capturing customer value with product service...

IN THE FIELD OF TECHNOLOGYDEGREE PROJECT DESIGN AND PRODUCT REALISATIONAND THE MAIN FIELD OF STUDYMECHANICAL ENGINEERING,SECOND CYCLE, 30 CREDITS

, STOCKHOLM SWEDEN 2019

Capturing customer value with product service systemsA case study at Xylem Inc.

HILDA HULTENBERGER

KTH ROYAL INSTITUTE OF TECHNOLOGYSCHOOL OF ENGINEERING SCIENCES

Capturing customer value with product service systems

- A case study at Xylem Inc.

Hilda Hultenberger

Master of Science Thesis

KTH Industrial Engineering and Management

TRITA-ITM-EX 2019:87

Department of Machine Design

SE-100 44 Stockholm

Fånga kundvärde med produkt- och tjänstesystem

- En fallstudie på Xylem Inc.

Hilda Hultenberger

Examensarbete

KTH Industriell teknik och management

TRITA-ITM-EX 2019:87

Maskinkonstruktion

SE-100 44 Stockholm

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Master of Science Thesis TRITA-ITM-EX 2019:87

Capturing customer value with product service systems

Hilda Hultenberger

Approved 2019-04-11

Examiner Sofia Ritzén

Supervisor Gunilla Ölundh Sandström

Commissioner Xylem Inc.

Contact person Bernt Gustin

Abstract Competition among original equipment manufacturers are increasing and firms are looking for new ways to compete without dumping the prices. A growing approach is to move from selling traditional products into solutions with a combination of product and services by offering product service systems (PSS). This can provide business opportunities and strengthen the relationship with existing customers, but to reap the rewards there are both internal and external challenges that the firm needs to overcome, they also need to look at new ways of working to be able to handle the increased complexity of selling solutions.

This master thesis has investigated how Xylem should approach servitization from a customer oriented perspective. It also discusses how the incentives and challenges for servitization for customers differ depending on segment and compared to literature.

Through a combination of existing literature and qualitative interviews with Xylems customer it has been possible to identify the key components and drivers for when a customer is mature to approach servitization.

It has resulted in an alternative list and ways of approaching servitization where the customer characteristics are taken into consideration. The findings from this thesis highlight a number of critical customer characteristics that need to be considered. It shows the importance of understanding a larger part of the customers business model when selling a product service system compared to when selling a product.

Keywords: Product service systems (PSS), Servitization, Customer value

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Examensarbete TRITA-ITM-EX 2019:87

Fånga kundvärde med produkt- och tjänstesystem

Hilda Hultenberger

Godkänt 2019-04-11

Examinator Sofia Ritzén

Handledare Gunilla Ölundh Sandström

Uppdragsgivare Xylem Inc.

Kontaktperson Bernt Gustin

Sammanfattning Konkurrensen mellan original utrustnings tillverkare tätnar och firmor letar efter nya sätt att tävla utan att dumpa priserna. Ett växande sätt att hantera det är att övergå från att sälja traditionella produkter till att sälja lösningar som består av en kombination av produkter och tjänster genom att erbjuda produkt- och tjänstesystem (PSS). Det här kan erbjuda affärsmöjligheter and stärka kundrelationen, men för att kunna skörda frukterna av detta så måste firman övervinna både interna och externa utmaningar. De behöver även titta på nya sätt att hantera den ökade komplexiteten som kommer med att sälja lösningar.

Det här mastersarbetet har undersökt hur Xylem bör närma sig tjänstefiering från ett kundorienterat tilltalssätt. Det diskuterar även hur drivkrafterna och utmaningarna för tjänstefiering varierar beroende på segment and jämfört med litteraturen.

Genom en combination av existerande litteratur and kvalitativa intervjuer med Xylems kunder hard et blivit möjligt att identifiera nyckelkomponenter och drivkrafter för när kunderna är mogna nog att närma sig tjänstefiering.

Det här har resulterat i en alternativ lista och angreppssätt när det kommer till tjänstefiering där kundprofilen tas med i bejakande. Slutsatsen betonar ett antal kritiska kundegenskaper som behöver ta i åtanke. Den visar också hur viktigt det är att förstå en större del av kundens affärsplan när man säljer ett produkt- och tjänstesystem jämfört med när man säljer en produkt.

Nykelord: produkt- och tjänstesystem, Tjänstefiering, Kundvärde

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Acknowledgments Several persons have played an important role to realize this master thesis. I would like to thank and show my gratitude to all of the people who have supported me during this time.

Firstly, I would like to thank my supervisor at Xylem Inc. Bernt Gustin, thank you for all of you guidance and help. I would also like to thank my academic supervisor at KTH, Gunilla Ölundh Sandström, for the support, guidance and good input during this thesis.

I also want to thank all of participants from Xylem Inc and their customers who have participated in this project for taking their time to share their experience and input with me.

Finally, special thanks to my family and friends, and especially my fiancée Jimmy Hallberg, for all the support and boosting when the days were tough.

Hilda Hultenberger

September, 2018

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Acronyms B2B - Business to Business

OEM - Original Equipment manufacturer

PSS - Product Service System

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Table of content

Abstract .......................................................................................................................................................... i

Sammanfattning ....................................................................................................................................... iii

Acknowledgments ..................................................................................................................................... v

Acronyms ................................................................................................................................................... vii

Table of content ....................................................................................................................................... ix

1. Introduction ..................................................................................................................................1

1.1 Background ...................................................................................................................................... 1

1.2 Purpose .............................................................................................................................................. 2

1.3 Delimitations .................................................................................................................................... 2

2. Definitions of servitization and customer value ...........................................................3

2.1 Definition of servitization ........................................................................................................... 3

2.2 Definition of customer value ..................................................................................................... 3

2.3 Customer profile and customer characteristics ............................................................... 4

3. Drivers and challenges for servitization ..........................................................................5

3.1 Drivers for servitization ............................................................................................................... 5

3.2 Challenges related to servitization ........................................................................................ 7

3.3 Research Question 1 .................................................................................................................. 12

4. Matching the customer profile along the product service continuum ............. 13

4.1 Models for the product service continuum ...................................................................... 13

4.2 Choosing the best approach to servitization .................................................................. 16

4.3 Research Question 2 .................................................................................................................. 19

5. Method ...................................................................................................................................... 20

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5.1 Research setting .......................................................................................................................... 20

5.2 Research design .......................................................................................................................... 23

5.3 Data collection .............................................................................................................................. 25

5.4 Data analysis ................................................................................................................................. 26

5.5 Method discussion ...................................................................................................................... 26

6. Result and analysis ................................................................................................................ 29

6.1 Drivers for servitization for customers (RQ1a) ............................................................... 29

6.2 Challenges of servitization (RQ1b) ...................................................................................... 38

6.3 The results of drivers and challenges for servitization .............................................. 45

6.4 How the customer characteristics are related to the PSS ......................................... 46

7. Discussion and Conclusion ............................................................................................ 52

7.1 Main finding .................................................................................................................................... 52

7.2 Theoretical Implications ........................................................................................................... 52

7.3 Practical (Managerial) Implications...................................................................................... 53

7.4 Future Research ........................................................................................................................... 53

References ................................................................................................................................................. 56

Appendices ...................................................................................................................................................I

Appendix A. List of all external interviewees .................................................................................I

Appendix B. Questions for the interviews ................................................................................... III

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1. Introduction In this chapter, the background and purpose of the study is presented followed by its delimitations.

1.1 Background There is a constant growth in global competition and customer demands are increasing (Erkoyuncu et al., 2017). This has resulted in that companies are looking for new strategies and ways to compete instead of only competing in price (Erkoyuncu et al., 2017). A solution that has been presented to this challenge is servitization. Servitization is described as the move away from thinking about services and products as separated offers and towards satisfying the customer needs with a combination of them both. Companies have started to compete based on value delivering instead of differentiating products, this is enabled through a shift from product focus to systems consisting of a bundling of products and services (Bastl et al, 2010). Firms are adding value to their core offerings through offering a combination of goods, services, self-service, support and knowledge (Rada and Vandermerwe, 1988). Rada and Vandermerwe (1988, 314) stated, “Services are dominating the economies of the world and much of the strategic thinking of business”. The most successful companies of the future are the ones that manage to develop a competitive advantage by broadening their offering to include services and product service propositions and still keep their customers. Companies need to stop thinking about product and services as separated and to start thinking more about the customer’s needs as a whole and about fulfilling specific client demands. (Rada and Vandermerwe, 1988; Manzini and Vezzoli, 2003). Servitization is sometimes used as a synonym to Product-Service Systems (PSS), which suggest that instead of selling a product, the firm should sell a product in combination with a service (Funke, Horst and Oliver, 2011).

The shift from selling products to selling value creates new demands for understanding the needs of the customer, since it is more difficult to measure value than product specifications, also new methods and tools for providing solution must be developed (Funke, Meier and Völker, 2011). Servitization can result in new business opportunities and extend the contact phase between the Original Equipment Manufacturer (OEM) and customer. It will demand more customer understanding but can also generate unique customer loyalty (Tukker, 2004).

An example of this is Rolls-Royce aerospace, which went from selling aero engines to selling “power by the hour” where they are retaining responsibility for risk and maintenance and creating revenue by charging for the usage of the engine (Neely, 2007). Servitization is not about renting or leasing the product instead of buying it upfront, but rather about paying for what really creates value for the customer. Rolls-Royce monitors the engine performance in real-time and can thereby remotely determine whether the engine needs to be repaired while the airplane is still airborne after an event has occurred, for example that the engine is hit by lightning. Rolls-Royce builds their business model on creating more uptime and avoiding

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delays for their customers and thereby generating a high value for their customers (Neely, 2007).

All companies are not as successful as Rolls-Royce in servitization and although OEM see the opportunities of moving into services multiple firms fail to reach their full potential and develop a successful strategy. The reason for this failure is difficult to determine but external factors have been highlighted, such as not understanding the incentives of buying a Product Service System PSS for the customer (Coreynen et al, 2017).

Servitization offers great potential but is simultaneously linked to major challenges. It is both about being able to change the previous way of working, culture and strategy internally but also about understanding your customer and delivering a concept that creates value (Baines and Lightfoot, 2013).

1.2 Purpose The purpose of this master thesis is to investigate the customer importance when an OEM approaches servitization. In order to achieve a greater understanding for what external key factors that affect the design and set-up of a PSS. The primary focus is to examine what challenges and obstacles that are identified from a customer perspective and how the specific characteristics of the customer segment affect where along the products service continuum that the firm should strive to develop its PSS offering. The incentives for customers to buy services and PSS in contrast to products are also studied and what aspects that influence their willingness for PSS. The findings are used to propose a new approach and guidelines for how to design a PSS with regards to the customer characteristics that can help to improve the outcome of future approaches to servitization.

1.3 Delimitations This master thesis was conducted at KTH Royal Institute of Technology during 20 weeks and was conducted by one master student.

The study was conducted at Xylem Inc. and investigated the relationship with their preexisting customer.

PSS offerings are at an early stage at Xylem and therefore the master thesis focused on the customer’s incentives and willingness to collaborate and buy PSS. The success of implementing a PSS has not be examined.

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2. Definitions of servitization and customer value This chapter presents the definitions of servitization and customer value used in this master thesis.

2.1 Definition of servitization Lay (2014) describes servitization as “the innovation of a manufacturer’s capabilities and processes to move from selling products to selling integrated product-service offerings that deliver value in use”. This emphasizes the understanding for creating value for the customer. Baines and Lightfoot (2013) describe servitization as about potentially viewing the manufacturer as a service provider who can improve the process of their customers through a business model rather than a product-based innovation. It is about more than just adding services to existing products but also about looking over the process. Servitization is about capturing customer value by offering process innovative solutions by combining a service and product offering. Manzini and Vezzoli (2003) describe a PSS as an innovation strategy, where the business focus is shifting from the physical product to a system of both products and services that joint satisfy the customer need. Servitization is sometimes used as a synonym to Product-Service Systems (PSS), which suggest that instead of selling a product, the firm should sell a product in combination with a service (Funke, Horst and Oliver, 2011). In this master thesis the definition of servitization will be used as the process of expanding the offering from selling products to selling a combination of products and services. When discussing the offering itself the term Product-Service System (PSS) will be used since this focuses on the offer rather than the process (Funke, Horst and Oliver, 2011).

