Connecting the principles of a Circular Economy with the
theory of Product-Service-Systems: creating a value
proposition for Philips Lighting
MSc Business Administration - Strategic Innovation Management Anne-Marleen Giesebrecht
S2548933 Supervisors:
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Abbreviations
CE Circular Economy
LaaS Light as a Service
NUS National Union of Students
PSS Product-Service-System
RQ Research Question
TCO Total Cost of Ownership
WMATA Washington Metropolitan Transit Authority
Abstract
This research connects the theory around Product-Service-Systems (PSS) with the framework of the Circular Economy (CE). Establishing this relationship highlights the importance of services and their claimed potential of environmental sustainability. As markets indicate a growing demand for services, the case explored here, Philips Lighting, taps into that opportunity aiming for CE inspired service propositions. However, as the results indicate the company struggles to detach itself from its product-centric focus. Therefore, this research encourages Philips Lighting to alter current business practices with a more determined, future-oriented approach to services. Moreover, this paper delivers the formulation of a CE inspired value proposition for Philips Lighting in a B2B context.
Aknowledgement
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Table of content
1 Introduction ... 6
2 Research question ... 8
3 Theoretical background ... 9
3.1 Generic approach to a CE business model ... 9
3.2 CE business models and the delivery of a “sustainable” value proposition through PSS ... 10
3.3 Capturing value from CE business models ... 13
4 Practical Background - Best practices: Current applications of PSS across and within industries ... 14
5 Case study ... 20
5.1 Methodology ... 21
5.1.1 Research Design ... 21
5.1.2 Sampling Characteristics and Size ... 21
5.1.3 Data Collection ... 22
5.2 PSS as a specific CE value proposition for Philips Lighting ... 22
5.3 Results of the interviews ... 25
5.3.1 RQ 1: How can the model of PSS be applied to Philips Lighting? ... 25
5.3.2 RQ 2: How can Philips current PSS be expanded by CE elements? ... 29
5.3.3 RQ 3: How can a CE inspired value proposition for Philips Lighting be formulated? ... 32
6 Conclusion ... 34
6.1 Theoretical contribution ... 34
6.2 Managerial implications ... 34
6.3 Discussion ... 35
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Tables
Table 1: Case study comparison ... 17
Table 2: Competitor analysis ... 19
Table 3: Customer needs ... 20
Table 4: Definitions service categories after Tukker (2004) ... 23
Table 5: Elements mentioned concerning taking over the energy bill ... 30
Table 6: Elements mentioned concerning upgrades ... 30
Table 7: Service elements for outer loops ... 31
Table 8: Internet references ... 43
Table 9: Interview respondents ... 44
Table 10: Service elements ... 46
Table 11: Status quo ... 47
Table 12: Business models for Philips Lighting ... 48
Table 13: Capturing value from services ... 49
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Figures
Figure 1: Ellen MacArthur Foundation (2013) CE framework ... 6
Figure 2: Modelled after Gaiardelli et al. 2013 – Philips Lighting Service Elements ... 25
Figure 3: Tukker (2004) Main and subcategories of PSS ... 42
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1 Introduction
“You never change things by fighting against the existing reality. To change something, build a new model that makes the old model obsolete.”
Buckminster Fuller
Facing the rapid depletion of scarce resources and, consequently, rising commodity prices that lead to more and more instability in markets requires a paradigm shift towards a new economic system. To encounter these problems, the report of the Ellen MacArthur foundation (2013) offers a European perspective on how to tackle future challenges of resource scarcity and economic growth. The report proposes a multidimensional framework of a Circular Economy (CE) that withdraws from the traditional and rather linear “take-make-dispose” approach and aims at closing the material loop. The “circularity” suggested is based on three principles: First, the elimination of waste enabled by design principles that embrace reuse and disassembly. Second, a differentiation is made between durable and consumable components. Consumables are considered as biological nutrients, non-toxic in nature and, therefore, can be directly given back to the biosphere. However, durables are composed of technical nutrients that cannot be easily returned. For this reason, they have to be designed in a way that permits the reuse of components. Third, the energy needed to keep these cycles going stems from renewable resources (Ellen MacArthur Foundation 2013).
This model has attracted attention from various industries, claiming that every loop of the system is a source of value creation.
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This study will focus on the technical materials loop. Four technical materials principles provide the biggest potential for value creation.
- The power of the inner loop: Aims at keeping the cycle as tight as possible to limit the amount of
changes a product has to go through for reuse, refurbish and remanufacturing. It is claimed that this can be achieved most efficiently by providing maintenance. However, as this research will demonstrate the inner loop can be even more exploited, offering services that go beyond maintenance.
- The power of cycling longer: Aims at maximising the number of cycles a product goes through in
each cycle.
- The power of cascade usage: Aims at expanding the reuse of a product along and across distinct
value chains.
- The power of pure cycles: Aims at increasing collection and redistribution efficiency and
maintaining quality by extending a product’s lifetime.
There are not only economically driven incentives that force businesses to rethink current production patterns. European policy increasingly reinforces stricter regulations for the disposal of industrial and consumer goods (Porter & Linde 1995a; Guide et al. 2003; Dangelico & Pujari 2010). This is evident in the directive on Waste Electrical and Electronic Equipment (WEEE) (Walther et al. 2009; European Union 2012). The change to a more restorative economic system is also embedded as one of the three important pillars within the framework of the European strategy Europe 2020 (European Union 2010). A very recent communication of the European Union “Towards the circular economy: A zero waste programme for Europe” (2014) reinforces measures taken by providing a new policy framework. Regulations, however, not only imply restrictions to current business practices. Porter & Linde (1995b) argue that adequately designed environmental standards may even generate innovations. The framework provided by the Ellen MacArthur foundation tries to grasp this chance, underscoring that the CE drives innovation on multiple levels and can even cumulate into radical business model innovations.
Business models change only if the foundation of a company’s current business practices is altered. This research aims, therefore, to explore how the principles of the CE might lead to innovation on product and service level. In addition this research aspires to emphasize that innovation does not only occur within the two domains, but rather across by connecting products and services into a comprehensive proposition. It thereby captures an important notion of the CE which claims that added value is created, providing performance-based solutions instead of sole product sales.
