Submission 015-0249

Challenges in Transforming Manufacturers into Integrated Product-Service Providers

Björn Claes

(bjorn.claes@cranfield.ac.uk)

Centre of Business Performance

Cranfield School of Management

Cranfield, Bedford, MK43 0AL

England

Veronica Martinez

(v.martinez@cranfield.ac.uk)

Centre of Business Performance

Cranfield School of Management

Cranfield, Bedford, MK43 0AL

England

POMS 21st Annual Conference

Vancouver, British Columbia, Canada

May 7 to May 10, 2010

Challenges in Transforming Manufacturers into Integrated Product-Service Providers

ABSTRACT

The last decades have shown an increasing interest in servitization strategies. Important

advances have been reported in the understanding of this phenomenon. Whilst research has

extensively highlighted the design and benefits of integrated goods-service strategies, much

less attention has been dedicated to the difficulties that companies experience when

transforming their “goods only” strategies to integrate services. Experience shows that

servitization constitutes a major managerial challenge because it alters the core business

model of an organization. Adaptation problems can seriously delay the implementation of

changes. Recognizing this research gap, this paper addresses the lack of understanding of the

servitization related change processes. We empirically identify factors that are obstacles in

the transformation process towards servitization. We theoretically validate these obstacles by

mapping them onto the antecedents and tenets proposed by the organizational ecology

theories. We conclude by discussing the significance of our findings and highlight the

opportunities for further research.

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Purpose: The purpose of this paper is to analyse the challenges experienced by the UK

manufacturing companies striving to integrate services into their traditionally products-based

offering. To gain better understanding of the factors that may hinder the integration process

we analyse four (related) companies that have transformed themselves from product

manufacturers only to product-service providers. We base our analysis on the organizational

ecology / structural inertia theories.

Design/methodology: The paper uses an exploratory multiple-case study approach

based on semi-structured interviews and archival data. Twenty-two senior managers were

interviewed from the product-service provider and its two suppliers, resulting in more than

400 pages of interview data. Data was analysed through an inductive research analysis by an

emergent identification of patterns.

Findings: The findings of this paper are twofold. First of all we find that the existing

body of literature on product service systems is largely composed of conceptual paper and

case based studies provides very little theoretical support for the analysis of the issues

encountered in the transformation processes that companies need to go through to become

integrated product service providers. Secondly, we find that many of the hindrance factors

faced by our focal companies can be partially or entirely explained by the organizational

ecology/ structural inertia theories. We summarize our observations in a table that relates the

specific hindrances observed in the servitization process of our case studies with the

antecedents for structural inertia identified by the organizational ecologists.

Practical implications: Experience learns that many difficult hurdles need to be

overcome when integrating services into a products-based offering, internally and along the

supply chain. Changing a company’s business model often leads to internal resistance and

loss of external credibility and should therefore be implemented with great care. A good

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understanding of the potential factors that may threaten the transformation is therefore

imperative. We argue that our findings will facilitate companies to address these impediments

(or prevent them altogether) and hence enable them to obtain the benefits of integrated

products-service based strategies suggested in the literature.

Originality: Over the last two decades much research has been dedicated to the design

and benefits of integrated product-service offerings. Research into the changes that

companies may need to implement to their business models to facilitate this integration has

thereby largely been overlooked. This paper provides a valuable overview of the factors that

potentially hinder companies’ efforts to integrate services into their traditionally product-

based offering. By doing so, this paper not only addresses an important gap in the

servitization literature, it also provides an explanation of the issues that potential keep from

reaping the benefits of servitization suggested by the literature. Lastly this paper makes an

important contribution to the servitization literature by strengthening the theoretical

foundation on which this literature is based.

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INTRODUCTION

One of the most important goals of integrating products and services into a single

offering, known as the process of servitization (Vandermerwe and Rada, 1988), is to better be

able to fend off exclusively priced-based competition and creating a more sustainable

competitive advantage. Although the servitization phenomenon has been observed for more

than 150 years (Schmenner, 2009), particularly the last two decades have shown a surge in

interest in servitization strategies. Important advances in the understanding of this

phenomenon have been reported applying multiple perspectives in (see Baines, Lightfoot,

Benedettini & Kay, 2009, for a comprehensive overview). Whilst research has extensively

highlighted the design and benefits of integrated product-service strategies (Oliva &

Kallenberg, 2003; Cohen, Agrawal & Agrawal, 2006; Newman & Cowling, 1996,

Vandermerwe & Rada, 1988), much less attention has been dedicated to addressing the

difficulties that companies face when transforming their “products only” strategies to

integrate services. Yet experience shows that servitization constitutes a major managerial

challenge (Oliva & Kallenberg, 2003).

Servitization often significantly alters the core business model of an organization.

Adaptation problems (organizational unrest and resistance) can seriously delay the

implementation of the proposed changes or even jeopardize them altogether. Indeed, Neely

(2008) identified some initial evidence of companies previously on a servitization course now

seemingly reversing their efforts. Gebauer, Fleisch and Friedli (2005) recognize that it takes

time to build up the profitability of integrated technology-services offering. Time however is

an increasingly scarce commodity. Most companies are under permanent pressure to stay

ahead of their competitors and to do so they must continuously evaluate the opportunities and

costs for exploring new business models (including servitization) against those better

exploiting the opportunities in their current business models (March, 1991).

