Gunter Lay Editor

Servitization
in Industry
Servitization in Industry
Gunter Lay
Editor

Servitization in Industry

123
Editor
Gunter Lay
Fraunhofer Institute for Systems
and Innovation Research ISI
Karlsruhe
Germany

ISBN 978-3-319-06934-0 ISBN 978-3-319-06935-7 (eBook)

DOI 10.1007/978-3-319-06935-7
Springer Cham Heidelberg New York Dordrecht London

Library of Congress Control Number: 2014941101

 Springer International Publishing Switzerland 2014

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Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Gunter Lay

Part I Servitization by Sector

2 Photocopier Industry: At the Forefront of Servitization . . . . . . . . 23

Filippo Visintin

3 Servitization in the Aircraft Industry: Understanding

Advanced Services and the Implications of Their Delivery . . . . . . 45
Tim Baines and Howard Lightfoot

4 The Automotive Industry: Heading Towards Servitization

in Turbulent Times . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Paolo Gaiardelli, Lucrezia Songini and Nicola Saccani

5 Plant Engineering: Old Wine in New Skins . . . . . . . . . . . . . . . . . 73

Gunter Lay

6 Air Compressors or Compressed Air: Harvesting the Benefits . . . 91

Peter Radgen

7 Machine Tool Industry: Beyond Tradition?. . . . . . . . . . . . . . . . . 109

Giacomo Copani

8 Chemical Industry: Servitization in Niches . . . . . . . . . . . . . . . . . 131

Daniela Buschak and Gunter Lay

9 Servitization of Capital Equipment Providers

in the Pulp and Paper Industry. . . . . . . . . . . . . . . . . . . . . . . . . . 151
Lars Witell, Per Myhrén, Bo Edvardsson,
Anders Gustafsson and Nina Löfberg

v
vi Contents

10 Manufacturers of Medical Technology: Servitization

in Regulated Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
Marcus Schröter and Gunter Lay

Part II Servitization by Manufacturers’ Operational Departments

11 Servitization as an Innovation Process: Identifying

the Needs for Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
Christian Lerch

12 Acquiring Customer Knowledge to Enhance Servitization

of Industrial Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Taru Hakanen, Minna Kansola and Katri Valkokari

13 Market Research for Servitized Offerings: A Case Study

in the Chinese Province of Guangdong . . . . . . . . . . . . . . . . . . . . 211
Christian Lerch and Matthias Gotsch

14 Strategies for Developing the Service Business

in Manufacturing Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
Jakob Ebeling, Thomas Friedli, Elgar Fleisch and Heiko Gebauer

15 Sourcing and Supplier Relationships

for Servitized Manufacturers . . . . . . . . . . . . . . . . . . . . . . . . . . . 247
Nicola Saccani and Marco Perona

16 Servitization and Process Interfaces . . . . . . . . . . . . . . . . . . . . . . 263

Martin Spring and Juliana Santos

17 Avoiding the Overhead Cost Trap: Towards an Advanced

Management Accounting Method for Servitized Firms. . . . . . . . . 277
Christian Lerch and Matthias Gotsch

18 Adapting Products for Servitization . . . . . . . . . . . . . . . . . . . . . . 295

Sabine Biege

19 The Impact of Servitization on Key Competences

and Qualification Profiles in the Machine Building Industry . . . . 315
Matthias Gotsch, Christiane Hipp, Petra Jung Erceg
and Nadezda Weidner
Contents vii

Part III Conclusions

20 Servitization by Sector and Manufacturers’ Operational

Departments: Lessons Learned . . . . . . . . . . . . . . . . . . . . . . . . . . 333
Gunter Lay
Authors

Tim Baines is Director at the Aston Centre for Servitization Research and
Practice. He is an international authority on servitization, and leads the work of the
Aston Centre for Servitization Research and Practice in this area. He has experi-
ence in a wide range of industrial engineering, technology management, and
manufacturing management disciplines, and works with the leading companies in
his field including Rolls-Royce, Caterpillar, Alstom, MAN, and Xerox. He is a
Chartered Engineer and a Fellow of both the Institution of Mechanical Engineers
and the Institution of Engineers and Technologists, e-mail: t.baines@aston.ac.uk
Sabine Biege studied Industrial Engineering and Management at the University
of Erlangen-Nuernberg. She obtained her Ph.D. in 2011 from the University of
Kassel with a thesis dealing with the effects of service-based business concepts on
the design of physical products of manufacturers. Dr. Biege has published articles
in journals such as European Management Journal, Journal of Service Manage-
ment, and Journal of Applied Management and Entrepreneurship. She is now
working for an internationally operating German truck manufacturer, e-mail:
sabine.biege@gmail.com
Daniela Buschak is a Research Associate in the Competence Center Industrial
and Service Innovations at the Fraunhofer Institute for Systems and Innovation
Research ISI, Karlsruhe, Germany. She studied business management with a
special focus on entrepreneurship at the University of Erlangen-Nürnberg. Her
major research interest is the design and evaluation of sustainable business models.
She is currently working on her Ph.D. titled ‘‘Service-based business model in the
manufacturing sector’’, e-mail: daniela.buschak@isi.fraunhofer.de
Giacomo Copani (Dr. Eng.) is the head of ‘‘Manufacturing Business Models’’
research at the Institute of Industrial Technologies and Automation (ITIA) of the
Italian National Research Council (CNR). He is research assistant at Politecnico di
Milano in the area of Industrial Marketing. His research activity is on manufac-
turing business models, industrial services, manufacturing sustainability, and
technology roadmapping, with specific focus on the industrial goods sector. He is
engaged in European and National research projects, and in supporting manu-
facturing research, and innovation policy definition at the national and European
levels, e-mail: giacomo.copani@itia.cnr.it

ix
x Authors

Jakob Ebeling is a Research Associate at the Institute for Technology Man-

agement at the University of St.Gallen (HSG). As group coordinator he was from
2011 to 2013 responsible for the topic ‘‘Industrial Services.’’ His research interest
is the development of the service strategy in manufacturing companies. He is
currently working on his Ph.D. thesis, e-mail: jakob.ebeling@unisg.ch
Bo Edvardsson is Professor and founding Director of CTF-Service Research
Center and Vice Rector, Karlstad University, Sweden and Professor II at NHH in
Bergen. His research includes service systems and service logic, service quality,
new service development and service innovation, customer experiences, and
transition from products to service. In 2008, he received the RESER Award
‘‘Commendation for lifetime achievement to scholarship’’ by The European
Association for Service Research and in 2004 The AMA Career Contributions to
the Services Discipline Award. He has written 12 books and 76 journal articles,
e-mail: bo.edvardsson@kau.se
Elgar Fleisch is Professor of Technology Management and Director of the
Institute of Technology Management at the University of St.Gallen (HSG). He is
also Professor of Information Management at the Swiss Federal Institute of
Technology Zurich (ETHZ). His research focuses on the economic impacts and
infrastructures of ubiquitous computing. He is co-chair of the global Auto-ID Labs
network, co-founder of several university spin-offs, and serves as a member of
multiple management boards and academic steering committees, e-mail:
elgar.fleisch@unisg.ch
Thomas Friedli is Professor of Production Management and Vice Director of the
Institute of Technology Management at the University of St.Gallen (HSG). His
research focus is the management of industrial enterprises. His area of expertise is
strategic operations management, management of industrial services, and opera-
tional excellence, e-mail: thomas.friedli@unisg.ch
Paolo Gaiardelli is Assistant Professor and Researcher at the University of
Bergamo, Department of Engineering. His research activities mainly focus on
servitization and product-service systems. In particular he is involved in studying
how to support automotive and truck companies to develop new customer value
propositions, operations, and value chains in order to uphold the product-service
business models. Paolo is also researcher of the ASAP Service Management
Forum, an Italian joint industry–academic initiative that promotes the culture and
excellence of service management through research projects, practice, education,
and technological transfer, e-mail: paolo.gaiardelli@unibg.it
Heiko Gebauer is an Associate Professor in Service Management, who leads the
Business Innovation group at the Environmental Social Science Department at the
Swiss Federal Institute of Aquatic Science and Technology (Eawag). He is also an
Adjunct Professor at the Karlstad University in Sweden (CTF–Service Research
Center). He has contributed to the research field on service business development
Authors xi

in manufacturing firms since 15 years through articles, books, presentations, and

consulting services, e-mail: heiko.gebauer@eawag.ch
Matthias Gotsch is a Senior Researcher in the Competence Center for Industrial
and Service Innovations at the Fraunhofer Institute for Systems and Innovation
Research ISI, Karlsruhe, Germany. He holds a Ph.D. from Brandenburg Technical
University of Cottbus for his research on innovation measurement in the knowl-
edge-intensive services industry and a German University diploma in Industrial
Engineering with focus on industrial business, technology, and innovation man-
agement from the University of Erlangen-Nürnberg. He has expertise in service
innovations, industrial services, and designing innovative service-based business
models and has contributed several papers and articles to the field of service
science, e-mail: matthias.gotsch@isi.fraunhofer.de
Anders Gustafsson is Professor of Business Administration in the Service
Research Center (http://www.ctf.kau.se) at Karlstad University, Sweden. Dr.
Gustafsson also holds a part-time position as a Marketing Professor at BI Nor-
wegian School of Business, Norway. He is conducting research on customer sat-
isfaction and loyalty, service innovation, and service infusion in manufacturing.
Dr. Gustafsson is an author of nine books and has published articles in journals
such as Journal of Marketing, Journal of Product Innovation Management,
Journal of Business Research, and Journal of Service Research, e-mail: anders.
gustafsson@kau.se
Taru Hakanen (M.Sc. Tech.) works as a Senior Scientist in the Business and
Technology Management competence center at VTT Technical Research Centre of
Finland. Her research interests relate to business networks and the development of
industrial and knowledge-intensive services. She is currently preparing her dis-
sertation on managing solution business and the development of integrated solu-
tions within business networks. She has had articles published in Journal of
Service Management and Industrial Marketing Management, e-mail:
taru.hakanen@vtt.fi
Christiane Hipp became dean of the faculty in 2011 and Professor for Organi-
sation, Human Resource Management and General Management at the Technical
University Cottbus in 2005. She received her diploma in Industrial Engineering in
1994 and her Ph.D. in Economics in 1999. From 1995 until 1999, Christiane Hipp
was Research Associate at the Fraunhofer Institute for Systems and Innovation
Research. She received her postdoctoral lecture qualification in 2005. Her areas of
interest include demographical change, service innovation, innovation strategies,
intellectual property, and innovation processes, e-mail: hipp@tu-cottbus.de
Petra Jung Erceg has been working at the Fraunhofer Institute for Systems and
Innovation Research ISI, Karlsruhe, Germany, for more than 10 years. Her
expertise in the management of value added services in manufacturing companies
covers nearly the entire process from strategy to operations, including controlling
and HR management. She studied Economics and has a Ph.D. from the
xii Authors

Department of Economics and Management at the Karlsruhe Institute of Tech-

nology, e-mail: petra.jung-erceg@isi.fraunhofer.de
Minna Kansola (M.Sc. Tech.) works as a Research Scientist at VTT Technical
Research Centre of Finland in the Business and Technology Management com-
petence centre. The main focus of her research includes business networks and
service development. She is especially interested in business-to-business relations
and inter-organizational collaboration in industrial SME networks. She has had her
articles published in several international and national publications focusing on
these topics, e-mail: minna.kansola@vtt.fi
Gunter Lay is a Senior Scientist at the Fraunhofer Institute for Systems and
Innovation Research ISI, Karlsruhe, Germany. He studied business administration
at the University of Mannheim and obtained his Ph.D. from the University of
Kassel. Dr. Lay’s recent research activities at the Fraunhofer ISI focused on the
servitization of industry. The results of this servitization research have been
published in journals such as Journal of Service Management, The Service
Industries Journal, Service Business, International Journal of Operations and
Production Management, and European Management Journal. Dr. Lay is the
author and editor of more than 20 books. Parallel to his work at the Fraunhofer ISI,
he was also a visiting professor at the University of Grenoble and a lecturer at the
Universities of Strasbourg, Hannover, and Kassel, e-mail: gunter.lay@outlook.de
Christian Lerch studied Economics Engineering at the Karlsruhe Institute of
Technology KIT and now works as a senior scientist at the Fraunhofer Institute for
Systems and Innovation Research ISI, Karlsruhe, Germany in the Competence
Center Industrial and Service Innovations. He has directed several research pro-
jects in the field of industrial services, analyzing the causes and effects of servi-
tization in manufacturing industries and its contribution to industrial change. He is
currently working on his Ph.D. thesis on managing the interactions of product and
service innovations in industrial companies. The results of his studies have been
published in national and international articles, e-mail: christian.lerch@isi.
fraunhofer.de
Howard Lightfoot is a Research Fellow at the Aston Centre for Servitization
Research and Practice. He works on the EPSRC—funded project, Gamification for
Servitization. He has held academic research positions at Cranfield, Loughbor-
ough, and Cambridge Universities previously. He has also held senior manage-
ment positions in industry (including Marconi, Volex, and several SMEs), e-mail:
h.lightfoot@aston.ac.uk
Nina Löfberg is a Doctoral Candidate at the Service Research Center (CTF) at
Karlstad University, Sweden. She is also a member of the Swedish Research
School of Management and Information Technology. Her research area includes
services in manufacturing firms, e-mail: nina.lofberg@kau.se
Authors xiii

Per Myhren is an Industrial Doctoral Candidate at the Service Research Center

(CTF) at Karlstad University, Sweden. He is also a member of the VIPP Industrial
Research College at Karlstad University. His research area includes service
innovations in industrial networks, e-mail: per.myhren@kau.se
Marco Perona is Full Professor of Industrial Logistics and director of the
Research Centre in Supply Chain and Service Management at the University of
Brescia, Italy. He does research, teaching, and transfer activities on operations
management, supply chain management, and service management. He is the
author of more than 100 scientific publications focusing on these topics. On the
same topics he has led more than 50 transfer projects with medium or large Italian
and multinational companies, in the manufacturing and services sector. He is
Chairman of the Board at Seggiovie Danterceppies SpA and IQ Consulting SrL;
board member at Advansys SrL and Vega SpA, and advisory board member at
Astelav SpA, e-mail: marco.perona@ing.unibs.it
Peter Radgen studied Mechanical Engineering at University of Karlsruhe
(Germany) and INSA Lyon (France). In 1996, he obtained his Ph.D. in Thermo-
dynamics from the University of Duisburg (Germany). From 2000 to 2007 he was
leading the efficient compressed air campaigns ‘‘Druckluft effizient’’ in Germany
and Switzerland, operated as public private partnerships between Government and
Industry. He was reader for Energy Efficiency at ETH Zürich, Switzerland from
2001 to 2007 and is the author of a large number of papers on energy efficiency
and energy services. Today, Dr. Radgen is working for E.ON, one of the world’s
largest investor-owned power and gas companies. He is heading E.ON’s devel-
opment and deployment activities on low carbon electricity generation technolo-
gies from fossil fuels, e-mail: peter.radgen@eon.com
Nicola Saccani is Assistant Professor and researcher at the University of Brescia,
Department of Industrial and Mechanical Engineering. Nicola is part of the ASAP
Service Management Forum (http://www.asapsmf.org), an Italian joint indus-
try-academic initiative that promotes the culture and excellence of service man-
agement through research projects, practice, education, and technological transfer.
His research interests include spare parts management, service supply chain
management, and servitization. He is the author of several scientific papers on
highly regarded journals and international conferences, e-mail: nicola.sacca-
ni@ing.unibs.it
Juliana Bonomi Santos (B.Sc., M.Sc., Ph.D.) acts as an honorary researcher of
Lancaster University Management School, in the UK, and of the GVCelog—
Research Centre for Logistics and Supply Chain Management, in Brazil. Before
dedicating herself to the academia, she worked in organizations like Unilever and
Itaú-Unibanco in the areas of supply chain management, process management, and
new services development. Juliana’s research explores operations management
issues in Expert Services and Integrated Solutions. More specifically, in these
contexts, she has looked at the management of delivery processes, of inter- and
xiv Authors

intra-organizational relationships, and of key productive resources, e-mail:

j.bonomisantos@lancaster.ac.uk
Marcus Schröter is Professor of Business Administration and Logistics at the
Bochum University of Applied Sciences. He studied Business Studies and Eco-
nomics at the University of Bremen and received his Ph.D. from the Technical
University of Braunschweig for research on the strategic management of closed-
loop supply chains. His main research interests are the design and assessment of
Industrial Product Service Systems and of sustainable business concepts. His
research articles are published in journals like European Management Journal, OR
Spectrum and Interfaces, e-mail: marcus.schroeter@hs-bochum.de
Lucrezia Songini is Associate Professor of Managerial Control Systems and
Strategic Management in Family Businesses at Eastern Piedmont University, Italy.
She is Adjunct Professor of Performance Measurement and Accounting and
Control in SMEs at Bocconi University, Milan. Since 1990, at Bocconi School of
Management she has been in charge of many executives and in company courses,
and research activities. She is the SIG chair of SIG (Special Interest Group)
Entrepreneurship of EURAM (European Academy of Management). She has
published on topics related to family business, sustainability, strategic cost man-
agement, performance measurement, after sales services, and servitization, e-mail:
lucrezia.songini@eco.unipmn.it
Martin Spring (B.Tech. (Hons), Ph.D.), Ph.D.) is Professor of Operations
Management in the Department of Management Science, Lancaster University
Management School. His research interests are in business-to-business services,
business model innovation, and operations strategy. He has had his articles pub-
lished in a variety of journals, including International Journal of Operations and
Production Management and Industrial Marketing Management. He recently
advised the UK Government’s Foresight unit on future manufacturing business
models and held an AIM Services Fellowship 2008–2011, e-mail:
m.spring@lancaster.ac.uk
Katri Valkokari (Dr.) works as a Senior Scientist at VTT Technical Research
Centre of Finland and as a team manager of the Value Network research team. She
has executed several development projects concerning business networks during
the years 2001–2010. In 2009, she completed her doctoral thesis on business
network development. She has written several international and national publi-
cations in the research areas of service business networks, collaboration, organi-
zational knowledge, and innovation management, e-mail: katri.valkokari@vtt.fi
Filippo Visintin is Assistant Professor of Service Management at the University
of Florence and research fellow at the Information-Based Industrial Services
Laboratory (IBIS Lab, http://www.ibis.unifi.it). He is the director of the Digital
Systems Section of the ASAP Service Management Forum (ASAP SMF, http://
www.asapsmf.org). His research and publications mainly concern product service
Authors xv

systems and healthcare operations management, e-mail: Filippo.visintin@unifi.it,

Filippo.visintin@gmail.com
Nadezda Weidner is a researcher in the Competence Center for Industrial and
Service Innovations at the Fraunhofer Institute for Systems and Innovation
Research ISI, Karlsruhe, Germany. She studied Sociology and Business Infor-
matics focusing on the management of high-tech innovations at the National
Research University—Higher School of Economics in Moscow, Russia, and
subsequently obtained a Master’s degree in Sociology with a focus on methods of
empirical research and economy and social welfare state at the University of
Mannheim, Germany. Currently, her research focuses mainly on quantitative
methods in social and economic research and data analysis in the field of inno-
vation research, e-mail: Nadezda.Weidner@isi.fraunhofer.de
Lars Witell is a Professor at the CTF-Service Research Center at Karlstad Uni-
versity in Sweden. He also holds a position as Professor in Marketing at Linköping
University in Sweden. He conducts research on service innovation, customer co-
creation, and service infusion in manufacturing firms. He has published papers in
scholarly journals, such as Journal of Service Research, Journal of Service
Management, and Journal of Business Research and Industrial Marketing Man-
agement, as well as in the popular press, such as The Wall Street Journal. Lars
Witell is responsible for the 8-year research program on Service Innovation for
Sustainable Business, e-mail: lars.witell@kau.se
Chapter 1
Introduction

Gunter Lay

Abstract Manufacturing industries traditionally develop and produce tangible

goods. Additionally, they provide their customers with services such as mainte-
nance and repair, in case these goods malfunction, or training so that their cus-
tomers’ employees can use these goods properly. In the past, these services have
not played a significant role in manufacturers’ strategies. Recently, however,
researchers and consultants are increasingly recommending that manufacturers
reassess the value of services. The term ‘‘servitization’’ has been introduced to
conceptualise the idea of manufacturers becoming service providers. This intro-
ductory chapter aims to confront the scientific servitization debate with recent data
regarding the industrial diffusion of servitization models. Through the juxtaposi-
tion of research and practice, it will become obvious that the practical diffusion of
servitization cannot keep pace with the increasing number of scientific publica-
tions focusing on servitization. The two objectives of this book relate to this gap
between research and practice: First, this book offers detailed analyses of manu-
facturing sectors that elucidate the options and barriers related to servitization
from a sector-based perspective. This sector-based approach allows for an indi-
vidual and in-depth examination of the relationships among manufacturers and
their clients by explaining leads and lags in servitization. Second, this book
examines all primary and supporting activities of manufacturers with respect to
manufacturers’ need to reshape their activities in order to cope with the challenges
of adopting a servitized business model. Such an examination will clarify the
extent of a comprehensive servitization approach. This book is organised based on
these two objectives and is thus divided into two parts. This introductory chapter
concludes by introducing the remaining chapters and their authors.

G. Lay (&)
Fraunhofer Institute for Systems and Innovation Research ISI,
Breslauer Straße 48, 76139 Karlsruhe, Germany
e-mail: gunter.lay@outlook.de

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_1, 1

 Springer International Publishing Switzerland 2014
2 G. Lay

1.1 Servitization of Industry: Origins and Definitions

The idea behind the servitization of industrial manufacturing can be traced back to
Levitt (1969). He reported a case concerning a salesman for tools, who stated:
‘‘Last year, one million quarter-inch drills were sold not because people wanted
quarter-inch drills but because they wanted quarter-inch holes’’. This example
effectively illustrates that customers need the product functionality of manufac-
turers’ products and the solutions that can be reached by applying such products
rather than the products themselves. Meeting this customer requirement implies a
transition for manufacturers from offering goods to providing functionalities
(through goods) and customer solutions.
Following this basic idea, the term ‘‘servitization’’ (Vandermerwe and Rada
1988) was coined in the literature in the late 1980s. Vandermerwe and Rada used
servitization as a synonym for offering packages of customer-focussed combina-
tions of goods, services, support, self-service and knowledge—with services in the
lead role. These authors regarded the servitization of business as a powerful new
feature of total market strategy that was being adopted by the best companies.
At the end of the 1990s, Wise and Baumgartner (1999) published their plea to
rethink manufacturing strategy, positing that instead of merely producing and
selling goods, ‘‘going downstream’’ and servicing the installed base of goods was
the new profit imperative in manufacturing.
Since that time, discussions addressing the concept of ‘‘industry as a service
provider’’ have steadily intensified in academic research and industrial practice.
Because manufacturers in developed countries are increasingly confronted with
new competitors in emerging countries who are catching up technologically, the
development of industrial services has been proposed as an approach for manu-
facturers to gain a competitive advantage (Vandermerwe and Rada 1988).
Although the industrial sector has traditionally offered customer services—for
instance, repairing delivered products or training customer personnel to apply such
products—those activities previously played a minor strategic role. Services were
considered a necessary evil that had to be offered and were not considered being a
strategic asset. With the advent of the servitization concept, however, services
were thrust into the centre of a service-dominant logic (Vargo and Lusch 2004).
After two decades, research on servitization in the manufacturing industry has
matured. Advancing little in early years, research on industrial service has
advanced exponentially in recent years (see, e.g., Baines et al. 2009). Scientific
publications addressing servitization have multiplied, highlighting this trend from
different angles (Lay et al. 2009):
• The marketing literature analyses the tendency towards servitization, as manu-
facturers have changed the focus of their business-to-business marketing models
from selling products to providing customer-oriented solutions (Grönroos 2000;
Stremersch et al. 2001; Davies et al. 2007).
1 Introduction 3

• Sustainability research addresses new business models, such as high-end types

of product-related services, which promise to save resources (Rothenberg 2007;
Tukker 2004; Mont 2002; Goedkoop et al. 1999).
• Literature targeting sector-specific evolution has established that in the
chemical (Mont et al. 2006; Eder and Delgado 2006) and energy industries
(Helle 1997; Sorell 2007), manufacturers have become service providers and
offer comprehensive solutions.
Because of the diversity of views and disciplines, different terminology is used
in the field of servitization research: integrated solutions, functional products and
product service systems illustrate some of the different aspects of servitization.
In the following sections, this introductory chapter aims to confront the scientific
servitization debate (Sect 1.2) with recent data about the industrial diffusion of
servitization models (Sect 1.3). Through the juxtaposition of research and practice,
it will become obvious that the practical diffusion of servitization cannot keep pace
with the increasing number of scientific publications focusing on servitization. The
two objectives of this book related to this gap between research and practice: First,
this book offers detailed analyses of manufacturing sectors that elucidate the
options and barriers related to servitization from a sector-based perspective. This
sector-based approach allows for an individual and in-depth examination of the
relationships among manufacturers and their clients by explaining leads and lags in
servitization. Second, this book examines all primary and supporting activities of
manufacturers with respect to manufacturers’ need to reshape their activities in
order to cope with the challenges of adopting a servitized business model. Such an
examination will clarify the extent of a comprehensive servitization approach. This
book is organised based on these two objectives and is thus divided in two parts.
This introductory chapter concludes by introducing the remaining chapters and
their authors (Sect 1.4).

1.2 State of the Art of Servitization Research

What do we know about the servitization phenomenon? Because services have

traditionally been offered by manufacturing industries, initial servitization research
aimed to categorise services provided by manufacturers to distinguish between
traditional services and new services related to servitization. The literature offers
various classification schemes: Frambach et al. (1997) distinguish among services
offered before, during or after the sale of the related product: ‘‘presale product
services’’ are designed to assist the customer in the purchase decision and stimulate
the adoption of an industrial product (such as by demonstrating the product and
offering a trial use of the product); ‘‘sale product services’’ are designed to help the
customer make use of the product (such as installation and training); and ‘‘postsale
product services’’ are designed to keep the customer satisfied with the purchase (such
as addressing product failures and performing regular maintenance inspections).
4 G. Lay

Boyt and Harvey (1997) describe a typology in which the features of six
characteristics are crucial for service classification: replacement rate, essentiality,
risk level, complexity, personal delivery and credence property. These charac-
teristics are the indicators that are decisive for classifying services into the ‘‘ele-
mentary service’’, ‘‘intermediate service’’ or ‘‘intricate service’’ types.
Mathieu’s classification allows for a distinction between a service that supports
the supplier’s product and a service that supports the customer’s action in utilising
the supplier’s product (Mathieu 2001). The first type consists of the traditional
product-related services of suppliers, such as supplying spare parts. The second
type includes more advanced services, such as ensuring that products function
properly or offering the use of products in a pay-per-use mode in lieu of outright
selling products.
The seminal typology presented by Tukker (2004) identifies three archetypal
categories of product-service systems: The first category, product-oriented ser-
vices, consists of consulting, maintaining and supplying consumables; such ser-
vices are aimed at selling products and represent the traditional approach to
offering services among manufacturing industries. The second category, use-ori-
ented services, includes leasing, sharing, renting and pooling products that remain
in the ownership of the manufacturer; in this category, the customer uses the
product and pays for its use. The third category, result-oriented services, represents
the most advanced service type. In this category, the customer does not pay for the
use of the product but pays for the results of its use; thus, the manufacturer of
capital equipment becomes its clients’ outsourcing partner and guarantees output
levels and qualities.
Despite (or perhaps because of) the multitude of typologies discussed above,
Nordin and Kowalkowski (2010) criticise the missing theoretical foundation—and
consequently the absence of a higher level of abstraction—in servitization
research. They regard as most problematic the various and thus differing typolo-
gies of industrial services and argue instead for a clearly drawn line between basic,
traditional industrial services and more advanced offerings of product-service
solutions. This criticism is ultimately levelled at analysing an imaginary—as
opposed to a real-world—phenomenon.
A second strand in the literature identifies the drivers of servitization. Many
scholars have tried to describe the different rationales manufacturing companies
have to servitize (see, e.g., Vandermerwe and Rada 1988; Frambach et al. 1997;
Wise and Baumgartner 1999; Mathieu 2001; Oliva and Kallenberg 2003; Gebauer
et al. 2005). Baines et al. (2009) made the first attempt to summarise and categorise
these rationales. Referring to their categories and to additional literature (Brax and
Jonsson 2009; Goh and McMahon 2009), we conclude that there are three main
motivations in servitization strategies: growth, profit and innovation (Fig. 1.1).
Realising growth (Mathieu 2001) with product-related services is frequently
described as a strategic rationale (Gebauer et al. 2005) and can be achieved by
stimulating product sales and by selling additional services. Both objectives are
fostered by gaining competitive advantages with services and by differentiation in
mature markets (Vandermerwe and Rada 1988; Frambach et al. 1997; Oliva and
1 Introduction 5

Fourth level Third level Second level First level

rationales rationales rationales rationales

Serving the
installed base
Increase
Assistence in Winning Product
exploiting high- new customers Sales
tech goods
Differentiation in Growth
mature markets
Increase
Entry in new Service
Protection markets
against Sales
imitation
Gaining compe-
titive advantages
Barriers for
competitors
market entry
Superior capacity
use
In-
creasing
Superior service Margins
margins Servizi-
Emerging tation
service markets Profit ratio-
Less price Stabi- nales
competition
lizing
Margins
Counter-cyclical
service-demand

Serving the Monitoring own Know-

installed base products in use ledge
improve
ment
Monitoring com- Innovation
petitor products
Increase
Intensified in
customer Customer de- demand
relations mand knowledge pull

Fig. 1.1 Hierarchy of servitization rationales

Kallenberg 2003). Setting barriers for competitors’ entry into markets, protecting
against imitation and helping to diffuse innovative products are means for man-
ufacturing companies to gain a competitive advantage and differentiate their
offerings through services.
The profit rationale behind servitization is frequently discussed in the literature
as a financial driver (Baines et al. 2009). On the one hand, profits from services can
be realised by increasing margins (Frambach et al. 1997): service offering can help
(1) increase capacity utilisation and therefore increase overall margins (2) open up
service markets with traditionally superior margins compared with product markets
and (3) avoid price competition in markets for mature products. On the other hand,
services can also help stabilise profits. Customers’ demand for products and services
are countercyclical. Thus, serving the installed base (Wise and Baumgartner 1999;
Oliva and Kallenberg 2003) can be a strategy to smooth capacity utilisations when
product sales are decreasing, thus diminishing the manufacturers’ vulnerability
(Mathieu 2001).
6 G. Lay

The innovation rationale until now has only scarcely been found in the litera-
ture. Enlarging service offerings is claimed to intensify customer relations
(Frambach et al. 1997; Mathieu 2001), and more contact with customers offers the
opportunity to learn more about customer demands. Thus, servitization may be
regarded as a means to foster the technology pull dimension of innovation. Brax
and Jonsson (2009) and Goh and McMahon (2009) argue that product-related
services are an important information source and that services feed information
back to manufacturers’ product development.
A third field of servitization research analyses the success factors of serviti-
zation. The joint assumption in the early literature was that servitization only offers
advantages to industry and society. Meanwhile, other scholars emphasise not only
the benefits but also the challenges of servitization. In their seminal work, Oliva
and Kallenberg (2003) note the tasks that manufacturing companies must master to
transition from product manufacturer to service provider. The most important
findings highlight that running a servitized manufacturer requires a specific
company culture, new organisational structures, adequate processes and personnel
qualifications that differ the product business setting. The absence of organisa-
tional changes for delivering services and the reluctance of managers in manu-
facturing companies to extend service business have resulted in many cases in the
so-called ‘‘service paradox’’. This phenomenon, which was coined by Gebauer
et al. (2005), describes the situation in which an investment to extend the services
business leads to increased service offerings and higher costs but, paradoxically,
not to correspondingly higher returns for all servitizing companies.
Fang et al. (2008) claim that pre-existing structures play a crucial role in the
success of servitization. The authors reveal that a transition into the service
business has a positive effect on firm value but with two constraints. First, a
positive effect is achieved only when the service business has reached a critical
mass. Second, the positive effect of services is tied to the synergetic potential of
services with the core business. Unrelated services do not have the spillover effects
that are a central contribution to covering the costs of the service business and that
make it possible to offer competitive service prices. Neely (2007, 2008) and Lay
et al. (2007) report that service development does not generally apply to all firms.
Their work indicates that differences in service success may be related to factors
such as industry sector, product life cycle, market power and company size.
Brax (2005) affirms that engaging in a service business also entails risks for the
companies providing services. Although services are regarded as a safe source of
revenue, turning into a service provider brings with it considerable challenges and
threats to business, particularly if services are considered to be secondary to the
product business in manufacturing companies.
Various challenges to servitization are discussed in the servitization literature. So
Auramo and Ala-Risku (2005) identify challenges for going downstream in the field
of supply and demand management. Galbraith (2002) indicates that it is necessary
for manufacturing companies to reorganise their businesses to deliver solutions.
Gebauer et al. (2010) suggest that matched environmental-strategy configurations
are essential to succeed with a chosen service strategy. Baines et al. (2009) argue
1 Introduction 7

that the servitization of a company presents challenges that relate to establishing a

service culture. Furthermore, Biege et al. (2012) identify the need for manufacturing
companies of tailor-made instruments to develop adequate processes. The literature
analysing why companies fail to realise the advantages of servitization provides a
list of management recommendations that are based on best-practice examples.
A fourth characteristic of servitization research is related to methodology. Case
study-based research is the most common methodological approach in the previous
literature (see, e.g., Auramo and Ala-Risku 2005; Brax and Jonsson 2009; Davies
et al. 2007; De Toni and Tonchia 2004; Johnson and Mena 2008; Kindström and
Kowalkowski 2009; Matthyssens and Vandenbempt 2010; Neu and Brown 2005;
Oliva and Kallenberg 2003; Sundin et al. 2009). This approach is appropriate for
an in-depth exploration of the mechanisms related to industrial services and for
building hypotheses about relationships between independent and dependent
variables. However, to gain valid and representative results and to test these
hypotheses based on large-scale observations, research strategies should be com-
plemented with survey-based analysis with a broader quantitative basis (Gebauer
and Kowalkowski 2012; Neu and Brown 2005).
Such quantitative analyses have been scarce until now, and they have specific
limitations. On the one hand, there are studies that are based on regional surveys
with focused objectives: for instance, Leo and Philippe (2001) examine export
offers in product-service systems based on the answers of 8,480 French companies;
Panesar et al. (2008) addresses barriers of servitization based on the answers of 62
Norwegian companies in the oil and gas industry; Antioco et al. (2008) analyse the
organisational implications of servitization based on the answers of 137 companies
from Belgium, the Netherlands and Denmark; and Davidsson et al. (2009) com-
pare the service orientation of the Swedish pulp and paper industry to the rest of
Swedish manufacturers based on a survey that included 364 respondents. On the
other hand, the literature provides quantitative insights into servitization by using
secondary data. For example, Fang et al. (2008) use the COMPUSTAT database,
and Neely (2007, 2008) bases his studies on the OSIRIS database. The service-
relevant information in both databases comes from company profiles and should be
explored by other methodologies, such as survey-based research (Fang et al. 2008).
Recently, quantitative analyses have been based on the ‘‘European Manufac-
turing Survey’’ (Lay et al. 2010; Bikfalvi et al. 2013; Dachs et al. 2013), which
provides a large and cross-national set of data on manufacturing industries and
their level of servitization. In the following paragraph, this database is used to
present a summary of the state of servitization in industry.

1.3 State of Servitization in Industry

Against the background of scientific research on servitization presented above, the

diffusion of servitization in industrial practice seems to be of interest. Data from
the ‘‘European Manufacturing Survey 2009’’ offer a representative view on
8 G. Lay

Table 1.1 Share of service sales in manufacturing industries

Median (%) Mean (%) Std Dev
Share of service sales 3.0 6.0 9.6
invoiced to customers
Share of service sales 5.0 7.1 9.2
included in product invoices
Share of service sales directly 10.0 13.0 14.5
and indirectly invoiced to customers
Source EMS 2009, N = 2,416

manufacturing industries and their level of servitization. The target groups of this
survey include manufacturing companies belonging to NACE (Nomenclature
statistique des activités économiques dans la Communauté européenne) rev. 1.1
No. 15–37, which have more than 20 employees. The survey questionnaires from
Austria, Croatia, Denmark, France, Finland, Germany, the Netherlands, Slovenia,
Spain and Switzerland comprise questions regarding to servitization. Thus, we can
employ these databases, which together provide 3,634 valid cases, to investigate
the state of service offering in industry, respectively 2,416 valid cases to analyse
the share of service sales in industry.
Measuring the relevance of services in European manufacturing industries by
analysing the indicator ‘‘share of service sales’’ leads to the results presented in
Table 1.1. The data presented in this table show that the mean share of sales
coming from services directly invoiced to customers is 6 %. The total value of
sales with respect to services (directly and indirectly invoiced) is 13 % on average.
These figures indicate that service offerings in the manufacturing sector rep-
resent a remarkable share of overall sales. Given that approximately every eighth
Euro of manufacturing industry turnover does not come from product manufac-
turing but from service provisions instead, services constitute a pillar of revenues
in this sector. Nevertheless, the data also indicate that service strategies in Europe
have not yet reached the level experienced by the frontrunners of servitization, as
has been reported in previous case studies.
Furthermore, the share of services that are not explicitly invoiced to customers
indicates that services are not explicitly proposed (nor considered) as an element
of value proposition to which a separate assessed value can be attributed. This
behaviour is also an indicator of the maturity of the service strategy pursued by
companies (Malleret 2006); companies charging services separately demonstrate
that they have made a strategic decision to incorporate services into their core
business, whereas companies pursuing bundling pricing generally view services as
product add-ons that facilitate product sales rather than a business product in itself.
In the service offerings of the manufacturing sector, the data show that the vast
majority of manufacturers appear on the market as service providers. In the EMS
sample, approximately 85 % of European manufacturing companies reported that
they offered at least one of the services on a predefined list. This finding confirms
1 Introduction 9

Table 1.2 Share of Type of service Share of

manufacturers offering manufacturers offering
services the service (%)
Design, consulting, project planning 69.0
services
Technical documentation services 56.8
Training customer personnel 48.5
Start-up assistance 44.9
Maintenance, repair services 39.8
Software development services 17.4
Operating services 15.0
Leasing, renting and financing services 12.1
At least one service from the list above 84.8
Source EMS 2009, N = 3,634

the theory that the distinction between the manufacturing and service sectors is
becoming increasingly blurred (Coombs and Miles 2000).
An in-depth analysis of services provided by the manufacturing industries
(Table 1.2) demonstrates that engineering services, such as goods designed spe-
cifically per customer request, consulting customers and planning projects, are the
most widespread types of services. More than two-thirds of interviewed manu-
facturers reported offering such services. Technical documentation services rank
second and are not far behind engineering services. Approximately half of all
manufacturers assist their customers in installing the delivered goods, which
includes training customers in using the goods or maintaining and repairing the
goods in case of malfunction or down time. Specific software solutions for the
delivered goods are offered by nearly one-sixth of all manufacturers in our sample.
Services such as operating the goods in customer plants to exhaust the potential of
such goods comprehensively, in addition to leasing, renting and financing services,
are generally the exception in terms of product offerings. These services are
provided by approximately one-seventh respectively one-eighth of the manufac-
turers answering the survey.
This empirical evidence confirms that the servitization of the manufacturing
industries is mainly limited to services that are closely related to products, such as
project design, consultation and planning, development, technical documentation
and maintenance. The services that imply the participation of the supplier in the
use phase of the product (such as operating the goods in a customer’s plant) or that
are far from the traditional core business (such as financial services or software
development) remain scarce.
These results confirm case-study research results indicating that servitization
mainly involves traditional product-related services and that the most advanced
types of services are still not offered on a regular basis, including those that require a
closer partnership with customers, a new attitude towards organisational changes
and a commitment to increase customer value beyond the boundaries of the
traditional offerings of the company (Mathieu 2001; Oliva and Kallenberg 2003;
10 G. Lay

Table 1.3 Share of service sales in manufacturing industries by sector

Sector N Share of sales from Share of service
services directly sales directly and
invoiced indirectly invoiced
Mean Std Mean Std
(%) Dev (%) Dev
Manuf. of food, tobacco (NACE 15, 16) 116 1.5 3.4 4.8 7.8
Manuf. of textiles, clothing, leather 71 3.6 9.4 10.2 16.1
(NACE 17, 18, 19)
Manuf. of wooden products 188 4.9 8.5 12.2 14.6
and furniture (NACE 20, 36)
Manuf. of pulp and paper, 118 4.4 5.7 11.6 13.8
printing (NACE 21, 22)
Manuf. of chemical products (NACE 24) 120 2.9 6.4 8.2 11.3
Manuf. of rubber and plastic products 188 5.9 11.2 12.7 14.5
(NACE 25)
Manuf. of glass, pottery, 124 3.6 5.7 10.3 11.0
mineral products (NACE 26)
Manuf. of basic metals (NACE 27) 66 3.6 6.9 12.2 16.6
Manuf. of fabricated metal 446 6.3 11.1 13.2 15.4
products (NACE 28)
Manuf. of machinery (NACE 29) 509 8.9 10.4 17.1 15.0
Manuf. of office machinery, etc. (NACE 30, 32) 88 9.3 14.9 15.8 16.1
Manuf. of electrical machinery etc. (NACE 31) 119 6.1 7.7 14.3 12.7
Manuf. of medical equipment, 183 5.9 6.6 13.8 12.5
precision instruments, optics (NACE 33)
Manuf. of motor vehicles, other transport 77 5.8 10.7 11.6 15.4
equipment (NACE 34, 35)
Total sample 2,413 6.0 9.6 13.0 14.5
Source EMS 2009

Lewis et al. 2004). Such advanced services are regarded as those that might guar-
antee a higher competitive advantage and, therefore, financial benefits (Mathieu
2001).
Regarding sector differences in the share of service sales, certain sectors are
clearly more advanced than others. In particular, the manufacturers of machinery
(NACE 29 to 32) and precision instruments (NACE 33) appear to be in the
forefront of achieving sales from services. Approximately 15 % of their turnover
results from services. Manufacturers of food and tobacco (NACE 15, 16) and
chemical products (NACE 24) lag behind. Mean service shares in total turnover of
5 and 8 %, respectively, underpin that services are less relevant in these sectors.
The numbers depicted in Table 1.3 also show that there are differences among
sectors in customer attitudes or sector cultures and their approach to regarding
services as products that must be paid for. Manufacturers of machinery (NACE 29)
and of office machinery and communication equipment (NACE 30, 32)—both with
high shares of service sales—have more turnover from billing services directly to
1 Introduction 11

their customers than manufacturers from other sectors. This result indicates that
service contracts are much more likely to accompany machinery and computer
sales than other investment goods.
Our results further indicate that types of services vary in their relevance by
manufacturing sector (see Table 1.4). The share of manufacturing companies
providing the surveyed services varies remarkably between manufacturing sectors.
Specifically, we obtained the following findings:
Engineering services, such as tailoring goods to customers’ demands, advising
customers or planning projects, appear to be handled as commodities by manu-
facturers of rubber and plastic products (NACE 25) and machinery (NACE 29, 30,
31, 32); Approximately 80 % of manufacturers from these sectors provide engi-
neering services. Engineering services also seem to be important in nearly all the
other manufacturing sectors; 60–70 % of companies in these sectors offer such
services. Only manufacturers of food and tobacco products (NACE 15, 16) are an
exception, with one-third offering such a service to their customers.
Technical documentation services proved essential for producers of machinery
(NACE 29, 30, 31, 32), medical equipment, precision instruments and optics
(NACE 33) and transport equipment (NACE 34, 35). All these goods require
accompanying technical documentation: thus, providing such a service is a pre-
condition for success in the corresponding markets, and from 68 to nearly 90 % of
manufacturers from these sectors provide these services. Manufacturers of wooden
products and furniture (NACE 20, 36); chemical, plastic and rubber products
(NACE 24, 25); and mineral, basic metal and fabricated metal products (NACE
26, 27, 28) offer technical documentation services in approximately half of the
cases observed. Technical documentation services seem to be less important in
textiles and clothing (NACE 17, 18, 19), pulp and paper products (NACE 21),
publishing and printing (NACE 22) and, again, food and tobacco products (NACE
15, 16). The share of manufacturers with technical documentation services varies
in these sectors from 21 to 34 %. These figures indicate that documentation for
these products is not as common as for other products, e.g., machinery. Customer
requirements and legislation have not previously forced manufacturers to focus on
these services.
Maintenance and repair services have sectoral importance not because of reg-
ulations or tradition but because of the price of manufactured goods and the
distinction between investment and consumer goods. Whilst consumer goods and
less expensive investment goods typically do not need much attention from the
manufacturer during their lifetimes, costly investment goods need regular main-
tenance and repairs if they breakdown. This difference induces different shares of
maintenance service providers in different industries. We found that approximately
78 % of the manufacturers of machinery (NACE 29) and approximately 71 % of
the producers of office machinery (NACE 30, 32) offer maintenance and repair
services. The manufacturers of wooden products and furniture (NACE 20, 36),
fabricated metal products (NACE 28), office machinery and communication
equipment (NACE 30, 32), electrical machinery (NACE 31) and transport
equipment (NACE 34, 35) provide repair services less frequently, with the
 12

Table 1.4 Share of manufacturers offering services by sector

Sector Share of manufacturers offering (%)
Design, Technical Software Leasing, Maintenance Operating
consulting documentation development financing and repair services
Manuf. of food, tobacco (NACE 15, 16) 33.3 21.3 0.7 7.8 6.4 6.7
Manuf. of textiles, clothing, leather (NACE 17, 18, 19) 61.4 34.2 1.8 8.8 22.7 11.0
Manuf. of wooden products, furniture (NACE 20, 36) 66.4 49.3 4.6 11.6 40.8 13.7
Manuf. of pulp and paper, printing (NACE 21, 22) 63.8 25.2 13.3 3.8 6.8 5.3
Manuf. of chemical products (NACE 24) 56.1 49.7 4.3 9.9 13.1 12.0
Manuf. of rubber and plastic products (NACE 25) 76.6 52.4 4.9 8.7 23.1 12.5
Manuf. of glass, pottery, mineral products (NACE 26) 64.4 48.9 1.1 4.0 17.3 8.9
Manuf. of basic metals (NACE 27) 69.1 41.8 3.6 1.8 10.5 8.6
Manuf. of fabricated metal products (NACE 28) 70.0 50.8 7.8 6.9 38.0 13.3
Manuf. of machinery (NACE 29) 84.6 88.0 42.7 27.2 76.9 26.3
Manuf. of office machinery and communication 81.0 73.5 50.4 13.7 51.7 20.9
equipment, (NACE 30, 32)
Manuf. of electrical machinery etc. (NACE 31) 80.2 76.6 29.1 5.5 48.5 18.2
Manuf. of medical equipment, precision instruments, 70.3 78.5 44.9 17.9 71.3 14.5
optics (NACE 33)
Manuf. of motor vehicles, etc. (NACE 34, 35) 69.0 68.1 16.5 19.0 53.6 23.4
Total Sample 69.0 56.8 17.4 12.1 39.8 15.0
Source EMS 2009, N = 3,634
G. Lay
1 Introduction 13

approximate share varying between 38 and 54 %. Hardly any such service offering
is provided in the food and tobacco industries (NACE 15, 16) and the pulp and
paper producing industries (NACE 21).
Software development is an industrial service that helps manufacturers exploit
the full benefits of computerised goods that are delivered to customers by offering
additional computer programmes. If the product does not feature a programmable
control unit or if the production process cannot be enhanced by customer data
transferred to the manufacturer, software development is not applicable as a
product-related service. Therefore, as would be expected, manufacturers of
machinery (NACE 29), precision instruments (NACE 33), and office machines and
communication equipment (NACE 30, 32) are in the forefront of offering software
development services. The control of these products depends on information
technologies and software. It is, however, astonishing that, in these sectors, the
share of companies offering software development services is only approximately
50 %. This finding indicates that many customers must rely on their own resources
or on the assistance of service providers from the service sector to obtain the
software required to run the products.
Financial services are relevant as product-related services of manufacturing
industries necessitated by customer difficulties in paying the investment costs of
purchased goods directly after delivery. Such problems may occur particularly
with investments in expensive machinery or equipment. Indeed, these three sec-
tors, manufacturers of machinery, medical and transport equipment, reported the
highest use of financial services. Approximately one-fourth to one-fifth of the
companies in these sectors includes financial services in their portfolio. This result
demonstrates that financial services—even if they are required—are predomi-
nantly provided by banks and financial companies to which customers apply
independently without the support or involvement of manufacturers.
Finally, operating services do not yet seem to have a clear sector focus. Only
manufacturers of machinery (NACE 29), transport equipment (NACE 34, 35),
office machines and communication equipment (NACE 30, 32) and electrical
machinery (NACE 31) reported significant shares of operating service offerings,
but these shares are only 26 % (machinery), 23 % (transport equipment), 21 %
(office machines) and 18 % (electrical machinery) which indicates that such ser-
vices are thus far of limited relevance.

1.4 Need for a Critical Review

Increasing awareness of the challenges linked to servitization in research (cf.

Sect. 1.2) and modest application of servitized business models in industrial
practice (cf. Sect. 1.3) indicate that a critical examination of the servitization
phenomenon is necessary. This book aims to contribute to providing such as
examination.
14 G. Lay

The following chapters address the discrepancies between early stage serviti-
zation euphoria and disillusioning case experiences and lagging overall diffusion
of servitization as a starting point. Following the assumption that recommenda-
tions for servitization must account for the heterogeneity of the manufacturing
sectors and the capabilities of the provider, this volume consists of two parts:
Part I contains articles from the following authors that analyse servitization with
respect to the specific characteristics of various manufacturing sectors (including
the options and barriers related to servitization) and presents a frameworks for
successful servitization of core sectors in European manufacturing industries.
Filippo Visintin from Florence University (Italy) illustrates the servitization
process in the information and communication technologies industry by presenting
the case of the photocopier manufacturer Xerox. Although photocopiers’ original
equipment manufacturers are highly servitized today, the servitization process in
this sector for the last 60 years has not followed a unidirectional path forward.
Visintin describes in detail the influences of technological developments, business
model innovations, regulatory changes and evolving customer needs on serviti-
zation strategies in this sector.
Tim Baines and Howard Lightfoot from the Aston Centre for Servitization
Research and Practice (United Kingdom) trace back the servitization of the aircraft
industry to the 1960s Bristol Sidley initiatives and the late 1990s ‘‘TotalCare’’
package of Rolls-Royce. They describe how these activities influenced the strat-
egies of other engine manufacturers (such as GE and Pratt & Whitney) and
develop a process model of an advanced service offering. Baines and Lightfoot
conclude that although aircraft manufacturers may be relatively advanced in their
adoption of servitization, many remain in the early stages of servitization.
Paolo Gaiardelli from the University of Bergamo (Italy), Lucrezia Songini
from Bocconi University (Milano, Italy) and Nicola Saccani from the University
of Brescia (Italy) present the state of the art of servitization in the automotive
industry. A service portfolio analysis for passenger car manufacturers and for truck
producers illustrates the extent to which product-oriented, use-oriented and result-
oriented services have penetrated sector offerings. Although Gaiardelli, Songini
and Saccani state a progressive diversification and enlargement of automotive
manufacturers service portfolio, they characterise the automobile industry as still
offering predominantly traditional product-oriented services.
Gunter Lay from the Fraunhofer Institute for Systems and Innovation Research
(ISI Karlsruhe, Germany) presents the results of his research on servitization in the
plant engineering industry. As plant engineering companies traditionally offer a
large portfolio of pre- and after-sales services, servitization is described as neither
a new nor an uncommon phenomenon in this industrial sector. Even advanced
services, such as plant operation services, are frequently provided by plant man-
ufacturers. Lay introduces different types of plant operation services offered by
plant engineering companies and discusses the sources of their value added.
Peter Radgen from E.ON, a major German power and gas company, presents
information about servitization in the air-compressor manufacturing industry. As a
result of unexploited energy saving potential in using compressors to produce
1 Introduction 15

compressed air, a business model was established several years ago involving
offering compressed air rather than selling compressors. Although it enjoys sub-
stantial ecological and economic advantages, Radgen estimates that this business
model has gained less than a one per cent share of all compressors sold in Germany.
Offering this business model requires high preliminary investments and qualified
engineers as providers. Thus, air compressor manufacturers hesitate to offer
compressed air contracts more intensively. Electric power companies are
becoming increasingly involved, however.
Giacomo Copani from the Institute of Industrial Technologies and Automation
(ITIA-CNR Milano, Italy) discusses servitization in the machine tool industry.
Based on quantitative and qualitative research at the European level, Copani
identifies several clusters of machine tool manufacturers with regard to servitiza-
tion. Although nearly all machine tool companies offer traditional product-oriented
services, advanced types of services could not be found to be diffused in practice to a
notable extent. A conservative cultural approach was recognised as a strong barrier
to servitization in this industrial sector.
Daniela Buschak and Gunter Lay from the Fraunhofer Institute for Systems and
Innovation Research (ISI Karlsruhe, Germany) analyse the diffusion of chemical
management services (CMS) in different product groups manufactured by chem-
ical industries. They conclude that CMS have only gained some relevance for
speciality chemicals, which only account for approximately one-fourth of total
chemical sales. Even in this product group, CMS is by far not the dominant
business model, and thus less than 0.1 % of overall chemical sales come from
CMS. Even if this share does not indicate a remarkable relevance of CMS for the
chemical industry in total, certain chemical niche markets, such as paints for
automotive coatings, are highly affected by this business model.
Lars Witell, Per Myhrén, Bo Edvardsson, Anders Gustafsson and Nina Löfberg
from the Service Research Center (CTF) at the Karlstad University (Sweden)
describe changes in the pulp and paper industry and the corresponding need for
servitization by manufacturers of machinery for this sector of manufacturing
industry. Although these conditions appear to be framed in favour of servitization,
the industry’s progress in servitization is limited. Many firms are attempting to
build new business models. However, to date, these attempts to change the busi-
ness relationships between capital equipment providers and pulp and paper man-
ufacturers have not replaced the traditional manner of doing business.
Marcus Schröter from Bochum University of Applied Sciences (Germany) and
Gunter Lay from the Fraunhofer Institute for Systems and Innovation Research
(ISI Karlsruhe, Germany) present their findings on servitization in the medical
equipment industry. They note that customers of medical equipment producers are
predominantly hospitals. Their shortage of financial means for investing into new
equipment hampers the diffusion of innovative medical devices. To overcome this
barrier, medical equipment manufacturers frequently offer to deliver their inno-
vative products to hospitals without payment and bill for every use. Even if this
business model requires prefinancing investments by equipment manufacturers
16 G. Lay

(which can result in diminished profits), it is regarded as the lesser evil compared
with shrinking markets.
Part II focuses on companies’ capabilities, which are necessary for a successful
servitization. By separating successful firms from less successful firms, the articles
in part II present concepts to adapt different departments of manufacturers to the
needs of servitization. These articles address the perspectives of strategic man-
agement, marketing, organisation, innovation, engineering, human resources, con-
trolling and networks. In detail, this third part comprises the following chapters.
Christian Lerch from the Fraunhofer Institute for Systems and Innovation
Research (ISI Karlsruhe, Germany) describes a case study-tested model to support
the process of developing product-service systems, including market analysis,
defining the value proposition, creating the value chain and the revenue model,
engineering the technical and organisational business environment and managing
accounting. This model integrates the market-driven and resource-driven activities
that are necessary to design a promising product-service-system.
Taru Hakanen, Minna Kansola and Katri Valkokari from VTT Technical
Research Centre of Finland test the applicability of key account management and
customer knowledge management methods for acquiring knowledge about cus-
tomers to enhance servitization. Based on qualitative exploratory research, their
article builds a bridge between the theoretical domains of servitization, key
account management and customer knowledge management and creates a new
understanding regarding why and how business-to-business customers purchase
industrial services.
Christian Lerch and Matthias Gotsch from the Fraunhofer Institute for Systems
and Innovation Research (ISI Karlsruhe, Germany) present marketing approaches
for collecting information about the demand for servitized offerings from foreign
markets. Based on a case study of the Chinese market, they develop a realistic
view of the feasibility of entering foreign markets with servitized products. In a
second contribution, they discuss new methodologies to adapt manufacturers’
accounting systems to servitization requirements. To avoid the trap of increasing
overhead costs when entering into servitized businesses, suitable management
accounting methods must be introduced in parallel to the servitization efforts.
Jakob Ebeling, Thomas Friedli and Elgar Fleisch from the Institute of Tech-
nology Management at the University of St.Gallen (HSG, Switzerland) and Heiko
Gebauer from the Environmental Social Science Department at the Swiss Federal
Institute of Aquatic Science and Technology (Eawag, Zurich, Switzerland) discuss
strategic options for the development of service businesses in manufacturing
companies. Four specific service strategies are introduced, and each provides an
attractive opportunity for product-oriented firms to reconsider and adapt their
position in the product-service continuum. To exploit the opportunities of each
strategic option, establishing an appropriate alignment among the external firm
environment, the service strategy and the factors of organisational design in the
servitizing manufacturer is considered necessary.
Niccola Saccani and Marco Perona from Brescia University (Italy) discuss the
‘‘make or buy’’ question for servitizing manufacturers. Which frame conditions
1 Introduction 17

favour establishing the capabilities required to develop and deliver the service
elements of their offerings in their companies, and which are supporting procure-
ment from suppliers? Additionally, they recommend models for shaping sourcing
and supplier relationships adequately to the needs of servitized manufacturing.
Martin Spring and Juliana Santos from Lancaster University Management
School (United Kingdom) focus on the adequacy of intra- and inter-firm interfaces
for a servitized manufacturer. Their article applies theoretical concepts of inter-
faces to servitization, and they argue that close attention to process interfaces
within and between firms is an important means of attenuating complexity that
may arise with servitization.
Sabine Biege, who works for a leading German automobile manufacturer,
summarises the results of her research on adapting manufacturing companies’
physical products to a servitized business model. She finds that only one-third of
manufacturers that offer both physical products and services try to adapt the
physical products to the needs of a servitized business. The propensity for adapting
physical products increases if servitized business models adopted by manufac-
turers are shaped such that all property rights of the physical product remain with
the manufacturer during the phase of use. Additionally, the increasing specificity
and innovativeness of the physical product increases the probability that manu-
facturers will modify their products for servitized business models.
Matthias Gotsch, Petra Jung Erceg and Nadezda Weidner from the Fraunhofer
Institute for Systems and Innovation Research (ISI Karlsruhe, Germany) and
Christiane Hipp from the Technical University Cottbus (Germany) discuss the
impact of servitization on employee competences and qualification profiles. They
analyse differences in the qualification structures of servitized and nonservitized
manufacturers and develop human resource strategies to qualify sales and after-
sales personnel for servitized business models.
All contributions to parts I and II present a detailed picture of servitization for
various sectors and servitization needs for manufacturers’ capabilities, processes
and departments and discuss practical implications for enterprises in manufac-
turing industries. Thus, depending on the type of activity and the sector of the
company, the book delivers highly differentiated support for manufacturers.
Because of this variety and richness of material, the concluding chapter does
not intend to summarise all the findings. This chapter merely intends to compile
and juxtapose several aspects discussed in previous chapters. Two questions are
addressed: (1) Are there any sector-specific frame conditions explaining differ-
ences in servitization that are documented in the statistics presented in the intro-
duction? If so, what conclusions can manufacturers draw from sector
characteristics for their servitization strategies? (2) Are there any linkages among
decisions in adapting different enterprise capabilities, processes and departments to
servitized businesses? What effects of adapting one business department to serv-
itization must be controlled in reshaping another? Finally, part III offers an outlook
on servitization in manufacturing industries, its prospective challenges and future
developments.
18 G. Lay

The authors contributing to this book represent leading servitization research

centres across Europe and have all published significant research findings on
servitization in refereed journals. Short biographical notes of all authors are pro-
vided in the heading ‘‘Authors’’.

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 Part I
Servitization by Sector
Chapter 2
Photocopier Industry: At the Forefront
of Servitization

Filippo Visintin

Abstract The photocopier industry is undoubtedly one of the forerunners of

servitization. The original equipment manufacturers (OEMs) of photocopiers, such
as Xerox, pioneered the implementation of servitized business models and, over
time, have developed considerable system-integration, application-development
and consulting capabilities. Today, these companies integrate print needs within
total ICT solutions and compete against system integrators, consulting firms and
software vendors in a large, diverse and growing document management market.
This chapter provides a state of the art analysis of servitization phenomenon in the
industry as well as a retrospective analysis of its evolution. The chapter ends with a
discussion of managerial implications.

2.1 Introduction

The photocopier industry is one of the forerunners of servitization (Finne et al.

2013; Matsumoto and Kamigaki 2013). The original equipment manufacturers
(OEMs) of photocopiers have profited from the sales of services and consumables
and pioneered the implementation of servitized business models that are now
common practice in many other industries. For example, some of the challenges
that photocopier OEMs have faced well in advance of many other manufacturers
include the sale of the products’ usage instead of the products themselves, the
adoption of pay-per-output (pay-per-page) pricing models and the delivery of
integrated solutions and outsourcing services (Finne et al. 2013; Visintin 2012).
Today, formerly analogue photocopier OEMs produce connected and digital
multifunction devices. Under the heading of managed print services, they also offer

F. Visintin (&)
IBIS Lab, Department of Industrial Engineering, University of Florence,
Viale Morgagni 40 c/o Centro Didattico Morgagni, 50134 Florence, Italy
e-mail: filippo.visintin@unifi.it

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_2, 23

 Springer International Publishing Switzerland 2014
24 F. Visintin

integrated solutions that claim to optimise the customer’s document-related pro-

cesses and infrastructure. They compete against (formerly) printer OEMs in a
consolidated global multifunction product market. In addition, they compete
against system integrators, consulting firms and software vendors in a large,
diverse and growing document management market, roughly estimated at over
$130 billion in 2012 (Xerox 2012).
The photocopier industry thus undoubtedly represents an interesting setting for
studying servitization. Indeed, Xerox Corporation, one of the industry leaders, is
considered the epitome of servitized enterprise. It is cited as a case example in a
large number of scientific publications (Baines et al. 2007; Baines et al. 2009a, b;
Geum et al. 2011; Park et al. 2012; Lightfoot et al. 2011; Martinez et al. 2010;
Gebauer et al. 2010; Santamaría et al. 2012; Vandermerwe and Rada 1988; Mont
2004; Rapaccini et al. 2013).
This chapter provides a state of the art analysis of servitization phenomenon in
the photocopier industry as well as a retrospective analysis, extending 60 years
into the past, of its evolution. The chapter is organised as follows. The next section
presents the most important evolutionary steps that characterised the industry and
their impact on the companies’ service strategies. Chapter 3 explores the most
important supply- and demand-related factors driving the ongoing industry
expansion into service. Chapter 4 illustrates the most important features of the
OEMs’ offerings. Chapter 5 presents the industry ecosystems, Chap. 6 shortly
illustrates the case of Xerox and, finally, Chap. 7 presents the conclusions.

2.2 Photocopier Industry Servitization: A Sixty-Year

Journey

Today, photocopier OEMs are undoubtedly highly servitized. In recent years, they
have developed considerable system-integration, application-development and
consulting capabilities. Furthermore, they have responded to the hardware market
crisis by consolidating services and solutions and by integrating print needs within
a total ICT offering (Visintin 2012). The industry servitization process, however,
has not followed a ‘forward-unidirectional’ (Finne et al. 2013) path. Indeed, in the
last 60 years, technological development, business model innovations, regulatory
changes and evolving customer needs have alternately boosted and inhibited this
process. These evolutions are briefly described in the following subsection.

2.2.1 The Birth of the Modern Photocopier and of the First

‘Servitized’ Business Model

Photocopier OEMs have always considered the provision of services and supplies
as low-risk and long-term sources of revenues (Sampson 2001). Photocopiers
2 Photocopier Industry: At the Forefront of Servitization 25

feature a large amount of mechanical parts, which more or less ensures that they
will inevitably suffer from some form of mechanical failure. This, in turn, creates a
stable demand for maintenance services, adding to the demand for supplies (ink
and paper) which automatically originate from the product utilization.
Indeed, even in the 1950s, most of the photocopier OEMs had already adopted a
‘razor and razor blades’ business model (Finne et al. 2013). They applied a modest
mark-up on their products’ cost to keep the selling price low, ensure the product is
affordable and expand the installed base. After the customers had purchased the
product, the photocopier OEMs sold service parts and supplies at a much higher
margin. Given the expensive papers and different types of supplies required by
those early copiers, the aftermarket ensured very high, stable and profitable rev-
enue streams (Chesbrough and Rosenbloom 2002).
The photocopier industry, however, was also one of the first industries in which
the ‘razor and razor blades’ business model, based on the provision of product-
related services (Tukker 2004), was challenged by an innovative and more serv-
itized business model (Finne et al. 2013) rooted in use-oriented rental services
(Tukker 2004). Such a business model was developed in the late 1950s by Haloid
Company (as Xerox was called then) to bring the first modern photocopier (Xerox
914 model) to market (Fig. 2.1).
In the late 1950s, Haloid Company wanted to commercially exploit the patent,
held by Chester Carlson, relevant to the electrophotography process (subsequently
renamed xerography, which literally means ‘dry writing’) (Owen 2004). Contrary
to the mimeograph process, which was the previous industry standard, the elec-
trophotography process produced dry copies instead of wet copies, i.e. it allowed
for the use of cheap plain paper instead of expensive chemically treated paper. The
first device implementing the electrophotography process was the Xerox 914. In
addition to the use of plain paper, the Xerox 914 model carried several other
advantages. It was much easier to use, more productive, produced higher quality
reproductions and carried no risk of damaging the original document (Owen 2004).
However, such technological superiority came at a price. The Xerox model 914, in
fact, was estimated to cost $2,000 to manufacture, while the price of the photo-
copiers sold by competitors was around $300 at the time (Chesbrough and
Rosenbloom 2002). Product commercialisation was thus a major challenge.
Eastman Kodak, General Electric and IBM all declined Haloid’s proposal to
establish a partnership to bring the product to market. Even these experienced
competitors thought that the superior performance of the Xerox 914 model did not
justify an estimated price approximately ten times higher than that of its compet-
itors (Chesbrough and Rosenbloom 2002). To overcome the problem of the selling
price, Haloid eventually decided to abandon the dominant ‘razor and razor blades’
business model and began leasing its 914 model at the price of $95 per month
(Chesbrough and Rosenbloom 2002). Such fixed monthly payments covered all the
required services and support—which were delivered exclusively by Haloid—as
well as the cost of the first 2,000 copies per month. Additional copies were charged
separately at 4¢ per copy. Such a pricing model was indeed very attractive. At that
time, the average number of copies per machine was approximately 3,000–4,000
26 F. Visintin

Fig. 2.1 Xerox 914 the first

modern photocopier (1959)

per month; the cost of the chemically-treated paper required by the competitors’
copiers was around 15¢ per sheet (Chesbrough and Rosenbloom 2002). Finally, to
reduce customers’ scepticism regarding this new and innovative offering, Haloid
allowed cancellation of the contract with just 15 days’ notice (Chesbrough and
Rosenbloom 2002).
By employing such a solution, Haloid was able to make the product affordable
for a much larger number of customers. This, in turn, led to the birth of a fast-
growing and profitable aftermarket in which competitors were completely locked-
out. Between 1959, when the Model 914 was introduced, and 1961, Haloid nearly
doubled its revenues (Chesbrough and Rosenbloom 2002). As the result of this
extraordinary success, the company changed its name to Xerox Corporation in
1961. During the course of the model 914 lifecycle, Xerox manufactured more
than 200,000 units and its revenues grew from $30 million in 1959 to $2.5 billion
in 1972 (Chesbrough and Rosenbloom 2002). In 1972, the company controlled
60 % of the photocopier market and 95 % of the plain paper photocopier business
(Kearns and Nadler 1992). This dominance, however, led the Federal Trade
Commission to issue an antitrust suit against Xerox in January 1972 for alleged
monopolization of the office photocopier market (Tom 2001). As a result of this
anti-trust suit, Xerox was forced to take the following actions in 1975: (i) license
the company’s entire patent portfolio for a small royalty; (ii) offer the model 914
(also) for sale; and (iii) allow competitors to provide services and toners for its
products (Tom 2001; Chesbrough and Rosenbloom 2002). These changes implied
a return to the pre-1959 ‘razor and razor blades’ business model. A formerly
integrated solution was unbundled and products and services were commercialised
separately in a market in which Xerox was no longer a monopolist (Finne et al.
2013).
The first companies to enter this newly created market were IBM and Kodak
(Markides 1999). Both of these US-based companies challenged Xerox in the
(high-end) corporate reproduction market, the segment where Xerox was
undoubtedly stronger. This segment was characterised by critical, high-speed and
2 Photocopier Industry: At the Forefront of Servitization 27

complex-to-repair products whose unavailability could create significant problems

for customers. As a result, customers were less sensitive to the price of mainte-
nance services, which were indeed overpriced. The strategy adopted by IBM and
Kodak involved conquering market share by offering better products and/or better
maintenance services at lower prices (Ortt 2007). However, their strategy failed,
mainly because of the huge loyalty of Xerox’s corporate customers (Markides
1997). Nonetheless, between 1976 and 1982, the U.S. industry’s global market
share fell from 82 to 41 %. Such a dramatic drop was due, in large part, to the
success of Japanese companies (Rogowsky 2009) and their ‘service-free’ photo-
copiers (Boulton 1996; Johnstone 2004).

2.2.2 The Growth of Japanese Competitors

and the ‘Service-Free’ Office Photocopier

The growth of Japanese competitors, such as Canon, Ricoh, Sharp, Minolta,

Panasonic, Toshiba and Konica characterised the second half of the 1970s and the
1980s. Contrary to IBM and Kodak, the Japanese did not challenge Xerox in the
high-end market. Their strategy, instead, was to first gain market share in the low
end of the market, a segment where Xerox was weak, and then move up. Xerox
machines were big, complex and tended to fail quite often (Johnstone 2004),
characteristics that Xerox exploited by charging for service calls. Japanese OEMs
realised that in order to challenge Xerox, they had to produce smaller, cheaper and
virtually ‘service-free’ photocopiers.
Canon was probably the most successful company in implementing this strat-
egy. Canon’s revolutionary intuition was to include all the photocopier’s key
components—drum, charger, toner and cleaner—in a replaceable cartridge
(Johnstone 2004) (Fig. 2.2). Such a solution made it possible, even for unskilled
people (and thus also for customers), to replace spare parts and perform simple
repairs (Ortt 2007).
A simplified design, coupled with the application of innovative production
techniques, such as lean manufacturing, cell production and just-in-time inventory
practice allowed Canon to produce extremely affordable and reliable products
(Boulton 1996; Rogowsky 2009). Canon (as well as the other Japanese OEMs) was
able to cut costs on warehouse facilities, shorten product lead times, assemble
products that had fewer manufacturing defects and establish production lines in
less time than their counterparts in the U.S. (Boulton 1996). In addition, to weaken
Xerox’s customer loyalty, Canon also developed an innovative distribution and
service strategy. Instead of establishing a direct sales and support channel, Canon
distributed its products in each country through a capillary network of small office
products dealers and retailers (Markides 1999). These local dealers were also
responsible for providing service and support (Boulton 1996), which, given the
simplified product design, was not a daunting task.
28 F. Visintin

Fig. 2.2 Canon PC-10, the

world’s first personal
photocopier with replaceable
cartridges (1982)

Hence, while Xerox emphasised the high productivity of its machines, the
competence of its direct sales force and its superior service, Canon concentrated on
the affordability, reliability and ease of use and repair as its differentiating features
(Markides 1999). With a growing product base, Japanese competitors moved up
market into mid-volume machines. By 1985, Canon had become the world’s
leading photocopier company. Xerox attempted, without success, to enter this mass
market, but in 2001 decided to stick to the high-end market segment (Ortt 2007).
With the advent of the personal office photocopier, the relative strategic
importance of services in the industry, on average, decreased. Companies still used
the ‘razor and razor blade’ business model, but most of their profits came from the
sale of cartridges as services were residual (Ortt 2007). Indeed, services remained
an important source of profit and differentiation in the high-end segment. For these
complex and critical products (production printers, wide format equipment, etc.),
customers still needed highly skilled representatives to be dispatched within a few
hours of notification and were willing to pay for their services (Visintin 2012).

2.2.3 The Digitisation of the Document Workflow

and the Shift Towards the Solutions Business

In the 1990s, another major product innovation set the stage for a new shift towards
more servitized business models. During this period, analogue products were
replaced with digital products (Visintin 2012). With analogue technology, the
document/image is projected directly onto a photosensitive drum through an
optical system, without being digitised. With digital technology, a light coming
from a copy lamp is reflected by the document and passed through the lens to the
charged coupled device (CCD) sensor. The CCD sensor converts the photo signal
into an electrical signal (digitisation). Once the image scanning is completed,
electrical signals are converted back into photo signals and the image is subse-
quently printed. Among other benefits (i.e. an increase in the machine’s reliability),
digital technology allows copiers to digitise, save, store and distribute the image/
document being scanned, thereby creating a digital workflow. To exploit the
opportunities arising from the digitisation of document workflow and from the
2 Photocopier Industry: At the Forefront of Servitization 29

diffusion of network technologies, copier manufacturers started to equip their

devices with controllers. Controllers allow connection to a network and, through
the network, to different terminals from which the photocopiers can be operated
(Visintin 2012). Former analogue photocopiers thus became connected digital
multifunction devices (Fig. 2.3) combining the functions of a photocopier, printer,
scanner and fax machine into a single device (Matsumoto and Kamigaki 2013).
The digitisation of the photocopier had two major implications. First, it
increased the number of competitors in the market. Companies traditionally pro-
ducing smaller and cheaper printers, such as HP, Samsung and Lexmark, started to
produce multifunction devices as well (Matsumoto and Kamigaki 2013; Rogowsky
2009). Second, these multifunction devices became part of the customer ICT
infrastructure and, as such, enablers of several processes (printing, scanning,
archiving, mailing, faxing, etc.). Both of these developments increased the
momentum of the servitization of the whole industry. On the one hand, the
hardware market became more price-sensitive. On the other hand, companies
realised that in order to bring more value to customers, establish long-term rela-
tionships and increase profits, they would need to expand their offerings from just
selling and maintaining hardware products to providing solutions ensuring the
optimization of the processes that these products enabled (Visintin 2012).
Xerox Corporation was the first company to offer this type of solution for the
U.S. market in the second half of the 1990s (Matsumoto and Kamigaki 2013).
Since then, external and internal stimuli have encouraged almost all the major
photocopier OEMs to venture into the solution business. Delivering solutions,
however, is far from simple. It requires implementing a new, more customer-
oriented, relationship-based business model (Spring and Araujo 2009; Baines et al.
2009c). It also requires the manufacturer to develop new competences (Oliva and
Kallenberg 2003; Davies et al. 2007; Storbacka 2011; Paiola et al. 2013). Indeed,
some OEMs have succeeded in the transition while others are still transitioning
and/or lagging behind (Weilerstein and Drew 2012; Le Clair 2012; Fernandes and
Longbottom 2012b; Muscolino 2011). The next section analyses the forces that are
driving this ongoing transition.

2.3 Supply and Demand-Related Factors Influencing

the Ongoing Servitization of the Photocopier Industry

Photocopier OEMs are increasingly servitizing their business models in response

to the following factors: (i) new and untapped customer needs; (ii) a flat hardware
market and (iii) decreasing print volumes.
30 F. Visintin

Fig. 2.3 a Xerox Printer 100, the world’s first machine incorporating print and copy functions
(1987). b HP LaserJet IIISi, the world’s first networked printer (1991). c Canon GP the world’s
first ‘true’ multifunction device (1994)

2.3.1 New and Untapped Customer Needs

Nowadays, many organizations use a vast amount of photocopiers, printers, fax

machines and scanners. Typically, these devices are sourced from different vendors
at various points in time in order to meet the contingent needs of different
departments or individuals. This fact, especially for large organizations, determines
the proliferation of redundant and/or outdated equipment, unmanaged document
workflows and the burden of dealing with many different types of devices and
service contracts. It, in turns, causes ever-growing indirect administrative and
logistic costs, paper and energy wastages as well as security and environmental
concerns. The printing processes are thus increasingly becoming non-core critical
processes. In fact, they consume a considerable amount of resources and have a
strong influence over other core and non-core processes. Companies, however,
usually lack the resources and competences needed to manage printing process
efficiently and often prefer to divert their limited resources to core activities. As a
result, they are usually willing to resort to external suppliers. The needs that these
suppliers are expected to satisfy can be synthesised as follows.
Reduce the printing environment cost Companies are increasingly more aware
of the direct and indirect costs driven by their copying/printing devices. Hence,
they need help to quantify and reduce these costs.
Increase control Companies need a visible record of their printed output for
accounting and control purposes. On the one hand, they need to allocate accurately
the printing costs to specific departments or cost-centres. On the other hand, they
need to control the print volume and enforce printing restrictions. The control issue
is even more complex for those companies adopting ‘bring your own device’
(BYOD) policies. These policies allow employees to bring personally owned
mobile devices (laptops, tablets and smart phones) to their workplace where they
can use them to access privileged company information and applications. These
policies expand the printing environment to mobile and home workers, thereby
driving the need for solutions that allow users to print from mobile devices and
companies to control such printing.
2 Photocopier Industry: At the Forefront of Servitization 31

Increase security Customers need to increase the security of their printing

processes. Once documents are printed, they are nearly impossible to track.
Consequently, documents left unattended or unclaimed in a printer output tray can
represent a major security risk. The data temporarily stored in a multifunction
device’s hard drive can increase security concerns as well. In certain cases, this
need for secure printing is driven by the necessity to comply with directives such
as the Health Insurance Portability and Accountability Act (HIPAA), the Markets
in Financial Instruments Directive (MIFID) and the Sarbanes-Oxley Act, among
others. All of these directives contain security requirements associated with the
document output activities.
Increase environmental sustainability Customers need to increase the envi-
ronmental sustainability of their business; hence, they need help to define and
implement responsible printing polices and to assess and certify the benefits of
these policies (e.g. in terms of carbon footprint).

2.3.2 Flat Hardware Market

The printing hardware market is characterised by decreasing sales, falling prices and
shrinking margins (Brewer 2009), especially in EMEA and in the U.S (IDC 2013;
Shah et al. 2013). Throughout 2012 the EMEA multifunction market experienced a
12 % unit decline (Shah et al. 2013); similarly, the U.S. experienced a 9.8 unit
decline (Kim et al. 2012). Device saturation and reduced consumer demand owing
to the global economic recession in 2008 have led to declining global spending on
hardware (Rogowsky 2009). Recovery to pre-crisis levels is expected to be slow
(Rogowsky 2009; Brewer 2009). Moreover, the commoditization of hardware is
creating unprecedented price pressure and constantly shortening the lifecycle of
new products. This, in turn, calls for a regular flow of new models and types, which
have to be attractively priced. The search for scale benefits and the need to develop
product platforms that serve as a basis for bringing new products to market as fast as
possible is evidenced by the rapid consolidation of the industry (e.g. in the last two
decades, Ricoh acquired Savin, Gestetner, Lanier, Rex-Rotary, Monroe, Nashuatec
and IKON Office Solutions; similarly, in 2010, Canon acquired Océ, the largest
European manufacturer of printers).

2.3.3 Decreasing Print Volumes

In the past, the lower margins associated with hardware sales were tolerated in
light of the substantial profits coming from the sales of consumables and break-fix
services. Unfortunately, print volumes, which drive the demand for consumables
and break-fix services, are shrinking as well. According to IDC, in 2011, the total
number of printed pages (3.09 trillion pages A4) decreased by 1 % compared to
32 F. Visintin

2010 (IDC 2012). In the same fashion, Gartner estimates a reduction in printed,
copied and faxed pages of approximately 50 % during the past six to seven years
(Weilerstein and Drew 2012). This decrease is certainly due to the digitisation of
document workflows. However, it has been accelerated by other factors, including
(Weilerstein and Drew 2012) the following: the diffusion of larger displays;
environmental initiatives undertaken by individuals, enterprises and governments;
generational turnover (workers who grew up with the PC and the Internet print less
than those who did not) and the diffusion of tablets and smartphones.

2.4 The Photocopier Industry’s Integrated Solutions:

The Managed Print Services

All the most important photocopier OEMs have responded to the developments
presented in the previous section by consolidating services and solutions (Visintin
2012). Managed print services (hereafter MPS) are the industry buzzwords used,
quite often inappropriately, to identify the integrated solutions built around mul-
tifunction devices. These solutions are indeed very heterogeneous. They span from
simple bundles of multifunction devices plus a maintenance contract to complex
enterprise-wide solutions encompassing a variety of hardware, software compo-
nents and a full set of services. By 2013, MPS are expected to account for 35 % of
total revenues in the global multifunction product industry (Kidambi 2013).
In general, MPS can be defined as solutions aiming at optimizing and managing
the customers’ document output environment. Such an environment includes
photocopiers, scanners, printers and fax machines, as well as their consumables
and outputs, the processes that these devices enable (mailing, scanning, copying,
faxing, archiving, distributing, sharing) and the people involved in these processes.
The document output environment can be limited to the office environment or
extended to mail/print rooms, corporate reprographics departments, datacentres, as
well as home workers and mobile workers. With MPS, the supplier takes on the
responsibility to supply the hardware equipment (which may replace or add up to
the hardware that the customer already owns) as well as the software and services
required to operate them efficiently.
MPS are usually regulated by multiyear contracts. Some contracts include
guarantees of certain outcomes and oblige the customer to act according to the
supplier’s policies. Depending on the type of contract, customers can purchase,
rent or lease the hardware. In any case, customers are usually charged a pay-per-
page fee that covers the supplies, the service and the cost of the equipment. Certain
contracts require a minimum number of pages per device per month, with unused
pages forfeited. Other contracts do not set a monthly minimum, instead charging
customers a price per page that decreases as the print volume increases. However,
when no limits are set, customers are still charged a flat fee (e.g. a per-device fee
or a per-seat fee). Sometimes, services are billed separately, applying a monthly or
quarterly flat fee. Historically, MPS customers are large enterprises. Nonetheless,
2 Photocopier Industry: At the Forefront of Servitization 33

the most important MPS providers are developing specific downsized offerings for
small and medium business as well (Fernandes and Longbottom 2012a).
The MPS solution is comprised of several hardware, software and service
‘components’. These components are briefly described hereafter.

2.4.1 Hardware

Hardware usually includes office printing and scanning devices (typically multi-
function devices). In certain cases, it can also include production printing devices
(those used in mail/print rooms and corporate reprographics departments) as well
as wide format (larger than A3) devices.

2.4.2 Software

Software includes machineware, utilities and applications (Visintin 2012).

Machineware provides the minimum functionality to operate the hardware in
compliance with common market practices. Utilities enable end-users to utilise the
machine (e.g. universal location-aware drivers). Finally, applications add value
and/or extra functionalities to the customer and extend the usage options of the
customer. These extended functionalities include the following: (i) Pull and secure
printing, i.e. the capability to hold print jobs on a server and release them only
when the user authenticates herself at a printer using a pin code, smartcard or
fingerprint reader. The job can be released at any printing device supporting this
feature. Print jobs can also be encrypted before being released. (ii) Mobile
printing, i.e. the possibility to print from tablets and smartphones using a mobile
application or via email. (iii) Usage tracking, i.e. the possibility to track the
utilisation level of each device as well as the printing volumes and behaviours of
individuals, departments or other workgroups. (iv) Rules-based control, i.e. the
possibility to control the attributes (type, paper size, media type, colour, definition
and duplexing) of the documents that can be printed from each account, and/or the
possibility to automatically delete, hold or reroute print jobs to the most suitable
printer (e.g. a cheaper black and white printer for a high volume text-based doc-
ument or the print room production printer for more complex jobs).

