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The International Journal of Logistics Management The development of a service supply chain model for a manufacturing SME Jukka Hemilä Jyri Vilko
Article information: To cite this document: Jukka Hemilä Jyri Vilko , (2015),"The development of a service supply chain model for a manufacturing SME", The International Journal of Logistics Management, Vol. 26 Iss 3 pp. 517 - 542 Permanent link to this document: http://dx.doi.org/10.1108/IJLM-01-2014-0001
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The development of a service supply chain model for a manufacturing SME
Jukka Hemilä VTT Technical Research Centre of Finland, Espoo, Finland, and
Jyri Vilko School of Business, Lappeenranta University of Technology,
Lappeenranta, Finland
Abstract Purpose – Services are increasingly growing in importance in the global economy. However, in the context of manufacturing industry supply chains, services are still little discussed. Therefore, the purpose of this paper is to increase the understanding of service business development for manufacturing small- and medium-sized enterprises by further developing previous conceptual frameworks for service supply chain management, based on the current scientific literature and empirical cases. Design/methodology/approach – The study is based mainly on qualitative interviews and expert group sessions set up to analyze the acquired data and test the developed model. The developed model is based on a multidisciplinary literature review, to provide a holistic perspective on the affecting factors in new business development in the service supply chain context. Findings – The implications of the study are beneficial from both the scientific and practical perspectives, which help to understand better the process and related factors in multi-actor service business development. The study contributes to the current scientific discussion of new business development in the supply chain context, proposing a new scientific framework based on the previous literature. The practical findings of the study give insights from manufacturing firms’ new service developments, and from the roles and resources required in the process. Originality/value – The paper provides new knowledge with regard to new service business development in the supply chain context, by illustrating the most essential factors and the new process framework based on those. The presented framework gives a holistic picture of the process, but also enables better consideration of the most essential points by using a more precisely structured model. Keywords Manufacturing industry, Small- to medium-sized enterprises, Service-dominant logic, Service supply chain Paper type Case study
Introduction In dynamic competitive environments, cost, quality, and technology leadership are no longer sufficient for enterprises to secure crucial advantages (Bullinger et al., 2003). Firms in various industries are finding that they can no longer succeed just by offering excellent products, traditional after-sales service, and logistics (Kowalkowski et al., 2013). To differentiate themselves from their competitors, manufacturing firms have begun to extend their range of service offerings and enhance their service orientation (Kowalkowski et al., 2013). Differentiation requires a change of business model, where innovation can aim at cost advantage, or competitive advantage in a changing business environment (Osterwalder et al., 2005; Maglio and Spohrer, 2013). Some scholars have argued how value-proposition design as a part of business model innovation can aim for adaptive advantages (improve existing offerings, create new offerings, or reconfigure the ecosystem) (Maglio and Spohrer, 2013). In this, service science can offer
The International Journal of Logistics Management
Vol. 26 No. 3, 2015 pp. 517-542
© Emerald Group Publishing Limited 0957-4093
DOI 10.1108/IJLM-01-2014-0001
Received 1 January 2014 Revised 19 July 2014 19 September 2014
Accepted 23 September 2014
The current issue and full text archive of this journal is available on Emerald Insight at: www.emeraldinsight.com/0957-4093.htm
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insights into effective value-proposition design, accelerating business model innovation through systematic exploration of the space of value propositions (Maglio and Spohrer, 2013). Value proposition is a generic term suitable for all industries. Our focus is on manufacturing industries, and especially small- and medium-sized enterprises (SMEs) original equipment manufacturers (OEMs), who are aiming to extend their value proposition with a wide range of service offerings.
There are many terms in use to describe the change from traditional manufacturing to providing services. It has been referred to as the emergence of “product – service systems” when a firm offers a mix of both products and services, in comparison to the traditional focus on products (e.g. Tukker and Tischner, 2006). The term “servitization” describes the strategy of creating value by adding services to products or even replacing a product with a service (e.g. Vandermerwe and Rada, 1988). Kowalkowski et al. (2013) have used “service infusion in manufacturing firms” to capture the empirical phenomenon, the common denominator of which is the increased importance of services in the offering and organization of manufacturing firms. Vargo and Lusch (2004) have argued the transition to be a movement from a goods-dominant (G-D logic) logic toward a service-dominant logic (S-D logic).
Rolls-Royce Aerospace is a well-known example of how an organization can transform successfully from a high-tech product business into a service company. Rolls-Royce Aerospace started providing “power-by-the-hour” or total-care packages, in which customers purchase the capabilities that an engine delivers rather than the engine itself. In their total-care package, Rolls-Royce retains responsibility for maintenance as well as risk (Neely, 2008). The current research in service sciences mostly focusses on large multinational enterprises, like Rolls-Royce, and only a few studies concern service infusion in SMEs (see, e.g. Kowalkowski et al., 2013; Kaski et al., 2011), which indicates a clear gap in the current body of knowledge. Indeed, the current research has neglected how a firm’s size may affect service business development, and therefore most of the existing findings cannot be transferred to the context of SMEs (Gebauer et al., 2010a).
Strategic positioning in the value chain can be considered the starting point for service business development. In fact, it can be argued that the strategy is of importance for the success of service business and service offerings development (Edvardsson et al., 2013; Gebauer et al., 2012). Managers involved in the logistics or supply chain process use strategies consistent with delivering high-quality products with competitive prices and service levels (Mellat-Parast and Spillan, 2014). SMEs experience difficulties moving downstream in the value chain, because of potential competition with their actual customers, distributors, and installers (Gebauer et al., 2012). Despite that, many examples can be found in the European manufacturing industries of small- and medium-sized OEMs with a wide range of service offerings. From a supply chain perspective, small- and medium-sized OEMs operate as large ones, when using many companies as tier one and tier two suppliers of components, sub-systems, and services. In order to provide services, SMEs have to reconsider the sales channels, motivate distributors to offer services, and arrange paybacks from customers to distributors and from distributors to the SME (Gebauer et al., 2010a).
The current available frameworks do not fully take into account the entire service system and service supply chain perspective, where the focus should be on managing product-service resource flows and collaboration of organizations. Our focus is on the development of the service business concept by utilizing supply chain resources, referred to as a service system (Maglio and Spohrer, 2013), rather than individual services.
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The development of service system entities dynamically configures four types of resources: people, technologies, organizations, and information (Maglio and Spohrer, 2013). Service development is usually referred to as new service development (NSD), which has its roots in new product development (NPD) methodology (e.g. Menor et al., 2002). There are several other frameworks for service development available (see, e.g. Edvardsson et al., 2013). After NSD methodology, the most referred to service business development frameworks are service design (Menor et al., 2002) and service engineering (Bullinger et al., 2003).
