Service integration at
manufacturing firms
A case study at Nedap Retail
Master thesis
Gert Jan ter Braak | s2065118
Stadsgravenstraat 73a 7511 ER Enschede +31(0)620465024 gjhterbraak@gmail.com
University of Groningen
Faculty of Economics and Business
MSc Business Administration – Business Development
Nedap N.V.
Business Unit: Retail Supervisors
University of Groningen: Drs. F. Streefland & Dr. M. Hillen Nedap Retail: Drs. J. P. Papen
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Preface
As the final part of my Master of Science in Business Administration this master thesis is written in the field of my chosen specialism, Business Development. This thesis is the result of a study done during my internship at Nedap Retail.
Nedap N.V. provided me with the opportunity to conduct a research towards the integration of services in one of its business units; Retail. Therefore I would like to thank Rob Schuurman for enabling this opportunity and Jean Paul Papen for his guidance and support.
I am also very grateful for the support of the University of Groningen, more specifically I would like to thank Frank Streefland and Michiel Hillen. Their professional guidance and academic knowledge helped to keep me motivated during the research process.
Last but in no way least, I would like to thank my parents and brother. It’s hard to imagine how I would have achieved to finish my studies without their support.
Gert Jan ter Braak
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Abstract
This research examines a current transition from pure product manufacturing towards more service providing activities at Nedap Retail. It also examines the potential and design of a further step in service integration.
Literature describes a trend in which services are becoming relatively more important than products. Intangible aspects of offerings appear to grow in importance compared to the specific product properties. This trend is perhaps best seen in the rising proportion of services compared to products in a country’s gross domestic products. Management literature is especially advising manufacturers to integrate services in order to gain competitive advantage. A preliminary validation of such an opportunity for Nedap Retail led to the following research question: What should the next step in the transition of becoming more of a service provider look like for Nedap Retail?
The properties of services (i.e. intangibility, inseparability, heterogeneity and perishability) may be exploited to gain competitive advantage when they are integrated with products to come to a new offering. This can result in advantages of services over products such as higher margins and more steady (extra) revenues. Compared to products, services also require fewer assets in the development process. An examination of the history of Nedap Retail in offering services suggests that product related services are valued but further service integration involves aspects which are incompatible with other perceived business needs. Worldwide coverage of the products is considered more important. The offering of Nedap Retail therefore has to be scalable in order to be deployed over their business partner network. Offering a more service based offering is in many cases less scalable. Software services appear to be the exception.
Through lessons found in NSD literature the service potential of a more recent product group at Nedap Retail is examined. These products are focused more on offering a solution (i.e. raising stock accuracy) for which more services can be thought of. By developing different propositions in which the service part of the total offering varies, the demand for more services was tested. The retailers in the sample indicated a certain demand for services and wish for a single solution provider for the implementation of these products. However, elaboration on the results of this test led to the conclusion that, at this moment, Nedap Retail is offering an insufficient part of the solution towards this customer’s problem. Especially the dependency on collaboration with the POS (point of sale) software integrator makes Nedap Retail’s future role as solution provider hard to imagine. On the short term a partnership with this party is advised. On a longer term Nedap Retail should consider taking over more service roles currently provided by this party if it wants to offer more than products in this market. Starting the development process of new products/offerings with customer solutions as a focus, instead of individual products or the requirement for scalability, may guide Nedap Retail to becoming more of an integrated solution provider in the future.
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Index
1. Introduction ... 4
1.1 Academic interest ... 4
1.2 Business interest ... 6
1.3 Research question and research approach ... 10
2. Service integration ... 13
2.1 Defining services ... 13
2.2 The process of service integration in manufacturing companies. ... 16
2.3 New Service Development ... 20
2.4 Service integration at Nedap Retail ... 24
3. Design ... 27
3.1 Clarifying the objectives ... 27
3.2 Design specifications. ... 30
3.3 Decomposition of the task and systematic variation... 31
3.4 Development of offerings ... 32
3.5 Offering testing ... 33
4. Conclusions and limitations ... 35
4.1 Conclusions ... 35
4.2 Academic reflection and contribution ... 36
4.3 Limitations and further research ... 37
References ... 38
Appendix A: Financial figures Ford Motor Company & GDP figures... 43
Appendix B: Data gathering ... 44
Appendix C: Example of a reviewed interview ... 48
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1. Introduction
“If you don’t have a competitive advantage, don’t compete“ - Jack Welch (Chairman and CEO of General Electric 1981-2001)
Over the last ten years Ford Motor Company made an average net loss of three billion dollars per year on their automotive sales. Their profit on financial services however accounted for a positive 2.4 billion a year, which reduced their overall loss significantly. Interestingly; over the last three years, which were closed with a positive result, services accounted for less than eight percent of total revenues while they accounted for close to forty percent of profits. Ford, like many other manufacturing companies, recognized the advantages of integrating services to their core business. It proved to be a logical and profitable strategy (see appendix A, table 1 for a summary of financial figures derived from annual reports of the last ten years).
This research starts off by exploring what academics have written about the subject of manufacturers integrating services to products and what has yet to be researched. Further research towards this subject will be conducted at Nedap Retail. A company description and its business interest in the subject will be explained in paragraph 1.2. The opportunity for Nedap Retail to integrate services will be validated in this paragraph as well. In the ensuing paragraph the research question will be presented and the research methodology will be clarified. In the second chapter, the relevant literature needed for the design part of this research is selected and elaborated on. It is combined with company experiences in service integration. The design steps to come up with more service based offerings for Nedap Retail are illustrated in chapter three. These offerings are also tested in this chapter. The final chapter of this research draws conclusions and reflects on the academic interest.
1.1 Academic interest
Over the last decades, services are forming an increasing proportion in the gross domestic products of developed countries. Services are, for instance, currently accounting for almost 80% of USA’s GDP (see appendix A Table 2). Academic interest appears to have made a similar shift from a focus on the exchange of tangible manufactured output towards a more service focused perspective (e.g. Vargo and Lusch, 2004a; 2008a; 2008b). This new perspective focuses more on intangible resources, the co-creation of value and relationships. The pattern of adding services towards existing products and combining products and services in new offerings can be seen in many leading companies as an attempt to improve competitiveness and performance (Lusch, Vargo, and O’Brien, 2007; Wise and Baumgartner, 1999). Services are becoming of more importance for companies. Especially for manufacturing companies, the development of superior products and scale economies are no longer considered to be enough of a competitive advantage to guarantee success; services are becoming fundamental parts of the total proposition (Vandermerwe and Rada 1988; Gebauer et al., 2006; Oliva and Kallenberg, 2003). Vargo and Lusch (2004b) for instance state that in order to remain competitive in current markets firms must shift from a “goods-centered paradigm” towards a “service-centered view”.