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It comes therefore as no surprise that companies struggle to define a clear strategy to

realize the benefits promised by the advocates of servitization strategies. Identifying this gap

in the literature, this paper set out to address this lack of understanding of the servitization

related change processes. To gain insight in the specific issues related to organizational

transformation, we set out on an explorative mission. Using a multiple case analysis

(Martinez, Bastl, Kingston and Evans, 2010) we empirically identified factors that are

experienced to be obstacles in the transformation process towards servitization. We then

turned to the servitization literature to find theories that would support our understanding and

explain these hindrance factors only to find that this literature, though very rich in anecdotal

evidence, case studies, untested conceptual frameworks and insightful opinions, proved to be

lacking a valid theoretical foundation to guide its research efforts. We were surprised by this

absence, particularly considering the fact that research efforts have been taking place for

nearly a quarter of a century and the increasing attention and growth in the broad area of

servitization research.

We subsequently turned to the more traditional theories on organizational change. Of

those, we found in particular the organizational ecology and structural inertia theories to be

very applicable and helpful to understand the problems that organizations where facing in

restructuring their business to become more servitized.

Then, following a similar approach as Rungtusanatham and Salvador (2008), we then

evaluate these obstacles and the corresponding generalizations by mapping them onto the

antecedents and tenets proposed by the organizational ecology/structural inertia theories

(Hannan & Freeman, 1977, 1984, 1988)..

In addition to addressing an under-research aspect of servitization, this paper makes an

important contribution in that it strengthens the theoretical foundation of the servitization

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literature, which is found to be rich in empirical evidence and practical anecdotes but much

lighter in theory.

The rest of this paper is structured as follows: we first elaborate on the phenomenon of

servitization and the potential that it may have for the strengthening the competitiveness of

traditionally goods based manufacturers. We then delve deeper into the specific problems that

companies face when transforming their organizations to become servitized followed by a

relate of the important research gaps we identified in the servitization literature. Subsequently

we provide a brief overview of the traditional theories of change and highlight the

applicability on one of them, Organizational Ecology. We conclude with a brief discussion of

the importance of our findings and highlight the opportunities for future research.

SERVITIZATION

Many manufacturers offer services, but may not use services as the basis of their

competitive strategy. Servitization is defined as the strategic innovation of an organisation’s

capabilities and processes to shift from selling products to selling an integrated product and

service offering that delivers value in use (Vandermerwe & Rada, 1988; Baines et al., 2007).

Servitization is occurring across many business sectors and has implications across all

organizational functions (Gummesson, 1995). For instance, in operations this change has

been heralded by an increased focus on services operations, supply chain relationships,

outsourcing, and has seen a shift from the supplier perspective - and the means of production

- to a customer perspective and a focus on utilization.

There are various forms of servitization. Tukker (2004) for example proposes

categorizations ranging from products with services as an ‘add-on’, to services with tangible

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goods. Servitized offerings tend to be delivered using customer-centric strategies in order to

provide ‘desired outcomes’ for the customer. This customer orientation consists of two

distinctive elements (Oliva & Kallenberg, 2003). Firstly, a shift of the service offering from

product-oriented services to ‘user process oriented services’: i.e. a shift from a focus on

ensuring the proper functioning and/or customer’s use of the product, to pursuing efficiency

and effectiveness of the end-user’s processes related to the product). Secondly, a shift of the

nature of customer interaction from transaction-based to relationship-based: i.e. a shift from

just selling products to selling complete solutions through long relationships. Servitization

frequently occurs as a response to financial difficulties, new customer demands and strategic

product differentiation (Mathieu, 2001a, Oliva and Kallenberg, 2003; Gebauer et al., 2006). It

has been observed in successful cases that when organisations gain insight into their

customers’ needs, they are able to develop more tailored offerings (Mathieu, 2001; Mallaret,

2006).

TRANSFORMATION TO SERVITIZED ORGANIZATIONAL FORMS

Organisations such as IBM, General Electric, Xerox, Cannon and Parkersell have had

a significant share of revenues and profits from services since the middle of 1990s; this is

attributed to a shift from product to service perspective (Quinn, Doorley and Paquette, 1990).

In theory, the transformation to product-service systems leads to higher revenues and margins

(Cohen et al 2006; Rosen et al, 2003; DTI 2002; Newman and Cowling, 1996; Chase and

Garvin, 1989), but in practice it takes times to build up profitability (Gebauer, Fleisch and

Friedli, 2005). The adoption of product-service based strategies requires significant

investments in capacity building consisting of things such as acquiring the required

information technologies and attracting (or training) people with the right skills and

capabilities (Reinartz and Ulaga, 2008). As a consequence, it is often a challenge to realize

the advocated revenues from the implementation of servitization strategies in the short term;

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it may only be in the longer term that the integration of products and services into a single

offering will deliver on its promises.

Researchers like Oliva and Kallenberg (2003), Davies (2003) and Araujo and Spring

(2006) have observed that when transforming their traditionally product based offering to a

combined product-service offering, organisations have to change their strategies, adapt their

operations, re-evaluate their value chains, update their (information) technologies, extent

their employees’ expertise and improve their system integration capabilities. However,

research shows that the transformation processes from a product centric strategy to a

combined product-service strategy are complex and remain poorly understood (Voss et al,

2005; Davies, 2003; Miller, et al 2002; Tukker, 2004).

