Adoption of Product-service System (pss) Business Model Innovations in Global Distributer Networks

Offering product-service systems (PSS) is argued to result in significant benefits to economic, environmental and social sustainability but also entails a significant challenges related to relational dynamics between the manufacturer and the service providers belonging to the distributer network. As most large manufacturing companies operate globally, their delivery network partners also tend to be globally distributed. This adds to heterogeneity within the global distribution network, where products and services sales largely relay upon readiness and willingness of their distributers to sell PSS innovations successfully. Thus, firms must actively manage the resistance in the distributer network to adopt and implement PSS business model innovations. Therefore, the purpose of this paper is to investigate how manufacturing companies can facilitate adoption of PSS business model innovations among their global distributer network. In a single case study we interviewed 23 respondents from the headquarter, regional managers and distributer network which resulted in unique insides about the challenges, needs and expectations of the different functions and how they differ from each other. The data clearly reveals that the distributer network varies significantly in terms of their readiness and ability to offer advanced services. The distributers can be classified based on the PSS business models that they are currently offer or based on certain characteristics that influence their possibility to offer advanced services (e.g. customer characteristics, market characteristics and distributer capabilities). Based on this classification and the individual challenges of the distributers, support mechanisms for managing PSS adoption in a global distributer network were identified. The mechanisms differ based on the maturity of the distributer and based on whether they support the value creation, value delivery or value capture (business model elements). The findings show that the distributers need to be treated differently based on their maturity level in order to adopt PSS successfully and that the manufacturer need to be actively involved in the development of all distributors. INTRODUCTION In current global economy, manufactures can no longer rely on traditional product-focused business models to gain competitive advantage (Adrodegari et al., 2016; Kindström and Kowalkowski, 2014). The shift to increased revenues that are derived from services has been dramatic even for manufacturing companies and service innovation is crucial to fuel the further economic growth and to increase the productivity levels of services (Parida et al., 2015; Spohrer and Maglio, 2008). In this context the adoption of Product Service Systems (PSS) business models has shown to be one of the most effective ways to gain economic, social and environmental benefits by moving from product to service provision (Tukker, 2015). However, the dispersed nature and diversity of customer segments, each of which has specialized requirements and regional differences, makes managing global PSS a problematic undertaking requiring new organizational capabilities and business models (Baines et al. 24th International Product Development Management Conference IPDMC, 2017 2 2009; Parida et al. 2014; Reim et al., 2015; Wallin et al., 2015). More importantly, recent studies indicate that providers of service innovation need to align their agenda with their distribution network; otherwise they risk market failure and unexpected costs (Gebauer et al., 2013; Story et al., 2016). In contrast, much of the prior literature has focused on internal changes (e.g. capability development) of providers and the technical feasibility of PSS offers, and thus, the demand and preferences from the distribution and market side has almost been ignored in literature (Tukker, 2013). Even though the definition of PSS explicitly concerns the fulfillment of customer needs through marketable sets of products and services (Goedkoop et al., 1999), the acceptance and diffusion of the developed PSS offers among customers is a major barrier to PSS success (Mylan, 2015; Rexfelt and Hiort of Ornäs, 2009; Rönnberg Sjödin et al, 2017). As most large manufacturing companies operate globally, their delivery network partners also tend to be globally distributed. This adds to heterogeneity within the global distribution network, where products and services sales largely rely upon readiness and willingness of their distributers to sell PSS successfully (Durugbo and Riedel, 2013; Parida et al., 2015). Without the alignment of the providers PSS strategy to the distributers demands and requirements the customers will not be able to take advantage of the full PSS potential. Hence, the adoption of new PSS business models is crucial to success. Even though the importance of business model development for PSS provision has been highly emphasized in literature (Ferreira et al., 2013; Parida et al., 2014; Reim et al., 2015; Richter and Steven, 2009), there is a gap in literature on how to manage the resistance in the distributer network to adopt and implement PSS business model innovations (Barquet et al., 2013; Gudergan, 2010). To fill this gap, the purpose of this paper to investigate how manufacturing companies can facilitate adoption of PSS business model innovations among their global distributer network. Our results build on an exploratory case study with a global provider of construction equipment and related services and representatives from their distributer network operating in more than 125 countries. The results show that the distributer network varies significantly in terms of their readiness to offer PSS. Therefore, all distributers need to be treated differently based on their maturity level in order to achieve PSS adoption. The manufacturer needs to be actively involved in the development of the distributors and still focus on alignment to create a common vision within the distributer network. The paper presents guidance on how to classify their distributer network based on their characteristics and their maturity as well as it proposes detailed mechanisms to support the adoption of PSS