Adopting the service-dominant logic: Overcoming internal conflict, the role of IoT, and societal impact

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Adopting the service-dominant logic:

Overcoming internal conflict, the role of IoT, and societal

impact

Thesis MSc BA Strategic Innovation Management

University of Groningen, Faculty of Economics & Business

Duisenberg Building, Nettelbosje 2

9747 AE Groningen, The Netherlands

Supervisor: D. Langley

Second supervisor: T. Broekhuizen

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Abstract

The change of the institutional logic instantiated in organizations seems evident. The recognition that not “goods” but “services” are at the basis of exchange is pushing the transition from a goods-dominant logic towards a service-dominant logic. The development and adoption of the Internet of Things is increasing the aforementioned transition, as the services provided by goods can now be efficiently separated from its physical holder. The adoption of the service-dominant logic at the cost of the goods-service-dominant logic is causing organizations to experience internal conflict. This study aims to describe possible strategies to address the different kinds of internal conflict stemming from the transition from the goods-dominant logic towards the service-dominant logic. When organization experience extensive amounts of internal conflict, organizations are found to separate the institutional logics, while organizations who experience less conflict are found to reconcile both institutional logics.

Furthermore, the societal impact of the adoption of both the service-dominant logic and the Internet of Things are described. Both the service-dominant logic and the Internet of Things embody essential characteristics which will transform our economy from a linear one to a circular one.

By conducting in-depth interviews in the automotive industry, this study finds that organizations apply different strategies to overcome internal conflict, depending on the characteristics of these conflicts. Until now, these internal conflicts, and corresponding strategies were considered to be homogenous. This paper proposes that this is not the case.

Keywords: Service-dominant logic, logic multiplicity, strategic flexibility, internet of things,

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Introduction

Ever since the industrial revolution, our economy has been based on the valuation and ownership of physical products. Traditional businesses are operating from a goods-dominant logic. The goods-dominant logic is describing an institutional logic, which is “focussed on tangible resources, embedded value, and transactions” (Vargo & Lusch, 2004; p.1), which is reflecting in today's linear economy. However, there is a growing trend in which businesses are moving away from a goods-dominant logic, to a service-dominant logic (Lusch & Nambisan, 2015). “Service-dominant logic focusses on the processes of serving rather than on the output in the form of a product offering that is exchanged” (Lusch & Nambisan, 2015; p. 156). Because of innovations in information technologies (IT), the difference between product and service offerings is increasingly becoming smaller (Barett, Davidson, Prahbu & Vargo, 2015).

The internet of things (IoT) provides goods-oriented businesses with the possibility to offer products as a service (McKinsey, 2015), which might challenge the goods-dominant logic. The IoT consists of the network and applications made available by the interconnectedness of physical objects and the internet (Miorandi, Sicari, De Pellegrini & Chlamtac, 2012; Ellen MacArthur Foundation, 2016; Dijkman, Sprenkels, Peeters & Janssen, 2015; Wortmann & Flüchter, 2015). The IoT can be applied to monitor the state of resources, so they can be efficiently applied, adjusted or totally reused in the content of their network (Spring & Araujo, 2016). This enables the possibility to re-evaluate the worth, the role, and ownership of resources in a different and more complete way.

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This shift towards a service-dominant logic is a change in the dominant institutional logics. “The ability to handle change” is defined as the strategic flexibility of a firm (Brozovic, 2016; p.1). The nature of some events triggering strategic flexibility has been described. Triggers can be derived from uncertainties (e.g. Kazozocu, 2011), from competitive forces (e.g. Hitt, Keats & DeMarie, 1998), from economic and political risks (e.g. Grewal & Tansuhaj, 2001), and a combination of various factors arising from the complexity of modern markets (e.g. Perez-Valls, Cespedes-Lorente & Moreno-Garcia, 2015). However, “the influence of various natures of changes on strategic flexibility… is an unexplored avenue in the literature on strategic flexibility” (Brozovic, 2016, p. 14).

The change of its institutional logic is a prominent change to businesses. The consequences for businesses facing logic multiplicity vary, as logic multiplicity can have both positive (e.g. Jay, 2012) and negative (e.g. Battilana & Dorado, 2010) effects. Besharov & Smith (2014) found that the different outcome is depending on the characteristics of logic multiplicity. A specific occurrence of logic multiplicity in one organization can have different outcomes, compared to the same logic multiplicity in another organization.

Pache & Santos (2013) described the strategic implications of firms facing logic multiplicity. However, these logic multiplicities are considered homogeneous, while more recently it was proposed that this is heterogeneous (Besharov & Smith, 2014). This indicates that the conflicts arising from logic multiplicity are not the same in every organization (homogenous), but can differ (heterogeneous) depending on a multitude of variables. How businesses facing heterogenous logic multiplicity should organize themselves to handle these conflicts will presumably differ depending on the nature of the conflict. Until now, however, these conflicts have been regarded as homogeneous, resulting in a large variety of contradictory strategies to address these conflicts (Besharov & Smith, 2014). This paper aims to address this gap. How do businesses, facing different kinds of conflicts stemming from logic multiplicity, adjust their strategy to reach their goals?

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competing alternatives to their goods. The changing perspective on the value of resources, evident in a service-dominant logic, is also changing our economic model. The conflict resulting from logic multiplicity is heterogeneous, which will presumably result in varying strategies. By comparing the strategic implications of different heterogenous conflicts of logic multiplicity, this research will develop a better understanding of strategic directions which are linked to the heterogenous conflicts stemming from logic multiplicity.

This research focus will contribute to theory by showing how strategic flexibility is needed and executed under different forms of conflict stemming from logic multiplicity. Which will further expand our understanding of logic multiplicity and strategic flexibility. Overall, this research will expand our understanding of how businesses facing logic multiplicity can survive and thrive. This is scientifically relevant because, although we know that logic multiplicity will result in heterogenous conflicts, it remains unknown how these distinct conflicts should be strategically addressed.

