Business model decisions behind servitization : Case product centric high-growth company

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Riku Hietarinta

BUSINESS MODEL DECISIONS BEHIND SERVITIZATION

Case product centric high-growth company

Faculty of Management and Business

Master of Science Thesis

January 2022

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ABSTRACT

Riku Hietarinta: Business model decisions behind servitization. Case product centric high- growth company

Master of Science Thesis Tampere University

Master’s Degree Programme in Industrial Engineering and Management Examiners: Prof. Teemu Laine and D.Sc. Tuomas Korhonen

January 2022

The shift from goods towards services on the goods-to-service continuum is called servitization. This shift has become more and more common on different industries since the competition has narrowed down the possibilities to do profitable business with just products. Therefore, servitization has been considered by many companies and covered by multiple different research.

Commonly the adopters of servitization are large corporations and therefore, also the known research are focusing on servitization of corporations rather than small and medium sized enterprises SMEs. The case company of this thesis is a SME and currently relies heavily on the product centric business model. Their core offering is built around a main product which is supported by basic and intermediate services. The service offering of the case company is seen as an addon and it requires the sales of the main product prior to the sales of the services. The current offering of services does not provide any competitive advantage to the case company and is not seen as an effective way of using the resources they have at disposal. Therefore, the case company aims to find ways to use their internal knowledge and resources effectively through a service offering that would provide competitive advantage. Since the current literature does not cover needed steps of servitization in a context of a SME, this thesis was designed to fill the cap between and provide case specific knowledge about how the case company could utilize their internal knowledge through servitization. And how the case company could support such actions with business model decision and structural changes of the organization.

To be able to provide these answers to the case company, this thesis firstly found the key knowledge of the case company. The key knowledge was then transferred into service proposals that utilized the key knowledge as a baseline for the service. These proposals also considered the possibility of utilizing digitization directly or indirectly to support the competitiveness of the service. Secondly these proposals were then evaluated and allocated with a business game that estimated the need for each of the proposals. With the results of the business game, the suitable services were found. Each of these services had specific requirements in terms of commercializ- ing. These requirements consist of actions, business model decisions and changes to the structure of the organization. Lastly, based on these services and the requirements, a plan of action was proposed to guide the case company on the early stages of the servitization.

Keywords: servitization, digitization, service offering, business model decisions, original equipment manufacturer

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TIIVISTELMÄ

Riku Hietarinta: Liiketoimintamallin päätökset palveluliiketoiminnan kehittämisen takana. Case tuotekeskeinen kasvuyritys

Diplomityö

Tampereen yliopisto

Tuotantotalouden diplomi-insinöörin tutkinto-ohjelma Tarkastajat: prof. Teemu Laine ja TkT Tuomas Korhonen Tammikuu 2022

Siirtymä tuote-palvelu jatkumolla, joka tapahtuu tuotekeskeisestä liiketoiminnasta kohti palve- lukeskeistä liiketoimintaa, tunnetaan nimellä palvelullistuminen. Palvelullistumisen trendistä on tullut kasvavan suosittu erilaisten teollisten yritysten keskuudessa. Tämä johtuu usein siitä, että teollisten alojen sisäinen kilpailu on ajanut perinteisen tuotekeskeisen liiketoiminnan tilanteeseen, jossa kannattavuuden saavuttaminen pelkillä tuotteilla on erittäin haastavaa. Tästä johtuen palvelullistuminen on liiketoimintojen kehittämisen keskiössä useissa eri yrityksissä ja toimialoilla.

Lisäksi palvelullistumisesta tehdään paljon tutkimuksia.

Useimmiten palvelullistumisen omaksuvat yritykset ovat isoja korporaatioita, ja siitä johtuen myös valtaosa tutkimuksista keskittyy palvelullistumiseen isojen korporaatioiden kontekstissa.

Tällöin pienten- ja keskisuurien yritysten palvelullistumista käsitteleviä tutkimuksia löytyy erittäin vähän. Tämän tutkimuksen case yritys on kansainvälisesti toimiva pk-yritys, jonka liiketoiminta pohjautuu tuotekeskeiseen malliin. Heidän ydintarjoomansa on rakennettu yrityksen päätuotteen ympärille, jota tukemaan on muodostettu peruspalveluita. Case yrityksen palvelutarjooma voi- daan katsoa olevan lisä päätuotteen varjossa, sillä palveluiden myyminen edellyttää aina ensin päätuotteen myymistä. Lisäksi nykyisestä palvelutarjoomasta löytyvät palvelut eivät tuo case yritykselle varsinaista kilpailuetua. Yrityksen edustajat mieltävätkin nykyiset palvelut hieman tehot- tomana tapana käyttää yrityksen resursseja ja kattavaa tietotaitoa toimialasta. Tästä johtuen case yrityksen intressi on tunnistaa heidän yrityksensä sisäinen ydinosaaminen ja löytää tehokkaat keinot hyödyntää sitä uudistetun palvelutarjooman kautta. Tällä case yritys pyrkii saavuttamaan luontaista kilpailuetua ilman valtavia resursseja. Koska aikaisempi kirjallisuus ei käsittele palvelullistumista pk-yrityksen näkökulmasta, oli tämän työn tarkoituksena täyttää kyseinen aukko ta- paustutkimuksen avulla. Lisäksi tutkimuksen tarkoituksena oli tarkastella konkreettisia toimia, joita case yrityksen tulisi tehdä tehokkaan palvelullistumisen toteuttamiseksi.

Jotta kyseisiin tavoitteisiin päästäisiin, tuli tutkimuksen ensin tunnistaa case yrityksen ydinosaaminen. Tunnistetun ydinosaamisen pohjalta muodostettiin erilaisia palvelukonsepteja, joita yritys voisi hyödyntää palvelullistumisessaan. Lisäksi palvelukonsepteissa tarkasteltiin toiminto- jen digitalisoinnin mahdollisuutta kilpailuedun saavuttamiseksi. Palvelukonseptien muodostami- sen jälkeen, konseptit arvioitiin ja niitä peilattiin asiakasyrityksiin business pelin avulla. Pelin lop- putuloksena valikoitui sopivaksi katsotut palvelukonseptit, joille jokaiselle oli muodostettu myös konseptin jalkauttamisen vaatimat toimenpiteet. Toimenpiteiden kuvauksesta löytyi esimerkiksi vaaditut liiketoimintamallin muutokset, organisaation rakenteen muutokset ja muut konkreettiset toimet palvelun mahdollistamiseksi. Lopuksi näistä valikoiduista palvelukonsepteista ja niiden vaatimista toimista muodostettiin case yritykselle toimintaohje, jonka avulla yritys pystyy aloitta- maan palvelullistumisen askel askeleelta.