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most likely due to the fact that the active promotion of the framework by the Ellen MacArthur foundation is rather recent (founding year: 2010). Nevertheless, this opens a wide range of new research opportunities. This research is one of the first to explore the phenomenon.
To provide the necessary theoretical grounding, this paper builds to a great extent on the academic literature of Product-Service Systems (PSS). This research stream originates back to 1999, when the first publication on PSS by Mark Goedkoop et al. and commissioned by the Dutch Ministries of Environmental and Economic Affairs was published. PSS create and deliver value, integrating products and services in one offering. It was this group of scholars that already pointed out in the past that: “PSS solutions have the potential for decoupling environmental pressure from economic growth by focusing on asset use rather than on asset ownership.” (Baines et al. 2007, p.8). Exactly this notion has been now readopted and is highlighted by the Ellen MacArthur Foundation to promote its concept of “an industrial model that decouples revenues from material input: the ‘circular economy’.”(2013, p.8).
The last two decades of this research field are characterized by a growing number of case studies. The majority explores PSS in the context of the automobile (Tukker 2004), washing machine (Mont 2004) or photocopier industries (Matsumoto & Kamigaki 2013). The context and the characteristics of products and services within an industry, however, play an essential role in how products and services can be delivered and integrated to realise a value proposition (Durugbo et al. 2010). This research tries to contribute to this literature stream, investigating PSS for a B2B environment in the lighting industry and, connecting it to the CE framework.
Philips provides its sustainability view in a mission statement on its website, explaining that its efforts are guided by a two-dimensional approach. It encompasses a social and ecological dimension to improve people’s life. The social dimension entails all products and solutions that contribute to people’s health in a curative (care) or preventive (well-being) form. In the ecological dimension, Philips embraces the CE framework, recognizing it as an important prerequisite to create a more sustainable world (www.philips.com). The CE is, therefore, deeply embedded in the strategic path Philips has chosen. However, this also represents the necessity to explore the drivers, challenges and requirements the CE brings along and its impact on Philips current business practices.
2 Research question
The CE considers business model innovation as a building block of its overall framework. However, this form of innovation is derived from changes on multiple business levels such as product development and services. A narrower approach that integrates the product and service perspectives into a comprehensive value proposition is needed to understand how CE principles drive innovation and might create value. Evolving from this consideration this research objective is to explore:
How can Philips Lighting use CE principles to create a convincing value proposition for the B2B sector?
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2. How can Philips current PSS be expanded by CE elements?
3. How can a CE inspired value proposition for Philips Lighting be formulated?
To answer the research question, the paper is structured as follows: The theoretical background aims to embed the CE within existent academic literature. The practical background explores whether CE principles in the form of a PSS can be already found across and within industries. This is followed by a case study that examines how the concept of PSS can be applied to Philips Lighting, revealing the status quo of the company’s product-service portfolio (RQ 1). This demarcates how CE elements can be used to expand the current PSS application at Philips Lighting (RQ 2). Based on these considerations a value proposition according to the CE principles is formulated (RQ3). Lastly, the conclusion summarizes the findings of the research and presents theoretical and managerial implications.
3 Theoretical background
3.1 Generic approach to a CE business model
Central to the idea of the CE is the opportunity to create value through new business models, which represent an important building block within the whole framework. As Teece (2010) indicated, business models can be a source and even the embodiment of innovation. However, the concept of a business model so far is missing a theoretical grounding that brings it down to one coherent definition. Amit & Zott (2012) define a business model as the set of interconnected and interdependent activities that determine how a company actively does its business, while Bucherer et al. (2012) stress its high degree of abstraction, which reveals the core elements of a business and its inherent logic. Innovation in a business model is, therefore, a process that alters these core elements and the business logic. Moreover, Teece (2010) states that its main function is to define the way in which a company delivers value to create a sustainable profit. The CE with its wide range of opportunities for new innovative business model creation focuses especially on this sustainable aspect of value creation. Furthermore, a business model also serves the function of mediator between the technological potential and economical value (Chesbrough & Rosenbloom 2002). The technological potential lies within the framework of the CE, in the ability to design products for reuse. Economic value can be found, for instance, in profits derived from new services. Moreover, the CE provides the potential to create ecological value (Ellen MacArthur Foundation 2013). For this reason, in particular the last two approaches offer valuable starting points to derive a CE business model definition:
A CE business model creates value using elements that differ from traditional (linear) business logic, by connecting technological, economical and ecological domains of doing business.
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which a firm develops and distributes its products and determines the firm’s position in the value network. This entails the linking of suppliers with customers, and the identification of possible partners and competitors. The core of every business model, however, is a value proposition. A value proposition provides a clear definition of the product or service being offered and the value it creates based on the underlying technology (Chesbrough & Rosenbloom 2002). The CE framework stimulates the development of new sustainable technologies in products or processes. For example, in the form of new high-quality recycling technologies (Ellen MacArthur Foundation 2013). However, it is unclear if these can be embedded into existent business models. Business model innovation would provide an opportunity to unfold the potential of circular products and value creation, requiring a completely new assessment of the value proposition and the above mentioned components of a business model (Bohnsack et al. 2014).
To evaluate and design value propositions for a CE, initially a more general understanding of it has to be created. According to Lindic & Silva (2011) a value proposition can be defined as: “[…]a description of a customer’s problem, the solution to it and value from the customer’s perspective.” (p.1). Moreover, it clarifies what kind of value is delivered through products and services to satisfy customer needs (Anderson & Narus 2006). However, a value proposition is not for, but about the customer. Hence, it is for a company’s internal use to specify what is intended to be delivered by the organisation (Lanning 2000). Barnes et al. (2009) argue therefore that it must define how an organisation works to serve its customers and that in the most profitable way.
The scope of a value proposition in academic literature has been defined through various templates (Carlson & William 2006; Barnes et al. 2009; Gyorffy & Friedman 2012) that divide the concept into distinctive elements. These templates, in a synthesized form, ask for the following elements: Who is the targeted customer and which insights of his/her problem are given? What is the market opportunity? What is the solution and which benefits does it create? Which competitive alternatives exist? How does the proposed solution differentiate and can provide advantage over these alternatives?
