Pawar Betalgui Riedel 2009_01

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The PSO triangle: designingproduct, service and organisation

to create valueKulwant S. Pawar, Ahmad Beltagui and Johann C.K.H. Riedel

Centre for Concurrent Enterprise,Nottingham University Business School, Nottingham, UK

Abstract

Purpose The purpose of this paper is to advance the understanding of product-service systems(PSS). It uses a multiple method approach to analyse literature and cases and synthesise a frameworkfor the understanding and investigation of PSS. It demonstrates the need to consider the

organisation or network, of firms involved in defining, designing and delivering value through thePSS. This is conceptualised as a product-service-organisation (PSO).

Design/methodology/approach The paper uses three complementary methodologies:a road-mapping analysis, investigating industrial challenges for collaborating enterprises,a multidisciplinary literature review of PSS concepts and analysis of two cases.

Findings The paper finds that value can be most effectively delivered by networks of collaboratingfirms, integrating the products and services they offer to create the value which customers seek. In short,creating value requires the simultaneous design of product, service and organisation the PSO triangle.

Research limitations/implications The paper offers a new classification of PSS relatedliterature, drawing on a broad review of research in marketing, design and operations managementrelated to service and PSS. The framework helps researchers understand the organisational challengesof PSS and provides suggested future research directions and questions.

Practical implications The framework provides the foundations for a process to develop PSS.

It highlights the organisational challenges and suggests that a systematic yet iterative process can bedevised to create and deliver value. This means defining customer value which can be profitablydelivered; designing the PSS to create this value and identifying the required capabilities; and finallycreating and managing the network of partners responsible for delivering value.

Originality/value The major contribution is a link between the emerging PSS literature andprevious research on virtual enterprises and other types of organisational networks. The paper arguesthat PSS often creates the need to identify and access capabilities through a collaborative network.This is conceptualised in the PSO triangle.

Keywords Operations management, Virtual organizations, Integrated cost and schedule control,Product management, Organizational design

Paper type Research paper

Introduction

The dividing line between traditional manufacturers and classic service companies isbecoming less clear (Vandermerwe and Rada, 1988, p. 321).

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0144-3577.htm

The authors are grateful for funding from the European Union for some of the research reportedhere, in particular the CE-NET and ARICON projects. The authors are grateful to the roadmapexpert working group, the CE-NET and ICE Conference communities for their contributions tothe roadmap.

IJOPM29,5

468

Received 4 April 2008Revised 31 July 2008Accepted 20 January 2009

International Journal of Operations &

Production Management

Vol. 29 No. 5, 2009

pp. 468-493

q Emerald Group Publishing Limited

0144-3577

DOI 10.1108/01443570910953595


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Services now account for a greater share of profits than manufacturing operations inmany manufacturing firms. The list includes Hewlett-Packard (Brown, 2000),General Electric (Mathieu, 2001), International Business Machines, Siemens (Davis andHeineke, 2005), Shell, British Petroleum and Rolls-Royce (Neely, 2007).

For manufacturers, services were traditionally considered as a harmful necessity(Mathieu, 2001, p. 456). Services were regarded as a cost to be reduced, but have graduallygained in importance and are now considered a source of added value for manufacturingfirms. The emphasis has shifted to the extent that some now view the manufacturedproducts as incidental (Ward and Graves, 2007, p. 465). This means that what is sold is notthe manufactured product, but the benefit or value which customers derive from theproduct, and associated services. This can be achieved by offering integrated packages ofproducts and services, which have been referred to as product-service systems (PSS).The effect of this transition is demonstrated in Figure 1, which shows the change inownership under the PSS model, on the right. Responsibility for maintenance and disposalof a product, under the new model falls upon the service provider, rather than the customer,who pays according to the value extracted. Whether the purchased output is the power

produced by an engine, or the experience offered in a restaurant, the provider is responsiblefor running costs and must ensure that access to value for the customer is not interrupted.

The term PSS has been in use only since the turn of the century (Goedkoop et al.,1999), but similar concepts have been reported under different names in otherliteratures. Since at least the 1980s, a transition has been recognised from an emphasison the manufacture of products to the provision of service. This was referred to,initially in the marketing literature, as servitisation (Vandermerwe and Rada, 1988).The transition is described by researchers in different disciplines, often describingapparently identical phenomena using different terminology. In this paper, we presenta multi-disciplinary literature review, which attempts to connect the literature fromseveral disciplines, including services marketing, service operations management,design and engineering. We have clustered the literature under three streamsof literature, containing papers which are similar in their perspective on the motivesand outputs of the product-service transition.

Figure 1.PSS may require a new

business model, aimed atcharging for access to,

instead of ownership ofproducts

Use Output Cash

Customer

Product

Use

Output

Cash

Customer

Product

Source:Adapted from Baines et al. (2007)

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The first stream of literature product service systems is based on a number ofreports aimed at convincing policy makers of the environmental benefits of servicising(White et al., 1999, p. 2): combining products and services to reduce the harmfulenvironmental impact of consumption. Research in this stream presents the argument

that focusing on services means using less physical resources, resulting inenvironmental sustainability. The second stream of literature integratedsolutions focuses on the financial sustainability which manufacturers can gain byadding services to combat the decreasing profits of their manufacturing operations.Research, aimed at academic and practitioner audiences alike, presents the argumentthat selling services requires the integration of products and services, utilising acompanys knowledge and competencies to deliver solutions to their customers.A third literature stream experiential services takes the perspective of customersas central and views the manufacturing to service transition as a step towards theobjective of creating memorable experiences (Pine and Gilmore, 1999). This viewsproducts and services as a means of interacting with customers and co-creating value.