5 Market factors such as increased competitiveness, turbulence and complexity made manufacturers more customer-centric and innovative over the last decades (Johnson and Selnes, 2004; Narver and Slater, 1990). More services were added to their range of offerings (Gebauer et al., 2010; Oliva and Kallenberg, 2003). Expanding the scope of the product offering to include services allows companies to generate additional revenues. Compared to products, these services provide higher margins, more steady revenues and require fewer assets in the development process (Davies, 2004). Windahl et al. (2004) also argue that by combining physical products and services to provide outcomes fulfilling the customers’ need, extra customer value can be generated.
Although lots of (management) literature advices manufacturers to integrate services to their core products (Bowen et al., 1989; Gadiesh and Gilbert, 1998; Quinn et al., 1990; Wise and Baumgartner, 1999), research on what the transition from manufacturer towards service provider looks like is more sparse (Gebauer et al., 2010). Baines (2009) states that “there is little literature evidence recording the evolution of servitization within manufacturing industry.” Baines (2009) also states that the limited examples in this field are often case studies at multinationals delivering high value capital equipment (e.g. Alston, Rolls-Royce and ABB).
One model of this transition is found in research of Oliva and Kallenberg (2003). The study describes the transition of manufacturing companies integrating services and states the need for more case studies on the subject: “further research is necessary to assess the experience and challenges of companies further into the transition process (p. 171).” They continue by saying that “the development of these ideas could prove especially useful to firms facing the challenges of product commoditization and that are looking into services as a way to differentiate their offering, satisfy their customers and improve their financial performance (p. 171).”The authors also point out that there are unaddressed issues associated with the hurdles identified for manufacturers to move into services – namely: “the evaluation of the installed base service potential, and the extent to which a firm should enter the service market (p. 170).”
This study contributes to filling the lack of case studies of manufacturers in the transition of becoming more of a service provider. Motives to do so and challenges during this process are described at a relatively smaller company. By examining the possibilities for a further step in this process, the potential for such a step is addressed and the factors this potential depends on are examined and compared to current literature. By doing so, this study provides a different view on service integration compared to literature which often reviews successful transitions in hindsight (e.g. Davies, 2004; Wise and Baumgartner, 1999; Miller et al., 2002; Mont, 2001).
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1.2 Business interest
One of the business units of Nedap N.V. was chosen to conduct this research. Nedap Retail wanted to know more about integrating services into its operational business and the potential benefits it could gain from doing so. The products, services and business processes will be described below whereas this chapter will end with a validation of the business opportunity.
1.2.1 Company description
Founded in 1929 in Amsterdam, the ‘Nederlandsche Apparatenfabriek’ (Dutch Devices Factory) started as a manufacturer of doorknobs and toilet seats. Later on the company changed its name to Nedap and also moved its headquarters from Amsterdam to Groenlo. It has been listed on the Euronext exchange since 1947. Nowadays the company is known as a manufacturer of intelligent technological products and solutions in a wide range of markets and employs over 700 people worldwide. The company can be split up in eleven business units, all of them located primarily in the headquarters in Groenlo. Each business unit is operating as an autonomous profit centre although knowledge and technology is free exchangeable. Examples of these business units are; security management, healthcare, energy systems, light control and retail. The latter being the focus of this research.
1.2.2 Nedap Retail
The business unit Nedap Retail was created in 1950 and develops and supplies innovative and sustainable products, such as security gates (often referred to as antenna’s), to manage and secure retail stores. These products used to be produced in the headquarters but from 2008, production moved to a nearby facility in Neede. Although some of the components are purchased in China, most of the components are produced by Nedap itself. The research and development of new products is done in the headquarters in Groenlo.
As is shown in Figure 1, Nedap Retail operates within a very flat structure allowing them to remain flexible and responsive to market changes and opportunities. Employees are encouraged to pitch ideas
Figure 1: Organizational structure
Board of Nedap N.V. Business Unit … Business Unit … Business Unit Nedap Retail Subsidiaries and business partners … Account team
Contact and sales international customers
Regional team
Contact and support business partners Product team Development of products Other teams General supporting activities
7 for innovations directly with the market group leader and knowledge is shared amongst business units. The actual selling and installation of the products is done by subsidiaries and business partners. Subsidiaries are located in the Netherlands, Germany, France, the United Kingdom, Spain, China and Hong Kong. In addition, more than fifty business partners make sure Nedap Retail can be represented globally.
Also shown in Figure 1, Nedap Retail consists of several teams. The product team is divided per product group. Each product group has employees responsible for R&D, software development and design. The Account team is responsible for contact and sales of international customers which have stores located in three or more countries. This team consists of account managers who are assigned to a specific company as a contact person and sales persons who are responsible for the acquisition of new international companies as customers. The regional team consists of several area managers each responsible for contact and support with business partners in this area. The other teams can be categorized as a marketing team offering overall support and a new business development team.
1.2.3 Sales process
The sales process of these products and services is done by business partners or by the headquarters. The distinction depends on the global spread of the retailer’s stores. Retailers operating in several countries cannot be served by business partners operating nationally. These accounts are therefore dealt with by the headquarters which manages the relations between the customer and various business partners. This process is shown in a simplistic form in Figure 2.
International retailer making central purchase
decisions? Contract extension/new deal? yes no yes no Local Business Partner
makes deal
Headquarters makes deal
Installation & after sales services by local
Business partners
Contract ends Request from retailer
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1.2.4 Products and services
Within the product range of Nedap Retail, three main product lines can be distinguished: Electronic Article Surveillance (EAS) systems, Store !D and Cube. The main focus of the business unit is on EAS systems. Nedap Retail has been active in this segment for more than 30 years while the other products are developed later on and launched within the last five years. Electronic Article Surveillance systems are designed to prevent shoplifting of products in retail stores. The collective term EAS entails the security gates with the antennas, tags, labels, detachers and deactivators.