Considering the previous discussion and the increasing need for service supply chain development, there is a growing demand for further information about the subject. Thus, the aim of this paper is to increase the understanding of service business development by further developing previous conceptual frameworks from the scientific literature, but also to give insight into service supply chain management (SCM). More precisely, our research is focussed on manufacturing industries and especially on small- or medium-sized companies aiming for service business. In doing this, we propose a framework that enables a systematic approach to service business development, not only for developing individual service offerings, but for taking account the service supply chain, resource allocation, and collaboration models. Sharifi et al. (2013) have argued that SMEs lack the capability to manage processes, drive negotiation, and absorb technology and knowledge, which contributes to firms missing the opportunity to grow. As SMEs lack resources and time, they require easy-to-use and simple development frameworks that take a minimum of time to learn and use (Löfving et al., 2013). Our aim was to create an easy-to-use and quite simple framework for service business development, but on the other hand, the model can also be used for large companies. SMEs might lose their agility if they use over-complex tools and managerial methods in decision making and development (e.g. Sharifi et al., 2013). An easy-to-use framework was one of the main objectives in our development. Furthermore, we discuss how the findings in the current literature align with our model, and what kinds of challenges the case companies faced during the different phases of the development process.
The study is structured as follows. In the next section, the theory with related concepts will be briefly introduced. Then the research design is explained with the implementation of the fieldwork and the cases. Thereafter, the new business development process will be described and discussed in the light of the theory. Thereafter, the cases will be reviewed and the results will be discussed in the light of the most relevant literature. The final section concludes the paper with theoretical and empirical implications of the research, as well as suggestions for further research.
Theoretical background This section presents the main theoretical concepts of the study, namely: the service business model and value propositions, service offerings development, and service supply chain.
Service business model and value propositions Moving toward a service business is a huge step for a company, and it requires all business functions to be involved in the development, with the creation of cross-functional teams (Alam and Perry, 2002).
The strategy and business model should be changed from product orientation to service orientation. A business model is a conceptual tool containing a set of objects,
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concepts, and their relationships with the objective, to express the business logic of a specific firm (Osterwalder et al., 2005). Osterwalder et al. (2005) present a business model canvas consisting of key partners, activities, resources, cost structure, value proposition, customer relationships, channels, revenue streams, and customer segments. The business model should answer the questions what, for whom, and by whom, concerning the firm’s assets. “What” is a fundamental question that defines the firm’s value offering. “For whom” defines the customer, customer segments, and sales channels. The question “by whom” has a strong link to the service supply chain, as the firm should decide by whom the value offerings will be provided. It is not always the firm itself providing all the services.
One of the largest available studies about service development in manufacturing industries has been done by Gebauer et al. (2010a), in which they compare their findings about SMEs to studies of large-scale multinational OEMs, and the main conclusion is that the service strategy formation and implementation in SMEs depend on their value chain position and the business environment. In their study, SMEs are often suppliers of components and sub-systems (Gebauer et al., 2010a). In such an environment, SMEs occupy different value chain positions compared to large-scale OEMs, and SMEs experience difficulties moving downstream in the value chain because of potential competition with their actual customers, distributors, and installers (Gebauer et al., 2010a). In our research, the focus is on small- and medium-sized OEMs, where the company is willing to enhance their value proposition with services. Five generic service strategies can be listed for selection in the manufacturing context (Gebauer et al., 2010b):
• customer service: service offerings aim to increase customer satisfaction and strengthen the credibility of the manufacturing firm;
• after-sales service provider: services such as repair, maintenance, and overhaul; • customer support service provider: concentrating on optimizing customer
processes, suppliers offer maintenance services, including preventive maintenance agreements, refurbishment, and process optimization;
• outsourcing partner: a supplier can offer operational services and take responsibility for the customer’s operating processes; and
• development partner: a supplier offers R&D-oriented services, but also pays intermediate attention to after-sales and process-oriented services.
These five generic service strategies are relevant whatever the size of the focal company. SMEs might not reach the critical mass needed by a service business to be profitable (Gebauer et al., 2010a), and we have found that to be an obstacle in the case studies. Service business can be profitable for manufacturing SMEs without a critical mass (installed base), but that requires well-defined service offerings and operation processes. The financial position of SMEs is not always very good. We have seen in practice that most innovative and R&D-oriented companies have quite a strong financial position. When a company invests in R&D, it can achieve a competitive advantage and a stronger position in markets. Long-term development might provide a valuable outcome even after years, and that kind of innovation activity requires a lot of allocated resources, as both time and money.
Service offerings development Several models describing the process of service offering development have been developed and described in academic publications, managerial literature, and teaching
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materials (Edvardsson et al., 2013). The most referred to service business development methods are service design, service engineering, and NSD. Service design focusses on the design of individual tools, methods, and content that are used for the development of the service offering (Menor et al., 2002). Service engineering is an approach for capturing services as an R&D object made within a project under the general heading of “service engineering,” and an attempt is made to systematize the development of services (Bullinger et al., 2003). NSD has its roots in the NPD methodology, in which the development process supports individual service development from the idea to market launch (e.g. Menor et al., 2002). Individual services, like installation or maintenance, are not enough as offerings, and today a comprehensive set of services is required. Usually, NSD models include the definition of clear milestones, and a sequence of process phases, gates, and stages (Alam and Perry, 2002). NSD can be done using a service blueprint approach, in order to create flexible flowchart-like models of customer- provider interaction flows (Tung and Yuan, 2011). Despite the many existing models, NSD has been criticized as being an ad hoc process associated with improvization (Edvardsson et al., 2013). In successful NSD, a firm should have formalized processes, market orientation, a positioning strategy, and competent resources. The lack of strategic focus on NSD and development competencies causes the new service failure rate to be quite high (Alam and Perry, 2002). For decades already, researchers have discussed material, resource, and information flows in the case of supply chains (e.g. Simchi-Levi et al., 2002). The exact same challenge with competent cross-functional resources exists in cases of service supply chains, but the current literature lacks indications of the level of resources needed in the development.