The literature in each of the three streams recommends that companies make

a transition from products to product-service offerings, but differ in the motivation forthis transition. Much of the focus is on the nature of the output (e.g. understanding PSS,solutions or experiences), but less attention has been paid to the organisationalimplications of creating these outputs. Where the organisation is studied, the emphasisis on the significant internal changes required, for example re-structuring towardsfront-end and back-end units. In this paper, we argue that the organisationalimplications of PSS extend beyond the boundaries of a single firm. Developing a PSSoften requires competencies, resources and capabilities which may be new to thecompany and require collaboration with other partners. We focus on the design ofthe (external) organisation, with respect to the competencies and capabilities which thecompany secures through its external partners and suppliers. We propose that theorganisation should be designed simultaneously with the product-service combinationwhich is its output. These three elements are integrated in theproduct-service-organisation (PSO) triangle, as shown in Figure 2.

Research aimThe PSO concept emerged from a road-mapping study investigating industrialchallenges for collaborating enterprises. Having recognised the transition fromproducts (or services) towards product-service combinations, one of the key objectiveswas to understand how to develop these offerings. Subsequent work focused on thelink between PS and O and the research reported in this paper aims to answer theresearch question:

Figure 2.The PSO triangle expandsthe PSS concept byincorporating theconcurrent design ofproduct, service andorganisation (the networkof partners thatcreate a PSS)

Value

S S

OPP

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RQ1. What are the key PSO challenges facing researchers and practitioners?

The result is a framework which captures key challenges and was developed throughan iterative process in order to be grounded in both the literature and practice.

As shown in Figure 2, the aim of PSO is creating value, which is problematic becausevalue is a relative concept. Smith (1776) is credited with initiating the prioritisation of themonetary value added by a producer (value in exchange), over the value of a productsutility for a customer value in use (Vargo and Lusch, 2004a). Baines et al. (2007)recognised that the novelty of PSS is the provision of value in use without the requirementfor ownership of products. This separates value in use from value in exchange, and meansvalue should not be seen from the producers perspective alone. Instead the producer of aproduct must be aware of the value demanded by their suppliers, their customers andend-users of their products (Slywotzky and Morrison, 1997). Each of these stakeholdershas a different and potentially conflicting definition of value.

The framework begins with the objective of defining value, from the perspective ofcustomers, but without losing sight of the value for other stakeholders. Subsequent

stages involve designing the product-service and organisation which create this valueand managing its delivery. To understand the challenges involved in each of these threestages, we undertook an iterative research process which is described in the next section.

Research methodologyThe research presented in this paper made use of three complementary research methods,in an iterative process of theory building (Eisenhardt, 1989) which is grounded in practice(Glaser and Strauss, 1967) but also closely linked to published research. The catalyst forthis work came from the findings of a road-mapping exercise carried out by the EuropeanUnion Funded Network of Excellence Concurrent Enterprising Network of Excellence(CE-NET). This road-mapping exercise was a form of grounded theory building, theresults of which are presented in publicly available documents (CE-NET, 2004a, b).

It identified that companies were collaborating and sharing capabilities in order to movetowards a PSS approach. The research reported in this paper began with a thoroughreview of PSS related literature to better understand the challenges in this area. With therealisation that the organisational dimension was not adequately addressed, caseresearch was used to identify further challenges. The selection of cases was thereforefocused on complex organisations, where the organisational implications of transitioningto a PSS approach are visible. An overview of the three research methods is shown inTable I and will be described further in this section.

Road-mappingThe road-mapping methodology was based on a similar exercise conducted previously bythe USAs Integrated Manufacturing Technology Initiative (IMTI, 2003). The result was

the identification of strategic objectives in the short-, medium- and long-term. IMTI aimedto contribute to the goal of ensuring US world leadership in manufacturing, but theiremphasis on manufacturing technology was considered to be a weakness. Instead, it wasrecognised that the integration of people and business practices i.e. organisationalissues should be addressed along with technology needs. Consequently, CE-NET beganby identifying challenges using high-level categories (human aspects, business models,PSO development, ICT aspects and legal aspects) to structure subsequent work. This wasfollowed by an iterative process using workshops, surveys and interviews, with the aim of

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Road-mapping

Literaturereview

Caseresearch

Objective

Toidentifychallengesfor

inter-organis

ationalnewproduct-service

developmentcollaboration

To

relateCE-NETroadmapfindingsto

existingliteratureonproduct-service

dev

elopment

Toanalysepracticalexamplesinorderto

illuminateanddevelopthetheoretical

framework

Methods

Workshopsinvolvinganexpertworking

groupofaca

demics/practitioners,overthree

years.Surve

ysandinterviews

Multidisciplinaryreviewofliteraturerela

ted

toP

SS;identifyinglinkageswith

organisationalcollaboration

Qualitativedataareanalysedwithrespectto

theorganisationalchallengesfacedin

developingPSS

Findings

Changeofem

phasisfrominternaltoexternal

collaboration

(concurrentengineeringto

collaborativeenterprising)andtransition

fromproductdevelopmenttoproduct-service

development

Thecommonthemewhichconnects

product-serviceandorganisationinthe

literatureisthecreationofvaluefor

customersandstakeholders.The

organisationaldimensionofPSSisnot

ade

quatelyaddressed

Thecaseshighlightthatatrans

itionfrom

manufacturingandsellingproductsto

deliveringvaluethroughPSSre

quiresnew

capabilities.PSSdevelopmentth

erefore

demandsconsiderationoftheor

ganisational

complexityanddecisionsonhowtoaccess

thesecapabilities

Originality

Owingtotheuniqueperspective,

organisation

alcollaborationisinextricably

linkedtopro

duct-servicedevelopmentinthe

roadmap,resultinginthePSOtriangle

Threestreamsofliteratureareidentified

and

presentedasdifferentapproachestovalu

e

creationthroughproduct-service

com

binations.ThePSSliteratureis

con

textualisedwithintheliteraturerelatedto

servicemarketingandoperations

management

OrganisationalimplicationsofP

SSare

elaborated,whereascasesinthe

PSS

literaturefocusonthedesignan

d

developmentofindividualPSS,

ratherthan

thewiderimplicationsforanestablished

business

Table I.An overview of the threeresearch methods used

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capturing the current situation, the future vision and the gaps between them, (Figure 3).The result is a set of challenges for research and practice.