This literature however, despite growing (see table figure 1) and increasingly rich in

anecdotal evidence, case studies, untested conceptual frameworks and insightful opinions,

proves to be starved of theory that would help to understand and explain the predicaments

that plague the implementation of servitization strategies (see figure 1). Valid (i.e. tested)

theories are imperative for guiding the research efforts in an emergent body of literature (Van

de Ven, 1989).

9

1 1 1 1

4

1

3

2

1 1

4

3 3

5

8

7

5

4

13

Figure 1: Papers published on sertivitzation in the last 25 years

IMPORTANCE OF THEORIES

Organizational theories are the valid theoretical foundations that allow the co-

production of compelling and sound scientific knowledge. They facilitate the understanding,

explanation and predictions of functional and behavioural problems of organizations (Miner,

1984) and guide research towards crucial questions (Van de Ven, 1989). Whereas the

servitization literature is rich on anecdotal processes of transformations (Wilkinson, Dainty

and Neely, 2009) it has largely failed to ask the basic organizational, transformation related

questions that would set the stage for the creation of organizational servitization centred

theories. The majority of the servitization studies that we identified lacked clearly defined

research questions, in even fewer studies relevant theories were applied to guide the research

(see appendix 1) and none of the studies explicitly states testable hypothesis. Furthermore,

10%

6%

84%

Figure 2: Published research bytheory application or development

Explicit use / development of theory

Theories referred to in the paper

No explicit use/development of theories

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the empirical papers that we identified predominantly applied case study methodologies of

analysis to explore the various aspects of servitization and to build theory from the

observations. Very few papers applied other methods of analysis such as survey based

research or research based on archival data and only one paper applied a blend of research

methodologies. A well balanced approach in the use of research methodologies is imperative

for truly advancing knowledge and understanding. Appendix 1 lists the papers that we

reviewed for this research. Out of the 70 published papers on servitization, 50% describes

empirical research. Of these, 75% are based on case studies (as the dominant method of

analysis). Figures 3 and 4 provide an overview of the type of research that is published and

the dominant methodologies that are used.

81%

5%

10%5%

Figure 4: Published research bydominant methodology

Case based researchResearch based on archival data Survey based researchResearch based on Multiple methods

30%

20%

50%

Figure 3: Publication by type

Empirical research

Conceptual research

Discussion and review papers

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Whetten (1989) argues that theoretical contributions should have explicit constructs,

concepts or variables expressed in research questions or testable hypotheses that provide

direction to the research. Testable hypotheses and research questions (and the inherent set of

assumptions) allow comparison between different research studies and generalization of the

findings. The question therefore that we, researchers in the field of servitization, should ask

ourselves is whether we are following the right strategy to provide scientifically valid

theoretical contributions to our field? Does our research sufficiently cover all the dimensions

of the research spectrum presented in figure 5?

Figure 5: The research spectrum along the dimensions of data and theory use

Theory building papers; their

contribution is conditional to the

relevance and clarity of their research

questions and testable hypothesis

Discussion and review papers;

Provide contribution when they identify

knowledge gaps delineate future

research directions

Conceptual and theory building papers; their

contribution is conditional to the

relevance and clarity of the formulated research

propositions

Papers that test and validate theory and

generalize findings; True advance of knowledge

NO Explicit use of Theory YES

Anec

dota

l Da

ta us

ed

Empi

rical

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In the absence of valid and applicable theories in the servitization literature, we turned

to the wider literature on organizational change, in search for theories that would advance our

understanding of the issues related to the implementation of servitization strategies.

CHANGE MANAGEMENT LITERATURE

A large body of literature reports on the research that has been devoted to

understanding organizational change. Organizational change however has many different

facets and consequently researchers have approached it from a wide range of perspectives

(Kelley & Amburgey, 1991). This paper aims to illustrate the potential of these theories for

increasing our understanding and ability to explain the change processes that companies go

through when implementing servitization strategies and in particular the factors that

potentially impede the or even jeopardize their implementation.

Three theoretical perspectives that make different predictions about the relationship

between organizational change and organizational survival, or, as in our case, the success of

the servitization efforts can be identified in the literature (Singh, House & Tucker, 1985;

1986); Random Organizational Action theory, Organizational Adaptation Theories and

Organizational Ecology/ Structural inertia theory.

Proponents of the Random Action Theory content that there is no relationship between

organizational change and organizational success (or the lack thereof). More specifically,

they argue that “in a complex world the enactment of the organizational environment is

inaccurate, leading to organizational actors believing in the existence of cause-effect relations

that are in effect non-existent” (Singh et al, 1986). When put like that, one indeed may argue

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that organizational actions to strengthen organizational success that are based upon such an

inaccurate enactment of the environment are in fact relatively random.