Avainsanat: palvelullistuminen, palvelutarjooma, liiketoimintamallin päätökset, alkuperäinen laitevalmistaja

Tämän julkaisun alkuperäisyys on tarkastettu Turnitin OriginalityCheck –ohjelmalla.

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PREFACE

The time in Tampere University has been a journey full of learning, networking, and gaining experience. This journey has been heavily guided by the global pandemic, which directed majority of my studies to different online platforms. Regardless of these changes, the tools I have been able to collect during the courses will most certainly be needed during my career.

Writing this thesis was a challenging task but at the same time I could finally fully utilize the potential of working full time during my studies. The possibility to write thesis com- missioned by my employer made work-studies balance smoother than ever before. The fact that this thesis project was not only an academic work, but also something that will be helpful in my job, motivated me throughout the writing of this paper. This motivation was supported by the examiners Teemu and Tuomas who guided me through the process.

When I applied to the master’s program, I wrote a motivation letter. In that letter I described how I set targets and if the process of achieving that target is enabled, I tend to accomplish them. For that reason, I want to thank that person who read my motiva- tional letter and gave me this possibility to achieve yet another target.

Seinäjoki, 31 January 2022

Riku Hietarinta

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LIST OF FIGURES

Figure 1. How this thesis is structured. ... 4

Figure 2. Business model canvas adapted from (Osterwalder & Pigneur 2010). ... 8

Figure 3. iTunes as an example of using business model canvas to map you the business model adapted from (Osterwalder & Pigneur 2010). ... 8

Figure 4. Goods-to-services continuum adapted from (Oliva & Kallenberg, 2003). ... 11

Figure 5. Service classification on the service matrix adapted from (Kowalkowski et al. 2011). ... 12

Figure 6. How value creation is linked to SD logic adapted from (Vargo & Lusch 2007, p. 257). ... 13

Figure 7. Shift from traditional transformation to complex engineering service systems adapted from (Ng et al. 2011, p. 11). ... 15

Figure 8. Evolution paths from products or services to a PSS adapted from (Baines et al. 2007). ... 16

Figure 9. Organizational change evaluation during servitization adapted from (Bigdeli et al. 2017). ... 20

Figure 10. Servitization pyramid model adapted from (Coreynen et al. 2017). ... 23

Figure 11. Synthesis of the theoretical background. Highlighting the vulnerability of product-based operations. ... 26

Figure 12. Synthesis of the theoretical background. Benefit of servitized operations. ... 26

Figure 13. Saunders’s research onion edited for this thesis (adapted from Saunders et al. 2019, p. 130). ... 27

Figure 14. Case company offering based on public data. ... 37

Figure 15. Section of servitization pyramid, adapted from (Coreynen et al. 2017). ... 48

Figure 16. Section of the service matrix, adapted from (Kowalkowski et al. 2011). ... 49

Figure 17. Case company positioning of the goods-to-services continuum, adapted from (Oliva & Kallenberg, 2003). ... 49

Figure 18. Service matrix, adapted from (Kowalkowski et al. 2011). ... 50

Figure 19. Second level of servitization pyramid, adapted from (Coreynen et al. 2017). ... 50

Figure 20. Example of the service proposals that were presented to the executives of the case company ... 51

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LIST OF TABLES

Table 1. List of interviews made for this research ... 32 Table 2. Interviewee's influence over customer base of the case company ... 43 Table 3. Service proposal allocation during the business game. ... 46

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LIST OF SYMBOLS AND ABBREVIATIONS

AM Additive manufacturing

B2B Business-to-Business

CEO Chief Executive Officer COO Chief Operating Officer

GD Goods Dominant logic

OEM Original Equipment Manufacturer

PSS Product Service Systems

SD Service Dominant logic

SME Small and Medium sized Enterprises

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1. INTRODUCTION

1.1 Background

Traditionally manufacturing industries have been offering tangible goods that they have developed and produced. Secondary stream of income has been the maintenance and repair services that have not played important role in the strategies of the manufacturing companies. Nevertheless, resent trend has changed the focus and the value of the services has been pointed out to the manufacturing companies by researchers and consultants. So called servitization where the manufacturers become service providers has changed the way business models and strategies are built. (Lay, 2014). The man- agers of different manufacturing companies are attempting to change the attitude from services as add-ons to services as value-adding function. When competition between different companies increases the main differentiator between making the deal or not might be whether the company has value adding services to offer or not. (Matthyssens

& Vandenbempt, 2008).

To succeed in the servitization effectively, company needs to have clear understanding of the strategic logic. This includes understanding how the financial targets are in- tended to be achieved with the servitization and how the assets are aligned with process. Which means understanding the business model of the company. (Rabetino et al.

2017). The purpose of the business model is to describe how to make an idea into an action and make money with it. This action is aligned with the competencies and capabilities of carrying out the value proposition given to the customers. (Newth, 2012, p.1- 6).

Even though many papers see e.g. (Alghisi & Saccani, 2015; Martinez et al. 2010) go through the core difficulties of servitization, there is relatively low amount of research about business model decisions behind successful execution of servitization. There- fore, this research aims to fill this gap by doing comprehensive case study about product centric company and its possibilities for the servitization. Other similar case studies see e.g. (Ahamed et al. 2013) are mainly focused on big corporations and therefore, might provide different narratives that empirical studies based on small to medium sized growth companies.

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1.2 Research objective and questions

To fulfil the demand for research that fills the gap highlighted earlier, this study aims to identify the potential of servitization, the business model decisions behind the real execution of the servitization and to clarify the required steps for achieving the desired level of servitization. To complete this task, this paper answers to the main research question and its three sub-questions:

Main RQ: How should a company integrate the service systems as part of their busi- ness model?