Service supply chain Research in SCM is approached from different disciplines: logistics, purchasing, transportation, operations management, marketing, and R&D (Arlbjørn et al., 2011; Simchi-Levi et al., 2002). Service SCM can be seen as analogous to SCM, but for services. According to Arlbjørn et al. (2011), it is important to differentiate the tasks in service SCM, which can be achieved through different types of relationships with customers, as well as suppliers. The service supply chain is a wide concept that covers businesses dealing with things such as the supply of spare parts, third-party providers, finance, insurance, retail, and governmental services (Arlbjørn et al., 2011). Within the S-D logic, supply chains are viewed as value co-creation networks (Lusch, 2011). These networks promote knowledge growth (the fundamental source of competitive advantage) and exchange among network members, via resource deployment and coordination (Tokman and Beitelspacher, 2011). The exchange of knowledge and the utilization of operant resources among the network members leads to co-created service offerings and value proposals for the end-users, with the ultimate goal of transforming end-user experiences to perceptions of superior value-in-use (Tokman and Beitelspacher, 2011). The service supply chain differs from the traditional manufacturing supply chain because of the special IHIP characteristics of services (intangibility, heterogeneity, inseparability, and perishability) that must be considered (e.g. Kelly and Storey, 2000; Vilko and Ritala, 2013). Services cannot be put in stock, but should be produced and delivered at the same time. SMEs have limited resources because of their size, but they can be profitable with strong assets. SMEs might need to outsource service operations for tier one suppliers, because they lack their own resources. If a firm begins to outsource functions and use organizational components that lie outside the firm, the entire production system becomes increasingly modular (Bask et al., 2010).
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Typically, there has been a trend among western manufacturers to reduce the number of tier one suppliers and establish longer-term contracts with a select group of supplier partners, which decreases service supply chain complexity (Bask et al., 2010). SMEs in particular should put a lot of effort into partnerships, but should not create an over- complex service supply chain. The service operation model and operation processes should be defined according to the selected make-or-buy decision. Sharifi et al. (2013) have argued the meaning of agility for the SMEs and for streamlining the strategies for market, product-services, and the supply chain. The strategic configuration of offerings and network, in alignment with market and performance priorities, can lead to profitable growth (Sharifi et al., 2013).
From theory toward a proposed service supply chain framework NSD is a system of parts (including personnel, material and information flows, facilitating goods, and supporting information technology and physical facilities), which must work together to form a functioning service delivery process (Menor et al., 2002). Traditionally, the supply chain consists of the plan, source, make, deliver, and return processes, and profitable management of these processes is the company’s aim (Simchi-Levi et al., 2002). These same processes should also be managed in service supply chains, but in service business it is more challenging to manage both product and service processes at the same time.
We have given special attention to the service SCM processes when developing the proposed model. The generic service development process can be presented by the following steps:
(1) strategic level of the company: targets, guidelines;
(2) corporate environment: idea for services, customers, analysis of business environment;
(3) service offering design and development: service supply chain development; and
(4) implementation, testing, improvement.
When comparing the existing dominant NSD process models (see Table I), we are proposing a more detailed framework. Existing models focus on service processes, without the connection to the existing product offering. Our focus has been on manufacturing industries, where the existing value offering is a tangible product. The product itself creates a competitive advantage, but the services are an extension of the offerings, and also a differentiation from the competition. Our model was developed according to the findings from the literature (e.g. Donnelly et al., 1985; Scheuing and Johnson, 1989; Grönroos, 1990; Alam and Perry, 2002), and we performed practical testing and validation of the model with the case companies. Table I presents the differences between the proposed model and existing NSD models.
Research design The research design is presented below in two separate parts: first, the research methods are described; and second, the empirical case is presented.
Methods The purpose of the study is to develop a step-by-step method for manufacturing SMEs transforming into a service business. The qualitative case study research approach was chosen to gain both theoretical and empirical insight into this little-researched
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D on ne lly
et al .( 19 85 )
Sc he ui ng
an d
Jo hn
so n (1 98 9)
G rö nr oo s (1 99 0)
A la m
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(2 00 2)
P ro po se d m od el
St ra te gi c le ve l
St ra te gi c
gu id el in es
↓
St ra te gy
fo rm
ul at io n
↓ A na ly si s an d
va lu at io n of
cu st om
er be ne fi ts
↓
St ra te gi c pl an ni ng
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ge ne ra ti on
↓ Id ea
sc re en in g
↓ B us in es s an al ys is
↓
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pa ny
st ra te gy
↓ P ro du
ct s an d it s fe at ur es
↓
C or po ra te
en vi ro nm
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lo ra ti on
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↓
Id ea
ge ne ra ti on
↓ C om
pe ti ti on
an al ys is
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↓
C us to m er s, se gm
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↓ P ro du
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↓ T he
se rv ic e of fe ri ng
de ve lo pm
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pr eh en si ve
an al ys is
↓ Se rv ic e de si gn
↓
A na ly si s
↓ Se rv ic e de si gn
an d
pr oc es s de ve lo pm
en t
↓
Se rv ic e of fe ri ng
de ve lo pm
en t an d
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↓
Se rv ic e de si gn
an d
ev al ua ti on
↓ P er so nn
el tr ai ni ng
↓
P ro du
ct lif e- cy cl e se rv ic es
↓ Se rv ic e of fe ri ng
s an d m od ul es
↓ Se rv ic e or ga ni za ti on
an d pr oc es se s
↓ E ar ni ng
lo gi c, pr ic in g m od el s
↓ Se rv ic e sa le s an d m ar ke ti ng
↓ Im
pl em
en ta ti on
an d
te st in g
D ev el op m en t te st in g
↓ In tr od uc ti on
T es ti ng
↓ In tr od uc ti on
M ar ke t
C om
m un
ic at io n an d
fo llo w -u p
Se rv ic e te st an d pi lo t
ru n
↓ T es t m ar ke ti ng
↓ C om
m er ci al iz at io n
Se rv ic e la un
ch in g to
m ar ke ts
↓ F ol lo w -u p an d i m pr ov em
en ts
Table I. NSD process models
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topic (Yin, 2003). The case study form was seen to work in the research for discovering the causalities of the phenomenon ( Jensen and Rodgers, 2001; Yin, 2003).
The research is based on constructive case study research design (Yin, 2003), in which we have developed a new construct (step-by-step method) for service business development based on the theory from the literature, and tested the model on empirical case data. More specifically, we have used the literature findings, especially from the S-D logic approach, when trying to find service innovations within the case studies.
As the study includes the constructive model testing perspective as well as the empirical case data analysis perspectives, the role of the researcher was twofold. First, the role was as a facilitator of the research process, thus ensuring that each step of the process was carried out properly and assessing how the model worked in the case supply chains. Second, the purpose of researcher involvement was to gather the data from the process, and insights from the model and the expert group engaged for analysis of the supply chain NSD. The experience and insights of the business informants were considered essential in order to make in-depth sense of the phenomena (Eisenhardt, 1989). Furthermore, the use of key informants in an expert group analysis enabled greater depth and richer description (Voss et al., 2002). The expert group consisted of members both internal and external to the supply chain, including the researcher and practitioners in the field.
