Two Strands of Servitization: A Thematic Analysis of Traditional and Customer
Co-created Servitization and Future Research Directions
Maxwell H GREENa
Philip DAVIESb
a,b
Warwick Manufacturing Group, University of Warwick, Coventry. CV4 7AL, UK
Corresponding author
Contact details:
M. Green - Email: [email protected] Tel: +44 (0)7833747786.
P.Davies - Email: [email protected] Tel: +44 (0)7891055728.
Abstract
Servitization is seen as adding services to physical products. Servitization therefore
embodies a shift from the mindset of value-in-exchange to value-in-use. However,
we argue that the literature has diverged in two directions; a goods-dominant logic
(GD logic) and a service-dominant logic (SD logic). While both streams of literature
have dealt with servitization, it is a challenge to understand where they converge and
diverge. The lack of an understanding is counterproductive and presents a challenge
to future researchers in servitization and may even inhibit future research in this
space. This paper reviews, analyses and extends the growing stream of literature in
servitization by 1) clarifying the two servitization approaches through a thematic
analysis; 2) discussing the divergences between the two approaches to servitization
and put forward the conditions under which one approach may be more appropriate
than the other; and 3) identifying future research directions. By doing so, we aim to
fill the gap that currently exists within this domain.
Keywords:
Servitization
Service-dominant logic
Internet of Things
Outcome-based contracting
Value
Customer co-created servitization
1
1. Introduction
Over the last decade there has been increasing support to conceptually challenge
our traditional underpinning assumptions regarding value and exchange (Vargo and
Lusch, 2004; Vargo et al, 2008a). The re-evaluation, in what can arguably be said to
be the basic principle of economics, has been brought to the fore in light of
increasing globalisation, the rise of digital economies and the prominence of the
service sector in Western industrialised nations (Prahalad and Ramaswamy, 2000).
Together, these factors have ultimately provided customers with an unparalleled
level of choice and customisation. In ever-increasing competitive markets,
manufacturing1 organisations are seeking to improve their competitive advantage
through the provision of services to complement their existing physical product
(Baines et al, 2009; Turunen and Neely, 2012). This paper argues that the research
in servitization inherently encompasses two themes which represent the
reconceptualization of value and exchange, namely that of customer orientation and
value-in-use. Indeed, at its core, servitization can be said to be the process of
tailoring value propositions to enable consumer’s greater efficacy in achieving
desired outcomes (Miller et al, 2002; Baines et al, 2009). In doing so, there is an
inherent move away from the traditional transactional exchange between the firm
and customer, to a longitudinal relationship centred around hybrid product service
offerings (Smith et al, 2014).
This paper studies the phenomenon of servitization that has resulted in two parallel
streams of literature. In the first, (Type 1) servitization is viewed as an extension of
manufacturing research, a mindset attributed to as a goods-dominant (GD) logic
(Vargo and Lusch, 2004; 2008a). Within this traditional logic, service is considered to
be an add-on to the physical product and as more attributes of service are added to
achieve an uninterrupted performance of a physical asset, complexity increases. A
second stream of literature (Type 2) proposes changing the mindset away from the
traditional manufacturing approach, towards a service-dominant (SD) logic approach.
Placing greater emphasis on the customer’s context, it focuses on the co-created
value-in-use attained by the customer when experiencing or using the physical
product. This applied SD logic approach considers servitization as the process of
designing a service system that incorporates both the firm and customer’s resources
(Spohrer and Maglio, 2008). These include both physical products and human
activities required to realise the value-in-use, such that the customer’s desired
outcome is achieved, while the firm remains profitable doing so. We term this stream
of literature, in which there is an applied SD logic approach to servitization, customer
co-created servitization (CCoS).
Both Type 1 (Traditional) and Type 2 (CCoS) advocate the move from the traditional
transactional exchange between the firm and customer, to a longitudinal relationship
centered around hybrid product service offerings (Smith et al, 2014). Yet under a
goods-dominant logic approach, customers are regarded as passive receivers of
value ‘delivered’ by the firm, while in a CCoS approach, they are seen as an active
co-creator of value. Ontologically, in a goods-dominant logic approach value resides
atomistically within a physical product, created, determined and ‘added-on’ to by the
1 Manufacturing is taken in the broad sense to represent any organisation with technology innovation capabilities at its core (Aston
Business School, 2013)
2
firm. In CCoS, value is phenomenologically derived in use, through the mutual
integration of both firm and customers resources.
This paper conducts a thematic analysis of these two streams of servitization
research in order to clarify and disseminate the conceptual differences between
Type 1 and Type 2. Our findings suggest that the two types are conceptually distinct,
but are not necessarily competing ideals. Rather, we argue that both approaches to
the conceptualisation of servitization have merit, but that under certain
circumstances, one may be more appropriate. Through the identification of the
underlying concepts and state-of-the-art research, we contribute to the development
of servitization literature and the development of a mid-range theory in SD logic. We
also present avenues for future CCoS research, particularly within the digital
economy.
2. Servitization research: A Literature Review
2.1 Traditional Servitization
Servitization is now an established area of enquiry that aims to determine viable
strategies to improve manufacturers’ competitive advantage (Oliva and Kallenburg,
2003; Baines et al, 2009). Baines et al (2009) define servitization as “the innovation
of organisation’s capabilities and processes to better create mutual value through a
shift from selling products to selling Product-Service Systems” (pp.555), where a
product-service system is defined as “an integrated product and service offering that
delivers value in use” (Baines et al, 2007 pp.3). The premise of servitization is
transitioning from selling products to selling capabilities for achieving solutions
(Aston Business School, 2013) and thus embodies the transition in thought from
value-in-exchange to value-in-use. Oliva and Kallenburg (2003) suggest that the
potential benefits of perusing a servitized strategy can be categorised as three main
drivers: 1) Economic; 2) Competitive; and 3) Meeting demand. These benefits are
similarly touted by Baines et al (2009) who, in a systematic review of servitization
literature, label them financial, strategic and marketing drivers.
The product-service (PS) transition, as servitization is commonly referred to, has
often been described as a move between a pure product to pure service value
proposition (Oliva and Kallenburg, 2003; Tukker, 2004; Gebauer et al, 2005; Pawar
et al, 2009). From this perspective, service activities are seen as intangible ‘added
value’ to support the use of the physical product offering throughout its lifecycle,
allowing manufacturers to command increased revenue (Vandermerwe & Rada,
1988; Davies, 2004; Baines et al, 2009). Within the PS continuum, Tukker (2004)
offers classification of product-service system (PSS) business models as product-,
use- and result-orientated, dependent on the level of service content offered. As the
firm moves along this continuum towards greater service content, Pawar et al (2009)
state that they add layers of complexity to physical product to ultimately provide
solutions for the customer. This notion of added complexity has been said to stem
from the organisation’s challenges and cultural difficulties associated with the
transition into services, which notably include: changing organisational mindsets
from product centric to service centric; managing risk, exposure and financial flows
associated with the shift toward longitudinal contractual relationships; development
of internal capabilities and processes required for collaborative behaviours with
3
customers; and alignment of product and service design processes to enable
integrated offerings (Neely, 2008; Baines et al, 2009; Martinez et al, 2010; Neely et
al, 2011.). Failure to address these challenges contribute to what has become
known as the service paradox (Gebauer et al, 2005). Put simply, the service paradox
is the phenomenon whereby investment in service design and delivery does not
deliver the expected returns, impacting profitability and therefore threatens the
viability of the firm (Neely, 2008).
The PSS classifications and challenges highlighted predominantly focus on
developing the firms’ capabilities as an extension of manufacturing capabilities.
Whilst acknowledging the increased importance placed upon collaboration with the
customer, recurrent terms such as ‘providing solutions to’ allude to the relegation of
the customers to a passive role. As servitization and its associated challenges gains
prominence, some research, predominantly coming into manufacturing from a
marketing domain, has begun to focus on the visibility of the customer and their
contextual use environment (Heinonen et al, 2010) as a different approach to
mitigating the potential service paradox (Ng et al, 2008). The focus on customer use
contexts was fuelled by novel business models in servitization such as ‘power by the
hour’ where payment for the service of equipment is based on use rather than
equipment repair. Research into such business models that centre on emergent
outcomes in the customer’s context of use resulted in findings that highlight the need
for customer capabilities and resources to be integral to the design of future offerings
and the need to focus on the service system of multiple stakeholders, inclusive of the
customer (Ng et al, 2011; Jaakkola and Hakanen, 2013). This in turn led to a need
to challenge a manufacturing mind-set where products are designed, manufactured
and sold by the firm with little or no resources provided by the customer, and by
extension, it also challenged the linearity of servitization (Polese et al, 2011; Smith et
al, 2012; Barnett et al, 2013). A set of literature in servitization then emerged,
proposing that a firm must integrate its capabilities with that of the customers,
necessitating the co-development of joint capabilities that enable the consistent cocreation of mutually valuable outcomes that go beyond just the performance of
physical assets (Guo and Ng, 2011).