Data were collected using three annual surveys conducted at the InternationalConcurrent Enterprising (ICE) conference[1], with approximately 100 responses on

each occasion. This helped identify a long-term vision and the key challenges to beovercome in achieving this vision.

Literature reviewTranfield et al. (2003) made a recommendation that the systematic review method,more commonly found in medical research should be utilised in management research.Baines et al. (2007) produced a systematic review of the PSS literature, identifying 80sources through a search of electronic databases, using a series of key-words. Of thesearch results, only 33 papers were considered by them to be relevant and included inthe systematic review. Owing to a divergence in the use of terminology, it is difficult toproduce a comprehensive list of relevant papers by searching databases. Relevantconcepts are dispersed across a number of different disciplinary literatures, and are not

clearly defined, making a systematic review difficult. For example, integratedsolutions and PSS both describe combinations of product and service, but papers onthese subjects are to be found in different publications. Our approach was to begin withthe most recent, key papers, initially in the two fields of marketing and operationsmanagement, and to backtrack through citations to identify relevant literature.

Following the analysis of this literature, our synthesis was a grouping ofproduct-service research into three streams. In all three streams, we found thediscussion of organisational implications to be rather limited and mostly restricted tothe internal organisation of a firm, despite several authors recognising the need forcollaboration between firms (Foote et al., 2001).

Figure 3.An overview of the

CE-NET road-mappingmethodology

IMTI

roadmap

CE-NET

surveys

interviewsActual

situation

Envisaged

situationGaps

Foreseen

solutions

Research

challenges

Short term

challenges

Med. term

challenges

Long term

challengesworkshops

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Case examplesThe literature was found to be lacking in the discussion of the organisationalimplications of the product-service transition. Our conception of the organisationdimension, in the PSO triangle, relates to the emerging literature on virtual enterprises

(Camarinha-Matos, 2004). Since the research question could not be answered throughcurrent literature (Eisenhardt, 1989), case research was used. The key element found tobe missing from existing perspectives, was a conception of the complexity of thenetwork of collaborating partners which is required to create and deliver a PSS. Forthis reason, the case studies in this paper are two large companies which producecomplex PSS that demand collaboration with suppliers and partners. These companieswere selected according to their suitability for illuminating and extendingrelationships and logic among constructs (Eisenhardt and Graebner, 2007, p. 27).They are not typical examples, but help to identify the challenges in extreme caseswhich should be considered by other companies.

It is recommended by Glaser and Strauss (1967) that interview data be combinedwith other sources, while Yin (2003) suggested multiple sources should be used in caseresearch. The cases were constructed using data collected through semi-structured andun-structured interviews, formal presentations and public documents. Informants fromthe two companies provided a range of contrasting views, spanning levels ofmanagement from managing directors of business units to specialist design andoperations executives.

Product-serviceA distinction has traditionally been made between products and services. It is, however,increasingly recognised that the lines between them and the companies that produce themare blurred or blurring (Wise and Baumgartner, 1999; Correaetal., 2007; Ward andGraves,2007). Vandermerwe and Rada (1988) investigated the growing importance of services in

corporate strategy and observed a transition towards a product-service approach. Thiswas largely due to managers looking at their customers needs as a whole, moving fromthe old and outdated focus on goods or services to integrated bundles or systems(p. 314). The newapproach was termed servitisation, andwas defined as the trend towardsbundles of customer focused combinations, dominated by service (p. 314). This transitionwas described in three stages of development, as represented in Figure 4.

This means that products and services are combined in packages which some referto as PSS. These are defined as:

[. . .] a marketable set of products and services capable of jointly fulfilling a users needs(White et al., 1999; Mont, 2002).

In this paper, we use the term PSS to describe any such combination, but a divergence

in terminology can be observed throughout the literature we discuss. For example,terms such as service offering (Gronroos, 2000), bundles of benefits (Davis andHeineke, 2005) and value packages (Correa et al., 2007) are used to describe what weconsider to be the same concept.

ServicesLevitt (1972, p. 42) insisted that everyone is in service regardless of whether theirfirms are classed as manufacturers or service providers. Although it is now more

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widely accepted that manufacturing and services are only theoretical pure states(Armistead, 1987), the literature on service management still centres on the differencesbetween them. The earliest research on services focused on how to break free fromproduct management (Shostack, 1977) and establish services as a valid researchsubject (Fisk et al., 1993). The result was the identification of the four IHIPcharacteristics: intangibility, heterogeneity, inseparability and perishability (Zeithamlet al., 1985). Although these are still referred to in textbooks (Kotler, 2003; Fitzsimmonsand Fitzsimmons, 2006), they have recently been described as myths (Vargo andLusch, 2004b) by those who claim their use has been outlived. Several authors haveclaimed they are no longer sufficient to distinguish services (Edvardsson et al., 2005;Aurajo and Spring, 2006; Correa et al., 2007) and that distinguishing services from

goods is not even a desirable objective. Instead research is required to examine therelationship between manufacturing and services and incorporate both operations andmarketing perspectives on service management (Cook et al., 1999; Wright andMechling, 2002; Grove et al., 2003). Our review of the literature was focused on researchwhich addresses aspects of a transition from the IHIP to PSS perspectives. That is,work which investigates how and why companies should combine their products andservices to maximise the value created for customers. We identified three streams ofliterature, which are compared and contrasted in Table II.

