EXPLORING TWO SIDES OF THE
SERVITIZATION COIN
A MULTIPLE CASE STUDY OF THE IMPLEMENTATION OF
SERVITIZATION FROM A CHANGE PARADOXICAL POINT OF VIEW
MASTER THESIS
MASTER BUSINESS ADMINISTRATION - CHANGE MANAGEMENT
Name C.D. Smit
Student number s2120550
E-mail c.d.smit@student.rug.nl
Supervisor Dr. O.P. Roemeling
Co-assessor Drs. H.P. van Peet
University of Groningen Faculty of Economic and Business
Nettelbosje 2 9747 AE Groningen
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ABSTRACT
Nowadays, many production companies find themselves moving from their traditional business models based on product sales towards models based on product-based services. This process is called ‘servitization’. Despite the growing scientific interest on this topic, it is still unclear how production companies implement a strategy of servitization. Therefore, this qualitative research focuses on five large installation companies which implement a servitization strategy in the Dutch installation sector. To answer the question how servitization is implemented, a change paradox lens on organizational structure, implementation process and the management between chain partners is used. The findings reveal that manufacturers which adopt a servitization strategy need to focus on (1) both integration and differentiation in relation to their organizational structure, (2) both top-down and bottom-up interventions in relation to their implementation processes and (3) both competition and collaboration within their supply chains. Besides, three forms of servitization, four drivers for servitization and three typologies of managing a supply chain with an increasing focus on service delivery are identified.
Keywords: servitization, change paradoxes, organizational structure, implementation process,
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ACKNOWLEDGEMENT
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TABLE OF CONTENT
1. INTRODUCTION 5
2. LITERATURE REVIEW 8
2.1 – Servitization: taking a historical perspective 8
2.2 – Servitization: research areas 9
2.2.1 – Product versus service 9
2.2.2 – Providing value added services 10
2.2.3 – An integrated solution 12
2.3 – Organizational structure, implementation process and supply chain management within the field of servitization
12
2.3.1 – Servitization and organizational structure 12
2.3.2 – Servitization and the implementation process 13
2.3.3 – Servitization and supply chain management 13
2.4 – Servitization drivers 14
2.5 – Servitization challenges 14
2.6 – Change paradoxes 15
2.7 – Change paradoxes of organizational structure: integration versus differentiation
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2.8 – Change paradoxes of the implementation process: bottom-up versus top-down 17 2.9 – Change paradoxes in supply chain management: collaboration versus competition 18 3. METHODOLOGY 20 3.1 – Qualitative research 20 3.2 – Research context 20 3.2.1 – Case criteria 20
3.2.2 – Case context: sector and segment 22
3.2.3 – Case context: case participants 23
3.3 – Data collection 24
3.3.1 – Interviews 24
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3.4 – Data analysis 26
3.5 – Quality assurances 27
4. RESULTS 28
4.1 – The servitization trend in the installation sector: from reactive business to proactive business (servitization forms: ‘what’ question)
28
4.1.1 – Pay-for-Performance (PfP) 29
4.1.2 – Consult and Create (CC) 29
4.1.3 – System Integration (SI) 30
4.1.4 – Classification of identified servitization forms 30
4.2 – Drivers for servitization (the ‘why’ question) 32
4.3 – The implementation of servitization (the ‘how’ question) 33 4.3.1 – Organizational structure: integration versus differentiation 34 4.3.2 – Servitization implementation process: top-down versus bottom-up 35 4.3.3 – Servitization supply chain management: collaboration versus competition 37
4.4 – Other implementation tensions 43
4.5 – An overview 46
5. DISCUSSION AND CONCLUSION 48
5.1 – Summary of findings 48
5.2 – Theoretical interpretations and propositions 49
5.2.1 – Forms of servitization (the ‘what’ question) 49
5.2.2 – Drivers for servitization (the ‘why’ question) 50
5.2.3 – Paradoxical lens 50
5.2.4 – Adopting a servitization strategy (the ‘how’ question): organizational structure, change implementation and supply chain management
51
5.4 – Change tensions of servitization 53
5.5 – Theoretical and practical implications 54
5.6 – Limitations and avenues for further research 55
REFERENCES 57
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1. INTRODUCTION
In this research the transition of production companies towards a service orientation will be investigated by using a change paradox lens.
Nowadays, many production companies find themselves moving from their traditional business models based on product sales towards models based on product-based services (Gebauer, Edvardsson, Gustafsson, Witell, 2010; Kindström, 2010; Lusch, Vargo and O’Brien, 2007; Skålén and Edvardsson, 2016; Vargo and Lusch, 2004). This trend, in which manufacturing organisations adopt extended service components to their offerings, is called ‘servitization’ (Vandermerwe and Rada, 1988). Servitization is ‘a change process wherein manufacturing companies embrace service orientation and / or develop more and better services, with the aim to satisfy customer’s needs, achieve competitive advantages and enhance firm performance’ (Ren and Gregory, 2007: 33).
Despite the conceptual attractiveness of this approach, the way in which organisations will develop, implement and manage servitization remains rather vague (Wilkinson, Dainty and Neely, 2009). It still need to be discovered how servitization can be implemented and which organizational tensions are relevant (Baines, 2015; Baines, Lightfoot, Benedettini, Kay, 2009; Baines, Ziaee Bigdeli, Bustinza, Shi, Baldwin, Ridgway, 2017; Kindström, 2010; Wilkinson, Dainty and Neely, 2009).
In order to dive into this relevant research topic, this research will focus on the way a servitization strategy could be implemented in the Dutch installation manufacturing sector by focusing on change paradoxes of three vital strategic organization elements: organizational structure, implementation processes and supply chain management.
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This research makes several contributions towards the scientific field of servitization. Scientific insights into the lacking knowledge about the how of business transformations towards servitization and the implementation of servitization will be provided. However, research that connects strategic and organizational aspects of servitization is limited (Gebauer, et al., 2010). According to Baines, Lightfoot, Peppard, Johnson, Tiwari, Shehab and Swink (2009) an organization need to focus on changes in organizational structure, implementation processes and operations strategy. In order to investigate the implementation of servitization, this research will concentrate on paradoxical tensions within the strategical fields of organizational structure (integration versus differentiation), implementation process (top-down versus bottom-up) and supply chain management (competition versus collaboration) during a servitization process. Until now, literature about the tensions in these strategic fields is scarce.