within the distributer network. The next section provides the theoretical background to this study. This is followed by a description of the research methodology. In section four the key findings from our case study are presented and afterwards the framework development is described. Finally theoretical and managerial contributions are presented together with suggestions for future research. THEORETICAL BACKGROUND Global PSS distributer networks The PSS concept with its high potential for economic, social and environmental benefits is currently one of the most pursued research streams. The concept was launched in a report from Goedkoep et al. (1999) defining PSS as a marketable set of products and services that are capable to jointly fulfill customers’ needs in an economical and sustainable manner. There are many different types and categories of PSS ranging from simple consultancy services up to outsourcing of whole operational processes to providers (Rönnberg Sjödin et al., 2017). Through the years many categorizations have been made mainly around the three categories product-oriented, use-oriented and result-oriented (Brax and Visintin, 2017; Parida et al., 2014; Tukker et al., 2004). The implementation of PSS is a frequent topic in the emerging literature; however focus is only on the internal implementation processes or on the relation 24th International Product Development Management Conference IPDMC, 2017 3 between provider and customers (Barguet et al., 2013; Stroughton and Votta, 2003; Tukker, 2004). The crucial intermediate service providers that are usually part of the distributer network are an understudied actor that is essential to convince customers and perform the services appropriately. Especially, Manufactures rely upon the readiness and willingness of their global and heterogenic distribution network to sell PSS successfully to their customers (Durugbo and Riedel, 2013; Lockett et al., 2011; Parida et al., 2015). Existing literature states several problems and challenges related to global service provision. Zarpelon Neto et al. (2015) mention local regulations, resource allocation, internal culture, commercial feasibility and lack of knowledge as the main problems in global service provision. Compared to selling products globally, global service provision is considered to be much more risky and complex which leads to a situation where local in-house service organizations are best suited to respond to local service demands (Kowalkowski et al., 2011; Reim et al., 2016; Wilson, 1999). Other authors transform challenges into capabilities needed for global service provision. Customer understanding, engagement, knowledge management and trust-based interaction are main capabilities that can be found in literature (Bagheri et al., 2014; Parida et al., 2015). This list can be further extended by the need for aligned objective, risk transfer, shared values and a common IT system across the enterprise (Harrington and Srai, 2012; Lockett et al., 2011; Nohria and Ghoshal, 1994; Rönnberg Sjödin et al, 2016). However, the current literature mainly focuses on organizational structures and general problems of selling services globally without studying the critical role of the distributer network (Kucza and Gebauer, 2011). Therefore, there is a need for studies on the relation between manufacturer and service providing distributer network and how distributer network support and development can be framed to improve PSS adoption and implementation (Durugbo and Riedel, 2013; Hakanen et al., 2016; Kowalkowski et al., 2011; Tabibzadeh and Wireman, 2003). PSS business model adoption The business model approach has been shown to be crucial for a successful development and implementation of PSS (Barquet et al., 2013; Reim et al., 2015). Business models are defined as the design or architecture of how an organization creates, delivers and captures value (Osterwalder and Pigneur, 2010; Teece 2010). Prior research has shown that an inferior technology with a superior business model will most often outperform more advanced technologies (Chesbrough and Rosenbloom, 2002). Also for servitizing manufacturing companies business model innovation has shown to be crucial to success and without a coherent business model it is impossible to manage the transition towards a service provider (Kastalli et al., 2013; Maglio and Spohrer, 2013). When it comes to innovation, the concept of diffusion has shown to be very helpful in understanding the sequence in which different actors or groups adopt an innovation. These groups can be categorized as innovators, early adopters, early majority, late majority and laggards; and specific initiative can be specified to reach the adoption of each group (Rogers, 1995). Literature even describes a process for industrial adoption based on the steps (1) awareness, (2) interest, (3) evolution, (4) trial and (5) adoption (Ozanne and Churchill, 1971). The initial literature on the PSS business model concept has commonly been used to categorize different types of PSS such as product-, use-, or results-oriented (Meier et al., 2010; Tukker, 2004). Other studies on PSS business models have mainly developed frameworks that focus on specific elements that are part of a PSS business model (Adrodegari et al., 2016; Barguet et al., 2013; Lewandowski, 2015). Another common topic in many prior studies on PSS business models is the focused on transitioning from providing products to solutions and on methods to develop PSS business models (e.g., Dimache and Roche, 2013; Ferreira et al., 2013; Palo and Tähtinen, 2013; Storbacka et al., 2013) without concerning the required transition of external delivery partners or customers. 