product design are seen as limitations and thus act as a barrier for a shift towards servitization (Mentink, 2014, Sundin & Bras, 2005).

Due to these new requirements in the designing and production process, businesses need to invest in research on Eexible production methods and ways to e<ectively organize material Eows.

Since the relationships established in a service-based business model is longer, a well-considered supplier pre-selection becomes necessary. This selection can be complex, as much information is required to conduct it accurately (Lozano & Witjes, 2016). The increased relevance of constructing suitable partnerships might act as hurdle because it requires more time and research for a company.

Government

Governments struggle to 8nd accurate legislation to facilitate a shift, since every subsystem that is subject to a shift requires an individual approach. Generally, no one right way exists to: a. e<ecting the shift, and b. implement the concept of servitization. Thus the implementation of servitization by PLM o<ers no one-size-8ts-all solution. This makes the systemic change complex, particularly from a governmental perspective (Keohane, Revesz & Stavins, 1998). Governments that apply policies to induce a shift struggle to 8nd a set of instruments that incorporates all aspects of a shift towards servitization (ibid). Other actors that are not concerned with the system as a whole, such as businesses and consumers, might be able to more easily handle the inherent complexity. However, they might struggle almost equally as a result of this legislation that is too general to facilitate their individual shift (ibid). Thus all actors are faced with a

trade-o< between Eexibility and legal certainty caused by the implementation of policies by the government (Savini, Salet & Majoor, 2014).

Existing policies concerning more sustainable solutions for production and consumption -many of which even refer directly to the implementation of servitization - are in place on municipal, regional and national level. Also on the international level there is much political concern about sustainability (EU, 2014). However, the coherence between these policies is weak and thereby often contradictory (ibid). This lack of coherence restrains change by complicating the institutional framework. Furthermore the existing legislation and its non-conformity illustrate that the urgency of sustainability issues has not yet reached policy makers (Jordan, Wurzel & Zito, 2003). This lack of urgency leaves little motivation to induce political change.

Next to regulatory instruments, governments also have the possibility to either directly or indirectly (via subsidies) invest in and promote wanted developments and thereby inEuence them. Whenever public investment does not take place, this lack of public investment can act as a hurdle (ibid). The lacking public investment leads to slow-moving innovation development, causing a general lack of know-how concerning crucial technological developments.

Use

Requirements in the use stage necessitate closer monitoring and controlling of products. Concretely, businesses need knowledge on the condition of the products in order to meet their obligation of maintenance. Monitoring and controlling are also necessary because businesses need to take the products back after the use stage. This process of returning the used products that are ready for recycling (or disassemblage and remanufacturing) requires the implementation of physical reverse logistic systems and accompanying digital structures (Mentink, 2014). The development of these distribution streams and networks require a new infrastructure, which does not immediately generate revenue. In addition businesses need to cooperate to a larger degree with the logistics-service providing business and its supporting network (Martinez et al., 2010). The initial e<ort that comes with the need for organizing the reverse distribution of products as well as their digital tracking can deter businesses from attempting a shift towards servitization. Another hurdle for businesses is the need to establish contractual partnerships with consumers. A contract must be signed to establish a formal relationship and to declare the rules of the service between customer and service provider (Sundin & Amp; Bras, 2005). Additional services will be determined in the contract. Setting up a contract is no easy undertaking and is accompanied by hurdles such as organizing the 8nancing of third parties to release service contracts and 8nding the skills to construct reliable and usable contracts (Baines, 2015).

Finally, in order to achieve contractual partnerships between consumers and businesses, the actual price of a service is essential. Products can be sold per piece, whereas services are charged on the basis of use (Mentink, 2014 & Oliva & Kallenberg, 2003). The price should also include additional services such as maintenance (Oliva & Kallenberg, 2003). This requires a service-based business to discuss and negotiate the costs of their equipment’s operating risk and other responsibilities in order to achieve a 8xed price that covers all services over a discussed period of time (Oliva & Kallenberg, 2003 & Lozano & Witjes, 2016). Generally, the total cost of ownership ought to be lower using a service-based business model (Lozano & Witjes, 2016). Thus the revenue model of a service-based business di<ers from that of a product-service-based business in the way that more factors are relevant for determining the price. This indistinctness around setting the price for a service can be seen as a hurdle.