First, research on a changing organizational structure in relation to servitization implementation is limited (Baines et al., 2009). Existing research focuses on organizational design differences between product-centric companies on the one hand and service-centric companies on the other hand (Galbraith, 2002) and on the configuration of a single service-orientated business unit within an organizational structure (Gebauer et al., 2006; Neu and Brown, 2005; Oliva and Kallenberg, 2003). Therefore, in this research, changes in organizational structure during servitization will be researched. Because the paradox between integration and differentiation is an important aspect of structure (Lawrence and Lorsch, 1967), the changes in structure will be researched by using a paradox lens of structural integration and differentiation.
Second, this research will concentrate on the way the process of servitization is designed. Research on tools, techniques and processes to implement servitization are scarce (Baines, 2015; Baines et al., 2009; Gebauer, et al., 2010; Kindström, 2010). An important aspect of organizing change processes is to deal with the tension between top-down control and the need for flexibility of employees at the bottom of the organization close to the customer. Therefore, the paradox between top-down and bottom-up interventions will be discovered.
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(Gebauer, Paiola, Saccani, 2003; Möller, Rajala, Svahn, 2005). Concentrating on the change paradox of collaboration and competition will lead to new insights into the management and configuration of supply chains within a servitization context.
This research also contributes to the practical field of servitization. First, this research will provide managerial insights and strategic tools to manage the process of servitization. Change tensions and their accompanying change tools are identified and proposed. Second, this research emphasizes the importance of using a change paradoxical point of view. Solving complex change dilemmas by embracing change paradoxes is a key differentiating characteristic of a successful company (Yoon and Chae, 2012). Third, this research provides managers an overview of possible supply chain configurations and different positions (and responsibilities) within these value chain systems. This will help managers to successfully implement servitization.
Therefore, in this research the following question will be central: how do production companies implement a servitization strategy? In order to answer this question, a change paradox lens is adapted. The following three sub-questions are formulated: (1) How do production companies deal with the organizational structure change paradox of integration versus differentiation within a servitization context? (2) How do production companies deal with the implementation process paradox of top-down versus bottom-up within a servitization context? (3) How do production companies deal with the change paradox of competition versus collaboration based on changes in the supply chain within a servitization context?
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2. LITERATURE REVIEW
This section provides an overview of the important literature in relation to this research. First, literature on the field of servitization will be presented. More specifically, a historical overview, interesting servitization areas, servitization research in relation to the three sub-questions, drivers for servitization and servitization challenges will be described. Second, this section will turn to literature about the adopted theoretical change paradox lens and will focus on the paradoxes of integration versus differentiation, top-down versus bottom-up and collaboration versus competition.
2.1 – Servitization: taking a historical perspective
The past decades, boundaries between manufacturing and services have become increasingly blurred (Baines et al., 2009; Johnston, 1999). In 1972, Levitt (1972) made the assumption that every business would turn to service business. Nowadays, services account for two-thirds of the output of the advanced economies of the world (Javalgi and Martin, 2007). Moreover, providing services are seen as a potential growth area by manufacturing companies (Jacob and Ulaga, 2008).
There is a growing interest of both academics and practitioners in integrating product and service offerings (Baines et al., 2009; Baines et al., 2017; Lightfoot, Baines and Smart, 2013). This has been referred as ‘going downstream’ (Wise and Baumgartner, 1999), ‘integrated solutions’ (Baines, Lightfoot, Evans, Neely, Greenough, Peppard and Alcock, 2007), ‘new manufacturing’, (Marceau, Cook, Dalton and Wixted, 2002) ‘winning in the aftermarket’ (Cohen, Argrawal and Arawal, 2006), ‘servicisation’ (Quinn, Doorley and Paquette, 1990) and ‘servitization’ (Vandermerwe and Rada, 1988). Despite the different definitions, the business transformation from selling products to providing services is the comprehensive theme. Within this research, servitization is ‘a change process wherein product companies embrace service orientation and / or develop more and better services, with the aim to satisfy customer’s needs, achieve competitive advantages and enhance firm performance’ (Ren and Gregory, 2007: 33).
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Gebauer and Friedli, 2005; Gebauer, Friedli and Fleisch, 2006) or assumed as an add-on to physical products (Gebauer and Friedli, 2005). In the 1960s, ‘systems selling’ strategies were integrated with the product offering of an organisation (Davies, Brady and Hobday, 2006).
The evolution of servitization has led to a huge shift from product-centred offerings towards service-centred offering. Neely (2008) suggests that large companies both in terms of numbers of employees and turnover are more likely to servitize. A classic, practical example of servitization is the business transformation of Rolls-Royce (see Insight 2.1) (Howells, 2000). Other frequently cited examples of successful adoption of servitization are Mont’s research (2001) of the servitization process of Xerox. Davies, et al. (2006) and Wise and Baumgartner (1999) focused on the servitization case of Nokia.
Servitization of Rolls-Royce: Power-by-the-hour (Mont, 2001)
Rolls-Royce’s revenue model used to be based on selling and repairing high-quality aero engines. Paradoxical, the worst the engines were, the more the company could earn with maintenance and repair orders. This business model was clearly not in line with customers’ needs and brand perception of Rolls-Royce. Therefore, the organization started to sell the power of the aero engine, including all the support services (maintenance) to ensure an optimal functioning of the engine. Nowadays, customers pay Roll-Royce a fee based on ‘power-by-the-hour’.
Insight 2.1 – Servitization of Rolls-Royce: Power-by-the-hour
2.2 – Servitization: research areas
Within servitization literature, different dominant research areas can be identified (Baines et al., 2009; Lightfoot, et al., 2013). The areas of product-service differentiation, providing value added services and integrated solutions will be used to introduce important concepts of servitization within this research context.
2.2.1 – Product versus service
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(IB) services are the product- or process-services required to successfully manage a production process.