The advocates of Organizational Adaptation Theories subscribe to the notion that

organizational change is primarily reflects the decisions and strategies of leaders and

dominant coalitions in organizations in response to changes in environmental threats and

opportunities. Change (when implemented correctly) corresponds to a lower level of

organizational failure (Singh et al, 1986). Different variations have evolved from the central

organizational adaptation theme including Contingency Theory (e.g. Thompson, 1967 and

Lawrence & Lorsch, 1967), Resource Dependence Theory (e.g. Adrich & Pfeffer, 1976 and

Pfeffer & Salancik, 1978), Institutionalization Theory (e.g. Meyer and Rowan, 1977 or

Dimaggio & Powell, 1983), the Theory of Organizational Strategy (e.g. Miles & Snow, 1978

or Minzberg, 1978) or Organizational Learning Theory (e.g. Levinthal and March, 1981 or

Nelson and Winter, 1982). The central argument across all of them is that organizations that

survive are those that developed the appropriate routines given the environmental

contingencies.

Followers of the tenets of Organizational Ecology/Structural Inertia Theory by Hannan

and Freeman (1984:156) content that the possibilities for implementing changes in the core

features of organizations are often strongly constrained. Compared to the challenges that need

to be overcome when implementing changes in the peripheral features, the challenges when

making modifications in the core business models of the organization are considerable and

the probability of success much lower (Hannan & Freeman, 1984). According to this theory,

structural inertia varies with the extent to which organizations are able to overcome a series

of internal and external constraints.

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To understand and explain the problems that companies face when implementing

servitization strategies, identified in the case studies, we found Organizational Ecology

theories to be most helpful. Whereas the Organizational Adaptation theories focus on the

match between environment and organizational structure, the Organizational Ecologists focus

on the problems of inertia when implementing change, irrelevant of whether the proposed

change is optimal in the light of organizational success.

ORGANIZATIONAL ECOLOGY AND SERVITIZATION

In their earliest formulation of the ecological theory of organizational change Hannan

and Freeman posited that “for wide classes of organizations there are strong inertial pressures

on structure arising from both internal arrangements (for example internal politics) and from

the environment (for example public legitimation of organizational activity).” (Hannan &

Freeman, 1997: p. 957). The desire of the management to transform the product-focused

business model into one that is based on an integrated product-service offer often implies

significant changes in the company´s organizational structure and processes (Oliva &

Kallenberg, 2003). In order to reduce the negative consequences that may arise from the

redistribution of managerial attention and financial resources and the unavoidable

introduction of new capabilities, metrics and incentives, management must identify and take

into account these inertial pressures. In the subsequent section we categorize the potential

constrains to the implementation of servitization strategies that managers may have to deal

with. Eight categories are identified; four categories of constraints arising from internal

pressures and four arising from the environment in which the company operates.

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Internal constraints

Internal constraints to the implementation of servitization strategies refer to the specific

hindrance factors that come from inside the organization. Particularly it refers to potentially

impeding factors such the investments business-model-specific assets (sunk costs), imperfect

information, internal politics and the consequences of past success and finally the company’s

and the effect that this has on the ability and willingness to embrace changes.

Sunk Costs. Sunk costs refer to the investments in plants, equipment and skilled

personnel enable the production of products, companies invest in plants. These

manufacturing assets tend to be highly focussed on the production of new products and are

generally not easily transferable to perform other tasks such as the provision of service.

Information constraints. The information on the activities within the organization the

organization that is available to the decision makers with than organization is often nowhere

near complete (Hannan & Freeman 1977). Within this context of bounded rationality (Simon

1991), manufacturers have learned to deal with the uncertainties caused by the market

volatility where is concerns planning and scheduling the manufacturing task. Shifting the

business model to include services may pull the organization and its members out of their

known reality (their “comfort zone”) and create unrest resulting in resistance to change.

Past success and internal politics. Implementing servitization strategies implies

making significant organizational changes and these changes upset known structures and

internal political equilibriums. Unless new resources are available to facilitate the integration

of services, the implementation of servitization strategies will imply a redistribution of

influence and resources (Hannan & Freeman, 1977). The areas of the organization that see

their influence and resources dwindle are likely to oppose the new business model.

Particularly when organizations have historically been successful in their markets,

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servitization strategies may end up being rejected despite their potential benefits for the entire

organization.

Organizational age, history and institutionalization. Organizations and their inherent

structures and processes gain intrinsic value over time. When that happens their perpetuation

becomes an end on itself, regardless of their utility for the companies’ survival (Scott, 1987).

Therefore the older a company, the more difficult it will be to change procedures and the

more resistance can be expected from its members (Hannan & Freeman, 1984, 1988).

External constraints

The external constraints to the implementation of servitization strategies refer to factors

beyond the boundaries of the organization and include factors such as network dependency

and regulatory barriers, imperfect market information, legitimacy and the organizations’

competitive environment.

Dependency and legal barriers. Two important categories of stakeholders need to be

taken into account when devising a servitization strategy. Companies can rarely implement

changes without taking their network partners into consideration. Because companies often

bound to entities in the wider network, they are likely to face constraints imposed upon by

corporate or long-term contractual commitments that restrict their freedom and flexibility in

responding to environmental pressures (Kelley, 1990; Rungtusanatham & Salvador, 2008).

Organizations must also remain within the boundaries imposed upon by the legislative

institutions in the countries in which they operate. As a consequence companies may face

legal and fiscal barriers to market entry or exit and/or restrictions to hiring and firing people

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with skills that might have become redundant which are imposed upon them by the policy

makers of the country in which they operate.