The main research question aims to find ways to effectively integrate potential services to the existing business model of the company. It guides the research to consider the nature of the case company and current business model decisions when finding out how far the case company should go with the service-goods continuum. The study is also guided towards creating steps and guidelines for the operative actions required from the case company to achieve successful service offering integration.

Sub RQ1: How the internal knowledge of the case company can be transferred into productive service sold through reseller network?

The first sub question aims to find theoretical background and empirical data that could be concluded into guidelines that could be used for recognizing the potential services that the case company has to offer for their customers. This research question also guides the research to focus on the means of evaluating whether the identified service is reasonable for the case company or not.

Sub RQ2: What parts of the internal knowledge of the case company would a customer be willing to invest?

The second sub question continues with the evaluation of the potential services. After the theoretical potential has been recognized the study aims to find different qualitative methods to create realistic view of those services that have potential to be invested by the customers of the case company. The purpose of this question is to guide the research towards customer value recognition.

Sub RQ3: How should the organizational structure of the case company change to support the servitization?

The third sub question aims to define whether the case company needs to do changes to the structure of the organization to support the servitization. And if the change is required, how the organizational structure should change. With it the study is also guided

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to identify current resources and the allocation to be able to define whether organizational changes or additional resources are required for the success of the servitization.

1.3 Structure of the thesis

The structure of the thesis is highlighted with in figure 1 below. The first chapter intro- duces the background of the thesis, research questions and the structure of the thesis.

The purpose of the first chapter is to guide the reader of the paper to the topic and clarify what is the purpose of this thesis.

The second chapter of the thesis is theoretical background of the topic. It consists of three different main subjects and theories. The subjects are business model, goods-to- services continuum, and organizational structure. With these main topics, the study aims to cover the theoretical aspects of the research topic. This theoretical data is used later as a reference to the findings done in the empirical case research.

The third chapter covers the research methodology of this thesis and the reasons behind the methodological decisions.

The fourth chapter of the thesis covers the empirical research of the study and the results of the research.

The fifth chapter of the thesis presents the analysis done on the empirical research results and it is then referred to the previous studies presented in the theoretical chapter.

In the sixth chapter the conclusion of the thesis is presented, and possible future research objectives are highlighted.

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Figure 1. How this thesis is structured.

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2. THEORETICAL BACKGROUND

2.1 Business models

Business model can be defined in many ways. Chesbrough & Rosenbloom (2002). describes that a business model is a way of doing business so that the company can sus- tain its operations, which eventually translates to the fact that it needs to make revenue with those operations. More precisely this is highlighted by pointing out where the company is in the value chain. Kaplan (2012 p. 19). simplifies this by stating that business model is how a company makes, provides, and captures value.

In other words, a business model of a company is describing the strategy that is being implemented through organizational processes, systems, and structures. Osterwalder

& Pigneur (2010). are defining business model with system called business model canvas. The system consists of nine different sections that help to understand different aspects of the business model. These nine sections are:

1. Customer Segments are the organizations and individuals that the business aims to serve. The goal is to satisfy the customers in effective way to achieve profitable business. Therefore, the customers can be defined more precisely to serve the needs of the specific customer group. (Oesterwalder & Pigneur 2010, p. 21-22).

2. Value Propositions is why a customer decides to choose one company over another. It fulfils the specific customer segments needs or solves their problem with a specific package of products and or services. Value proposition can be defined as a bundle of benefits that is provided to customers by the company.

(Oesterwalder & Pigneur 2010, p. 24-25).

The purpose of business model is to create value for the customers. Therefore, the heart of the business model can be described by telling how it creates value and for whom. One way of defining the value proposition more precisely is by answering to a question, what is the task that the customer hires us to fulfil. For that reason, value propositions should be done by thinking from the perspective of the customer to make the propositions as appealing as possible. (Kaplan 2012, p. 20-21). The value proposition highlights how the value is created, but it is as important for the providing company to know how to capture some of the value as profitable revenue. The challenge is that, commonly the most appealing value propositions are open technologies, which makes

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capturing the value more difficult. Therefore, finding the balance between how appealing the proposition is and how easy it is to capture the value. Aspects that effect also to how appealing the value proposition is, are factors like price, availability, level of service. (Chesbrough, 2007).

3. Channels are the links between the company and the customer. They are ways of communicating and distributing the value propositions to the specific customer segments. (Oesterwalder & Pigneur 2010, p. 27-28). The defined value propositions need to be delivered to the customers with consistent, reliable, and scalable way. Therefore, the channels are just as important elements of the business model as the value propositions, they are describing what are the operative means of delivering the value proposition. Those operative means and actions can be done internally or also externally such as by utilizing partners and distributors to deliver the value to the customers. (Kaplan 2012, p. 22).

The channels of delivering value propositions are best described by using operating models. Instead of organization charts and structures that describe only the hierarchical order of the company, operating models highlight the flow of the value delivery process. Operating models showcase how the company’s functions are linked together and how they are linked to external functions such as partners delivery processes.

(Kaplan 2012 p. 22).

4. Customer Relationships are the established relationships that the company has with specific customer segment. The relationship can vary from one customer segment to another and is something that should be defined by the company when the relationship with the customer is being built. (Oesterwalder &

Pigneur 2010, p. 29-31).

5. Revenue Streams are the cash that the company gets from different customer segments. The revenue streams are defined by the company based on what they assume the customer is willing to pay for the value proposition they are delivering through the channels. The pricing mechanisms of different revenue streams might differ from each other. (Oesterwalder & Pigneur 2010, p. 32-33).

Different revenue streams can be described also by defining how the company is capturing value. In plain English this means who is paying for the value provided and how much. This can be then reflected with the cost structure of the created value and the result should be positive to ensure profitable business. Since the gap between the OEM and the real end user of the product might consist of multiple different stages and intermediaries it is not always clear who finally pays the bill for the created value. For

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this reason, the flow of the revenue streams needs to be understood by the party who designs the business model and calculates estimations of the profitability of value deliv- eries. (Kaplan 2012, p. 29-30).

There are different bases for revenue streams, they might be based on a leasing, rent- ing, subscription agreement or direct sales of the goods. Good example of innovative use of optimizing revenue streams is leasing and eventually selling the goods like Xerox does with their copiers. This way the revenue streams are designed for the whole life cycle of the specific value proposal. (Chesbrough, 2007).