Service-logic versus Goods-logic
Logic Service-logic Product-logic
Nature of offering Value-supporting process Value-supporting resource Perspective A process where a set of resources interact
with customers, aimed at supporting their processes in a value-creating way
A resource which the customers use, possibility together with other resources, with the purpose of creating values for themselves
Business logic Facilitate customers’ value creation process Make goods and resources available to customers
Customer’s role Co-producer and co-creator of value (active) Sole creator of value (passive) Firm’s role Provide a service process and co-produce
and co-create customers’ value
Selling goods
Table 2.1 – Service-logic versus product-logic (adopted from Grönroos, 2007)
2.2.2 – Providing value added services
A strong customer centricity is the key feature of servitization (Baines et al., 2009). This is because of the customer’s role as co-producer of value (Davies, 2004; Grönroos, 2007). Adopting a servitization strategy demands a shift in product-logic business towards a business logic based on centric services (Galbraith, 2005). In order to deliver customer-driven solutions, manufactures need to understand how and which values customers experience (Brady, Knight, Cornin, Tomas, Hult and Keillor, 2005). Within this process, relationship marketing plays an important role (Grönroos, 2007). Manufacturers need to invest in long-term relations with their customers in order to provide the right bundle of products and services. In this way, services are claimed to increase customer loyalty (Vandermerwe and Rada, 1988).
process-11
oriented services (providing an integral service solution, including delivering a product) (see table 2.2).
Service classification (Oliva and Kallenberg, 2003)
Product-oriented services End-user’s process-oriented services
Transaction-based services
Basic installed services (i.e. repairs/spare parts)
Professional services
(i.e. process-orientated consulting)
Relationship-based services
Maintenance services
(i.e. full (preventive) maintenance)
Operational services (i.e. managing operations)
Table 2.2 – Service classification (adopted from Oliva and Kallenberg, 2003)
Different forms of service delivery can be distinguished. For example, Lalonde and Zinszer (1976) focus on the timing of service delivery. They distinguish three service delivery possibilities: before, during or after the production sales. Brax (2005) and Gebauer (2008) focus on five different service typologies. Gebauer (2008) argues that a manufacturing organization can develop their service offering from being a service provider towards an outsourcing partner (see table 2.3). However, literature distinguishes a lot of different descriptions of service value-creation. In order to clarify value creation through service delivering, this research has collected and categorized different researches on the topic of service value creation (see table 2.3).
Developed overview of service value creation (according to different research sources) Service typologies (Brax, 2005; Gebauer, 2008) Service Provider After-sales service provider Customer support provider Development partner Outsourcing partner Value Creation (Baines and Lightfoot, 2013; Gebauer, 2007; Gebauer, 2008; Gebauer et al., 2010; Oliva and Kallenberg, 2003) Providing product-orientated services Providing product-orientated (IB) services with a focus on after sales Delivering services (i.e. preventive maintenance) to guarantee product functioning and extend the product life-cycle Providing an integrated customer solution by offering research and development assistance and centralizing the customer values and needs
Providing an integral customer solution by shifting the full responsibility and risks of the customer’s operating (non-core business) activities to the manufacturer. This solution contains a bundle of products and services, often provided by a network of suppliers
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2.2.3 – An integrated solution
A lot of research has been done on changing business strategies towards servitization. This has led towards changes in business models from product manufacturer to integrated solutions provider (Martin and Horne, 1992; Mathieu, 2001a; Oliva and Kallenberg, 2003; Vandermerwe and Rada, 1988). An integrated solution is a combination of products and services to offer an optimal customer solution. According to Davies (2004) different companies can deliver components as part of a total service offering. Therefore, a company needs to decide about which value adding activities should be performed internally and for which activities the adaptation of a diversification (Penrose, 1959) or outsourcing strategy is necessary (Baines, Kay, Adesola and Higson, 2005; Saccani, Visintin, and Rapaccini, 2014). The company which identifies, selects and manages the creation process of an integrated consumer solution is often referred to ‘system integrator’. This system integrator integrates the various service components into a functioning system (Gebauer et al., 2013).
2.3 – Organizational structure, implementation process and supply chain management within the field of servitization
New guiding principles, structures and processes are need to operate and produce products and services (Oliva and Kallenberg, 2003). In order to investigate the implementation of servitization this research focuses on the strategic elements of organizational structure, implementation process and supply chain management.
2.3.1 – Servitization and organizational structure
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2.3.2 – Servitization and the implementation process
Implementing strategic change is one of the most important undertakings of an organization (Sonenshein, 2010). The way a process towards change is shaped is a vital element in implementing change (Cawsey, et al. 2016; Burnes, 2014). A lot of work has appeared on the process of changes in service design (Davies et al., 2006; Howells, 2000; Spring and Araujo, 2009; Mont, 2001; Wise and Baumgartner, 1999) and the consequences in the organization (Loomba, 1996; Goffin and New, 2001; Bruhn and Georgi, 2006; Smith, Maull, and Ng, 2014). However, academics and practitioner still struggle to understand how they should design the process of the business transition towards service delivering (Baines, 2015; Baines et al., 2009; Baines, Lightfoot, Peppard, Johnson, Tiwari, Shehab and Swink, 2009; Baines et al. 2017; Kindström, 2010; Wilkinson et al., 2009).
2.3.3 – Servitization and supply chain management
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design, manufacture, sell and maintain the equipment. On top of that, all operational needs of the customer will be provided by this network of chain partners.
2.4 – Servitization drivers
Motivations for servitization differs (Wise and Baumgartner, 1999). Literature suggests three different drivers to adopt a servitization strategy: (1) competition; (2) demand, and (3) financial (Baines et al., 2009; Davies, 2004; Oliva and Kallenberg, 2003; Wise and Baumgartner, 1999) (see table 2.4).
Servitization drivers
Competitive driver Demand-based driver Financial driver -Servitization can function as a product
differentiation strategy (Mathieu, 2001a; Dachts, Biege, Borowiecki, Lay, Jäger and Schartinger, 2014) in order to survive in an increasing commoditized market (Frambach et al., 1997; Gebauer and Fleisch, 2007; Reinartz and Ulaga, 2008) -Servitization can enhance barriers to competitors (Mathieu, 2001b).
-Providing services by relationship marketing will increase customer loyalty (Vandermerwe and Rada, 1988) and sales (Gebauer, Friedli, Fleisch 2006; Mathieu, 2001b)
-Because of the flexibility of services and the increasing technical complexity of products, customers demand changes towards services (Lojo, 1997).
-Servitization can lead to higher profit margins and income stability (Oliva and Kallenberg, 2003, Gebauer and Friedli, 2005; Wise and Baumgartner, 1999) -Servitization can lead to new sustainable revenue streams (Mathieu, 2001a). This can help to survive in financially stagnated markets (Slack, 2005).
Table 2.4 – Servitization drivers
2.5 – Servitization challenges
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(Mathieu, 2001b). Therefore, hiring service-orientated employees is vital for servitization companies (Huikkola, Kohtamäki and Rabetino, 2016; Vandermerwe, Matthews and Rada, 1989).