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Literature Review

A change in dominant logic

Until recently, our economic model was based on a goods-dominant logic. In this view, physical resources themselves are valued. These resources are labeled operand resources, which are “static, usually tangible, resources that must be acted upon to be useful” (Vargo & Lusch, 2004; Lusch, Vargo & O’Brien. 2007, p. 8). In exchange among people, the goods exchanged are considered primarily an operand resource by the goods-dominant logic. In exchanging the goods, the customers themselves are also regarded as operand goods. Consequently, the market consists of a large number of customers, which can be segmented, penetrated, distributed to, and promoted to. It is important to note that the whole market, and the customers of which it consists, are regarded passive actors in the creation of value. The valuation of the goods exchanged, according to the goods-dominant logic, is solely done by the producer of the good. The total value of the goods is embedded in the operand resources themselves. In a goods-dominant logic, “wealth is obtained from surplus tangible resources and goods. Wealth consists of owning, controlling, and producing operand resources” (Vargo & Lusch, 2004; p. 7). The values exchanged are entangled with the operand resources in this logic, however when the value of exchange degrades, so does the value of the operand resource itself. This does not necessarily indicate that the operand resource itself has changed in any way.

There is a growing trend, moving away from a goods-dominant logic towards a service-dominant logic (Lusch & Nambisan, 2015). This trend was first extensively described and given a name by Vargo & Lusch (2004). The service-dominant logic is differing from the goods-dominant logic in fundamental ways. Where a goods-dominant logic is based on

operand resources, the service-dominant logic is based on operant resources. “Operant

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customer. Producers are merely proposers of different value propositions. “Wealth is obtained through the application and exchange of specialized knowledge and skills. It represents the right to future use of operant resources” (Vargo & Lusch, 2004; p.7). The differences between

operand resources and operant resources are summarized in figure 1.

It is becoming more evident that the basis of economic exchange is not based on the exchange of goods for other goods, but that exchanges are actually based on the exchanges of services consisting of specialized knowledge and skills (Vargo & Lusch, 2017). The goods, through which services thus can be indirectly exchanged, are not the value that is being exchanged. Furthermore, the customers are no longer regarded as passive actors but are embedded in the creation and valuation of the services being exchanged.

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Internet of things

The service-dominant logic is becoming more popular in a multitude of industries. The recognition that physical goods are essentially being exchanged for the value they are able to deliver to the consumer will have an impact on the way businesses operate. The reason why this new dominant logic is emerging at the moment is partially due to the fact that innovations in IT offer the possibility of new operations and new value propositions. The distinction between physical products and services is increasingly becoming smaller (Barett et al., 2015). One of the innovations in IT that has the potential to be of great influence is the IoT.

The Internet of Things (IoT) has been first described by Kevin Ashton in 1999 (Ashton, 2009). Since its introduction, the IoT has been recognized as one of the biggest trends in shaping our future. The IoT consists of the network and applications made available by the interconnectedness of physical objects and the internet (Miorandi et al., 2012; Ellen MacArthur Foundation, 2016; Dijkman et al., 2015;Wortmann & Flüchter, 2015) Previously, the internet was used to connect end-users with each other. The IoT enables the creation of a network of physical objects which collect, share and react to data. The IoT has been growing rapidly. The Ellen MacArthur Foundation (2016) has predicted that there will be 20-50 billion devices connected to the internet by 2020.

The IoT has the potential to liquify information on an unprecedented level. Information is being liquified, when it is separated from the physical holder of information (Normann, 2001). The IoT enables the information regarding a physical object to be transported without the physical movement of the object itself. As the information, description, or definition of objects can now be liquified (Lusch & Nambisan, 2015), the density of available information is reaching its maximum (Lusch, Vargo & Tanniru, 2010). Density of information is described as the combination of information from different sources, combined in an ideal way specific to its context (Lusch, Vargo & Tanniru, 2010). The IoT, through its smart objects, enables the combination of different sources of information to provide the necessary information in a context in the most complete way.

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its physical use. A birdhouse, for example, can be used to provide habitat for birds, which is its physical materiality. However, due to the IoT in can also serve as a measurement device of local air quality. Yoo et al. (2010) describe seven new properties of digitalized materiality: sensibility, traceability, associability, communicability, programmability, and memorability. These characteristics are required to achieve high information density. With the new concept of digital materiality, the concept of physical goods as the basis of exchange and value is getting less comprehensive (Yoo et al., 2012). The valuation of possible services physical goods enables is more comprehensives and is reflected in the service-dominant logic.

The IoT enables resources to be applied in new ways. Hoffman & Novak (2015) described this in their assemblage theory. Due to the IoT, objects can be paired together in an assemblage to reach certain performances none of the individual objects could have achieved alone (Hoffman & Novak, 2015). The object can be part of multiple assemblages at the same time in ever-changing environments. This characteristic of the IoT enables far-reaching modularization of assemblages and individual objects. Again, the valuation of the physical goods who enables these assemblages is getting less comprehensive. The services enabled by these assemblages is the real value being exchanged, as described in the service-dominant logic.

The liquification and the digital materiality enabled by the IoT change the way in which resources are used and valuated. Products are in need of a revaluation, in which products are subjected to constant re-definition and re-valuation as they are regarded in everchanging contexts and networks (Spring & Araujo, 2016).

The service-dominant logic argues that physical goods are used to exchange the knowledge and skills embedded in them, and thus are the physical carriers of services which are valuated (Vargo & Lusch, 2004). The IoT enables the separation of information embedded in physical goods (knowledge and skills) from its physical being. The physical good is also no longer solely designed for a single purpose or content but is the carrier of a more flexible set of knowledge and skills which enables the productions of different values in different contents. Because of the IoT, it is now possible for businesses to focus on the value that they really exchange and co-create with customers. Therefore, this research argues that the IoT is increasing the speed of adoption of the service-dominant logic.