6. Key Resources are the assets that are necessary to make the business model work. These assets allow the company to develop and provide the value propositions, built, and maintain the relationships and make revenue for the company.

Different key resources can be internal of external based on the business model of the company. (Osterwalder & Pigneur 2010, p. 35-36).

7. Key Activities are the activities the key resources complete to make the busi- ness model work in action. These are actions that are required to make offering of value propositions possible, maintaining the relationships with the customers and other important aspects to earn revenues for the company. (Osterwalder &

Pigneur 2010, p. 37-38).

8. Key Partnerships is a network of different suppliers and partners that play sig- nificant role on the success of the business model. These alliances are created in different ways to achieve benefits such as lower level of risk or achieving more resources for specific key activities. (Osterwalder & Pigneur 2010, p. 39- 40).

9. Cost Structure portraits the expenses of operating the business model. All the actions from creating the value proposition to maintaining the customer relationship creates costs that are described in the cost structure of the business model. Different business models are affected by the cost structure differently.

Some are more guided by the costs that others. (Osterwalder & Pigneur 2010, p. 41-42).

These different aspects of business model are then placed on a canvas as shown below in the figure 2.

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Figure 2. Business model canvas adapted from (Osterwalder & Pigneur 2010).

Then you fill the canvas according to your business model elements as shown in the example figure 3 below.

Figure 3. iTunes as an example of using business model canvas to map you the business model adapted from (Osterwalder & Pigneur 2010).

Business models can be also categorized according to the company’s awareness as highlighted in the model Chesbrough (2007). showcased in his paper with the six different business model categories. The first category is called type one and it includes

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companies that do not differentiate them self from other companies with their business model. They are selling based on the price and availability and are commonly commod- ity providers such as restaurants. The second category is more aware of their position and has some differentiation from their competitors. Usually, they are still lacking the needed resources to maintain the differentiation. This might lead into situation where one product or service might be success but the next one is not differentiating enough.

The third category has the resources to differentiate and offer services and products to different market segments. They are still lacking the ability to react to major technical innovations that might disrupt their offerings. The type four category business model is being aware of such signals from the market that might effect on the differentiation from the competitors. External ideas are harvested and utilized in the offering development. Type five category is allowing external parties to involve their self to the innovation process of new offerings and services. Companies with such business model also focus on their customers sub-customers to understand how their offering could benefit their customers the best possible way. The sixth and the last business model category includes adaptive business models that are changed according to the situation. It is more flexible for the current market demand than the other categories and include deep adaptation of internal and external ideas. (Chesbrough, 2007).

2.1.1 Service based business model

Due to the continuously progressive intensity on the original equipment manufacturing industry the rapid changes on market prices, demand and other key elements are pushing the decision makers towards rethinking of their business plans. Since the mar- gins on the products are decreasing, the profitability of the business needs to come elsewhere. Therefore, it is common to move towards service business. On the other end of this product service continuum, we have companies that base their business model purely on the products and possible services are just add-ons. The other end, services are the core of the business and products become the addons. (Gebauer et al.

2005, p. 14).

Since the manufacturing equipment industry is shifting towards services, it is common for the companies to expand their market scope by providing wider portfolio from goods to services. This utilization is commonly referred as servitization. With it, the tangible goods are not anymore in the obvious center of the business model. This change has been recognized but not necessarily always reacted by the companies, since it requires strategic changes, such as redesigning the business model to match the demand of new services and solutions. When this kind of change is implemented in product-based

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company, it can be considered as an evolutionary change, and it will usually happen by increments over time. These increments will guide the way of thinking about the services on the product-to-services continuum from one extreme towards another. During the evolutionary change, the ideology eventually changes from services as addons to services as a core of the value provided. (Kindström 2010, p. 479-480).

To be able to implement these incremental steps towards service-based business model, company needs to realize that by changing just the value proposition to more service oriented is not enough to make permanent and effective change. All the aspects of business model need to be aligned in a way that the value with the services can be created and captured in profitable and sustainable way. (Kindström 2010, p.

481-485).

2.1.2 Business model decisions of SME

The service-based business model might be even more valuable for a small and medium sized enterprises (from now on referred as SMEs), since they are commonly more vulnerable for the competing businesses than larger companies would be. This is related to many different factors such as the lack of resources to keep the competitive advance through product innovations. Therefore, the service base business model might give more competitiveness through value adding solutions and without a need for extensive resource increases. Another option is to build strategic alliances with other SMEs or companies with more extensive resources. Through these alliances multiple parties might find effective methods to improve their business models with shared resources and common goals. (Rapaccini et al. 2019). When a SME is considering of business model changes to support the servitization they might find the needed

changes quite costly considering the resources of the company. In general, the benefits of servitization have proven to be still more beneficial than the costs of the needed changes to the business model. The limitation in this equation are the services that go outside the resources of the SME. For those services the external resources through alliances or other partnerships might be required for achieving the maximum benefit of the servitization. (Queiroz et al. 2020).

Due to the limited resources and informality of the SMEs the business model supporting servitization should be designed in a way that it aligns company’s operations with the needs of their customers and does all of it by taking the internal resources and di- mensions into account. Another aspect that needs to be in the center of the change is the service-oriented culture inside the company. Business needs be done with an attitude that is focused on the service offering that provides value to the customers. On

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top of this all, servitization requires a business model that highlights the need of internal and external coordination. This includes also active communication in both direc- tions. Company needs information from the customers to be able to provide needed services and solutions. And on the other hand, customers need information about the availability and value adding features that the company can and will offer for them.

(Queiroz et al. 2020).

In Queiroz et al. (2020). paper, they researched the effect of the servitization for SMEs.

Their findings showcased that generally servitization has a positive effect on the performance of the SME. Unlike in many other similar researches, Queiroz et al. (2020).

founded that even a small service offering of basic services had already positive effect on the overall performance of the SME. They also found out that servitization in general helps SMEs to handle the environmental and competitive pressure better through effective means of using resources through services and solutions instead of just product offering.

2.2 Goods-to-services continuum

The goods-to-services continuum has pure service providers in the other end and pure equipment providers in the other one as shown in the figure 4 below. The shift on this continuum is related to integrating the missing component, eighter services or products to the portfolio to gain competitive advantage. The challenge of this shift is to define how much to change and how to do the change. (Oliva & Kallenberg, 2003).