24th International Product Development Management Conference IPDMC, 2017 4 In order to make better use of the business model concept its three components (create, deliver, capture) can even be looked upon separately to better understand the needs and consequences for overall PSS implementation. In more detail, value creation in PSS happens through taking over work tasks from customers and accomplishing them more efficiently, which also improves the relationship with the customer and their loyalty (Meier, 2010; Tukker, 2015). Furthermore, value is created through positive effects on the environment in terms of reduced material use and higher levels of resource utilization (Mont, 2002; Tukker, 2004; Vezzoli et al., 2015). Value delivery is characterized by the high skill, competence, and experience levels required to control the entire process of providing sustainable PSS (Meier, et al., 2010, Reim et al., 2015). In addition, new organizational structures and new partners need to be integrated into PSS provision. For value capture, it is important to design PSS such that customers are willing to pay for the added value (Mont, 2002). At the same time, costs need to be handled efficiently. In addition, the profitability of PSS is difficult to show because cash flows are uncertain and quantifying savings is difficult (Erkoyunku et al., 2013; Gebauer et al., 2005). Although the business model concept is visible in PSS studies, literature is rare when it comes to integrated business models for networks and distribution channels through which most large, global manufacturing companies have to provide their PSS offers (Barquet et al., 2013). Even though adoption of PSS has been discussed, the distributer network was not considered and only the relationship of manufacturer and customer was studied (Baines et al., 2009). However, the customer acceptance is crucial and can only be reached by service providers that are close to the market (Cenamor et al., 2017; Morschett, 2006; Rexfelt and Hiort af Ornäs, 2009). Furthermore, the PSS implementation at the distributer network should not only be driven by the manufacturer but also by the service provider itself and they need to have power to steer certain aspects (Cavanagh and Freeman; Kowalkowski et al., 2011). Hence, the adoption of new PSS business models by the distributer network is crucial to success and there is a gap in literature on how to manage the resistance in the distributer network to adopt new PSS business models (Barquet et al., 2013; Gundergan, 2010). RESEARCH METHODS The present study is based on an exploratory single case study involving a global Swedish manufacturing company (hereafter Alpha) that actively offers PSS. We studied the case company from three different levels, strategic development, regional development and distributer network. This research design was chosen because there is limited knowledge about how PSS implementation is affected by the characteristics and readiness of the distributer network. Information from rich real-life cases can help identify new aspects and phenomena derived from reality (Eisenhardt, 1989; Yin, 2003), such as relationships between provider and distributer that form the conditions for successful PSS implementation. Alpha was chosen as the case company because of its long experience with PSS provision and operations in global markets through company owned as well as independent distributers. In particular, Alpha has directed significant attention to dealer development due to its global operations and need to manage high diversity in customer requirements and value chain configurations. Furthermore, Alpha has undertaken significant steps to restructure the organization and processes to ensure successful PSS operations to global markets. Thus, Alpha represents an appropriate case for the present exploratory study. Alpha is a global provider of construction equipment, and it conducts sales through internal and independent dealers globally (see Figure 1). Currently, it offers several services in addition to its machines, including maintenance contracts, extended warranties, up-time services, and close attention to error codes and fuel consumption as well as advanced services such as an agreed-upon availability level. In total, we interviewed 23 respondents from headquarter (9), regional managers (6), and the distributer network (8) who have been actively 24th International Product Development Management Conference IPDMC, 2017 5 involved in the PSS development and operation in their part of Alpha or the distributer network. Figure 1: Organisational Structure of PSS provision at Alpha The present study’s research approach was qualitative and based on semi-structured and openended interviews. The interview guide was designed to explore the differences between the distributer networks, their challenges and readiness level. Furthermore, questions about the needed support and future PSS plan were ask to compare the maturity in PSS provision between the different global settings. The face-to-face interviews lasted between 60 and 90 minutes, and interviews were recorded and transcribed in addition to the notes the researchers took during the interviews. The companies also shared internal documents before the interviews that were used to help the researchers understand their operations. These documents and the transcribed interviews and notes built the basis for the analysis. The data analysis was based on open coding content analysis where headings were written into the transcriptions based on different risks that where mentioned (Elo and Kyngäs, 2008). This first-order categories were then analysed for links in order to cluster them into theoretically distinct groups, the second-order themes, and finally aggregate theme or dimensions were identified (Nag et al., 2007). The preliminary results of the present study were shared at the validation workshop, and the participants commented and added to the findings. EMPIRICAL FINDINGS The diversity among global distributers and service providers is enormous. In order to provide appropriate support for the implementation of more and more advanced PSS it is necessary to know how mature and ready the distributers are and adapt the support based on their specific needs. Therefore, the first step in this analysis is to classify the distributer network based on their maturity. The analysis has shown that differences in distributer maturity can be expressed in two different ways; first, based on the current service offers of the distributer, and second, based on the distributer characteristics including capabilities, customers and their market. Connected to Rogers (1995) categorization for the diffusion of innovations we will use the categories early adopters, majority and laggards to classify the maturity and readiness level of the global distributers. 