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Conflicting institutional logics

Businesses will thus presumably increasingly experience the service-dominant logic, next to the traditional goods-dominant logic. There is thus a conflict in the institutional logics. An institutional logic has been defined as “the socially constructed, historical patterns of cultural symbols and material practices, including assumptions, values, and beliefs, by which individuals and organizations provide meaning to their daily activity, organize time and space, and reproduce their lives and experiences” (Thorton, Ocasio & Lounsbury, 2012; P. 2). Within organizational boundaries, it is not uncommon that multiple institutional logics are present (e.g. Dunn & Jones, 2010; Glynn & Lounsbury, 2005). The possible implications of having multiple institutional logics within an organization are diverse. While some studies have found that logic multiplicity leads to conflict (e.g. Battilana & Dorado, 2010), others have found that it can lead to greater innovative capacity (Jay, 2012). The number of conflicting results of logic multiplicity is significant (Besharov & Smith, 2014). According to Besharov and Smith (2014), these contradictions can be partly explained due to the fact that logic multiplicity has been addressed as a homogeneous event. However, the results of logic multiplicity are not homogeneous, but heterogeneous, depending on how the logics are instantiated within the organizations (Besharov & Smith, 2014). The degree and nature of conflict arising from logic multiplicity is based on two dimensions; the degree of centrality of the institutional logics, and the degree of compatibility of the institutional logics (Besharov & Smith, 2014).

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Next to the degree of centrality, the degree of compatibility of institutional logics is an important dimension influencing the degree and nature of conflict stemming from logic multiplicity. Compatibility has been defined “as the extent to which the instantiations of logics imply consistent and reinforcing organizational actions” (Besharov & Smith, 2014; P.9). The degree to which multiple institutional logics are compatible regarding organizational goals is more important than the compatibility of means. This implies that there is little to no conflict when the institutional logics within an organization are compatible regarding the organization goals. However, incompatibility may lead to more intense conflicts.

Combining these dimensions will result in a framework with four types of organizations and corresponding levels of conflicts.

Figure 2 Taken from Besharov & Smith (2014); p. 42

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“contested” in the transition from a goods-dominant logic to a service-dominant logic. Estranged organizations are characterized by moderate levels of conflict. Although both institutional logics are not compatible, they are instantiated in different parts of the organization with a clear hierarchy. Conflicts are often resolved in favor of the institutional logic which is essential to organizational functioning. Contested organizations are characterized by extensive conflicts, as both logics are instantiated in the most fundamental way. Both institutional logics are applied in fundamental processes, without a clear hierarchy in logics. This causes both logics to be carried by multiple advocates, which will find themselves in conflict over the hierarchy of the institutional logics in their organization.

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Strategic flexibility

Organizations will presumably find themselves facing multiple competing institutional logics as the role and value of physical goods will presumably change, and services enabled by goods will be central to exchange. Furthermore, the role of customers will change substantially. As described above, this will lead to some levels of internal conflict. Furthermore, the primary assumption of the nature of doing business might change. All these changes lead to the question: how do organizations thrive in the face of change?

With the rise of popularity and acceptance of the service-dominant logic, organizations will face change on multiple levels. “The ability to handle change” has been described as strategic flexibility (Brozovic, 2016: p. 1). The revised analytical model of Brozovic (2016) describes strategic flexibility in a framework of six pillars. Strategic flexibility is first triggered by a change or event in the organizational environment or organization itself (e.g. Combe, Rudd, Leeflang & Greenly, 2012). These changes can be described on multiple dimensions, for example, the degree of predictability of the change (Young-Ybarra & Wiersema, 1999). The changes can be classified into multiple types of change, for example as uncertainties (Hitt, Keats & DeMarie, 1998). Today's environment can be described as being in a chronic state of change (Nadkarni & Herrmann, 2010). Which causes businesses to face an increased number of triggers of strategic flexibility. Therefore, firms should take this into account and should be prepared to face and cope with changes (Sanchez, 1997).

Strategic flexibility has multiple dimensions. In analyzing the fast number of definitions of strategic flexibility, Brozovic (2016) has distinguished multiple dimensions which are emphasized the most in the literature. Strategic flexibility has traditionally been described as a more reactive process, in which organizations experience change and responds to that by applying resources and activities in a fitting matter to the change (e.g. Sanchez, 1995; Fernández-Pérez, Javier Llorens Montes & Jesús García-Morales, 2014). However, the proactive dimensions of strategic flexibility have been gaining momentum more recently (Sushil, 2015). The proactive dimension of strategic flexibility describes the ability of a firm “to model, shape and transform its environment” (Brozovic, 2016: p. 6). Next to that, strategic flexibility can be either intentional or unintentional.

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enablers of strategic flexibility has been expanding. New enablers like technologies and flexible business models are being mentioned (e.g. Dwyer, Cvelbar, Edwards & Mihalič, 2013; Hitt et al, 1998). But organizations might also face barriers to strategic flexibility, especially organizational rigidity (e.g. Sanchez, 1997) is a major barrier to strategic flexibility. Other types of barriers result from, for example, management (e.g. Singh, Oberoi & Ahuja, 2013) and technological, cultural, and structural barriers (e.g. Shimizu & Hitt, 2004).