The system is based on radio frequency (RF) technology. The antennas are placed at the exits of the stores where they signal and give alarm if active labels are leaving the store. This usually means the item to which the tag or label is attached isn’t paid for. The most distinctive difference between labels and tags is that labels are glued on the product and remain there after purchase while tags are removed at the store by a detacher. The labels are ‘destroyed’ by a deactivator after they are paid for and can’t be used again while tags can be reused after they are detached from the items.
Next to alarming security personal in cases of theft, the antennas can be used for other functions as well. Six types of antennas can be distinguished amongst three lines; the economy, business, and dynamic line. Apart from differences in design and price, these antenna’s differ in capabilities as well. Customers can choose whether they only want the alarm function or have more functions integrated such as customer counting, remote assistance and metal detection which is designed to signal foiled bags made to bypass standard shop security. If a retailer decides to connect his antenna to the internet he’ll be able to see system uptime which shows if the systems are working properly. Further analyses of systems and their integrated functions can be ordered through reports.
Store !D products are based on RFID instead of RF. This technology allows for more uses than EAS. RFID tags can store more data which can also be rewritten. This allows for more applications in retail stores. Where EAS is more or less used as an alarm system on products, RFID can also be used to control and manage stock. After the retailers items are equipped with RFID tags or labels the !D Hand and corresponding software application can be used to achieve fast and accurate stock taking or register sent and received items. Other items such as the !D top which registers in and out going RFID tags/labels and RFID upgrades for EAS antenna’s are also developed by Nedap. Some of the disadvantages, such as the higher price of the labels and limited functioning on certain products (i.e. on metals/liquid containers), make that RFID technology is not able to replace EAS entirely but is only suitable for certain
9 stores. The simple one-button-design of the !D hand for instance is developed for easy use in fashion retail stores.
Recently a new platform is introduced under the name ‘Cube’. Instead of sending reports with usage data, Cube allows for real time data tracking on several functions of the antenna’s, customer counting devices and label deactivators. Next to the offerings of Nedap, Cube can also be used for other applications of other suppliers such as managing security
camera’s, managing personnel planning, or energy costs. It is designed to be a complete and comprehensive platform for retailers to manage their entire store or chain of stores.
1.2.5 Preliminary validation of the business opportunity
In order to come up with a research question and to get a better understanding of the importance of services compared to products for Nedap Retail, the business interest of the opportunity of service integration has to be validated. In this preliminary analyses annual reports were reviewed and the most important stakeholders were interviewed to see whether integrating services may in fact lead to an advantageous new situation. This was done trough semi structured interviews of which the questions and most important outcomes are listed in Appendix B. A summary of these outcomes is given below. Annual reports show a companywide transformation from manufacturing towards including other activities. Subcontracting activities are being reduced while a focus on marketing its own products increases: “The effects of the fundamental shift from production and operational tasks to more creative and creating activities such as development and commerce are becoming more and more visible throughout the company”. (Nedap N.V., 2011 p.12).
Nedap Retail is already distinguishing itself from competitors by offering a more service focused approach than competitors. “The Nedap way of doing things” as it was called by one interviewee, entails thinking along with the clients. However because of Nedap’s company structure a lot of product related services are offered through its business partners. Nedap controls the quality of these services by offering training sessions and by setting strict requirements. Currently, a certification project is undertaken to guarantee the quality of the business partner’s operations even further.
A possible way to distinguish itself from competitors through services is opted by perhaps the most important stakeholder, being the business unit leader. In his view, Nedap Retail should remain its focus on solving the customer’s problem and design a complete service around this process. An example of this customer problem is item shrinkage due to theft or fraud. Problems like these could be a starting point of the design of a solution. RFID technology was opted to allow for better possibilities than EAS systems in terms of solving customer problems like these. Next to the opportunity of service differentiation, halve of the interviewees also declared a pressing need to change the current, product and price-based, business focus. A declared fear for future commoditization of the core products caused this believe. It was opted that the “knowledge and experience of Nedap should be used to offer a complete package instead of just selling products.” (Rob Schuurman – Nedap Retail Business unit leader).
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1.3 Research question and research approach
Interview outcomes indicate that the market Nedap Retail is operating in appears to value a more service based approach. Stakeholders agree that a focus on solving the customer’s problem gains them some sort of a competitive advantage already. Annual reports show a shift from a producing supplier to third parties towards a producer selling products –and servicing them- under its own brand name. A quick scan of relevant literature (Wise and Baumgartner, 1999; Vargo and Lusch, 2004a) on the subject also confirmed advantages for companies that start to perform more as a service provider instead of just selling products and offering only basic services. From this opportunity the following research question was derived:
What should the next step in the transition of becoming more of a service provider look like for Nedap Retail?
Although an opportunity is researched, the best research approach is academic problem solving. To do so, the reflective cycle of van Aken et al. (2007) is used as a guideline for the structure of this research. In this cycle a type of problem is chosen and a case which is experiencing this problem is selected. Trough the regulative cycle of Van Strien (1997), the business problem is further investigated and hereafter an academic reflection is given.
Because this research is focused more on an opportunity instead of a problem, there is less need to investigate causes and more need for an understanding of the situation the business is in, before designing solutions. Therefore different literature streams are reviewed and combined in the next chapter. Lessons on how services can be integrated to provide advantages are searched for. Combined with a description of the current service transition at Nedap Retail, this makes for the preliminary analyses which is used as input for the design phase of this research. For this phase, steps from New Service Development (NSD) literature and a systematic approach to design were used. The first five steps of the NSD model of Scheuing and Johnson (1989) were used. This NSD method did not prove to
11 be sufficient for the design since the offerings which had to be designed comprised more than the development of a service alone. Limitations of a structural method to design (i.e. more than one offering had to be designed on a continuum from product to service focused) made a combination the most logic choice. This resulted in the structure displayed in Figure 4. Verschuren (2001) advises an iterative-parallel research strategy for more open ended research. This approach allows for moving back and forth between the diverse stages in the research. Findings of later stages may be used to reshape earlier stages of the research. This was especially necessary in the design phase of the research.