2.4.3 Services

Services can be classified as follows: (i) assessment (ii) design (iii) implementation
(iv) education (v) improvement (vi) support (vii) environmental (viii) financial and
(ix) business process management.
34 F. Visintin

i. Assessment services These services are intended to identify the current

number of devices installed at the customer’s site and estimate the volume
of pages printed. In the simplest situations, these data are self-reported by
customers. When conducting a more thorough assessment, the supplier
maps the number of devices installed at each floor/building and surveys the
end-users to understand what is being printed, on what type of media and by
whom. In addition, the supplier analyses the document workflows and the
document environment infrastructure. Such an analysis can also include
environmental and security risk assessments. In-depth assessment could
require up to three months and the utilization of dedicated software.
ii. Design services Based on the assessment, the supplier defines the hardware,
software and services needed to achieve agreed on performances. Depending
on the case, optimization services can also include a thorough reengineering
of the document-related processes. The solution designed typically consists
of an upgraded fleet with a new layout and will likely involve new printing
and imaging devices, new software and new printing policies.
iii. Implementation services These services allow the deployment of the designed
solution. New devices and software are installed and existing devices are
redeployed or removed. The whole process is carried out following a deploy-
ment plan, with precise deliverables and milestones agreed on with the customer.
iv. Education services These consist of training activities ensuring that end-
users (and, in general, all the stakeholders) have the necessary skills and
knowledge to benefit from the implemented solution. Attendees are taught
how new devices and software applications work, how to maximise pro-
ductivity and reduce waste and how to ask for support. Education programs
can also address environmental issues.
v. Improvement services These include the control and fine-tuning of the
document output environment over time to meet the agreed upon service
level agreements or key performance indicators. They can also include
installing, moving, adding, changing and disposing (IMAC/D services)
devices in order to update the fleet and/or accommodate changes in the
customer’s IT infrastructure and environmental policies.
vi. Support services These typically include a centralised help desk, on-site
support and supplies replenishment; more sophisticated solutions also
include remote monitoring services. With these services, the supplier
monitors low toner and equipment issues, delivers firmware updates, con-
figures network devices and provides a web-based portal through which the
customer can monitor the fleet performance. These services are usually
associated with proactive supply replenishment.
vii. Environmental services With these services, the supplier not only helps cus-
tomers to reduce paper and power consumption, but also supports the cus-
tomer’s environmental sustainability initiatives by suggesting various
alternative energy solutions, including solar panel installation, reforestation or
carbon credit purchases. They supplier can also provide the customer with a
carbon offset certificate(s).
2 Photocopier Industry: At the Forefront of Servitization 35

viii. Financial services These include financing, leasing and rental services.
ix. Business process management services With these services, the supplier
takes on the responsibility to manage one or more of the customer’s pro-
cesses on its behalf. The managed processes are usually noncore, time-
consuming and transaction-based processes, including payroll, accounts
payable, mortgage processing as well as several other industry-specific
activities (annual student registrations, patients tracking, etc.).

2.4.4 The Solutions Spectrum

To address the heterogeneous needs of different types of customers, OEMs have

devised scalable offerings and developed delivery frameworks (Océ’s approach is
thoroughly described in (Visintin 2012)) to design, deploy and support their
solutions. All of these solutions are loosely referred to as MPS. Indeed, they can
include only a small portion of the aforementioned components and address very
different types of customer segments. While basic MPS are offered by almost all
the industry players, advanced MPS are offered only by a few leading companies.
The characteristics of the different types of solutions are summarised in Table 2.1.
It is worth noting that, while the advent of MPS created new business oppor-
tunities for the printer/photocopier OEMs, it also introduced new competitors. As
already mentioned, delivering MPS requires system-integration, application-
development and consulting capabilities. It creates business opportunities for
several other actors (system integrators, software vendors, consultancy firms, etc.)
other than the OEMs. These actors cooperate and/or compete with the OEMs in a
rather complex ecosystem that is described in the next section.

2.5 The Integrated Solutions Competitive Landscape

The photocopier industry’s integrated solutions competitive landscape includes the

following: (i) OEMs (ii) systems integrators (iii) consulting firms (iv) technology
specialists (v) value-added resellers/dealers and (vi) office supplies retailers.
i. OEMs usually shape their offerings around their own products, although they
also provide multivendor support as well. The most important vendors in this
category include Canon, HP, Kyocera, Konica Minolta, Lexmark, Ricoh,
Toshiba and Xerox/Fuji Xerox. Other players, such as Dell, Sharp, Samsung,
Brother, Oki Data and Epson are developing their own MPS offerings as well
(Weilerstein and Drew 2012; Le Clair 2012; Fernandes and Longbottom
2012b; Muscolino 2011).
ii. Systems integrators can either partner with OEMs in delivering MPS solutions in
certain markets/industries and/or can offer vendor-agnostic MPS solutions as
part of wider managed service contracts (e.g. IBM, Accenture, Capgemini, etc.).
36 F. Visintin

Table 2.1 The solutions spectrum

BASIC solutions INTERMEDIATE ADVANCED
solutions solutions
Customer need Trouble-free Optimised document Better value
utilization of one output proposition for
or a few devices environment their business
Value proposition Shift from several Manage and optimise Manage and optimise
transactional the entire fleet of the entire
purchases to one devices under document-output
contract; shift from contract environment and
capital expenditure improve business
spending to more processes under
predictable contract
operational
expenses
Services offered Supplies, basic Assessment, design, All the preceding plus
assessment service, implementation, business process
basic support education, management
services, financial improvement, services
services support,
environmental
and financial
service
Scope One or a few devices The document output The whole document
environment output
environment and
several business
processes
Customization Low Medium High
Duration of the contract Short Medium Long
Customer-supplier Out-tasking Out-sourcing Partnership
relationship

iii. Consulting firms, like system integrators, develop vendor-neutral MPS

solutions but usually specialise in specific regions or market segments (e.g.
healthcare, architecture, engineering and construction, legal).
iv. Technology specialists provide solutions enabling specific advanced features,
such as mobile printing and secure printing. These solutions can include both
hardware and software elements but exclude the actual copying/printing
devices. Specialists are thus often partners of generalist MPS providers,
which use these extra features to add value to their offerings.
v. Value-added resellers/dealers deliver downsized MPS solutions for small and
medium businesses. Hence, they are leveraged by the OEMs as a channel to
reach small and medium business customers. Local VAR/dealers, in addition
to being located physically close to customers, are familiar with the technol-
ogy and IT environment employed by these companies. VAR/dealers usually
must be certified by the OEMs and need to undergo specific MPS training
programs (Fernandes and Longbottom 2012a) to obtain the certification.
2 Photocopier Industry: At the Forefront of Servitization 37

vi. Office supplies retailers, especially those in the U.S. (e.g. OfficeMax, Staples
or Office Depot) have developed their own MPS offerings.
It is worth noting that while competitors coming from different sectors are
expanding into the MPS business, leading OEMs are expanding into business
process management (BPM), business process outsourcing (BPO) and/or the IT
outsourcing business. This should not be surprising. Providing MPS, in fact,
affords a good understanding of the customer’s IT infrastructure and of their non-
core processes, such as IT, accounting and payroll. Leading providers of MPS are
thus leveraging their experience and reputation as MPS providers to compete in the
managed service business as well. This strategic intent is clearly demonstrated by
the number and magnitude of the acquisitions made by some of the most important
OEMs in the industry. Some examples include HP’s acquisition in 2008 of EDS
(now HP Services, a $22 billion multinational system integrator and provider of IT
outsourcing service); Xerox’s acquisition in 2010 of ACS (a $6.4 billion multi-
national provider of diversified business process outsourcing and information
technology solutions) and Lexmark’s acquisition of Perceptive Software in 2010
and of Pallas Athena in 2011 (providers of enterprise content management and
business process management solutions, respectively).

2.6 A Case Example: Xerox Corporation

Xerox Corporation is considered one of the most successful examples of servitized

companies. Indeed, Xerox no longer qualifies itself as a photocopier OEM but as
an ‘enterprise for business process and management’ (Xerox 2012). Few key
figures provide sufficient clarity regarding Xerox’s involvement in the service
business and of how such involvement is going to increase in the near future.
In 2012, Xerox’s total revenue was $22.39 billion. Approximately 84 % of this
revenue were annuity-based revenues coming from contracted services, equipment
maintenance, consumable supplies and financing services (Xerox 2012). The
remaining 16 % came from equipment sales (either from lease agreements that
qualify as sales for accounting purposes or outright cash sales). Annuity-based
revenue has driven the growth of Xerox’s revenues in recent years whereas the
equipment sales have flattened (Fig. 2.4).
The most important business segments in which Xerox operates are business
process outsourcing, information technology outsourcing and document manage-
ment (Fig. 2.5).
The business process outsourcing segment accounted for $6.57 billion (29.3 %)
and comprises a diversified portfolio of services, including customer care services,
healthcare claims reimbursement services, accounting services and human
resource services, just to mention a few.
The IT outsourcing segment accounted for $1.38 billion (6.2 %) and includes
mainframe and server outsourcing, network outsourcing and cloud services.
38 F. Visintin

25

20

15

10

0
2007 2008 2009 2010 2011 2012
Equipment sales [B$] Annuity revenue [B$]
Fig. 2.4 Xerox’s revenue streams (Source Xerox 2012)

The document management segment accounted for around $13.04 billion

(58.3 % of the grand total). This market is comprised of document systems,
software, solutions and services. Such a segment is subdivided into the following
two components: document outsourcing and document technology. The former
accounted for $3.574 billion (16 %) and for the most part is driven by the MPS, a
business where Xerox is undoubtedly one of the market leaders. The latter
accounted for $9.46 billion (42.3 %) and includes the sale of products (those not
provided under a document outsourcing contract) and supplies as well as the
associated technical services and financing.
Altogether, in 2012, outsourcing services (business process outsourcing, IT
outsourcing and document outsourcing) accounted for 52 % of Xerox’s total
revenue. The growth of Xerox’s service business was sustained, in recent years, by
the acquisitions of a number of service and solutions providers around the world
(Table 2.2).
As a result of these acquisitions, Xerox plans to extend its service to two-thirds
of its total revenue by 2017 (Xerox 2012). However, to date, notwithstanding the
importance of outsourcing services, the sale of products and of the relevant
technical services and supplies still account for 42 % of Xerox’s total revenues.

2.7 Conclusions and Managerial Implications

The history of the photocopier industry, as well as the business model adopted by
its leading OEMs, can help us draw some important conclusions.
2 Photocopier Industry: At the Forefront of Servitization 39

InformaƟon
technology Other
outsourcing 6%
6%

Document
Document technology
Management 42%
58% Document
outsourcing
16%

Business
process
outsourcing
30%

Fig. 2.5 Xerox 2012 revenues by business segment (Source Xerox 2012)

Table 2.2 Xerox’s most relevant acquisitions between 2010–2012

Month Company Services/solutions provided
Feb-10 Affiliated Computer Diversified business process outsourcing and
Services, Inc. ACS information technology services
Jul-10 Excellerate HRO, Benefits administration and relocation services
LLP (‘EHRO’)
Oct-10 TMS Health, LLC (‘TMS’) Customer care services to the pharmaceutical,
biotech and healthcare industries
Nov-10 Spur Information Solutions, Parking enforcement computer software
Limited (‘Spur’)
Apr-11 Unamic/HCN Customer care service in the Benelux region
May-11 NewField IT Print consultancy and software solution (UK-based)
Jul-11 Education and Sales Marketing, Outsourced enrolment management and student
LLC (‘ESM’) loan default solutions
Nov-11 The Breakaway Group Cloud-based service simplifying the adoption
of electronic medical records
Jul-12 Wireless Data Services (‘WDS’) Telecommunications technical support and
consultancy services (UK-based)
Jul-12 Lateral Data E-discovery technology (US-based)
Jan-12 LaserNetworks Inc. MPS solutions
Jan-12 XL World Multilingual customer care services (Italy-based)
Source Xerox 2011, 2012

First, highly profitable and servitized market offerings can be made unattractive
by innovations improving the products’ reliability and ease of use. What happened
in the 1980s in the photocopier market, i.e. smaller, cheaper and more reliable
products that replaced bigger, complex, service-demanding products, could happen
40 F. Visintin

again in other industries. The consumerisation of IT (Moschella et al. 2004) is an

example of this trend. Consumerisation is the current tendency for new IT to
emerge first in the consumer market and then spread into the business-to-business
market. One of the consequences of consumerisation is that people are becoming
increasingly self-sufficient in meeting their IT needs. Today, several products have
become easier to use, and cloud-based, software-as-a-service offerings are
addressing an increasing number of business needs in areas such as video-con-
ferencing, digital imaging, business collaboration, sales force support and systems
back up, just to mention a few. These products clearly represent a threat for those
companies providing integrated solutions in these business areas.
Second, service opportunities emerge when products are critical and customers
find it difficult to use and maintain them. The Japanese assault on the photocopier
market in the 1980s with ‘service-free’ products did not target the high-end seg-
ment, where superior service performance was still an order winner; rather, it
targeted the low-end segment, where service was almost no longer needed. When
products are simple, customers learn how to use them and low-cost third-party
service suppliers learn how to maintain them. Consequently, both service volumes
and profitability inevitably decrease. One way to increase the products’ criticality
and complexity is to connect them. When low-end office photocopiers became
connected multifunction devices, they became part of a more complex and critical
system (the company’s ICT infrastructure) that customers were no longer able to
manage optimally. This opened a huge business opportunity for MPS providers.
Similar trends are now emerging in many other industries. In fact, an increasing
number of products are becoming connected, and IT-based technologies and new
software are extending the functionalities and performance of these goods (Neely
2009; Penttinen and Palmer 2007; Shepherd and Ahmed 2000). Suppliers can thus
extend their service business by offering to manage and support not only the
product supplied, but also the entire complex system (made of hardware, software
and networks) within which the product operates, as well as the processes that such
a system enables (Davies et al. 2007).
Third, product services can also become commoditised (Sampson 2013). In the
office photocopier market, for example, break-fix services are now commodities.
Basic MPS services are becoming commodities as well. The number of companies
providing intermediate and advanced MPS solutions is also increasing. Leading
photocopier OEMs are reacting to this trend by expanding their offering to services
that are only marginally related with the product they manufacture (e.g. business
process outsourcing services). This type of expansion could be successful in other
types of business as well. Indeed, the experience and the reputation gained by
supporting customers in closely product-related processes are invaluable assets
when companies decide to diversify into non-product-related business. Nonethe-
less, the growth into non-product-related business requires significant investments
to develop the required knowledge and capabilities (Fischer et al. 2010;
Matthyssens and Vandenbempt 2010). A wise way to acquire these capabilities is
through merge and acquisition, which is the approach adopted by many of the
photocopier OEMs. The redeployment of a labour force with a strong knowledge
2 Photocopier Industry: At the Forefront of Servitization 41

about the product and the related process but no experience in the new businesses
can, in fact, be very risky (Sampson 2013).
Finally, the example of the photocopier industry suggests that succeeding as a
solution provider does not necessarily require shifting from solely providing goods
and the related support services to delivering highly integrated and customised
solutions (Visintin 2012). Instead, it suggests that companies need to develop the
capability to provide modular and scalable solutions to address customers with
different types of needs as cost-effectively as possible (Visintin 2012). As the case
of Xerox demonstrates, even when companies are highly servitized, the transac-
tional sale of products, supplies and maintenance services can still represent a
substantial source of revenues and profits.

Acknowledgments The author is grateful to the ASAP Service Management Forum (www.
asapsmf.org), an Italian research and dissemination initiative. In particular, the author is grateful
for the insights provided by the managers involved in the ASAP’s ‘Business Process Out-
sourcing’ Focus Group.

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Chapter 3
Servitization in the Aircraft Industry:
Understanding Advanced Services
and the Implications of Their Delivery

Tim Baines and Howard Lightfoot

Abstract The aircraft industry is relatively advanced in the adoption of serviti-

zation. The history of power-by-the-hour, for example, can be traced to the
practices of Bristol Sidley in the 1960s. The extent of this adoption has helped to
give an insight into how servitization affects the organisational structure, polices
and processes of a manufacturer. In particular, what it takes for a manufacturer and
its suppliers to successfully deliver advanced services such as power-by-the hour.
The purpose of this chapter is therefore to describe a typical advanced service, and
to highlight the challenges that supporting this model poses for a conventional
manufacturing enterprise.

3.1 Introduction

All manufacturers offer services, but some use services as the basis of their
competitive strategy. Servitization is now widely recognised as the innovation of
an organisation’s capabilities and processes. It is used to better create mutual
value, through a shift from selling product to selling Product-Service Systems
(Baines et al. 2007a, b; Aurich and Fuchs 2007).
Advanced services are a special case in servitization (Baines and Lightfoot
2013). These provide the customer with the ‘capabilities’ that arise from the ‘use’
of the manufacturer’s products, and demand that the manufacturer extends itself
significantly beyond design and production based competences. In many instances

T. Baines (&)  H. Lightfoot

Aston Centre for Servitization Research and Practice, Aston Business School,
Aston Triangle, Birmingham B4 7ET, UK
e-mail: t.baines@aston.ac.uk
H. Lightfoot
e-mail: h.lightfoot@aston.ac.uk

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_3, 45

 Springer International Publishing Switzerland 2014
46 T. Baines and H. Lightfoot

the manufacturer is moving into the territory of activities previously carried out by
the customers themselves, and in doing so is delivering capabilities that are a
major component of the customers’ core business processes.
Advanced services are commonly combined with additional features. Contract
life-cycles tend to be long (5–15 years are common); the manufacturer takes on
responsibility (and so risks) for ensuring that the capability performs as expected;
and revenue payments are often coupled to usage. So prominent are these features
that advanced services are frequently referred to in these terms. Performance
contracting, availability contracts, and risk and revenue sharing contracts are all
terms that are commonly used to describe advanced services.
To succeed with the delivery of advanced services a manufacturer is likely to
need some new and alternative organisational principles, structures and processes
(Oliva and Kallenberg 2003) which differ to those associated with traditional
product manufacture. For example, it may be insufficient to simply attempt to
replicate the lean principles of Toyota. Authors such as Chase and Garvin (1989)
have suggested for sometime that there is a subtle mix of organisational structures
that are appropriate to a servitized manufacturer that are distinct and different to
those associated with either a more traditional product manufacture, or a pure
service provider. However, the particular challenges to manufacturers are not yet
widely appreciated. This, therefore, is the purpose of this chapter. Due to its
maturity the aircraft industry offers an excellent opportunity to gain an insight into
the implications of servitization for a manufacturer.

3.2 Evolution of Servitization in the Aircraft Industry

Servitization started to take a hold in the aircraft industry in the late 1990s with
engine manufacturer Rolls-Royce structuring a ‘TotalCare’ package for its cus-
tomer American Airlines. Here the customer simply paid for hours flown by the
engine. This type of contract was initially risky and potentially loss-making.
However, over time the development of Engine Health Management (EHM)
systems and data analysis software, and the establishment of joint venture Main-
tenance Overhaul and Repair facilities at the customer’s operational hubs (Texas,
Singapore, Hong Kong) and the operations control centre at Derby, England have
mitigated the associated risk in delivering this servitized business model. These
technologies and facilities have been major enablers of the effective and efficient
delivery of the service offering. Today, Rolls-Royce now makes over 50 % of its
revenues from advanced and intermediate services.
Advanced services such as TotalCare help aircraft manufacturers to smooth
revenues streams. They are especially valuable to this sector as the installed based
for civil aircraft is about 150 times average annual sales volumes. Other engine
manufacturers like GE and Pratt & Whitney have similar business models and new
engine developments are now undertaken on the basis that the majority of engines
sold will be under servitized business model contracts. However, it is important to
3 Servitization in the Aircraft Industry 47

appreciate that old style (intermediate) repair contracts where cost to the customer
is based on time and materials (T&M) are still offered.
Airframe manufacturers also adopt servitized business models. For example,
Boeing’s ‘GoldCare’ is a comprehensive recurring fleet maintenance and engi-
neering management service which provides flexible solutions for material man-
agement, engineering, and maintenance execution. It simplifies airplane ownership
with a more efficient business model that reduces costs, enhances predictability
and provides 24/7 operational control using e-Enabling technologies to turn
aeroplane data into actionable information.
Services are now also a ‘big part’ of the forward strategy for manufacturers of
aircraft landing gear with the objective off getting and staying close to the cus-
tomer. More advanced services like condition and trend monitoring are sometimes
used as ways of insuring against the risk of failure and are offered as ‘products’ in
their own right. Companies are prepared to adopt technical and financial risk
shared with the customer. The offering will depend on the business model with, for
example, brakes and wheels offered on a ‘fixed price per landing’. However, this
can cause problems commercially with usage patterns; regional commuter jets will
cycle up to 14 times daily, wide bodied jets once or twice, and business jets can
vary widely in use therefore the model is difficult to price confidently.
For all these aircraft industry manufacturers it is essential to choose the right
partners in the extended supply network if these types of services are to be
delivered successfully. Many potential suppliers continue to live in the T&M
world and often supply chain incentivisation is crude. For manufacturers, moti-
vations include long term customer relationship development (e.g. 10 year deals)
and developing an understanding of customer operations, hence likely future
requirements to help forward planning. For aircraft customers, motivations include
their ability to get back to basics (flying aeroplanes) and being provided with an
integrated solution providing the lowest ‘total cost of ownership’.

3.3 Process Model of an Advanced Service

Servitization is a term given to a transformation. It is about manufacturers

increasingly offering services integrated with their products. Of these, some
manufacturers choose to servitize by offering an extensive portfolio of relatively
conventional services. Others move almost entirely into pure services, largely
independent of their products, and provide offerings such as general consulting.
Others still move to deliver advanced services.
Advanced services are a special case in servitization. Sometimes known as
‘capability’ or ‘availability’ contracts, here the manufacturer delivers services
(coupled with incentivized contracting mechanisms) that are critical to its cus-
tomer’s core business processes. The contracts associated with this type of offering
frequently extend over many years, with the manufacturer adopting greater risk by
taking responsibility for the performance of its products, and being rewarded
48 T. Baines and H. Lightfoot

Fig. 3.1 Product-service system for the delivery of advanced services (Baines et al. 2007a, b)

through ongoing and more profitable revenue streams. ‘Power-by-the-hour’ as

offered by Rolls-Royce is an iconic example of such a service.
With an advanced service, asset ownership is not necessarily transferred to the
customer. Simplistically, in the case of the photocopier (Fig. 3.1), the producer
would typically provide ‘a document management solution’ (see for example
Xerox, www.xerox.com). Then the producer, rather than the customer, selects and
provides the equipment and consumables, monitors performance, and carries out
servicing and disposal. In return it receives payment as the customer uses the
printing capability. A similar model is Power-by-the-Hour offered to airlines by
Rolls-Royce Plc where, although the engine is sold, the service and support
contract for the engine is negotiated on the basis of ‘hours flown’.
The operational form of such a model is presented in Fig. 3.2. Prior to describing
how the model operates in practice, it is important to emphasise that the illustration
is of a steady-state system, and does not attempt to show the interactions necessary
during the creation of the overall business model (e.g. contract negotiation, product
manufacture and delivery). The main ‘actors’ are the customer (user), the Original
Equipment Manufacturer (OEM) and the OEM’s partners, each of which have
through-life interactions with each other, and the asset in use. These interactions are
illustrated by the line-arrows in the diagram. The direction of these arrows repre-
sents the ‘relationship’ between actors. The arrow originates from the actor who is
responsible for delivering the ‘action’, with the head of the arrow indicating the
actor who is the recipient of the benefit. For example, the OEM is shown to be
responsible for the provision of maintenance and upgrades to the asset. The head of
these arrows also indicates a ‘touch-point’ within the system. Each ‘touch point’
generates ‘customer experiences’ and can generate a ‘demand signal’ into the
network. The principal demand signals are shown in Fig. 3.2 as block arrows, with
the direction of these indicating the main feedback mechanisms within the system.
This model illustrates the principal interactions between the OEM, Customer
and the ‘Asset in use’ under steady state operation.
3 Servitization in the Aircraft Industry 49

Fig. 3.2 Process model describing the key interactions in the delivery of an advanced service

3.3.1 Understanding the Offering

The starting point for explaining many process models is to describe the output
from the system. In a traditional production system, the output is the physical
product or capital asset (e.g. car, boat, train). In the case of an advanced service the
product or asset is offered with an integrated portfolio of services. There is
sometimes confusion within the literature over ownership, with a common view
being that OEMs are retaining ownership of products and assets rather than selling
them. This is a little misleading. While the user may not necessarily own the
product or asset, in most cases of advanced services ownership is transferred from
the OEM to either the customer or a third party such as a financial partner. Hence,
the OEM sells both the asset and a portfolio of related services.
The value proposition is first based on the sale of an asset (e.g. train, agricul-
tural equipment, excavator, aircraft, machine tools, printing machinery) and then
service and support of the asset in use. More sophisticated service and support
offerings are sold on the basis of a ‘pay-per-use’ contract. Such contracts are also
frequently coupled with the OEM taking a greater risk exposure if the asset fails to
perform adequately. In such cases, in order to mitigate the associated risk, the asset
or product is designed to be capable of being ‘interrogated’ locally by the ‘user’
and OEM and/or remotely by the OEM. Such information is gathered using a
combination of ‘on board’ modules for sensing (e.g. pressure, temperature,
vibration) and communication (e.g. data-bus, internet link, wireless telemetry) (see
Benedettini et al. 2009). In this way the asset is said to be ‘informated’. Thus the
50 T. Baines and H. Lightfoot

OEM is able to collect data from, and monitor the performance of, the asset in use.
The extent of the OEM’s information gathering and analysis capability is a key
enabler in delivering the value proposition and mitigating any risk associated with
the advanced services.

3.3.2 The Role of the OEM and Its Operational Partners

Fundamentally the OEM provides services to support the product in use and the
customer’s use of the product.
In our process model (Fig. 3.2), the SSP that are provided by, and the
responsibility of, the OEM are shown between the OEM and asset. For example,
many other services are initiated as a result of the remote monitoring of the asset in
use. The acquisition of the data, and its subsequent analysis (usually in a bespoke
operations centre), enables efficient scheduling of Maintenance and the effective
provision of Repairs and Spares using new and/or re-manufactured parts. Data
obtained from the asset is also used to trigger Upgrades. These provide improved
functional performance. The direct recipient of all these service elements is the
asset itself. The predominant variables that generate demand signals on the OEM
originate from data coming directly from the asset. Hence, the relationship and
customisation levels required to effectively and efficiently deliver these service
elements are generally low. These demand signals will in turn trigger demand
signals for the OEM partners.
Services supporting the customer (SSC) are shown by the arrows between the
OEM and the customer, through the box labelled SSC. Here, the asset performance
data is key to informing the customer about the status of the asset in use. This then
enables scheduling of repair and maintenance activities, to ensure optimal avail-
ability and performance of the asset. Training and advice on the most effective and
efficient use of the asset are also provided to the customer. For SCC activities, the
customer’s personnel (e.g. operations mangers) are the direct recipients of the
services. Here, the predominant variables, that generate demand signals, originate
from people (these can be both customer and OEM personnel). Hence the rela-
tionship and customisation levels required to effectively and efficiently deliver
these service elements are generally high. These services again create demand
signals from the ‘user’ to both the OEM and the customer’s partners.

3.3.3 The Role of the Customer and Its Operational Partners

The customer has the operational use of the asset, and revenue typically flows to
the OEM on the basis of asset use. Operating parameters for the asset in use are
agreed with the OEM and, when taken together with asset performance data,
impact on the revenue received by the OEM. Our model shows the customer is
3 Servitization in the Aircraft Industry 51

responsible for the operational use of the asset, local monitoring of its perfor-
mance, and providing agreed ‘Low-Level Maintenance’ to support the asset as it is
used. These activities will generate demand signals for the customer and its
partners. The customer’s operational partners work with the customer to support
the asset in use by, for example, providing dynamic consumables (e.g. fuel,
lubricants etc.) and other services (e.g. labour, periodic monitoring, and low level
maintenance). The customer is also responsible for providing the OEM with
feedback, in the form of performance monitoring data, which can also generate
demand signals for the OEM and network partners.

3.4 Challenges in Delivering Advanced Services

Supporting an advanced service such as Power-by-the-Hour places particular

pressures on the manufacturer. These go beyond those traditionally associated with
production operations (e.g. targets around cost, quality and delivery of the prod-
uct). Quite simply, an advanced service demands that the manufacturer interacts
closely with customers throughout an extended life-cycle, and so has many more
demand signals against which to respond. In this section we describe the generic
challenges that have been overcome by leading manufacturers in the aerospace
sector such as Rolls-Royce, as they have moved to deliver advanced services.

3.4.1 The Language of Services

One of the most striking differences apparent with servitization is a change in the
terminology and vocabulary of the everyday language used by the employees
within the organisation. Personnel within conventional manufacturers use, and
fully understand, terminology such as product, part and component; they use terms
associated with service loosely. With advanced services, many words and phrases
take on particular and specific meanings. This distinction appears strongest
amongst personnel who deal most closely with the service delivery process within
the organisation. As a Services Director within aerospace recently told us: ‘‘…to
integrate with customers, we’ve just got to ‘talk’ like they do’’. Many people
within practice leaders such as Rolls-Royce recognise that the development of an
appropriate language, based specifically around the product and service delivery, is
a significant challenge. These include difficulties in describing, expressing and
communicating a customer’s expectations and values.
52 T. Baines and H. Lightfoot

3.4.2 Value Dimensions of Integrated Products and Services

Advanced services mean that the nature of the relationship with the customer
changes from a transaction to that of a long-term relationship. Production opera-
tions tend to support a more transactional approach, whereas service operations
tend to be more associated with customer relationship development. Traditional
manufacturers tend to take a linear view of producing a product, which is then sold
(a transaction) to the customer for its use (consumption).
With advanced services there is a series of ‘touch points’ between the product
provider and customer. For example, initial contract negotiation may be lengthy;
monitoring of the asset in-use may be carried out by the provider, which may lead
to the provider servicing the product and finally the provider may take back the
product at end-of-life. Whilst the product itself may still be sold to the customer,
the associated services are more closely associated with long-term relationships.
Revenue, profits and cash flow arise mainly from the relationship aspects of this
model with a shift from a focus on reducing costs to improving the value-in-use for
the customer. Practice leaders in aerospace will describe how they have become
much better at understanding the value of service to their customers. Indeed, they
see that communicating and demonstrating value is also a challenge, especially
with services. A commonly held view is that ‘‘…if the customer doesn’t ‘see’ what
he’s getting, then he thinks he’s getting nothing’’.

3.4.3 Designing Products and Services

Design processes associated with advanced services differ to those conventionally

associated with product design. Traditionally, product designs are conceptualised
remotely, prototyped, tested and refined, and then put into practice. With services,
prototyping tends to take place through application. The challenge is that engineers
attempt to apply conventional product design processes to services.
Advanced services demand an increased emphasis on the product design
aspects that impact on product maintainability and reparability, which are integral
to the effective and efficient delivery of the overall product-service offering.
Practice leaders will typically say ‘‘the best thing you can do is design it [the
product] knowing you’re going to have ‘this service’ out there’’. This is typical of
the many product features that are introduced to aid maintenance and servicing to
support asset availability in the field.
3 Servitization in the Aircraft Industry 53

3.4.4 Integrated Delivery Systems

As with design processes, the organisational design required to support the effective
and efficient delivery of advanced services also differs. The conventional view of
materials flowing into a factory, through production, to be consumed by the cus-
tomer, does not occur. While a small portion of this somewhat uni-directional
material flow does occur, there is a complex service delivery system that monitors
and supports the asset in use, superimposed upon the traditional production business.
This system transcends the traditional internal/external barriers of the host
business. The effective provision of an integrated product-service offering requires
inter-organisational integration achieved through the co-ordination of manufactur-
ing systems, maintenance systems, spare parts supply systems and logistics systems.
This delivery system is directly impacted by the relational component of the
business model and associated performance measures. These requirements are so
particular to this context that practice leaders in aerospace frequently decouple this
service delivery mechanism from their more conventional production system.
However, they recognise that as business pressures increase, the sharing of
resources and knowledge will necessitate that these systems be more tightly
coupled. Moreover, a tighter coupling is necessary in the supply network that
supports service delivery.
Some elements of service and support are provided by members of the supply
network, and so effective coordination and integration between network members
is essential. Typically this stimulates the establishment of joint ventures with key
customers and suppliers involved with service delivery.

3.4.5 Organisational Transformation

Transformation issues are both particular and pervasive. Organsations such as

Rolls-Royce have, in the adoption of a servitization strategy, encountered changes
to language, value, and product/organisational design. Such transformations are
significant challenges across organisations and their broader supply chains. A HR
Director recently told us that, ‘‘… at the interfaces between the company and the
customer, I think we’re seeing far more evidence of responsive agile service-
centred behaviour’’.

3.5 Summary and Outlook

Servitization is now widely recognised as the innovation of a manufacturer’s

capabilities and processes to move from selling products to selling integrated
product-service offerings that deliver value in use. Such a strategy is advocated as
a means by which western manufactures can face-up to the challenges of
54 T. Baines and H. Lightfoot

competitions from lower cost economies. There are particular issues that con-
ventional manufacturers face in their attempts to servitize, these are:
• Language: The language used in a servitized manufacturer is particular and
peculiar; this has to be developed and adopted throughout the organisation.
• Value dimensions: The value dimensions relate to both asset sale and use and
therefore comprise both transactional and relationship elements; these need to
be adequately defined and communicated as performance measures.
• Products and design processes: Design processes need to consider both product
and service features that are consistent with the delivery of through-life per-
formance; these differ from traditional product design processes.
• Integrating service and product delivery: The simultaneous delivery of both
products and services creates significant tensions within the operations and
supply chain of the OEM; the challenge is to integrate the delivery of these,
such that resources and knowledge are used effectively and efficiently.
• Transformation: The change from traditional to servitized manufacturer
requires significant organisational changes in language, values, design process
and organisation design; these changes raise specific transformation issues that
are unique to a move to servitization.
Although companies involved in aircraft manufacturer are relatively advanced
in their adoption of servitization, many are still in the early stages of their journey.
The challenges highlighted above help to rationalise the inhibitors that companies
who are embarking on servitization are likely to face. By structuring and
describing these inhibitors, our intention is to help manufacturers to address these,
and so accelerate the adoption of servitization across sectors.

References

Aurich, J., & Fuchs, C. (2007). Advances in lifecycle engineering for sustainable manufacturing
businesses, Proceedings of the 14th CIRP Conference on Lifecycle Engineering, Tokyo,
Japan.
Baines, T., Lightfoot, H., Evans, S., Neely, A., Greenough, R., Peppard, J., et al. (2007a). State-of-
the-art in product service-systems. Proceedings of the IMechE-Part B. Journal of Engineering
Manufacture, 221, 1543–1552.
Baines, T. S., Lightfoot, H. W., & Kay, J. M. (2007b). Servitized manufacture: Practical
challenges of delivering integrated products and services. Proceedings of the IMechE-Part B.
Journal of Engineering Manufacture, 223, 1207–1215.
Baines, T. S., & Lightfoot, H. (2013). Made to serve; Understanding what it takes for a
manufacturer to compete through servitization and Product-Service Systems. Hoboken: Wiley.
Benedettini, O., Baines, T., Lightfoot, H., & Greenough, R. (2009). State-of-the-art in integrated
vehicle health management. Proceedings of the IMechE Part G, Forthcoming.
Chase, R., & Garvin, D. (1989). The service factory. Harvard Business Review, 67(4), 61–69.
Oliva, R., & Kallenberg, R. (2003). Managing the transition from products to services.
International Journal of Service Industry Management, 14(2), 160–172.
Chapter 4
The Automotive Industry: Heading
Towards Servitization in Turbulent Times

Paolo Gaiardelli, Lucrezia Songini and Nicola Saccani

Abstract The European automotive industry has been fiercely hit by the recent
economic downturn, which has further emphasized the structural overcapacity of
production plants and price competition in the sales of new vehicles. Services
constitute the main means for original equipment manufacturers (OEMs),
authorised dealers, and repair shops, as well as the independent actors, to survive
and be profitable, thanks to the size and age of the vehicle fleet. Servitization is
thus a strategy pursued by manufacturers and their networks. However, the
offering is still dominated by transactional, product-oriented services. Moreover,
the relevance of services is still not fully recognized by the service network, which
is not completely aware of the impact of servitization on profitability and customer
loyalty. In addition, end customers are often not aware of the full range of services
available. Further, the perceived importance of services by the network and the
final customers may differ. At the forefront of servitization are noteworthy
experimentations of sustainable mobility solutions that improve environmental

P. Gaiardelli
Department of Engineering, University of Bergamo, Bergamo, Italy
e-mail: paolo.gaiardelli@unibg.it
P. Gaiardelli  N. Saccani
ASAP Service Management Forum, Brescia, Italy
L. Songini
Managerial Control Systems and Strategic Management in Family Businesses, Eastern
Piedmont University, Alessandria, Italy
e-mail: lucrezia.songini@eco.unipmn.it
L. Songini
Performance Measurement and Accounting and Control in SMEs, Bocconi University,
Milan, Italy
N. Saccani (&)
Department of Mechanical and Industrial Engineering, Supply Chain and Service
Management Research Laboratory, University of Brescia, via Branze 38, 25123 Brescia, Italy
e-mail: nicola.saccani@unibs.it

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_4, 55

 Springer International Publishing Switzerland 2014
56 P. Gaiardelli et al.

impact and quality of life. These are the forerunners of new business models
dominated by result-oriented services, where customer get access to vehicles on-
demand rather than through direct ownership.

4.1 An Industry on Bumpy Roads

The automotive industry is a major contributor to the European Union (EU)

economy, with a turnover of 551 billion €, around 6.5 % of Europe’s GDP (ACEA
2012). About 11.6 million people (5.3 % of the EU employed population) are
employed either directly or indirectly in the industry. In particular, 3.4 million jobs
are related to sales (vehicles and parts) and in-use services, such as maintenance,
rent, and lease.
Globally, the automotive market is still growing thanks to the expansion of
China and other countries in Asia and South America. In Western Europe, instead,
the market is shrinking, thus further emphasizing the structural production over-
capacity in the continent. Production figures of 2012 (17.3 million units in Europe,
11.3 million of which were produced in the EU15) are back to the volumes of
2003. The EU hosts 177 production or assembly vehicle plants: 58 % of them are
estimated to work under the break-even point (AlixPartners 2013). Such a trend
concerns both the passenger-car and the truck sectors. The latter, being business-
to-business, suffered particularly during the economic recession from 2007
onwards. Dealers, too, saw their financial performance constantly worsening in
recent years, but are striving to survive.
The economic recession slashed the sales of cars, professional vehicles, and
trucks. Moreover, it has lead to high unemployment rates, especially among young
people, which has depressed the propensity to purchase cars in Western Europe.
Other trends characterise the EU markets at the social level. Aging demographics
are likely to lower the demand for new cars. In addition, younger generations are
losing interest in cars: once a priority, they are now less important than smart
phones and networked devices (AlixPartners 2013). The increasing trend towards
urbanisation, the rising efforts towards sustainable mobility, and the high pene-
tration rate in Western Europe also contribute to stabilizing, or decreasing, the
need for cars. In addition, laws and regulations aiming at protecting consumer
rights, safeguarding the environment, and pulling down entry barriers have obliged
companies to redefine their products, production processes, and organisations.
Improved vehicle durability and efforts to meet emissions and safety requirements
are just examples.
OEMs (original equipment manufacturers, the vehicle brands) increasingly
recur to mergers, acquisitions or alliances in order to survive in such a complex
and global market, characterised by heavy costs of research, development, and
innovation, along with high fixed costs of production capacity.
4 The Automotive Industry 57

4.2 Servitization and the Automotive Industry:

An Overview

4.2.1 Why Develop the Service Business in the Automotive

Industry

In a context of global competition and decreasing profits from vehicle sales, ser-
vices are vital for all actors in the automotive industry to survive and increase their
business in the long term. In particular, the automotive industry presents several
factors pushing towards servitization, in line with what has been advocated by
managerial and scientific literature (Baines et al. 2009).
At the economic level, service generates high profits. This is fundamental, since
the average sales profitability of passenger cars for OEMs and their dealer network
ranges between 0 and 2 %. CLEPA, the European Association of Automo-
tive Suppliers, calculated that, in Germany in 2006, the aftermarket accounted for
23 % of the total revenues in the auto industry, and for 50 % of the total profit
(SupplierBusiness 2009). For dealers alone, after-sales services account for between
30 and 70 % of total profit (sources: ICDP and ASAP SMF). In addition, after-sales
services for a vehicle are estimated to generate at least three times the turnover of
the original purchase. The vehicle fleet is huge: 273.7 million units in the EU27 in
2010 (240 million passenger cars), with an average fleet age of 8.3 years (cars). The
stock of cars circulating can therefore secure important and stable revenues over
time, whereas the ratio of new cars sold to the vehicle fleet is 1:18.
At the strategic and marketing levels (Vandermerwe and Rada 1988), services
may lock in customers to the authorised OEMs networks, through long-term
warranties, service contracts, or mandatory maintenances to preserve warranty
rights. Proprietary technology and remote information exchange may enable
OEMs to lock out competitors that may not have the skills or equipment to service
vehicles of other brands, despite the efforts undertaken by EU legislators with the
Block Exemption Regulation. Moreover, services are a way to differentiate an
OEM offer from those of competitors, and therefore, to sell more vehicles. Ser-
vices represent a constant connection between customers and the brand, driving
customers to dealership and brand loyalty, and repurchase intent. A typical
example is the one by Toyota, among the first to introduce a free long-term
conventional warranty, thus reinforcing its image of a high-reliability brand.
Moreover, with innovations as the DuoTec, a ‘fast ordinary maintenance’ service,
Toyota aims at differentiating itself from competitors by the speed and quality of
the services they offer.
In addition, product-support services enable the continuous improvement of
product design and quality, through feedback information from the field.
Finally, the environmental and lifestyle aspects should be considered. Running a
car generates only around half of the annual carbon emissions that making a new one
does (SupplierBusiness 2009). Reduction of environmental impact influences not
58 P. Gaiardelli et al.

only product development but also the definition of new business models of sus-
tainable mobility, where the vehicle becomes an appliance aimed to provide a
function (mobility). Long-term leasing, car sharing and carpooling substitute product
ownership, and also improve the control of vehicles’ reliability, and vehicle util-
isation, safety, and quality of life. An example is the Car2go mobility
concept launched by Daimler in several cities. Cars are available for lease on a
pay-as-you-go scheme within the city, 24/7. These solution offerings are at the
forefront of servitization in the industry: they entail completely new business models
and the involvement of new players (municipalities, providers of utilities, and so
forth). Launched as ‘experiments’, with little impact on the OEMs market and rev-
enues, in the long term they will transform the concept of mobility in the EU. In fact,
it has been estimated that the diffusion of such new solutions can reduce the number
of cars by about 40 % and distances driven by up to 60 % (Whitelegg and Britton
1999). Moreover, these new solutions will be used in the ‘smart cities’ of the future.

4.2.2 Services in the Automotive Market: Overview

Based on different studies by ICDP, BCG, and SupplierBusiness, auto services can
be valued at around 200 billion € in the EU. Stability of service volumes and their
profitability allowed most actors operating in automotive services to survive
during the crisis. For instance, in 2008–2010, without the after sales services, the
profitability of American dealers would have been mainly negative (NADA 2012),
and similar evidence can be found in Europe.
The automotive service supply chain is not vertically integrated, but rather
complex and fragmented (Gaiardelli et al. 2007). The OEMs in general do not
directly own the product and service channels, but rely on authorised dealers’ and
repair shops’ networks, which display the OEMs’ brands and constitute the
‘official’ channel. However, although vehicle purchasers are bound to resort to
the authorised network during the warranty period, the independent channel has
the highest market share: 70 % in Poland, 66 % in the UK, around 62 % in Spain
and Italy, and slightly over 50 % in France and Germany (source: BCG and
ICDP). Independent companies can be small players or large chains, and some-
times they are highly specialised (e.g., on glass or tire substitution). The inde-
pendent channel shows levels of customer satisfaction very similar to the
authorised channel (BCG 2012). The service market was stable in the last few
years: fewer kilometres driven by customers and improved part-quality imply
longer maintenance intervals, and reduce the demand for traditional services. For
instance, the number of after-sales interventions in Italy in 2015 is expected to
shrink by 19 % in volumes and 8 % in value, compared to 2009. Moreover,
intensified competition also limits prices and increase transparency.
In this context, advanced services are expected to drive profitability in the
future, as traditional services may become commodities. Notwithstanding
the forces pushing towards servitization, however, the service business in the
4 The Automotive Industry 59

automotive industry is still primarily related to parts and traditional maintenance.

Financial services and warranty extensions still have a low penetration rate: for
examples, compared to 40 % of the US market, warranty-extension penetration
ranges between 20 and 35 % in Western Europe. The diffusion of such new
services is also introducing new players in the competitive arena: since vehicle
repair is one of their main cost drivers, insurers, fleet operators, and leasing firms
make special-condition contracts with selected repair shops or networks, in order
to lock in customers to these actors for their maintenance interventions.

4.3 A Service-Portfolio Analysis in the Automotive

Industry

4.3.1 Service-Portfolio Classification

Scientific literature and anecdotic evidence suggest that companies that are serv-
itizing proceed along a continuum, through incremental stages characterised by
different levels of service sophistication (Oliva and Kallenberg 2003; Davies 2004;
Davies et al. 2006).
Based on a research carried out in Italy between 2010 and 2012, this section
presents an analysis of the servitization level in the automotive industry, through
the lens of the service portfolio. The analysed sample includes 36 brands that
represent approximately 95 % of the total market: 29 brands belong to the car
industry (Alfa Romeo, Audi, BMW-Mini, Chrysler, Citroen, Daihatsu, Fiat, Ford,
Honda, Hyundai, Infiniti, Jaguar, Lancia, Lexus, Maserati, Mazda, Mercedes,
Nissan, Opel, Peugeot, Porsche, Renault, Skoda, Subaru, Suzuki, Seat, Toyota,
Volkswagen, Volvo), and 7 brands to the heavy-truck segment (DAF, Iveco,
MAN, Mercedes, Renault Truck Scania, and Volvo Trucks).
The research was conducted based on publicly available information collected
from company websites and their brochures. Services were listed in a table and
then mapped into a scheme (reported in Fig. 4.1) that critically combines three
classification dimensions, namely:
• the offering focus, that moves from ensuring the vehicle availability and
functionality to supporting the end-users’ processes and activities (Mathieu
2001; Windhal and Lakemond 2010). Moving from product—(vehicle) to
process—(driving) and people-focused (i.e., driver) services, the intensity of
the relationship (customer and provider’s involvement and commitment), and
the service customisation increase.
• the nature of interaction between the customer and the service provider (Oliva
and Kallenberg 2003; Penttinen and Palmer 2007), either transaction-based or
relationship-based. The nature of the interaction entails different ways to price
the service: from a mark-up for labour and parts (transaction-based approach),
60 P. Gaiardelli et al.

Offering orientation Offering focus

oriented
Result-
oriented
Use-

Driving
Driver/
Product-oriented

Product
Transactional Relationship-based
Nature of interaction

Fig. 4.1 The adopted schematic representation of services

to a fixed price covering all services over an agreed period (relational

approach), and the risk taken by the provider dramatically increases.
• the offering orientation dimension, which groups services into three types:
product-, use- and result-oriented services (Tukker 2004).
Services proposed in the car and heavy-truck industries are listed in Table 4.1.
Most of the services enhance the vehicle features or support vehicle availability
and reliability. Other services exemplify how automotive companies have been
diversifying their offerings to help customers in managing their vehicles during the
whole lifecycle: they are, for instance, vehicle upgrading and outfitting, vehicle
cleaning, the provision of refurbished spare-parts, and initiatives to support the
management of the vehicle end of life.
Most services are characterised by different options (or features) that the cus-
tomer may choose, concerning the duration, guaranteed performance, payment
conditions, and so forth. This further shows the efforts made by car and heavy-
truck OEMs to identify solutions to the needs of different customer segments. For
example, repair and maintenance activities are promoted with a wide number of
warranty forms and are available in a large set of alternatives, ranging from the
provision of traditional support to the delivery of express (fast-fit) services. The
activities can be associated with a 24/7 workshop opening, and/or can include road
assistance in case of emergency rather than an at-home direct assistance.
Services are not just offered to improve vehicle performances but also to enhance
the customers’ operations, or to improve the efficiency or effectiveness of their
activities or advance their skills. Sport- and eco-driving courses, solutions for mobility
of disabled persons, training and consultancy for fleet maintenance and management,
and spare-parts management optimization are examples of the large range of advice,
training, and consultancy services offered by car and heavy-truck makers.
4 The Automotive Industry 61

Table 4.1 Services offered in the car and heavy-truck industries

Service description Car Heavy truck
Transactional services for product support
24/7 repair and maintenance services 4 4
Body, glass, tire, maintenance, and repair 4 4
Express maintenance/repair (fast-fit) 4 4
Fly & fit 4
Onsite diagnostic, maintenance, and repair 4 4
Product dismantling management 4 4
Product upgrading/outfitting 4 4
Refurbished spare-parts 4 4
Repair and maintenance during warranty period 4 4
Road assistance 4 4
Service for alarm systems 4 4
Summer/winter check-ups 4 4
Take back 4 4
Vehicle cleaning 4 4
Vehicle preinspection/precheck-up 4 4
Relationship-based services for product support
Extended warranties 4 4
Remote monitoring and diagnostics 4 4
Repair and maintenance long-term contracts 4 4
Spare-parts supply and maintenance packages (all inclusive) 4 4
Spare-parts supply and maintenance packages (for old vehicles) 4 4
Telematics assistance 4 4
Transactional services for customer activities (driver/driving)
Courtesy vehicle 4 4
Driver accommodation and repatriation in case of accident 4 4
Driver accommodation during repair activities 4 4
Financial support (in case of accident, emergencies, etc.) 4 4
Healthcare assistance in case of accident 4 4
Help desk (information/emergency) 4 4
Insurance packages 4 4
Legal support in case of accident 4
Merchandise 4 4
Online documentation (products, accessories, merchandise, parts) 4 4
Online monitoring (tracking) of repair activities 4 4
Services for mobility of handicapped 4
Sport- and eco-driving courses 4 4
Visibility on workshop activities 4 4
Relationship-based services for customer activities (driver/driving)
Credit/debit card 4 4
Fidelity card 4 4
Financing scheme for product repair services 4 4
(continued)
62 P. Gaiardelli et al.

Table 4.1 (continued)

Service description Car Heavy truck
Financing scheme for product sale 4 4
Fleet management services (in outsourcing) 4 4
Fleet management training and consultancy 4 4
Support for maintenance activities and spare-parts management 4
(consultancy) for customers with own workshops
Support for maintenance activities and spare-parts management 4
(training) for customers with own workshops
Web community services (app, social network, etc.) 4 4
Use-oriented
Leasing 4 4
Rental (short term) 4 4
Rental (long term) 4 4

Services may also be offered in packages. Packages are developed to support

the physical product (e.g., summer/winter check-ups or special offers for old
vehicles), or to ease the management of customer mobility (e.g., ‘all-inclusive’
maintenance programs including several services in case of accident, such as
mobile workshop assistance, towing, courtesy cars, travel and hotel expenses,
return home or onward journey, picking up the vehicle for repair, vehicle repa-
triation, and all necessary information support). Service packages are also pro-
vided to safeguard the value retention of customers’ fleets. In such cases, packages
usually consist of leasing and rental schemes (i.e., advanced service offerings
created to reduce asset obsolescence and flexibility, and to preserve customers’
working capital, without transferring the vehicle ownership to customers) that may
be matched with maintenance, financing, training, and business consultancy
contracts.
In addition, car sharing and carpooling are two types of use-oriented services
offered in the passenger vehicle sector. Generally, these services are provided by
third-party companies or joint ventures that involve the OEMs and their dealer/
workshop network as vehicle, spare-parts, and maintenance providers. For this
reason, these services are not taken into consideration in the quantitative analysis
reported in this section.
It has to be noticed that the list in Table 4.1 does not include result-oriented
services. This testifies that notwithstanding the recent efforts, the sector is still
strongly orientated towards ‘traditional’ services. However, a transition from use-
oriented to result-oriented services is starting, based on the evolution of the
packages described above, evolving the lease/rental plus maintenance packages,
into pay-per-use schemes (e.g. the CharterWay Services by Mercedes-Benz).
Not all the services listed in Table 4.1 represent a direct source of revenues for
the OEMs or the networks. In some cases they are proposed only to meet cus-
tomers’ needs, in order to improve the business in the long term. For example,
some complementary services are available free of charge, just to increase
4 The Automotive Industry 63

customers satisfaction and loyalty and/or to attract potential new customers. In

other cases, offering such services is considered strategic for the overall network
sustainability, because they boost sales of collateral services. For example, repair
and maintenance services not covered by a contract influence the revenues of the
service network but are not a direct source of cash for carmakers. However, they
boost the spare-parts sales business: the higher the volume of maintenance services
provided by the network, the higher the OEM’s revenues coming from sales of its
own branded new and refurbished parts.

4.3.2 Findings in the Car and Heavy-Truck Industries

The analyses are based on the following indexes:

• number of services offered,
• service-portfolio share (average number of services belonging to each area over
the total number of offered services),
• service diffusion index (percentage of companies offering on average a generic
service in each service category), and
• average differentiation level among brands [reported as ‘Low’ (L), ‘Medium’
(M) or ‘High’ (H)].
Results are illustrated in Figs. 4.2, 4.3, 4.4 and 4.5.
Figure 4.2 concerns the passenger-car industry, and shows the number of ser-
vices offered on average in the different classes (in brackets the total number of
services in each class). Summing the figures for all classes, the average number of
services offered is 28.3 out of 44 (64 %). The high number of services that support
the driver and its activities (9.4 transaction-based and 4.3 relationship-based ser-
vices), suggests that carmakers seek to differentiate themselves through the de-
materialisation of their service portfolio. However, the emphasis on tangible
elements remains central. On the contrary, only few services (e.g., credit/debit card
and Web community services) are purely customer-oriented and independent of
the vehicle utilisation.
Figure 4.3 reports the diffusion index in the car industry (i.e., the percentage of
companies offering, on average, a generic service in each class). In brackets, the
same index is reported, computed only for the subset of the most-offered services
in each class. Comparing the two indexes within each class, a polarization of the
portfolio emerges (except for the use-oriented services) around a set of services
offered by nearly 100 % of companies, and a set of services with a very low
diffusion (often coupled with a greater degree of novelty and differentiation). In
fact, 20 out of 44 services are offered by more than 90 % of the sample: on the
contrary, 6 services are offered only by one or two brands. They belong to both the
transaction-based and the relationship-based categories. They are explicitly
designed to reduce waiting time and increase flexibility of repair and maintenance
services (e.g., Fiat’s ‘fly and fit’ or Toyota’s ‘Duo-Tech’ express maintenance), or
64 P. Gaiardelli et al.

Offering orientation Offering focus

oriented
Result -
oriented
Use -

2.1 (3)

Driving
Driver/
Product - oriented

9.4 4.3
(13) (7)

Product
8.6 2.9
(15) (6)

Transactional Relationship-based
Nature of interaction
Car industry (...) n o . of services offered in the segment

Fig. 4.2 Car industry: average number of services offered by the sample in each class
(in brackets, the overall number of service in the class)

support the brand identity by creating new experiences (e.g., the Porsche Club or
the Maserati Experience) or to respond to the increasing societal concern about
natural resource depletion and environmental degradation as ecomaintenance
service programs, delivery of refurbished spare-parts, and integrated packages for
green mobility (e.g., Peugeot ‘Mu’, Daimler ‘Car2go’).
Figure 4.4 concerns, instead, the heavy-truck industry, and reports the number
of services offered, on average, in the different classes (as in Fig. 4.2 for passenger
cars). Summing the figures for all classes, the average number of services offered
is 31.4 out of 42 (75 %): the portfolio share is thus higher than in the car industry
(28.6 or 64 % of services).
The portfolio is mainly made of product-oriented services (11.0 transactional
and 4.9 relational services). This finding differs from the car industry, and reflects
a market structure mainly composed by clients who are, at the same time, owners
and drivers of a single vehicle. The factors driving these customers to choose a
specific brand are reliability, comfort, and quality. Therefore, they are mainly
interested in technical and tangible services.
Truck makers are also developing new alternatives and packages to support
their customer processes and business. This shift reflects a gradually growing
interest of customers for innovative solutions that enhance their operations and
improve their business performance. For instance, new services offer the possi-
bility to manage (postpone and defer) the payments of operating costs (e.g., fuel,
tolls, repair, maintenance, and spare parts) thanks to special debit card or full
maintenance contracts priced on the basis of the use and mileage of the truck.
4 The Automotive Industry 65

Offering orientation Offering focus

oriented
Result-
oriented

71% (71%)
Use-

Driving
Driver/
63% (82%) 61% (94%)
Product-oriented

M M

Product
64% (92%) 49% (79%)
M/H M/H

Transactional Relationship-based
Nature of interaction
Car industry (...) excluding services offered by less than 50% of the
sample

Fig. 4.3 Car industry: service diffusion and differentiation indexes

Figure 4.5, finally, reports the service diffusion index in the truck industry (i.e.,
the percentage of companies offering on average a generic service in each class).
In brackets, the same index is reported, which is computed only for the subset of
the most-offered services in each class.
The diffusion level is high in all classes and generally greater than in the car
industry (Fig. 4.3). In particular, the high diffusion of relationship-based services
reflects the requirements of large clients such as logistic transport enterprises
managing truck fleets, that prefer long-term solutions that support their operations
rather than over-reactively purchasing product-related services.
Comparing the two indexes (overall and for the highly offered subset) within
each class, no large differences emerge, contrary to the car industry (with the
exception of use-oriented services).

4.4 The Downstream Service Chain: Dealers

and Customers Perspectives in the Truck Industry

In a complex supply chain such as the automotive one, an effective servitization

strategy requires the coordination and integration of the different actors involved
(Cohen et al. 2006). Dealers and workshops play a significant role in service
delivery, and represent the connection between OEMs and customers.
As previously highlighted, services contribute significantly to the strategic,
competitive and financial results of the automotive industry players. However,
66 P. Gaiardelli et al.

Offering orientation Offering focus

oriented
Result-
oriented

1.3 (3)
Use-

Driving
Driver/
7.5 (13) 6.5 (8)
Product-oriented

Product
11.0 (14) 4.9 (6)

Transactional Relationship-based
Nature of interaction
Heavy-truck segment (...) no . of services offered in the segment

Fig. 4.4 Heavy-truck industry: average number of services offered by the sample in each class
(in brackets the overall number of service in the class)

Offering orientation Offering focus

oriented
Result-
oriented

63% (85%)
Use-

L
Driving
Driver/

69% (81%) 81% (89%)

Product-oriented

L
Product

79% (83%) 79% (85%)

L L

Transactional Relationship-based
Nature of interaction
(...) excluding services offered by less than 50% of the
Heavy-truck segment sample

Fig. 4.5 Heavy-truck industry: service diffusion and differentiation indexes

services are not yet recognized as a relevant source of competitiveness and profits
by many dealers because they require a significant change in the strategic,
organisational, and managerial approaches. In particular, the cultural shift towards
4 The Automotive Industry 67

a thorough customer-orientation represents a barrier to the servitization of service

networks that are still characterised by a product-centric focus.
A key factor stands in the service-portfolio development and delivery (Cohen
et al. 2006): however, the identification of the set of services most appropriate for a
single customer or a customer segment is not so obvious. Offering too few or too
many services reduces quality levels and profits. Moreover, an excessively cus-
tomised service-portfolio may be too costly to deliver.
Based on these premises, this section presents the results of research carried out
in the Italian heavy-truck industry, aiming at understanding the attitudes of cus-
tomers and service networks towards servitization. The research, based on two
surveys, involved 254 authorised dealers and repair shops, and 207 customers of
the main brands operating in Italy (Gaiardelli et al. 2011). The research, on the
service-network side, addressed: (1) the kind of services offered by dealers and
workshops, (2) their perception about the interest of customers in different ser-
vices, and (3) the perceived relevance of services for dealers’/workshops’
profitability.
The customer survey addressed instead: (1) the customers’ attitudes towards the
utilisation of different services and (2) the elements that mainly influence their
attitudes.

4.4.1 The Service-Network Perspective

The sample is composed by a 69 % of workshops and 31 % of dealers (carrying

out both sales and after-sale activities). Companies were clustered around the
extension of their service offerings and their attitude. The three groups obtained
are described in Table 4.2.
In addition, research findings show that firms that operate both in product
sales and after-sales segments that belong to a mono-brand network are more
willing to offer a wide range of services. They also recognize the positive impact
of services on company profitability in the short (higher and more stable mar-
gins) and long term (effect on customer loyalty). It seems that a positive relation
occurs between the width of service offer and the awareness of impact of ser-
vices on corporate performance. Moreover, mono-brand dealers find fewer dif-
ficulties in offering a wide range of services, probably as they can benefit from
the OEM’s support for marketing initiatives, advices, training, and consultancy.
Additionally, a correlation between the number of services offered by the OEM
and the number of services provided by the network emerges. In other words, the
wider the heavy-truck makers’ service portfolio is, the higher the diffusion is in
their network. Such evidence confirms the importance of having a coordinated
and top-down organisational and managerial support delivered by the OEMs to
their networks, to achieve fully the benefits of service-business development.
However, the shift towards a service-oriented and customer-centric business
model asks networks to give up the traditional vision focused only on technical
68 P. Gaiardelli et al.

Table 4.2 The attitude towards services of heavy-truck service networks

Cluster Cluster name Main characteristics
#1 Low service attitude
This group is mainly composed of workshops that offer a quite limited number of
product-related services, e.g., repair and maintenance. Companies belonging to this
group do not see market opportunities in other kinds of services
#2 Attitude towards product-related services
This group of companies shows a medium service attitude and believes their customers
have a medium-high interest in services. The cluster includes both workshops and
dealers, which mainly offer services supporting product reliability and availability.
These firms also provide other product-oriented services addressing drivers’ and
driving needs
#3 High service attitude
This group is characterised by a high service attitude and an estimated high customer
interest for services. It includes both workshops and dealers that offer a wide array of
services belonging to all service categories

issues and/or on selling products, and to improve managerial and relational

competences.

4.4.2 The Customers’ Perspective

First, the set of services provided in the heavy-truck industry has been divided in
four clusters concerning their degree of diffusion and use in the market, as sum-
marized in Table 4.3.
In exploring the customer viewpoint, it has been noticed that most of the services
offered are little known and used. In particular, the attitudes towards services can
strongly differ among customers, as emerged in a second cluster analysis. The
analysis identifies three categories of customers according to their awareness and
interest towards the service offerings. The clusters, reported in Table 4.4, are
described considering (1) their nature (they can be truck owners and drivers or just
owners); (2) the number of owned vehicles: small fleet (less than 10 vehicles),
medium fleet (10–50 trucks), and large fleet (50 or more trucks); and (3) the kind of
route driven (international, national, regional, and local/off-highway route).
From a more in-depth analysis of the aforementioned clusters, it emerges that
the size of the owned fleet seems to the influence customers’ knowledge of ser-
vices, whereas the driven route influences the importance given to services.
Actually, customers with a medium-sized fleet know a larger number of services,
whereas players who drive national and international routes perceive more clearly
the value added to their businesses by services.
The research shows that some divergent perceptions of the importance of ser-
vices occur between customers and the service network. In fact, dealers and
workshops emphasize product-support services, which are considered strategic and
4 The Automotive Industry 69

Table 4.3 Service diffusion in the heavy-truck market

Cluster Cluster name Main characteristics
#1 Services with a limited diffusion and use
This group consists of services that are mainly intangible, and characterised sometimes
by transactional interactions, sometimes by relational approaches. Because of their
complexity, they are often delivered by the OEM. They are rarely promoted and
provided by the service network directly, because they require significant
investments, and are characterised by a low level of utilisation. Examples are legal
and financial support, driver accommodation and repatriation in case of accident,
online monitoring (tracking) of repair activities, support for maintenance activities,
and spare parts management (training)
#2 Services with a medium diffusion and use
This group mainly consists of product-oriented services aimed to support vehicles’
reliability and availability. The group includes also some relationship-based services
for product support, delivered together with the vehicles to create a long-term loyal
relation with customers, such as telematics assistance or vehicle remote monitoring
and diagnostics. In this cluster also included are training, information, and promotion
services delivered by workshops to create long-term relations with their customers.
Examples of such services are service for alarm systems, fleet management training
and consultancy, support for maintenance activities and spare-parts management
(consultancy) for customers with their own workshops, help desk (information/
emergency), spare parts supply and maintenance packages (for old vehicles), and
extended warranties
#3 Services with high diffusion and medium use
Services included in this group are created to simplify customer operations and financing
schemes. They are characterised by a medium use by customers, but a high level of
diffusion among service networks. Examples are summer/winter check-ups, long-
term contracts for repair and maintenance, pre-check-up, visibility on workshop
activities, credit/debit cards, online documentation, and 24/7 repair and maintenance
services
#4 Services with high diffusion and use
This group comprises mainly traditional after-sales services, which customers expect to
find in all workshops. Offered by almost all sample companies, and used by a quite
large number of customers, these are mainly tangible and transactional product-
support services, which do not suppose a long-term relation between customers and
workshops. Examples are refurbished spare-parts, road assistance, and express
maintenance/repair (fast-fit)

thus are promoted towards customers. However, customers consider such services
to be commodities. On the contrary, there are services, focused on training,
information, and supporting to the customer’s business, which are little known and
promoted, even though they are strategic for a customer segment.
Moreover, even though services are considered by OEMs as strategic for
competitive and financial performance, sometimes the service network is not
aware of the contribution that increased service volumes can give to their profit-
ability. The main reasons for the lack of knowledge of services by customers can
be found in ineffective communication and promotion of services to final cus-
tomers, by OEMs, and in the low degree of servitization of the assistance network,
focused mainly on traditional after-sales services. Such evidence highlights that
70 P. Gaiardelli et al.

Table 4.4 The attitude towards services of heavy-truck customers

Cluster Cluster name Main characteristics
#1 Low awareness and importance attributed to services
This group comprises customers with little knowledge of offered services, who attribute
low importance to services, except for repair and maintenance. They are mainly
owners of small fleets who drive local routes
#2 Medium awareness and importance attributed to services
Mainly owners of small fleets who drive national routes, these customers know a
significant number of services and give them a medium-high importance. They are
interested especially in product-support services such as repair and maintenance but
often also use customer-based services
#3 High awareness and importance attributed to services
This cluster comprises customers who know very well the service offerings and consider
services very important for operating their vehicles. They are mainly owners of
medium fleet, and they drive international routes

the OEM and the service network have to collaborate and coordinate both to
design and to promote a service offering that is more consistent with customers’
needs, and to concur jointly in defining and developing a servitization strategy.
However, a shift in the mindset is necessary for not only OEMs and service
networks but also for customers, who generally are not quite conscious of the
potential relevance of services for improving their businesses. For a customer, a
greater emphasis on services means to place value not only on owning a physical
product but also on having a need met by using different services.
Finally, our findings could be influenced by the analyzed context, Italy, where a
strong culture of product ownership is widespread. The success of a service offer in
the market is highly dependent on being sensitive to the culture in which it will
operate. Indeed, service solutions have been more readily accepted in the com-
munal societies as Scandinavia, the Netherlands and Switzerland.

4.5 Conclusions

The European automotive industry is living through tough times. Demand for new
vehicles has dropped dramatically, especially in the truck sector, after 2007.
Decline and stagnation have caused the structural overcapacity of production
plants to reach unprecedented levels, and put at risk the survival of companies,
including component suppliers, vehicle manufacturers, dealers, and repair shops
(authorised or independent). Concentration and alliances are being pursued as a
way to improve the bottom line of the different actors.
Services are actually allowing companies to survive in these hard times, and
servitization seems to be an obliged evolution. New financial, strategic, and envi-
ronmental opportunities emerge both for OEMs and their service networks through
the development of this new paradigm, based on the move from a product-orientation
4 The Automotive Industry 71

towards the provision of customer-focused bundles of products and services.

Customers achieve important advantages from servitization, as they can benefit from
a wide array of new customised alternatives to fit their needs.
The results of the empirical research, however, show that the transition to
servitization is far from being achieved. A progressive diversification and
enlargement of service portfolio is occurring, and several companies have started a
process of dematerialisation of their product service-portfolio, consistent with a
servitization strategy. However, OEMs, both in the car and heavy-truck sectors,
still mainly offer traditional product-oriented services and rarely consider result-
oriented ones.
The vertical integration of the service chain is low, because OEMs rely on
third-parties dealers and workshops. Stronger coordination is acknowledged as an
important element needed to achieve a higher degree of servitization, through an
enhanced offer of relationship-based, use-oriented services. This evolution may
allow the OEMs and their authorised networks to lock out the competition by the
independent aftermarket channel, which holds the largest share of the market and
reaps most of the profits. However, authorised workshops and dealers are not fully
aware of the role of services for firms’ profitability and competitiveness. A main
obstacle can be acknowledged in the difficulty faced by OEMs and service net-
works in perceiving the difference between offering ‘the core physical product’
and the ‘product-service’ bundle, and in underestimating the strategic, tactical, and
operational challenges entailed by this transformation. Besides that, customers
have to change their mindset towards a greater emphasis on having a need met,
instead of owning a vehicle.
In fact, the picture is very complex and dynamic: technological and normative
evolutions that shape the vehicle of the future may create unprecedented oppor-
tunities for services. Moreover, urbanisation, political pressure over reduced
environmental impact, and the evolution of lifestyles shape the need for sustain-
able mobility, where mobility instead of vehicle ownership is required by cus-
tomers. Long-term leasing, car sharing, and carpooling are at an experimentation
stage, but may in the future define the next revolution of the automotive sector.

Acknowledgments This chapter has been inspired by the activity of the ASAP Service Man-
agement Forum (www.asapsmf.org), a community where scholars and practitioners from Italian
universities and several leading manufacturing companies, consulting firms, and service providers
collaborate in developing research projects and share findings in the product-services manage-
ment field. The authors wish to express grateful thanks to Giuditta Pezzotta and Barbara Resta,
researchers of the Research Group on Industrial Engineering, Logistics and Service Operations
(CELS) of the Engineering Department of Bergamo University for their contributions to the
research described in this chapter. The authors also gratefully acknowledge MobilDelvac1 that
supports their research in the automotive industry.
72 P. Gaiardelli et al.

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Chapter 5
Plant Engineering: Old Wine
in New Skins

Gunter Lay

Abstract Plant engineering companies design and construct power plants,

petrochemical plants, steelmaking plants, drinking or wastewater plants, assembly
plants, and production facilities for various other industries. Traditionally, plant
engineering companies, in addition to their physical products, offer a large port-
folio of pre- and after-sales services. Hence, servitisation is neither a new phe-
nomenon nor rare in this industrial sector. Even advanced, result-oriented services
such as the operation of newly constructed plants are frequently offered. In this
chapter, different types of plant operation services provided by plant engineering
companies are introduced. Because this type of service is transforming plant
engineering companies into users of their own product technologies, the sources of
value added for operational services are discussed in comparison to traditional
business concepts of merely selling the plants and offering services such as
training, maintenance, and the provision of spare parts. Furthermore, the economic
performance of operational services will be depicted and the future relevance of
this type of servitisation will be assessed. The empirical basis comes from the
literature, case studies and firm documents.

5.1 Introduction

Among mechanical engineering companies, manufacturers of entire plants play a

prominent role in this sector. Instead of merely producing machinery or equipment
in the B2B business, plant engineering firms provide comprehensive solutions to
their customers. These firms design and construct manufacturing sites for various
industries:

G. Lay (&)
Fraunhofer Institute for Systems and Innovation Research ISI,
Breslauer Straße 48, 76139 Karlsruhe, Germany
e-mail: gunter.lay@outlook.de

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_5, 73

 Springer International Publishing Switzerland 2014
74 G. Lay

• Producers of electricity are supplied with power plants. Plant engineering

companies are either specialised in offering fossil power plants (coal, oil, and
gas), hydro power plants, nuclear power plants and power plants based on
renewable resources or they simultaneously offer several types.
• Mining companies or oil producers are provided with mineral processing lines
(crushing, grinding, flotation, filtration, conveying, etc.) and equipment for up-
stream and down-stream business.
• The chemical industry is provided with petrochemical plants, polymer facili-
ties, fertiliser production sites, air separation plants, drinking or wastewater
plants or other specialised process lines. Plant engineering companies are also
engaged in providing facilities for rubber and plastic producers.
• The metal industry procures iron and steel making plants from plant engi-
neering firms. Plant engineering firms deliver hot and cold rolling mills for
ferrous and non-ferrous metals.
• Cement producers are supplied with cement plants comprising technology for
raw material handling and production, clinker production, cement grinding,
storage packing and dispatch.
• Manufacturers of wood, paper and paper products are provided with plants for
wood-based materials and integrated solutions for paper production comprising
the entire value chain from the removal of raw materials from the environment
to paper mills, the paper production line, stock preparation and reels.
• The automotive industry procures, e.g., body welding lines, assembly lines and
coating lines from plant engineering companies.
This is not an exhausting portfolio of plant engineering companies and illus-
trates that all major industries are their clients. The performance of the industrial
manufacturing sector is thus determined by the productivity, flexibility and quality
of plant engineering companies.
The variety of clients, their stochastic demand for new plants and the spe-
cialisation of plant engineering companies for the needs of individual client
industries imply a market fragmentation. There is no single market for plant
engineering products but many sub-segments, each with few companies on the
supply and demand side.
This oligopolistic structure creates bi-directional dependencies: The limited
number of clients strengthens their bargaining position in contract negotiations.
Clients often succeed in imposing contract terms and conditions on their suppliers
that favour the demand-side interests. Plant engineering companies as suppliers
have to compete with few competitors. Hence, the transparency of competing
offers is obvious. Customer companies are internationally located. Thus, the share
of exports reaches up to 80 % of plant engineering companies’ sales.
Regionally, many plant engineering companies have their home bases in western
and northern Europe as well as in the US. However, recently, Japanese and Korean
plant engineering firms gained relevant market shares. Increasingly, Chinese com-
petitors have appeared in the market. Their low price offers compete with high-quality
and advanced technology offerings from traditional vendors of plant equipment.
5 Plant Engineering 75

Table 5.1 provides examples of major plant engineering companies by product

and country. Because plant engineering is not addressed in the NACE code as a
specific category, reliable data on the sales and employees of this sub-sector of
mechanical engineering are not included in official statistics. Estimations indicate
a sales volume of €175 billion per year (Stroh 2006).
Because the plant engineering business requires individual solutions for each
customer, pre-sales services are necessarily part of each offer and contract.
Analyses for requirement specifications, R&D, consulting and individual engi-
neering services are traditionally fundamental elements of plant engineering.
Additionally, after-sales services, such as plant construction, installation, training
of customers’ employees and start-up assistance, are generally provided. During
the lifetime of the installed plant, equipment plant engineering companies have to
offer spare parts, maintenance and repair services.
Hence, servitisation is not a new trend for plant engineering companies. Plant
engineering companies regard themselves traditionally as manufacturers and ser-
vice providers. An analysis of service offerings of major plant engineering com-
panies depicted in Table 5.1 supports this attitude. The homepages of almost all
companies include a direct link to the services that they offer to their customers.
Only a few companies lack a prominent link to their service offering on their
homepage but describe their service offerings beyond their product offers. In our
list of examples, no plant engineering company without a service offering was
found. A comparison of this result with the data reported by Dachs et al. (2013)
proves that plant engineering companies are at the forefront of servitization.
Whilst Dachs et al. demonstrated that 74 % of manufacturers of simple products,
88 % of producers of medium-complex products and 94 % of manufacturers of
complex products offer at least one service, we found that 100 % of the companies
in the sample of plant engineering companies provide services. This result is in
line with the findings of Leo and Philippe (2001), Oliva and Kallenberg (2003) and
other scholars, who have reported that an increasing product complexity has a
positive impact on the propensity to offer additional services to customers. Fur-
thermore, the findings confirm the assumptions of Hobday et al. (2005) that
product customisation stimulates product-related service offerings.
An in-depth analysis of the services offered by plant engineering companies
clearly indicates that advanced service offerings are widespread in plant engi-
neering companies. The application of Tukker’s typology (Tukker 2004) shows
that many companies do not merely offer product- or use-oriented services but are
also engaged in result-oriented services. More than ten of the plant engineering
companies listed in Table 5.1 provide plant operation services to their customers.
This type of service transforms plant engineering companies into users of their
own technologies. Customers taking advantage of this offer buy the final product
of the manufacturing plant provided by plant engineering companies instead of the
plant technology.
A closer look into operational services of plant engineering companies reveals
that the motives for and arrangements of these services vary. The following sections
introduce different types of plant operation services and illustrate the sources of
Table 5.1 Examples of major plant engineering companies by products, size and countries
76

Company Products Employees Country Website

ABB Power pl., car assembly pl. 145,000 CH http://www.abb.com/
Air Liquide E&C Air separation plants n.a. F http://www.engineering-solutions.airliquide.com
Alstom Power plants 92,000 F http://www.alstom.com/
AMG Vacuum process plants 3,300 NL http://www.amg-nv.com/
ANDRITZ Power plants, pulp and paper and steel production 23,400 A http://www.andritz.com
plants
Ansaldo Power plants 2,900 I http://www.ansaldoenergia.it/
Bechtel Petrochemical and mining facilities, power plants 53,000 USA http://www.bechtel.com/
Bosch Rexroth Assembly plants 35,000 GER http://www.boschrexroth.com
Bühler Food processing plants 8,000 CH http://www.buhlergroup.com
Langley Cement plants, welding plants 4,000 GB http://www.langleyholdings.com/
Hillenbrand Plants for plastic and aluminium production 4,200 USA http://www.hillenbrandinc.com/
Dieffenbacher Wood-based panel production plants 1,700 GER http://www.dieffenbacher.de
Doosan Power plants 43,000 KOR http://www.doosan.com
Dürr Paint shops and assembly plants 7,700 GER http://www.durr.com
Eisenmann Car body and assembly plants 1,400 GER http://www.eisenmann.com
Ferrostaal Power pl., petrochemical pl. 4,300 NL http://www.ferrostaal.com/
FLSmidth Cement/mineral plants 15,000 DK http://www.flsmidth.com/
Hitachi Power Power plants 1,100 JAP http://www.hitachi.com
KHD Cement plants 800 GER http://www.khd.com/
Krones Food industry plants 12,000 GER http://www.krones.com
KUKA Car assembly and welding plants 7,300 GER http://www.kuka.com/
Linde Chemical, petrochemical, air separation plants 56,300 GER http://www.the-linde-group.com
Outotec Iron and steel making plants, mining equip. 4,900 FIN http://www.outotec.com/
Siemens Metals Iron and steel making plants n.a. A http://www.industry.siemens.com/verticals/
Techn. metals-industry
(continued)
G. Lay
Table 5.1 (continued)
Company Products Employees Country Website
Siempelkamp Plants for wood materials, rubber and metal forming 3,300 GER http://www.siempelkamp.com
SMS Siemag Metallurgical plants and rolling mills 6,300 GER http://www.sms-siemag.com
Thyssen-Kr. Res. Cement plants, mineral industries plants 5,500 GER http://www.thyssenkrupp-resource-technologies.com/
Tech.
5 Plant Engineering

Thyssen Krupp Uhde Plants for fertilisers. base chemicals, polymers 5,900 GER http://www.thyssenkrupp-uhde.de
Voith Paper and power plants 42,000 GER http://www.voith.com
WABAG Drinking and wastewater pl. 1,500 A http://www.wabag.com
Wärtsilä Power plants 18,900 FIN http://www.wartsila.com
77
78 G. Lay

value added for these business concepts in comparison to the traditional business
concepts. The descriptions are based on literature, case studies and firm documents.

5.2 Types of Plant Operation Services Provided by Plant

Engineering Companies

5.2.1 Plant Operation Services to Push Innovative Plant

Technologies to the Market

A first type of plant operation services provided by plant engineering companies

has been developed to overcome customer reservations against innovative tech-
nologies. If plant engineering companies want to introduce innovative technical
concepts into markets, they have to convince their customers of their superior
performance. Because innovative technologies often involve start-up problems
and/or imply higher investments, customers may hesitate to switch from traditional
and proven technologies towards innovative solutions. Hence, providers of these
new technologies have to demonstrate their potential before customers will invest
in these innovative plants.
The case of ALD Vacuum Technologies, Hanau, Germany, provides a conclu-
sive example for this type of plant operation services. ALD was established in 1994,
is now a member of AMG Advanced Metallurgical Group N. V. in the Netherlands
and employs approximately 750 people. ALD has developed innovative vacuum
furnaces and vacuum processes and regards itself as one of the leading suppliers of
this technology. The applications of vacuum thermal processes are amongst others
utilised in the tool industry and particularly in the automotive and gear production.
(http://www.ald-vt.com/cms/en/vacuum-technology/company).
Vacuum heat treatment processes have been developed to cope with the
problems of oxidation. Oxidation occurs on a part’s surface when exposed to the
atmosphere. Oxidation results in costly and time-consuming post treatments.
Therefore, heat treatment is preferably conducted in an oxygen-free atmosphere. In
addition to the use of high-purity protective gases, a vacuum allows the best
protection against oxidation and thus is the most cost-efficient atmosphere.
The ‘‘new technology’’ vacuum heat treatment was developed by ALD in the
early 1990s. When first introduced, ALD realised that the processes were not
easily accepted because they were significantly different from established heat
treatment processes using atmosphere and oil quenches. To improve understanding
of the new technology by the global manufacturing community, ALD established
their ‘‘Own and Operate Division’’.
This division installed several vacuum heat treatment facilities and operates them
currently for various customers. One of these customers is GM Powertrain in Port
Huron, Michigan, USA. Established in 2005, this plant started production in June
2006. The operation arrangement comprises the following aspects: ALD built the
facility ‘‘fence-to-fence’’ to the customer’s plant and remained owner of all
5 Plant Engineering 79

equipment. The capital for this investment was financed by bank loans. The employees
for running the facility were hired by ALD. GM pays for the vacuum heat treatment of
the transmission gears according to the number of manufactured parts. The contract
with GM includes no fixed number of parts to be delivered, which implies that the
market risk of GM is partly transferred to ALD. ALD has accepted this risk to provide
a showcase for the ALD brand equipment technology as well as the new process
techniques. Furthermore, ALD acquires additional know-how from running the
innovative equipment, which enables this plant engineering company to improve the
equipment’s performance and to gain an increased competitive lead (Lay 2007).
The value added of the type of operational service offerings illustrated by the
ALD case presented above compared to traditional business models is at least
twofold. First, customers avoid start-up problems and start-up costs possibly
generated by an investment in innovative and unproven plant technology. How-
ever, this value added can only be achieved in the experimental phase of tech-
nology use. After having demonstrated the superior performance of new technical
solutions, such a value added cannot be achieved permanently. Second, the plant
engineering company can realise an enduring value added if its operational know-
how exceeds the customers’ know-how permanently due to the complexity of the
technology, the speed of technological change and an inseparability of the pro-
ducer’s and applied knowledge. The latter frame conditions would imply that in
the long run, plant engineering companies would have to decide if they should
incorporate downstream businesses.
A particular setting in terms of the latter frame condition occurs if the customers
of plant engineering companies are not generally excluded from acquiring the
necessary know-how of running innovative plant equipment on a high-performance
level comparable to the providers’ ability. If customers decide that acquiring spe-
cific knowledge for running an innovative plant technology is outside their core
competencies, plant engineering companies could offer operational service only for
this clientele without ‘‘going downstream’’ in general. Kujala et al. (2011) found
such a case in their studies of a power plant engineering company in Finland. Such a
‘‘split business model’’, however, could raise the problem that customers of plant
engineering companies could regard them as rivals in their markets. The business of
engineering and selling plant equipment could conflict with the operational service
business. Our interviews with ALD executives have clearly shown that they are
aware of such a conflict and that the ALD management is eager to avoid this
problem by segmenting markets.