Limited market information. Like the constraints caused by the imperfect information

on the activities within their companies, incomplete information about the market puts

constraints on the efforts of integrating a service component into a traditionally products-

based product offering. Acquiring information about customers’ expectations and the abilities

and limits of network partners so support a servitization strategy is costly, especially in

strained and volatile markets where this information is most essential.

Reliability, accountability and other legitimacy constraints. In a world of uncertainty,

clients tend to value reliability over price. Every change in a company’s business models

potentially puts an organization’s reliability at risk. Hannan and Freeman (1984) refer to this

potential loss of reliability due to the novelty of the activity as the “reliability of newness”.

Product-centric manufacturers who introduce a service component into their product offering,

introduce an activity in which they often lack the experience. Any problem in delivering this

service component may reflect negatively upon the traditional product based offering.

Accountability is important because resource providers want to assure that their time, money

and efforts are not wasted. However when companies, embark on servitization strategies,

accountability gets another dimension that may directly impact the performance of the

organization as well as the perceived reliability in the market. Shifting focus from

manufacturing only to the integrated provision of products and services makes accountability

a key component for being able to al in order to provide “value-in-use” over time.

The organization’s competitive environment. Lastly, the competitive environment in

which companies operate can be an important constraint for implementing servitization

strategies. As argued previously, integrating services into a traditionally product-based

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offering constitutes a mayor managerial challenge and will demand dedication of the

appropriate resources (time and money). Unless new resources are obtained, servitization will

imply a partial shift of resources from the traditional activities towards serviced based

activities. In highly competitive markets this redirection of resources may however put the

organization at risk in its traditional markets. The Red Queen paradox (Van Valen, 1973)

suggests that organizations must not only cope with the present environmental conditions but

they must also out-evolve competing organizations over time (Fombrun, 1988)1. The Red

Queen paradox forces companies to dedicate resources to exploitative changes (changes that

make them better adapted to the present context) rather than to explorative changes (changes

that will move the organization in new directions) (Barnett and Pontikes (2008). Companies

that aspire to servitize may find that modifying their business models may not be feasible

without putting their competitive position in the markets at risk.

ILLUSTRATING THE RELEVANCE OF ORGANIZATIONAL ECOLOGY

To illustrate the relevance of Organizational Ecology Theory for understanding and

explaining the predicaments in the transformation processes toward servitized business

models, we mapped the hindrance factors observed in the case described by Martinez et al

(2010) onto the antecedents and tenets of the organizational ecology and structural inertia

theories (Hannan & Freeman, 1977, 1984; Kelly & Amburgey, 1991).

We summarize this theoretical mapping in Table 1. Matching the constraints to change

described above with the hindrance factors identified in the case studies, proved to be very

straightforward. For example, the hindrance factor pertaining to the alignment of investments

1 In Lewis Carroll’s classic story Through the Looking Glass the Red Queen explains the running Alice her relative stability in a contexts of other who are running. To actually get ahead she would have to run ever so much faster.

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and service delivery and the reasons why these investments are so difficult to align to service

delivery is explained very well by the legacy and routinization constraint as well as by the

constraint caused by sunk costs. The constraints pertaining to imperfect information clarify

that product-based performance metrics fail to provide full information to decision makers to

manage product-service organizations. The imbalanced view towards engineering processes

can be traced back to past organizational successes and how these can prevent the adoption of

new service delivery processes and practices.

Organizational Ecology Theory is found to be a highly relevant theoretical lens through

which the factors that complicate the integration of product and service offerings that were

indentified in the case studies can be analysed. As such this is a good example of how the

application of valid theory can help advancing the servitization literature.

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Table 1: Theoretical Mapping of the Hindrance Factors onto the Organizational Ecology and

Structural Inertia Theories

Hindrance Factors in Servitization Organizational Ecology and Structural Inertia: Internal Constraints

Alignment of investments to service deliveryIn the process of transforming towards provision of an integrated offering it has become clear that without specific infrastructure an organisation will not be able to deliver what has been promised to the end customer.“At that point it became very clear that we did not have the infrastructure in place to provide the support we contracted”. (ServPro, Customer Services Manager).An integrated offering implies a greater number of customer touch-points, with the result that a broader range of personnel are being exposed to the customer than previously. “…because ... they’re [customer-facing people] doing those jobs but they can’t deliver, all they can do is an acceptance, it’s the rest of the company that has to deliver and if the rest of the company is still sitting believing that we’re an OEM organisation that has months and years to resolve issues and respond to challenges ... then we’ve failed because our competitors aren’t necessarily having to deal with those issues” (ServPro, HR Manager).

Sunk costs: An organization’s investment in plants, equipment and specialized personnel constitutes assets that are not easily transferable to other tasks and functions

Performance information managementMetrics which were designed for a “product-centred” organisation require re-alignment when organisations transform towards provision of an integrated offering. “The metrics in the individual functionalities that make up ServPro aren’t really aligned... ...you don’t see how that’s aligned through the metric to actually deal with the integrated offering”. (ServPro, Supply Chain Manager).“We operate too much in silos and our metrics are based on how we service one side against the other without recognition for how we are all collectively serving the end customer”. (ServPro, Project Manager). There is a lack of tools and techniques to use for the purposes of assessing the internal capabilities of organisations to design and deliver product-service offerings.“It’s the tools to assess our ability to meet a service level of agreement just as the joiner’s arm is about to put pencil to a piece of paper” (ServPro, Service Operations Director).