The previous section indicates that emerging digital technologies can aid to mitigate hurdles concerning the monitoring and controlling of a product sold as a service. However, the use of such new technologies calls for regulations with regard to: a. consumer trust in businesses, especially concerning consumer privacy (Coreynen et al., 2016) and b. liability in case of erroneous data-driven decision-making, i.e. who is responsible if autonomous machines make wrong decisions that cause physical/8nancial harm? (Ellen MacArthur Foundation, 2016). Without suitable regulations emerging digital technologies cannot be employed on a large scale, and thus make lacking legislation rather than lacking technological innovation a hurdle.

Consumer

The need for a shift in consumer mentality is also relevant: Coreynen et al. (2016) highlight the need to shift consumer mentality from owning a product to having a need met. In relation to consumer mentality, two additional hurdles come into play, both connected the to sense of ownership which servitization challenges (Hirschl, 2002; Mont & Plepys, 2003; Rexfelt & Ornäs, 2009): Firstly, products have a symbolic value attached to an object that appears to be more important than 'the use value' of the object (Niinimäki, 2014; Catulli, 2016). Servitization by itself provides merely a use value. Secondly, consumers believe that servitization will complicate daily life and reduce their sense of control (Rexfelt & Ornäs, 2009; Williams, 2007; Armstrong, 2015). This argument is an ampli8cation of the sense of ownership. The lack of ownership increases the feeling of uncertainty, since the consumer will then depend more on the infrastructure of a company (Rexfelt & Ornäs, 2009).

The habit of buying new products in current consumer-mentality is another substantial hurdle; it interferes with concept behind servitization, which inherently stimulates the creation of durable products for long consumer use (Hirschl, 2002; Armstrong, 2015). Hirschl (2002) suggests in Western society use intensi8cation is not deeply rooted in consumer patterns. In addition to this, Niinimäki (2014) argues that the current Western economy has created the need in consumers for fast changing trends.

In order to consciously be able to decide for buying a service instead of a product, consumers need to weigh up the bene8ts: Currently consumers are unable to weigh up the bene8ts and make informed decisions. This is due to lacking opacity with regards to information on the quality and durability of products (EU, 2014).

Reuse/Recycle

Practices such as reducing, reusing and recycling materials are inherent to a servitized business compared to a business selling a product (Kastelli and van Looy, 2013). However, it will be diOcult for a service providing business to trigger excitement about repairing a complex product (Oliva & Kallenberg, 2003). Emerging digital technologies can aid the recovery and recycling processes. However, so far the implementation of advanced technologies to deal with such complex products has been hindered by poor scalability, poor controllability and high labor intensity.

Moreover, some building blocks of the servitization lifecycle are currently not pro8table, which is why unsustainable practices in product chains prevail. The manufacturing and selling of a product and its resources is comparatively more pro8table than the eventual e<ort necessary for closing the product loop (ibid). The shift is impeded by the unequal distribution of pro8tability within the servitization lifecycle.

Government

Regulatory instruments currently encourage or at least tolerate unsustainable practices such as planned obsolesce within product chains (EU, 2014). The tolerance of unsustainable practices also points to a lack of coordination and cooperation of the relevant agencies concerned in PLM. This additionally impedes the implementation of

servitization (Puppim de Oliveira et al, 2013). In order to e<ectively organize the transportation of the disposed product between the agencies municipalities need to provide the necessary infrastructure (EU, 2014). By failing to do so the practical execution of servitization is hindered. Economies of scale increase the a<ordability and eOciency of such a transport infrastructure (Koshal, 1972).

Table 1 - The interdisciplinary hurdles to implementing PLM. Horizontally divided per stage in PLM (Manufacturing, Use & Recycle/Reuse). Vertically divided by main actor concerned (Business, Government or Consumer). Own illustration.

Case study

In the following section Philips Circular Lighting will be discussed as case study. Philips is one example of an innovative business that includes servitization on a large scale in part of their business models. Therefore their experiences can be analysed and may indicate the hurdles to overcome when implementing servitization. After this case study, the results can refute, con8rm or complement the hurdles that resulted from the interdisciplinary literature research above. One of Philips’ service based projects was launched 2015 in the newly renovated Terminal 2 at Schiphol Airport. It is the biggest shopping hall after customs. In the service based model Schiphol would 'Pay per Lux'; Instead of acquiring the light installations for its light, Schiphol only pays for the light. Philips stays the owners of the light installations. Cofely installs and maintains the lights. At the end of a contract, Philips retains the light bulbs and chooses to either replace or recycle the product. It is expected that the armatures will last 75% longer, and that they will safe 50% of the electrical bill compared to the non-servitized system (ten Brink, 2015).