5.2.2 Plant Operation Services Forced by Customers’

Financial and Rating Motives

A second type of operational service provided by plant engineering companies

differs from the first type discussed above in initiators and motives. Whereas the
first type is an instrument actively deployed by plant engineering companies to
80 G. Lay

stimulate the market entry for innovative technologies, the second type is pre-
dominantly customer driven. Particularly customers from the automotive industry
in the nineties of the last century started to require plant operations from the
providers of plant equipment. Customers aimed to improve their balance sheets by
diminishing fixed capital, by developing new instruments for financing their
investments or by cutting wages to gain advantages from the wage drifts between
automotive and engineering industries.
The case of Dürr may illustrate this second type of plant operation services.
Dürr is one of the major systems suppliers for automobile manufacturing. Dürr
plans and builds complete paint shops and final assembly facilities. A Dürr project
requires, on average, an investment of €100–€200. Dürr has its home base in
Germany, is directly represented in 23 other countries and, with 7,700 employees,
generates annual sales revenues of approximately €2.4 billion (2012).
In the nineties, within their business unit ‘‘services’’, Dürr established specialised
department ‘‘operating models’’. Although the corporate policy of Dürr was not
targeted towards an active offering of operating models, the demand for this type of
result-oriented service required such a reorganisation. In 2001, Dürr received 39
inquiries to calculate and offer operating models. An internal analysis of Dürr
proved that the majority of these inquiries was motivated by financial (optimised
cash flow management) or balance sheet (provisions for rating issues) reasons. Only
3 customers intended to realise value added (Stock and Wende 2003).
The operating models developed by Dürr to meet the customer requirements
consisted of 4 components, each with different options:
• Equipment: Brownfield or Greenfield, building included or excluded.
• Financing: Operating lease, joint venture or full ownership.
• Services: Managed services, different levels of maintenance, cleaning, and full
service.
• Operation: Managed operation, full operation, supplier network management,
and quality management.
These components can be combined individually: Some projects may include
equipment, financing and service; other projects may include equipment, services
and operations. Not all 4 components are necessarily part of a project. The dis-
tinction between the services component and the operation component is blurred:
Within the service component, Dürr already guarantees that all parameters of a
coating line are adjusted for a smooth coating process. Dürr personnel start the
coating line, clean the blast pipes or supervise the drying process equipment,
which is used to cure coatings and to turn the paint finish into a perfect surface. If
the component ‘‘operation’’ is additionally part of the contract, the lacquerers are
also on Dürr’s payroll (Stock and Wende 2003).
Based on this modular concept, Dürr realised several plant operation projects.
One of these projects has been contracted by IBC Vehicles, Luton (GB). In this
project, Dürr was responsible for the engineering, manufacturing, delivery and
financing of a final finishing wax line. Additionally, full services, operations,
maintenance and cleaning tasks were transferred to Dürr. Twenty-two Dürr
5 Plant Engineering 81

employees operated full time in 3 shifts at the Luton site of IBC. The operational
contract was for 13 years, and the payment was arranged on a cost-per-unit schema.
In addition to the case of Dürr introduced above, several other plant engineering
companies engaged in supplying the automotive industry with manufacturing sites
have realised this type of plant operation services in the nineties of the last century
and in the first years of the new millennium:
• KUKA (Augsburg, Germany) built a body shop plant to assemble the bodies
for Chrysler’s Jeep Wrangler in Toledo, Ohio (USA) and operated this welding
line with 245 industrial robots since 2007. The investment of 142 million US
dollars and the wages for 230 employees have been financed by KUKA.
Chrysler pays on production (Eckhardt 2006; AMS 2006).
• Eisenmann (Böblingen, Germany) offers a build-operate-transfer model in
which it operates the customers’ Eisenmann plant with its own personnel and
performs logistics, quality control and maintenance (http://www.eisenmann.
com/en/products-and-services/service/full-service-and-build-operate-transfer-model/
build-operate-transfer-model.html). Eisenmann provides references of operating
models in Brazil (painting system for truck cabs and truck trailers), Belgium
(operation/maintenance of EMS connecting a supplier park with final assembly) and
Germany (operation/maintenance of an assembly line and EMS connecting a sup-
plier park with final assembly).
As mentioned above, this type of plant operation service was not primarily
targeted towards creating value added but was inspired by the off-balance sheet
financing interests of automotive manufacturers. The attempt to improve their
ratings by off-balance financing of investments was enabled by US GAAP regu-
lations (United States Generally Accepted Accounting Principles). If the operating
lease contracts did not comprise automatic transfer of ownership to the lessees at
the end of the contract and no purchase option to the lessees at a low price, if the
leasing term was beyond 75 % of the equipment’s life time, and the discounted
lease rates were beyond 90 % of the investment, off-balance status could be rea-
lised. After amendments to this regulation, this type of plant operation service lost
its value for customers, and customer requests decreased. In addition, some plant
engineering companies realised that operational business models established for
financial reasons shift risks from customers to suppliers without an adequate
compensation. In this environment, Dürr, for example, decided to stop offering
operational services for their products in 2005 (Dürr 2005).

5.2.3 Plant Operation Services to Compensate for Deficits

in the Qualification of Customers’ Employees

A third type of operation service provided by plant engineering companies aims to

compensate for existing qualification deficits of customers’ employees in operating
plants. Either customers can request offers for this type of service if they feel
82 G. Lay

unable to exploit plant technologies with their own personnel or plant engineering
firms can take the initiative if they want to tap new markets for their products,
particularly in developing countries in which the skills of the workforce cannot
guarantee the appropriate use of their technology and from which orders are
consequently scarce.
The WABAG Group provides vivid examples of this type of plant operation
services by its offerings and references. WABAG is one of the world’s leading
companies in the water treatment field. WABAG’s key competences, which are
based on over 80 years of plant building experience, lie in the planning, com-
pletion and operation of drinking water and wastewater plants for both the
municipal and industrial sectors. The WABAG Group with international operating
companies in Vienna (Austria) and Chennai (India) has a workforce of approxi-
mately 1,500 employees and is represented through companies and offices in 20
countries. Since 2000, WABAG has installed over 500 plants worldwide, which
furnish more than 100 million people and over 200 industrial companies with
water infrastructure (http://www.wabag.com).
WABAG has realised that the efficient management of their water treatment
plants for customers frequently represents an unknown technical area. Business
management requirements are increasing and technologies are constantly devel-
oping. Simultaneously, the legislation in many countries relating to water man-
agement is also becoming increasingly stringent. To meet all these economic,
technical and legal demands, WABAG offers its knowledge and competence in the
area of operational management of water and wastewater plants to their customers.
The goal is to optimise the plant operation and thus contribute to their success
(http://www.wabag.com/performance-range/operations).
WABAG offers a range of individual plant operation models:
• The ‘‘Build-Own-Operate and Transfer (BOOT)’’ model represents a complete
solution for the financing, construction and operation of a plant. WABAG takes
overall responsibility for the building and operational management of the plant,
while at the same time securing the financing of the required investment using
available grant possibilities. At the end of the contractual period, the plant
becomes the property of the customer.
• The ‘‘Designs, Build, Operate (DBO)’’ model consists of the planning, con-
struction and operational management of new plants. Customers are offered
trained specialists, proven technology, secure operational procedures, guaran-
teed availability and high quality.
• The ‘‘Plant Operation/Outsourcing (O&M)’’ model transfers the operational
management of existing wastewater plants and waterworks to WABAG. In this
arrangement, a ‘‘pure’’ service agreement is concluded. WABAG is responsible
for the technical process and/or commercial success of plant operation. This
model is characterised by the training and integration of the existing skilled
personnel as well as unaltered charges, investment control and ownership.
Table 5.2 summarises the operational models offered by WABAG. Today, plant
operation services contribute markedly to WABAG’s overall sales. An interview
5 Plant Engineering 83

Table 5.2 Operational service concepts of water plant provider WABAG

WABAG plant operation WABAG responsibility
service concepts
Engineering/ Financing Ownership Maintenance Operation
construction
Build-Own-Operate, x x x x x
Transfer (BOOT)
Design, Build, Operate x x x
(DBO)
Plant Operation/ x x
Outsourcing (O&M)

with WABAG’s executive for operational services in 2006 indicated that this
business segment at that time already had a share of approximately 10 % of the
total revenues.
There are various references for BOOT, DBO and O&M projects of WABAG: A
BOOT wastewater treatment project with a contract extending from 2003 to 2017
has been realised in Alandur (India). DBO projects have been contracted, for
example, in Adana (Turkey), Batna and Baraki (Algeria), Teheran (Iran), Vadakuthu
(India) and Petrobrazi (Romania). O&M projects are reported in Macau (China),
Windhoek (Namibia) and Arpechim (Romania). This reference list of plant opera-
tion service projects (http://www.wabag.com/projects) indicates that developing
countries offer a promising market for this type of operational service from plant
engineering companies.
This finding is confirmed by the experiences of FLSmidth, a leading supplier of
equipment to the global cement and minerals industries that is based in Denmark.
For example, in 2010, FLSmidth received contracts from the Angolan Fabrica De
Cimento Do Kwanza-Sul S.A. for the operation and maintenance of its 4,200 tonne-
per-day cement plant, by Carthage Cement for the operation and maintenance of its
new cement plant to be constructed approximately 40 km southwest of the Tunisian
capital Tunis and by the Arabian Cement Company (ACC) for the operation and
maintenance of the second line at its cement plant near the city of Suez in Egypt
(FLSmidth Company Announcements No. 04-2010, 18-2010, 32-2010).
The offering of operational services by plant engineering companies because
the customers’ personnel are unqualified appears to be a widespread phenomenon
in plant engineering businesses. In addition to the water treatment plant and
cement plant examples above, the literature also provides a case study from a
power plant manufacturer (Kujala et al. 2011). In the case study of Consolidated
Power Company (CPC, a pseudonym), two types of contracts were realised: first,
an integrated project with a power plant delivery contract, and second, a stand-
alone service contract composed of operation and maintenance services (O&M).
Out of 5 CPC O&M-projects that are depicted in depth, 3 aimed to overcome skill
level deficits on the customers’ side.
To summarize, the operational services of plant engineering companies targeted
towards overcoming deficits in customer qualifications appear to create sufficient
84 G. Lay

additional value for both sides. Plant engineering companies can realise profits as
providers of operational services, while customers can gain benefits superior to
self-contained plant operation.

5.2.4 Plant Operation Services to Exploit Benefits

from Combined Production

A fourth type of operational service provided by plant engineering companies

addresses manufacturing facilities such as petrochemical plants and air separation
plants. Whereas petrochemical plants produce bulk building blocks, such as eth-
ylene, propylene and aromatics from fossil resources, air separation plants frac-
tionate the air components oxygen and nitrogen as well as various rare gases. If
customers need only one or two components from petrochemical or air separation
plants, they need to handle the redundant results of combined production pro-
cesses. Thus, the customers need to become traders of these products or dispose of
the materials that are useless to them but perhaps useful for others. Some expenses
can be avoided if the combined production of the plant is not operated by these
customers but by plant engineering companies. Plant engineering companies can
construct, own and operate combined production plants in optimised locations to
serve customers in need of all the materials that result from combined production.
Production costs per unit decrease if all materials from the combined production
processes can be commercialised. The value added is obvious.
The German Linde Group offers an illustrative example for such a business
concept. Linde has a workforce of approximately 62,000 employees working in
more than 100 countries worldwide. In the 2012 financial year, Linde generated a
revenue of €15.280 billion. Linde is organised into two divisions: engineering and
industrial gases. The engineering division focuses on constructing plants for the
production of hydrogen, synthetic gases, oxygen and olefins as well as plants for
natural gas treatment. With more than 1,000 process-engineering patents and 4,000
completed plant projects, Linde Engineering ranks among the leading international
plant contractors. The gas division offers a wide range of compressed and liquefied
gases as well as chemicals, for the energy sector, steel production, chemical
processing, environmental protection, welding, food processing, glass production
and electronics, among others.
Both divisions are closely linked. More than one fifth of the engineering
division’s revenues result from the gas division’s orders for building air separation
plants (Linde 2012b). These plants have not been sold to customers of Linde
Engineering but are operated by Linde Gas on-site at the customers’ facilities, and
Linde Gas provides them with the required gases. Two newly contracted projects
elucidate this business model:
• In June 2011, Linde announced that Linde Engineering would build the largest air
separation plant in Indonesia for Krakatau Posco’s new steelwork. Krakatau
Posco would build a steelwork in the Cilegon area, located approximately 100 km
5 Plant Engineering 85

west of Jakarta. To support the gas requirements of the new steel plant, Linde Gas,
not Krakatau Posco, would invest approximately EUR 88 million for the engi-
neering and construction of the air separation plant. To meet the 1,680 tpd oxygen
requirement of the new steelwork, the plant would also produce liquid products to
meet the growing demand for industrial gases in West Java (Linde 2011).
• In February 2012, Linde reported a major on-site contract in New Zealand with
the steel producer New Zealand steel. The agreement consisted of a new air
separation unit constructed by Linde Engineering and the installation of gas
supply systems. Linde Gas would invest in this air separation plant instead of
New Zealand steel and supply air gases to the steelworks. The air separation
unit would also produce large quantities of liquefied oxygen, nitrogen and
argon for the regional market in New Zealand (Linde 2012a).
An expert interview with a Linde representative in 2005 further clarified the
economic rationales behind these types of projects: Linde Engineering configures
the on-site facilities to be operated by Linde Gas not only to meet the demand of the
direct customers but also to supply regional demand. Thus, the on-site project can
realise economies of scale. These economies of scale together with the synergies
from combined production generate value added, which cannot be realised by the
traditional business models of customers investing in plants of Linde Engineering.
The advantages of the plant operation concept described above are commer-
cialised not only by the German Linde Group. The French Air Liquide has a
similar structure consisting of gas-producing divisions and an engineering and
construction division (Global E&C Solutions). The latter constructs the group’s
production units—mainly air separation units and hydrogen production units—and
provides plants for third party clients.

5.2.5 Plant Operation Services to Increase Customers’ Plant

Utilisation Rates

The fifth type of operational service provided by plant engineering companies

solves the customer problem of adequately dimensioning plant capacity. In the
process of planning a new plant, customers can choose a configuration that is
designed to meet the anticipated average capacity demand. Such a decision will
lead to capacity utilisation rates that are temporarily beyond the economic opti-
mum. Alternatively, customers can choose a smaller configuration, which is only
able to meet the lowest anticipated demand. The economic optimum of running the
plant at full utilisation rates would be guaranteed; however, spot demands could
not be met. Thus, competitors would be able to enter the market and gain clients.
In this situation, the customers of plant engineering companies traditionally
choose the former alternative. To enable customers to choose the latter alternative
without risking the consequences, several plant engineering companies take
advantage of flexible capacities in their own facilities and operate these plants to
meet the spot demands of various customers.
86 G. Lay

The case of Rohwedder Micro Assembly GmbH in St. Leon-Rot (Germany)

illustrates this fifth type of operational service from plant engineering companies.
The focus of Rohwedder’s activities, with its approximately 95 employees, lies in
implementing assembly solutions for the automotive, medical equipment, elec-
tronics, consumer product and general industry sectors. Between 2005 and 2008,
Rohwedder and its customer Jenoptik AG, an optoelectronics group with approx.
3,270 employees and sales of €585 million (2012), were collaborating on a project
subsidised by the German Federal Ministry of Education and Research. The
companies aimed to develop technological solutions and business models to meet
Jenoptik’s requirements for assembling regular and spot capacities. The project
results accommodated three scenarios. One of these scenarios envisaged installing
an automated assembly line at Jenoptik’s facilities designed for regular capacity
demand. Additionally, modular assembly technology that could be deployed for
various customers’ assembly tasks should be installed in another Rohwedder plant.
Rohwedder remains owner of the latter assembly technology. When spot demands
occur and Jenoptik assembly facilities are running at capacity, Jenoptik will ship
the parts to be assembled to Rohwedder, and Rohwedder will perform the
assembly with its own personnel and will be paid for the usage. In case of regular
capacity demands, Rohwedder can use the line for the spot demands of other
customers or for test and demonstration purposes (Müller and Schmidt 2008).
KUKA AG (Germany), a supplier of robotics as well as plant and systems engi-
neering, offers a similar concept. Instead of only offering robot welding lines to their
customers, KUKA AG additionally developed ‘‘subcontract welding’’ offerings. On
their website (http://www.kuka-systems.com/en/products/job_order_prod/), the
company states the following: ‘‘As a manufacturer of flexible robot cells for laser
machining as well as friction and magnetarc welding machines, we have many years
of experience in machine design and process applications. We have been carrying out
subcontract welding work for renowned companies since 1970. We manufacture a
wide range of thick and thin metal plates as well as parts, including drive shafts,
hollow-spoke aluminium wheel rims, pipeline valves, bevel gears, piston rods,
engine valves, trailer axles, rollers, turbine wheels, drawbars, and many more.
Subcontract welding work is subjected to 100 % process monitoring.’’
The Swiss Bühler Group, a specialist and technology partner for plant, equipment,
and services for processing basic foods and for manufacturing advanced materials,
provides a third example of this type of plant operation service. The group offers their
‘‘Rent a factory’’ service, ‘‘a factory which only generates costs when it is actually
used’’ (http://www.buhlergroup.com/global/en/services/manufacturing–logistics.htm).

5.3 Summary and Outlook

The results depicted above clearly indicate that servitisation is neither a new
phenomenon nor rare in plant engineering companies. Manufacturers of plants
traditionally regard themselves as engineering and service-providing firms.
5 Plant Engineering 87

Product- or use-oriented services are available everywhere, and result-oriented

services are prevalent. Several plant engineering companies are experienced in
plant operation services as they have been offering them for many years. The types
of plant operation services provided by plant manufacturers differ in their initia-
tors, motives and value added. Table 5.3 summarises the types introduced above.
The synopsis of Table 5.3 shows that two types of plant operation services are
supply-side driven, two other types are jointly initiated by plant engineering
companies and their customers, and one type is predominantly customer driven.
The motives for taking the initiative to offer or to require plant operation services
in three of five types (3, 4 and 5) are deeply rooted in the untapped economic
potential of traditional business models. If customers’ employees do not have the
skills to exploit advanced plant technology, if combined production processes
inevitably produce materials that the customers do not need in their manufacturing
or if investments can be adapted to enduring capacity demands of customers, then
the value added of operational services is obvious. Plant engineering companies
and their customers can realise benefits if they reach a fair agreement on how to
share the value added.
One type of plant engineering service (1) is not directly linked to the untapped
economic potential of existing business models but promises to open up markets
for innovative plant technology. Hence, the plant engineering companies can
realise the value added. If plant engineering companies succeed in stimulating
additional demand for their plant technology by demonstrating their superiority,
they can generate additional sales and profits. This finding implies that plant
engineering companies do not need to offer operational services at lower costs or
with an increased output compared to traditional business concepts.
In contrast, a final type of operational service (2) appears not to provide any
value added. This type of service is initiated by customers trying to overcome their
financial or rating problems. In this case, customers intend to impose risks on their
suppliers, and suppliers can hardly refuse due to their dependency on a few large
customer companies. The modification of the US GAAP regulations stopped this
pressure from customers. Hence, this type of operational service, which boomed in
the nineties of the last century, has lost its relevance to some extent.
The forms of operational services of plant engineering companies do not vary
significantly. The ownership of the plant remains predominantly with the plant
engineering company, the employees that operate the plant are recruited by the
plant engineering company, and payment is based on the quantity and quality of
parts or units manufactured in the plant. Only the location of the operated plant
varies. The location is either at the customers’ site, near the customers’ site or even
connected to the facilities of the plant engineering companies. In each case, the
choice depends on the best way to realise the value added.
The economic performance of operational services appears to satisfy plant
engineering companies. Interviews with executives from plant engineering com-
panies engaged in operational services (Lay 2007) as well as (preliminary) results
from the literature (Kujala et al. 2011) indicate sufficient profits, at least for types
1, 3, 4 and 5 of this business model. Because plant operation services provide
 88

Table 5.3 Types and characteristics of operational services provided by plant engineering companies
Type characteristics Type of plant operation service provided by plant engineering companies
1 2 3 4 5
Initiator of plant operation Plant engineering Customer Plant engineering Plant engineering company Plant engineering
service company company company and/or company and/or
customer company customer company
Motive for supplying/ Marketing for Financial/rating Lacking employee skills Only partial demand for Decrease of customers’
demanding operational innovative problems on on customers’ side products from combined plant capacity to
service plant customers’ production on customers’ increase utilisation
technology side side rates
Form of Ownership Plant engineering Plant Predominantly customers Plant engineering company Plant engineering
operational of plant company engineering company
service company
Personnel Plant engineering Plant Executives and first-line Plant engineering company Plant engineering
for company engineering management: plant company
operation company engineering company
Payment for Pay per part/use/ Pay per part/use/ Investment plus pay per Pay per part/use/unit Pay per part/use/unit
operation unit unit part/use/unit for
suppliers’ operational
costs
Location of Fence-to-fence Customer site Customer site Fence-to-fence with customer Plant engineering at
operated with customer site company’s site
plant site
Source of value added for Additional sales No value added Optimised exploitation of Commercialisation of all Increased utilisation of
plant operation service by developing (zero sum plant technology products from combined investments
larger game) production plants
markets
G. Lay
5 Plant Engineering 89

continuous revenues, they can additionally equalise cyclical sales in the engi-
neering business. This advantage motivates engineering companies to extend their
business into these areas. While operational services already generate important
revenues for many plant engineering companies, the relevance of these services
will increase in the future.

References

AMS. Automotive Manufacturing Solutions. (2006). Quality down the line, AMS November/
December 2006, p. 64.
Dachs, B., Biege, S., Borowiecki, M., Lay, G., Jäger, A., & Schartinger, D. (2013). Servitisation
in European manufacturing industries: Empirical evidence from large-scale database. The
Service Industries Journal.
Dürr. (2005). Annual Report, Letter of the CEO.
Eckhardt, J. (2006). Tom im Glück, in: Handelsblatt, 2006, August 31.
Hobday, M., Davies, A., & Prencipe, A. (2005). Systems integration: a core capability of the
modern corporation. Industrial and Corporate Change, 14(6), 1109–1143.
Kujala, S., Kujala, J., Turkulainen, V., Artto, K., Aaltonen, P., & Wikström, K. (2011). Factors
influencing the choice of solution-specific business models. International Journal of Project
Management, 29(2011), 960–970.
Lay, G. (Ed.). (2007). Betreibermodelle für Investitionsgüter. Stuttgart: Fraunhofer-Verlag.
Linde. (2011). Press Release dated 11.06.2011.
Linde. (2012a). Annual Report.
Linde. (2012b). Financial Report.
Leo, P.-Y., & Philippe, J. (2001). Offer of services by goods exporters: strategic and marketing
dimensions. The Service Industries Journal, 21(2), 91–116.
Müller, L., & Schmidt, B. (2008). Wirtschaftliche Montage bei schwankender Nachfrage und
extremen Kapazitätsspitzen. In: Witte, K.-W., Vielhaber, W. (Ed.), Lebenszyklusoptimierte
Montage, pp. 119-148. Aachen:Shaker Verlag.
Oliva, R., & Kallenberg, R. (2003). Managing the transition from products to services.
International Journal of Service Industry Management, 14(2), 160–172.
Stock, S., & Wende, M. (2003). Betreibermodelle – Eine Wettbewerbsstrategie für Industrieun-
ternehmen, Diplomarbeit, Bergische Universität Wuppertal, Integrierter Studiengang
Wirtschaftswissenschaften.
Stroh, V. (2006). Bilanz und Perspektiven des deutschen Industrieanlagenbaus.
Tukker, A. (2004). Eight types of product-service-systems: Eight ways to sustainability? Business
Strategy and the Environment, 13(4), 246–260.
Chapter 6
Air Compressors or Compressed Air:
Harvesting the Benefits

Peter Radgen

Abstract The customers of air compressor manufacturers are traditionally

industries that procure and use these devices for the production of compressed air,
which is needed in their production processes. Because the application of air
compressors for the production of compressed air is quite often not regarded as a
core competence by these customer industries, the efficiency in the air compressors
can usually be significantly improved. New business concepts have been designed
that target the more efficient use of air compressors. In this chapter, these new
compressed air contracting schemes will be analysed based on 6 case studies in
German industry.

6.1 Introduction

Air compressors are mechanical engineering products that enable their buyers to
produce compressed air for their production processes. The technical configura-
tions of air compressors distinguish between turbo compressors, oscillating posi-
tive displacement compressors and rotating positive displacement compressors.
The manufacturers of air compressors in the EU achieved sales of 7 billion euro
in 2012. Aside from Germany (approx. 3 billion euro), the most important European
producers are Italy (approx. 1.4 billion euro), Great Britain (approx. 0.2 billion
euro) and France (approx. 0.1 billion euro) (PRODCOM 2013). The production of
compressors in the EU is largely export-oriented. Exports comprise approximately
two thirds of overall production. The most important export markets are the EU
countries, China and the USA. In recent years, the production of compressors has
been characterised by stagnating production and falling employment.

P. Radgen (&)
E.ON Technologies GmbH, E.ON-Platz 1, 40479 Düsseldorf, Germany
e-mail: peter.radgen@eon.com

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_6, 91

 Springer International Publishing Switzerland 2014
92 P. Radgen

Applying air compressors to efficiently generate compressed air presumes their

proper and demand-oriented dimensioning, including the correct splitting of
compressor sizes, the application of variable speed drive compressors and the
selection of compressor types. In addition, a control system is needed to select the
set of compressors that most efficiently matches the respective demand.
The life cycle costs of air compressors are not dominated by the investment but
by the operating costs, primarily for the electricity supply. Energy costs typically
account for four-fifths of the total life cycle cost. The energy consumption of
compressed air systems can not simply be determined by the efficiency of the
compressors, but primarily by the interaction and efficiency of all the components
in the compressed air system (Radgen and Ruppelt 2003). Analyses have deter-
mined that the economic efficiency of compressed air production is often subop-
timal when industrial customers are purchasing and operating the compressors
(Radgen and Blaustein 2001). Because the customer industries do not regard the
production of compressed air as their core competence, only minor efforts are
often made to optimise the compressed air production. Instead, the key focus of the
customers is the availability of the system. This emphasis leads to a situation in
which roughly one third of the 14 TWh of electricity used each year to generate
compressed air in Germany (80 TWh in the EU-15) could be saved by optimising
air compressor applications (Radgen and Blaustein 2001).
This significant energy saving potential has induced the design of new business
models for the manufacture and use of air compressors, which have been realised
and tested over recent years. In these new service-oriented business models,
industrial clients requiring compressed air no longer invest to buy and operate
compressors. In this new business models of compressed air contracting, com-
pressors are owned and operated by the compressor manufacturers or any other
third party offering a similar service. The industrial customers typically pay for
each cubic metre of compressed air supplied.
Electric power companies are becoming increasingly involved in these business
models because the majority of the costs in these types of operating schemes are
not attributed to the capital expenditure for the compressors or other components
of the compressed air system, but to operational expenditures primarily for the
electrical consumption of the compressors and driers. The following groups of
actors are active in the German market, offering new business models to supply
compressed air to industrial customers:
• Manufacturers of air compressors (e.g., Alup, Atlas Copco, Boge, Compair,
Kaeser, Ingersoll Rand)
• National or supra-regional electric power companies (e.g., E.ON, RWE,
EnBW, Vattenvall)
• Regional and municipal energy companies (e.g., GEW Rhein-Energie, Mark-E,
MVV, Stadtwerke Detmold, Stadtwerke Düsseldorf, Stawag, Wuppertaler
Stadtwerke)
• Service providers with or without a special focus on compressed air technology
(e.g., Dalkia, Elyo, Getec, industrial estate operators, UltraAir, Systemplan)
6 Air Compressors or Compressed Air: Harvesting the Benefits 93

• Technical building services/technology providers (e.g., GA-TEC, Hochtief

Facility Management, IMTECH, NGT)
• Regional energy agencies, planners and compressor retailers (e.g., Energie-
agentur Mittelfranken, Drucklufttechnik Kruckenberg, Uhl Drucklufttechnik).
Different technology options, different actors on the market and a significant
energy and cost saving potential are leading to different business models, as the
individual interests of the companies can be quite different. To understand the new
business models offered for generating compressed air, new empirical evidence is
necessary.

6.2 Methodology and Database

To obtain the necessary background and understanding, we were able to convince

six companies to discuss and analyse their compressed air business models. In-
depth, face-to-face interviews were conducted with most of these firms; others
only participated in telephone interviews. All of the six companies were particu-
larly concerned about confidentiality, and so the presentation of data and findings
is anonymous to ensure that they cannot be traced back to the source. Table 6.1
presents an overview of the companies in our sample.
The data for the six case studies presented in Table 6.1 clearly indicate the
variety of actors, business perspectives and roles. Hence, the case studies present
well balanced information relative to the different perspectives of the different
stakeholder groups for the new business models. The companies examined
included compressor manufacturers, electric power supply companies and a
compressed air service provider.
The interviews proved that until now, new business models in compressed air
tended to be implemented for larger firms by larger firms. The number of
employees in the table refers, however, to the respective firm/company as a whole
and not just to the group responsible for the new business model. As a result, the
statements made for the group also apply to the companies offering operating
schemes via subsidiaries (typically the large electric power utilities). If the oper-
ating schemes for compressed air supply are outsourced as separate companies for
each costumer, these activities are usually bundled together with operating
schemes in other areas such as, e.g., heat supply, cold supply, combined heat and
power (CHP) or other services.
All the firms represented in the case studies had already implemented several
projects that applied the new business models at the time of the analysis; the
numbers ranged from 5 up to 80 projects. The majority of the projects were
realised by the compressor manufacturers.
 94

Table 6.1 Overview of the case study examples in the analysis of new business models conducted for compressors/compressed air supply
No. No. of Sector Start of new State of new business model activities Clients for the new Number of new
employees business model business model business model
activities contracts
1 [1,000 Manufacturer 1991 Continuous expansion of activities Automobile suppliers, Approx. 80
chemical industry
2 [1,000 Manufacturer 1989 No active marketing; offer only on customers’ demand Automobile suppliers, Approx. 50
chemical industry
3 \1,000 Manufacturer 1995 Discontinued activities No information Approx. 5
4 [1,000 Service 2000 After intensive start-up phase, with-drawal. Currently Automobile suppliers, Approx. 10
company renewing activities linked with comprehensive chemical industry,
energy saving contracts glass industry
5 [1,000 Service No data Continuous expansion of these activities Mechanical engineering, Approx. 10
company chemical industry
6 \100 Compressed 2001 Significant increase in turnover since 2006, continued Glass industry, chemical Approx. 10
air expansion industry, automobile,
contractor energy
P. Radgen
6 Air Compressors or Compressed Air: Harvesting the Benefits 95

6.3 Characteristics of the New Business Models

in the Analysed Sample

In all cases of our sample, the stakeholders in compressed air contracting offered to
assume complete responsibility for the generation of compressed air. The con-
tractor (compressor producer, utility or service provider) plans and installs a
compressor station on the premises of the contracting company (industrial cus-
tomer with compressed air demand). This compressor station is either installed in a
room provided by the contracting company or in a container owned by the con-
tractor and placed on the contracting company’s premises.
In most of the cases, the electricity to generate the compressed air is supplied
via a separate sub-meter by the contracting company. The actual electricity costs
are settled between the two partners or, if the power is provided free of charge by
the contracting company, a maximum electricity consumption for the production
of compressed air is fixed. Otherwise, the contractor would have no interest in
installing and maintaining an energy-efficient system. If the contractors need to
purchase the electricity directly from an energy supplier, it typically negatively
impacts the compressed air price. The contractor would have a much lower
electricity demand, and hence would obtain less favourable rates and terms for the
electricity purchase than the contracting companies, which have a much higher
total demand.
All the operating schemes realised in the new business models typically end at
the pipe flange of the compressor station, at which point the air meter is installed
and after which the client’s air distribution system starts. An air meter reading is
used to determine the payments from the client to the service provider based on
contracted terms and conditions. Aside from the volume of compressed air
delivered, sometimes the quality of the compressed air (pressure, humidity, oil
content, dust, etc.) is measured and recorded to ensure that the agreed-upon
compressed air quality standards are respected, as higher quality (especially higher
pressure) goes together with higher energy consumption. The pricing schemes for
compressed air delivery are typically established along the same lines as other
energy carriers such as electricity and gas. Remuneration schemes typically
comprises of a fixed monthly price, which is usually calculated in such a way that
the investment’s depreciation is covered, and an additional consumption-depen-
dent price per cubic metre of compressed air.
As operating costs are the dominant cost factor, the primary basis for calcu-
lating the service cost is the volume of compressed air, which must therefore be
determined as accurately as possible. The compressed air stations owned and
operated by the customers do not typically measure the amount of compressed air
produced, but for the new business models, these numbers are essential. Because
precise flow metres, which needs to be temperature and pressure compensated, are
relatively expensive, for small compressed air systems, it is usually more appro-
priate to determine the volume of compressed air delivered in a simpler way.
Instead of the volume of compressed air, the numbers of load hours of the air
96 P. Radgen

compressors are determined and multiplied with the nominal compressed air
production of the compressors based on their technical data sheets to obtain the
volume of compressed air delivered. Sometimes the contract also fixes a price
directly related to the number of operating hours, omitting the calculation for the
amount of compressed air produced.
In comparison, energy savings contracting and billing based on raw material
purchases or goods production are not widely established (Fritz 2002). In energy
savings contracting, the customer gets typically promised cost savings based on his
current costs for compressed air. In this business model, the contractor therefore
needs to realise cost savings by reducing the energy consumption for the com-
pressed air production to finance the investment and to deliver cost savings to his
customer. This type of energy savings contracting can only be successful if a
significant energy savings potential exists. Although this magnitude of savings can
be typically ensured for compressed air (average saving potential [30 %), it is
difficult to distinguish between the savings linked to technical improvements and
the impact from a change in compressed air demand on consumption, the primary
reason that energy savings contracting is not favoured despite the large saving
potential.
Business models that are linked to the clients raw material use or goods pro-
duction output would be attractive for the customer, as he would have clarity on
the share of the compressed air cost in his products. However, this model would
involve a high risk for the contractor as production is often uncertain and com-
panies are unwilling to share their market expectations for the products produced.
The required risk premium will, in most cases, therefore make this type of offers
unattractive for customers.
The structure of the new business models in the analysed cases can be gener-
alised and shown in a structured way using the following criteria: ownership of the
system, division of labour into operation and service, location of the system and
exclusiveness of use. By these criteria, several concepts can be distinguished:
In the first business model structure (case studies 1, 2 and 3), the installation is
financed by either the compressor manufacturer or a leasing bank. For smaller
systems, financing is typically provided by the manufacturer as part of his normal
credit line with his banks. For larger compressed air stations requiring a significant
investment, in most cases, a leasing bank acquires ownership of the compressors.
Usually, the suppliers work together with the same leasing bank because the bank
needs to understand the business model and the risks. The compressor manufac-
turer operate according to the sale-and-leaseback method.
Conventional financing for the new business models via existing credit lines
from the banks is straightforward for the service providers because the business
volume of the operating scheme is still less than 5 % of the turnover for the
compressor manufacturers.
The billing for the business model is based on compressed air consumption;
contractually, the minimum and maximum purchase quantities are always defined.
A minimum and maximum is regarded as necessary to enable the correct and
efficient planning and dimensioning of the compressed air system. The compressor
6 Air Compressors or Compressed Air: Harvesting the Benefits 97

manufacturer also provides the required staff to operate the system; they are
typically not required to be on site at all times. The service and maintenance of the
compressed air system is also provided by the compressor manufacturer, which is
also the case in the traditional business model. The choice of who provides the
operational personnel is typically not decisive for compressed air supply because
the systems can be operated and controlled remotely without personnel present on
site. The remote monitoring and control of compressed air systems via telephone
or LAN/internet connection has become widely established. A system equipped
with this type of technology can be monitored and controlled from anywhere in the
world. At the same time, error reports are automatically sent to the next service
technician. If compressor failures do occur, these can be addressed promptly by the
dense network of service technicians from the compressor manufacturers. In
addition, installations are typically composed of more than one compressor and are
planned based on the n - 1 rule. This rule means that even if the largest com-
pressor fails, the remaining compressor units would still be able to satisfy the
maximum compressed air demand.
A second business concept, which differs from the first, was found in cases 4
and 5. In this concept, the electric power companies sponsor and promote the
business model. These companies invest in compressors and equipment and offer
compressed air supply to industrial clients. Although the electric power companies
are better equipped financially compared to the interviewed compressor manu-
facturers (a compressor is much cheaper than a power plant), the supra-regional
energy service company still always involves a leasing bank for the financing to
keep the assets off from their balance sheets. The interviewed regional utility, in
contrast, prefers internal financing and keeps the compressed air systems operated
for their clients on their own accounts.
The electric power companies provide the staff to operate and service the
systems. However, there are some maintenance jobs (e.g., remounting the com-
pressor block or changing the compressor stage) that must be performed by
specialised staff from the compressor manufacturer. As a result, the energy service
companies place themselves in a situation of partial dependency on the compressor
manufacturer because they must rely on the prompt delivery of spare parts or
prompt repairs in the case of a compressor failure. At the same time, the energy
service companies are the biggest rivals of the compressor manufacturers in the
competition to sell compressed air to a customer. As long as the significance of
the new business models in the overall market for air compressors is still low, the
manufacturers will attempt to participate in such business together with the energy
service companies through cooperation as an option to increase their product sales.
For the supra-regional utilities, supplying several customers at once, such as in
an industrial park, or supplying a single costumer with a broad variety of energy
services (cooling, heating, lighting, electricity, etc.) is of interest and potentially
within the scope of the new business models. However, the utilities have not yet
realised these types of projects.
An important aspect of the new business models for compressed air is that each
single contracting customer requires an individual design and layout for the
98 P. Radgen

compressed air supply system, even if reference can be made to a construction kit
of standard components (compressors, driers, control units, condensate treatment,
filters etc.). So compressed air is not comparable to the commodity business of
selling electricity and gas. For this reason, the supra-regional energy supply
companies are willing to cooperate with an external service provider that is
responsible for the detailed engineering and for analysing the current condition of
the system in place. In contrast, the regional utility also analyses (including
measurements onsite) and plans the system using its own internal staff.
Unlike the business models described so far for supplying compressed air, in
case 6, a specialised service provider offers the business model. A leasing bank
acquires ownership of the compressors and transfers ownership to the service
provider as the compressed air supplier and operator. The service company pro-
vides the required staffing for the plant. The staff works together with the com-
pressor manufacturer to provide maintenance services.
Comparing the different business models presented above, it is clear that the
key difference is not in the concept but the type of company providing and offering
the business model.

6.4 Experiences and Lessons Learnt

Although the compressor manufacturers first experiences operating their com-

pressors to supply compressed air at their customers plants usually date back many
years, their interest in these business models was and still is limited. The acqui-
sition cost for this type of business models and the added risk from the long-term
contracts is often seen as too high compared to the achievable profits because of
the greater complexity of providing a service rather than simply selling a com-
pressor. The compressor manufacturers have only recently become partially active
again in this business, due to the growing competition from the energy supply
companies, energy service companies and specialised service providers.
For the energy supply companies, compressed air contracting is primarily
interesting within the framework of building long-term customer ties (electricity
contracts) and as a way to further develop business relationships by assuming
responsibility for other supply systems such as, e.g., heat or cold. Problems arise
for the energy supply companies when entering the market because they have no
experience with compressed air supply and decentralised systems; however, they
are considering a market entry seriously since the German ‘‘Energiewende’’. This
lack of experience and the associated reluctance on the part of industrial customers
to commission the energy supply company with their compressed air supply often
resulted in low cost offers during the market entry phase with the aim of winning
clients to build a project reference list. Because the turnover share of contracting is
very low during this initial phase, these companies could afford to make low or
zero margin offers and even risk losses with some projects if the assumed
boundary conditions would change. However, covering costs and lucrative
6 Air Compressors or Compressed Air: Harvesting the Benefits 99

compressed air contracts have since become important to the energy supply
companies; this typically drives the creation of subsidiaries specialised in this type
of business model.
The interviews showed that the complexity of compressed air contracting was
underestimated by the electricity supply companies, especially with regard to the
very high upfront and learning costs. Compressed air contracting has since become
a ‘‘me too’’ product for electricity supply companies and is offered by almost all
the larger and medium-sized utilities. However, only a few companies have
already realised these types of projects and accumulated the necessary technical
know-how. Among other things, these unexpected difficulties resulted in the
temporary withdrawal of the supra-regional electricity supply companies from
compressed air contracting and even the termination or sale of ongoing contracting
projects.
The regional utility analysed in our sample was prepared to bear the consid-
erable preliminary costs to develop its own expertise in this field and to build up
strategic partnerships with compressor manufacturers and other companies. This
utility lists a steady increase in sales from the new business model because of
existing business contacts at the management level or within the purchasing
department of the potential customers. These sales are especially important
because all actors assume that the market for compressed air contracting will grow,
albeit slowly. The utilities have a good reputation in power supply, however a
much higher value can be realised from the sale of compressed air supply. Given
the typically inflexible company structure and the cost framework in the supra-
regional electricity supply companies only larger projects can be addressed. The
attractiveness for the service provider increases with the option to supply also
other media for the customer immediately or in the near future. The regional
electricity company also realises smaller standardised projects in its supply area.
Service providers specialised in compressed air contracting or in contracting
energy services usually have the necessary technical skills for customer-specific
engineering. However, these providers use combinations of standard components,
so that the customer-specific engineering only involves the overall system design
while the standard components are assembled, connected and integrated into the
existing infrastructure. The number of specialised compressed air service com-
panies active on the German market is still small. Again, the high upfront costs
before the first project is signed is frequently forming a barrier to market entry for
firms offering new business models in the production of compressed air. The
decisive obstacle here is not the cost of the investment in compressors and com-
ponents, but the upfront cost and time for project acquisition. As a result of the
generally low importance given to compressed air supply by industrial enterprises,
despite its importance for their production processes, it usually takes 1–2 years
from the first customer contact until the signing of the contract, but only a small
number of first contacts will lead to a contract. During this business start-up period,
wages must be paid for the staff needed for customer acquisition and the compi-
lation of offers. Usually three to five members of staff are needed for a proactive
canvassing, equivalent to costs of approximately 0.5–1 million Euros per year,
100 P. Radgen

although it can be assumed here that the technical skills are already available in the
companies. All of the compressed air systems realised by the questioned specialist
service providers were financed with the help of a leasing bank.
As can be seen from the case of the examined company, the service providers in
the field of compressed air contracting are usually companies that cannot pre-
finance the investment using their own funds due to their size or financial resources,
and they often do not have a sufficient credit line with their banks. Correspondingly,
compressed air service companies need to involve a leasing bank to finance the
compressed air system, unlike the regional electricity supply companies or com-
pressor manufacturers, which can select a financing option depending on the size of
the installation. In addition, this constraint means that the compressed air system
needs to be on the balance sheet of the leasing company because it cannot be on the
balance sheet of the service provider and the customer often enters into the new
business model with the aim of keeping the compressed air system off from their
balance sheet. Specialised service providers face a drawback as they are not
familiar with the target industry and they cannot count on an existing network of
sales staff compared to the compressor manufacturers and electricity supply com-
panies, The key advantage of specialist compressed air service providers is that they
are manufacturer neutral, and they usually have much higher flexibility and lower
cost structures compared to the regional and supra national utilities.
The initiative for embarking on a new business model for compressed air
supply almost always stems from the customers in the case of the compressor
manufacturers. In the case of the electricity supply companies and the specialised
service providers, however, it is almost always triggered by the company deciding
to offer the new business model. The service providers contact potential customers
and advertise their services, particularly the (cost) optimisation of the compressed
air production, while accounting motives are typically of secondary importance. In
contrast, compressor manufacturers highlight the greater relevance of accounting,
although the optimisation of processes is often simultaneously pursued. For
technical reasons, services to absorb capacity peaks in the compressed air supply
do not play a role. Substitute compressors in case of significant compressor failures
leading to longer outage times can be arranged for when necessary via short-term
rentals.
For the acquisition of new customers, the electricity supply companies report
the advantages of existing customer ties due to existing energy supply contracts. In
addition, the supply companies have frequent contact with the management level/
purchasing department/energy management, which are the appropriate points of
contact for selling these types of energy service agreements. Because the power
purchasing agreements last between approximately 1 and 3 years, both of the
interviewed electricity supply companies use the renewal of the electricity supply
contracts as an opportunity to discuss additional services. In addition, the elec-
tricity supply companies already have the relevant sales and marketing teams for
the closely related product gas and electricity. Therefore, new sales structures do
not have to be developed to sell operating schemes for compressed air, as the
existing sales force can be used.
6 Air Compressors or Compressed Air: Harvesting the Benefits 101

In contrast, the surveyed compressor manufacturers and specialist service

providers tend to have contacts at the level of the technical managers or the works/
plant managers. Admittedly, decisions are made at this level regarding the pur-
chase of systems, but not about service and operating contracts. Even if these
managers are involved in a decision, the final decision is usually not in their hands.
Also this group of employees from the potential costumer is usually directly
affected by the impact of outsourcing the compressed air supply; outsourcing
shrinks their area of responsibility and would most likely reduce the number of
their staff. These managers would therefore have a vested interest in not realising
the operating schemes and the outsourcing of the compressed air function, and
instead they would prefer to maintain responsibility for these tasks.
A considerable amount of groundwork must be performed up front by the service
providers to obtain the technical information necessary to compile an offer, because
potential customers are in most cases unable to formulate their requirements for the
compressed air supply. In the first step, all the interviewed contracting providers
conduct an analysis of the existing compressed air supply by installing measuring
equipment at the existing compressor system, and they then analyse and evaluate
the results. Because the design and planning of a compressed air system must be
individually tailored to the demands of each potential customer, it is necessary for
each provider to conduct the corresponding technical measurements to obtain the
technical basis for making an offer. The analysis of the current situation must be
accounted for as an acquisition cost by the contracting company because these costs
are normally not reimbursed by the potential customer. If errors are made during
this phase, they can have a considerable impact on the energy consumption of the
system and thus its economic efficiency. After an offer has been made, the potential
contracting customer usually does not have a pressing need to take a decision
because they still have access to the existing and functioning compressed air
supply, even if the existing plant is not energy- and cost-efficient. All the surveyed
companies therefore agreed that often one to two years go by between the initial
contact and the signing of a contract, during which time the ties to the potential
customer must be maintained. For the companies just starting to offer compressed
air contracting, this delay means that they need to account for having a first contract
being signed one or two years after having started the business..
Acquiring projects in the field of compressed air contracting also requires more
qualified staff than is required to sell air compressors, as the sales people not only
need to understand a product, e.g., a compressor, but also need to have a deeper
understanding of the economic impacts from the long-term business model
including issues around insurance, liabilities, accounting rules and meter tech-
nology. The compressor manufacturers all agreed that the new business models
can only be marketed by specially trained and educated employees. The costs for
active marketing are therefore higher than for the traditional sales business.
Potential customers must be interested in and informed about the new business
model, because not all companies have heard of compressed air contract-
ing before. Based on these framework conditions, contracting projects can only be
presented as economically feasible if the total project cost is correspondingly high.
102 P. Radgen

The surveyed companies assume that the required investment therefore needs to be
above 100,000 Euro.
Only recently several providers have ventured for market offerings to provide
contracting solutions for small and standardised compressed air systems, typically
composed of a single compressor. One of the compressor manufacturers and one of
the electricity supply companies offer contracting for small systems. The concept
aims to reduce costs based on a standard solution that can be realised in a large
number of units and for which the investments make up a larger share of the total
life cycle costs. Simple invoicing using the number of compressor operating
hours is performed in these cases. Both companies are still in the test phase for this
product and cannot yet foresee whether the necessary and projected number of
units can be realised in the market.
All the interviewed suppliers underlined that their customers do not regard
compressed air supply as a core competence. Although the industrial customers
usually have well qualified staff, especially in case of larger compressed air sys-
tems, wherever possible, these workers should not be tied up with routine tasks
such as generating compressed air. The compressed air supply is frequently a low
priority in these companies, as long as everything is running smoothly and there
are no malfunctions.
Because the operation of the compressed air system is largely automated, know-
how plays only a minor role according to the statements made by the companies.
The providers believe that their know-how is very strong on the supply side, while
the customer has strengths in compressed air distribution and application. Whether
efficiency potentials can be tapped depends more on the correct planning and
design than on operative know-how. The interviewed compressor manufacturers
have advantages here compared to the other providers because they have more
detailed data and knowledge regarding the weaknesses and strengths of their
compressors and components; however, they might not be able to reach out for
better suited products from a competitor if they have no equivalent product in their
own portfolio.
The range of services supplied using their own staff or purchased from third
parties and marketed in the overall package varies among the surveyed providers
of compressed air contracting. Table 6.2 presents an overview of the service types
that must be covered in a compressed air contracting project. The biggest value
added in compressed air contracting is generated in the ‘‘production of compressed
air compressors’’ and ‘‘electricity sales’’. Correspondingly, it is easier for those
types of companies to offer their own services to enter into new business models
for compressed air. However, the manufacturers of compressors and components
need to reflect on the sources of additional revenue and sales potential that can be
tapped by entering into compressed air contracting. Compressors will be required
regardless of whether the compressed air supply is provided by them or by another
party. This model therefore only offers advantages for the compressor manufac-
turers if they are able to expand their compressor market share by using the new
business models or if they can earn higher sales margins from providing services in
comparison to simply selling the compressors.
6 Air Compressors or Compressed Air: Harvesting the Benefits 103

Table 6.2 Services covered by own staff within the scope of operating schemes by supplier
group
Task Compressor Electricity Electricity Service
manufacturer supply company supply company provider
(supra-regional) (regional)
Technical measurements to Yes No Yes, partly Yes
analyse the status of the
existing installation of the
customer
Engineering of compressed air Yes No Yes, partly Yes
supply
Production of compressors/ Yes No No No
components of compressed air
systems
Construction of piping and Yes, partly No Yes, partly No
ventilation systems
Installation of compressed air Yes No No Yes
system
Financing No Yes, partly Yes No
Controlling/invoicing Yes Yes Yes Yes
Maintenance Yes No Yes, partly Yes
Repairs Yes No No No
(Remote) Monitoring Yes Yes Yes Yes
Electricity supply No Yes, usually Yes No
Number of services covered in 8.5 3 6 6
compressed air contracting
per type of contract provider

By comparing the types of services offered by the surveyed companies, it

becomes obvious that the absolute value added by the new business models is
highest for the compressor manufacturers, while the potential growth achieved by
embarking on this concept is the lowest. This result could be one explanation for
the fact that the business models are pursued much more hesitantly by compressor
manufacturers than other market actors. The only growth in the range of services
from the operating schemes achieved by the compressor manufacturers stems from
controlling and financing. While controlling is not a core business for the com-
pressor manufacturers, it is managed in the interviewed companies using their own
personnel; the financing is usually not performed by the manufacturer. Table 6.2
also shows that the supra-regional utilities only achieve a low value added in
compressed air supply, but that the offer is frequently necessary in connection with
the supply of other energy and media as desired by the customer. Therefore, the
supra-regional utilities do not actively offer operating schemes in the field of
compressed air supply without other synergies.
Very mixed results are obtained from analysing the extent to which the above
operating schemes were economically successful. Five out of six providers of the
new business model have had both positive as well as negative experiences with
the operating schemes; one company only negative. This particular company is no
104 P. Radgen

longer offering these types of operating schemes. The interviewed supra-regional

energy supply company has changed its strategy several times based on its
experiences in the market. After expanding its activities over a period of several
years, large cut backs were then made to this field of business and at some point,
selling the already realised projects to third parties was considered. Since then, the
strategy has changed again and compressed air supply is once again being offered
within the scope of multi energy delivery contracts for sites.
All the companies that participated in our work referred to massive price
competition during acquisition. Despite this pressure, all the companies stated that
they always designed the projects to achieve at least break even. However, the
companies all also reported difficulties with the corresponding projects, especially
if the framework data were not specified precisely enough or the compressed air
demand altered significantly due to unexpected growth or closures. An extensive
(usually non-standard) contract was necessary to complete the business transac-
tion, which all of the providers considered to be difficult. However, all the pro-
viders tried to use standardised text modules as far as possible.
Overall, the group of compressor manufacturers, the group of utilities and the
group of service providers all cited case examples that have been executed suc-
cessfully and also cases in which a lesson was learnt the hard way. Finally, the
economic success of the providers cannot be measured yet because the operating
schemes for compressed air supply must first become more broadly established and
the expected long-term developments in regards to compressed air demand, energy
consumption and personal costs need to be confirmed by reality. Therefore, a
comprehensive evaluation of success and failure appears to be feasible only after
the end of the service contracts. At present, none of the suppliers have yet written
off the start-up costs associated with the product development. The business con-
cepts that were particularly successful were those with simple framework condi-
tions and in which a significant energy and therefore cost savings could be realised.
These conditions typically lead to a situation in which a win-win situation can be
realised by reducing the costs for the customer while still leaving sufficient margin
for the contractor.

6.5 Conclusions: Opportunities and Risks of New Business

Models for Air Compressors

At least three different stakeholder groups are now acting as operators of com-
pressors to supply compressed air to industrial customers: compressor manufac-
turers, utilities and specialist (energy) service providers. A wide range of companies
are involved in this business because compressed air contracting was often estab-
lished as a successful business model with a win-win option. The fact that the
operation risk is manageable has also contributed to the reputation of the business
model as being able to achieve low-cost remote monitoring and operation. A Win-
win situation can be achieved for the providers of these compressed air operating
6 Air Compressors or Compressed Air: Harvesting the Benefits 105

schemes as well as for the customers because of the significant and unexploited
energy efficiency potential in the compressed air systems. Electricity costs are the
primary cost factor in compressed air supply. As part of a study for the EU (Radgen
and Blaustein 2001), an energy saving potential of approximately 33 % on average
was determined for compressed air systems. Despite the large economic saving
potentials and the ‘‘druckluft effizient’’ (2004) campaign sponsored by the German
Federal Ministry of Economics, large sections of the industry still do not pay enough
attention to the efficiency of their compressed air supply. Because the compressed air
supply is not part of the core business, even profitable measures to improve the
compressed air system frequently remain unrealised. This situation offers a great
potential for promising offers in the field of compressed air contracting.
In all the supplier groups for this new business model, the regulations in the
compressed air operating schemes are almost identical with regard to ownership,
invoicing, staff, the operating site and exclusivity of use. There are only subtle
differences between these items. Energy supply contracting is the typical concept
underlying the operating scheme for air compressors. Despite the high existing
energy saving potential in compressed air supply, which can be realised by the
customer without own investment by a contracting solution, energy savings con-
tracting has not achieved a breakthrough. Among other issues, this lack of progress
can be ascribed to the fact that the required contract duration of 3–5 years
requested by the industry does not allow for a full refinancing of the investment. In
buildings, a contract duration of over 10 years is usually accepted for energy
saving contracting by the contractees.
Although all six companies interviewed over the course of this work regarded
operating schemes as a promising option, not all providers want to remain active in
this business field. Some compressor manufacturers, in particular, show no
increased interest in operating schemes because they see their competence as being
in compressed air technology and do not believe that their sales opportunities are
dependent on their ability to offer operating schemes. The drivers for the devel-
opment of this business are more likely to be the financially strong, supra-regional
energy supply companies and also the regional utilities, which see the chance to
grow beyond their region’s borders. In the wake of the power market’s liberali-
sation, the energy supply companies have identified energy contracting as an
important instrument for customer relationship management. Correspondingly,
many supply companies are offering compressed air contracting, but without
having developed it as an independent strategic business field. As a result, the
number of companies offering contracting services is much larger than the number
of companies that have already realised projects.
The total number of compressors that have been installed by compressor
manufacturers within the scope of the new business models is very small compared
to the total number of compressors produced by them. If an average of six com-
pressors is assumed in a contracting system, the annual contracting volume is most
likely still less than 150 systems or 1,000 compressors per year. This number is
roughly equivalent to a market share of less than one percent of all the com-
pressors sold in Germany.
106 P. Radgen

Offering operating schemes for compressed air supply requires a high pre-
liminary investment and qualified engineers. This business model is therefore
primarily adopted by regional utilities and (energy) service companies. Individual
compressor manufacturers are attempting to use the new business models to
expand their market share. The supra-regional utilities and the majority of com-
pressor manufacturers want to continue to work reactively in the future as well. If
compressed air contracting gains a significant market share, increased price
pressure could be exerted on the compressor manufacturers as purchasing power
becomes concentrated in the hands of the contractors. There is also a risk that
customers might see the compressor manufacturers as mere ‘‘commodity pro-
ducers’’ if they do not want to offer the new business models. However, due to the
low number of units expected in the contracting field, the impact will be not of
relevance in the course of the next 10 years.
Building on the survey results, an attempt was made to determine the strengths
and weaknesses of the individual groups offering operating schemes for com-
pressed air supply. This analysis revealed that compressor producers profit from
their extensive know-how and their prominence in the compressed air field. In
addition, these producers usually already have a national service network at their
disposal, which is necessary to manage the corresponding compressed air systems
nation-wide. Detrimental for the producers is that they only consider their own
products when planning. In addition, the company structure is not set up for longer
term contracts; these contracts require a partial reorganisation of processes when
embarking on these types of business models.
There are opportunities for compressor manufacturers accompanying the sale of
their own products by providing service over the entire lifespan and the associated
extensions of the chain, even if minor, to achieve additional value. For these
compressor manufacturers, risks result from the framework condition because
larger companies tend to outsource the energy and media supply together; their
service offers focussing on compressed air alone are therefore too limited for these
customers.
Looking at the supra-regional energy supply companies, their biggest strength
are the contacts they have at the management level of the potential customers for
compressed air contracting. The power supply contracts provide them with the
opportunity to contact customers. Due to the economic pressure on the utility
companies from the liberalised electricity market, they need to develop additional
business fields. To enter into these, projects without a profit margin were acquired
in the past with the objective of winning prominent reference clients. Their market
competitors are particularly the compressor manufacturers which are more expe-
rienced, in the analysis of the current compressed air systems and can provide
better insights into the technical details of the systems. A significant weakness of
the supra-regional utilities is the lack of specific compressed air know-how, which
results in dependencies on third party suppliers. Risks also exist for the supra-
regional utilities regarding their somewhat negative image in terms of service
orientation, flexibility and cost structure. Compressed air supply becomes attractive
6 Air Compressors or Compressed Air: Harvesting the Benefits 107

for supra-regional utilities when synergies and cross sales can be achieved with the
supply of other energy carriers.
In comparison, the regional utilities win recognition for their ‘‘proximity to
home’’ and for being well known in their regions. However, these advantages
shrink if the companies want to expand their markets outside of their supply
region. Nonetheless, compressed air contracting projects may be one route to
expanding supra-regional marketing of other energy products for the regional
utilities, especially power. For smaller utilities, however, this expansion also
harbours the risk of a lack of professionalism in planning and implementation.
Specialised compressed air service providers usually have good knowledge of
the compressed air market. These providers know and understand the details of the
technical systems and are familiar with the needs of industrial customers in this
field. They profit from the industry’s tendency to focus on core business matters,
but they sometimes suffer from lacking staff qualifications and the long lead times
needed to acquire compressed air contracting projects. Compressed air service
providers are also challenged because they are not broadly known in the manu-
facturing industry.
Because the overall demand for compressed air systems does not depend on the
type of operating mode/ownership, only minor job effects are expected in the field
of compressor production. Additional jobs could be created in sales and marketing
and engineering because the marketing of operating schemes is more complex.
Careful planning is needed to exploit the energy savings potential in compressed
air generation.
Business opportunities will arise for all market actors due to the growing
market for contracting in Germany and the European Union; however, this market
is growing more slowly than originally predicted. The presented analysis of the
strengths and weaknesses reveals that the biggest opportunities for the successful
implementation of new business models for compressed air supply can be expected
for compressor manufacturers and energy supply companies, but only if these
firms actively work the market. Therefore, sufficient business potential for spec-
ialised service providers in the market is expected, if they get a head start and
behave proactively.

References

Druckluft effizient. (2004). Retrieved September 24, 2013, from http://www.druckluft-effizient.

de/english.html.
Fritz, M. (2002). Cutting edge management of utilities in industrial facility management—
Utilities as a pre-product. Kufstein: Master Thesis University of Applied Sciences.
PRODCOM. (2013). Annual Production Data 2012. Retrieved September 24, 2013, from http://
epp.eurostat.ec.europa.eu/portal/page/portal/prodcom/data/database.
Radgen, P., & Ruppelt, E. (2003). Druckluft-Handbuch. Essen: Vulkan-Verlag.
Radgen, P., & Blaustein, E. (2001). Compressed air systems in the European Union. Energy,
emissions, savings potential and policy actions. Stuttgart: LOG_X Verlag.
Chapter 7
Machine Tool Industry: Beyond
Tradition?

Giacomo Copani

Abstract Service infusion in the machine tool industry is regarded as a key-

competitive factor for the future of this strategic sector and of manufacturing
companies that use machine tools for production. This chapter illustrates the
findings of a research that was conducted at European level to assess the state of
the art of servitization in the machine tool sector and to outline future challenges.
Through quantitative research, five clusters of machine tool servitizers were
identified, distinguished by the type of service value proposition and the service
supply chain configuration. Clusters outlined that, even if the offering of services is
very spread in this sector, the servitization process is far from being mature. In
fact, the type of offered services are mainly product-related services, many serv-
itizers resulted not to have adapted their supply chain to the service business, and
the most advanced service strategies observed in the sample did not lead to
additional financial benefits. To allow the in-depth interpretation of these findings,
qualitative research aimed at understanding the cultural and managerial approach
of clustered servitizers was conducted. A conservative cultural approach was
recognized as a strong barrier to servitization. It generally derives from low service
competences, but it can also be generated by customers’ unbalanced contractual
power, which forces machine builders to enter the service arena without being
prepared. Case study research permitted also to identify few companies being a
successful example of advanced servitization. By analysing their example, it was
clear that a proactive attitude to service innovation and the approach to serviti-
zation as a multidisciplinary structured change management project can represent
a key-success factor. Managerial implications are presented at the end of the
chapter, together with suggestions for future research.

G. Copani (&)
ITIA-CNR, Institute of Industrial Technologies and Automation, National Research Council
of Italy, Via Bassani 15, 20133 Milano, Italy
e-mail: giacomo.copani@itia.cnr.it

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_7, 109

 Springer International Publishing Switzerland 2014
110 G. Copani

7.1 The Machine Tool Sector and Its Strategic Challenges

Machine tool is a strategic sector for industrialized economies all over the world.
Machine tools are critical capital goods, since they are needed to realize most part
of industrial productions in many sectors. Hence, machine tools represent enabling
technologies that have a high potential to impact on the competitiveness of
manufacturing companies, having a crucial role in the determination of the quality
of manufactured products and of the efficiency of production operations.
From a technological point of view, machine tools are a complex mechatronic
product which groups mechanical, electronic and informatics features to provide
the functionality they are designed for. The design, production, and maintenance
of these industrial goods require machine builders’ multidisciplinary competences
in several technology domains and manufacturing processes. It requires also the
exploitation of a network of specialized suppliers that produce critical components
such as drives, control systems, engines, spindles, etc. The decision on the type of
components machines are initially equipped with is strategic for Original Equip-
ment Manufacturers (OEMs), since it affects the final machines performance and it
determines long-time relationships with components suppliers. It is also relevant
from the end-users point of view, since it introduces interoperability issues that
limit the interconnection of machines with other shop floor equipment, or the
possibility to change or upgrade machinery components over time.
Being the machine tool sector at the beginning of the manufacturing supply
chain, its demand is characterized by high volatility that is generated by the
amplification of the industry trends. The amplified cycles of orders generate
complexities in managing stable organizations and production during peaks.
In terms of economical dimension of the sector, the global output of the machine
tool industry amounted to 93 billion dollars in 2012 (Gardner 2013). The historical
market leader is Europe, with a share of 31 %, nearly equalled by China (30 %).
Japan (20 %), South Korea (6 %), Taiwan (5 %) and USA (5 %) are following. The
European machine tool industry is made of approximately 1,100 companies that
employ 150,000 workers and that export the 82 % of their production (Cecimo
2013). Within Europe, Germany is the first producer, followed by Italy, Switzerland
and Spain. In 2010, for the first time, the Asiatic machine tool production surpassed
the European one. In terms of machine tool consumption, China is the first country
buying machine tools for local production, with a share of 41 % of total con-
sumption. It is followed by United States (9 %), Japan (8 %), Germany (7 %), Korea
(5 %) and other countries (30 %) (Gardner 2013). Looking at these figures, it can be
argued that the global market situation poses serious threats to the world historical
leading suppliers of machine tools. They are called to serve two different markets:
the one of developed economies, which is mature and steady, being investments
mainly limited to substitution or to technological upgrade, and the one of emerging
countries, among which China represents the main customer and a significant sales
opportunity. However, the increase of the technology level of Chinese manufac-
turers generates nowadays not only a request for basic machines, but also a new
7 Machine Tool Industry: Beyond Tradition? 111

demand for advanced machinery that European suppliers are able to provide.
Consequently, as an insidious effect, exports to China support local machine builders
in improving the quality of their machines, due to the well known ability of learning
form imported products. Considering the low labour cost of Chinese companies, this
phenomenon contributes to make Chinese manufacturers more and more competi-
tive on mature high-end markets. This is proven by the easing number of Chinese
export, which is increasingly directed to developed countries.
In the last decades European market leaders have competed on technology level
and customization, which were critical success factors able to justify the premium
price that customers are disposed to pay (Copani et al. 2007a). As a consequence,
before the new century, innovation in the machine tool sector was mainly based on
technology improvement and methods necessary to adapt production capacity to the
more and more dynamic changes of the business context. To evolve from mass
production to mass customization, up to the agile production paradigms, technologies
for dedicated production systems, flexible production systems and reconfigurable
production systems were developed and widely discussed in the scientific literature
(Pine 1993; Anderson 1997; Bolden et al. 1997; Dugay et al. 1997; Koren et al. 1999;
Son et al. 2000). Under the light of the new global market situation, this technological
focus is not sufficient anymore, since Asiatic competitors are fast covering the
technological gap. To continue maintaining the leadership, it is necessary that leading
machine builders embrace new strategies based on other additional competitive
sources of advantage. It is common agreement in literature that services can repre-
sent one of the main pillars around which these new strategies should be designed
(Tosatti et al. 2002; Urbani and Pasek 2002). Service strategies should imply:
• the shift of machines builders in the downstream supply chain, in order to
support customers in their operations and to be more committed in final
manufacturing results (for example, through ‘‘total cost of ownership’’ or
‘‘availability guarantee’’ contracts, by managing operations with own skilled
personnel, etc.) (Wise and Baumgartner 1999);
• the establishment of closer partnerships relationships with manufacturers for the
realization of win-win situations in which value is co-created (Vargo et al. 2008);
• the introduction of unconventional revenue models in which revenues are not
linked anymore to the product that is sold, but to the value customers receive
from the offered solution (pay per part, pay per use, short-term full-service
renting, etc.) (Copani et al. 2007b; Hypko et al. 2010);
• the adoption of new supply chain configurations and organizational practices,
where extended networking is necessary to supply customized products and
services that require specific competences, resources and geographic presence
(Davies 2003).
Oliva and Kallenberg (2003) claim that equipment manufacturers have unique
advantages for the offering of services that are related to the ‘‘installed base’’ of
equipment that they sell. First, they can take advantage of the low customer
acquisition cost, since they can count on a historical customer’s base of which they
know needs and characteristics. Second, they can benefit from a low knowledge
112 G. Copani

acquisition cost, since they know better than others the life cycle service
requirements of their products. Third, they have lower capital requirements
compared to new companies that may enter the service market, since they already
master many of the specialized production technologies required to fabricate spare
parts or to upgrade existing equipment. Due to these reasons, the machine tool
sector was targeted in the past by researchers as a significant sector for investi-
gating service innovation (Oliva and Kallenberg 2003; Gebauer 2008; Gebauer
et al. 2005; Brax 2005; Azarenko et al. 2009).
At research policy level, the European Commission destined in the last decade
significant funds to stimulate servitization in the machine tool sector as a strategic
competitive pillar for manufacturing. Starting from the beginning of the new cen-
tury, the ‘‘MANTYS Thematic Network’’ FP5 project (2001–2005), the ‘‘NEXT—
Next Generation Production Systems’’ FP6 project (2005–2009) and the ‘‘DE-
MAT—Dematerialised Manufacturing Systems: A new way to design, build, use
and sell European Machine Tools’’ FP7 project (2010–2013) were promoted and
funded. All these initiatives intended to increase the competitiveness of the Euro-
pean machine tool sector by supporting research combining technology and service
innovation. New service-oriented business models were also included among the
five competitive pillars of the Strategic Research Agenda of ‘‘Manufuture’’, the
European technology platform of the manufacturing sector (Manufuture 2006).
Grounded on this strategic and scientific background, the findings of a sectorial
research aimed at understanding the current state of the art and the open challenges
of servitization in the machine tool sector are presented in the following paragraphs.

7.2 Methodology

To draw a sector-specific picture of servitization, a research combining quantita-

tive and qualitative methods was conducted between 2008 and 2011 at European
level (Copani 2013). The main research questions have been:
• What are the service business models currently diffused in the machine tool
sector, with particular regard to the most advanced ones?
• How do companies innovate their business model through services?
• What are the characteristics of service innovators?
• What is the success associated with service business model innovation?
Quantitative analysis was performed using the database of the ‘‘EMS—European
Manufacturing Survey’’. The EMS is a questionnaire-based survey investigating
innovation in manufacturing industries with specific focus on service innovation
(Jäger et al. 2007). For the analysis, records of companies belonging to the
machine tool sector (NACE 29.4) were extracted from the 2007 database. The
initial sample consisted of 77 companies located in Central Europe. The focus of
EMS on service innovation allowed considering a set of variables useful to assess
the servitization process under different perspectives:
7 Machine Tool Industry: Beyond Tradition? 113

• the service value proposition, that was evaluated according to a list of different
type of services including product-oriented, user-oriented, transactional- and
relationship-based services (Oliva and Kallenberg 2003; Gebauer 2008);
• the supply chain architecture, that was assessed by evaluating the level of
cooperation with external organizations for service supply, manufacturing,
purchasing, training and research. In this way, companies vertical integration
and the issue of internalization or externalization for services were analysed
(Kowalkowski et al. 2011);
• the revenue model, that was assessed through the offering of financial services
and the arrangement of financial mechanisms other than usual leasing and
renting (such as pay-per-part or other performance-based contracts);
• the strategic service orientation that, according to Homburg et al. (2003), was
evaluated considering both the breadth of services and the service orientation
of a company’s strategy. The latter was measured using rankings of the com-
petitive priorities companies were pursuing, among which service was an
option (together with price, quality, innovation/technology, delivery time and
customization) (Lay et al. 2010);
• the type of product (machines) offered by companies, that was assessed by
evaluating product customization and product complexity (Hill 2000; Lay et al.
2010);
• the service performance, that was measured through service turnover and
Return On Sales of services compared to Return On Sales of products. Both the
directly and indirectly-generated service turnover were considered according to
Lay et al. (2010), Malleret (2006), Gebauer and Fleisch (2005).
Quantitative analysis permitted to identify different types of service strategies
adopted by machine tools companies and to statistically outline the differences
between servitizers. In order to add in-depth information to statistical results for a
better understanding of the servitization mechanisms, quantitative research was
complemented with a case study campaign conducted at European level. Com-
panies were selected with the intent of involving representative organizations
producing different machines technologies and key-components, operating in
multiple European countries and having different dimensional size. Since previous
researches failed to involve significant examples of business model innovators, a
specific effort was made in order to include in the sample some advanced servi-
tizers. The final sample is represented in Table 7.1.
Case studies have been elaborated combining multiple sources: face to face
interviews, phone interviews, public financial information and reports, products
catalogues, fairs information and the direct observation of products and processes,
where possible. Face to face interviews have been conducted with marketing/
commercial managers and with the entrepreneurs, depending on the dimension of
companies. In some cases, also the research and development manager was
interviewed, together with the service business unit responsible.
Results of quantitative and qualitative research are presented in the following
paragraphs.
114 G. Copani

Table 7.1 Case study companies sample

No. Company Machines Country Size
1 A High precision grinding and milling machines UK Medium
2 B Manual and CNC lathes UK Large
3 C Precision sawing, turning, grinding machines Spain Medium
4 D Electroerosion machines Spain Medium
5 E Flexible manufacturing systems Finland Medium
6 F Tools and accessories Sweden Large
7 G Machining centres DE Large
8 H Machines controls and drives DE Large
9 I Machining centres and robots IT Large
10 J Flexible machining centres IT Medium
11 K High speed milling centres IT Medium
12 L Slitting lines, roll feeders, levelling machines IT Small
13 M Bending and cutting machines IT Small
14 N Band saw and cutting machines IT Small
15 O Drawing presses and lines IT Small

7.3 Results of Quantitative Research

Service offerings are very spread among the surveyed companies. 78 % of the
companies offers on average more than six services. In particular, traditional
product-oriented post-sales services (such as technical documentation, ramp-up
assistance, product training and maintenance) are common to almost all service
providers. Results are in line with Lay et al. (2010) and with the emphasis that
services received in literature in the last years. On the other hand, only 27 % of
companies declared to offer operational services, 49 % financial services and 64 %
software development services. The percentage of total turnover generated by
services was 18 %, of which the 8 % was directly invoiced, while the 9 % was
indirectly invoiced together with products sales. In average, services could guar-
antee a return on sales 2.2 times higher than products. The average importance
assigned by surveyed companies to different critical success factors lead to the
following ranking: product quality, technical level, customization, price, delivery
time and service (being the critical factors ordered by decreasing perceived
importance).
The implemented econometric strategy responded to the intention of identifying
different type of service strategies adopted by surveyed companies and to under-
stand the sources of differences. Thus, explorative cluster analysis was chosen as
econometric technique to identify different groups, discriminant analysis to
understand clustering drivers and analysis of variance to test clusters differences of
variables characterizing companies and their products.
The first two discriminant functions, able to account for the 80 % of the total
variance, resulted to be the nature of offered services (distinguishing between
operation and non-operational services) and the level of supply chain cooperation.
7 Machine Tool Industry: Beyond Tradition? 115

Software-oriented servitizers with

moderately cooperative supply chains
Flat servitizers with Financial-oriented
integrated supply servitizers with
chains cooperative supply chains

Consulting-oriented
servitizers with
integrated supply chains

Operational-oriented servitizers with

cooperative supply chains

Fig. 7.1 First and second discriminant function per cluster (Source own illustration)

They are plotted in Fig. 7.1 versus each single observation, with the indication of
cluster affiliation. Clusters are discussed in Sect. 7.3.1.

7.3.1 Clusters of Machine Tool Servitizers

Based on the results of clustering and discriminant analysis, the five clusters were
named and interpreted. In labelling the clusters, the first part of the assigned name
relates to the service value proposition, while the second part deals with the supply
chain integration and cooperation.
• CLUSTER 1: ‘‘Consulting-oriented servitizers with integrated supply chains’’
Companies in this cluster are oriented towards consulting services and, com-
pared to other clusters, they present a narrow offering of other services.
Regarding cooperation along the supply chain, they report values below the
average in almost all types of cooperation, except for manufacturing purposes.
• CLUSTER 2: ‘‘Flat servitizers with integrated supply chains’’
Companies in this cluster offer a wide range of non-operational services with a
slight tendency towards consulting, but without a specific focus on any of them.
From the supply chain point of view, they are significantly integrated since they
report a level of supply chain cooperation below the average, especially for the
supply of services, training and purchasing. Companies in this cluster appear
116 G. Copani

similar to the ones of the first one, with differences in the value proposition: the
previous group focuses nearly uniquely on consulting services, while these
companies offer a wide range of non-operational services.
• CLUSTER 3: ‘‘Operational-oriented servitizers with cooperative supply chains’’
Companies in this cluster offer a wide portfolio of services—excluding the
financial-related ones—and are specialized in the provision of operational
services. From a supply chain point of view, they report a supply chain
cooperation level above the average, especially for research, manufacturing,
service supply and training.
• CLUSTER 4: ‘‘Financial-oriented servitizers with cooperative supply chains’’
Companies in this cluster offer a wide range of services—excluding the
operational-oriented ones—, with strong specialization in financial services and
in the implementation of unconventional revenue models. They exhibit high
values of supply chain cooperation for all the scopes.
• CLUSTER 5: ‘‘Software-oriented servitizers with moderately cooperative
supply chains’’
Companies of this cluster focus on software services, neglect operation and
consulting services, and offer the remaining ones according to the average level.
Their supply chain cooperation level is moderate, especially for manufacturing
and purchasing purposes, while they report good cooperation in research.
The first cluster presents the lowest value of service breadth, while the others are
characterized by a wider service offering. Considering that the service breadth is
one of the elements determining companies’ service orientation (Homburg et al.
2003), it might be assumed that this cluster is the least innovative one from the
value proposition point of view and that the companies that it groups are at the
beginning of their service infusion process.
Clusters 1 and 3 are based on the offering of relationship-based process-oriented
services, which are regarded as the most innovative services companies can supply
and as the final goal of advanced service strategies (Mathieu 2001; Oliva and
Kallenberg 2003; Windahl et al. 2004). In particular, the Cluster 1 is based on
process-oriented consulting services, while Cluster 3 on services related to the
operation of machines. Considering that consulting services are offered by
machine tool companies in all clusters due to the need to offer machines fitting
with customers’ processes, the operational-oriented servitizers of Cluster 3 can be
appointed as the most advanced ones under the point of view of their value
proposition.
A relevant characteristic distinguishing clusters is the specialization of com-
panies’ value proposition in one specific type of service: consulting service
(Cluster 1), operational service (Cluster 3), financial service (Cluster 4) and
software service (Cluster 5). In particular, the specialization appears very pro-
nounced in the case of operational services, whose offering is maximum in Cluster
3, while it is nearly absent in all the remaining clusters except Cluster 1. This
finding confirms the complexity of operational services, which can not be offered
as an easy complement to other services, but which requires on the contrary a
7 Machine Tool Industry: Beyond Tradition? 117

strong dedicated implementation commitment (Mathieu 2001; Oliva and Kallen-

berg 2003). For Clusters 3, 4 and 5, this specialization is grounded on a wide service
offering, while for Cluster 1 the specialization corresponds nearly to the unique
service offered by companies (excluding basic services that companies of this
sector are forced to provide anyway, such as for example technical documentation).
The specialization goes in the direction of creating specific competences and
organizational structures tailored to the type of service offering, as suggested by
Mathieu (2001), Oliva and Kallenberg (2003), Gebauer et al. (2005), and Malleret
(2006). It also confirms the incremental evolutionary theory (Oliva and Kallenberg
2003; Davies 2003; Hildebrand et al. 2004) by which companies achieve service
effectiveness through incremental steps, by first consolidating their actual service
offering and then introducing and improving more innovative services.
From the supply chain point of view, the five identified clusters differ in terms of
cooperation practices: Clusters 1 and 2 are different from the others because they
imply vertical integration. The remaining ones, on the contrary, are characterized
by wider supply chain cooperation. Under the assumption that extended networking
practices are needed for successful implementation of service strategies (Davies
2003; Windahl et al. 2004; Palo and Tähtinen 2011), it should be concluded that
servitizers of Clusters 3, 4 and 5 are more innovative compared to those of Clusters
1 and 2. It can also be hypothesised that, since they present a broad service offering
nearly totally managed internally, servitizers of Cluster 2 correspond to the case of
missed adaptation of supply chain processes to service infusion (Davies 2003;
Windahl et al. 2004; Palo and Tähtinen 2011). Thus, they are classifiable as on an
intermediate innovation level between servitizers of Cluster 1, which show a very
poor service infusion, and servitizers of Clusters 3, 4 and 5, that show higher service
infusion and advanced supply chain cooperation practices.
Considering value proposition and supply chain configuration together, it can
be concluded that Cluster 1 (consulting-oriented servitizers) represents the most
traditional companies among those identified, since they rely on a restricted ser-
vice breadth and on vertical integration. It is followed by Cluster 2 (flat servi-
tizers), presenting a higher service breadth but still relying on vertical integration.
Companies of Clusters 3 and 4, on the other hand, are the most innovative ones
among those observed, because they are characterized by extended service offer-
ings and advanced supply chain cooperation practices. In particular, operational
servitizers of Cluster 3 can be considered the most advanced due to the innovative
nature of the services they offer and due to their networked practices. On the other
hand, financial-oriented servitizers of Cluster 4 are the only ones pursuing revenue
model innovation. Finally, the level of service innovation of Cluster 5 can be
considered between that of Cluster 2 and Clusters 3, 4 and 5. While Cluster 5 is
characterized by a wide service offering, in fact, supply chain cooperation is not
practiced to a high extent.
It should be highlighted that this type of evaluation of servitizers innovation
level is theory-driven. However, if a contingency approach is taken (Kowalkowski
et al. 2011), there is no best innovative service strategy in absolute terms, since
success depends on environment-fitting reasons (Gebauer 2008). In our case, for
118 G. Copani

example, the service strategy of Cluster 1, which was judged poorly innovative
because of its narrow service offering and its vertical integration, might potentially
be successful if there are markets recognizing value to this value proposition. The
integrated value chain could potentially be an efficient way to manage efficiently
the restricted offering of services and to develop internal dedicated competences.
From the revenue model point of view, only Cluster 4 leverages on the inno-
vation of financial mechanisms. Such an innovation is not combined with the
offering of operational services. Thus, the most theoretically advanced service
strategies in which operational services are supplied in the frame of performance-
based or use-based contracts, were not observed in the sample. The revenue model
innovation is, on the contrary, associated with more traditional services such as
maintenance (giving rise for example to availability-guarantee contracts), or with
the leasing or renting of machines without foreseeing functionalities guarantee.
These statistical findings seem to confirm that advanced service strategies are
not diffused yet in the machine tool sector and that manufacturing companies’
service business models have not reached their mature phase yet.

7.3.2 Differences Between Clusters

After having clustered, discriminated and characterized the identified service

business models, Analysis of Variance was computed on available company-,
offering- and performance-related variables to test differences between clusters.
Because of the ordinal scales that were adopted in some measures and of data non-
normality, non-parametric Kruscall-Wallis tests were used. Results are reported in
Table 7.2, where asterisks indicate the significance level of variables according to
the results of statistical tests.
Company size, personnel education, type of product in terms both of custom-
ization and complexity, and the number of offered services, resulted in statistical
differences between the five clusters. Surprisingly, no difference was registered in
terms of financial performance of different business models and of service strategic
orientation.
Cluster means of statistically significant variables are reported in Table 7.3.
The results of the Analysis of Variance support the conclusions of non-maturity of
service business models in the machine tools sector. In fact, they show that, despite
the statistical difference in service breadth between clusters, there is no statistical
difference in service strategic intent. This suggests that even companies adopting
more advanced business models (such as the ones of Clusters 3 and 4), they seem
not to assign higher strategic priority to services than companies adopting less
advanced business models (such as in Cluster 2). Additional elements supporting
this hypothesis are the high percentage of bundled practices, that can be considered
as an indicator of service strategy immaturity (Malleret 2006), and the undiffer-
entiated financial performance of different business models. This confirms the
‘‘service paradox’’ (Gebauer et al. 2005): there is evidence that companies having
7 Machine Tool Industry: Beyond Tradition? 119

Table 7.2 Statistical differences between clusters

Variable Chi 2 Significance level
Number of employees 15.748 0.0034 ***
Percentage of graduated employees 11.7 0.0197 **
Products customization 14.689 0.0054 ***
Products complexity 11.924 0.0179 **
ROS of services/ROS of products 4.837 0.3044
Turnover realized with services 3.97 0.4100
Service strategic orientation 4.903 0.2974
Breadth of services 14.413 0.0061 ***

Table 7.3 Clusters means of statistically significant variables

Variable Cluster 1 Cluster 2 Cluster 3 Cluster 4 Cluster 5
Number of employees 103 175 774 531 807
Percentage of graduated employees 10 % 9% 26 % 15 % 15 %
Product customizationa 1.71 1.83 1.27 2.00 2.13
Product complexityb 2.5 2.92 2.88 3.00 2.94
Breadth of services 4.60 6.08 6.53 6.44 6.31
a
1 = products according to customer specification; 2 = products with pre-defined variants
options; 3 = standard products
b
1 = low complexity; 2 = medium complexity; 3 = high complexity

introduced a wide service offering, including also operational services, do not

obtain differential financial benefits compared to companies that have not.
The role of the product was confirmed to be relevant in relation to service
strategies, in accordance with Lay et al. (2010). Results deepened the knowledge
on how different product attributes can influence business models. In the analysed
sample, while higher product complexity was associated to more innovative
business models, according to the argumentations of Leo and Philippe (2001) and
Oliva and Kallenberg (2003), the effect of product customization was not as clear
and univocal in the results. The most customized products, in fact, were reported in
the business models of Cluster 3 (operational-oriented), while business models 4
and 5 were centred on the least customized products that are manufactured by
surveyed companies. This empirical evidence confirms only partly the advocated
necessity of products standardization in service strategies (Windahl et al. 2004;
Johansson and Olhager 2006). In the case that product ownership remains with the
supplier, economies of scale and standardisation can enable the re-use of products
for different customers (Meier et al. 2010). This might be the case of financial
arrangements such as leasing, renting or pay per use of the business model of
Cluster 4. On the other hand, results showed that one of the most innovative
identified business models, that of Cluster 3, is built around very customized
products, which contradicts the argument in favour of standardization for product
reuse. Thus, it seems that there is not a general rule, but that product customization
can be a barrier for some types of business models and, on the other hand, an
120 G. Copani

important enabling factor for others. This is in line with Weissenberger-Eibl and
Biege (2010), who argue that product design criteria should be integrated in the
service design process and should be tailored to the specific type of service that
products will support.
Company size was confirmed to be important in relation to service strategies
(Leo and Philippe 2001; Oliva and Kallenberg 2003; Brax 2005; Windahl et al.
2004; Lay et al. 2010). Results showed that the more advanced the service business
model, the larger the size of companies that implement it.
Finally, personnel education was significantly different between the five clus-
tered business models, being higher for the more advanced ones and at a maximum
for the operational service oriented business model. This confirms that, in order to
move from traditional to advanced service models, highly educated personnel and
superior competences are needed (Mathieu 2001; Brax 2005; Vargo et al. 2008).