2.2 Definition of customer value Customer value is created through a specific mix of elements catering to that special segment and the value can be either qualitative e.g. price or quantitative e.g. design (Osterwalder and Pigneur, 2010). Customer value is defined as the perceived benefits minus the perceived price (Baker, Marn and Zawada, 2011). The perceived benefits that the suppliers provide to their customers fall into the following three categories; functional, process and relationship.

Functional benefits are the performance or physical nature of the product. This can be the flow rate of a pump or the acceleration of a sports car. This is the simplest category to measure and therefore often the first and sometimes only category considered.

Process benefits are the benefits of making transactions between buyers and their customer. This includes automated restocking, drive-through pickup window or ease of access to product information.

Relational benefits are those that make a customer choose a mutually beneficial relationship with a provider of either products or services. This includes both softer and more tangible variables, for example emotional connection to a brand or personalized service as well as

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differentiated loyalty rewards. The relational benefits are growing and becoming more powerful drivers for purchasing in many markets (Baker, Marn and Zawada, 2011).

Perceived benefits of an offering differ depending on what the offering consists of, therefor the customer value of a PSS is different from the customer value of a product or a service. Functional benefits often get the most attention since they are easier to measure (Baker, Marn and Zawada, 2011). Although the relational benefits may have a bigger importance when an OEM is moving from products into services (Oliva and Kallenberg, 2003). Companies that are successful at the customer value level spend a lot of resources on understanding their customers and how each attribute contributes to perceived customer value and how the company is performing against those (Baker, Marn and Zawada, 2011). In this master thesis the focus will be on perceived benefits and the perceived price will not be tested since the PSS offer is still at a developmental phase and it is only the incentives for buying the PSS that is investigated.

2.3 Customer profile and customer characteristics A customer profile contains detailed information about particular customer characteristics and it provides a description of a typical customer for the business. It can include geographic, demographics as well as purchase history and buying patterns. Loshin and Reifer (2013) argue that customer profiling is used “to understand their target customer and then plan around a customer profile and identify the types of products to sell based on the characteristics about the different customer segments they intend to target”.

The customer profile is a detailed description of the attributes that specify that customer segment, while customer profiling is a process for capturing relevant data about a customer segment. The customer characteristics values are used to segment customers and thereby try to predict business behaviors and buying attributes. The customer profile and profiling process can appear different depending on what the focus of the provider is, it may differ if the focus is on demographics, customer abilities or interests (Loshin and Reifer, 2013).

Customer value can also be defined as a match between the customer profile and the value proposition in a value proposition canvas (Osterwalder et al, 2014). Where the customer profile in this case consists of customer jobs, pains and gains. In this master thesis a combination of Loshin and Reifer (2013) and Osterwalder et al (2014) view of customer profile will be used when mapping the customer characteristics.

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3. Drivers and challenges for servitization This section will offer a brief exposition of the theories behind the incentives and drivers for servitization both for the provider and the customer. It will also discuss potential challenges and finally present the first research question.

3.1 Drivers for servitization Production is moving away from western industrialized nations and the competition from low-cost economies are intense and intensifying, with labor rates being only a fraction of those in the West (Baines and Lightfoot, 2013). For western manufacturers, the repairs and spare part market it constantly being challenged from both producers from lower cost economies and individual contractors who can offer small-scales repairs. This can lead to both reduced revenues for service sales and replacement parts and also damage the brand if the replacement parts are not good enough (Baines and Lightfoot, 2013). Servitization is also driven as a response to eroding margins in the product market (Kowalkowski, Gebauer and Oliva, 2017). Companies are looking for an alternative way to achieve economic sustainability by increasing their service offering instead of competing by price. Customers are simultaneously demanding more customized solutions and only want to pay for the value of the offer instead of buying the product (Baines and Lightfoot, 2013). These trends are driving a change from the traditional way of selling products and services to focusing on selling value. The following section will present in detail the drivers for servitization from both the providers and the customer’s perspective.

Drivers for servitization for providers On a global scale the drivers for servitization are globalization, deregulation, technology and increased competition (Rada and Vandermerwe, 1988). Companies are striving towards servitization to reduce cost and maximize revenue by building new revenue streams (Bustinza et al, 2014, 279). Services can also help stabilize profit since customers’ demands for products and services are countercyclical (Lay, 2014).

Rada and Vandermerwe (1988, 319) describe servitization as “a way to both create new business opportunities and extend the life-cycle of their product and make money during the whole life-cycle”. This is especially true when it comes to providers that have a large installed base of products with a long life cycle since services generally have higher margins than products (Gebauer, Fleisch, and Friedli, 2005). It is about creating barriers for other competitors, by making the product-service offer more specific and thereby more difficult to imitate and compete with. The company also makes sure that the customers themselves do not conduct the service themselves but buy it from the provider by making sure that it is economically beneficial for both the provider and user. By coming into the process of services earlier in the sales process it is easier to maintain customer loyalty and creating an understanding for what the customer desires (Rada and Vandermerwe, 1988; Baines and Lightfoot, 2013). It is also a potential benefit in an environmentally sustainable perspective

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by decreasing the resources used (Tukker, 2004). If servitization is deployed successfully it can ensure customer loyalty and satisfaction, support firms growth and be an important revenue source. (Kowalkowski, Gebauer and Olivia, 2017). It is also more difficult to imitate services and thereby offer a sustainable source of competitive advantage (Oliva and Kallenberg, 2003). Servitization is also driven by external factors such as new technological development and solutions (Kowalkowski et al, 2015)

Finally Baines and Lightfoot (2013, 50) state that “it is hard to imagine why any manufacturer should ignore exploring some aspect of servitization”. Selling a service system often involves a more extensive and closer relationship with the customer compared to selling a product. This relationship building requires energy and work from the business provider but also offers great potential benefits. The lower the quality of the service the higher the relationship cost and vice versa (Grönroos, 1996). This shows the great potential of developing the PSS offering but also that it is not some premade concept that is applicable to all different customer segments and markets but rather that it has to be adjusted to that specific environment to be able to create and deliver value. Table 1 shows a summary of the nine drivers for servitization for providers identified in literature.

Table 1: The drivers for servitization for providers as identified in literature

Drivers for servitization for providers Author

1. Create new business opportunities, instead of competing by price, differentiate and create new source of competitive advantage

Rada and Vandermerwe (1988), Oliva and Kallenberg

(2003) 2. Extend the life-cycle of the product and sell service throughout the life-cycle

Rada and Vandermerwe (1988)

3. External factors as globalization, deregulation and access to new technological development and solutions

Rada and Vandermerwe (1988)

(Kowalkowski et al, 2015) 4. Create new revenue streams that will reduce cost and maximize revenue

Bustinza et al (2014), Neely (2007)

5. Increase customer understanding Tukker (2004)

6. Environmentally sustainable Tukker (2004)

7. Creating barriers for other competitors Baines and Lightfoot (2013)

8. Ensure unique customer loyalty and satisfaction Kowalkowski, Gebauer and Olivia, (2017), Tukker (2004)

9. There are often higher margins for services than products

Gebauer, Fleisch, and Friedli (2005)

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Driver for servitization for customers A successful PSS offer should be beneficial for both the service provider and the customer but there are multiple drivers that motivate the customer (Lay, 2014). Servitization allows customers to focus on their core competencies and core business activities. It is a way to reduce risks and barriers of acquiring and operating new technologies. It is also a way of reducing capital lock-up by transferring fixed costs into variable costs that reflect revenue generation. (Baines and Lightfoot, 2013), (Funke, Meier and Völker, 2011) .

Servitization is brought on by a possibility to reduce operating costs and simultaneously improve product or asset performance (Baines and Lightfoot, 2013). It can reduce risk and decrease support and predictable maintenance cost (Neely, 2007). It also provides the opportunity for the customer to get a solution to fit their exact needs with a combination of products and services (Funke, Meier and Völker, 2011). Table 2 shows a summary of the five drivers for servitization for customers as identified in literature.

Table 2: The drivers for servitization for customers as identified in literature

Drivers for servitization for customer Author

1. Focus on core activities Enabling management teams to focus on their core business activities. It creates a possibility for the customer to focusing on their core competencies

Baines and Lightfoot (2013) Funke, Meier and Völker

(2011)

2. Customization Customers can get a customized solution to fit their exact needs.

Funke, Meier and Völker (2011).

3. Reducing costs Reducing operating costs and improving product or asset performance. It can reduce risk and decrease support and predictable maintenance cost.

Baines and Lightfoot (2013), Neely (2007)

4. Access to new technology Reducing risks and barriers of acquiring and operating new technologies and make new technology accessible

Baines and Lightfoot (2013), Funke, Meier and Völker

(2011) 5. Financial visibility Improving financial visibility and reducing capital lock-up. Transferring fixed costs into variable costs that reflect revenue generation.

Baines and Lightfoot (2013) Funke, Meier and Völker

(2011)

3.2 Challenges related to servitization The potential for servitization has been emphasized but there are also multiple challenges that a provider approaching servitization must overcome. Benedettini, Neely and Swink (2015) highlight “the importance for managers to be aware that the risks of service strategies may outweigh the benefits”. Many manufacturing firms that strive to expand their service business

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increase their service offerings and simultaneously their cost, but do not get higher returns as expected. This phenomenon is common in practice and is referred to as the service paradox (Fischer, Gerbauer and Fleisch, 2012). To overcome the service paradox the challenges related to servitization must be addressed. There are three main uncertainties regarding the application and feasibility of a product service system and they are; the readiness of companies to adopt them, related to the internal implementation, the readiness of consumers to accept them, related to the customer adaptation and finally their real environmental implications (Becker and Pessôa, 2017). This section presents both the internal and external challenges in more detail.

Internal challenges for servitization Multiple challenges for servitization have been identified in literature. Changing the business model from product- to customer centric often offers challenges related to the internal aspect (Kindström, 2010). It involves overcoming the embedded product-service culture, learning how to package and deliver integrated offerings and transform the internal processes and capabilities. The business model is often focused on selling products and there is a challenge of aligning the strategy of the firm with the new goal of selling PSS (Bastl et al., 2010).

The internal challenges are related to having to change the previous way and approach to working. This can be difficult since it can be buried deep into the culture in the organization and includes changing all the systems, ways of working, company culture and the way of measuring profit and success (Bastl et al., 2010). This also includes adapting to a new way of gaining profits by adapting to medium and long term profit amortization instead of short term profit on the point of sales (Becker and Pessôa, 2017). It is not only the structure internally that needs to change but also the relationships with the suppliers and the customer, since buying and selling services requires a closer relationship with the stakeholders (Bastl et al, 2010). There is also the risk of assuming that customers are interesting in only using the product and not owning it, although this is more common with B2C than B2B (Becker and Pessôa, 2017). When moving into selling PSS compared to traditional products the value chain changes which may result in extensive problems. Both the value chain and the product development process must be adopted to fit with the new business. (Becker and Pessôa, 2017).

There are three hurdles in servitization that all manufacturing firms need to overcome in order to succeed (Oliva and Kallenberg, 2012). These hurdles are related to the internal view of services and show how important it is to get the whole company onboard and aligning the strategy of the firm with their new objectives.

1. The company does not believe in the economic potential of the service 2. The company believes that providing services is beyond the scope of their

competencies. 3. The firm fails in deploying a successful strategy for entering a service market.

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Finally Oliva and Kallenberg (2012) state the dilemma of servitization “On one hand, increasing service quality and scope might extend the product’s useful life, thus reducing its replacement sales. On the other hand, increasing the quality and durability of products might reduce future service revenues”. This shows the difficulty in finding a balance and puts high demands on the internal structure within the company to make sure that different departments do not compete and there are no sub optimizations.

Table 3 shows a summary of the 15 challenges for servitization for the provider as identified in literature.