Figure 4. Goods-to-services continuum adapted from (Oliva & Kallenberg, 2003).

The shift from goods-to-services can be implemented following two different known paths. The first one of those is goods-dominant logic (GD), which is focused mainly on the products and sees services as non-measurable good which is distributed utilizing slightly modified channels that are designed for measurable products and non-measur-

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able services. Another path is service-dominant logic (SD), which is focused on defining services as a method of utilizing manufacturers resources to creating value for the customer organization to gain economical profit. (Vargo & Lusch, 2007, p. 254).

Previous literature states quite clearly that transition towards service business by integrating services as part of their core offering is something that product-based companies should do. Reasoning for such transition is usually based on economic benefits, demand for services and competitive pressure. Nevertheless, there is still obstacles on the way for the companies implementing such transition. One of those obstacles is that the company is not believing in the profitability of the services, second is that the company defines providing services to not be their core competence and the third major ob- stacle is that the company is not able to deploy successful strategy for service implementation. Therefore, the means to move from goods towards the services needs to be defined according to each specific occasion (Oliva & Kallenberg 2003, p. 160-161).

Important realization for the companies aiming towards service-based-business is not only to recognize the potential services but also identifying where in the service matrix these specific services are located. Services can be bundled or non-bundled with products, services can be product or process related and any combination of these. For the strategic development it is important to specify where in the matrix each service is located. The service matrix is introduced in the figure 5 below (Kowalkowski et al. 2011).

Figure 5. Service classification on the service matrix adapted from (Kowalkowski et al. 2011).

2.2.1 Goods-dominant logic

Goods-dominant logic GD is focused on the parallel offering of products and services to gain profit. More precisely the business is based on the transaction of delivering products to the customer and supporting the functionality of the products with services

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that improve the value provided to the customer. GD logic can be seen as a traditional logic behind providing products and services, since it has its roots in the paper created by Smith (1776). and has been part of business models since. Over time the GD logic has become more challenging to utilize since, it has its limitations on marketing of the value added to the customer. The logic provides possibility to highlight general idea of the value creation through products and services but does not dive deeper into customer business or concern customer customers in the value creation process. (Vargo &

Lusch, 2007, p. 255).

2.2.2 Service dominant logic

Service dominant logic SD describes the general mentality of the company towards thinking about the term service. If in the GD logic the default way of thinking has been that a service is individual action that is provided to gain revenue, SD logic aims to think service as a title term to describe how the business allocates its resources to add value for customers business. In this model, customer is always seen as a co-creator of the value, since all the stakeholders around the service influence on the outcome of it. Compared to GD logic, the value creation is indicated more transparently in the SD logic. The value creation and the utilization of internal and external resources can be highlighted easily as shown in the figure 6 below. This shows how the value creation includes all the stakeholders in different phases of service development and delivery.

(Vargo & Lusch 2007).

Figure 6. How value creation is linked to SD logic adapted from (Vargo & Lusch 2007, p. 257).

The shift from GD logic to SD logic has core differences that can be highlighted in six different steps:

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1. Shift from thinking that products and services are the core of the business, to focusing on helping customers in their value-creation process

2. Shift from thinking that the company is creating value with the products or services to the customer, to realising that the value is co-created with the customer and other stakeholders.

3. Shift from thinking that customers are doing business in their own bubbles that manufacturing company does not need to focus, to realising the operating environment of the customer

4. Shift from thinking that the resources of the company are labour hours and ma- chinery utilization, to realising that the resources are non-measurable means like knowhow and talent inside to organization.

5. Shift from thinking that the customers are the focus group for the offering, to realising that the customers are resources as well.

6. Shift from thinking that the core focus is on efficiency of operations, to realising that efficiency is created with effectiveness of the operations. (Vargo & Lusch 2007, p. 258).

Since papers like Vargo & Lusch (2007). highlight that sd logic is focused on the value creation and that customers are seen as co-creators of this value, it is important to look deeper into the value creation in sd logic. This has been done comprehensively in the paper Grönroos (2008). Grönroos states that originally even Vargo & Lusch saw customer as co-producers but later updated their statement to customers as co-creators.

Based on this updated statement and other similar points Grönroos summarizes the value creation on two core sentences that showcase how value is created and by who:

1. Customer service logic is based on the combination of resources from the provider and internal resources. These are then utilized by using the skills they have and by doing so, the customer creates value for their self with daily activities.

2. Provider service logic is based on the active communication with their customers to create relationship and see how they use the goods. With this the provider gains possibility to co-create value with the customer. (Grönroos 2008, p.

299).

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2.2.3 Servitization

Companies that have been mainly focused on products and have seen services only as an addon or have not provided services at all, and then start to shift on goods-to-services continuum are implementing so called servitization. The purpose of this operation is to increase the importance of services in their business to add more value for their customers. This can be considered also as a method to differentiate from the competitors and gain competitive advance. For this reason, manufacturing companies are in- creasingly moving towards services to not compete just with the costs of the products.

(Van der Merwe and Rada, 1988).

Doing such change requires actions on multiple different levels of organization and the way customers think of the provider. The organization, strategy, way the management is aligned, and the internal culture of company needs to be oriented towards value- added thinking. All the stakeholders from internal operators of the company to the decision makers of customers organization need to be more active throughout the whole lifecycle of the product to make effective value adding through services possible. (Bar- net et al. 2013, p. 146).

The shift from product-oriented business model towards the service oriented one, is highlighted in the book Ng et al. (2011). with a figure 7 shown below.

Figure 7. Shift from traditional transformation to complex engineering service systems adapted from (Ng et al. 2011, p. 11).

The target of the servitization shown in the figure 7 is to move from transforming materials and equipment to a more complex way of comprehensively transforming the whole

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system. This is highlighted with three different stages: 1. Transforming information by doing research, communicating, and managing the innovation around the subject. 2.

Transforming people by educating, building relationships, and creating trust. 3. And then transforming the materials and equipment according to the needs of the whole system to gain more competitiveness and effectiveness. (Ng et al. 2011, p. 9-11). This model is called complex engineering service systems and it highlights the difference between gd logic and sd logic well through simple presentation of how the model trans- forms different aspects.

