Rinnakkaistallenteet Luonnontieteiden ja metsätieteiden tiedekunta
2019
Servitization and bioeconomy
transitions: Insights on prefabricated wooden elements supply networks
Pelli, Päivi
Elsevier BV
Tieteelliset aikakauslehtiartikkelit
© Elsevier Ltd
CC BY-NC-ND https://creativecommons.org/licenses/by-nc-nd/4.0/
http://dx.doi.org/10.1016/j.jclepro.2019.118711
https://erepo.uef.fi/handle/123456789/7806
Downloaded from University of Eastern Finland's eRepository
Servitization and bioeconomy transitions:
Insights on prefabricated wooden elements supply networks
Päivi Pelli1*, Katja Lähtinen2
1University of Eastern Finland (*corresponding author)
2Natural Resources Institute Finland, Luke
Abstract
Despite the academic research on servitization in the recent past, few studies have investigated how the increasing role of services as a change in production processes affects the evolving bioeconomy, pursuit of resource efficiency and improved sustainability. The servitization of manufacturing companies, the blurring of the lines between the manufacturing and services sectors as well as the role of territorial servitization in emerging technology fields are already being studied in several disciplines, but bioeconomy strategies connect these questions to primary production, natural resources and new bio-industries. To fill this void, we 1) elaborate an analytic framework for addressing servitization at multiple levels of transitions
(individual companies, supply networks and socio-technical systems), 2) test it with data on three
prefabrication supply networks for wooden elements, and 3) discuss the system dynamics how servitization affects bioeconomy transitions. The analyses exemplify that servitization resides at multiple levels in the increasingly integrated manufacturing processes. The analytical framework elaborates how renewal of wood products companies and the forest-based industries that supply to them is determined by these companies’ responses to the changes in customer industries and their ability to adapt to the evolving socio- technical regime. Better understanding is needed on the non-technological innovations and gradual reconfigurations due to servitization that can contribute to increasing efficiency and improve sustainability in bioeconomy transitions.
Keywords: product-service systems, business models, socio-technical transitions, forest-based sector, industrial wood construction
DOI information: 10.1016/j.jclepro.2019.118711
Servitization and bioeconomy transitions:
Insights on prefabricated wooden elements supply networks
1. Introduction
The bioeconomy emphasizes the biophysical aspects of the economy through transformation toward renewable resource-based industrial processes supported by research and innovations (D’Amato et al., 2017; Bugge et al., 2016; Kleinschmit et al., 2014; Pfau et al., 2014). Many national bioeconomy strategies seek to increase value added in production and service provisioning (Canadian Council of… 2018; German Federal Ministry of.., 2011; Ministry of Employment and…
2014). Alongside the renewal of traditional natural resource-based industries, it has been emphasized that advanced bio-based products and services play a crucial role in change. Yet, often the focus on services has been superficial, whether it is their role as necessary support functions for the evolving bioeconomy (R&D, production-related maintenance, delivery channels, wholesale and retail) or the opportunities for improving competitiveness, innovation and new businesses (Pelli et al., 2017).
Services are embedded in all economic sectors. Servitization in manufacturing (Mathieu, 2001;
Oliva and Kallenberg, 2003; Vandermerwe and Rada, 1988; Wise and Baumgartner, 1999) provides an analogy to elaborate the above-mentioned bioeconomy goals. In traditional industries such as forest industries, servitization enables companies to increase value added by shifting toward service provisioning and moving further downstream in the value chain. The feedback loops that services open to customer industry processes, in turn, could support adoption of new products (Bauer et al., 2016), market creation for the new bio-based solutions substituting non-renewable
materials, and development of products and processes improving environmental performance and circular solutions (Tukker, 2015) or service innovation for sustainability (Calabrese et al., 2018).
Manufacturing companies face several challenges in their businesses that hinder their ability to reap the benefits of servitization (Gebauer et al., 2005; Neely, 2008). From a managerial point of view, the decision to increase the complexity of a company’s service offering (Mathieu, 2001; Oliva and Kallenberg, 2003) can also be understood as a process of balancing several types of offerings simultaneously (Benedettini and Neely, 2018; Green et al., 2016; Kowalkowski et al., 2017).
Research attention has recently extended from company-level studies to more systemic analyses, including evolving servitization concepts at different stages of the industry life cycle (Cusumano et al., 2015), technology clusters (Gebauer and Binz, 2018), and territorial servitization (Vendrell- Herrero and Wilson, 2017). In transitions research that investigates profound system changes, in turn, servitization has not been of specific interest, although product-service systems and technology-enabled services have been mentioned as examples of changing business models that connect with the socio-technical system dynamics (Bidmon and Knab, 2018; Bolton and Hannon, 2016; Sarasini and Linder, 2018). The interlinkage between sustainability transitions and evolving services remains little investigated, for example, with respect to the role of services in dissemination of cleantech solutions or adoption of products with higher environmental performance.
Bioeconomy transitions affect socio-technical systems through material substitution in energy, mobility or housing. Construction and use of the built environment have a major role in enhancing sustainable development (European Commission, 2014) through energy consumption, greenhouse gas emissions and the usage of extracted materials (Herczeg et al., 2014). High carbon storage properties and the possibilities for recycling wood as a construction material (Dahlbo et al., 2015;
Takano et al., 2015) have recently driven regulatory changes to support the market diffusion of
multi-story wood construction (Hurmekoski et al. 2018; Mahapatra and Gustafsson, 2008).
However, companies operating in wood construction must also implement strategic changes (Toppinen et al., 2018a; Toppinen et al., 2018b). Servitization and new business models could potentially affect renewal at wood products companies but also contribute to a system transition in construction towards improved sustainability.