The 8rst phase in the process is the manufacturing of the light bulb. According to Frans van Houten, CEO of Philips Electronics, (EY, n.a.) the CE is about access to technology and its function when needed. They apply circular designing in 'Pay per Lux'; In the

design of the product they try to utilize as few raw materials as possible. Furthermore, not blending materials makes it easier to disassemble the product after usage and reassemble its parts or materials into a new product. (MT, 2016). The hurdle of creating a product with limited mixing was overcome in the design of the 'Pay per Lux' light bulb. Van Houten admits that it was challenging at 8rst to think in an end-to-end way because it requires a resourceful and inventive way of thinking (Fleming & Zils, 2014). This problem can be seen as the lack of know-how. Next to this, Philips included its suppliers from the beginning of the process to overcome coherence-issues and improve their value chains (ibid); The collection of data should be added to the value chain. Which requires a digital infrastructure (EY, n.a.): Digital systems are placed to inform Cofely and Philips on the performance of the lights (Beemster, 2015).

The second phase in the process is the use by Schiphol Airport of the light provided by Philips. MT (2016) argues, that part of the 8nancial merits of the servitized business model comes from the savings in the use phase. Firstly, the sensors and digital systems make sure that lights are only turned on when needed. Secondly, service costs will be low; digital information systems will indicate when maintenance is necessary, making the need for manual monitoring and controlling superEuous. In addition, making a product more sustainable (less energy-intensive in the case of light bulbs) lowers the maintenance costs. And since Philips retains ownership over the installations they can easily control the product lifecycle. However, because of this all the costs would be with Philips if the product would break down (Beemster, 2015). When it comes to the payment method, van Houten argues that consumers are price driven when purchasing a product and are reluctant to take subscriptions (EY, n.a.). Moreover, customers are used to pay one price for purchasing and not to think about the total cost of ownership and the ecological inEuence (Fleming & Zils, 2014). In the business-to-business case of Philips and Schiphol, there are no hurdles concerning ownership and the issues regarding payment methods do not apply.

The third and last phase is the process of reuse and recycle. The return of products forms a complex logistical problem and creates di<erent supply challenges (EY, n.a.). However when products can successfully be returned, they may be entirely or partially reused, or the materials can be recycled so that the product can get a ‘second life’. In both cases the ‘new’ products will be totally or partially secondhand or be made out of recycled materials. Philips Healthcare points out that this might form a hurdle because many customers do not want secondhand products (Fleming & Zils, 2014).

Although Philips points out many di<erent hurdles in servitization, the most important one is costs. No parameters have shown how the circular business models reduce costs or assists with market expansion (EY, n.a.). Regardless of the uncertainty about increasing growth due to servitization, Philips created a center of expertise that is focussed on CE. The center of expertise provides CE as intrinsic value in the end-to-end value chain and all their processes, metrics and structures. Moreover, to reach the targets of Philips concerning CE, the business-unit managers need to meet criteria that are continuously raising and upgrading. However, Philips has a small to no e<ect on the legislative issue with municipal governments when changing the ownership (Fleming & Zils, 2014).

Recommendations

From the conducted research emerge several ways of overcoming some of the hurdles that currently prevent the implementation of servitization. The consulted literature indicates that developments in technology and policy-making are the main sources for innovative solutions to these hurdles. In this section some technological solutions and policy recommendations will be provided.

Digitization can contribute to a more sustainable form of manufacturing by providing methods for optimizing material Eows and product design (Coreynen et al., 2016; Ellen MacArthur Foundation, 2016; Kagermann, 2015; Lasi et al., 2014; Spiess et al., 2009; Thomas & Trentesaux, 2014; Westkämper et al., 2001; Zhang et al., 2010). Concretely, emerging technologies such as the IoT could provide businesses with the means to remotely monitor and receive information about the status, location and direct environment of their products (Ellen MacArthur Foundation, 2016; Kagermann, 2015; Thomas & Trentesaux, 2014; Spiess et al., 2009; Westkämper et al., 2001). This could allow businesses to overcome the hurdles regarding monitoring and control and aid in installing, managing and maintaining complex reverse logistics systems. Such technologies could also facilitate the communication between supplier and consumer which could help in overcoming the sense that servitization complicates daily life. Finally, the closer relationship and dependence between consumers and businesses will also help determine potential consumers, which is bene8cial for a service-based business (Lozano & Witjes, 2016).