Information provided to decision makers (DM): Research shows that DM fail to receive full information on the activities in the organization and in the relevant environment. Hence,- The actual structure may depend on random events (history).- The pursuit of efficiency may lead to rigidity and unresponsiveness

to further change.

Imbalance view towards engineering processes as opposed to service processesThere is a tendency in the organisation to revert to a focus on product, rather than the whole integrated offering (particularly when under stress).“We are now a global company and we are going through huge growing pains, I mean absolutely enormous growing pains, we are struggling, our supply chains are struggling and focus goes on the sexy new products” (ServPro, Repair Engineering Manager).“Normally a new service is actually adding onto an existing product design” (ServPro, Operations Centre Manager).“Guys that do product change are not involved at all in service change, so guess why we decided service has to be aligned very much along the process and product change” (ServPro, Operations Centre Manager).

Internal politics & past success Altering structures and processes upset political equilibriums. Negative political response generates short run political costs high enough to forgo planned reorganizations; “The disutility of a loss of a certain magnitude is greater than the utility of a gain of the same magnitude (Kahneman, Slovic & Tversky, 1982)Furthermore organizations that historically have been successful tend to reinforce certain behaviors deemed to have contributed to that success. Hence opposition to change is likely to be greater in these organizations as change will upset the standardized operating procedures and routines that are considered sustained the historical success.

Engineering-based cultural traditionStrongly embedded traditional manufacturing culture in the organisation is observed to hinder transition towards provision of an integrated offering. An interviewee said “Culturally, people still think that at the end it’s still just a big bloody product that comes in and gets overhauled." (ServPro, DS).

Organizational history (age)/institutionalization): Over time standards of procedure and the allocation of tasks/authority become the subject of normative agreement (this is particularly the case in organization that historically have been successful). Normative agreements constrain in 2 ways: 1) The provide legitimate justifications for those opposing the change2) They preclude serious consideration of many responses to threats

and opportunities in the environment.

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Hindrance Factors in Servitization Organizational Ecology and Structural Inertia: External Constraints

Customers expectationsMisunderstandings may occur on the part of both the provider and the customer, and this may lead to an imbalance in expectations.“…you have to accept...that they think they are paying for a certain level of service meaning they want a team of people sitting on their doorstep” (ServPro, Services Executive).“One of the issues that we have… customers think well if I take some of these things out of the [name of PSS offering package] offering, my price comes down, that’s evident so if I can take that out, if I don’t have the logistics part and take that out, I don’t want that bit and that bit then surely my cost will come down but it’s actually the opposite is true in my view, we may have these things like controlling of assets but actually they are the things that enable the cost to be that low, you start to take that out and the price should start going up and we need all those levers to allow us to deliver” (ServPro, Repair Engineering Manager).

Dependency and Legal and fiscal constraintsOrganizations that are part of a large corporate structure or otherwise bound to entities in the larger business network are likely to experience constraints or undergo long-term contractual commitments that restrict its freedom and flexibility in responding to environmental pressures (Kelley 1990, Rungtusanatham & Salvador 2008) Furthermore companies may face legal and fiscal barriers to market entry or exit and or restrictions to hiring and firing people with skills that might have become redundant.

Suppliers’ communication managementSuppliers lack of information to better manage their forward planning.

“We don’t receive [from ServPro] any forward planning or strategy of roles going to their market place and trying to win more business into integrated offering. We read it in the newspaper”. (ServSup-1, Customer Service Manager).

“I think the only thing I would like to see is a lot more information off ServPro to enable us to manage the risk, so they can provide us more information on their sustaining engineering bills, their modification bills.” (ServSup-2, Production/Operations Director).

Information availability

Acquiring information about relevant environments is costly.

Employees tend to specialize in using certain information channels even when other, newer, channels would provide superior information (such specialization limits the range of info that an org can obtain and hence its possibilities to adapt.

Contracts and accountability

Introduction of new types of offering can cause issues in terms of their definition (in contracts, in negotiations, in understanding of what is required).

“…grey areas in the contract...and the need for a new mind-set to deal with this, rather than exploit the opportunity available in having unclear contracts” (ServPro, Customer Services Manager).

Legitimacy constraints (reliability & accountability and Routinization)

Organizations receive public legitimating and social support as agents for accomplishing specific and limited goals (Hannan & Freeman 1984). Deviating from the original business model may therefore jeopardize this legitimating. Potential investors want assurance that their investments of time, effort and resources will not be wasted.

Cultural legacy and lack of external focus

The cultural legacy in the company is inhibiting the transition towards a servitized strategy. The organisation needs to embrace the thinking of the end customer.

“I think it was traditional ... ponderously slow in the way that we did things, I think that the drum beat was set by the research and development programs for the major new product types. I think … we look back as often as we look forward, everybody knows we’re very old and there is an awful lot on legacy you know” (ServPro, Human Resource Manager).

