Academia and industry use several different terms for business solutions. ... companies new technical solutions gave incentive to offer functional sales since the ...
TRITA-MMK 2003:13 ISSN 1400-1179 ISRN KTH/MMK/R—03/13—SE
Environmental and Developmental Perspectives of Functional Sales
Gunilla Ölundh
MMK Stockholm 2003
Licentiate Thesis Division of Integrated Product Development Department of Machine Design Royal Institute of Technology S-100 44 STOCKHOLM, SWEDEN
Environmental and Developmental Perspectives of Functional Sales Licentiate Thesis TRITA-MMK 2003:13 ISSN 1400-1179 ISRN KTH/MMK/R-03/13-SE © Gunilla Ölundh 2003 Department of Machine Design Royal Institute of Technology S-100 44 Stockholm Universitetsservice US AB, Stockholm 2000 II
Key words: ecodesign, integrated product development, environmental product development, product service systems, eco-efficient services, functional sales
Abstract Developing business strategies that create value for customers and have the potential to lower environmental impacts is considered to be a key factor for industrialized societies to lower their environmental impact. The theme of this thesis has been to explore functional sales from an environmental and developmental perspective. Of particular interest in this regard was to explore how the concern for the environment has been taken into consideration while developing functional sales, and whether or not functional sales could be used as an instrument for achieving environmental benefits. The research has been conducted by empirical studies in six Swedish companies in the manufacturing sector, having product development and service development in special focus. The data collection method has mainly been qualitative interviews. Academia and industry use several different terms for business solutions. This confusion could lead to difficulties in understanding each other. From an environmental perspective it is important to focus on what incentives to lower environmental impact different business strategies give rise to. For the companies in the performed research the incentives for lowering environmental impact, stemming from functional sales, affected the whole lifecycle of the product. Reuse, refurbishment and upgrading of products were performed in several companies. Several companies in the study had a strong focus on lowering the lifecycle cost for the customer and claimed that by internalizing costs the already existing strategy for the companies was strengthened. The environmental impact of the use phase was lowered by optimizing the engineering solution or customer business. A new situation affecting product design is that the product becomes less price sensitive, which could lead to that more effort is put in product development to lower the total lifecycle cost. Environmental tools were used in product development but usually not when developing services or functional sales offers. Most companies in the study added services to their traditional technology. For some companies new technical solutions gave incentive to offer functional sales since the new technology was more expensive per operation but lowered the lifecycle cost. When developing functional sales offers, the complexity in the development process increases. Functional sales development could benefit from the following points: • • • •
Incorporating skills and expertise from all the parties involved throughout the product’s lifecycle into product development. Developing partnerships for providing solutions to fulfill the desired functions. Developing the organization to handle for example financing, service and endof-life considerations, and incorporating a service culture into the company. Formalizing the development process.
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Acknowledgements Conducting research and writing this thesis has been both a scientific journey and an emotional journey, which both have had its up and down periods. These journeys would not have been possible without support and inspiration from other people. Firstly I would like to express my appreciation to my advisors; Sofia Ritzén for inspiration and support during the whole research process. During the final stages of writing this thesis she gave birth to a lovely son, but has still found time and energy to give valuable contributions to the thesis by reading and discussing my work., and my professor Margareta Norell, for giving me the possibility to conduct this research and for providing insights to the area of integrated product development. I would also like to express my gratitude to the people at Atlas Copco AB, Duroc Rail, ITT Flygt, Proton Caretec, Scania and Swepac, for taking time to share their thoughts with me in interviews. A special thanks goes to the contact persons at each company who took the time to read the thesis, comment and confirm the result concerning their company. I would also like to acknowledge Naturvårdverket (Swedish Environmental Protection Agency) for financial support. My colleuges at the division of Integrated Product Development have been a great support both in providing a pleasant working environment and giving contributions to the research. Special thanks goes to Mattias Lindahl for valued discussions and insights to the research area of functional sales and to Annika Zika-Viktorsson and Per Sundström for fruitful discussions on research methodology. I would also like to thank Anne-Marie Åkermark for appreciated lunch walks, keeping body and mind in shape and Gunilla Sivard for interesting discussions on functional sales. A thesis cannot be written without having a functioning computer. My appreciations go to Peter Reuterås and Payam Madjidi, who have given me computer support whenever the computer refused to act normally. The support from my nearest and dearest in life is highly appreciated. Eva, Lena and Sussie are the ones that I guess have heard more about functional sales and research life than they really wanted to and also the ones that I have relaxed and have had a lot of fun with. I would like to express especially warm appreciation to my parents Eva and Lars, and to my brother, Gunnar, for always believing in me, inspiring me, and supporting me, in life and in my work. Finally, I would like to express my appreciation to Kim for being my partner in life. Gunilla Ölundh, Stockholm, April 2003
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Contents Abstract.....................................................................................................................III Acknowledgements ................................................................................................... V Contents .................................................................................................................. VII PART I : PURPOSE AND THEORETICAL FOUNDATIONS ...............................1 1 Introduction ........................................................................................................1 1.1 Research area and purpose .............................................................................2 1.1.1 Purpose ...................................................................................................3 1.1.2 Core research questions ..........................................................................3 1.2 Thesis structure...............................................................................................4 2 Explanation of key terms used in the thesis .......................................................5 3 Functional sales and services from an environmental perspective.....................7 3.1 Functional economy .......................................................................................7 3.2 Various classifications and degrees of services..............................................8 3.2.1 Functional sales ......................................................................................8 3.2.2 Eco-efficient services ...........................................................................10 3.2.3 Product Service Systems ......................................................................13 3.2.4 Satisfaction delivery systems................................................................15 3.3 The environmental potential of functional sales...........................................16 3.3.1 Producer responsibility.........................................................................17 3.3.2 Environmental strategies for companies ..............................................18 3.3.3 Reaching environmental benefits by offering functional sales ............19 3.3.4 Obstacles to achieving environmental benefits when offering FS .......22 4 Development of products, services and combined solutions............................25 4.1 Product development models .......................................................................25 4.2 New service development.............................................................................26 4.3 Differences between product and service development ...............................27 4.4 Developing functional sales—a combination of services and products .......28 4.5 Addressing environmental concern while developing functional sales........30 4.5.1 Development methods taking environmental concerns in account ......31 PART II : RESEARCH METHODS ........................................................................35 5 Research process...............................................................................................35 5.1 Empirical research ........................................................................................35 5.2 Qualitative interviews...................................................................................37 PART III: RESULTS FROM THE EMPIRICAL RESEARCH ..............................39 6 Brief presentation of the companies .................................................................39 7 Result presentation ...........................................................................................43 7.1 The sale alternatives (RQ 1) .........................................................................43 7.1.1 Differences between products ..............................................................48 7.1.2 Main findings RQ 1 ..............................................................................49 7.2 Driving forces and obstacles for offering functional sales (RQ 2)...............49 7.2.1 Driving forces for providers .................................................................50 VII
7.2.2 Driving forces for customers, according to the providers’ …………….respondents ..........................................................................................52 7.2.3 Obstacles to offering functional sales for the providers .......................53 7.2.4 Main findings RQ 2 ..............................................................................55 7.3 Development of products and services (RQ3)..............................................56 7.3.1 Development of services ......................................................................56 7.3.2 Complexity in development of offers...................................................57 7.3.3 Changes of the product design .............................................................59 7.3.4 Organizational aspects..........................................................................61 7.3.5 Main findings RQ 3 ..............................................................................63 7.4 Environmental aspects (RQ 4 & 5) ..............................................................65 7.4.1 Environmental activities within the companies....................................65 7.4.2 Environmental effects due to offering functional sales ........................68 7.4.3 Public procurement and environmental requirements ..........................71 7.4.4 Handling products at the end of their lifecycles ...................................71 7.4.5 Main findings RQ 4 & 5 .......................................................................72 Part IV: DISCUSSION AND CONCLUSIONS ......................................................75 8 Discussion.........................................................................................................75 8.1 Sales alternatives ..........................................................................................75 8.1.1 Eco-efficient services or product service systems? ..............................78 8.2 Development of functional sales ..................................................................78 8.2.1 Complexity in development process increases.....................................79 8.2.2 Obstacles to becoming functional sales providers................................81 8.3 Environmental aspects of functional sales....................................................81 8.3.1 Business strategies that create incentives for lowering environmental ……………impact ...................................................................................................82 8.3.2 Environmental considerations in developing functional sales .............83 8.3.3 Environmental benefits of offering functional sales.............................84 8.3.4 Does offering functional sales change product design? .......................86 8.4 Developing FS taking environmental considerations...................................88 9 Conclusions ......................................................................................................91 9.1 Generalisation...............................................................................................92 10 Future research .................................................................................................93 11 References ........................................................................................................95
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PART I :
PURPOSE AND THEORETICAL FOUNDATIONS In part I the research area is outlined and the purpose and the core research questions are described. The theoretical foundation is divided into two main sections; environmental perspective of functional sales and developmental perspective of products, services and functional sales.