Stream one: product-

service systems

Stream two: integrated

solutions

Stream three: experiential

services

Objective oftransition

Environmentalsustainability

Financial sustainability Co-creating value

Achievesobjectivethrough

Combining products andservices to provide thevalue derived fromproducts, while reducingenvironmental impact

Adding services to existingproducts, providing valueto customers andgenerating long-termsustainable income

Creating an environmentwhich turns provision ofservices and products intoa memorable experience

Table II.Three streams of

literature related toproduct-service

combinations

Figure 4.The servitisationof manufacturing

P

Product OR Service

Product = value,

service = cost

P

Core product with

added service

Product = value,

service = differentiation

S

S

S

S

P

Product-Service System

Product + service = value

S

Source: Based on Vandermerwe and Rada (1988)

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Product-service systemsThe first stream of literature is PSS. For some time after Vandermerwe and Radaintroduced the servitisation concept to the European management literature, thediscussion lay dormant. A decade later, the term servicising emerged in a report for the

US Environmental Protection Agency by White et al. (1999). This report used the termservicising to describe the emergence of product-based services which blur thedistinction between manufacturing and traditional service sector activities (White et al.,1999, p. 2). While this appears very close to the earlier servitisation concept, the focus ofthe report was on the potential environmental, rather than commercial benefits ofoffering service dominated bundles. The PSS literature developed from a number ofother policy focused reports, recommending service as a means of reducingconsumption, by reducing the need for products. The first such report was publishedin The Netherlands (Goedkoop et al., 1999) but the PSS concept can be found in similarreports for policy makers in Sweden (Mont, 2000) and the United Nations (Manzini andVezzoli, 2002). These reports present PSS as a means of creating a functional economywhere producers take responsibility for products and sell the function (value) tocustomers (Stahel, in White et al., 1999). This would mean less demand for energy andmaterials because products are durable, upgradeable and have long life-spans. The aimis to move towards lean consumption delivering to customers exactly what they wantwhen and where they want it (Womack and Jones, 2005, p. 59).

Roy (2000) showed the change in approach to environmental sustainability over time,beginning with attempts to tackle pollution at the end of pipe. Subsequent effortsaimed to make production cleaner and then to design products to be recyclable or lesswasteful. This progressed to a lifecycle approach whereby sustainability is consideredright from the extraction of raw materials through production, usage and then disposalor re-use of products. Although it is not specifically mentioned, it should be noted that allof these activities are normally conducted by different companies, whose efforts are

integrated to create the PSS offering.The literature on PSS has tended to be focused on social and environmental issues(Baines et al., 2007) and the aim of reducing consumption. Researchers have presentedan argument to policy makers that PSS should be adopted. There is recognition,however, that new design methodologies (Morelli, 2006) and business models (Montet al., 2006) must be developed for the concept to be accepted by business managers.

Integrated solutionsThe second stream of literature, integrated solutions, argues that global competition isshifting the power from the producers to the buyers (Davis and Heineke, 2005, p. 126)making it difficult to profit from products alone, so services are seen as a way toguarantee income flows over time. Product quality and performance are no longer

order winners but have been relegated to what Hill (2000) refers to as orderqualifiers the minimum criteria for a purchase. Services are now seen as a source ofdifferentiation and added value which some have argued offer more profit potentialthan product innovation does (Gebauer and Friedli, 2005). A number of writers havefocused on the opportunities for increased profits that services offer to manufacturers(Mathe and Shapiro, 1993). In fact the management literature is almost unanimousin recommending that manufacturers should integrate services into their productofferings (Oliva and Kallenberg, 2003, p. 160). Services offer a source of competitive

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advantage in increasingly saturated markets (Mont et al., 2006), in which the installedbase of products leaves little scope for sales growth. In the US automobile industry, forexample, the ratio of installed base to new units is 13 to 1 (Wise and Baumgartner,1999). This makes it logical to shift efforts towards after sales services, which are a

source of growth for many manufacturing companies. Manufacturers developknowledge of their products which they can utilise in offering service to customers(Chase and Garvin, 1989). In doing so, they add layers of complexity to their products,extending the core product (Thoben et al., 2001), as represented in the conceptualtransition shown in Figure 5. The next stage in this transition is the integration ofproducts and services to create solutions, for individual customers.

Offering solutions means accepting more responsibility for customers operations,but profiting by creating value, not simply reducing costs as is often the case withoutsourcing (Foote et al., 2001). Solutions utilise the organisations knowledge andunique competencies to create new value propositions (Sharma and Molloy, 1999).For example, a producer of lubricants can re-define its role to that of increasing theperformance and reducing the down-time of customers machines. This meansaccepting responsibility for running machines and receiving payment for deliveringperformance, not simply supplying a product. It is, however, necessary to develop ameans of predicting the costs involved, in order to set the price of the offered solutions(Roegner et al., 2001).

Experiential servicesThe third stream of literature is found in marketing. The previous discussion has beenmostly relevant to the transition from manufacturing to service. Pine and Gilmore(1998) view this as a step on the path towards entering the experience economy.When Vargo and Lusch (2004a) proposed a service dominant logic to replace theseparate concepts of products and services, they drew together a large body of

literature in the field of marketing. This included work which focused on building

Figure 5.Adding layers of service

increases the knowledgeand complexity in the

extended productSource: Thoben et al. (2001)

Core

product

Tangible

product

Tangible product and

intangible service

Knowledge intensity

Complexity

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relationships with customers as opposed to one-off transactions. This approach sees afocus on the value which products and services provide to customers as the key to theriddle of how to find a sustainable competitive advantage (Gronroos, 1997, p. 411).