2.6 – Change paradoxes
According to surveys of European firms, only 20 % of European firms reporting substantial success with implementing change initiatives (Nasiam and Sushil, 2011; The Economist, 2000). Therefore, organizational change theorists and practitioners are calling for rethinking and reorienting organizational change science in order to discover new ways to implement change successfully (Beer and Nohria, 2000; Luscher and Lewis, 2008; Smith and Lewis, 2011; Quinn and Cameron, 1988; Tsoukas and Chia, 2002; van de Ven and Poole, 1988; Weick, 1998).
One way to perceive such change in different way is to take a change paradox lens. Change paradoxes are one of the central ideas of post-modern change theories (Cooper and Burrell, 1988). The necessity to manage organizational paradoxes in general has been stressed by many researchers (Clegg, da Cunha and e Cunha, 2002; Hatch and Ehrlich, 1993; Lewis, 2000; Luscher, Lewis, Ingram, 2006; Luscher and Lewis, 2008; Luscher and Lewis, 2008; O’Conner, 1995; Quinn and Cameron, 1988; Smith and Lewis, 2011; van de Ven and Poole, 1988). Paradoxes can be described as something that is made up of two opposite yet interrelated elements, which seems logic in isolation but illogic when appearing simultaneously (Lewis, 2000; Quinn and Cameron, 1988). Change managers are increasingly adopt a paradoxical lens because of the interesting tensions, opposites, and contradictions among elements in organizational practice (Poole and Van de Ven, 1989).
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Academics have categorized paradox literature within four different groups: (1) performing group; (2) belonging group, (3) organizing group, (4) learning group (Luscher, Lewis and Ingram, 2006; Smith and Lewis, 2011) (see table 2.5). According to Luscher and Lewis (2008), the performing group focuses on tensions in relation to asynchronous ideas of organizational successes. The belonging group focuses on tensions related to group or organizational identification. The organizing group focuses on tensions during implementing a change. Finally, the learning group focuses on tensions of innovation and knowledge creation.
Paradox groups (Luscher, Lewis and Ingram, 2006; Luscher and Lewis (2008) Smith and Lewis, 2011)
Performing group Belonging group Organizing group Learning group -The performing group
focuses on tensions related to the identification of
organisational success (Luscher, et al. 2006; Luscher and Lewis, 2008; Jarzabowski and Sillince, 2007). These tensions will develop if stakeholders have different thoughts of organisational strategy and goals (Donaldson and Preston, 1995).
-The belonging group focus on tensions which appear because of feelings of identity
discrepancies between an individual (group) and the organization (Luscher er al., 2006; Luscher and Lewis, 2008; Westenholz, 1993; Brewer, 1991; Smith and Berg, 1987; Ybema, 1996).
-The organizing group
categorizes tensions originated from organizing change process and its participants (Luscher, et al. 2006; Luscher and Lewis, 2008).
-The learning group categorizes tensions of knowledge creation processes and innovations. (Smith and Lewis, 2011).
Table 2.5 – Change paradoxes groups
The aim of this research is to investigate the way organizations implement and organize an organizational change from selling products towards providing services from a change paradoxical point of view. In order to do so, this research focuses on the organizing group of paradoxes.
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2.7 – Change paradoxes of organizational structure: integration versus differentiation
Based on the work of Burnes and Stalker (1961), Lawrence and Lorsch (1967) concentrates on organizations’ internal structure. They make a distinction between integration and differentiation. Integration concentrates on collaboration between organizational departments in order to create synergy by sharing resources and knowledge (Lawrence and Lorsch, 1967). Differentiation refers to the degree of distinctive procedures and structure between functional departments (functional silo’s) (Lawrence and Lorsch, 1967). According to Galbraith (2002) an effective organization is both highly differentiated and highly integrated.
As organizational structure follows organization strategy (Mintzberg, 1979; Robbins and Judge, 2014), changes in organization design are needed after a firm adopted a servitization strategy. On the one hand, integration of functional departments can be expected because of the need for integration between products and services. According to Oliva and Kallenberg (2003), the installed based (IB) and IB services need to be aligned to provide an integral customer solution. Therefore, organizational departments have to be more aligned (Smith, Maull, and Ng, 2014). Neu and Brown (2005) propose to integrate service units within a manufacturing (hierarchical) organizational structure in order to adopt a servitization strategy. On the other hand, providing services can be identified as a sub-part of the manufacturer’s process (differentiation). Moreover, regardless the increasing focus on services the need for specialized production knowledge in different business units remains. Therefore, Gebauer et al., (2006) and Oliva and Kallenberg (2003) propose to set up an independent entity for the service business. In this way an organization can provide and develop the values of services within an isolated entity (Oliva and Kallenberg, 2003). In conclusion, managers will have to manage the tensions between integration and differentiation if they adopt a servitization strategy.
2.8 – Change paradoxes of the implementation process: bottom-up versus top-down
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local actors as impediments to successful implementation (Matland, 1995). However, by ignoring opinions from the bottom and eliminate political voices, resistance among change recipients can start to emerge (Berman 1978; Cawsey, et al., 2016). On the other side of the implementation spectrum, bottom-up designers start an implementation process by a focus on the change recipients (Matland, 1995). However, change recipients do not always want to participate in change implementation. They can experience anxiety of taking initiatives or are not used to participate in a change (Cawsey, et al., 2016). Furthermore, employees can experience difficulties in identifying important change stakeholders and therefore create misfits between stakeholders and change implementation (Cawsey, et al., 2016).
As previous research indicates, adopting a servitization strategy has a profound effect on internal and external organization processes. Such important organizational implications demands a secure and controlled change process from the top of the organisation (Cawsey, et al., 2016). However, as providing service demands customer-centricity, the implementation of servitization should therefore start at bottom of the organization, at people who are directly face the customer (Grönroos, 2007).
2.9 – Change paradoxes in supply chain management: collaboration versus competition
Adopting a servitization strategy by manufacturers often leads to competition from unexpected rivals including a manufacturer’s own suppliers, distributors, and customers (Baines, Lightfoot, Peppard, Johnson, Tiwari, Shehab and Swink, 2009). Alghisi and Saccani (2015) describe this process if servitized manufacturers enter the market which is already covered by (in-)direct customers (sales intermediaries) or suppliers (service network). On the other hand, integral solution suppliers have to search for new collaborations in order to deliver a successful bundle of products and services in line with customers’ (changing) needs and values (Saccani, Visintin and Rapaccini, 2014). The position of a manufacturing within collaborative relationships seems to be an important predictor of the degree of control a firm has over the other actors in the supply chain (Windahl and Lakemond, 2006). A position as solution integrator will have the latitude to achieve change through the chain of partners.