This all leads to the outcomes of strategic flexibility, which is influenced by the process of strategic flexibility. In the process of strategic flexibility, firms go through multiple stages; awareness, attention, assessment, and action (e.g. Lau, 1996; Shimizu & Hitt, 2004). This often leads to the development of strategic options, from which one is selected to be the most fitting to both the organization and the changes it faces or will face (e.g. Combe et al., 2012). When the strategic flexibility is successfully incorporated in organizations, this will lead to higher financial performance (e.g. Hitt et al., 1998; Comber et al., 2012). Strategic flexibility is also often recognized as providing an organization with a competitive advantage (e.g. Winfrey, Michalisin & Acar, 1996), can result in higher innovative capacity (Li, Liu, Duan & Li, 2008), and the creation of new markets (Das & Elango, 1995). However, it should be kept in regard that the outcomes of strategic flexibility are not homogenous, but depending on the context in which it occurs (Grewal & Tansuhaj, 2001).

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The circular economy

The transition to a service-dominant logic will presumably also have implications for modern economy and society as a whole. The goods-dominant logic is product centered by nature. In the linear economy, streams of goods are unidirectional and are based on a “take-make-dispose” mentality (Spring & Araujo, 2016). However, due to environmental pressure and the growing scarcity of resources, there is a growing interest in the circular economy. The concept of a circular economy is defined as ‘one that is restorative by design, and which aims to keep products, components and materials at their highest utility and value at all times’ (Ellen MacArthur Foundation, 2015; p 18).

For the circular economy to be adopted, both technological and institutional innovations are required (Spring & Araujo, 2016). The IoT is a technological innovation which could increase the transition towards a circular economy. The role of the IoT in the circular economy is evident, as “the IoT can help to solve some of the critical qualification, classification and categorisation problems that stand in the way of achieving circular economy ideals, in settings where products circulate beyond the direct governance of one coordinating firm” (Spring & Araujo, 2016; p. 18).

The institutional innovation required for the adoption of the circular economy is presumably the service-dominant logic (Spring & Araujo, 2016). The service-dominant logic has multiple characteristics which are similar to that of the circular economy. The service-dominant logic can as a framework be used for environmental sustainability (Vargo & Lusch, 2017). In the linear economy, the end-user was considered a “value-sink” (Normann, 2001); the last step in value delivery and destroyer of the delivered value. The circular economy replaces the role of the consumer with that of a user. This indicates that the circular economy has some close linkages with the service-dominant logic (Spring & Araujo, 2016). Because of this, the adoption of both the IoT and the service-dominant logic will presumably increase the adoption of principles of the circular economy.

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The reduction pillar of the circular economy is based on multiple sources of reduction. The amount of resources consumed my end-users plays a role in the reduction process. In a service-dominant logic, organizations will focus on the co-creation of value with their customers. These customers are interested in the service that they receive from the organizations, not in the physical goods that are the holder of the service (Vargo & Lusch, 2004). When organizations adopt this institutional logic, they should be incentivized to deliver as much value in the most effective way. In other words, they should use as little physical goods as possible, as they are a driver of costs, to create as much value as possible.

The reuse principle in a circular economy promotes the usage of resources, which would be valued as waste in a linear economy, for the same purpose as it was originally designed. However, to be able to apply this concept, one should know about the state and location of resources which can be reused. The IoT enables the monitoring of resources, which consequently enables the reuse of resources which otherwise would have gone to waste. Recycling focusses on all the processes in the recovery of resources which has been labeled as waste and transforming those resources into resources which can be applied to new ends. Although recycling is being applied on large scales, there are some drawbacks to consider. By laws of nature, resources cannot be recycled infinitely, and thus will lose some value after each cycle (e.g. Reh, 2013). A second “danger” of recycling is that high recycling rates will not incentivize the reduction or reuse of resources.

A possibility is the redesign of products and systems as a whole. Modular designs instead of fully integrated systems is a promising reconceptualization advancing the circular agenda (Ji, Jiao, Chen & Wu, 2013). Again, the IoT enables the monitoring of resources which could be used in a modular way, similar to the assemblage concept discussed earlier.

The reclassification of resources is a complex but essential matter. When shifting to a service-dominant logic, we will no longer value the physical goods, but instead will regard the physical object as a transferrer of value (Lusch and Nambisan, 2015; Spring and Araujo, 2016; Vargo and Lusch, 2004). By focussing on values instead of goods, whole new business models can be implemented. Goods will be more often owned by the firms, as they sell the value it holds instead of its physical form. This will incentivize the businesses to increase the efficiency and length of life of their products.

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price and supply, it also heavily impacts the environment. The usage of renewable sources of energy, however, do not have these problems. In a circular economy, the sources of energy should be renewable to decrease the number of negative externalities.

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Methodology

Research design

To develop a better understanding of conflicts resulting from logic multiplicity, and consequently develop a better understanding of possible strategies for organizations to deal with these heterogenous conflicts, a theory development approach was taken. By taking a multiple-case study design, this paper will develop new theoretical insights derived from empirical observations. The process of theory development from case studies as described by Eisenhardt (1989) will be followed.

Case selection

The research will be held in the industry of traditional car rental, and in the industry of new forms of mobility, which in total will be further referred to as the automotive industry. This includes, but is not limited to, private lease, business lease, peer to peer car sharing, car sharing platforms, and other forms of mobility enabled by cars. A total of ten in-depth interviews were held with top managers of a broad variety of organizations, covering the automotive industry from multiple angles. In the automotive industry, both the IoT and the service-dominant logic are already sparsely being put into practice and are expected to have a more dominant role in the future. This already results in conflicts between institutional logics, resulting in high levels of uncertainty. By describing how these organizations act and strategically respond to these changes, this paper will develop a more generally applicable theory.