1.3.1 Research methods and data collection 1.3.1 Research methods and data collection
Different research methods are used in order to avoid the pitfalls of qualitative research. This qualitative approach is mostly done through interviews but data was also derived from literature, internal documentation, observations and brainstorm sessions. The different methods of data gathering are explained below. It is specified how the main quality criteria -controllability, validity, and reliability- (Yin, 2003) are taken into account.
Semi structured interviews. Compared to a quantitative approach, qualitative methods are generally less compelling and less controllable (Verschuren, 2001). Open ended in-depth interviews are also more easily ‘colored’ by the researcher. To avoid this critique as much as possible, internal interviews were recorded, written down and summarized. Interviewees were asked to read and sign this document when they approved in order to avoid wrongful conclusions drawn by the researcher. The researcher is in possession of these signed abstracts of interviews. This was done for all internal interviews except the validation of the business opportunity. Interview questions and structures are based on academic literature and findings on previous interviews. Quality criteria to guide the interviews was derived from Emans (2002, p67-79). External interviews were held at the stores or head offices of the retailers listed in appendix B. The duration of these interviews was an hour on average and were all recorded and worked out (see the example at the end of Appendix B). A complete list of interviews, questions and justification of the interviewee’s is listed in Appendix B.
Literature. In order to come up with objectives for the design phase and to gain insight in existing design knowledge several peer reviewed journals and books were used. Databases that have been used are EBSCOhost, Web of Science and Emerald insight. Search terms included: servitization, service integration, service + manufacturing, integrated solutions, new service development.
Company documents. Nedap Retail’s database (Portal) was used to gain understanding of products and services offered by Nedap and its business partners. Next to this, a companywide improvement program
Figure 4: Research structure
Clarifying objectives
Decomposition of task & Systematic variation Design Specifications Development of offerings Offering testing Design Phase Service integration in literature Service integration at Nedap Retail Analyses
12 (Road to Excellence, 2011) and annual reports were used. Implementation plans on RFID projects were also reviewed. A full list of internal documents is added at the end of the reference list.
Brainstorm sessions. In the ideation phase of the design a brainstorm session with three important stakeholders was held to come up with ideas for further servitization. Outcomes contributed to the selection of a single product group.
Observations. The process of applying and using RFID based applications in retail stores was observed in different stores to experience sub problems and as input for the external interviews and to get a clear understanding about the processes. In-store processes such as labeling, installation, product scanning were observed and performed first hand.
Appendix B offers more detailed information on how the research was executed. It displays data, details of interviewees and reasons for interviewing.
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2. Service integration
“The importance of physical products lies not so much in owning them as obtaining the services they render.” - Philip Kotler
The purpose of the first part of this chapter is to review literature for lesson that will guide the design process of more service based offering of Nedap Retail. Its lessons also help to choose which product group is best suitable for service integration. Existing literature is reviewed to gain understanding of what characteristics of services may help to gain advantages over offering solely products. These general benefits are reviewed but specific case studies on how manufacturers made a successful transition to becoming more service focused are also reviewed. Since no models or development tools for service integration in manufacturing companies were found, the new service development literature is explored for lessons on how to integrate services. The last part of this chapter reviews Nedap’s experiences in service integration. By doing so general lessons from literature can be combined with firm and market specific experiences of Nedap. Each paragraph ends with a sub conclusion of the input for the design process.
2.1 Defining services
Vargo and Lusch (2004a) argue that there still is no generally accepted and positive definition of a service. In a recent research by Zeithaml et al. (2006) services are described as “deeds, processes and performances provided to customers in exchange relationships among organizations and individuals”. Older definitions describe services as something connected but different from a product such as Solomon (1985): “Services refer to the marketing of activities and processes rather than objects”. Services appear to have transformed from a necessity of products (in order to reach customers you need to add services to the products) towards its own entity. This change in view of what a service is may explain why no durable definition of service is established over time.
2.1.1 Characteristics of services
A lot of well known leading scholars argue that pointing out the differences between products and services is irrelevant. Perhaps the most famous quote in this area is that of Levitt saying “the customer really doesn’t want a drilling machine, he wants a hole-in-the-wall.” (Levitt; 1972). Customers ask for a solution for an inconvenient situation they wish to change and do not mind whether the solution is classified as a service or product. For the supplier however, the differences between products and services do matter for daily operations. For instance, there is no need to focus on your inventory as a sole service provider or focus extensively on improving customer contact points as a commodity vendor. The characteristics that differ services form products require companies willing to integrate these service to develop new competences. The four most accepted characteristics that distinguish products from services are intangibility, inseparability, heterogeneity and perishability (Zeithaml et al., 1985; Lovelock, 1983; Shostack, 1977; Thomas, 1978; Alam, 2002).
14 - Intangibility, this is the main difference between products and services (Bateson, 1977). Services are performances rather than objects. Therefore they cannot be touched or seen in the same way as products.
- Inseparability for services means that the production and consumption of services happen simultaneously. Products can be produced, sold and consumed in that order and across different places whereas pure services are sold, produced and consumed at the same time. This, naturally, causes more involvement of the buyer of services with the production process which makes the process highly interactive (Grönroos, 1978).
- Heterogeneity differs services from products because once a production line is set up, one can expect every product to come out identical to another. Services are in general more labour intensive and consistency among service employees is harder to achieve than consistency in a production line for products.
- Perishability in this context means that services cannot be saved or stored. This causes more difficulty in adjusting supply to demand.
This exploration of service characteristics gives a rather black and white view in which an offer is either a service or a product. Shostack (1977) argues that no offer is pure tangible or intangible and their marketing positions should be seen along a continuum as is clarified in Figure 5.
In a similar line of reasoning one can imagine a continuum from pure product manufacturers to pure service providers (Chase, 1981; Oliva and Kallenberg, 2003). At the beginning of the continuum, product manufacturers can be positioned which are only producing a core product. The further one moves along the line the more important services are becoming for the firm in terms of revenue, profit and customer satisfaction. At the right end point of the continuum one can place service providers that gain little part of their value creation process from products (see Figure 6). The transition described in the academic interest and in the next paragraph can be seen as a step from a current position on this continuum to the right side.