Despite the academic research on servitization and the several angles to investigate product- service systems (Baines et al., 2009; Böhm and Thomas 2013; Rabetino et al., 2018), there are deficiencies in understanding how servitization as a change in production processes affects the evolving bioeconomy. To fill this void, we take industrial wood construction as an empirical study context; thus, by improving understanding about one customer industry, we seek for a systemic approach to gain detail on the dynamics of a forest-based bioeconomy. Better understanding about servitization contributes to the concepts and methods for studying also other important biocluster businesses, for example in the energy sector (Hermans, 2017).
The paper is structured as follows: Section 2 describes the dynamics of business renewal at wood products companies. Section 3 elaborates an analytic framework to extend the servitization analyses from a company level to supply networks as activity systems and, further, to the system dynamics of transitions. The analytic framework is tested with data on three prefabrication supply networks (Section 4), and the results (Section 5) are discussed to assess the role of servitization in bioeconomy transitions (Section 6).
2. Industrial construction and prefabrication as innovations and sources of business renewal at wood products companies
Wood products companies have emphasized strategic renewal through a transition toward more specialized businesses with higher value added in tandem with cost-efficiency as an avenue to enhance competitiveness since the 1990s (Lähtinen, 2007; Lähtinen and Toppinen, 2008). In practice, more attention has been paid to innovations in product, process and business systems (Hovgaard and Hansen, 2004; Nybakk et al., 2011; Stendahl and Roos, 2008) and the needs of customers in downstream operations such as the construction sector (Cohen and Sinclair, 1992;
Hurmekoski et al., 2015; Toivonen et al., 2005). As a result, many wood products companies have shifted their business focus from timber processing, e.g., sawn and planed lumber or glue laminated timber, toward component and module fabrication for industrialized multi-story construction (Höök et al., 2015; Hurmekoski et al., 2015; Mahapatra and Gustavsson, 2008; Nordin et al., 2010).
In the construction sector, increasing industrialization has been seen as a prerequisite for increasing efficiency, meeting market demand and enhancing competitiveness since the 1960s (Nadim and Goulding, 2011). The benefits of construction sector industrialization are similar to those in other industries, such as the automotive industry (Gann, 1996; Gibb, 2001). Despite this, the renewal has been slow (Holt, 2013), to a great extent due to strong industrial linkages between the concrete industry and construction sector, which have formed institutional structures and path dependencies that hinder, for example, the adoption of multi-story wood construction (Hemström et al., 2017; Kadefors, 1995; Toppinen et al., 2018b). However, in the recent past, global sustainability initiatives have pushed the construction sector to decrease its carbon footprint and increase energy efficiency (Toppinen et al., 2018a). For forerunner companies, these
sustainability pressures from the external business environment have opened entirely new opportunities to move from a niche toward mainstream businesses (ONeill and Gibbs, 2014;
Rohracher, 2001).
The increasing involvement of wood products companies in construction sector operations is an example of a mature industry renewing its operations through absorption of “new modes of technological behavior originally developed elsewhere” (Fai and von Tunzelmann, 2001). In the industrialization of the construction sector, the focus has been on moving fabrication from on-site to off-site with different types of components and modular solutions. In the early 2000s, wood played only a minor role in these solutions, which at that time were based on using concrete, steel and various cladding materials (e.g., Gibb and Isack, 2003; Jonsson and Rundber, 2014). Since then, different types of wooden components have entered the market in a quite rapid pace as technologically feasible options (Brege et al., 2014; Lattke and Lehmann, 2007; Lessing and Brege, 2015; Nordin et al., 2010) as substitutes for non-renewable material based building solutions.
Due to its material properties, wood is well suited to industrial building processes supporting resource-efficiency, cost reductions, improved productivity, more standardized construction processes and better coordination of work in supply networks among different actors (Mahapatra and Gustafsson, 2008; Brege et al., 2014). New technologies, such as sensor applications or energy-efficiency solutions integrated into buildings, provide possibilities for connecting the upstream and downstream more efficiently (Holmström et al., 2015; Robinson et al., 2016).
Modularizations with standardized elements enable development of site- and customer-specific solutions in a novel way, including testing of more servitized solutions (Robinson et al., 2016). Such thinking, however, requires new business models such as those adopted by advanced manufacturing companies (Davies et al., 2006). Digitalization opens new opportunities for wood
products companies (Makkonen, 2018). So far, the usage of wooden components has not taken a full potential. Instead, these solutions are seen more as a promising niche (Toppinen et al., 2018b).
Due to spillover paths from other branches of industry, even companies in a mature industry may genuinely renew their operations and avoid turning into relics by harnessing inter-industry capability development abreast with the recognition of downstream operations (Fai and von Tunzelmann, 2001). By employing patent data in the United States on approximately 900 US and European companies or affiliates, evidence has been found that in 1930–1990 changes in business paradigms were perceived through linkages of a specific business to cooperating industries in its supply chain instead of intra-industry structures (Fai and von Tunzelmann, 2001). In the case of building materials, innovations had been strongly connected to the mechanical, transport, electrical and chemical sectors. In the case of wood products companies, moving toward construction sector supply chains has resulted in new product and process innovations abreast with new business model development (Brege et al., 2014). In the course of time, wood products companies have been able to absorb spillovers from other industries as well through their more profound involvement in construction industry operations.
In the future, a paradigm shift is expected to occur in the European construction sector toward provision of systems and services that enhance the fulfilment of green building initiatives (Weber and Schapel-Rinkel, 2017). From the perspective of the bioeconomy, the goals of increasing the use of wood in industrial construction extend the focus upstream and to the natural resources sectors. Thus, there is a need for evaluating the changes in construction not only by means of intra-industry analyses, but also through external supply network linkages between different industrial sectors (Barret et al. 2007; Squicciari and Asikainen, 2011).