1 Introduction Industrialized societies face an ever increasing need to move towards sustainability. Companies in these societies play an important role as they provide members of their respective societies with products. The level of activities that companies perform in order to lower their negative environmental impacts has been growing over the past 30 years. Early environmental activities consisted mainly of pollution management. Laws setting the permissible limits of harmful substances were a driving force in early pollution control. Subsequent steps taken to lower environmental impacts have included implementing environmental management systems to analyze the environmental impacts of companies and the environmental challenges facing them, as well as for finding ways to deal with them. For some companies, it is the use of their products that causes most of the environmental impacts during product lifetime. Laws have also been put in place for controlling pollution resulting from the use of these products, and therefore driving the development of technology forward. Market demands are also doing this in some product categories. Eco-design has developed over the past few decades, and many companies now use eco-design methodologies in their product development. As a lot of effort has already been invested into pollution control, more and more attention is now being focused on the actual usage of products, along with consumption patterns and consumer behaviour. For example, at the United Nations Conference on Environment and Development (UNCED) in 1992, it was stated that: The major cause of the continued deterioration of the global environment is the unsustainable pattern of consumption and production, particularly in industrialized countries and that, changing consumer behavior is essential for realizing a more sustainable society. (Agenda 21, 1994)
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One way of changing production, product usage and consumption patterns is to create business solutions that present a different relationship to the consumer than that offered by the traditional sale of products. When undergoing a transition from the traditional selling of products to selling an increasing content of services in sales offers, the relationship with consumers changes. The responsibilities companies have for their products also change as product responsibility increases. Eco-efficient services (EES), product-service systems (PSS) and functional sales (FS) are all examples of business strategies developed to increase the service content in sales offers made to consumers, which also increase the product responsibility of the companies involved. There is an ongoing discussion amongst researchers and policy makers in this field, about what role the business strategies FS, EES and PSS play in solving the complicated issue of meeting ever increasing demands for reducing negative environmental impacts, while also achieving economic growth. Some researchers claim that these business systems have the potential to de-link economic growth from the consumption of natural resources. Compared with pollution control, eco-design or environmental management systems, using these business concepts as corporate environmental strategies would affect business strategies and decisions in a more substantial way. This also opens the way to considering environmental issues in earlier phases of the development of products and services.
1.1 Research area and purpose Research into the development of new business concepts through increasing the service content in sales shows the potential for achieving environmental benefits, but that these are not always realized. Research shows that: • • •
potential exists for de-linking corporate economic profit from consumption of natural resources (see for example Goedkoop et al., 1999); environmental benefits are not an automatic consequence of increased service content in sales offers made by manufacturing companies (see for example Mont, 2001); and increased service content by way of leasing was not developed for environmental reasons, however environmental benefits could be achieved because closing company material loops was economically beneficial and product design was changed (Fishbein et al., 2000).
Whether environmental benefits are achieved or not could partly depend on how FS is viewed and managed in industry. Increasing the service content in sales and offering FS to customers can be viewed from two perspectives: (a) as a business strategy, and (b) as an environmental strategy. When FS is used by companies as a business strategy, the intent is to focus on creating value for the customer by focusing on fulfilling customers’ functionality requirements or desires, rather than on providing them with products. The ownership of the products
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used to fulfill the customers’ needs is therefore not transferred to the customers, and price setting is based on value rather than cost. The environmental interest in FS is based mainly on two new situations for companies. The first situation is where the ownership of the product used to fulfill customer needs is not transferred to the customers or users. This can create economic incentives for shared use of these products, their reuse, refurbishment and remanufacturing, and thereby closing material loops in material systems. This could generate new designs of products. The second situation is where the focus on fulfilling a need opens up innovative ways of solving customer needs by finding solutions that are less material-intensive than previous ones. Previous empirical research has looked at examples of FS solutions in various companies and described and analyzed these from different aspects—such as environmental, economic and organizational (see for example Goedkoop et al., 1999; Zaring (ed), 2001; White et al., 1999; Cooper and Evans, 2000; and Mont, 2001). There is however a need for gaining deeper knowledge about how FS could trigger reduced environmental impacts. Baumann and co-researchers concluded that there was little research conducted into the eco-design area that covered the broader context of product development (Baumann et al., 2002). They also saw product development as being closely linked to the business strategy of a specific company and stated that research ought to also have this perspective.
1.1.1
Purpose
In this thesis FS is studied which is a business strategy closely linked to product development. The main purpose of this thesis has been to explore FS activities in manufacturing companies, and how these have affected product development. Of particular interest in this regard is exploring how their concern for the environment has been taken into consideration while developing FS, and whether or not FS could be used as an instrument for achieving environmental benefits.
1.1.2
Core research questions
The following core research questions were posed in order to formally structure the exploration of the purpose of the thesis. In order to explore what FS means to the companies investigated, and the sales offers that they made to their customers, the following core research question (RQ 1) was posed: RQ 1. What does FS mean in the companies investigated? The underlying forces driving companies toward developing FS were considered important to the exploration of the role environmental considerations played during FS development. Obstacles to development were also interesting, as they illustrate the
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difficulties companies encountered in their efforts to expand their FS offers. This has been formalized in RQ 2 below. RQ 2. What are the driving forces and obstacles to offering FS? Product development was central to this study. Exploring how product development was affected by, and possibly even changed by developing FS offers, the following RQ was posed: RQ 3. How is product development affected by offering FS? The actual environmental considerations taken into account in FS development were also deemed to be of special interest to the investigation. In order to study whether the FS offers were evaluated from an environmental perspective and used as an environmental strategy, the following RQ was posed: RQ 4. What environmental considerations have been taken into account when developing services and products included in FS offers? It was also considered to be of particular interest to ascertain whether or not respondents from the investigated companies perceived that environmental improvements had been achieved. RQ 5. Have the companies investigated achieved environmental improvements by offering FS, and if so, what were those improvements?
1.2
Thesis structure
This thesis has been organized into four main parts. Part I presents an introduction, the purpose of the study, the core research questions and the theoretical foundations. The theoretical foundations cover FS from an environmental perspective, and product and service development theory. Part II describes the research approach adopted for conducting this research. Part III presents the results of the empirical research. A summary of the main findings can be found at the end of each respective section of this part of the thesis. Each section is linked to a specific core research question. Part IV presents a discussion about the main findings along with the conclusions drawn from the research findings. The discussion is also linked to the core research questions.
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2 Explanation of key terms used in the thesis Some of the key terms used in this thesis have the same or similar meanings – central concepts as FS, EES and PSS are described in section 3.2. When referring to the work of other researchers, their respective use of these terms has been adopted. The term product is sometimes used in the literature for both goods and services. However in this these, products refers exclusively to physical products or goods sold, but not services. The concept of product-service systems would for example become confusing otherwise. The term FS or Functional Sales is central in this thesis. FS has been used by the author, as it was perceived to be used by several key operators in industry to refer to offers made to their consumers, which included both goods and services and attracted payment that was connected with fulfilling a consumer need. The term FS can be misleading, but has become fairly widely used, and is therefore used in this thesis. “Sales of Functions” could arguably been better to use to capture the underlying meaning of the whole concept. This refers to what is actually being sold to the consumer rather than implying that the sale is functional. To specify what a function is, was not considered relevant here, as it is the consumer who defines the desired function or need that the provider is attempting to fulfill. The payment for FS is directly related to fulfilling customer needs, and these needs can be specified in different ways. Payment is related to something that is measurable, and the price is related to factors such as, for example: the number of times something is performed, the length of time a function is provided, or the number of kilometers a function is provided. Hence, what the function actually is, is negotiated and agreed on by the parties involved.