With a change of focus towards contexts of equipment use, this stream of research
found compatibility with Vargo and Lusch’s (2004; 2008) service-dominant (SD)
logic. This ‘new logic’ places the co-creation of value-in-use at the fore. It proposes
that service is the application of skills and knowledge by one entity for the benefit of
another and that it is service, rather than utility (the perceived usefulness of an
offering, embedded at creation), that is the fundamental basis of exchange.
2.2 Service-Dominant Logic and Customer Co-created Servitization
Since its conceptualisation in 2004, SD logic has had astounding diffusion in the
academic world, with the citation count of the original article currently standing at
over 6,500 (based on Google citations, September 2015). Despite its success there
however exists criticism as to the abstract nature of the logic, which has led to
confusion and potential reluctance in its uptake in practitioner spheres
(O'Shaughnessy and O'Shaughnessy, 2009). It has been suggested that
researchers should strive to develop mid-range theories focused on the application
of SD logic in empirical settings (Brodie et al, 2011), as such theories may help to
bridge the gap between academia and industry. Of SD logic’s ten foundational
premises, Brodie et al (2011) suggest FP1, 6, 9 and 10 are core to such a
4
development. Additionally, of particular importance when considering the application
of SD logic to servitization, is FP3: Goods are a distribution mechanism for service
provision (Vargo and Lusch, 2008a). Put differently, a physical product offering can
be viewed as an indirect service provision (Ng and Briscoe, 2012).
Applied to a servitization context, these FPs propose that the totality of a firm’s
offering is service (the application of competencies). Within this service offering, a
physical product is viewed as indirect service provision, with additional direct service
activities integrated by both firm and customer to enable achievement of desired
outcomes through value co-creation (Guo and Ng, 2011). Thus the firm’s servitized
offering is one of applied competencies, in which the physical product and direct
service activities together constitute the firm’s value proposition to support the
achievement of customer outcomes. These foundational premises place particular
emphasis on value co-creation and resource integration, signifying the importance of
the customer’s competency and context of use in achieving desired outcomes. As a
result, over the last decade researchers have utilised SD logic to investigate a
customer co-created approach to servitization, how best to improve the system of
product use and experience through the concept of a service system (Barnett et al,
2013) and the optimisation of the firm’s value proposition within such a system.
While both streams of literature have dealt extensively with servitization, it is still a
challenge to understand where the overlaps are, and where the streams have
diverged in their approaches. This lack of an understanding would be a challenge to
future researchers in servitization and may even inhibit future research in this space.
In addition, much of the servitization research is interdisciplinary, taking extensively
from manufacturing, marketing and business research. There is also a need to
elucidate the language of disciplines in the study of the servitization phenomenon so
that different terms can be clarified with regards to their conceptual nature. This
paper sets out to review, analyse and extend the growing stream of literature in
servitization by 1) clarifying the two servitization approaches through a thematic
analysis; 2) discussing the divergences between the two approaches to servitization
and put forward the conditions under which one approach may be more appropriate
than the other; and 3) putting forward the future direction of servitization. By doing
so, we aim to fill the gap that currently exists within this domain.
3. Methodology
Thematic analysis draws upon a number of different areas of academic investigation
to identify any relevant themes and relationships between them. For Servitization,
these areas include, but are not limited to, operations, marketing and management
studies. We chose to conduct a thematic analysis so as to synthesise the key points
of convergence and divergence from these different areas in order to extend the
current knowledge base of the servitization phenomenon.
Thematic analysis offers a theoretically flexible approach to qualitative enquiry that
aims to identify and describe patterns (Braun and Clark, 2006). Braun and Clark
describe a theme as that which “captures something important about the data in
relation to the research question, and represents some level of patterned response
or meaning” (p.10). Given the magnitude of different perspectives around the
servitization phenomenon and the level at which they appear disconnected, we
consider thematic analysis as an appropriate methodology for our attempt to
5
synthesise the emerging themes of divergence. That is to determine and critically
analyse the loci of different conceptual standpoints that relate to the same issue
Patton (1990) suggests that the analytical process of thematic analysis should
attempt to theorise not only the significance of patterns but also their broader
meanings and implications. Accordingly, in order to first develop the themes relating
to the disparity of approaches in servitization literature, and then examine in greater
detail the conceptual positions from which these approaches stem, we employed a
two-tiered thematic analysis procedure consisting both semantic and latent theme
analysis (Braun & Clark, 2006). Semantic analysis was used in order to provide an
idea of potential areas of divergence between the two streams, the results of which
are organised and presented in Table 1 that can be found in the appendix. However,
in order to check the validity of expressed differences, it is of course necessary to
compare and contrast with traditional literature to verify the points of departure.
Accordingly, Latent theme analysis is then used in the form of supporting evidence
that is incorporated throughout the body of text, in order “to identify or examine the
underlying ideas, assumptions, and conceptualisations – and ideologies - that are
theorised as shaping or informing the semantic content of the data.” (Braun & Clark,
2006, p. 13).
The methodological strategy developed to identify appropriate literature first required
the identification of key data sources and keywords. To begin with, a broad selection
of databases was used to ensure that journal articles, conference proceedings,
books, white papers and reports were included. These databases included, but are
not limited to, Emerald, Taylor & Francis and Wiley. Keywords for the search
included, but are not limited to: product service-system, servitization, customerbased (oriented/co-created) servitization, integrated solutions, solution-based
business models, outcome-based contracting.
A two-step analysis was employed to establish the relevance of the papers for the
semantic analysis. First, the authors reviewed the titles and removed them if not
deemed relevant. Second, the abstracts of those deemed appropriate from the first
round were read and discarded if not considered relevant. The authors chose not to
restrict the criteria of relevant papers by date. However, given that the literature
employing an applied SD logic for servitization was post-2004, following the
publication of SD Logic (Vargo and Lusch, 2004), we reviewed the traditional
servitization papers over the same time period to ensure greater validity in analysing
the concurrent developments in the two streams and thus giving greater weight to
the findings.
Following the identification of the key themes, we then investigated supporting
references from the key papers of the semantic analysis so as to identify and
elaborate on the conceptual basis of their arguments. This ensured relevance
between the semantic and latent levels of the thematic analysis. The translation of
these underlying ideologies and their implications on the different approaches is
critically analysed throughout the body of the article. The discussion is presented on
a tiered basis, each section serving to build upon concepts of the previous one. In
this way the reader is presented with a thorough understanding of the divergences
present in extant and emerging servitization literature.
6
4. Findings and Points of Convergence and Divergence
We label the two streams of literature as Type 1 (traditional servitization) and Type 2
(CCoS). Five themes were identified in the extant literature, providing the conceptual
divergence of Type 1 and Type 2 servitization research. It is seen that these themes
were 1) Value; value-in-use; 2) Design of the offering; or the way in which products
and services are conceptualised within the firm’s offering; 3) Value co-production vs
value co-creation; the perception of the customer within the offering 4) Complexity vs
contextual variety; how the firm attempts to ensure the viability of its offering under
conditions of uncertainty and; 5) Business models of solutioning vs outcome based.
The following section elaborates on these themes.
4.1 Theme One - Value-in-Use
Both Type 1 and Type 2 consider customer centricity as a key constituent of a
servitized manufacturer (Oliva and Kallenberg, 2003; Baines et al, 2009; Grönroos
and Helle, 2010; Smith et al, 2012). In so doing, the term ‘value-in-use’ is often used
to underpin customer centricity, and both Type 1 and Type 2 refer to the
achievement of value-in-use as the driver behind the implementation of servitized
strategies. However, there seems to be disparity in the way in which the term is
used, in particular where value is created.
In perhaps the most comprehensive review of Type 1 literature, Baines et al (2009)
state that traditionally, “the main part of total value creation was considered to stem
from physical goods, and services were assumed purely as an add-on to products”
(p555). The authors go on to state that more recent research recognise services to
be the “main differentiator” in which the product is reduced to become just part of the
offering. However in this context, direct service activities are referred to as valueadded activities. This notion of ‘value added’ implies that Type 1 literature considers
value as embedded utility (Ng and Smith, 2012), atomistically embedded in both the
physical product and the service activities created by the firm for the customer’s use.
This is therefore the traditional goods-centric logic. With value being created and
delivered by the firm, this focuses the servitization strategy on the reliability of the
firm’s performance in delivering the value created by the firm to be used by the
customer. The customer is therefore a passive ‘receiver’ of value in its use.
For Type 2, rather than being the passive receiver of manufactured value, customers
are integral to the value-creating process (Prahalad & Ramaswamy, 2000). This is
because Type 2 considers value as being created only in the process of use or
experience of both the physical product and its corresponding service activities. This
therefore leads to a philosophical, but important, SD logic implication that Type 1
does not make: if value is only created in use then the customer must necessarily be
the co-creator of value (Maglio et al, 2009). Manufacturers cannot then deliver value
to a customer, but instead offer value propositions, acceptance of which allows value
to be created and determined by the customer (Vargo and Lusch, 2008). This
changes the boundary between firm and customer into a collaborative relationship
since the creation of value, essential for the firm’s viability, extend beyond the
proposition and into the contextual use space in which both parties are accountable
for the achievement of desired outcomes (Smith et al, 2014; Frow et al, 2015).