Table 3: The internal challenges for servitization for the provider

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Internal challenges to servitization Author

1. New and changed relationship to both supplier and customer

Bastl et al., 2010

2. Strategically aligning the PSS with the business model

Bastl et al., 2010

3. Overcoming the embedded product-service culture Bastl et al., 2010

4. Learning how to package and deliver integrated offerings

Bastl et al., 2010

5. Transforming the internal processes and capabilities Bastl et al., 2010

6. A miss-assumption that customers are interesting in only using the product and not owning it (more common with B2C than B2B)

Becker and Pessôa, 2017

7. The value chain for the firm is not adapted to the new business model with PSS.


8. The product development process needs to be adopted to fit with the complete value chain and complete lifecycle of the product.


9. Adapting to a new way of gaining profits by adapting to medium and long term profit amortization instead of short term profit on the point of sales


10. Overcoming the disbelief in the economic potential of selling services

Oliva and Kallenberg, 2012

11. Overcoming the belief that providing services is beyond the scope of the competencies of the firm.


12. Deploying a successful strategy for entering a service market.


13. Finding the balance between products and services and not create internal disputes about what to prioritize and thereby create sub optimizations

Oliva and Kallenberg, 2012)

14. Build confidence in the PSS offering Build external confidence in the PSS. The customer must be able to trust the provider that they can provide and fulfil the PSS offering. There company has prove themselves as service provider instead of just product providers


15. Translate customer value The challenge of being able to translate the insights from customer value creation from a customer perspective into the perspective of the provider

Kastalli and Van Looy, 2013)

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External challenges for servitization While the internal challenges focus on aligning the strategy of the firm with the servitization objective, the external challenges are about understanding the market and customer orientation. The objective is to understand the readiness of consumers to accept the PSS offering (Becker and Pessôa, 2017). All customers are not going to be interested in a PSS offering and therefore it is important to identify the progressive customer segment that can find a value and interest in a PSS (Lerch, 2014). The firm has to understand how their services and competencies could complement the customer’s strategy, organization and competencies (Lay, 2014).

Among the challenges are that the customers haves a low level of maturity are not aware of the possibilities that a PSS entails (Lerch, 2014). The provider has to build enough confidence in the customer, since buying a PSS requires a closer relationship and thereby more trust in the provider compared to buying a product. Both purchasing and evaluating the PSS is difficult compared to a product and may hinder the customer from purchasing. There is also the risk of loss of knowledge when buying a service that was previously conducted by the customer themselves. The extended involvement may cause both intra- and inter-organizational changes, where the provider and customer must adapt to each other (Becker and Pessôa, 2017). These challenges are all connected to the relationship between provider and customer. Buying a service compared to a product requires a closer relationship and higher investments in both time and complexity (Grönroos, 1996). To overcome these challenges the best way is to understand your customer to the fullest extent and be able to translate the insights from customer value creation from a customer perspective into the perspective of the manufacturer (Kastalli and Van Looy, 2013). Table 4 shows a summary of the six challenges for servitization for the provider as identified in literature.

Table 4: The external challenges for servitization for the provider

External challenges to servitization Author

1. Risk of losing knowledge internally The risk of loss of knowledge when buying a service that was previously conducted by the customers themselves.


2. Increased complexity There is an increase in complexity when it comes to understanding how the customer’s strategy, organization and competencies aligns with the PSS offering compared to a product or service offering.

Lay, 2014

3. Increased relationship costs Buying a service compared to a product requires a closer relationship and higher relational investments in both time and complexity.

Grönroos, 1996

4. Higher demands for adoption to each other for the customer and PSS provider

Becker and Pessôa, 2017 Bastl et al., 2010

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Both the provider and customer has to adopt more to each other when buying a PSS compared to a pure product or service 5. Increased complexity in evaluation The difficulty to evaluate the PSS compared to products may hinder the customer from purchasing a PSS.


6. Customer maturity Customer has a low level of maturity are not aware of the possibilities that a PSS entail (For the provider) Identifying the progressive customer segment who can find a value and interest in a PSS and understand the readiness of consumers to accept the offering

Becker and Pessôa, 2017. Lerch, 2014

3.3 Research Question 1 Based on the previous argumentation servitization is changing the way companies compete and the landscape they are competing in. It offers a way for OEMs to differentiate their offer but it is simultaneously linked to big challenges that the provider needs to overcome. In literature the importance for understanding the customer is established but there is a lack of understanding of how the customer segments differentiate and how this affects their perception of incentives and challenges. There is a lack of literature that discusses the factors that describe how customer segments should be divided with their regard to PSS and how these differ depending on customer. In order to understand this new landscape, the changing incentives and challenges and how these differentiate depending on customer segment the first research question, divided into two sub questions, was formulated. Understanding the customers’ segments different incentives and obstacles for buying a PSS is essential for understanding how to approach customers, therefore the first research questions addressed are:

RQ1a. How do the drivers for purchasing a PSS coincide and differentiate depending on customer segment?

RQ1b. How do the challenges for purchasing a PSS coincide and differentiate depending on customer segment?

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4. Matching the customer profile along the product service continuum This section presents a brief exposition of the literature relating to servitization. It continues with discussing two different models for how to approach servitization, both from an internal and an external perspective and debate the proscenium and consequences of them. It finishes with presenting the second research question.

4.1 Models for the product service continuum Servitization has been described as the process of moving from selling tangible goods to moving towards offering a bigger share of intangible services and more advanced and complex services (Becker and Pessoa, 2017). Servitization is about going from selling products and then little by little moving into more and more advanced services as illustrated in Figure 1 (Oliva and Kallenberg, 2012). It is about primary deciding what target position the firm should aim for and why they want to expand their service offering. It is both about why and where the company should change and how these changes should take place to move along the service continuum.

Figure 1: The product service continuum (Oliva and Kallenberg, 2012)

It is a three stage process where the OEM in each step should involve more advanced services to move along the continuum and become more and more servitized (Becker and Pessoa, 2017). The initial stage is product oriented, moving towards use and finally result oriented as shown in Figure 2. Each step represents an additional step that includes a more complex way of offering services and focusing less on the product and more on the result and outcome for the customer.

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Figure 2: The different stages of the product service continuum, adopted from Becker and Pessoa (2017)

The first product oriented stage is where most traditional product companies and OEMs are. It is about selling a product and offer product related services. An example can be selling a product, for example a truck and offer product related services, for example spare parts and repairs for the truck.

The user oriented stage is when a company starts looking at how the customer uses the product and developes an offering that involves the usage. Instead of buying the product the customer uses the product and pays for the use. For example, a customer can have a contract for a truck where the customer pays for a subscription that allows them to only pay for the time they use the truck, but not own the truck themselves. The service company takes care of reparations, making sure it is in good shape when the customers need it. Leasing, sharing and renting are all part of the use oriented offerings.

The final stage of the servitization continuum is result oriented. Result oriented is when the customer only pays for the result or desired outcome and does not consider how the process of getting there looks. An example of this is paying for the transport of goods from point A to B and it is irrelevant if the transport is done by a truck or a train, it is only the result that matters (Becker and Pessoa, 2017).

The literature above describes servitization as an ongoing process where the goal is offering result oriented services or PSS instead of products and product related services and solutions (Oliva and Kallenberg, 2012; Becker and Pessoa, 2017). This process is oversimplified and it has been criticized by Kowalkowski et al. (2015) who state that it is frequently assumed that service growth is achieved by moving along the smooth and gradual continuum from product to services, although the evidence points towards the need of capability related steps. It is also unlikely that the firm will know a priori what will be a successful service offering in the market and this indicates that the process will not be straightforward but demands interaction and tentative steps of trial and error. This is something that is forgotten in literature but needs to be carefully explored (Kowalkowski et al., 2015)

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In literature it is described that the goal is to be become a service provider but what is often forgotten is that all customer segments will not be interested in the same degree of service offering. The focus should lie upon identifying the key customer to develop a service offering together with and coping with having multiple business models and service offerings to different customer segments (Lerch, 2014; Kowalkowski et al., 2015). There needs to be a balance between exploration and exploitation for PSS. “Firms need to balance business expansion and standardization activities, and they concurrently perform a number of roles, rather than switching serially from one role to another” (Kowalkowski et al, 2015).

Servitization should not be seen as a move on the continuum but rather as a process that can take different directions and should be done in multiple steps and it may not be simply in one direction but is rather about balancing expansion and standardization of services (Kowalkowski et al, 2015). It is not a linear path from product focused to services focused offerings, study cases shows that the process rather consists of trial and error (Bacchetti, Perona, and Saccani, 2017). Firms do not transform from being product- to service-centered but rather that there is a coexistence between product-focused offerings and PSS. There exists offerings all along the product service continuum simultaneously. Firms are equipment suppliers, performance providers and availability providers at the same time but to different customers, as shown in Figure 3. This model is similar to Becker and Pessoas (2017) model for the different stages of the product service continuum, the difference is that instead of moving along a continuum firms usually have all three roles simultaneously (Kowalkowski et al, 2015).

Figure 3: Three different PSS supplier roles, adopted from Kowalkowski et al (2015)

Equipment supplier role

Offering characteristics• Product oriented• Standardized• Input based• Low business process

integration Availability provider roleOffering characteristics:

• Use oriented• Customized/ Standardized• Availability based• High business process

integration

Performance provider roleOffering characteristics:

• Result oriented• Customized• Performance based• High business process

integration

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This shows that the firm needs to have both customer and product knowledge since being a performance or availability provider requires knowledge of the customer’s business model while having an equipment supplier role requires understanding of the product technology. Therefore focus should shift from products to customer and their businesses as firms aim at developing more service centered offerings (Jovanovic, Engwall and Jerbrant, 2016).

4.2 Choosing the best approach to servitization Servitization is described as a process that should be approach in multiple steps, adding more and more services and expanding the thinking from product to result (Becker and Pessoa, 2017). It is a process where the company aims at moving from selling services close to the product to advancing in their service offering along the product service continuum (Oliva and Kallenberg, 2012).

There are two basic theories about how companies should approach servitization and how the process should go about, it is either initiated from an internal or external trigger. The most common one mentioned in literature is that the firm should start internally by looking at where they want to be along the product service continuum, thereafter the firm should drive an internal change where they believe that they can expand their service offering to include more advanced services (Oliva and Kallenberg, 2012). This theory focuses on that the firm chooses a specific new position that they want to occupy. It does not take into consideration the perspective of what service level the market demands and what the customer needs are.

The second theory is that the firm should start from an external customer oriented perspective, looking at what the market demands are and then decide where and how they should approach servitization. It should be the customer needs that drive an expansion of the service offering. It can be difficult to succeed when not taking the market perspective into consideration (Lerch, 2014). Neither an internal or external starting point guarantees a successful implementation, they are both related to risks (Benedettini, Neely and Swink, 2015). But if implemented successfully there are many potential benefits for the firm and more and more OEMs are therefore striving to increase their revenues from services and PSS (Baines et al, 2009).

Servitization driven from an internal perspective Servitization is usually initiated by the need to search for new business opportunities. If it is approached from an internal perspective, the focus lies on using the internal capabilities and resources to extend the service offering. It focuses on changing the internal environment to match the new business model rather than looking at the market needs (Kindström, 2010). To succeed with this approach the company both needs to focus on selecting a business model that fulfills the company's differentiation strategy (Reim, Parida and Örtqvist, 2015) and develop dynamic capabilities (Kanninen et al, 2017). “With dynamic capabilities, manufacturing firms can purposefully create, extend, and modify their current, manufacturing-related capabilities into service-related capabilities” (Kanninen et al, 2017).

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There are a number of internal challenges that have been pointed out here that may stand in the way of servitization; these are both pre-established corporate culture and organizational structure. Top managers are also struggling with handling the shift in strategic direction, since it involves developing new service based business models. The inter-organizational issues are one of the main challenges in servitization (Kindström, 2010). The key enablers for a successful approach to servitization are not only changing the pre-established structure but it is just as important to look at the human resources (Bacchetti, Perona, and Saccani, 2017). This highlights the importance of looking at the resources and internal perspective of the firm before entering servitization. The internal organizational dimensions such as strategy, people, structure, rewards and processes must undergo a change from product to customer centered (Bacchetti, Perona, and Saccani 2017). This means that the customer perspective should not be ignored regardless if a resource based approach is initiated.

There is an additional factor that may limit how far along the product service continuum that a company can move and that is the specific characteristics of the product. Therefor the provider should also consider if potentially some products are better sold just as products with product related services and some others may have more potential to become successful PSS offerings (Jovanovic, Engwall and Jerbrant, 2016).