3.2 CE business models and the delivery of a “sustainable” value proposition through
PSS
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transfer. They argue that in a traditional model, those companies which do not require chemicals for their core activities, have no incentives to transfer knowledge. Therefore, one model implies that the ownership stays within the producer, requiring him to take care of the disposal and recycling of the chemical. In addition to that, the concept can be extended to the application of the chemical and the supply of needed equipment. Since the provider of the chemical is very knowledgeable about his product, excessive use of chemicals can be avoided. The resulting efficiency gains can be translated into cost savings for the consumers, making leasing models more attractive. This example illustrates not only the concept of shifting ownership but also the expansion of a product definition into services.
Conclusion: CE inspired business models create value by shifting ownership to the producer and expanding their product definition into services.
Since the CE fully embraces the concept of services, the phenomenon of business “servitization” , a strategic innovation of organization’s capabilities from selling products to services (Martinez et al. 2010), must be further reflected on. From a business angle, services offer the opportunity to compete on a basis other than cost (Velamuri et al. 2011), provide higher margins and steady revenue streams (Wise & Baumgartner 1999), and enhance customer satisfaction. Most importantly, they provide a competitive advantage since they are less visible and create unique resources that are difficult to imitate (Gebauer et al. 2011). However, the shift from a pure product to a pure service provider is an idealistic perception (Cooper & Evans 2000). A range of hybrid business models exist in between, that entail product or service-dominant elements. The overarching concept is defined as a product-service system (PSS) (Tucker 2006). A PSS consists of “tangible products and intangible services designed and combined so that they jointly are capable of fulfilling specific customer needs” (Tukker 2004; p.1). However, the term PSS is hardly found in mainstream business literature, even though it depicts the same elements as those of a business model (Tukker & Tischner 2006a). The difference and opportunity identified by the stream of sustainability literature lies in the delivery of a “sustainable” value proposition, and the consideration of the whole value system a company is working in (Gaiardelli et al. 2013). As Baines et al. (2007) argue “A PSS offers the opportunity to decouple economic success from material consumption and hence reduce the environmental impact of economic activity.” (p.3). Thus, PSS aim at reducing environmental impact and adding value at the same time (Brezet et al. 2001). Value is created by offering integrated and customized solutions that build on frequent interactions with the customer (Gaiardelli et al. 2013). Besides, the intensified customer relationship gives insights into the customers’ needs and, therefore accelerating the speed of innovation (Tukker 2004). The value on the user side resides in two aspects: First, in tangible and objective value, for instance, resources, time and costs saved. Second, in the intangible and subjective value like additional “priceless” experience (Tukker & Tischner 2006a).
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business models can be found in leasing, renting or sharing or pooling. Third, result-oriented services capture the performance aspect of the CE targeting outsourcing activities, pay-per-unit and functional (provider can choose how to deliver) services (Figure 1, Appendix). The environmentally beneficial potential differs among these categories. However, the latter two models provide the highest impact of environmental sustainability (Tukker & Tischner 2006a).
Conclusion: Hybrid business models that combine products and services into an integrated value proposition are sources of value creation in the CE framework, as their joint combination and underlying green connotation, is capable of fulfilling very specific customer needs.
As the above mentioned aspects provide an essential basis for further explorations, in order to facilitate the understanding of PSS as an integrated part of the CE, the following definition will serve as a guiding notion throughout this research:
PSS constitute a specific type of value proposition that stresses, however not always delivers, the potential of reducing environmental impact by providing a systemic perspective.
Business models around reuse and refurbishment provide further options to create value. A wide range of case study research has examined the potential of reuse businesses ranging from automobiles (Seitz & Wells 2006) or photocopiers (Kerr & Ryan 2001) to office furniture (Steinhilper 2001). They provide benefits through savings in energy and material consumption, reduce expenditures on manufacturing and acquiring components, and increase employment due to its labour intensive nature (Matsumoto 2010; Steinhilper 2001). On industry level this requires efforts in terms of reverse logistics to ensure a steady stream of supply (Guide et al. 2003). The CE requires beyond that a “think in system” approach that entails full cross-chain and cross-sector collaboration to make use of “cascades”. Cascading is defined as: “Putting materials and components into different uses after end-of-life across different value streams [...]” (Ellen MacArthur Foundation 2013, p.26). Value creation is realized through cascading material that replaces virgin material inflows(Ellen MacArthur Foundation 2013). On product level these business models require a sophisticated understanding of materials and components. Consequently, improved product designs can be developed and then translated into a new value proposition (Ellen MacArthur Foundation 2013). As criteria for improved designs the CE requires pure, non-toxic materials and the possibility of disassembling. These characteristics can be understood as a lever to fully exploit the value from the different cycles. Additionally, a further core value creation potential resides in the “power of circling longer”, which implies two scenarios: First, the prolongation of product usage and secondly, the increase of consecutive cycles (Ellen MacArthur Foundation 2013). Overall, these cycles provide the opportunity to fill the apparent gap between environmental concerned management and product design identified, as by Frei (1998).
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Implications
For companies like Philips, value creation from CE inspired business models has several broader implications. Next to technical challenges, some scholars argue that many companies face a “service paradox”(Gebauer et al. 2005; Martinez et al. 2010). Such a paradox is existent when “substantial investment in extending the service business leads to increased service offerings and higher costs, but does not generate the expected correspondingly higher returns.” (Gebauer et al. 2005, p.1). They identify that present organisational structures and processes in manufacturing lack orientation and focus in delivering services due to a lack of service culture and mind-set (Kastalli et al. 2013). A shift, however, requires new performance measures (e.g. service quality, customer satisfaction) (Kastalli et al. 2013), better defined service portfolios, a clear description of the service content and relevant processes and resources in place (Bullinger et al. 2003). Hybrid business models, therefore, can bridge the gaps resulting from the change to services (Gaiardelli et al. 2013).
A further challenge is to overcome possible customer resistance evolving from the lack of product ownership (Roy 2000). Future research is needed to investigate how to raise customer acceptance with regard to those new impediments (Tukker & Tischner 2006b).
3.3 Capturing value from CE business models
The way value is captured is much more emphasized in a business strategy than in a business model, which in itself is more generic (Chesbrough & Rosenbloom 2002; Teece 2010). However, to protect competitive advantage and to ensure commercial success, a pairing of strategy and business model analysis is necessary (Teece 2010).
