Implementing Servitization: investigating the Hurdles
to overcome in Product Lifecycle Management.
Tutor: Koen van der Gaast. Date: 28.11.2016. Words: 4668.
Authors: Name StudentID Major
Louise van Britsom 10270183 Sociology
Maud van den Eijnde 10764437 Business Management
Antonie Kuhlmann 10736247 Planning
Mart van der Marel 10752919 Artificial Intelligence
Introduction
Circular Economy (CE) is a concept that is receiving much attention as an alternative to the current unsustainable economic system. It aims at decoupling economic growth from resource consumption and includes practices such as new business strategies, innovative product design, complete recycling methods and enabling agencies (MacArthur, 2013). One building block of CE is Servitization, which refers to selling services instead of
products (ibid). It strongly encourages modular product design and recycling of products. This Research Project proposes to: a. critically reflect 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 realized by answering the following research question: What are the hurdles to overcome in Product Lifecycle Management to achieve the implementation of servitization? To be able to answer this question and capture all its interactions and interrelations, an interdisciplinary approach is needed. Hence the research question will be analyzed from four different perspectives: 1. Artificial Intelligence to identify technological limitations, 2. Business to find corporate
bottlenecks, 3. Sociology to discover societal difficulties, and 4. Urban planning to clarify obstacles in the policy making process.
The following Research Proposal is structured as follows: in the next section the
theoretical framework that lies at the basis of this research will be discussed. Then the methods that will be used to conduct the research are explained. After that, the results will be presented. And finally we end with some concluding remarks.
Theoretical Framework
Servitization is a business strategy, whereby a mix of tangible services are designed and combined so they are jointly capable of fulfilling 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 paper will focus specifically on use-oriented servitization: which is commonly defined 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, by means of leasing or renting (Baines et al., 2009, Mentink, 2014 & Steunebrink, 2012). Due to changes in Product lifecycle management, 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).
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 (Hirschl et al., 2002). The ownership of the tangible product is retained by the service provider, who sells the functions of the product, via modified distribution and payment systems, such as sharing, pooling, renting and leasing (Neely, 2008).
Since the 1990s, these use-oriented service-systems are present practically in organizations and theoretically in scientific literature. This development arose as a solution to overcome the similarity of products in the market and the limited ability for product differentiation due to high product quality (Tukker, 2015). Services were a new way for businesses to improve one’s position in the market, to increase utility for the customer, and add value to their products with the intention to improve customer value (Visnjic, 2012). However, the purpose of services changed from merely attaining a 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 circular economy with servitization as the underlying and facilitating economical framework.
Implementing closed physical loops, paramount to the circular economy, requires a radical change of Product LIfecycle Management (PLM) and the aspects of the business model such as processes, activities, resources, capabilities and the revenue model (Mentink, 2014). Firstly, 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 influence of lifecycle assessments on environment, resource base and working environment are substantial.. However, taking environmental aspects into account leads to a different 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 circularity by replacing recycling with the state of manufacturing and reuse being equal to usage; after usage the product or the materials from which the product is made re-enter the lifecycle. 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). Reducing consumption of resources is part of product manufacturing. To what degree the materials are reusable and recyclable have been built into the product.
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 different 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 more concentrating on improving the lifecycle itself by means of constant ownership by the providing organization (Toffel, 2002).
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 such planning issues that are complex to a degree to which they can be defined as ‘wicked problems’ (Webber & Rittel, 1973). Policy change is defined by Hall (1993) as ‘cognitive struggle between different 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 different orders (Hall, 1993). The first and second order refer to policy change as a process of social learning, thus an incremental change in the political landscape, as defined 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 specifies not only the goal 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). 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 definition, 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 exist to activate or propel wanted developments. Howlett (1991) defines such policy instruments as the ‘myriad techniques at the disposal of governments to implement their policy
objectives’. The instruments that are relevant for changes in connection to increasing
sustainability are identified and organized by Jordan, Wurzel & Zito (2003) in four categories. These include common regulation (often in the form of command-and-control), market-based-instruments, voluntary agreements and informational devices.
Method
The central subject in this research is the implementation of servitization, and the potential hurdles to overcome. A well-informed and well-defined method for performing this investigation improves the validity of the assay, the degree to which a test measures what it should measure, and the reliability, the extent to which a test is free of
measurement errors and so the same results would show up when re-running the test (Boeije, 2010 & Walliman, 2011).