Servitization driven from a market perspective The process to develop new services is demand driven and often triggered by customers (Lerch, 2014). When approaching servitization from an external market perspective, the focus should therefore be the customer and their needs, to create a solution consisting of a PSS that creates value for the customer. The process to develop this system is not comparable to the R&D-driven innovation process and therefore demands new models. The process should include both the market perspective, with market needs and potentials and the resource perspective with adoption of the process and resource allocation. Figure 4 shows a potential process for developing a PSS (Lerch, 2014).

Figure 4: Model for the process development of a PSS, adopted from Lerch (2014)

The initial focus lies on the market analysis and customer orientation to match the needs of the customers with the strategic fit of the firm (Lerch, 2014). The challenge is how to use and acquire customer knowledge in servitization. There is a common problem that value propositions often exhibit in practice a provider perspective, although customer-related factors should play a central role in deciding the focus on different values. Managers need to understand both inter-firm and intra-firm interactions in order to understand value creation, since value is created through interactions between provider and customer (Kowalkowski, 2011). The first step is to understand what the customer value of servitization is. It is important to understand why and how business customers purchase services and what factors that do

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affect their procurement process for services. (Lay, 2014). When studying the customer it is possible to identify which customers that have the highest service purchasing potential. “Strong customer orientation is recognized as a key feature of servitization strategies” (Lay, 2014).

Servitization is not only about identifying the internal challenges but also about how to identify those customers that have the most potential for supporting the strategic aim of servitization. The offering needs to be brought forward with regards of high customer understanding to provide the expected value and customer experience of the service offering. Strong customer orientation results in delivering a solution that fulfill customer-specific needs and deliver a service solution that fits them (Lay, 2014; Grönroos, 1996).

The second stage is to understand the market and how the market segments should be divided. The market segmentation for PSS may not look the same as the ones for products (Grönroos, 1996). Customers should be segmented by their deficits to be able to estimate their potential for buying product service offerings (Lay, 2014). This involves identifying the key customers and engages them in the development of service strategies.

The main challenges to servitization from an external perspective are about understanding the customer and identifying which segment that may be mature enough for a PSS offering (Becker and Pessôa, 2017; Lerch, 2014). To overcome these challenges there is a need for tools for understanding the customer.

Comparison between approaches to servitization As shows above there are two ways to approach servitization, either by looking at what internal capabilities that the firm has, this includes both the human capabilities and specific product characteristics or what kind of market needs that exist. Regardless if the process is initiated from internal or external drivers, both aspects will be important and affect the process and outcome (Lerch, 2014).

Servitization is usually either started by collaboration with a leading customer or a technological push (Lerch, 2014). OEM traditionally have a relatively limited interaction with customers and focus more on improving operational efficiency internally, therefor it may be easier and more familiar to start servitization from a technology push and internal perspective compared to a collaboration with a leading customer (Lerch, 2014). But when working with PSS there is a strong need to invest in customer relationships, since with services, the relationship extends from including a single transaction to being a long term interactive relationship (Baines et al, 2009). A PSS should be developed for specific users in contrast to trying to create a mass solution. (Hiort af Ornäs and Rexfelt, 2009). The final design needs to be adapted to that specific customer segment needs and it must be mapped how the PSS will change the business model of the customer.

It is important to turn the value proposition into a business concept that provides value both for the customer and the provider. Product service systems are not comparable to product related

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services and this means re-designing the roles and relationship between the customer and the provider (Lay, 2014). It demands a change in relationship with the customer when expanding from product to PSS (Baines et al, 2009). Involving customer in servitization is not only about the nature of customer interaction but also about acquiring knowledge about the customer, for example by addressing the Key Account Manager (KAM) (Lay, 2014). It also involves taking the customer organization into consideration (Becker and Pessoa, 2017) This is confirmed by Baines and Lightfoot (2013) who state that there are four strategic things that all leading adopters of servitization share and they are:

1. Focusing on helping their customer to be more successful, this can be achieved by decreasing their costs or increasing their profits.

2. Focus on process innovation with existing customers and thereby opening up for new revenue streams.

3. Locking out competitors by developing long-term business relationships 4. Developing resilient revenue streams and cash flow.

This shows how important it is to focus on what the customer needs and build successful and fruitful relationships. The relationship between the service provider and the customer are of highest importance and should not be ignored (Grönroos, 1996). Therefore when initiating a PSS offer this should be done in consultation with the customer to make sure that it creates sufficient customer value (Lay, 2014).

The customer is sometimes forgotten when a firm develops a PSS, although it is difficult to create value without truly understanding the customer (Lerch, 2014; Kowalkowski, 2011). Firm needs to improve the understanding of customer needs and increase their relational orientation by developing customer interfaces (Alghisi and Saccani, 2015). It is not possible to develop a servitization strategy without understanding the customer and it should combine the value proposition and the strategic management of the company. This shows that a successful PSS cannot come from merely an internal perspective (Lerch, 2014).

4.3 Research Question 2 Based on the previous argumentation, an OEM should approach servitization by possessing multiple supplier roles simultaneously along the product service continuum. In litterateur it has been highlighted the importance of involving your customers in the process and it has also been noted that all customer segments do not require the same level of servitization. But there is a lack of literature that has researched what specific customer characteristics that influence where along the product service continuum that they should be placed or what type of PSS that should be sold to them. To understand how customer characteristics influence the degree of PSS that should be sold the second research question was formulated.

RQ2. How do the specific characteristics of the customer segment affect which type of PSS that should be sold?

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5. Method This chapter describes the research setting that the master thesis was conducted in and the methods used for gathering data and analyzing it. First it offers a short presentation of Xylem Inc, its company structure, sales channels and a presentation of the customer segment investigated. Secondly it describes the research design and case study.

5.1 Research setting This master thesis project work has been performed in collaboration with Xylem inc. The purpose was to provide a deeper understanding for the customers involvement in servitization and how Xylem can, in a successful way, use this to extend their current PSS offering. The thesis work was supervised by Gunilla Ölundh Sandström, Professor in Product Innovation and Engineering at KTH Royal Institute of Technology and Bernt Gustin, Product Manager for TotalCare Services at Xylem Inc.

Xylem Inc. Xylem Inc., continuously referred to as Xylem, is a product company with approximately 16,000 employees and active in over 150 countries. They design, manufacture and sell engineered solutions for critical applications, which include the complete water cycle, with delivery of drinking water, collection and treatment of wastewater and return of the water to the environment. Xylem was founded in 2011 as a spinoff of ITT Corporation and consists of over 30 brands, which includes among others Flygt, Godwin, Lowara, and Sanitaire. (Xylem Inc, 2017a; Xylem Inc, 2017b). Where Flygt is the originator of the electrical submersible pump, founded in Sweden in 1901. Today Flygt sells products and solutions for moving water and wastewater, but also tools for both monitoring and controlling the equipment and also to increase energy efficiency and optimize performance (Xylem Inc, 2017a). Xylem have many different customer segments when it comes to their product sales, from end-users such as municipalities to operational companies who are only operating the product for their final customer but does not own the product themselves.

Servitization at Xylem Xylem is a traditional product oriented company and their main sales are products. They have a service portfolio with different kind of service offerings, that vary from product oriented services, such as Repair & Maintenance of pumps to more extensive service concepts that involve consultancy, building and starting up a pump station. These are sold in varying degree depending on region, but the biggest part is services close related to the product itself.

External organizations Since Xylem is a product oriented company and an OEM the currently used customer segments are divided in accordance with how the end customer uses the products, but it does not necessary have to be the same segmentation when talking about selling PSS. In this thesis a

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new segmentation has been established for the interviewed customers where they are divided in accordance with how they buy services instead of products. Four companies divided into three segments were interviewed. The case studies have been anonymized upon request. A summary of the characteristics of the companies is described in Table 5. A longer description of each segment follows below. In Appendices

Appendix A. List of all external interviewees, there is an extensive list of the interviewees and their position within the company.

Table 5: External companies investigated in the study

Company alias Core Business Number of employees

Servitization level towards Xylem

Company I

Operations, uses Xylems products in their core process

500 Framework agreement on products and repairs

Company II

Maintenance and operations

17000 Service agreement, buys products and rebuilding on their customers behalf

Company III

Maintenance and operations

4000 Service agreement, including regular inspections, buys products and rebuilding on their customers behalf

Company IV

Manufacturing industry, uses Xylems products in sub processes

5000 Framework agreement on products and repairs for a number of their independent facilities

The following is a short description of the three customer segments where interviews were conducted. Company II and III belongs to the same customer segment.

Company I (Segment A)

Company A is medium company, with approximately 500 employees. Their core activity is to take care of water and wastewater, therefore pumping is a part of their core business. They buy products from Xylems such as pumps and approximately 97% of all the pumps they own are from the Flygt brand. They buy product related services, such as reparations and rebuilding of pump stations from Xylem. Company A takes care of the simple repairs while more advanced reparations such as exchanging bearings is conducted by Xylem or similar repair service companies. They also buy maintenance operations but for a very limited level, for example Xylem takes care of the operations of the pump station for a limited time while Xylem rebuilds it, but hands the operations over to the company as soon as the pump station is finished.

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Company A’s takes care of water and wastewater for both business customers and consumers and are therefore both B2B and B2C. It is a municipality owned group company that have a monopoly on their business.

Company II and III (Segment B)

The second customer segment consists of two international companies focusing on operations of infrastructure, a part of this infrastructure includes pumping away water and wastewater and ensuring that the operations and equipment are working. Both companies have their main market in Europe and are active in Sweden. Their core activity is to operate the infrastructure of the customer and to guarantee reliability. They buy both products and services of varying degree from Xylem. Their relationship with Xylem is a reflection of their contract with their customer. Xylem acts as a subcontractor to the firms providing the services, that they lack the capacity or competency to provide or conduct themselves. Company II and III do not own the equipment themselves but buys, installs and operates it for their customers. Big investments such as rebuilding of pumps stations must be approved by the final customer. The two operating companies have pumping as an activity included in their contract as an operational company but it is not their core competency. What they will operate is regulated depending on what their employer wants to include in the contract. Both companies are owned by shareholders.

Company IV (Segment C)

Company IV is a production company, with approximately 5500 employees. It consists of multiple self-governing facilities but with a central organization that negotiates about blanket purchase agreements and service contracts. The company buys products from Xylem and product related services like reparations. The degree of relationships varies depending on the self-governing facilities. Company IV has a core process that is far away from pumping, but it is a supportive process to their core business. For them pumping is a necessary process but not something that has a direct correlation with their core activities. It is a B2B company and owned by the shareholders.

Sales channels from Xylem to customer segments Xylem works with different sales channels for the varying customers. Figure 5 shows the sales channels from Xylem to the three segments under investigation.

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Figure 5: Illustration of the different sales channels from Xylem to three of their customer segment.

To segment A, the sales channels goes from service technicians to service technicians and is based on an overall framework agreement but the sales channels is still quite low in the hierarchy.

To segment B the sales channels are similar. The only difference is that the sales channels go to team leaders and in some cases there are framework agreement that involves both service contracts.

Segment C is a bit different since company IV consists of multiple standalone units where there is the purchasing organization that handles and negotiates about framework agreements but it is up to every standalone unit to choose if they want to use the supplier or not.

5.2 Research design The master thesis was originated by the question to research new business opportunities for Xylem. After a primary literature review three interesting topics were presented and in collaboration with Bernt Gustin, responsible for business development at Xylem the one topic that would have the greatest potential to generate value for Xylem was chosen. These questions discuss both the challenges and opportunities of servitization but also how these differ depending on customer characteristics. The aim of the thesis was to answer both “how” and “why” questions and therefore a case study was chosen as research design in accordance with

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Yin (2003). The focus was on contemporary events where a case study is preferable (Yin, 2003).

A case study was chosen as research design with both cross- and comparison- design, since it is good when you aim at analyzing a certain person, event or as in this study observes the organization Xylem and the external customers organizations. The cases that have been chosen are the ones that are rich both in information and contain data that is easy to access (Bell and Bryman, 2017).