3. Analytical framework for servitization in bioeconomy transitions
This paper addresses bioeconomy transitions as a profound system change that extends across industrial sectors and requires a view of the dynamics of the socio-technical systems in which wood products companies and their customer industries operate. The increasing role of services, as described in the introduction, is embedded in all economic sectors (Fig. 1). Interlinked developments at multiple levels require a systemic approach: The renewal of wood products companies and their suppliers in the forest-based industries is supported by bioeconomy strategies. However, the success of these companies is determined by their responses to the changes in customer industries, and their ability to adapt to the evolving socio-technical regime.
Fig. 1. Interlinkages between servitization (arrow in grey), bioeconomy strategies and renewal of wood products companies operating in the supply networks of the construction sector.
The socio-technical system changes in energy, transportation and housing involve the complex co- evolution of society and technology over a long period of time (Geels, 2002; 2004; 2011). The multi-level perspective (MLP) on socio-technical change describes these processes through the interplay of three analytical levels: niches (the locus for experimentation and testing of radical innovations), socio-technical regime (the locus of institutional arrangements), and an exogenous socio-technical landscape (Geels, 2002, 2011; Rip and Kemp, 1998). The regime has built-in path dependencies and it resists changes and seeks more manageable, incremental innovations, even if radically improved technologies, including more sustainable solutions were available (Elzen et al., 2004). Exogenous developments may impose increasing pressure on the regime, and open a window of opportunity for the niches to break through and challenge the dominant regime (Geels
and Schot, 2007). However, tensions also reside within the regime, which is described as a semi- coherent ruleset composed of different sub-regimes (Geels, 2004, 2011).
In other words, bioeconomy strategies – with their goals of increasing the use of renewable materials – may impact on the socio-technical transition in construction by imposing pressure on established construction companies to seek new solutions. This, in turn, may support the shift of wood construction from a technological niche to a market niche, where wood products companies could scale up the solutions they have already developed. Also, innovations by incumbent firms contribute to transitions; these firms can reorient their operations or combine niche solutions with other technologies developed in parallel niches (Geels, 2018). Transitions are neither linear nor predictable. The pressure on the socio-technical regime may result in many outcomes, for example, in construction, technology might yield resource-efficiency among other material suppliers, while wood products companies might fail to harness these opportunities.
The sub-regimes – like the established industrial sectors of wood products and construction – have a dominant logic that guides managers in these industries to define which tasks the companies perform and the sources they use to seek information about changes. The dominant logic supports efficient decision-making in a stable operating environment but may narrow their view – or even blind them – in times of turbulent changes (Bettis and Prahalad, 1995; Chesbrough, 2010). Recent investigations about the role of business models in system transitions (Bidmon and Knab, 2018;
Bolton and Hannon, 2016; Sarasini and Linder, 2018) have emphasized the non-technological processes of transitions, such as for improved sustainability (Naor et al., 2018; Williams, 2007), low-carbon systems (Wainstein and Bumpus, 2016) and circular economy (Ranta et al., 2018).
Changing business models, i.e., the definitions of how value is created, distributed and captured (Chesbrough and Rosenbloom, 2002; Chesbrough, 2010; Zott et al., 2011), affect regime dynamics.
Business models are typically investigated at the level of individual companies, but they can also be approached at an industry level (see Iles and Martin, 2013, on the chemical industry and evolving bioplastics market) or across industries (see Gebauer and Binz, 2018, on evolving service concepts of suppliers, manufacturers and operators in an emerging wind-to-energy cluster). Foss and Saebi (2017) recognize service business models as a form of business model innovation. In socio-technical transitions studies, in turn, services are merely a part of the complementary infrastructure necessary for technology innovations, such as the maintenance services needed to support adoption of new technology in transportation. Owning such complementary assets can help incumbent firms to protect their market from new entrants (Geels, 2011).
Services are intertwined with technological development and changes across economic sectors.
They are carriers, facilitators and producers of innovation contributing to economic development (Gadrey et al., 1995; den Hertog, 2000). Especially knowledge-intensive business services (KIBS), such as financing, human resources management and marketing, have been recognized as important contributors to innovation and competitiveness (Coombs and Miles, 2000; Miles, 1993;
Vendrell-Herrero and Wilson, 2017). As they have adopted information and communication technologies (ICT), service companies have disseminated technologies and practices across their customer industries and developed new technology themselves. Advances in ICT have increasingly blurred the lines between the manufacturing and services sectors: Manufacturing companies produce services along their supply chains and offer them to their customers (de Backer et al., 2015). Manufacturing companies contribute to innovations in services as users of advanced services that require intensive interaction between the service provider and customer (Story et al., 2017). Furthermore, service companies can perform manufacturing tasks as part of the solution they offer to the customer (so-called reverse servitization by Baines et al., 2017).
Today, manufacturing tasks are internationally distributed in global value chains, and services are important for de- and re-bundling of supply chains in search for higher efficiency (Ali-Yrkkö and Rouvinen, 2015; de Backer et al., 2015; Sturgeon et al., 2013). Corporate operations, such as environmental and information systems engineering, extend beyond individual companies or industrial sector boundaries. Servitization processes connect sub-regimes across geographical borders. For example, introduction and dissemination of new resource-efficient technologies require services, and their uptake create demand for international services trade (Steenblik and Geloso Grosso, 2011). From the perspective of meeting the bioeconomy targets for substituting non-renewable materials with renewable ones, a more profound understanding on manufacturing supply networks is required: Services are not necessarily measurable as specific volume or weight in the wood industries, but they are embedded in production and the ongoing developments in parallel industries that affect how the socio-technical regimes evolve (Fig. 1).