7.4 Results of Case Study Research

Qualitative research permitted to better characterize the different service strategies

outlined by Clusters, especially through the understanding of cultural and mana-
gerial factors of companies populating them. In addition, it permitted to identify
new type of servitizers, different than the ones clustered in the first part of the
research.

7.4.1 Cultural Attitude of Consulting-Oriented Servitizers

Case studies permitted to analyse the cultural attitude of companies of the first
cluster, the ‘‘Consulting-oriented servitizers with integrated supply chains’’, which
can be considered as the least advanced in terms of servitization process. Two
cultural attitudes regarding service could be recognised. The first one was a strong
cultural aversion to services. Averse companies are characterized by a very hard
conservative technology-driven culture. They believe that the opportunities of
services promoted by researchers are a theoretical speculation with no foundation
in reality. This position is an intimate conviction and these companies are totally
closed to the discussion, having nearly a derisory attitude respect to the argument.
Most part of them reported disastrous experiences with advanced services in the
past. They were forced by customers, which were generally big-sized companies
with high contractual power, to enter some unconventional service relationships
such as renting equipment or guaranteeing for machinery performance. They
registered economic losses and experienced very bad relationships with customers.
In general, these companies demonstrated a very basic service culture and showed
no strategic intent to the service business.
7 Machine Tool Industry: Beyond Tradition? 121

The second cultural attitude of the consulting-oriented servitizers was a totally

tactical approach to the business, combined with a nearly total unawareness of
what new service strategies can look like. These companies seemed not to follow
any clear strategy, except continuing as they did in the past. They operate in local
districts and do not export their products outside. They serve mainly small cus-
tomers in the district, whose needs are exclusively of technological nature. For
these reasons, they were never exposed to the stimulus of service innovation and
they continue competing on the base of the traditional success factors. Their
organization and management processes are not formalized. When told about new
service opportunities, they immediately thought that this is a business to be done
by someone else. Their small size allows the saturation of their production
capacity with few orders. Thus, they do not see the need to turn business to
services, since they believe they can continue to survive in the traditional way.

7.4.2 The Service Obligation

Case studies permitted to outline another important characteristic common to most

part of servitizers. They clearly showed that many companies in the machine tool
sector have a passive attitude towards service innovation and offer advanced
services because they are asked—often forced—by their customers. This condition
was called ‘‘service obligation’’. It explains the low general service strategic
commitment that emerged from statistical analysis.
Two situations were observed in case studies, mainly determined by the con-
tractual power of customers compared to the suppliers’ one, which determined the
‘‘strength of the obligation’’. In case of unbalanced customer contractual power at
customer side, for example in sectors where the market is highly concentrated and
customers are big multinationals (such as the automotive one), machine builders
are often obliged to accept very demanding service requests of customers to get
big orders and to continue surviving in the market. Services that are generally
requested are oriented to the efficiency increase of customer’s operations effi-
ciency, such as ‘‘Total Cost of Ownership’’ or ‘‘availability guarantee’’. Suppliers
are not usually involved in the joint design of the service and in the definition of
service levels, that are imposed by customers as a pre-requisite to remain in their
vendor list.
In case there is a more balanced contractual power between parties, usually
when customers are medium-sized companies with a more collaborative approach
and when the orders have not a significant value in suppliers turnover, passive
innovators accept to provide the new services that are requested by customers
voluntarily and with minor pressure than the previous case. They consider services
as an opportunity to make business with a customer, while experiencing at the
same time new business options with a limited risk. The service offerings that have
been reported in these situations were mainly consisting in short term renting
122 G. Copani

contracts of machines with a final purchase option, or in temporary production

services.
In both cases, the interviewed machine tool companies reported that they were
not prepared to supply the advanced services requested by customers. They con-
tinued operating with the current infrastructure or, in some cases, they reported to
have tried to introduce on-going improvements in order to be more efficient in
supplying new services. For example, in order to improve the maintenance plan-
ning and to better manage its contractual obligations, one company requested to
offer a ‘‘Total Cost of Ownership guarantee’’ developed a new on-purpose system
to constantly monitor availability data of the installed machines. Another company
that was requested to supply a production service rapidly re-organized its show-
room in order to dedicate one machine to the production for the customer. Thus,
the behaviour of passive innovators appeared to be defensive. Managers’ expec-
tations were mainly tactical, consisting in the fulfilment of contractual obligations
without incurring in economic losses. They did not include ambitions to gain
extra-profits from services. Companies reported not to be even able to properly
forecast the costs and the risks associated with the new contracts, since they had no
instruments or competencies to deal with the increased lifecycle complexity
implied by the offering of new services.
Economic results of passive innovators were in line with their low expectations.
In fact, in general, they did not signal better performances compared to the tra-
ditional products-focused model. On the contrary, they told to have experienced
quite often economic losses form service contracts, that made them culturally
adverse to services and that made consider servitization as a necessary evil. This
case study finding confirmed quantitative results about the non-statistical differ-
ence of financial performances and strategic intent among different groups of
servitizers.
However, among passive innovators, few companies reported to be satisfied
with this forced service experience. These companies declared that, once in the
service arena, they had started to have a better knowledge of service operations
and to have perceived the potential of service business. Consequently, they have
started to evaluate the service business model innovation as a realistically possible
strategic option for their company. This finding indicates that passive innovation
might be a trigger for proactive service innovation. Passive innovation, in fact,
might force a cultural maturation process, triggered by the necessity to fast
learning while dealing with the supply of services.

7.4.3 Promising Examples of Servitization

In addition to the type of servitizers characterized in quantitative research, case

studies permitted to identify some promising examples of machine tool companies
that are more advanced in the servitization process. Two new categories of serv-
itizers were encountered: companies willing to start service strategies but still
7 Machine Tool Industry: Beyond Tradition? 123

adopting a traditional product-oriented business model, and companies offering

advanced services in the machine tool sector with great success.
The first type of companies showed a clear strategic intent in advanced services.
They have a medium-high marketing culture that led them to recognize the new
opportunities of services both for customers and suppliers, and to start autono-
mously an internal reflection finalised to service introduction into company port-
folio. They heard about advanced service strategies from customers, associations
or research initiatives, and started to create internal consensus around advanced
services. In these companies, the marketing or the commercial manager was
identified as the big sponsor of the ‘‘service manoeuvre’’. He was deeply con-
vinced about the opportunities of services and he was consequently preparing the
ground for the new business by diffusing a new service culture and fighting against
cultural resistance of colleagues. In this way, companies started to gather infor-
mation and to acquire some knowledge about the available service options,
existing implementations, competitors already offering advanced services, etc.
Even if without structured method, these organizations were autonomously iden-
tifying possible service solutions suitable to their business and started analysing
their potential market and barriers. During case studies interviews, they not only
showed a pre-existing knowledge on the investigated service topics, but also
demonstrated a very high interest in understanding the state of the art and in
acquiring detailed information on service innovation. However, even if strategi-
cally committed in services, they reported not to have started the service business
yet, because they were still lacking of the resources and competences that they
believe necessary to proceed successfully in services (financial resources, human
resources, service design and implementation tools).
Besides these strategically-committed companies, another restricted group of
case study companies reported to be already a successful servitizer in the machine
tool industry. Value-added services were indicated by them to be their main
competitive priority. The type of advanced business models they adopt relies on
the offer of availability guarantee over the whole machines life cycle and/or in the
offer of knowledge based services aimed at the efficiency increase of customers’
operating performances, being the revenues linked to the effective results cus-
tomers obtain. In one case, contracts were foreseeing that no fee was due in case
performances were below the contractually agreed level.
These companies demonstrated to strongly master their products technology,
being very active in constant technological innovation, and to have deep knowl-
edge about their products operating performances such as availability data, optimal
operating conditions and improvement possibilities through constant updates or
better use. In other words, they grounded their service offering on the deep
knowledge and control of their innovative products, which is considered as a pre-
requisite for the successful offering of advanced services. In this way, these
servitizers are in the position to identify and quantify the additional value they can
provide customers with, by taking care of products operations, maintenance or
upgrade better than customers and other service companies. The created additional
value is than shared with customers, which can appreciate that their machine tools
124 G. Copani

suppliers are committed in the results. The capacity to calculate this value and the
high confidence in the products that are used to generate it, were reported to be the
key conditions for excellence in services.
The successful servitizers are mainly big global players with a solid market
reputation and a high cultural openness. They can count on financial resources and
high level of internal competences. They have a strong market orientation that
pushed them to imagine proactively new ways of delivering value to customers as
soon as market changes were perceived. They designed new advanced services
offerings after having conducted market researches and having interviewed key-
customers. Some of them adopted formalized service engineering techniques and
designed in-house specific software for the parameterization and pricing of service
offerings, tailored on their products. They decided to start implementing service
strategies after having achieved a good strategic consciousness about service busi-
ness, having designed the transformation process and having quantified the resources
necessary to the transformation through a structured business planning approach.
They adopted a structured and managerial innovation process to manage the tran-
sition from the organizational, financial and cultural point of view. A strong com-
mitment of the top management was a common element to this type of servitizers and
it guided the entire company to think strategically, acting as a strong sponsor in
fighting resistance.
In order to optimize their market action and to win customers reluctance, these
companies allocated resources to strategic marketing tasks by segmenting and
targeting the market, and by forecasting and managing risks. This permitted them
to have clear which were the type of customers and the sectors that could benefit
most from advanced service solutions, and they addressed consequently the sales
force activity and the marketing budget.
All the companies of this group built a dedicated organizational unit to manage
the new services offering, in which key persons were moved to manage the
transformation process and in which new highly educated employees were hired to
support the service tasks since the design and planning phase. Their supply chain
was adapted for the efficient offering of advanced services. Big multinational
companies had already a pre-existing structure to exploit, since they had the
opportunity to activate their local branches worldwide dispersed. Another medium
company, on the other hand, had to recur to new networking partnerships with
service companies to assist customers all over Europe.
These proactive innovators reported very satisfying results under all the per-
formance dimensions. First, services guaranteed them a significantly higher profit
margin compared to products. Second, they generated turnover in the periods of
crisis, when customers’ investments in machinery were stopped, but lower
expenditures for gaining efficiency were feasible for customers. Third, high value-
added services were a precious instrument to maintain a constant relationship with
customers, with a double benefit: the possibility to immediately detect market
trends and needs on one side, and the increased probability to sell products when
the investment cycle started again, since customers had already an on-going
business relationship with the machine tool company through service contracts.
7 Machine Tool Industry: Beyond Tradition? 125

It has to be outlined that the majority of the companies above described are
suppliers of critical machine tool components having the potential to deeply
influence the final performances of machines, embedding high technology and
high supplier know-how. Only one machine builder (OEM) belonged to this group
of successful service innovators. He reported higher difficulties in setting up
advanced service business models than the components suppliers. The reason was
recognised in the fact that machines are generally combined with other suppliers’
machines in a production shop floor. Consequently, the machine builder had to
limit his responsibility to the machines he can control and exclude other machines.
This situation is often obliging the company to restrict its service activity to some
isolated production islands, with the impossibility to impact significantly on
overall customer performance.

7.5 Conclusions and Managerial Implications

This research indicates that servitization in the machine tool sector is an on-going
process which is not mature yet. Successful advanced service innovators seem to
be rare exceptions and are generally medium and big sized companies. While
traditional product-oriented services are offered nearly by all machine tool com-
pany, the most advanced type of services, that are regarded as the most promising
ones in terms of benefits for customers and suppliers (such as operational, rela-
tionship- and process-oriented services), are not diffused in practice.
Findings show that it is hard to extract benefits from the services business when
companies do not play a proactive role in service innovation. If they react pas-
sively and tactically to customers requests, there is evidence that they can incur in
losses or in no differential financial benefits.
The following main barriers to a successful and diffused servitization process in
the machine tool industry were recognised: the traditional product and technology-
oriented sectorial culture; the passive attitude of machine builders towards service
innovation and the unbalanced contractual power of customers; the complexity of
machine tools and their components; the multi-disciplinary effort required by the
service innovation process. Only companies with a significant strategic and mar-
keting culture, which is open to technology as well as to managerial innovation,
can have the instruments to face the challenges that the implementation of new
service strategies present.
The conclusions are in line with the low diffusion rate of advanced service
strategies advocated by different studies performed also in other industrial sectors.
Based on a sample of 199 European companies, Gebauer et al. (2005) reported that
only one third of these realized a service turnover higher than 20 % of their total
turnover. Service revenues were between 10–20 % for another third, and less than
10 % for the remaining third of the companies. Analysing a sample of 477
American companies, Fang et al. (2008) concluded that service sales were
responsible for 42 % of revenue for North American manufacturers in 2005.
126 G. Copani

Relying on a database of 10,000 firms, Neely (2008) concluded that only 35 % of

manufacturers had undertaken service strategies. Based on a sample of 3,376
observations form the ‘‘European Manufacturing Survey’’, Lay et al. (2010)
reported that, while 85 % of manufacturing companies were offering at least one
service in their value proposition, their service sales accounted on average for the
16 % of the overall companies turnover, of which the 9 % was invoiced indirectly.
Empirical findings have significant managerial implications for companies of
the machine tool sector that are willing to start or to improve advanced service
business. First, they suggest to play a proactive role in service innovation before
customers, especially the big ones, start requiring advanced services as a pre-
condition to assign orders. Results show that if the company is not prepared to the
service offering from the cultural, managerial, organizational and supply chain
point of view, its complexity is so high that it is hard to adjust tactically the
organization to make a good business out of services. If the service contract is not
too unfavourable and if the supplier is able to reasonably cope with the ‘‘service
obligation’’, however, the latter might be a trigger to understand the potential of
services and to start a cultural change towards servitization. If this is not the case,
it is very likely that the organization will develop a negative opinion around
services, which will represent a considerable barrier for the future.
But how to play a proactive role? The success stories and the difficulties out-
lined by companies involved in this research suggest to manage the introduction of
advanced services in company as a strategic and structured change management
project, to which resources and time should be dedicated, with a strong commit-
ment of the top management. This change management process should include
clear sequential steps. First, an initial phase in which the service culture growths
inside the company is needed. In this phase, the company should increase its
knowledge about services in terms of potential options, advantages, real examples,
etc. This knowledge should be diffused internally fighting the traditional resistance
of the technology-oriented culture that is typical of the machine tool companies. In
this phase, a strong internal sponsor such as the marketing manager or the general
manager appears necessary. The growth of service culture should trigger the start
of strategic service marketing tasks, thus the segmentation of potential customers,
the targeting and the positioning of the company service value proposition. Once
the company has analysed the market potential for services and has a better idea
about their value for customers, all the activities finalized to service design and
service supply should be planned, considering also eventual products modifica-
tions with respect to the services to be offered and including the design of business
processes, supply chain and service organizational structure. In parallel, the nec-
essary human and financial resources should be estimated in order to plan their
acquisition. Before starting the implementation of the service project, finally, the
economic viability of the designed service business model should be assessed
quantitatively and the win-win conditions for customers and suppliers should be
identified with structured business planning and forecasting methods and tools
(pricing level of product-services, minimum volumes, costs for logistics, organi-
zation, etc.). By implementing this structured process, companies can follow a
7 Machine Tool Industry: Beyond Tradition? 127

‘‘proactive innovation path’’ leading them to become successful service innova-

tors, as the ones encountered in case studies.
To implement this challenging process, machine tool companies can benefit
from the results of scientific literature and of recent European research projects
that provided tools, instruments and guidelines to implement new service-oriented
business models in the machine tool sector. In particular, the NEXT FP6 project
realized a set of business model design tools: a methodology for the configuration
of the service value proposition (Copani et al. 2008a); technical guidelines to
support machinery adaptation to the different type of services (Marvulli et al.
2009); financial guidelines for the identification of suitable revenue models
(Copani et al. 2007b); organizational guidelines for the definition of the organi-
zational structure and for the design of service business processes; a business
model evaluation life cycle software for the assessment of the financial and
environmental performance of a generic service business model (Copani et al.
2008b). After NEXT, which provided a general toolkit for service business model
design in the machine tool industry, the DEMAT FP7 project focused on services
aimed at supporting customers in managing production capacity in turbulent
contexts. The project defined the archetype of two new flexibility-oriented service
business models and proposed a probabilistic methodology for the assessment of
their financial performance (Copani and Urgo 2012).
In order to continue supporting the servitization process as a strategic process of
machine tool companies, research should proceed to overcome the barriers that
still prevent the diffusion of advanced services as a standard practice. Such barriers
derive from the peculiarities of this sector: the complexity of machines with
respect to service design and supply; the relationship between OEMs and com-
ponents suppliers not only for machine tools design and production, but also for
operations, maintenance and upgrade activities; the prevalent sectorial product and
technology-oriented culture; the impact that machine tools have in determining
manufacturing sustainability from the economic and environmental point of view;
the small and medium size of the majority of the companies in the machine tool
industry compared to the contractual power of their manufacturing customers. In
particular, suggested topics for future research are:
• risk management and probabilistic methods for the financial assessment of
service business models;
• services for environmental sustainability and tools for the evaluation of the
environmental advantages of services;
• organization and change management for servitization;
• models and tools for supply chain configuration and international networking
for services;
• methods and tools for managing products complexity and suppliers interde-
pendencies for the offering of advanced services;
• organizational transformation of companies and new entrepreneurship in the
machine tool service sector.
128 G. Copani

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Chapter 8
Chemical Industry: Servitization
in Niches

Daniela Buschak and Gunter Lay

Abstract The chemical industry represents an important share of global manu-

facturing and all other manufacturing sectors employ products made by the chemical
industry. Its strong B2B focus makes the chemical industry an interesting subject for
analysis of the state-of-the-art servitization in this industry. Even more interest in the
chemical industry’s servitization arises from the fact that United Nations Industrial
Development Organization (UNIDO) is strongly promoting the service of ‘‘chem-
ical leasing’’ because of its potential to reduce the environmental impact of the use of
chemicals. Thus, this paper presents a state-of-the-art analysis of servitization in
chemical industry. A review of the case study literature shows that chemical man-
agement services appeal only to a sub-group of chemicals, namely specialty
chemicals. As a result, commonalities and differences between certain types of
specialty chemicals and their service offer implications are highlighted. We cate-
gorise the providers and customers of chemical management services and conclude
by evaluating the servitization potential of the chemical industry. The empirical
basis of this research comes from the literature, case studies and firm documents.

8.1 Introduction

The chemical industry represents an important share of global manufacturing

turnover. In 2011, the turnover of the chemical industry was valued at
2,744 billion Euros. During this year, Asian companies were the major producers

D. Buschak (&)  G. Lay

Fraunhofer Institute for Systems and Innovation Research ISI,
Breslauer Straße 48, 76139 Karlsruhe, Germany
e-mail: daniela.buschak@isi.fraunhofer.de
G. Lay
e-mail: gunter.lay@outlook.de

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_8, 131

 Springer International Publishing Switzerland 2014
132 D. Buschak and G. Lay

of chemical products (52 % of global sales), followed by European (23 %) and

NAFTA-region companies (17 %). This ranking is partly reflected by the list of the
largest chemical manufacturers: Germany’s BASF is the largest, followed by
China’s largest petrochemical producer, Sinopec. US-based ExxonMobil and Dow
Chemical are ranked third and fourth, respectively, and LyondellBasell Industries
(NL) is in the fifth position. Finally, Saudi Arabia’s SABIC, Royal Dutch Shell
(GB/NL), Mitsubishi Chemical (J), DuPont (USA) and INEOS (CH) complete the
top 10 (ICIS 2011). In the European Union (EU), chemical companies employed a
total of approximately 1.19 million people in 2011 (Cefic 2012).
According to the European Chemical Industry Council (Cefic 2012), the
chemicals industry works with three types of chemical products: base, speciality
and consumer chemicals. Base chemicals (petrochemicals, polymers and basic
inorganics) are produced in large volumes and sold within the chemicals industry
itself or to other industries. In 2011, base chemicals represented 62.4 % of total
EU chemical sales. To the group of speciality chemicals belong paints and inks,
crop protection, dyes and pigments and other specialty items such as lubricants,
adhesives, tanners and water treatment products (Cefic 2012; Kortman et al. 2006).
Speciality chemicals are produced in small volumes. They represented 25.3 % of
total EU chemical sales in 2011. Finally, consumer chemicals are sold to final
consumers in the form of products such as soaps and detergents as well as per-
fumes and cosmetics. They represent 12.3 % of total EU chemical sales in 2011
(Cefic 2012). Whereas competition in the production of base chemicals is driven
by prices, the producers of specialty chemicals compete on differentiation and
customisation (Cesaroni et al. 2004).
In traditional chemical industry business models, the products mentioned above
are sold by volume. It can be assumed that in these traditional models, chemical
manufacturers have no strong incentives to help customers use their chemicals
more efficiently. Because they earn money by selling higher volumes, inefficient
use by customers will increase the sales of chemical producers (Kortman et al.
2006).
Several years ago, predominantly environmental concerns encouraged the
development of innovative business models in which chemical waste is avoided.
Such business models promote servitization in the chemical industry by linking the
physical offers of chemicals companies with the provision of additional services to
customers. Labels for these innovative business models include the following:
• Chemical product services (CPS) describe business models that shift the focus
from the sale/use of chemical products to the sale/use of chemical product/
service combinations that jointly fulfil the demands of customers and suppliers
(Kortman et al. 2006).
• Chemical management services (CMS) are defined as business models in which
a customer engages with a service provider in a strategic, long-term contract to
supply and manage the customer’s chemical and related services (Stoughton
and Votta 2003).
8 Chemical Industry: Servitization in Niches 133

• Chemical leasing is a business model in which the chemicals required for a

specific service are not sold to the customer but are rather made available for
use and maintained (Jakl et al. 2004).
The essence of all these concepts is that the remuneration provided to chemical
manufacturers as suppliers is not entirely linked to the amount of chemicals sold.
Instead, chemical suppliers are also paid for the successful delivery and man-
agement of chemicals. Thus, supplier profitability is based on better performance,
not the sale of more chemical products (CSP 2009). However, the different con-
cepts discussed in the scientific and industry literature are not congruent. Chemical
leasing is often seen as a special type of management service (CSP 2009; Kortman
et al. 2006). In the following, we refer to the broader concept of chemical man-
agement services and particularly note special concepts such as chemical leasing
without a transfer of ownership in the presentation of the literature.
The most important reason for customers to use CMS is to generate cost sav-
ings, specifically in life-cycle-costs, because chemical providers have greater and
problem-adequate know-how on how to handle chemicals (Mattes et al. 2013).
Reductions in environmental waste are more of a positive side effect rather than
the initial driver for these business models (Kortman et al. 2006). Kaltenegger
(2006) summarises four major advantages that can be linked with cost reductions
for customers that use chemical management services:
• Exclusion from liability
• Reduction in required storage space
• Reduction in amount of employed chemicals
• Reduction of health and environmental risks
Strict legal regulations exist for the handling of chemicals, especially solvents,
due to their potential to be hazardous, and society is also interested in information
on their handling. These legal restrictions are expressed through avenues such as
the European agreement on the international transport of dangerous goods on roads
(ADR) or agreements on tariffs that users have to consider (Mattes et al. 2013;
Kaltenegger 2006). In addition, societal expectations create a demand for the
responsible handling of chemicals, which has to be included in environmental
reports for various stakeholders.
A fact that users are often unaware of is that the costs of chemical management
are significantly higher than the costs of purchasing chemicals. These costs range
from 1 to 10 Dollars for every Dollar spent on chemicals over their lifespan
(Kaltenegger 2006). Service providers have relevant knowledge with regard to the
handling of chemicals in terms of transport, storage, documentation and pro-
curement. In addition, their expertise helps them to identify optimisation potential,
such as fine-tuning chemical mixtures, and thus helps users to reduce costs. When
the use of technical equipment or uncommon chemicals is required, optimisation
potential is boosted through cooperation among chemical providers, manufacturers
and customers. Due to the health and environmental hazards represented by
chemicals such as solvents, management of the handling process constitutes a very
134 D. Buschak and G. Lay

serious responsibility (Hammerl and Jasch 2007). Thus, handling expertise can
help ensure the safety of employees and the environment by, for example, reducing
emissions of Volatile Organic Compounds (VOCs) in the applications of solvents.
If customers deal with several chemical suppliers, the outsourcing of all
chemical management to one orchestrating company has additional benefits. These
can include reductions in redundancies related to purchasing similar products from
different suppliers, the implementation of just-in-time logistic by selecting the
right point of sale, simplification of Material Safety Data Sheets (MSDS), health
and safety controls and, as previously outlined, lower administrative costs for
purchasing and logistics because there is only one supplier instead of 6 or 7
(Kortman et al. 2006).
Within this context, the next section describes the actual diffusion of serviti-
zation in the chemical industry according to groups of chemical products
(Sect. 8.2). In Sect. 8.3 different types of CMS providers and customers are
characterised and Sect. 8.4 concludes with an estimation of the actual extend of
CMS diffusion.

8.2 Incidence of CMS by Chemical Product Groups

The assessment and analysis of CMS incidence in the chemical industry cannot
rely on official statistical data because CMS represents special types of offers that
are incorporated into the total sales of manufacturers. Hence, we employ a com-
pilation of case study data from various sources and expert commentary from the
literature.
Table 8.1 presents a summary of CMS cases that were conducted between 1989
and the present and were reported in literature or on the Internet. From this
compilation, it becomes obvious that both base and consumer chemicals do not
play a major role in the provision of CMS. Only speciality chemicals have been
reported as being included in CMS contracts.
This finding is aligned with existing expert opinions. Kortman et al. (2006)
found that the base chemicals market provides limited opportunities for suppliers
and customers to develop and implement chemical product services, with the
exception of industrial gases and fertilisers. Bierma and Waterstraat (2000) con-
cluded that speciality chemicals have been the driving force behind most CMS
programmes. The reasons for this are the relatively high margins of such chemicals
and the higher level of expertise required to optimise their use.
Hence, Sect. 8.2.1 will provide a detailed analysis of the applications of CMS
for the types of speciality chemicals reported in case studies.
Table 8.1 CMS case studies reported in the literature or on the internet
CMS supplier CMS customer CMS chemicals Source
Akzo Nobel Powder Coatings S.A.E. ABB Arab, Cairo, Egypt Coatings Jakl et al. (2004)
Cairo, Egypt
Ashland, Covington, KY, USA Motorola Semiconductors, Austin, Chemicals for semiconductor production CSP (2013)
USA
Betz Dearborn today GE Water: GM, Truck and Bus Plant, Janesville, Water treatment chemicals CSP (2013)
Trevose, PA, USA USA
Cabot Speciality Fluids Aberdeen, UK Total E&P UK Ltd., Aberdeen, UK Cesium formate brine Gilbert and Downs (2010)
Castrol Industrial North America, USA Navistar, Engine Plant, Melrose Park, Machining coolants, cleaners CSP (2013)
USA
Castrol/BP, Liverpool, UK Cummins, Inc., Engine Plant, Metalworking fluid, liquid nitrogen CSP (2013)
Jamestown, USA
Castrol/BP, Liverpool, UK Airbus UK n. a. Oldham et al. (2003)
8 Chemical Industry: Servitization in Niches

Chemical Mac Oil S.A. + SUMAT, Mexican Sugar Mills Lubricants Jakl et al. (2004)
Mexico
Chemico Systems, Southfield/ Lansing School, Facility management chemicals CSP (2013)
Chesterfield, USA Michigan, USA
Dr. Badawi Chemical Work, El Ameria, GM Egypt, Maadi, Cairo Egypt Hydrocarbon solvents Jakl et al. (2004)
Egypt
DOW, SAFECHEM Europe, Germany Magna Steyr Fuel Solvents for metal cleaning CSP (2013)
Systems GmbH Austria
DuPont Canada, Canada Ford, Oakville, Ontario Paint for automobiles UNIDO (2011)
assembly plant
(continued)
135
Table 8.1 (continued)
136

CMS supplier CMS customer CMS chemicals Source

Ecolab Serbia Knjaz Milos, Lubricants Jakl et al. (2004)
Arandelovaz, Serbia
Ecolab Nalco de Colombia Ltda Ecopetrol, Bogota, Colombia Oilfield production chemicals CSP (2013)
ERG Henkel ERA, Russia Water purification chemicals CSP (2013)
Haas TCM, USA Claverham Manufactures Bristol, UK Machine coolant, adhesives, paints, etc. CSP (2013)
Haas TCM, USA Raytheon Management for all chemicals and gases Claussen (n.d.)
Haas TCM, USA Stanford Linear Accelerator Center Cooling tower, fuel and cryogen, etc. SLAC (2008), and
(SLAC), USA Claussen (n.d.)
Haas TCM, USA GM, Oshawa Plant, Paint booth management chemicals CSP (2013)
Ontario, Canada
Henkel, Germany Bambi Banat A.D. Adhesives Jakl et al. (2004)
Pozarevac, Serbia
Interface LLC, USA Delta Airlines, Atlanta, Georgia, USA All chemicals needed for operating Gilbert and Downs (2010)
airplanes (not fuel)
Mardi Inc. S.A. Mexico Cromadoro Delgado S.A. Mexico Chemical agents for electroplating CSP (2013)
PPG/Chemfil, Pittsburgh, Pennsylvania, Chrysler Neon, Plant, Belvidere, solvents Oldham et al. (2003)
USA Illinois, USA
PPG Polska GM/Opel site in Poland Paints used in site facilities CSP (2013)
PPG/Chemfil, Pittsburgh, Pennsylvania, Ford, Taurus Assembly Plant, Chicago, Plant chemicals except paints, sealers, and CSP (2013)
USA USA lubricants
Quaker Chemical Corporation, General Motors, Grand Rapids Plant Lubricants, greases, adhesives, paints etc. Jakl et al. (2004)
Pennsylvania, USA USA
Tiefenbacher GmbH Ennsdorf, Austria Mepla Alfit (today Grass), Götzis, Solvents Jakl et al. (2004)
Austria
Zinc Misr, Cairo, Egypt El Sewedy Electrical Company, Egypt Zinc chloride, ammonium chloride Jakl et al. (2004)
D. Buschak and G. Lay
8 Chemical Industry: Servitization in Niches 137

8.2.1 Solvents

Solvents are used in most industrial sectors to clean and degrease materials. They
are used to clean metals, e.g., remove oily grease, metal scarf, dust or other
impurities, as well as to dry clean garments. Solvents are also necessary in paint
production to dissolve the compounds that are components of paint (Kortman et al.
2006). The production of solvents accounts for approximately 13 % of speciality
chemical production and 3 % of overall chemical production (own calculation
based on Cefic and Eurostat). In the following, selected case studies are presented
to develop a better understanding of the particularities of CMS for solvents.
The first example of CMS for solvents involves the cooperation of Tiefenbacher
and Mepla Alfit. Tiefenbacher GmbH is from Ennsdorf, Austria, was founded in
1989, and has approximately 10 employees. It is active in de-lacquering metal,
plastic and wooden surfaces. For its customer, Mepla Alfit (a company resulting
from a 2007 fusion with Grass into Grass GmbH, located in Höchst, Austria)
which produces hinges, drawers and sliding systems, Tiefenbacher offered to
provide its expertise to the internal de-lacquering process used at Mepla Alfit in
the painting of different parts. The offered services included the delivery of sol-
vents, provision of descriptions for care of the de-laquering baths, process
instructions and data sheets, solvent quality analysis before and after use and waste
management. The benefits of the service package included reductions in the
required amount of solvents as well hazardous waste produced in the de-laquering
process. The revenues for Tiefenbacher were linked to the quantity of consumed
solvents (Beyer 2008).
The second example is the trilateral cooperation between SAFECHEM, Pero
and Magna Steyr. SAFECHEM is a subsidiary of The Dow chemical company,
with divisions in Europe and North America and approximately 20 employees
(SAP 2011). SAFECHEM was founded in 1992 and provides solvent uses with
services and solutions for surface cleaning in the aerospace, automotive, high
precision and electronics industries, among others (Dow 2013a). SAFECHEM
services over the complete life cycle of solvents, including delivery, inventory,
quality monitoring and adjustment, and the recycling and remarketing of used
solvents (Kortman et al. 2006). As a chemical supplier, in 2005, SAFECHEM
committed to a partnership with Pero AG, a manufacturer of metal cleaning
machines with approximately 170 employees headquartered in Königsbrunn,
Germany (Pero 2013). In collaboration with Pero Innovative Services GmbH,
located in Weiz, Austria, Pero AG founded a company to deliver cleaning services.
The new company’s first customer was Automobiltechnik Blau, a branch of Magna
Steyer, from Weiz/Perding, Austria. In this case, Pero Innovatives Services pro-
duced a machine specialised in cleaning metal parts, was responsible for rooms
and material logistics and provided the personnel for operating the machine,
whereas SAFECHEM provided the adequate solvents for the customer’s cleaning
processes, monitored solvent quality and was responsible for waste management.
The cleaning process using SAFECHEMs solvents and the operation of Pero’s
138 D. Buschak and G. Lay

cleaning machine were performed by personnel from Pero Innovative Services

GmbH. The benefits to the customer from hiring a chemical service provider were
savings in personnel costs because no additional expertise was needed. Further-
more, no investments needed to be made because the ownership of the machine
remained with the machine builder, resulting in projectable costs for the customer
and, due to the expertise of the machine builder and chemical provider, reductions
in process costs. Revenues for the service provider were linked to the number of
cleaned parts (Erbel 2008).
The examples presented above and experiences reported in the literature
(Kortman et al. 2006) can be summarised as follows: Chemical management
services for solvents play a significant role in dry cleaning, metal cleaning and
paint application, e.g., as in automotive industry. The services offered in this
business concept include chemical supply, quality monitoring, adjustment,
removal of applied chemicals for purification and recycling. Providers of such
services include companies of all sizes. As shown in the case study of Tiefenb-
acher GmbH, chemical management for solvents can also be a suitable business
model for smaller companies. Specialisation in CMS for solvents is exemplified by
the second case, in which the machine builder provides the end customer with a
solution; in this case, the chemical producer acts within the solution network of the
machine builder. Linking the remuneration scheme to the number of parts allows
the machine builder to continue to own this product. This configuration allowed
the machine builder to bring in its expertise in optimising the chemical application
equipment to design the machine according to the requirements of the service
concept. The technical optimisation of the machine to reduce life cycle costs made
the machine so expensive that it would be impossible to sell on the market (Erbel
2008). By leasing the product and co-operating with the chemical producer, the
machine builder can generate economic benefits not only for itself but also for all
other network actors as well as the environment.
In addition to the primary effect of reducing the amount of employed solvents
through the new business concept, further positive effects result from reduced
environmental pollution and improvements in workplace conditions (Sena et al.
2008). Through the engagement of chemical service providers and remuneration
schemes linked to chemical output, the cases reported in the literature demonstrate
reductions in the amounts of used chemicals, resulting in lower costs for customers
and positive effects for the environment. For the provider, it is reported that going
downstream represents an opportunity to compensate for decreasing demand for
chemicals, differentiate itself in the market and respond to legal requirements
related to environmental and health protection. Through this approach, chemical
producers such as SAFECHEM can provide services on their own or in co-oper-
ation with process equipment manufacturers. In addition, pure chemical service
providers, such as Haas Group International (http://www.haasgroupintl.com/
haas-overview.html), are important providers of solvent CMS, especially in the
automotive and aerospace industries.
8 Chemical Industry: Servitization in Niches 139

8.2.2 Painting/Coating

Paints are chemicals that are relevant in chemical management, especially in the
car and transport equipment industry. Kortman et al. (2006) report that between 40
and 70 % of painting processes in the European automotive industry are provided
within service contracts. In aeronautics, this share ranges from 30 to 45 %. For
example, the production of paint accounts for approximately 12.3 % of speciality
chemical production and 5.3 % of overall chemical production in Germany, the
biggest chemical producer in Europe (own calculation based on VCI/Prognos
2013). In the following, selected case studies are highlighted to provide a detailed
understanding of the particularities of CMS for coatings.
The first example of CMS for coatings is PPG, which was founded in 1883 and
has headquarters in Pittsburgh, Pennsylvania, USA. PPG is a leader in coatings and
specialty products, with more than 39,000 employees (2012) and operations in
approximately 70 countries around the world. Through its 7 business segments, it
serves various industries, including the automotive and aerospace industries (PPG
2013a).
PPG offers the Optima Solutions Chemical Management programme, in which
the company takes the role of a system integrator (PPG 2013b) to offer compre-
hensive services to its customers. PPG has sound experience in chemical man-
agement services, especially for car manufacturers. A prominent case study with
PPG focused on its strategic partnership with the Ford Motor Company and its
Ford Taurus Assembly Plant in Chicago Illinois. Starting in 1988, PPG was
responsible for the management of most chemicals used in the plant, including
solvents. As a supplier, PPG was responsible for procurement, inventory man-
agement, distribution and container management as well as quality assurance and
maintenance oversight, training for VOC emissions reductions, environmental,
health and safety (EHS) and chemical tests and lab analyses (Ford 2006). Although
PPG (a Tier 1 supplier) and Tier 2 suppliers managed by PPG had full-time service
technicians on-site, PPG was not operating the coating process with own personnel
(Bierma and Waterstraat 2000). The reported benefits of chemical management
services in this case were reductions in emissions, reductions in costs due to the
use of fewer chemicals, higher product quality and improvements in health and
safety. Revenues for PPG were linked to per-vehicle fees. This revenue scheme
also served as an incentive to reduce the amount of chemicals used as well as
peripheral costs. Furthermore, not linking revenues to the amount of chemicals
sold encouraged PPG to work to improve usage processes (Bierma and Waterstraat
2000).
Another case study describes the cooperation between DuPont Canada and the
Ford Motor Company in Oakville, Ontario, Canada, starting in 1996. DuPont was
remunerated by a fixed fee according to the number of cars painted. In this case,
the per-gallon cost of paint and amount of paint used were delineated in the
contract and re-negotiated every quarter (GEMI 2001). An on-site technician from
DuPont helped to understand the manufacturing process and identify optimisation
140 D. Buschak and G. Lay

potential. DuPont added to its technical expertise on paint by acquiring expertise

on the paint application (GEMI 2001). As a result, DuPont reduced its costs in
years one through three, with the percentage of cost savings in year three being
nearly half of that in the first 2 years. Ford also reduced its costs by 35–40 %
through the new business model, as well as reducing its volatile organic emissions
and water and wastewater emissions (GEMI 2001).

8.2.3 Lubricants

Lubricants are applied for friction minimisation or cooling in industrial production

processes. Servitized offers for lubricants are reported in the automotive and metal
industries, among others (Kortman et al. 2006). For example, lubricants are
applied to make the operation of a conveyor smoother (UNIDO 2011). In the
following, selected case studies are highlighted to provide an in-depth under-
standing of the particularities of CMS for lubricants.
The first example is the cooperation between Knjaz Milos and Ecolab Serbia.
Kniaz Milos, founded in 1811 and having approximately 900 employees, is a pro-
ducer of beverages located south of Belgrade, Serbia. Ecolab Serbia is a subsidiary
of Ecolab, a world leader in professional cleaning services with headquarters in St.
Paul, Minnesota, USA. Although it now has over 40,000 employees, in 2009, when
the cooperation began, Ecolab had approximately 26,000 employees (Finanzen.net
2013). For chemical leasing, the type of lubricant was changed from a wet lubricant
to a dry lubricant that is applied to a bottle conveyor in one production line.
Chemical leasing benefits for the customer, Knjaz Milos, include improvements
in worker safety, higher process efficiency because fewer bottles fall with the use of
the new lubricant and the need for smaller amounts of lubricants. The revenues for
the provider, Ecolab Serbia, are linked to the working hours of the bottle conveyor.
Because less lubricant is used, the service revenues within the chemical manage-
ment contract include higher margins for Ecolab. As a result, both parties benefit
from chemical leasing so it can be regarded as a true win-win situation. In 2011, the
model was extended to two more production lines (UNIDO 2011; Ahrens 2011).
Another example is Airbus UK’s 2004 decision to outsource lubrication man-
agement for its Filton production site to Castrol UK, a chemical manufacturer.
Castrol performs the management of all metalworking fluids and lubricants,
vibration analysis, filtration management and washer parts management. A result
of this outsourcing contract is the reduction in the volume of coolants used. In
addition, a decrease in the downtime of the cleaning machine was achieved as well
as cost reductions in non-production-related processes (N. U. 2006). Another
example is the lubricant chemical service cooperation between Fideicomiso In-
genio San Cristóbal, a sugar producer, and Chemical Mac Oil, a manufacturer of
oil and greases, both located in Mexico. A Chemical Mac Oil technician is at the
customer site to support and train the customer’s staff. Benefits of this cooperation
include higher process efficiency, reduced water and energy consumption, the
8 Chemical Industry: Servitization in Niches 141

production of less waste and extensions of machine life cycles (Valerio et al.
2008). Remuneration for the chemical provider was linked to the tonnes of sugar
cane that were milled at the factory (Valerio et al. 2008).
Specialisation in chemical management for lubricants is based on impact on the
condition of the technical equipment and machines (Kortman et al. 2006).
The outsourcing of lubricants often leads to higher lubricant consumption because
the customer processes were previously performed very poorly. Adequate usage and
application by chemical providers thus increases the amounts of items such as oil or
grease that are used but also increases the lifespan or performance of machines.

8.2.4 Water Treatment Chemicals

Water treatment chemicals are another type of specialty chemical. Related case
studies in the literature focus on wastewater purification. One case study focuses on
the arrangement between General Motors and BetzDearborn, which began in 1992.
BetzDeaborn (now Water and Process Technologies, a division of GE Infrastruc-
ture) (GE Power and Water 2013) acts as a Tier 1 supplier for wastewater treatment,
paint detackification, power house, paint maintenance, and solvent and chemical
services at the GE plant in Janesville, U.S.A. Benefits from this collaboration are
reductions in employed chemicals and inventory costs, improvements in health and
safety, higher quality and reductions in rework. Remuneration is based on a fixed
per-vehicle fee. An additional target agreed on in the contract was the implemen-
tation of annual savings on the value of the contract (N. U. 2000).
Another example is the collaboration between Henkel-ERA, producer of
industrial and household glues, soaps and detergents located in Tosno, Russia, and
ERG, a service company specialised in developing wastewater purification
chemicals located in St. Petersburg, Russia. To increase the level of water
decontamination, Henkel-ERA established a new type of contract with the service
provider in which remuneration was linked to the amount of purified water. ERG
continued to own the chemicals. ERG reconstructed the wastewater processing
facilities and used new technologies in this business model. Benefits from this
model were cost savings of 50 %, reductions in the amounts of chemicals used,
improvements in the quality of the wastewater and reductions in hazardous
chemical amounts (Startsev and Schott 2008).

8.2.5 Commonalities and Differences

From the case studies on CMS for different types of speciality chemicals presented
above, we learn that each speciality chemical requires particular CMS character-
istics. Hence, in the following, commonalities and differences between CMS for
different types of speciality chemicals are summarised.
142 D. Buschak and G. Lay

If we first consider the commonalities, we realise that all cases include changes
in revenue models. In addition to basing prices on the amounts of chemicals sold,
prices of the service components are based on higher chemical application effi-
ciency. Anttonen (2008) reports another commonality, stating that in all types of
CMS, technology plays an important role in monitoring and analysing the amount
of chemicals used as well as their costs. Additionally, he found that for all types of
specialty chemicals, CMS offers include a portfolio of services for procurement,
process management, IT services or waste management (Anttonen 2008), from
which customers can choose individual services to be included in their CMS
contracts.
If we focus on differences and analyse CMS for lubricants, we see that it
requires technical equipment to process chemicals, such as in paint shops, or the
chemicals facilitate the functioning of processes, such as cooling for machine
spindles. To generate efficiency improvements through CMS, an understanding of
the manufacturing processes in which lubricants are applied is necessary as well as
technical knowledge in relation to the equipment. This expertise related to the
exploitation of improvement potential necessitates two types of cooperation
between different actors: First, cooperation between chemical suppliers and cus-
tomers and second, cooperation between chemical suppliers and manufacturers of
the equipment on which the lubricants are applied. Another characteristic of CMS
for lubricants is that economic benefits are not necessarily derived from savings in
lubricant consumption. With the introduction of CMS, the volume of consumed
lubricants might even increase. The reason for this is that companies that outsource
the handling of lubricants often had difficulties in performing proper maintenance
(Kortman et al. 2006). Thus, by handing these tasks over to professional service
providers, the amount of lubricants used could increase. However, due to proper
maintenance, positive effects on the condition and performance of machinery can
be realised, such as fewer machine failures and higher life expectancy (Kortman
et al. 2006).
In contrast to CMS for lubricants, CMS applications for solvents have to cope
with the challenge that the application of solvents for cleaning or as paint com-
ponents differs according to the type of solvent, the treated surface or the appli-
cation procedure (UBA 2013). Organic solvents contain volatile organic
components that evaporate into the surrounding air. These components cause
greater smog in the summer and are harmful because they can cause cancer (UBA
2013). Thus, solvents can be harmful to health or even poisonous and threaten air
and water quality. The recycling of solvents is already a normal process; however,
there are always some remaining solvents that need to be disposed of. This mostly
hazardous waste needs to be disposed of in special ways that are very costly. This
is only one of the unique characteristics of handling solvents. Due to the impor-
tance of using solvents, special knowledge in procurement, handling, application
and disposal is required. There is also pressure from politicians in many countries
to reduce the use of or even substitute halogenated solvents (Ceresana 2013)
with lacquering based on water or containing no solvents at all (BASF 2004).
8 Chemical Industry: Servitization in Niches 143

In Europe, for example, there are special principles affecting the application of
solvents, such as 1999/EG/13, which includes reductions in VOC emissions.
CMS for coatings in the automotive industry is also unique. These services are
primarily targeted towards cost reduction (Kortman et al. 2006). The CMS clients
are the big automotive OEMs, which have strong bargaining power with regard to
their supplier contracts. To realise cost reductions, the optimisation of the entire
car body painting process has to be included in CMS projects. Hence, CMS
services are targeted towards material requirements planning, material logistics,
inventory control, laboratory services, paint mixing, quality control and other
activities. In all these steps of the car body painting process, the experience of
coating providers such as PPG, BASF or Dupont is the precondition for process
improvements. Because car body painting requires supplies such as wax, PVC,
phosphate, auxiliary lacquering material or solvents in addition to coating mate-
rials, the CMS contracts assign the procurement of these materials to the CMS
provider. Through this second Tier, supplier management is also part of the duties
of CMS providers. Miga and Benson (n. d.) characterise the relinquishing cus-
tomers’ need to deal with sub-suppliers (Tier 2) as the key aspect of coating CMS
because these are dealt with by the CMS business partner (Tier 1). In the case of a
CMS car-coating contract between PPG Poland and GM Opel Poland (Miga and
Benson n.d.), the CMS supplier, PPG, had to procure 700 car-coating products
from 50 tier 2 suppliers as part of its CMS responsibilities.

8.3 CMS Providers and Customers

8.3.1 CMS Providers

The case studies on CMS applications depicted above (Table 8.1) indicate that
different types of companies act as CMS providers. Based on the reviewed liter-
ature, we can distinguish among 4 different groups.
First, chemical manufacturers offer CMS. Examples of this type of CMS pro-
vider include the German companies BASF and Henkel, the British companies
Castrol/BP and Ecolab, and the U.S.-based companies DuPont and PPG. Some of
these companies offer CMS solutions prominently on their web sites. For example,
PPG has established its ‘‘Optima Solutions Chemical Management’’ programme,
which represents a ‘‘systems’’ approach through the services of a single, first-tier,
on-site manager who focuses on cost reduction, safety, material management, Tier
2 management, environmental reporting requirements, problem resolution, con-
tinuous improvement and project management (PPG 2013c).
Second, chemical manufacturers have established affiliates that are focused on
offering CMS. A prominent example of this type of CMS provider is SAFECHEM,
which is a subsidiary of the Dow Chemical Company that provides services and
solutions related to the safe and sustainable use of solvents for surface and dry
144 D. Buschak and G. Lay

cleaning applications. With offices in Düsseldorf (Germany) and Paris (France)

and a network of distributors, SAFECHEM serves over 7,500 customers around
the world (DOW 2013b). SAFECHEM created its CMS trademark, Safe-TainerTM,
and actively promotes this closed-loop chemical application system (DOW 2013c;
Kaltenegger 2006).
Third, we identified pure service providers that offer CMS. These companies do
not produce chemicals but offer full services for the handling of different chem-
icals in different industries. For example, Haas Group International Inc., with more
than 300 employees and headquarters in West Chester, PA, U.S., is an interna-
tional distributor of chemicals and provider of chemical management services. It
offers a wide range of different chemicals and chemical-related-services to users in
different sectors, such as aerospace and defence, manufacturing, food and bever-
ages (Haas Group International Inc. 2011).
Fourth, manufacturers of equipment on which chemicals are applied act as
CMS providers. For instance, paint shop manufacturers have the necessary
knowledge for optimisation or problem solving in relation to the effective handling
of coatings. An example of such a business model is the painting of truck steeple
cabs for MAN Latin America (formerly VW) performed by Carese, a subsidiary of
the German paint shop manufacturer Eisenmann AG. Remuneration in this case is
divided into two components: Eisenmann is paid a fixed fee covering personnel
expenses and another fee is paid to Eisenmann for every painted cab that passes
the quality test (Koll 2010). The paint shop manufacturer acts as CMS provider
that has incentives to reduce the amount of chemicals used and the cost of
chemical management as well as ensuring quality.

8.3.2 CMS Customers

An analysis of CMS customers by sector indicates that the automotive industry is

by far the most important source of clients. The case study reports listed in
Table 8.1 name automobile manufacturers as CMS customers in 11 out of 28 cases
(39 %). Electronics/electrical equipment manufacturers rank second (14 %), and
the food processing industry and service sector are tied for third (11 % each).
The predominance of the automotive industry is reinforced by the CSP industry
report (2009). Their results of providers’ estimations of CMS market penetration in
the U.S. place the automotive industry in the lead, followed by aerospace and
electronics manufacturers.
The importance of the car industry as a CMS customer may be due to the broad
diffusion of CMS for car coating. At the beginning of the new millennium,
40–70 % of painting processes in the automobile industry have already been
servitized (Kortman et al. 2006). The prominence of the electronics and aerospace
industries may result from their high consumption of specialty chemicals such as
lubricants and solvents. As illustrated above, CMS for these groups of chemical
8 Chemical Industry: Servitization in Niches 145

products can be found in various CMS pilot projects (CSP 2009; Kortman et al.
2006; Kaltenegger 2006).
In addition to industrial companies, public or private organisations from the
service sector are also important CMS customers. Cooperation between the hos-
pital of the city of Worms (Germany) and Schülke and Mayr, GmbH in Norder-
stedt (Germany), a global expert on hygiene and preservation with more than 600
employees, serves as a recent example. According to this CMS contract (DBU
2009), Schülke and Mayr does not sell disinfectants but is remunerated per dis-
infectant application. This new business model leads to a reduction in disinfectant
consumption, especially in the cleaning area. The new model is associated with a
higher level of hygiene in the cleaning of medical instruments. The cases of the
Lansing School District and Stanford Linear Accelerator as CMS customers (see
Table 8.1) further demonstrate the relevance of service-sector organisations as
customers.
An analysis of CMS customers by size clearly indicates that until now, big
multinational companies have been the most relevant clients. Out of the 28 CMS
pilot cases presented in Table 8.1, 24 could be classified by size, 17 of which have
more than 10,000 employees, 5 of which have between 1,000 and 10,000
employees and only 2 of which have less than 1,000 employees. This finding is
aligned with the results of Mont et al. (2006) and Schröter et al. (2010). The latter
study provides several reasons for the dominance of larger firms. First, the authors
argue that larger firms are generally at the forefront of innovative technology or
business model adoption. In addition, they conclude that the necessary volume of
chemicals that economically justifies CMS is only reached in larger customer
companies. Finally, they cite the bargaining power of larger companies to compel
chemical providers to offer CMS contracts even if they are hesitant to agree to this
business model.
Although the actual relevance of small and medium sized customer companies
is limited, even this small number of CMS clients seems to be at least partly a
result of governmental intervention. As UNIDO has launched a Global Chemical
Leasing Programme (www.chemicalleasing.com), UNIDO member countries from
developing regions with smaller companies have tried to push for the imple-
mentation of pilot cases. Both smaller CMS customer companies in Table 8.1 are
part of such initiatives.
An analysis of CMS customers by region in the CMS Industry Report (2009)
concludes: ‘‘It is clear that CMS is used to a much greater degree in the U.S./
NAFTA-region than in other parts of the world’’. Based on their 2009 survey
including 15 CMS providers and 15 CMS customers, they estimated that
approximately 60–65 % and 70–75 % of all CMS in use were located in the U.S.
and the NAFTA-region, respectively. This inquiry finds that the predominance of
the U.S. is expected to continue: 64 % of survey respondents expected growth of
CMS applications in the U.S., whereas 36 % expected CMS growth in Europe and
only 14 % expected growth in the Middle East and Africa. This forecast is based
on the experiences of many American CMS customers that are struggling to find
ways to implement CMS programmes in their overseas facilities. Factors such as
146 D. Buschak and G. Lay

unionisation, facility operational style, perceptions of the CMS value proposition,

and governmental regulations are considered to negatively affect the potential
success of CMS in the overseas facilities of U.S. based multinational companies
that use CMS in their home bases.
To overcome the low relevance of CMS, especially in developing countries the
UNIDO Global Chemical Leasing Programme has initiated CMS pilot projects in
Colombia, Egypt, Mexico, Morocco, Russia, Serbia and Sri Lanka (UNIDO 2010).
Whether these activities in the mid term will influence the unbalanced distribution
of CMS customers by region cannot be predicted.

8.4 Overall Relevance of CMS in the Chemical Industry

and Outlook

The CMS case study reports and descriptions of CMS providers and customers
presented above clearly provide evidence for the increased prominence of servi-
tization in the chemical industry. However, the relevance of CMS remains rather
marginal. Because the focus of CMS is limited to speciality chemicals, which
account for 25 % of chemical production, at best only one-fourth of chemical
industry sales are susceptible to changes business models from the traditional sale
of chemicals to servitized business concepts.
More realistic estimations (CSP 2009) consider that approximately 55 % of
speciality chemical production is for so called ‘‘direct’’ chemicals, which become
part of end products and are not likely to be amenable to a CMS approach. The
remaining 45 % have further restrictions for CMS, which leads to the assumption
that an absolute maximum of 18 % of speciality chemicals, representing less than
5 % of overall chemical production, can be regarded as potentially suitable for a
CMS approach.
This figure roughly corresponds with the estimation of Kortman et al. (2006).
They found evidence for CMS only among chemical product groups representing a
14 % share of total chemical sales. Because not all of these product groups will
adopt CMS applications, but rather one-third is expected to do so, the market
potential for CMS could reach a maximum of approximately 5 % of chemical sales.
The most recent revenue figures for the CMS market indicate that the moderate
market potentials introduced above are far from being reached. Based on a
combination of survey responses and interviews, the CMS industry report (2009)
estimated the 2009 market revenues of the CMS industry at between US Dollars
900 million to 1 billion in the U.S., 1–1.2 billion US Dollars in the NAFTA
region, and 1.3–1.6 billion US Dollars worldwide. Relative to overall chemical
sales around the world, these figures represented in 2009 a share of around 0.06 %
of worldwide sales and a share of around 0.2 % of sales in the U.S., as well as
NAFTA region (CEFIC 2011 and own calculations). Industry characteristics, such
as division of labour between technology suppliers and chemical companies and
8 Chemical Industry: Servitization in Niches 147

the acceptance of networks (Cesaroni et al. 2004) are ideal points of departure for
new business models.
The findings presented above are aligned with statistics from the German
Federal Statistics Office and the EMS survey results presented in the introduction.
The most up-to-date German statistical data comparing the share of service sales in
manufacturing indicate that the chemical industry is ranked at the lower end in a
comparison of manufacturing sectors (Statistisches Bundesamt 2004). Whereas
other industries have an average service share of overall sales of 3.8 %, the
chemical industry’s share is only 0.5 %. The EMS survey results confirm this
ranking (see Chap. 1).
A large-scale survey of the German manufacturing industry conducted in 2009,
which provides a sample of 1,484 companies, shows that at the time, 3 % of
German manufacturing companies had been customers of chemical leasing
(Schröter et al. 2010). Several reasons are given for this, including strict national
laws concerning the handling of waste, lack of customer demand, liability risks,
fear of losing know-how to the provider and the reluctance of the provider to take
on all the investments. By interviewing experts from the chemical industry in
Germany, Mattes et al. identified barriers that explain the low application of the
chemical leasing concept in Germany. The experts named the loss of know-how,
dependency on providers, internal barriers from staff and shop committees, and
lack of demand from customers as issues with differing degrees of relevance
(Mattes et al. 2013). Reluctance to adopt CMS is identified not only in Europe but
also in Asia (CSP 2009).
Even if shares of CMS revenues for providers and the percentage of CMS
customers do not actually indicate a remarkable relevance of CMS for the
chemical industry as a whole, it seems to be applicable to a greater extent to
several chemical product groups and regional markets.
First, in the NAFTA-region and especially in the U.S., the CMS approach has
been diffused more broadly. The activities of the Chemical Strategies Partnership
(www.chemicalsstrategies.org), which has been promoting CMS for more than
10 years in the U.S. and has major U.S. chemical producers as members, may have
contributed to this result. UNIDO’s Global Chemical Leasing Programme (www.
chemicalleasing.com) is attempting to initiate a catch-up process, especially in
developing countries, with pilot projects that began in 2005.
Second, CMS has gained major relevance in several market niches. In partic-
ular, the sale of paint to automotive manufacturers for the coating of cars has been
replaced to a large extent by CMS contracts. Chemical manufacturers that produce
coatings for the automotive industry have established this business model
worldwide. We assume that most cars produced today have been coated through
the application of a business model that is characterised by fixed remuneration per
coated car instead of the traditional sale of coatings.
The future relevance of CMS will increase gradually. Awareness of health and
environmental safety is increasing not only in developed countries but also in
emerging economies, building a strong market for CMS. Emerging and developing
countries will drive future demand for chemicals (Ceresana 2013). Another
148 D. Buschak and G. Lay

relevant factor is the increasing competition for base chemicals because their
production is more likely to be the starting point for chemical producers in
emerging countries (VCI/Prognos 2013). Technical know-how related to specialty
chemicals can be seen as an isolation mechanism. Industry studies forecast an
annual growth rate of 4.5 % for the global chemical industry from 2011 to 2030
(VCI/Prognos 2013). In developed countries, higher prices resulting from dimin-
ishing amounts of resources, stricter regulations on environmental protection such
as REACH and higher awareness of environmental issues and friendliness will
promote the chemical management services concept (CSP 2009). However, due to
the restricted feasibility of CMS applications with regard to product groups, as
well as the other factors mentioned above, CMS will most likely remain a business
concept of minor importance.

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Chapter 9
Servitization of Capital Equipment
Providers in the Pulp and Paper Industry

Lars Witell, Per Myhrén, Bo Edvardsson, Anders Gustafsson

and Nina Löfberg

Abstract The digitalisation of society and a reduction in the need for printed
media has resulted in dramatic changes to the pulp and paper industry. During the
past 10 years, investments in this industry decreased by approximately 40 %.
Consequently, service provision has become more important and a larger portion
of the business of many capital equipment providers. This chapter describes and
discusses the servitization of capital equipment providers regarding technology,
business model, offering, organisation and network. Technology is a driver of
servitization in the pulp and paper industry and it has introduced a wide range of
new offerings for customers. A key issue for capital equipment providers have
been to start charging for services, i.e. to turn services for free to services for fee.

L. Witell (&)  P. Myhrén  B. Edvardsson  A. Gustafsson  N. Löfberg

CTF-Service Research Center, Karlstad University, Karlstad, Sweden
e-mail: lars.witell@kau.se
P. Myhrén
e-mail: per.myhren@kau.se
B. Edvardsson
e-mail: bo.edvardsson@kau.se
A. Gustafsson
e-mail: anders.gustafsson@kau.se
N. Löfberg
e-mail: nina.lofberg@kau.se
L. Witell
Linköping University, Linköping, Sweden

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_9, 151

 Springer International Publishing Switzerland 2014
152 L. Witell et al.

9.1 Introduction

Many manufacturing firms add services to their offerings (Gebauer et al. 2010;
Oliva and Kallenberg 2003), a process often referred to as servitization
(Gustafsson et al. 2010). This trend implies that services are becoming a greater
part of the offerings and the revenue. The pulp and paper industry rely heavily on
capital equipment and traditionally sold capital equipment at a high price, pro-
vided spare parts and maintenance for a reasonable price and then provided
additional services for free. When the demand for new capital equipment
decreased, this approach to doing business became no longer possible, and capital
equipment providers developed an interest in servitization. Such a change calls for
significant changes to the business logic followed by changes in the activities and
interactions with customers throughout the whole business of the capital equip-
ment provider in the pulp and paper industry.
The pulp and paper industry is experiencing a pronounced development. Digi-
talisation has changed behaviour and fewer people use printed media in favour of
the Internet and other digital platforms. During the past 20 years, the structure of the
industry has changed, with the number of mills decreasing by approximately 40 %
(CEPI Key statistics 2011). Moreover, the number and employment of paper
machines has decreased and investments in the industry have declined by 40 %
(CEPI Key statistics 2011). Yet, pulp and paper production remains at the same
level as 10 years ago, indicating that pulp and paper mills attempt to produce greater
volume using existing capital equipment and mills, and that services have become
key to improving their effectiveness and efficiency, including environmental
responsibility. A reduced use of paper threatens the industry and we expect that not
many new paper mills will be built, particularly in the western part of the world.
The change in the pulp and paper industry can be described as from making
great paper machines to creating a great business for customers and at the same
time pay attention to environmental issues. A chief executive officer (CEO) in the
industry described the change as follows: ‘We start from making the customer
more profitable than our competitors do… and if we can do that, we will make
money, otherwise not. That is the foundation for our businesses’. The change from
a focus on technology to a focus on the customer’s business illustrates the fun-
damental change occurring with capital equipment providers of the pulp and paper
industry. Today, manufacturing outstanding capital equipment is not enough;
improving the business of the customer demands knowledge and competences not
only of technology but also of business models, offerings, organisations and the
network.
The present chapter shares our knowledge of the role of servitization in the pulp
and paper industry. In particular, this issue is discussed from the perspective of
capital equipment providers. Information on servitization in the pulp and paper
industry comes from a series of surveys, cases studies and interviews with CEOs,
service managers and key account managers. The chapter starts with the
9 Servitization of Capital Equipment Providers 153

introduction of a framework that includes technology, business model, offering,

organisation and network. Then, the chapter discusses these issues, with a specific
emphasis on what is happening in the pulp and paper industry.

9.2 A Framework for Servitization in the Pulp and Paper

Industry

The pulp and paper industry places high value on capital equipment, and the role
of the service business is increasing in importance. Previously, the only role of
services was to contribute to customer satisfaction, customer retention and the
generation of new product ideas. Over time, services have begun to constitute a
substantial and stable source of revenue (Panesar et al. 2008) and a way to come
closer to the customer’s business processes. Fischer et al. (2012) showed that the
margin leverage for paper machines is five, suggesting that the profit margin for
capital equipment is from 1 to 3 %, whereas the margin on services is 10–15 %
(see also Ren and Gregory 2007). Most capital equipment providers are attempting
to grow through services, and many of them have succeeded in making services a
substantial contributor to both turnover and profit.
To describe the changes in the industry, this study suggests viewing serviti-
zation as changes in different parts of the business of a capital equipment provider.
The different parts were identified as important to the process of servitization and a
manufacturer can engage in different possible servitization changes and routes,
which are summarised as follows:
• Technology
• Business models
• Offering
• Organisation
• Networks
When a firm changes in one area of its business, it often needs to change other
areas of its business. As an example, Gebauer et al. (2010) suggested that different
organisations are needed to provide different types of services, indicating that a
specific fit between offering and organisation is needed to succeed with serviti-
zation (see Fig. 9.1). The following sections discuss the role of each area in the
servitization of capital equipment providers in the pulp and paper industry.

9.2.1 The Role of Technology

Most capital equipment providers in the pulp and paper industry offer services,
such as installation, delivery of spare parts, maintenance and repair, field assis-
tance and expertise, to support their products (Kumar et al. 2004). Given a
154 L. Witell et al.

Fig. 9.1 Overview of different areas that are important for servitization of firms in the pulp and
paper industry

decrease in employment of 28.5 % over the last 10 years but the same pulp and
paper production volumes, companies are very much focused on the core activities
related to producing and shipping paper to their customers. The technical capa-
bilities on the customer side (paper mills) are reduced, requiring a greater need for
external specialists and their competence. These mills must rely on capital
equipment providers to identify and eliminate bottlenecks in the production pro-
cesses, creating an opportunity for these providers to introduce new services and
increase the share of services to their customers.
A versatile approach for capital equipment providers to improve their services
is to use technology. Through technological solutions, customers can benefit from
extended offerings, more reliable information and quicker responses from sup-
pliers when a problem occurs (Walker et al. 2002). One way to integrate tech-
nology and services is to build sensors and ICT technology into the capital
equipment and use the information provided to offer services (Davidsson et al.
2009). These services are called embedded or ‘smart’ services, and are successful
at creating a competitive advantage (Wise and Baumgartner 1999). By using smart
services such as remote monitoring systems, the capital equipment provider is able
to predict problems and react to them before the customer does. Most capital
equipment providers adopt ‘smart’ services, which may be decisive with regard to
staying competitive (Allmendinger and Lombreglia 2005). A CEO of a capital
equipment provider expressed his view on how his company wants to embed
technological services into its products in the future: ‘If you can be there before the
customer calls you to provide that replacement component, before the customer
even picks up the phone, you already know that some things need to be replaced’.
However, to date, smart services have not lived up to their market potential.
Many capital equipment providers in the pulp and paper industry focus on the
introduction and sales of ICT-related services such as remote monitoring and
diagnostic systems, help desks and online help for fast and efficient problem
resolution (Kumar et al. 2004). Sensors and ICT technology are built into new
9 Servitization of Capital Equipment Providers 155

capital equipment, and remote services can be offered without any initial major
investment. However, for the installed base of capital equipment, initial invest-
ments to enable ICT services are needed before they can be provided. Conse-
quently, capital equipment providers are willing to introduce remote services,
whereas industry adoption is low. Introducing such services is challenging for
many companies because customers might not be interested in replacing personal
contacts with technical solutions or they may not be convinced of the financial
benefits of the new service.
A number of barriers are associated with selling ICT-based services in the pulp
and paper industry. One important issue is that neither the sales staff nor customers
can see the added value. Justifying the cost of a remote monitoring system is
difficult when the capital equipment is highly reliable and has a low probability of
failure. Another issue is the complexity of the systems. Information handling is
becoming comprehensive and the supplier needs to be familiar with the customer’s
entire production system (Davidsson et al. 2009). ICT-related services that replace
personal contacts, such as spare part ordering through the Internet instead of
calling the manufacturer, prove difficult to sell. Customers fail to see the added
value in using new technology for such services.
Remote monitoring systems require extensive organisational changes at the
paper mills to be able to use the information and justify the extra costs. One
maintenance manager suggested an additional reason for the low adoption of such
services: ‘It might also have something to do with my generation. The people that are
employed now are actually more familiar with IT. And the people already working
out there today were in a sense not there when IT was developed. So I believe that it’s
only a matter of time.’ Furthermore, the demand for ICT-related services should
increase as paper mills continue to reduce staffing levels. The limited success of
technology-based services is not only the result of a lack of customer demand. Many
equipment suppliers become too occupied with what is technically feasible instead
of focusing on the benefits of the services. For example, a capital equipment provider
developed a technically advanced remote service utilising the latest developments in
ICT technology. The service was functionally a success but failed in terms of
customer interest because the company was too preoccupied with technology and
did not pay enough attention to the customer value of such a service.

9.2.2 The Role of the Business Model

A key question for capital equipment providers in the pulp and paper industry is
what their business model should look like. First, to what extent should managers
charge for capital equipment and services? Second, how many parallel business
models can a firm use simultaneously for a specific service?
A focus on transactions and selling capital equipment created a tradition of
including free services with such sales (Oliva and Kallenberg 2003). Examples of
free services are provision of knowledge and skills regarding the use and
156 L. Witell et al.

maintenance of the capital equipment and minor improvements in operational

performance. This tradition is common in many industries (Oliva and Kallenberg
2003) and, historically, particularly strong in the pulp and paper industry. Given a
long lifecycle of capital equipment, suppliers have on-going business relationships
with customers that last for more than 35 years. After offering a service free of
charge to sell capital equipment, and then suddenly expecting the customer to
willingly pay for these services might later be difficult. Only 16 % of the turnover
in the pulp and paper industry is from services, compared with 28 % for the
manufacturing sector in general (Davidsson et al. 2009). The last financial crisis
showed that capital equipment providers that charged separately for services
continued to generate revenues when capital equipment sales declined. Mean-
while, firms providing free services continued to deliver them at no charge when
capital equipment sales declined, resulting in no revenues, high costs and, con-
sequently operating the business at a loss. They learned the lesson that allowing
capital equipment be the only source of revenue independent of the costs they
carry is risky. However, a fundamental problem with turning services for free into
services for a fee is that customers are not prepared to pay for something they used
to get for free (Brown et al. 2009; Witell and Löfgren 2013).
One capital equipment provider sold its equipment and included free services
throughout the entire life cycle of the equipment. When the pace of investment
slows, such a business model is difficult to uphold because a lack of new customers
means that the company cannot cover the cost of providing free services to
existing customers. One service manager noted that the services offered have
always been more or less the same, ‘but we haven’t managed to charge for these
services. Often, when someone has bought a machine from us, they believe that
some services should be included’. In 1999, the capital equipment provider
decided to start charging for services—a painful change to its business model for
both the company and its customers. Suddenly, sales staff who were not used to
selling services were supposed to sell them to buyers who were not used to paying
for them. However, since then, consumer demand for paper and the role of services
in the studied capital equipment provider has changed significantly. Today, the
service business accounts for approximately 40–45 % of turnover and growth in
the service business during the past 10 years was approximately 400 %.
More capital equipment providers in the pulp and paper industry fully or partly
charge their customers for services (78 %) than other manufacturing companies
(65 %) (Davidsson et al. 2009). The most common business model is to base the
price on the cost of performing the service. Most capital equipment providers also
look at business models based on the value provided to the customer. The problem
in the pulp and paper industry is that many production lines contain equipment
from several capital equipment providers, making it difficult to identify the
equipment responsible for providing the value. Therefore, business models that
call for suppliers to assume customer risk and offer penalty/bonus agreements are
rare. Moreover, different markets have different views on services and value. A
manager expressed this view: ‘in certain markets … it is all about price and when
you buy capital equipment it is supposed to be cheap … make a buck today … I
9 Servitization of Capital Equipment Providers 157

have no idea about what happens tomorrow’. The maturity of the role of services
and the business model differs between different markets.
Instead of value-based business models, many capital equipment providers turn to
maintenance contracts or service agreements. Selling service agreements ensures that
the capital equipment gets the service it requires and facilitates a service business
model. Capital equipment suppliers know from experience the services that are needed
throughout their products’ life cycles and that preventing problems before they occur
avoids unnecessary and costly production downtime and a bad reputation from
equipment breakdowns. A regular demand for services is an advantage for service
providers because they can better plan available resources throughout the year. Service
agreements also increase total turnover because close relationships with customers
generate additional business. The paper mills were also positively inclined towards
service agreements. Firstly, they can specify the maintenance staff they wish to deal
with because the services are planned and troubleshooting is easier when an unex-
pected problem occurs. Next, service agreements facilitate the estimation of required
service costs throughout a product’s life cycle. Finally, customers who have service
agreements are prioritised and, thus, collaboration is more intensive.
The most advanced business model is to stop selling capital equipment and sell
output or guarantee a specific production volume of paper. Several providers
discussed and even tested such alternative business models. However, given the
large investment in capital equipment, the role of the service business is concerned
with improving its production capacity over time. A manager explained: ‘let us say
that [capital equipment] is 20 million euro and then it provides service of 1 million
euros a year … It’s hard to convince anybody … to give this away, it’s gonna take
20 years … or 40 years of revenue to pay … that i impossible’.

9.2.3 The Role of the Offering

Homburg and Garbe (1999, p. 42) defined industrial services as ‘services provided
by a manufacturing company to organisational customers’. This definition includes
pre-purchased services, services delivered at purchase and after-sales services.
Sawhney et al. (2004) used the term customer-activity chain and argued that
companies can identify business opportunities by adding new services to the chain,
offering services previously performed by the customer or introducing new ser-
vices in adjacent areas. By taking advantage of service opportunities throughout
the entire product life cycle, manufacturing firms can move downstream in the
supply chain towards the customer and secure more stable revenues (Davies 2003;
Wise and Baumgartner 1999).
Given structural and cyclical changes and the long lifecycles of capital
equipment, demand for new equipment decreases over time. The attention then
turns to the large installed base. To shift the focus of attention, capital equipment
providers in the pulp and paper industry not only need to adapt how they think
about strategy and their business models (Wise and Baumgartner 1999).
158 L. Witell et al.

Rethinking strategy includes defining activities performed by the customer when

the equipment is being operated and maintained, and changing the business model
is a way to take advantage of the service opportunities identified throughout the
life cycle of the equipment. Capital equipment providers have several advantages
because they sold the equipment, know their customers and possess knowledge of
the equipment and its associated technology (Oliva and Kallenberg 2003).
The opportunities identified could be classified as services that support the
product and services that support the customer (Mathieu 2001). Services that
support the product, such as ensuring its functioning, have become common, and
capital equipment providers also need to focus on services that support the cus-
tomer to stay competitive, such as enhancing the productivity of customer pro-
cesses (Markeset and Kumar 2003; Mathieu 2001). This shift implies that strategic
consultancy advice becomes important in the capital equipment provider’s offer to
analyse a customer’s business, identify problems in the customer’s organisation,
offer solutions based on knowledge gained from experience and coordinate
components into a solution (Davies et al. 2007). These services are based on a
productivity-enhancing logic; that is, the service concept should suggest
improvements to enhance customers’ productivity and can only be provided as
long as potential exists for improvement.
In the pulp and paper industry, services such as maintenance are often per-
formed by the paper mill or by pure service providers, although the number of
services performed by capital equipment providers since the 1990s has increased.
These services are based on capital equipment providers’ own products given their
knowledge advantages, even though competitors’ products may be included in
certain services. These services strengthen the relationship with paper mills,
increase a supplier’s credibility and enhance the possibilities for future business.
‘So that is what we are looking for from service, but also want from service is that
the customer again sees that if your able to provide him service he can trust you
with the capital, so if you do a good job on service he can then trust you with the
capital equipment. So those are the two main things we look for in service, that
provide stability to the business so that you can continue your capital business and
provide you with opportunities to get more capital more of this capital business’.
The distinction between products and services within an offering seems to
become more blurred after the manufacturer offers services for a while. A customer
need is identified and satisfied through the activities and physical goods required,
and the distinction between services and products becomes less important: ‘…when
we perform services and replace spare parts, we call that a product too. […] So, at
the end of the day, everything is probably products, as we see it, which consist of
services and things and components and … services’. Competitive pressure seems
to increase to continuously develop offerings, identify business opportunities and
level out the structural and cyclical changes in the pulp and paper industry. ‘What
we try to do with service is to balance out the peaks and valleys of the capital
business and it does it in two ways; revenue and also profitability’.
9 Servitization of Capital Equipment Providers 159

9.2.4 The Role of the Organisation

Servitization demands that changes in the service strategy or offering are

accompanied by changes in the organisation (Gebauer et al. 2010). In the short
term, successfully providing services without changing the organisation is possi-
ble; however, long-term changes in offerings and the business model must be
accompanied by the right organisation for the service provision. Examples of
changes in the organisation are increased customer contact and customer
responsiveness and efforts to foster a service-related climate and culture. In the
organisational change, the interpersonal skills of frontline staff should be evaluated
and the company should attempt to achieve customer involvement in design,
production, delivery and consumption (Bowen et al. 1989). Most research con-
tends that organisational changes are necessary for manufacturing companies to
succeed in services. However, disagreement exists over the changes that should be
made. Oliva and Kallenberg (2003) suggested that separate organisational units
should be created, whereas Neu and Brown (2005) argued that managers need to
integrate business unit responsibilities and foster intra-firm collaboration in the
servitization of their businesses.
One problem for these organisational units is in initiating a cultural change
through the creation of service norms and values (Bowen et al. 1989). Previous
studies on capital equipment providers suggested that engineers who designed a
multimillion-dollar equipment and who work at capital equipment providers with
an engineering tradition have difficulty getting excited about a contract worth
$10,000 to repair the equipment (Oliva and Kallenberg 2003). This phenomenon
suggests the need for a cultural change that is more profound than a change within
an individual business unit. Gebauer et al. (2010) suggested that creating a match
between the capital equipment provider’s service strategy and the design of its
organisation that provides services is needed. However, this fit is difficult to
achieve in practice. The CEO of a capital equipment provider suggested that his
organisation went back and forth three times in 6 years on whether service pro-
vision should be a separate business unit.

9.2.5 The Role of the Network

In a recent study, Kowalkowski et al. (2013) identified the critical role of the
external network in service provision. In particular, small manufacturing firms
need to adopt different value constellations to acquire the right competence and
resources for service provision. Altogether, Kowalkowski et al. (2013) identified
nine different value constellations: (1) systems integration, (2) customer-to-
customer intermediary, (3) competence co-location, (4) specialist externality, (5)
shared service platform, (6) dual customer contact partnership, (7) horizontal
collaboration, (8) integration co-location and (9) competence acquisition
(Kowalkowski et al. 2013).
160 L. Witell et al.

Most capital equipment providers in the pulp and paper industry provide many
of the services using their internal resources. The following section discusses the
value constellations that our studies on capital equipment providers in the pulp and
paper industry identified. The three value constellations used to build service
competence and capacity for service provision are as follows:
• Horizontal collaboration
• Competence co-location
• Competence acquisition.
Capital equipment providers lacking the full range of products and services use
horizontal collaboration. One partner may participate in horizontal collaboration
because customers asked the firm to provide a wider range of spare parts and instal-
lation services. By widening the range of its offering through close, informal rela-
tionships, the firm attracted orders for maintenance plans and training services that it
would not otherwise receive. The key is the horizontal collaboration that makes firms
more appealing as potential partners for customers who want to reduce their number of
suppliers. In this value constellation, partners tend to take the same horizontal position
in the business network and their cooperation is rather informal and consistent with
customer service, after-sales service or a development partner strategy.
One organisational change for service provision is to establish a new business
unit or organisation for this purpose at customers’ locations. Kowalkowski et al.
(2013) viewed it as competence co-location for service provision. A capital
equipment provider took over its customer’s maintenance organisation, which
involved only low capacity utilisation and was not economically feasible for the
customer to keep in-house. The capital equipment provider achieved higher ser-
vice productivity in turn by offering such services to external customers. The key
to success is the ability to coordinate work across several locations with limited
resources, and the key competitive advantage is proximity to customers.
Finally, in competence acquisition, a capital equipment provider chooses to
internalise a SME to access its specific manufacturing, services, or marketing
competences. Unlike the other value constellations, the nature of the relationship is
formal and greater adaptation is needed to make the acquisition profitable. Inte-
gration can be horizontal or vertical. In one case, acquiring an engineering
workshop provided process improvement capabilities that enabled it to offer cal-
culation services and a better estimate of the cost of higher quality service
offerings. In addition, manufacturing capability provided a vertical extension of
the firm in the supply chain.

9.3 Servitization in the Pulp and Paper Industry:

How Far Has it Come?

Returning to the basic question of the changes needed for servitization to succeed
in the pulp and paper industry, the suggestion is that servitization in this industry is
being driven by changes in technology (see Fig. 9.2). These coordinated changes
9 Servitization of Capital Equipment Providers 161

Fig. 9.2 Overview of how servitized capital equipment providers in the pulp are

are followed by changes in the offering and the organisation, and mismatches are
resolved and followed by new reorganisations and introductions of new offerings.
Networks and business models also receive interest from capital equipment pro-
viders, but the industry’s progress in these areas is limited. Many firms attempt
new business models and setting up networks for service innovation and service
provision; however, to date, these attempts to change the business relationships
between capital equipment providers and paper mills have not replaced the tra-
ditional way of doing business.
The decreased employment level in the pulp and paper industry influences the
technical capabilities of the paper mills. Fewer people are employed who can
perform services and preventive maintenance. This situation represents the
potential for capital equipment providers because they are experts in capital
equipment, the production process and their customers’ businesses. Embedded or
smart services can be used for remote monitoring of the production process, but
such development faces barriers. The lower demand for paper force paper mills to
close down or lower production volumes, which lead to lower investments in
capital equipment. Another barrier is convincing both sales personnel and cus-
tomers to see the added value of an investment in smart services. Finally, the
service provider needs to ensure that smart services create value-in-use for the
customer.
Offerings from capital equipment providers often use technology as the starting
point and are developed to provide a large service component. Given lower
investments in new production capacity, the service potential lies in maintenance
and production improvements. At large capital equipment providers, more than
40 % of the turnover comes from services. Ideas for new services are numerous;
the challenge is to develop services that focus on value-in-use for the customer. To
provide such services, a change in the service strategy and offerings needs to be
162 L. Witell et al.

accompanied by a change in the organisation (Gebauer et al. 2010). The design of

a capital equipment provider’s organisation for service provision must match its
service strategy. A cultural change is often needed, and is accomplished by cre-
ating service norms and values. Service providers often miss the fact that the
quality of the service provision needs to be the same as the quality of the capital
equipment.
A traditional focus on transactions and sales of capital equipment that include
services for free is a barrier when developing new business models built on service
provision. To begin to pay for something that was once provided for free is
difficult for both sales personnel and customers. The cultural change from service
for free to service for a fee is one that many capital equipment providers
accomplished successfully. However, a remaining challenge is to become a pro-
fessional service provider and develop the services over time to ensure a sus-
tainable business. Service supporting the customer rather than service supporting
the product seems to be a successful strategy. Service becomes a perspective on
value creation (Edvardsson et al. 2005). This requires both structural and cultural
changes and new ways to capture value. Thus new or changed business models are
needed. A barrier is the complexity of the production processes, the long-term
investment engagements in the pulp and paper industry and the fact that equipment
most often comes from several capital equipment providers. This makes it difficult
to identify the equipment that creates the most favourable business for the cus-
tomer, i.e. value in use. The potential to develop new business models is found in
the development of maintenance contracts, service agreements and outcome based
contracting. These services strive to optimise operations throughout the life cycle
of the capital equipment, prevent unnecessary repairs and avoid costly production
downtime.
A barrier that service providers need to overcome is building the right com-
petence for service provision, which is not always possible within an existing
service organisation. The key to overcoming this barrier is to use external net-
works for service provision. Capital equipment providers may use several different
value constellations to infuse the needed service provision capabilities and com-
petences into their organisations. Critical to achieving success is the ability to
coordinate service provision across several locations with limited resources and
using proximity to customers as a competitive advantage.
A final word on servitization of capital equipment providers in the pulp and paper
industry concerns that a key to success is to identify the value in use for the cus-
tomer. If the value for the customers comes first for the capital equipment provider,
then technology can be used to drive the servitization of the business. Based on new
technology, new business models can be developed that enables capital equipment
providers to charge for services that previous were provided for free.
9 Servitization of Capital Equipment Providers 163

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Chapter 10
Manufacturers of Medical Technology:
Servitization in Regulated Markets

Marcus Schröter and Gunter Lay

Abstract The markets for medical equipment are highly regulated. Innovative
technologies must be tested extensively before receiving official authorisation,
hospitals’ investment budgets are restricted because of cost reductions in health
systems, and the application of medical technologies requires a doctoral admis-
sion. These frame conditions set specific barriers and triggers for the servitization
of medical technology manufacturers. Hence, in this chapter, the state of the art of
servitization in the German medical technology industry is illustrated. The results
from three empirical studies provide the basis for this summary. The findings
indicate that specific patterns of servitization can be observed, partially in spite of
and partially induced from regulations. Advanced services have reached a
remarkable level and serve predominantly as openers for introducing innovative
technology into markets, characterised by the small investment budgets of cus-
tomers. The potential for stimulating process improvements through advanced
services is limited because the operation of medical equipment necessarily remains
assigned to customers’ physicians.