Another key concept which Vargo and Lusch drew on was that of value co-creation

(Prahalad and Ramaswamy, 2004). This demands a less firm-centric and moreinteractive model of business. It demands that services and goods be seen as themedium through which companies interact with their customers and demands that thecustomers experience be central to every business. Taking this recommendation to itslimit, several researchers have viewed service delivery as a performance, in thetheatrical sense (Grove et al., 1992). An attempt has been made to derive lessons forservice management from the established practice in theatre (Stuart and Tax, 2004)and to transform services into memorable experiences (Pine and Gilmore, 1999).

Applying principles from the behavioural sciences has allowed researchers toidentify the key stages of the experience which must be designed (Chase and Dasu,2001; Cook et al., 2002). For example, memories of the experience will be stronger at thebeginning and the end so the start and end of the service experience should be givenparticular attention. Voss and Zomerdijk (2007) used this as the basis of theirsuggestion that developing services should be seen as the planning of a journey. Theydescribed the stages of this journey, before and after the service is delivered, as shownin Figure 6.

Writers who describe the design of services as an experience often insist that thisapproach applies equally in business to business as for business to consumer services(Dunn and Davis, 2003; Prahalad and Ramaswamy, 2004). The majority of companiesthey use in examples and case studies, however, deal in consumer markets, for exampletheme parks and destinations such as Disneyland and X-Scape (Voss and Zomerdijk,2007), consumer products or web-based services such as Lego and Napster,respectively, (Prahalad and Ramaswamy, 2004). We therefore argue that, while the

concepts are similar, experiential services are a more suitable form of PSS forconsumer markets, but that solutions are generally more applicable for industrialmarkets. In this section, we have identified different types of PSS and theirrelationship, from the literature. In the next section we discuss the organisationaldimension involved in creating and delivering these PSS.

Figure 6.Stages to be designedin the creationof a service experience

Anticipation

Arrival

Experience

Departure

Savouring

Source:Voss and Zomerdijk (2007)

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OrganisationCompanies wishing to become solutions providers are required to make changesto their organisation (Sharma and Molloy, 1999; Foote et al., 2001; Galbraith, 2002).For manufacturing companies, notably IBM, a recommended approach is shown in

Figure 7, whereby the manufacturing operations become the basis of the back-end,which continues to make products for direct sales to customers. A new front-end isadded which is more customer facing and builds customised solutions around thesemanufactured products. In IBMs case, credibility is demonstrated through itsimpartiality in using rivals products when these are the best option for the customer.

Re-designing an organisation to create experiences also separates the front-stage,or customer facing parts of the business, from the operational, back-stage parts. Thiscan be traced back to Shostacks (1982) line of visibility as well as incorporatinga theatre metaphor which sees employees as actors and customers as the audience(Pine and Gilmore, 1998). In this case, stage is taken literally as the environment forperforming a service. Voss and Zomerdijk (2007) identified five areas of the serviceorganisation to be designed in order to create an experience, shown in Figure 8.

Organisation designThe literature described in this section explores the nature of product-service offerings.Some writers also prescribe approaches to organisation design, to enable these offeringsto be created. Our conception of the organisation is close to the concept of the VirtualEnterprise (Davidow and Malone, 1992; Camarinha-Matos, 2004; Bititci etal., 2005). Thisis a network of collaborating companies, functioning as a single, temporary company(Khalil and Wang, 2002) to act on a particular opportunity. In Table III, a list oforganisational implications of PSS is presented. While this is not an exhaustive list of

Figure 7.A recommended

organisational approachfor providing solutions

Back-end Front end

Product

customers

Solutions

customers

External

supplier

External

supplier

Externalsupplier

External

supplier

External

supplier

Externalsupplier

Top

management

(strong centre)

Boundary

of the firm

Sources:Adapted from Foote et al. (2001) and Davies (2006)

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literature sources or issues, it contributes to the understanding of PSO challenges andsuggests that the organisational issues are not fully addressed by the existing literature.

Case examplesThe literature review has highlighted that, while organisational issues are sometimesrecognised as important, the published research does not address these issues fully. Toexpand our understanding and fill gaps in the framework, we developed two caseexamples, which describe companies that are in the process of a product-servicetransition. The first company has developed a service to capture customers in a verycompetitive market while the second company is changing as a direct result of the

main customer altering its purchasing procedure to demand services. In both cases, therequirements of the PSS place new and unfamiliar demands on the design anddevelopment of products. The result is that not only must products be designeddifferently, but the added service element demands that the development and deliveryorganisation is also re-designed. The cases illustrate that there are challenges involvedin servitisation, which must be identified, considered and addressed. What appears tobe a customer driven transition raises issues for operations managers.

Company aircraft enginesThe first example describes the network of partners required by a manufacturer ofaircraft engines, to ensure that faults can be diagnosed and repaired anywhere in theworld, before they become a problem and result in downtime.

Background. The company is a successful producer of aircraft engines for bothdefence and civil aerospace applications. Competition for the civil market is betweenthree large companies, who compete for airlines to specify their product be integratedinto the airframes of the two major producers. The result is intense competition, for thesame customers, on the basis of products which are required to meet identicalspecifications. R&D expenditure is high and results in technology that provides acompetitive edge, but the technology of products alone is not seen as a sufficient sourceof advantage and the company is focusing its efforts on service provision.