Fast-food Outlets Fast-food Outlets Tangible Dominant Intangible Dominant Salt Automobiles Detergents Soft Drinks Cosmetics Teaching Investment Management Consulting Advertising Agencies Airlines
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Figure 6: Product service continuum (Oliva and Kallenberg, 2003)
2.1.2 Benefits of services
In order to gain competitive advantage trough the integration of services one has to be aware of the benefits services may offer. The earlier characteristics of services may potentially cause benefits found in three domains; financial benefits, strategic and marketing benefits.
Financial benefits - Perhaps the most appealing benefit of services compared to products is that in general they generate higher profit margins (Anderson et al., 1997). Margins decrease as more parties are able to offer the same or a similar offer. Services are harder to imitate since they are usually less tangible and more centered around relationships with customers. In their research, Lay and Jung Erceg (2002) compared several product related strategies such as focusing on innovation, product quality and cost leadership with competing through services and found out that the latter strategy enabled product manufacturers to earn the highest margins. Six years later Fang’s research (2008) also concludes that companies with a greater focus on the service part of their business achieve a better return on sales and improve their company value.
Services can also bring forth a more stable source of revenue. Investments in products are made relatively more in prosperous times whereas service level agreements are paid upon annually. Therefore the demand for services is less dependent on economical cycles and more stable (Quinn, 1992). Integrating services into products enables companies to generate additional service revenues throughout the product life cycle (Wise and Baumgartner, 1999). Integrating services is especially profitable for manufactures since they already have an installed base to approach with these services (Knecht et al., 1993).
Strategic benefits - The lower tangibility and visibility of services combined with its labor intensiveness makes services harder to imitate. This makes the integration of services a sustainable source of competitive advantage (Heskett et al., 1997). The relation based foundation of services also creates an entry barrier for competitors (Oliva and Kallenberg, 2003).
Marketing benefits - Marketing has traditionally been seen as a way to sell more products. This was the service part of selling products. What has changed over the last decades is that services nowadays are marketed as a separate entity as well. However services can still be used to market products as well.
2.1.3 Conclusion:
This paragraph shows that certain characteristics of services can be exploited as business benefits. Competitive advantage may be created by offering services which are hard to imitate because of their labor intensiveness and lower visibility. Consultancy services for instance are ranked far from commodity goods on the tangibility continuum (figure 6). Adding this type of service to products causes
16 the offering as a whole to shift more towards a service based offering which is harder to imitate and may therefore cause the offering to be less vulnerable for commoditization which helps to maintain margins over time. Another aspect to take into account when integrating services is the duration of the service. Achieving the financial benefit of more stable revenues indicates the advantage for a subscription based service instead of a onetime offered service.
2.2 The process of service integration in manufacturing companies.
Case studies with success stories can be found in literature of companies that made a successful transition from product manufacturer towards service provider. Off course this doesn’t mean this will be a wise strategy for every manufacturer. Written examples of companies that were convinced of the necessity to integrate services but failed nonetheless are more sparse. A McKinsey report (2003) on firms transitioning from product selling to what they call ‘solution selling’ shows that three out of four organizations fail to see sustainable economic profit. However, literature does give a few guidelines of how a successful transition is achieved. A useful explanatory model is given by Gebauer and Friedli (2005) and is displayed in Figure 7.
Figure 7: Transition from product manufacturer to service provider (Gebauer and Friedli, 2005)
The model indicates that a successful transition is not achieved by adding more services to current business practices but success depends on transforming the focus from producing and selling products to a focus on providing services where the actual products are no longer most important. This is consistent with other recent literature arguing that firms should focus more on high-value services and
17 customer-focused solutions instead of stand-alone physical products (e.g. Wise and Baumgartner, 1999; Shepherd and Ahmed, 2000). It is argued that gaining competitive advantage is about the way products and services are combined into an ‘integrated solution’. When developing these integrated solutions, companies have to focus on user processes and operations instead of their own products and spare parts (Shepherd and Ahmed, 2000).
The model in Figure 7 however does not explain why some companies made a successful transition and others have not, as is noticed by the authors as well. The results of a study by Fang et al. (2008) supports the notion that transitioning to services affects firm value in a positive way. However there are a few important reservations on this result which may explain the difference between success and failure for companies. First off, firm value only increases after services reach a critical level of minimal 20 to 30% of total firm sales. The authors warn that a limited push may detract from firm value. Secondly, industry factors also play part in the success of the transition. Service initiatives should be avoided if the core product’s market is growing quickly or if this market is stable instead of volatile. This outcome is consistent with the notion of companies arguing they made the transition because their core products were becoming more of a commodity good. Finally, managers should avoid unrelated service initiatives and should focus on closely related businesses to enhance synergistic spillover benefits (Fang et al. 2008 p. 12).
How should one decide what services to integrate at what time and what should this transition look like? Oliva and Kallenberg (2003) developed a model of the transformation patterns followed by firms that have attempted the transition from products to services for the installed base as is displayed in Figure 8. The process begins by consolidating product related services. This is often done to improve the quality of the services. By doing so, a reputation among clients as a reliable service provider can be created. In the second step, the potential of a service focus is recognized and actions to exploit this potential are taken. A cultural change is needed among employees to get excited about these services and also the knowledge to value, sell and deliver the services has to be developed. Another difficulty in this phase is the creation of a network able to provide the necessary product related services locally. This involves large investments and the development of certain capabilities. The capabilities to disseminate knowledge across this network and to manage the large organizations of service personnel have to be developed. The ease at which these services are transferred across the network depends on the balance between customization and standardization of the services. Shepherd and Ahmed (2000) recognize a great emphasis on such a network as a reason to halting the transition process from product innovation to solution innovation.
After a basic service infrastructure to offer product related services is made, the next step in the transformation is to expand towards relationship based services or process-centered services, examples are given in Table 1. This step requires a change in the pricing strategy of services. Instead of paying for the hours and materials whenever a service is provided, the new pricing model requires a fixed price covering all services in a given time period. This entails that a large part of the operating risk of the products will shift towards the service provider. In order to achieve this step both the demand and supply side have to gain an advantage. For the service provider the switch to these maintenance contracts is profitable because the demand for services can be controlled better which results in a
18 higher average capacity utilization. The advantage for the end user is less clear and has to be created by the service provider. This is done by not focusing on the costs of the maintenance but by offering pricing based on equipment availability. This makes the offer more tangible to the customer. Oliva and Kallenberg (2003) argue that remote monitoring can offer its benefits to achieve a higher equipment availability.