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3. METHODOLOGY
3.1 – Qualitative research
To gain a deeper understanding of how organisations adopt servitization and the way they deal with change paradoxes a qualitative research is conducted. The rationale of a qualitative research framework is twofold. First, the research question has an exploratory and open-ended nature. Qualitative research questions focus on ‘how’ and ‘why’ and less on ‘how much’ or ‘whether’ (Gordon, 2011; Yin, 2003). Second, the goal of qualitative research is to understand a given research problem from the perspective of the local population it involves (Mack, MacQueen, Guest and Namey, 2005). Qualitative research is appropriate if new insights of a business phenomenon are explored or to add new phenomena on matured research topics (Aken, Berends and van der Bij, 2012; Eisenhardt, 1989). In addition, qualitative research is desired in order to produce relevant managerial knowledge (Leonard-Barton, 1990; Silverman, 2001). As both the aim of the research and the research question fit within this qualitative research framework, the choice of a qualitative research design seems justified.
This research adopts a multiple case study approach and focuses on the private-sector. The dualistic and paradoxical perspective of this research demands an interpretative research framework to fully capture the sensemaking practices of the participants. Within an interpretative research philosophy, qualitative multiple case studies are the most appropriate research tool (Lee, 1991; Lewis and Ritchie, 2003). The multiple case approach allows more robust results in comparison with a single case study (Eisenhardt and Graebner, 2007; Yin, 2003). Furthermore, case studies are necessary if there will be many more variables of interests than data points (Yin, 1994).
3.2 – Research context
3.2.1 – Case criteria
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servitization alters the functioning of the organization and how the organization deal witch change paradoxes. With these criteria in hand, the following cases were selected for this study (see table 3.1; table 3.2; table 3.3; table 3.4; table 3.5).
Case ProfMulti
Employees 2800 (worldwide 38.000)
Founded 2004 (holding is founded in 1900) Main
activities
ProfMulti is the Dutch subsidiary of the ProfMultiGroup. This group is one of the largest technical companies in Europe. ProfMulti focuses on the design, implementation, maintenance and exploitation of network systems, energy and technology. The company has six different main activities: building of systems, engineering, communication infrastructure, industry, civil infrastructure and technology. In fact, the company can deliver all technical facilities which are needed within a building. In order to keep growing the company acquires a lot of technical niche companies.
Table 3.1 – Case overview ProfMulti
Case ProfEnergy
Employees 6400 (worldwide 138.000) Founded 1984 (holding is founded in 1946) Main
activities
ProfEnergy is the Dutch subsidiary of the ProfEnergyGroup which is one of the largest electricity, gas and energy services provider worldwide. ProfEnergy’s main focus is on developing innovative and energy solutions. Besides, the company focuses on providing technical solutions and manages its own technical research lab. Nowadays, providing technical solutions is the fast growing business.
Table 3.2 – Case overview ProfEnergy
Case ProfConstruction
Employees 6500 Founded 1923 Main
activities
ProfConstruction focuses on three core areas of people: living, working and connecting. The company is located across different European countries. ProfConstruction provides technical solutions and technical knowledge in five different markets: real estate, housebuilding, utility, roads and civil engineering.
Table 3.3 – Case overview ProfConstruction
Case ProfWork
22 Main
activities
ProfWork concentrates on the quality and safety of infrastructure and the design and manufacturing of technical systems and buildings. This means the company focuses on developing new technologies and providing integrating solutions. Internationally, ProfWork concentrates on transport systems in densely populated areas. The company is mainly located in Europe but is expanding intensively.
Table 3.4 – Case overview ProfWork
Case ProfSolution
Employees 8500 (worldwide 22.000) Founded 1869
Main activities
ProfSolution is a Dutch construction company which has grown as one of the largest construction companies in Europe. The company has two business lines. The first business line contains construction and technical activities. These activities are fully integrated since 2015. In this way, the company can provide integral building solutions. The second business line focuses on civil engineering and infrastructural activities.
Table 3.5 – Case overview ProfSolution
3.2.2 – Case context: sector and segment
This research is conducted in the installation sector. This sector is responsible for the planning, design, construction and maintenance of technical installations in the Netherlands. This work can be separated in four different segments: utility (non-residential buildings), residential buildings, roads and civil engineering and industry. After a period of decline during the economic crisis of 2009, the installation sector is slowly growing again (ABN-AMRO, 2016; UNETO-VNI, 2016; Rabobank, 2016; ING, 2016). The past decade installation organisations have started to reinventing itself. Changing customer demands, technical innovations and shorter product cycles demands for changes within the sector (UNETO-VNI, 2016; Rabobank, 2016; ING, 2016). This will affect original business models including long-term, repair and service contracts and can lead to a business transition from a goods-dominant to a service-dominant logic (ABN-AMRO, 2016; UNETO-VNI, 2016; Rabobank, 2016; ING, 2016).
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3.2.3 – Case context: case participants
Five installation companies within the top ten of largest electronical installers in the Netherlands are visited. Different top managers, on a strategic (boardroom) position, of the companies will be interviewed to gather information about servitization and the way they deal with change paradoxes. These respondents are purposefully selected in cooperation with consultancy firm ProfConsul. This enhanced the external validity of this research. All respondents received an informative letter about the research subject (see Appendix table 3). The following table provides an overview of the selected respondents (see table 3.6).