It is unlikely that a company can patent the way it is doing its business, in other words, its business model. For this reason, it is important that a company applies processes and assets that hinder imitation (Teece 2010). Organizational skills and resources (when they have the following attributes: valuable, rare, imperfectly imitable and non-substitutable) are sources of a sustainable competitive advantage that lead to a strategy of either cost-leadership or differentiation (Bharadwaj et al. 1993). Which CE inspired business models enable to pursue these strategies has been explored in the previous sections. Here it is emphasized that services, due to their intangible nature, are more difficult to replicate (Gebauer et al. 2011) and therefore, provide protection against copycat behaviour.
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An additional informal mechanism lies in the “lock-in” effect of services. Services can turn a one-time transaction-based relationship into a long-term relationship (Malleret 2006). Strengthening und building up a relationship-based interaction creates customer loyalty and is often rewarded by a “lock-in” effect (Gaiardelli et al. 2013). For instance, if a customer once is provided with a full service package including a light installation, he might be reluctant to change to competitors due to high switching (learn usage of new installation) and removal costs.
As the highest potential of value creation resides in the inner loop of the CE framework, the serviceability of products plays a key role. New design criteria must be developed that embrace concepts, such as disassembly and modularity, to facilitate maintenance activities (naturally, these also have to enable the reuse and remanufacturing of products for the outer loops). To add new functionality to products there must be the possibility of upgrades. This in turn requires standards on component level and adaptable, future-oriented technology platforms. Most organisations like Philips Lighting have started rather recently to experiment with CE principles. Therefore, missing standards and uncertainty have not led to a dominant design on product level yet.
Complementary assets entail the capabilities and resources needed to commercialize an idea (Teece 1986). Since the CE requires collaboration across different industries and value chains, logistics will be one, if not the most important asset that has to be built up. Marketing will be of importance to diffuse the idea of the CE, but moreover to convince customers of the advantages of the new concept. Brand reputation will therefore also come into play in raising attractiveness and credibility of proposed solutions. However, predictions about strategies whether to contract or integrate complementary assets are difficult to make, as CE business models will operate in industries of different nature ranging from weak to tight appropriability regimes.
Conclusion: To capture value from CE inspired business models, these businesses must leverage on “intangible” services that enable the lock-in of customers. Moreover, standards are needed for adaptable and future-oriented technology platforms. Lastly, logistics will be the key complementary asset to be acquired.
4 Practical Background - Best practices: Current applications of PSS across and
within industries
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Method
To gain insights, the form of analysis chosen is a comparison that incorporates successful projects of the case at hand, a competitor and a non-lighting industry player. Case studies are selected from the companies’ websites, which describe projects based on product-service solutions. The information from the case studies is used to derive value propositions based on the model of (Müller 2012). The distinct aspects of a value proposition are used for the benchmark. According to Müller (2012) a sustainable value proposition must contain the following modules:
- Design principles: Products and services are designed in harmony with natural cycles over the
entire life cycle.
- Awareness: All stakeholders are introduced to the concept of the triple bottom line.
- Customer: The value proposition must clarify the customer’s needs.
- Market opportunity: What is the market situation and which opportunities does it offer?
- Solution: What is the solution that satisfies the customer’s need and which resources are
deployed for it.
- Stakeholder &Lifecycle: Who provides which output in order to realize the solution?
- Advantage &Experience: What’s the advantage over existing internal or external solutions?
- Result: What are the benefits for all the stakeholders from the solution?
Naturally, this form of document analysis is inherently biased. However, the restricted time and scope of this research inhibits other forms of investigation, like in-depth interviews with the analysed firms. Applying the framework of Müller (2012) therefore is an attempt to create greater transparency sub-dividing the value propositions into its elements and analysing these separately.
Non-lighting industry player: Ricoh
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centers. Re-using an item can then take place within the company’s own value chain, providing an opportunity for closing the material loop. However, the success and the controllability of this logistics need also a critical assessment, since the following quote on Ricoh’s website can be found: „As every Ricoh sales organisation has its own unique market demands, the decision for treatment is country specific and subject to change *...+“1.
For the benchmark, a case study illustrating a global implementation of managed service proposition at the company Henkel has been chosen to demonstrate the scope of a PSS implementation in the office management industry. Moreover, the project at AkzoNobel depicts a case in which sustainability aspects are put in the foreground, applying the Total Green Office Solution.
Competitor: Schneider Electric
Schneider Electric is a French-based multinational provider for electricity distribution and automation management. Its solution areas incorporate power, process and machine, data center, security and building systems. The latter is of interest for the analysis, since within this business area Schneider electric aims to cover all services connected to building management and, therefore, is also incorporating lighting solutions. Moreover, in 2005 Schneider Electric acquired Juno Lighting, a leading manufacturer for lighting fixtures in the US market. The acquisition gave Schneider Electric access to know-how, technology and an established network, enhancing its position in present channels and making it a strong competitor for Philips Lighting. On its website 18 cases are displayed that represent lighting solutions. The distribution of the cases indicates potential markets: hotels, big private companies and community buildings demonstrate the most projects. Ideally, cases would have been chosen that cover the purpose and size of projects similar to Philips Lighting. However, none of the cases can fulfil these criteria. The Musgrove Park Hospital case has been selected, since Philips Lighting provides in its overall solution portfolio the GreenEvolution concept, targeting hospitals as well. Furthermore, the Ideapark, a commercial center in Finland has been chosen for the benchmark. This case illustrates how Schneider Electric applies a comprehensive building management service and, therefore, demonstrates how services can be expanded beyond lighting.
Islands of best practices within Philips Lighting
At Philips Lighting efforts to provide lighting in the form of a service contract are very recent. However, there are two projects one can learn from. In 2013 Philips Lighting closed a deal with the Washington (DC) Metro Area Transit Authority (WMATA) to retrofit 24 park garages not only with newest LED technology, but also covering a full solution from implementation to maintenance. The second example is a performance-based lighting solution called “pay-per-lux“ that Philips installed at the offices of the National Union of Students (NUS).