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3 Functional sales and services from an environmental perspective Interest shown in the FS concept is mainly as a business strategy and an environmental strategy. For most companies, FS is used as a business strategy, but the concept has been gaining much more attention in recent years for its potential as an environmental strategy. As a business strategy, FS relates to new ways of differentiating products, especially in mature markets, as well as where there is a need to find new ways of making profits. Increased competition and customer demands make including services very appealing. The concepts Factor 4 and Factor 10 were developed in the 1990s by researchers at the Wuppertal Institute in Germany. The background to these concepts was that the industrialized countries use such a disproportionately large amount of the Earth’s total natural resources, that it would cause massive global environmental problems if all the countries of the World were to use the Earth’s natural resources to the same degree. In order to reach globally sustainable development, industrialized countries need to lower their consumption of energy and natural resources (www.environ.se, Oct. 2000). It is therefore necessary to increase the efficiency in the way resources are used; or as described by 4Sight (led by The National Center for Business and Sustainability, Biffaward and Co-operative bank, UK ) www.4sight.org.uk/ (Feb. 2003), “If resource productivity were increased by a factor of four, the world would enjoy twice the wealth that is currently available whilst simultaneously halving the stress that is placed on our natural environment”. Factor 10 is a concept signifying that we have to become 10 times more efficient in the way we use material and energy just to maintain the standard of welfare we enjoy today—in other words, to achieve a sustainable society. Research into developing EES and PPS is to a large extent performed by researchers with an environmental focus, such as eco-design researchers. One reason for the growing interest in business solutions is the increasing opinion that Western societies need to move towards functional economies, and in order to create these, there is a need for increasing the level of service in sales offers made to society, including sales by manufacturing companies. The objective is to find and develop business systems that are sustainable, by increasing the degree of service included in the sales offered to customers, through what is referred to as EES. The whole product-based system needs to change, and the product needs to be designed in new ways in order to achieve the expected environmental and economical benefits.
3.1 Functional economy That companies sell services, functions or performance could be seen as one of the components in a functional economy (Stahel, 1997) or a function-based society (Dalhammar et al., 2002). A functional economy is defined by Stahel (1997) as “one that optimizes the use (or function) of goods and services and thus the management of existing wealth (goods, knowledge, and nature)”. The economic success then arises 7
from good husbandry and stewardship, and not from mass production. Stahel states that a functional society will however, “not make the manufacturing sector disappear”. Dalhammar et al. (2002) also argue that functional thinking on its own is not enough to enable a society to achieve sustainability. They do however see that it could contribute to incentives to producers for closing material loops in a way that would lower the environmental impact of the entire product lifecycle, and can help consumers become more aware of the environmental impacts of consumption. In Dalhammar et al. (2002), the actual existence of a functional society is debated and it was claimed that we are on the way to becoming an emotional-society, but also that we have a functional society and always have had, and that the real question is about seeking satisfaction in new ways.
3.2 Various classifications and degrees of services A wide variety of classifications and terms are used in research covering the shift from selling products to selling services. There is unfortunately no standard way in which these terms are used, and consequently it is easy to become confused by all the different terms used in the literature covering this field. Some of these concepts are based on empirical data and real business cases, and have resulted in a number of categories of services. Other concepts have been developed addressing how business strategies could or should be designed to achieve environmental and economic benefits from selling services or performance instead of products. FS for example stems from a business strategy perspective, based on creating value for customers by differentiating products, whereas EES and PSS stem from the notion of business strategies with lower negative environmental impacts than those they replace. Some of these central terms and concepts have been reviewed in this section.
3.2.1
Functional sales
FS has a strong focus on fulfilling customer needs and creating value. The traditional focus is shifted from the goods to the functions that the customer desires. Abrahamsson and Eriksson (1997) provided an example of a company that usually produced office equipment, shifting from selling goods to supplying a good office environment. Fulfilling the contract can involve the client companies’ using their own “goods” as components, as well as creating new partnerships to satisfy client need. A more complex product can be created that is designed for individual customers. Abrahamsson and Eriksson see a clear opening for market diversification and differentiation, as the concept is service oriented (ibid). When goods are offered for sale it is often clear what the purchase includes, but when selling a function it becomes more complex, and a more formal contract needs to be established. There is for example a shift in the ownership of the goods to be used, and the provider’s responsibility becomes more long term. The structure is more formal, and includes contracts regulating what the sales offer includes, and the requirements that the provider should fulfill. Price setting is based on the value created for the customer, as opposed to the value of the goods sold to fulfill a need (see Table 1).
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Table 1 Differences between sales offers of goods and functions (Abrahamsson and Eriksson, 1997).
Ownership Responsibility Structure Price setting
Goods Buy Short term Informal Cost based
Functions Rent Long term Formal Value based
The emergence of this concept has been market driven, focusing on: (a) increasing value-creation by offering services, and (b) on customer need. Rapid technical development especially in the IT-sector is seen as a driving force behind FS. One reason for this is that it has been difficult for customers to continuously keep up to date with, and to be able to afford the best and latest technology, which they may have to do in order to remain competitive. This is seen as a problem for both the providing company and for the consumer. When offering FS, the providing company is able to deliver new solutions to the consumers, and the consumer can avoid making large investments in new products. In the publication Teknisk Framsyn (IVA, 2000), FS is described as a vision for placing the function in focus rather than the product. A broad definition is used, including maintenance and service agreements associated with products to agreements where the provider owns the product and gets paid for its usage by the customer. Dalhammar et al. (2002) concluded that FS could help contribute to a functional economy as it could affect the ownership at the end of product lifetimes. Retaining ownership could help closing material loops. This could also increase the probability of product reuse. The upgrading and re-usage of products is seen as one way of lowering the need for constantly buying completely new products. Stahel (2001) have highlighted some differences between selling products and performance (see in Table 2). Important differences between selling products and performance include changes in what is sold, what the provider is liable for, shifts in payment, and shifts in property rights. In this thesis business concept called FS are closely linked to the factors presented by Stahel (2001) and Abrahamsson and Eriksson (1997). That means business concepts that effects what object is sold, the seller liability, payment and price setting as well as the property rights of the product used. Important is that both the property rights and liability of the product used remains with the provider. To create value for the customer by fulfilling the customer need by focus on the functions that the customer desires rather than the product is in focus.
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Table 2 Selling products versus selling performance (after Stahel, 2001).
Sale of product
Sale of performance
Object of sale
The object of sale is a product.
The object of sale is performance, and customer satisfaction is the result.
Seller liability
The seller is liable for the manufacturing quality.
The seller is liable for the quality of the performance.
Payment
Payment is due for and at the time of transfer of property rights.
Payment is due pro rata if and when the performance is delivered.
Property rights
Property rights and liability are transferred to the buyer.
Property rights and liability remain with the provider.
From environmental and consumption perspectives, it is important to be clear about the differences between how the contract with the customer is to be fulfilled and how the provider fulfills the contract using products and services (Lindahl and Ölundh, 2001). Contract between the customer and the provider: the consumer’s focus is on the function delivered, along with whatever else the contract with the provider includes. This contract can include items that the customer perceives as being purely for service, such as voice mail. The way the provider company fulfills the contract: in order to fulfill a function defined by the contract, the provider still needs goods, for example computers, telephone switches, exchanges and wiring.