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Data collection

Ten semi-structured in-depth interviews have been conducted among ten organizations in the Dutch automotive industry. These ten organizations were selected to cover the goods-dominant logic, the service-dominant logic, and firms transitioning from the goods-dominant logic to the service-dominant logic. Furthermore, three industry experts were interviewed to express their professional opinion and to discuss their observations of the automotive industry. Together with a fellow student, researching the same industry and technology, an interview guide was developed to structure the interviews to a certain degree. Two different interviews guide were developed, in which one was specified for the interviews with the organizations itself (Appendix A), where the latter was developed for the interviews with the industry experts (Appendix B). The interviews were held in a timeframe of 4 weeks. The interviews were preferably conducted in person but were conducted using Skype or over the phone when interviews in person were not possible. The interviews lasted 66 minutes on average.

During all interviews, one of the researchers was conducting the interview, while the other took notes and asked supplementary questions to ensure all topics were covered and discussed in depth. Making use of multiple investigators increased the creative potential of the study, and confirmed the strength of the findings by converging observations (Eisenhardt, 1989). Both the interviews and the observation were used to strengthen the construct validity by making use of triangulation (Eisenhardt, 1989). All interviewees were asked for their permission to record the interviews and apply their data anonymously. Furthermore, all interviewees were offered the opportunity to review the transcripts.

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Data analysis

There was an overlap in the process of data collection and data analysis. This enabled the flexible collection of data, and a richer theory development process (Eisenhardt, 1989; Yin, 2014). The cases researched were described during the process of data analysis, which initiated the thought process during the data collection process (Yin, 2014). Furthermore, this allowed us to identify and add other relevant cases to our sample (Eisenhardt, 1989).

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Findings

This section will examine the results drawn from the multiple-case study performed and the analysis of the data drawn from these studies. First, the results regarding the transition in the institutional logic are described. Second, the role of the IoT in this transition is further elaborated on. Third, the internal conflicts resulting from the conflicting institutional logics are discussed. Fourth, the observed strategies applied to deal with these changes is discussed. And finally, the societal impact of the transition to a service-dominant logic is reviewed. All the quotes that are in italic, are quotes from one of the interviews which represents an ongoing trend, consensus, or remarkable event.

The transition in the dominant logic

There is a transition recognizable in the institutional logic held by both people and organizations themselves. The data shows that all organizations, to some degree, recognize the transition from the goods-dominant logic towards a service-dominant logic. In the industry selected, all organizations have changed their offer and communication towards their customers. No longer are these organizations offering cars, which is representing the goods-dominant logic, but they are all offering mobility, which is representing the service-goods-dominant logic. It is noticeable that the physical item that is being exchanged is nearly unchanged. This is in line with the service-dominant logic, and the differentiation between operant resources and operand resources (Vargo & Lusch, 2004). This is perfectly illustrated in one of the cases, as they stated: “[…] we deliver mobility. We deliver this mobility as a service, that we use cars

to do so is just coincidental”

The adoption of a service-dominant logic is currently visible among customers and is expected to increase in the future. The younger generations are less able to acquire expensive goods, like cars, and are less inclined to do so, as they do not completely agree with the need for ownership. They are better informed and are used to have an overload of possibilities to choose from, and selecting the one most fitting to their needs. One of the older and larger organizations stated that “[…] people of the age of 20 are not interested in owning such an expensive piece of metal,

together with all the work and problems coming with it. A subscription [on mobility] is a good solution to them.” The older generation, however, is still more used to the ownership principle.

The same organization indicated that: “A lot of people older than 50 are still willing to buy

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want to own cars.” Ownership of products is still associated with wealth and status, which is a

reason for people to buy goods. This association is declining, but still dominant.

The customers are also fulfilling a different role in the current and future industry, compared to the traditional industry. Customers are more central to the organization, having an important role in the determination of the offer that is being proposed by the organizations. “We used to

not listen to customers, we used to develop what we thought was right based on our estimations. Now we first listen to our customers. In fact, we now earn the most from projects that we didn’t start because of early customer feedback”. Organizations are more often expressing an

outside-in perspective, opposed to the former outside-inside-out perspective. Additionally, customers are actively contributing to the value proposed by the organizations. For example, customers make their own cars available to share with other users on platforms created by automotive organizations. Recognizing customers as co-creators of value is one of the axioms of the service-dominant logic (Vargo & Lusch, 2016), and a way to gain a competitive advantage (Lusch, Vargo & O’Brien, 2007).

All organizations researched are sure of a future in which MaaS is dominant in the industry. The selling and leasing of cars is expected to decrease in importance and to become a niche in the long run. Because of this transition, organizations are starting to focus on their operant

resources opposed to their operand resources. Especially the selection of niches, or specific

points in the network which proposes value, which is in line with current knowledge and skills of organizations, is a recognizable trend. The creation of value in a service-dominant logic happens in the collaboration of organizations with its external environment. As stated by one of the industry experts: “Businesses are working together in many different ways. Businesses

are specializing more and more, and therefore need to work together more closely.”

Adoption and application of the IoT

The internet of things is being implemented in the industry but is still in early development. However, digital skills and infrastructure are being recognized as important for both now and the future. The internet of things is being adopted in the industry at the moment, as there are a lot of potential benefits in this technology. “Car manufacturers are therefore making nearly

all of their new models connected”. Other parties are focussing on connecting cars to the

internet that are currently not connected yet.

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and is being surrounded by uncertainties. The standards and regulation regarding the monitoring and measurement of cars have not been set, which causes a lot of organizations to take a more passive approach. “The privacy of our customers is important, we are careful with

that”. Until there is clarity regarding the regulation of IoT privacy, the rate of adoption of the

IoT will be suboptimal.

However, the possibilities of the IoT are being recognized and prepared for. The IoT will enable whole new business models. In the automotive industry, the carsharing platforms are now gaining in popularity. The IoT enables the monitoring, the access, and the administration of cars who are shared. This is being recognized as the first step towards the shared autonomous car. When this is available, cars are expected to be (nearly) identical. “I expect that cars will

turn into a commodity. Mobility should be a commodity, just like the safe and clean tap water.”