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Table 1: Case study comparison
Pattern Case 1: @ Henkel Case 2: @ Akzo Nobel Case 1: @ Ideapark Case 2: @ Musgrove Park Hospital Case 1: @ WMATA Case 2: @ NUS
Business Model Managed Document Service TGO embedded in Managed Document Service contract
Facility management Performance contract Performance contract Pay-per-lux
Performance-oriented business model
Contract duration 21 years long-term performance guarantee over
next 20 years
10 years 15 years
Awareness refer to the three pillars of
sustainability: triple bottom line
claim this a sustainable approach (but don't refer to a specific concept)
Design principles copier designed for
disassembly and modularity
luminaires with restricted modularity, recessed luminaires which increases downtime
Customer problem (before implementation)
lack of transparency leads to high operational costs, no exploitation of scale effects
no control over usage of the printer fleet, rising costs, inefficient equipment causes high CO2 emission
reduce capital (CapEx) and operational (OpEx) expenses, regulatory pressure to enhance sustainability
backlog of maintenance issues, high operational costs, consultancy on lighting, legislation requires to meet mandatory carbon reduction targets
high maintenance costs that result in high operatonal expenses, regulatory pressures concerning sustainability, consultancy on LED technology
educational role model maintenance issues that result in high operational costs, regulatory pressure --> end-to-end solution Market Opportunity global end-to-end solution
for Henkel's entire printer fleet
end-to-end solution save on OpEx through effective building management
delivery of the first guaranteed energy reduction project in the UK healthcare sector through end-to-end solution
end-to-end solution end-to-end solution end-to-end solution
Stakeholder &Lifecycle Schneider electric manages IT, security and
facility services, however subcontracts indoor and outdoor lighting control, waste management, maintenance, cleaning, and cooling services to a third party
remains unclear who is really involved
Solution standardization of printer fleet, 4.000 modern Ricoh systems had replaced over 13.000 systems from diverse manufacturers
remove many stand-alone printers and replace them by a lower number of multi functional products, reverse logistics and remanufactured products
EcoStructure (hardware package) offers modular technical solutions for ICT network
integrated refurbishment program incorporates 180 solution to reduce energy consumption, minimize
risk and tackle reactive maintenance; project is being funded through capital investment provided by SE through a 12-year capital borrowing facility.
reduce the variety of fixtures from 30 to 4, project 100% financed and payment covered buy energy savings
latest standard of lighting technology
reduce number of product variety, financing solution,
Advantage &Experience global experience, consultancy competence
lower cost for pre-owned machine and with same warrenty as for a new one
long partnership since a decade collaborative partnership approach, comprehensive consulting
sustainability aspect of Philips’ products, ability to provide a lower total cost of ownership, Philips’ reputation as a market leader in the technology space
claim Philips as the one with most expertise
reputation and trust in experience
Result 15% less paper consumed,
reduction in carbon footprint
reduced OpEx, increased tenants retention reduced maintenance costs, minimised business risk from energy price volatility, money from energy savings can be reinvested in other estate projects, more control over estate operating systems and energy costs
energy-savings, required light levels will be maintained through the period of the contract
reduced OpEx, lower environmental impact
Process central project team prepared a Henkel specific Deployment Package, definition of precise milestones, project goals and timelines
contracted machines go to local return centres, service parts replaced by European field service engineers go to collection and treatment centres and get sorted and recycled
one single point of contact for customer, significant internal collaboration of project team
project team > high degree of customization
Ricoh Schneider Electric Philips Lighting
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Results
Across industries
The comparison reveals some interesting patterns. However, the conclusions that can be drawn from that will remain rather generic. All cases indicate that the reduction of operational cost is an important customer need. In the case of Ricoh this mainly stems from a lack of transparency over usage and equipment inefficiency. In the two cases from the lighting industry the emphasis lays on maintenance issues that cause high expenses. Moreover, what these two cases share in common is an important point of concern the regulatory pressure concerning the sustainability of the building that is operated.
Across industries the market opportunity for a product-service solution can be described as providing end-to-end solutions delivering a hassle-free experience for the customer and, therefore, facilitating them to concentrate on their core businesses. Reputation and former experience with the provider play a major role in closing a deal, since the contract duration always covers a long time period of ten to 20 years. Internal company documents of the WMATA case give more in-depth insights on this aspect. The WMATA stressed that they were looking for the ability to work with a manufacturer to develop possible future products to meet specific needs. Philips’ sheer size, its market leadership in the technology space and being a credible driver of LED technology were therefore crucial for selection. Moreover, this case displays that in negotiations with a public entity an early involvement is key, as those projects have to be put out to bid. A lack of experience in new lighting technologies and giving insights on what composes an end-to-end solution makes public institutions (but also private entities) dependent on the consultancy of a provider. Advising these entities even before the bidding process starts by participating in crafting a request for proposal, gives an important competitive edge. It becomes evident that consultancy is not only an important customer need, but is also necessary to shape the outcomes of a deal.
The comparison illustrates that in all cases the PSS is embedded in a performance-based business model. This in itself does not constitute a sustainable value proposition. Theoretically, it might stimulate the search for more efficient solutions (Baines et al. 2007). Giving the provider more room in designing the PSS, allows for implementing low-impact systems (Tukker 2004). Indeed, the cases of Schneider Electric and Philips Lighting demonstrate how, through influencing the lighting design energy savings occur that can be translated into environmental impact reductions and cost savings for the customers. However, the full potential of the CE and its loops of value creation can only be exploited when further elements are included. The trend identified here is that CE is treated so far rather as an “add-on” to a performance-based contract, when the customer wishes to enrich the value proposition for a more sustainable solution. That downgrades the CE to a sales-theme instead of a comprehensive solution.
Ricoh, for instance, provides its “Total Green Office Solution” as part of a performance-based contract, enabling them to diversify their portfolio and to respond to customer’s sustainability requirements. On the company website Ricoh states that it applies design rules such as disassembly
and modularity to facilitate easy maintenance of their photocopiers2. In contrast to Philips Lighting,
however, it becomes evident that maintenance services are more challenging when the product is an integrated part of the infrastructure and, therefore, difficult to access. In the case of the NUS a
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luminary (PowerBalance) has been used that even though not designed for the CE, already provides maintainability features. As mentioned before, the duration of a performance-based contract in the lighting industry covers a time period of one or two decades. That makes a prolongation of a luminary’s lifetime necessary to keep maintenance costs as low as possible for the provider. Moreover, the technical components that are most likely to fail in a luminaire are the driver and LED board. Hence, their accessibility is important. In the case of the PowerBalance the driver is exchangeable. However, the luminary must be recessed into the ceiling, which increases the downtime and makes a repair costly. This example demonstrates that product designs and business model are closely connected. Nonetheless, the current applications of performance-based business models even though placed under the label of CE do not fully grasp the potential of the CE, by not yet having the right products in place.