Figure 8.Thefocusof organisationaldesign for experientialservices

CustomersFront Stage

5) Back

office

support

3) Service

Delivery

Process

1) Physical

Environment

2) Service

Employees

4) Fellow

Customers

Back Stage

Customer

Experience

Source:Voss and Zomerdijk (2007)

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Definingvalue

Designingv

alue

Deliveringvalue

Valueinuseisdefinedin

dependentlyofproducts

orservicesLevitt(1960),VandermerweandRada

(1988),Manzini(2001),Thobenet

al.(2001)and

Baineset

al.(2007)

Valuecanb

ecreatedbydesigningproductsand

servicesinc

ombinationShostack(1982),Lovelock

(1995),Ramaswamy(1996),Roy(2000),Manzini

andVezzoli

(2002)andMorelli(2003)

DeliveringvaluethroughPSSrequires

managementoftheorganisationand

may

demandexternalpartnerships.Norm

annand

Ramirez(1993),Hayes(2002),Cooket

al.(2006),

Montet

al.(2006),WardandGraves

(2007)

Definingvalueforcustom

ers/stakeholdersisthe

startingpointofPSSdes

ignWoodruff(1997),

PayneandHolt(2001),M

ont(2002),Vargoand

Lusch(2004a)andDonald

sonet

al.(2006)

Servicessho

uldbedesignedaroundthecustomer

experienceincludingsensorydesignofthe

environmentBitner(1992),Groveet

al.(1992),

PineandGilmore(1998),ChaseandDasu(2001),

StuartandT

ax(2004),Candi(2007)andVossand

Zomerdijk(2007)

Dependinguponcomplexity,aPSSmaybe

deliveredbyasinglefirmordemandanetwork,

whereallbutcore-competenciescan

be

outsourcedMathieu(2001),Galbraith(2002)and

Davies(2003)

Definingcustomersactiv

itiesisthebasisfor

solutions,whicharemoreprofitablethanproduct

salesSharmaandMolloy

(1999),Wiseand

Baumgartner(1999),Brown(2000),Vandermerwe

(2000),Correaet

al.(2007

),Karlsson(2007)

Organisationalnetworkscanbedesignedtoshare

capabilities;andjointlycreatevalueAchroland

Kotler(1999

),AurajoandSpring(2006),Lusch

andVargo(2006),Agarwal(2007)andSmartetal.

(2007)

Anetworkcanbecreatedbydefinin

grequired

activities,selectingandthenmanagingpartners

toundertakethemFooteet

al.(2001),Lauand

Wong(2001),SheridanandBullinger(2001)

Risksandeconomicpotentialarehardtopredict

butnewpricingmodelsareessentialtoensure

profitabilityofPSSRoeg

neret

al.(2001),Oliva

andKallenberg(2003),W

indahlet

al.(2004),

GebauerandFriedli(2005),TukkerandTischner

(2006)andNeely(2007)

Thesenetworkssouldbedesignedconcurrenty

withtheproductandserviceBoardmanandClegg

(2001)andA

urichet

al.(2006)

Performancemesuresareneededfor

both

organizationalnetworksandservice

innovation

Voss(1992)andBititciet

al.(2005)

Table III.The literature identifies

challenges of PSOdevelopment

The PSO triangle

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The company previously considered itself a manufacturer but gradually grew its services,which are nowseen as the key to futuresuccess. Over time, the potential to profit from aftersales service was recognised. This function has expanded from selling spare parts, torepairing engines to selling power rather than the engines which provide it.

By leveraging knowledge of the product, its usage and customers, the company is nowable to offer a service which guarantees a certain number of flying hours, minimisingdowntime, and thus providing long-term income for the company. This is an oft citedexample of PSS, whereby the engine is owned by the producer and its functionalityguaranteed over the life of an agreed contract. Another example of product-service in theaerospace sector is the case elsewhere in this special issue (Johnstone et al., 2009).

Product-service. Although the designers and engineers continue to design and makethe same engines, the company now sells only their output. Responsibility andownership of the product is retained, instead the service is sold. This places newdemands on the product, to be considered at the design stage. The major difference isthat it is now more important to extend the life of the engine and reduce the amount ofrepairs required, since this is now a cost, not a source of income. Products being designedto fill future orders will be required to last longer and require less maintenance. Whilethis sounds straightforward, the designers argue that we can make it last twice as long,but it will be twice as heavy (case company interviewee, February 2008).

In the past, when designing the product (engine) alone, performance characteristicswere optimised according to certain usage requirements. Altering one requirement,such as the length of service intervals, will change the overall specification of theproduct. Owing to the timescales involved in product development, however, theservice must now be sold with engines which were designed to meet differentperformance specifications. Since existing products were not designed with the newservice contracts as the starting point, performance may no longer be optimal. Further,approval is required from the aviation authorities, making it very difficult to introduce

changes during the lifetime of a product.An immediate change which has been introduced by PSS is to make the engines

more intelligent, by incorporating condition monitoring systems to detect potentialproblems. This provides a rich source of data on the products in use, which canpotentially be utilised in designing future products. It also increases the companysknowledge about customers use, which helps in designing the service and the engine.

Organisation. The aim of the PSS induced changes to the product, is to reducedown-time, by detecting and preventing problems. Any loss of functionality representsa loss for the company, since it receives payment on the basis of up-time delivered. Theimportance of maintaining functionaility was demonstrated through an anecdoteregarding an employee being sent abroad, carrying an important component in asuitcase. The cost of losing this employee for several days was acceptable when weighed

against the risk of losing uptime for an important customer. This highlights theimportance of uninterrupted access, but also suggests the organisational challengesinvolved. Customers are based across the world and, by their nature the products aredispersed globally. Whereas scheduled repairs can be made in specified locations,tackling unexpected problems requires a global reach.

The companys vision is to have faults diagnosed and repaired anywhere in theworld, before they can cause disruption. For example, if a potential failure is identifiedin-flight, the aim is to have the parts and the appropriate personnel in place when the

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aeroplane lands to repair it before it fails. A visual representation is provided inFigure 9, which shows a typical process that the company would aim to managesmoothly. Doing so requires them to either own facilities across the world, which couldrepair engines at short notice, or to access the capabilities of local partners. One of the

major challenges which emerges is how to ensure that these partners deliver the samelevel of service quality and performance that the company would deliver itself.External partners are trusted with the responsibility for delivering the service and, inthe customers eyes, are employees of the company. Measuring and managing PSOperformance is therefore a vital concern.