As a starting point disciplinary literature research is done to gain insight into the relevant concepts connected to the implementation of servitization and possible hurdles. Not only disciplinary concepts are detected, but also varying viewpoints on similar concepts. The relevant concepts give a general idea of the hurdles connected to the individual fields of research.
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 different 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 offer deeper insights to this robustness and detect its origin. Disciplinary concepts and hurdles have been identified in the ILRs. The integration takes place by organizing these hurdles (coming from scientific theory) around a product lifecycle, which consists of three phases (manufacturing, use, recycle/reuse). The integration method that is used is organisation; the conformity of the different hurdles are identified and subsequently redefined and reorganised. This way the links between them can be mapped and set within a new interdisciplinary system.
The thus conceived theoretical insights are applied to the selectively chosen case study of the business model, motivation and consumers of firm X, focussing in particular on product Y. Firm X is selected because the setup of this research project necessitates a business that is at all concerned 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 variables were identified 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 being integrated using the three phases of the product lifecycle (manufacturing, use, recycle/reuse). 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 effects (see Figure 1).
Figure 1) Interdisciplinary Product lifecycle and the relevant aspects to hurdles (Own
illustration).
Manufacturing
Many services are based on a product. E.g. a lamp (product) is needed to provide light (service). However, the design of the product will differ in a service- compared to a product-based business. In the product-based manufacturing stage it is important to create a cheap product that can eventually be disposed. In the service-based
manufacturing stage a low production costs are just as important as durability, possibly reusability and recyclability (Mentink, 2014). To extend the lifecycle and make the product recyclable it is essential to create sustainable products made of recyclable resources as much as possible (Mentink, 2014 & Sundin & Bras, 2005). Moreover, higher
recovery rates result in less waste after the product is taken back and decreases the required amount of fresh raw materials (She and Zhang, as cited in Lozano & Witjes, 2016). The range of usable materials could decrease if recyclability is a requirement, narrowing down the possibilities and opportunities of product design and increasing the effort and initial investment that is necessary. This gives rise possibly to the first hurdle. In addition to this, it is essential that products are designed in such a way as to facilitate disassembly or recycling. Companies need to invest in research on flexible production methods and ways to effectively organize material flows. Digitization can provide these methods and contribute to a more sustainable form of 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). The term digitization is used to indicate the application of digital technologies as a means to facilitate monitoring of physical objects and automate manufacturing processes. Digital technologies such as the Internet of Things (IoT) and Cyber-Physical Systems (CPS) are considered a tool in, or a part of digitization.
Concretely, emerging technologies such as the IoT and CPS, are expected to connect billions of products and devices, creating smart environments. The ubiquity of these "smart assets" will allow businesses to monitor and control their production processes in real-time: this could provide the technological means required for realizing flexible smart factories that optimize production through improving resource-efficiency and allow easily disassembled products (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). Hence, concerning the hurdles connected to employing aspects of
digitization to implement servitization, on-going technological innovation aid to mitigate and overcome these.
In addition, further ‘smart’ technologies facilitate the communication between supplier and consumer and can help determine potential consumers, which is beneficial for a service-based organization to create a long product/service lifecycle. Increased communication will create a relatively long-term relationship with suppliers in comparison to the relationships within a product-based economy. Therefore, the
beginning of the manufacturing stage requires a well-considered supplier pre-selection (Lozano & Witjes, 2016). The finding of a matching partner can become a hurdle because a suitable relationship will be more crucial and require more time and research for an organization.
Complications around acquiring business partners and establishing individual supplier-consumer relationships are also prompted by a shift to servitization, since no right way exists to: a. effecting the shift, and b. implement the concept of servitization. Generally regulatory instruments can tool. However, they could prevail due to the complexity a number of hurdles.
The implementation of servitization and the Product lifecycle itself offer no one-size-fits-all solution. This complicates a shift, since every subsystem that is subject to a shift requires an individual approach. 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 find a set of instruments that incorporates all aspects of a shift towards servitization (Keohane, Revesz & Stavins, 1998). This can be analyzed as a planning paradox (Savini, Salet & Majoor, 2014); on the one hand
governments wish to offer opportunities for innovation in the form of flexibility. On the other hand governments are set out to insure the legal security. Other actors who focus on the individual level, such as businesses and consumers, can 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 (Keohane, Revesz & Stavins, 1998). Thus all actors are faced with a trade-off between flexibility and legal certainty caused by the implementation of policies by the government.