10.1 Introduction

The manufacturers of medical technology provide hospitals, laboratories and

medical practices with medical and surgical equipment and instruments. The span of
products is diverse and encompasses orthopaedic (amputation appliances, crutches),

M. Schröter (&)
Hochschule Bochum, Lennershofstraße 140, 44801 Bochum, Germany
e-mail: marcus.schroeter@hs-bochum.de
G. Lay
Fraunhofer Institute for Systems and Innovation Research ISI,
Breslauer Straße 48, 76139 Karlsruhe, Germany
e-mail: gunter.lay@outlook.de

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_10, 165

 Springer International Publishing Switzerland 2014
166 M. Schröter and G. Lay

dental and optical products (glasses, ceramics), medico-technical instruments

and supplies (needles, beds), devices for irradiation, electromedical and electro-
therapeutic equipment (pacemakers, ECG devices, x-ray apparatus) and other
devices such as wheelchairs. In addition to the U.S. and Japan, German manufac-
turers are leading in terms of sales and technology. In total, the German medical
technology sector includes approximately 1,200 manufacturers that achieved a
turnover of 22.3 billion € and employed a workforce of 94,500 in 2012 (Spectaris
2012a, b). Despite the economic crisis in recent years, the German manufacturing of
medical technology demonstrated constant growth, as shown by export shares that
exceeded 60 % (cf. Table 10.1).
Approximately 15 % of all employees in the German medical technology
industry work in R&D (Spectaris 2012a, b). The most important product groups
are x-ray and radiation therapy appliances with 13.4 % of total medical equipment
sales; dental systems, appliances and materials with 12.9 % of total medical
equipment sales; and diagnostics and reagents with 11.8 % of total medical
equipment sales (Lindner et al. 2009).
The German medical technology sector is largely composed of small and
medium-sized enterprises. Approximately 97 % of all medical technology firms
in Germany employ fewer than 500 employees, and 20 % of all employees work in
businesses with fewer than 50 employees (cf. Table 10.2). Large companies with
more than 500 employees account for approximately 60 % of total turnover in this
sector. The smallest companies (fewer than 50 employees) account for approxi-
mately 7 % of total turnover.
The market for medical products in general is subject to strong legal regulations,
is less volatile with regard to economic cycles and is thought to have positive
growth prospects because of demographic changes. The markets for German
manufacturers of medical technology are developing differently. Whereas the
turnover achieved abroad is growing, domestic sales are stagnating (cf. Table 10.1).
This stagnation in domestic sales is attributed to declining investments by German
hospitals. Old devices and appliances are increasingly being repaired to delay the
point at which equipment must be replaced (IG Metall 2003). The main reason for
this trend is a decrease in funding following the German hospital-financing act,
which resulted in a decrease in the investment rate. Because of the difficult financial
situation of the state coffers, any increase in funding in the near future is rather
unlikely (Blum and Schilz 2005).
Consequently, the medical engineering devices used in hospitals are progres-
sively ageing. Because of this deterioration in the framework conditions, hospitals
have been turning to new financing options (Blum and Schilz 2005). The manu-
facturers of medical technology now face the challenge of reviving the stagnating
domestic market. Converting hospitals’ investments into continuous spending by
servitized business models of technology providers is one option that has been
discussed intensively. Based on this concept, the manufacturers of medical tech-
nology would have to offer extended service models, which are linked to a usage-
dependent financing component.
10 Manufacturers of Medical Technology: Servitization in Regulated Markets 167

Table 10.1 Sales, export and employees by German manufacturers of medical technology
Year
2008 2009 2010 2011 2012
Total sales in billion € 19.2 18.3 20.0 21.4 22.3
Domestic sales in billion € 6.6 6.9 7.2 7.2 7.2
Sales in foreign markets in billion € 12.6 11.4 12.8 14.2 15.1
Export in % 65.6 62.3 64.0 66.4 67.9
Employees 86,790 87,000 89,200 92,000 94,500
(Source Spectaris 2012a, b)

Table 10.2 Distribution of employees in German medical technology companies according to

company size
Classes of German manufacturers of medical technology by size
1–49 50–99 100–249 250–499 500–999 1,000 and
employees employees employees employees employees more
employees
Share of employees 20 12 16 13 8 31
of German
manufacturers
of medical
technology (%)
(Source Spectaris 2012a)

These discussions induced the German Industry Association for optical, med-
ical and mechatronic technologies (Spectaris) to commission a study of coopera-
tion models between the producers of medical equipment and hospitals. In this
study, 52 hospitals were examined in their role as the customers of medical
technology manufacturers. The results indicated that new business models for the
relation between medical technology providers and customers would be increas-
ingly relevant. The following three concepts were distinguished (Wieselhuber and
Partner 2006):
• In ‘‘operating models’’, the manufacturers of medical technology remain the
owners of their products and operate the medical devices in the hospitals. The
customers pay the manufacturers for using a service, e.g., the preparation of
sterile equipment.
• In ‘‘transfer models’’, medical technology devices remain the property of the
manufacturers, but hospitals operate and use the equipment. The customer pays
based on the utilisation of the devices.
• In ‘‘cooperation models’’, producers and hospitals form a joint operating
company.
168 M. Schröter and G. Lay

Given the background outlined above, the following paragraphs will present the
results of three empirical studies that investigate servitization in the medical
technology-producing sector of German industry.

10.2 Survey of 12 Medical Technology Manufacturers

with Regard to Their Servitization

The first study investigated a sample of 12 medical technology manufacturers with

regard to their service offerings (Buschak et al. 2010). Table 10.3 illustrates the
characteristics of the companies interviewed in this study.
In the sample, 9 manufacturers were serving end-users whereas 3 were sup-
plying the manufacturers of final products. With regard to size, 4 of the inter-
viewed companies were small and medium-sized companies (SMEs) and 8
companies were large manufacturers. The interviews were semi-structured, that is,
conducted using pre-defined and structured interview guidelines. The records of
the interviews were analysed through qualitative content analyses.
An initial highlight revealed that all of the interviewed manufacturers of medical
devices offer traditional product-oriented services such as product-oriented training
for customer employees, telephone hotlines, maintenance and repair services and
the delivery of spare parts. In addition, consultancy services for adapting standard
products to customers’ needs are widespread.
The products of medical technology manufacturers for end users (physicians,
nurses or medical technicians) are subject to strict legal principles concerning the
functionality of the equipment. Hence, quality check-ups to ensure the accuracy of
the devices or regular maintenance analyses are mandatory services for equipment
manufacturers. Manufacturers must provide such services even without service
contracts. These services do not allow any differentiation from competitors
because the regulations require all providers to provide quality check-ups or
regular maintenance.
In 2 of the interviewed companies, financial services to cope with the challenge
of customers’ shortages in investments were found. These companies provide their
customers with the option to lease the products. Maintenance contracts were found
to be included in the leasing offer. However, availability guarantees were not
detected in the business concepts of these two case studies.
Company E offers its customers a pay-per-use service instead of purchasing the
product. The product remains in the ownership of the manufacturer, who installs
the equipment at customers’ premises and sells a card with a fixed number of uses
of the medical equipment to the customer. After consuming the fixed number of
uses, the customer must purchase a new card for additional applications of the
medical device.
10 Manufacturers of Medical Technology: Servitization in Regulated Markets 169

Table 10.3 List of interviews in Buschak et al. (2010)

Company Product Size Customer Interviews
A Software for medical devices Large Laboratories R&D, IT
B Imaging systems (x-rays, Large Laboratories Service
magnetic resonance management
imaging apparatus)
C Imaging systems (x-rays, Large Laboratories as a Service
magnetic resonance division of hospitals, management
imaging apparatus) universities
D Endoscopes, extraction Large Physicians, hospitals, Product
systems, devices for universities management
diagnosis
E Laser and diagnosis gadgetry Large Physicians, hospitals Product
management
F Precision gadgetry for SME Hospitals, manufacturers Sales
diagnosis and therapy of measuring systems management
G Optical diagnosis and surgery SME Manufacturers of Sales
technology devices for therapy management
and diagnosis
H Laser and examination tables Large Hospitals, physicians Services and
quality
management
I X-ray systems Large OEM manufacturers for R&D
x-ray and radiation
devices
J Surgical instruments and Large Hospitals Services
devices for endoscopic marketing
surgery
K Devices for dental surgery SME Dental technicians, General
Dentists management
L Dental ceramics SME Manufacturers of dental General
technology management

Two additional companies offer result-oriented services in which the operation

is borne by the manufacturer. Company H, a manufacturer of medical laser
equipment, provides this offer for the German market, whereas company F, a
manufacturer of precision gadgetry for diagnosis and therapy, provides such a
service for its customers in the USA. Medical technology manufacturer H char-
acterised the option to buy the functionality of the product instead of the product
itself as a well-running business. This company offers a mobile laser for its clients
and sells the functionality. Through this type of offer, the company particularly
responds to the needs of small doctors’ offices, which are predominantly the clients
of this manufacturer. Small medical practices often cannot afford to buy a laser and
do not require continuous utilisation.
Summarising the findings, several basic services have been detected as wide-
spread and traditional offers in the German medical technology sector. Advanced
services such as pay-per-use or operational services have been detected in a
170 M. Schröter and G. Lay

relevant share of medical technology manufacturers in Germany, providing their

products directly to customers. Companies E, F and H extended their offerings to
address customer difficulties in investing in high-tech products. These findings
imply that one-third of the end-user-oriented manufacturers of medical equipment
have incorporated servitized business models into their strategy. Even if this study
does not claim to provide a representative picture of the German medical tech-
nology-manufacturing sector, the findings indicate that advanced services are
beyond the stage of discussion.

10.3 Survey of 7 Medical technology Manufacturers

with Regard to Their Offerings
of Product-Service-Systems

Köbler et al. (2009, 2010) provide findings regarding the state of the art of product-
service-systems in the German medical engineering industry. These researchers’
results are based on interviews with the representatives of seven medical tech-
nology manufacturers, a hospital and an independent consulting company. An
overview of the sample of the medical technology manufacturers is presented in
Table 10.4
The results of the empirical research are widely similar to the findings of
Buschak et al. (2010). First, the authors highlight a widespread offering of tradi-
tional product-based services such as maintenance and repair services as well as
product-oriented training services (Köbler et al. 2009). Second, the authors note
the increasing importance of IT-supported services such as remote services. In
addition, the authors (Köbler et al. 2010) report an increasing demand by hospitals
for services targeted towards an optimisation of medical care processes (e.g.,
process-oriented training).
With regard to the offering of product-services, the authors suggest that stra-
tegic objectives of the interviewed medical technology manufacturers include
increasing customer loyalty, strengthening customer relationships and acting as a
solution provider. Superior margins and revenues were mentioned only by two
companies as strategic objectives (Köbler et al. 2009).
In contrast to the traditional services mentioned above, advanced services such
as the operation of medical equipment is described by Köbler et al. (2010) as
innovative for the medical engineering industry. One example of such advanced
services is the guaranteed availability of medical instruments needed by hospitals.
Another example is the pay-per-use offering by large medical equipment
producers.
Because medical care processes and surgical activities are the core processes of
any hospital, the authors suggest that it would be unlikely that medical technology
manufacturers would offer services to take over the responsibility for the com-
prehensive applications of medical equipment. In the future, the authors expect an
10 Manufacturers of Medical Technology: Servitization in Regulated Markets 171

Table 10.4 Sample Company type Products Number

companies in Köbler et al. of companies
(2009) in the sample
Large medical Medical imaging 4
equipment technologies
manufacturers (X-rays, magnetic
resonance imaging
apparatus, computer
tomography scanners)
Medical Endoscopy equipment, 3
instruments surgical instrumentation
manufacturers and implants

increasing importance to be placed on developing and offering innovative value-

added services for medical technology manufacturers to differentiate themselves
from competitors (Köbler et al. 2010).

10.4 Survey of 4 Medical Technology Manufacturers

with Advanced Service Offerings

A third study that examines servitization in the medical technology-manufacturing

sector has been presented by Schröter and Ostertag (2007). The objective of this
research was to understand the rationales and outcomes of servitized business
models in which manufacturers remain the owners of the equipment instead of
selling their products to hospitals. Four companies were included in the sample.
The characteristics of these companies are depicted in Table 10.5.
The following paragraphs summarise the results of this study, which was
published in German (Schröter and Ostertag 2007). One result identified the
existence of variety in the shaping of advanced business models in the manufac-
turing of medical equipment. The business model realised in company 1 is applied
for water jet surgery. Rather than selling the equipment, the manufacturer retains
ownership of the appliance for the contract duration. Payments are made using the
pay-per-use concept. The customer purchases for each surgery a sterile application
system—the so-called disposable—that is only meant to be used once. A pro-
portion of the costs of the water jet surgical appliance is included in this pur-
chasing price. In addition, the parties agree upon an annual acceptance quantity
and a period of validity or a total number of disposables to be accepted. The
disposable price is calculated such that the return of the capital is guaranteed with
a reasonable interest rate via the agreed number of units. Once the minimum
amount has been purchased, the ownership of the water jet dissection equipment is
transferred to the customer, and the disposables can be bought at the lower market
price. The surgeon at the hospital handles the application of the device. Because of
172 M. Schröter and G. Lay

Table 10.5 Characteristics Company Size Product Customer

of the sample in Schröter and
Ostertag (2007) 1 SME Appliances for water Hospitals
jet surgery
2 Large X-ray machines, Hospitals, doctors’
examination offices
systems based on
ultrasound
3 SME Endoscopy incl. Hospitals, doctors’
peripheral offices
equipment
4 Large Endoscopy Hospitals

the agreement on a minimum quantity of disposables, the capacity utilisation risk

remains with the customer.
The business model offered by company 2 involves a leasing bank, which
purchases the medical equipment and owns the appliance. The customer’s monthly
payment for using the equipment is paid to the leasing bank and determined from
the average number of patients and a flat rate per patient. If more than the pre-
dicted number of patients are treated using the equipment, the corresponding
additional charges are made and the contract’s duration is shortened. The contract
also contains an agreement regarding a minimum acceptance quantity (annually or
in total). The manufacturers of the equipment do not apply the devices in the
hospitals because the manufacturers do not want to accept responsibility for the
risk to patients. However, the manufacturers do take responsibility for service and
maintenance. Devices, which are not purchased at the remedial value by the
customer, are collected and refurbished when necessary. Through the agreement
on a minimum acceptance quantity, the capacity utilisation risk remains to a large
extent, although not completely, with the customer.
The business model offered and implemented by company 3 concerns the
management of a pool of endoscopy devices and peripherals. In this business
model, the customer’s existing appliance pool is initially evaluated and replace-
ment and supplementary investments are planned for the duration of the contract.
Other services by the supplier concern the following: the maintenance, upkeep and
repair of the devices; short repair times; devices on loan in the case of defects; the
procurement of materials (consumables, chemicals, etc.); and the compilation of
reports on the consumption of disposable articles (consumables), repairs and
service costs. The customer is responsible for the actual operation of the appli-
ances. Accounting is divided into fixed monthly instalments, which are calculated
beforehand. The main factors on which the calculations are based are the expected
number of cases and the customer’s history of caring for the appliances as far as
this handling is known. As part of the collaborative approach, if the case numbers
are lower than expected an agreement is reached with the customer regarding how
to reduce the contractual obligations. For example, the delivery of the next device
can be dispensed with, or if partial payments have already been made, the
10 Manufacturers of Medical Technology: Servitization in Regulated Markets 173

payments can be refunded. If the figures are higher than expected and additional
demand for devices results, the objective is to draw up a supplementary contract.
The pool of appliances remains the property of the producer. After the contract has
finished, the customer can purchase the pool if so desired at the low residual value.
The supplier arranges the financing.
Company 4 also offers pay-per-use models for endoscopy. The objects are
reusable endoscopic instruments, which in total constitute an investment volume
for the hospital of at least €100,000. In a sale-and-lease-back contract, the own-
ership of the appliances is transferred to a leasing bank that is closely involved.
Company 4 then enters into a ‘‘sublease agreement’’ with the customer together
with a conservation of value contract, which primarily covers repairs and, where
necessary, the replacement of the appliances in addition to service and mainte-
nance. Accounting is conducted via pay-per-use. The instalments are calculated
from the investments, service flat rates and the planned number of cases. The
invoice is based on actual case figures. If these actual figures deviate from the
planned figures, the price per case is adjusted for the subsequent year based on a
previously specified regulation in the contract, thus delegating the capacity util-
isation risk back to the customer.
In all of the cases in the sample, the manufacturers initiated the new business
models described above, perceiving the models as new methods of safeguarding or
opening up markets. At the same time, however, increased demand for new
business models is also being registered by customers. Sometimes this demand is
addressed directly to the producers; sometimes the demand is specifically
requested in tendering procedures.
Examining the customer motives behind the demand for new business models,
financing motives dominate in all of the cases. Limited investment budgets are one
reason why both hospitals and doctors’ offices are searching for alternatives to
conventional business models. The critical investment threshold of €100,000 to
€200,000, from which hospitals begin to be interested in pay-per-use models, is
viewed as being much higher than for smaller private clinics or doctors’ offices.
Liquidity considerations also favour pay-per-use models because the instalments
are only due if the use of the appliance actually generates revenues. According to
the experiences of company 4, customers are increasingly interested in making
costs transparent and more variable.
Process optimisation played a role in two of the analysed cases as an additional
customer motivation. This process optimisation refers primarily to auxiliary pro-
cesses such as the processing of reusable instruments. To some extent, however,
process optimisation can also encroach on the customer’s core competence areas.
This scenario occurs if optimisation affects the procedures in operating theatres
and ensures smoother, more efficient processes and higher capacity utilisation. In
the course of some business models, the availability of the required instruments is
increased, for example, or the doctor’s choice of instrument is influenced by
information about the treatment costs in the form of price tickets. Furthermore,
there is interest in faster upgrades of the devices in this dynamic technology field.
174 M. Schröter and G. Lay

The high technology dynamics of product development in the field of medical

technology are not only relevant for tackling these types of business models but
also for influencing the design of the contract duration or the end of the contract in
relation to the product life span. Potential second users in the market often regard
used products as outdated. If the original contract concludes before the end of the
product life span and if the appliance remains the property of the manufacturer, its
continued use is therefore regarded as difficult. In the analysed cases, this problem
is solved in different ways. In company 1, the customer acquires ownership of the
appliance. Company 3 sets the contract duration according to the expected product
life span so that the devices only have a small residual value at the end of
the contract. In company 4, the contract duration is fixed just below 75 % of the
customary service life for accounting reasons. When the contract ends, the
appliances are the property of the leasing bank but are amortised. An instalment is
usually paid by company 4 to assume ownership and can either be used in other
pay-per-use models as practically new appliances after undergoing a complete
refurbishment or be disposed of.
Examining the question of whether and to what extent the new business models
were economically successful, a cautiously positive picture results overall. Com-
pany 1 believes it is still too early to make a definite statement but is convinced
that the models are advantageous. In this case, the sales share of new business
models is approximately 15 % of the sales of the affected device or approximately
5 % of total sales. The major economic advantages are not only the profits
achievable with the new business models but also the acceleration of the market
penetration of innovative products. There is not yet any rival product on the market
for the device used in cosmetic surgery. The intention is to exploit this ‘‘window of
opportunity’’ as much as possible via more rapid market penetration using pay-
per-use models. The clientele for this device are seen as being primarily located in
private clinics, where a healthy response to the pay-per-use model is also expected
because of the general business orientation. For the second device, the clientele are
more likely to be from public hospitals. Because of the administrative structures,
greater reticence is expected towards the pay-per-use model, which has only been
offered for this device since 2006. There is the hope, however, that this business
model will be able to circumvent the long, drawn out budgeting process in such
hospitals, which can last several years.
Company 2 provides a neutral evaluation of the economic success of the new
business models thus far. On the one hand, it is seen that alternative business
models, particularly different forms of financing, are being increasingly requested
in the health market. On the other hand, difficulties related to such models are also
perceived. Poor experiences have occurred in the past with regard to performance
contracting. In these types of contracts, the payment is partially oriented to the
availability achieved. The definition and verification of availability proved to be
difficult, causing conflicts between customers and producers.
Companies 3 and 4 assess their experiences with the new business models
positively. In both cases, added value is generated with the new business models
by optimising the process at the customer level. The turnover share of the new
10 Manufacturers of Medical Technology: Servitization in Regulated Markets 175

business models is estimated at 8–10 % for company 3. This company identifies

additional strategic advantages in pay-per-use models, which are connected with
securing the market position achieved. The models are said to form a unique
selling proposition and are seen as important for customer ties because switching
to the products of other producers is economically unattractive during a contract’s
lifetime. The opportunities for foreign suppliers to offer a comparable service are
poor because of the need to manage the necessary complexity.

10.5 Summary and Outlook

The empirical research on servitization in the manufacturing of medical technol-

ogy in Germany presented above indicates that several frame conditions appear to
create a very specific environment for servitized businesses in this sector.
First, the market for medical equipment is subject to regulations. New tech-
nology must be tested intensively to prevent hazards for patients. Companies that
design new technical products must obtain official authorisation to bring the
product into the market. Technical documentation, testing and the administrative
process of certification are standard services in this sector. Certifications for dif-
ferent markets or health care systems worldwide are essential preconditions for
entering a market. Hence, basic services in this sector are ubiquitous and do not
only comprise traditional functions such as maintenance, repair and training.
Second, the customers of sector manufacturers are predominantly public hos-
pitals. This clientele cannot decide independently if investments shall be made.
Financial restrictions from the health system hamper the machinery of the market.
If medical equipment manufacturers have developed superior technology, the
diffusion of this technology requires specific incentives. Servitized business
models can be regarded as such an incentive because their function is to overcome
restraints in investments by customers.
Third, the application of medical equipment is the domain of physicians. The
operational services of medical equipment manufacturers therefore cannot com-
pletely replace customers’ involvement if manufacturers do not intend to engage in
establishing and running hospitals and to employ doctors for patients’ medication.
The potential to increase efficiency by manufacturers’ operational services is
limited because of this fact. Only peripheral operations can be managed and
improved by manufacturers.
With regard to these factors, servitization in the medical technology manu-
facturing industry appears to follow specific patterns. The creation of added value
through services plays a minor role compared to other sectors. The dominant
motives appear to be opening up markets and inducing product sales, even if
margins are affected negatively.
Given that background, the diffusion of advanced service offerings is not only
subject to discussion but also empirically proofed. Even if the share of manu-
facturers offering advanced services is far from the majority, servitization appears
176 M. Schröter and G. Lay

to be much more of a reality than in other sectors. Future expectations for limited
budgets in health systems may induce a still broader diffusion of advanced services
in this sector.

References

Blum, K., & Schilz, P. (2005). Krankenhaus Barometer 2005. Düsseldorf: Herausgegeben vom
Deutschen Krankenhausinstitut e.V.
Buschak, D., Biege, S., Wassmus, A., & Voigt, K.-I. (2010). State-of-the-Art in Service
orientation in the German Medical Engineering Sector. Proceedings of the 21th RESER
Conference, Hamburg, Germany, 8.9–9.9.2011.
IG Metall (2003). Medizintechnik-Industrie Kurzreport 2003. Frankfurt am Main, 2003. Retrieved
October 28, 2006, from http://62.156.146.53/cps/rde/xbcr/SID-0A342C90-BF0853B0/
internet/docs_ig_metall_xcms_7718_7719_2.pdf
Köbler, F., Fähling, J., Vattai, A., Leimeister, J.M., Krcmar, H. (2009). Analysis of value creation
through product-service-systems in the German medical engineering industry. In 1st
International Symposium on Services Science (ISSS) 2009, Leipzig, Germany.
Köbler, F., Vattai, A., Leimeister, J.M., Krcmar, H. (2010). Evaluation des Produkt-Dienstleis-
tungsangebots in der Medizintechnikbranche. In V. Wulff, J. Haake, T. Herrmann, H. Krcmar,
J. Schlichter, G. Schwabe, J. Ziegler, (Eds.), Schriften zu Kooperations- und mediensysteme
Band 24. Hybride Wertschöpfung in der Gesundheitsförderung. Innovation—Dienstleis-
tung—IT (pp. 199–212). Lohmar, Germany: Josef EUL Verlag GmbH.
Lindner, R., Nusser, M., Zimmermann, A., Hartig, J., Hüsing, B. (2009). Medizintechnische
Innovationen—Herausforderungen für die Forschungs-, Gesundheits- und Wirtschaftspolitik.
The Office of Technology Assessment at the German Bundestag (TAB) Report No. 134.
Schröter, M., Ostertag, K. (2007). Neue Geschäftsmodelle in der Medizintechnik. In Lay,
G. (Ed.): Betreibermodelle für Investitionsgüter: Verbreitung, Chancen und Risiken,
Erfolgsfaktoren (pp. 77-95). Stuttgart: Fraunhofer IRB Verlag.
Spectaris (2012a). The Medical Technology Industry in Germany. Retrieved September 4, 2013
Access: http://www.spectaris.de/uploads/tx_ewscontent_pi1/Fact_Sheet_MedTech2012_web.
pdf.
Spectaris (2012b). Daten und Fakten zur deutschen Industrie für optische, medizinische und
mechatronische Technologien. Retrieved September 4, 2013 http://www.spectaris.de/uploads/
tx_ewscontent_pi1/SPECTARIS-Jahreszahlen2012_03.pdf.
Wieselhuber & Partner (2006). Medizintechnik 2010.
 Part II
Servitization by Manufacturers’
Operational Departments
Chapter 11
Servitization as an Innovation Process:
Identifying the Needs for Change

Christian Lerch

Abstract In the past, innovation efforts in industry were focused on tangible

product innovations. Debating the topic of servitization has led to an expanded view
of innovation. Intangible product innovations are an opportunity to complement
innovation strategies. However, the practices and tools that facilitate creating
tangible innovations have failed for intangible innovations. Therefore, many
manufacturers hesitate to develop new services or Product Service Systems (PSS).
With this background, this chapter presents a concept for managing a systematic
innovation process with respect to specific challenges of intangible innovations.
This managerial innovation model is based on case studies of servitizing manu-
facturing industries. The insights derived from actively applying industrial servi-
tization processes were bundled into a generic procedure. The presentation of this
generic procedure is organised into five sections: After an introduction, the second
section provides a literature summary on service innovations in industrial firms.
Then, we present the challenges of servitization processes identified in case studies
and characterise the new innovation model.

11.1 Introduction

In the past, manufacturers in industrialised countries were intensely focused on

research and development to create product innovations. Competing with high-
technology products was ubiquitously regarded as a promising means to address
the challenges of globalised markets. ‘High-tech’ and ‘innovation’ became buzz
words for both industrialists and politicians.

C. Lerch (&)
Fraunhofer Institute for Systems and Innovation Research ISI,
Breslauer Straße 48, 76139 Karlsruhe, Germany
e-mail: christian.lerch@isi.fraunhofer.de

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_11, 179

 Springer International Publishing Switzerland 2014
180 C. Lerch

However, innovation research has shown that this constrained definition of

innovation can omit innovation opportunities. Tapping the full potential of inno-
vation requires a more comprehensive view of innovation issues. Innovative
manufacturing processes and intangible innovations, such as innovative service
offers, are as important as innovative products.
In marketing literature, this shift from a logic focused on the exchange of goods
to a new logic focused on intangible resources, such as the co-creation of value and
relationships, has been well characterised by Vargo and Lusch (2004). Their
appeal to formulate a new service-dominant logic for marketing, in which service
provisions rather than goods is fundamental to economic exchange, was a major
contribution to recent research.
However, manufacturers have hesitated to utilise this new paradigm. For many
reasons, only a limited number of manufacturers have focused on developing
innovative services (see Schröter et al. 2008; Lay and Schröter 2006). First,
industrial firms are concerned about the significant financial risks of developing
innovative services and Product Service Systems (PSS). Firms often doubt the
costs and benefits of new service offers (see Lay and Schröter 2006). Second, the
development of new services is not comparable to the development of new
technical products (see e.g., Lerch 2011a, b). Product innovations are usually
triggered by research and development (R&D) activities, while the need for new,
customer-oriented solutions is mostly driven by the market or even single cus-
tomers (see e.g., Lay et al. 2009a, b). Therefore, the tools and the knowledge
gained from developing innovative products cannot be applied to the new chal-
lenge of creating innovative services.
Therefore, this chapter presents a generic and systematic concept for generating
innovative services and Product Service Systems. This concept has managerial
implications for manufacturers and aims to support industrial companies in
developing new, customer-oriented solutions in the most suitable manner.
The presentation of this concept is organised into five sections: The next section
is an overview about service innovation processes in industrial firms based on the
existing literature. The third section presents eight generic challenges for service
innovation processes that have been identified in cooperation with servitizing
companies through recent research projects. In the fourth section, we derive a model
process for creating customer-oriented solutions meeting the challenges introduced
in the third section. The last section concludes and summarises the findings.

11.2 Service Innovations in Manufacturing Firms:

Towards an Autonomous Innovation Management
for Services

The relevance of service innovations in manufacturing industries has recently been

discussed in the literature. As Velamuri et al. (2011) declared, the perspective of
innovation should be regarded as its own pillar in servitization research. As one of
11 Servitization as an Innovation Process: Identifying the Needs for Change 181

eight streams of servitization research, the authors state that the so-called ‘‘inno-
vation view’’ has its own questions of principles and also significantly influences
servitization research.
Following an extensive literature review, the innovation view contains two sub-
groups: ‘‘innovation management’’ (1) and the ‘‘transition’’ (2) of industrial firms
into service providers (see Velamuri et al. 2011).
The first sub-group, which addresses the topic of innovation management,
contains publications working out innovation processes for product-related ser-
vices or service-enhanced firms (see Gann and Salter 2000). Other publications
develop integrated solutions for manufacturers by incorporating the customer
within the innovation process (see e.g., Brax and Jonsson 2009; Windahl and
Lakemond 2006). Generally, the authors of this sub-group agree that the inno-
vation management of industrial services must be distinguished from product
innovation management and requires new methods and tools for practical solutions
(compare with Velamuri et al. 2011).
The second sub-group, the transition of manufacturers into solution providers,
is a traditional field and addresses one of the principle questions of servitization
research. Those publications focus on alternative service strategies for successful
transitions of industrial firms and develop solutions for the challenges encountered
during those changes (compare e.g., the works of Matthyssens and Vandebempt
2010; Gebauer et al. 2008; Matthyssens and Vandenbempt 2008; Penttinen and
Palmer 2007; Oliva and Kallenberg 2003 or More 2001). Following the basic
assumption of these works, industrial companies are transitioning from pure
manufacturers to solution providers with individual client-oriented product-service
bundles (see Gebauer 2004). During that process of transformation, companies
face internal and external resistance that must be overcome (compare to Velamuri
et al. 2011).
In terms of these sub-groups, this chapter follows the frame conditions and the
principle questions of the innovation management literature, sharing the basic
assumptions and opinions of these publications, which are that innovation pro-
cesses of novel services or Product Service Systems should be regarded as a
unique research subject. Due to these assumptions, some approaches already exist
in the literature that suggest alternative processes for developing Product Service
Systems (PSS). A substantial overview of the existing concepts is presented by
Weißfloch (2013).
Aurich et al. (2010) present three general processes for developing PSS. The
linear model (1) includes different stages, with each step building on the previous
step, and is adequate for less complex services. The iterative model (2) includes
loops and feedbacks and is used for more complex services. The so-called ‘‘Pro-
totyping-model’’ (3) describes a very rapid development process and is improved
by its initial applications. Consequently, for each service type, a specific devel-
opment process can be chosen.
Other concepts, developed independently from one another, are described by
Schröter et al. (2008), Maussang et al. (2008), van Halen et al. (2005), Emmrich
(2005), and Morelli (2002), among others. Most approaches focus on generating
182 C. Lerch

new ideas and the development process, but neglect the stages of implementation
(see Weißfloch 2013). Furthermore, some authors argue that products and services
must be developed simultaneously and that the development process for products
and services should be merged (see e.g., Spath and Demuß 2003).
Consequently, a number of new service development processes for industrial
companies already exist; however, they are fitted to a specific type of service in
terms of complexity and concentrate on the integrated development of products and
services. Finally, an innovation process that can be used for simple services as well
as for complex PSS and can be developed autonomously and independently from a
technical product and used with already existing products has yet to be described.
Discussion in the literature shows that service innovations in manufacturing
industries should be regarded as an autonomous research topic that is not com-
parable to product innovations or innovations in service industries. Furthermore,
some theoretical approaches for developing new services already exist. However,
these processes concentrate on specific service types and emphasise the integrated
development of products and services. Consequently, a service innovation model
suited to all types of industrial services, from very simple services to highly
complex PSS, that is independently applicable from the product is still missing
from the literature.

11.3 Eight Challenges to Mastering the Service Innovation

Process in Manufacturing Firms

In recent years, we have directly observed several efforts by manufacturers tar-

geted towards servitization. Our role in these projects was to both analyse and
assist the companies. Table 11.1 presents the characteristics of these projects.
Based on these projects, we have learned that servitization efforts by manu-
facturing companies face several challenges. We identified eight aspects that are
crucial to the success of servitization projects:
Customer orientation The impulse to develop new services or PSSs may be
developed by customer co-creation or by market research techniques (see e.g.,
Witell et al. 2011; Lerch 2011a). Particularly complex PSSs are triggered by single
customers who are often very important clients. In this case, the provider must
develop a highly individualised customer-oriented solution. The effort to develop
such a PSS is often not foreseeable, and success is ambiguous. Usually, this is the
first challenge for manufacturers entering the field of servitization. The issue of
how to use and acquire customer knowledge to improve servitization in industrial
firms has proven to be a very important challenge.
Market analysis A second aspect from the market is the emerging need of entire
customer groups. In this case, customers should be segmented by their deficits.
Then, the PSS-market potential of each customer must be estimated. The result of
this market analysis is a prioritised list for exploring the different service markets.
11 Servitization as an Innovation Process: Identifying the Needs for Change 183

Table 11.1 Empirical background for identifying challenges in service innovation projects
Involved Type of developed PSS Customer sectors
Manufacturer(s) (in terms of Tukker
2004)
Robot manufacturers Result-oriented PSS; Producers of complex products and small
Use-oriented PSS; batch sizes (Metal goods, wooden
Product-oriented PSS products, aluminium parts)
Manufacturers of Result-oriented PSS Automotive and aerospace industry,
assembly systems pharmaceutical and chemical industry
Manufacturers of Result-oriented PSS; Energy-intensive companies (e.g., Automotive
compressors and Use-oriented PSS industry, food industry, machinery and
pneumatic systems equipment)
Machine tool builders Result-oriented PSS; Manufacturers of high-tech products and
Use-oriented PSS large-scale production (e.g., Automotive
industry, automotive suppliers)
Manufacturer of large- Product-oriented PSS; Manufacturers in process industries (e.g.,
scale plants Result-oriented PSS Minerals and mining)

A procedure for identifying key customers in service markets as an input for

developing service strategies is widely unknown among manufacturing companies.
Servitization strategy After identifying the customer’s needs, a suitable service
strategy must be developed. A service strategy combines various aspects, such as
the service offer or value proposition, which are part of the strategic management
of a company. The strategic management decision requires answering the fol-
lowing question: Which service offerings will be implemented and which ones will
be discarded? If the PSS is implemented, manufacturers must design a PSS that is
able to exhaust the remaining potential of the pure product (see e.g., Kowalkowski
et al. 2012; Hakanen and Jakkola 2012). The strategy is highly important to the
long-range success of a new service offer.
Sourcing and supply chain management Depending on the strategic decision,
the value proposition should be translated into a business concept that can create
value for both the provider and the customer. Due to their nature, PSSs are not
comparable to classical product-related services; therefore, the roles between
provider and customer must be totally redesigned (see e.g., Kowalkowski et al.
2013; Morelli 2006). As a result, an internal feasibility study should identify the
activities that can be conducted in-house, those that can be conducted by external
parties and those that can be conducted by customers. If neither the provider nor
the customer can manage a special element of the PSS, a third party must be
involved. Finally, the question arises about which activities should be outsourced
versus insourced, as well as how to manage the supply chain (see e.g., the mor-
phological box of Lay et al. 2009a, b).
Processes and interfaces A widely discussed topic in servitization literature is
the redesign of processes, organisational structures and interfaces. An initial
question for servitized firms is the organisational structure of the service depart-
ment. For example, Rainfurth (2003) highlighted the specific advantages of
184 C. Lerch

different types of organisational structures for offering services. Additionally,

internal and external processes must be renewed for the associated responsibilities
and implementation of individual activities (see e.g., Biege et al. 2012). Further-
more, new interfaces within and between firms must be designed. Due to the
servitization of firms, the nature of interfaces is changing and the processes are
becoming increasingly complex.
Management accounting Often, complex services have highly uncertain turn-
overs and costs. To offer new services, it is essential to implement a management
accounting system that takes into account the special features of a PSS. The
literature describes methods for calculating the costs and benefits, including Life
Cycle Costing (LCC) and Total Cost of Ownership (TCO) (see e.g., Lay and
Radermacher 2005), which also may be used as pricing instruments, in addition to
other methods that are based on multi-criteria analysis (as e.g., Weißfloch 2013;
Mattes et al. 2013). Moreover, there are approaches that use the Balanced
Scorecard (BSC) (e.g., Kinkel 2003) or Function Point Analysis (FPA) (e.g., Lerch
and Gotsch 2013) for accounting services on a company level. However, as the
literature emphasises, the implementation of PSSs has significant risks, and
decisions are made under uncertainty.
Product adaptations The implementation of new services may lead to adapta-
tions of the technical product. Consequently, this stage of the model focuses on the
technical business environment of industrial firms relative to adapting the core
products. As Weissenberger-Eibl and Biege (2010) already noted, the implemen-
tation of new services, and particularly PSSs, requires adaptations of the physical
product. Depending on the type of service, there are different adaptation strategies
and requirements for the product’s design (see Biege 2011). The challenge is
identifying the most appropriate ways to design the physical assets used in the PSS.
Human resources Finally, implementing complex PSSs highly impacts the
manufacturing staff. Change is required not only of the technical equipment,
processes and organisational structures but also among employee’s key skills and
qualifications (compare to Jung Erceg 2005). Whereas engineers and technicians
of pure manufacturers are focused highly on the physical product, the service staff
of a solution provider must develop more customer-oriented skills. This concern
particularly includes the appropriate handling of customers from the beginning to
the end of the product life cycle. Consequently, the question arises: what are the
suitable competency profiles and new key skills of technicians and engineers?

11.4 Process Model for Service Innovations

in Manufacturing Companies

The fourth section presents a generic process model for generating and imple-
menting innovative services in manufacturing companies based on the eight
challenges introduced above. This process covers simple product-related services
11 Servitization as an Innovation Process: Identifying the Needs for Change 185

as well as complex PSSs and is applicable to both new and existing, diffused
products. The presented procedure contains a generic structure with different
stages and may be adapted for individual cases.
The basic structure of this procedure has been described by Schröter et al.
(2008) and has been continuously adapted and improved over various research
projects and studies. This ideal type of innovation process evolved as part of the
common development of PSSs with various manufacturers from different indus-
trial sectors. Therefore, this model is based on the experiences of several case
studies from five research projects conducted during the last years and bundled
into a generic approach.
The evolution of this model, the identification of necessary changes, the implied
assumptions behind the individual steps and the theoretical underpinnings are
presented here. As already discussed in the literature, the impulse to develop new
services is often triggered by customers and is therefore demand-driven (see e.g.,
Witell et al. 2011; Lay et al. 2009a, b). The same experience was observed in the
case studies about the process of PSS-development. Therefore, we assume that the
innovation processes for PSSs are not comparable to R&D-driven innovation
processes, but may be opposite to R&D-driven processes.
Furthermore, the case studies highlight that a novel business concept, in terms
of a PSS, should be regarded under a systemic point of view. This means the
development of new product-service bundles cannot be accomplished successfully
by a single business area. Instead, various skills are needed because such an
innovation affects different parts of an enterprise. The systemic nature of those
PSS-models has been described in the literature (see e.g., Morelli 2006) and should
always be regarded for PSS-development.
Furthermore, we realise that an integrated perspective consisting of external
market needs and internal resources is absolutely necessary for a successful PSS-
development. Therefore, the presented innovation process combines both per-
spectives: market needs and market potentials, as well as the allocation of
resources and the adaption of processes. Due to these major findings, highlighted
by the conducted case studies and supported by the literature, the managerial
service innovation model is based on the following three principles:
• Novel PSSs are systemic innovations, affect various parts of a company, and
can be broken down into different stages, which may be conducted sequentially
or iteratively.
• Novel PSSs are mostly demand-driven; therefore, we imply that the dominant
innovation process for PSSs is reverse.
• Successfully developing a new PSS requires an integrated perspective that
combines external market needs and internal resource allocations.
The approach should be understood as a guideline for industrial companies,
with managerial implications, tools and instruments for individual stages. The
basic structure is shown in Fig. 11.1.
186 C. Lerch

Customer
Sourcing & Processes Manage-
orientation Product Human
Strategy fit Supply and ment
adaptation resources
Market analysis Chains interfaces accounting
t

Market‐driven Resource‐driven

Feasibility Study

Impulsion & knowledge Design& Implementation &

development conception diffusion

Fig. 11.1 Generic model for the development of PSS (Source own illustration)

The approach is embedded into the overall innovation process, starting with the
idea for a new business concept and ending with the implementation of a service or
a PSS-demonstrator. Each stage requires various skills within an industrial com-
pany to address the eight challenges that have been identified.
As already described, the process may be run sequentially or iteratively. As the
case studies show, the stages are followed more sequentially for less complex
services, and the entire process is completed more quickly because some stages
can be omitted. In contrast, for more complex services, the stages are followed
more iteratively and the entire process requires more time. Consequently, this
process is self-regulated by the complexity of the service.
Finally, the question arises: How should companies use this process model and
how can they implement the results? As case studies demonstrate, it is helpful to
involve employees from the different departments associated with a PSS-devel-
opment. Employees should be drawn from marketing, product development,
human resources, accounting, legal, company management and customer service.
The working group, or project team, should include five to ten people participating
in the design and conception stage of the PSS.
During this stage, an efficient working style is achieved by completing several
workshops conducted by either internal or external experts. In our case studies, the
workshops lasted between one-half day and one full day and were conducted every
two to three weeks. The appropriate people were consulted according to the
workshop topic. The workshop concept has the advantages of being a strong,
continuous process that involves all company segments, recognises errors early,
and provides an innovative working environment.
Implementing the results of the workshops occurs during the next stage, which
is the implementation and diffusion phase. The findings collected from the
workshops should be recorded for developing a PSS-demonstrator. The imple-
mentation and diffusion stage is driven mainly by customer service and is con-
nected to other departments through feedback loops. Consequently, this first
demonstrator is improved if it is ready for a marketable application.
11 Servitization as an Innovation Process: Identifying the Needs for Change 187

11.5 Conclusion and Outlook

In recent years, innovation research increasingly broadened the focus of analysis

from tangible towards intangible innovations. As a result of this shift, service
innovations have attracted greater attention and are relevant competitive factors
among manufacturers. However, the diffusion of service innovations in manu-
facturing industries reflects only part of their value for competitiveness. A lack of
adequate tools for managing servitization processes has hampered the servitization
of the industry.
Therefore, this work highlights the challenges for mastering the process of
service innovation and presents a generic process model to overcome these
challenges. This process model is adaptable to basic product-related services as
well as to complex PSSs, concerns all relevant areas of a company during the
development, and can be used as a guideline for companies.
The challenges in servitization mentioned above for manufacturers are detailed
in the subsequent chapters.

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Chapter 12
Acquiring Customer Knowledge
to Enhance Servitization of Industrial
Companies

Taru Hakanen, Minna Kansola and Katri Valkokari

Abstract To enhance servitization of industrial companies there is a need for better

understanding of why and how business customers purchase services. The purpose
of this study is therefore to identify the factors affecting customer’s service pro-
curement. The study combines the theoretical bases of servitization, key account
management and customer knowledge management. A qualitative exploratory
research approach based on semi-structured interviews in both supplier and cus-
tomer companies (n = 47) was used. The study contributes to the servitization
literature by suggesting that customer’s outsourcing strategy, manufacturing tech-
nology, level of technological competency, procurement function structure, and
expectations for benefits and customer experience significantly influence the pro-
curement of services. We propose that acquiring in-depth customer-specific
knowledge is key to increasing solution supplier’s customer orientation in serviti-
zation. The acquired customer knowledge offers a basis for identifying customers of
most strategic importance with regard to their service purchasing potential.

12.1 Introduction

To meet customer’s evolving needs and to achieve new competitive advantage,

companies are increasingly offering value-added solutions to their customers
(Brady et al. 2005; Davies et al. 2006; Nordin and Kowalkowski 2010). Industrial

T. Hakanen (&)  M. Kansola  K. Valkokari

Business and Technology Management competence centre,
VTT Technical Research Centre of Finland, Espoo, Finland
e-mail: taru.hakanen@vtt.fi
M. Kansola
e-mail: minna.kansola@vtt.fi
K. Valkokari
e-mail: katri.valkokari@vtt.fi

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_12, 191

 Springer International Publishing Switzerland 2014
192 T. Hakanen et al.

companies are augmenting their product offerings with various industrial services
and striving for a servitization strategy (Baines et al. 2009; Matthyssens and
Vandenbempt 2008; Vandermerwe and Rada 1988). Strong customer orientation is
recognized as a key feature of servitization strategies (Baines et al. 2009).
The key account management (KAM) approach has gained major relevance for
companies as b-to-b customers increasingly centralize their purchases and ratio-
nalize their supply base (Millman and Wilson 1995). The KAM approach is being
adopted by suppliers aiming at building a portfolio of loyal key accounts by offering,
on a continuing basis, product/service packages tailored to customer’s individual
needs (McDonald et al. 1997). At the very heart of the KAM approach is the
identification of customers of strategic importance to the supplier (McDonald et al.
1997). Traditionally, key accounts have been selected, for example, on the basis of
sales volume, profitability and length of relationship (McDonald et al. 1997; Ojasalo
2001). Key account management plays a central role when a company strives for a
strategic change—such as servitization—that may considerably change its offering
and cooperation with its customers. But how to identify those customers that have
the most potential for supporting the strategic aim of servitization?
Successful key account management requires the acquisition, dissemination,
and utilization of customer-specific knowledge (Salojärvi and Sainio 2010).
Customer knowledge management (CKM) creates understanding of customer
needs and expectations (García-Murillo and Annabi 2002) and enhances innova-
tion and growth (Gibbert et al. 2002). However, current literature does not identify
the customer knowledge that would support servitization, although deep under-
standing of customer’s business and needs have been recurrently emphasized
within the servitization domain (e.g. Brady et al. 2005; Brax 2005; Davies et al.
2007; Sawhney 2006). What, then, should suppliers know or find out about cus-
tomers in order to enhance their service selling? This question provides the starting
point of our study. Industrial companies need to understand why and how business
customers purchase services.
This study aims to strengthen the customer orientation of the servitization
domain (e.g. Baines et al. 2009; Brax and Jonsson 2009; Davies et al. 2006;
Hakanen and Jaakkola 2012; Tuli et al. 2007) by increasing understanding of how
customer knowledge management could enhance the servitization of an industrial
company. More specifically, the purpose of the paper is to identify the factors
affecting business customer’s procurement of industrial services. A qualitative
exploratory research approach was applied. Data was collected from fourteen
supplier-customer dyads by means of semi-structured interviews (n = 47).
As a result, the paper provides empirical insight into how customer companies’
basic characteristics, business, procurement, and value expectations can affect the
procurement of industrial services. Furthermore, the study creates new under-
standing with regard to the key account management’s pivotal role in managing
and organizing servitization. The study also provides suggestions for the man-
agement of companies and for key account managers, especially regarding the
customer knowledge required for focused and effective service development and
sales and marketing.
12 Acquiring Customer Knowledge to Enhance Servitization 193

The article is organized as follows. Firstly, literature on key account manage-

ment and customer knowledge management are reviewed and the research gaps
identified. The methodology is then presented, followed by the findings, consisting
of the identified factors affecting customer’s service procurement. Finally, theo-
retical and managerial implications are stated by drawing conclusions on how
customer knowledge management can enhance the servitization of an industrial
company.

12.2 Customer Orientation in Servitization

Strong customer orientation is widely promoted within the servitization literature

(e.g. Baines et al. 2009; Brax and Jonsson 2009; Davies et al. 2006; Hakanen and
Jaakkola 2012; Tuli et al. 2007). According to Oliva and Kallenberg (2003), cus-
tomer orientation in servitization consists of two elements: a shift of the service
offering from product-oriented services to the end-user’s process-oriented services,
and a shift in the nature of customer interaction from transaction-based to rela-
tionship-based. Solutions design begins with a deep understanding of the customer
problem that the solution is designed to solve (Sawhney 2006). Brax (2005) suggests
that knowing the customer’s business context and operational conditions is funda-
mental in designing industrial services. Similarly, Brady et al. (2005) stress the
importance of having a detailed understanding of the customer’s business activities
in order to understand how value is created through the eyes of the customer.
The servitization literature emphasizes long-term customer relationships and
interaction with the customer. Enduring relationships with customers need to be
established to obtain comprehensive and relevant information and to build a strong
knowledge of their business (Shepherd and Ahmed 2000). Storbacka (2011)
emphasizes the importance of dialog with the customer’s decision makers and the
role of sales and account management in working proactively with customers. The
study by Kapletia and Probert (2010) suggests that customer orientation is best
developed in the early stages, from defining customer requirements onwards.
Solutions can be regarded as ‘on-going relational processes of defining,
meeting, and supporting customer’s evolving needs’ (Tuli et al. 2007). As a result
of thorough understanding of the customer’s processes, the supplier becomes a part
of the customer’s processes (Windahl and Lakemond 2010). Suppliers organize
their operations around customer segments (Galbraith 2002). Engaging in a close
dialogue with the customers and identifying customer’s business needs results in
developing the capabilities to offer products and services that link uniquely well to
the customer’s priorities (Davies et al. 2006). Thus, long-term relationships and
knowledge exchange between a supplier and a customer organization enable the
provision of customized solutions (Tuli et al. 2007). In other words, strong cus-
tomer orientation results in delivering a solution that fulfils customer-specific
needs (Brax and Jonsson 2009). Customer-focused solutions provide the customer
with the expected value and customer experience (Hakanen and Jaakkola 2012).
194 T. Hakanen et al.

12.2.1 Customer Knowledge Management

Account management can be seen as a proactive development towards a customer-

focused organization (Gosselin and Bauwen 2006). Systematic selection, analysis
and management of the most important current and potential customers are the
bases for key account management (Zupancic 2008). Successful key account
management (KAM) consists of four basic elements: identifying the key accounts,
analysing key accounts, selecting suitable strategies, and developing operational
capabilities to build, grow and maintain profitable and long-lasting relationships
with them (Ojasalo 2001).
The KAM literature abundantly addresses different criteria for the determina-
tion of strategically important customers. Key account managers and others
responsible for customer relationships operate in a boundary-spanning role
between the supplier and customers (McDonald et al. 1997; Nätti et al. 2006).
They conduct in-depth analyses of the customer’s business, which results in
addressing customer-specific needs (Davies et al. 2007). They understand the
customer’s business and customer needs now and in the future. Arguably, they are
in a central position in identifying strategically important customers with regard to
the supplier company’s servitization goals.
Several authors have pinpointed the importance of managing customer
knowledge in key account management (e.g. Abratt and Kelly 2002; Nätti et al.
2006; Salojärvi and Sainio 2010). Customer knowledge utilization lays the foun-
dation for all strategic decision-making concerning the key account relationship
(Salojärvi et al. 2010). Instead of the structured data that is gathered from trans-
actions, García-Murillo and Annabi (2002) emphasize the information coming
from interactions with customers. Customer knowledge management (CKM) is
based on personal interaction and long-term cooperation as well as knowledge
gathered from conversations with the customer. Of the three identified phases of
CKM (acquisition, dissemination, and utilization) the degree of acquisition and
utilization has been found to be significantly associated with supplier’s key
account performance (Salojärvi and Sainio 2010).
CKM research (e.g. Campbell 2003; García-Murillo and Annabi 2002; Gebert
et al. 2003; Gibbert et al. 2002; Salojärvi et al. 2010; Salomann et al. 2005), rooted
in the integration of customer relationship management and knowledge manage-
ment, has boosted during the past decade. While customer relationship manage-
ment has identified managing the relationship between a company and its current
customer base as a success factor, knowledge management stresses the importance
of knowledge in a company’s success (Gebert et al. 2003). The key motive of
customer knowledge management is better understanding of the customer and their
true needs and expectations (García-Murillo and Annabi 2002). According to
Gibbert et al. (2002), CKM is about collaboration, innovation and growth—how
companies generate growth by acquiring new customers and engaging in active
value-creating dialogue with them. Their research showed that companies
12 Acquiring Customer Knowledge to Enhance Servitization 195

managing customer knowledge are more likely to sense emerging market oppor-
tunities and create economic value more rapidly. Thus, CKM entails a strong
future perspective in business development.

12.2.2 Acquiring Customer Knowledge to Enhance

Servitization

Increasing customer orientation in servitization is a common trend among industrial

companies (e.g. Baines et al. 2009; Brax and Jonsson 2009; Davies et al. 2006; Tuli
et al. 2007). However, the servitization literature lacks empirical insight into the
required customer knowledge that would enhance servitization of an industrial
company. Key account management (KAM) literature addresses several customer
knowledge insights that are beneficial to acquire about business customers. Cus-
tomers should be analysed in terms of the basic characteristics of the customer
company, such as internal value chain, markets, suppliers, products, and economic
situation (Ojasalo 2001). In other words, in addition to the customer company itself,
the business network surrounding it should be analysed. Millman and Wilson
(1996) emphasized the importance of knowing the composition and dynamics of a
customer’s procurement function, practices and decision making. CKM literature
outlines, for example, the following as salient customer knowledge: customer needs
(García-Murillo and Annabi 2002; Gebert et al. 2003; Salojärvi et al. 2010), cus-
tomer’s sources of problems (García-Murillo and Annabi 2002), motivations and
behaviour (Gebert et al. 2003), and purchasing history (Salojärvi et al. 2010).
Although the importance of customer understanding and the acquisition and
utilization of customer knowledge is widely acknowledged, current research
refrains from addressing what knowledge should be acquired about customers with
regard to the strategic aim of servitization—what exactly should be known and
understood about the customer? Therefore, the aim of this study is to increase
understanding on how customer knowledge management could enhance the
servitization of an industrial company. In particular, the purpose of the study is to
identify the customer factors that affect the procurement of industrial services. By
acquiring knowledge about customers, how they purchase, and which factors affect
their purchase decisions, a supplier can customers that are most likely to purchase
their services. Of the CKM phases of acquisition, dissemination, and utilization
(Salojärvi and Sainio 2010), this study concentrates on knowledge acquisition.

12.3 Methodology

As customer knowledge management has not been applied before within the
servitization domain and research on customer factors affecting service procure-
ment remains sparse, a qualitative exploratory research strategy was chosen.
196 T. Hakanen et al.

Table 12.1 The studied dyads and their business fields

Supplier company, business units Customer company, business field
Dyad: Supplier A—Customers A1–A4
Supplier company - Customer A1, mechanical engineering
- Customer A2, automation industry
- Customer A3, mechanical engineering
- Customer A4, engineering steel producer
Dyad: Supplier B—Customers B1–B6
Management of the concern - Customers B1–B6
Machine tools unit - Customer B1, mechanical engineering
- Customer B2, minerals and metals processing
Engines and generators unit - Customer B3, base metals production
- Customer B4, material handling solutions
Construction machines unit - Customer B5, construction machine rental
- Customer B6, construction machine rental
Dyad: Supplier C—Customers C1–C4
Management of the company - Customers C1–C4
Production services unit - Customer C1, metal industry manufacturer
- Customer C2, food industry
Industrial services unit - Customer C3, food industry
Business solutions unit - Customer C4: pharmaceuticals

Qualitative research is often used when ‘how’ and ‘why’ questions are being posed
and the aim is to increase understanding of a phenomenon previously under-
investigated (Yin 2003). With the exploratory approach, key issues and/or key
variables are identified to enhance understanding of the studied phenomenon. In
this study, identifying the factors affecting customer’s procurement of services
advances the discussion on how key account management and customer knowl-
edge management may enhance servitization and effective solutions selling.
Fourteen customer-supplier dyads were selected as the units of analysis. Data
was collected from three supplier companies and fourteen customer companies.
The scope of analysis was limited to b-to-b relationships, with the public sector
customers of the studied supplier companies excluded from the study. Table 12.1
outlines the studied companies and their business fields.
The studied suppliers operate in the mechanical engineering sector within the
EU. Supplier A manufactures chip removal machining and production systems.
Supplier B operates in the technical trade and imports machine tools, engines,
generators and construction machines. Supplier C manufactures robotic packaging
and palletizing systems. Shares of services vary between 20–25 % of the turnover
of the supplier companies. The main service business volume of the supplier
companies derives from repair and maintenance services with related spare part
and software-based services. The suppliers mainly focus on the repair and main-
tenance of machinery that they have previously delivered to their customers. In
addition, they offer training, modernization, technical support and consultancy.
12 Acquiring Customer Knowledge to Enhance Servitization 197

All of the supplier companies had identified their biggest and most significant
customers, i.e. key customers, according to sales volume and length of coopera-
tion. They had also appointed certain persons to be responsible for key customers.
However, Suppliers A and C did not have a formal key account management
programme, and Supplier B had recently established one. The suppliers had
hundreds of customers in their customer base, of which a number already pur-
chased services. However, the common challenge of all the suppliers was how to
identify customers of key importance when aiming to sell more services? The
supplier’s motive for participating in the study was to deepen their customer
knowledge and develop their solution sales strategy and practices accordingly. The
duration of the study was September 2011–February 2013.
As conceptualized by Salomann et al. (2005), customer knowledge manage-
ment is the utilization of knowledge for (e.g. product information), from (e.g. their
ideas about product improvements) and about customers (e.g. their requirements
and expectations) in order to enhance the customer-relating capability of organi-
zations. The focus of the present study was on the latter: the acquisition of
knowledge about customers in order to be able to assist customers in making
purchase decisions (c.f. García-Murillo and Annabi 2002).
Data was collected by means of semi-structured interviews in which consid-
erable freedom was given for the informants to openly discuss the interview topics
(cf. Silverman 2006; Yin 2003). The interviews consisted of questions regarding
purchased solutions, the characteristics of customer companies and their pur-
chasing function and procedures, as well as customer-supplier cooperation. To
strengthen the reliability of the study, the interviews were transcribed verbatim.
The findings were presented to the representatives of the supplier companies in
company workshops to ensure the validity of the findings and to correct any biases.
The selected supplier informants represented the company management and the
persons responsible for key customers and for daily cooperation with customers.
Although there were, in the strict sense, no ‘key account managers’ among the
informants, the informants (e.g. business unit directors) represented the persons in
charge of key customer relationships. Customer informants were selected based on
their responsibility for or involvement in supplier selection and purchases as well
as their extensive knowledge and experience of the supplier and cooperation with
them. Table 12.2 outlines the data collection and the selected informants of the
study.
Data analysis commenced with reviewing the interview transcripts and high-
lighting significant issues regarding the customer companies and their purchases.
We identified the factors affecting the procurement of services and analysed how
these factors are connected to purchasing services. Conclusions were then drawn
regarding the most important factors with regard to the supplier’s aim of serviti-
zation. Finally, contributions to the servitization, KAM, and CKM literature were
addressed. In the next chapter, the factors affecting customer’s procurement of
services are reported using the following categorizations that emerged on the basis
of the data collection topics, as well as during the data analysis: (1) Basic company
characteristics; (2) Customer’s business, products and processes; (3) Procurement
198 T. Hakanen et al.

Table 12.2 Outline of the informants and collected data

Supplier informants Customer informants
Supplier A—Customers A1–A4
Managing director, technical director, Development director, real estate
director, product line director, manager, development
purchasing manager, product manager, project engineer
manager, project manager,
regional manager, two team
leaders
n = 10 n=4
Supplier B—Customers B1–B6
Managing director, main owner, three Three managing directors,
directors, marketing manager, technical director, production
administrative manager, two director, maintenance manager,
product line managers, sales spare parts manager,
manager, maintenance manager, production engineer
spare parts manager, repair and
maintenance supervisor
n = 13 n=8
Supplier C—Customers C1–C4
Managing director, R&D director, Managing director, purchasing
three directors, manager, product manager, production manager,
manager, service manager production supervisor
n=8 n=4
Supplier n (total) = 31 Customer n (total) = 16

strategy, function and practices; and (4) Value expectations and purchasing cri-
teria. To increase the reliability of the study, findings are reported using direct
quotations from the interviews.

12.4 Customer Factors Affecting the Procurement

of Industrial Services

12.4.1 Basic Company Characteristics

When asked about the differences between customers, company size seemed to
emerge as a key factor affecting service procurement in several ways. An inter-
viewee of Supplier B stated that smaller companies may not be as eager to buy
services as bigger companies as they are more willing and capable of repairing and
maintaining machines by themselves: ‘These small workshops… when they pur-
chase a machine they want to maintain it themselves. It’s like owning a car. Some
people take the car to a garage, while others change the oil themselves. And the
12 Acquiring Customer Knowledge to Enhance Servitization 199

bigger the company, the more likely they will want to be sure that machine
breakdowns won’t cause a break in production’ (Supplier B). On the other hand,
small companies may lack, for example, engineering competence, which may
motivate them to purchase larger service packages including engineering. In such
cases, the limited resources of a small company may provide opportunities for a
supplier to offer complementary resources. However, the sales volumes of small
customers may never reach those of bigger customers and, in the present study,
such small-scale projects were characterized by poor profitability. On the other
hand, a representative of Supplier B considered bargaining with bigger clients to
be expensive, as the following quote illustrates: ‘There are usually at least ten
people … in the delegation attending the negotiations. Bargaining with them can
get expensive because there’s usually a lot of wining and dining involved.’
All of the studied supplier companies were family-owned and, especially for
one customer, having a similar organizational culture to theirs was an important
factor affecting the procurement of services, as one CEO (Customer B5) described:
‘Things can be discussed at the owner level, too. Compared to stock listed com-
panies, we are closer to those kinds of suppliers as they have a similar mind-set to
us. Changes don’t happen as quick, but long-term cooperation and partnership are
valued. You can trust one another.’ Customers thus considered that a supplier with
a similar background to them would be more likely to understand their business.

12.4.2 Customer’s Business, Products and Processes

The studied customer companies differed in terms of their core businesses and the
role of manufacturing in their business, although the majority was highly ‘man-
ufacturing-centric’. The importance of manufacturing may affect how customers
value manufacturing and invest in repair and maintenance. On the other hand,
Customer B5, for example, does not manufacture but provides construction
equipment rental services and seldom purchases services as this is their own core
business: ‘If we run out of ideas of how to fix a machine, Supplier B takes care of
it. However, we have to know how to fix our machines ourselves. It’s our promise
to our customers’ (Customer B5).
A common servitization approach among suppliers was to augment previous
machine deliveries with services. They gathered knowledge on the customers
using their technology and offered additional services to them. One interviewed
customer considered the main benefit of purchasing services from the same sup-
plier that delivered the products was the supplier’s competence in their ‘own’
technology: ‘In the ideal situation the supplier (which has delivered the machine)
offers the best possible maintenance. They know the machine. I think this is a
useful role for an importer. For example, Company x offers general machine
maintenance, they don’t have special expertise…in the future, machines will be
even more complicated with a lot of technology… the one who has the competence
will be the winner in industrial services, then’ (Customer B1). Similarly, Customer
200 T. Hakanen et al.

C3 confirmed: ‘We tend to centralize our purchases. It makes it easier for the users
and the maintenance personnel, not having a different machine on each production
line. They know how … the machine works. And then we get the spare parts … for
repair and maintenance we can agree on the timetable (with Supplier C) and stop
several production lines at the same time.’ It also makes the customer’s life easier
to purchase products and services on a one-stop shop principle: ‘Customers want
services, too, a total solution. They want to buy everything from the same place’
(Supplier A). Thus, the customers saw several benefits accruing from the same
supplier providing both the technology and the related services. Knowing the
customer’s manufacturing technology was regarded as pivotal, as a supplier is thus
not limited to offering services regarding their ‘own’ technology, but also other
supplier’s technology.
The data provides several indications of how customer’s technological com-
petence affects service procurement. According to the interviewed suppliers,
technological competence varied considerably among the customers, as one
director described: ‘Some are highly technical and extremely knowledgeable,
whereas with others … you wonder whether they’ve ever bought one before—do
they really have any idea what they’re buying’ (Supplier B). Although some
customers invested in their own repair and maintenance (R&M) function, the level
of technological competence was not necessarily high, as a representative of
Supplier A stated: ‘The manufacturer (i.e. machine supplier) always has the right
expertise. We’ve noticed this during audits. Although there were customer’s own
repair and maintenance personnel they aren’t able to do anything special beyond
basic maintenance tasks.’ Especially technology that requires special expertise
may encourage the customer to purchase R&M services from the manufacturer or
importer who knows the machine best. Similarly to R&M services, services such
as safety audits provide the customer with competences they do not have them-
selves. Suppliers may thus—when knowing the customer’s competencies—
discover potential for selling services that complement these competencies.
The data also revealed how customers differ regarding the extent to which they
are able or prepared to make information on their future plans, such as investment
plans, known to suppliers. The ability of a stock listed company to release such
information is naturally limited. However, in the present study, family-owned
companies, in particular, discussed their future plans openly, sharing confidential
information with suppliers. Supplier B described their strategic aim of being
involved as early as possible in their customer’s investment plans: ‘We’re espe-
cially interested in whether they have new machine acquisitions in the offing, or
any other big changes where we could assist the customer.’ Early involvement in
investment plans may increase opportunities to sell technology and/or services to
the customer.
The ways in which customers categorize their own products can affect how they
purchase services. For example, Customer B6 categorizes its products, which it
rents to its customers, in three categories according to products’ self-sufficiency
and criticality to its business. Products in which Customer B6 has 100 % self-
sufficiency are classed as the most important and are invested in most. Services are
12 Acquiring Customer Knowledge to Enhance Servitization 201

also most likely to be purchased for these products. Customer B6 even described
itself as ‘married’ to Supplier B in terms of certain critical products, as they are
unable to readily change the strategic categorization of their products or the related
service suppliers.
The criticality of a machine to the manufacturing process can influence the
procurement of services. Customers are likely to invest more in maintaining
machines that are critical to maintaining a trouble- and stoppage-free manufac-
turing process: ‘If something unexpected happens, in most cases they (Supplier B)
are already here. Those machines are critical… machine tools, especially, are
such huge investments that they have to run reliably’ (Customer B2). Similarly, in
another business field, Supplier C has been able to sell service contracts to all of its
pharmacist customers (e.g. Customer C4) as the robotic medication storage and
retrieval system manufacturer is at the core of its customer’s business, bringing
them significant benefits in terms of core process effectiveness.
Knowledge about customer’s core and non-core processes can open up
opportunities for suppliers to offer additional services to their customers. Cus-
tomers are likely to invest most in services that focus on their core processes, and
non-core processes are most likely to be fully outsourced. On the other hand,
customers may invest in their own R&M function in cases where they cannot
afford to risk production downtime and need to have the competence in house. The
closer supplier gets to the customer’s core processes, the stronger and more critical
the position of the supplier becomes. The data thus indicated that knowing the
customer’s processes and strategically important products and machines is pivotal
in evaluating the future potential for selling services to the customer.
However, Supplier B encountered an obstacle in attempting to broaden its
service offering by renting certain construction machines as this service was
already the core business of their customers: ‘We are not a rental company. That’s
why we can’t go straight to the end customer, because we’d basically short-circuit
the construction machine rental company. I don’t want to compete with my cus-
tomer’ (Supplier B). Thus, the supplier assessed the customer’s position in the
value chain and took the decision not to pursue servitization through the provision
of rental services.

12.4.3 Procurement Strategy, Function and Practices

Customer’s outsourcing strategies were shown to be a central factor affecting their

service procurement. The studied customers differed in terms of whether they had
their own R&M function. Some customers (e.g. Customers A3, B1, and C2) had
outsourced repair and maintenance work completely as a strategic efficiency
improvement decision. Some customers (e.g. Customers A2, B5, and C3) had their
own R&M function but also purchased complementary R&M services from sup-
pliers. The data indicated that it was essential for suppliers to know both the
present strategy of the customer as well as, more importantly, their future
202 T. Hakanen et al.

development strategy—which operations will be insourced and which ones may be

outsourced.
Interviewees were asked about the structure of their customer’s procurement
functions, who are the main counterparts between the supplier and customer, and
who makes the purchase decisions. Some customers had a centralized purchasing
function while others purchased through different organizational units. The CEO
or the owner was typically the main contact person and decision maker in smaller
companies. In larger companies, the main contact person was the production
manager or a representative of the procurement function. However, in some cases,
especially with large customer companies, the customer’s purchasing organization
was complex and challenging to grasp for the supplier, as the following statement
by Customer C1 illustrates: ‘Vehicle parts procurement has its own unit, which is
divided into component sourcing, with its own sourcing manager, and vehicle
parts sourcing… then, purchasing support operations are my responsibility, and
we’re not a part of a procurement organization… then, when it comes to spare
parts, there’s another separate unit. So we purchase from three places. Then, in
manufacturing, there’s so-called strategic sourcing, which isn’t included in the
procurement function but in manufacturing. Strategic sourcing focuses on the
selection of suppliers, contracts and prices. Daily operational cooperation (with
the suppliers) takes place through the logistics unit\.’ (Customer C1). In many
cases the production manager approves purchases up to a certain cost limit, beyond
which more expensive purchases require additional upper management approval.
Furthermore, when aiming at selling services instead of technology, the contact
person may not be the same as previously. The studied suppliers were aware that
purchase decisions could be influenced by several persons within a customer
organization in addition to the main decision maker or purchaser, such as pro-
duction line employees. Finding the right counterpart(s) in a customer organization
was thus identified as critical to servitization.
In addition, knowledge about a customer’s other suppliers can be beneficial to a
supplier. For example, a representative of Supplier C emphasized the importance
of knowing which companies provide R&M services to the customer, as occa-
sionally Supplier C may be able to sell their special expertise to these companies.

12.4.4 Value Expectations and Purchasing Criteria

When asked about purchasing criteria, a representative of Customer C3 stressed

the following: ‘We look for trouble-free solutions and reliability, as our produc-
tion lines have to roll five days a week, 24 hours a day without interruption.’ The
representative went on to describe how Supplier C makes his work easier: ‘Those
guys have been with us for several years now. They know our hygiene rules (within
the food processing lines) and know how to take care of all that for us. That makes
my work a lot easier because I don’t have to be watching over them the whole
time.’ Another customer, which completely outsourced its R&M to Supplier B,
12 Acquiring Customer Knowledge to Enhance Servitization 203

described the reasons behind their satisfaction as follows: ‘They have very
carefully planned and analysed our machinery and its optimal maintenance…
These days they work pretty much independently, we get input from them, we don’t
have to push them, instead they make things easy for us, and that’s how it should
be’ (Customer B2). In other words, the customer values the supplier taking a larger
manufacturing responsibility and contributing new ideas and perspectives. In
contrast, another customer criticized Supplier B for not giving their full support to
their business and that this, ultimately, affects how much they are willing to
purchase their services: ‘No salesman has ever, ever, during our entire 30 years of
cooperation, asked me how am I doing ‘business-wise’, how am I coping with my
customers, or suggested visiting a customer together, for example. If they were
more interested in our business, and how we could do better business, they’d be
able to sell more to us’ (Customer B5).
Another customer emphasized availability and fast service delivery with regard
to spare parts, for which there only exists one supplier: ‘The only thing that matters
then is availability, how fast can you get it? That’s the most important thing. In
these cases, price is meaningless’ (Customer A1). On the other hand, with regard
to bulk services, price was the central decision-making criterion, as one customer
confirmed: ‘Services such as building maintenance, cleaning and security services,
for example… are very price driven’ (Customer A1).
One of the interviewed customers challenged Supplier B in a way that could
lead to significant changes to the supplier’s service business: ‘Another challenge…
I don’t know whether it’s even realistic, would be to change the revenue logic, i.e.
instead of being based just on hours, there would be some other drivers defining
the revenue logic, perhaps the utilization rate of the machines, or something else?’
(Customer B2). In other words, suppliers were urged to find out what different
customers value and to plan their service pricing models accordingly.
The studied customers varied considerably in terms of what kind of cooperation
and customer experience they expect. In some cases, services require close and
long-term cooperation in order to learn and adapt to the customer’s operations.
Some customers (e.g. Customer B2) valued close cooperation involving working
and solving problems together at the manufacturing line. Other customers valued
services that are effortless and ‘out of sight, out of mind’ (Customer C3) or in
which they are kept informed only of the most critical issues (Customer B3).
Customer A3 saw a downside to close cooperation: ‘Every time we ask them to
visit us the price of the project goes up a hundred thousand euros.’ As the result of
various value expectations, the suppliers aimed at adjusting their services and
agreeing on a suitable extent and depth of cooperation with the customers.
The suppliers also noticed that the purchasers vary in terms of the decision
making criteria or benefits that they stress in their decision making. The suppliers
also considered purchasers with a technical background to be more interested in
technical details, whereas ‘professional purchasers’ stress costs: ‘They do differ,
the users think more about the use of the machine, the professional purchasers
stress the euros more’ (Supplier A). As a result of these observations, the suppliers
adapted their selling arguments and offering according to the characteristics of
204 T. Hakanen et al.

their customer companies, but also according to the background and preferences of
individual purchasers.
Similarly, Supplier C stressed the importance of knowing the customer thor-
oughly in servitization: ‘I think understanding the customer starts with under-
standing that they are all individuals. If you don’t know your customer well
enough you’ll end up trying to sell your own thing, but you won’t be able to tailor
your way of selling to the customer, you won’t have the right selling arguments…’
To acquire the needed knowledge about the customer, personal customer inter-
action was recognized as pivotal, as two representatives of Supplier C stated:
‘When we get to visit the customer, to spend time there on the production line, we
can discover new customer needs.’ ‘If you don’t spend time with your customers,
you won’t get the customer knowledge you need. You’ll end up thinking you know
what they need.’

12.4.5 Summary of Factors Affecting Service Procurement

To summarize the empirical findings, the factors affecting customer’s service

procurement are outlined in Table 12.3.
In servitization, knowledge of the above customer factors is essential for sup-
pliers. This knowledge should be analyzed more in depth by the supplier orga-
nization to adjust their service offering and cooperation with the customer
according to the customer’s specific needs and preferences. Instead of the basic
customer company characteristics (e.g. size), the influence of customers’ business,
procurement, and value expectations were emphasized in the data. Next, we
present the conclusions drawn on the basis of this study.

12.5 Customer Knowledge Management for Enhanced

Servitization

12.5.1 Theoretical Contributions

Customer orientation, acknowledged as a central success factor in servitization,

results in changes in supplier’s service offering and customer interaction (Oliva
and Kallenberg 2003). However, our study suggests that customer orientation in
servitization is not only about undertaking changes in the offering and the nature of
customer interaction, but actually focusing on the customer and acquiring
knowledge about customers in the interest of servitization. We argue that acquiring
deep customer-specific knowledge is key to increasing customer orientation in
servitization. Consequently, our study proposes that customer knowledge man-
agement can be used for analysing and identifying customers of strategic
12 Acquiring Customer Knowledge to Enhance Servitization 205

Table 12.3 Summary of Basic company characteristics

customer factors affecting
• Company size
service procurement
• Organizational culture
• Position in value chain
Customer’s business
• Core business
• Products and product categorization
• Role of manufacturing
• Technological competencies
• Manufacturing technology
• Core and non-core processes
• Investment plans
Procurement
• Outsourcing strategy
• Repair and maintenance function
• Procurement function
• Decision-making process
• Purchaser and others involved in decision making
• Background and orientation of the purchaser
• Supplier base
Value expectations
• Benefits and customer experience
• Extent and depth of cooperation
• Purchasing criteria

importance with regard to their potential for purchasing industrial services. Key
account management plays a pivotal role in organizing and managing servitization
as it focuses on building and maintaining long-term relationships with key
customers. Key account managers are responsible for analysing customers and
creating understanding of customer’s business and needs and communicating
customer knowledge in their organization (cf. García-Murillo and Annabi 2002;
Millman and Wilson 1995; Nätti et al. 2006; Ojasalo 2001).
This study builds a bridge between the theoretical domains of servitization, key
account management and customer knowledge management, and creates new
understanding with regard to why and how b-to-b customers purchase industrial
services. The results show that a customer’s service procurement is most influ-
enced by its outsourcing strategy, manufacturing technology, level of technolog-
ical competency, procurement function structure, and expectations for benefits and
customer experience. Consequently, acquiring knowledge about a customer’s
outsourcing strategy, repair and maintenance function and level of technological
competency allows the supplier to discover opportunities to complement the
customer’s resources and competencies with its services. Acquiring knowledge
about the customer’s manufacturing in terms of machines, processes and
206 T. Hakanen et al.

investment plans may also open up new service business opportunities for sup-
pliers as they may complement both previously and presently supplied machinery
with service contracts, for example. Knowing the customer’s procurement function
and practices is essential for discovering the right customer counterpart for
negotiating industrial services, as the contact person may not be the same as when
selling machinery. In addition to the customer company itself, knowledge about
the customer’s business network may offer possibilities to sell services to other
companies within this network. Finally, knowledge about company-level value
expectations as well as individual purchaser expectations regarding customer
experience and cooperation were identified as essential customer knowledge for
servitization purposes.
This study contributes to the servitization literature emphasizing the customer
centricity of solutions (e.g. Baines et al. 2009; Brax and Jonsson 2009; Davies
et al. 2006; Hakanen and Jaakkola 2012; Oliva and Kallenberg 2003; Sawhney
2006; Tuli et al. 2007) and customer knowledge management literature (e.g.
García-Murillo and Annabi 2002; Gebert et al. 2003; Gibbert et al. 2002; Salojärvi
and Sainio 2010) by presenting rich empirical evidence on the customer knowl-
edge that is required in servitization. Annual customer satisfaction surveys seldom
provide sufficient means for developing and selling services more effectively.
Instead, more thorough customer-specific knowledge is required. Our study also
supports the notion that customer knowledge needs to be continuously evaluated
(cf. Salojärvi and Sainio 2010) as customers—their business, strategy, and orga-
nization—change over time.
The commonly recognized main selection criteria for key accounts include
sales volume, length of relationship, and profitability (McDonald et al. 1997;
Millman and Wilson 1995; Ojasalo 2001). This study contributes to the key
account management literature by complementing the selection criteria with the
identified customer factors, which provide means for analysing and selecting
customers that are of most importance with regard to servitization. Compared to
the current KAM literature and the selection criteria for key accounts, of which the
majority are based on past experience with customers, the contribution of this
study focuses more on future business opportunities and potential new customers.
With regard to KAM literature, our study also provides new knowledge on
‘organizing for KAM’ which was recognized as an under-researched topic within
the KAM literature, although being of high relevance for practitioners (Guesalaga
and Johnston 2010).

12.5.2 Managerial Implications

The results of our study provide support and advice especially for the management
and key account managers of companies offering industrial services to business
customers. Companies are encouraged to increase their understanding of their
customer’s business and service procurement motives in order to have better
12 Acquiring Customer Knowledge to Enhance Servitization 207

possibilities to influence their customer’s purchasing decisions. We encourage

companies to obtain customer knowledge through conversations with both present
and potential new customers, as more thorough knowledge is needed on cus-
tomer’s strategy, repair and maintenance function, manufacturing, procurement
practices and future plans than companies usually present in public. In essence,
customer-centric servitization comes down to identifying how the supplier’s ser-
vices and competencies could complement the customer’s strategy, organization
and competencies—how the supplier could find ways to integrate itself into the
customer’s business and manufacturing both technologically and organizationally.
To enhance customer-centricity in servitization, companies need to analyse
their customers first and align their offering and the nature of their customer
interaction accordingly. The summary of factors affecting service procurement
outlined in Table 12.3 provides a checklist for supplier companies in customer
knowledge management when striving for servitization. As companies may have
hundreds of customers, the results of this study provide a means to thoroughly
analyse selected customers and to identify those with the most potential for pur-
chasing services, thus resulting in more effective and focused sales and marketing.
The identified customer factors may also provide a means for servitization-based
customer segmentation.
It is the responsibility of the management to make decisions on how to utilize
customer knowledge in line with the servitization strategy and solutions devel-
opment. However, acquiring and utilizing thorough customer knowledge demands
resources as well as agreement on the required practices in the development and
utilization of common customer understanding within the organization.

12.5.3 Limitations and Suggestions for Future Research

Certain limitations of this study deserve consideration and offer possibilities for
future research. Firstly, the study covered a limited number of companies, which
poses challenges with regard to generalizability. On the other hand, rich empirical
insight into the topic was achieved. However, this qualitative exploratory study
addressing the factors affecting the procurement of services builds, rather than
tests, theory. As a consequence, the study provides possibilities for scholars to
conduct further quantitative research on the same topic. For example, the proposed
customer factors and their relation to purchased solutions or, for example, to
customer-supplier relationships could be studied in more general terms. As
industrial services defined the scope of this study, studying service procurement
and customer knowledge management in other industries and contexts could also
provide interesting avenues for future research.
The effective utilization of CKM in servitization is also an interesting area for
further research. As the emphasis of the present study was on the acquisition of
customer knowledge, we call for more research on the dissemination and utili-
zation of customer knowledge. How can suppliers effectively utilize customer
208 T. Hakanen et al.

knowledge in servitization? What kinds of tools and practices would enhance

customer knowledge dissemination and utilization in servitization?
As argued the role of key account management is pivotal to promoting cus-
tomer understanding in servitization. We therefore also call for further research on
KAM in servitization. In addition to addressing the role of KAM operations, the
role of other employees in customer knowledge management could be addressed,
as in service business customer knowledge is gained collectively by several
employees. In this respect, an interesting topic for further study would be how the
customer knowledge of all employees operating within the customer interface can
be acquired, disseminated and utilized in servitization.

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Chapter 13
Market Research for Servitized Offerings:
A Case Study in the Chinese Province
of Guangdong

Christian Lerch and Matthias Gotsch

Abstract Servitization has already diffused to a reasonable extent in European

manufacturing industries. While several studies have shown and analyzed this
development, little is known about the needs and behaviour of manufacturers
with regard to services in emerging industries, e.g., in the so-called BRIC
countries. Consequently, service providers have to conduct their own market
analysis to obtain a deeper understanding of the target foreign market. However,
in reality, manufacturers are uncertain of how to conduct this type of service
market research. Therefore, this study presents a typical market research analysis
for servitized offerings in emerging manufacturing industries. This work entails a
study of the demand of manufacturers for services in emerging markets based on
a quantitative survey that was conducted in the Chinese province of Guangdong.
To obtain a deeper understanding of the existing service needs in emerging
industries, we conducted market research for manufacturers that offer services
abroad. On the basis of our experiences with this study in China, we describe the
challenges for manufacturers in conducting market research analysis and the
managerial implications of designing a suitable market entry mode. Conse-
quently, this article aims to support industrial firms in conducting their own
market research and in developing individual market entry modes, with a focus
on BRIC countries.