With an extensive IoT network, combined with autonomous driving, mobility can be a commodity, and cars would be one of the ways to facilitate this.

Furthermore, the connectivity of the car will create new markets, in which the car is a source of data which can be used to numerous ends. For example, the data acquired from connected autonomous cars will create a market for in-car entertainment. “There are new business model

opportunities for organizations like Youtube and Netflix. Or maybe the taxi-industry will change its revenue model, in the sense that your ride gets cheaper as you are exposed to incar advertisement.” A large number of organizations will suddenly be able to approach you, based

on your use of mobility.

Conflicting institutional logics

All organizations included in this research indicated that they expect, and prepare for, a future in which their organization will be based on the service-dominant logic. The degree to which these organizations have already embedded the service-dominant logic, and in which places of the organization, differs. This causes different levels of conflict within organizations.

Older and more traditional organizations are more often expressing a goods-dominant logic. This is the case, as these organizations have a longer history in which the goods-dominant logic was internalized. “As long as you have a history, you will be stuck in your history. It is hard to

create something new in that case.” The goods-dominant logic is more central to these

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logic as successful and quick as organizations with less history could, and that transition will not happen overnight. “[We know] we have to change, the world is changing, customer demand

is changing, everything needs to be different. For a large organization, with a lot of employees, this change is very hard”.

There are also organizations which have been incorporating the service-dominant logic for a longer time, or even from the very beginning. These were younger organizations with less history. “Younger organizations have had a different starting point compared to the traditional

car rentals. There are also other movements and trends in the society, so they start from a different viewing point”. The service-dominant logic has been the core of their operations and

is not expected to change anytime soon. However, we have not observed any organization which held service-dominant logic principles in all parts and processes of its organization. The organizations described first, are going through a process of change in which they will need to replace their institutional logic. This process is expected to require some time and is bound to cause internal conflict. Therefore, they expect that the transition will at some point reach a tipping point in which one institutional logic will take over the other one. This transition will cause internal conflict, as stated by one of the traditional organizations: “the transition is

still a problem, as half of our business is still based on products”.

The latter organizations, however, already seems to be prepared for a service-dominant logic future. They have embodied the service-dominant logic in the core of their organizational functioning, as they offer services and have different customer interactions.

Strategic options

The aforementioned trends are being recognized by the industry, and require changes to comply with. The ability of these organizations to handle these changes is dependent on the strategic flexibility of these organizations. Strategic flexibility is triggered by multiple changes or events. The certainty that the industry will change towards a MaaS future, but the uncertainty about the process and outcome, is the most important trigger. “It is certain that MaaS is the

future… however, it remains uncertain how the future will be, and how the market would look. It is a bit of a black box”. The technological advancements in the IoT also enable new

opportunities and possibilities, which organizations want to make use of. “The data and

connections of cars will enable interesting new revenue models”. The changing institutional

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assumption that car manufacturers will be the future owns of physical goods, while other parties might manage the platforms where customers can make use of the mobility. Furthermore, the big data companies in the world are expected to enter at some point. Considered together, it is predictable that the industry and organizations will change, but the process and outcome are uncertain. These changes can present themselves as both opportunities and threats and might change the competitive landscape drastically.

Their ability to change is depending on and hindered by a number of factors. The service-dominant logic is radically changing the business model of traditional automotive businesses. These organizations are often large and influential. These organizations have invested a lot in the foundation of a goods-dominant logic. It is therefore not in their interest to adopt the service-dominant logic, and in the process “burn their own ships”. Although there is no official evidence, the incumbents are probably “saying everything they can to be able to sell their

current cars in the same model.”. Furthermore, the organizations themselves are not always

able to adjust their institutional logic or are not willing to. A traditional organization mentioned the existence of “innovation prevention teams”, which hindered their ability to transform and innovate within their organization.

Organizations feel the pressing need to change. Various factors were observed, influencing their ability to be strategically flexible. Especially organizational structure and the ability of the organization to recognize and acknowledge the expected trends in the industry, were important for organizations to be strategically flexible. To become strategically flexible, incumbents make use of internal projects and start-ups. They are the “the speedboats that are

surrounding the oil tanker”. Looking ahead is also getting more important: “the necessity to structurally look ahead 15 years has never been so high”. Also, the ability to be flexible in

the use of resources, and the availability of relevant knowledge and skills, was of big influence. Newer organizations were more often able to be flexible in the application of resources, however, they also lacked the necessary resources (Brozovic, 2016).

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acquiring successful start-ups” In this way, these organizations aim to enter the mobility

market, which is expected to grow in the future. The acquisition of successful start-ups in the mobility market gave them access to, and influence in, a growing future market. “All

incumbents participate in start-ups … which of course also results in them being able to make arrangements easier”. Finally, the incumbents are aware that their role might be taken over by

other players in the future, which incentivizes them to focus on broadening and diversifying their organization. “We expected the manufactures to take over our role as importers. So we

expanded our chain…not because we wanted to, but because we felt it was a good match with our main business”.

The younger organizations found that they would not experience extensive internal conflict, and would be estranged at most. However, to benefit from the foreseen changes, they would need sufficient (financial) resources. The industry in which they are active has relatively high entry barriers, as “[Lease] cars are capital intensive products. This makes it more difficult for

new parties to enter the industry.”. Furthermore, the possible threats of large global

organizations, like Google and Amazon, entering the industry incentivizes the younger organizations to find a powerful party to cooperate with. All new organizations interviewed or discussed were either acquired or looking to be acquired by larger organizations. “When the

offer is sufficient, we will definitely let somebody buy us”.