7
Type 1 similarly recognises the move away from transaction-based toward
longitudinal, relationship-based interaction, for example, categorising five connecting
factors of such buyer-supplier relationships: information exchange, operational
linkages, legal bonds, cooperative norms and buyer-supplier adaption (Martinez et
al, 2010). However, as the authors stated, these relational specific factors directly
arise from the need to increase the firm’s effectiveness in providing the integrated
solutions; although acknowledging the need for mutual, reciprocal adaptation. Under
Type 1, since the firm creates value through the manufacturing of the physical
product and its corresponding service, customer use is an important part of its
viability, but the firm does not ‘own’ that contextual space, the way Type 2 approach
expects. Type 1’s unit of analysis is very much firm centric on creating and delivering
value with the customer as a use participant, while Type 2’s unit of analysis is very
much customer centric on the context of use and experience with the firm as a value
proposition participant.
4.2 Theme Two – Design of the Servitized Offering
Our findings show that the implication of the Type 2 view of value-in-use requires a
fundamental change to how organisations design future offerings. Payne et al (2007)
describe this change as a move from an inside-out to an outside-in mentality to value
propositions. Rather than basing future offerings on the current competencies of the
organisation (inside-out), the authors suggest an organisation should first understand
customer value-creating processes and aim to provide greater support for cocreation in these contexts (outside-in). This approach is similarly encouraged by
Grönroos and Ravald (2011), who state that understanding a customers’ valuecreating processes allows for the organisation to design more effective and efficient
ways to provide resources that support value co-creation. Indeed, Type 1 and Type 2
view servitized manufacturers as striving to optimally configure resources (both
human and material) to enable the most effective and efficient manner of delivering
valuable solutions or supporting customers in co-creating their desired outcomes,
respectively (Baines et al, 2009; Smith et al, 2014), suggesting that both types
converge in the approach. However, a close examination of the analysis suggest that
the Type 1 conceptualisation of embedded utility and value being created by the firm
implies that this approach cannot truly be viewed as an outside-in approach. This is
because the role of the customer, while important, is exogenous to value creation,
which is embedded in the delivery of the firm’s physical product and service activities
exogenously for use by the customer.
In contrast, the Type 2 view, driven by SD logic, considers the process of value cocreation as that which occurs through mutual resource integration (Vargo and Lusch,
2008). As such, in order to understand customer value-creating processes to enable
the most efficient design of offerings, a manufacturer must consider the availability of
existing customer resources and how best to complement them (Jaakkola and
Hakanen, 2013), while staying viable. Indeed Takeyama et al (2014) stress the
importance of recognising that any resource cannot exist in isolation but rather, they
‘become’ (De Gregori, 1987) when drawn upon to support other resources in
customers’ context of use. Ng et al (2012b) explain this by stating that resources are
only ‘active’ in the enabling processes of eventual outcomes, with resources seen as
bundles of potential service, and activities the process through which they are
realised to achieve value. Thus, the resources of both firm and customer interact to
contribute to value-creating activities (Grönroos and Helle, 2010). In this way
8
resource integration and by extension, value co-creation, is multidirectional, with all
parties uniquely integrating multiple resources for their own benefit and that of others
in relational value- creating systems (Vargo, 2008; Ng et al, 2012b; Frow et al,
2015). As previously stated, it is the customer who ultimately determines value
phenomenologically, hence evaluating the benefit of the organisation’s offering in
relation to their value- creating activities. The conclusion of this course of thought is
that Type 2 literature advocates the need for customer resource and context to be a
feature of future offering design, so as to enable more effective provision of the firm’s
servitized physical product to support co-creation opportunities.
The key difference between Type 1 and Type 2 literature is the role of the physical
product. For Type 1 literature, the physical product is unchanging with services being
the ‘add-on’ activities required to assist in customer usage (Verstrepen and van Den
Berg, 1999; Baines et al, 2009). For example, we found that when describing
product-related services, Tukker (2004) states that the firm adds more service
contracts onto the product sale, such as a take-back contract or maintenance
contract. Furthermore, Neely (2008) highlights that manufacturers offering solutions
deliver them via their manufactured product, whilst Lightfoot et al (2013) find in their
review of the literature that most studies focusing on design elements of servitization
emphasise organisational changes to accommodate the additional risk, with no
mention of product changes e.g., “manufacturers may be concerned with pricing,
absorbing risks and shifts in organisational configuration” (p.1413). Even with the
advances in technology, such as sensor technologies generating vast amounts of
data, the focus is on remote health and usage monitoring (Grubic, 2012) or
improving the efficiency of the firm’s service offering (Zaki & Neely, 2014). Given that
the physical offering is viewed as fixed, a Type 1 approach utilises digital
technologies to either deliver a service as an add- on to their manufacturing
capabilities rather than co-creating the service with the customer or chase efficiency
gains. For example, servitized supply chains rely on real-time information (remote
monitoring technologies) to create a more responsive supply chain compared to a
pure manufacturing firm (Johnson and Mena, 2008). In addition, use data is used to
improve spare part decision making (Kim et al, 2007), whilst predictive analytics
utilise equipment use data to prevent equipment failure and improve efficiency so
that these failures do not occur again (Swanson, 2001).
In contrast, Type 2 literature does not consider the physical product as unchanging
or unchangeable. Instead, since it considers a physical product an indirect service,
Type 2 research acknowledges both its limitations and its advantages as an indirect
service. The advantage of physical products within the service system is that it
creates standardization so that the firm can replicate or scale better, resulting in
lower costs and greater viability (Ng and Briscoe, 2012). Its limitation, however, is its
inability to be flexible for the customer’s context of use (elaborated in Theme 4).
Type 2 service literature therefore considers one of servitization’s challenges as
where rigidity and a stable boundary should be within a service system (the role of
the physical product) and where variety is necessary for the customer use (the role
of service activities). Ng (2013) further argues for Type 2 research by claiming that
service activities may be difficult to scale and replicate paradoxically because of the
legacy physical product, since the physical product was designed for a different
business model (that of exchange) and not for a business model of servitization and
usage. Instead, she argues for the use of digital technologies as an enabler for
component change during the use context.
9
In summary, the design of the servitized offering for Type 1 is that of the combination
and configuration of the physical product and service activities as added on and for
Type 2, the servitized offering is a combination and configuration of indirect service
(physical product) and direct service (activities) where the decision is on boundaries
for both viability and variety absorption, which may necessitate changes to the
physical product.
4.3 Theme Three - Value Co-production and Value Co-creation
Our findings point to another divergence, that of the difference between co-creation
and co-production. Under Type 2 research, co-production is seen to be the
customer’s involvement in the creation of a company’s core offering, i.e. involvement
in design of desired attributes (Etgar, 2008; Parry et al, 2011, Ranjan and Read,
2014). Co-creation however, is seen as the customer’s realisation of an offering so
as to obtain the beneficial outcomes in use. Although a distinction can be drawn
theoretically, in reality the distinction between the two may become blurred (Jacob
and Rettinger, 2011). Indeed, Vargo (2008) states that co-creation should be viewed
as superordinate to co-production, in that the former is hypernymic to the latter. Ng
and Smith (2012) support this view, positing that although customers are always cocreators of value-in-use within their context, they may not have contributed to the
design of a firm’s offering through co-production.
To clarify this concept within the Type 2 approach, the authors offer the following
definitions synthesised from the extant literature (Etgar, 2008; Vargo, 2008; Ng and
Smith, 2012):
● Co-production is the customer involvement in the formation of a company’s
core offering (optional);
● Co-creation is the beneficial realisation of that offering in use (requisite);
● Co-creation is superordinate to co-production.
It is important to note that although Type 1 literature does not acknowledge value cocreation it does use the term co-production (Brax, 2005; Morelli, 2009; Wilkinson et
al 2009; Kowalkowski et al, 2010), albeit it normally undefined as a catch all term for
customer involvement in the process of enabling solutions. For instance, Brax and
Jonsson (2009) state that a key research finding as “In integrated solutions, value is
created incrementally through the customer-provider co-production process”(p.539).
However, co-production is not explicitly defined, but is instead taken to refer to
concepts such as co-design of the solution offering. Windahl et al (2004) similarly
cite the importance of co-production in the development of integrated solutions
without an explicit definition, instead using the term to refer to ‘client interaction’ and
informational exchange between the firm and customer. Morelli (2009) takes a more
encompassing definition of co-production stating the customer should no longer be
considered as destroyers of value but rather co-producers of value, which leads the
author to suggest that companies should focus on the “physical space in which value
is co-produced” (p.570). Co-production here is then taken to be the enactment in
which value is produced, akin to the concept of co-creation in the Type 2 literature.
In this way the point of departure between the two streams appears to be value cocreation, in that Type 2 literature considers value co-creation as separate from coproduction.
10
4.4 Theme Four - Contextual Variety and Complexity
Our findings also show another divergence in terms of the importance of context.
Chandler and Vargo (2011) define a particular context as a unique set of actors with
reciprocal links among them, where actors are any social or economic entity whose
resources are integrated into the value-creating system. Taking this definition of
context, Type 2 research consider a firm’s resources as forming only part of a
customer’s value-creating system which may comprise hundreds of actors, each with
their own unique set of resources, contributing towards the customer’s outcome.