Within industry
To compare PSS applications within the lighting industry, another competitor has been taken into consideration besides Schneider Electric. In this case, broadening the sample complements the insights generated above. LED Lease is a Dutch competitor, having started its business activities rather recently in 2009. The company discovered and is now filling a market niche, providing financing solutions for LED lights. Being a small organization that purchases its products from developers and producers of luminaires, such as Philips Lighting, it demonstrates that the light market is undergoing a transformation in which also small players might have a stake. However, it gives an indication that channel conflicts can arise between those parties. Compared to an incumbent LED Lease provides the necessary flexibility to adapt quickly to customer needs. The company recognized early on that high investments are an important barrier to new lighting. Their new business model is turning this obstacle into an opportunity.
Philips in contrast builds on its knowledge and expertise in lighting application. They can differentiate themselves from competitors like Schneider Electric by creating experience through its lighting, such as security or well-being. Even though offering the full range of services around building management, Schneider Electric’s activities concerning lighting will be restricted to lighting control. As the analysis shows PSS in the lighting sector are only applied in the B2B environment, targeting the professional market segment (e.g. hotels, hospitals, parking garages). This suggests that PSS are most profitable in the B2B sector. Future research must investigate whether PSS applications are also feasible and profitable in the consumer market.
The table below summarizes the finding of the within industry comparison:
Table 2: Competitor analysis
Schneider Electric LED Lease Philips Lighting
Business model Building management Financing schemes for light
applications
Light as a Service
Customer target B2B B2B B2B
Differentiation stratgey
Full service solution for building management, including lighting
Customized financing solution
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What can be learned from current value propositions realised through PSS across and within industries?
As the comparison across and within industries demonstrated the PSS offered by the photocopier and the lighting industry resemble to a great extent. Both industries tap into the growing need of customers to externalize non-core business activities. In summary the following customer needs were identified:
Table 3: Customer needs
Moreover, the comparison revealed that the market opportunity lies in a hassle-free experience for the customer. Companies can gain from a lock-in effect (Gaiardelli et al. 2013), binding their customers through long-term contractual agreements. However, Ricoh’s “Total Green Office Solution” demonstrates that to avoid the customer feeling trapped, it is necessary to involve him from the beginning in the solution building process. This establishes not only a more intimate relationship, but also informs about very specific customer needs. Furthermore, Ricoh’s reverse logistics provide evidence on how to extract value from spare parts, using a second hand-market. Moreover, Philips Lighting can learn from smaller players, such as LED Lease, to identify market niches that grow into great opportunities. In this case it unveils that financing is a crucial element in a value proposition for lighting. Even though it is unlikely that Philips Lighting wants to move away from its core business of lighting, it must keep a critical eye on the developments around building management. This market segment gives insights into (changing) customer requirements and provides a good example of a one-stop-shop, offering an overall service solution for customers. Besides, this analysis demonstrated that PSS provide a foundation to incorporate and strengthen innovative elements, such as CE principles. However, to exploit the CE in this context changes in product design are a prerequisite. Eventually, the comparison also revealed that within but even across industries a lot of the elements that compose a value proposition are similar. This is an indication that the later findings might be generalizable, at least within the boundaries of the lighting industry.
5 Case study
Lighting accounts for a significant part of worldwide electricity use, thus, contributing to a great extent to CO2-emissions. Consequently, legislation and standards are becoming increasingly stricter to reduce the environmental impact of lighting. To remain a credible partner concerning sustainability, Philips Lighting must provide innovative solutions to lower the environmental burden of its offerings. The company, thereby, can also respond to new customer needs triggered by regulatory pressure. Moreover, current business models in the lighting industry are challenged by the new light technology of LED that has a considerably longer lifetime than traditional technologies and
Customer needs
Regulatory pressure Consultancy
Adaptability to current and future needs Concentrate on core business
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will become standard in the long term (Curtis 2009). For this reason, an attractive value proposition is needed to retain customers also in the future.
Based on the CE framework this research aims to develop a generic value proposition for Philips Lighting. The methodology section explains how interviews were used to facilitate answering how the model of PSS can be applied to Philips Lighting (RQ 1). Furthermore, the status quo identified in this previous analysis provides opportunities to explore how Philips Lighting can expand its current PSS by CE elements (RQ 2). Combining all the insights, a CE value proposition is formulated (RQ 3).
5.1 Methodology
5.1.1 Research Design
According to Yin, a case study research method is useful because it is an “empirical inquiry that investigates a contemporary phenomenon within its real-life context; when boundaries between phenomenon and context are not clearly evident […]” (1984, p.23) Hence, in the context of this research project, the case study method aided the researcher in directly interacting with the respondents to gain deeper insights. This qualitative research is of exploratory and deductive nature. It is deductive as the research questions are derived from the theoretical framework of PSS by Tukker (2004), which is also an integrated part of the concept of Gaiardelli et al. (2013).
5.1.2 Sampling Characteristics and Size
Hycner claims that, “the phenomenon dictates the method (not vice-versa) including even the type of participants.” (1999, p.156) Therefore, purposive sampling was used as an approach to select the participants. The selection of interview partners is based on the researcher’s judgement and the purpose of the research (Schwandt 1997; Greig & Taylor 1999), searching for those who “have had experiences relating to the phenomenon to be researched” (Kruger 1988, p.150). The researcher took the novelty of information an interviewee could contribute with his insights and experience into account. To establish a fair judgment of this, participants were asked at the end of the interview session who else could be recommend as a further interview participant. This method of snowball sampling is an established technique for qualitative research (Biernacki & Waldorf 1981).