Respondent Code
Job Position Years of
service
Years in current function
Age Gender
Respondents of ProfMulti
ResMUL01 Executive Director Innovation and Business Development
8 1 40-50 Male
ResMUL02 Executive Director Business Development (healthcare
utility)
6 1 40-50 Male
ResMUL03 Technical Strategic Function 2 1 20-30 Female
Respondents of ProfEnergy
ResEN01 Executive Director Integrated and Venture Solutions
4 1 40-50 Male
ResEN02 Innovation Support Officer 21 1 40-50 Male
ResEN03 Executive Division Director 5 5 50-60 Male
Respondents of ProfConstruction
ResCON01 Executive Director Business Development
12 6 40-50 Male
ResCON02 Strategic Service Manager 2 1 20-30 Female
ResCON03 Executive Director Utility 14 5 50-60 Male
Respondents of ProfWork
ResWO01 Senior Business Development 14 1 40-50 Male
ResWO01 Executive Project Director of Large Projects
6 2 40-50 Male
24 ResSOL01 Director Control,
Maintenance and Technique
4 2 40-50 Male
ResSOL02 Executive Director Technique and Construction
16 16 50-60 Male
ResSOL03 Director Control and Maintenance
17 2 40-50 Male
Table 3.6 –Overview of selected respondents
3.3 – Data collection
Data collection is based on semi-structured interviews and secondary data. Data is triangulated between real-time observations and retrospective data, allowing the establishment of a chain of evidence, and thereby strengthening construct validity (Yin, 1994).
3.3.1 – Interviews
For this study, semi-structured in-depth interviews were conducted. The interviews provide a vivid picture of the participant’s expert perspective on the research topic (Darlington and Scott, 2002; Mack et al., 2005). Conducting semi-structured interviews appears to be the most appropriate and most used approach for data gathering in explorative research (Lewis and Ritchie, 2003). A semi-structured interview protocol was used to assure a certain level of structure and direction during the interviews (Creswell, 1998). Moreover, using an interview protocol enhances the accuracy of data analysis (Miles and Huberman, 1994; Stake, 1995) and contributes to research validity, reliability and controllability (Yin, 2003). The protocol is critically evaluated by several friendly strangers in order to enhance construct validity (Miles and Huberman, 1994) (see Appendix table 1).
During the interviews the two interviewers posed questions in a neutral manner. Moreover, actively listening, asking follow-up question and probing on responses are at the heart of this type of interviewing (Mack, et al., 2005). One researcher was taking the lead in the interview, assuring that the most important questions were asked. The second interviewer, a consultant of ProfConsul, fulfilled the role of time-keeper and asked the occasional follow-up question. By using two interviewers, investigator triangulation is obtained (Aken et al., 2012).
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reasons. All in all, the interview protocol including the questions were accepted after the pilot interview and were evaluated as highly useful for this research purpose (Yin, 2003).
The interviews had a duration of approximately 60 minutes. In order to make the participant feel comfortable the interviews were conducted at the preferred (working) location of the respondent. Each interview started with an explanation of the interview procedure, followed by a personal introduction of the interviewers and the participant. After that, the interview framework was explained. Finally, the research-specific questions were asked. The interviews were conducted in Dutch.
To ensure ethical integrity, all data used in this research was anonymized. All respondents signed an informed consent form (see Appendix table 2). The interviews were recorded to enhance the quality of data analysis and to enhance interaction between the researcher and the respondent as the interviewer did not have to focus on taking notes during the interviews (Rapley, 2004). No participants objected to the recording of the interviews. The interviews were transcribed within one day in order to control researcher bias (Eisenhardt, 1989). All respondents were approached to inspect the interview transcriptions before it was used to analyse. This has enhanced the (construct) validity of this research (Braster, 2000). None of them disapproved the transcriptions. All data are anonymized by using pseudonyms of the respondents and cases.
Field notes were written after each interviews to fully capture first thoughts and observations. Furthermore, thoughts about potential research directions were written down (Lewis and Ritchie, 2003; Glaser and Strauss, 1967). This contributed to the preparation of the coding process (Charmez, 2006).
3.3.2 – Documentation
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3.4 – Data analysis
After the transcription phase, coding techniques were used. Coding techniques are a way to structure data (Miles and Huberman, 1994). Glacer and Strauss’ (1976) guidelines of grounded theory formed the basis of the data analysis. Data analysis consisted of both deductive and inductive coding (Strauss and Corbin, 1990; Yin, 1981). Some examples of deductive and inductives codes can be found below (see table 3.7). A comprehensive codebook is developed to systematically categorise the large amount of data (see Appendix table 4). The coding procedure can be separated in three coding-cycles (see Appendix table 5). Initial coding, focused coding and theoretical coding (Charmaz, 1990; Eisenhardt, 1989; Miles and Huberman, 1994; Yin, 1981). Furthermore, a friendly stranger supported the coding process by comparing used codes and categories on accuracy and consistency. This increased research’s reliability (Aken, et al., 2012). Finally, it is important to note that interview quotes, codes and categories are translated from Dutch to English.
Examples Inductive and Deductive Codes Deductive Codes Description
(Servitization) Driver: Competition Adopting a servitization strategy because of the potential to gain competitive advantages by providing service as a product differentiation strategy (Dachts, Biege, Borowiecki, Lay, Jäger and Schartinger, 2014; Frambach et al., 1997; Gebauer and Fleisch, 2007; Mathieu, 2001a; Reinartz and Ulaga, 2008)
Top-down implementation An authoritative implementation strategy managed by the top of the organization (Matland, 1995)
Differentiation The degree of distinctive procedures and structure between functional departments (Lawrence and Lorsch, 1967)
Inductive Codes Description
Hit-and-Run Projects Respondents refer to clearly defined, short-term, highly-competitive projects characterized by low quality products and low returns
Design, build and maintain performance contracts
Respondents refer to a long-term performance contract with a customer. These contracts contains the responsibility of designing, building and maintaining an installation for the customer
Shared business model Respondents refer to an open and shared business model between chain partners in order to provide an integral customer solutions
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3.5 – Quality assurances
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4. RESULTS
In this section the results of the cross-case analysis will be presented. First, a brief overview of the development of a servitization strategy in the installation sector is provided. And three identified servitization forms are presented (the ‘what’ question). Second, drivers for servitization will be briefly discussed (the ‘why’ question). Finally, the results concerning the implementation of servitization and accompanying change tensions will be presented (the ‘how’ question). In line with the formulated research (sub-)questions the results about the paradoxes in organizational structure, implementation process and supply chain management will be discussed.