Moreover, optimized and self-organizing machines could provide the technological means required for realizing Eexible smart factories that optimize production and improve resource-eOciency (Coreynen et al., 2016; Ellen MacArthur Foundation, 2016; Kagermann, 2015; Lasi et al., 2014; Spiess et al., 2009; Westkämper et al., 2001; Zhang et al., 2010). ‘Smart factories’ could facilitate complicated tasks such as disassemblage and repair of complex products.

Policy Recommendations

As the case-study indicated, companies shy away from servitization because of the 8nancial insecurities. Philips has also indicated their reluctant attitude towards servitization, since literature states - but does not prove - the pro8tability of the servitization business model. Economic incentives concerning the less pro8table stages of PLM need to be put into place; Such incentives will lower the hurdle concerning insecurity about pro8tability. The other insecurity for businesses concerns knowledge; The separate stakeholders experience a lack of know-how due to a lack of experience and research on servitization. To overcome this lack of knowledge, public investment is required on the subjects of product design, recycling and recovery infrastructure (EU, 2014).

More knowledge about servitization can be created by means of a stronger cooperation between supplier, manufacturer and distribution businesses with regards to product design. The platform created from within will deal with the lack of coherence between stakeholders. The cooperation will lead to higher likelihood of succeeding in the development of a ideal product, which is sustainable and recyclable (EU, 2014); Cooperation will overcome the hurdles and limitations in product design.

Finally, policies could act on the reserved attitude of consumers towards servitization. In reaction to technological changes, policies ought to protect product transparency and privacy. With these securities in place, the hurdles related to consumer’s mentality will become more lenient towards servitization.

Conclusion

The present research deals with the question of which hurdles impede the implementation of servitization. Servitization is thereby de8ned as a building block of CE. It can most accurately be approached by regarding the three di<erent phases of PLM (manufacturing, use and reuse/recycle). This way the disciplines relevant for the implementation of servitization are revealed. The analysis mainly includes the integration of the included disciplines, namely business, arti8cial intelligence, sociology and planning. Hurdles identi8ed this way concern both the actual implementation of servitization as well as servitization itself.

The hurdles reported in the manufacturing stage cover three main aspects. Firstly, new demands for product design require innovation of materials. Thus the reduced range of possible materials and higher initial investment can impede the implementation of servitization already in the manufacturing stage. Secondly, emerging technologies can facilitate the monitoring and controlling of production processes and material Eows. However, considering the incomplete process of digitization, the lack of smart technologies can hinder the realization of servitization. Lastly, policies can cause hindrances in the implementation, due to having a low coherence, being too generally formulated and or not even in place due to a lacking feeling of urgency. Public investment is not focussed on changing manufacturing methods in PLM, even though it might be crucial, especially concerning this initial stage.

Regarding the use stage of PLM relevant hurdles are connected to the implementation and usage of reverse logistic systems. These organizational means are not yet suOciently advanced to facilitate servitization. Additionally the development of such technologies is neglected by public authorities. Other factors that impede the implementation of servitization in the use stage are concerned with the absence of regulations with regard to trust and liability issues, transparency of product properties and the availability of information. Further current consumer mentality and habits concerning consumption do not match possible future requirements.

Lastly, hurdles identi8ed in the regenerative stage of the lifecycle include scalability caused by lacking cooperation between relevant agencies. Controllability is currently impeded by the unemployment of advanced technologies. The unequal distribution of pro8tability within PLM calls for incentives for this unpro8table regenerative phase, which is currently not in place.

The present research summarizes the hurdles concerning a shift towards servitization in a general theoretical manner. Table 1 (page 11) summarizes the interdisciplinary hurdles to the implementation of PLM for each stage. The hurdles proposed in this research project are not a complete collection of all the hurdles that might hinder the implementation of servitization and these hurdles may or may not be present in every case.