3.2.2
Eco-efficient services
The goal of EES is to achieve greater eco-efficiency using new business solutions including service provision. The EES concept is built around the eco-efficiency concept that includes creating value for customers and reducing negative environmental impacts. What EES is differs according to the definition used, although reducing negative environmental impacts and satisfying customer needs are common to all of these. Actions taken to increase eco-efficiency focus on increasing energy and resource efficiency. Criticism has been directed towards how companies use increased ecoefficiency as an environmental strategy, when these companies fail to take responsibility for their product consumption patterns, environmental impact beyond those governed by their own internal policies, and the manufacture of their products. For example Mont (2001) argued that the concept needs to be complemented with other approaches that deal with changes in consumption patterns.
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Eco-efficiency is defined by the World Business Council for Sustainable Development (WBCSD) as follows: “Eco-efficiency is reached by the delivery of competitively priced goods and services that satisfy human needs and bring quality of life, while progressively reducing ecological impacts and resource intensity throughout the life-cycle, to a level in line with the earth’s capacity” (WBCSD, 1998). According to the Wuppertal institute, eco-efficiency is: “the answer of enterprises to the question how sustainability can be achieved within the enterprise” (http://www.oekoeffizienz.de/english/content/oekoeffizienz/index.html, Mars 2003). The Wuppertal institutue has a very positive view of what companies can accomplish through having an eco-efficiency approach to doing business. Economic and ecological interests are considered to be combined (ibid): “Eco-efficiency is a management concept that allows enterprises [to achieve] a more profitable organization of their production processes and products; a reduction of ecological impacts is a positive side-effect in this development. The concept of ecoefficiency shows clearly that economy and ecology do not exclude each other but, on the contrary, that a combination represents a benefit for the enterprises and society. The motto is: to create more values whilst using less resources and thus minimize ecological impacts.” “Five elements are considered to define the eco-efficiency concept: 1 an emphasis on services, 2 a new perspective on human needs and life style quality, 3 inclusion of the complete lifecycle of a product, 4 acknowledgement of limits to ecosystem capacities, and 5 continuous further development of the concept” (ibid). Meijkamp (2001) suggested that EES could lead to environmentally friendlier solutions, using the following definition of EES: “Eco-efficient services are all kinds of commercial market offers aimed at fulfilling customer needs by selling the utilization of a product (system) instead of providing just the hardware for these needs. Eco-efficient Services are services, related to any kind of hardware, of which some of the properties rights are kept by the supplier.” The focus in this definition is on offering value by selling the utilization of products. The following definition of EES used by Zaring (2001) is broader and includes direct and indirect activities by the provider that help reduce environmental impacts. Also
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included in this definition are consultancy activities that help to reduce the environmental impact caused by the customer: “An eco-efficient producer service is one which improves the eco-efficiency of customer activities. This can be done directly (by replacing an alternative product-service mix) or indirectly (by influencing customer activities to become more eco-efficient.” Categorization of eco-efficient services As shown above, EES can be viewed from several perspectives, and numerous attempts have been made to categorize different types of services into different categories of EES. In all types of services, some kind of material is needed, either directly or indirectly. Services and products are used to fulfill customer needs. The relation between the service content needed and the material content needed for fulfilling customer needs varies. There are different kinds of EES and a number of authors have used the categorization presented in Table 3 below. Table 3 Categorization of eco-efficient services.
Increased responsibility for the provider of the product and to fulfill customer need
Service type
Description of service
Product-life extension services (Meijkamp, 2001).
Increasing the useful life of products or materials by maintenance, repair, reuse and recycling.
Product-orientation services (Hockerts, 1998).
Increasing the useful life of products or materials by maintenance, repair, reuse and recycling. Plus helping customers to optimize the application of a product through training and consulting.
Product-use services or shared utilization services (Meijkamp, 2001
Increasing utilization by sharing of products.
Use-oriented services (Hockerts, 1998).
Selling the use of a product. Vehicle leasing and car-pooling are examples.
Result services (Meijkamp, 2001;
Selling a result instead of a product; for example, selling clean clothes instead of a washing machine.
Need-oriented services (Hockerts, 1998).
Satisfying customers regardless of the material product, where the provider guarantees a certain result.
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These services range from offering maintenance and recycling, through offering leasing or sharing of products, to taking the full responsibility for fulfilling a function, regardless of the products used - when the result is what is being offered. FS fits into the EES categories, as the price setting is value based and the ownership is not transferred to the user in the EES - such as in selling a result and utilization of products. FS as a business strategy was not however originally developed with a focus on reducing negative environmental impacts.
3.2.3
Product Service Systems
Mont and Lindhqvist (2002) have claimed that functional thinking is important but that FS is a specific solution that should not be considered as a goal in itself. The most important thing is to minimize the negative environmental impacts from the total lifecycle. Function-based solutions need to be environmentally and economically beneficial, and consist of combinations of products and services. Mont and Lindhqvist promoted PSS as a more environmentally-focused concept. They also stated that PSS is an interplay between consumers, industry and the financial sector. According to Mont (2001), PSS is defined as follows: “A system of products, services, supporting networks and infrastructure that is designed to be competitive, satisfy customer needs and have lower environmental impact than traditional business models.” The idea is to have a holistic view and create a system of products and services that fulfills the customer’s needs efficiently from an economic and environmental point of view. The challenge is to develop system solutions rather than focusing on increasing the service content of the solution (see Figure 1). Design of products and services Resource extraction
Design
Communication Sales techniques Sales contracts Alternative services
Alternatives End of current of product use use Use phase management management
Sale/use contract
Manufacturing
Use
End of current product use
Refurbishment Remanufacture Technological and design upgrading
Buy back or take back system
Consumer feedback Service and repair
Recycling Figure 1 Schematic representation of the main PSS elements at a company level (from Mont, 2001).
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In PSS, it is important to recognize that the focus is on the whole product and service system - from product development through to customer use and the management of used products. The infrastructure and supportive networks are of great importance as they often involve major changes when a provider wants to fulfill customer needs in new ways. PSS is a concept that adopts a holistic perspective, including all parts of the product chain. Figure 2 below, presents a schematic representation of the elements of PSS at a company level. Networks and infrastructure are also linked to this as shown in the figure.
Networks
Service companies
Advertising
Consumer research
Comminication consultants
Design agencies
Recycling stations
Environmental consultancy Incenirators Technologies
Collection points Take back systems
Shradders Infrastructure
Figure 2 Schematic representation of a PSS (from Mont, 2001).
According to Mont (2002), PSS contains the following main elements: 1. products, services or combinations of them, 2. services offered at the point of sale including financial services and customer training in product usage, 3. product use concepts such as use or result-orientation, 4. maintenance services for extending product life, and 5. revalorization services for closing material loops by taking back products, reusing and recycling materials. These are similar to FS and EES (product-life extension services, usage services and result services), though there is a stronger focus on closing material loops, and the consideration of the infrastructure and those parties connected to the product throughout the whole product lifecycle.
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3.2.4
Satisfaction delivery systems
Ehrenfeld and Brezet (2001) concluded that system innovation is often suggested to be the innovation category that leads to solutions with the least environmental impacts, and that environmental improvements are linked to successive stages of innovation type as seen in Figure 3.
Sustainable Index
System Innovation
Function Innovation
Product Redesign
Product/Process Improvement Time
Figure 3 Environmental benefits achieved through different types of innovation (as discussed by Ehrenfeld & Brezet, 2001).
Ehrenfeld and Brezet (2001) claimed that products and services are just different modes for delivering satisfaction, and that it is not whether a service or a product is delivered that is important, but the changes in device concept, the changes of institutional or infrastructural context, and the change in consumer practices that are important for determining the effectiveness of promoting sustainability (see Table 4). Table 4 Characteristics that define innovative categories (after Brezet & Ehrenfelt, 2001).