“I think if this organization is ever going to be able to integrate with our customers we’ve just got to talk like a customer does”. (ServPro, Customer Services Manager).

Market environment (the Red Queen argument)

Competitive pressure in the market may put constraints on how organizations assign their limited resources. Exploration into new business opportunities may be restricted by the need dedicate scarce resources to better exploitation of the existing business model in order to stay ahead (or even at par) with the competition.

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CONCLUSIONS

We started this paper by highlighting the challenges that organisations face when they

implement servitization strategies. During our research efforts we have found that

servitization researchers faced challenges of their own in terms of gaining better

understanding of the integration of product and service-based offerings. The analysis of the

published literature presented in this paper suggests ample room for strengthening the

theoretical foundation of the increasing academic research efforts in servitization. The

largest share of the papers we reviewed for our study either presented a vision, a review, a

discussion or a blend thereof. The vast majority of the empirical papers based their findings

on one or several cases studies. Case-based studies are very effective for the exploration of

new or previously under-researched phenomena, for building new theory to explain those

phenomena or for verifying the relevance of theories borrowed from other academic areas.

For testing theories and establishing a sound foundation for knowledge development a

balanced blend of methodologies is called for. Moreover, regardless of research

methodology, it is important that authors explicitly state the research questions that guide

their analysis and define clear and falsifiable research hypothesis. Both the well defined

research questions and hypothesis enable objective comparison of research findings and

facilitate correct replication of the studies in different empirical settings. Replication of

research and correct comparison of its conclusions validate the research findings and

facilitate the development of new theory or the adjustment and extension of existing theories

“borrowed” from other fields. This paper calls for a reflection about the progress achieved to

date in our understanding of the integration of product- and service-based offerings and

invites the research community to strive for a more balanced blend of methodologies to be

applied to study servitisation.

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Lastly, this paper illustrates how research into that servitization could be advanced by

“borrowing” organisational theories such as Organisational Ecology to formulate and ground

the challenges that organisations face. By doing so we help creating a stronger foundation for

further research into this highly relevant topic.

LIMITATIONS AND FUTURE RESEARCH

No research is perfect and this paper too has its share of shortcomings. First and

foremost, our findings are based on the papers that we managed to identify that specifically

address the integration of product- and service-based offerings. Although we have strived to

be thorough in our literature review, we might have overlooked some papers that do exactly

what we propose in this paper. One reason for this might be the absence of a common

terminology that plagues this field of research. We are, however, confident that these papers

will be few and they therefore will have a negligible effect on our findings. In addition, this

paper more than anything else calls for a critical examination of the way our field is

developing where it concerns the research methodologies. One may argue that an ongoing

process of self reflection is imperative for assuring relevance to practitioners and academics

alike regardless of the current state of research.

Interesting opportunities exist for research that tests the emerging theories that have

evolved from the case studies till date. Borrowing relevant theories from other academic

areas may be another way to advance our understanding of servitization processes.

Lasty, interesting opportunities exist for researching servitization using other

methodologies than case studies. A more balanced approach with regards to the use of

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research methodologies may ensure a comprehensive approach towards capturing all the

issues relevant to the phenomenon of servitization and the generalizability of the findings.

ACKNOWLEDGMENTS

The authors would like to acknowledge the support of the EPSRC/IMRC under grant

number [IMRC 154], which is supporting Product Service Systems research. We also would

like the comments by Prof. Mark Jenkins of the Cranfield School of Management for his

helpful comments with regards to the arguments presented in this paper.