The case study focussed on Philips Circular Lighting providing the service of light to Schiphol Airport. According to Philips it is possible to overcome the hurdle of creating a product with limited material mixing. However, thinking in an end-to-end way when designing a product requires an resourceful and inventive approach. A new hurdle found in the case study was that customers are used to pay once for purchasing a product and are not used to thinking about the total cost of ownership and the ecological inEuence. Next to that, the hurdle of monitoring and controlling is not supported by the case study. Moreover, Philips does not have any diOculties in terms of organizational means so it is possible that this hurdle is not as signi8cant in this case-study. However, in general the case study supports most hurdles found in the literature research.

Discussion

The conducted research o<ers a framework for analyzing the hurdles impeding a shift towards servitization from the perspective of various actors. This is a quite theoretical framework and thus ought to be tested extensively to further validate the results. Such future research can aid to align this theory with practice. There was a plan to interview di<erent people who are concerned with the implementation of Circular Lighting at Schiphol by Philips, but due to circumstances the interviews have not taken place. However, in the appendix the prepared interview questions are described and can be used for further research. Even though this framework is tested on a small scale on the case-study of Philips, a broader application will improve the overall accuracy of the theoretical results.

The present research o<ers hurdles from the perspective of all relevant stakeholders. It might become more applicable and accessible by narrowing this perspective to only one of the stakeholders, for example businesses. The framework might then be applied by businesses as a tool to 8nd relevant hurdles toward servitization present in their business-model. Conversely also public authorities could substantiate the results for their purpose of identifying actions necessary to facilitate a shift towards servitization.

Even though this research handles a de8nition of servitization not only as a business model - but also as a building block towards a more sustainable economy and society - it is not directly focussed on the relationship between servitization and the environment. Possible consequences of the implementation of servitization concerning more sustainable practices are only touched upon when relevant for discussing the hurdles concerning the implementation itself. It might be interesting to investigate in future research to what extent servitization actually does contribute to sustainability and what the di<erent hurdles for speci8c markets or products are.

Finally, it should be noted that a lot of e<ort has been undertaken to identify relevant disciplines and integrate these in a meaningful and valuable way. However the scope of a topic such as servitization is evidently very broad and further disciplines should be incorporated to improve the overall understanding; The areas of research covered in this research project are strongly connected to other 8elds of expertise such as law and public administration which are almost, if not equally important, in investigating the hurdles to servitization. Hence it is crucial to maintain and broaden the interdisciplinary approach when pursuing or applying research on servitization.

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Appendix

| Welke kenmerken van servitization maken het een aantrekkelijke business strategie voor Philips? Schiphol

Wanneer wij onderzoek doen naar Philips en servitization vinden wij het voorbeeld van Schiphol, een handelsrelatie tussen twee bedrijven gericht op het voorzien in een service, in dit geval licht. | Welke redenen zijn er en voordelen biedt het om de service aan te bieden aan een ander bedrijf in tegenstelling tot het voorzien van particulieren?

| Aangezien er in het geval van servitization sprake is van het behouden van eigendom over het product door de organisatie die de service verschaft, is er een sterkere relatie opgebouwd uit meerdere afspraken tussen organisatie en consument die in de meeste gevallen is vastgelegd in een ‘contract’. Welke kenmerken met betrekking tot het voorzien van een service zijn ondergebracht in het contract tussen Schiphol en Philips?

| Zijn de contracten eenzijdig opgesteld of kan dit gezien worden als een overeenkomst tussen twee bedrijven?

| Hoe beschrijft u de relatie tussen Philips en Schiphol in dit project? Hurdles

| Welke stappen moesten er doorlopen worden om tot een business model te komen, toegepast op servitization?

| Bent u vooraf, tijdens de ontwikkeling van het project en het business model, hurdles tegen gekomen? Zo ja, welke hurdles kwam u tegen en hoe is hier op geanticipeerd?

| Heeft u tijdens de uitvoering van het project struikelblokken ondervonden?

| In hoeverre werkte de huidige regels/het huidige beleid van Philips maar ook van de maatschappij tegen de ontwikkeling van servitization in?

Afsluiting

| Is er onderzoek gedaan naar de toepassing van servitization gericht op het leveren van een service aan de particulier? Zo ja, wat voor inzichten heeft dit opgeleverd en hoe beïnvloed dit u keuzes?

| Heeft Philips meer producten en mogelijkheden die gerealiseerd kunnen worden met de implementatie van een servitization business model?