Current 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 international level there is much political concern on sustainability (EU, 2014). However, the coherence between these policies is weak and thereby often contradictory (EU, 2014). This lack of coherence restrains change by complicating the institutional framework. Further 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 such regulatory instruments, be they as they may too general and not coherent, governments also have the possibility to either directly or indirectly (via subsidies) invest and promote in wanted developments and thereby influence them. In this case such public investment in product design and recycling and recovery infrastructure and technologies that enable a circular lifecycle in the form of servitization can facilitate a shift (EU, 2014). However, whenever public investment does not take place or merely takes place in other areas, the lack of public investment can act as a hurdle (EU, 2014). The lacking public investment leads to innovation developing haltingly. This generates a general lack of know-how concerning crucial technological developments.
Use
In addition to the previously discussed contributions to manufacturing, the ubiquity of "smart assets" also allow businesses to monitor and control their products in real-time (Ellen MacArthur Foundation, 2016; Kagermann, 2015; Thomas & Trentesaux, 2014; Spiess et al., 2009; Westkämper et al., 2001). Which aids the execution of servitization in the use stage: service-based businesses distribute the product from the manufacturing location to the customer. And after usage it is transported back to the manufacturer again. This process of reverse-logistics involves transferability across markets (Oliva & Kallenberg, 2003). Furthermore, the knowledge about the condition of the product is also essential in a service-based business in contrast to a production-based business (Oliva & Kallenberg, 2003). 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). Controlling the product is associated with the implementation of reverse logistics systems (Mentink, 2014) and with a greater cooperation between the service providing organization and its supporting network to fulfil the maintenance, reuse and recycle (Martinez et al., 2010). The development of distribution streams and networks requires a new infrastructure, which does not immediately generate revenue.
Other important hurdles to implementing the emerging digital technologies are the need 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/financial harm? (Ellen MacArthur Foundation, 2016).
Current opacity concerning information on the origins and perishability of a product does not contribute to consumer awareness (EU, 2014). This lack of knowledge on the side of the consumer could be addressed by policies concerning increased transparency of the products properties. In addition, the need for a shift in consumer mentality is also discussed: Coreynen et al. (2016) highlight the need to shift consumer mentality from owning a product to having a need met. On the topic of consumer mentality, two extra hurdles come into play, both connected the to sense of ownership which servitization challenges (e.g. Hirschl, 2002: Mont & Plepys, 2003 : Rexfelt & Ornäs, 2009). Firstly, products have a symbolic value attached to an object appears to be more important than 'the use value' of the object (Niinimäki, 2014: Catulli, 2016). Servitization as it is only provides 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 amplification of 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). From a business perspective, this is seen as an opportunity for customers and the organization to become partners (Mentink, 2014). A possible solution is provided by Rexfelt and Ornäs (2009), who argue that the sense of ownership could be incorporated in the product design, for example through product customization.
Another large hurdle is the habit of buying new products in current consumer-mentality; it interferes with concept behind servitization where it is preferred to create durable products for long consumer use (Hirschl, 2002: Armstrong, 2015). Hirschl (2002)
suggests in Western society use intensification 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.
Finally, to achieve a compromise between customer and businesses, the price of a service can play an important role. Products can be sold per unit in contrast to services that are charged on the basis of use (Mentink, 2014 & Oliva & Kallenberg, 2003). In addition, the price should also contain additional services such as end-user’s
maintenance and costs of machine failure because of the access over ownership of the service-based organization as explained in the concept 'selling functionality' (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 fixed price that covers all services over a discussed period of time (Oliva & Kallenberg, 2003 & Lozano & Witjes, 2016). Furthermore, the total cost of ownership will be lower using a service-based business model (Lozano & Witjes, 2016).