2.2.4 Product service systems

As defined the goods-to-services continuum highlights the transition from one extreme to another. Moving from products to services is called servitization and moving from pure services towards products can be called as a productizing. When the products and services from a bundle and act as a single offering it is referred as a product service system (PSS). (Clayton et al. 2012, p. 273-274). The evolution from products or services to a full product service systems can be defined as a crossing of two separated paths. One path is servitization, moving from products to services and another being productization, moving from services to products. At the meeting point of these two paths the products and services merge into a single offering which can be described as a product service system. This evolution is highlighted in the figure 8 below.

(Baines et al. 2007, p. 1546).

Figure 8. Evolution paths from products or services to a PSS adapted from (Baines et al. 2007).

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To be more specific product service systems can be divided into five different groups that each have their own way of combining services and products. The five groups are:

1. Integration-oriented product service systems are moving the ownership to the customer but utilizing vertical integration of the services to gain more profitable business

2. Product-oriented product service systems are transferring the ownership of products to the customers, but utilize the services such as deployment, user training or other to create more value for the customer.

3. Service-oriented product service systems are as well transferring the ownership of the product to the customer but provide services as integrated part of the value adding offering.

4. Use-oriented product service systems are usually keeping the ownership of the product at the supplier but provide the end goods to the customer as a value adding service which is then paid according to different agreements.

5. Result-oriented product service systems are offering the end results as a service not the products that makes it possible. The ownership of the products is kept by the manufacturer and the end products are paid according to subscription agreement. (Clayton et al. 2012, p. 273-274).

Another way to divide different PSS from each other was described in the paper by Baines et al. (2007). They divided PSS into three different groups: 1. Product-oriented PSS which is described as selling products in traditional manner and providing needed services to support the functionality of the products. 2. Use-oriented PSS is defined as selling the use of the equipment without moving the ownership of it to the customer.

Leasing is one form of this system. 3. Result-oriented PSS is defined as selling the end results to the customer instead of selling the equipment. Good example of such could be providing 3D printed parts instead of selling a 3D printer and materials.

(Baines et al. 2007, p. 1547). These groups are quite like the ones with same names introduced in their paper by Clayton et al. (2012). Major difference is that Baines et al.

(2007). defined more of the functionality of the different PSS groups and Clayton et al.

(2012). focused more on the aspect of ownership of the equipment. Boehm & Thomas (2013). highlighted in their literature review that the three groups of PSS used by Baines et al. (2007). in their paper are commonly utilized as for example in the paper by Tukker, (2004). (Boehm & Thomas, 2013, p. 254).

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Regardless to which of these groups the PSS belongs the core principle is that the operations are guided by service-led strategy and an aim to differentiate from the competitors. PSS can be seen as a special case of a servitization since, it aims to extend products properties by utilizing services. (Baines et al. 2007, p. 1543-1544).

For the manufacturers located in more developed countries PSS might offer oppor- tunity to gain the competitive advance against competitors from locations with cheaper labour and manufacturing costs. By combining the product with advanced services that extend the value added by the product, the cost-value ratio becomes more appealing than purchasing a cheap competing product. This operation also moves the manufacturer higher up in the value chain by providing important knowledge to their customers.

More practical presentation of the successful PSS has been based on things like:

Xerox offers a guaranteed fixed fee per copy with their combination of products and services. Electrolux offers washing machines for professional use with initial investment fee and additional fee for remote monitoring that guarantees high uptimes through maintenance and rapid fixing of machines. Castrol offers service packages for lubricant that will reduce the consumption of the lubricant. This will reduce the cost over time from their customers and offer competitive advance over competitors. (Baines et al.

2007, p. 1548). As these examples highlight, PSS can vary from each other quite dra- matically, but the common feature is that they offer better value over time compared to the competitors and therefore compete with value instead of more traditional field of competition such as the price.

The main challenges of creating PSS are linked with implementation of PSS. The transition from owning an equipment to purchasing services according to needs is something that requires cultural and organizational changes to both, customer, and manufacturers organizations. Therefore, creating PSS needs to be done always according to the operation environment in a case-by-case fashion. On top of that the mentality of the providing company needs to shift from product or service thinking to system and solution thinking. This way the mentality is supporting the development and deployment of the PSS. When the PSS is being implemented the relationship between the customer and the provider will most likely deepen since, the shift from delivering just a product or a service to a comprehensive solutions and systems requires deeper knowledge from the operations of the customer for successful implementation. (Baines et al. 2007, p.

1549).

To be able to develop these PSS, the companies need sufficient tools and methodologies. Common methodologies are introduced by different actors, but they are mainly focused on the idea development and other direct development phases to the PSS.

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Maussang et al. (2009). states that having an idea for PSS helps for understanding the purpose of the PSS, but it does not provide sufficient information for designers to create needed products or services. Therefore, the PSS architecture is a guideline that needs the product specification for successful development of needed products. Only with these technical specifications the designers know how to create a physical object that can be then utilized in the implementation of the PSS. (Maussang et al. 2009, p.

355). For the development of PSS there are different tools and methodologies availa- ble, but majority of them are project specific and the methodology highlights the in- tended use environment for it. Therefore, it is critical to use the right tools and methodology for the PSS development in each use case and operating environment. (Baines et al. 2007, p. 1549).

2.3 Service oriented structure of organization

When looking at different structures of organisation in different companies, it can be seen that in product-oriented companies the structure has been built around the different products or categories of products. It is also quite common that these organizational units compete against each other for the resources and attention from the top management of the company. This is due to quite hierarchical structure and top-down style of management. In service-oriented organizations the structure is commonly quite different since it is focused on resources and capabilities of a value creation and offering for the customers rather than something tangible. (Zeithaml, 2014).

2.3.1 Structural change during servitization

For comprehensive understanding of changes that organization might face during the shift from product company to a service company, different aspects need to be considered. Bigdeli et al. (2017). introduced a holistic approach to these changes by first showcasing three different point of views and then combining these three to a one comprehensive framework. These different approaches were summarized as: 1. Con- tent framework that is focused on the strategic changes and structural changes of the organization. 2. Context framework that is focused more into the internal and external circumstances of the company that have influence on the effectiveness of the company. 3. Process framework is focused on describing how the change in concentri- cally done. (Bigdeli et al. 2017, p. 13).