24th International Product Development Management Conference IPDMC, 2017 6 Classification based on service offers The simplest form of services offered by the case distributers are so called care inspections. These inspections are not related to any contract but lead often to additional service provision or future agreements. The regional manager for Middle East explained: “We use care inspections quite a lot because most of them will send their technician to the customer ... and then you quite often they find a lot of faults and that may be a foot in the door.” Distributers that only offer this simplest type of services could be seen as the laggards in terms of PSS adoption and will need much support and development to reach more advanced levels of PSS provision. Another service called extended warranty has been widely promoted by Alpha and is also widely used by the majority of distributers. The German distributer explained: “the extended warranty concept is used intensively and most of the new machines are sold with extended warranty which basically is a repair contract.” However, distributers that offer more advanced service see differently on the benefits of extended warranty as the distributer from the Netherlands highlights: “We want to stay away from extended warranty and offer a total warranty because otherwise you come into discussion and everything that breaks down will be for free”. With the extended warranty the provider takes over most of the risk of the service provision from the distributer that is not willing or able to bear the risk on its own. Furthermore, maintenance contracts are a type of PSS which is widely offered and they exist in a huge variety with regard to what is covered, how long they last and how payment is handled. Many of the distributers offer at least a simple version of maintenance contracts that cover standard services during the first years and are paid in advance or over time. For example a distributer from UAE stated: “We try and provide every machine that goes out with a proposal and a quotation for a maintenance contract .We try to follow up and convert as many maintenance contracts we can to guarantee after-market business.” However, not all dealers are ready to offer this type of PSS as a global product manager said: “Many of our dealers worldwide are not even convinced that normal maintenance contracts are a good idea or they are not even mature to manage those or to sell those.” Many of the distributers are also offering some type of leasing or rental services to their customers which is a typical use-oriented PSS. Because the ownership is sustained at the distributer which also is responsible for all maintenance this is a good way to enter more advanced service business. The Australian distributer exemplified that: “A lot of the larger mining companies they have larger machines on lease and then part of the leasing package is the maintenance package or servicing package as well.” Thus, leasing and rental can be handled more or less sophisticated and even reach up to a result-oriented PSS, offering e.g. transportation, for the most advanced distributers. For more advanced services that only the early adopters already offer there are plenty of varieties and they are based on different types of data analysis or responsibilities. First, services related to the data from telematics or remote control can be used for operation optimization. Analyzing the data tracked by sensors in the machine can be used to e.g. improve fuel consumption or to train operators based on their driving behavior. The German distributer explained: “There is a huge demand for fuel efficiency consultancy, especially for customers with huge fleets.” He further explained that customers even can get personal coaching where they get messages on their phone when their driving behavior is changing, including advices for improvement. Another type of service that is based on the telematics system in the machines is proactive maintenance. Mainly this means that the provider receives alarm codes from the machines and will send a technician to the side to fix the problem. One respondent from the UK distributer exemplified the benefits like this: “we managed to diagnose lot of problems before so that we can get them repaired under warranty where the same fault would have kept happening until a point when something major happened”. 24th International Product Development Management Conference IPDMC, 2017 7 Some distributers even develop their own service agreements. For example the distributer in the Netherlands is offering something they call total care. Our respondent explained: “Last year we launched, that was our own development, which was called total care. We offer the leasing or the financing of the machines, we offer a service contract with the machine and we offer all the insurances with the machines so if the machine breaks down and anything else is covered.” The distributers in these cases bear all risks themselves and are not dependent on the support from Alpha for these advanced service packages. Another PSS type that has been used by some of the quite mature distributers is the availability contract. In those cases the distributer guarantees a certain percentage of availability to the customers. The respondent from the distributer in UAE illustrated this advanced offer: “we have in the past guaranteed availability to one or two previous contracts ... you have to agree to a certain time assurance with penalties if not achieved.” Even more advanced, some distributers considering offering a result-oriented PSS that is similar to RollsRoyce famous “power-by-the-hour” concept, in this case based on cost-per-ton. One distributer responded: “I think the future is probably ... selling a cost per ton to and end user so would pay per ton of material moved rather than paying for the machines, operator, fuel, maintenance and so on.” These types of services would basically utilize the full potential of PSS but also require a very high maturity level from the distributers. Table 1 gives an overview of the different services and how distributers can be classified based on which services they offer. Table 1: Classification based on service offers Offer Early Adopters Majority Laggards