Servitization comprises business activities of a mature industry to extend its revenues from extant products, to differentiate the company offering from the competitors and to seek new revenue by increasing the service content of the product (Cusumano et al., 2015; Oliva and Kallenberg, 2003;
Wise and Baumgartner, 1999). The manufacturing company offering can be developed from simple to more complex services, or balancing between different combinations of products and services offered simultaneously to different markets or customer segments (Benedettini and Neely, 2018). Introducing services requires organizational changes in the manufacturing company, which can lead to more profound strategic reorientation of activities (Green et al., 2016;
Kindström and Kowalkowski, 2014; Kowalkowski et al., 2017). Increasing interaction between the service provider and customer open feedback loops that enable the pursuit of increased efficiency, continued improvements and deeper integration across networks of suppliers and customers.
Bundling of products and services, or product-service systems (PSS) have been investigated in several research communities (Baines et al., 2009; Böhm and Thomas, 2013; Rabetino et al., 2018;
Tukker, 2015), and these have developed several approaches to PSS, for example, with focus on company-level decisions (Oliva and Kallenberg, 2003); design and engineering (Mont, 2002) or more general functional economy (Tukker, 2004). In this study we employ the PSS definition from Baines et al. (2007) who assessed servitization in manufacturing in a broad sense and defined product-service systems (PSS) as integrated combinations of products and services. By using international database descriptions of manufacturing companies, Neely (2008) extended the typology of product-oriented, use-oriented and result-oriented PSS with two additional categories (Table 1). While seeking to analyze the financial performance of servitized companies, he remarked that the statistics for manufacturing also included companies that can be described as
“pure service” firms. This is in line with the above observation that servitization extends across several economic sectors and calls for new means to detect such developments. Instead of excluding the result-oriented PSS or pure service firms from the analysis of manufacturing, the ongoing processes must be studied in greater detail.
A business model provides generic elements for describing the changes in company operations related to servitization. Zott and Amit (2010) define “business model” as an activity system that
“enables the firm, in concert with its partners, to create value and also to appropriate a share of that value” (p.216). Innovations can address any elements of a business model: which activities or wider value potential the company foresees (content), how activities, such as the manufacturing and services tasks, link together (structure), and whether the tasks are performed in-house, in alliance with other companies or by third parties (governance). Companies seek to keep their processes manageable, lock in the suppliers and customers, and build complementarities and efficiency that glue the activity system tighter together (Zott and Amit, 2010). Servitization as a
gradual change of a mature industry from a simple to more complex service offering describes a similar tendency: Companies seek to exploit their investments with incremental rather than radical innovations. Extending the PSS typology to business models as activity systems (Table 1) gives more detail for characterizing the company boundary-spanning activities through servitization.
Table 1. Product-service systems (PSS) typology and the elements of a business model as activity systems (modified from Neely, 2008; Zott and Amit, 2010).
ACTIVITY SYSTEM ELEMENTS
PRODUCT-SERVICE SYSTEMS (PSS) Integration-oriented
PSS Services complementing
manufactured products
Product-oriented PSS Services connected to
products
Service-oriented PSS Services coupled with
products as inseparable entities
Use-oriented PSS Services delivered
through product functions
Result-oriented PSS Services replacing
products
Content Product with additional services, e.g., in retail and distribution, financing and consulting services, property/real estate services
Product with services directly connected to the product, e.g., in design and development, installation and implementation, maintenance and support, consulting, outsourcing and operating
Product and services coupled together as an inseparable entity, e.g., tools and means to provide value- added services such as sensors for monitoring
Service performance (of a product) is sold via distribution and payment systems, such as sharing, pooling and leasing
Service is
performed as tasks within the customer process
Structure What it takes to…
…get the product to
the customer? …get the best out of the product for the customer?
…get additional benefits from the product for the customer?
…improve the customer process with the product?
…perform a part of the customer process?
Governance Activities are implemented by the producer through, e.g., in-house operations, partnerships or outsourced operations. Ownership of a product transfers to the customer.
Product ownership is often retained by the producer, and implementation of activities is agreed between the producer and customer.
Implementation of activities through joint processes of the service provider and customer.
Use-oriented and result-oriented PSS illustrate the potential of the servitization process for intensifying integration across industrial sectors. Business models as activity systems allow extending the PSS analyses beyond manufacturing and services to all companies involved in the supply networks; consequently, also servitization becomes connected from company-level decisions, to wider collaboration networks and to the socio-technical regime (Fig. 1). With this extension, servitization can be addressed as reconfiguration mechanisms that are not rapid or discontinuous, but which can lead to transformative effects within the socio-technical regimes (Geels, 2018). In a similar vein, Bidmon and Knab (2018) elaborate business models as sources of inertia for the socio-technical regime: Firstly, the dominant business model logics help to maintain the established regime. Secondly, business model changes can drive socio-technical change by
advancing commercialization of a new technology, e.g., combining new applications with services to lower the risk of first adopters. Thirdly, new business models, such as digital services on virtual platforms, can drive societal change by laying the foundations of a new regime.
Previous studies on the role of business models in system transitions identify several signals of foundations being built up for a new regime. They highlight the technology-enabled services that are perceivable in mobility and transportation (Sarasini and Linder, 2018; Naor et al., 2018) and in energy systems (Bidmon and Knab, 2018), the new organizational forms in energy services (Bolton and Hannon, 2016; Wainstein and Bumpus, 2016), the changing practices necessary for sustainable transport systems (Williams, 2007), and the new economic value generation models of the circular economy (Ranta et al., 2018).
Non-technological innovations in business models can provide an additional means for transition management (Sarasini and Linder, 2018) to stabilize a new regime gaining momentum in market niches, or to disrupt the established routines and support experimentation with radical business model innovations, such as uptake of public-private partnerships. Since transitions require alignment between different system levels, it is challenging to detect the gradual reconfiguration mechanisms within regimes. Standard metrics for assessing individual companies or industrial sectors do not necessarily capture these developments.