Combination of these different approaches was then introduced as one framework by Bigdeli et al. (2017). The combined framework showcased that the content of change is

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measured on different levels of competence. Starting for the change on the competence of business units, moving to the change of the offering of the company on specific industry and finally highlighting the change on the relationships of two or more companies from pure transactions to co-operative value creation. The contextual change is measured on inner and outer operational environment that includes aspects such as the structure of the organization, culture inside the organization, political decisions and other topics that might influence the effectiveness of the change. The process development is measured by how the change will be deployed. It includes aspects like implementation of the development strategy and how the business model is designed to support the process of servitization. These different stages can be utilized in an evaluation framework as showcased in the figure 9 shown below (Bigdeli et al.

2017, p. 13-15).

Figure 9. Organizational change evaluation during servitization adapted from (Bigdeli et al. 2017).

When the company aims to servitize their business model, it has been notices that in- correct organization structure prevents service innovations where suitable structures guide towards the service innovations. Therefore, it is important to build a suitable structure to support the road towards services. If the company is originally product oriented, the common first step to change the organizational structure to be more support- ive for services is to create a separated service unit. Once the service unit has been established the second common step is to push towards co-operation with the customers to understand the real value of the offering. This supports on the development of

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the offering as well. The aim of these two steps is to find the real value that the company can offer to their customers and effective means to utilize the resources to provide this value to them through different services and solutions. (Kindström & Kowalk- owski, 2014).

When the strategic decision to move towards service innovations is made, it is important to understand that all the elements play key role on making the innovation successful. From these elements the organization structure plays big role as well. Good example of the importance of the structure is when company decides to create a new innovative service. The service most likely requires a separated unit or operators that will be responsible on the development and deployment of the service. This new service creates potential for new customer that needs representation from the sales, and other fields of the company. Again, this needs to be arranged effectively through the organizational structure of the company. Therefore, it is crucial to have a structure that support the service offering in all the different stages and makes the operations effective. It is not just a thing that you need during the innovation and development phase of the process. (Kindström & Kowalkowski, 2014).

The question that many companies aiming towards servitization seek for an answer is, what is the optimal organizational structure that supports the shift. In Zeithaml et al.

(2014). book this question was answered with in depth research. In their findings it was highlighted that the successful companies had created a separated service unit that would develop and deploy the services. But the specific structure of that unit highly de- pended on the service maturity of the company. Another key highlight showcased in their findings is that the organisations needed to be quick in the decision making that was not possible with product-centric hierarchical structure. Therefore, the structure needs to be agile so that it can response quickly and do the operations needed to serve the customers effectively. (Zeithaml 2014).

Since the optimal structure depends on the maturity of the service offering and the positioning on the service continuum the structural changes might need to be done through different stages. One way to divide these changes into different changes was presented in the Zeithaml (2014). book:

Flattening the organization means that a shift from outdated hierarchical organization towards more agile structure where the decision making is fast and does not need mul- tilevel approvals is a required step towards right structure for effective servitization.

Flow of resource allocation means that the company needs to create a way to allo- cate the internal resources of the company to where and when needed by flexible

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means. Therefore, the flow of resources needs to be designed into the organizations structure.

Preventing organizational silos means that the structure is built in a way that the cross-unit communication is easy and mandatory. By doing so the structure guides operators to communicate and share the knowledge which prevents these silos from hap- pening. By doing so the company has a shared knowledge base that benefits all the units and prevent unnecessary repeated mistakes during operations.

Structure built around the categories of services is a stage of designing the organi- zations structure in a way that the decision making is divided to different sub-organizations that are connected to a specific category of services. By doing so the decision making becomes yet more agile than before, which support the main goal of being effective on delivering the services to the customers.

Back, front, and strategic units is a stage of re-structuring the organization when the company wants a full integration of the services and products into a solution-based business. At this stage the units are divided by the positioning on their operations.

Front unit will be the one operating with the customers, back unit will be focused on the development and the strategic unit will be the one in between these two units as a communication and control channel for the operations. This stage is the ultimate re- structuring of the organization when the servitization has reached the far-right end of the continuum. (Zeithaml 2014).

By looking at the different stages of structure decision highlighted by Zeithaml (2014). it becomes obvious that the organization aiming towards servitization and wants to support it by making changes to their organization, needs to know where they are posi- tioned on the goods-service-continuum and how mature their service offering really is.

Since the different stages are highly related to this information.

2.3.2 SME’s structure decisions

As highlighted in the chapter 2.1.2. SMEs are commonly the group of enterprises that would benefit from the servitization the most, but also are the group that has less resources at their disposal to do so. Therefore, it is important to address the possibilities of effective organizational structuring for optimal resource allocation to achieve the benefits of servitization regardless of the limitations.

Coreynen et al. (2017). implicate in their paper that one way to achieve the benefits of servitization as a SME is to utilize digitization. Digitization in their paper is described as use of digital technologies for linking different entities with each other. The benefit of

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digitization for SMEs is that they can expand their possibilities to reach their customers and to communicate effectively with them. This enables service implementation with relatively small resources through the knowledge gained form the digital communication with the customers. In the servitization of industrial company, digitization offers possibilities to improve customers operational efficiency with service offering that has been developed with the knowledge gained from the digital communication. These services can be anything from basic to advance highly depending on the maturity of the service offering. One way to identify the maturity of the service offering is to locate the offering on the servitization pyramid which is showcased in the figure 10 below.

(Coreynen et al. 2017).

Figure 10. Servitization pyramid model adapted from (Coreynen et al. 2017).

2.3.3 Utilization of distribution channels in servitization

Utilizing distribution channels reflects to the competitiveness and effectiveness of the business for product centric companies that are operating on global scale. Therefore, it is quite common that the OEM does the manufacturing of the goods, but the network of partners will do the distribution for improved effectiveness. To transfer this distribution ideology to service offering, requires effective service designing and correct selection of distributors. (Aminoff & Hakanen, 2018).

Traditionally the roles of customer, distributor and OEM have been quite clear. Manu- facturer’s responsibility has been on the development of the goods, distributor has done the sales and provided the good with knowledge to the end users, customer has been the consumer of the goods. Due to the servitization these roles have started to shift and change to support the needed features of service delivery. Through this

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change distributors are not just a reselling entity but also the party that adds value to customers processes through the service offering. (Aminoff & Hakanen, 2018).