Thus under a Type 2 approach, the firm’s offering (which aims to support a given
customer’s value-creating system) will be subject to a variety of contextual use
scenarios both between and within the different value-creating systems (Ng et al,
2012a). As these contexts may not necessarily be known prior to their occurrence,
Batista et al (2013) state that contextual variety can therefore exhibit complexity.
Since the Type 2 unit of analysis is the use/experience context, its research
proposes that the role of the physical product and service activities must address this
added complexity (as highlighted in theme 2) and develop ways of attenuating the
variety, as failure to do so may negatively affect the achievement of a firm’s value
proposition and thus have an impact on its competitive advantage or continuing
viability (Ng & Briscoe, 2012). This example highlights that two things are essential
for a Type 2 approach; understanding contextual use variety and the generation of
customer co-capabilities. In the forklift example provided, the customer has to be
competent in business planning (a co-capability) and willing to allow said plans to be
visible to the firm (an understanding of contextual use variety). If they cannot provide
this, the firm may not be able to utilise their capabilities in the redeployment of
equipment or staff to meet emergent needs of the customer.
As part of Type 2 research, Ng and Briscoe (2012) state that due to the complication
of heterogeneity of use contexts, and the fact that these contexts cannot be
exhaustively known before use, each physical product offering is therefore a tradeoff between different sets of possible contexts. In this way, a physical product
offering (indirect service provision) (Vargo and Lusch, 2004) can be viewed as
having fixed boundaries and thus has low tolerance to contextual variety. For a
servitized manufacturer, post-manufacturing service activities can help to attenuate
unexpected variety as it arises. However, a reactive approach becomes increasingly
expensive under conditions of high variety (especially when the product offering
resides in the customer’s context) and can ultimately threaten the viability of the firm
due to a lack of scalability (Smith et al, 2014). Instead, it is recommended that firms
take pre-emptive steps towards variety attenuation, thus helping to secure
sustainable viability.
Unsurprisingly, given the conceptual divergences already discussed, Type 1
literature approaches the issue of complexity in a different manner. Complexity is
primarily seen to stem from service activities, so as the firm moves along the
product-service continuum (from pure product to pure service), complexity is seen to
increase (Smith et al, 2014). Transitioning along this continuum means more risks
are transferred to the firm e.g., guaranteed availability and ensuring reliability of the
product. Hence, this transition creates additional complexity for the firm to manage.
This suggests that complexity, as described in Type 1 literature, and contextual
variety, as described in Type 2 literature, are similar. Our analysis finds that the
terms are nuanced due to their treatment of the customer and therefore, Type 1
research handles complexity conceptually different from Type 2 research. Many
11
authors adopting the Type 1 approach have said that servitization generates
complexity for the manufacturer through the transfer of risk around non-availability
and suboptimal product performance (Grubic, 2012), minimisation of downtime
(Küssel et al, 2000) and minimisation of operational hold ups (Jonsson et al, 2008),
to name but a few. This is because Type 1 research considers the customer
resources as exogenous to servitization, thus complexity from any contextual variety
of use must be treated as risks to be managed or mitigated. For example, Tukker
(2004) highlights that a pay per service PSS would see the firm take over
responsibilities the customer previously had e.g., paper and toner supply, repair,
maintenance and overhaul and replacement of the product when required. By taking
over these responsibilities, the firm is now burdened with additional complexity in
operational performance that could have implications on how efficiently they operate
internally as a firm, but also how they ensure the customer’s day-to-day business
operates efficiently under the new service contract. Thus, the challenge to firms
adopting a Type 1 approach (solution-based system) is to manage or mitigate the
complexity of the service offering to ensure the offering operates efficiently and with
little or no interruptions e.g., the offering experiences as little downtime as possible.
To overcome the added complexity and to facilitate the outsourcing of a functional
solution, studies have pointed towards usage monitoring (Holmström et al, 2010),
remote monitoring technology (Grubic, 2012; Jonsson et al, 2008) and error and
diagnostics reporting (Küssel et al, 2000). For example, we found that authors
studying the use of remote monitoring technology identified that the use of real-time
data about product health, usage and performance allowed a manufacturer to 1)
mitigate any risks that come about from servitization; 2) be more proactive about
repair, maintenance and overhaul; and 3) prevent any disruptions or losses to the
customer's business.
Our findings therefore show that a Type 1 approach to servitization will focus only on
the firm’s capabilities, be they product performance or service activities, and manage
or mitigate the added complexity of assuming on additional responsibilities usually
taken on by the customer and providing a solution to the customer as the passive
receiver of the ‘solution’. In focusing on these elements, the aim of a Type 1
approach is to ensure operational efficiency for both firm and customer.
In contrast, the Type 2 approach assumes the customer as endogenous to the
system, and therefore focuses on not merely managing or mitigating risks, but also
lessening the risk by actively engaging with the customer and assisting them in
managing their use or experience, including the variety in context of use, so that the
alignment of the firm and customer can reduce the complexity caused by variety. For
example, Ng et al (2013) suggest seven alignments are crucial to the successful
enactment of Type 2 offerings: Complementary competencies, congruence of
expectations, empowerment, perceived control, behavioural alignment, information
alignment and material/equipment alignment. Batista et al (2013) discuss cocapability as the “collaboration between provider and customer and the
establishment of ‘joint capabilities’”, stating that transformation involving key
customer-provider relationships allows the achievement of greater viability and
stability for long‐term equipment outcomes. The focus of Type 2 is primarily on
effectiveness and optimising the fit between the context of use and the desired
outcome to lessen contextual variety and its challenges. In short, Type 2 addresses
complexity by reducing asymmetry in information between the firm and customer,
12
and actively manages future uncertain and incomplete information by ensuring the
alignment of capabilities between them.
4.5 Theme Five –Business Model of Solutions vs Outcomes
A fifth and final point of divergence was found, that of business model development.
Type 2 research inherently views all servitized business models as outcome based,
with the difference being the contractual boundary (Ng et al, 2012a). Indeed, in
employing a Type 2 approach, Smith et al (2012) propose three value proposition
cycles of equipment-based manufacturers seeking to adapt their offerings to
maximise value-in-use: 1) recovery – minimising disruption from technology failure;
2) availability - maximising availability of technology; and 3) outcome – better
capability to achieve desired outcomes of technology. Tukker’s (2004) Type 1
classifications also cite three main categories of product service systems dependent
on the level of service content: 1) product oriented – predominantly the sale of
products with some extra services added; 2) use oriented – the product plays a
central role, but ownership is retained by the provider; and 3.) result oriented –
customer and provider agree on a predetermined result without specification of a
predetermined product.
Whilst Smith et al’s (2012) Type 2 value propositions seem to be analogous to
Tukker’s Type 1 PSS classifications, the Type 2 authors use the term ‘cycles’ to
indicate that in reality, each value proposition is interlinked in the ultimate
achievement of customer outcomes, particularly when including customer resources
at points of use. As a company moves through these cycles, it increasingly facilitates
and supports the use experience of the offering, and so requires greater resource
contribution to, and appreciation of, the customer value-creating process (Jaakkola
and Hakanen, 2013). Thus, the enactment of Type 2 value propositions can be said
to be in accordance with Payne et al (2007)’s outside-in mentality to value
propositions design. Ng and Briscoe (2012) state that developing outcome-based
value propositions to provide greater support for value co-creation in the customer
contexts (outside-in mentality) allows potential for a company to increase its
competitive advantage through increased customer satisfaction. This is supported by
Kowalkowski & Kindstrom (2013), who highlight that business models centred
around service, where achieving customer outcomes become paramount, reduces
imitation of a company’s offering as it is harder for competitors to isolate and copy
individual elements of a system with emergent outcomes. Moreover, the longitudinal
and collaborative nature of such value propositions provides potential for the firm to
reduce marginal costs through the development of co-capabilities with the customer
that allow for the more efficient use of both parties’ resources (Etgar, 2008). The
development of co-capabilities however, requires the transformation of both parties’
resources, which has the potential to cause emergent effects within the valuecreating system. Accordingly, Ng et al (2009) state that the firm must develop the
capability to manage customer autonomy.
Our findings suggest that Type 1’s proposal of integrated solutions as a business
model (Brax and Jonsson, 2009) could potentially be misunderstood to be similar to
Type 2’s proposal of outcome-based business models (Ng et al, 2013). Our findings
suggest differently. For Type 2 research, customer autonomy is what sets outcomes
apart from solutions. Ng et al (2009) suggest that the Type 1 notion of delivering
value-in-use in the form of integrated solutions implies that the firm is responsible for
the entirety of the outcome, alongside its risks. Indeed this is signified by Miller et al
13
(2002) who state in order to preserve price premiums the firm must “always work to
stay ahead of clients - and some may have to keep secrets from them” (p.8). To
mitigate the risks of high variety of ‘solutions’, rigidities and clear boundaries would
need to be specified. Type 1 literature show that these could be contractually defined
performance levels (Zaki and Neely, 2011) such as those that ensure asset
availability under a risk and revenue sharing contract Baines et al (2009b).