Table 2 summarizes the levels of analysis for investigating servitization in bioeconomy transitions:
Servitization can be detected in the gradual reconfigurations embedded in company-level operations (business models), in business-to-business networks (across companies and industrial sectors) and in the dynamics of the socio-technical regimes (the established modes for how energy, transportation, housing and other societal functions are arranged). Servitization depicts a regime tendency that is difficult to capture: The dynamic balance of a regime includes both the
forces to stabilize the regime (companies seeking to maintain their position and enforce the activity systems that extend their products’ life cycle) and the forces to disrupt the regime (new opportunities emerging in expanding networks, increasing integration and interaction). The previous section described the business renewal of wood products companies. Next, we assess empirical data to provide further detail for this study context: servitization embedded within prefabrication supply networks.
Table 2. Levels of analysis for investigating servitization in bioeconomy transitions and the interlinkages of company, activity systems and regime dynamics levels in the empirical context.
Service business models at
company level PSS activity systems across
industries Servitization embedded in the socio-technical regime dynamics Specific part of the regime
analyzed Dominant industry logic Institutions and rulesets of
industrial sectors (sub-regimes) Dynamics of the established regime
Target of analyses Business model as a company strategy and revenue architecture; PSS to extend product life-cycle and support commercialization of new (technological) solutions
PSS as boundary-spanning activity systems for all companies involved in supply networks
Forces to stabilize the regime, including facilitation of the dissemination of new solutions
Sources of disturbing forces De/re-bundling of activities, new (technology-enabled)
organizational forms for resource integration and improved efficiency
Forces increasing tensions, including experimentation with radical business model innovations
Sources of balancing forces Gradual reconfigurations,
incremental changes that lay the foundations of a new regime and the value potential attainable through technology-enabled activity systems
Empirical study: Business renewal of wood products companies vis-à-vis the business models detectible in manufacturing for construction
Prefabrication supply networks in the context of manufacturing for industrial wood construction
Servitization processes affecting system dynamics
4. Data and methods
The business renewal of wood products companies illustrates a strong product and tangible production orientation. In order to elaborate servitization in bioeconomy transitions in the context of industrial wood construction, three wooden element prefabrication supply networks were used
as a test ground. Data were gathered between September 2016 and May 2017 from three complementary sources: information retrieved directly from three companies operating in Finland (A, B and C), company-level financial data acquired from domestic and international databases (the Finnish Patent and Registration Office, asiakastieto.fi and the Amadeus database by Bureau van Dijk) and inquiries to supplier companies and representatives of industry federations.
The analyses concern three types of standard wooden element products fabricated for professional customers in the construction sector for use in either multi-family homes, multi-story construction or public buildings. The companies A, B, and C provided for the analyses the whole bill of materials of their products, i.e., all supplies and inputs, including product/service identification, supplier information, amount, price, and as available the country of origin. The fact that the analyzed products are standard products means that services such as product development, design and architecture are indirectly included in the analyses and cannot be weighted separately from the company A, B and C value added.
Information from company databases was complemented with materials such as annual reports, product manuals, catalogues, company websites and press releases, as well as with direct contacts with individual suppliers. Interviews yielded more information on the development of specific fields including wholesale and trade, production services and engineering, and construction materials. The interviewees represented the Finnish HVAC Technical Traders’ Association, the Finnish Hardware Association, the Confederation of Finnish Construction Industries, the Finnish Electrotechnical Trade Association, the Electrical Contractors’ Association of Finland, the Finnish Association of Building Services Industries, and individual experts in the wholesale branch.
In Step 1 (Fig. 2) the supply networks of the three prefabricated wooden elements were analyzed with the trade-in-value-added method, which sheds light on distribution of value added within
production, including the intangible value creation by services embedded in manufacturing supply chains (Sturgeon et al., 2013; Ali-Yrkkö and Rouvinen, 2015). As described in the previous section, on the macro-economic terms the increasing role of services has been recognized to interlink with international distribution of supply chains. The method provided detail on the three supply networks: Firstly, successive tiers of production were identified based on the bill of materials data.
The value added of each supplier company was approximated by using value-added margins (i.e., turnover divided with the sum of personnel expenses, depreciations, and earnings before interests and taxes EBIT), and further, divided geographically based on the supplier company information.
Results from the product-wise analyses are presented as relative shares of the geographical distribution and production stages, corresponding to the level of detail in Ali-Yrkkö and Rouvinen (2015) on other manufacturing products. The Step 1 analyses revealed the international business structures of the supply network, but also inconsistencies in data (see Section 5). These issues were clarified with the representatives of industry federations that also provided expert views on trends in a specific supply industry.
[Fig. 2. Data and methods for the analyses connecting the company, activity systems and regime dynamics levels]
In Step 2 the analyses zoomed into the business models, and the targets of analysis were the supplier companies and their business operations. The data of the three supply networks were merged together into one datasheet including all companies identified in all tiers of the supply chains (120 companies in total). The data were categorized using NACE (rev.2) four-digit identification in order to keep the supplier data anonymous and to harmonize the analyses of PSS
business models for all involved companies irrespective their role in the specific supply chain. The data include trade descriptions of the companies as available in the Amadeus international company financial database, national registers, and descriptions of the company offering based on the company materials. The qualitative content analyses were concluded based on the PSS categorization (Table 1) for all suppliers. The analyses are similar to what Neely (2008) conducted when categorizing large manufacturing companies for his analysis. The national database and company materials, however, provide substantially more detailed descriptions, also including small and medium-sized companies. In Step 3 all data collected was utilized to identify the foundations of a new regime, and results from the previous steps were concluded to assess servitization processes affecting system dynamics.