Because the result of the study is a development model, special attention should be given to the reliability and validity of the study (Yin, 2003). These were considered from both theoretical and empirical perspectives. In the development phase of the model, the theoretical foundation was made using a multidisciplinary approach, which enabled better consideration of the complex nature of the subject. For the empirical testing and data collection of the model, two different cases were chosen. The selection strategy of the case companies was made on the basis of maximizing the utility of the information. The information-oriented cases can be argued to have both extreme and critical natures, as the companies were doing quite well financially and as they had invested a lot in R&D (Flyvbjerg, 2011). These facts were considered to be important for the initial testing phase of the model, as it helped the researchers to gain both the necessary personnel to be involved in the development phase, and also better conceptual clarity from the engaged people as they had already been involved in R&D.
During the long and complex research process with two main goals, a number of procedures had to be followed in order to ensure the validity and credibility of the study. Following Creswell and Miller (2000), three perspectives were considered (researcher, study participant, and people external to the study) to establish validity and credibility. First, from the researcher’s perspective, validity was ensured by triangulating the data sources (theoretical and empirical, workshop and interview methods, as well as using informants and researchers with different backgrounds to ensure their relevance and know-how in different areas of NSD). At the beginning of the research process, researcher reflexivity was used in order to gain a wider perspective of the theoretical framework and the different aspects it holds. Second, from the study participants’ perspective, member checking was used by enabling the commenting and checking of the interview and workshop records for the informants and participants. Prolonged engagement in the study area ensured better understanding of the context of the participants’ views, while collaboration with the participants was used to incorporate the participants’ views and to enable review and comment on the research data, as well as further analysis of it. Finally, consideration of the perspective of people external to the study was given using peer debriefing, namely by revealing the study progress and results to the scientific community in conferences and publications.
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Empirical cases We had two empirical case studies in which we tested our developed step-by-step model. Both case companies were Finnish machine manufacturer SMEs, or in other words small- and medium-sized OEMs. Case 1 is a cooling and heating equipment manufacturer. Their customers are national and international construction companies and real-estate owners. Case 2 is manufacturer of wrapping machines. Typical customers are globally operating construction, tissue paper, and food industry companies. Both case companies used different sized companies as tier one suppliers of components, sub-systems, and services. Tier two suppliers are key suppliers to tier one suppliers, without supplying a product directly to the OEM. Business relationships and contracts are made between the OEM and tier one suppliers, and tier one suppliers manage relationships with tier two suppliers. The case companies’ strategic position is that OEMs give them more bargaining and managerial power toward tier one suppliers, even if tier one suppliers are global and large-sized companies. Both companies have sales in Finland, but more than 70 percent of turnover comes from exports. Both companies have a very strong financial position, which is a precondition for comprehensive and quite long-lasting development activity. The firms must be healthy and properly capitalized in order to be able to take advantage of any reasonable opportunities presented in the marketplace (Kim et al., 2008). Töyli et al. (2008) have found in their literature review that factors such as firm IT capability, internal and external collaboration, and supply chain integration improve firms’ financial performance. Our case companies have strong supply chain integration, information sharing, and IT supported processes internally and externally, which makes them competitive and profitable in the markets.
We defined teams for the core development areas. Teams were cross-functional and represented all the main business functions within the companies. We used semi-structured interviews at the beginning of the development, to get a big picture of the project aims, company strategy, and vision. We had both individual and group interviews. Most questions were open-ended. By using workshops, we developed the service business models for the case companies. The companies have implemented new service models, and we have analyzed how successful the development has been. During and after the interviews and workshops, several documents were created and consulted to enable triangulation: minutes of the meetings, proposals, progress reports, presentations about the step-by-step model, service process charts, marketing brochures, leaflets, and several communications between researchers, case companies, suppliers, and customers. The Table II defines the main figures from the case companies.
The value of this paper lies in the description of the method, which can help practitioners to develop service offerings and a service business model as a whole. The paper defines the required steps and necessary resources in the development of a service business.
Proposed service supply chain development framework The literature includes many NSD programs and models (e.g. Scheuing and Johnson, 1989; Kelly and Storey, 2000; Alam and Perry, 2002), but these methods are not described in such detail that SMEs can strictly follow them. A formalized process from strategy to implementation, with the usage of the best available resources, can ensure the success of the NSD program (Alam and Perry, 2002). Traditionally, strategies and strategic development activities are formulated by top management, but the key mechanism for overcoming resistance to change is to include employees and allow
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them to participate in the formulation (Löfving et al., 2013). Both individual and group participation help in achieving enthusiasm, understanding, and commitment. Existing development models include four main phases: strategic targets; corporate environment; service offering design and development; and implementation. We noticed the need for a detailed and simple, but comprehensive step-by-step model for the development of the service business and service supply chain. We have created a step-by-step model with service development phases (SDPs), to define the required steps in the service business development. Our model has the following steps (SDPs), which will be described in more detail in the following sections:
• SDP1 – company present state and strategy; • SDP2 – products and their features; • SDP3 – customers, segments, needs; • SDP4 – product life-cycle; • SDP5 – services along product life-cycle; • SDP6 – service offering, service modules; • SDP7 – service organization, service processes; • SDP8 – earning logic, service pricing models, service value; • SDP9 – service sales and marketing models; • SDP10 – service launch to markets; and • SDP11 – follow-up and improvements.
There is a strong link in the development phases to S-D logic foundational premises, in enhancing the understanding of customer, value creation, and marketing perspectives in service development (Vargo and Lusch, 2004).
SDP1 – company present state and strategy The development begins with an analysis of the company’s present state and its strategy (SDP1), which should be defined and agreed by the management board. Strategy is not always well described in SMEs. Usually the CEO knows the direction of company, but it is not discussed with or informed to others in the organization.
Product offerings Turnover Employees Workhops Involved employees Involved Positions
Case 1 Cooling and heating equipment
20M€ 50 26 11 CEO, CFO, CTO, ICT and Logistics Director, Sales Director, employees from IT, Production and Service departments
Case 2 Wrapping machines
30M€ 55 27 14 CEO, CTO, CFO, Production and Logistics Director, Sales Director, employees from R&D, IT, Production and Service departments
Table II. Empirical cases
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When formulating strategies for manufacturing SMEs, the involvement of different departments and information to employees is important in order to facilitate formulation as well as implementation (Löfving et al., 2013). Usually development frameworks assess managed communication, and only a few mentioned involvement of employees (Löfving et al., 2013). Alam and Perry (2002) have argued that there is a lack of strategic focus on service development and competencies. The strategy formulation in SMEs is unique; it bears little resemblance to the strategy process in larger organizations, and formal strategy formulation is rare (Löfving et al., 2013). We suggest that it depends on the customer case as to what kind of role a manufacturer can offer, and in that way the service strategy with each customer might be different. Gebauer et al. (2012) have argued that the main business driver for a service strategy should be: first, to satisfy the customer’s needs over time; second to achieve competitive advantages; and third to enhance financial performance. It is necessary to have open eyes, and critical and innovative discussion, when fixing company strategy. In our case studies, we had two strategy workshops with both companies, to crystallize service business targets.