Company B defence aerospaceThe second example addresses the organisational complexity required to cope with theadded responsibility a company undertakes to deliver value in the form of capabilityrather than products.

Background. Company B is a developer of complex, hi-tech products, includingmilitary aircraft, for which it receives orders from the UK governments Ministry ofDefence (MoD). The development of these products is itself a complex task, requiringcollaboration between partners who are specialised in the development of key systemsand components. For example, in typical projects, major partners supply engines,weapons systems, or electronics systems which are integrated into new products,developed to meet specifications. The MoD is the main customer, which previouslyseparated the two functions of procuring these products from supporting them,

Figure 9.Minimising an aeroengines downtime

requires a global reach

(1)

(2)

(8)

(4) (5)

(9)

(6)

(7)

Storage

Facility

EuropeAsia

UK

Service

Facility

Key

Information transferPhysical transfer (products, components or passengers)

(3)

Notes: (1) a plane makes a scheduled flight from Paris to Hong Kong; (2) the engine monitoring

system detects a problem and informs the manufacturers headquarters; (3) information from

engines last scheduled check is requested and received; (4) a request for a repair is made to a local

service partner; (5) a request for required components is made to a storage facility; (6) scheduling

of maintenance work including people and parts required; (7) components required for repair are

transported to airport; (8) following repair, the plane makes a scheduled return flight; (9) a request

to replenish the stock of components is made to the engine producer

The PSO triangle

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through two separate organisations. Contracts for design and development wereplaced by the procurement organisation while the support organisation would placesupport contracts.

Even though Company B previously developed and supported products, these two

functions would be separated, with no incentive to integrate them. Products were notdesigned to be easily maintained if this was not specified and paid for by the customer.Since maintenance was paid for separately, offering support services was another keysource of income for the company. A recent restructuring in the MoD has seen theprocurement and support functions combined within the same organisation, whichnow offers single contracts for design, development and support. There has been aprogressive increase in the amount of responsibility given to suppliers by the MoD,reflected in the types of contracts offered. Traditional contracts, covering the designand development of specified products gave way to spares inclusive contracts as theservice element increased. The next step was availability contracts which demandmission ready equipment, meaning responsibility for the development of the productsand support to ensure uninterrupted functionality. Now, the industry is movingtowards through life capability management (TLCM) contracts, which specify only thecapability or value required but are less explicit in the detailed technicalspecifications of the products which deliver it. An example of a TLCM contract is theprovision of the capability for pilot training. The company providing this capabilitycould produce, maintain and refuel aircraft on an airbase, ensuring their availabilitywhen required for instructors to train pilots. An alternative could be to reduce thenumber of aircraft and provide flight simulators instead of or in addition to physicalaircraft. If the required training capability is provided, then the customer is lessconcerned with how it is achieved, but the provider must deliver the capability withinthe agreed budget. The company thus provides an integrated solution over a longperiod of time. This often involves many partners in both the development and

delivery phases, including civil and military partners in delivery.Product-service. The availability and capability contracts have greatly altered the

development of products. It is now necessary to design products with the requirementsof maintenance and support in mind. This alters the design process by adding greaterrequirements and constraints, so that product performance is not the onlyconsideration. It becomes essential to estimate future costs accurately, since thesecan no longer be passed on to the customer. In the past, if a product was to be upgradedto incorporate new technology, for example new fuel systems, this would be paid for bythe customer. Now the producer is required to plan for this and incorporate newtechnology into its products. Failure to predict future usage and the availability oftechnology may incur costs and, since the price is fixed at the beginning of the contract,will reduce profitability.

These new contracts shift the responsibility and costs over the lifetime of theproduct, from the customer to the producer. These contracts would not be for theproduction of a particular model of aircraft, but for the capability to strike withoffensive force, 5,000 miles from base. There is scope for alternative means ofdelivering this capability, but at present, a bid for such a contract would be based onaircraft either presently available or under development. A major change is the addedrequirement to provide spare parts, fuel, weapons and personnel to maintain thefunctionality of the aircraft. If the aircraft has a range of only 4,000 miles this also

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necessitates the capability to refuel them in flight. Providing capability thus requiresthe producer to move closer to the front line and for civilians to take on responsibilitieswhich were previously military concerns. Although civilian personnel do not pilotaircraft in battle, they may now be required to operate facilities on the airbases the

aircraft take off from. Although the products this company develops are among themost technologically advanced in the world, the complexity involved in delivering aPSS for a TLCM capability contract means that product design is the simple bit (casecompany interviewee, June 2008).

Organisation. TLCM contracts offer potential financial benefits but only if theorganisation has the infrastructure to cope with the increased responsibility placed uponit. In one recent project, the cost of developing the supporting infrastructure outweighedthe cost of developing the product by around ten times. This infrastructure includes manyresponsibilities which are out-with the traditional scope of the companys operations.It may have core competencies related to the design of highly complex products andthe integration of cutting edge technologies, however, transportation of fuel to remoteairbases in potentially hostile territories, may not be among its capabilities. It signslong-term contracts, lasting several decades, to deliver this capability. These contractscreate problems in meeting current and predicting future demands.

The solution has been to create virtual enterprises (VE) described in the previoussection with several partner companies operating as a single organisation toco-ordinate the creation and delivery of the required capability. Collaboration isbetween a temporary consortium of partners which forms to bid for a contract and, ifsuccessful, to develop and deliver the capability demanded, through PSO development.The partnership is dissolved at the end of its function, but the partners may collaborateagain in future projects. Additional partners are identified by defining the requiredcapabilities, assessing potential partners and selecting the most appropriate ones.Traditionally each organisation would work independently, sub-optimising to

maximise their own profits and reduce their costs. The new approach createsdependence between all participants and results in suppliers being includedthroughout the product design, development and delivery process.