Conversely, for Type 2 research, the customer is endogenous to the system. Hence,
risks could be reallocated when the contract is based on co-capability. Such risks
could be the uncertainty of future and emergent outcomes, environmental
uncertainty etc. Ng and Briscoe (2012) state that outcome-based contracting or OBC
(a Type 2 approach to business model development) has three major changes to
traditional (Type 1) business models: 1.) Both parties are aligned to the achievement
of a common outcome, reducing the likelihood of opportunistic firm behaviours and
eliciting desired customer behaviours. Together, these potentially reduce servicing
costs in the long term. 2.) The firm bears a greater proportion of the risk associated
with achievement of outcomes in the customer value-creating system, providing the
opportunity to manage the integration of both parties’ resources for more effective
and efficient support of the value co-creation process, thus earning greater margins
through decreased resource utilisation. 3.) Achievement of the coordination role in
OBC constitutes an additional competency for the firm that may result in increased
market share through proliferation of similar contracts. The potential of similar
contracts can incentivise a firm above and beyond the contractual terms in pursuit of
achieving outcomes, thus further reinforcing mutual alignment.
Both Type 1 (solutioning) and Type 2 (OBC) business models will necessarily entail
close collaboration between the firm and customer. However, the difference between
the two lies in the firm’s management of customer autonomy and the use of its
resources. Type 2 considers customer resources as part of the value-creating
system, and proposes that since resources are in context, customer resources are
better place to be deployed as the customer would know first when anomalies or
variety come about. Hence, the OBC business model allows the firm to work
collaboratively with the customer to actively manage the customer’s resources so
that their more efficient use (coordinated by the firm) allows the potential for marginal
gains in the enactment of the value proposition. This process is shown visually in
Figure 1.
Figure 1. Marginal gains from the co-production of outcome-based contracts
14
Type 2 therefore considers the customer endogeneity in servitization as threefold first, to jointly take on the capability of achieving the outcomes, second, jointly taking
on the risks, and third, to be best placed for contingent assets or capabilities close to
the context of usage/experience such that such potential resources from the
customer would be more cost effective than the firm.
In this way, while solution-based Type 1 approaches for servitization business
models may be appropriate for closed system problems with objective measures and
low variety, an outcome-based Type 2 approach for servitization business models
may be more appropriate when the desired end states are complex, high variety,
uncertain or emergent.
5. Discussion and Reconciliation
The creation of value is the core purpose of any economic activity and as such,
forms the basis of competitive advantage (Vargo et al, 2008; Ng & Smith, 2012). It is
then a logical assumption that a thorough understanding of value-creating processes
is crucial to any organisation interested in servitization. Our paper brings the
difference in the understanding of value to the fore, through the thematic analysis of
two strands of servitization literature. Our study demonstrates the divergences in
servitization approaches driven by two ways of describing value, namely value-inexchange and value-in-use (Vargo et al, 2008).
The traditional focus on tangible goods as the basis for exchange led to a
manufacturing culture in which products were viewed as inherently valuable due to
their perceived usefulness or utility (Ng and Smith, 2012). Under this
decontextualisation of value, the focus of manufacturers became the design of
offerings with more utility, thus achieving greater exchange value. This notion
inherently assumes that at the point of exchange, the utility of an offering is
immediately obtained, an assumption that is increasingly being challenged
(Grönroos and Helle, 2010). Whilst the exchange value (termed here as worth)
based on utility may be involved in the process of a customer choosing an offering,
Type 2 literature suggests that this does not represent that offering’s true value
(Lapierre, 1997). Instead, it posits that it is in the use experience, thus the ability to
achieve outcomes within a specific context, that an offering becomes valuable
(Vargo and Lusch, 2008; Ng & Smith, 2012). This then shifts the focus of value
creation from utility (perceived usefulness) to value-in-use/context, a strong
conceptual underpinning of Type 2 research.
Our study showed that the shift, which divides servitization literature into two
approaches, creates divergences in five major areas - that of conceptualising valuein-use, design of the servitized offering, value co-creation and co-production,
contextual variety and complexity as well as business models. However, we posit
that the divergences are not irreconcilable.
We argue that for the firm, value is always in the exchange, only because it is value
for the firm in the way that exchange generate revenues valuable to it. For
customers, value is always in the experience, in the way the experience and usage
creates outcomes, which is valuable to them. Therefore, if one does not assume an
overarching transcending notion of value, but discusses value as a construct
attributable to an entity as perceived by another entity i.e. the value of what to
15
whom, then value-in-exchange is the value of revenues (from servitized offerings) to
the firm and value-in-use is the value of experience/use (from servitized offerings) to
the customer. The divergences are therefore underpinned by the focal decision, and
a logic of which is the supra set. In the case of Type 1, value-in-exchange is the
supra-set, with use sitting within it. In the case of Type 2, value-in-use is the supra
set, with the exchange (and the firm’s value proposition) sitting within it. The logic of
which is the supraset is reflected in the argument of outside-in or inside-out as
discussed earlier.
Based on the vast body of literature surveyed, our study have reviewed both Type 1
and Type 2 servitization approaches and have presented the divergences and
convergences between the two. From the study, we propose a reconciliation and
recommend situations when a Type 1 and Type 2 approach is most beneficial and
appropriate for research to adopt.
Adopting a Type 1 Approach: Based on the findings, we propose a Type 1
approach is most appropriate when a firm embraces the following mindset:
1) Value-in-use is delivered by the firm and its value proposition has embedded
value that is consumed during the use of the offering by the customer;
2) The addition of service contracts is simply an extension of its manufacturing
capability – that is, service is a bolt on to its manufacturing capability to
extendits market reach, customer base and additional revenue streams;
3) The design of PSS is seen as a linear transition – that is, the firm transitions
through different contractual boundaries that start at pure product through to
pure service.
4) The service is focused on efficiency gains for both the firm and customer,
meaning the design of the offering remains functionally rigid and the value
proposition has a low tolerance for variety across a range of contexts of use.
Throughout the literature that is grounded in Type 1 servitization, efficiency gains
were continually emphasised as a key element of servitization. For example, in the
design of the PSS, firms are focused on reducing internal firm or product efficiencies,
as highlighted by Kim et al (2007), Johnson and Mena (2008), and Swanson (2001).
Corollary 1: A Type 1 approach to servitization is most appropriate for a firm to adopt
when the customer wishes to remain exogenous to the firm and the focus for the firm
is on delivering more efficient use within the product service system for both the
customer and the firm.
Therefore, taking a Type 1 approach is focused on improving efficiency gains.
Examples of such scenarios would be reducing platform downtime and improving
supply chain responsiveness.
Adopting a Type 2 approach: In contrast to Corollary 1, we propose that a Type 2
approach to servitization is most appropriate for a firm to adopt when it embraces the
following mindset:
1) Value-in-use is co-created with both firm and customer and cannot be created
without the involvement of two or more parties. Therefore, the customer is an
16
active participant and contributor to the creation of value during the use of the
offering.
2) The design of the PSS is not simply an extension of manufacturing, as it
requires the design and management of the service system as a whole. Here,
establishing co-capabilities and including the customer within the system is an
essential component of service provision. However, the development of cocapabilities means the firm does not have control over all resources that
introduces contextual variety.
3) All value propositions are focused upon outcomes, thus serving the customer
across different contexts of use becomes a priority.
4) The service is focused on effectiveness for both the firm and customer,
meaning the design of the offering exhibits open and flexible functional
boundaries resulting in the value proposition having a high tolerance for
variety across a range of contexts of use.
Corollory 2: A Type 2 approach to servitization is most appropriate for a firm to adopt
when the customer can be endogenous to the value-creating process, co-capabilities
between firm and customer can be developed alongside new methods of resource
integration need design and innovation to support the achievement of outcomes
across a range of contexts of use.
Throughout the literature that is grounded in Type 2 servitization, effectiveness and
outcomes were continually emphasised as key elements of servitization. However,
Type 2 literature have acknowledged that this increases contextual variety of use
which in turn implies that the firm relies on the human resource to absorb the variety.
It is acknowledged that this approach is not easily scalable or replicable, meaning
that serving outcomes becomes increasingly complex. This could be set to change,
with recent literature highlighting that the design of the offering can allow for
customers to configure the offering themselves, removing the firm’s reliance on the
human resource and creating further co-capabilities with the customer. Increased
digitisation could allow firms to increasingly challenge the dominant design of
physical and unconfigurable products.
6. Managerial Implications: Rise of Digitization and the Internet-of-Things
One major implication of our study suggest a direction where a Type 2 servitization
approach may be useful. Recently, the literature has seen a number of authors
suggest that digitisation will change the nature of offerings and make them much
more flexible at the point of use. Ng et al (2014) suggest a product designed with
fixed boundaries is not competent across context and that they suffer from three
things: 1) the rigid boundaries make it functionality static; 2) the exchange lacks
information of the desired outcome (asymmetric information); and 3) the firm is not
present in context, which obstructs them from serving context. Rather, they suggest
a digitised offering overcomes these challenges. This is supported by Henfridsson et
al (2014), who say that increased digitisation will allow manufacturing firms to embed
a digital service layer within their offering, enabling re-programmability. This reprogrammability means a product is ‘incomplete’ (Yoo et al, 2010), as it can be
continuously modified even after it has been transferred to the customer (Davies &
Ng, 2015), changing the way the offering is consumed (Hylving & Schultze, 2013).