C. Lerch  M. Gotsch (&)

Fraunhofer Institute for Systems and Innovation Research ISI,
Breslauer Straße 48, 76139 Karlsruhe, Germany
e-mail: matthias.gotsch@isi.fraunhofer.de
C. Lerch
e-mail: christian.lerch@isi.fraunhofer.de

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_13, 211

 Springer International Publishing Switzerland 2014
212 C. Lerch and M. Gotsch

13.1 Introduction

Over the last few decades, a debate has emerged around so-called ‘‘servitization’’
(see, e.g., Baines et al. 2009; Wise and Baumgartner 1999; Vandermerwe and
Rada 1988). This term is used to describe the increasing service orientation of
industrial companies or even of entire manufacturing industries (see, e.g., Neely
2008; Desmet et al. 2003). As previous analyses show, industrial services can both
strengthen the competitiveness of providers and improve the efficiency of their
customers (see, e.g., Brady et al. 2005; Boyt and Harvey 1997). Due to these
positive features of accompanying services, servitization has already diffused
throughout Europe in manufacturing industries.
While several studies have analysed the dissemination of services or the rele-
vance of servitization in Europe (see, e.g., Bikfalvi et al. 2013; Dachs et al. 2013;
Tether and Bascavusoglu-Moreau 2012; Lay et al. 2010; Neely 2008), little is
known about the service needs in emerging manufacturing industries, e.g., in the
so-called BRIC countries. Indeed, there are already a couple of foreign market
entry models for manufacturers aiming to become global service providers (see,
e.g., Wassermann 2010) and studies about the international service activities of
goods exporters (see, e.g., Léo and Philippe 2001).
However, it is still not clear how global service providers can deliver services to
their customers in emerging manufacturing industries in the most client-oriented
way. Consequently, manufacturers that become global service providers still have
to conduct their own market research in order to obtain a deeper understanding of
the target foreign market. However, in reality, industrial firms are uncertain of how
to conduct this type of service market research on foreign markets.
Therefore, this article presents a typical market research analysis for servitized
offerings in foreign countries, with a particular focus on BRIC countries. To this
end, we analyze the demand for and consumption of services by producers in
foreign markets and derive the managerial implications of providing successful
service delivery. Hence, we aim to answer the following questions:
• What are the challenges and hurdles for manufacturers in conducting service
market analysis?
• What are the managerial implications for service providers that are derived
from the results of market research analysis?
This study is structured as follows: Following the introduction, we discuss the
challenges arising during market research for manufacturers in Sect. 13.2. These
challenges concern problems due to both the characteristics of emerging markets
and the features of servitization. Subsequently, in Sect. 13.3, we provide an
overview of how to design and conduct a market research analysis by using
surveys. For this, we present a framework concerning the survey structure and
support this framework with experiences from a study conducted in China. We
conducted a quantitative survey at the company level among manufacturing firms
located in the area surrounding Foshan and in the province of Guangdong in
13 Market Research for Servitized Offerings: 213

Southeast China. Afterward, Sect. 13.4 shows how to design an individual market
entry strategy for servitized offerings in foreign countries based on the results of
market research. Section 13.5 closes the chapter by presenting the major findings
of the study, conclusions and an outlook.

13.2 Emerging Markets and Servitization as Challenges

to Market Research

For manufacturers, there are several ways to conduct market research in a target
market. One possibility is to use public data that have been published by the
government or public facilities. However, as we have realized, these data are not
suitable for market research concerning services in emerging markets because the
available data are not collected at the firm level and cannot be used to identify
service needs. Another possibility is to conduct a literature analysis. However, the
existing literature does not focuses on servitization or the market of interest.
Consequently, often, the only way to conduct market research is to collect and
analyse data using surveys.
However, conducting market research on servitized offerings in emerging
manufacturing industries is challenging for manufacturers for two reasons: First,
European manufacturers still trade most of their goods in domestic markets or
inside industrialized countries, primarily Europe or the U.S. Consequently, for
most industrial firms, trading goods with emerging manufacturing industries is still
a challenge in general. Second, most European manufacturers still consider
servitized offerings to be a supplementary business apart from the production of
physical products. Thus, manufacturers’ services are still less professionalised or
even underdeveloped, and hence, clients’ service needs may not be understood in
industrialized markets.
Consequently, market research on servitized offerings in emerging manufac-
turing industries may be characterised by a second-order challenge, owing to
uncertainties concerning foreign markets and uncertainties due to the servitization
context. Therefore, it seems logical that manufacturers that export services to
foreign markets should have experience either in the service business or in
emerging markets. These enterprises should either have an installed base in the
target market or a strong service business in domestic or industrialized markets.
Otherwise, manufacturers should avoid exporting services to foreign markets.
As already described in the first section, this article is based on experiences from
a contract research project that was conducted by the Fraunhofer ISI for the gov-
ernment of the province of Guangdong, located in the Southeastern part of China.
The aim of this study was to identify the service needs of industrial firms to
strengthen the competitiveness of the local manufacturing industry in Guangdong.
To do so, we conducted a market research analysis in this province by using a
quantitative survey and deriving practical implications from its results. This project
214 C. Lerch and M. Gotsch

consisted of two parts: The first part was an in-depth analysis of the degree of
servitization in various, selected German industrial sectors. The results of this
analysis have already been published in two papers (see Lerch and Gotsch 2013;
Gotsch et al. 2012). The second part was a quantitative analysis of the service needs
of Chinese manufacturers in Foshan and Guangdong, which is the subject of this
article.
In the following sections, we describe the experiences from this research in
terms of the challenges and hurdles faced during this project, present the results of
this exemplary study and describe how to develop suitable market entry strategies.
Owing to this second-order challenge, we can conclude that there are two types of
problems with conducting market research on servitized offerings in emerging
manufacturing industries: (1) those arising from the emerging market context and
(2) those arising from servitization context. The next two sections provide an
overview of these challenges.

13.2.1 Challenges in the Context of Emerging Markets

Three major challenges arise from the context of emerging markets for market
research on servitized offerings. The first problem relates to communication and
expertise, the second problem relates to collecting reliable information and valid
data, and the third problem relates to trust and dependency.
The first problem that arises during market research on servitized offerings
relates to Communication and Expertise. Conducting market research in China
without any support from Chinese enterprises or public authorities seems to be
almost impossible. In our opinion, it is very helpful for European manufacturers to
collaborate with a Chinese institution, because of difficulties related to language
and culture. However, even communicating with a Chinese partner remains dif-
ficult. Such difficulties arise from, for example, indirect communication over
various interfaces and differences concerning the understanding of and expertise
related to services. In China, so-called industrial services are considered general
services, such as those related to sports facilities or medical care, rather than
services between two manufacturers to improve production processes. Developing
a common understanding of servitization takes time and is complex.
Moreover, we realised that there are substantial problems concerning the ability
to obtain Reliable Information and Valid Data. Among the most important pro-
cesses in market research are data collection and analysis. The process of col-
lecting data in China differs from that in Europe. First, it is extremely difficult to
obtain a critical mass of answered questionnaires because it is difficult to access
industrial firm data in the target market. Obtaining representative data from a
large-scaled survey seems to be almost impossible for non-Chinese institutions.
Another problem concerns the quality of the data. Chinese firms are uncertain of
how to answer questionnaires and switch between expectation and reality. These
difficulties related to accessing firm data and obtaining data of sufficient quality are
13 Market Research for Servitized Offerings: 215

the greatest challenges for market research on servitized offerings and should be
considered before conducting such research.
The third problem concerns Trust and Dependency. Very often, European
manufacturers are not located in the target market of an emerging manufacturing
industry. Therefore, it is not possible to control all of the processes involved in
market research, including those conducted by Chinese partners. Often, information
channels are interrupted, or different interpretations of problems arise, particularly
during data collection and data analysis. Consequently, European manufacturers
are highly dependent on Chinese partners in such market research. Thus, to conduct
a market analysis, manufacturers highly depend on their partners, and hence,
establishing trust between European manufacturers and Chinese partners is
important.
To overcome these problems, we believe that collaborating with a Chinese
partner that is located in the target market is absolutely necessary. Conducting
market research for servitized offerings in emerging manufacturing industries
without collaborating with a Chinese partner is a highly difficult and time-consuming
activity, and the results of such research may be ambiguous. Establishing a coop-
erative relationship is valuable but is still time consuming because of the need to the
develop trust and a common understanding of the problem.

13.2.2 Challenges in the Context of Servitization

Two major challenges arise from the servitization context for market research in
emerging manufacturing industries. Here, manufacturers have to answer two
questions: What are the targeted companies and sectors in the foreign markets?
What are the research fields of interest?
A first challenge for identifying service needs in foreign markets is to identify
the Target Companies and Sectors. Before entering a foreign market, a manu-
facturer has to identify the potential customers in the foreign market, including
both the type of company and the industrial sector of these customers. Identifying
potential customers is highly important because the industrial sector decides the
potential market volume in the target market. Therefore, it seems necessary to
analyse public data on the number of companies in an industrial sector and the
annual turnover of the sector in advance. Moreover, it seems important to identify
the traditional markets and emerging sectors of a country. Traditional sectors hold
a higher market volume but are more difficult to enter because of already existing
structures. Emerging sectors hold a lower volume, but acquiring clients may be
easier during earlier stages of the market. Furthermore, it is necessary to categorise
the companies within a sector. A market research survey should be conducted to
distinguish between companies based on the enterprise sizes and sector. This
information is important for developing a market entry strategy.
The second challenge concerns the Research Fields of Interest. The manufac-
turer has to be certain about the information that is needed from the target market.
216 C. Lerch and M. Gotsch

Therefore, firms should conduct a survey aimed at the context of servitization to

determine the actual dissemination of services in the market, the service needs
abroad and manufactures’ service-consumption behaviour. Example survey
questions, which we also used in the research project, are as follows:
• What is the actual dissemination of services in the target market?
• What types of services are still needed?
• Where are service providers located in the foreign country?
• What are the drivers for service demand in the target market?
• Which enterprises use most services, and are they satisfied with the applied
services?
To elucidate how such a survey is conducted, we present the analysis and the
results of the so-called Foshan Survey in the next section. We first describe the
structure of the database and the background of the study and then present the results.

13.3 Conducting Market Research: The Foshan Survey

as an Exemplary Study

13.3.1 Data Sample and Background

The basis for the subsequent analysis is the set of answers from 48 manufacturing
companies located in the Chinese province of Guangdong, which are primarily
located at Foshan City and immediate surrounding area. The companies were
selected by the Chinese partner institute, and the authors of this article were not
able to influence the survey method that was used.
The chosen manufacturers belong to 16 different sectors of the Chinese manu-
facturing industry and are divided as follows: Seven companies are from the sector
‘‘Communication equipment, computers and other electronics’’, while five are from
‘‘Special-purpose machinery’’. ‘‘Medicines’’, ‘‘Plastic Products’’, ‘‘Smelting and
Pressing of Nonferrous Metals’’ and ‘‘Electrical machinery and equipment’’ are
each represented by four companies. The sectors ‘‘Raw chemical materials and
chemical products’’, ‘‘Nonmetal Mineral Products’’ and ‘‘General-purpose
machinery’’ are each represented by three companies. ‘‘Processing of Farm and
Sideline Food’’, ‘‘Metal Products’’ and ‘‘Handicraft and Other Manufactures’’ are
each represented by two companies, while there is one firm each from the sectors
‘‘Cultural, Educational and Sports Articles’’, ‘‘Transport Equipment’’, ‘‘Instru-
ments, Meters and Machinery for Cultural and Office Use’’ and ‘‘Recycling and
Disposal of Waste’’.
The names and designations of the industrial sectors are taken from official
Chinese statistics and do not correspond to the often-used NACE codes. Unfor-
tunately, this hinders a comparison with European and other manufacturing
industries. This problem has already been described in Gotsch et al. (2012).
13 Market Research for Servitized Offerings: 217

Fig. 13.1 The distribution of 2% 4%

the companies by legal form State owned
(Source own illustration)

15% Private Share-holding

79% HK-, Mac -, or TWN-funded

Foreign funded

Fig. 13.2 Firm structure by

number of employees and 10-49 4%
Number of employees

turnover (Source own

50-249 21%
illustration)
250-499 17%

500-999 17%

1000-1999 13%

above 2000 29%

<RMB 5 Mil. 2%
Annual turnover

RMB 5-10 Mil. 6%

RMB 10-50 Mil. 9%

RMB 50-500 Mil. 53%

>RMB 500 Mil. 30%

0% 20% 40% 60%

Share of firms

Figure 13.1 shows the distribution of the companies by legal form. While 4 % of
the companies are state owned, more than three-quarters are private share-holding
companies (79 %), and 15 % are Hong-Kong-, Macao- and Taiwan-funded firms
(HK-, Mac- and TWN-funded). Other foreign funded companies have the smallest
share, at 2 %.
The structural data of the companies are shown in Fig. 13.2 and defined by the
number of employees and the annual turnover. There are six company size classes
based on the number of employees. Manufacturers with between ten and 49
employees are the least represented in the sample, and those with more than 2,000
employees have the largest share in the sample. The other company sizes have
approximately equal shares.
218 C. Lerch and M. Gotsch

For more than half of the questioned companies, the annual turnover is between
50 and 500 million RMB. In 2011, almost one-third of the manufacturers had an
annual turnover of more than 500 million RMB.
In the following, we present the main results of the Foshan Survey using a
structured approach. Specifically, we show the degree of service dissemination and
service usage in the Foshan area, the locations of service providers and the drivers
of service demand. We then combine company size and service demand and show
the degree of satisfaction.

13.3.2 Degree of Service Dissemination

It seems important to start with identifying which kinds of services are demanded
the most by manufacturers in the Foshan region before examining individual issues
related to service dissemination in more detail. Therefore, the 23 services
demanded by the questioned manufacturing companies are presented in Fig. 13.3,
sorted by frequency of occurrence.
In addition to actual service users, manufacturers that were currently not using
services were asked about their attitudes toward them and could select from the
following: the service is needed, but no offers are available; the plan is to adopt the
service within the next 3 years; the service is not known; the service is not needed.
These results are also presented in Fig. 13.3.
As expected, most of the services are used frequently. More than 80 % of the
manufacturers use ‘‘Intellectual property services’’ and ‘‘Transportation/logistics’’,
whereas ‘‘Renting/leasing’’ and ‘‘Condition monitoring/tele-services’’ are deman-
ded the least, at approximately 23 %, which is still quite large. In this context, it is
noticeable that four of the six most demanded services, ‘‘Intellectual property ser-
vices’’, ‘‘Legal services’’, ‘‘Recruitment services’’ and ‘‘Marketing/advertising’’,
can be grouped into a higher class of management and consultancy services that are
more customer oriented than product related.
‘‘Condition monitoring/tele-services’’, ‘‘Project management/consultancy’’ and
‘‘Process optimization’’ are the most demanded services that are currently not
available. In addition, manufacturers plan to use mainly ‘‘Information platform/
digital library’’, ‘‘Condition monitoring/tele-services’’ and ‘‘Financial services’’ in
the next 3 years, whereas ‘‘Service hotlines’’ are not needed by approximately one-
third of the surveyed firms. The large number of manufacturers (33 %) selecting ‘‘not
known’’ for ‘‘Renting and leasing’’ indicates that there is a lack of information about
these services, which partially explains the low adoption rates for such services.
Overall, we can conclude that services are already being widely used
throughout manufacturing industries in the city of Foshan and its surrounding area.
In all, 16 of the 23 demanded services are used by 60 % or more of all of the
questioned companies. Nevertheless, there is still an unexhausted potential for
services. Depending on the type of service, up to 30 % of all of the questioned
companies still have service needs and plan to use further services.
13 Market Research for Servitized Offerings: 219

4%
2%
6%
Intellectual property services 81% 4% 2%

4%
8%
Transportation/logistics 81% 4% 2%

6%
Legal services 79% 2% 6% 6%

6%
4%
Recruitment services 79% 8% 2%

4%
Testing services 79% 4% 8% 4%

4%
Marketing/advertising 75% 8% 10% 2%

6%
2%
Inspection/maintenance/repair 73% 2% 17%

2%
Retrofitting/upgrade services 71% 6% 8% 10% 2%

Training/instruction 71% 4% 8% 15% 2%

2%
Research and development services 67% 6% 10% 13% 2%

Financial services 67% 2% 17% 4% 10%

Installation/construction/start-up 65% 8% 8% 19%

2%
Design services 65% 2%8% 23%

Technical consultancy/documentation 60% 6% 10% 21% 2%

4%
Process optimization 60% 10% 8% 15% 2%
4%

Project management/consultancy 60% 13% 10% 13%

Reconfiguration/reconstruction 56% 6% 13% 25%

Online support 54% 6% 15% 4% 15% 6%

Spare part service 48% 6% 10% 10% 21% 4%

6%

Service hotline 42% 6% 6% 31% 8%

Information platform/digital library 31% 6% 21% 21% 17% 4%

Condition monitoring/tele-service 23% 13% 21% 15% 27% 2%

Renting/leasing 23% 6% 4% 33% 29% 4%

0% 20% 40% 60% 80% 100%

Share of firms
Apply service Currently needed, Planned to apply Not known Service not needed
no offers available Not specified

Fig. 13.3 Service dissemination in the area of Foshan (Source own illustration)
220 C. Lerch and M. Gotsch

13.3.3 Origin of Service Offerings

We combined two concepts to analyse the origin of the services offered. Beckenbauer
(2006) differentiates among local, regional and global service delivery processes.
Haupt (1999) develops a classification framework for services in manufacturing
industries, which distinguishes between services with the product as an external
factor, e.g., maintenance and repair, and those with the customer or a customer
employee as an external factor, e.g., training or consultancy services. By combining
these concepts, we can identify the origin of services on the basis of whether the
product or the consumer is the external factor in the service.
Customer-oriented services do not concern single products or machines but
rather concern the customer’s company as a whole or a customer’s employees and
all corporate issues related to strategy, organisation, human resources or support.
In this context, we understand customer-oriented services to be intellectual
property services, transportation/logistics, legal services, recruitment services,
marketing/advertising, training/instruction, financial services, project manage-
ment/consultancy, online support, service hotlines, information platform/digital
library services and renting/leasing.
In contrast, product-oriented services do not concern corporate strategy but
rather concern single products or machines, in general, and specific ways to
support and develop these products. Therefore, we understand product-oriented
services to be testing services, inspection/maintenance/repair, retrofitting/upgrade
services, research and development services, installation/construction/start-up,
design services, technical consultancy/documentation, process optimisation,
reconfiguration/reconstruction, spare part services.
Services that are delivered in the Foshan area are ‘‘local’’, while services that
are provided from Guangdong or China are ‘‘regionally’’ sourced. Services that are
offered from a provider that is located outside China ‘‘global’’.
Our findings (see Fig. 13.4) show that local delivery is more common for
customer-oriented services, as 53 % of customer-oriented services are sourced
locally, while only 41 % are procured from regional suppliers. In contrast, only
36 % of product-oriented services are delivered by local providers, while 56 % of
them are sourced regionally. Global services are less important for the surveyed
manufacturers, as only 6 % of customer-oriented and 8 % of the product-oriented
services are procured globally.
One can conclude that services that are sourced locally are mainly customer
oriented, while regionally sourced services are more product oriented. Conse-
quently, providers of services oriented toward customers or their employees are
clustered closely around their clients. On the other hand, providers of services
oriented toward physical products seem to deliver their services from regional
service hubs or centres. Lastly, the relationship between the location of the service
provider and the location of the service consumer seems to depend on the type of
service and varies depending on whether the services are customer oriented or
product oriented.
13 Market Research for Servitized Offerings: 221

Fig. 13.4 Local, regional 60%

and global origin of 56%
53%
customer- and product-
oriented services (Source 50%
own illustration)
41%
40%
36%

Share of firms
30%

20%

10% 8%
6%

0%
Local Regional Global
Customer-oriented Product-oriented

13.3.4 Drivers of Service Demand

Of course, not only the origins of services but also the drivers of service demand
are interesting for providing a deeper understanding of servitization in the man-
ufacturing industry. Respondents could choose from eight answer options con-
cerning why they use services (compare Fig. 13.5).
While the use of special expertise and the adoption of innovative ideas increase
companies’ knowledge, improvements in production quality and performance can
boost the quality of products and processes in general. Efficiency improvements
can be achieved by reducing lead times and using flexible cost structures, while
outsourcing and adaptation to market changes increase the flexibility of a com-
pany. In conclusion, there are four different reasons why manufacturers use ser-
vices, as shown in Fig. 13.5: knowledge, quality, efficiency and flexibility.
The most important reasons for using services seem to be to obtain external
expertise (44 %) and increase performance (38 %) while only 15 % of respondents
cited outsourcing measures as their main motivation. Noticeable is that 32 %
reported both knowledge and quality as motivations for using services, whereas
only 22 % reported both efficiency and flexibility as motivations.

13.3.5 Company Size and Service Demand

The surveyed manufacturers were questioned about their demand for a total of 23
kinds of industrial services, as shown in Fig. 13.3. On average, 14 services were
222 C. Lerch and M. Gotsch

Flexibility
Adaptation to market changes 29%

Outsourcing measure 15%

Efficiency
Reducing lead time 27%

Receive flexible cost structure 21%

Increase performance 38%

Quality

Improve production quality 29%

Knowledge

Use special external expertise 44%

Acquire innovative ideas 19%

0% 10% 20% 30% 40% 50%

Share of firms (Multiple answer)

Fig. 13.5 Drivers of the demand for services (Source own illustration)

being used at the time of the survey. Manufacturers that demand fewer than eight
services represent only a small share of the sample. Most of the firms use between
13 and 20 services at the same time.
To examine the demand for services in more detail, three groups were formed:
low, medium and high demanders. The group of ‘‘low demanders’’ includes all
manufacturers that use up to 11 services, the ‘‘medium demanders’’ are those with
12–16 services, and the ‘‘high demanders’’ are those with more than 16 services.
Classifying the companies into low, medium, and high demanders is crucial for
further analysis. For instance, if we control for company size, an interesting issue
arises (see Fig. 13.6). Large firms are mainly high and medium demanders of
industrial services (50 and 43 % are high and medium demanders, respectively),
while medium-sized firms, in contrast, are mainly medium or low demanders
(46 % are low demanders, and 36 % are medium demanders). The proportion of
small firms is similar in the different demand groups, with shares of 30 % for both
low and medium demanders and 40 % for high demanders.

13.3.6 Satisfaction with Service Offerings

We use this classification of low, medium, and high demanders to explore the
degree of satisfaction with the service offerings. Figure 13.7 shows that high
demanders are generally more satisfied than low demanders. While approximately
6 % of high demanders are very satisfied and 41 % are at least satisfied, 47 % are
partially satisfied, and only 6 % are not satisfied. In contrast, medium or low
demanders seem to be less satisfied. None of the companies belonging to these
13 Market Research for Servitized Offerings: 223

60%

50%
50%

43% 43%
40%
40%
36%

30% 30%
30%

21%
20%

10% 7%

0%
Small size Medium size Large size
Low-demanders Medium-demanders High-demanders

Fig. 13.6 Service demand as a function of company size (Source own illustration)

Low-demanders 27% 73%

Medium-demanders 6% 94%

High-demanders 6% 41% 47% 6%

0% 20% 40% 60% 80% 100%

Share of firms
Highly satisfied Satisfied Partially satisfied Not satisfied Not at all satisfied

Fig. 13.7 Satisfaction with services by type of demander (Source own illustration)

groups were very satisfied with the offered services. In all, 94 % of the medium
demanders and 73 % of the low demanders are only partially satisfied with the
services that are offered in the Foshan area.
Consequently, we assume that manufacturers’ satisfaction with the offerings of
service providers in this emerging industry is currently low. However, the number
of services that a manufacturer uses seems to have a positive influence on the
manufacturer’s level of satisfaction.
224 C. Lerch and M. Gotsch

13.4 From Market Research to Managerial Implications

This section describes how to develop individual strategies for entering foreign
markets using the results of a data analysis. In our case, a couple of implications can
be derived from the market analysis, from which we were able to generate individual
entry modes. We suggest using two steps to develop an individual strategy for
entering a foreign market: First, pattern needs to be derived from the findings of the
data analysis to provide evidence of the actual situation of the targeted foreign
service market. Second, an individual strategy based on this pattern may be devel-
oped. This strategy should include a procedure for market entrance, as a first step,
and a procedure for further penetration into the market, as a second step. A typical
procedure based on the Foshan Survey is presented in the next two sections.

13.4.1 Summarising the Results from Market Research

With regard to the origin of the service provider, the survey results show that
customer-oriented services tend to be mainly sourced locally and that such services
are closely connected to the location of the customer company. Thus, service
providers that offer customer-oriented services should be located close to their
potential customers in order to adequately meet their demands. In a more sim-
plified way, one could say that the closer the provider is to the customer, the
greater the chances of collaboration will be.
In contrast, product-related services tend to be mainly delivered by regional
providers. Location seems to play only a minor role for customers seeking prod-
uct-oriented services. Therefore, spatial proximity is not as important if the pro-
vider is offering product-related services. Because industrial services are rarely
delivered globally, as the survey has shown, the provider has to be located at least
in the region in order to realise appreciable sales.
As the results of the survey show, large companies most frequently use industrial
services and have comparatively high percentages of medium and high demanders.
However, while large companies tend to use a large number of services, and small
companies are very heterogeneous (with nearly equal shares of high and low
demanders), medium-sized companies seem to consume the fewest services, as 46 %
of the low demanders are medium-sized companies (see Fig. 13.6). The relationship
between company size and service demand thus seems to resemble a U-shaped curve,
with low and high demanders at both ends and medium demanders in the middle.
We assume that the consumption of services in emerging manufacturing
industries evolves through various phases. Depending on the stage or position in the
life cycle, different services are demanded. Providers of industrial services should
know which types of services are being offered in order to be able to best meet
customers’ demands. In earlier stages, providers should focus on customer-oriented
services, while later stages are dominated by the need for product-oriented services.
13 Market Research for Servitized Offerings: 225

Consequently, the stage or, rather, the development of an industry seems to influ-
ence the service needs in the industry and manufacturers’ service-consumption
behaviour.
We lastly can conclude that this exemplary study allowed for manufacturers’
behaviour to be analysed with regard to the type of services, size of firms, drivers
of service demand, location of services and level of satisfaction. We report the
following overall findings, which provide a valuable characterisation of the foreign
service market:
• Generally, the demand for services is already high in the emerging industry
observed in this study. However, the dissemination of services oriented toward
customers is greater than that of services oriented toward products.
• Customer-oriented services are closely connected to the location of the con-
sumer. The closer the service provider is located to the customer, the greater
the possibilities for collaboration are. In contrast, location plays only a minor
role for customers seeking product-oriented services.
• Increasing knowledge and quality are the main drivers of service demand in
emerging industries. Improving efficiency and flexibility are less common
motivations for using services.
• Large companies tend to use more services than small companies, while
medium-sized companies seem to use the fewest. This relationship can be
characterised as a U-shaped curve.
• Most manufacturing companies are only partially satisfied with the services
offerings in the industry. However, the level of customer satisfaction increases
with the number of services that a manufacture uses. Accordingly, there seems
to be a positive relationship between the service orientation of the customer and
the level of satisfaction.

13.4.2 Developing a Suitable Market Entry Strategy

Based on these findings, three principle managerial implications arise for manu-
facturers. In contrast to other studies, these managerial implications are provided
from a customer’s perspective and, consequently, more closely reflect clients’
needs. These implications are as follows:
• Customer-oriented services should be delivered from a location that is very
close to the client. Product-oriented services can be delivered from regional
service hubs without significant competitive disadvantages.
• Service providers should concentrate on large companies first (market entry)
and then expand service offerings to small and medium-sized enterprises
(market penetration).
• The less developed an emerging industry is, the greater the demand for cus-
tomer-oriented services will be. The more developed an emerging industry is,
the greater the demand for product-oriented services will be.
226 C. Lerch and M. Gotsch

Consequently, providing services for large and important customer firms could
be a suitable strategy for a market entry. Large enterprises tend to use more
services and, hence, are more attractive for global service providers in the
observed region. These clients could be served from a location that is close to the
customer firms. Therefore, an effective strategy may be to establish a service
business office in, e.g., a technology park or industrial centre that holds a large
number of large enterprises. This office may focus on delivering customer-oriented
services.
Once established in the market, service providers should expand their service
offerings by concentrating on small and medium-sized companies to increase their
market share. If a service office seems to be profitable, step by step and over time
more service centres may be established close to other large industrial centres. For
further market penetration, a manufacturer may establish a service hub located in
the surrounding area to support service offices that focus on providing individual
product-oriented services. This hub could contain technical equipment and con-
duct maintenance and repair services as well as other after-sales services. Later, a
production centre may be added, offering, e.g., additional engineering services.
This procedure may be repeated until the service market has fully developed.

13.5 Conclusion and Outlook

This article presents an approach to market research analysis for servitized

offerings in emerging manufacturing industries. Therefore, this section summarises
our conclusions from a contract research project financed by the government of the
province of Guangdong in China and conducted by the Fraunhofer ISI. To support
companies in the process of conducting market research, we first described the
challenges and hurdles that arise from such an analysis concerning servitized
offerings in emerging markets. We then showed how to conduct market research,
using the Foshan Survey as an example. We lastly presented how to derive
managerial implications from market research and develop a market entry strategy.
Lastly, this study provides insights into the service needs of manufacturers in an
emerging industry and sheds some light on their service-consumption behaviour.
The findings of this analysis can help providers to understand how to design their
service offerings to suit emerging manufacturing industries and to fulfil customers’
needs in the associated markets.
However, it should be noted that the results are based on the findings of only one
emerging manufacturing industry. Other studies could test the derived hypotheses
on other emerging industries or make comparisons between these markets. Con-
sequently, the results of this study should be regarded as initial insights on the
service needs of manufacturers in an emerging industry. We recommend that fur-
ther research be conducted to fully elucidate the service-consumption behaviour of
manufacturers in BRIC countries or other emerging industries.
13 Market Research for Servitized Offerings: 227

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Chapter 14
Strategies for Developing the Service
Business in Manufacturing Companies

Jakob Ebeling, Thomas Friedli, Elgar Fleisch and Heiko Gebauer

Abstract Higher market complexity and increasing competition are forcing tra-
ditional manufacturers to rethink their traditional business strategy. New growth
potential and lucrative margins in the service business tempt companies to extend
their traditional products business by services and so, change their position in the
product-service continuum. But, which position should be selected? What does
influence this decision? And, which implications does the new position have for
the organization? This contribution tries to answer these questions by describing
existing strategies for the development of the service business in manufacturing
companies. First, environmental factors are specified that influence the decision on
a service strategy. Second, four different service strategies along the product-
service-continuum and their organizational implications are described in detail.
The chapter ends with some conclusions on the implications for managers.

J. Ebeling  T. Friedli  E. Fleisch

University of St.Gallen (HSG), St. Gallen, Switzerland
e-mail: jakob.ebeling@unisg.ch
T. Friedli
e-mail: thomas.friedli@unisg.ch
E. Fleisch
e-mail: elgar.fleisch@unisg.ch
H. Gebauer (&)
Business Innovation, Environmental Social Sciences,
Swiss Federal Institute of Aquatic Research (eawag),
Karlstad University, Karlstad, Sweden
e-mail: heiko.gebauer@eawag.ch

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_14, 229

 Springer International Publishing Switzerland 2014
230 J. Ebeling et al.

14.1 Introduction

Higher and more complex customer needs coupled with increasing competitive
intensity and the need to exploit new profitable growth potentials are forcing
manufacturing firms to extend their service business (Anderson et al. 1997).
Companies like GE, IBM, Xerox, and Rolls-Royce Aerospace are prominent
examples of this trend (Kastalli and Van Looy 2013). These companies have
constantly added new services along the product-life cycle and increased their
service revenue share to up to 56 % (Fischer 2012). These success stories are well
known to managers and business consultants. But are these success stories
transferable to other manufacturing companies?
Many companies failed in transforming their business by expanding their ser-
vice offer. Instead of higher profits due to increasing service revenues they were
con-fronted with higher costs and shrinking profitability. This phenomenon, also
known as the service paradox (Gebauer et al. 2005), leads to the question on how
to decide on the right service strategy (for manufacturing companies)?
Service strategies are based on extending services within the total offering (e.g.
Vandermerwe and Rada 1988; Martin and Horne 1992; Mathieu 2001; Oliva and
Kallenberg 2003; Davies 2004; Sawhney et al. 2004; Gebauer 2008). According to
Martin and Horne (1992) and Kotler (1994) the product-sevice continuum in the
development of total offerings follows a specific pattern: it begins with pure goods,
continues to total offerings dominated first by goods and then gradually by ser-
vices, and ends with pure services (Fig. 14.1).
The literature generally agrees that extending the breadth of services can be
considered as moving along the transition line from products to services in the
product service continuum, with the two ends being services as the add-on and
tangible goods as the add-on (Oliva and Kallenberg 2003; Neu and Brown 2005).
Service strategies represent different positions on this continuum. The following
descriptions of service strategies are most often used (Fischer 2012):
• Service strategies for moving downstream in the value chain (Wise and
Baumgartner 1999)
• Service strategies within manufacturing (Mathieu 2001)
• Transformation strategies for moving from manufacturing to service business
(Oliva and Kallenberg 2003)
• Moving towards high-value integrated solutions (Davies 2004)
• Service strategies in product manufacturing companies (Gebauer 2008)
• Five types of new service-based business concepts (Lay et al. 2009)
• Service strategies and service transition trajectories (Matthyssens and
Vandenbempt 2010)
In this chapter we focus on the four service strategies identified by Gebauer
(2008), who used an explorative factor and cluster analysis of a sample of 195
Western European manufacturing firms, and Fischer et al. (2010), who detailed the
findings based on 31 case studies (Fig. 14.2).
14 Strategies for Developing the Service Business 231

Current Target
position position

Relative importance
of services

Relative importance of
tangible goods and/or product

Product manufacturer Service provider

Services as an add-on, main Products as an add-on, main part
part of value creations stems of value creation stems from the
from the product service

Fig. 14.1 Product-service continuum (adapted from Oliva and Kallenberg 2003, p. 162)

External environment Service strategy

Competitive intensity in Service offering
the product field Value proposition
Competitive intensity in Pricing
the service field
Market growth Fit

sensitivity Organizational design

elements
options for operating the HR management
product Corporate culture
Organizational structure

Fig. 14.2 Achieving a strategic fit

14.2 Influencing Environmental Factors

Organizational theory has established several dimensions of environmental char-

acteristics: uncertainty, directness, change, dynamism, homogeneity, complexity,
and munificence (Aldrich 1979; Andrews 1996; Duncan 1972). Research on the
external environment started with Dess and Beard’s discussion (1984) of the various
dimensions of organizational task environments. They distinguish between the
following three factors characterizing the external environment: munificence,
complexity, and dynamism. Munificence relates to the scarceness of environ-mental
resources that support firms’ growth within a given industry. Environ-mental
complexity reflects the heterogeneity and concentration of environmental elements.
Environmental dynamism refers to the rate of change and degree of in-stability of the
environment. Rapid change, short product life cycles, and processes of creative
destruction are typical characteristics of dynamic environments. Dynamic envi-
ronments make current products and services obsolete, and require new competences
to be developed (Dess and Beard 1984). Miller (1987) uses the term environmental
competitiveness to reflect the number of competitors, and of areas in which there is
232 J. Ebeling et al.

Environmental configurations

Cluster 1
Highly competitive
Very price-sensitive customers
Customers request proper
functioning product
Cluster 2
Low competitive intensity
Not very price-sensitive
customers
Customers request services
optimizing their processes

Cluster 3
Highly competitive
Very price-sensitive customers
Customers are strongly
interested in services reducing
the initial investment
Cluster 4
Low competitive intensity
Not very price -sensitive
customers
Customers interested in
collaborative innovations

Fig. 14.3 External environmental configurations

competition. Jaworski and Kohli (1993) use the term competitive intensity, which
reflects the behaviour, resources, and ability of competitors to differentiate their
products or services. The market orientation view argues that organizational activ-
ities are not only influenced by competitors, but also by market turbulence in terms of
changing customer product preferences. Kohli and Jaworski (1990), for example,
propose a philosophy that directs firms’ activities toward understanding changing
customer preferences and design a strategy to satisfy those needs (Fig. 14.3).
Not all of these dimensions are equally important for the service business. On
that account, Gebauer (2008) developed a model for the external environment
which comprises competitive intensity in the product fields, competitive intensity
in the service field, market growth, price sensitivity of customers, and strategic
choices of customers. The first two derive directly from the literature on market
orientation. Market growth and price sensitivity of customers reflect the two
aspects of market turbulence, a traditional dimension of the business environment
(Jaworski and Kohli 1993). Market growth refers to the growth rate of total sales in
a business unit’s principal market segment. A high market growth in the product
field denotes a more favourable environment for manufacturing companies (Slater
and Narver 1994). Price sensitivity captures customer behaviour in consequence of
changing prizes (Janiszewski and Lichtenstein 1999). Market turbulence, as
operationalized by Jaworski and Kohli (1993), also covers the changing customer
product preferences. In this context, customer product preferences are interpreted
as changes in strategic choices on how to operate the products. Outsourcing the
product maintenance represents such a strategic option. Other strategic options
refer to ensuring only proper product functioning or optimizing the efficiency and
effectiveness of the product within the customer process. Customers following
different strategic options probably have different customer needs.
According to the contingency theory companies have to align their strategy on
the external environment. High performance can be reached if a strategic fit is
14 Strategies for Developing the Service Business 233

realized (Mintzberg 1979). Gebauer (2008) analysed in his study of 195 companies
these environmental factors and their influence on the performance. Four different
clusters of external environment configurations could be identified.
The first cluster comprises an environment that is highly competitive for
products and services. The customers are very price-sensitive and request services
that ensure the proper functioning of the product. Very little attention is paid to
services optimizing effectiveness and efficiency of the product in their processes,
focusing on collaborative innovation for their processes, and reduction of the
initial investments by paying for performance.
The second cluster can be described by low competitive intensity. Customers
are not very price sensitive. They demand services which focus on optimizing their
process. They don’t expect services which are only focusing on ensuring the
proper functioning of the product. Similar to cluster 1, customers don’t request
services focusing on collaborative innovation for their operating processes and the
reduction in the initial investments.
High competitive intensity and strong interest in reducing the initial investment
are the main environmental factors of the third cluster. Ensuring the proper
functioning of the product as well as collaborative innovation is less prominently
requested by customers, whereas services optimizing the effectiveness and effi-
ciency of the customer’s processes are demanded on a medium level.
The fourth and last cluster of environmental influences can be described as low
competitive intensity and high interest on collaborative innovations. Companies in
this environment are faced with customers requesting services ensuring a proper
functioning of the product and optimizing their processes on a medium level. The
price sensitivity of their customers is low.

14.3 Service Strategies for Manufacturing Companies

To meet these external requirements four different patterns of successful service

strategies could be identified which vary in terms of service offering, value
proposition and pricing (Gebauer 2008; Fischer et al. 2010). These four strategies
are labelled as After-Sales Service Provider (ASP), Customer Support Provider
(CSP), Outsourcing Partner (OP), and Development Partner (DP) (Gebauer 2008).
To implement one of those strategies managers need to adapt several factors
within their organization, such as human resource management, corporate culture,
and organizational structure (Gebauer 2008). In the following section the four
different service strategies are described and their organizational implications are
explained.
234 J. Ebeling et al.

14.3.1 After-Sales Service Provider

Companies following the After-Sales Service Provider strategy are faced with high
competitive intensity and price sensitive customers, who (only) expect a properly
functioning product for a low price. Predictably, the low prices cause deficits in
product reliability, leading to sporadic breakdowns and customers increasing
request for support to ensure proper product functioning. The main field for
competition are attractive prices for both, products and services (Cluster 1).
ASPs focus on ensuring the functional capability for the period in which the
customer uses the product. If the product breakdowns appear, standardized after-
sales services are offered to the customer, which include predefined services such
as spare parts, repair, inspection, hotline, and basic training. Sophisticated service
needs such as the optimization of effectiveness and efficiency of the product in the
customer process, collaborative innovation in customer’s operating processes, and
reduction in the initial investment by paying for product performance are only
minor issues. The prices for these services are not integrated into the product price.
Charges and prices are based on a mark-up for labour and parts. Price discounting
is used frequently.
ASPs create a unique value proposition by providing products at attractive
prices and guaranteeing a proper functioning of the product through after-sales
services. Because of the unbundling pricing approach, the customer can choose
those after-sales services that are really needed. The customer can compare the
prices for services and obtain price discounts.
To deliver superior after-sales service, ASPs establish frontline employees as
reliable troubleshooters, who guarantee a quick response in case of a product
breakdown and concentrate on a small range of issues that arise when delivering
standardized after-sales services. In addition, service technicians possess strong
technical expertise and are motivated to get continuous training. The latter
includes on-the-job and formal classroom trainings and ensures that individuals
have basic knowledge of the technical expertise needed for the range of issues that
typically arise when after-sales services are requested.
In terms of the corporate culture, ASPs change their corporate values by pro-
viding after-sales services and making the role of service employee to one of the
most important positions within their company. The service employees interpret
after-sales services as the main differentiating factors in the product-marketing
strategy. However, service employees understand that services are not just an add-
on to the product. Services are charged separately and represent an essential part of
total value creation. Other typical service-related values, such as innovation,
customization, and the belief that flexibility and variety create profits, are not
necessarily developed.
APS bundle the various after-sales service activities such as repair, inspection,
and spare-parts management in a cost-centre within the product unit. The for-
mulation and implementation of after-sales services is a collaborative effort among
various units within the business, between the after-sales services and product
14 Strategies for Developing the Service Business 235

functions. Having fixed costs for the required service personnel, the main driver
for profitability becomes capacity utilization. Since the demand for after-sales
services is unpredictable, high capacity utilization is very difficult to achieve. So,
sharing resources between after-sales service and production-function can facili-
tate the covering of peaks and proper capacity utilization.
ASPs put great emphasize on collaboration with third-party logistic providers as
a key factor for implementing the after-sales service strategy and differentiating
it-self from competitors. Having a high number of installed products all over the
world, good collaboration enables them, for example, to provide on-site support
including the right spare parts in less than 48 h.

14.3.2 Customer Support Provider

Customer Support Providers’ markets consist of customers who are looking for
outstanding product quality. Product performance and reliability are the main
purchasing attributes. Furthermore, customers are demanding more services, since
they’re increasingly focussing on their core competences. They invest in reliable
products and demand services that increase the efficiency and effectiveness of the
product in the operating phase. Compared to ASPs, CSPs are not faced with such a
high competitive intensity in terms of price competition and intensity of price
discounting. CSPs are still able to achieve elements of the differentiation through
technical superiority (Cluster 2).
Both the customer expectations of improved product efficiency and effective-
ness in the customer process as well as the explained competitive situation
appeared to support the need for alignment with the customer support service
strategy. This strategy concentrates on optimizing customer operating processes.
The latter means achieving maximum uptime (operationality) and yield through
services such as comprehensive preventive maintenances, advanced training, and
process optimization. In contrast to ASPs, the goal is not to react immediately to
product failures, but rather to prevent breakdowns.
The price of the services is not integrated in the product price. Services are
bundled into customized packages and the customer pays a fixed price. That means
that compared to ASPs, the customer-support service strategy is based on service
elements that can be customized and bundled according to customer needs.
Thereby they are able to offer sufficient flexibility to respond to individual cus-
tomer needs. Optional service elements are designed to accommodate expected
differences between customers. In addition, services are tailored by modifying
individual service elements to fit the needs and wants of an individual customer.
CSPs form a value proposition by providing highly reliable products and
increasing customer efficiency and effectiveness through a comprehensive range of
maintenance services, tailoring service offerings to satisfy the unique needs of an
individual customer, and guaranteeing customers a fixed price for an individual
service package.
236 J. Ebeling et al.

In terms of corporate culture, CSPs make substantial effort in convincing ser-

vice employees that customized service packages are an essential part of the value
creation. The flexibility to modify and adjust the amount of purchased service
elements is interpreted as enabling to accommodate unexpected differences that
arise between various customers. Consequently, both managers and employees
believe that customization and flexibility contribute to better differentiation, thus
leading to higher profits. Customer support providers also adapt the key roles
performed by frontline employees who deliver highly customized services and
serve as performance enablers. Performance enablers develop an in-depth under-
standing of the individual performance requirements of customers and provide
unbiased recommendations to customers on how to achieve the desired perfor-
mance outcomes. Delivering highly customized services means that frontline
employees must also be able and willing to assume responsibility and provide
flexibility for the broad range of issues that arise when customizing services for
individual needs.
CSPs recruit individuals who have a strong foundation in technical expertise
and have behavioural competencies, as well as an appropriate customer-focused
attitude. The technical expertise is similar to ASPs. The behavioural competencies
include (listening and) communication skills. These skills are necessary, because
listening to and communicating with customers is essential for the understanding
of individual customer needs. These skills help to convince customers that the
defined service package fits their needs. The behavioural competencies and the
customer-focused attitudes are trained by formal or informal mentoring programs,
during which new service employees are coached by experienced, long-term
employees, and service managers. Customer support providers try to retain these
unique competencies by reducing employee fluctuation and establishing long-term
employee/customer relationships. Long-term employees accumulate a broad base
of technical expertise, behavioural competencies, and a customer-focused attitude
which is also needed to supervise new service technicians.
In comparison to ASPs, CSPs do not integrate the responsibility for imple-
menting the service strategy into the existing product division. Instead, they create
a new service division with specific and clear responsibilities for services, such as
preventive maintenance, advanced training, process optimization, repair, inspec-
tion, and spare parts. As a typical business unit, the service division also takes over
the profit-and-loss responsibility. Setting-up a new service division is an intra-firm
collaborative effort between product and service divisions. The human-resource
needs of the new service division are met initially through internal resource flows
from the product unit. Compared to ASPs, no resources are shared on an on-going
basis between product and service division. Due to a higher focus on preventive
maintenance the service demand is more predictable which enables higher
capacity utilization.
For CSPs, a somewhat trickier issue is the challenge of creating a global service
infrastructure that is capable of delivering the different services locally to the
customer’s installed base. This presents multiple challenges. One of which is the
investment decision to build an infrastructure that will not generate revenues
14 Strategies for Developing the Service Business 237

immediately. The initial investment can dilute some of the operating profit, thus
reducing the overall profitability of the service division. At the operational level,
the ability to diffuse knowledge across the local service organizations has to be
developed. The different local service organizations also have to make an explicit
decision about the degree of standardization of the service offer, to balance the
transferability of services across the local organizations with the customization for
individual local organizations. To make this decision, CSPs install a product
management function for customizing the services offered.
CSPs emphasize the considerable extent to which collaboration with customers
can become a key factor for the success of a customer-support service strategy.
This strategy requires the development of a shared understanding of market
conditions and of individual customer needs for optimizing the customer’s oper-
ating processes.

14.3.3 Development Partners

Development Partners’ customers expect specific solutions for the operating pro-
cesses. A greater specialization of customer processes and a clearer definition of
operating processes as core competencies seem to be the drivers for a higher
demand on innovative solutions for customer processes. DPs also report that
competitive equality has been reached in the field of products and after-sales ser-
vices, leading to essentially greater competitive intensity. Sustainable competitive
advantages derive mainly from designing individual solutions for customer pro-
cesses (Cluster 4).
DPs’ value proposition is based on providing design and construction services
to support customers in the process development, to achieve outstanding process
performance. That means that DPs create a situation in which the firm’s customers
benefit directly from their development competencies. These competencies are co-
produced between the service provider and customer, serve as a resource-position
barrier, and can be translated into an entry barrier for competitors. Both the DPs
and their customers possess a unique and hard-to-imitate competency position,
leading to sustainable competitive advantages. Since DPs often bundle products
and services into solutions, products and services are sold together.
DPs convince their initial R&D staff to be a ‘‘service provider for customers’’
that co-produces, with the customers, innovative solutions for customer processes.
Instead of believing that innovation with respect to self-developed products is the
main value driver, over a period R&D staff increasingly recognize that co-produced
or even co-innovated solutions are the major new source of value creation. The
R&D staff serves as a trusted adviser and develop a learning relationship. As trusted
advisers, R&D staff develops an in-depth understanding of various customer pro-
cesses. Employees collaborate with and provide unbiased recommendations to
customers on how to innovate and develop solutions for customer processes.
Employees participate in the implementation of innovation to improve customer
238 J. Ebeling et al.

processes. Additionally, the R&D staff is compelled to establish a learning rela-

tionship with individual customers. A learning relationship is typically defined as
an on-going connection that becomes more effective as a seller’s personnel and
(one) of its customers interact with each other. The R&D staff become ‘‘smarter’’ as
they gain an intimate knowledge of customers’ complex problems in developing the
operating process. At the same time, customers become smarter as they learn about
the real development capabilities of the supplier. Additionally, customers also learn
about the firm’s specific development capabilities, whether they can support future
process development, and whether the firm’s R&D staff can be trusted to provide
superior design and construction services to answer the customer’s current and
future process challenges.
DPs essentially invest in developing and recruiting technical competencies.
Engineers are recruited at both levels—graduate engineers from technical uni-
versities and managing engineers from professional engineering consultancies or
other manufacturing companies. Typically, an intensive trainee program ensures
the initial skill adaptation of graduate engineers in terms of company-specific
technical competencies. A major part of the trainee program consists of lessons on
behavioural competencies and customer-focused attitudes. The graduate engineers
learn appropriate communication skills to perform the role of a trusted adviser and
developer of a learning relationship. New managing engineers are usually assessed
according to their technical and behavioural competence, as well as customer-
focused attitudes. Only engineers with an outstanding performance record are
recruited.
A separate R&D team is responsible for design and construction services to
achieve outstanding process performance. Setting-up this separate R&D team is an
internal R&D effort. The initial human resource needs of this new separate R&D
team are initially met through internal resources. Resources are shared on a regular
basis between the separate R&D teams for extra customers and the remaining
R&D staff for internal research and development projects. Compared to ASPs, the
reason for sharing resources does not stem from the unpredictability of the service
demand, but is driven by the potential to use customer knowledge to innovate
products. As in typical R&D functions, DPs concentrate on retaining the com-
petencies needed to provide superior design and construction services. Only high
employee retention ensures carrying out different front-line roles and developing
the necessary competencies effectively.
The DP service strategy requires a common understanding of customer chal-
lenges in the process development. The collaboration with customers is also
interpreted as a key factor in contributing to a successful implementation of the
service strategy. Compared to ASPs and CSPs, there is no need to set up a global
service infrastructure of service agents or service organizations. The separated
R&D team is usually located at the headquarters.
14 Strategies for Developing the Service Business 239

14.3.4 Outsourcing Partner

Outsourcing Partners combine cost leadership with medium degree of product and
service differentiation. Customers in this field have the need to improve cash flows
and reduce the capital employed leading to an increased concentration on core
capabilities. Instead of concentrating on the product, they expect to buy mainly the
performance of the product that they need in the post-purchasing phase. Buying
product performance increases price competition and the intensity of price dis-
counting. This leads to an erosion of product margin because, hence-forth, customers
only compare prices but do not separately value technical features or better services
any more (Cluster 3).
OPs offer attractive prices for operational services. Their goal is to assume the
operating risk and full responsibility for the customer’s operating processes. The
value proposition of OPs is simply based on reducing the customer’s capital
employed and managing the corresponding risks. In contrast to CSPs, OPs do not
create customized service packages. Operational services are standardized and
focus on efficiency, economies of scale, and the belief that service customization is
costly. However, offering attractive prices for the performance of the outsourced
process without a sufficient product and service quality is insufficient. If the
product breaks down frequently, troubleshooting, repairs, and spare parts will
increase service costs, leading to a possible erosion of overall profitability.
In terms of corporate culture, OPs place considerable effort on convincing
front-line staff to be a ‘‘pure service provider’’ that delivers the output of the
operating process to the customer. Instead of believing that customized service
packages or technical features are an essential part of the value creation, the
frontline staff has to recognize that taking over customers’ operating processes
means providing standardized services. The OPs’ frontline staff has to adapt to
their roles as reliable operators and boundary spanners between standardized
services and complex service delivery. A reliable operator guarantees a defined
quality of output from operating processes. He has an in-depth understanding of
customer requirements of the process output that makes it possible to satisfy
customer needs.
OPs search for individuals for the role of frontline employees is based primarily
on their good expertise in operating processes. They try to recruit the customer’s
employees when taking over the operation of customer processes. Thus, they can
gain immediate access to the intimate knowledge of the operating processes. This
enables them to operate the customer process at the same performance level as the
customer. OPs do not incur great costs of intensive training of the frontline staff in
advanced operational skills but usually only to update the former customers’
operators in terms of technical experience with machines of the OPs and ensure
that they have the right skills to provide service. The training and development of
technical expertise and advanced service skills are provided by on-the-job training.
Furthermore, training in behavioural competencies and appropriate customer-
focused attitudes does not seem to be important. Previous customer employees
240 J. Ebeling et al.

already have adequate communication skills for dealing with their former
employers.
OPs typically set up a separate service company as a new service organization
which is often a legally independent company to provide operational services. The
organizational separation from the main company reduces internal barriers with
regard to taking over the operation of processes that are not related to own
products but to products from third party companies. Therefore, integrating out-
sourcing services into the existing product and/or service division seems less
appropriate for OPs. Keeping close ties to the main company is important, for
example, in terms of spare parts replacements within an outsourcing partnership.
However, more important to the intra-firm collaborative effort is the inter-firm
collaboration of the new service company with existing customers, banks and
insurance companies. An extensive collaboration with customers aids in recruiting
the necessary employees and clarifies the degree to which the newly formulated
strategy aligns with the customers’ underlying needs. A close collaboration with
banks and insurance companies is important to deal with the financial risks of
operating customers processes. Since, OPs operate as pure service companies, they
put great emphasis on customer proximity of the service organization. During the
formulation and implementation of the service strategy, companies decentralize
decision-making-authority.
Table 14.1 summarizes the explained alignment between external environment,
service strategy and organizational design elements.

14.4 Managerial Implications

Instead of discussing the question what position manufacturing firms should

occupy on the transition line between manufacturing and providing services, four
specific service strategies were presented. The service strategies provide an
attractive opportunity for product-oriented firms to reconsider and adapt their
position in the product-service-continuum.
However, to exploit the opportunities of services successfully, manufacturing
firms have to establish the appropriate alignment between the external environ-
ment, service strategy, and factors of organizational design. This means that there
is no one way of positioning on the transition line. Mangers have to be aware that
for (re-) defining their service strategy a sound knowledge of the external envi-
ronment is needed, which is especially true for knowing the requirements of their
customers. Since, shifting their service strategy and offering new services might
not address the need of all customers. However, satisfying the needs of all cus-
tomers to the full extend could result in an unmanageable complexity, which
would not deliver the expected results. To avoid this, a clear picture of which
markets and customers should be addressed in the future has to be developed.
Consequently, one key factor for success appears to be a managerial orientation
toward markets.
Table 14.1 Service strategies based on external environments and their organizational implications
14

After-sales service provider Customer support provider Development partner Outsourcing partner
External environment Cluster 1 Cluster 2 Cluster 4 Cluster 3
Customer requirements Proper functioning of the Main purchasing attributes are Innovative solutions for their Reducing the initial investment;
product product performance and operating processes high level of operational
reliability; efficiency and services
effectiveness of the product
in the customer processes
Competitive intensity Competitive equality with Technical superiority creates Competitive equality with High price competition
products, erosion of part of the differentiation products; and after-sales
product margins service; erosion of product
and service margins;
sustainable competitive
advantages come from
designing individual
solutions for customer
process
Strategies for Developing the Service Business

Service strategy
Service offering Spare parts, repair, Comprehensive preventive
inspection, hotline, maintenance, advanced
basic training training, process
optimization, repair,
inspection, hotline and spare
parts
Value proposition Provide products at Provide highly reliable products Customers benefit directly from Combining cost leadership,
attractive prices; and increase customer
guarantee proper efficiency and effectiveness
product functioning through services; tailored
through after-sales services to satisfy the
services individual customers;
guarantee a fixed price for
individual service package
Design and construction Mainly operational services;
services
supplier development
competencies; Co-
production of competencies
between customer and
supplier
other kinds of services are
not important; customized
service are not important
medium degree of product
and service differentiation;
value proposition is based
on reducing the customer’s
capital employed and
managing the corresponding
risks
241

(continued)
Table 14.1 (continued)
242

After-sales service provider Customer support provider Development partner Outsourcing partner
Pricing Unbundling pricing Low intensity of price Price bundling of product and High price competition, price
approach enables discounting service discounting is regularly used
customer to choose
service; use of
discounting
Organizational design
elements
Human resource
management
Personnel recruitment Strong foundation of Strong foundation of technical Strong foundation of research Frontline employees with good
technical expertise; expertise; behavioural and development expertise; expertise in operating
ability and motivation to competencies and customer- graduate engineers from processes recruit customers’
learn continuously focused attitude; risk- technical universities; employees when taking over
assessment skills managing engineers from the operation of customer
professional engineering processes
consultancies or other
manufacturing companies
Personnel training Formal classroom training; Initial training program, on-the- Trainee program for graduate Do not incur great costs of
on-the-job training job training; mentoring engineers; on-the-job intensive training of the
program training frontline staff in advanced
operational skills; on-the-job
training
Corporate culture
Values with respect to Services as an essential part Customization and flexibility Being service provider for Convincing frontline staff to be
providing services of total value creation are the enabler of value customers; Co-innovating a ‘‘pure service provider’’
creation solutions is main source of that delivers the output of
value creation the operating process to the
customer; focus on
standardized services
J. Ebeling et al.

(continued)
Table 14.1 (continued)
14

After-sales service provider Customer support provider Development partner Outsourcing partner
Role of employees Serve a reliable trouble- Deliver highly customized Serve as a trusted advisor, Reliable operators and boundary
shooter; deliver services; serve as develop a learning spanners between
standardized service performance enabler relationship; lead standardized services and
collaborative innovation complex service delivery
performance
Organizational
structure
Integration of business After-sales services as a Creation of a separate service Separate R&D team Separate service organization
unit responsibility cost centre within the division which is often legally
product unit independent
Inter-firm collaboration Initial internal resource Initial internal resource from the Initial resources from the R&D Close collaboration with banks
flow from production product unit, no shared function, internal expert and insurance companies
function, shared resources on an on-going knowledge network
resources between basis
service and production
Strategies for Developing the Service Business

function
Global service Service agents Infrastructure of local service Centralized service Great emphasize on customer-
infrastructure organizations; essential infrastructure because R&D proximity; decentralized
investment that will not team for external customers decision making
generate revenues is located at headquarters
immediately; diffuse
knowledge across the local
service organizations;
explicit decision on
standardization of services
243
244 J. Ebeling et al.

The successful implementation of the four service strategies requires different

types of adaptation of organizational design elements. Identifying the alignment of
service strategy and organizational factors with market characteristics seem to
present both major challenges and the primary implications for managers.
Table 14.1 could serve as a managerial navigator, indicating the consistent config-
uration of factors of organizational design. Depending on an organization’s indi-
vidual service strategy, managers can use the table as a checklist for the alignment of
the service strategy with the actual environmental and organizational factors.
For example, a Customer Support Provider strategy benefits from a service-
oriented culture which is characterized by values that emphasize customization
and flexibility and employees that live and deliver these values to support cus-
tomers with tailored services to optimize effectiveness and efficiency in using their
products. Delivering such services leads to a high degree of interaction with the
customer during tailoring. This, in turn, requires the necessary skills including
technical expertise, behavioural competencies and customer-focused attitude as
well as risk-assessment skills, and so on. In Contrast, a Development Partner
service strategy should be backed up by strong R&D competencies, an organisa-
tional structure close to the central R&D division that supports the development
and delivery of R&D-oriented services and an incentive system that encourages
the service employees to provide R&D-oriented services not to internal—as usual
R&D units do—but directly to external customers.

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Harvard Business Review, 77(5), 133–141.
Chapter 15
Sourcing and Supplier Relationships
for Servitized Manufacturers

Nicola Saccani and Marco Perona

Abstract Servitization implies that manufacturers make decisions about the make
or buy of the capabilities required to develop and deliver the service elements of
their offerings, and about how to shape and manage supplier relationships. These
two decisions are the object of this chapter. Make or buy approaches for devel-
oping capabilities by manufacturers are addressed through a framework matching
three options (pure make, pure buy and mixed) with four classes of services
included in the offering (supporting the sales, the after sales, the design phase and
taking over customers’ activities). Four profiles are pointed out: After-sales ser-
vices seller, After-sales offering integrator, Life-cycle solution seller, Life-cycle
solution orchestrator. When an integrator or orchestrator approach is pursued, in
particular, managing supplier relationships becomes critical, since large portions
of the offer are (developed and) delivered resorting to external suppliers. The
characteristics of supplier relationships for service delivery are described
according to five dimensions (Information Exchange; Operational linkages; Legal
Bonds; Relationship-specific adaptations; Cooperative Norms). Against a ‘‘one
best way’’ view of supplier relationship management, the characteristics of
the relationship should be devised considering the service elements object of the
relationship. Through these conceptual lenses, the chapter offers support to man-
agers facing the servitization journey.

N. Saccani (&)  M. Perona

Department of Industrial and Mechanical Engineering, Supply Chain and Service
Management Research Laboratory, University of Brescia, via Branze 38,
25123 Brescia, Italy
e-mail: nicola.saccani@unibs.it
M. Perona
e-mail: marco.perona@unibs.it

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_15, 247

 Springer International Publishing Switzerland 2014
248 N. Saccani and M. Perona

15.1 Introduction

Several manufacturing companies are shifting from being pure manufacturers to

offering solutions and services, often delivered through their products or in
association with them (Neely 2008). The transition entails the breadth and com-
plexity of the product and service offer to expand. Therefore, servitization requires
the development of service capabilities, which are away from the consolidated
capabilities of manufacturers (Gebauer et al. 2005; Kowalkowski et al. 2011a).
Manufacturers, indeed, have consolidated technical and product-oriented capa-
bilities, but are generally weak in service-orientated ones (Neu and Brown 2005).
Broadly speaking, researchers agree that a strategic, cultural and organisational
shift is required to manufacturing companies undertaking the route to servitization
(Oliva and Kallenberg 2003).
A particularly important issue concerns the level of vertical integration and the
supply chain organisational arrangements for the delivery of the services included
in the offer by manufacturers. Successful companies such as Rolls Royce or Dell
have made moves downstream the value chain in the sales and after-sales business
(Wise and Baumgartner 1999): however, insourcing the service provision (‘‘going
downstream’’ the supply chain) presents costs and risks that have to be carefully
evaluated. On the other hand, resorting to a network of partners and suppliers leads
to the risk of competition within the network and knowledge spillovers. The
chapter explores the make or buy choice and the supplier relationships for the
provision of services in servitized contexts, moving from the findings from over 30
case studies (Saccani et al. 2012; Gebauer et al. 2013; Paiola et al. 2013).

15.2 Make or Buy of Service Development and Delivery

by Servitized Manufacturers

15.2.1 ‘‘Make or Buy’’: Why and Why Not

Manufacturers often develop integrated offerings coupling product and services,

by adding (and integrating) over time services to their traditional product offerings.
This can lead to the point where the service (e.g. the functionality ensured by the
product) becomes the core offering, and the product itself only a mean to enable
this functionality.
Companies willing to include service elements in their offerings are faced with
the ‘‘make or buy’’ choice concerning the development of the capabilities to design
and deliver such services to their customers. This dilemma is not new to organi-
zations operating in manufacturing businesses, but traditionally regarded the
sourcing of physical components, parts or materials. The transaction cost eco-
nomics (Williamson 1975) suggests that when undertaking a sourcing decision,
firms aim at the minimization of transaction costs, generated by activities such as
15 Sourcing and Supplier Relationships 249

search and contracting, transferring information to the supplier, monitoring and

enforcement (Williamson 1985). The choice is determined by the level of
uncertainty, asset specificity and frequency of transactions. The resource-based
view of the firm (Penrose 1959; Wernerfelt 1984), instead, posit that make or buy
choices depend on the nature of the resources required, and on whether these are
suitable to build upon a competitive advantage. This can be assessed according to
some attributes of the resources, such as value, rarity, imitability and substitut-
ability (Barney 1991). Competitive advantage, indeed, cannot be purchased on the
open market, but stems from the valuable, inimitable resources already controlled
by a firm. Operations strategy studies, moreover, highlighted the link between
sourcing decisions and competitive priorities. Kroes and Ghosh (2010) point out
19 outsourcing drivers related to the five competitive priorities of cost, time,
innovativeness, quality and flexibility.
As for servitization and integrated solutions, Wise and Baumgartner (1999)
promote the vertical integration of ‘‘downstream’’ services (from distribution to
support, to the offer of integrated solutions) as a way to capture valuable revenue
sources, and to build long-term relationships with customers. Mathieu (2001)
views the service development options in a continuum ranging from internaliza-
tion, to partnering and eventually to outsourcing. Davies et al. (2007) conceptu-
alize the make or buy choice with the roles of the ‘‘system seller’’, that focus on
the internal development of capabilities and the ‘‘system integrator’’, that integrate
capabilities developed externally with those developed internally. Kowalkowski
et al. (2011b) consider the internal, external as well as the hybrid option (i.e. core
service activities are performed both in-house and externally) to develop and
deliver solutions. Research focusing on after-sales product support identified some
factors deemed to influence the make or buy decisions of manufacturers (Saccani
et al. 2007). Among these drivers are: the business attractiveness of the services,
the service volumes, the existing sales distribution channels, the product substi-
tutability, the cost of creating direct distribution channels, and the required degree
of control over customer support quality. In addition, the range and characteristics
of the service elements offered by servitized manufacturers affect the make or buy
choice. For instance, when service complexity and customization increase, as
typical of integrated solutions (Windhal et al. 2004), new capabilities that go
beyond the scope of what can be developed internally by the manufacturer may be
required. Conversely, complex services may be key differentiators, that companies
prefer to develop internally (Kowalkowski et al. 2011b).
In summary, companies developing capabilities internally (make option) are in
control of all service and product elements of their offering. This is beneficial for
the integration of all the components, since it limits inter-organizational co-ordi-
nation efforts. Moreover, it contributes to creating a competitive advantage for the
firm (Nordin 2008). However, internal development extends the number of
capabilities, making it more difficult for the company to specialize, and/or may be
achieved at higher costs compared to sourcing from the market.
The external development (buy option), on the other hand, is faster than the
internal development and reduces fixed costs: this is a very important aspect since
250 N. Saccani and M. Perona

Table 15.1 Advantages of the ‘‘make’’, ‘‘buy’’ and ‘‘mixed’’ options

Make Buy
Description Capabilities are developed Capabilities and services
internally. Services are are provided by
provided (mostly) with external suppliers.
internal resources The manufacturers
integrates these
capabilities and
services, governing
the whole offering
Advantages Complete control over the Quick development of the
offerings offering
Preserving competitive Cutting fixed costs
advantage
Access to superior
resources by
specialized suppliers
Mixed
Capabilities are
developed jointly.
Services are offered
by the manufacturer
and/or service
suppliers
Manufacturers keep
control and know-
ledge of the service
offering
Limited fixed costs
(compared to
‘‘make’’)
Partnering with
specialized suppliers
to develop superior
offerings

companies are uncertain about the outcome of the move towards solutions (Davies
et al. 2007; Neely 2008). Moreover, relying on the external development of
capabilities enables companies to focus on their core competence, and take
advantage of the superior resources offered by selected external specialists for
developing and providing the services. However, the ‘‘buy’’ option entails the cost
of co-ordination and a looser control over the services offered with the risk of
opportunistic behaviour by business partners.
A third option is a mixed, or hybrid, capability development approach. In this
case, capabilities are developed jointly with suppliers or customers, thanks to
collaborations in service development or operational activities, or through the
exchange of knowledge (Paiola et al. 2013). The services are then sold and
delivered jointly or by one of the parties.
The advantages of the ‘‘make’’, ‘‘buy’’ and ‘‘mixed’’ options for servitized
manufacturers are summarized in Table 15.1.

15.2.2 Matching Make or Buy Choices and Service Offerings

Figure 15.1 links the service elements part of the offering of servitized manu-
facturers to the make or buy choices. The order of the service elements in
Fig. 15.1, follows the typical cumulative evolution of the service offer in serviti-
zation, where manufacturers progressively add services to their product offerings
(Oliva and Kallenberg 2003).
15 Sourcing and Supplier Relationships 251

Service Supporting Supporting Supporting Outsourcing

elements the sales the after- the pre - services
Make-or- phase sales phase sales phase
buy options

Make

Mixed devel-
opment

Buy

Fig. 15.1 The space of ‘‘make or buy’’ choices and service offerings (adapted from Paiola et al.
2013)

Service elements in Fig. 15.1 have been classified in a straightforward way:

• Services supporting the sales phase are meant to augment the product offering,
through additional information, documentation, and to allow simplified forms
of payment (financial services). Financial services can also enable non-own-
ership ways of transferring the product to customers, e.g. through rental or pay-
per-use agreements.
• After-sales services are aimed to support the installed base. Basic services such
as reactive maintenance or spare parts supply allow to re-establish the product
functionality, are reactive and can be provided in a transactional way to cus-
tomers. Advanced after-sales services, such as product support contracts, pre-
ventive maintenance, remote and condition-based monitoring are instead
proactive, aimed to avoid product breakdowns, and relational in nature, relying
on medium-long term agreements.
• Design and construction services support the pre-sales activities, and consist of
customizing the product and the service offer to match individual customer
needs. They may also involve customer activities, through e.g. consultancy
services that improve the customer’s production processes.
• Finally, outsourcing services correspond to the step in which the manufacturer
takes over customer-related activities, such as operating and maintaining the
product. This can be linked to result-oriented contractual agreements, such as
pay-per-output or pay-per-performance.
The space depicted in Fig. 15.1 allows to describe the approaches adopted by
manufacturers for the development and delivery of service elements within their
offerings An empirical research described in Paiola et al. (2013), identified four
predominant strategic profiles of servitized manufacturers, as reported in Fig. 15.2.
The research was based on 24 case studies of capital goods companies with a
turnover from services between 10 and 67 % (27 % on average). The four profiles
252 N. Saccani and M. Perona

In-house (1) After-sales services (3) Life-cycle solution

(make) seller seller
Make-or-Buy
Approach Integrator
(2) After-sales offering (3) Life-cycle solution
(mixed or
integrator orchestrator
buy)
After-sales Lifecycle / Customer
Service offering extension

Fig. 15.2 A taxonomy of make or buy and service focus combinations (based on Paiola et al.
2013)

summarize the main approaches to the development of a servitized offering. On the

make or buy dimension, the analysed manufacturers adopted an in-house devel-
opment (make) approach, or rather an integrator one, combining capabilities and
resources developed externally or in a mixed fashion. On the service elements
dimension, manufacturers tend to adopt either a narrow perspective, focusing on
after-sales services, or a life-cycle perspective, extending towards customer
activities. The four profiles are described in Fig. 15.2.

15.2.2.1 After-Sales Service Sellers

These companies concentrate on service elements in the sales and after-sales

phase. They resort to the internal development of capabilities and internal service
provision. The service components offered are aimed to:
• Augment the service offering (e.g. documentation, information, private website
areas)
• Ensure the functionality of the product (basic services for the installed base
such as ‘‘hotline’’, diagnosis, spare parts, repair and inspection services)
Only rarely these companies provide advanced services for the after-sales
phase, aimed at preventing product failures (e.g. retrofitting, remote services,
condition monitoring services or process optimization).

15.2.2.2 After-Sales Offering Integrators

These companies emphasize advanced services for the installed base: they aim at
improving the efficiency of their products in the customer processes through the
prevention of failures. The term ‘‘integrators’’ indicates that these companies
match capabilities provided externally, or developed jointly, with internal capa-
bilities in order to deliver the service components to customers. Technical
expertise in providing repair and maintenance services and a customer-oriented
15 Sourcing and Supplier Relationships 253

attitude are developed mainly internally, while external provision of services is

often sought, by partnering with distributors and specialized service providers.
Therefore, the service components offered are aimed to:
• Augment the service offering, also providing financial services that support
‘‘non-ownership’’ product offerings (rental, pay-per-use, …) by partnering with
specialized suppliers of these services.
• Ensure the functionality of the product (basic services for the installed base
such as ‘‘hotline’’, diagnosis, spare parts, repair and inspection services).
• Optimizing the efficiency of products in the customer processes through the
prevention of failures, with maintenance contracts, remote control and diag-
nosis, condition-based monitoring and so forth.

15.2.2.3 Life-Cycle Solution Sellers

These companies cover the whole product life-cycle by offering services across the
pre-sales, sales and after-sales phase. They emphasize the internal development of
capabilities without resorting to external partners but for exceptions (such as
financial services, or the offer of after-sales services in geographic areas with
dispersed installed base).
They are characterized by the provision of services supporting the pre-sales
phase, developed internally thanks to the intimate technical knowledge of the
products: R&D-services, such as design & construction (Oliva and Kallenberg
2003). This can lead to the entire design of a customer’s production process, in
which the offer goes beyond the production equipment and services necessary for
maintaining the equipment, and addresses the customer’s need for increased effi-
ciency and effectiveness of the whole production process.
Therefore, the service components offered are aimed to:
• Augment the service offering.
• Ensure the functionality of the product through basic services and optimize it
with services aimed at the prevention of failures (maintenance contracts,
remote control and diagnosis, condition-based monitoring and so forth).
• Extend services towards customer activities, in order to optimize the produc-
tion processes carried out by customers with the products supplied.

15.2.2.4 Life-Cycle Solution Orchestrators

These companies cover not only the whole product life-cycle (i.e. services the for
pre-sales, sales and after-sales phases), but move forward to taking over full
responsibility for a customer’s process, through outsourcing services (Oliva and
Kallenberg 2003). For instance, such companies take over the responsibility for
operating their products at the customer’s. The change in responsibility for
254 N. Saccani and M. Perona

outsourcing services leads to ‘‘performance offering’’ (Windahl and Lakemond

2010), where customers pay for the performance reached by the processes rather than
for the products and services provided by the supplier. Performance offerings change
the revenue model, making financial services necessary. Finally, increasing the
number of service components embraced by the solution requires integration ser-
vices (Davies 2004). These include customizing activities to make all the product
and service elements fit together, reconfigured according to the customer’s needs. To
define such companies, the term ‘‘orchestrators’’ is used (Christopher et al. 2004).
Orchestrators focus on aggregating and integrating service elements that are (almost
all) sourced externally, and on changing the configurations of the services according
to the specific requirements of the customer. Capabilities for services in the design
and construction phases, however, are kept partially internal since there is an overlap
between the competences necessary to supply integration services (customization)
and services supporting the pre-sales phase (design and construction).
In this case, then, the orchestrator operates in order deploy a full range of
services through its partners, aimed to:
• Augment the service offering
• Provide basic and advanced services for the installed base that ensure and
optimize the functionality of the product
• Support customer activities (consulting/improvement/optimization of the cus-
tomer’s production processes)
• Take over the responsibility for the product operation and maintenance in field,
moving towards performance-based contracts.
The taxonomy described above, although focusing on the sole service com-
ponents of the offering, refines the classical distinction between ‘‘System Seller’’
and ‘‘System Integrator’’ (Davies et al. 2007), by considering two dimensions:
• First, the width of the service portfolio: the empirical research showed that
companies tend to be in one of the two stages. In a first stage, companies limit
the offer to services supporting the sales and after-sales phases (after-sales
sellers and after-sales offerings integrators). In the second stage, they extend
the offer towards the whole product lifecycle, including R&D and construction
services, and eventually outsourcing services.
• Second, the way capabilities are sourced. Some manufacturers follow an in-
house development, while others resort to an integrator one.
Matching the two dimensions, we can observe that in principle there is no a
superior choice (make vs. buy/mixed) for any of the two stages. The companies
object of the empirical research have a profitable service business, independently
of the profile adopted. However, companies with the integrator approach are able
to offer a wider service portfolio compared to the correspondent ‘‘seller’’ (make)
profiles (moving into advanced support services in the ‘‘after-sales’’ profile, and
into the outsourcing business in the ‘‘life-cycle’’ profile) and can easily develop a
multivendor approach (Davies et al. 2006): this way they show a greater ability to
satisfy customer needs, especially in complex businesses.
15 Sourcing and Supplier Relationships 255

15.3 Shaping Supplier Relationships for Service Provision

by Servitized Manufacturers

15.3.1 Analysing Supplier Relationships in Servitization

When manufacturers resort to external suppliers to develop and deliver the service
elements in their offerings, the need arises of managing relationships with the
suppliers involved in the service provision (Cohen et al. 2006; Johnson and Mena
2008). This is typical of the After-sales offering integrator and the Life-cycle
Solution Orchestrator profiles described in the previous section. Several notable
examples of firms resorting to an external network to deliver complex solutions or
product service systems exist, such as Alfa Laval, Alstom Transport, Atkins, Cable
and Wireless, General Electric, GF AgieCharmilles, Ericsson Operating Systems,
IBM, John Deere, Rolls Royce, Siemens, Voith Industrial Services (Davies et al.
2006; Gebauer et al. 2013).
Buyer-supplier relationships are acknowledged to be critical in order to retain
the value coming from end customer interactions, and to achieve differentiation
(Nordin 2008). Actually, suppliers are key assets for the manufacturer to fully
achieve the benefits of servitization. With the word of Martinez et al. (2010,
p. 459): ‘‘When a company is transforming to become a provider of an integrated
offering, a different degree of insight into the problems and applications of cus-
tomers is necessary, which calls for a greater degree of cooperation between a
provider and its supporting network’’.
Buyer-supplier relationships in servitized environments are more complex
compared to the traditional product-related upstream relationships (Lockett et al.
2011). Moreover, recent studies highlighted the difficulties in managing such
relationships with a thorough partnering approach, for the fear by manufacturers to
generate knowledge spillovers. However, when manufacturers exploit their bar-
gaining power to transfer the risk connected to servitized offerings to suppliers
(e.g. long-term, fixed-price maintenance contracts) and when information sharing
is limited, suppliers are not put in the best conditions to deliver effective services,
and/or this is done at the expenses of their internal efficiency (Lockett et al. 2011;
Bastl et al. 2012).

15.3.2 Setting Supplier Relationships by Servitized

Manufacturers

In order to describe the characteristics of buyer-supplier relationships in servitized

contexts, we resort to a framework by Cannon and Perrault (1999), which analyses
buyer-supplier relationships under different dimensions. Such dimensions ‘‘reflect
the behaviours and expectations of behaviour in a particular buyer-seller rela-
tionship’’ (Cannon and Perrault 1999, p. 441) and are described in Table 15.2.
256 N. Saccani and M. Perona

Table 15.2 Dimensions describing a buyer-supplier relationship (from Cannon and Perreault
1999)
Dimension Description
Information exchange Expectations of open sharing of information among parties. In practice,
this might include involving the other party in the early stages of
product design, opening books and sharing cost information,
discussing future product development plans, or jointly providing
supply and demand forecasts
Operational linkages Degree to which the systems, procedures, and routines of the buying
and selling organizations have been linked to facilitate operations.
At one extreme, the two organizations may operate independently
and at ‘‘arm’s length,’’ where there are not interfirm routines and
systems. At the other extreme, intercoupled systems tend to specify
roles implicitly or explicitly for both parties in a relationship
Legal bonds Detailed and binding contractual agreements that specify the
obligations and roles of both parties in the relationship. Such legal
bonds go beyond the basic obligations and protections that regulate
commercial exchange whether the parties sign a formal document
or not
Relationship specific Investments in adaptations to process, product, or procedures specific
adaptations to the needs or capabilities of an exchange partner. Adaptive
(by the buyer or the behaviour focuses on the individual behaviour specific to the other
supplier) party in the relationship
Cooperative norms Expectations the two exchanging parties have about working together
to achieve mutual and individual goals jointly. Cooperative norms
do not imply one party’s acquiescence to another’s needs but rather
that both parties behave in a manner that suggests they understand
that they must work together to be successful

General considerations can be made about the characteristics of buyer-supplier

relationship in servitized environments.
Reducing uncertainty, information exchange should enhance effective decision
making, for instance in demand forecasting, capacity planning, etc. This dimension
is more critical in servitized contexts than in traditional ones (Johnson and Mena
2008; Lockett et al. 2011). Bidirectional information exchange allows for greater
responsiveness and capacity utilisation (e.g. in product support services), thanks to
improved forecasting activities, resource and inventory planning (e.g. workforce
and spare parts). Moreover, feedbacks from the field improve warranty manage-
ment activities and contribute to product redesign at the manufacturer’s side. In
addition, information exchange generates a richer knowledge of the final customer
and supports marketing activities and the identification and development of new
services.
Operational linkages smooth information exchange and increase efficiency
through Information Technology connections, e.g. automated systems to exchange
schedules, spare parts requests et cetera. Operational linkages also increase the
switching costs for parties willing to abandon the relationship (Bastl et al. 2012).
Legal bonds. In servitization contexts greater reliance upon relational gover-
nance is expected instead of formalised contracts, due to the greater uncertainty
15 Sourcing and Supplier Relationships 257

and interdependency of the exchange content (Bastl et al. 2012). Legal bonds are
thus important to enforce ‘‘standard’’ services such as the delivery of basic after-
sales services by a third-party supplier, while they may be ineffective where the
content of the exchange is very customized and situation-specific, such as in
design and construction services.
Cooperative norms. The interdependent nature of servitized offerings requires
cooperation and trust between the parties (Bastl et al. 2012), the development of
integration capabilities by the buyer, and a shared effort to preserve the
relationship.
Relationship-specific adaptations. Given the greater interdependence within a
servitization context, greater reciprocal adaptations by the buyer and the supplier
can be expected (Bastl et al. 2012). Process, procedure or tool adaptations that
have little value outside the relationship may be required. An example is the
adoption of specific software or equipment to deliver support services.
An empirical research, however, suggests that besides these general consider-
ations, there is no just ‘‘one way’’ to manage buyer-supplier relationships by
servitized manufacturers, but rather that the service element object of the rela-
tionship influences the relationship characteristics. Seven buyer-supplier rela-
tionships in servitized contexts have been analysed (preliminary results of the
research are reported in Saccani et al. 2012). The cases are described in
Table 15.3. Companies were selected on conceptual grounds to allow for greater
representativeness. More specifically, we analysed buyers operating in different
industries and carrying relationships with different suppliers to deliver different
types of services. Moreover, selected manufacturers are acknowledged as top
performers in their industries and with well-known brands. The selected suppliers,
in turn, are highly representative, in terms of size, service volumes, geographic
coverage and the number of different buyers served. In addition, each supplier was
involved in a long-term (at least 5 years) relationship with the buyer.
The empirical cases showed that moving from basic after-sales services to
advanced services and to services entering the customer activities, the technical
information needed by the supplier should be coupled with an increasing degree of
knowledge of the customer, of its business processes, and ultimately with a
thorough knowledge of the whole product and service offering. This entails
increased levels of information exchange, relationship-specific adaptations and
cooperative norms. On the other hand, traditional and standard services are gen-
erally linked with buyer-supplier relationships of a more transactional nature.
An illustration of this concept is provided in Fig. 15.3. Business relationships
are represented as a continuum ranging from two extremes (based on the
dimensions in Table 15.2). On one end, there is the so-called Open Market
Negotiation, which is characterized by arm’s length relationships; on the other
hand Partnerships, which are ongoing relationships involving two organizations in
the long term, and are characterized by commitment, mutual sharing of risks, and
rewards (Ellram 1995). In particular, one direction of integration focuses on
operational aspects, such as process linkages and information exchange, enforced
or not by relational adaptations (i.e. asset specificity) and influenced by the
258 N. Saccani and M. Perona

Table 15.3 The seven analysed buyer-supplier relationships in servitized contexts

Buyer company (business) Supplier company (service offered) Type of relationship
Imaging and printing 1. Micro company (technical Arm’s length
industry, large company, assistance services)
subsidiary of a large Asian 2. Small company (technical Cooperation (efficiency-
multinational assistance services; integration oriented)
services for fiscal printers)
3. Small company (technical Partnership
assistance services; integration
services for fiscal printers;
certified printing and additional
services for photographers and
artists on behalf of the
manufacturer)
Professional washing 4. Small company (technical Cooperation (efficiency-
appliances, medium-sized support services, maintenance oriented)
company, subsidiary of a contracts)
large European company 5. Small company (design and Partnership
construction services, training
programs and full-risk
maintenance contracts)
Professional appliances for 6. Micro company (installation, Cooperation (efficiency-
the restaurant industry, break-fix services, maintenance oriented)
Italian medium-sized contracts)
company
Consumer Electronics and IT, 7. Large company (customer care Cooperation
large company, subsidiary and contact centre services) (effectiveness-oriented)
of a large Asian
multinational

bargaining power of the parties. A second direction, instead, focuses on the

development of trust and commitment, as a consequence of sharing strategic
planning (Saccani and Perona 2007), to be accomplished through relational
investments and cooperative norms. Legal bonds have the role to closely link the
buyer and the supplier. While the former integration direction has a short-medium
term perspective, the latter has a long-term orientation. Partnership are needed to
achieve the benefits of servitization on all sides (manufacturer, service supplier,
final customer) when services are complex, customized and require intimate
knowledge of the whole product+service offerings and of the customers. This is
typical of design and construction services, and of outsourcing services that enable
pay-per-performance business models.
Open-market negotiation or efficiency-oriented relationships may be suitable
for basic services, which are transactional in nature, where knowledge exchange
can be limited to very specific areas (e.g. financial services or reactive technical
services) and where information exchange and operational linkages are a mean to
increase the efficiency and speed of the process. Instead, services with a more
relational content, which entail the usage of relevant product and/or customer
15 Sourcing and Supplier Relationships 259

Open market negotiation Basic,

•Basic information exchange transactional
•Almost no operational linkages sales and after-
sales services
Efficiency - oriented relationship
•Information exchange
•Operational linkages
•Supplier specific adaptation
•No cooperative norms

Effectivess – oriented relationship

•Information exchange
•Cooperative norms Customised,
•Mutual relationship specific relational
adaptation services
•Long term orientation entering into
customer
activities
Partnership

Fig. 15.3 Linking buyer-supplier relationship types with service elements in servitized contexts

information drive towards greater cooperative norms by the parties and relational
adaptations. These allow to build long-term partnership and to orientate the
relationship towards providing solutions to the final customer and achieving
customer loyalty in the long run.