SDP2 – products and their features Our model is focussed on manufacturing industries in which a company is willing to move from product-based business toward service business. Successful manufacturers provide their customers with solutions that make their life easier, and keep them informed of money-saving ideas and industry changes (Kim et al., 2008). Small manufacturers must focus on matching their product selection with current customer needs (Kim et al., 2008). The second step is the analysis of the product offering, its features and value in use, and the mechanisms for service provision (SDP2). Kim et al. (2008) have indicated that SMEs must have an explicit goal of the organization (strategy process in SDP1) and require ample product and management experience. The company must also produce products with a longer life-cycle, and must have an in-process inspection system to have quality control of products that are critical to consumer satisfaction (Kim et al., 2008). Our case companies have a long tradition in the industry sector, with over 20 years of experience in producing high-quality products in markets. Kowalkowski et al. (2013) have argued that manufacturing SMEs cannot enter the service market by serving the installed base, because SMEs usually sell through distributors, deliver through installers, and have limited access to their installed base. Successful manufacturing companies develop an intimate relationship with their customers and are more capable than larger firms of adjusting to customer preferences (Kim et al., 2008). SME manufacturers must use more effective channels of distribution in order to make the products available as customers want (Kim et al., 2008). Our case companies have a direct selling channel to customers, and all life-cycle services from installation to end-of-life can be offered, but the bigger issue is how to organize a global service offering with limited resources. The R&D function in the companies should be strongly involved in this phase. New technologies, features, and even production methods might be needed when moving toward service business. The R&D function should ensure that a product can be installed, maintained, and operated as planned. New technologies and embedded intelligence can support this target. Sensors, diagnostic tools, and human-machine interaction are today issues of which even SME machine manufacturers should be aware.
SDP3 – customers, segments, needs The next step is the creation of a service-centered view (Alam and Perry, 2002) through customer analysis, new customer segmentation according to the potential service
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customers, and existing customers for sold products (SDP3). Identifying key customers and customer groups through customer relationship management (CRM) is a key step in service SCM (Baltacioglu et al., 2007). The customers should be segmented in order to achieve a better overview of the markets. Determining the key customers or classifying customers according to their different characteristics leads to the development of partnering programs, and increases interaction between the focal company and its customer (Baltacioglu et al., 2007). Segmentation can be based on many methods. Location is the most important segmentation method when looking from a supply chain point of view. A company should be sure if it is capable of serving customers locally by themselves, or by using a supplier or service provider. Other frequently used segmentation methods are company size, customer relation, and profitability, for example. Kaski et al. (2011) have argued that the main challenges for SMEs seem to be in acquiring deep customer insight and designing a concrete service concept based on it. According Gligor and Holcomb (2014), logistics in demand-management interface capabilities enable firms to understand what customers need and enable them to deliver according to the customers’ expectations. Close collaboration with customers will help in understanding needs, but also in developing offerings to better fit customer needs. Customer involvement is suggested by results in important benefits, such as reduced cycle times, superior services, and user education (e.g. Alam and Perry, 2002), but also supports the innovativeness and success of NSD projects. We have used customer interviews to achieve a better understanding of requirements and deeper customer insight. Customers have told us what kinds of services they are willing to buy, and where their own competencies are insufficient.
SDP4 – product life-cycle The fourth step is the analysis and development of a product life-cycle model (SDP4). The product is the core of many G-D businesses, but in the S-D approach, goods deliver value in use for customers. As our focus is on machine manufacturing, the companies’ business is based on the machine itself, its functions, quality, and something unique to differentiate the company in the markets. These machines are made using a make-to- order methodology. Product life-cycle has a strong link to the service supply chain, in which the company must identify how and by whom they will serve customers, but also what kinds of suppliers they are using in supplying parts, in manufacturing, and in services. We look at the product life-cycle from the user (customer) perspective. Users typically have the following life-cycle stages for investment goods: purchasing, usage, and product disposal (Aurich et al., 2004). By taking a closer look at the mentioned life- cycle phases, a more detailed life-cycle can be found with the following phases: demand, investment, installation, usage, modernization, and end-of-life. On the other hand, the manufacturer should define their own view of the product life-cycle; see the different views in Figure 1.
Our idea is that the manufacturer should create service offerings for users so that the offerings fit all product life-cycle phases (engineering, production, usage, disposal), but create value for the product life-cycle from the user/customer’s point of view (purchasing, usage, disposal). All these aspects require service SCM: how and by whom to deliver product and services in the value chain.
SDP5 – services along the product life-cycle Services are developed to support the entire product life-cycle (SDP5). The innovation and management literature indicates that the development of a service product is
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different from the development of a tangible product because of the nature of services (Kelly and Storey, 2000). Gebauer et al. (2012) have classified offerings into product life- cycle services, on-site maintenance services, managed services, and consulting services/consultancy-led solutions, each of which can be further categorized. Oliva and Kallenberg (2003) have defined two main service categories: product-oriented services and end-user’s process-oriented services. Both categories were shared relationship- based and transaction-based services (Oliva and Kallenberg, 2003). We have merged different kinds of services under the same term of “product life-cycle services,” such as consulting services, installation services, maintenance services, and upgrading services. When the manufacturer’s business is based on the product, as in our case machines, the manufacturer typically knows the value of the product, how to install it, how to operate and maintain it, and finally how to dispose of it.
As the customer segmentation and more detailed customer requirement analysis have been done earlier, the idea phase can now be started. The company should have a clear view of what customers require, and from the strategy should select the company’s value chain role. After this, the selected main service offerings can be developed. Understanding the architecture of a physical product helps developers to partition the development work content, and also helps developers to understand the potential interactions between different parts (modules) of the product, which helps development managers to plan the coordination of different organizational functional groups and task teams associated with specific modules (Menor et al., 2002). We have developed services for two manufacturing companies as an extension of their offering. Consulting services included, for example, definition of a customer-specific solution, process consultation, and simulation of a selected design. Installation services can consist of factory acceptance tests already on the manufacturer’s site, customer on-site installation, set-ups, and training services. Maintenance services are supported for the longest duration during the product life-cycle, consisting of repairs, remote services, maintenance services, and information services about energy consumption, for example. Upgrading services include modernization services, relocation services, and end-of-life services. These mentioned product life-cycle services are just examples, but each company should create its own service offering to add value for the customer and fulfill the customer’s needs. Individual services can be packaged as a full offering for the customer.
Engineering
Product design
Service design
Product Purchasing
Product life cycle
Manufacturer’s view
User’s view
Mfg. = Manufacturing
UsageProduction
Product mfg.
Spare parts mfg.