Change in device Change in concept infrastructure None Process and product None to minor redesign None to minor Functional innovation Significant
Change in user learning None Minor
Institutional innovation
None to minor
Significant
Significant
System innovation
Significant
Significant
Significant
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Ehrenfeld and Brezet (2001) argue that much attention has been focused on the naturalistic side of sustainable products and services, and suggested that more attention needs to be paid to the humanistic dimension. They claimed that there has been too much focus placed on increasing the content of service in sales offers to customers. They also state that people seek satisfaction using different means, which can be fulfilled by services or products. It is finding sustainable satisfaction delivery systems that should be in focus, and not whether or not we should produce services or products per se. Providing consumers with services, presents the consumer with a risk for “unlearning”, and in order to be satisfied the consumer keeps seeking satisfaction, maybe by consuming. Ehrenfeld and Brezet (2001) conducted an analysis of different types of innovative categories, and the influence these had on devices used, infrastructure, and change in consumer behavior (see Table 4). They introduced the concept of institutional innovation, and claimed that most cases of product-based services fit into this category; which is also pointed out by Hockerts (2001). In process and product redesign, the design maintains its basic characters and performance modes. In functional innovation, the product used for fulfilling a function is replaced with a new one that has different characteristics. Institutional innovation mostly affects the infrastructure and the use of the product. System innovation occurs when large changes are made to the product as well as to infrastructure and consumer behavior.
3.3
The environmental potential of functional sales
Most studies done in the FS, PSS and EES area do not quantify potential or actual change of environmental impacts occurring when fulfilling a function with a combination of services and products. The types of environmental benefits that can be achieved are usually defined in the phase of the product lifecycle that the benefits can be expected. As quantification is not undertaken it is difficult to estimate the degree to which these effects change the environmental impacts. Meijkamp (2000) did however quantify the environmental effects of introducing a car-pooling system by comparing the environmental impacts before and after introducing the system. Factors such as production type, number of products and changed consumer behavior were analyzed. Meijkamp (2000) concluded that a reduction in environmental impact was made but not in the order of Factor 4 or Factor 10. Goedkoop et al. (1999) claimed that with an attractive economic value of a PSS, the potential exists for unlinking environmental pressure from economic growth. A number of authors have discussed the potential for de-linking economic growth from the use of natural resources when providers offer services instead of products. Meijkamp (2001) questioned whether EES helped to disconnect economic growth from growth in environmental effects. Heiskinen et al. (2001) and Meijkamp (2001) do not see this delinking as strong enough to predict significant reduction in absolute natural resource use, and definitely not by a factor of 10. Reiskin et al. (2000) described one example where a new relationship to the customer can change the link between resource use and economic profit (see Figure 4). This example concerns chemical management services, where the supplier takes over 16
chemical management from the chemical user and therefore becomes a service provider. In the traditional relationship, the supplier benefits from the volume of chemicals sold, but in the new relationship the service provider benefits from using a smaller amount of chemicals as the costs for the chemicals are internalized. The authors highlighted though, that this is an opportunity and not a guaranty for environmental benefits (ibid). Traditional Relationship Supplier
Conflicting incentives
Service provider
Buyer
Material products Wants to increase
Servicizing Relationship Aligned incentives
Buyer
Value of services through products
Wants to decrease
Wants to increase
Wants to increase
Figure 4 Different relationships between provider and buyer in sales activities of a more traditional or product-based type (left) and a service-based type (right), (after Reiskin et al, 2000).
3.3.1
Producer responsibility
A central issue in most of the concepts mentioned previously is the matter of ownership of the product used. Shifting ownership from the user to the provider is seen as one of the most important factors for creating incentives that could lead to lowered environmental impacts. For Mont (2001), retained ownership by the provider is one way of creating incentives for closing material loops. Hopkinson and James (2001) suggested that it is more valid to discuss who is responsible for the product. They pointed out that a provider can be responsible for a product without owning it. They cited a case with single-use cameras, where the provider promised to take the cameras back after use. In other cases, companies own assets but delegate the responsibility for these to others—for example to facility management companies. According to the Swedish Environmental Protection Agency (EPA), the Law of Producer Responsibility (adopted by Sweden, January 1, 1994), has been drafted with the long term objective of encouraging more environmentally-conscious product design (www.naturvardverket.se Feb. 2003). In other words, products that require fewer resources are easier to recycle and do not contain environmentally harmful substances. This law applies to some industries—such as managers or producers of waste paper, packaging, tires, electronics and automobiles (< 3500 kg) . In these cases, the provider does not usually retain ownership of the products, but the responsibility for the end-oflifecycle handling of the products. According to White et al. (1999), the changes seen in industry with the increased content of service in sales offers made to customers is driving the extension in producer responsibility. The potential exists for creating economic incentives that lead to extended producer responsibility. The responsibility for the product increases to cover more of the product lifecycle with service offers than in traditional product sales.
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3.3.2
Environmental strategies for companies
Eco-efficiency and dematerialization are the most common environmental strategies mentioned in the literature discussing how to achieve environmental benefits by offering services or functions (see for example, Hekkert 2001); Dobers & Wolff, 1999; Heiskanen et al., 2001). Eco-efficiency, dematerialization and eco-effectiveness have been summarized below in Table 5. Table 5 Summary of the literature definitions of eco-efficiency, dematerialization and eco-effectiveness.
Strategy Eco-efficiency
Implications for companies “Doing things right”; increasing materials and energy efficiency; reducing environmental impacts per functional unit.
Dematerialization
Replacing of products with services (see www.miljorapporten.se, Dec. 2002); focusing on lowering material and energy inputs; one way to increase material and energy efficiency.
Eco-effectiveness
“Doing the right thing”; an absolute measure for lowering total environmental impact; alternative fulfillment of function improves the total environmental impact.
Ehrenfeld and Brezet (2001) have pointed out that there are differences between ecoefficiency and dematerialization. The main difference they stated was that ecoefficiency is a relative measure, and provides grounds for “doing more for less”; which could lead to just doing the same thing but a little more efficiently. Dematerialization is an absolute measure for lowering the content of material. Dobers and Wolff (1999) suggested that dematerialization focuses on the input side of material and energy-use compared with eco-efficiency that focuses on the output side of material and energyuse. Focusing on input orientation has the effect that a company avoids introducing material into the societal loop by reducing the overall amount of materials and energy used. Important here too is the difference between eco-effectiveness and eco-efficiency. According to Jacobsen and Stören (1999), eco-effectiveness is reducing the total negative impacts on the environment by fulfilling costumer need or demand using an alternative fulfillment of the function. In comparison, eco-efficiency is improving the environmental performance of a product through the selection of low-impact material usage, and reduced waste pollution per functional unit of a product during its lifecycle. As discussed above, business strategies featuring increased service contents and lowered environmental impact are often referred to as EES in literature, and linked to the eco-efficiency concept. Dematerialization is also often used as a business strategy,
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and for companies offering FS, all three strategies can be applicable depending on the FS solutions chosen by the provider.
3.3.3
Reaching environmental benefits by offering functional sales
Hekkert et al. (2001) presented a model of different types of improvement measurements that can be used to evaluate different business solutions (see Figure 5). The model is based on the various phases of a product’s lifecycle. Environmental benefits can be achieved by considering: (a) the product’s lifecycle and working with environmental improvements from design considerations, (b) ways to fulfill customer needs, (c) optimizing the function, and (d) adopting efficient waste management. Finding alternative ways of fulfilling customer needs with solutions that feature reduced environmental impacts and increased service content over previous solutions is central to both EES and FS. Life cycle of materials Resource extraction
Raw material production
Improvement measures Increasing process efficienies
Material recycling Increasing process efficiences Material substitution
Product manufacturing
Sustainable product design Increasing process efficiencies
Product use
Service fulfillment
Discarding products
Product re-use Optimization of product demand
Alternative service fulfillment
Efficient waste management
Figure 5 Improvement measures that can be taken in different lifecycle stages of materials and products, for achieving more efficient material use (after Hekkert et al., 2001).
Mont (2001) pointed out the increased potential for reuse, refurbishment, upgrading of products and recycling of materials. Closing material loops are central, and management in the usage-phase is also an important area. The goals above are very similar to the goals of Producer Responsibility Law, however the focus on lowering the amount of environmental harm is not clearly expressed for 19
EES and PSS. The focus is mainly on more efficient material and energy use, and handling. White et al. (1999) produced the model presented in Table 6, that shows reductions in environmental impact made possible by offering product-based services instead of traditional selling. The precondition that must be fulfilled in order to achieve these reductions has also been specified. The following three situations have been pointed out where the manufacturer receives incentives to potentially reduce lifecycle environmental impacts when increasing the service content in offers made to customers: • • •
when internalizing the use or disposal cost, when the product has economic value at the end of its life when the product provision is a cost rather than a profit center.