The VE involves different companies sharing resources and knowledge throughoutthe process. During the delivery phase, civilian organisations must collaborate witheach other and with military personnel. They are required to use military facilities suchas bases and hangars and co-ordinate logistics, such as delivery of supplies, withmilitary personnel. In potentially volatile and dangerous situations, ensuring thecontract is profitable is not straightforward, given the fixed price. The complexityinvolved in this extreme case serves to highlight the challenges involved in predictingthe costs and risks of the PSO. It also demonstrates that delivering the value customersdemand requires consideration of the capabilities required and how to access them.

Summary of casesIn both of the cases presented, there is a shift from manufacturing products to deliveringvalue to the end-user. The implication for both companies was to extend the boundary ofthe organisation to access the capabilities of external partners. In the first case, thepartnerships are relatively stable and therefore the company puts resources and effortinto the development of its partners. In the second case, however, the partnerships havemore of a temporary nature and exist for the duration of a specific project.

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These cases helped in the identification of PSO challenges not addressed in theliterature. Some examples of issues which emerged are given in Table IV. From thesetwo cases we can see two different types of PSO. For company A, the O can be designedindependently of the P-S, since the development of the product and delivery of the

service involve different partners. Company B, however, works on projects in whichthe design of the infrastructure is tied to the design of products and therefore P-S and Omust be designed simultaneously.

PSO challengesThe research reported in this paper aimed to identify the challenges which PSOdevelopment poses for companies. The result of the literature review and case studiesis the framework, shown in Figure 10, presenting three stages of developing PSO and

Define value Design value Deliver value

CompanyA

Value is defined by theoutput of the products, whileownership is retained by theproducer

Current products aredesigned with conditionmonitoring. New productswill be designed to lastlonger and require lessmaintenance in order toreduce lifetime cost

Maintaining the productsfunction in order to ensurevalue is delivered requiresmanagement of a globalnetwork of local partners.Measuring and managingpartners performance andquality are vital

CompanyB

Value, or capability, isdefined by the customer, notspecific products. Assessingthe risks and costs of theadded responsibility is vital

The complexity of productsand scale of infrastructuremake it necessary forproduct-service andorganisation to be designed

simultaneously

Delivering value requirescollaboration betweenseveral partners managed asa single organisation andsharing military facilities

Table IV.The ceises provideexamples of PSO

challenges

Figure 10.The PSO frameworkdescribes a set of genericchallenges of PSOdevelopment

DELIVER

Value

DESIGN

Value

DEFINE

Value

Defining the value

proposition which will satisfy

customers

Estimating the cost and

assessing the risks involved

over the lifetime of the

service agreement

Designing the integrated system

of products and service which

create the defined value

Designing the organisation in

terms of capabilities required to

complement the core

competencies of the firm

Identifying, selecting and

managing the network of

partners which jointly deliver

value

Defining performance measures

and managing trade-offs to

ensure quality and access

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key challenges at each stage. The framework encompasses the iterative,multi-disciplinary and collaborative process to create and deliver value to customers.

In the past, attempts have been made to adapt traditional product designmethodologies to the development of services (Hollins and Hollins, 1991; Ramaswamy,

1996). When developing PSS, rather than services, it has been recognised that a newmethodology is required (Morelli, 2002). Our framework contributes towards such amethodology by incorporating the external collaboration required to develop PSS. Themajor difference between PSO and traditional product development is the complexityadded by the service element, which demands increased organisational complexity.Although, it cannot claim to be comprehensive, the PSO framework builds on conceptsinherited from the literature and provides a foundation for future work, which will aimto both test and expand this framework.

Conclusion

Three streams of literature argue that companies should make a transition fromoffering products or services to providing value through PSS. The benefits, bothfinancial and environmental, have been identified, but there is a gap in the operationalimplications: how to make such transitions is unclear. This paper proposes that valuecan be most effectively delivered by networks of collaborating firms, integrating theproducts and services they offer to create the value which customers seek. In short,creating value requires the simultaneous design of product, service and organisation the PSO triangle. The result of the research presented in this paper is the PSOframework. It is presented as an iterative, context specific process to guide thedevelopment of PSS by incorporating organisational considerations.

We identify three stages in the process:

(1) Defining value. Identifying customer value, needs and the cost of meeting themto determine the profitability of a PSO.

(2) Designing value. Designing a PSS and identifying the organisationalrequirements in terms of capabilities which are available or required.

(3) Delivering value. Selecting the network of partners which can deliver therequired capabilities and managing the performance of this network to ensureuninterrupted access to value for customers.

An important contribution of the paper was to identify the different streams ofliterature addressing product-service and to connect them; especially to connect theindependently developing marketing and operations management literatures and toshow that concepts such as experiential services and integrated solutions are

complementary. These concepts can be viewed as alternative strategic approacheswhich may be more appropriate in different organisations. To create and deliver value,the gap between operations and marketing must be closed, to combine the customersand the organisations perspectives and their differing definitions of value. Theimplication for managers is that customer needs, rather than internal resources orcapabilities, should determine the PSO configuration. Resources and capabilities whichare required, but are not available should be acquired through collaboration with, oracquisition of, external partners.

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Note

1. See www.ice-conference.org. The conference attracts participants representing an even splitbetween research and industry practitioners, with an interest in collaborativeenterprising/engineering.

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Management, Vol. 6 Nos 3/4, pp. 321-34.

Corresponding authorKulwant S. Pawar can be contacted at: [email protected]

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