In accordance with Bell and Bryman (2017) an inductive research investigation was carried out. It also involved an interpretational way of viewing the questions, which was needed since this is about interpreting, a big part of the research is about relationships which is difficult to measure with numbers but has more to do with values. Therefore a qualitative compared to quantitative research approach was to prefer (Bell and Bryman, 2017). Qualitative research uses text as empirical material and is interesting in the perspectives of participants, their everyday knowledge and everyday practices. It is effective to use when studying a process or a relation as in the case with Xylem (Flick, 2007a). In qualitative research it is important to take a research perspective and get updated with literature on multiple levels and also theory. Flick (2007a) suggests a usage of extreme, deviant cases or typical cases. This approach makes it easier to understand the field as a whole, since you have picked extremes from both sides. When choosing segment for the investigation, the aim was to choose from different extremes. Figure 6 shows an illustration of the research design process inspired by Bell and Bryman (2017).

Figure 6 - research design process as adopted by Bell and Bryman (2017)

Choice ofresearch design

• Case study

Choice ofresearch design

•Three segment of Xylems customers•Internal and external interviews

•Cases that are easy to access and rich in data•The first reseach case builds the framework for the second one.

Gathering of data

•Qualitative open ended interview questions•Transcription of interviews

Coding ofdata

•Division of data:• Pre designed themes

• Sporadically designed themes

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5.3 Data collection The data collection consisted of semi-structured interviews to generate qualitative data. Qualitative interviews is a good way to understand the world from the subjects’ points of view and allow them to freely present their life situation by using their own words (Kvale, 2006) This method was useful since the data consisted of understanding the customer and their values and their own interpretations of problems and opportunities that affects their jobs. There were a total of 23 interviews conducted, of them were 11 conducted with external customers from four companies divided into three customer segments. The internal interviews were conducted to get a greater understanding for how the company functions internally and how the relationship with the customer looks from an internal perspective and what sales channels that exists. All the interviewees will be referred to as Interviewee x and then given a number. An extensive list of all the interviewees and which company they belong to and what position they have within the company can been seen in Appendices

Appendix A. List of all external interviewees. Each interview lasted between 45 and 90 minutes. The outline for the interviews can be seen in

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Appendix B. Questions for the interviews.

The interviews were initiated by a interview request over the phone and then an outlook meeting was scheduled either in person or over the phone. The interviewees got the questions for the interview e-mailed to them before the interview so that they had the possibility to prepare. Meetings in persons were preferred but due to geographical distances some interviews were conducted over the phone. For two of the eleven external interviews the sales person responsible for that specific customer would be present at the interview to complement the questions from an internal perspective from Xylem. All the external interviews were recorded and transcript and all the interviewees were offered anonymity. All the interviews were conducted in Swedish and the quotes used have thereby been translated to English. Thought collecting the data comes before analyzing it, both of the methods are connected. Therefore the method of analyzing the data though coding was decided along with the method of collecting the data through qualitative interviews (Collis and Hussey, 2013).

5.4 Data analysis First all external interviews were recorded, with the approval of the interviewees, and then transcript. All the transcript interviews were coded by both predefined themes and sporadically designed themes (Bell and Bryman, 2017). These themes consisted of four different areas of investigation and all the data analyzed were coded into these themes, the themes consisted of the following four areas.

1. Information that is related to any of the two research questions 2. Information that is related to findings in literature 3. Information that is related to mapping the customer profile, their pains, gains and jobs 4. Information that is unexpected and may result in new themes

The information was coded in excel in accordance with the themes. This resulted in parts consisted of both pre-defined and sporadically new themes. The new themes were complemented by additional literature research. The interviews were first mapped into the three segments to provide a within-case comparison and analysis and then compared between segments, to provide a cross-case analysis.

5.5 Method discussion The aim of this thesis was to gain understanding of how different factors regarding servitization relate to each other. This was a study of a complex phenomenon that required an exploratory methodology. The approach also made it possible to identify factors and attributes that were unexpected for the studied subject. There were no pre setup thesis or theory that needed to be tested but rather a way to collect data and understand how practice may differ from theory. Yin (2009) argues that a case story is the best solution when having to answer how and why questions, but when one does not need to require control over behavior events but rather over contemporary events. For case stories Yin (2003) proposes five components of a research

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design that are especially important. Table 6 shows a summary of the components and how they have been considered in this essay.

Table 6: Components of research design adopted from Yin (2003)

Components of research design Adoption for master thesis 1. Study question RQ1a. How do the drivers for purchasing a

PSS coincide and differentiate depending on customer segment? RQ1b. How do the challenges for purchasing a PSS coincide and differentiate depending on customer segment? RQ2. How do the specific characteristics of the customer segment affect which type of PSS that should be sold?

2. Proposition There is a correlation between experienced drivers and challenges for servitization and specific customer characteristics.

3. Units of analysis Individual level 4. The logic lining the data to the

proposition Explanation building

5. The criteria for interpreting the data

Comparison to literature

1. Study question. The first research question is based on a how question but to understand what area to focus on and limit down the question the proposition of the master thesis led it to the second research question and the area of focus.

2. The proposition was that the drivers and challenges for servitization are affected by the customer characteristics.

3. Since the research question focused on the individual chooses the unit of analysis is on an individual level

4. The logic linking the data to the proposition is that the data will provide an explanation building

5. For criteria for interpreting the data is a comparison to the previous literature. There has to be some sort of similarities to be able to compare the study results and data. The research is built on previous studies.

By building the research on previous studies and also making sure and following Yin (2003) five components of research design, the relevance, choice and approach to the research design of the study are ensured.

Three customer segments were interviewed since these segment were the ones that had been showing an interest in extending the service collaboration. These customers were identified

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after the primary internal interviews and in accordance with Yin (2003) it is important to gather data from cases that are rare or easy to access. For future studies it could be interesting to expand the segments of customers investigated to include for example municipalities, since they belong to the customers were Xylem has a high installed base.

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6. Result and analysis This chapter presents the findings from the qualitative interviews. First the drivers and challenges for servitization identified both through the data collection and is presented, later a comparison between literature and the interviews is provided in order to answer the first research question.

Secondly, the second research question is approached, how do the customer characteristics affect which type of PSS that should be sold? First a framework for deciding which customer characteristics is presented and then a comparison between the three segments are analyzed individually. This chapter finishes with providing a cross-case analysis in order to answer the second research question.

6.1 Drivers for servitization for customers (RQ1a) In literature it is described that there is great potential for servitization and that all companies should look into it, but there are also multiple challenges related to it (Rada and Vandermerwe, 1988). The initial stage for approaching servitization is to understand the market and customer (Lerch, 2014). It is important to understand if the segment is mature enough to accept a PSS system (Becker and Pessôa, 2017). To be able to guarantee the success of the PSS strategy and deployment it is paramount that there is an understanding of the customers motivations and fears, therefore this chapter will concentrate on discussing the incentives and challenges to servitization from a customer perspective, it will initiate with the drivers and continue with the challenges. It will also study a number of characteristics that are typical for each segment and how they affect the customers’ view of incentives. The incentives identified during the interviews will be presented and then a cross case analysis will be provided and a discussion regarding the similarities and differences and what aspects that may affects them. The drivers identified in the case studies are compared to the six drivers found in literature. This section will aim at answering the first part of the first research question.

RQ1a. How do the drivers for purchasing a PSS coincide and differentiate depending on customer segment?

The following quotes have been put forward to try to illustrate the drivers for servitization for each specific segment. This section will focus on the commonalities and differentiators for the drivers for each segment.

Driver 1- Focus on core activity Enabling the customer’s management teams to focus on their core business activities. It creates a possibility for the customer to focusing on their core competencies

Segment A

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Segment A has a very limited history of buying PSS and mainly buys products. They describe that they would like to do even more of the repairs in house than they do today, but that they lack the resources and machines internally. This shows that one of the drivers for finding partners and buying services is that they have to look for it outside of the firm since they lack the resources to do it themselves, this can be both technical resources as machines or human resources as knowledge. Segment A only focuses on solving minor problems that occur that does not demand opening up the pump and repairing things inside of it, they describe that often it is the smaller things that breaks and the pumps themselves are not the biggest problem but rather everything around them and that there are five to six big sources of error. This shows that the firm does not build up the knowledge internally since the problems do not occur often enough to make it efficient to have their own personnel and equipment.

“We are both pump repairs and caretakers, it might as well be a locker or a delivery pipe that breaks down. The pump is just one of many things that

may break down inside the station.”

-Interviewee 1

By not having to build up the competence for everything internally it is easier to focus on their core business and purchase a service for problems that does not occur regularly.

Segment B

Segment B as compared to segment A only buys services and PSS and almost no pure products. They describe that buying services was initiated by the lack of the internal competences within that area. In their case they are controlled by what the contract with their final customer includes. If the contract includes competencies they lack, they must acquire the knowledge from external sources or develop the resources internally. It is both about the competencies and resources available internally and that it can be difficult to find the right personnel with the knowledge required. Deciding what knowledge to educate and create internally and what knowledge to buy externally is also a reflection of what the purpose and strategy of the firm is. It does not have to come from the top as a strategy to outsource but rather as deciding what the core competency of the firm should be. It also highlight that there is a willingness to focus and build knowledge around the business.

“It is very different between areas, we are not bound to any specific way of working (outsourcing or in-house), but where we lack the competence we

should not try to change our guys into pump-guy/…/ If you lack the competence internally, collaboration partners are a good idea.”

- Interviewee 3

Segment C

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Segment C describes multiple drivers for servitization. The first and most dominant driver that was described was the lack of internal resources and competencies. An explanation for this lack of competences is that it is far away for their core competence and that it does not contribute to extending the value of their offering.

“We have a lot of service agreements. We buy incredibly much services that are outside of our core business”

-Interviewee 5

“Above all it is a question about resources, some units do not have the competence and resources. These parts demand that someone focuses on

them and have the knowledge. We have so many things that to work with in our business. It can be better to leave it to someone that focuses on this and

can come up with new ideas and provide quality”.

- Interviewee 5

Driver 2 - Customization Customers can get a customized solution to fit their exact need.

Segment A

For segment A there is a high emphasis on the relational aspect. This is a way to differentiate the offer, without changing the physical product and is a big part of servitization since servitization involves more intangible aspects. Segment A wants a customized service where they both get consultancy, to get the right product, and a follow-up, to make sure that the product works as well as intended. They are also in need of specific services that they cannot perform themselves since they do not want to expand their competences too far away from their core business. Simultaneously they are strict about not wanting to buy operations but rather that they want to choose which specific parts of the concept that they require help with.

Customization is a driver but also a challenge. It can be difficult to buy a PSS that is adopt to your company’s’ specific demands and business plan. One of the challenges that was mentioned was referred to as the customer dilemma. There is both the driver for exploring and using new technology but also the question on how to integrate it in a successful way. It was described that the problem was not the technology or lack of technology but rather with having a business plan that was successful for both the provider and supplier and matched their business model and infrastructure. One interviewee mentions the difficulty here.

“The customer dilemma, we have a section of suppliers but the problem is to make it work as a entirety. It becomes a form of fragmentation. There

are a lot of parallel structures but how do you connect them to make it manageable? That is the 10.000 SEK question that I do not have any

answer to // Sometimes our demands may clash with the provider's business

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plan. They (the providers) have enough problems defining it as it is today // The big question when the technology well is up front is how to use it in operations. The question is not technological but rather how we use it.

Technology enabled but then is the question how do we interpretive it”.

-Interviewee 6

The importance of open interfaces was also described as a very important aspect. If it was not possible to integrate the providers solution to the rest of the business it would generate sub optimizations and the true value of the solution would not come to use. Therefore this highlight an understanding for the environment and business plan of the customer and this result in that it is much more complex to sell a service or PSS compared to a product.

Segment B

There is a high emphasis on getting a personalized solution that aligns with the strategic goals of the firm. It does not have to come from the top as a strategy to outsource but rather as deciding what the core competency of the firm should be and how to get a specific solution that suits their needs. For this segment there is a willingness to focus and build knowledge within the business. An example here is that company III value to still have the internal knowledge to be able to learn to handle minor problems themselves. The customized solution that they are buying therefore includes that they do rounds together with personnel from Xylem.