15.4 Managerial Implications

Manufacturers undergoing servitization face critical decisions about the make or

buy of the capabilities to develop and deliver the service elements of their offer-
ings, and about the way supplier relationships have to be managed.
Concerning the former decision, different approaches can be pursued in
aligning the development and delivery of service offerings with the development
of capabilities. The four approaches presented in the taxonomy of Fig. 15.2 offer
viable alternatives for managers attempting to navigate the changeover from
products to services. External development of capabilities for basic services is
quite uncommon in the early stages of servitization. Such services require capa-
bilities generally possessed by a manufacturer, drive profitability and influence the
reputation of the company. Extending the service portfolio towards life-cycle
oriented services shifts the focus of the company away from manufacturing and
core competences. A ‘‘make’’ approach should be pursued, thus, only when the
company has the resources to face such an effort, and when an internal develop-
ment is critical to build and preserve a competitive advantage. External
260 N. Saccani and M. Perona

development of capabilities, instead, provides the company with the opportunity to

keep the organization flexible (by reducing fixed costs), saving time and avoiding
risks, allowing to specialize all the more on particular capabilities. On the other
hand, managers should assess carefully whether they are able to integrate and
orchestrate external partners.
Companies can easily become sellers of after-sales services if they are able to
build capabilities internally in order to expand their service offering (distributors
and installation specialists). When they decide to move further in the customer
activities, they may either: (1) continue to rely on their ability to develop the
capabilities internally and maintain the selling approach (selling life-cycle solu-
tions); (2) expand their partnering competencies, and move away from the selling
to the integrated approach (integrating after-sales offerings). However, if they rely
on external development of capabilities, the external partners could marginalize
the companies. Finally, the orchestrator approach requires strong integrating
capabilities and a thorough knowledge of the whole offering. The orchestrator
approach is viable also when most of the service elements of the offering have
become commodities, and when only coordinating and orchestrating a value-
creating network of external partners may result in strategic differentiation.
In practice the external approach (either ‘‘full buy’’ or mixed) is quite common,
as exemplified by notable cases, since it may be beyond the capabilities of indi-
vidual manufacturing firms, or not make economic sense, to master internally all
the activities needed to provide services (Gebauer et al. 2013). Several servitized
companies come from a manufacturing background: for this very reason they may
not possess the competence related to customer services or the customer orien-
tation typical of service organizations, and they are prone to outsource the
development and delivery of some services. In this case, there is no ‘‘one best
way’’ to manage supplier relationships, but the appropriate level of integration
depends upon the characteristics of the services included in the offerings.
Supplier relationships may be managed at arm’s length (open market negotia-
tion) in the case the role of services is ancillary to the physical product and a
‘‘necessary evil’’. If the service offering is oriented to support the product func-
tioning through basic services, with a revenue generation potential, instead, buyer-
supplier relationships should be characterized by information exchange (on tech-
nical updates, spare parts orders, and data relevant to the interventions performed)
and by operational linkages, this way increasing the efficiency of operations,
directly impacting the cost and margins of the provision of support services (effi-
ciency-oriented relationship). If the servitized company offering puts great
emphasis on supporting the customer rather than the product, then, the buyer-
supplier relationships should be characterized by an intense information exchange,
cooperatives norms and legal bonds in order to align the objectives of the supply
chain actors towards customer satisfaction and loyalty (effectiveness-oriented
relationship). Finally, if the servitized company tend to provide a wide set of
advanced services, with the aim of providing comprehensive solutions to customers,
the company should rely on partnerships with selected suppliers, in order to craft
long-term business relationships with the customers and competitive advantage.
15 Sourcing and Supplier Relationships 261

Buyer-supplier relationships, in this case, are long-term and entail an intense

information exchange, cooperatives norms and trust, operational linkages, legal
bonds and relational specific adaptations.

Acknowledgments This chapter has been inspired by the activity of the ASAP Service Man-
agement Forum (www.asapsmf.org), a community where scholars and practitioners from Italian
universities and several leading manufacturing companies, consulting firms and service providers,
collaborate in developing research projects and share findings in the product-services manage-
ment field. The authors are grateful to Heiko Gebauer, Marco Paiola, Mario Rapaccini and
Filippo Visintin for their contribution to the research described in this chapter.

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Chapter 16
Servitization and Process Interfaces

Martin Spring and Juliana Santos

Abstract We examine servitization in terms of process interfaces. Concepts are

drawn from modularity theory to examine how the concept of interfaces can be
applied to service settings. Based on this, we examine how process interfaces
change as we move from a basic product sale model to a result-oriented PSS. It is
argued that close attention to process interfaces is an important way to attenuate
complexity that may arise from servitization.

16.1 Introduction

Servitization takes many forms. But common to all of them is that, to a greater or
lesser extent, the relationship with the customer changes, as compared to a ‘base
case’ relationship of a manufacturer providing a physical artefact in exchange for a
payment. Servitization also changes some of the links between activities within the
provider organization or organizations: it may require new activities to be carried
out by the manufacturer, or by third-party firms providing complementary ele-
ments, and the establishment of new inter-connections between existing activities
within the manufacturing firm. It may also increase the number of points of contact
between provider(s) and customer, as well as change the nature of those contacts.
The purpose of this chapter is to examine these changing connections and
contacts within and between firms, in a servitization context. Our starting point is

M. Spring (&)  J. Santos

Department of Management Science, Lancaster University Management
School, Lancaster LA1 4YX, UK
e-mail: m.spring@lancaster.ac.uk
J. Santos
e-mail: j.bonomisantos@lancaster.ac.uk
J. Santos
Departmento de Administração, Centro Universitário da FEI, São Paulo, Brasil

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_16, 263

 Springer International Publishing Switzerland 2014
264 M. Spring and J. Santos

the fundamental operations management (OM) concept of the process, and the
observation that servitization tends to increase the complexity of these processes.
Following Simon (1962), we take complexity to be a function of the number
of process elements (e.g. actors, activities, tangibles) and the extent to which they
are inter-related, and examine this phenomenon in terms of its architecture. As part
of this approach, we adopt as our theoretical framework the modularity theory of
the firm, more specifically the notion of interfaces as part of that theory (Langlois
2002; Baldwin 2008). By examining interfaces in particular, we aim to comple-
ment other studies of the ‘shift to service’ that have emphasised strategy and
organizational culture (Baines et al. 2009) and the need for new capabilities
(Matthyssens et al. 2009; Ulaga and Reinartz 2011). Our essential argument is that
understanding and managing process interfaces helps to both attenuate and manage
the complexity that arises from the ‘shift to service’.

16.2 Processes in Operations Management

Processes have become the central notion of operations management. For example,
‘all operations produce products and services by changing inputs into outputs
using an ‘‘input-transformation-output’’ process’ (Slack et al. 2010: 11). Processes
can be identified at micro-level—e.g. an individual workstation such as a machine
tool—or the very macro e.g. the entire supply chain for the production of a
garment—and anything in between.
Construing what happens in a business as an operations process provides a basis
for many analytical and practical moves. At the tactical level, the output of the
process can be measured to see how it compares to customer requirements or other
benchmarks; process capacity and cycle-time can be defined and managed; par-
ticular stages of the process can be identified as targets for improvement efforts. At
a more strategic level, processes can be chosen or designed so as to be able to
excel in one operations performance criterion rather than another—for example,
low cost rather than high flexibility—in keeping with the logic of the ‘trade-off’
(DaSilveira and Slack 2001). Processes might also be subjected to pervasive
performance improvement initiatives such as ‘lean’.
The difference between manufacturing processes and service processes has
been a long-standing topic of discussion in operations management, and this is
particularly relevant here, since servitization entails the adoption of more service
processes by manufacturing firms. In OM thinking (as in marketing), services used
to be distinguished from products on the basis of factors such as ‘intangibility’
(Sasser et al. 1978). More recently, service processes have been defined as those to
which the customer provides inputs:
With services, customers are suppliers of significant inputs to the service production
process. These inputs include customer minds and selves, customer belongings and/or
customer information. (Sampson 2000: 351)
16 Servitization and Process Interfaces 265

Our concern, then, is how shifting to such processes presents new challenges to
manufacturers, and what to do about this. Sampson’s definition of service pro-
cesses is uncannily similar to Thompson’s classic description and exemplification
of so-called reciprocal interdependence between organizational ‘parts’:
A third form of interdependence can be labelled reciprocal, referring to the situation in
which the outputs of each become the inputs for the others. This is illustrated by the airline
which contains both operations and maintenance units. The production of the maintenance
unit is an input for operations, in the form of a serviceable aircraft; and the product (or by-
product) of operations is an input for maintenance, in the form of an aircraft needing
maintenance. (Thompson 1967: 55)

Reciprocal interdependence, Thompson argues, is the most difficult form of

interdependence to co-ordinate (his others being pooled interdependence and
sequential interdependence). As such, manufacturers need to find a way to mitigate
that difficulty as they shift to service, and we suggest that a focus on interfaces can
be a useful part of that endeavour.

16.3 Modularity and Interfaces

Before considering servitization, it is necessary to set out a little of the background to

the notion of interfaces. And to do that, it is necessary to outline some of the concepts
of modularity, which, in contemporary management studies, has its roots in the work
of Herbert Simon (1962, 1991 [1969]). His conception was of artifacts—humanly
sythesised objects, buildings, organizations and more—designed to achieve a pur-
pose, given a particular environment in which to perform. Although he didn’t use the
term ‘modular’, he argued that artifacts subject to dynamic environments benefit
from ‘near-decomposability’—essentially the same as modularity—whereby each
sub-system and sub-sub-system has many interdependent connections between the
elements within it, but relatively few connections with elements in other sub-
systems. Interestingly for the present discussion, although he didn’t use the term
‘modular’, he did (a little grudgingly, perhaps) introduce the term ‘interface’:
An artifact can be thought of as a meeting-point—an ‘‘interface’’ in today’s terms—
between an ‘‘inner’’ environment, the substance and organization of the artefact itself, and
an ‘‘outer’’ environment, the surroundings in which it operates. (Simon 1991 [1969]: 6)

‘Interface’ here is used to refer to the whole artifact’s meeting its environment:
by extension, we could consider each sub-system or module to be an artifact within
an artifact, and each link between these subsystems as interfaces, too.
The potential of Simon’s idea of ‘near-decomposability’ has been extensively
used in studies of modular product design (Sanchez and Mahoney 1996; Ulrich
1995), but was formalised and extended to examine the organization of tasks more
generally by Baldwin and Clark (1997, 2000). They argue that modular systems
design should involve ‘visible design rules’ and ‘hidden design parameters’. The
notion of information hiding, derived from computer science, suggests that
266 M. Spring and J. Santos

complexity can be reduced by hiding information about the detailed design and
functioning of one module (‘hidden design parameters’), from all other modules,
so as to avoid huge information processing costs arising from high levels of
interdependence. The ‘visible design rules’, then consist of:
• ‘architecture, in other words, what modules will be part of the system, and what
their roles will be;
• interfaces, that is, detailed descriptions of how the different modules will
interact, including how they will fit together, connect and communicate;
• standards, for testing a module’s conformity to the design rules…and for
measuring one module’s performance relative to another’ (Baldwin and Clark
1997: 86)
The (few) visible design rules are widely communicated, whereas the hidden
design parameters are only communicated within the module to which they relate.
In this way, modular systems, and the interfaces that are a vital part of them,
attenuate complexity.

16.4 Service Interfaces

As we have seen, modularity and interfaces have been studied in the context of
artifacts, products, software and, to some degree, organizations. Although there are
also some attempts to apply modularity to service operations, most existing dis-
cussions of service modularity only deal with the structural relationships between
modules (i.e. the architecture). For example, we might be concerned with
breaking down the total experience of travelling on a cruise ship into its constit-
uent elements: restaurant meals, swimming, entertainment and so on (Voss and
Hsuan 2009). The purpose of service modularity on this view is to enable various
combinations of these elements (modules) in such a way as to provide a high
variety of total experiences while benefiting from economies of scale in the pro-
duction of each constituent element. Economies of scale result from the organi-
zation replicating essentially the same (say) restaurant process module on many
different ships. Similarly, various elements of care can be combined in different
ways for elderly citizens with different needs (De Blok et al. 2010). In the latter
example, the modularity also allows flexible re-specification of an individual
client’s service package, as his or her condition and requirements change.
Both of these accounts in fact emphasise the modules much more than the
interfaces between them, and acknowledge that service interfaces are as yet poorly
understood:
Second there is a need for empirical study in greater detail of particular areas, in particular
that of interfaces between modules/services, an area posited as important but where we
have little detailed understanding. Outsourced services would provide a powerful base for
study of interfaces. (Voss and Hsuan 2009: 560–561)
16 Servitization and Process Interfaces 267

So, what constitutes the interface in services? Let us explore some of the
examples already used, and some others with which we may be familiar. In the
examples of cruise liner service (Voss and Hsuan) and in elderly care (De Blok et al.
2010), the module is a subset of the activities provided by the service provider for
the benefit of the customer. To the extent that the activities in one subset are
independent of activities in any other, they are modular1 (Langlois 2002).
When discussing product modularity, what is considered is the end result—the
product (e.g. Ulrich 1995), and we consider the physical elements that constitute
modules. In the ideal modular product there is a ‘one-to-one mapping from
functional elements….to the physical components of the product’ (Ulrich 1995:
422). In the examples of what we will for the time being call services, we are
considering a process, in which the customer may or may not play an active part.
So what constitutes that service process? It is manifest in the work done by service
staff and the physical infrastructure that is used. This is what we have previously
(Araujo and Spring 2006), after Gadrey (2000), called a ‘sociotechnical capac-
ity’(STC): customers pay to access a sociotechnical capacity for certain periods of
time, on certain terms. For example, an elderly person may pay to attend a day care
centre for a three-hour period, temporarily using its facilities and being helped by
its staff. Other services are what Gadrey terms ‘requests for intervention’, where
the STC is brought to bear on the customer or on entities for which the customer is
responsible. For example, a physiotherapist might visit an elderly person in their
home to diagnose and treat a particular condition. In both cases, as emphasised by
Sampson and Froehle (2006), the customer may (will!) provide inputs of one form
or another.
As such then, the service module might be characterised by the people that
deliver it and the equipment used and, without an ‘end product’, an important
(maybe the only) delineation of the boundaries of a service module is achieved by
writing—writing specifications and charters, policies and procedures. Michel
Callon (2002) describes such a process of ‘objectification’ in the creation of
‘product-files’ for the definition of service offerings (again, the context is crui-
ses…), and of ‘handbooks’ and ‘bibles’ for the definition of the role of each
member of staff in the delivery of the service. These do not just describe the
service, they construct it and, in some senses, they are the service. Selviaridis and
Spring (2010) analyse the collaborative design of third-party logistics services as
periodic temporary stabilizations of what is otherwise a constantly changing set of
activities; these stabilizations are achieved in large part through the writing and
re-writing of contracts and associated service level agreements.
Take also university education—a modular service familiar to many of us.
Modules consist of a set of experiences of teaching and learning. But they are
objectified above all by writing: writing module outlines, learning outcomes,
assessment elements, reading lists, and are associated with course mnemonics

1
To be precise, they are more decomposable; designs can be modular, but not nearly-decomposable
(Langlois 2002). However, in recent use, ‘modular’ has come to mean decomposable.
268 M. Spring and J. Santos

and learning credits. In this way, they are objectified and made manageable
(Czarniawska and Mouritsen 2009) in such procedures as timetabling, the award of
degrees and the measurement of faculty workloads. They are crisply demarcated in
relation to the primary actors they involve by such procedures as registration,
which defines who can sit examinations and submit assessed work and, perhaps,
who has access to online learning technologies and by the assignment to faculty
members of roles such as module coordinators, defining who is responsible for
carrying out assessment and teaching. Modules should avoid overlap in content
and should collectively offer the possibility of constructing a coherent degree in,
say, operations management, while offering some choice to the student.
What of interfaces here? It is inappropriate to apply many of the definitional
elements used for product interfaces to something like a degree module. There is
not, as in Simon’s definition, a ‘meeting-point’ in time and space. One module
does not, in any meaningful way, communicate with another: information is not
purposefully transmitted across a boundary in the way that it is in modular
products between, say, a personal computer and its printer. Perhaps in this sense
the interface only exists in the mind of the participants, in how they (e.g. the
students) see a relationship between the content of one module and the content of
another. The inter-modular connection is, however, formalised in at least one
way—by the definition of pre-requisites i.e. that in order to take module B, a
student must have successfully completed module A. But again, this doesn’t
involve the transmission of information between modules. It could, however, be
seen as involving the transfer of people—or, more generally, service recipients—
between modules. Taking into account all these examples, it seems that interfaces
in services are elusive and multifaceted phenomena.

16.5 Some Key Characteristics of Interfaces

Baldwin and Clark’s definition of architecture only explicitly distinguishes

between hidden design parameters and visible design rules in terms of whether
they are widely or only locally known (i.e. within the module). Later, Baldwin
(2008) examines the special case of interfaces that enable transactions, arguing
that transactions between firms can best be brought about at ‘thin’ crossing points,
where there is very limited interdependence between the activities on one side of
the crossing-point and those on the other. Baldwin stresses that such a state of
affairs doesn’t just happen, but is achieved through work to define what is to be
transferred, and to devise both a basis for counting or measuring it, and a means of
remunerating the supplier. This work results in what Baldwin terms ‘mundane
transaction costs’, which might be incurred by one firm, by a pair of trading
partners, or by a much larger group of organizations.
An illustrative example of the latter is INCOTERMS, the international system
for defining the respective rights and responsibilities of buyer and seller in the
international shipment of goods. INCOTERMS allow buyer and seller to define, in
16 Servitization and Process Interfaces 269

one three-letter acronym selected from a small range of options (e.g. FOB,
standing for ‘‘Free on Board’’), responsibilities for a range of activities involved in
such shipments, including transportation, insurance, loading and unloading. The
alternative to using INCOTERMS in such a situation might be for the two trading
partners to interactively define, negotiate and agree on the details of each of the
activities, from scratch. This would be a ‘thick’ interface.
Puranam and Jacobides (2005) argue that part of the thickness of such inter-
faces arises from under-specification and the need for ‘rich’ information to deal
with ambiguous or subjective issues, which in turn requires a great deal of
interaction to define what is to be done. This echoes Thompson’s notion of
‘reciprocal interdependence’.

16.6 Servitization and Interfaces

Having explored modularity and interfaces in service settings, it is now necessary

to return to the focal theme of servitization. Servitization has been defined, dis-
cussed and exemplified in Part 1 of this book. For the purposes of this discussion,
we will take as a rough organizing scheme the typology of Product-service systems
(PSS) of Arnold Tukker (2004), combined with the base case of a completely
‘unservitized’ product sale. Hence we have four models:
• Product sale
• Product-oriented PSS
• Use-oriented PSS
• Result-oriented PSS
The focus in Tukker is on the nature of the relationship and interaction in the
dyad between supplier and customer. Implicitly (and examined more explicitly
elsewhere, see Lay et al. (2009)), an important element of the distinction between
these categories is rooted in property rights. Interestingly for our present purpose,
property rights also plays an important part of Langlois’ treatment of modularity
(Langlois 2002) and, by implication, interfaces. The supplier-customer relation-
ship is not the only site of interfaces that we might be concerned about, however.
Especially in more complicated servitization contexts, there may be several
organizations or organizational units involved in providing a servitized offering to
a customer. For example, a supplier of commercial vehicles may outsource field
maintenance activities to a network of maintenance providers using a franchise
approach (Karatzas 2013), and leading to a triadic structure between the manu-
facturer, any individual customer, and the relevant service depot (cf. Li and Choi
2009). This leads to more potential interfaces at organizational boundaries.
Interfaces may also be construed between elements of the offering, as well as
between organizations or organizational units. In some way, the maintenance
service process of our truck manufacturer’s depot will come into contact with the
trucks to be maintained; one might even say that the maintenance process comes
270 M. Spring and J. Santos

into contact with the process in which the truck is used. This will have a structural
aspect, dealing in effect with the division of labour and the rights and responsi-
bilities of each party (e.g. the customer carries out routine checks on tyre pressure,
but the provider arranges for and pays for longer-term tyre monitoring and
replacement). It will also have a processual aspect, which is concerned with where
and when the activities that connect the two modules are carried out (e.g. the depot
staff have to schedule tyre replacement events for when the truck is not being used,
and when it is at a convenient location). This temporal and spatial aspect of
processual interfaces is a recurring theme.

16.6.1 Product Sale

At one end of the spectrum is the simple transfer of ownership of a physical

product, with no service elements at all. In the extreme form of this model, the
customer would independently be able fully and accurately to convey a specifi-
cation of its needs ex ante, and the supplier would then provide the product in
exchange for payment. ‘Pareto is supposed to have said that we do not need the
consumer to be present at all so long as he leaves us a snapshot of his preferences.’
(Langlois and Cosgel 1998: 107)
In Baldwin and Clark’s terms, there would be a very thin (structural) interface
constituted by the specification, and a simple processual interface that would
define when and where the product would be delivered. Although the data trans-
ferred via the structural interface might be considerable in volume, there would
be no need for any interaction and the data would not be ‘rich’ (Puranam and
Jacobides 2005). Allowing for a little more interaction, there might be some form
of technical advice offered by the manufacturer to assist the customer in identi-
fying the most appropriate product to buy; the interface here might be configured
by a standard requirements capture form or standard applications engineering
procedure. Again, in Baldwin’s approach, this would provide a carefully controlled
‘common ground’ between customer and supplier, reducing to a minimum the ad
hoc interaction between staff (and processes) on either side of the boundary.

16.6.2 Product-Oriented PSS

Product-oriented PSSs involve the sale of additional service elements such as a

maintenance contract or spares and consumables. They might also involve more
wide-ranging technical support than basic advice in selecting a product, extending
to process improvement and the like. In some instances, the provision of additional
services might be rather discrete and isolated events. For example, a piece of
capital equipment might be subjected to an annual check and re-calibration; parts
that are intended to wear in the normal course of use could be replaced on a routine
16 Servitization and Process Interfaces 271

basis. Parts and/or pre-defined service interventions (defined by writing, as dis-

cussed above) would be transacted in exchange for payment. A breakdown would
require a one-off episode of diagnosis and repair, and a more iterative definition of
the transaction may ensue. Then, the interface between provider process and
customer process becomes thicker (in the sense of Baldwin and Clark—what is to
be transacted requires iterative definition) and richer (in the sense of Puranam and
Jacobides—there is a need for ‘qualitative problem-solving’ (Langlois 2002)).
The process interface would need to take account of the user’s production
schedule and hence when it is appropriate to carry out the standard service tasks,
but would not need to take account of any specific or idiosyncratic circumstances
of the machine’s use: in that sense it is predominantly a processual interface.
Breakdowns and repairs may entail a less clear-cut division of labour as both
customer and provider might play a part in the diagnosis stage. The processes to
make, ship and transfer the product to the customer, maintain and repair it, and
provide spares and consumables, would remain relatively discreet and would be
initiated by customer request. If circumstances dictate that more maintenance is
required, it is essentially the customer’s problem, and the customer’s job to request
it. And the customer must play a leading role in ‘joining the dots’—managing the
implications of an asset being under maintenance or broken down, perhaps.

16.6.3 Use-Oriented PSS

In use-oriented PSSs, ownership of a piece of equipment remains with the man-

ufacturer. In Baldwin and Clark’s terms, the thin interface is based on the defi-
nition of a transactable unit of access to the product and associated technical
capabilities: the measured kilometre flown in ‘power-by-the-hour’, perhaps. The
logic of these arrangements from the customer’s point of view has many facets, but
one is surely that the user just wants to depend on availability of the capacity for
which they pay, without concerning themselves with how that capacity is provided
(except insofar as, in contrast to ‘result-oriented PSSs’ (below), the central product
is specified and remains constant). The process of providing this use, however,
may require multiple processual interfaces with the customer, in order to coor-
dinate the logistics of maintenance and repair, and to monitor the use and condition
of the equipment which is, of course, the manufacturer’s property.
According to Tukker’s scheme, some use-oriented PSSs can include arrange-
ments whereby the asset is not used exclusively by one customer, but used suc-
cessively by multiple customers (renting, such as plant hire) or simultaneously by
multiple customers (pooling, such as in contract warehousing). These introduce
extra interfaces—temporal in the case of renting, e.g. the need to explicitly delimit
the period of use of a piece of equipment, and to institute systems for assessing the
condition of the equipment as it is passed from one user to the next (as in private
272 M. Spring and J. Santos

car hire). In pooling, it may be necessary to partition the asset itself in some way:
for example, some users of shared warehousing will require that their products are
not mixed physically with those of other users.

16.6.4 Result-Oriented PSS

In use-oriented PSSs, just discussed, responsibility for achieving the required

outcome is still the responsibility of the customer, since the manufacturer is only
required to provide access to the asset. As we move to result-oriented PSSs, the
responsibility shifts even more to the manufacturer/provider. Result-oriented PSSs
also eliminate any attachment to a particular physical asset, and leave to the
manufacturer/provider’s discretion what assets will be used in providing the
required result. The thin transaction interface here depends on the specification and
measurement not of access, but of outcome. The manufacturer/provider has the
responsibility and prerogative to change assets and processes to achieve outcomes
in the face of changing circumstances or to make use of new technologies, perhaps.
As such, the provider may need to re-design processes and customers’ roles within
them—in contrast to the use-oriented PSS, where the degree and open-endedness
of interaction will be much less. In result-oriented PSSs, then, the provider needs
not only to have process interfaces defined as well as possible, but procedures for
re-defining them as the need or opportunity arises.2

16.7 Managing Interfaces in Servitization

As Langlois (2002) reminds us, modularisation is only of value under circumstances

where the environment is differentiated or dynamic.3 In the examples discussed
earlier, modularity helps provide varied experiences for cruise passengers, cus-
tomised and adaptable care for the elderly, and a variety of degree programmes for
students. And as we move through the four models from product sale to result-
oriented PSS, the responsibility for coping with changes in the environment shifts
progressively from customer to provider. If the purpose of modularisation—and

2
At the much-documented VW Resende truck plant in Brazil, so-called modularist suppliers
each make their truck sub-systems and fit them on the assembly line. VW staff only touch the
vehicles when they conduct final quality controls. Suppliers are only paid when the finished truck
is accepted and, if there are any quality problems with a truck, none of the suppliers are paid until
they work together to resolve it. The result-oriented model impels the suppliers to manage the
interfaces between them (Marx 1997).
3
Langlois refers to Simon’s famous parable of the two watchmakers, one (Hora) who uses a
modular approach, and one (Tempus) who doesn’t: ‘Tempus will do as well as Hora if neither is
ever interrupted’ (Langlois 2002: 23).
16 Servitization and Process Interfaces 273

hence the management of interfaces—is to attenuate the effects of environmental

disturbance, then as they ‘shift’ to service through the four archetypes, manufac-
turers should pay more attention to interfaces between elements of the PSS they
provide, within their firm and between their firm and suppliers and complementors.
Some use- and output-oriented PSSs are referred to under the banner of
‘systems integration’ (Prencipe et al. 2003). But what becomes clear from the
modularity perspective adopted here is that, in joining the elements of product and
service together to create a product-service system, it would be unwise to adopt an
integral architecture, as might be suggested by the term ‘systems integration’.
Precisely because many previously un-connected or weakly connected elements
are being brought together, some modularisation will be necessary to avoid the
consequences of the exponentially-increasing number of possible interconnections
between elements. This is nothing new: as Puranam and Jacobides (2005) note,
‘… Lawrence and Lorsch (1967) make clear that task decomposition and the
creation of modules (differentiation) goes hand in hand with mechanisms for
coordination that penetrates the boundaries of the resulting modules (integration)’.
So, in an output-oriented PSS potentially encompassing the manufacturing,
operation, maintenance, procurement, re-specification and even re-design of the
product/asset, the need for effective design and use of interfaces is at its most
critical for the manufacturer/provider.

16.8 Final Comment: Interfaces and Knowledge

In this brief discussion of interfaces in services and servitization, we have

emphasised the typical operations management concerns of process specification
and execution, leading to what we have termed structural and processual inter-
faces. Somewhat in keeping with Thompson’s approach, we are mainly concerned
with defining and coordinating what needs to be done, rather than how to know
what to do in the first place. Nevertheless, we are well aware that that the division
of labour causes and is caused by differentiation and specialisation in knowledge
(Loasby 1996); we are also aware that, as Baldwin also notes, ‘The domain of
transactions is a domain of action: goods are made; services are performed;
compensation is paid and received. But research has shown that a firm’s knowl-
edge is generally not coterminous with its actions’ (Baldwin 2008: 160). As such,
we leave the systematic analysis of servitization and knowledge interfaces for
another day.
274 M. Spring and J. Santos

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Chapter 17
Avoiding the Overhead Cost Trap:
Towards an Advanced Management
Accounting Method for Servitized Firms

Christian Lerch and Matthias Gotsch

Abstract During the process of servitization, industrial companies may become

lured into an overhead cost trap, meaning that costs for service delivery are
invoiced not directly but indirectly by the product price, which leads to an over-
priced product on the one hand and inferior service delivery on the other. This cost
trap diminishes the competitiveness of the product and results in an underdevel-
oped service business. Therefore, this chapter develops several management
accounting methods for service offerings to help manufacturers avoid the overhead
cost trap. In addition to traditional methods, such as life cycle costing, more
advanced accounting methods on the service business (e.g., function point anal-
ysis) and firm (e.g., balanced scorecard) levels are adapted to the needs of servi-
tized manufacturers. In summary, this chapter aims to present suitable
management accounting methods and thereby support manufacturers in profes-
sionalising their service businesses.

17.1 Challenges for Management Accounting

in Servitized Firms

Former investigations by Lay et al. (2010) and Tether and Bascavusoglu-Moreau

(2012) have shown that product-related services in industry are generally not billed
separately. Instead, the manufacturer provides the services free of charge to the

C. Lerch (&)  M. Gotsch

Fraunhofer Institute for Systems and Innovation Research ISI,
Breslauer Straße 48, 76139 Karlsruhe, Germany
e-mail: christian.lerch@isi.fraunhofer.de
M. Gotsch
e-mail: matthias.gotsch@isi.fraunhofer.de

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_17, 277

 Springer International Publishing Switzerland 2014
278 C. Lerch and M. Gotsch

customer but includes the service-connected costs in the product price itself. Thus,
the service benefit and service value are not obvious. In order to communicate the
relationship between all service-related benefits and costs to their customers,
industrial companies need an appropriate management accounting method that
covers all financial and strategic aspects of their service business.
Data from the European Manufacturing Survey (EMS) presented in the intro-
duction of this book clearly indicate that in mechanical engineering and computer,
electronic and optical product manufacturing in particular, a comparatively high
portion of sales can be made in services. Noticeable in this context is the generally
high percentage of indirectly invoiced services, which account for approximately
half of the service turnover in these two sectors. In the other manufacturing sec-
tors, the share of indirectly invoiced services is even higher than that for directly
invoiced services.
In this way, the actual importance of service business and the associated value
of industrial services are systematically underestimated. This leads to overpriced
products, on the one hand, and inferior service delivery, on the other hand, which
diminishes the competitiveness of the product and leads to an underdeveloped
service business. In order to avoid such connected overhead costs, a management
accounting method has to be introduced that supports manufacturers in service
accounting. Unfortunately, there are some challenges to management accounting
for servitized firms.
According to Kinkel (2003a), a customised and efficient management accounting
method can ensure that product-related services do not become a cost trap and
become a supporting element of a firm’s business. Therefore, the question regarding
how companies can measure the profit contribution of these services seems
important. To answer this question, it is necessary to know the sales opportunities
and exact cost structure of product-related services. However, it is difficult for most
industrial companies to estimate these opportunities and costs, partly because ser-
vices are generally not part of the core area of industrial companies.
Thus, systematic management accounting is particularly important for product-
related services. Suitable controlling methods and procedures must be established
in order to help manufacturing companies effectively measure the incomes and
expenses of their product-related services. The methods that are commonly used in
management accounting practice for industrial plants are only partially suitable to
adequate control product-related services. These methods are characterised by a
number of challenges, which, according to Kinkel (2003a), can be aggregated into
four main challenges:
• Challenges related to cost accounting
• Challenges related to benefit monitoring
• Challenges related to invoicing
• Challenges related to cooperative services.
Challenges related to cost accounting arise from the fact that in most industries,
product-related services are provided from indirect subdivisions within firms, such
as development departments, marketing departments or traditional customer
17 Avoiding the Overhead Cost Trap 279

service departments. These costs are generally undifferentiated and charged as

overhead costs (Niemand 1996). In addition, reasonable time accounting is gen-
erally not used to ensure that working hours are correctly allocated to service
contracts. For instance, there is no breakdown of indirect cost centres in areas with
different cost rates, which can be accounted differently for the provision of
product-related services.
Challenges related to benefit monitoring are primarily relevant if the provision
of product-related services is not directly aimed at independent sales or a high
return. The primary goal of offering product-related services may also be to
increase customer satisfaction and create a product package that will increase
customer loyalty and thus the firm’s market share due to cross-selling effects with
tangible goods. Service delivery can deliberately be offered at a loss in order to
increase the product business, as long as the overall sales provide a sustainable
return on investments. If stronger customer loyalty and cross-selling effects are in
the foreground of the service strategy, simple monetary cost and revenue variables
are not sufficient to provide a goal-oriented control of product-related services
(Schuh et al. 1999). The presentability and communicability of the service benefits
must be ensured by using appropriate qualitative measures. Classic management
accounting methods, which focus on financial variables, quickly reach their
functional limits.
Regarding systematically invoicing product-related services, intangible assets,
as opposed to material goods, often do not have comparable prices. Assessing
value through comparison with competitors is hardly possible, since the quality of
a service can only be reliably estimated once it has been already provided (Simon
and Darnian 1999). Product-related service providers face the problem of assessing
what specific customer groups are willing to pay in order to determine the scope of
their pricing. In addition, they must decide whether to offer their product-related
services completely free of charge or charge for some or all of the costs of their
services, determining their cost covering and profit margin.
Cooperative services impose additional requirements on management
accounting in different collaborative arrangements. Product-related services are
used more frequently in collaborations compared to pure product manufacturing.
Depending on the kind of service, collaboration with customers or suppliers,
outsourced services, complementary suppliers or even competitors is unavoidable
or strategically promising. Here, questions regarding how costs and revenues are
distributed between the partners are relevant. Additionally, the benefits and costs
of the cooperation activities have to be communicated to partners and the outside
world in an appropriate manner (Kinkel 2003a).
Summarising these four challenges, it can be stated that due to the key char-
acteristics of services, a pure observation of costs is not sufficient for adequate
management accounting of product-related services; rather, the service quality and
service productivity have to be considered as well. Based on the assumption that
service quality and service productivity cannot be managed separately, Grönroos
and Ojasalo (2004) presented a critical appraisal of manufacturing-oriented pro-
ductivity methods. In manufacturing processes, the input factors and the
280 C. Lerch and M. Gotsch

production processes can be standardised, with the production and consumption of

goods as two separate processes. However, in service processes, the customer
actively participates in the service production as an input factor. Hence, the input
factors cannot be standardised and are difficult to calculate. In addition, measuring
the output is difficult since the quality perceived by the customer is an important
output factor (Biege et al. 2012). Concerning the requirement that the interaction
between customer and provider must be used as an input factor, Grönroos and
Ojasalo (2004) state that ‘‘the interactions which are created by the service pro-
vider and its customers influence the efficiency of the service process’’ (p. 417).
In sum, this chapter aims to present workable accounting methods that enable
industrial companies to overcome the four outlined challenges of management
accounting for product-related services. Therefore, in the following sections, three
different methods that industrial companies can use to professionalise their service
management accounting system are presented. The chapter closes with a short
conclusion presenting the major findings and outlook.

17.2 Life Cycle Costing: Cost accounting and Pricing

Adding services to a physical product leads to additional costs for a provider. For
instance, the provider has to issue additional invoices for employee instruction and
training, maintenance contracts and spare part services (see Lay and Radermacher
2005). To avoid long-ranging negative effects, it seems necessary to invoice
product-related services directly in order to increase competitiveness.
However, attempting to invoice product-related services directly leads to new
challenges. In order to account for the costs of services, the service delivery
process has to be made transparent. Then, the benefits have to be analysed as well.
To do so, manufacturers have to determine the costs and benefits of services over
the entire product life cycle. Determining the life cycle costs and benefits is
necessary because costs are directly visible for customers and arise in the short
term, while benefits are often not perceived by customers and arise in the long term
(see Lerch 2010; Lerch et al. 2010).
In order to consider short-term and long-term effects separately, life cycle
costing (LCC) can be used. LCC systemises costs and profits over time and
structures them over individual phases. LCC is based on the life cycle (cf. Pfeiffer
and Bischof 1975) of products and technology and plans, controls, regulates and
cumulates all incurring costs over the different life cycle phases of a reference
object (cf. Kralj 1999). The concept of LCC appeared in the mid-1960s for mil-
itary applications (see Cole and Sterner 2000; Kemminer 1999) and was extended
in the 1970s to other sectors (see Franzeck 1997). Due to its broad scope of
application, several definitions of LCC can be identified in the existing literature
(see Woodward 1997; White and Ostwald 1976; Barringer 2003). According to
Woodward (1997), a useful and short definition of LCC is provided by White and
Ostwald (1976); the authors defined LCC as ‘‘the sum of all funds expended in
17 Avoiding the Overhead Cost Trap 281

support of the item from its conception and fabrication through its operation to the
end of its useful life’’. Based on this definition, two main characteristics of LCC
can be identified:
• LCC concerns both tangible (e.g., capital or fixed goods) and intangible assets
(e.g., projects or services), and
• LCC considers all costs incurring from the development and design of
equipment to its disposal or redeployment.
Hence, LCC allows for more effective decisions related to not only the initial
investments but also all the relevant future costs over a specified time horizon that
may account for a substantial proportion of the total cost of a product or piece of
equipment throughout its useful life (see Jackson and Ostrom 1980). Thus, the
LCC method prevents firms from making poor financial decisions based only on
initial costs, which represent a very small part of all expenses to be sustained for an
investment, typically defined as the tip of the iceberg (see Lund 1978).
In addition, different perspectives on the life cycle of a product exist: that of the
manufacturer and that of the customer. For the customer, the incurring total costs
and the life time of a product are important. Consequently, buying decisions result
in a trade-off among acquisition costs, operating and maintenance costs and dis-
posal costs (cf. Taylor 1981). In contrast, there are other cost drivers for product
manufacturers, which, according to Blanchard (2004), can be divided into four
types: planning and development costs, construction and production costs, oper-
ating and maintenance costs, and disposal costs. This basic principle can be
applied to the service cycle of products (cf. Potts 1989).
Given these features, it becomes obvious that LCC may also be applied to
services, which are closely connected to the life cycle of a physical product. For
such an application, a Life Cycle Costing Tool for robot manufacturers was
developed, which is able to evaluate costs and involved benefits over the entire life
cycle and whose logic is implemented in a software-based instrument (see, e.g.,
Fig. 17.1).
This tool structures the different life cycle stages of the physical product. The
costs that are considered in these stages are quantified by the customer’s input
data, and all costs are discounted to the base period using an appropriate discount
rate. In order to achieve this objective, the following elements are considered in
the Life Cycle Costing Tool: (1) the investment refers to the purchase price of the
product; (2) costs for installation and process embedding are included in the
initiation costs; (3) operating costs comprise direct and indirect labour, materials,
direct expenses, and establishment costs; (4) quality costs emerge during the
production process and may be influenced by the reworking rate or the scrap rate;
(5) maintenance and repair costs are determined by direct labour, materials or fuel
power and can be divided into planned maintenance costs, unplanned maintenance
costs (in case of failures) and intermittent maintenance costs (for major refur-
bishment); (6) disposal costs occur at the end of an asset’s life cycle for its disposal
or for repurposing it for other uses; finally (7) service costs arise for services that
are additionally provided and delivered over the entire life cycle and depend on the
282 C. Lerch and M. Gotsch

Fig. 17.1 Input mask of the life cycle costing tool

kind of service offered. For this analysis, service costs are regarded as an extra
expense.
In order to better explain these costs, a case study is used. In the following
analysis, we consider a large, globally active robot manufacturer based in several
European countries. In addition to the physical product, the enterprise offers
product-related services to its customers. For this case study, we use a small steel
foundry company with 80 employees, located in Northwest England, as the cus-
tomer firm. The robot is operated by a novel technology. It is able to be programmed
by intuitive instructions given by the staff of the customer company. The robot is
used for fettling and burning steel products as one of the last steps of the production
process. The steel foundry wants to automate this production step by means of a
robot with the aim of using the workers for high quality production steps.
As the steel foundry company has no experience with using robots, a first life
cycle cost analysis should clarify the financial effects of such an investment.
Therefore, the Life Cycle Costing Tool was used to analyse the data of the steel
foundry. The results of this analysis are shown in the following figures. First, we
can state that the LCC of the robot over eight years has a total sum of approxi-
mately 493,300 € , discounted to the moment of purchase. As the diagram in
Fig. 17.2 shows, the investment in the robot holds a share of 8.2 % of the LCC,
17 Avoiding the Overhead Cost Trap 283

while the costs for initiation and disposal carry less weight, with a share of 1.3 and
0.4 %, respectively. The operating costs are the largest driver, with 80.0 % of the
total amount. The remaining cost drivers, maintenance and repair costs and quality
costs, hold shares of 7.8 and 2.3 %, respectively (see Fig. 17.2).
The results of the Life Cycle Costing Tool were used afterwards to optimise the
costs over the life cycle through product-related services. A deeper analysis
showed that three major cost drivers arose, which may be reduced by additional
services: costs for change overs, scrap and repairs. In order to reduce these cost
drivers, a service package was chosen, which included training, a maintenance
contract and a spare part service. The Life Cycle Costing Tool was especially
designed to compare the LCC of a pure product with that of a product-service
bundle. Consequently, if the LCC of the product-service bundle is lower than that
of the pure product, the use of services is justified. Lastly, the difference between
both alternatives shows the value arising due to services and, thus, supports the
provider in pricing services.
Therefore, we assumed that the scrap rate may be reduced from 1.5 to 1.0 % of
all handled steel parts, because the employees now have higher skills due to
specific training. The costs for this training are 2,500 €. Furthermore, the training
should be able to reduce the time for change overs from 30 to 25 min, on average.
Finally, the spare part service combined with the maintenance contract is able to
increase the Mean Time Between Failure (MTBF), on the one hand, and reduce the
Mean Time To Repair (MTTR), on the other hand, because of the availability of
spare parts. On average, we assumed that the MTBF would increase from 4,000 to
5,000 h and that the repair time would decrease from 18 to 12 h. In contrast, the
spare part service is priced at 2,500 € per year, while the maintenance contract is
priced at 400 € per year.
With these new framework conditions, a second life cycle cost analysis, which
included the service package, was run. An overview of the impact of the services
on the cost drivers is shown in Fig. 17.3. As the diagram highlights, the costs for
change overs, scrap and repairs are reduced by a significant share. The costs for
change overs are reduced from 57,880 to 38,587 €, the costs for scrap are reduced
from 34,072 to 23,098 €, the costs for spare parts are completely avoided, and the
costs for repairs, which hold the largest financial effect, are reduced from 37,081 to
18,521 €. Summing up the financial effects for all cost drivers, a total amount of
approximately 54,300 € is avoided due to services over the entire life cycle of
eight years. Consequently, these savings indicate the value that is now provided by
product-related services.
The arising service value of approximately 54,300 € is shared between the
provider and the customer through the price for the offered services. The service
package as a whole over the entire life cycle and discounted over eight years has a
total price of approx. 20,900 €, which is the additional value for the provider. The
remaining part of the service value of approx. 23,400 € is the customer’s share.
Consequently, we can state that the use of life cycle analysis has a couple of
advantages: first, life cycle cost analysis helps firms to identify the financial effects
of services in terms of costs and benefits and, hence, helps firms to avoid overhead
284 C. Lerch and M. Gotsch

Fig. 17.2 Life cycle costs Life Cycle Cost Drivers

for the observed robot in the
steel foundry 0.4%
1.3%
7.8% 8.2%
2.3%

80.0%

Investment Costs of Initiation

Quality costs Operating costs
Costs for maintenance & repair Disposal costs

costs; second, life cycle cost analysis is able to estimate the arising value due to a
service package over a product’s life cycle and provides information on the pricing
and value sharing between the customer and the provider.

17.3 Advanced Accounting Methods: The Need

for Indicators Beyond Costs and Benefits

The previous section showed that it is possible to assess costs and benefits over the
entire life cycle of a product through LCC. Accordingly, a manufacturer can obtain
a deeper understanding of the cost drivers and long-term benefits of additionally
provided services and, hence, avoid the overhead cost trap. Consequently, such an
analysis is a useful and necessary step in developing a management accounting
system during the process of servitization on the firm level.
However, as experiences from practice show, the exclusive consideration of
costs and benefits holds limitations. As becomes obvious, accounting costs and
benefits provides no explanation, e.g., of the productivity or the quality of the
services and holds no possibility for service business accounting on a company
level. Consequently, the service delivery process is still mainly a black box, which
hinders the management and accounting of service structures and processes.
Therefore, professionalised management accounting for services should open
this black box and consider all relevant factors of a service business. In order to do
so, we need new methods for accounting the services of manufacturers, with new
indicators that are able to measure the different activities on different levels in a
suitable manner. Hence, advanced management accounting for servitized firms
should include new indicators beyond costs and benefits in order to provide new
methods for measuring and controlling all types of activities related to the servi-
tization of industrial firms.
17 Avoiding the Overhead Cost Trap 285

Saved Life Cycle Costs

70.000 €

60.000 € 57.880 €

50.000 €
40.580 € 38.587 €
40.000 € 37.081 €
34.072 €

30.000 € 24.750 € 22.925 €

18.521 €
20.000 €
11.342 €
10.000 € 7.985 €
5.428 €

0€
Investment

Start -up time

Change -overs

Scrap

Reworking

Energy

Spare parts

consequential costs
Repairs incl.

(for failure)
Life cycle cost drivers without services Life cycle cost drivers including services

Fig. 17.3 Life cycle costs drivers without services and including a service package

We suggest that an advanced management accounting system for servitized

firms should include the following two levels:
• The service business level, for accounting single service projects and the entire
service set, which has implications for managing customer service, and
• The firm level, for accounting services as a sub-system of the entire firm, which
has implications for the firm’s management board.
In this section, we present an exemplary management accounting method for
each level, demonstrate its application and interpret the results through an
exemplary case. In Sect. 17.3.1, we present the so-called function point analysis, a
method that we have already adapted from the ICT-sector and applied to services
in manufacturing industries. In our opinion, this is a valuable method for
accounting both single services and the entire service set. In contrast, Sect. 17.3.2
introduces the balanced scorecard, a helpful and practical instrument for
accounting the causes and effects of services on the entire industrial firm level.

17.3.1 Management Accounting on the Service Business

Level: Function Point Analysis

For accounting and controlling services on a service business level, the so-called
function point analysis (FPA) was adapted from the ICT sector to service busi-
nesses in manufacturing industries. This new method was developed and described
286 C. Lerch and M. Gotsch

by Lerch and Gotsch (2013). This method is a highly valuable instrument for
measuring numerous service indicators and, hence, for controlling the service
delivery. Through some examples, we show how this generic approach is used and
how the results are interpreted.
FPA is used to evaluate the technical functional scope of a system and was
originally used to better assess the expenses involved in a software development
project (see Poensgen 2012). First, need-based categories and influencing factors are
defined and then evaluated by using function points (FP) and, if requested, are also
weighted. The sum of all FPs is then the functional size (FS) and can be considered
the unit for the volume of the task or activity on which it is based. Consequently, this
approach can also be adapted to services in manufacturing industries.
To adapt FPA to services in manufacturing industries, FPA was combined with
the model by Grönroos and Ojasalo (2004) regarding the input, throughput and
output. This approach is also used because the interactions between the service
provider and the customer affect the productivity of the service process. As a result
of the customer’s role in the process of service production, the authors identify
three sub-processes that compose the process of service production (see Grönroos
and Ojasalo 2004):
• back office processes, which are services that are produced by the provider in
isolation,
• service encounters, which are services produced by the provider and the cus-
tomer interactively, and
• self-services, which are services produced by the customer in isolation from the
service provider using the infrastructure provided.
FPA for services in the manufacturing industry comprises the FPs and a TOC
factor (technical-organisational complexity). Together, these variables make up
the FS, which describes the scope or expense of a service. Accordingly, this
produces the following equation outlined by the units of the respective indicators:

Functional Size ðFSÞ ¼ Functional Points ðFPsÞ  TOC factor ðdimensionlessÞ

These three indicators comprise additional indicators that should be individu-

ally tailored to a company. Generally, the FPs measure the performance of a
service and comprise output, throughput and input indicators. On the one hand, the
actual performance-related effect of the service on an output factor (customer or
product) is evaluated. On the other hand, the perceived service quality of the front
office and the non-visible work of the back office can be taken into account. The
FPs of a service describe the performance of a service and the added value of a
service for the customer’s company. The performance can be measured by (1) a
decrease in the input or (2) an increase in the output during the production process.
For example, a change in performance may result from a reduction in the use of
material or energy and labour input or an increase in production as well as in the
quality and quantity of the end product (see Lerch and Gotsch 2013). The stronger
17 Avoiding the Overhead Cost Trap 287

the performance-related effects on the customer or the product are, the more FPs
are given for a service.
In contrast, the TOC factor defines the technical and organisational challenges
for the company for offering the service. The technical and organisational
framework conditions include the required ICT systems, necessary expertise,
possibility of standardising a service and demands on the internal or external
coordination and organisation (see Lerch and Gotsch 2013). These factors are
compared among other services so that a dimensionless unit in a percentage
emerges. For this indicator, 100 % refers to the average complexity. Services with
a value below that have a below-average complexity; services with a higher value
have an above-average complexity. The FPs are then weighted by multiplying
them with the TOC factor. The greater the technical and organisational require-
ments of a service are, the higher the TOC factor will be. Therefore, a high TOC
factor increases the FPs and, therefore, the FS (for an exact calculation, compare
Lerch and Gotsch 2013).
These three indicators provide new possibilities for measuring services and
their features. In the following subsections, we list some implications that derive
from FPA and show how this method is used and how its results are interpreted.
FPA has implications, e.g., for measuring the performance and complexity, the
efficiency and effectiveness and the innovativeness of services.
Implication I: Measuring the performance and complexity of services
FPA can be used to show the trade-off between the performance and the com-
plexity of services. As discussed above, the FPs are able to measure the perfor-
mance of services regarding an output factor. Consequently, the higher the FPs are,
the higher the impact of a service is on the customer and hence the higher its value
is for the customer. In contrast, the TOC factor indicates the technical and
organisational requirements for offering services. The higher the TOC factor is, the
higher the complexity of offering a service is. Based on these indicators, we are
able to determine the trade-off between performance and complexity, as shown in
Fig. 17.4.
Implication II: Measuring the efficiency and effectiveness of services
First, companies should introduce services that provide high performance but low
complexity. During the process of servitization, they should add services with
higher complexity, step by step. The most unattractive services for providers are
those with high complexity and low performance. However, as experiences from
practice show, there seem to be a trade-off between performance and complexity,
as these factors are correlated. Nevertheless, the relationship between performance
and complexity may be better or worse for certain services.
For manufacturers, measuring the efficiency and effectiveness of services is
highly complex. However, using the definitions of efficiency and effectiveness in
Tangen (2004), FPA is able to measure the efficiency and effectiveness of services.
Efficiency describes how well resources are used to reach a specific output level
(see Tangen 2004). Generally, efficiency is measured by comparing the output and
288 C. Lerch and M. Gotsch

Fig. 17.4 Illustrating the 100

trade-off between the 90 Process

Functional Points (FP)

performance and the analysis
80 Repair
complexity of services

(Performance)
70
60
50
40
30
20 Service
Hotline
10
0
0,4 0,6 0,8 1 1,2 1,4 1,6
TOC - factor
(Complexity)

the input of a service unit. As defined above, the FS represents the total scope and
extent of a service and consequently may be used as an output indicator. The input
for a service unit may be measured by inserted man hours. Lastly, based on the
relationship between the FS of a service and the inserted man hours for conducting
this service, we are able to calculate the service efficiency as functional points per
man hour (FP/mh).
In contrast, effectiveness represents the degree to which a specified target is
achieved (see Tangen 2004). Consequently, to measure the effectiveness of ser-
vices, we have to compare the target FPs with the achieved FPs of a service. The
result is a dimensionless variable that represents the effectiveness of services.
Figure 17.5 shows a diagram that may be used to illustrate the effectiveness of a
service. The dark area represents the target of the service performance for five
indicators, here shown in percentages. The lighter area represents the achieved
percentage rate of each indicator. Consequently, the larger the light area is com-
pared to the dark area, the more effective the observed service is. Based on the
average of the indicators, the observed case has an effectiveness of 87.1 %.
Implication III: Measuring the innovativeness of services
FPA can also be used to measure the innovativeness of services in terms of
continuous improvements and incremental innovations to services. For such an
assessment, we have to compare the different indicators over time. If a firm wants
to analyse the impact of incremental innovations on service efficiency, it has to
compare the FPs per man hour over the last couple of years. If the relationship
between the FPs and man hours increases over time, this indicates that incremental
innovations have been made, which become measurable using this procedure. If,
for example, a maintenance service had an efficiency of 3.4 FP/mh in the former
year and an efficiency of 3.9 FP/mh in the actual year, the value of incremental
innovations is 0.5 FP/mh.
The same procedure may be used to measure the impact of innovations on
effectiveness. If a maintenance service achieves an effectiveness of 87.1 % in the
17 Avoiding the Overhead Cost Trap 289

Fig. 17.5 Illustration of the Reduction of

effectiveness of services by Target FPs
workforce
comparing the target Achieved FPs employees
functional points and 25
achieved functional points 20
15
Reduction of
10 Reduction of
time for
5 energy
change-overs
0

Increase of
Reduction of
produced
material scrap
output units

actual year, while the former year had an effectiveness of 85.4 %, the value of
incremental innovations is 1.7 % concerning effectiveness.
FPA thus is able to measure continuous improvements in manufacturers’ ser-
vice offerings. We assume that innovations that improve efficiency relate to pro-
cesses, while innovations that improve effectiveness relate to products. Moreover,
if no innovations were implemented over time but there is still an improvement,
the source of this effect may be knowledge development or capability
improvements.

17.3.2 Management Accounting on the Firm Level:

The Balanced Scorecard

In a comprehensive manner, management accounting on the firm level has to adopt

a wider perspective than that on the service business level. Accounting systems on
the firm level consider services to be a sub-system of the entire firm and have
implications for the firm’s management board. In addition, considering only the
provider perspective is insufficient; rather, the customer perspective and associated
social effects have to be considered as well. Against this background, the question
arises as to which instruments are most likely to resolve the described challenges
to holistic, company-wide, management accounting for product-related services.
The balanced scorecard (BSC) method, as adapted for customer and product-
related services, seems to be a suitable tool for this purpose and was first described
by Kinkel (2003b). The following method is based on Kinkel’s BSC but is adapted
for current developments in product-related services. The performance-measure-
ment method used for the BSC, which was developed by Kaplan and Norton in the
1990s (Kaplan and Norton 1996), is now widely used in practice. Numerous
publications are available on this method, the development trends and the state of
290 C. Lerch and M. Gotsch

implementation in industry, as well as success factors or strengths and weaknesses

related to this management instrument. However, there are only initial conceptual
approaches for adapting the BSC to control product-related services in manufac-
turing industries (Schuh et al. 1999).
The classical model of the BSC (Kaplan and Norton 1996) stands out because it
clusters the key indicators into four perspectives: the ‘‘Financial perspective’’, the
‘‘Customer perspective’’, the ‘‘Process perspective’’ and the ‘‘Capability per-
spective’’. By using this standard frame for the design of the key indicator system,
the BSC can be used as a valuable method to effectively communicate strategies.
Moreover, the key indicators are also well balanced, as the financial and non-
monetary indicators as well as the lag indicators and lead indicators balance out
one another. The strategic targets and their indicators are linked by cause-effect
chains. Breaking the targets and indicators down into a process and a result is the
challenge in using a BSC, making the BSC a valuable accounting method.
According to Kinkel (2003b), several characteristics of the BSC (listed below)
make the method, in a modified form, suitable for an integrated controlling system
for product-related services. The integrated perspectives for vision, strategy, the
key indicators and the resulting measures makes the BSC an ideal communication
channel for important information for assessing the success of product-related
services in companies (Weber and Schäffer 2000). Thus, a BSC-based controlling
approach, because of the popularity and acceptability of this established instru-
ment, is suitable for communicating the success of product-related services not
only internally within the company but also externally to potential customers,
suppliers or financiers.
In order to develop a BSC for success controlling product-related services, the
iterative development process is at least as valuable as the BSC itself (Horvath and
Kaufmann 1998). Usually, this process significantly improves the service orien-
tation in the entire company and increases the transparency of the decision-making
process for all people involved. When attempting to identify suitable variables to
evaluate a product-related service, companies usually do not have the essential
information in aggregated form; while a substantial amount of rather unimportant
data are collected for various sources. The BSC focuses on a few key indicators
that are crucial for success and provides a balance of monetary and non-monetary
indicators as well as lag and lead indicators (Horvath and Kaufmann 1998),
facilitating data collection for the key indicators of services.
The architecture of the BSC is not restricted to the four perspectives proposed
by Kaplan and Norton (1992). Rather, Kaplan and Norton’s framework is a general
mental framework that has to be adapted for a specific application and that can
integrate new perspectives. It may make sense for the management accounting of
product-related services not only to focus on meeting customers’ expectations but
also to explicitly consider the expectations of other partners who may play a
decisive role in the provision of product-related services through a firm’s col-
laborative efforts (Kinkel 2003b).
In particular, cause-effect chains need to be identified between the strategic
objectives and the key indicators, which is often considered the greatest challenge
17 Avoiding the Overhead Cost Trap 291

in using the BSC method (Wurl and Mayer 2000). Thus, several strategic objec-
tives of the service offering must be determined, and an exemplary cause-effect
chain must be identified and allocated to the individual perspectives of the BSC.
Figure 17.6 illustrates an example of a cause-effect chain. In the following dis-
cussion, an example of a possible service BSC is introduced, and its most
important points are explained. The discussion of this example focuses on the
important issues in the process of developing a suitable BSC for product-related
services rather than the results and their implications.
As the example shows, when a firm selects the strategic objectives, which are
selected based on the specific service and the choice of variables to be balanced in
the BSC, it is important to focus on a few, important objectives. As an example, let
us consider the ‘‘capability perspective’’. Here, a high ‘‘fluctuation’’ results in
negative effects on the ‘‘staff experience’’, which in turn influences the factors
‘‘hourly wage rate’’, ‘‘employment of labour’’ and ‘‘design and features’’ of the
process perspective. A large number of available ‘‘provided ICT systems’’
decreases the necessary ‘‘employment of labour’’ but also increase the factor
‘‘design and features’’. This factor has to be understood to correspond to industry-
specific capabilities, which are central to product-related services. The last indi-
cator of the ‘‘capability perspective’’, the ‘‘provided staff’’, lowers the ‘‘capacity
utilisation’’ of the individual employees but also increases the incurred service-
specific ‘‘costs’’. Similarly to the ‘‘capability perspective’’, the results for three
other perspectives can also be analysed. However, when collecting data for the
indicators, it is necessary to ensure that the expenses related to collection are kept
as low as possible.
Figure 17.6 also shows numbered control loops. These can be categorised into
‘‘balancing loops’’ (B) and ‘‘reinforcement loops’’ (R). The former trigger a bal-
ancing effect and the latter escalate over time. Using suitable system dynamic
simulation models, an additional temporal component can be taken into account
and can be derived based on these future-oriented assessments. However, such an
analysis would go beyond the scope of this study. Therefore, a pragmatic approach
should be used, and the actual value for the identified key indicators and an index
value, which should be attained within a certain period of time, should be estab-
lished. This process is necessary to derive concrete measures. Identifying and
prioritising these measures transform a BSC into a living instrument, allowing
strategic objectives to be connected to operative planning. Subsequent imple-
mentation can help in achieving strategic goals in an accountable manner.
In order to select and prioritise the measures, as in our example, the identified
cause-effect chains can provide a valuable contribution. The primary aim of
identifying these chains is to correlate the effects of the strategic goals of product-
related service delivery. In addition, positive and unwanted negative mechanisms
of action, particularly concerning the financial goals of the BSC, are to be made as
transparent as possible in order to identify, as soon as possible, control measures
that are expedient or that compromise the objective. Here, as well as when the
strategic objectives are selected, it is sensible to use a limited number of powerful
292 C. Lerch and M. Gotsch

Capability perspective Financial perspective

Process perspective Customer perspective

Fig. 17.6 Example of a cause-effect chain between the strategic objectives of a service-oriented
balanced scorecard

effects so that the overall presentation remains clear and is easy to interpret
(Kinkel 2003b).
The analysis of the driving cause-effect chains can also be used to answer the
following questions: Is the developed BSC a homogenous unit of interacting
objectives or are some targets left out? What are the bottlenecks, and what are the
drivers of success for the service offering? What is the significance of negative and
therefore counter-productive effects on the success of services? The studied
example provides an indication of the aforementioned potential of the BSC for
targeted and strategic controlling of product-related services and the visual
expressiveness of their presentation. The BSC is therefore generally a useful
instrument for accounting a specific product-related service or a homogenous
bundle of congruent objectives.

17.4 Conclusion and Outlook

As this study illustrates, management accounting in servitized firms plays an

essential role in the competitiveness of a manufacturer’s service business. By
using an adequate accounting system, the overhead cost trap may be avoided, and
the risks of an indirectly invoiced service offering may be overcome. To help
manufacturing firms develop management accounting system for their services, we
discussed three different approaches.
The first approach represents a traditional measurement method based on life
cycle costing. This method helps firms to assess the costs and benefits of services
17 Avoiding the Overhead Cost Trap 293

and their financial effects on the physical product and the customer over the entire
life cycle. Moreover, life cycle costing may be a helpful method for service
pricing. However, due to its limitations in providing advanced accounting, we
presented two additional methods for accounting services.
The second method, the so-called function point analysis, is able to measure
numerous indicators of services beyond costs and benefits. Function point analysis
may be applied for accounting services on a service business level, for single
services as well as the entire service set of a manufacturer. The third method, the
balanced scorecard, may be regarded as an instrument for accounting and con-
trolling the service business within an entire company, because of its cause-effect
chains and connected relationships.
Consequently, to overcome the overhead cost trap, providing solutions for
pricing and cost accounting is highly valuable. Therefore, manufacturers have to
calculate their costs and benefits deriving from service offerings. However, to open
the black box of the service delivery process, advanced methods are needed. Two
such methods are suggested in this article, but in our opinion, there are numerous
possibilities for developing new methods for management accounting in servitized
firms. Consequently, the development of new indicators as well as new accounting
methods is an essential part of servitization research and investigated in the future.

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Chapter 18
Adapting Products for Servitization

Sabine Biege

Abstract The literature has extensively discussed many aspects of the transition
from product-centric producer of capital goods to solution provider. However,
guidelines and recommendations for the design of physical goods used in indus-
trial services or in use- and result-oriented product-service systems are still
lacking. By using large-scale quantitative data to test four hypotheses regarding
the probability that manufacturers will adapt their physical goods to their offered
service concepts, the research presented in this chapter tries to contribute to
closing the existing gap in engineering guidelines for the integrated development
of the product and service components of product-service systems.

18.1 Introduction and Research Question

During the last decade, many manufacturing industries have shifted from business
models that are product-oriented towards those that are service-oriented. Rather than
merely selling physical products, i.e., machinery and equipment, to their customers
and offering product-related services, manufacturers increasingly sell their prod-
ucts’ functionality. In this fashion, the business model of manufacturing companies
has changed—at least partially—from transaction- to relationship-based.
This shift implies several challenges and risks. For equipment manufacturers, one
way to address these risks can be to adapt their physical goods to these newly emerging
requirements (Weissenberger-Eibl and Biege 2010). However, neither design prin-
ciples for physical goods nor service products are appropriate for products used in

This chapter is based on my Ph.D. work (Biege 2011) and enhanced by managerial recommendations.

S. Biege (&)
Sabine Biege is working for an anonymus German truck manufacturer,
Maybachstraße 21, 70469 Stuttgart, Germany
e-mail: sabine.biege@gmail.com

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_18, 295

 Springer International Publishing Switzerland 2014
296 S. Biege

product-service concepts. Until now, design research on services has been minimal
compared to design research on products (Kim et al. 2010), service requirements are
rarely considered in the development of new products and existing products are
usually not adapted for product-service systems (Müller and Blessing 2007).
In conclusion, the research question tackled in this chapter is this: In what way
do the physical assets used in product-service systems need to be adapted to the
requirements of servitization to facilitate the delivery of product-service systems?
The first aim of the research described in this chapter is to determine the extent to
which manufacturing companies already adapt their physical products to the
product-service systems that they deliver to their customers. This was accom-
plished by testing a set of four hypotheses via survey data from 518 producers of
capital goods. The second aim of this research is to derive managerial implications
by analysing the data.

18.2 A Theoretical Perspective on the Need to Adapt

Physical Products for Servitization

Tukker compiled a widely used categorisation scheme (e.g., Baines et al. 2007;
Weissenberger-Eibl and Biege 2010) for product-service systems. Following this
approach, product-service systems are divided into three categories that are sorted
by decreasing product content and increasing service content. Product-oriented
product-service systems are based on a traditional transaction, i.e., ownership of a
good is transferred to a customer and the offer is enhanced by a set of services such
as repair and maintenance, etc. In use-oriented product-service systems, ownership
of the product remains with the equipment producer, who sells the use of the
equipment via concepts such as leasing, pooling and sharing. In result-oriented
product-service systems, the service component is predominant. The ownership of
the equipment used is well retained by the providing company, which sells the
results of the equipment’s operation to the customer. Thus, the provider of the
results is free to decide how they are produced (Tukker 2004).
As in use-oriented and result-oriented product-service systems, ownership of the
equipment used is not transferred to the customer but remains with the equipment
manufacturer. Thus, a novel way of doing business emerges. Consequently, these two
business concepts are subsumed into service-based business models (Lay et al. 2009).
Product-service systems pose new challenges for product design because new
and complex dimensions need to be considered during the product development
process (Brad 2009). However, ‘‘design research on service has been minimal
compared to design research relevant to manufacturing’’ (Kim et al. 2010).
Product-service system development has been explored only from a management
perspective, although developing product-service systems entails primarily tech-
nical innovations (Morelli 2003). Physical and service components, however, need
to be developed in an integrated manner to ensure the proper functionality of the
18 Adapting Products for Servitization 297

product-service system (Kindström and Kowalkowski 2009; Martin and Horne

1992; Morelli 2003). Considering service requirements throughout the develop-
ment of a physical component contributes to increasing the efficiency of service
delivery. Furthermore, the costs of service activities can be decreased so that the
overall competitiveness of an offer rises (Goffin 2000).
The New Institutional Economy (NIE) is one of the main pillars of modern
economic research. It dismisses assumptions that economic actors behave with
perfect rationality. Instead, a more realistic view is provided and information
asymmetries, bounded rationality and opportunistic behaviour are accepted as
basic assumptions. In the NIE, a central question is the influence of the complexity
of cooperation and its costs on how institutions and organisations are shaped. It is
assumed that ownership of material and immaterial goods always goes along with
so-called property rights. Following Furubotn and Pejovich (1972), Hockerts
(2008) distinguished five types of property rights:
• the right to retain profits and the obligation to cover losses,
• the right and obligation to maintain and operate a product,
• the right and obligation to dispose of a product,
• the right to exclude others, and
• the right to use a product.
Transferring these rights to another individual or institution is called a trans-
action. The costs that are involved in determining and enforcing these rights are
called transaction costs. Ex ante transaction costs are the costs of ‘‘drafting,
negotiating and safeguarding an agreement’’ (Williamson 1985), whilst ex post
transaction costs include the costs of maladaption, correction, set-up and running
costs, along with the bonding costs of securing the agreement (Williamson 1985).
The third object of the NIE’s investigation is economic contract theory. One major
element of this theory is the relation between a principal and an agent, whose
actions are determined by the above-mentioned information asymmetries and
opportunistic behaviour. Thus, the aim of principal-agent theory is to explain the
actions of actors and to find suggestions for drawing up a contract or an agreement.
The altered distribution of property rights in service-based business models,
particularly compared to the sale of goods, presents manufacturers with an incentive
to consider modifying the designs of their products (Hockerts 2008). Whereas a
capital goods manufacturer in a product-centred transaction will lay great store on
optimising the good at the moment of sale, e.g., the price, the situation is entirely
different in relation-based business relationships in which the manufacturer retains a
portion of its property rights, including any related obligations.
With reference to the right to retain profits and the obligation to cover losses,
respectively, it can be argued that a capital good’s sales characteristics retreat into the
background, whereas its operating characteristics gain relevance, over the entire
product life cycle. In particular, when a capital goods manufacturer partially or
completely retains the right to earn revenues from a good, it is in the manufacturer’s
interest to minimise the costs occurring during the life cycle of that good, with the
profitability of the business model as his goal (Hockerts 2008). Thus, a long product
298 S. Biege

lifetime can be sought, which delays re-investment in new machinery and equipment
or even makes it unnecessary. A capital goods manufacturer tries to influence other
types of costs in the design and construction phases. Similarly, one can argue in
favour of the right of change along with the right to sell or dispose of a good and the
obligations associated therewith. In that case, following the sale the customer
transfers the right and obligation to preserve the good back to the capital goods
manufacturer, who assumes this obligation in exchange for a fee. In such a case, in
which rights and responsibilities are transferred, capital goods producers will be
interested—independent of the form of payment—in ensuring that costs incurred for
maintenance and repairs are as low as possible, again in the interest of profitability.
The same applies to the obligation to pay for disposal, should this become necessary.
If the customer has the right of disposal, the manufacturer has no incentive to design
the capital good in such a way that it can be easily disassembled and materials, parts or
whole assemblies or modules can be re-used or recycled. Whether due to statutory
regulations or in exchange for a fee, the manufacturer of a good can re-assume this
obligation. In such a case, it is important that the product design already anticipates
disposal costs (Hockerts 2008). The following hypothesis is derived from these
observations:
Hypothesis 1 (H1)
Applying service-oriented design depends on the property rights remaining with
the capital goods producer and thus, on the service concept offered.
Due to specific investments that a capital goods producer must effect in the
context of service-based business models, a certain degree of dependency on the
customer results. The rule here is that the (mutual) interdependency of supplier and
customer is more pronounced when the affected investments are higher because a
termination of the supply relationship is accompanied by the loss of these financial
investments.
In service-based business models, in which property rights to an employed
capital good remain partially or completely with the producer of that good, the
incentive for a service offer consists of the yields and profits that can be generated.
In use-oriented business models, in which clients pay to utilise capital goods, it is
possible that several customers involved in so-called pooling concepts, either in
the same utilisation period or in temporary leasing models, successively have
access to the same capital good. In result-oriented business models, the manu-
facturer processes his clients’ products on his own, i.e., the manufacturer’s,
equipment. This is possible on a temporary basis. Thus, for example in the case of
a boom, peak orders can be outsourced to a capital goods manufacturer. In result-
oriented business models, capital goods manufacturers are integrated into cus-
tomers’ production processes for a longer time. The objective of a capital goods
producer must be to minimise lifecycle and transaction costs. Accordingly, it is
expedient to re-use machinery and equipment in adapted forms for individual
customer orders, whether use- or result-oriented, and not have to construct a new
capital good for each utilisation phase. Thus in all cases, whether use- or result-
oriented business models are involved, the adaptability of a capital good with
18 Adapting Products for Servitization 299

regard to the needs of an individual client is a significant factor that contributes to

the economic success of these business models. On one hand, it is important to
reduce the transaction costs of altering capital goods, i.e., to minimise internal and
external search, information and negotiation, exchange, guarantee and adaptation
costs. On the other hand, products should be designed so that it is possible to re-use
them in various utilisation phases for different customers. In order to level the risks
that accompany offering these service concepts, a manufacturer is interested in
keeping the specificity of its capital goods to a minimum.
Hypothesis 2 (H2)
Applying service-oriented design depends on the specificity of the capital good.
In service-based business models, in which property rights to the employed
capital goods are diluted, the roles of principal and agent are reversed. Thus, in
service-based business models, a capital goods manufacturer transfers a portion of
his property rights in the utilised machinery or plant to his customer whilst
retaining the remaining property rights. For instance, a capital good and the right
to change it remains the property of the manufacturer, who transfers the right to
use the machinery or plant to his customer. This capital goods manufacturer
conversely becomes the principal, who instructs the customer as his agent to
produce using the capital good. Due to information asymmetries, however, the
manufacturer does not know how the customer’s employees treat the capital good
during its operation. This close integration into the customer’s production process
results in additional, high interdependencies. These interdependencies can—in the
event that no specific investments are made, as is the case with client companies in
service-based business models—favour opportunistic behaviour. A capital goods
manufacturer will also have an interest in designing the employed product in such
a way that information asymmetries can be counteracted and thus avoid the risk of
opportunistic behaviour on the part of a transaction partner. This, however, is only
possible if the capital goods manufacturer has developed an awareness of such
risks. This results in the following hypothesis:
Hypothesis 3 (H3)
Applying service-oriented design depends on the level of risk awareness main-
tained by a provider of advanced service concepts.
Because a capital goods manufacturer has a knowledge lead over his customers
with respect to his specific product, it may be appropriate to offer repair and main-
tenance contracts to avoid inefficiencies in the operation and maintenance of that
product (Hockerts 2008). Gebauer et al. found that it was more complex to develop
services in firms in the manufacturing sector than in enterprises that mainly provided
services because traditionally it was the manufactured products that were the value
carriers, and accordingly, they were deeply rooted in the corporate culture. Conse-
quently, capital goods producers who want to establish themselves successfully as
service providers should create and maintain a symbiotic relationship between
product values and service values (Gebauer et al. 2005). They must manage two
business concepts in parallel: the service-oriented concept and the product-oriented
300 S. Biege

production concept (Kindström and Kowalkowski 2009). More specifically, this

means that suppliers of product-service systems must not only cultivate existing
competences in the fields of product development and manufacturing but also develop
new competences in the fields of service development and provision (Burr 2003).
Although product and service innovations have different requirements, they must
be linked to enable product-service systems, and a balanced relationship between
them should be created (Gebauer et al. 2008a). Despite the debate among scientists
as to whether product and service innovations differ so radically that different
research approaches should be developed for empirical analyses, an overview of the
literature on product and service innovations shows that these development pro-
cesses differ considerably in some aspects (Kindström and Kowalkowski 2009).
Although many of the traditionally quoted differences between product and service
innovation have been removed (Bascavusoglu-Moreau and Tether 2010; Drejer
2004; Sirilli and Evangelista 1998), significant contradictions still exist on some
points. Whereas in product development, R&D and the staff employed in this sector
are the main drivers of innovation, it is mainly customer service employees who
provide impulses for innovation in the service sector. Manufacturing companies that
offer and develop innovative service concepts are a special case and, as part of their
innovative activities, must compatibly combine the characteristics of both product
and service innovations. Thus, Baines et al. argued that product-centred enterprises
required employees who had a high level of understanding of physical products
together with the ability to maintain and further develop relationships with cus-
tomers (Baines et al. 2009). This view was shared by Gebauer et al., who noted that
it was insufficient to transfer the framework conditions for developing services
stemming from the service sector to firms in the manufacturing industry because
service innovations in manufacturing firms proceeded differently from those in the
service sector (Gebauer et al. 2008b). Success factors for the integrated develop-
ment of goods and services have been mentioned as involving customer service staff
in innovation activities, information sharing, putting multi-functional teams in
place, IT, internal organisation, application of statistical marketing methods for
client segmentation and training and education (Gebauer et al. 2008b).
When companies expand their business models and offer services in addition to
their manufactured products, they must ensure that they have the necessary
infrastructure and the required competencies to provide these services (Kindström
and Kowalkowski 2009). These consist, on one hand, of a thorough understanding
of their physical core products and, on the other hand, of having the skills to foster
and further develop customer relationships.
The following hypotheses related to a provider’s specialisation are derived from
these considerations:
Hypothesis 4 (H4)
Applying service-oriented design depends on the specialisation of the provider.
H4a Applying service-oriented design depends on the supplier’s specialisation in
developing innovative services.
18 Adapting Products for Servitization 301

H4b Applying service-oriented design depends on the provider’s specialisation in

developing innovative products.
The next section of this chapter describes how the four hypotheses derived
above were tested using a logistic regression model.

18.3 The Database and Methodology Testing

the Theoretical Assumptions Governing
Product Adaptation Necessities

18.3.1 Database and Operationalisation of the Hypotheses

The quantitative analyses in the following sections were based on the German
Manufacturing Survey database. The 2009 database, which is a representative
database for all of the manufacturing sectors in Germany, covers 1,484 German
companies, among them 518 capital goods producers. The survey, which was
conducted in 2009, targeted sectors 15–37, as set forth in the ‘‘Nomenclature
statistique des activités économiques dans la Communauté européenne’’ (NACE)
of firms with more than 20 employees.
To test the hypotheses derived in the previous chapter regarding the design of
products in accordance with the principles of service-oriented design and with the
help of the quantitative data set described above, it was first necessary to con-
ceptualise and operationalise the derived constructs. In the hypotheses, based on an
analysis of the literature and of the NIE, different influencing factors were iden-
tified, which were assumed to have an impact on the propensity of companies to
constructively adapt their products to the requirements of the service concepts that
they offered. Several of these influencing factors were directly addressed in the
survey; others had to be illustrated using one or more indicators. The literature
suggests an approach to determine the indicators used to measure constructs that
consisted first of developing an understanding of the subject based on the existing
literature and second of developing an initial set of indicators. Building on this
recommendation, the sections below describe how the hypotheses were concep-
tualised for testing, using data from the German Manufacturing Survey 2009, to
measure their influence on the likelihood that companies constructively adapt their
product design to demands that result from the service concepts that they offer.
Section 18.2 of this chapter establishes that the constructive design of capital
goods with respect to the requirements they must fulfil based on the services
provided takes place within the framework of a so-called adaptation design.
Accordingly, the companies participating in the survey were asked to indicate
whether they had already made such a product adaptation, i.e., whether they had
adapted one of their products to one of their services. The companies answered this
question by ticking yes or no. To illustrate the question more clearly, service
302 S. Biege

concepts and product adaptations were given as examples that could be selected if
the responding company had already made one of the constructive adjustments.
The distribution of property rights between provider and customer was opera-
tionalised by analysing the services the companies had agreed to offer. The surveyed
companies were asked to select the services that they offered from a list of eight
services ranging from product-oriented (e.g., planning services) to results-oriented
(i.e., operating equipment for the customer). Both companies that offered to operate
equipment for their customers and companies that offered maintenance and repair
services in combination with financial and leasing services were identified as those
who engaged in business models in which a shift in property rights took place.
The specificity of the goods involved in business models and those business
models’ consequent adaption to service components was operationalised by
building a construct of three indicators. The first indicator for specificity was
complexity because a high degree of complexity entails a high potential for
changes to customer needs and conditions (von der Osten 1989). However,
because complexity and specificity are not linked, following Hill (2000), batch
sizes and product development processes were used as the second and third
indicators. These two variables were used to describe the customisation of goods.
Complexity, batch size and product development processes were measured by
using categorical variables.
Companies’ risk awareness was surveyed by using a list of eight potential risks,
which respondents ticked if they considered these risks as part of their risk management.
Specialisation in developing innovative products was expressed through three
variables because competence is a phenomenon that is empirically indeterminate
and cannot be measured quantitatively (Burr 2003), i.e., by determining the pro-
portion of staff employed in research and development and the proportion of staff
employed in construction and design. Furthermore, the question of whether the
companies surveyed had developed products during the previous three years that
either were completely new to the company or were a significant advancement of
their product portfolios was used as the third indicator of specialisation in
developing innovative products.
Accordingly, specialisation in developing innovative services was conceptua-
lised by using the number of services selected from the list that described above,
the proportion of staff in customer service and turnover directly generated by
services (Lay et al. 2010). Furthermore, in accordance with the development of
new products, the companies surveyed were asked to indicate whether they had
developed new services in the past three years that either were new to them or
represented significant advancements in their service portfolios.
Table 18.1 gives an overview of the indicators investigated as part of the German
Manufacturing Survey 2009 in correlation to the constructs explained above.
18 Adapting Products for Servitization 303

Table 18.1 Operationalisation of the constructs and description of the analysis data set
Construct Variable Mean StdDev
Influencing factor attribute (%)
Construct to be explained
Product adapted to service concepts 0/1 27.8 n/a
Explanatory constructs
Distribution of property rights (business model)
Service-based business model (AVDL) 0/1 30.4 n/a
No service-based business model 0/1 69.6 n/a
Specificity
Complexity of the capital good: complex (KOMPLEX) 0/1 52.4 n/a
Complexity of the capital good: simple and averagely complex 0/1 47.6 n/a
products
Product development made to order (PEMTO) 0/1 80.7 n/a
Product development: Prefabrication and final assembly after 0/1 15.5 n/a
customer order (PEVEMTO)
Product development: in stock 0/1 3.9 n/a
Single-batch production (EINZELS) 0/1 44.0 n/a
Small- and medium-batch production (MITTELS) 0/1 48.6 n/a
Large-scale production 0/1 7.5 n/a
Risk awareness Number of risks considered (ANZRIS) m 2.79 2.00
Specialisation in developing innovative services
Share of staff in customer services (%) m 6.70 6.87
Share of turnover generated directly by services (n = 345b) c (%) m 7.93 7.55
(UADL)
Data on the share of turnover generated directly by services 0/1 83.3 n/a
(PERSDL)
No data on the share of turnover generated directly by services 0/1 16.7 n/a
(AUADL)
Number of services offered (ANZDL) m 4.90 1.92
Innovative service concepts offered (DLINNO) 0/1 23.7 n/a
No innovative service concepts offered 0/1 76.3 n/a
Specialisation in developing innovative products
Share of staff in research and development (%) (PERSFUE) m 7.02 9.96
Share of staff in construction and design (%) (PERSKONST) m 10.20 9.61
Innovative products offered (PINNO) 0/1 69.1 n/a
No innovative products offered 0/1 30.9 n/a
Context
Number of employees in 2008 m 339 2259
Logarithm of number of employees 2008c (ANZBESCHLog) m 4.55 1.18
Manufacture of metal products (NACE 28) 0/1 12.6 n/a
(BRANCHEMETALL)
Mechanical engineering (NACE 29)a 0/1 54.6 n/a
(continued)
304 S. Biege

Table 18.1 (continued)

ConstructInfluencing factor Variable Mean StdDev
attribute (%)
Manufacture of electrical equipment (NACE 30, 31, 32) 0/1 4.1 n/a
(BRANCHEELEKTRO)
Medical, precision and optical equipment (NACE 33) 0/1 18.8 n/a
(BRANCHEMSR)
Manufacture of transport equipment (NACE 34, 35) 0/1 9.9 n/a
(BRANCHEFZBAU)
Source German Manufacturing Survey 2009, own calculations, n = 414
Notes a as reference in the logistic regression model
b
companies that provided no information were represented by the dichotomous variable kA-
UADL in the logistic regression model
c
values were z-transformed; m metric

18.3.2 Logistic Regression Model

Because the variable ‘‘product adaptation’’ was a dichotomous variable in the com-
pany survey, a binary logistic regression was used to describe correlations between
the hypotheses variables and the dependent variables. The relationships between the
dependent variable and several independent variables were analysed using a regres-
sion analysis. A logistic regression is one method that is well suited to describing and
testing hypotheses about relationships between a dichotomous dependent variable
and several dichotomous or constant factors of influence. This statistical method is
superior to discriminant analysis because of its wide field of application and its
robustness, which can also be used to examine categorical dependent variables.