5. Results
5.1 Supply networks in prefabrication for industrial wood construction are largely domestic When depicting the three prefabricated wooden elements with their successive tiers of supplies, a pattern of complex supply networks appears (Fig. 3). Specifically in terms of the bioeconomy strategy targets for increasing the use of wood in construction, the forest-based industries contribute to construction sector supplies also through other material streams in addition to wood products, for example, in insulation materials.
Transportation, wholesale and retail, and production services (HVAC and other engineering work by external service providers at the manufacturing company premises) are the main services purchased in the case supply networks. A more detailed look at supplies reveals that several manufacturing companies, in addition to their own products, supply the materials necessary for
the use of their product, but that these materials are produced by other suppliers. Wholesale companies that represent international brands in turn often still have a production unit in Finland for local supplies. Several wholesale companies also sell their own brands supplied by contract manufacturers in Finland or abroad. The supplier and interview information explained the local supply networks for very different types of products in the local markets for construction, the high transportation costs of construction materials, and the customer preferences that vary between countries. The role of rules, regulations and local standards that are highlighted as a challenge for increasing the share of wood in multi-story construction are not as prevalent in other construction material flows, but electronics supplies, for example, must comply with international standards.
[Fig. 3. Supply network of prefabrication for industrial wood construction: summary of data from the analyzed supply networks.]
For international distribution of the supply networks (global value chains), the share of domestic value added is relatively similar in all three cases even though the share of wood varied between 20-60% of the total material costs (Table 3). Thus, wood is not the only locally sourced material:
Domestic supplies are important for all construction materials. Also the region “EU, excl. FI” as a source of suppliers in most cases refers to the Northern Europe/Baltic Sea region. In other words, the largely domestic and regional supply networks for construction illustrate activity systems that are place-based and market-specific.
Table 3. Division of value added by functions and geographical distributions in the three supply networks for prefabrication of wooden elements.
VALUE ADDED BY FUNCTIONS GEOGRAPHICAL DISTRIBUTION OF VALUE ADDED Case company Suppliers, all tiers
included Assembly
(in-house) Logistics
to the customer FI EU, excl. FI US Asia Other
CASE A 26 47 39 (22) 9 79 12 3 3 3
CASE B 43 48 35 (30) 4 80 13 3 2 2
CASE C 37 60 17 (17) 4 79 14 2 2 2
*Case companies’ value-added shares (“Case company”) include in-house assembly (figures in brackets), logistics and distribution;
accounting for these categories, the shares under “Value added by functions” add up to 100%
5.2 Servitization is embedded in the manufacturing of construction materials
As pointed out in the previous section, the statistical categorization of companies into manufacturing (NACE C) or services (NACE G) did not fully describe the roles that the supplier companies played in the analyzed supply networks: Manufacturing companies also sell products made by other producers, and wholesale companies have production units to handle supply to local markets. When assessing all companies involved in the supply networks based on the PSS- typology, these are not exceptions: PSS business models are detectible in all industrial sectors, irrespective of whether the companies are classified as primary production, manufacturing, construction or services companies (Table 4). Limiting the analyses solely to manufacturing sector would only partly capture servitization phenomena. Also, mass production companies, such as sawmills and pulp companies, offer advanced, integrated services for specific market segments, products or customers. For example, while all three companies from the pulp and paper industry (NACE C17) in Table 4 are categorized into product-oriented PSS, this does not mean that all or even a major part of their operations are product-oriented PSS, but that such an offering for their customers is significant to the extent that it is indicated in the company materials. The figures can be interpreted such that servitization is already embedded in companies in all industrial sectors within the case supply networks, and the company materials promote more advanced PSS business models than those described in the official registers or company databases.
In primary production, the analyzed company data are limited to forestry (NACE A02). Companies identified for further analysis in this step were forest-based industries with several business areas from forestry and wood procurement to manufacturing and, further, also to wholesale. Production sidestreams are also supplied to other companies, for example, from wood products to pulp mills
and to energy production. Wood procurement is part of the resource management of forest-based industries, and instead of the downstream customers, their product-service offerings are explicated to the upstream suppliers, i.e., private forest owners that represent a large share of roundwood supply in Finland. In addition to the actual harvesting and forestry operations, these services include forest management services, property management, digital tools and related services.
Table 4. Summary of companies involved in the case supply networks categorized in accordance with the PSS typology based on the company descriptions in databases (%) and more in-detail company materials (% italics).
Pure manu- facturing
Integration oriented
PSS
Product oriented PSS
Service oriented
PSS
User oriented
PSS
Result oriented
PSS
Pure services
Silviculture and other forestry activities A021
Companies n=7
71% 29%
100%
Manufacture of …
…wood and of products of wood…
NACE C16 2 Companies n=19
53% 37% 10%
11% 47% 42%
…paper and paper products NACE C17
Companies n=3
100%
100%
…chemicals and chemical products NACE C20
Companies n=7
57% 43%
14% 86%
…rubber and plastic products NACE C22
Companies n=12
75% 25%
67% 25% 8%
…non-metallic mineral products NACE C23
Companies n=7
43% 57%
14% 29% 57%
…basic metals and fabricated metal products…
NACE C24, C25 Companies n=11
18% 36% 46%
9% 64% 27%
…computer, electronic, optical products, electrical equipment, machinery and equipment n.e.c, and furniture NACE C26, C27, C28, C31 Companies n=10
30% 20% 40% 10%
10% 60% 30%
Construction NACE F41, F42, F43 Companies n=6
17% 83%
100%
Wholesale and retail NACE G46, G47 Companies n=45
18% 9% 15 % 58 %
9% 9% 31% 51%
1A02 also includes the companies in NACE categories C16, C17 and G46, where business descriptions of wood procurement and forestry were available.