“It is a way to both maintain the internal competence and learn”

- Interviewee 3

Segment C

There is a drive to get services and product that are adopted to their specific needs. Segment C describes that they work with this by trying to convince their contractors and product and service providers that this is the way to go in the future and create a new market that makes more suppliers develop products and services adapted to their values and needs. A way to this is by have a close collaboration that focuses on business development rather than product development.

“We conduct business development together with our suppliers”

-Interviewee 6

Driver 3 - Cost reductions Reduce operational costs, increase performance of the product and reduce cost for preventive maintenance

Segment A

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Segment A has a strategy that aims at working preventive and fix the problem before it occurs, there is a desire to reduce the operational cost and the cost for preventive maintenance without decreasing the performance through proactive work. Segment A strives at doing this by buying quality products from their suppliers. They describe that the advantage of buying products from Xylem is that you are aware that they work with constantly striving at lowering the energy consumption and thereby reducing operational cost. They also highlight that there are more aspect with regard to operational cost that could be considered.

“Our biggest expenditures for my department are salary and energy consumption from the pumps. We have started to look into this now but

have not set up any specific goals yet.”

-Interviewee 1

Segment B

Segment B does rounds together with service technicians from both the provider and customer, which result in identifying problems before they occur and thereby reducing operational costs and increasing asset performance.

Segment C

There is a view and thinking that it is best to allow the company that has the greatest knowledge to work with what they do the best. It is described how they should focus on both cutting cost and on their core activity. If there is a company that has greater knowledge and competence within an area outside of their core business they are probably better at determining when the products needs maintenance. It is a way to decrease maintenance cost and work.

“If we look at the pumps, I assume that the pump provider works with that question, that they know when we should provide maintenance work.”

-Interviewee 4

This statement also highlights a trust for the provider, that they know best and can provide quality. Overall it is a cost aspect, the choice of educating the internal personnel or buying it as a service although multiple other factors were mentioned the cost aspect was highlighted as the most important. The cost was compared throughout the life cycle of the product to be able to correctly compare it to buying a PSS. There were no guidelines connected to strategy for choosing in-house or outsourcing, but the overall cost perspective was important. One interviewee also argued that additional aspects affected the result.

“It is an economical question, what is most profitable? Doing it in-house or outsource?”

-Interviewee 4

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“You compare with having it done in-house. There is a comparison between total cost of production, which is built on investment, personnel

and operational cost. In this case you can compare apples to apples. What is most expensive and what is cheaper? On the investment side we count that the payback time is between 8 and 10 years. The means to an end is

less important, the model of payment is predefined for the finishing result./…/ It does not only have to be the price, as many may believe. It can

be service, good access to spare parts and backup. There are many things that you can work with in the contract. Many times we do a total cost of

ownership for a ten years period of time. Then we calculate spare parts, maintenance and energy consumption”

-Interviewee 5

“You look at it from a cost perspective. It is often the most important factor./…/ You do the math and what is the cheaper alternative is the one

you chose. You compare it to what your own personnel would cost.”

- Interviewee 9

Driver 4 – Lowering the barriers to new technology Segment B

Segment B describes the difficulty of achieving improvements when it is within an area that is outside of their core business, buying PSS also enables this and enables access to new technology.

“I think it started with that we could not fix it ourselves, then after a while we have gotten some suggestions for really good things. If you are not in

the business (of pumping) then it could be difficult to know what to choose. It is easy that you only replace existing with what you had before or

equivalent and do not improve it.”

- Interviewee 3

This quote highlights two drivers, both being able to focus on core activities and also the driver of accessing new technology and smart solutions. It also shows that segment B do not only want to buy a closely product related service, as the repairs of the product, but they do also assume and want it to involve a higher degree of services, such as consultancy services, where the company offers suggestions on new products and help with dimensions and requirement analysis. It is not obvious that the customer segment views this as actually purchasing services but more as something that is assumed to be included in the purchase of a product. But it also indicates that there is a drive to get a customized solution and access to ne technology rather than buying a product. A PSS can also improve the performance of the product since otherwise

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it is easy to just continue with the same products or solutions as previously and thereby miss out on asset performance uplift. The same thing goes for getting access to new technology.

Segment C

Segment C has a goal of enabling more atomization and this is done by collaborating with companies that are preeminent within their area and automatization. They see that it is not possible to develop everything for themselves but rather to use the knowledge and competence that is available within the collaboration partners. There is a view and thinking that it is best to allow the company that has the greatest knowledge to work with what they do the best. If there is a company that has greater knowledge and competence within an area outside of their core business they are probably better at determining when the products needs maintenance and what products that are best suited for that application and how they should be handled. It can be a way to decrease maintenance cost and also get access to the best technology for that given application. An additional driver is the technological push, it is difficult to develop all the technology themselves. There is the question about having the same focus and goal for the PSS provider as for the customer but without competing for their core activity. Since segment C has a strong focus on automation they thereby choses to collaborate and buy both services and products that enables automation.

“It is the technical solutions that are pushing this, we are supposed to decrease maintenance cost. Technological solutions and costs are related.”

-Interviewee 9

“It is both a question about cost, but the operators that we have chosen to conduct collaborations with are cutting edge within automation. Another

thing is that we have business in northern Europe and the labor costs there are very high, that results in the way for us to become profitable is through

high automation.”

-Interviewee 4

An interviewee describes that there were no alternatives than to look at new and innovative ways of working. It was not only a driver but rather that there was no alternative, due to the surrounding environment in which they work.

“High personnel cost and strict environmental regulations. These are very clear drivers for an innovative behavior. Embrace new technology or

die/…/ The companies (collaboration partners) develop new technology, they are allowed to test is with us and we get access to the newest

technology and they can use it in their marketing. It is roughly our game plan.”

-Interviewee 6

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Driver 5 – Reduce capital lock-up Reduce capital lock-up and transform fixed cost into variable cost that conceding with the revenue streams. It includes improving financial visibility and reducing capital lock-up

Segment C

The economic perspective has a high impact on the choice of service partner and whether to buy a product, service or PSS. There seems to be a common goal of cutting cost throughout the company independent of position. When buying the product themselves it is a high initial investments cost but it should also be looked at from a life cycle perspective. The investment is calculated throughout a 10-year period of time to see what would be more beneficial, buying the product itself or buying it as a service. Although in the short term buying a PSS can reduce capital lock-up. The degree of products versus services differs depending on which standalone unit that you are looking at. An interviewee argues that they see a pattern that their standalone unit wants to own everything themselves while another describes that they have outsourced almost everything possible.

“The cost aspect. It is an expensive investment to buy all the machines ourselves. An entrepreneur already has all of that themselves. xxxxxx has

traditionally had and still has a lot of entrepreneurs. It is a hearty investment with buying machines and keeping up with depreciation and all

that comes with that.”

-Interviewee 10

There is also the other side that describes how much they customer uses the product. The less the company uses the product the more efficient it may be to rent or lease the product or pay for a service compared to owning it yourself.

“It depends a bit on how the agreement is written, some functions buy everything (as a service). The choice depends on both the lifetime of the

product and how much we use it.”

-Interviewee 10

Driver 6– Create a common level of quality This driver was not identified in literature but only in the interviews with segment C.

Segment C

A driver for servitization that was not mentioned in literature but in one the interviews was the possibility of establishing a common level of quality for a certain service for the company. Increasing asset performance is not only about increasing performance but it also involves securing a high and common level of quality. Segment C consists of multiple self-governing

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facilities, therefore each facility has the possibility to choose the way the want to address services. Procurement negotiates about the framework agreement, and then each facility has the possibility to handle it differently depending on resources and competences. Segment C describes that there is a driver to have a common level of quality and if each unit can use the same providers it is possible to build synergic effects. The same thing goes for the product since it is less expensive to have a smaller compared to a lager storage of pumps. To enable this, there needs to be as many similar pumps as possible.

“If you let Xylem do the repairs you get a receipt after the repairs that the product is as good as new. It is renovated in a professional way. We think

that this is good on an internal level, we want a common level of quality of the repairs.”

-Interviewee 5

Summary of drivers for servitization for customers To be able to truly understand the drivers behind servitization one must also understand the background of the company, what is their goal and how the PSS offer can align with their business model (Becker and Pessoa, 2017). There is a view that all collaborations or buying of PSS should be a win-win situation for both the supplier and buyer (Baines and Lightfoot, 2013).

By studying the drivers for each segment, both the ones identified in literature and new one from the interviews, it can be seen that some drivers overlap for all segments and some are only visible for specific segment. All drivers for servitization, except for driver number 6. Create a common level of quality, that were identified in the interviews were also confirmed in literature. It is interesting to see, as shown in the Venn-diagram in Figure 7, that all the three segments share some sort of common ground and incentives for buying PSS but there are still major differences. The three segments described that that share three similar incentives. A Venn diagram as shown shows the overlap and common drivers for servitization and also which ones that only one segment or none of them share.

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Figure 7 – Venn diagram of the shared drivers for servitization for each segment

Drivers shared by all three segments

All three segment share the following three drivers, identified both in literature and in the qualitative data collection.

1. Focus on core activities.

2. Customization

3. Reducing costs

As seen in Figure 7 segment A describes only three drivers for servitization, while segment B describes four and segment C describes six of the identified drivers for servitization in literature and one driver only from the interviews. This reflects the degree and level of services that the segment purchases today and also reflect their level of maturity for buying a PSS. To be able to understand how their potential for purchasing services compared to products is it is interesting to also study the challenges for servitization for each segment. The three drivers that were identified by all three segments are the drivers that are most important to focus on regardless of segment.

6.2 Challenges of servitization (RQ1b) One of the challenges of servitization is to identifying the progressive customer segment who can find a value and interest in a PSS and understand the readiness of the consumers to accept

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the offering (Lerch, 2014) (Becker and Pessôa, 2017). A challenge is that the customer has a low level of maturity are not aware of the possibilities that a PSS entail (Lerch, 2014). Another challenge is to be able to build enough confidence for the customer to make them believe in the PSS offering (Becker and Pessôa, 2017). Therefore it is just as import to understand what the specific customer segment may see as a challenge and may stand in the way of purchasing the offering as understanding what drives it. This section will aim at answering the second part of the first research question.

RQ1b. How do the challenges for purchasing a PSS coincide and differentiate depending on customer segment?

Challenge 1 – Risk of losing knowledge internally Segment A

Segment A is the customer that today buys the lowest degree of services and express that there is a fear of being replaced. It is one thing to buy the competence you lack but it is another thing to be replaced completely, this also highlight a fear of losing knowledge internally. One of the interviewees stated the following:

“Xylem will never get in to rounding with us, then we would lose our jobs”

-Interviewee 1

Segment B

Segment B describes that they see services as using the knowledge of the external service provider as a way of teaching their own personnel to handle similar situations, in contrast to Segment A. To do that they let their own personnel go along with Xylems service staff, this allow their service personnel to learn and cope with similar problems but they still turn to Xylem for expert advice.

“We want our own personnel to be able to handle it if something happens/…/ We still want expert knowledge instantaneously, so that we can

present suggestions to our client.”

-Interviewee 3

This shows that although there is a fear of losing the knowledge internally it can be seen as an opportunity to acquire and learn from the service provider.

Segment C

Segment C describes the fear of outsourcing too much. There may be an enhanced risk of losing that competence internally and not being able to question the contractor. This is a reason why firms may feel a fear of outsourcing parts of their business. It is possible to bring back parts of

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the business when it has been outsourced, but it is described as a challenge and not that common. When something has been outsourced it is very uncommon that you take it back the operations.

“When it comes to the core business we strive to build up our own competency so that we can question the way things are being conducted.”

-Interviewee 5

Challenge 2 – Increased complexity There is an increase in complexity when it comes to understanding how the customer’s strategy, organization and competencies aligns with the PSS offering compared to a product or service offering. This complexity is both a challenge for the company selling the service but also for the company buying it.

Segment A

The core business of segment A is to deliver water and retrieve wastewater. The strategy of the firm is to avoid flooding, proactive work and security thinking. Segment A strives to have all those competences in their staff. Therefor it is difficult to try to sell a service that complements their strategy instead and not to been seen as an offering that strives to take over their core business.