Product Re-mfg.
Servicing
FinalizationExecutionPreparation
Product disposal
Product usage
Recycling Disposal
Source: Aurich et al. (2004)
Figure 1. Product life-cycle
from different views
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SDP6 – service offering, service modules Service offerings can be modular and packaged as service packages for the customer (SDP6). What makes a service innovative is often not the service per se, but the changing roles of customers, service providers, and partners in the value network (Witell and Löfgren, 2013). Today, customers are willing to outsource many non-core functions, like maintenance and repairs, so the customer and supplier are changing their roles in that function of the value chain. A service offering packaged in modules can provide full product life-cycle support for the customer. Then the customer can focus on their own core business and be sure that the machines are working as needed. For the machine manufacturer, service packages are a way to make them even stronger in the markets, with a fully covered product life-cycle with services. Usability services are today an example of a service package in which the supplier (machine manufacturer) is responsible for the agreed usability, by maintaining, controlling, and repairing the machine when needed, to ensure an operational level.
SDP7 – service organization, service processes The next step is the creation of a service organization for the company itself, or outsourcing a local service near the customer site (SDP7). Resources and processes are the fundamental source of competitive advantage, whether it is the company’s own or an outsourced resource, and resources create value as networks of networks (resource- integrators) (Baltacioglu et al., 2007). There are many views regarding how to organize service provision and whether manufacturing firms should integrate or separate their service and product business units (Kowalkowski et al., 2013). A firm can choose to sell and deliver a new service either through an in-house service organization (internal), external partners (external), or a combination of both (hybrid configuration) (Kowalkowski et al., 2013). It is easy to sell and deliver spare parts globally, but the maintenance operation and all services at the customer site are the most challenging part, especially for SME manufacturers. It is a question of resource management and service employee performance, whether it is an internal or external resource. Employee professionalism and performance are viewed by customers as important quality indicators, where the term “performance” includes technical, product knowledge and personal experience, education, and training competencies (Biehl et al., 2004). SMEs do not always have clear organization structures with clear responsibilities. Successful manufacturers should define employees’ roles within the processes, and provide clear job descriptions (Kim et al., 2008). If a company decides to have its own service organization, it needs investments and management. Outsourced resources are simple and, in many cases, the fastest way to create a local presence on global customer sites, but this requires a supplier selection process, negotiations, a contract, and continuous control after the service agreement.
SDP8 – earning logic, service pricing models, service value Next, earning logic and pricing models should be created for the services (SDP8). Earning logic, pricing models, and value creation are crucial parts of a business model. Since SMEs are known to have very limited financial resources and capabilities, they must have detailed and sophisticated financial planning in order to survive over a long time (Kim et al., 2008). Experienced manufacturers should be able to make products and services that function properly, at prices that consumers are willing to pay (Kim et al., 2008). Research by Witell and Löfgren (2013) presents different transition strategies that manufacturing firms use to change the business model from service for free to
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service for fee. Services create value for the customer, but the question is how much and what kind of value? It is a complicated task to decide how much customers are willing to pay for value-added services (Laine et al., 2004). A key issue for manufacturing firms is their ability to charge for services, and the introduction of new capabilities with enhanced offerings through a new value constellation into an ongoing business relationship, which changes the status and potential of the customer-provider relationship and can lead to a changed revenue model (Kowalkowski et al., 2013). Pricing should be in line with the service offering, quality of service, service competencies, and service organization. In this research, the case companies’ management had responsibility for this task, and our research contribution was not in this phase, but it is still one of the most important issues during development.
SDP9 – service sales and marketing models A movement from goods orientation to service orientation also requires new models for marketing and sales (SDP9). A product catalog and technical specification are easy to understand, and it is quite easy to sell concrete products. Because of the nature of services (intangibility, heterogeneity, inseparability, and perishability), it is not an easy task for traditional sales persons to market and sell services. The work done in the customer analysis phase (SDP3) supports this part of development. In our case studies, the marketing and sales functions were integrated in development teams at an early stage of the development, already from the strategy process (SDP1). Sales and marketing involvement in development is about taking part in the innovation process, to be trained in the service business and to create service knowledge. Too often, a new service fails because the firm’s personnel have not been properly trained to market and sell the services (Scheuing and Johnson, 1989).
CRM includes the processes that focus on the interface between the firm and its customers, seeks to create customer demand, and facilitates the placement and management of orders (Baltacioglu et al., 2007). Manufacturing SMEs do not always have a formal CRM, but independent sales and marketing functions. In our case studies, we made formalized processes for sales and marketing functions. A function with a plan, coordination, and effective management ensures a better end result. We made service sales and marketing strategies, implementation plans, and clear organizational structures for the case companies. If a company has some close and long-term customers, it is advised to launch test marketing, have customer meetings, and test how to sell services alongside the product (e.g. Scheuing and Johnson, 1989). In many cases, the customer interface (the person in charge) is different in product and service purchasing. For example, the production manager might be in charge of buying production machines, but the maintenance manager might be responsible for repairing and maintaining production assets. CRM should include an analysis of the correct interface in the customer base. Managers should be proactive in developing long-term relationships with customers, and should take care of their feedback for existing services, but also for new services (Alam and Perry, 2002). In service industries, CRM is a critical function, due to extensive human involvement in the delivery phase, not only sales and marketing (Baltacioglu et al., 2007).
SDP10 – service launch to markets After all the parts mentioned above are completed, the company should launch its service offering on the market (SDP10). Many NSD models include the service launch in the commercialization phase (e.g. Scheuing and Johnson, 1989; Alam and Perry, 2002).
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In this part, the company really gets feedback, creates knowledge, and finally succeeds or fails in the service business. The launch should be easy if plans, development, and tests are done with formal processes, with ensured quality and using trained employees.
SDP11 – follow-up and improvements According to feedback and experiences, the service offerings should be updated and improved (SDP11). In manufacturing industries, there is continuous pressure from customers, competitors, and shareholders, and successful companies should always be awake and continuously improve their offerings and processes (Gebauer et al., 2012). In the follow-up, it is important to get feedback from customers and to learn from the feedback. In a service business, customers are co-creators of value, but customers can also take part in the co-development and updating of service offerings (Maglio and Spohrer, 2013). There are three quality components that service managers can focus on to improve service quality: functional quality (how the service is delivered), technical quality (the quality of service that is actually delivered), and service environment quality (the environment in which the service is provided) (Tokman and Beitelspacher, 2011).
Summary of the proposed model With the presented step-by-step SDPs, an entire business model can be changed from goods orientation to a service business. We have used this step-by-step method with two cases in Finland. Both projects took two years, with tens of person-months of working time in the companies. The time scale sets the limits for when the project should end and defines the plan of what to do (Löfving et al., 2013). There should also be clearly defined objectives and expectations for the development process, which were also included in our framework. The following section analyses in more detail the resource allocation and the achieved results.