2NACE C16 includes companies in NACE categories A02, C17 where business descriptions of wood products were available.
Within manufacturing, the data on forest-based companies (NACE C16 and C17) illustrate several PSS business models: In addition to thinking of logistics, cost-efficient and reliable deliveries of materials and products, the company offerings explicate means to assist the customers in adopting wood products in their processes. The examples (Fig. 4) are similar to other manufacturing supplies in prefabrication for industrial construction. Services include, among
others, design and planning tools, technical services, project management, engineering services, assembly, testing and optimizing services, as well as system engineering in equipment manufacturing and turnkey projects in, for example, steel and prefabricated metal products and certain HVAC products.
Production services (NACE F) perform a task for the customer processes in prefabrication, such as HVAC work including engineering and assembly as well as all material supplies for work carried out on customer premises and/or for on-site construction. External service providers keep pace with technological development and standards in their field, as applicable, test and introduce new materials and applications, and pursue efficiency in their processes, including project management.
In wholesale, approximately half of the companies identified in the case supply networks sell products that are manufactured in their own production facilities either in Finland or within the international corporate group. For example, a large international manufacturer establishes a distribution channel in Finland by acquiring a local manufacturing company or setting up a joint venture with one; the new company is defined in the registers as a wholesale company, but it still manufactures products. In addition to this, large wholesale companies have their own brands that they orchestrate through contract manufacturing networks. Efficiency in supply, storage and logistics is developed with digital tools, including integrated ordering systems, express supplies and customer-tailored on-site storage facilities. Several wholesale companies also offer diverse services for their industrial partners, such as product and system training (product academies), testing and optimizing services, design, planning and engineering services, project management and resource management tools and services.
[Fig. 4. Examples of product-service systems (PSS) of companies involved in prefabrication supply networks for industrial wood construction.]
5.3 Foundations of a new regime in the making for construction
The analysis of PSS business models of the companies involved in the three case supply networks describes the potential for advanced services and increasing integration of manufacturing processes. This potential did not become strongly evident as a result of the Step 1 analysis. Rather, both in the meetings with the three companies that provided their bill of materials data for the analysis and in the interviews with the industry federation representatives, the changing role of services companies was emphasized, particularly that of the intermediates in trade and logistics:
While more and more products and materials are available online and more established ways to organize delivery and money transactions between the market actors become available, the intermediates seek to provide “information as a service.” In other words, information attached to the products or materials enables an efficient flow of resources, transparency of operations and verification of compliance with standards. Digital tools and the data attached to products (digital products) allow developing efficiency from design and planning to production of materials and components, to prefabrication of elements and to assembly on site, and further, to use and maintenance throughout the whole construction life cycle, and beyond to reuse and recycling of the products and materials. The same data would in the future also allow connecting an individual building to its environment, including smart energy systems, waste management and mobility.
Digitalization of the construction industry and the real estate sector, international projects in smart cities and the Internet of Buildings were mentioned by the industry federation representatives as major sources of change.
In the Step 2 analysis of PSS business models of supplier companies, the same observation was made regarding the manufacturing companies that offer digital tools and digital objects of their products. Some large manufacturers of tools and machinery explicate their involvement in developing the Internet of Things (IoT), although such solutions were not directly detectable in the material flows of the three prefabrication supply networks. Thus, the evolution of the role of intermediates and the services business is interlinked with the manufacturing sector, and new complementary assets can be seen to form across the industrial sectors. Also in primary production, the forest-based companies offer digital tools and services for private forest owners in order to ensure traceable raw material flows, including fulfillment of sustainable management and use of forests.
The evolving digital systems, information infrastructures forming out and the changing roles and tasks by the companies in the supply networks illustrate an increasing integration across manufacturing, services as well as the primary production. The empirical data, however, does not foretell the forthcoming developments. Instead, servitization provides a new angle to discuss the system dynamics of the construction sector, renewal of wood products companies, as well as the evolving bioeconomy.
6. Discussion
The PSS typology developed for servitization in manufacturing (Baines et al., 2007; Neely, 2008) was used in this study to assess servitization embedded in production processes. The analytic framework elaborates how business model changes at company and activity system levels can affect the regime dynamics. Thus, the servitization processes within the supply networks for
industrial wood construction and consequent renewal of wood products companies may support to maintain the old, disrupt or balance a new socio-technical regime of construction.
These developments interlink with the bioeconomy transitions in several ways. For example, in addition to wood in the analyzed prefabricated products, the forest-based industries also supply other materials to manufacturing networks for construction. These companies are integrated industries ranging from raw material supply (forestry and wood procurement) to wood products and energy, pulp and paper and biorefineries. New bio-based materials developed in biorefineries represent substitution potential in several chemical industry material streams, such as in adhesives and plastics. Plastics are used in several supplies for construction, such as in products for heating, ventilation and air conditioning (HVAC), and in packaging of materials and interim products. Many of these types of products used in construction have international standards, and consequently, global markets. The forest-based biorefineries have already been mentioned as a future source of sustainable materials for construction (e.g., Dessbesell et al., 2016). Yet, the interlink between wood products companies and biorefineries is often assessed on biomass, cascade use and efficient material flows, instead of the organizational changes in the supply networks that enable increasing efficiency. The opportunities for de- and re-configurations of supply networks are already detectible, but the emerging bio-industries along the supply networks for industrial wood construction do not unfold with the standard metrics. Focus on the extant products and production modes serves as a means to maintain the established processes.