18.3.2.1 Description of the Analysis Data Set

The first step in any data analysis is to construct the model. In the case of logistic
regression, this is when the potential factors of influence, i.e., the exogenous
variables, are determined for the probability of occurrence of the dependent model
variables. This formulation of the model was accomplished based both on the
hypotheses derived in the section above from the conceptual and theoretical ref-
erence frameworks and on the five constructs operationalised above.
The dependent variable product adaptation could have two attributes—yes and
no. This represented the dichotomous endogenous variable in the logistic regres-
sion model, whose probability of occurrence was predicted using the model. The
logistic regression model estimated the probability of occurrence of the event
‘‘product adaptation implemented’’ p(y = 1).
Table 18.1 gives an overview of the operationalisation of the constructs, the
attributes of the selected variable, the means or percentage shares and, where
applicable, the standard deviation in the analysis data set. To estimate the
regression equation, metrically distinct variables were z-transformed.
18 Adapting Products for Servitization 305

Of the survey’s 518 original data sets from capital-goods producers, 104 were
missing values for at least one variable. The highest non-response item concerned
data on the share of turnover achieved directly by services UADL. The dichoto-
mous auxiliary variable kA-UADL was introduced to avoid a possible non-
response bias and to keep to a minimum the share of companies that had to be
excluded because of missing data. In cases in which no data were available for this
turnover share, the turnover was set to 0 and dispensed with for estimating the
regression coefficients; the auxiliary variable kAUADL captured possible group-
specific effects. This approach enabled the data on UADL to be used in the logistic
regression model and simultaneously kept the number of cases as high as possible.
One main condition of using logistic regression was the independence of the
regressors: they could not be multi-collinear. The correlation matrix of the x-
variables was examined for a first estimation of whether multi-collinearity existed.
This revealed a relatively high, positive bivariate correlation between the inde-
pendent variables ANZDL, i.e., the number of services offered, and AVDL, the
existence of service-based business models in the firm. In addition, the correlation
matrix of the estimated coefficients was also examined. This examination also
showed a high correlation of[0.5 between these two predicators, which is why the
variable ANZDL was not included in the regression model. After excluding that
variable, there was no other indication of multi-collinearity between the predictors.
Excluding the number of services offered did not increase the number of cases.

18.3.2.2 Assessing the Model

Table 18.2 lists the logistic regression coefficients, standard errors, results of the
Wald-test and the odds ratio, i.e., the ratio of occurrence and non-occurrence together
with the explanatory significance of the influencing factors. This table also shows the
respective difference for the odds ratio that corresponded to the unit by which the
factor of influence had to change so that the odds ratio shifted by the given value.
The constructs were tested to assess the significance of individual effects or
bundles of effects to the model. A step-wise logistic regression was calculated,
which in the first step, constructed the logistic regression model without the
construct to be tested as a reduced model and calculated its likelihood. In the
second step, the remaining factors of the full model were entered and the differ-
ence between the likelihoods of the reduced full models was calculated. In this
way, any change in the goodness of fit due to the lack of a single variable or bundle
of variables could be determined. Table 18.3 contains the v2-difference values for
the constructs considered, their degrees of freedom and the resulting significances.
306 S. Biege

Table 18.2 Logistic regression model analysing the explanatory significance of the influencing
factors on adaptation of physical products to services offered
Construct Regression Standard Walds v2 Difference for Odds
Influencing factor coefficient error odds ratio ratio
Intercept -4.15 1.180 12.353 0.02*
Business model
AVDL 0.96 0.283 11.500 Yes versus no 2.61*
Specificity of the investment good used
KOMPLEXa 1.09 0.305 12.856 Yes versus no 2.98*
PEMTOb 1.72 0.907 3.597 Yes versus no 5.58+
PEVEMTOb 0.91 0.946 0.918 Yes versus no 2.48
EINZELSc -0.25 0.705 0.128 Yes versus no 0.78
MITTELSc -0.05 0.676 0.006 Yes versus no 0.95
Risk awareness
ANZRIS -0.04 0.147 0.078 2.0 riskse 0.96
Specialisation in developing innovative services
PERSDL 0.09 0.143 0.350 6.9 %e 1.09
DLINNO 1.03 0.313 10.752 Yes versus no 2.79**
UADL 0.17 0.155 1.165 7.5 %e 1.18
kaUADL 0.26 0.434 0.339 Yes versus no 1.29
Specialisation in developing innovative products
PERSFUE 0.01 0.150 0.001 10.0 %e 1.01
PERSKONSTR 0.32 0.140 5.247 9.6 %e 1.38***
PINNO 0.73 0.350 4.403 Yes versus no 2.08***
Contextual variables
ANZBESCHLog 0.43 0.151 8.082 1.2e 1.54**
BRANCHEMETALLd -0.64 0.551 1.337 Yes versus no 0.53
BRANCHEELEKTROd -1.08 0.746 2.103 Yes versus no 0.34
BRANCHEMSRd 0.07 0.375 0.030 Yes versus no 1.07
BRANCHEFZBAUd -1.63 0.741 4.816 Yes versus no 0.20***
Source German Manufacturing Survey 2009, own calculations, n = 414
Notes a reference: simple/medium complex products
b
reference: product development for standard portfolio
c
reference: mass production
d
reference: manufacturing sector
e
equated to one standard deviation of the z-transformation
+, *, **, *** identified the significance at the 10, 0.1, 1 and 5 levels
-2*LogLikelihood = 355.259; Cox and Snells R2 = 0.276; Nagelkerkes R2 = 0.399
18 Adapting Products for Servitization 307

Table 18.3 Construct tests

Factor (single factor or block) v2 (step/ df Significance
block)
Service-based business model (AVDL) 11.51 1 0.001
Specificity (KOMPLEX; PEMTO; PEVEMTO; EINZELS; 22.973 5 0.000
MITTELS)
Number of risks under consideration (ANZRIS) 0.078 1 0.779
Service orientation (PERSDL; DLINNO; UADL; kAUADL) 14.195 4 0.006
Product orientation (PERSFUE; PERSKONSTR; PINNO) 10.372 3 0.016
Context (ANZBESCHLog; BRANCHEMETALL; 15.507 4 0.008
BRANCHEELEKTRO; BRANCHEMSR; BRANCHEFZBAU)
Source German Manufacturing Survey 2009, own calculations, n = 414
Notes v2 of the comprehensive model: 133.958 (19 degrees of freedom, p \ 0.001)

18.4 Empirical Findings on Adapting Products

for Servitization and Managerial Implications

18.4.1 Dissemination of Product Adaptation in the Capital

Goods Industry

One goal of the empirical analysis is to describe the dissemination of constructive

adaptations of products to service concepts offered by capital goods manufacturers.
In the company survey, this phenomenon was a priority; its results draw the same
picture. Among the questioned capital goods manufacturers, 27.7 % stated that
they had already constructively altered goods to bring them into alignment with
the service concepts that they offered.
The dissemination of service-compatible design by enterprises in the capital
goods industry is not yet comprehensive. The share of product-adapting firms is
30 %—far below the percentage of firms (more than 97 %) that offer their cus-
tomers at least one service concept. Only one-third of the enterprises that offer
services recognise the necessity of designing physical products according to the
requirements that result from providing services.
For the remaining two-thirds of firms, it can be concluded that either their
combinations of products and services do not require adaptations or the adaptation
of their products to their service concepts would be appropriate. However, this has
not yet occurred because either the need for structural changes is not recognised or
there are internal or external barriers impeding this adaptation. Companies that
truly adapt a service-oriented mind-set must recognise the close linkage between
their products and their services. In the future, an increase in the proportion of
product-adapting firms will be desirable. Service research can support these
companies by identifying barriers and recommending clear strategies for linking
physical products to services via product design changes.
308 S. Biege

18.4.2 Product Adaptation and Ownership

Hypothesis 1 states that applying service-oriented design depends on the property

rights that remain with the capital goods producer and thus, on the service concept
offered. The construct analysis shows that the implementation of service-based
business models is significant as an explanatory variable for the probability that
companies adapt their products to their service concepts. The difference of
v2 = 11.51 (one degree of freedom) was calculated between the full model and the
sub-model, reduced by the factor AVDL at a \0.01 level of significance. The
positive regression coefficient indicates the postulated correlation. Consequently,
this hypothesis should not be rejected. When including the other factors of influence
in the regression model, the application of service-oriented design is also positively
dependent on an offer of a service-based business model. When a company’s service
portfolio lacks advanced service concepts but then implements at least one service-
based business model, it has a 2.6 times higher probability of adapting its products to
service concepts than do companies that lack any service-based business models.
The transition from a traditional product-centric business model to a service-
based business model entails a redistribution of property rights of the physical
good employed; the change in the incentive structure can be observed in the
quantitative survey. One positive result that can be derived from the analysis above
is that companies with service-based business models that effect a change in their
distributions of property rights can be seen as forerunners in adapting their
products to their service offers. Their probability of inducing design changes to
support their provision of services is nearly three times higher than in companies
that offer exclusively traditional services without any change in the property rights
structure. However, as described in Sect. 18.4.1 of this chapter, even in companies
with service-based business models, only one-third stated that they had adapted
their products to service needs.
To learn from already-adapting firms, companies that are transitioning from tra-
ditional product-centric business models to service-based business concepts should
understand and draw conclusions from their changed business conditions. More
precisely, providers should clearly define the objectives that they are pursuing in
implementing new business concepts and communicate those objectives to the
departments involved, with the aim of creating a common understanding of new
targets and giving joint responsibility to all parties involved. By doing so, internal
barriers might be reduced and the creativity of employees, e.g., in design departments,
can be channelled into considering service needs when developing their concepts.

18.4.3 Product Adaptation and Specificity

The second hypothesis argues that applying service-oriented design depends on the
specificity of the capital good. The more specific the goods are, the more likely it is
that firms will attempt to reduce that specificity by means of constructive adaptations.
18 Adapting Products for Servitization 309

The analysis indicates that this second hypothesis also proves to be a significant
explanatory factor. The hypothesis does not need to be rejected when considering
the other factors in the logistic regression model. The difference between the
likelihood of the full model and the likelihood of the sub-model, reduced by the
five factors covering the block of specificity, proves to be significant with
v2 = 22.973 at five degrees of freedom (level of significance at \0.01).
When looking at the individual factors and their influence in the full model, it is
clear that the complexity of goods is highly significant to explaining the proba-
bility that companies will adapt their products to the services that they offer. The
odds that a product will be adapted increase by 2.98 times if it shifts from simple
or averagely complex to complex. The error probability of this estimate amounts to
\0.01 %. The positive regression coefficient indicates the postulated correlation.
No other sub-factors of the block of specificity prove to be significant factors of
influence. If a larger error probability is tolerated, there is an explanatory factor of
made-to-order product development. The odds of making product adaptations
increase by 5.6 times when shifting from in-stock prefabricated products to
developing and manufacturing products to order. However, this estimation must be
treated with reservations because the error probability is 5.6 %.
The specificity of the employed capital goods is a factor influencing a company’s
decision to effect a constructive change in the physical goods that it utilises in
service-based business models. In the hypothetical model, it was assumed that in
light of the re-usability and the widest possible application of machines and
equipment, which are not sold in service concepts but whose use or results are the
object of transactions with customers, companies would strive to minimise the
specificity of their material goods. At the same time, however, client-specific
requirements must be addressed. On one hand, this consideration applies to the
individual composition of product and service components. On the other hand,
business models have several features that must be addressed according to each
individual client. Properties such as the geometry, material, quality or production
volumes of the end products or components manufactured under service-based
business models comprise only one factor of influence. It is up to firms, taking into
account various factors against the background of the targets of their business
models, to find the right balance between re-usability and customised configurations.

18.4.4 Product Adaptation and Risk Awareness

The third hypothesis claims that applying service-oriented design depends on the
risk awareness of the provider of advanced service concepts. However, the data
indicate that the number of risks considered does not have a significant influence
on the probability that products are adjusted to the service concepts offered. This
hypothesis is therefore rejected.
In this hypothesis, a link is made between the risk awareness of the selling
companies and the probability that they will make structural changes to the
310 S. Biege

physical goods that they utilise in service concepts. As a result of their changed
responsibilities and the new distribution of property rights in service-based busi-
ness models, a number of risks emerge for vendors and clients, which they would
not have had in the traditional business model. Accordingly, the hypothesis model
assumes that an increased sensitivity to risks on the part of providers of service
concepts leads to adaptation of the employed goods in order to minimise those
risks. The above-discussed reduction in the specificity of capital goods to make
them more widely deployable and re-usable after completion of their first life cycle
is one example of a measure undertaken to reduce the risks inherent to service-
based business models.
One possible explanation of the rejection of the hypothesis is the method that
was used to measure risk awareness. The number of risks considered in risk
management activities was used to operationalise the construct. However, com-
panies that implement service-based business models might not use a structured
risk management approach to consider the risks that accompany these concepts;
instead, they might choose a more ‘‘hands-on’’ method of managing those risks
and adapt their goods to service needs whilst eschewing the label of ‘‘risk
reduction’’. Another possible explanation for the rejection of the hypothesis might
be the existence of a pragmatic approach to service-based business models. When
a company reacts to short-notice inquiries from its customers it might not suffi-
ciently consider the inherent risks of those inquiries. However, the importance of
considering all chances and risks when entering into new ways of doing business
must not be underestimated, particularly in cases involving business concepts in
which the well-known distribution of property rights between providers and cus-
tomers changes.

18.4.5 Product Adaptation and Specialisation

in the Development of Innovative Services and Goods

Hypothesis 4 refers to the relationship between the specialisation of a provider of

service concepts and the probability that the company will modify its physical
goods to meet the requirements arising from its services.
The block-of-service orientation proves to be a significant explanatory factor
for the probability that companies adapt their products to their service concepts.
The difference between the likelihood of the full model and the likelihood of the
sub-model reduced by the block-of-service orientation equals v2 = 14.195, which
is significant at four degrees of freedom and an error probability of \0.01 %. An
examination of the full model shows that the individual factor of service inno-
vativeness is a significant explanatory factor for the probability of product adap-
tation. Companies that have introduced innovative service concepts to the market
during the past 3 years are 2.8 times more likely to have adapted their products to
18 Adapting Products for Servitization 311

their service concepts compared to situations in which no service innovations have

been introduced during the past 3 years.
Based on the construct analysis of the likelihood that products are adapted to
services, orientation towards developing innovative products also proves to be a
significant explanatory factor. The difference between the likelihood of the full
model and the likelihood of the sub-model reduced by the three factors of the
block of product orientation is v2 = 10.372 (three degrees of freedom). When
looking at the full model, two of the single factors of this block show significant
influence on the probability that companies adapt their products to their service
concepts. Both the proportion of personnel employed in construction and the
proportion employed in design and product innovativeness are significant factors:
both estimates have error probabilities smaller than 5 %. If the proportion of staff
employed in construction and design increases by 9.8 % points, the odds that
product adaptations will be made increase by 1.4 times. If a company is considered
to be a product innovator, i.e., if it has introduced product innovations to the
market during the last three years, the odds of product adaptations increase by 2.1
times compared to companies that are not product innovators.
The fact that both the product innovativeness and the service innovativeness of
the companies surveyed have significant explanatory power for product adapta-
tions is in accord with the findings of Gebauer et al. Those researchers concluded
that it was unnecessary, or perhaps even counterproductive, for an industrial
company to successfully provide product-related services by replacing its existing
focus on products with a service culture. As a real in-house challenge, they
identified the introduction of a parallel service orientation in a firm that had a
symbiotic relationship with typical production-technical values. In particular, the
efficiency idea stemming from product orientation and the quest for flexibility that
arises from a service orientation must be harmonised (Gebauer et al. 2005). Both
product and service innovativeness are relevant factors for product adaptations. At
least two departments of a company—customer service and construction—are
touched by adapting products to service concepts. Data collected while providing
customer service are an input factor for developing new products and improving
existing products. Furthermore, products must be designed in such a way that they
are service-friendly, i.e., that service provision can easily take place. For service-
providing companies and, more specifically, for companies with service-based
business models, it is therefore important to create a strong link between these
divisions of a company and the values for which they stand.

18.5 Summary

To address a gap in the available research on servitization, the present chapter of

this book reports the results of an analysis based on data from the German
Manufacturing Survey 2009. The results illustrate that, whilst the majority of
manufacturers offer services that accompany the physical products they sell, fewer
312 S. Biege

than one-third of these service providers adapt their products to their services.
Although such an adaptation could provide advantages for servitized manufac-
turers, they obviously hesitate to make their products ‘‘fit for services’’.
Research analysing the factors stimulating servitized manufacturers’ propensity
to adapt their products to servitized business concepts clearly indicates that the
distribution between customer and provider of the property rights of physical
goods has explanatory power. If the property rights of a product remain with its
manufacturer in the phase of use instead of being transferred to the customers, the
probability of manufacturers to adapt their products to services increases.
The same could be shown for the specificity of the equipment employed.
However, the number of risks considered in risk management does not influence
the probability of product adaptation. That said, against the background of theory,
risk awareness seems to drive companies to adapt their goods to their service needs
in business models in which property rights are only partially transferred to cus-
tomers. In future research, this discrepancy should receive more attention.
Finally, companies’ specialisation in developing both innovative products and
innovative services influences the probability that manufacturers will adapt their
goods to the services that they offer.
These findings apparently demonstrate that if innovative manufacturers of
goods that conform to customers’ needs engage in the phase of use instead of
transferring ownership to customers, they will be in the lead in adapting their
products to servitized business concepts. To avoid failures in servitising manu-
facturers without such frame conditions should attempt to intensify their internal
links between servitization and product engineering.

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Chapter 19
The Impact of Servitization on Key
Competences and Qualification Profiles
in the Machine Building Industry

Matthias Gotsch, Christiane Hipp, Petra Jung Erceg

and Nadezda Weidner

Abstract The servitization of industrial companies indisputably has consequences

on key competences and human resources management. This article will show how
qualification profiles of machine building companies are affected by servitization
and which aspects of servitized businesses induce new modes of working for the
employee groups concerned. A comprehensive key competences catalogue for
servitized machine building companies is developed and in order to show the
current impact of servitization on human resources in operational practice, data
from the German Manufacturing Survey is used. To conclude, two specific quali-
fication profiles for sales and after-sales employees in machine building companies
are elaborated in detail.

19.1 Introduction

For industrial companies the ambition to reach new potential customers and to
ensure the loyalty of existing customers is connected with servitization. But
improved customer loyalty can only be achieved if high customer satisfaction can

M. Gotsch (&)  P. J. Erceg  N. Weidner

Fraunhofer Institute for Systems and Innovation Research ISI,
Breslauer Straße 48, 76139 Karlsruhe, Germany
e-mail: matthias.gotsch@isi.fraunhofer.de
P. J. Erceg
e-mail: petra.jung-erceg@isi.fraunhofer.de
N. Weidner
e-mail: Nadezda.Weidner@isi.fraunhofer.de
C. Hipp
Human Resource Management and General Management,
Technical University Cottbus, Cottbus, Germany
e-mail: hipp@tu-cottbus.de

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_19, 315

 Springer International Publishing Switzerland 2014
316 M. Gotsch et al.

be generated during the interaction with the customer in the service process. An
employee who during his service is in direct contact with the customer is auto-
matically his company’s representative. Customers equate the service quality
provided by the firm’s employee with the quality of the entire company. Against
this background, the qualifications of the staff providing a service increasingly
plays a key role for the desired customer satisfaction and thus the success of
industrial service strategies overall. To empower its employees to successfully
deal with the challenges of servitization has been referred to by Homburg et al.
(2003) as an economic necessity for the service-oriented industry.
Literature reports positive as well as negative implications on service
employees by servitization effects. The increasing job requirements on the service
personnel can be described as very challenging for the individual employee. For
instance, employees have to manage diverse tasks, such as anticipation of cus-
tomer needs, round-the-clock commitment or increased communication intensity.
The service is often called when the customer is already in a critical situation and
thus the providing of service is exposed to a high pressure of time. On the other
hand, the range of activities of individuals subsequently extends their area of
responsibility. Due to the direct relationship to the market a service employees is
an appropriate messenger of market information and early trends into one’s own
company. Thereby the service employees have greater importance within the
company, which can be perceived by employees as very positive and enriching
(Rainfurth 2003).
Adequate human resources management and especially sufficient competence
management is crucial for the success of servitization in industrial companies.
Therefore, we develop some implications how to manage the transition from
manufacturer to service provider for human resources management. In doing so,
all social aspects of servitization have to be taken into account and the qualifi-
cations of service employees should be adapted to new needs. Amongst others,
sales and after-sales personnel have to be empowered in order to fulfil servitization
requirements. Hence, the paper is divided into five chapters. After the introduction
at hand, in Sect. 19.2 we concentrate on the derivation of specific qualification
profiles for servitized machine building companies. As an empirical examination
of this qualification profiles is desirable, we present recent empirical findings of
the German Manufacturing Survey in Sect. 19.3, which shed light on human
resources in servitized manufacturing companies. Then in Sect. 19.4, we elaborate
specific qualification profiles for employees in sales and after-sales services of
machine building companies. In the last Sect. 19.5, we summarise the research
contribution and propose managerial implications.
19 The Impact of Servitization on Key Competences and Qualification Profiles 317

19.2 Derivations of Specific Qualification Profiles

in the Servitized Machine Building Industry

The successful transformation from a traditional industrial company to a product-

service system provider requires, beside the traditional competences, also additional
complementary qualifications and skills by the employees. By qualification
requirements we understand those human performance requirements that originate
from a specific task in the situational context. These requirements must be met by an
employee in order to adequately deal with this task (Becker 1994). This means that
the concepts and practices of human resource management in industrial enterprises
have to be adapted to these task changes. The safeguarding of service competencies
in industrial enterprises requires a system of new qualification measures tailored to
the competency requirements (Rainfurth 2003; Kinkel et al. 2003).
Other findings by Oliva and Kallenberg (2003) highlight that running a servi-
tized manufacturing company requires—beside a specific company culture,
adapted organizational structures and adequate processes—particularly appropri-
ate qualifications by the personnel that are different from the product business
setting. The strategic objective of a company to position itself successfully in the
field of product-service systems influences the qualification profile of the indi-
vidual employee. Particularly, those involved in the core processes are confronted
with new challenges and requirements resulting from the specific characteristics of
servitization issues.
According to Penttinen and Palmer (2007) product-service systems are generally
characterized by a high level of product and relationship complexity. Both com-
plexities can be described by several dimensions as noted in DIN (2009): For product
complexity, the number and heterogeneity of the individual sub-components can be
used as the dimension. Relationship complexity is on the one hand demonstrated by
the external complexity with an increased customer orientation and its integration into
the value creation process. On the other hand, also the internal complexity rises
through the integration of the product components and their individualization.
Additionally, the temporal extent of the different core processes (such as sales process,
service delivery process, operator models) increases both the product and the rela-
tionship complexity (DIN 2009).
Employees should be empowered and motivated to act in accordance with these
new challenges. All measures to improve staff qualification have to be designed to
enable employees to cope with servitization challenges. While the increased
product complexity can be handled with an increasing specialization of staff in
specific subject areas, the increased relationship complexity requires methodo-
logical and social competencies (Egeling and Nippa 2009). Social skills are nec-
essary to deal with other people, and it is crucial that all employees are involved in
this process. For all areas some basic methodological skills like multidisciplinary
activities and independent methods are important. Specifically, these are project-
and process-management methods that are considered for a successful sales and
delivery process (Wienhold 2009).
318 M. Gotsch et al.

Furthermore, new service-based business models require new qualification

profiles of employees. Therefore, we will not limit our observation to product-
related services only, but will also include service-based business models of
industrial companies in our examinations to allow for additional learning. We look
closely at three exemplary service-based business models for machine building
companies (availability guarantees, flexibility guarantees, and operational ser-
vices) and discuss their consequences for employees’ qualification profiles.
As an example for so-called use-oriented business models the concept of
availability guarantee promises the customer a pre-defined level of availability for
the machine. The provider monitors the operating conditions of the product and
extends this by comprehensive maintenance activities (Kim et al. 2007; Kindström
2010; Tukker 2004). The responsibility for the availability of the installed
machinery’s performance requires some safeguarding mechanisms. This can be
done by applying technology or by putting a monitoring person at the customeŕs
side. In both cases human capital with adequate skills is a pre-requisite. The front
end personnel must be embedded in a network of internal units reacting to the
monitoring results, such as the sending and sometimes shipping of spare parts to
prevent a fail out.
The value proposed in flexibility-oriented business models is to guard the
customer against the dynamic changing environment. Flexibility in this model
requires that the machine tool builder is able to support customers at any time to
have available the right production capacity to satisfy market demand, which
might change in terms of features and volumes. In terms of resources the most
important one is the technical knowledge on how to plan and forecast production
system dynamic evolution, and to modify, upgrade and overhaul the production
system with the available resources. The internal value chain in this model has to
permanently keep up the potential to deliver flexibility. This requires an ongoing
engagement in research, an active sensing without concrete customer demands on
application possibilities for the current installed base of the customer, the provi-
sion of human resources able to perform activities such as forecasting, planning
and pricing reconfiguration and maintenance services managing customer’s market
uncertainty. The support of the planning of flexibility and the assessment to which
extent it is actually feasible with the current machinery software tools and to
quickly process all the information (as-is parameters, as-should parameters) are
enablers that nowadays make this value proposition economically feasible.
Operational services are even more sophisticated, which are process-oriented
services in which the supplier is directly engaged in the production of the results
(for example by managing operations) and which are also paid on results. Pay on
production concepts are stereotypical examples in literature representing result-
oriented services (Kim et al. 2007). This selling of the result is an appropriate way
to bring very new production technology into the market as the risk is shared by
the machine tool builder and the customer. The delivery of the parts produced on
the own machine at the right time and of the right quality are essential. Compared
to a pure machine tool producer, planning tools and capabilities for capacity
scheduling are needed especially when several short term orders with high time
19 The Impact of Servitization on Key Competences and Qualification Profiles 319

Key competences profile

Professional expertise Methodological skills Social and personal abilities

Personal
Technical competence Managerial methods Social skills
characteristics
• Expert knowledge • Life-cycle costing • Behavior • Agility
(mechanics, electronics)
• Cost benefit analysis • Appearance • Openness
• Knowledge about product-
• Calculation methods • Act of courtesy • Self-confidence
systems (components,
processes, controls) • Project management • Acculturation • Resilience
• New developments • Conflict resolution • Decision-making
(alternative technologies) Methods of mediation ability
• Behavior towards
• Diagnostics and negotiating
customers • Self-initiative
• Didactics
• Affability • Ability to judge
Knowledge of conditions • Rhetoric
• Helpfulness • Autonomy
• Knowledge of languages
• Contract interpretation • Cooperativeness • Improvisational
• Interview techniques • Reflectance ability
• Limitations of liability
• Safety regulations • Conflict management • Willingness to learn

Methods of information
Corporate knowledge and communication

• Area of responsibility • IT and data management

• Relevant interfaces • Scheduling systems
• Recent developments • Methods for documentation

Fig. 19.1 Service related key competences profile (Source own illustration)

pressure are served or when the machines for the service business are also needed
for internal testing of the R&D department. In addition, personnel for the service
business is required that needs to be skilled in operating the own machinery. For
example, employing temporary workers is not an adequate means to build up a
sustainable business model. Skilled personnel are required for this task which often
needs to be trained over a longer time span. In addition, if this service is offered at
the machine tool builder’s facilities there has to be enough job shop capacity.
Often a crucial parameter for the success is the capability to wisely apply
complementary assets for this model such as when the production and service
personnel are equally experienced and could rotate between production service
business units.
To conclude, all potentially necessary qualifications and competences for
employees in a servitized machine building company are presented in Fig. 19.1.
Based on the various work situations in which industrial services are being pro-
vided, a key competences catalogue of all service- related activities can be
developed. This comprehensive catalogue comprises all disciplinary and interdis-
ciplinary competence requirements for providing industrial services (Hartel 2002;
Noch 1995). While inside larger companies the amount of service-related assign-
ments will allow the distribution of these competence requirements on several
shoulders, focussing a larger range of competences on a single person could be a
requirement in a small industrial company to. Since this catalogue should serve as a
checklist when creating the specific competence requirement profiles for all
working places concerned with providing services, we divided the key competences
320 M. Gotsch et al.

into three features ‘‘professional expertise’’, ‘‘methodological skills’’ and ‘‘social

and personal abilities’’. In determining concrete qualification and competences
profiles for providing services in industrial companies, it makes sense to use this
comprehensive catalogue and to single out those aspects, which are required for
different job activities related to providing a service. In order to establish a solid
foundation for long-term development of the entire service area, it is not sufficient
to develop only the competence areas derived from the direct service-related tasks,
but to consider also more product-related duties (Woehe and Lang 2003).
After the derivation of the comprehensive profile of key competences for serv-
itized machine building companies, in the following section we will present recent
empirical findings of the German Manufacturing Survey on this research field.

19.3 Human Resources in Servitized Industrial

Companies: Recent Empirical Findings

In order to show the current impact of servitization on qualification profiles in

operational practice, data from the German Manufacturing Survey is used, which
is conducted every 3 years and is part of the European Manufacturing Survey. For
the following analyses we use survey data from the year 2009, which covers
1,494 companies of the German manufacturing sector.
The analyses focus on two groups of companies: servitized and non-servitized
companies. Servitization in this context is operationalized using the sales of
product-related services as a share of total turnover. Therefore, in the following we
understand servitized companies as realizing more than 15 % of whole sales by
selling services (upper tertile), while non-servitized companies have a share of
services in the sales below 5 % (bottom tertile). Thus, firms without any services
sales are included whereas companies with a share of services between 5 and 15 %
are excluded from the analysis. Hence, we identified 371 servitized companies and
370 non-servitized companies in our sample. All analyses are based on this extract
of 741 firms from the German Manufacturing Survey. The main results of the
comparison between the two groups are presented and discussed in the following.
Servitized companies have a higher share of highly qualified staff (graduates,
PhDs, technicians) and also qualified staff (afore mentioned plus employees with
commercial or technical/industrial training) than non-servitized firms. While the
latter on average have only 18 % of highly qualified personnel, the servitized
companies have nearly 28 % (see Fig. 19.2). The same phenomenon occurs when
also taking into account the employees with commercial or technical/industrial
training. Here the servitized companies on average have nearly 73 %, while the
non-servitized ones only have 63 % employees belonging to the qualified work-
force. According to an Independent-Samples T-Test for equality of means, both
group differences are significant at the 1 % level (t = -7.747, df = 627.467,
p \ 0.001 respectively t = -5.091, df = 692.367, p \ 0.001).
19 The Impact of Servitization on Key Competences and Qualification Profiles 321

80%
73%
63%

Share of employees
Servitized companies
Non - Servitized companies

Highly qualified staff:

28% Graduates, PhDs, Technicians
18%
Qualified staff:
Graduates, PhDs, Technicians,
Employees with commercial or
0% technical/industrial training
Highly qualified staff Qualified staff

Fig. 19.2 Staff qualification in servitized and non-servitized manufacturing companies (Source
German Manufacturing Survey 2009, Fraunhofer ISI)

Since knowledge and qualification requirements change over time, companies

need to invest in qualification and learning programmes to keep the qualification
standard on a high level. In times of ageing societies, also age-sensitive qualifi-
cation activities become more and more important for companies. In this case
activities for older employees include:
• specific working time models for older employees;
• specific training programmes for older employees;
• instruments for retaining and transferring the knowledge of older employees in
the company (mixed-age teams, old-young tandems, mentoring schemes, etc.);
• specific human resources plans for older employees;
• specific efficiency factors for older employees (knowledge transfer, improve-
ment suggestions, etc.);
• specific schemes for health management for older employees (work-life bal-
ance, back training, cardiovascular training, etc.).
In addition, activities for young employees are:
• increased number of vocational training courses and schemes;
• new incentives for junior staff retention (bonus systems, family-friendly
working times, etc.).
Regarding an involvement in activities especially for older or younger
employees, no statistically significant difference can be observed between the two
groups (v2(1) = 0.658, p = 0.417 respectively v22(1) = 0.174, p = 0.676). Both,
servitized and non-servitized companies offer these activities almost to the same
extent as shown in Fig. 19.3.
In our analysis, we also examine the usage of special human resources orga-
nizational concepts in manufacturing companies:
• use of task integration;
• use of knowledge-based systems (documenting of currently not fully exploited
qualifications);
322 M. Gotsch et al.

Fig. 19.3 Activities for 80%

employees in servitized and 67% 66%

Share of companies
non-servitized manufacturing 60%
57%
companies (Source German
Manufacturing Survey 2009,
Fraunhofer ISI)

0%
Activities for older Activities for young
employees employees

Servitized companies
Non -Servitized companies

• use of regular individual appraisal interviews;

• personnel training schemes as a special function in human resources.
As expected, our empirical results indicate that it is more likely for the servi-
tized companies to offer innovative product-related services than it is for the non-
servitized companies. Indeed, the share of service innovators among the servitized
companies is more than double than among the non-servitized companies (31 vs.
14 %). Accounting for the number of special human resources organizational
concepts, we find that companies with higher numbers of concepts in use are more
likely to be service innovators (see Fig. 19.4).
This relation is particularly strong for the servitized companies. In the non-
servitized companies, service innovations, in contrast, seem to be only weakly
associated with the usage of special organizational concepts for personnel.
Therefore, the difference between both groups of companies grows with an
increasing number of human resources concepts in use. For the sake of simplicity
we categorized the number of concepts, which are used by a company at the same
time, into three categories: none or one concept, two concepts, and three or four
concepts. In the first category, the share of service innovators is 10 % among the
non-servitized companies, compared to 23 % among the servitized companies.
The biggest difference is observed for the companies that implemented three or
four special concepts. The share of service innovators among the servitized
companies in this category is the highest and accounts for 44 %, in contrast to only
17 % among the non-servitized companies.
As results of the German Manufacturing Survey also showed, servitized com-
panies are predominantly covered in the sector of ‘‘manufacture of machinery and
equipment’’ with 75 % of all companies operating in this sector belonging to
servitized firms. This emphasises the meaningfulness to especially examine the
machine building industry in this contribution. As no further empirical data is
available to explore the consequences of servitization on human resources more in
detail, specific qualification profiles for selected departments will be presented in
the following section.
19 The Impact of Servitization on Key Competences and Qualification Profiles 323

Fig. 19.4 Use of special 50%

44%

Share of service innovators

human resources
organizational concepts in
servitized and non-servitized 32%
manufacturing companies
(Source German 23%
Manufacturing Survey 2009, 17% 17%
Fraunhofer ISI) 10%

0%
none or one two concepts three or four
concept used used concepts used
Servitized companies
Non - Servitized companies

19.4 Qualification Profiles for Selected Departments

in a Servitized Machine Building Industry

A two-dimensional personal portfolio can be used to develop homogeneous groups

of employees in the service department of industrial enterprises (Elsik 1992;
Wörwag 1996).1 This tool assumes that industrial service activities can be dis-
tinguished regarding their complexity. Services with low complexity or high
complexity require different qualifications by the personnel and form a first
demarcation criterion for developing service- related job positions with homoge-
neous requirements. A second segmentation criterion of service activities repre-
sents the orientation of the service. Hence, a distinction can be made between
highly task-oriented services and highly relationship-oriented services (see
Fig. 19.5). Each of these service types requires a specific qualification profile.
Here we present two competence and qualification profiles, placed diametri-
cally opposed in the portfolio, which are highly widespread in practice and
therefore of great importance. A first requirement profile summarises the tasks that
are heavily relationship-oriented, but have a relatively low complexity. This
concerns mainly tasks in the field of sales and marketing of industrial services. The
employees who will fulfil this task must provide a high communication perfor-
mance. Although technical expertise is required, the depth of penetration into the
material may remain limited.
A second requirement profile is much more task-oriented compared to the first
profile. The complexity of the tasks is the highest in this case. Service activities of
this type include mainly the areas of responsibility of the service technicians who
perform independent troubleshooting and resolution for customers. This concerns
after-sales services like the installation and commissioning of systems, and also

1
Sect. 19.4 is based on a paper in German by Jung Erceg (2005). Since this topic is still of
current interest to the manufacturing companies, we decided to update the content by considering
recent contributions from literature and to make it available in English for the first time.
324 M. Gotsch et al.

High degree of
complexity High professional
expertise required
Employees in
After - sales

(customer services)

Moderate professional
expertise required
Low degree of
complexity

Employees in
Sales

(services marketing)

Task - oriented Relationship - oriented

Fig. 19.5 Human resources portfolio of industrial services (Source own illustration)

the incident management in the current operation. Therefore, in the following

section we will present special qualification profiles which comply with the
requirements for sales and after-sales employees.

19.4.1 Qualification Profiles for Employees in Sales

Basically, active and intense marketing plays a crucial role for the market success of
industrial services (Lay and Jung Erceg 2002; Homburg et al. 2000; Müller 1998).
A sales representative, whose sales job has traditionally been focused on sales of
material products, cannot be expected to suddenly promote and sell industrial ser-
vices without any additional qualifications and training. Probably the biggest
‘‘change over’’ in sales behaviour originates from the intangibility of services,
which opposed to material products cannot be demonstrated before use. Sales staff
has the task to turn their company’s current service offerings into the real com-
petitive advantages as perceived by the customer (Schleicher 2003). The under-
standing of the functional complementarity between material products and services,
allows the seller to customize his service communication by precisely selecting a
specific product-service configuration for the very particular problem of a client. Of
course, this information cannot be successfully ‘‘translated’’ into pertinent selling
arguments if the sales employees do not understand the technical purpose of services
to improve the overall product performance. The expertise of a service seller include
proficiency regarding the payment conditions to provide a service that goes beyond
simply knowing the service prices and supplying additional information about
19 The Impact of Servitization on Key Competences and Qualification Profiles 325

financing commandments, service-related discount policy and warranty of the

company.
Another peculiarity that emerges is the difference regarding the customer
acceptance to pay for services. In the machine tool building industry it is a given
that many services are provided for free. Therefore the supplier of services realize
the importance to explain to their customers the service benefits in concrete and
measurable terms such as savings in time and money. The communication of the
value-added for the customer is a crucial point and is often the main obstacle which
needs to be overcome in every new service job. When customers realize the added
value delivered by the service, the effort put into the cooperation by the customer as
well as their acceptance of new solutions is supposedly higher. The sales staff must
be empowered to take an active role in services sale. Therefore, it is crucial that the
sales staff (1) is familiar with the extended range of the service offering, (2) argues
problem-oriented and not product-oriented and (3) clearly highlights the added
value of the hybrid product to the customer (DIN 2009).
As a result of an active service offering and corresponding changes in sales
argumentation and behaviour mentioned above, there are new requirements in the
area of methodological skills for the sales staff. This is particularly true for
business methods and possibilities of electronic data processing. With the aim of
pointing out the service benefits more precisely, data simulations based on eco-
nomic methods such as the analysis of life-cycle costs or cost-benefit analyses are
used for selling. This allows a better illustration of the financial relationship
between the use of a product-related service and the potential savings in product
costs. Particularly for the exploration of the customer problem in case of more
complex product-service systems, an adequate interview technique will be needed.
Finally, it is essential that employees in the service distribution have sufficient
personal abilities. All aforementioned requirements are summarised in the quali-
fication and competence profile for sales employees in Fig. 19.6.

19.4.2 Qualification Profiles for Employees in After-Sales

The activity spectrum of customer services in after-sales include all product-

accompanying services that are performed during the use phase for conservation,
recovering or increasing the functionality of the tangible good. Examples are
common terms such as inspection, maintenance and repair, which are subsumed
under the generic term maintenance and are supplemented by modernization
services (Rainfurth 2003; Zborschil 1994). Most customers expect that after-sales
services are flexible and that they are carried out according to highest performance
and technological standards (Hartel 2002). Furthermore, customers expect from
the service provider competent advice on every aspect of the product as well as
mediation in all matters between the manufacturer and the customer.
The expansion of product-related services inside industrial companies affected
this group of employees in many ways. New industrial business models, in which
326 M. Gotsch et al.

Key competences profile for sales employees

Professional expertise Methodological skills Social and personal abilities

Personal
Technical competence Managerial methods Social skills
characteristics
• Expert knowledge • Life-cycle costing • Behavior • Agility
(mechanics, electronics)
• Cost benefit analysis • Appearance • Openness
• Knowledge about product-
• Calculation methods • Act of courtesy • Self-confidence
systems (components,
processes, controls) • Project management • Acculturation • Resilience
• New developments • Conflict resolution • Decision-making
(alternative technologies) Methods of mediation ability
• Behavior towards
• Diagnostics and negotiating
customers • Self-initiative
• Didactics
• Affability • Ability to judge
Knowledge of conditions • Rhetoric
• Helpfulness • Autonomy
• Knowledge of languages
• Contract interpretation • Cooperativeness • Improvisational
• Interview techniques ability
• Limitations of liability • Reflectance
• Safety regulations • Conflict management • Willingness to learn

Methods of information
Corporate knowledge and communication

• Area of responsibility • IT and data management

strong characteristics
• Relevant interfaces • Scheduling systems
• Recent developments • Methods for documentation moderate characteristics

Fig. 19.6 Key competences profile for sales employees (Source own illustration)

service level agreements are offered to the customers which guarantee highest
levels of machine availabilities of more than 90 %, mean that the service technician
is directly responsible for results. If the promised benefits of the service contract are
not met by preventive maintenance or by a rapid response to emergency incidents,
the customer has compensation claims, which can lead to painful losses for the
machine tool builder. Against this background, the activity diagram for the service
technician changes in the way that they are not only responsible for the proper
removal of disturbances, but that they need to take action in error prevention, which
is suitable for the agreed service level agreement. Additionally, the service
employees must consider the time that is spent on troubleshooting.
Therefore the key for delivering qualitative service is that the service employees
have a high level of technical expertise of the applied technology. Thus, some
companies require their service employees to have worked on the production line
beforehand. To guarantee a high service performance new employees accompany
experienced colleagues in order to learn. Attention is also paid to the knowledge of
technical language as some companies offer special courses for the technical terms.
Interpersonal and communication skills are of utmost importance in services.
These two terms comprise issues such as the mindset of being a service worker in
terms of solving problems for the customer as well as to have an understanding of
the specific characteristics according to size or industry (DIN 2009).
For an after-sales service representative to complete his role, he is expected not
only to know all of the information mentioned above, but has to also continuously
develop his knowledge. This requires intense feedback from the marketing
19 The Impact of Servitization on Key Competences and Qualification Profiles 327

Key competences profile for after-sales employees

Professional expertise Methodological skills Social and personal abilities

Personal
Technical competence Managerial methods Social skills
characteristics
• Expert knowledge • Life-cycle costing • Behavior • Agility
(mechanics, electronics)
• Cost benefit analysis • Appearance • Openness
• Knowledge about product-
• Calculation methods • Act of courtesy • Self-confidence
systems (components,
processes, controls) • Project management • Acculturation • Resilience
• New developments • Conflict resolution • Decision-making
(alternative technologies) Methods of mediation ability
• Behavior towards
• Diagnostics and negotiating
customers • Self-initiative
• Didactics
• Affability • Ability to judge
Knowledge of conditions • Rhetoric
• Helpfulness • Autonomy
• Knowledge of languages
• Contract interpretation • Cooperativeness • Improvisational
• Interview techniques ability
• Limitations of liability • Reflectance
• Safety regulations • Conflict management • Willingness to learn

Methods of information
Corporate knowledge and communication

• Area of responsibility • IT and data management

strong characteristics
• Relevant interfaces • Scheduling systems
• Recent developments • Methods for documentation moderate characteristics

Fig. 19.7 Key competences profile for after-sales employees (Source own illustration)

department and product development, which leads to more exchanges of infor-

mation within the company than was the case in the past. To fulfil this role the
departments must be familiar with the company’s usual methodology of docu-
menting machine faults and fault causes and business-relevant information about
the customer. Therefore, advanced knowledge of modern information and com-
munication technologies is essential, because the employees communicate and
exchange data and information with the company almost exclusively on laptops
that have become mandatory for their work. This includes mastering the latest
electronic systems for data transmission, management and processing.
With the increase of the export business in the field of offering product support
services to worldwide customers, service representatives are increasingly con-
fronted with different cultural backgrounds. In order to deal with cultural differ-
ences based mainly on different behaviour and expectations of foreign customers
during their work abroad, the service employees need language skills and inter-
cultural competence. Finally, the after-sales service representatives get to know
customer complaints and dissatisfaction personally, while performing service
activities. Another main task in this context is to reassure customers. Therefore,
methods used for conflict transformation are also essential tools. Ultimately, the
work in the field assumes a large energy potential, mobility, strength, action and
decision-making skills, self-reliance, friendliness, helpfulness, abstraction ability,
curiosity and cultural compatibility.
When the industrial business models are even more complex and contain the
operation of plants and machinery by the supplier at the customer site, the service
328 M. Gotsch et al.

team of the operator is still subject to further requirements. The operator service
team may replace the service team of the customer and has to independently
decide what to do when a disturbance on call occurs. All supposable requirements
for employees are summarised in the qualification and competence profile for
after-sales employees in Fig. 19.7.

19.5 Discussion

19.5.1 Research Contribution and Summary

In order to design a clearly arranged overview of qualification profiles we derived

specific qualification and competence profiles in a servitized industry and to
conclude presented all potential necessary qualifications, skills and abilities for
employees in a servitized machine building company.
The empirical evidence presented in the third chapter showed that servitized
companies have a higher share of highly qualified staff (graduates, PhDs, techni-
cians) and qualified staff (former ones plus employees with commercial or tech-
nical/industrial training) than non-servitized firms. Servitized companies also have
a higher share of service innovators and this share is even higher if the companies
use special human resources organizational concepts.
In the following we elaborated two specific profiles, for employees in service
sales and for after-sales departments and showed the qualifications and compe-
tences necessary in these specific two working fields. Future research should
address a more strategic and resource based approach to better connect different
product and service strategies of manufacturing companies, organizational designs
and derivations to qualify service employees (Gebauer et al. 2010).

19.5.2 Managerial Implications

In the future, manufacturing companies especially face the challenge of integrating

services into product offerings in combination with managing a shift in the
underlying business model. This movement has been termed the servitization of
business (Raja et al. 2010). The human resource management of servitization
needs to be addressed at the same time within this debate.
Indisputably, it seems very challenging to formulate common proposals on the
topic of human resources regarding servitized businesses. While the production of
high technology products still gives distinction to the self-understanding in the
machine building industry, additionally the product is also seen as a value carrier,
where the value is exploited through service. Therefore, the qualifications of service
employees have to be increased by adequate training measures. Especially sales and
after-sales personnel should to be empowered in order to fulfil servitization
19 The Impact of Servitization on Key Competences and Qualification Profiles 329

requirements. To develop service-related training goals for the individual employ-

ees, the target job profiles have to be compared with the actual skill profiles of the
employees. If a gap in skills is identified, the company can begin to develop and
implement training programmes to address the lack of qualifications. In the following
we present two examples, one for employees in sales and one for after-sales services.
Employees in sales have to calculate adequate prices for all services to be
delivered, which is a challenging task. For the production of security and routine
when calculating the selling price and discount of product-related services, inter-
active work might help. Using practical examples which employ computerized
programs for life-cycle costing analysis and cost-benefit analysis of product-related
services might also be effective.
Employees in after-sales services have to deal with other tasks and therefore
have different support requirements, for instance, customer service representatives
should be prepared with information materials and documentation, whether in
paper or electronic form. Since they are used to acting independently and to filter
out the necessary and useful information for own activities, the creation of a way
to access machines’ histories, data sheets, photos, knowledge or customer rela-
tionship management databases stored on a central server should support the rapid
and independent action.
But not only the individual qualification profile needs to be addressed, also an
adoption of the organizational governance structure is necessary (Turunen and
Neely 2011). Raja et al. (2010) highlight, that the shift to servitization endangers
the implementation of modern partnering programmes which are especially
important for decentralized sales and after-sales units. It is highly relevant for the
successful implementation of the servitization strategy to have a close look at the
demand, control, and decision latitude structure. It is necessary to give service
employees as much decentralized freedom of decision taking to motivate them to
take responsibility for the full service process and its results. This often means a
shift in the culture of the whole company and requires additional qualification
programmes for managers.

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 Part III
Conclusions
Chapter 20
Servitization by Sector
and Manufacturers’ Operational
Departments: Lessons Learned

Gunter Lay

Abstract This concluding chapter summarises the previous chapters by focussing

on two questions: (1) Can sector-specific environments explain differences in
servitization by sector? (2) What dependencies affect the adaptation of manufac-
turers’ operational departments to servitization? Juxtaposing the findings from the
sector chapters suggests that manufacturers in sectors that are shocked by radical
innovations in physical products, that serve markets with an oligopolistic customer
structure and that have acquired superior knowledge in applying their own products
are more likely to change their business models towards offering advanced services.
In addition to the ratio of the installed base to annual sales, these three aspects have
proved to be relevant for adopting servitization strategies. As the results presented
in the departmental chapters indicate, mutual dependencies exist among the various
decisions involved in adapting manufacturers’ capabilities, processes and structures
to servitized business models. Accounting practices, procurement and supplier
relationships, research and development, human resource management and—first
and foremost—the competitive strategies of manufacturers must be reshaped
simultaneously. This final chapter concludes with a discussion of possible future
trends regarding servitization in manufacturing industries.

20.1 Introduction

The previous chapters presented a comprehensive compilation of sectoral studies of

servitization in manufacturing industries, on the one hand, and research investi-
gating the necessity to adapt various processes and departments of manufacturing
companies to servitized business models, on the other. The variety of findings and

G. Lay (&)
Fraunhofer Institute for Systems and Innovation Research ISI,
Breslauer Straße 48, 76139 Karlsruhe, Germany
e-mail: gunter.lay@outlook.de

G. Lay (ed.), Servitization in Industry, DOI: 10.1007/978-3-319-06935-7_20, 333

 Springer International Publishing Switzerland 2014
334 G. Lay

the richness of detail illustrate that despite the multitude of servitization publications
and the impressive case studies of servitized manufacturers in the literature, servi-
tization is by far not the dominant trend in industrial practice. The challenges of
adapting nearly the entire structure and all the tools and competences of a manu-
facturing company to the needs of a servitized business proves why no more than a
few manufacturers thus far have transitioned from traditional business models to
advanced servitized models.
Because the comprehensiveness and complexity of the material presented above
precludes each attempt to merge the findings into a neat summary, this concluding
chapter merely intends to compile and juxtapose several subjects discussed in the
preceding chapters and is crafted to address the following questions:
• Are there any sector-specific frame conditions that explain the differences in
servitization that are documented in the data presented in the introduction? If
so, what conclusions can manufacturers draw from sector characteristics for
their servitization strategies?
• Are there any linkages among the decisions made with respect to adapting the
capabilities, processes and departments of manufacturers to a servitized busi-
ness? What effects of adapting one operational department to servitization must
be controlled in reshaping another?

20.2 Servitization by Sector

The review of sector studies on servitization in manufacturing industries indicates

that companies in all sectors have traditionally offered services that accompanied
sales of products. Providing customers with customised products through engi-
neering services, delivering manufactured items, training customers’ employees to
use products properly and maintaining and repairing products in case of mal-
function are not new business activities.
The innovative business models in manufacturing are advanced services that
provide ‘‘the customer with the capabilities that arise from the use of the manufac-
turers’ products, and demand that the manufacturer extends itself significantly beyond
design and production based competences’’ (see Baines and Lightfoot, Chap. 3).
Offering such services implies that manufacturers are entering into uncharted waters.
If we regard servitization as a process in which manufacturers make a transition from
traditional businesses towards a new type of value proposition, perhaps the use of the
label servitization should be restricted to manufacturers’ adopting advanced services
or so-called use- and result-oriented services (Tukker 2004).
In a cross-sector comparison, such advanced services are labelled with different
terms and comprise various work activities. Table 20.1 presents a compilation of
sector-specific advanced service offerings from the previous chapters that shows
various business schemes for offering advanced services. In addition to the widely
known ‘‘power-by-the-hour’’ in the aircraft industry (see Baines and Lightfoot,
Chap. 3), we also find copier manufacturers that enter the ‘‘managed print services’’
20 Servitization by Sector and Manufacturers’ Operational Departments 335

Table 20.1 Relevance of advanced services by manufacturing industry sector

Manufacturing sector Advanced services
Label for Variety of Quantity of Importance
advanced advanced sector of advanced
services service companies services for
offerings offering sales in the
advanced sector
services
Aircraft industry Power by the Medium High Medium
hour, fixed
price per
landing
Automotive industry Car sharing, car Low Low Low
pooling
Chemical industry Chemical Medium Low Low
management
Services,
Chemical
leasing
Manufacturers Air compressor Compressed air Low Low Low
of manufacturers contracting
machinery Manufacturers of Guarantees for a Low Low Low
machinery for specific
pulp and production
paper volume of
production paper, Selling
output
Machine tool Total cost of Medium Low Low
industry ownership,
Production
services
Plant engineering Plant operation Medium High Low to
companies services medium
Manufacturers of medical Pay per use Medium Medium Low
equipment
Manufacturers of office machinery Managed print High High High
(copiers) services

business (cf. Visintin, Chap. 2), air compressor manufacturers that offer advanced
services to become providers of ‘‘compressed air contracts’’ (cf. Radgen, Chap. 6)
and chemical companies that offer advanced services by providing their customers
with ‘‘chemical management services’’ and/or ‘‘chemical leasing’’ (cf. Buschak and
Lay, Chap. 8).
If we intend to compare the diffusion of advanced services in manufacturing
industries, we can use the number of companies in each manufacturing industry
offering such services as an indicator. Table 20.1 summarises the descriptions
from the sector studies in the previous chapters in this respect. It is clear that, until
now, the majority of companies in only a limited number of manufacturing sectors
336 G. Lay

have offered advanced services. The aircraft industry, manufacturers of office

machinery (such as copiers, scanners and printers) and plant engineering compa-
nies belong to this group of manufacturing sectors. In most other manufacturing
industries, the sector studies show that few companies offer advanced services.
This finding reinforces the results of previous studies (cf. e.g., Lay et al. 2010).
If we measure the importance of advanced services with the indicator ‘‘sales in
manufacturing industries from advanced services’’, Table 20.1 shows that
advanced services are even less relevant. Only one sector study—manufacturers of
office machinery such as copiers, scanners and printers (cf. Visintin, Chap. 2)
—reports that more than one-third of sales originate from advanced services.
Do any sector-specific frame conditions explain this differing relevance for
servitization? The sector studies presented in the previous chapters suggest so.

20.2.1 Sectors with Radical Innovations

First, major changes in the product technology of a manufacturing sector—

so-called radical innovations (cf. e.g., McDermott and Colarelli O’Connor 2002)—
are identified in several sector studies as a significant stimulus for changing
manufacturers’ business models in the direction of advanced servitization. Radical
innovations are characterised by technological uncertainty, technical inexperience,
business inexperience and technology cost (cf. Green et al. 1995). Henderson and
Clark (1990) describe radical innovation as an extreme point along the dimensions
of the ‘‘core design concept of a technology’’ and the ‘‘linkages between core
concepts and components of a product’’. Whereas modular and architectural
innovation change only one of the two dimensions and incremental innovations
change none of the dimensions, radical innovations establish a new dominant
design and, therefore, a new set of core design concepts that are embodied in
components that are linked together in a new product architecture. Examples of
radical innovations in the past include the shift from piston aircraft engines to
turbojets, the change from steam to diesel electric locomotives and the move from
core to semiconductor memory (McDermott and Colarelli O’Connor 2002).
Visintin impressively illustrates the relevance of radical technological innova-
tions for the business models of copier manufacturers (cf. Visintin, Chap. 2): The
transition to dry copy technology from wet copy machines apparently forced the first
wave of advanced servitization, and the shift from analogue to digital technology
and the merger of copier, scanner and printer technology have been clearly iden-
tified as the drivers for the second wave of advanced servitization that has resulted in
a broad offering of managed print services by office machinery manufacturers.
Technological breakthroughs in medical equipment manufacturing (cf. Schröter
and Lay, Chap. 10) and innovative vacuum technologies from the plant engi-
neering sector (cf. Lay, Chap. 5) further prove the substantial role of innovative
product technology in the development of servitization. Currently, we are expe-
riencing a similar process in the automotive industry that has, until now, offered
20 Servitization by Sector and Manufacturers’ Operational Departments 337

only traditional services. The transition from combustion power units to electric
drives clearly represents a radical innovation and seems to have induced several
experiments in which automobile manufacturers provide advanced services that
have not been offered previously. Gaiardelli et al. (cf. Chap. 4) discuss the car2go
electro drive offers launched by Daimler in several cities. Because e-mobility with
electro vehicles requires a new infrastructure and pricing that greatly exceeds that
of traditional automobiles, this radical technological change seems to have initi-
ated advanced service offerings in the automotive industry with the objective of
opening up markets for electric-powered passenger cars.
Therefore, we assume that the manufacturing sectors affected by fundamental
changes in product technology may recognise the necessity of altering their
business models towards advanced servitization to convince customers of the
benefits of the new technology. If so, technology is more than an enabler of
servitization, as reported in case of equipment manufacturers for the pulp and
paper industry (cf. Witell et al. Chap. 9); in addition, radical technological changes
in products manufactured by a sector may be a precondition—or at least a strong
motivating factor—for introducing advanced services in such a sector.

20.2.2 Sectors with an Oligopolistic Customer Structure

Second, manufacturing industries with a market that features customers structured

as an oligopoly have reported broadly diffused advanced service offerings. Baines
and Lightfoot (cf. Chap. 3) indicate that engine manufacturers for the aircraft
industry, such as Rolls-Royce, GE and Pratt & Whitney, that serve a market with
two major customers (Boeing and Airbus) sell the majority of their products under
servitized business models. Furthermore, other manufacturing sectors that depend
on a limited number of large automotive original equipment manufacturers
(OEMs) as customers are generally prominent providers of advanced services:
• Providing chemical management services is the dominant model for providers
of car coatings to the automotive industry. The majority of the painting pro-
cesses in automotive production are now managed by chemical companies that
once sold their coatings only as a product (cf. Buschak and Lay, Chap. 8).
• Total cost of ownership (TCO) contracts are increasingly common in the
relationship between the machine tool industry and clients in the automotive
industry. Suppliers are not typically involved in the joint design of the service
and definition of service levels, which are instead imposed by customers as a
prerequisite to remain on their vendor list (cf. Copani, Chap. 7).
These examples from the chemical and machine tool industry illustrate that
unbalanced contractual power can force manufacturers to offer advanced services
when an oligopoly on the demand side expects advantages from servitized busi-
ness models on the supply side.
338 G. Lay

However, the enduring diffusion of advanced business models induced by a

customer oligopoly makes added value a precondition for mutual gains. In the case
of chemical management services, coating providers apparently succeeded in
creating added value. Their experience with coating materials created savings in
applying paint for lacquering cars. This added value to the traditional business
models and benefitted both the suppliers in the chemical industry and the buyers in
the automotive industry. Regarding TCO contracts as an advanced service required
by automotive OEMs from machine tool builders, added value depends on several
preconditions. One involves the transparency of applying machinery in the auto-
motive industry by installing remote online monitoring and transferring the data
regarding automotive manufacturers’ production to the machine tool builders.
Without the ability to learn from practical applications of their machinery,
machine tool manufacturers cannot optimise their products to minimise and
guarantee life-cycle costs. Because the automotive industry hesitates to establish
this type of transparency, machine tool manufacturers offer advanced services—
such as TCO contracts—not by choice but by necessity.

20.2.3 Sectors with Advantages of Superior Knowledge

in Applying Their Own Products

Third, knowledge disparities in applying tangible products between manufacturers

and traditional buying-and-utilising industries seem to stimulate advanced servi-
tization in manufacturing industries. Sectors that manufacture products that are
applied by customers more or less as a ‘‘black box’’ can realise considerable
increases in efficiency if they not only produce the equipment but also engage in
the use phase. Several examples from the sector case studies presented in the
previous chapters illustrate this phenomenon:
• Copiers, scanners and printers are office machinery devices that are procured and
installed by customers of office machinery industries to support office tasks,
preferably following a ‘‘plug and play’’ model. Customers typically lack the
resources and competences required to manage printing processes efficiently
(cf. Visintin, Chap. 2). Manufacturers of office machinery as external suppliers
of managed print services are well grounded in optimising bundles of multi-
functional devices. Their expertise in running office machinery far exceeds their
customers’ competences. This disparity guarantees added value compared with
traditional business models, and this added value can be shared and offers mutual
benefits for both manufacturers providing advanced services and customers.
• Speciality chemicals, such as lubricants, solvents or coatings, are typically
purchased and applied as additives in production processes. Customers of
chemical manufacturers must buy these additives, which are applied to allow for
processes free of frictions. They do not have in-depth knowledge of the chemical
processes that these speciality chemicals trigger. Thus, particularly with respect
20 Servitization by Sector and Manufacturers’ Operational Departments 339

to volatile environments, dosage is frequently a matter of chance. The superior

knowledge of chemical manufacturers can help solve this problem. If they offer
chemical management services, savings in speciality chemicals application and
reductions in environmental contaminations can be obtained (cf. Buschak and
Lay, Chap. 8).
• Air compressors provide a further example of knowledge disparities between
manufacturing and applying industries. As applying industries regard air
compressors as the means to produce compressed air, which is required in
several production processes, running air compressors is regarded as a neces-
sary adjuvant but not as a core competence (cf. Radgen, Chap. 6). Limited
customers’ resources and priorities in core processes and technologies hamper
knowledge acquisition in optimising the use of air compressors and offer a
sphere of activity for air compressor manufacturers. Again, the asymmetry in
knowledge constitutes an option for a promising advanced service offering.
• Plant engineering companies that install equipment for comprehensive drinking
water and wastewater plants—particularly in developing countries—can also
successfully offer plant operation services to compensate for deficits in their
customers’ employee qualifications (cf. Lay, Chap. 5). Manufacturers’ superior
knowledge about running such plants provides the basis for manufacturers’
advanced servitization, at least until customers’ employees have acquired the
appropriate qualifications.
Although these vivid examples from the sector studies show that sectoral dis-
parities in knowledge between manufacturers and customers offer opportunities for
servitization, the sector studies also show that a lack of disparity in knowledge
provides few opportunities for servitized businesses. Providers who are experts in
capital equipment are not necessarily experts in their customers’ processes
applying this capital equipment. Assembly plants or coating lines for the auto-
motive industry may serve as examples. Employees of automotive manufacturers
applying assembly or coating lines are often reported to possess process know-how
that is superior to that of capital equipment manufacturers. Thus, in such a situ-
ation, equipment manufacturers cannot efficiently offer operational services
focused on enhancing productivity. If automotive manufacturers as customers
insist on such offerings, imbalanced service contracts (cf. Copani, Chap. 7, or Lay,
Chap. 5) that are not based on creating additional value and that thus do not
provide opportunities for equipment manufacturers to realise margins result.

20.2.4 Sectors with Technology-Based Cultural Traditions

Fourth, cultural differences among manufacturing sectors are crucial for discrep-
ancies in the adoption rates of advanced service offerings. Traditional industries—
such as manufacturers of machinery, which have relied for many decades on their
engineering competences in developing high-tech products and have competing
successfully with such a model—apparently hesitate to change their business
340 G. Lay

model towards increased servitization. The most prominent example is presented

by Copani (cf. Chap. 7): the machine tool industry. Copani blames the traditional
product- and technology-oriented culture in this sector for the passive attitude of
machine builders towards service innovations. Witell et al. (cf. Chap. 9) also
highlight sector cultural issues in investigating another branch of machinery
manufacturers, the builders of machinery for the pulp and paper industry. They
indicate that the traditional focus of that industry on transactions and sales of
capital equipment with services included for free is a barrier to the development of
new business models.
By contrast, less traditional sectors of manufacturing industries, such as
producers of office machinery and of medical equipment or plant engineering
companies that traditionally regard themselves as a hybrid of manufacturer and
service provider, have clearly adopted advanced service offerings more easily.
Plant engineering companies, in particular, appear to successfully combine com-
petences in manufacturing entire plants for different industries with service
offerings. The quantity of sector companies offering advanced services and the
variety of advanced service offerings (cf. Lay, Chap. 5) show that plant engi-
neering companies have a culture that favours servitization. Thus, sector culture
and tradition seem support servitization in several manufacturing industries and act
as a barrier in other industries.
If sector tradition hampers the adoption of advanced service offerings by man-
ufacturing companies, the sector studies presented in the previous chapters describe
a process of ‘‘filling the gap’’ in several sectors. Companies from other sectors
develop advanced service offerings neglected by manufacturers that are reluctant to
move towards servitization. Radgen (cf. Chap. 6) illustrates this process for com-
pressed air contracting and air compressor manufacturers. He identifies national,
regional and municipal energy providers, companies from the service sector,
facility management companies and compressor retailers as emerging competitors
for compressor manufacturers not ‘‘going downstream’’. A similar trend can be
observed in the chemical industry (cf. Buschak and Lay, Chap. 8). Chemical
management services as an advanced service offering seem to increasingly con-
stitute a business for companies other than chemical manufacturers. Pure service
providers and manufacturers of machinery for the application of chemicals compete
with chemical manufacturers in offering chemical management services. These new
competitors locate themselves between chemical producers and their clients.
Supply relationships may be cancelled if the companies providing chemical man-
agement services move in between chemical manufacturers and their traditional
clients.
Even if manufacturers do not hesitate to servitize, the competitive landscape
seems to undergo a fundamental change with the transition from traditional busi-
ness models to servitized models. Visintin (cf. Chap. 2) identifies several actors in
the market for managed print services from the supply side: in addition to copier,
printer and scanner manufacturers, so-called system integrators, consulting firms,
technology specialists, dealers and retailers are expanding their scope of activities.
20 Servitization by Sector and Manufacturers’ Operational Departments 341

In several manufacturing sectors, companies from outside the particular sector

of industry are beginning to offer advanced services. These companies either
compete with traditional sector manufacturers or they fill in the gap that traditional
sector manufacturers have created in their reluctance to provide advanced services.
Thus, there appears to be market profitability in advanced services in at least these
industry sectors.

20.2.5 Conclusions on the Impact of Sector Characteristics

for Servitization

Sectors with an installed base that far exceeds annual sales are identified as servi-
tization pioneers in the literature (cf. e.g., Wise and Baumgartner 1999) and the
sector studies presented above (cf. Baines et al. Chap. 3; Witell et al. Chap. 9). To
smooth revenue streams serving an installed base offer excellent opportunities for
manufacturers to servitize. A high ratio of the installed base to annual sales stimulates
manufacturers ‘‘going downstream’’. For instance, the installed base of approxi-
mately 150 times the average annual sales volume in the aircraft manufacturing
industry (cf. Baines et al. Chap. 3) may explain this sector’s lead in servitization.
However, Visintin (cf. Chap. 2) also identifies a strong impetus to servitize in a
sector in which the installed base is small compared with annual sales. Office
machinery, such as copiers, become obsolete in a few years as innovative products
quickly replace older generations of products. Thus, additional sector character-
istics may matter.
The synopsis of the impact of sector characteristics for servitization presented
above suggests that manufacturers from sectors (1) that have been shocked by radical
innovations in tangible products (2) that serve markets with an oligopolistic cus-
tomer structure and (3) that have acquired superior knowledge in applying their own
products additionally are more likely to change their business models towards
advanced servitized offers. Those manufacturers either see an important need for
new business models or realise superior chances compared with other sectors’
companies. Conversely, technology-based cultural traditions and the lack of the
stimuli mentioned above seem to hamper servitization. This finding from sector
analyses of servitization may complement the results of research focused on indi-
vidual company motives to change business that are presented in the literature
(cf. e.g., Vandermerwe and Rada 1988; Frambach et al. 1997; Wise and Baumgartner
1999; Mathieu 2001; Oliva and Kallenberg 2003; Gebauer et al. 2005; Baines et al.
2009a; Brax and Jonson 2009; Goh and McMahon 2009).
342 G. Lay

20.3 Servitization by Manufacturers’ Operational

Departments

We learned earlier from previous research that servitization in manufacturing

industries implies challenges for not only the service departments of manufacturers
but also the entire firm (cf. e.g., Baines et al. 2009b; Oliva and Kallenberg 2003;
Galbraith 2002). The contribution of Witell et al. (cf. Chap. 9) reinforces this
finding and underlines that the technology, business model, offering, organisation
and network are important for the process of servitization. Lerch (cf. Chap. 11)
also confirms the necessity of using a comprehensive servitization approach and
identifies customer relationships, market research, strategies, supply chain man-
agement, processes, accounting practices and human resource management as well
as engineering tangible products as crucial for successful servitization. The further
contributions to the second part of this book impressively confirm this finding and
present practicable knowledge and tools for assisting manufacturers in managing
the challenging task of reshaping their entire value chain.
However, all contributions illustrate an additional aspect of servitization
adoption: adapting manufacturers’ operational departments to a servitized business
model does not necessarily require a clear-cut, new arrangement. Reshaping is
open for alternatives, and managers must decide on these alternatives. Further-
more, the decisions about how to reshape manufacturers’ operational departments
cannot rely solely on autonomous decision-making processes within departmental
responsibilities. Establishing a sound servitization model in a manufacturing
company requires a process of coordination of planning between departmental
decision makers and processes. This coordination must account for the compati-
bilities and incompatibilities among the options to adapt departmental structures
and competences to the needs of servitization.
Ebeling et al. (cf. Chap. 14) describe this necessity of coordination according to
Gebauer (2008) as ‘‘strategic fit’’ between companies’ external environment,
service strategy and organisational design elements. Ebeling et al. and Gebauer
identify four types of service strategies that correspond to specific manufacturing
environments and claim that human resource management, organisational struc-
ture and corporate culture must reflect the environment-driven service strategy.
From the contributions in the second part of this book, we assume that the idea
of ‘‘achieving a strategic fit’’ can be enlarged in accordance with the following:
• On the one hand, additional activities of manufacturing companies should be
incorporated into the process of coordinating and planning a sound servitization
model. In addition to the environmental, strategic and organisational design
elements enumerated thus far, reengineering the physical product of the
manufacturer, sourcing, shaping supplier relationships and adapting manufac-
turer accounting practices seem to be important for a comprehensive and
harmonised servitization model.
20 Servitization by Sector and Manufacturers’ Operational Departments 343

Adaptation of
Products

Customers's Interfaces to
Knowledge Servitization Suppliers
Acquisition Controlling

Organizing to
Servitization
Serve
Strategy

Market Make or Buy

Research Service Offerings

Adapting HR

Fig. 20.1 Mutual dependencies among design decisions in shaping manufacturers’ operating
activities towards servitized business models

• On the other hand, the consecutive sequence ‘‘environment determines strategy’’

and ‘‘strategy determines organisational design’’ may be supplemented. The
contributions in the previous chapters suggest that there are complex interde-
pendencies and that feedback loops may be important.
Figure 20.1 illustrates such an enlarged pattern of coordination requirements in
adapting the processes and departments of manufacturing industries to servitization.
The following sections summarise and illustrate several dependencies among the
alternatives of reshaping manufacturer operational activities for servitized models.

20.3.1 Dependencies Among ‘‘an Adequate Servitization

Strategy’’, ‘‘Product Adaptation’’ and ‘‘Control
Measures’’

Ebeling et al. (Chap. 14) present four types of servitization strategies that are
adapted to different external requirements:
• After-Sales Service Providers (ASP) are focused on ensuring that the product
functions for the period during which the customer uses the product. ASP offer
standardised after-sales services, such as spare parts, repair, inspection, hotlines
and basic training.
• Customer Support Providers’ (CSP) service offerings concentrate on optimising
customer operating processes. CSP intend to achieve maximum uptime (ope-
rationality) by providing services such as comprehensive preventive mainte-
nance, advanced training and process optimisation.
344 G. Lay

• Development Partners (DP) offer design and construction services to support

customers in process development to achieve outstanding process performance.
• Outsourcing Partners (OP) assume the operating risk and full responsibility for
the customer’s operating processes. Operational services are standardised and
focus on efficiency and economies of scale.

For each of these strategies, Ebeling et al. indicate how to shape adequate
organisational structures, human resource management and corporate culture. The
contributions of Biege (Chap. 18) and Lerch and Gotsch (Chap. 17) suggest that
additional interactions may also matter. Biege argues that capital goods manu-
facturers that retain the right to earn revenues from the good during the phase of
use, either partially or completely, should try to minimise the costs occurring
during the lifecycle of the capital good. Because a long product lifetime either
delays reinvestment in new machinery and equipment or makes it unnecessary,
capital goods manufacturers should try to influence the product lifetime in the
design and construction phase. This argument seems to be relevant primarily to
CSP and OP. Both strategies succeed economically if the efficiency of operation
processes involving capital equipment can be increased. If manufacturers intend to
servitize following the CSP or OP strategy, they should rethink the design prin-
ciples. Adapting products to new business models that aim to reduce life-cycle
costs seems to be appropriate.
Conversely, current product and design strategies may affect the decision about
servitization strategies aside from external requirements: manufacturers tradi-
tionally competing with low-cost products are in an inferior position with respect
to life-cycle costs and cannot easily switch to a CSP or OP servitization strategy.
Without a fundamental change in their traditional product strategy, a CSP or OP
servitization strategy would hardly succeed.
The necessary linkages between product technology and servitization strategy
are also highlighted by Witell et al. (cf. Chap. 9), who address the option for
capital equipment providers to employ an upgrade in product technology to
improve their service offerings. However, many equipment suppliers focus on the
technical feasibility rather than the benefits of services. The example of a capital
equipment provider that develops a technically advanced remote service that
utilises the latest developments in information and communication technology is
presented to illustrate the disadvantages of having a link missing between product
development and service strategy. In this example discussed by Witell et al. the
service was functionally successful but failed in terms of customer interest because
the company was too preoccupied with technology and did not focus on the
customer value of such a service.
The bidirectional interdependency between product and service strategy seems
to be even more complex when we take into account current controlling and
accounting practices in manufacturing companies. Lerch and Gotsch (Chap. 17)
demonstrate that service costs traditionally increase overhead costs. Cost or profit
centres can scarcely be found because approximately half of the services are not
charged to customers. Manufacturers treat these costs as part of overhead and
20 Servitization by Sector and Manufacturers’ Operational Departments 345

allocate overhead expenses to product sales and prices. This practice is common for
both presales services (such as engineering and product development) and specific
after-sales services (such as maintenance and repair during the guaranty period).
This current state of practice in many manufacturing companies hinders both
the selection of an adequate servitization strategy and the adaptation of products to
servitization needs:
• Pricing services cannot rely on operating experiences. Choosing the ‘‘DP’’
strategy probably will fail because of the lack of cost rates in developing
departments. Training, maintenance and process optimisation as core elements
of the ‘‘CSP’’ strategy can hardly be calculated based on experience and
accounting systems.
• Reshaping products towards decreasing life-cycle costs instead of prioritising
price of sale cannot be based on existing experience with life-cycle costing.
Additionally, the revenue loss caused by the decreasing reinvestment needs of
customers that have products with an extended life cycle cannot be balanced
with an increase in service revenues.
Both examples illustrate the dependencies among accounting, product engineering
and servitization strategies. Depending on the types of systems and tools applied in
accounting practices, such practices either facilitate or hamper the selection of
alternative ways of adapting products to servitization and implementing service
strategies. Conversely, opting for a servitization strategy and adapting products to
servitization require the use of adequate accounting practices and, in particular, the
identification of parameters for controlling the success of servitization.

20.3.2 Dependencies Among ‘‘Make-or-Buy Decisions’’,

‘‘Human Resource Management’’
and ‘‘Service-Oriented Organisation’’

Saccani and Perona (cf. Chap. 15) presented three alternatives for make-or-buy
decisions in servitizing firms:
• The ‘‘make’’ model relies on internal capabilities. Such capabilities must be
developed and services are provided afterwards (mostly) with internal
resources.
• The ‘‘buy’’ model relies on utilising the capabilities of external suppliers to
provide services. Manufacturers integrate these service capabilities and govern
the entire offering.
• The ‘‘mixed’’ model relies partly on internal and partly on external capabilities.
Using empirical research as their basis, the authors link the decision about these
alternatives to the types of services that the servitizing manufacturers intend to
offer to their customers: after-sales services or life-cycle services. They conclude
346 G. Lay

that there is no superior choice in the make-or-buy decision. Both, after- sales
service providers and life-cycle service providers can choose either the make or
the buy model. However, manufacturers choosing the buy or the mixed model
seemed to be able to offer an expanded service portfolio compared with those that
choose the make model.
The extensive freedom of choice resulting from these findings raises the question
as to whether additional frame conditions should be considered when manufac-
turers decide to opt for the make or buy model in their servitization process. The
findings presented by Gotsch et al. (Chap. 19) suggest that existing qualifications of
employees and the potential to qualify the workforce for servitized business models
may also have a significant impact on make-or-buy decisions.
Gotsch et al. discuss emerging qualification requirements induced by serviti-
zation regarding two groups of employees: sales personnel responsible for com-
mercialising innovative product service offerings and service personnel in charge
of executing new after-sales services. The authors identify professional expertise,
methodological skills and social and personnel abilities as qualifications for both
groups that must be upgraded individually to succeed with servitization.
The preconditions for such an upgrade in qualifications may differ among
manufacturing companies. In some companies, personnel skills might have existed
but might not have been employed before servitization. In other companies,
qualification processes for servitized businesses may have to begin with the basics.
Such differences may affect the decision as to whether innovative services should
be made internally or purchased from external suppliers (in addition to considering
the types of services), as discussed by Saccani and Perona. Thus, in the make-
or-buy decision, the extent to which personnel resources are available internally
and the extent to which the qualification gap must be closed should be considered.
Conversely, adapting qualifications in a servitizing company are highly affected by
make-or-buy decisions.
The bidirectional impact of relations in servitization processes between make-
or-buy decisions, on the one hand, and human resource management, on the other,
seem to be affected by a third variable: existing organisational structures. Different
product lines may be organised into different divisions consisting of R&D, man-
ufacturing, and sales and service units. Alternatively, a manufacturer may be
organised in a more customer-centric manner. In the last model, individual cus-
tomers or groups of customers have one key account and do not need to contact
different departments of the manufacturing company if they require a portfolio of
the manufacturers’ products or services. Galbraith (2002) claims that the second
alternative with customer-facing units is a prerequisite for successfully delivering
solutions consisting of products and services.
Existing customer-centric, front-end units may obviously be taken into account
when companies decide whether they should make or buy the capabilities nec-
essary for servitization. Such units facilitate the ‘‘integrator’’ or ‘‘orchestrator’’
functions (cf. Saccani and Perona, Chap. 15) that must be fulfilled when external
capabilities are purchased for servitization. Product-oriented structures will not be
able to provide such coordinating roles. Thus, in addition to the types of service
20 Servitization by Sector and Manufacturers’ Operational Departments 347

offerings intended and existing qualifications, established structures may also

affect decisions concerning whether to make or buy.
Additionally, opting for one or the other structural alternative seems not to be
independent of personnel resources. Restrictions in existing qualification structures
may hamper an intended transition from a product-centric to a customer-centric
structure.
In summary, we conclude that there are dependencies among ‘‘make-or-buy’’
decisions, ‘‘human resource management’’ and ‘‘service-oriented organisation’’ in
choosing an adequate servitization strategy. Managing servitization in manufac-
turing companies requires understanding these dependencies to guarantee a coor-
dinated approach in transforming current structures, processes and capabilities.

20.4 Outlook

Servitization in the industries of developed countries seems to be at a crossroads.

Although scientific research investigating servitization has clearly increased in
recent years and boosted the number of publications, in practice, manufacturing
industries have proved hesitant to move towards servitization. In the future, two
developments seem to be feasible:
• In the first option, manufacturing industries will progressively realise the
advantages of servitization by offering advanced services illustrated by the
frontrunners in various industries and in scholarly work. The number of
manufacturers providing their customers with advanced service offerings will
grow gradually, and highly servitized manufacturers will represent the majority
in manufacturing industries in the long run. Failures in attempts to create
servitized businesses reported in several analyses (cf. e.g., Neely 2008;
Gebauer et al. 2005) are necessary events in the learning process of an industry.
• In the second option, servitization with advanced service offerings will remain
restricted to niches. Manufacturers will mostly continue their traditional ways
of doing businesses. Services are part of this business model but do not
dominate manufacturers’ strategic orientations. Offering advanced services
linked with a service-dominant logic will be realised only in business niches
that are characterised by frame conditions that induce companies to abandon
traditional business models.
Which of these options will become a reality depends on several factors. First, the
perspectives of manufacturing in industrialised countries were the subject of
alternating assessments in the past. Whereas several years ago the commonly held
view of economists and politicians was that the manufacturing industries in Europe
and the US were on a downturn (leaving an economy based exclusively on
engineering and financial services), the financial crisis changed that assessment.
Now, a base of industrial manufacturing has been identified again as a vital core of
348 G. Lay

economies in many of the more mature industrialised countries (cf. e.g., Helper
et al. 2012). The role that the new world economic order finally assigns to man-
ufacturing in developed countries will affect the necessity to servitize.
Second, the management of manufacturing enterprises have not always based
their actions solely on rationality in the past. Trends in manufacturing were fre-
quently initiated by publications that became popular in professional circles and in
public discussions. ‘‘Lean management’’ (Womack et al. 1990) or ‘‘focusing on core
competences’’ (Prahalad and Hamel 1990) are two examples of such trend-setting
buzzwords that strongly influenced industrial management practice. Managers could
not withdraw from executing those management guidelines without coming under
suspicion for violating their duties to shareholders. If ‘‘servitization’’ succeeds in
reaching similar popularity, broad diffusion seems guaranteed. However, such
diffusion will unlikely be sustained. The buzzwords mentioned above proved to
produce a backlash after the phase of euphoria.
Third, whether servitization will play a dominant role for manufacturing
industries or remain in niches depends to a large extent on the definitions and
measurement benchmarks employed to monitor the diffusion. This book aimed to
define servitization according to Vandermerwe and Rada (1988), who coined the
term. They use servitization as synonym for offering packages of customer-
focussed combinations of goods, services, support, self-service and knowledge—
with services in the lead role. Without being completely congruent, Tukker’s
(2004) definition of use- and result-oriented services reflects such a transition from
product-centric to service-centric businesses. If we employ these definitions as a
benchmark and measure not only whether manufacturers offer such services but
also whether they earn their revenues predominantly from such offerings, it will be
much more difficult in the future to identify servitization as a dominant strategy in
manufacturing industries.
Regardless of whether servitization expands by offering advanced services as a
major or minor trend in manufacturing for the future, the contributions in this book
clearly indicate that servitization is both a chance to enter into a promising
business segment (at least for a subgroup of manufacturers) and a challenge in
adapting manufacturers’ capabilities, processes and structures to exploit this
chance successfully. Managerial recommendations provided in this volume may
assist industrial management in coping with these servitization issues.

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