Eventually, twelve participants were chosen. Eight of them work for Philips, and are related to the CE, either directly being part of the CE project team within Philips Lighting or by seeing their current business influenced through the implementation of CE approaches. The familiarity with the concept differs. However, this gives a good indication on how CE is perceived within the organization and within functional departments. To create a diverse pool of different perspectives, interviewees were chosen from distinct departments and even within different sectors of the organization. The heterogeneous sample and each of the respondents’ individual characteristics, their relation and contribution to the CE is extensively elaborated in Table 9, Appendix. Four external participants who are not part of the organization were recruited to add further viewpoints and, thereby, increasing external validity. This group of respondents consist of a potential customer, a consultant and a researcher of PSS.
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number of 12 participants can be justified and deemed appropriate. Furthermore, restricted time and scope of this research influenced the choice of the sampling size.
5.1.3 Data Collection
Data was collected, using semi-structured interviews in combination with a PowerPoint presentation in the background. The time frame covered roughly a month with the interview appointments spread evenly over this period. The first two interview sessions were very exploratory in order to comprehend Philips employee’s level of understanding concerning CE and PSS. After transcribing the interviews, a mind-map was used to analyse the interviews on their content (Figure 4). This step was crucial to sharpen the research questions and to design a refined interview plan. During the interview period further questions were adjusted when it felt necessary to gain more specific insights. Even though the interview plan and the PowerPoint presentation guided through all the following sessions, the general nature of the interviews was kept “semi”-exploratory. This enabled that very individual insights (due to job position or past experience) were included. On average each interview took one hour. After each session the interviews were transcribed within a week. The transcriptions were carefully read and helped to understand which questions had to be adjusted. However, the full analysis of all data was done when the interview period was finished. The interviews were read in parallel to investigate if similar themes emerged. Most of the themes appeared in correspondence to the questions asked (e.g. transition process). However, some themes arose independently from the questions (e.g. front-runner). Within these themes different colours were used to code words or statements with a related meaning. The coding procedure is illustrated in Table 11-13, Appendix. Using a PowerPoint presentation facilitated answering the research questions (1& 2), assisting and stimulating ideas of the respondents concerning the concept of PSS, which has been largely unknown by the participants. The main elements of the presentation were the following: After a brief introduction of Tukker’s model (section 3.2), three theoretical assumptions concerning the added value of services were presented (section 3.3). The interviewees were asked to prioritize them according to what they consider most important for the company. This task was followed by a model of Gaiardelli et al. (2013)(explained in next section). Moreover, a table was shown illustrating the four loops of value creation. The participants were asked to think of both challenges and requirements for each loop. However, after a few sessions this slide was skipped, as the researcher decided to focus on two service elements only (see explanation in RQ 2). Lastly, the presentation displayed an overview of customer problems (identified in section 4). These were discussed with respect to their relevance for a service solution of Philips Lighting. Moreover, this provided a good transition to talk over further elements of a value proposition.
5.2 PSS as a specific CE value proposition for Philips Lighting
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the portfolio can be expanded in terms of CE principles and which consequences arise through that. Besides, it is of academic interest to test the applicability of the tool in the setting of the lighting industry to generalize its utility beyond the investigated scope. The concept has been chosen, as both cases resemble in having no fully integrated service packages yet and, therewith, provide a similar basis. Moreover, the companies’ shared goal is a leading position in sustainability, which explains their ambitions to diversify their current service portfolio.
Giardelli’s et al. (2013) concept, based on a case study in the industry of transport logistics, identifies three dimensions of a PSS. The first dimension illustrates the service orientation and is based on Tukker’s (2004) classification of PSS subcategories, as explained in the previous section. As a second dimension the author considers the focus of the Product-Service (PS) portfolio that can shift from product to process. The PS focus has been left out as it is very similar to the first dimension and the minor difference has no relevance for this research. Lastly, the nature of interaction between customer and provider is addressed. The change of interaction is captured by a transaction and relationship-based perspective. A transaction-based differs from a relationship-based interaction in capturing value from a one-time customer and on-going payments, respectively (Osterwalder et al. 2005). For the latter the risk level increases by taking over customers previous performed activities. As a consequence, the incorporated risk must be integrated into the service pricing (Sawhney et al. 2003). For new business models within the CE framework this requires, therefore, the development of new pricing schemes.
Method
As a first step Philips service elements (Table 10, Appendix) that are offered in a B2B context are assigned to the subcategories of the different service orientations. However, for this research names and definitions of Tukker (2004) have been modified to stay closer to the wording of the CE and to better adapt to the service elements of the case at hand.
Table 4: Definitions service categories after Tukker (2004)
To indicate the product-, access-, performance orientation (y-axis) for each category a scale (1-5) has been developed. Setting each service element into relation with the others a value could be applied. For instance, preventive cleaning [23] is much more product oriented than data analytics & reporting [28]. On the x-axis the degree from a transaction to a relationship-based interaction between customer and provider is demonstrated. From a transaction-based perspective the price is based on a fee for an unlimited and individual use of the product, while the user pays the performance of the
Tukker (2004) This research New definition
Product-orientation Product-orientation
Services that mainly take place at the initial project stage (e.g. installation, commissioning) and ensure the functioning of the product during its life time.
Use-orientation Access-orientation
Services that provide access to a product over an agreed upon time that is shorter than the actual lifetime of that product.
Result-orientation Performance-orientation
The user decides to which degree the
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service in relationship-based interactions. The next step was the mapping of the different service elements onto the framework.
Organizing the service elements into these categories indicates also a rising scale in ownership, since with a decreasing product-orientation, business models come into play that emphasize the use and access to a product without owning it and eventually rise into performance based arrangements (y-axis). The concept, therefore, embodies the change in ownership, an essential element of the CE. Moreover, Tukker and Tischner (2006) argue that use- and result-oriented PS offerings have a higher intrinsic environmental sustainability.
Results
Overall Philips Lighting displays a wide range of different services that are mainly product-oriented and transaction-based. Taking this path, the company stresses the availability and functionality of its light installations and brings the more tangible elements of its service portfolio into focus. Moreover, the tool illustrates how, within the category of product-orientation, the different service elements could be bundled into integrated service offerings. Several elements can be clustered into a package such as maintenance [15-19,22], advisory services [11,21,27-29] or bundled, for instance, into an audit activity [2,31,32]. Providing integrated service packages could be helpful in guiding a customer’s choice without getting him lost in the great variety of distinct service activities. As a case study from the UK demonstrates, integrated services also lower cost and environmental burden through accessing and connecting valuable proprietary information. For instance, by closely coupling design options to maintenance cost per lamp cost (PriceWaterhouseCoopers 2004).