The environmental impact is divided into use-related and non-use-related impacts. The use-related impacts are linked to the number of “service units” delivered, and to the efficiency of the products used. Non-use-related impacts are linked to the numbers of products produced. Meijkamp (2000) as well as Zaring (2001) have pointed out that customer behavior is an important factor to investigate when studying the environmental effects of services. Changed customer behavior could lead to increased as well as to reduced environmental impact. Zaring also pointed out that the environmental effects of EES are generated by material and human scale-effects at the supplying firm, and by behavioral changes in the consumer. Material-scale effects include for example the efficient use of products (for example launderettes) or the use of the latest technology. Human-scale effects are due to specialist knowledge within the provider organization, resulting in smart solutions. The positive type of environmental impact can be caused by optimization of processes and product usage, by closing material loops, dematerialization—substituting products by information and communication technologies—and also by consultation, information and financial services.
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Table 6 Possible reductions in environmental impacts derived from servicizing (after White et al., 1999).
Source of impact reductions Via product design.
Use Impacts
Via increased turnover.
Via optimizing operation of the existing product (maintenance, training, process efficiency).
Via reductions in the number or volume of product manufactured.
Source of impact reductions Use-related environmental costs are internalized, and these costs may be reduced by improving the design of the product. Servicizing drives more rapid turnover of product stock in use, combined with progressive efficiency improvements in consecutive model years. • Usage-related environmental costs are internalized, and these costs may be reduced by more optimal operation. • Where the product is a cost center rather than a profit center, and more optimal operation extends product life/reduces product consumed. The product is a cost center rather than a profit center, providing incentives for any of the following:
Non-Use Impacts
• • •
more durable products, products with larger service capacity, via the reduction of economies of scale, and more efficient utilization of the products in use.
Via reductions in the number or volume of products manufactured.
The product has economic value at the end of its life, or where end-of-life costs are internalized; in either case this stimulates reclamation activities.
Via improved environmental performance of non-usage processes (esp. disposal impacts, and reclamation activities).
The product has economic value at the end of its life, or where end-of-life costs are internalized; in either case this stimulates reclamation activities.
It is interesting that Fishbein et al. (2000) claimed that the environmental impact linked to having a leasing program did not depend on the driving forces for initiating the leasing program. Xerox, IBM and Dell are all examples of where leasing has not been adopted for environmental reasons, but has become a driving force for environmental product management. All three of these companies initiated design programs focusing on design for the environment, in which end-of-life considerations played a great part in the design of new products. Dell started a “cradle to cradle” design philosophy in 1996, 21
resulting in modular design for easy upgradeability, disassembly and reuse. Xerox developed a design for the environment program in 1991 for taking end-of-life and material-recovery considerations into account in product design. Xerox has succeeded in closing loops and in designing their products for reuse, remanufacturing and recycling. One important factor is that they provided an infrastructure to support a takeback system, and a steady and predictable flow of used machines. IBM also initiated an ECP (environmentally conscious product) program in 1991 to improve recyclability, upgradeability and use of recycled materials (ibid). The forces driving take-back systems and changed product design in these cases were considerable, but that is not always the case. For example Lissinger (2000) stated that in the case of Volvo Penta, forces driving remanufacturing and take-back systems were not considered strong enough to drive changes in product design, production and handling of used products. Potential improvements were instead seen as related to reducing environmental impacts in the usage phase of the product. Fishbein et al. (2000) claimed that leasing has been used as a tool for achieving environmental benefits in companies like Electrolux and Interface. At Electrolux, FS originated from a strategic, environment-oriented planning exercise, adopted to identify strategic business opportunities (see White et al., 1999; Strannegård, 1998). Jacobsson (2000) stated that mature products have a greater potential for being successfully remanufactured to a condition that will gain market acceptability. The remanufacturability of products with less mature technologies and design cycles can be improved by adopting either or a combination of upgrading or shortening lifecycles.
3.3.4
Obstacles to achieving environmental benefits when offering FS
Points can be made to counter claims that environmental benefits can be achieved through offering FS, and there are also concerns for rebound effects, (negative environmental effects). One rebound effect of leasing is for example that more people can afford to use a product. Meijkamp (2001) claims that EES is not aimed at influencing the volume of consumption or the number of units of services. Changes in consumer behaviour leading to benefits in the amount of environmental impacts are seen as accidental and not a general effect of EES. EES is very context specific, and the change in environmental impact varies from case to case. One obstacle to the success of FS business strategies is that business solutions are dependent on the context they operate in. Dobers and Wolff (1999) stated that dematerialization solutions are only possible where the arrangement in social and economic institutional environments change. They claimed that company change needed to be addressed in both contemporary and historical development contexts. For example, market-related institutions and political regulations affect contexts. McAloone (2000) also commented that sustainable-design approaches may be dependent on aspects beyond integrating environmentally-conscious design. Societal and cultural aspects are for example also involved.
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Product-life extension services Hekkert et al. (2001) raised three points countering the achievement of environmental benefits through employing product-life extension services: 1. The reuse of products and their component parts is limited, while the recycling of material is more widespread. As high-tech products are often used in product-life-extension services, rapid technology development limits the possibility of reusing components. Hekkert et al. (2001) concluded that in most cases, it is only material recycling that is achieved, and not the desirable reuse of products and parts. This point was partly based on the work of Stevels (1999), who stated that recycling of television sets really equates to the recycling of the materials. Rapid technical development limits the potential for reuse of components or parts. 2. Take-back systems often require long transportation distances. This is also partly based on the work by Stevels (1999), who argued that responsibility for the take-back logistics should stay with local authorities for both environmental and economic reasons. Local authorities already have experience in the collection and management of waste, and the infrastructure required for doing so. 3. Rapid replacement of products may occur. Hekkert et al. (2000) argued that product life-extension services could lead to more rapid replacement of older machines with newer ones to provide the customer with the latest technology. However this is seen as positive in some cases, such as where the newer products are more energy efficient than the replaced products. Nonetheless, there needs to be a significant improvement in energy efficiency to counter the environmental impacts of producing new machines. Product use services The main point Hekkert et al. (2000) raised to counter the view that FS achieves environmental benefits through for example product use services—such as the shared use of products like carpooling—is the fact that consumer behavior needs to be changed. Changing consumer habits is difficult, and ownership of for example a car is directly related to emotions and status. They only expected these kinds of systems to become successful in niche markets. As Meijkamp (2001) stated, emotional values associated with product use cannot be neglected in most domains of consumption. This aspect is however more important when dealing with private consumers than with business-to-business relationships. Cooper and Evans (2000) also pointed out that ‘eco-leasing’ needs to be distinguished from traditional leasing in at least two ways. Firstly, there should be no option of final purchase of the product so that the responsibility for the product always stays with the provider. Secondly, there needs to be a close relationship between producer and customer for repair and service requirements. 23
Dalhammar et al. (2002) claimed that because operational leasing is an established concept in companies, and because the environmental considerations came in later on, it is difficult to show the environmental side of leasing, because the environmental measurements were never performed. Result services Companies that offer result (oriented) services often have an outsourcing relationship with their customers. The provider adds knowledge and can be more effective at the service than the customer. Hekkert et al. (2001) only expected incremental environmental improvements from adopting result services. This is because these services stimulate good “housekeeping”, such as the reduction of production losses and the inclusion of other efficiency measures during the consumption stage. Innovation is focused on organizational and legal aspects rather than technical ones.
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4 Development of products, services and combined solutions In order to understand the nature of product development and how it is performed in the companies studied, a selection of product development models, along with new service development, the development of combinations of products and services, and how to integrate environmental concern into the development of combinations of products and services have been discussed here.