Societal impact

As argued before, the adoption of a service-dominant logic should contribute to the transition towards a circular economy. The role of physical goods in the service-dominant logic is different in comparison to the goods-dominant logic. No longer is wealth generated by the production and transaction of goods. No longer are operand resources the central pillar of the economy, but operant resources will be. Therefore, it would not make any business sense to unnecessarily waste operand resources which are often the carriers of operant resources. The automotive industry is recognizing this. They foresee a future of autonomous shared cars, which are most likely owned by the cars manufactures themselves. They expect that the role of the manufacturers will change drastically. As future owners of the autonomous car fleet, they are incentivized to extend the lifetime of the cars they produce and use. “This is exactly

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Furthermore, the growth of the IoT is enabling a better monitoring of physical goods. Especially their state and use are now being monitored. This data can be applied in a variety of ways, but the most common in the industry seems to be the monitoring of cars and parts of the car for maintenance purpose. “By monitoring the cars from a distance, we can have better

maintenance and service” By doing so, resources are more efficiently used and only replaced

or repaired when necessary.

However, the full adoption of the circular economy is still in the far future, and it remains uncertain how the future will look. The adoption of one pillar of the circular economy, however, is certain. The renewal pillar is the most important at the moment and is widely being implemented. The electrification of cars was even explicitly described in the core strategy of organizations interviewed: “Our strategy is based on CASE…in which E stands for

Electrification”. There seems to be a consensus that future fuel will be environmentally

friendly. All future cars are expected to be (fully) electric, which will be powered by sustainable energy sources like wind and solar. However, the usability of electric cars now is being questioned. They do not yet reach the same standards as “regular cars” can. The opinion on electric cars still is very diverse, ranging from “electric cars are for environment freaks” to

“the biggest part of our future fleet will be electric [in the near future]”.

The importance of sustainability is more often being recognized, by both producers and consumers. Both producers and consumers are more aware of their environmental impact, and the need to reduce that. A lot of regulation is in place or is expected to be in place in the near future, to reduce the environmental impact of society. “We are seeing that the world is

changing. Whether you would say that we have a green mindset, the customers do expect that from us more often. Also, new regulations regarding sustainability are changing business models”. A lot of organizations, however, decided consciously to do more than minimally

required by law. We found two separate reasons for this. In the first place, a lot of the managers share the belief that the environment is important and that they should use their power to bring about a positive influence. Secondly, the organizations recognize the demand from customers to be sustainable. They, therefore, use sustainability as a strategic tool. “Besides from the fact

that sustainability is good for PR, it also feels good on a personal level”.

Sustainability as a strategic tool was found to be implemented in two ways. First of all,

greenwashing, where organizations claim to be more sustainable than they actually are, is

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sustainability] … but, up to certain degree, will say anything their customers want to hear”.

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Discussion

The transition towards a service-dominant logic seems certain. In the near future, service will be the basis of every exchange, while physical goods will be regarded as the temporal carrier of a service. I presume that the transition towards a service-dominant logic will be accelerated by the IoT. The IoT enables the separation of the services from the physical carriers of the services. The IoT enables this in an unprecedented way. The new role and valuation of goods, together with new possibilities enabled by the IoT, incentivizes organizations to adopt multiple pillars essential to the circular economy. Organizations with different legacies, resources and/or skills will adjust their strategy in different ways to stay competitive and thrive, with the goal of minimizing internal conflict.

This study has contributed to the development of a better understanding of the service-dominant logic, the IoT, the circular economy, and strategic flexibility. Especially the linkages between these concepts has been further elaborated on. Furthermore, the event of logic multiplicity has been described, and strategies to reduce or prevent the resulting internal conflict has been proposed.

The adoption of the service-dominant logic

The service-dominant logic is becoming more dominant. The recognition that not operand resources, but operant resources are at the center of exchange, will have far-reaching consequences. This is already being recognized by businesses, and sparsely put into practice. Adopting a service-dominant logic can provide organizations with a competitive advantage. “The most fundamental implication is that firms gain a competitive advantage by adopting a business philosophy based on the recognition that all entities collaboratively create value by serving each other” (Lusch, Vargo & O’Brien, 2007, p.15). Organizations seem to be more aware that they offer services instead of products, which are created and valued in collaboration with their customers and network. However, not all axioms of the service-dominant logic are implemented equally at the moment. The recognition of service as the basis of exchange (axiom 1), the increased involvement of other actors, including the beneficiary, to co-create value (axiom 2) within actor-generated institutions (axiom 5), and the recognition that all actors are resource integrators (axiom 3) are being implemented in practice. However, the recognition that value is determined by the beneficiary (axiom 4) is not put into practice, as “value is based

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dominant logic is still in early stages, but it is also being recognized to play a central role in the near future.

The adoption of the service-dominant logic is partly due to the new developments and applications of the IoT. The IoT enables the separation of services, and thus value, from the physical holder of that service. Furthermore, the recognition that customers are operant resources, incentives organizations to cooperate with them closer. The IoT enables the platforms to do this. Both the literature as the data indicates that there is a transition towards the service-dominant logic and that the IoT is contributing to this transition. The possibilities enabled by the IoT cause the deinstitutionalization of the goods-dominant logic and is a source of the change towards a service-dominant logic, as the performance in the latter case seems to be higher (Dacin, Goodstein & Scott, 2002). Therefore, the following proposition has been made:

Proposition 1: The Internet of Things accelerates the transition from a goods-dominant logic towards a service-dominant logic, because IoT enables the separation of services from its physical holder in an unprecedented way.

Figure 3 Proposition 1

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Strategy for estranged organizations

When logic multiplicity happens within an organization, different kinds of conflict can arise (Besharov & Smith, 2014). How the institutional logics are instantiated differs among organizations. In estranged organizations, the two institutional logics are not compatible, and a clear hierarchy between the institutional logics has been established. This will result in moderate levels of internal conflict.