There are no services that fall into the category of access-oriented services. It has to be investigated whether this stems from a lack of experience or if other options are simply not available. This might imply that leasing, renting or sharing models are not feasible within the lighting industry.
From the service portfolio of Philips “Pay-per-Lux” and “Managed services” are identified to fall into the category of performance-based business models. In this context, company documents frequently mention the term “Light as a Service”, which would add to this category. However, it remains unclear whether there is a real difference between “Pay-per-Lux”, “Light as a Service” (LaaS) and “Managed Services”.
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Figure 2: Modelled after Gaiardelli et al. 2013 – Philips Lighting Service Elements
The interviews showed that the comprehensibility of the graph is limited, as it led several times to confusion. While the category of product-orientation depicts single service elements, the other two categories illustrate business models. For future research it is, therefore, recommendable to illustrate the distinct groups not in one, but rather in three separated graphs.
5.3 Results of the interviews
5.3.1 RQ 1: How can the model of PSS be applied to Philips Lighting?
The CE framework identifies four loops of value creation. The main focus of this work, however, has been put on the exploitation of the inner cycle through services. Services seem to be, as the accumulated evidence of interviews suggests, the most profitable way to create and extract value for Philips Lighting. The residual value of a light installation is considered by the Philips employees as too low to generate revenues from remanufacturing or parts harvesting. This aspect will be further analysed in 5.3.2.
26 1) Status quo and vision
The application of PSS to Philips Lighting enables to discover the current state of the company’s transition process from a product to a service provider. In the previous section, the developed model of Philips Lighting service landscape revealed a strong focus on the tangible and functional elements of the portfolio, such as, delivery and initial installation of the system [7, 9], delivery of replacement products [15] or regular preventive cleaning [23].
Confronting the Philips employees with the model, the theoretical assumption is confirmed by all participants: Philips Lighting service portfolio has been identified as clearly product-oriented:
“We come from product-oriented and the vast, vast majority of what we still do belongs to that category. And we are striving to develop use- and result-oriented services. But it’s a struggle and I mean that in a positive way, not in a negative way. It’s a challenge.” (Sales Manager Indoor) Even though perceived as challenging, the transition process is supported by all the interviewees of the sample (see Table 11). However, the main internal obstacle of this process has been diagnosed as the cultural change that requires a new mind-set. Driving this change implies not only a better understanding of services, but also why and which role the CE framework plays in regard to it. For this reason, current change management processes at Philips have to be further strengthened. In particular, the focus must be placed on identifying existing practices that are already “circular” and by demonstrating how an employee’s individual work can be connected to the CE notion. Moreover, as Gebauer et al. (2005) argue, creating a service culture implies to boost new values that focus on innovation, customization and the perception that flexibility and variety create profit (whereas traditional manufacturing companies centre on economies of scale, efficiency and the idea that flexibility and variety are costly). However, Philips Lighting must not substitute these values against each other. Its management must find a balancing approach and can, therewith, diffuse resistance to change.
2) Business models for the CE
The lack of clear definitions for the business models “Pay-per-Lux”, “Light as a Service” and “Managed Services” identified in the previous section was raised and reflected on in the interviews (Table 12). Even though three out of five of the Philips Lighting respondents consider it only as a difference in naming for performance-based contracting, the intended coverage of this service models still remains vague and varies from each respondent.
“I don’t believe in pay-per-lux because lux levels can’t be measured on real time basis. So Pay-per-Lux is another name for Light as a Service. Light as a Service is a Managed Service proposition. So from that perspective, it’s all equal.” (Sales Manager Indoor)
Only one respondent considers a distinction as necessary:
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What this discussion illustrates is that Philips Lighting runs risk of falling into the so called “service paradox” (Gebauer et al. 2005), which has already been described in the theoretical background (section 3.2, “Implications”). Despite high investments in increased service offerings, financial returns might stay out. According to Bullinger et al. (2003) poorly defined service portfolios and a lack of clear service content descriptions contribute to that paradox, being one of the main obstacles a company faces in its transition process to services. It is therefore a crucial step for Philips Lighting to develop clear definitions that distinguish their different service propositions. Through the analysis and coding of the interviews an overview could be established (see Table 12). This table provides a starting point to integrate the interviewees’ understandings into coherent definitions for the business models. Perhaps this might also show that a harmonization of the distinct business model terms into one is appropriate. A detailed differentiation into various business models might not yield additional value for the customer.
The model developed in section 5.2 indicates that Philips Lighting does not provide use-oriented business models, such as leasing. PSS literature solely provides operational leasing examples like car leasing schemes (Tukker 2004). However, the interviews suggest that this classical understanding of leasing must be expanded by financial leasing opportunities. The absence of use-oriented service models in Philips Lighting service portfolio (PSS framework, section 5.2) results from the lack of a second-hand market for lighting products. Only a second-hand market makes an operational lease feasible. For Philips Lighting and all industries in which this form of market for their products does not exist yet, financial leasing options are relevant. Therefore, the PSS literature still has to sharpen the definitions around use-oriented business models and consider more clearly the nuances inherent to those.
3) Why Philips Lighting envisions services as value drivers for the future
The strategic decision at Philips Lighting to make the transition to services has been set, and the company’s starting point has been analysed above. To reveal the motivation behind it, a more confirmatory approach of investigation has been chosen, as otherwise the question would have been too broad. Therefore, the respondents were confronted with three value capturing mechanisms of the service context, elaborated in the theoretical background (section 3.3). They were asked if those elements can be recognized in Philips “servitization” strategy and to prioritize them (see Table 13).
- Lock-in effect of the customer (Gaiardelli et al. 2013)
- Competitive advantage through intangible nature of services that is inimitable (Gebauer et al.
2011)
- Higher degree of sustainability (Tukker 2004)
The lock-in effect is considered by the respondents (6 out of 9) as the most important mechanism to benefit from services.