4.1 Product development models According to Ulrich and Eppinger (1995), product development is defined as: “the set of activities beginning with the perception of a market opportunity and ending with in the production, sale, and delivery of a product”. In the manufacturing industry it is common for at least larger companies to have structured product development processes, and many companies use stage-gate processes (Johansson, 2000). A stage-gate model is divided into activity phases, within which work is performed with the goal of developing a product. Located between the activity phases are important decision points or “gates” (Cooper, 1988). At these decision points, it is decided whether or not the development of the product should proceed. For example, the process starts with a generation and screening of ideas phase in order to develop design concepts. The concepts are then investigated and a “go or no go” decision is taken before developing each product. Ulrich and Eppinger (1995) stated that a well defined product development model helps assure the quality of products, and facilitate the coordinating of product development, the planning of product development, the managing and identifying of possible problem areas, and the identifying of improvement areas through careful documentation. Their generic model included all the development phases from the mission statement— including a target group, business goals and a basic functional description of the product—through to the product launch. They divided product development into the following phases: planning, concept development, system-level design, detailed design, testing and refinement, and production ramp-up. During these phases, marketing, manufacturing and design work proceeds in parallel, so there is a need for strong integration between different functions of the development teams. The need for strong integration in the development work was raised early on by Andreasen and Hein (1987), who proposed the concept of integrated product development. Figure 6 below was used by them in their work to illustrate how the aspects associated with marketing and selling the product, designing the product and producing the product are closely linked to each other.
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The Need
0 Recognition of need phase
Determining the basic need
User investigation
Market investigation
Determining the type of product
Product principle design
Consideration of product type
Determining type of production
1 Investigation of need phase
2 Product principle phase
Preparation for sales
Sales
Preliminary product design
Modification for manufacture
Product adaption
Determining production principle
Preparation for production
Production
3 Product design phase
4 Production preparation phase
5 Execution phase
Figure 6 The integrated product development process (after Andreasen & Hein, 1987).
In integrated product development, it is important that activities due to different aspects (marketing, design, production) are carried out in parallel. The integration of procedures and methods is necessary for achieving the common goal. This is not the same as integrating departments or functions, but rather finding integrated ways of working. There is also a need to integrate parties with different skills and expertise, and those from different levels into the product development process—such as project leaders and project team members. It should also be pointed out that the development process is an iterative and not a straightforward process, as the illustration above may give the impression of. Norell (1992) also claimed that successful integration of different parties involved in product development was dependent on the following underlying factors: the work procedures, support tools and methods, and effective information management. Norell (1999) stated that multi-functional teams provided a basis for integrated product development.
4.2 New service development According to John and Storey (1998), new service development (NSD) is the development of service products new to the supplier. In general, service companies do not have formal processes for the development of services in the same way that manufacturing companies have structured models for their product development (Edvardsson, Gustavsson, Johnson & Sandén, 2000). Edvardsson et al. (ibid) stated that the following three parts need to be considered in service design: (1) the service concept, (2) the service system and (3) the service process. The service concept includes the offers made to customers and the needs that are fulfilled by the services. The service system includes resources and infrastructure enabling delivery of the service, and the service process involves activities undertaken to realize and deliver the service. They also suggested that the work should involve integrated teams encompassing several areas of skills and expertise, such as for example sales people and technicians. The three systems can be developed in parallel. The design 26
of the service is just one phase of the service development process proposed by Edvardsson et al. (2000) presented in Figure 7 below.
Service The Service Service Idea Strategy & Design Generation Culture Gate
Service Policy Deployment & Implementation
Figure 7 Model of the service development process in context (modified after Edvardsson et al., 2000).
The process starts with a service-idea-generation phase, in which ideas are formulated and evaluated. Before going on to service design, there is a need to evaluate the ideas so they are in line with company strategy and culture. The last phase includes implementing the service into the service system, through for example internal and external marketing and training. According to Edvardsson et al. (2000), understanding customer needs is vital. Having a service strategy and culture in line with the customers’ values and perceptions is important for forming a foundation to support the realization of the service.
4.3 Differences between product and service development In the opinion of Boden & Miles (2000), the service and manufacturing sectors are moving increasingly closer to one another. Both sectors are acquiring some of the characteristics that have been peculiar to the other. They saw the distinction between the manufacturing industry and the service industry becoming less important than the degree of services and products that are needed to fulfill offers made to consumers. Increasingly, more attention will be placed on the underlying characteristics of the offers made to customers, such as more intangible and client-intense services. They also outlined some differences between service and manufacturing firms with respect to innovation. Research and design (R&D) is in many cases structurally organized in R&D departments in larger manufacturing firms, but in service firms innovation is more commonly ad hoc based in project development. Service innovation in manufacturing companies also occurs outside the R&D departments, which are usually responsible for technical aspects. The service sector is considered to be better at developing services in interaction with customers than the manufacturing sector. Brezet (2000) claimed that the development time of services is shorter than for products, and is usually performed by business managers and marketers. Brezet also stated that the environmental impact is considered in an early stage when developing services, in contrast to the development of products where the environmental impact is considered after the concept for the product has already been developed (see Table 7).
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Table 7 Differences between product and service design (after Brezet, 2000).
Product design Long development time. Performed by designers and engineers.
Service design Short development time. Performed by business managers and marketers. Focus on software. Secondary products more important. Focus on environmental impact comes at the beginning of the system design.
Focus on hardware. Secondary products less important. Focus on environmental impact comes after the concept of the product has been developed.
The culture in service companies seems to be an important factor for service development and realization (see for example Edvardsson et al., 2000), while this is not as prominent in the literature discussing the development of products.
4.4 Developing functional sales—a combination of services and products A combination of services and products is used in FS development. In many cases the same company provides the service and the product. Numerous authors have pointed out that the changes in companies applying FS are often more organizational than technical. In order to understand product development when the offers made include both services and products, it is important to understand the whole development process and to understand the connection between developing services and products. Brännström (2001) proposed the development model seen in Figure 8, covering the whole lifecycle of the product, and enabling the provider to understand and create value for the customer. This model evolved from traditional product development models mentioned earlier here. In this model, the product support organization proposed is presented along with hardware, software and service processes. Business development has also been added. Brännström (2001) also mentioned the need for interaction between the processes, especially during the concept phase.
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Functions
Prod u Supp ct o rt
n P ro d uctio
Prod u Deve ct lopm ent
Busi n Deve ess lopm ent Mark e & Sa t les
Customer
Service Software Hardware Functional Product
Figure 8 Lifecycle model for functional products (after Brännström, 2001).
Brännström and Elfström (2002) viewed a market offer made to the customer as a tool for value creation for the provider. Market offers consist of products and services. Market-offer development refers to establishing the preconditions necessary for making the customization of the offer to the consumer possible in terms of resources—such as technologies, skills and expertise, company structure, resource structure, products and services. Market-offer customization then refers to the adaptation of different attributes to the needs of a specific customer or group of customers. Brännström and Elfström (2002) stated that in order for a company to effectively manage market-offer innovation, the business development process must be the central activity, and this should include skills and expertise from at least both the engineering and the marketing side of the organization. This business development should set the scene for the marketing and sales organization in terms of what they can customize, how they are allowed to do it, what business models to utilize, and in what markets they should operate. For the rest of the organization, the outcome of the business development process determines what products and services that should be developed, produced and supported, and also for example what technologies, skills, expertise and resources are required to provide the basis for customization. Importantly, this outcome also determines what attributes should be standardized and what attributes are open for customization. Shepard and Ahmed (2000) stated that the supplier adopts the role of a “trusted adviser” rather than being just a supplier when offering combinations of products and services to customers. The relationship with the customer changes and a mutual beneficial relationship created. They suggested that in order to adopt a solution focused business model, new skills and expertise needed to be injected into the company. Key skills and expertise they identified fell into the following areas: technology, integration, marketing-business, and customer partnering. They also suggested that key partnerships could be necessary in order to be able to develop effective solutions. They were of the opinion that a shift was required away from having a large commitment to technical 29
ability, toward having a more balanced profile of skills and expertise, in which customer and market skills are of greater importance than before. Shepard and Ahmed (2000) also suggest that a number of organizational adjustments needed to be made, including: securing effective communication within the organization, having reward systems to encourage the selling of solutions, having measurements to evaluate the business, and having a properly organized company for supporting the execution of the solutions. It is interesting to note that Kim and Mauborgne (2000) concluded that companies successful at repeating value innovation took advantage of the innovation potential in the product, the service and the delivery. In delivery, they included logistics and the channels used to deliver the product to the customer. All three sources need to be considered when seeking new value for customers. They concluded that value innovators thought in terms of the total solution needed by the customer.