4.1 – The servitization trend in the installation sector: from reactive business to proactive business (servitization forms: ‘what’ question)
According to the respondents the traditional art of business in the installation sector can be described as a knowledge-intensive, short-term and cost-price driven business in a highly ‘traditional, conservative and detached sector’ (ResEN01). Traditional companies in the sector concentrate on ‘hit-and-run-projects’: ‘We wait for customers to approach us. If a customer wants to have a new building including technical installations, the customer first approach three advisors: an architect, a constructor and a technical specialist.’ (ResSOL01). Those advisors are responsible for the design of a building and carefully specify all technical requirements. With these requirements in hand, the customer and advisors approached the market: ‘The installation party which is able to fulfil all requirements against the lowest price is selected to do the job.’ (ResSOL01). Often the quality of installations and the focus on innovation suffers from the focus on low costs: ‘Within traditional projects, the requirements set up by advisors are imposed to an installation company. In such situations you start to believe that the advisors have all the required market knowledge, so you are not invited to develop new knowledge and innovations.’ (ResCON03). In short, the researched companies are characterized by short-term horizon, low innovation and business models which are increasingly under pressure.
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4.1.1 – Pay-for-Performance (PfP)
The first identified form of servitization are Pay-for-Performance projects. In these projects installation companies take full responsibility for design, construction, and maintenance of (partly) customized installations. In contrast to hit-and-run-projects, Pay-for-Performance projects have a long-term (service) character. Because of the long-term responsibility for the installations, companies shift focus to delivering a high-quality product. In this way they prevent expensive maintenance and repair services in the long-term. Installation companies start to invest a little bit more at the design and build phase, so they will be rewarded in the long-term if maintenance and repair jobs are not necessary. In return, customers pay a specified amount based on the performance (output) of the installation. A variant of this business practice can be found in the level of ownership. Often, a PfP project leads to a shift of ownership of the installation from customer to installation company. The installer has the total (costs of) ownership of the installation. In return, the customer will pay the installation company a monthly fee. In this fee are the rent of the installation, output and maintenance included.
4.1.2 – Consult and Create (CC)
The second identified form of servitization is Consult and Create (CC). Some companies have an increasing focus on consultancy. They provide advice on energy-saving activities and revitalisation projects of buildings. Often, this advice will also be implemented (see ESCo projects; Appendix Insight 1). One of the managers describes this process: ‘More often we become an advisor. We provide an energy-scan of a building and identify elements of improvements. If the customer is satisfied with the advice and is aware of the reduction on energy costs, we really start to technologically renovate the building on basis of our scans.’ Within these projects, the installation company also bears the financial risks. In this way, clients are guarded against unexpected costs: ‘We pay for our own interventions. The advantages for the customer are clear: they economize on energy expenses, pay less energy taxes and do not have to worry about the renovation and maintenance of technical installations (…) in return the customer pays a fee per month like a lease-contract.’ (ResWO01).
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transition from a focus on manufacturing to a more holistic approach where manufacturing and services through consultancy are combined.
4.1.3 – System Integration (SI)
Based on the findings of this research, it appears that taking the position as system integrator is the most extensive way of adopting a servitization strategy. A system integrator takes the responsibility to design, finance and build a new building including matching technical installations. Moreover, the company maintains the building and technical installations for a long period and provides all facilitating services of the building by offering a synergetic combination of products and technical and non-technical services. In short, a system integrator takes care of everything within customers’ company, except for customers’ core competences.
In the studied cases, some examples of the system integrator approach are part of public-private-partnerships1. These projects contain large public externalities. Therefore, some level of direct financial support from the government may be appropriate. Moreover, the government is a trustworthy partner to work with in long-term projects. Project MILITARY of ProfConstruction is a good example of such a project (see Appendix Insight 2). ProfMulti primarily focus on the healthcare sector to gain a position as technical system integrator (see Appendix Insight 3). Because system integrators are responsible for all non-core operations of the customer, system integrators need a close relationship with the customer. In this way, customer values can be discovered, identified and managed. In return, the customer pays a fee per month. This fee consists of a fixed part and a variable part based on the performance of the operational facilitating services.
4.1.4 – Classification of identified servitization forms
This research identified three servitization forms and typified these as (1) Pay-for-Performance; (2) Consult and Create and (3) System Integrator. The three typologies can be summarized and classified (see table 4.1) based on literature of servitization typologies (e.g. Gebauer, 2008), service value creation (Olivia and Kallenberg, 2003) and service delivering (Lalonde and Zinszer, 1976).
1
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Table 4.1 – Classification of servitization forms
Classification of servitization in practice Classification
according to literature
1. Pay-for-Performance (PfP) 2. Consult and Create (CC) 3. System Integrator (SI)
A. Servitization typology
(and definition according e.g. Gebauer, 2008)
A1: Customer service provider
Delivering services (i.e. preventive maintenance) to guarantee product functioning and extend the product life-cycle
A2: Development partner
Providing an integrated customer solution by offering research and development assistance and centralizing the customer values and needs
A3: Outsourcing partner
Providing an integral customer solution by shifting the full responsibility and risks of the customer’s operating (non-core business) activities to the manufacturer. This solution contains a bundle of products and services, often provided by a network of suppliers B. Service value creation (and definition according Olivia and Kallenberg, 2002) B1: Maintenance services
-Relationship based service (long-term contracts) -Product focus
(basic service complements a product)
B2A: Professional services (if only ‘Consult’ services are provided)
-Transactional based service (paid per advice project) -Process orientated
(process-orientated consulting)
B3: Operational services
-Relationship based service (long-term contract)
-Process orientated (integrated customer solution: focus on all non-core capabilities of the customer)
B2B: Operational services (if ‘Consult and Create’ is offered as one servitization form)
-Relationship based service (long-term contract)
-Process orientated (bundle of product and additional services)
C. Timing of service delivery
(Lalonde and Zinszer, 1976)
C1: During and after product sale
(i.e. design advice and repair jobs)
C2: Before, during and after product sale
-Providing advices is possible in every product sale phase. -However, Consult and Create jobs focus on services during and after product sale
C3: Before, during and after product sale
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4.2 - Drivers for servitization (the ‘why’ question)
This research has identified four different drivers for servitization: competitive, financial, demand and technological innovation drivers. First, a competitive driver is found. Respondents refer to the need to differentiate their products in a highly-commoditized market where business models are under pressure. Second, a financial driver is found, the researched companies has discovered the financial potential of delivering long-term services. This will lead to sustainable income revenues in contrast to income based on short-term projects. Third, respondents refer to a change in customer demand. According to one of the managers: ‘customers increasingly focus on their core-businesses and try to outsource their non-core capabilities.’ (ResSOL03). This provides opportunities for installation companies in the position as system integrator. Besides, six other demand drivers are identified which can be found in table 4.2. A recurring theme is sustainability in terms of enhancing the life-cycle of an installation or building and in terms of corporate environmentalism. The latter is partly because of increasing government regulations on the domain of energy-efficiency (see table 4.2).