The wood construction literature recognizes servitization as a characteristic of a mature industry and thus as an opportunity for manufacturing companies to extend the product life cycle and provide new revenues by moving downstream in the value chain (Brege et al., 2014). The supply network analyses in this study illustrated that due to local regulations, norms and standards in
construction, services that are necessary for designing the technical solution for the target market need to be acquired in the country where the wood products are used. Moving downstream, as a servitization option for the wood products companies, would be a place-based and market-specific decision, limiting the options for companies that seek large-volume international markets. The products analyzed in this study were standardized wooden elements, and still, the supplier companies displayed several forms of servitization. Thinking of servitization as a profound system change, i.e., how value is created, distributed and captured, provides a different angle to changing business models of wood products companies. For example, the material properties of lightweight and easy-to-modify wood provide new benefits for the customer processes by reducing transportation costs, increasing material efficiency and saving time during installation, maintenance and renovation. Increasing efficiency of construction processes can support market leverage of wood-based solutions, but such opportunities cannot be detected without deep understanding of the customer processes.
New technology-enabled services create foundations for more integrated processes, and instead of thinking of advanced services as a move downstream in the value-added chains, servitization can also lead to higher value added attainable by moving upstream in the value-added chains. The traditional industrial logic would become challenged. In evolving circular economy business models, this is already recognized in circular material processes that call for rethinking the economics of business at the inter-company level (Ranta et al., 2018). A systemic approach to servitization provides a new angle to wood construction, including the questions how new bio- based products and processes interlink with manufacturing for construction, how technology affects resource-efficiency of all material suppliers, how cleantech solutions change the supply networks, and how the wood products companies can serve those customer processes that ensure their own success in a changing socio-technical system.
The potential changes in inter-industry activity systems are not limited to material-based innovations and higher production efficiency of engineered products, as they also include new types of solutions for architects (digital objects enabling mass production of individually designed components) or the real estate sector and end-users (sensors and monitoring for increasing efficiency or improving human health and wellbeing). Instead of substituting concrete or steel in the standard construction solutions, the question shifts to: what does wood provide for the customers, real estate sector and users beyond the present-day solutions in the built environment?
As signals of the foundations of a new regime in the making, the empirical data in this study illustrated similar examples as the previous studies (Bidmon and Knab, 2018; Sarasini and Linder, 2018), i.e., technology-enabled services, particularly the role of digital tools and information-as-a- service developed both in manufacturing and services. Upstream companies emphasize sustainable management and use of natural resources as benefits/services for society, end users, and policy- and decision-makers. The gains achieved, e.g., thanks to the traceability of raw materials, certification for sustainable management and use of forest resources, as well as multiple use of forests, are highlighted by forest industry companies, but it is less clear how these properties benefit the successive tiers of production in the construction supply networks. From the PSS business model perspective, bioeconomy transition seems to direct the focus on quantities and stable flow of raw materials (roundwood), rather than customer-specific qualities or functions for the customers further downstream (also in Makkonen, 2018). Simultaneously, technology-enabled services allow connecting the upstream and downstream operations in a novel way, extending the value potential across the whole supply network (Zott and Amit, 2010;
Zott et al., 2011); also the value potential by sustainable production could be redefined. Such ambitions for bioeconomy transitions, however, require disrupting the established regimes.
7. Conclusion
This study elaborated and tested an analytical framework to assess how servitization – which has been recognized over the past decades as a development in the manufacturing industries – interlinks with bioeconomy transitions within the context of construction. Previous studies have evidenced that inter-industry interlinkages and capability development are important for the renewal of industries. An extensive research work has been conducted in parallel for servitization in manufacturing (Baines et al., 2009; Rabetino et al., 2018), product-service systems in information systems, business management and engineering and design (Böhm and Thomas, 2015), and societal change towards functional economy (Tukker, 2015). Although these investigations have different research angles, they describe the phenomenon of increasing role of services, its implications, opportunities and challenges that so far have gained little attention in bioeconomy transitions.
Analyses of the wooden elements supply networks in this study provided insights on servitization from the perspective of changes in manufacturing, and interlinkages between the company level changes, inter-industry developments, and wider system dynamics. The quantitative analyses, i.e., division of value added in supply networks and the relative shares of different PSS business models among the companies, are not to be generalized beyond the analyzed supply networks. Instead, the analyses exemplify how the phenomenon of servitization resides at multiple levels in the prefabrication supply networks, and with respect to wood construction, connects primary production and the targets set by bioeconomy strategies to the increasingly integrated production processes. The analytical framework for servitization in bioeconomy transitions elaborates that renewal of wood products companies and the forest-based industries that supply to them is
determined by these companies’ response to the changes in customer industries and ability to adapt to the evolving supply networks within the socio-technical regime.
Socio-technical transitions are not fully manageable. Assessing servitization as reconfigurations embedded in socio-technical regimes highlights the non-technological changes that are difficult to perceive, but which may change the regime from inside out. Geels (2018) points out that low- carbon transitions connect both incumbent firms and new technological niches in multiple ways to energy, mobility and other such systems simultaneously. Also, bioeconomy transitions, e.g., material substitution with renewables by extant industries and emerging new bio-industries, affect several socio-technical systems. However, these transitions particularly impact on connecting the sustainable management and use of natural resources to socio-technical system changes, thus, forest-based raw materials but also multiple benefits from forests in terms of ecosystem services, such as carbon sequestration. This link often remains out of the scope of socio-technical change investigations.
The old and new bioeconomy evolve side by side, and better understanding is needed on the non- technological innovations and the processual changes such as servitization that are sources of gradual reconfigurations to both maintain and disrupt regimes. The analytic framework of this study does not provide an answer what the outcome of system dynamics will be. Instead, it provides a systemic approach to address the increasing role of services in manufacturing that can contribute to increasing efficiency and improve sustainability in bioeconomy transitions.
Acknowledgements
The corresponding author gratefully acknowledges the support from the doctoral school of the University of Eastern Finland (2014-2017) and the grant for the empirical data collection of this study by Metsämiesten säätiö Foundation (2016-2017).
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