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APPENDIX 1 – THE PUBLICATIONS ANALYZED FOR THIS PAPER2

2 References of the literature list are available upon request from the authors.

Author(s) Year Functional area MethodologyTheories Applied/ Developed

Levitt, T. 1976 General management Insight NoneLevitt, T. 1981 General management Insight NoneLevitt, T. 1983 General management Insight NoneVandermerwe, S., Rada, J.F. 1988 General management Discussion / Interviews based NoneCoyne, K. 1989 General management Conceptual NoneBowen, D.E., Siehl, C., Schneider, B. 1989 General management Conceptual NoneVandermerwe, S., Matthews, W. H., Rada, J. F. 1989 General management Discussion / Case based NoneChase, R. B., Garvin, D. A. 1989 General management Insight NoneQuinn, J. B. Doorley, T. L., Paquette, P. C. 1990 General management Insight NoneSamli, A. C., Jacobs, L. W., Willis, L. 1992 Marketing Conceptual NoneVoss, C. 1992 Operations / Supply Chain Management Conceptual / Case based NoneMartin Jr., C. R., Home, D. A. 1992 Services Discussion / Case based NoneKellog, D., Winter, N. 1995 Operations / Supply Chain Management Conceptual NoneAnderson, J. C., Narks, J. A. 1995 General Management Insight NoneFrambach, R. T., Wels-Lips, L., Gündlach, A. 1997 Marketing Survey based NoneWise, R., Baumgartner, P. 1999 General management Insight NoneMathieu, V. 2001 Services Conceptual NoneMathieu, V. 2001 Marketing Conceptual / Case based Not explicitly.Foote, N. W., Galbraith, J. R., Hope, O. 2001 General management Discussion NoneRoegner, E. V., Seifert, T., Swinford, D. D. 2001 General management Discussion / Case based NoneGalbraith, J. R. 2002 General management Conceptual / Case based NoneMiller, D., Hope, O., Eisenstat, R., Foote, N., Galbraith, J. R. 2002 General management Discussion / Case based NoneRobinson, T., Clarke-Hill, C. M., Clarkson, R. 2002 Services Discussion / Case based Service Marketing TheoryOliva, R., Kallenberg, R. 2003 Services Archival NoneDennis, M., Kambil, A. 2003 Operations / Supply Chain Management Discussion NoneStille, F. 2003 General management Discussion / Survey based NoneWindahl, C., Andersson, P., Berggren, C., Nehler, C. 2004 Innovation management Case based Network theoryDavies, A. 2004 General management Conceptual / Case based Theory applicationSawhney, M. Balasubramanian, S., Krishnan, V. V. 2004 General management Discussion NoneAlonso-Rasgado, T., thompson, G., Elfström, B. 2004 Operations / Supply Chain Management Discussion NoneJohansson, P. Olbager, J. 2004 Operations / Supply Chain Management Literature review / Conceptual NoneBrax, S. 2005 Services Case based NoneAuramo, J., Ala-Risku, T. 2005 Operations / Supply Chain Management Case based NoneGebauer, H., Fleisch, E., Friedli, T. 2005 General management Conceptual / Case based NoneGebauer, H., Friedli, T. 2005 Marketing Conceptual / Case based Not explicitly.Neu, W., Brown, S. 2005 Services Conceptual / Case based Contingency theorySlack, N. 2005 Operations / Supply Chain Management Discussion Resource based theoryWard, Y., Graves, A. 2005 General management Literature review / Case based Service theoryCorrea, H., Correa, C. 2005 Operations / Supply Chain Management Review NoneDavies, A., Brady, T., Hobday, M. 2006 General management Case based NoneJohansson, P. Olbager, J. 2006 Operations / Supply Chain Management Case based None Windahl, C., Lakemond, N. 2006 Marketing Case based Network theoryGebauer, H., Friedli, T., Fleisch, E. 2006 General management Case based NoneCohen, M.A., Agrawal, N., Agrawal, W. 2006 Operations / Supply Chain Management Case based NoneMalleret, V. 2006 General management Discussion / Case based Not explicitly.Glueck, J., Koudal, P., Vaessen, W. 2006 General management Review NoneDavies, A., Brady, T., Hobday, M. 2007 Marketing Case based NoneCorrea, H., Ellram, L.M., Scavarda, A.J., Cooper, M.C. 2007 Operations / Supply Chain Management Conceptual / Case based NoneBaines, T; Lightfoot, H; Evans, S; Neely, A; Greenough, R; Peppard, J; Roy, R; Shehab, E; Braganza, A; Tiwari, A; Alcock, J; Angus, J; Bastl, M; Cousens, A; Irving, P; Johnson, M; Kingston, J; Lockett, H; Martinez, V; Micheli, P; Tranfield, D; Walton, I; and Wilson, H. 2007 Operations / Supply Chain Management Literature review NoneCohen 2007 Operations / Supply Chain Management Review NoneGebauer, H., Fleisch, E. 2007 General management Survey based NoneNeely, A. 2008 Operations / Supply Chain Management Archival NoneGebauer, H., Krempl R., Fleisch, E., Friedli, T. 2008 Innovation management Case based NoneBaines, T. S., Lightfoot, H.W., Benedettini, O., Kay, J.M. 2008 Operations / Supply Chain Management Literature review NoneGebauer, H., Bravo-Sanchez, C., Fleisch, E. 2008 General management Review NoneBaines T, Lightfoot H, Benedettini O, Whitney D, Kay J, 2009 Operations / Supply Chain Management Case based NoneBaines T.S., Lightfoot,H. and Kay, J.M. 2009 Operations / Supply Chain Management Case based NoneBaines, T.S, Lightfoot, H., Peppard, J., Johnson, M., Tiwari, A., Shehab, E., and Swink, M. 2009 Operations / Supply Chain Management Case based NoneJohnstone, S., Dainty, A., Wilkinson, A. 2009 Operations / Supply Chain Management Case based NoneBrax, S., Jonsson K. 2009 Operations / Supply Chain Management Case based NoneGebauer, H., Putz, F., Fischer, T., Fleisch, E. 2009 Marketing Conceptual / Case based NoneBaines T.S., Lightfoot, H and Benedettini, O 2009 Operations / Supply Chain Management Literature review NoneErkoyuncu, J. A., Roy R., Shehab E., Cheruvu K. 2009 Operations / Supply Chain Management Literature review NoneErkoyuncu, J. A., Roy R., Shehab E., Cheruvu K., 2009 Operations / Supply Chain Management Literature review / Conceptual NonePawar, K.S., Beltagui, A., Riedel, J.C. 2009 Operations / Supply Chain Management Multimethod NoneRoy R., Cheruvu K, S 2009 Operations / Supply Chain Management Review NoneSpring, M., Araujo, L. 2009 Operations / Supply Chain Management Review Not explicitly.Schmenner, R. W. 2009 Operations / Supply Chain Management Review None

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