By designing an offering as incomplete, the boundaries between the digital and
17
material become much more fluid and the functionality of the offering could be
altered by the customer via 3D printing, the Internet of Things (IoT) or digital apps
(Maull et al, 2015). Digitisation would therefore allow a firm to design a scalable
offering in production and a customisable offering during use because of the
boundary between the physical and digital layers (Ng, 2013). Customers’ are now
able develop further co-capabilities and reduce their reliance on the firms human
resource to attenuate variety. This approach would see the components change
based on the context of use. Digitisation allows firms to embed a reconfigurable
service layer within their offerings, changing it from a service with a low tolerance for
variety to one with a high tolerance without sacrificing scale economies. In addition
to these methods of reconfiguration, firms can leverage consumption data to design
and innovate personalised offerings (Ng et al, 2014) that can then be integrated via
the digital layer (e.g.,3D printing, IoT data or digital apps) within the consumption
space.
We argue that the future of CCoS servitization (i.e. Type 2) approaches would
benefit from the use of data as a service for customisation and the development of
functionally incomplete products. First, data of the consumption space can be used
to adapt the functionality of the offering to context by integrating the data directly into
the offering. Second, and in a similar fashion, information about the context can be
used to print components or download apps within the consumption space for
integration with the offering. Finally, the use of customer data can be used by the
firm to develop personalised products or services.
6. Conclusion
This study has highlighted that there are clear divergences in the literature between
two different approaches to servitization. However, much of the literature does not
make this clear and may have contributed to the confusion of appropriate strategies
for managers to adopt. Through contrasting Type 1 and Type 2 literature, the review
clears up any confusion within the literature and makes very clear the divergences
between two main types of servitization. Therefore, this paper provides a clear
distinction between two servitization approaches to allow future researchers to
evaluate the two approaches and progress the knowledge base in servitization. In
deciding on the most appropriate approach to adopt, we have proposed key
conceptual issues that researchers will need to address in order to pursue one such
approach against the other. Future researchers should therefore be able to identify
organisational changes and servitization strategies required based on the approach
they adopt.
This research has several limitations. First, within the servitization domain, there is
an endless number of terms used to describe servitization. In our methods, we used
as many keywords as possible to identify a wide range of research articles.
However, we anticipate that we have missed a variation of the terms in the search
and as such, we may have missed a small number of publications in the area. In
addition, much of this review focuses on literature dating back to 2004 when SD logic
was first published. Although the authors do include a few important papers pre2004, it is possible they may have missed some important contributions to the field
by restricting our search to this time period.
18
Our paper serves to contribute to the growing research community in servitization.
We believe that the servitization knowledge domain has much to contribute to the
future of the digital economy and the Internet of Things, and we hope to continue the
conversations through the clarifications set out in this paper.
7. Appendix
Table 1 – Semantic Thematic Analysis
Type 1
Type 2
Theme one - Value
Vandermerwe & Rada 1988. The point
Prahalad & Ramaswamy, 2000.
however is that a larger component of the
Customers are stepping out of their
added value in customer offerings is going into traditional roles to become cocreators as
services. And since the primary objectives of
well as consumers of value.
business is to create wealth by creating value, Pawer et al, 2009. This means that what is
sold is not the manufactured product, but
“servitization” of business is very much a top
management issue.
the benefit or “value” which customers
derive from the product, and associated
Tukker, 2004. The ability to create and
capture sustained added value (often referred
services.
Grönroos and Helle, 2010. Invariably value
to as shareholder value) is often seen as the
for customers and value for the firm are
key measure of success of business. (...) The
discussed and analyzed separately as
creation of (tangible and intangible) value
separate, non-interactive phenomena.
alone is not sufficient. The PSS provider
However, the value a supplier can create in
(network) should be powerful enough to
a business engagement with a customer is
capture this value as well
Neely, 2008. A Servitized Organisation
dependant of the value that this customer
designs, builds and delivers one or more
can create from being involved in the same
integrated product and service offerings that
relationship. Hence, in this paper, in this
deliver value in use.
sense value is considered a mutually
Baines et al, 2009. the main part of total value created phenomenon.
creation was considered to stem from physical Smith et al, 2014. a firm cannot “satisfy” a
goods, and services were assumed purely as
customer; they can only collaboratively
an add-on to products
support value co-creation. (...) both the firm
Bastl et al, 2012. In this paper we define
and the customer are accountable in
integrated solutions in line with Davies (2004)
achieving value-in-use – the former through
and Wise and Baumgartner (1999), where an
its value propositions be they direct (human
“integrated solution combines products and
activities) or indirect (through product) and
services into a seamless offering that
the latter through its realisation of the
addresses customer’s business or operational propositions.
needs.
Theme Two – Design of Servitized Offering
Oliva and Kallenberg, 2003. Our analysis of
Payne et al, 2007. In traditional business
the actions taken by the firms found a recurring strategy models, suppliers make decisions
pattern on the adoption of IB services. The
and choices about which core business or
observed commonalities were not in the
product category they should be operating
specific service provided, but in the nature of in. The view is clearly inside–out, as it is
the service contracts and in their adoption
based largely on the understanding of
sequence. Furthermore, our analysis suggests current organizational competencies. In S-D
that the transition occurs in stages, and from
logic, business strategy starts by
these we developed a process theory for the
understanding the customer’s valuetransition.
creating processes and selecting which of
19
Tukker, 2004. The trick then becomes to
satisfy needs on these higher levels in
conjunction with the offer of a material artifact:
‘turning ordinary products into extraordinary
experiences’. By creating such intangible
added value, the provider makes the client
willing to pay more than would be justified on
the basis of ‘rational’ calculation.
Baines et al, 2009 - the process of creating
value by adding services to products
Brax and Jonsson, 2009. To increase
business, solution providers continuously
develop additional features for the basic
offerings.
Martinez et al, 2010. There are various forms
of servitization such as the categories that
Tukker proposes (2004). They range from
products with services as an ‘add-on’, to
services with tangible goods.
these processes the supplier wishes to
support. (...) Planning for co-creation is
outside–in as it starts from an understanding
of the customer’s value-creating processes,
and aims at providing support for better cocreation of value
Grönroos and Helle, 2010. In practice,
adopting a service logic would mean that all
activities and processes of a supplier that
are relevant to its customer’s business are
coordinated with the customer’s
corresponding activities and processes into
one integrated stream of actions, with the
aim to support the customer’s processes,
and eventually the business outcome.
Ng and Briscoe, 2012. Our study showed
that the difficulty in the change of business
model may lie not merely in the activities of
service personnel, or in processes that
surround the asset, but in the design and
engineering of the asset itself to support
activities of service personnel in
combination with customer resources.
Consequently, if the asset was originally
designed towards a different set of
boundaries i.e. the firm is only responsible
until the ownership was transferred, it may
need to be redesigned with this new set of
boundaries where both are now responsible
for co-created outcomes.
Theme Three – Value co-production and Value Co-creation
Windahl et al, 2004. we believe that productPrahalad & Ramaswamy, 2000. Customers
focused companies moving towards supplying are stepping out of their traditional roles to
integrated solutions would over time need to
become cocreators as well as consumers of
orient themselves towards the interact covalue.
producing mode. Client involvement is often
Grönroos and Helle , 2010. Interactions
seen as a fundamental aspect of knowledgeprovide value co-creation opportunities for
intensive service activities, and the notion of
the supplier, because the supplier’s and its
co-production developed in service
customer’s processes do not run in parallel
management studies is highly relevant to firms only, but merge into one interactive process.
offering integrated solutions.
The customer takes actions as co-producer
Brax, 2005. As services are processes,
inside the supplier’s practice or process, and
communication with the customers is needed
simultaneously the supplier takes actions
throughout the service relationship. The role of inside the customer’s corresponding
process, and hence, is also directly engaged
this communication is to support the service
co-production, and therefore the manufacturer in the customer’s value-creating process,
needs to express care instead of opportunism. and can perform actively as part of that
Brax and Jonsson, 2009. Integration is not
process
Guo and Ng, 2011. There is a distinction
just a phrase to sell the idea of full service to
clients. It is a necessity even for the provider to between value co-creation and service co-
20
be able to deliver solution offerings, i.e. to fully production though both imply the involvesolve a need in relation to a specific function or ment of the customer and the firm. With S-D
task in the client’s business system. (...)
logic, value is viewed as customer value
integration refers to co-design and
which is proposed by the firm and unfolded
management of the different subsystems
by the customer over time. Nevertheless,
within the solution offering.
service co-production is a process where
Morelli, 2009. the new role of business
the customer and the firm work together to
companies is now to organise value creation,
deliver service outcomes
in the perspective of considering customers no Parry et al, 2012. Co-production requires
that the customer plays an active role in
longer as the end of pipe of the production
process (...) but as co-producers of value. This developing the service offering (Lovelock
new role extends business companies’ interest and Wirtz, 2004) and this further allows
them to co-create value, drawing upon
far beyond their formal boundaries, out in the
logical and physical space in which the value is different resources to attain desired
outcomes
co-produced
Frow et al, 2015. Co-production is generally
Kowalkowski et al, 2010. The nature of
viewed as a component of co-creation with
service infusion requires a matching of
available competencies and assets (strategies) the term referring to customer participation
in the development of the core offering
to the demands (ends) of customers.