Table 1: The IB service space (Oliva and Kallenberg, 2003)
In order to come up with a feasible price for equipment availability, the service provider has to use a convincing benchmark. The current maintenance costs can be used or a pricing mechanism based on the opportunity costs of machine failure can be used. Data on historical failure rates help to determine such a benchmark. It takes time and marketing efforts to establish this ongoing relationship with the end-users. However, according to Oliva and Kallenberg (2003) “it is normally possible for the service provider to pass on the benefits of higher utilization of the established service capacity as a lower price for the maintenance of the equipment.” (p.169). Which makes this a win-win situation for both the service provider and the end-user.
Offering services beyond transaction-based and product-oriented services is seen as a necessity in order to move further towards a pure service provider by the authors. Only after a firm establishment in the maintenance and professional services market should a company consider moving further towards operating as a service provider. The next step would be to take over part of the end-user’s operations completely.
This strategy is described by Gebauer et al. (2010) as outsourcing partner and is closely related to Oliva and Kallenberg’s (2003) theory of process-centered services. Outsourcing partners take over part of the customer processes. This service strategy is based on an assumed operating risk and taking the responsibility for the customer’s operating processes. Its value proposition is based on reducing customer’s capital employed, managing the corresponding risk, and reconfiguring the responsibilities within the value chain (Gebauer et al., 2008).
19 Other literature describes this step as offering high-value integrated solutions (Windahl et al., 2004) or customer solutions (Hax and Wilde, 1999). Instead of selling products and offering services when needed, integrated solutions consist of product and service components that are customized and priced according to a specific customer’s needs (Hax and Wilde, 1999).
Figure 8: Process model for developing IB service capabilities (Oliva and Kallenberg, 2003)
When developing integrated solutions companies have to focus on user processes and operations, instead of their own products and spare parts (Shepherd and Ahmed, 2000). By looking at the entire customer value stream instead of only looking at the current product offering, manufacturers can decide how to integrate services or service based offerings. Manufacturers traditionally focus on upstream activities such as the development of new products and technology. By looking at the customer value stream, companies can recognize more downstream activities in which their product may serve as part of a solution (Davies, 2004; Wise and Baumgartner, 1999).
This transition requires other competences which have to be developed by the firm. A model by Shepherd and Ahmed (2002) displays the required competences of integrated solution providers. It is modified specifically for manufacturing companies implementing integrating solutions by Windahl et al. (2004) and is displayed in Figure 9. The main focus of the manufacturing company when offering products is on their technical competences. When offering integrated solutions more applications than
20 the original product features have to be taken into account (i.e. maintenance, finance and operations during the products life cycle). Offering a solution towards a customer problem involves more interaction with different parties than delivering a product towards a customer. This requires the firm to develop partnering competences. The authors conclude that in order to develop integrating solutions a balanced competence profile has to emerge which needs to “match technical and product competences with integrating, consulting and partnering competences, based on a strong focus on customer interaction. “ (p. 220).
Figure 9: Organizational competence of an integrated solution provider (Windahl et al., 2004).
2.2.1 Conclusion
This paragraph indicates that a successful transition towards operating more as a service provider involves more than just adding more services. The service part of the offering has to become relatively larger while a focus on closely related business is kept. Especially if companies are already offering product related services, the next step in the transition would be to offer more process and relationship focused services in the form of integrated solutions. Since this step has to be sufficiently large in order for it to be profitable, research towards the potential is important. A step towards integrated solutions requires the existence of certain competences which a traditional manufacturer may lack.
2.3 New Service Development
The previous literature review suggest that the focus should be on integrating services and combining them with into a solution which aids the clients process (e.g. Shepherd and Ahmed, 2000). Because no model to develop these solutions was found, this paragraph will be used to review different new service development models in order to choose the most appropriate to use for the design phase of this research.
Compared to NPD literature, the NSD research field appears to be less developed. Perhaps the most famous new product development models are the Booz-Allen & Hamilton’s model (1982) and the Cooper & Kleinschmidt’s Stage gate model (1986). The NPD models are all comparable with each other since they basically all consist of the four steps; idea generation, concept development, building and
21 implementation (Vermeulen, 2004). Most of the stages used in these models are also to be found in NSD models (Fitzsimmons & Fitzsimmons, 2000). However Papastathopoulou et al., 2001) argue that models on new service development can be divided in three stages; pre development, service concept development and the service implementation stage. The absence of the building stage may be explained by the ‘inseparability’ of services which imposes that services are produced and consumed at the same time. Also because most services involve close interaction with users, Earle (2000, p. 48) emphasizes the integration of user research in the development process. Similarly, Gebauer et al. (2005) point out that next to increasing the formality of the NSD process, customer involvement is also positively associated with the extension of the service business.
De Jong et al. (2003) came to a model which to enhance efficiency and effectiveness of the development of new services. It consists of the following stages: idea generation, screening, commercial evaluation, development, testing and launch. The model is displayed in Figure 10. The model allows for iterations between activities within different stages. One of the few NSD models of which its appliance is documented in the development of new financial services (Papastathopoulou et al., 2001) is that of Scheuing and Johnson (1989). This model differs from others due to its focus and involvement of the end user in the development process. Combined with the proposed stages of Papastathopoulou et al. (2001) the model is displayed in Figure 11.
Figure 10: A model for new service development (De Jong et al. 2003)
The stages are comparable to the findings of Bitner et al. (2008) which state that the most successful companies in terms of providing new services use planned stages. Their stages include establishment of clear objectives, idea generation, concept development, service design, service launch and customer feedback.
2.3.1 The NSD model of Scheuing and Johnson, 1989.
This paragraph will combine the stages of the NSD model of Scheuing and Johnson (1989) with other relevant literature on the first five steps in the model to give structure to the development of a new offering in the next chapter.