Servitization driver: Changing demands Specific demand-driver Quote Example Increasing output-driven
demand by customer (bundled with life-cycle services)
ResEN01: ‘Customers often request an output without any further
specification. If you order a Coke in a restaurant, you expect a cold sparkling Coke, but you do not order a cold sparkling Coke. You just order Coke. You can find this line of reasoning also in the installation sector (…) eventually a customer wants to have ice-water to cool their production machines. So, we will guarantee the delivering of ice-water by building an ice-water machine bundled with 24/7 services. The customer pays per cup of ice-water. Pay per performance bundled with a life-cycle service.’
Demographic changes (ageing population)
ProfMUL02: ‘In 2030 50% of our population has the age of 65+ (…) these
people become dependent on integral technological solutions which will function in the long term.’
Increasing technological complexity (Lojo, 1997) and shortage of technical knowledge
ResCON02: ‘I think, it is because of the increasing complexity of technical
installations, that customers simply do not understand the functioning of new installations and they do not want to know. They want an integral technical solution. (…) In the past, companies had an internal technical service, but they cut down on these expenditures. So, companies expect us to fully take care of every technical device.’
Sustainability: growing awareness of corporate
33 environmentalism and
contribution to the circular economy
they expect advices. How can I save energy? (…) we lease installation parts of our supplier, so we can return them after ten years.’ (ResCON02).
Sustainability: increasing amount of governmental sustainability regulations
ResEN03: ‘The climate deal of Paris leads to regulations of national and local
governments. These restrictions requires integral building and installation solutions.’
Sustainability of buildings: revitalization projects
Large revitalisation projects of buildings demands technical knowledge, technical renovations and new installations which will be maintained in the long-term. ‘Sustainability is not only green-thinking. But also thinking on the
long term. We take care of the optimal functioning of buildings for 20-25 years instead.’
Table 4.2 – Specification of changing customer demand
Based on the findings of this research technological innovation (and knowledge) is a fourth servitization driver. The fast development of technological knowledge, innovation and digitization is a driver to adopt a servitization strategy. According to the respondents, technology is nowadays perceived as the most valuable asset of the building. Technology enables the integration between products and services by predictive analytical tools and tracking customers product usage and preferences. Due to technological innovation it is possible to connect technology and combine data to deliver and develop new customer specific services. Data will make it possible to predict breakdowns and will guarantee in-time (preventive) maintenance services specific to the client product use. One of the interviewed business development managers explains this: ‘Look at the technology of everything. Everything can be measured. Continuously. And you can translate this big data into information. With this information you can add value to your product by delivering services. We are part of the fourth industrial revolution on the area of digitization.’ (ProfMUL01).
4.3 – The implementation of servitization (the ‘how’ question)
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4.3.1 – Organizational structure: integration versus differentiation
All researched companies have to deal with the tension between integration and differentiation. According to the respondents, providing an integral customer solution based on products and long-term services demands cross-functional knowledge creation and sharing and one overall corporate communication and marketing strategy. The companies have an organizational structure based on either functional business units (ProfMulti and ProfConstruction) or geographical business units (ProfEnergy, ProfWork and ProfSolution). Those business units are divided into different departments with a focus on specific tasks or functions. For example installation design and installation maintenance are in all cases separated departments. All those business units have to work together more intensively. According to one of the managers: ‘Finally, we have one place in the organization with the resources to bundle different ideas and to work on an overall value proposition.’ (ResEN02).
However, the need for specialized knowledge remains. In fact, traditional installation activities, maintaining and repairing capabilities are still vital elements, also within a servitization context: ‘We still have to focus on specialized knowledge and skills’. (ResEN03). So the researched companies focus on embracing both sides of the integration versus differentiation spectrum. A respondent explains: ‘It is not or integration or differentiation, it is both. We need more communication on a central level and integration of knowledge. However, we need specialized knowledge and departmental working structures. It is important to break functional silo’s.’ (ResCON01).
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local customers. This combination of local contact and central know-how and shared innovations will provide an optimal solution for the customer.
The second way how companies cope with the integration and differentiation paradox is organizing projects in a matrix structure. In this way, specialized knowledge of maintenance and repair mechanics will be consulted during the design and build phases of installation or buildings.
Thirdly, an interesting finding is that integration of ideas and innovations can lead to further development of specialized work. ResCON01 explains the consequences of bringing people together: ‘if you put experts on different domains together they will discuss problems and start brainstorming of solutions. This will lead to ideas which can be put in practice within their specialized organizational domain.’
Change paradox: integration versus differentiation
Need for integration Need for differentiation Suggested change solution -To provide PfP, CC and SI
projects, different organizational activities (designing, building, financing, maintaining, operating) have to be aligned in order to create a (cost) efficient combination of products and services;
-Sharing specialized knowledge will lead to process innovation
-Distinctive specialized knowledge are still required in order to perform distinctive process activities;
-Within a structured environment based on routinized task,
specialized knowledge can be further developed
-Build a ‘horizontal’ entity across the organization to bring
(geographical) business units together;
-Design a matrix project structure; -Focus on integration can lead to increasing level of differentiation
Table 4.3 – Change paradox: integration versus differentiation
4.3.2 – Servitization implementation process: top-down versus bottom-up
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However, employees at the bottom of the organization provide the services and are close to the customer. They know the needs and values of the customer. A focus on customer-centricity demands a bottom-up implementation.
So the researched companies focus on embracing both sides of top-down versus bottom-up spectrum. One of the managers explains the paradoxical relation: ‘the bottom of the organization identifies environmental challenges, these challenges are shared on a central level (…) on a certain moment the top of the organization presents a new vision and emphasize the crucial role of the bottom of the organization within this new vision (…) then the change is addressed. And if the top removes obstacles and provides resources and trust for an organizational change identified at the bottom of the organization, than the change implementation will be accelerated. New change initiatives will arise from the bottom.’ (ResEN03).
Another way to implement change is a process based on the combination of top-down, bottom-up and customer-driven implementation. Here, the demand of the customer is the starting point. Three implementation activities are key: (1) the demand of services of the customer; (2) the bottom-up translation of the customer demand into executive work models by local offices or departments, and (3) providing (financial) resources, trust and communication of a strategic vision by the top of the organization. According to one of the respondents, the integration of these three elements will lead to a fast and secure change implementation.