For this reason, the importance of choosing right distributors is highlighted more than before. Since the value is added through the channels that distributors represent the competitiveness of the manufacturers business relies on the effectiveness of their partners. The selection of distributor(s) that support the servitization can be done using following criteria:

- How well the capabilities and skillsets of the distributor align with the service offering and the required co-operation with end customers.

- How willing the distributor is to tie longer relationships that include common goals and work to achieve them.

- How well the characteristics of the distributor fit on the set business model. Is the distributors organization right sized, located correctly and do they use sub- contractors or not.

- How wide or narrow the offering of the distributor is. Since too wide offering might tight down too much of the resources and too narrow offering might indi- cate the lack of willingness on developing the offering portfolio. (Aminoff &

Hakanen, 2018).

When the distributor has been selected through suitable criteria the role of the distributor becomes important in the delivery of the value for the end users. Even though the distributor would have needed capabilities and selection would have been done

through suitable criteria, there is always a need for support and training from the manufacturer. This way the co-operation of the manufacturer and distributor ensures ideal delivery of the offering and gives tools for building relationships between customers, distributors, and manufacturers. It is important to notice that gaining these relationships requires cross channel work and it becomes more challenging if distributors have sub- contractors. Therefore, the flow of information and possibilities of controlling the value delivery become limited when the delivery chain lengthens through sub-distributors.

(Aminoff & Hakanen, 2018).

2.4 Synthesis of the theoretical background

The roots of the operations of a company are built with business model. Business model gives comprehensive explanation of how company does its operations, why they do it and for who this operation is done for. This can explain on many different levels

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how company keeps its business alive and stays ahead of its competition. Due to the constantly increasing competitiveness of industrial B2B business, the competitive advance needs to be found with innovative means. The importance of services has been increasing part of this equation due to the possibility to gain competitive advance without a need of developing something tangible. Through services, companies can compete on different fields and provide value in ways that their competitors currently can- not. This provides important tools for competition especially for SMEs that might lack the needed resources for rapid product development but might still have advance knowledge in house that could be transferred as value to their customers through services.

To be able to share that knowledge to their customers SMEs might need to utilize distribution channels. Especially if the target audience is spread globally. This brings new aspects to the table that need to be considered when selecting right partners. Since advanced services and product service systems need usually also advance knowledge from the delivering party, the partner distributing these offerings needs to have suitable capabilities, right organization structure and willingness for longer relationship with the manufacturer. With such partners and right amount of co-operation through shared knowledge and trainings, SME’s can compete on global scale through distribution channels and right positioning on the goods-to-services continuum with their offering.

To visualize the synthesis the figure 11 highlights how business model guides the operations that are then provided as a product to the desired customer. Since the relationship between the company and their customer is based on a goods with a cost transaction, the customer is not necessarily bonded with the company and therefore, competitors have high chance of providing their products as well and interfering the business.

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Figure 11. Synthesis of the theoretical background. Highlighting the vulnerability of product-based operations.

In figure 12. the same situation has been displayed when the operations have been servitized. The importance of business model is still obvious, but this servitized model of operations provides value for the customer through different solutions. By doing so the relationship between the customer and the company is being built with an information flow that goes in both ways and deeper understanding of customer business.

This makes probability of competitors interference lower and provides longer and more profitable relationships with customers.

Figure 12. Synthesis of the theoretical background. Benefit of servitized operations.

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3. RESEARCH METHODOLOGY

3.1 Approach and philosophy of the research

The choices of research philosophy, approach, methodology, strategy, and time hori- zon of this thesis are displayed by using the Saunders’s research onion highlighted in the figure 13. The purpose of the research onion is to show the decisions behind the research that reflect to the nature of the research. This is done layer-by-layer starting from the outmost layer and ending with the center of the onion. By displaying each layer, the reasoning for decisions behind the research can be introduced with enough details to make the background of the thesis transparent. (Saunders et al. 2019, p.

128-130).

Figure 13. Saunders’s research onion edited for this thesis (adapted from Saunders et al. 2019, p. 130).

3.1.1 Philosophy

The purpose of this research is to create new understanding of the research topic to the case company. The research topic is highly subjective and has multiple different levels of understanding and therefore, just a theory or quantifiable results will not provide the end results desired for this research. Thus, the philosophy of the research needs to support subjective approach and allow researchers and interviewees subjec-

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tive interpretation guide the direction of the research. Interpretivism as a research philosophy serves the nature of the research well, since it allows the subjectiveness of the research guide it in right way. Interpretivism allows also richer understanding of the different social worlds which in this context are the different stakeholders related to the business model decisions. When the research interviews are done based on interpretivism approach the meaningful and important aspects for the interviewee are usually displayed well in the results. (Saunders et al. 2019, p. 148-149).

3.1.2 Theory development approach

The use of theory will be involved in research projects in one way or another. Most commonly it is eighter theory testing or theory building which are related to traditional inductive or deductive approaches. When these two approaches are combines the reasoning is called abductive approach. In abduction the research moves back and forth from data to theory and from theory to data. The research starts with an observation of an interesting fact that is then explained through plausible theories. While compiling these theories, the researchers usually find other interesting and surprising facts that lead to other theories. And for this reason, abduction is a combine’s approach that is going back and forth between data and theories. (Saunders et al. 2019, p. 152-155).

This research starts with observations of current business model decisions and future goals of the case company. Then it aims to find theories supporting the path of the development and on the way most likely find other surprising facts about the business model or the development process. Therefore, it provides more insights and multi-level data for the case company that inductive or deductive approach would not provide.

3.1.3 Methodology

When the research is based on interpretive philosophy, qualitative methodology is commonly used. Since interpretivism allows researchers subjective opinions effect on the research, the methodology needs to support the use of subjective means on the research. Qualitative research is focused on the participants, meanings, and the relationships between different parties rather than something that can be measured or calcu- lated. Therefore, it is important that the researcher is doing interviews and other means of collecting data on-site to get the full range of impressions that might influence on subjective level to the collected data. Qualitative research can use multiple qualitative data collecting methods and analysing techniques. This is called multi-method qualitative study. (Saunders et al. 2019, p. 179).

Business model decisions behind servitization : Case product centric high-growth company

Riku Hietarinta