Formulation of New Service Objectives and strategy
22 can be explained due to the nature of the process of coming to new services which is generally less formalized than most other functions in an organization: “Satisfy customers, and the rest will follow” is used as a typical illustration of this point. Instead of an imposed strategy, service innovation is more or less achieved by reactions to changes in customer demand or availability of new delivery methods. Many companies come up with new services to exploit opportunities associated with new communication and information technologies (Gustafsson and Johnson, 2003; Quinn, 1992). Somewhat contrarily, Scheuing and Johnson (1989) argue that beginning any new service development process requires guidelines set out by senior management that chart the course of this effort and give clear direction to it. Objectives of new services have to be clear in advance and have to be in line with the overall strategy as well. In this stage Shekar (2007) argues for an identification and definition of a market segment and the specific needs and problems of this segment.
In order to come up with a new service strategy, components of the definition of Johnson and Scholes (2006) can be used. The authors describe strategy as “the direction and scope of an organization over the long-term: which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations". They also describe that business unit strategy is concerned more with how a particular business unit competes successfully in their market. More specifically it focuses on meeting needs of customers, gaining advantage over competitors and exploiting or creating new opportunities.
Idea generation ; In this stage ideas are requested from different sources. Both internal as external sources can be addressed. Different idea generation techniques can be assessed such as brainstorming, attribute listing, observation en interview methods, to get a preliminary list of possible ideas.
Idea screening; The previously generated ideas have to be filtered to separate the more promising from the less hopeful ideas. Scheuing and Johnson (1989) warn that in this rather judgmental process care has to be taken and not to reject ideas just because they seem unusual. They also argue that feasibility and profitability are the general key considerations while other factors may be important for a specific company depending on the circumstances..
Concept development; The remaining ideas are worked out in this stage into full concepts. Prospects and customer contact personnel can be used to give input in this stage. The concept should be a description of a potential new service. A service concept can include a description of a problem (which the service solves), the reasons why the new service is offered, an outline of its features and benefits and the rational for its purchase (Scheuing and Johnson, 1989).
Concept testing; The concept should be tested both internally and with customers. Iterations with the previous step are advised since testing may improve development.
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2.3.2 Conclusion
Successful new service development is often achieved by following a structured method. Nonetheless it is also argued that a formalized and detailed planning system stifles the creativity needed to develop really successful new services (Edvardsson and Olsson, 1995; Sethi and Iqbal, 2008). Adding iterative possibilities to an otherwise formal NSD model may help to acquire the advantage of a structured process while remaining flexible (Biazzo, 2009). Because the model of Scheuing and Johnson is made uniquely for services, tested in practice and focuses on the end user as well, the steps from this model will be used as a guideline in this research. This end user involvement is argued to be important for Nedap Retail since security and stock issues are said to be a somewhat delicate matter for the retailers. Therefore their feedback is required. The iterations suggested in the model by de Jong et al. (2003) will be used during the development. The first two stages are the focus of this research since they need to be completed to answer the research question.
1. Formulation of New Service Objectives and strategy 2. Idea generation 3. Idea Screening 4. Concept Development 5. Concept Testing 6. Business Analysis 7. Project Authorization 8. Service Design and Testing 9. Process and System Design and Testing
10. Marketing Program Design and Testing
11. Personnel Training 12. Service Testing and Pilot Run
13. Test marketing 14. Full-Scale Launch 15. Post Launch Review
Pre-development stage Service concept development stage Service launch stage
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2.4 Service integration at Nedap Retail
This paragraph summarizes findings on how Nedap Retail integrated services into their offering over time. Based on the model of Oliva and Kallenberg (2003) as previously described in paragraph 2.2, the model in Figure 12 describes the process and most important steps taken by Nedap Retail in this process. Comparing differences and similarities will be used for the academic reflection part of this research but also for the design of offerings in the next chapter.
Consolidating product-related services.
In the late 70’s Nedap Retail started with just one type of product (EAS antenna) for one specific customer there was no immediate need for a service department. This was in line with the general way Nedap developed, produced, sold and serviced products. Nedap was primarily a manufacturer of industrial products for a limited number of clients with a relatively large order size per customer. To reduce its independency from this one client, Nedap Retail started developing EAS systems for other customers as well. This was part of a new strategy to become more than just a supplier of technology products. This strategy was needed not only to reduce its dependency on several clients but also to arm them against price erosion due to increasing international competition.
The need to focus on product services meant a cultural change for Nedap Retail because there was hardly any experience in servicing any products. Around 1985, these new product related services were centrally housed under the name ‘Nedap beveiligingstechniek’.
Improving services offered by business partners.
The separate service division of ‘Nedap beveiligingstechniek’ became the first subsidiary of Nedap Retail. In the following decennia a worldwide sales network consisting of subsidiaries and more than fifty independently operating business partners was established. Internationally operating retailers valued a larger geographical coverage to install and service the products. This network coverage became a n important competitive advantage for Nedap Retail. Quality of the services delivered by these business partners had to be guaranteed. Over time, differences occurred in the methods to improve the quality of these services. Personal training sessions were replaced by e-learning programs but the triggers to insure this quality remained the same; gaining competitive advantage and customer satisfaction.
Expanding product related services.
As the demand for EAS systems gradually declined price pressure on the systems rose. A new vision was developed. This vision was focused on the question; ‘what are we doing for the customer?’. An integrated approach including consultancy aspects on the entire chain of article surveillance was envisioned and developed. This approach turned out to be too labor-intensive for implementation. Process guidance services to prevent further item shrinkage were not valued. Store managers are assigned with this task. This backwards integration is recognized by Penrose (1959: p8) as one of the main competitive problems facing suppliers. She continues by arguing that a firm can strengthen its position in the value stream by acquiring intimate knowledge of customer’s business and market needs. (1959: p14). By gaining more market knowledge about item loss it was thought that an advantages could be offered in the future. Retailers were however hesitant to give –or were unaware of- their item loss
25 figures so that no proper problem analyses and result check could be made. At this time the e-learning capabilities didn’t allow for online training solutions which hindered a potential deployment of more services.
What followed was an attempt to gain knowledge about the EAS systems on which advice could be given remotely. The, for that time, very innovative solution of connecting the devices to the internet was developed. This resulted in a much more efficient way to handle product functioning interferences. More importantly, subscriptions to information regarding the product functioning could be bought from Nedap. A dashboard would display this functioning and critical alerts were mailed. This embedded service approach proved itself to be better scalable than the consultancy approach.