Segment B

Regarding the complexity of services, it is about finding a company that understands their strategy and can provide services that are in line with their overall goal. For segment B their strategy must aligns with the strategy of their client. This reflect on the demands of their subcontractor, it is important that the subcontractor understands and shares the vision of their client. Company III describes that the reason that they started collaborating with Xylem was that they had previous experience of a company whose values did not align with their strategy and this resulted in that they could not deliver what they wanted to their client. An interviewee stated the following:

“We have a long contract with our customer, sometimes we lose some but in the long term we make it up and as long as our subcontractors has the

same view as us we will be fine. A lot of what we contract is a reflection of our contract with xxxx.”

-Interviewee 3

They continue to describe that there is a long-term commitment and that the contract between company III and Xylem is nine years, which means that is has to be smart in the long run. And simultaneously there are multiple parts of the contracts and strategy that need to align.

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“The contract control us, it can be very strict and this creates a lot of extra job for us”

-Interviewee 2

There is also the challenge to find a balance between using a subcontractor and still do enough themselves to keep some of the monetary profit. The challenges are often related to the layout of the contract and the contract with the client reflect the contract Company II has with their subcontractor, in this case Xylem. Depending on what is in included in this contract it may be an obstacle or a driver for buying a PSS. This really shows the complexity of buying services compared to buying products and also highlights the difference in timeframe between product sales and PSS sales.

Segment C

It was both described as a challenge and a risk to buy services since there is a risk of losing that competency internally, but it was also highlighted as a risk to not buying services, since segment C is dependent on that the services are available when needed.

“We are dependent on that competency, we are dependent on aftermarket. If we never buy any services will the provider probably pull it in. If we buy a pump or a truck are we tremendous dependent on aftermarket. It can be

as cheap as ever, but if there is no aftermarket then it is a bad affair. It is a heavy consideration when you bring in a new provider how their

aftermarket looks like.”

-Interviewee 9

This quote shows the complexity of buying PSS and services compared to products. The company needs to keep enough competencies to question how the work is being conducted but at the same time buy services to ensure that the provider will continue to provide the service.

Challenge 3 – High relationship investment Buying a service compared to a product requires a closer relationship and higher relational investments in both time and complexity

Challenge 4 - Higher demands for adoption to each other Both the provider and customer has to adopt more to each other when buying a PSS compared to a pure product or service

Challenge 3 and 4 are related since they both have to do with the increase in relationship and adoption from the provider and customer.

Segment A

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When deciding whom to collaborate with collaborate or buy services from there are three factors that matters for segment A. One of the most important parts is the personnel contact and that takes time to establish. Segment A describes that the personal communication and personal connection is essential.

“There needs to be good sales personal that has the social competency and

are engaged/…/You have to connect with the sales person”

-Interviewee 1

This shows how much you have to invest in the relationship with the customer. It also involves the time aspect, good relationships takes time to establish. Segment A describes that there has been a collaboration with Xylem for at least 38 years and that it has always worked out, but if the provider would for some reason stop being there and helping when problems occur they would have no problem with exchanging the provider. It is both about the long-term time aspect but also about not living on old merits, this means that the service quality has to be uphold.

Both the customer and the provider has to adopt to each other and also build a confidence. Xylem has a reputation in segment A of being the best when it comes to products, which build a trust for the provider.

“Flygt is like a Mercedes, if you buy a Mercedes you get a Mercedes. When the pump breaks it might as well be time to exchange it anyway”

-Interviewee 1

Xylem has proved that they are great with products but they have not managed to build the same confidence in the customer as service provider.

Segment B

Segment B describes that it is important to understand each other and have a common view of what the vision should be. The contract with Company III client is for nine years which means that it is important to find someone who they can collaborate with for that period of time. To have a functional long term collaboration is essential. Which requires both generating trust and also high relationship investments.

“We need each other, we live in some sort of symbiosis/…/ It is important to have a good collaboration on all levels.”

-Interviewee 2

The relationship aspect is very high valued here, it is important that their subcontractor match their own business goal and that the way of working aligns. Since the contract with their subcontractor is a reflection of the final contract that they have with the end-customer, both what the contract itself includes but also how much resources it gives the company.

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“Much of what we contract is a mirroring of our contract with our end customer/…/It is a combination question, resources that we get from

the agreement and how much help we need”

- Interviewee 3

“Our contracts are built on total solutions /.../ you sign a contract that is supposed to include everything with full term solutions, then you sign

agreements with subcontractors./…/ “The contracts control us, they can be very strict. For our customer nothing can ever stop. We are also supposed

to be proactive and prevent future problems, it is important to take care otherwise you will get a fine”

-Interviewee 2

This shows that not only does the strategy and goal of the customer influence but also the goal of the final consumer. One example that is described here is that Company C wants to be able to provide a pricing that will match what it costs and therefore it is equally important that their sub-contractor can do the same. The same thing goes for the choosing a service partner that wants to work proactive and preventive since it reflect the contract. Not only the way of working but also the relationship is described as a very important aspect when choosing a service partner. It is not only supposed to work good but there is another aspect about enjoying to spend time together. You are supposed to be able to talk to the subcontractor.

“It is almost A and O that you can talk to the people, tell them what has happened. If you go somewhere were the collaboration does not work it does not matter if it is cheap /.../ The service is great (from Xylem), it is

what we have elaborated on. If you call you get help, service and help it is what you are looking for. You want help now and not tomorrow”

-Interviewee 2

Segment C

There is also the aspect of history and relationship, if something has been conducted in a certain way for a long period of time and it is working it is not easy to change those patterns. Two interviewees describe this while answering the question regarding why they had the current solution for their pumps.

Since Xylem have been a supplier of submersible pumps at all times and we buy pumps and services for a couple of millions each year. 95 % of all of

our submersible pumps are from them, it speaks it clear language.”

-Interviewee 9

“With respect to history, we have worked as a company for 90 years, it is more the way that it has become.”

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-Interviewee 8

The same thing was mentioned when talking about buying services versus buying products. All firms have some sort of resistance to change. The reason for why segment C buy so much services and focuses on servitization can very much have to do with the fact that they started their automation journey during the seventies. This can also be a real challenge to approach new customers since there is a resistance to change and therefore this increases the demands for both relationships and also an adoption to each other.

Challenge 5 - Increased complexity in evaluation The difficulty to evaluate the PSS compared to products may hinder the customer from purchasing a PSS.

Segment C

When buying a PSS compared to a buying a product it demands a bit more work to evaluate the offering. The provider must not only provide a more beneficial economical solution but also fulfill the values of the firm; this includes safety and working environment demands. An Interviewee from segment C explains this by the following quote

“It is more job to buy a service compared to a product, especially on the evaluation side. We do not only look at the cost, they (the service providers) have to work with systematic work environment programs and safety. Their

safety culture must be adapted to our business. It is all weight in a service delivery, plus quality and price of course.”

- Interviewee 5

Challenge 6 – Customer maturity Customer has a low level of maturity are not aware of the possibilities that a PSS entail. Identifying the progressive customer segment that can find a value and interest in a PSS and understand the readiness of consumers to accept the offering

Segment C

Another challenge that was described was the human aspect and customer maturity. There is always a certain opposition to change. All people will not embrace digitalization or change in way of working. One of the interviewees describe that the challenge is rather to get as many as possible onboard. We cannot expect everybody to like it. Another interviewee confirmed this by stating that the biggest challenge was:

“People that are not inclined to changes. They do not want to work with new ways of working or products. To solve this we have to find ways to

motivate them”

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- Interviewee 7

Summary of challenges of servitization for customers A summary of the overlapping challenges identified in both literature in the interviews are shown in the Venn diagram in Figure 8.

Figure 8 – Venn diagram of the shared challenges for servitization for each segment

Different units

A number of different drivers and challenges for servitization were mentioned in chapter 6.1 and 6.2. One explanation for the sometimes contradictory claims is the structure of company C, which means that they have self-governing units. This is shown in Figure 5: Illustration of the different sales channels from Xylem to three of their customer segment.

“The conditions for different parts are different since the units are very unlike, there are some large logistics questions and similar that determine.

We have different competences in the units, this means that there are multiple factors that influence.”

-Interviewee 7

6.3 The results of drivers and challenges for servitization

Section 6.1 and 6.2 illustrates what drivers and challenges that are important to all customer segment and which ones that are only important to some of them. This highlights two aspects:

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x What challenges should be focused upon when striving to approach a customer segment with a PSS

x How the drivers and challenges varies depending on the specific characteristics for the customer segment.

All three segments shared three drivers and four challenges. The first conclusion that can be drawn is that those seven specific topics should be of high interest and approached in special detail when approaching servitization. The shared challenges and drivers and summarized in Table 7. The differentiated drivers and challenges are summarized in

Table 8 for reference.

Table 7: Shared drivers and challenges identified in the interviews.

Shared drivers for servitization Shared challenges for servitization 1. Focus on core activities 1. Risk of losing knowledge internally 2. Customization 2. Increased complexity 3. Reducing costs 3. High relationship investment 4. Higher demands for adoption to each other

Table 8: Differentiated drivers and challenges identified in the interviews.

Differentiated drivers Segment Differentiated challenges Segment Access to new technology Segment B +

C Increased complexity in evaluation

Segment C

Financial visibility Segment C Customer maturity Segment C Create a common level of quality

Segment C

This is not a complete mapping of drivers and challenges but it shows a trend towards what is most important when focusing on a specific area and what is only important to a specific segment. It is interesting to study what may be the differences in customer characteristics and if and how they affect what product service system that is most appealing to the customer. The second research question will focus on this subject.

6.4 How the customer characteristics are related to the PSS

In accordance with Lerch (2014) the primary parts of the process development of PSS is first to identify the customer orientation and conduct a market analysis. To do so the following chapter will present a number of specific customer characteristics and how they differ for the three segment. The section will strive at answering the second research question:

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RQ2. How do the specific characteristics of the customer segment affect which type of PSS that should be sold?

The customer profile contains specific customer characteristics that varies depending on what product or service that is offered (Loshin and Reifer, 2013). In this case the profile should reflect the customers will and tendency to purchase PSS compared to products. Therefore the customer profile and the specific customer characteristics of interest has been based on the shared drivers and challenges for servitization for all three segments. They also include the pains, gains and jobs for each segment since they make up the basis for the value proposition canvas (Osterwalder et al, 2014). Table 9 shows how the drivers and challenges identified in research question 1 have been used to decide which customer characteristics that may be of interest. Table 9 consists of four columns where the first one, Theory, describes where the theory originates from. It can be either a shared driver or challenge as identified in research question 1, summarized in Table 7, things that all successful PSS companies do or a part of the customer profile (Baines and Lightfoot, 2013; Osterwalder et al, 2014). The second column describes where the theory has been found in literature and the third one describes which author that has written that literature. The forth column, Customer characteristics based on theory, provides customer charterships, where the specific theory has been interpreted and translated into a customer characteristics. For example driver one, where the drive for servitization is that it allows the company to focus on core activities. This was found in literature from articles from Baines and Lightfoot (2013) and Funke, Meier and Völker (2011). This is translated into the customer characteristics: What are the customers core business and how is the PSS offering related to the customers core business?

Table 9: Finding in literature translated into customer characteristics

Theory Findings in literature

Author Customer characteristics based on theory

Driver 3 Focusing on helping their customer to be more successful

Baines and Lightfoot, 2013

1. Customer strategy and alignment with customer strategy

Driver 1 Focus on core activities

Baines and Lightfoot (2013) Funke, Meier and Völker (2011)

2. Core Business What is the customers core business and how is the PSS offering related to the customers core business?

Challenge 1 Fear of losing internal knowledge

Becker and Pessôa (2017)

Challenge 2,3 & 4 Locking out competitors by developing long-term business relationship


3. Historical and ongoing relationship between supplier and customer

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Things that all successful companies going through servitization does

Developing resilient revenue streams and cash flow


4. Revenue streams 5. Sales channels

Driver 3 Reducing operating costs and improving product or asset performance.

Baines and Lightfoot (2013), Neely (2007)

6. Costs

Beneficial for entering servitization

High installed base

Gebauer, Fleisch, and Friedli (2005).

7. Installed base of the providers products

The value proposition canvas

Customer jobs Osterwalder et al (2014).

8. Customer jobs

The value proposition canvas

Pains and fears Osterwalder et al (2014).

9. Pains and fears

The value proposition canvas Driver 2

Gains and needs. Customers can get a customized solution to fit their exact needs.