Interaction, co-production, and continuous
means-ends adjustment are key
characteristics of many services. Especially in
the case of advanced services, coordinating
and mutually adjusting the means and ends of
both customer and provider become critical.
Theme Four – Contextual Variety and Complexity
Oliva and Kellenburg, 2003. Pricing
Ng et al, 2012a. contextual variables may
equipment availability requires the service
arise from changes in the physical
provider to assume the equipment’s operating environment, originating either from the
risk, i.e. pricing will be based either on the
provider and/or from the customer
opportunity cost of machine failure, or the
themselves. In using technology, there could
traditional maintenance cost for the end-user’s be a number of contextual factors affecting
maintenance organization.
value creation, and such contextual factors
Neely, 2008. Managing and controlling longwill create contextual variety in the way
term risk and exposure in these partnerships,
technology is used, even by the same
as well as modelling and understanding their
individual. This is what we term Contextual
cost and profitability implications is a
Variety.
significant challenge.
Ng and Briscoe, 2012. Since contextual
Baines et al, 2009. Risk also needs to be
variety of use will impact upon the firm’s
considered in the design process as
value propositions, achieving outcomes of
undertaking activities previously performed by use as part of contract performance can
customers can present new
become increasingly complex, even
challenges…marginal risk incurred might
threatening the firm’s future profitability and
outweigh the benefits of increased profit
continued viability. Therefore, firms need to
potential.
re-organise themselves to maintain viability,
Grubic, 2012. This change brings lots of
and manage the complexity that can emerge
challenges with a transfer of risks, from a
from such service systems.
customer to a product manufacturer, being the Batista et al, 2013. A first aspect we
most important one. The primary risks incurred recognise is that contextual variations
by the manufacturer are non-availability and
coming from the external environment of a
21
suboptimal product performance.
Visnjic and Van Looy, 2013. In addition,
investments in service information systems are
necessary to handle the complexity of the
service-delivery process to a growing number
of customers.
Lightfoot et al, 2013. Risk adoption and value
creation appear to be pivotal factors when
considering the design of service oriented
market propositions. The manufacturer’s risk
increases as the organisational focus moves
from tactical (e.g. extended warranty) through
to strategic (e.g. GE providing operational
support for their medical equipment).
system, as well as the multitude of events
that may arise within the system itself,
confront the system with ‘variety’.
Contextual variety as described here is a
measure of complexity, for it represents the
number of different states in a system
Smith et al 2014. As a firm transitions from
product to P-S, contextual use variety
increases.
Theme Five – Business Models of Solutioning vs Outcomes
Miller et al, 2002. The value of solutions to
Ng and Briscoe, 2012. Overall, new
clients is clear: superior or simplified
business models can be seen as more
operations, cost savings, performance
customer centric, taking on new forms of
guarantees, convenience, customized service, collaboration for value creation that
and state-of-the-art offerings.
necessitates a systems perspective. It is
Davis, 2004. These authors argue that
also seen as a change in the unit of analysis
competitive advantage is not simply about
from the firm to the value-creating system,
providing services, but how services are
which spans boundaries, and the need to
combined with products to provide high-value
focus on organisational activities that
‘integrated solutions’ that address a customer’s contribute to that system. This is the case
business or operational needs.
with outcome-based contracts
Brax and Jonsson, 2009. Integrated solutions Ng et al, 2012a. While it is useful to view a
are complex and customized offerings that
system as a set of entities, the fundamental
extend beyond mere bundles of services and
understanding of why a system is a service
products. These solutions can create value by system is that it aims for value to be an
improving operating efficiency, increasing
outcome, regardless of whether such a
asset effectiveness, enabling market
value is commercial, intrinsic, explicit, coexpansion, and mitigating risk
created or multi-faceted.
Lightfoot et al, 2013. “Tukker’s (2004) model
Smith et al, 2014. Delivery of availability
of a product-service spectrum illustrates
and outcome value propositions requires
differing forms of product-service systems
customer resource integration.
business models or value propositions. These Ng et al, 2013. From the delivery
include product oriented services, use oriented standpoint, OBC is unlike traditional service
services, and result oriented services. This
contracts where there is a sequential
framework is, however, typical of many in the
process (call comes in, processes triggered,
PSS literature in that it tends to focus on the
equipment repaired, activities invoiced). In
features and examples of the offering, and
OBC, there is usually no sequential ‘value
whilst useful in terms of organisational
chain’ to speak of; effective equipment use
positioning, it is of limited value in the
is a consequence of collaborative processes
development of strategy.”
and practices with the customer in a valueZaki and Neely, 2011. By a complex service
creating system to achieve positive
we mean the provision of a set of technical
outcomes.
capabilities based on a complex system to a
Frow et al, 2015. Co-creation changes the
customer at a contractually defined
locus of value creation from inside the
22
performance level.
company to collaborative interactions that lie
beyond the firm boundaries. This
perspective requires new business models,
identifying the practices that assist a firm in
coordinating those interactions that lead to
an increase in resource density across
multiple actors
References
Aston Business School. (2013). Servitization impact study : How UK based
manufacturing organisations are transforming themselves to compete through
advances services. Retrieved from
https://connect.innovateuk.org/documents/416351/3926914/Servitization+impact+stu
dy.pdf.
Baines, T. S., Braganza, A., Kingston, J., Lockett, H., Martinez, V., Michele, P.,
Wilson, H. (2007). State-of-the-art in product service-systems. IMechE Proceedings
Part B: Journal of Engineering Manufacture, 221(10), 1–11.
Baines, T. S., Lightfoot, H. W., Benedettini, O., & Kay, J. M. (2009). The servitization
of manufacturing. Journal of Manufacturing Technology Management, 20(5), 547–
567.
Baines, T. S., Lightfoot, H. W., and Kay, J. M., (2009b). Servitized manufacture:
Practical challenges of delivering integrated products and services. Proc. IMechE
Part B: J. Engineering Manufacture, 223 (9), 1207–1215.
Barnett, N., Parry, G., Saad, M., Newnes, L., & Goh, Y. (2013). Servitization: is a
paradigm shift in the business model and service enterprise required? Strategic
Change, 22(3/4), 145–156.
Batista, L., Davis-Poynter, S., Ng, I.C.L, & Maull, R. (2013). Transformation of
provider and customer organisations to achieve co-capability in outcome-based
contracts: a viable service systems approach. In 31st Spring Servitization
Conference, 196–202.
Braun, V., & Clarke, V. (2006). Using thematic analysis in psychology. Qualitative
Research in Psychology, 3 (2), 77-101.
Brodie, R. J., Saren, M., & Pels, J. (2011). Theorizing about the service dominant
logic: The bridging role of middle range theory. Marketing Theory, 11(1), 75–91.
Brax, S. (2005). A manufacturer becoming service provider – challenges and a
paradox. Managing Service Quality: An International Journal. 15(2), 142 -155.
Brax, S.A., & Jonsson, K. (2009). Developing integrated solution offerings for remote
diagnostics. International Journal of Operations & Production Management, 9(5),
539 – 560.
Chandler, J. D., & Vargo, S. L. (2011). Contextualization and value-in-context: How
context frames exchange. Marketing Theory, 11(1), 35–49.
23
Davies, A. (2004). Moving base into high-value integrated solutions: a value stream
approach. Industrial and Corporate Change, 13(5), 727–756.
Davies, P., & Ng, I.C.L. (2015). Moving towards the incomplete: a research agenda
for future products in the digital economy. Procedia Manufacturing. 3, 3368–3374.
De Gregori, T. (1987). Resources are not; they become: an institutional theory.
Journal of Economic Issues, 21(3), 1241–1263.
Etgar, M. (2008). A descriptive model of the consumer co-production process.
Journal of the Academy of Marketing Science, 36(1), 97–108.
Frow, P., Nenonen, S., Payne, A., Storbacka, K., 2015. Managing co-creation
design: a strategic approach to innovation. British Journal of Management 26, 463483.
Gebauer, H., Fleisch, E., & Friedli, T. (2005). Overcoming the service paradox in
manufacturing companies. European Management Journal, 23(1), 14–26.
Grönroos, C., & Helle, P. (2010). Adopting a service-logic in manufacturing. Journal
of Service Management, 21(5), 564–590.
Guo, L and Ng, I. (2011) The co-production of equipment-based services: An
interpersonal approach, European Management Journal, 29(1) pp. 43-50
Heinonen, K., Strandvik, K., Mickelsson, J., Edvardsson, B., Sundström, E., &
Andersson, P. (2010). A customer dominant logic of service. Journal of Service
Management, 21(4), 531–548.
Henfridsson, O., Mathiassen, L., & Svahn, F. (2014). Managing technological change
in the digital age: the role of architectural frames. Journal of Information Technology.
29, 27-43.
Holmström, J., Brax, S., & Ala-Risku, T. (2010). Comparing provider-customer
constellations of visibility-based service. Journal of Service Management, 21(5),
675–692.