Developing solution-based services
Further price pressure and commoditization of the core products, but also a believe that Nedap Retail should focus on solving customer problems instead of selling products, led to wish to develop customer solutions instead of products alone. A focus on technologically better products is kept simultaneously since at this point it is unclear were the potential for service integration lies and how solution based services should be implemented.
1. Consolidating product-related services 2. Expanding product-related services
∞ Improving services offered by business partners / subsidiaries
3. Developing solution-based services Triggers: · Customer satisfaction Goals:
· Correct product installation · Maximizing product utilization
Actions: · Establishment of customer service center Triggers: · Customer request · Customer satisfaction Goals:
· Offering worldwide coverage · Gaining customer information
Actions:
· Expanding business partner
network
· Development of online monito-
ring / online repair service
Triggers:
· Customer satisfaction
· Gaining competitive advantage
Goals:
· Offering worldwide coverage · Guaranteeing of quality
Actions:
· Setting requirements for
business partner selection
· Training sessions
· Develop e-learning programs · Certification of business
partner’s engineers
· etc.
Triggers:
· Escaping commoditization of core
products
· Focusing on customer problem
Goals:
· Creating a durable relationship with
customers
· Becoming more of a service provider
Actions:
· Development of service strategy and
objectives
· ??
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2.4.1 Conclusion
Although Nedap felt it should focus on more than their product and product functioning, the attempt to offer more process related services was hindered by two factors. First of fit was unclear what advantage Nedap Retail could offer in this process. Secondly. these relatively labor intensive services were hard to implement on the current business partner network. One of the differences between the model of Oliva and Kallenberg (2003) and the service integration process at Nedap is the importance of the business partner network. Whereas in literature the installed base is seen as an important factor to determine the potential of further service integration (Knecht et al., 1993; Wise and Baumgartner, 1999) at Nedap Retail the limits of the business partner network have to be considered when thinking about this potential. Scalability of an offering may lead to a more sustainable competitive advantage than merely adding labor intensive services to an offering. Software based services overcome both these difficulties. Compared to the product related services (e.g. installations) they also produce a more steady stream of revenue.
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3. Design
In order to design an offering that may prove to be the next step in the transition of becoming more of a service provider, requirements on two levels have to be met. More general company requirements and specific customer requirements have to be used. To structure this design process a systematic approach to design (Cross, 2008) and the steps from the NSD models are used. A mixture of both methods was used since none of the methods proved to be sufficient on its own. First off, the overall objectives for the more service focused way of offering a solution are listed. Based on these, the most potential product group is selected. The customer problem that can be solved within this product group is reviewed next and sub problems for which Nedap can offer solutions are compiled. Thereafter the sub solutions are grouped in offerings to test the extent to which retailers value a more service focused approach.
3.1 Clarifying the objectives
The previous lessons from literature and the current process of service integration at Nedap Retail are, in accordance with the recommendations of Scheuing and Johnson (1989), discussed with higher management. Because no formal service strategy was present, lessons learned from the previous chapter were used for a strategy and for the selection of a product group for further service integration. This resulted in the following guidelines for the design process.
The new offerings should be steps in the transition of becoming more of a service provider.
The product service continuum displayed in Figure 16 was used to envision a desired position for Nedap Retail. The desired position for Nedap Retail was seen on the far right were Nedap Retail would be operating as a total solution provider. By developing and testing multiple propositions which can be ranged on this service continuum, the service proportion valued by retailers can be assessed. This also entails a product based offering similar to current practices since integrating more services may also not be valued by retailers. Relative importance of products Relative importance of services Desired position Nedap Retail Intermediate step in transition Current position Nedap Retail
Figure 13: Product service continuüm
Clarifying objectives
Decomposition of task & Systematic variation Design Specifications Development of offerings Offering testing
28 The service should be focused on a customer’s problem or process.
Next to recommendations from literature, interviews held to validate the business opportunity showed that a focus on the customer’s problem and offering high quality product related services instead of a focus on making transactions is already a source of competitive advantage for Nedap Retail. Not surprisingly, it was agreed that a new offering should also keep or expand this focus.
Products should not be the main focus, they should be add-ons to the service part of the offering instead of the other way around. The services currently offered by Nedap Retail can be classified as transaction related (Frambach et al., 1997) or seen as services supporting the supplier’s product (Mathieu; 2001). These services can be offered in a relatively standardized way and the intensiveness of the relationship with the clients can remain relatively low. For Nedap Retail these characteristics were needed to set up a global service network trough business partners for their EAS systems. However, as is noticed in literature and at Nedap as well, competing on products alone is no longer sufficient for manufacturing companies to remain competitive. Shorter product life cycles, increased globalization of competition and technology cause for new strategies. A downstream focus –paying attention to more client related activities in the product value chain- is advised (e.g. Davies, 2004; Windahl, 2004). Literature showed that companies which made a successful transition towards operating more as a service provider did so by adding a higher service contribution in their offering; products became add-ons to services (e.g. Gebauer and Friedli, 2005). One of literatures recommendations is to focus on the performance of the solution (how well do we solve the problem) instead of the product properties (what does it cost to make, deliver and install).
The offering should focus on closely related businesses to enhance synergistic spillover benefits and to appear credible. A reoccurring pattern in the case studies studied for this research is seen in the fact that all companies making a successful transition stayed relatively close to their core products or operations (e.g. Slater, 1999). Innovative new offerings were made by combining existing products with a more service based approach to market them. During interviews it was also said that Nedap is known as a technology manufacturing company instead of a consultant. A fear was expressed that operating as a consultant may not be valued by the market since it may be too far off from current practices. Therefore the new offering should be closely related to its existing practices, market (Retail) and technology is preferred to be part of the offering.
The service should lead to a long-term customer oriented relationship.
One of the advantages of services is their ability to offer a more stable source of revenues compared to making product related transactions. However a lot of services can be based on a single transaction as well (i.e. installation). During the development of the offering a long-term relationship should be kept in mind in order to capture the benefits of stable revenues.
The service must be financially attractive and implementable within the organization.
These specifications are basic and logical preconditions for any offering developed by a commercially focused firm.