Osterwalder et al (2014). Funke, Meier and Völker (2011).

10. Gains and needs

The specific customer characteristics are based on previously mentioned litterateur and can be viewed in greater detail where they are presented in chapter 3.1 and 3.2. Table 10 shows the specific customer characteristics for each segment to provide a complete customer profile. The mapping of the customer profile is based on the interviews.

Table 10: Customer characteristics for each of the three segments

Customer characteristics based on theory

Segment A Segment B Segment C

1. Customer strategy Alignment with customer strategy

Proactive work – what is not taken care of in time become three times as expensive

Fix it before it breaks down

Automation

2. Core business How the offering is related to their core business

Uses xylems products in processes close to core business

Uses Xylems products in one of their areas of operations

Uses Xylems products in a sub process

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3. Historical relationship

Long-term product sales.

Relationship for approximately a decade of buying services. Operates the high installed base

Product sales, some of the standalone units buys services

4. Revenue streams

Monopoly, owned by the municipality

Long term contract with the client.

World market prices, can always sell regardless of production volume

5. Sales channel from Xylem to customer (see Figure 5)

Framework agreement Service seller to group management

Service provider, some monthly agreements.

Framework agreements, multiple channels

6. Costs (Highest expenditures)

High costs of personnel

High costs of interruption in operations and service

High costs of personnel

7. Installed base Xylem has a high installed base with 97% of all their submersible pumps

Their customers has a high installed base with Xylems products

Different depending on unit

8. Customer jobs Transport water and wastewater to residents in Sweden. Predictive maintenance, safety thinking

Operations and maintenance

Extraction of raw material

9. Pains and fears Fear of losing jobs Align with strategy towards final customer Fear of losing knowledge Fear of giving away “too much of the cookie”

Fear of losing knowledge and sub optimizations Fear of subcontractors not following the safety rules

10. Gains and needs

Planning for an unknown future

Fix it before it breaks Automation

Below follows a clarification of some of the customer characteristics that require to go into in greater detail.

Historical relationship and hierarchy

The historical relationship and hierarchy affect how a PSS should and could be sold. It is confirmed by the internal interviews with salesmen who describe that there is a long process before managing to get in and sell services and that it involves a lot a relationship investment. One of the challenges here is that it involves building relationships to be able to sell services but simulations there is a risk of trying to take over someone’s job when you sell a service compared to a product. This means that you have to go higher up in the hierarchy to sell services

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compared to products but it could be more difficult to establish relationships there. This is illustrated in Figure 9, which shows how the increase in price and extent of the PSS also moves up the sales process.

Figure 9: How the firm has to move up the value chain when increasing the complexity of the PSS.

From the ten mentioned factors in Table 10 some conclusions can be drawn with regards to where the customer segment should be placed for providing a PSS offering.

1. The PSS offering should align with the customer’s strategy. If there is a cost focus, focus on how the offering can improve that. The final consumer may have another strategy than the customer and the more comprehensive the offering gets it is important to take their goal into consideration.

2. The core business/core competence of the customer should be far away from the PSS offering

3. Long relationship and high installed base in beneficial since it offers trust for the provider. High installed base is beneficial since it is more difficult to both move into a new product and new customer.

4. The revenue streams must be considered, how does the PSS offering affect and fit into the customers’ existing revenue streams.

5. The sales channels will be affected, the more advanced or more comprehensive the PSS offering is the higher up the scale the hierarchy in the company the sales channel needs

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to be. This is confirmed by segment C who describes that there is a limiting budget of what kind of investments that they are entitled to make.

6. The intangible aspects such as: pains, gains and needs, should align with the PSS. A PSS offering requires higher relational investments and is more complex than selling a product, therefore it needs to be more focus on customization for a PSS than for a product. One way to do so is by studying and focusing on the intangible aspects.

These factors above are things to take into consideration when developing a PSS. It still requires that the customers willingness to buy a PSS offering is tested. The more of the factors that are brought up that align with the PSS and the customer the more complex PSS can be sold. Figure 10 illustrates a guideline to where on the service continuum that the customer offering should be develop depending on the customer characteristics.

Figure 10 - Illustration of how customer characteristics are related to the degree of PSS that should be sold, adopted from Oliva and Kallenberg (2012)

Based on a combination of literature and qualitative research a framework for customer characteristics that needs to be considered when developing a PSS offering has been initially established. Further research may be needed to confirm and classify the relative importance of each characteristic.

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7. Discussion and Conclusion In this chapter the conclusion of the main findings of the study will be presented by addressing and comparing the two research questions. It will provide theoretical and practical implications. It will also include general suggestions for what to consider when approaching servitization and suggestions for future research. Lastly, an analysis and reflection regarding this study and its results will be provided.

7.1 Main finding The main findings are here presented by answering the two research questions. The first research question was used to build the foundation and bring an understanding for that all customers do not see the same motivation to purchase a PSS but that this differs from segment to segment.

Many of the drivers and challenges for servitization were shared for the three segments but a number of them differentiated. A way to explain the differentiation is provided by the second research question and can be describes as due to the specific customer characteristics of the segments.

From this thesis two major conclusions can be drawn:

1. When developing a PSS the provider should not only look at what they can offer from their internal capabilities but rather look at both the drivers and challenges for servitization for the customer segment and how the providers offering align with the drivers and how it overcomes the challenges for the customer.

2. The provider should also be aware of the importance of customer characteristics when selling a PSS compared to a product. The customer segments incentives vary depending on segment, this thesis provides an alternative list for customer characteristics to consider when approaching and developing a PSS offering.

7.2 Theoretical Implications

This study has contributed to theory by highlighting and expanding the complexity of servitization. It argues why servitization should be seen from an external perspective for an organization and why the high degree of customer understanding and generating customer value should be of highest focus. Previous research has either been limited to focus on the internal capabilities of the firm and how it should go approach servitization and based on that argued for how they could move along the product service continuum. Another theory that has been presented in that the PSS provider should approach different customer with different PSS but there is still a lack of research that studies how to match the specific customer segment with a fruitful PSS offering. This thesis identify which of the challenges and drivers for servitization that are the most important ones to focus upon for firms and it also provides a rough

53

presentation for some of the customer characteristics that should be taken into consideration when approaching servitization based on that.

7.3 Practical (Managerial) Implications

Based on the finding from this study I propose a new framework and managerial implication to better understand how servitization should be approached from a customer oriented perspective. First I propose three drivers and four challenges for servitization that the company should strive to fulfill and take into consideration when developing their PSS offering. These drivers and challenges can be seen both from an internal and external perspective.

Drivers

x Focus on core activities x Customization x Reducing costs

Challenges

x Risk of losing knowledge internally x Increased complexity. x High relationship investment x Higher demands for adoption to each other

From the drivers and challenges a managerial framework has been developed. It highlights a number of critical customer characteristics that need to be considered. The purpose of this framework is to highlight new properties that need to be discussed when considering entering servitization. It is supposed to increase the considered parts of servitization and emphasize the importance and external understanding.

7.4 Future Research

This study has highlighted that servitization should not only be initiated from an internal perspective but rather from an external perspective but there are more factors that should be studied in greater detail. The focus of this study was limited to the initial stage of servitization and only focused upon the incentives for purchasing a PSS or moving along the product service continuum (Oliva and Kallenberg, 2012). Future research should therefor expand the study to include not only the initial stage with the incentives to buy PSS but also to confirm these theories by including to try to sell PSS on multiple places along the PSS continuum.

The study focused upon three customer segment. Future studies could also include more customer segment to see if there are additional drivers and challenges that where not mentioned

54

in this study and to gain an even more detailed picture of how the customer segments differentiate. Including more customer segment in the study may also enhance the picture of how the customer characteristics affect where along the product service continuum and what kind of PSS that should be offered.

The area regarding customer characteristics were briefly touched upon in this master thesis, further studies should include a higher focus to identify which characteristics that are of higher importance to consider when approaching servitization from a customer oriented perspective and which ones that does not require the same amount of focus. By focusing on the customer characteristics a more in detailed picture ma becomes visible.

This study has been limited to one specific business, the business of pumping, for future research new business areas and customer segment should be studied to be able to provide a bigger and more in-detailed picture. This thesis has only focused on the first part of the sales process which is to map the incentives, there is need for further studies to confirm these characteristics and also to look into taken the next step of actually developing a specific offering.

Final markings This thesis has discussed servitization from an unexplored perspective. It has provided a new way of viewing servitization with its drivers and challenges. It has shifted the perspective from an internal provider perspective to a customer and value oriented perspective and highlighted how this approach could be beneficial both for the provider and customer when approaching servitization and developing a PSS offering. It has also provided a new way of viewing servitization, as from a customer characteristics oriented view and emphasized the importance of a correct segmentation. This master thesis can be used as a new way of understanding how PSS can be seen and developed from a market oriented focus and thereby provide an new innovative approached to servitization.

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Appendices

Appendix A. List of all external interviewees

Name Company Function

Interviewee 1 Company I Group manager

Interviewee 2 Company II Group manager

Interviewee 3 Company III Group manager

Interviewee 4 Company IV CIO

Interviewee 5 Company IV Procurement

Interviewee 6 Company IV Specialist

Interviewee 7 Company IV Manager Project engineer

Interviewee 8 Company IV Manager

Interviewee 9 Company IV Manager and strategy

Interviewee 10 Company IV Manager

Interviewee 11 Company IV Group manager

III

Appendix B. Questions for the interviews

Intervju Intervjun är till för att få förståelse för xxxxx som företag, dels hur de ser på framtiden med strategiska beslut men också vilka utmaningar som finns. Den är till för att få förståelse för vad som skapar värde för företaget. Intervjun är anonym.

Bakgrundsbeskrivning x Berätta om din position och uppdrag på xxxx x Vad har du för bakgrund i branschen? x Vad har du för relation med Xylem?

Jobbeskrivning x Berätta om dina arbetsuppgifter x Hur är dina arbetsuppgifter relaterade till pumpverksamheten (om alls)? x Vad skulle du beskriva är dina viktigaste arbetsuppgifter/ Vad är viktigast på jobbet? x Vad får inte bli fel? Vad är jobbigast om det går fel?

Kärnverksamhet x Vad skulle du beskriva är er kärnverksamhet? x Har ni någon uttalad strategi/riktning ni önskar fokusera på? x Vad har ni för lösning med pumparna i dagsläget? x Varför har ni valt nuvarande lösning för pumparna?

Samarbetspartners x Hur ser ni på samarbeten av delar av verksamheten utanför kärnverksamheten? x Varför har ni valt att lägga att göra samarbeten med externa aktörer tidigare? x Vad är det som driver steget mot samarbetspartners eller outsourcing och vad är det

som hindrar det? x Vilka delar av verksamheten kan ni ta hand om själva och vilka delar kräver ni extern

hjälp med via eventuella samarbeten? x Hur ser er process ut där ni bestämmer huruvida ni kommer köpa en produkt och göra

arbetet själva eller om ni köper en hel tjänst? x Hur ser köpprocessen ut? Påverkas den beroende på om ni köper en produkt eller en

tjänst? x När ni gör investering, gör ni de baserat på en livscykelkostnad eller en initial

inköpskostnad? x Hur viktigt är det för er att äga produkten? x Hur ser ni på Xylem som erbjudare av tjänster? x Hur ser ni på Xylem som erbjudare av produkter? x Hur kommer det sig att ni valde valt nuvarande servicelösning?

Vinster och utmaningar x Vilka utmaningar ser du i verksamheten idag?

IV

x Finns det något som du anser hindrar er för att genomföra det ni vill i dagsläget? x Vilka begränsningar finns det som gör att ni inte når hela vägen fram? x Vilka risker finns det om pumpdriften inte fungerar som den ska?

o Vad kan hända om det inte fungerar som det ska? x Hur mäter ni misslyckanden? x Berätta gärna om vilka av dina farhågor som du anser är värst? x Vad har ni för förväntningar på pumpverksamheten? x Hur mäter ni framgång på företaget? (Inga driftstopp? Monetär vinst? Antal

driftstimmar utan stopp?) x Berätta gärna om hur ni prioriterar att lösa olika utmaningar? Dvs vilka är de

viktigaste/mest aktuella utmaningarna ni har?

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