Reuse/Recycle
The likelihood of reducing, reusing and recycling materials is larger in a servitized enterprise compared to a company selling a product (Kastelli and van Looy, 2013). From the organization’s perspective, the returning of a product to the manufacturer for
recycling or reuse gives the possibility to evaluate the performances of the product throughout its lifecycle and the chance to improve the product's lifecycle (Sundin & Bras, 2005). Elements such as cooperation between supplier and manufacturer, distribution and creativity in design increase the chance of success of the reuse or recycling of the product. However, it will be difficult for a service providing organization to trigger excitement about repairing a complex product (Oliva & Kallenberg, 2003): 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. However, taking into account the emergence of the IoT and CPS, Coreynen et al. (2016) argue that this complexity can effectively be managed through these digital technologies: Thomas & Trentesaux (2014) suggest that digitization could, for instance, allow for the
synchronization of material and information. Zhang et al. (2010) share this view and propose the application of the IoT to manage component-information throughout a product's lifecycle. The resulting feedback could then be used by the producer to
optimize its services and material flows in order to limit waste. All this could facilitate and establish remanufacturing practices throughout the sector and lead to significant
improvements in the resource-efficiency of businesses.
Product-based business models represent the opposite of a closed Product lifecycle aimed at in servitization. Regulatory instruments currently encourage or at least tolerate unsustainable practices such as planned obsolesce within product chains (EU, 2014). This is partly due to some building blocks of the servitization lifecycle being currently not profitable. The sourcing and manufacturing of a product and its raw materials is
comparatively more profitable than the effort that has to eventually be put in closing the product loop (EU, 2014). Also at the beginning of a shift towards servitization economic incentives concerning these less profitable aspects need to be put into place. Until then the shift is impeded by the unequal distribution of profitability within the servitization lifecycle.
The tolerance of unsustainable practices also points to a lack of coordination and cooperation of the relevant agencies concerned in the lifecycle of a product. This
additionally impedes the implementation of servitization (Puppim de Oliveira et al, 2013). In order to effectively organize the transportation of the 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 affordability and efficiency of such a transport infrastructure (Koshal, 1972) Thus also the collaboration between municipalities is crucial.
Discussion & Conclusion
The present research deals with the question of which hurdles impede the
It can most accurately be approached as a business model by regarding the different phases of LCM. This way other disciplines relevant for the implementation are revealed. The analysis mainly includes the integration of these disciplines, namely business, artificial intelligence, sociology and planning. Hurdles identified this way concern both the actual implementation of servitization as well as servitization itself.
The hurdles reported in the manufacturing stage concern a current lack of technologies and materials due to missing public investment and stimulation of the acquisition of know-how. The current policies does not fit into the model of servitization due to a lack of one size-fits-all solution and too general regulatory instruments. So the policies have to change to lead the new sort of relationship between consumer, business and supplier in order to achieve servitization. Especially, the long-term relationship between business and supplier that will be determined during the manufacturing stage can form a hurdle. The total process of manufacturing will be more difficult and will consume more time, mainly in the beginning.
Regarding the use stage of a servitization lifecycle, relevant hurdles are insecurities of consumers due to their habits concerning consumption. The relationship between consumer and business will change but the hurdle is about the how. Is it possible to create a partnership or is there not enough trust of consumers with respect to the business. Examples of specific hurdles are: differences in consumption patterns, the symbolic value and privacy. Eventually, all uncertainties should be written down in a contract that describes the rules of providing and using a service. Additionally organisational means, mainly in the form of technologies, are not yet sufficiently advanced to facilitate servitization. The development of such technologies is not sufficiently stimulated by public authorities.
Lastly, hurdles identified in the regenerative stage of the lifecycle include a lack of infrastructure, caused by a. available technologies not being integrated and widespread enough and b. missing cooperation between relevant agencies.
Manufacturing Use Recycle/Reuse
❖ Smaller range of possible materials
❖ Larger effort concerning supplier-consumer relationships
❖ Lack of one-size-fits-all solutions for policies ❖ Too general regulatory
instruments ❖ Lack of coherence of policies on various levels ❖ Lack of public investment ❖ Lack of organizational means ❖ Lack of regulations on data-usage concerning consumer privacy ❖ Lack of regulations on liability ❖ Opacity concerning information on the origins and perishability of a product
❖ Consumer insecurities about complications ❖ Current consumption
patterns
❖ Symbolic value not represented
❖ Unequal distribution of profitability within the servitization lifecycle ❖ Lack of coordination and
cooperation of the relevant agencies ❖ Lack of economies of scale ❖ Lack of organizational means
Table 1) The interdisciplinary hurdles to implementing product lifecycle
management (Own illustration).
The present research summarizes the hurdles concerning a shift towards servitization in a general theoretical manner. Table 1 summarizes the interdisciplinary hurdles to the implementation of product lifecycle management for each stage. Hurdles proposed in this paper might differ per case.
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