Hylving, L., & Schultze, U. (2013). Evolving the modular layered architecture in
digital innovation: The case of the cars instrument cluster. In Thirty fourth
international conference on Information Systems, Milan.
Jaakkola, E., & Hakanen, T. (2013). Value co-creation in solution networks. Industrial
Marketing Management, 42(1), 47–58.
Jacob, F., & Rettinger, B. (2011). The role of customer co-production in value
creation. In Proceedings of the Naples Forum on Service.
Johnson, M., & Mena, C. (2008). Supply chain management for servitised products:
a multi-industry case study. International Journal of Production Economics, 114(1),
27-39.
Jonsson, K., Westegren, U.H., & Holmström, J. (2008). Technologies for value
creation: an exploration of remote diagnostic systems in the manufacturing industry”,
Information Systems Journal, 18(3), 227-245.
Kim, S., Cohen, M.A. and Netessine, S. (2007). Performance contracting in aftersales service supply chains. Management Science, 53 (12), 1843-58.
24
Kowalkowski, C., & Kindström, D. (2013). Servitization in manufacturing firms: a
business model perspective. In 31st Spring Servitization Conference.
Kowalkowski, C., Kindström, D., Alejandro, B.T., Brege, S., & Biggemann, S. (2012).
Service infusion as incrementalism in action. Journal of Business Research, 65(6),
765-772.
Küssel, R., Liestmann, V., Spiess, M. & Stich, V. (2000), TeleService a customeroriented and efficient service. Journal of Materials Processing Technology, 107(1),
363-371.
Lapierre, J. (1997). What does value mean in business-to-business professional
services? International Journal of Service Industry Management, 8(5), 377–397.
Lightfoot, H., Baines, T., & Smart, P. (2013). The servitization of manufacturing: a
systematic literature review of interdependent trends. International Journal of
Operations & Production Management, 33(11/12) 1408 - 1434.
Maglio, P., Vargo, S.L., Caswell, N., & Spohrer, J. (2009). The service system is the
basic abstraction of service science. Information Systems and E-Business
Management. 7(4), 395–406
Martinez, V., Bastl, M., Kingston, J., & Evans, E. (2010). Challenges in transforming
manufacturing organisations into product-service providers. Journal of Manufacturing
Technology Management, 21(4), 449–469.
Maull, R., Godsiff, P., & Mulligan, C. (2015). Transitioning to the pull economy : the
case of the UK railways. In 48th Hawaii International Conference on Service
Systems, Hawaii.
Miller, D., Hope, Q., Eisenstat, R., Foote, N., & Galbraith, J. (2002). The problem of
solutions: Balancing clients and capabilities. Business Horizons, 45(2), 3–12.
Morelli, N. (2009). Service as value co-production: reframing the service design
process. Journal of Manufacturing Technology Management, Vol. 20 (5), 568 -590.
Neely, A.D. (2008) Exploring the financial consequences of the servitization of
manufacturing. Operations Management Research, 1(2):103-118.
Ng, I.C.L. (2013). Value & worth: creating new marketing in the digital economy.
Innovorsa Press; Cambridge.
Ng, I.C.L., & Briscoe, G. (2012). Value, variety and viability: new business models for
co-creation in outcome-based contracts. International Journal of Service Science,
3(3), 26–48.
Ng, I.C.L., Ding, X., & Yip, N. (2013). Outcome-based contracts as a new business
model: the role of partnership and value-driven relational assets. Industrial Marketing
Management, 42, 730–743.
Ng, I.C.L., Guo, L., & Ding, Y. (2012a). The use of information technology as value
co-creation: the role of contextual variety and means drivenness. The University of
Exeter Business School Discussion Papers in Management.
25
Ng, I.C.L., Maull, R. & Yip, N. (2009). Outcome-based contracts as a driver for
systems thinking and service-dominant logic in service science: evidence from the
defence industry. European Management Journal, 27(6), pp377-387.
Ng, I. C.L., Scharf, K., Pogrebna, G., & Maull, R. (2014). Contextual variety, internetof-things and the choice of tailoring over platforming: mass customisation strategy in
supply chain management. International Journal of Production Economics, 159
(January), 76-87.
Ng, I.C.L., Parry, G., Smith, L., Maull, R., & Briscoe, G. (2012b). Transitioning from a
goods-dominant to a service-dominant Logic : visualising the value proposition of
Rolls-Royce. Journal of Service Management, 23(3), 416–439.
Ng, I.C.L., & Smith, L. A. (2012). An integrative framework of value. (S. L. Vargo & R.
F. Lusch, Eds.) Review of Marketing Research (9th ed., Vol. 9). Emerald Group
Publishing Limited.
Ng, I.C.L., Parry, G., Maull, R., & Mcfarlane, D. (2011). Complex engineering service
systems: a grand challenge. In I. Ng, G. Parry, P. Wild, D. McFarlane, & P. Tasker
(Eds.), Complex Engineering Service Systems - Concepts and Research (pp. 439–
454). London: Springer London.
Oliva, R., & Kallenberg, R. (2003). Managing the transition from products to services.
International Journal of Service Industry Management, 14(2), 160–172.
Patton, M.Q. (1990). Qualitative evaluation and research methods (2nd ed.).
Newbury Park, CA: Sage.
Pawar, K. S., Beltagui, A., & Riedel, J.C.K.H. (2009). The PSO triangle: designing
product, service and organisation to create value. International Journal of Operations
& Production Management, 29(5), 468–493.
Payne, A.F., Storbacka, K., & Frow, P. (2007). Managing the co-creation of value.
Journal of the Academy of Marketing Science, 36(1), 83–96.
Polese, F., Pels, J., & Brodie, R. J. (2011). Theoretical underpinning to succesful
value co-creation. In E. Gummeson, M. Cristina, & F. Polese (Eds.), The 2011
Naples Forum on Service - Service Dominant Logic, Network and Systems Theory
and Service Science: Integrating Three Perspectives for a New Service Agenda.
Prahalad, C.K., & Ramaswamy, V. (2000). Co-opting customer competence. Harvard
Business Review, 78, 79–90.
Ranjan, K. R., & Read, S. (2014). Value co-creation: concept and measurement.
Journal of the Academy of Marketing Science. DOI 10.1007/s11747-014-0397-2.
Smith, L., Maull, R., & Ng, I.C.L (2014). Servitization and operations management: a
service dominant-logic approach. International Journal of Operations & Production
Management, 34(2), 242–269.
Smith, L., Ng, I.C.L., & Maull, R. (2012). The three value proposition cycles of
equipment-based service. Production Planning & Control, 23(7), 553–570.
Spohrer., J & Maglio, P. (2008). The emergence of service science: toward
systematic service innovations to accelerate co-creation of value. Production and
Operations Management. 17(3), 238-246.
26
Takeyama, M., Tsukui, K., & Shibata, Y. (2014). Resource oriented service ideation :
integrating S-D logic with service design. In Fourth Service Design and Service
Innovation Conference. Lancaster University, United Kingdom.
Tukker, A. (2004). Eight types of product-service system: eight ways to
sustainability? Experiences from suspronet. Business Strategy and the Environment,
13, 246–260.
Turunen, T., & Neely, A. (2012). Organising servitization: an in-depth case study.
Cambridge Service Alliance Working Paper, 1–19.
Vandermerwe, S., & Rada, J. (1988). Servitization of business: adding value by
adding services. European Management Journal, 6(4), 314–324.
Vargo, S. L. (2008). Integration and value creation - paradigmatic traps and
perspectives. Journal of Service Research, 11(2), 211–215.
Vargo, S. L., & Lusch, R. F. (2004). Evolving to a new dominant logic. Journal of
Marketing, 68 (January), 1–17.
Vargo, S. L., & Lusch, R. F. (2008). Service-dominant logic: continuing the evolution.
Journal of the Academy of Marketing Science, 36(1), 1–10.
Vargo, S.L., Maglio, P.P., & Akaka, M.A. (2008). On value and value co-creation: A
service systems and service logic perspective. European Management Journal,
26(3), 145–152.
Verstrepen, S., & van Den Berg, R. (1999). Servitization in the automotive sector:
creating value and competitive advantage through service after sales. Global
Production Management, Kluwer Publishers, London.
Visnjic I., & Van Looy B. (2013). Can a product manufacturer become a successful
service provider? In pursuit of a business model that fosters complementarity
between product and service activities perspectives. Academy of Management
Conference. San Antonio. USA.
Wilkinson, W., Dainty, A., & Neely, A. (2009). Changing times and changing
timescales: the servitization of manufacturing. International Journal of Operations &
Production Management. 29(5).
Windahl, C., Andersson, P., Berggren, C., & Nehler, C. (2004), Manufacturing firms
and integrated solutions: characteristics and implications. European Journal of
Innovation Management, 7(3), 218 - 228.
Yoo, Y., Henfridsson, O., & Lyytinen, K. (2010). Research commentary —the new
organizing logic of digital innovation: an agenda for information systems research.
Information Systems Research, 21(4), 724–735.
Zaki, M., & Neely, A. (2014). Optimising asset management within complex service
networks: the role of data. Cambridge Service Alliance Working Paper, 1-11.
27