Results and discussion From an academic perspective, it is important to understand the service business phenomenon and the success of service business in manufacturing firms. From the practitioners’ point of view, it is, however, more interesting to understand how to develop service business, after the strategic decisions and the firm’s positioning in its value chain.
Manufacturing firms have become increasingly interested in creating value by delivering added services to their customers, for example by supplying spare parts, installing equipment, training employees, or performing maintenance (Kowalkowski et al., 2013). The purpose of G-D logic is to make and distribute units of output, preferably in tangible form (i.e. goods). Goods are embedded with utility (value) during manufacturing, and the goal is to maximize profit through the efficient production and distribution of goods. According to S-D logic theory, a service is the process of using one’s competencies for the benefit of some other party, or in other words, a service is the application of knowledge and skills (Vargo and Lusch, 2004). SMEs lack the necessary resources (staff, competencies, facilities, and finances) and capability to manage processes, drive negotiations, and absorb technology and knowledge, which contributes to firms missing the opportunity to provide the products and services that customers expect (Kowalkowski et al., 2013; Sharifi et al., 2013). New service providers, collaboration partners, and even customers are needed, when moving to a service business. All business functions should be informed and involved during the development (Löfving et al., 2013).
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Supply chain perspectives in service business development Our proposed model is developed and tested within the machine manufacturing industry, and especially OEM SMEs with their own products. SMEs require descriptive, easy-to-use, and simple development frameworks. Large companies might have difficulties in getting all the required functions to take part in the development program (Löfving et al., 2013). However, SMEs are usually flexible, simple in terms of organizational structure, fast in decision making, and have close collaboration with supply chain partners. By developing internal processes, the idea is to improve on what they do best, become self-sufficient, and keep the internal resources that make them successful within the organization (Tokman et al., 2013). The proposed NSD model takes these factors into account, and can therefore be considered suitable especially for SMEs. Due to contextual factors, such as organizational culture, management culture, and political issues, large companies may have other requirements, which lead to the choice of other development frameworks. With the proposed model, the whole business model will be changed from product orientation to service orientation. When the model is more detailed, it takes care of more business processes and focus areas than existing models. Our proposed model includes customer co-development and customers as co-creators of value, which are today widely discussed in innovation, marketing, and service science literature (e.g. Maglio and Spohrer, 2013; Tokman and Beitelspacher, 2011). Customers are taken care of in all parts of the development, starting from segmentation and requirements, but also in the sales, delivery, and operation support processes. Successful manufacturing companies develop an intimate relationship with their customers, and are more capable than larger firms of adjusting to customer preferences (Kim et al., 2008). On the other hand, the supplier side of the service supply chain is taken care of when organizing service processes. The model takes care of the make-or-by decision in the case of service process realization, or in the other words, resource allocation is planned and coordinated within the model. We have calculated the resource allocation in more detail in the case studies, to get an overview of how the resources are committed in different SDPs (see Tables III and IV).
Even though the strategy process is often said to be the most critical for the success of companies, in our service development model, SDP1 – company present state and strategy had an SDP impact of 14 in Case 1 and 16 in Case 2. According to our analysis, the strategies are set by a limited number of persons within the SME cases, so the overall resource allocation is not big. However, SDP1 set the target and plan for the entire service development process, and in that way, it is one of most important phases.
We found that technology and ICT have an impact on how the service provider and customer interact with each other, so new kinds of collaboration methods and operation models are needed in a technology-based service offering. Management of information and technology is critical to service supply chains, as the success of the key functions in the chain, such as demand management, capacity management, CRM, SRM, and order process management, are dependent on an effective flow of information (Baltacioglu et al., 2007). ICT department involvement was greatest in SDP2 – products and their features, with an impact of 4 in both cases. We had five workshops in Case 1 and six workshops in Case 2 for the development of product features and the definition of life-cycle phases with both case companies. Additionally, the R&D function had internal meetings about new technologies, at which the researchers were not present. At all SDP2 workshops, production, ICT, and R&D functions were present, which means about 30 percent of overall impact. In Case 2, SDP2 was the most important part, and most of the resources were used there (31 percent of overall resource allocation).
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Table III. SDP resource allocation and impact (Case 1)
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Table IV. SDP resource allocation and
impact (Case 2)
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In both cases, R&D used more resources than other departments in SDP2, with an impact of 8 in Case 1 and an impact of 6 in Case 2. We argue that the reason for this is the product-based business. Despite moving toward services, the product itself should be further developed to ensure service opportunities. For more detail, see Tables III and IV for resource allocation.
The customer base is the most important issue for companies, as without customers there is no business. The customer, segment, and requirement analysis (SDP3) included two workshops in Case 1 and three workshops in Case 2, and in addition the researcher held selected customer interviews to deepen customer understanding. Customer segmentation was a challenging task in Case 2 (SDP impact 14.4 percent), because of more spread in the customer base globally. It was hard to find the correct customer segmentation method in Case 2, and finally SPD3 was the third most affected phase during the development. The customer segments were created by interviewing sales personnel, and in the development workshops with other business functions. Although the customer base is crucial for business, the typical customer base for a machine manufacturer SME is limited. Our case companies provide tailor-made solutions, not mass production, which means they have tens or hundreds of customers, whereas larger companies might have thousands of customers. Customer segmentation is easier with limited industrial sectors and a limited customer base. Our findings show that customer segmentation (SDP3) is important, but it did not take so many resources to develop.
The product life-cycle model, life-cycle services, and service modules were together really large tasks with a great impact on the overall projects. NSD models provided valuable insights for development, but the service offering is always a case-specific task. Even though our cases were both machine manufacturers, the developed offerings were totally different. First of all, the product life-cycle is usually different, according to the selected value chain role. For example, assembly or installation is not always needed in the machine manufacturing industries. Some machines are like “plug and play,” but sometimes it is necessary to spend many days on the customer site for the installation and set-up of the machines.
Looking at the resource allocation in all related functions, most resources were used in the sales, ICT, service, and R&D functions. The resources used in these functions contributed 76 percent of the overall resource allocation with an impact of 74 percent in Case 1, and an overall resources allocation of 75 percent with an impact of 71 percent in Case 2. Marketing and sales departments are surprisingly the most innovative contributors in the idea phase, and lower levels of contributions come from the operations, customer service, and information technology departments (Kelly and Storey, 2000). We found in the case studies that sales persons have many innovative ideas on how to serve customers and what kinds of service offerings might be interesting for them. The sales function impact was greatest in SDP9 in Case 1 (impact 8), which was jointly the most important impact on the entire development, alongside the R&D function contribution in SDP2. In our cases, IT departments were quite active, because they had the best knowledge of existing ICT solutions, embedded technologies, and operation support systems. Organizations increasingly rely on their information technology capabilities as a source of competitiveness; they develop IT-enabled service supply chain capabilities that are firm-specific and hard to copy across organizations (Mellat-Parast and Spillan, 2014). IT was also involved in most SDPs, because the case companies’ business is based on products, and ICT can create value-adding services. The same is true of the R&D function, because the product should be updated and designed for services. More detailed resource allocations can be seen in Tables III and IV.