From the data gathered and the literature discussed, this study found that new entrants more often incorporate a service-dominant logic, while still applying specific parts of the goods-dominant logic. However, the service-goods-dominant logic within these organizations is more dominant, which classifies them as estranged organizations.

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Proposition 2a: Institutional entrepreneurs are communicating and guiding the organizational transition from a goods-dominant logic towards a service-dominant logic.

Figure 4 Proposition 2a

Proposition 2b: Selective coupling is applied to internally increase the compatibility of the goods-dominant logic and the service-dominant logic.

Proposition 2c: Selective coupling will result in lower levels of internal conflict stemming from logic multiplicity.

Proposition 2d: Selective coupling will transform estranged organizations into organizations in the aligned logic category.

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Strategy for contested organizations

Incumbents find themselves having more trouble when adjusting to a new dominant logic. Again, the compatibility of the goods-dominant logic and the service-dominant logic is low. In the past, incumbent organizations had a clear hierarchy between the goods-dominant logic and the service-dominant logic, where the goods-dominant logic was more dominant and important to organizational functioning. This would also classify them as estranged. However, both the literature as the data suggest that a transformation is happening and will continue to do so in the future. In this scenario, incumbent organizations will be classified as contested and will experience extensive internal conflict.

Incumbents recognize this threat and therefore try to prevent this event from happening. Among incumbents, there seem to be two different goals regarding logic multiplicity. First, the organization should be prevented from becoming contested. Second, the organization should transform towards a service-dominant logic as fast as possible, with as little loss as possible. These two goals are important, as incumbents already experience competition with organizations expressing a service-dominant logic. They feel the need to transform, but also recognize that they cannot adopt a competing institutional logic as fast as new entrant can. They should thus transform themselves as fast as possible, while also staying competitive. Again, organizations either separate or reconcile conflicting institutional logic (Greenwood et

al, 2011). Contested organizations are found to focus on the separation of institutional logics.

The use of strategic options was observed, as organizations develop alternate strategic options and implement the most fitting one when more knowledge is acquired (Combe et al., 2012). This results in the following proposition:

Proposition 3: Organizations facing logic multiplicity apply strategic options to prevent themselves from becoming contested organizations.

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Merger and acquisition can be used to apply structural overlap within organizations with the aim of changing the institutional logic within organizations (Thornton, 2004; Thornton, Ocasio & Lounsbury, 2015). However, from the data in remains unknown if the transition towards a service-dominant logic was the main goal of mergers and acquisitions. The incumbents might not intentionally stimulate the adoption of the service-dominant logic, but the level of adoption of the service-dominant logic by an organization might in their expectations be similar to a successful or promising organization.

Proposition 4a: Contested organizations intentionally use mergers and acquisitions to acquire a new institutional logic.

Proposition 4b: Contested organizations unintentionally acquire new institutional logics in mergers and acquisitions.

Figure 7 Proposition 4a, 4b

Furthermore, incumbents promote the usage of project-based development. These projects are often decoupled from the organizations, to promote its innovative performance. These projects are, up to a certain degree, self-steering entities. This creates free spaces in which institutional intrapreneurs apply a different institutional logic, in this case the service-dominant logic. Institutional intrepreneurs are found to integrate their institutional logic into the broader organization, and thus changing the institutional logic of the organization (Heinze & Weber, 2015). Again, it is unknown if these strategic options are intentionally applied to promote the transition from a goods-dominant logic towards a service-dominant logic. This results in the following propositions:

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Proposition 5b: Contested organizations intentionally stimulate intrapreneurship and/or projects with the goal of increasing the speed of transition from a goods-dominant towards a service-dominant logic.

Proposition 5c: Contested organizations unintentionally increase the speed of transition from a goods-dominant towards a service-dominant logic with intrapreneurship and/or projects.

Figure 8 Proposition 5a, 5b, 5c

Societal impact

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Proposition 6a: Through the reduction pillar, the service-dominant logic will positively influence the transition towards a circular economy.

Proposition 6b: Through the reclassification pillar, the service-dominant logic will positively influence the transition towards a circular economy.

Proposition 6c: Through the reduction pillar, the IoT will directly positively influence the transition towards a circular economy.

Proposition 6d: Through the redesign pillar, the IoT will directly positively influence the transition towards a circular economy.

Figure 9 Proposition 6a, 6b, 6c, 6d

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and their goals more (Hockerts & Wüstenhagen, 2010). This convergence of disruptive organizations with a service-dominant logic (entrants) and resourceful organizations with a goods-dominant logic (incumbents) will results in organizations who will have a more positive environmental impact (Hockerts & Wüstenhagen, 2010). Following this finding, the following proposition has been made:

Proposition 7: The convergence of organizations holding either a goods-dominant or service-dominant logic will result in more sustainable organizations in the near future.

Managerial implications

The concepts discussed in this study are all relevant for the management of organizations in the present and in the near future. First of all, the service-dominant logic will play a more dominant role in the future. This requires strategic changes of organizations on a multitude of dimensions. However, the adoption of a service-dominant logic also can be a source of competitive advantages.

The first step in managing the transition towards the service-dominant logic is the recognition and classification of the (possible) internal conflict in the organization or in the near future. The appropriate strategy should be than implemented. The findings of this study give managers some rough guidelines on possible strategic options to minimalize the internal conflict stemming from logic multiplicity. Either the separation or the reconciliation of institutional logics is an appropriate strategy, depending on the type and severity of internal conflict. Furthermore, it is important to understand the interplay between the IoT, the circular economy, and the service-dominant logic. Although different, these three concepts are co-evolving and influencing each other. For managers, it is important to understand the effects of the change in one of these dimensions on the others.

Limitations and future research

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Conclusion

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Adopting the service-dominant logic: Overcoming internal conflict, the role of IoT, and societal impact