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Managerial implications The case studies ran for more than two years each. Overall resource allocation in the workshops that the researchers organized was over seven person-months in Case 1 and almost nine person-months in Case 2. Additionally, both companies had a resource allocation of more than 50 person-months for service business development during the two-year project. In Finland, usually one employee’s working time is 10.5 person-months per year. That means a 525 person-month annual resource for a firm of 50 employees. Tables III and IV show the used resource allocation in SPDs. The investment in service business development requires around 5 percent resource allocation from the annual available person-months. Each phase of the proposed model consists of several brainstorming sessions, benchmarking, learning, workshops, and tens of person-months to realize the service business in practice. Comprehensive service business development should be aligned with competent resources and also the reason that investments are needed. Competent resources mean the establishment of cross-functional teams (Alam and Perry, 2002).
The most challenging part of the development is technology and the product itself, which is quite surprising. There were many people involved in product development, because they introduced new sensors, ICT, and structures to the final product. These developed features created new opportunities for services, so these were made in close collaboration with the service developers. Today, machines are extremely complex structures, with more and more embedded intelligence. Technological innovations are an opportunity for machine manufacturers’ service offerings. Customers are not capable, in many cases, of installing, maintaining, or even operating the machines without support from the machine manufacturer. Bullinger et al. (2003) have argued that information technology support in service development is crucial for success. In a perfect world, engineers would always maintain and repair products from their current location, without ever incurring the costs spent on physical travel (Biehl et al., 2004).
The service organization, processes, and earning logic workshops were follow-up meetings. Most of the work was done before and after the workshops: in meetings, negotiations, contracts, and so on. Earning logic was the development phase in which the researchers did not have a specific role; it is more related to the topic of business management.
We created new models for managing customers, because moving from product sales to service sales requires a new interface for customers, and also a new approach. This part of the development took two workshops in both cases. We had one workshop about the service launch and one workshop where we defined a measurement and follow-up method for service processes.
A more generic empirical finding was that some of the existing models have a go/kill process part, so at each phase, the company can end the development (Alam and Perry, 2002). Our model is based on a strategic decision within the company management. If management decides to create a service business program, it will not be stopped. There might be delays or really time-consuming phases, but the program should be run to the end. There should also be clearly defined objectives and expectations of the development process, and the time scale sets the limits of when the project should end, and defines the plan on what to do (Löfving et al., 2013). In summary, managers using SDPs in development should reserve resources, as indicated in Tables III and IV, but most of the resources were used outside workshops, in internal meetings within the case companies. Workshops were organized by the researchers, and companies had their own resource allocation outside the workshops. For example, companies used
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resources in the development of product features between organized workshops. The tables show the number of workshops, the number of persons from each function involved in individual SDP, and the last column is resource allocation. Resource allocation is calculated as the number of workshops multiplied by the number of involved persons. Resource allocation is in person-days, as all workshops were approximately one day in duration.
It was valuable for case companies to have a structured and formal process for the development. Companies with limited resources need external consultants (or researchers) to support the development process. The knowledge created during the projects helped organizations to move toward service business. Our framework creates understanding for managers about resource allocation within different phases of development. For example, the impact of customer segmentation (SDP3) resource allocation and activity was quite different in both cases. This means that, in every case, managers should allocate enough resources, and our framework gives an overview of the amount of required resources and the impact of each development phase during the development process.
Conclusions The focus of this research was to increase the understanding of service business development in supply chains by examining the process of NSD in the machine manufacturing industry, and the role and resources of different business functions during the development. The study contributes to both theory and practice, and the findings are of considerable value to scholars and practitioners in the field.
Theoretical implications The theoretical findings contribute to the further development of existing NSD process models, especially taking care of the service supply chain point of view. According to our model, it is easier to set up a service development program with clear tasks and necessary resources. Services have a strong link to existing machine offerings, as the installed base, but also to new sales. For machine industries, services can be seen as a value-adding offering. Our proposed model gives special attention to product life-cycle development, which will become the basis of service business success for machine manufacturers. Second, our model has phases for service organization and sales development. Process development and service organization development are not typically included in NSD models. We argue that the service supply chain is one of the key elements for success in global service business, so companies should put great effort into partnerships or their own service organization development. Customers wanting long-term partnerships with small manufacturers are interested in getting quality products at reasonable prices, but for these small firms to accomplish this goal, they must generally be run by experienced managers with well-trained and motivated employees (Kim et al., 2008).
Practical implications Practical contributions of the study illustrate what kinds of resources are needed and what kinds of steps should be taken during development. Practitioners using our SDP step-by-step model could have better insight into the resources needed and the required steps, when aiming for service business model innovation. For successful NSD, project managers should involve all business functions and competent resources from the organization. The process should start with a strategic discussion of whether the firm’s
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future is based only on the product offerings, or whether there should be a services offering. We hope the most successful machine manufacturing SMEs in the future will be the ones that have used our proposed service development model. The model also creates knowledge about the impact of different organization functions on service development. When setting up a development project, sales, ICT, and R&D functions should be heavily involved. These functions have core knowledge and ideas required in the development of service business in machine manufacturing firms.
Limitations and suggestions for further research There are some limitations to the study. This research was conducted on machine manufacturing industries and with two Finnish SMEs. Still there is a question: is this proposed model appropriate for all machine manufacturing SMEs? To really understand the suitability of development frameworks in SMEs, more case studies are needed to test and evaluate the use of frameworks in practice (Löfving et al., 2013). There are no estimations or experiences of how the proposed model will fit into a different business environment. Service science emphasizes the customers’ role in service innovation and production, and the foundational premise of S-D logic states that the customer is always a co-producer and that value is always co-created (Vargo and Lusch, 2004). Thus, further studies should be conducted in organizational networks, with closer collaboration with suppliers and co-development with customers. Our model does not have a specific test launch or test marketing in the commercialization phase, which is included in some other NSD models (e.g. Scheuing and Johnson, 1989; Alam and Perry, 2002). In our model, customer feedback is collected already in the development phase, and services are tested before launch on the markets. In the future, research is suggested to study how co-development and testing before commercialization impact on the success of service business.
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Corresponding author Jukka Hemilä can be contacted at: [email protected]
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