4.5
Addressing environmental concern while developing functional sales
Environmentally conscious design evolved fairly recently - especially during the 1990s - into a research discipline in its own right. In environmentally conscious design, there has been a major focus on tools and methods that can support designers in their endeavors to develop products that take the environment into consideration. Lifecycle analysis (LCA) has gained much attention in both industry and academia. Other methods tested in industry include for example, the MET matrix (material-energy-toxic substance matrix), environmental effects analysis (Lindahl and Tingström, 2001), and the design for environment strategy wheel (Brezet and van Hemel, 1997). Design for remanufacturing is also a large research area with strong connections to the development of FS. To design a product for remanufacturing is important for gaining environmental and economic benefits from selling services, and having a take-back system for remanufacturing (Seaver, 1994; Stevels, 1999; Jakobsson, 2000; Sundin, 2002). Several researchers have acknowledged the need for understanding how to implement environmental aspects into organizations and product development (for example Strannegård, 1998; McAloone, 2000; Ritzén, 2000). Research on how to develop sustainable business concepts expands the research area to include core business strategies in companies. McAloone (2000) claimed that whole-life thinking in design occurs in companies exhibiting high and widespread motivation for environmentally conscious design. The understanding of possible trade-offs between different product lifecycle phases increases. These companies also realize that ecological improvements could also be economically beneficial. McAloone (2000) suggested that this can lead companies to redefine their core business by increasing the service content in their sales offers. McAloone also claimed that the practice of environmentally conscious design matures as the company undergoes the four-step transition, outlined below.
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1. simply designing; to 2. gaining environmentally conscious design motivation; to 3. learning how to develop and communicate environmentally conscious design ideas; to 4. taking a whole-life view of their products. Johansson (2001) added innovative eco-design at an even higher level of eco-design experience. The focus for the organization is however not on using eco-design tools and on the environment, rather the focus is on technology and technical problem solving for developing radically new designs. In the design for the environment (DfE) strategy wheel, “new concept development” is an environmental strategy that could include: dematerialization, shared use of products, integration of function, and the functional optimization of products. In the publication by IVA, (1995) it was mentioned that companies could choose different strategies according to economical and environmental aspects. Following on, the business strategy chosen by companies partly depends on customer demand and legislation (see points below). • • • •
4.5.1
Meeting legislation and market demands. Exceeding legislation and meeting market demands. Meeting legislation demands and exceeding market demands. Exceeding legislation and market demands.
Development methods taking environmental concerns in account
Brezet, Diehl and Silvester (2001) proposed the sustainable system triangle for developing satisfaction-delivery systems, presented in Figure 9. In this triangle, the emphasis is not on developing for product redesign, functional innovation, institutional innovation, or reaching system innovation, but rather for finding sustainable ways of delivering satisfaction to the consumer using services or artifacts. The proposal is that a development team look for the innovation potential of the artifact to use, in the physical and institutional context or infrastructure, and the potential for new user practices and user learning. In this way, different aspects of the product system can be considered in the development phase.
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Artefact
Physical and institutional infrastructure
User practices and user learning
Figure 9 The sustainable systems triangle (after Brezet et al, 2001).
Other researchers have also included market potential, economical aspects and environmental aspects. Goedkoop et al. (1999) developed a model for evaluating different systems based on the following questions. 1. What are the environmental characteristics at the function fulfillment level, and how do these relate to overall environmental loading in society? 2. What are the economic characteristics at the company level, and at the business sector level? 3. To what extent does the PSS match the company’s identity and strategy? 4. To what extent would the market accept a PSS? The above questions can be evaluated from either quantitative or qualitative perspectives. First of all the environmental impact is estimated, and the economic effects are evaluated. Then whether or not the strategic business decisions match the solution with the company culture and identity. An evaluation of customer adoption of the solution is also part of the model. An economy-environment vector tool has also been developed, called the E2 vector. The E2 vector represents the value creation and the environmental load over a product’s lifecycle. Using this tool, different system solutions can be evaluated. Hockerts (1998) proposed that in order to shift from offering products to EES, the institutional arrangements and the interaction potential with the customer need to be considered and analyzed. The concept needs to be inspired by strong corporate commitment to environmental concerns, sustainability, and customer satisfaction. The corporate strategy needs to be adapted in order to translate the service concept into action. The following six-step approach was proposed. 1. Assign an eco-integrated innovation team. 2. Brainstorm – to find service innovations. 3. New institutional arrangements – analyzing the institutional effects of offering the service. 4. Eco-efficiency test – evaluate the environmental efficiency potential. 5. Market viability test – analyze the business potential. 6. Validation – seek interaction with customers; conduct testing.
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The development team needs participants from a number of different functional roles in the company, such as marketing and sales, R&D and product design, environmental management, and strategic development and finance. Mont (2001) proposed a similar model for introducing PSS into companies with a brainstorming session, and evaluating concepts relating not only to economic and environmental but also social aspects. Mont suggested that the PSS concept could be introduced stepwise, based on Deming’s cycle for continuous improvements (plan-docheck-act), and pointed out that the model needs to undergo further development and testing. Mont (2002) also mentioned that there were few examples of design attempts where an entire PSS was designed. Mont claimed that developing a PSS differed from developing a product. When designing a PSS, the focus is on designing the whole product service system, including for example the infrastructure. Mont claimed that designing a PSS required the integration of all the parties across the whole lifecycle of a product. Integration between service and remanufacturing organizations is seen as being especially important to achieving economic incentives from service activities for driving manufacturing or design changes. For closing product flows and reducing transport distances, it is important to recruit business partners and develop a system for taking back products. Mont (2001) and Hockerts (1998) both stated that the sales force plays an important role in selling the new services, and that the commission systems in companies needs to stimulate sales people to sell services or integrated solutions.
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PART II : RESEARCH METHODS In part II the research approach chosen is discussed and the data collection method as well as the analysis of results are described.
5 Research process There is a strong belief that sustainable and profitable business solutions are needed to achieve a sustainable society. This belief raised the author’s interest in the FS business concept, as researchers claimed that business concepts related to FS have the potential to de-link economic profit from natural resource usage. At the beginning of this research, the author attended a seminar involving members of Swedish industry and academia, focusing on FS, held at the Swedish Environmental Protection Agency (EPA). Reflections stemming from this seminar, and contacts with industry representatives together with a literature study (Lindahl and Ölundh, 2000) made it clear that the expectations and perceptions of FS appeared to be different in industry, academia (environmental research) and the EPA. The expectations and hopes that environmental benefits would stem from FS seemed to be greater in academia and the EPA than in industry. The perceived differences in attitudes towards FS in industry, academia and at the EPA aroused the author’s curiosity and desire to learn more about how work with FS is performed in industry. The industry perspective was adopted in this thesis and therefore the term FS has been used in preference to EES and PSS, as this term is perceived to be more representative of how industry views the changes. The ambition of this thesis is therefore to provide some insight to industry, academia and policy-makers, by describing how the companies participating in the study worked with developing FS.
5.1 Empirical research In order to learn more about how companies work with FS an empirical approach was chosen for this research. This field of research is young and few empirical studies have been conducted to date, that focus on the development process for offering FS taking environmental concerns into account. Most studies into EES, PSS and FS describe the solution, the driving forces and the obstacles, as well as the environmental potential. Theoretical models for developing EES or PSS have also been proposed. With this empirical study, an attempt has been made to provide further insight into how developing FS is managed in the Swedish manufacturing industry. The nature of the research questions where mainly “what” but also “how”. According to Yin (1994) an exploratory approach is suitable when having “what” and “how” questions. 35
The prerequisites for selecting the companies participating in this study were: (1) they must be in the manufacturing sector, (2) their product development must be located in Sweden, (3) their sales offers to customers must extend beyond merely the selling of products, and (4) they must conduct business-to-business activities. This last point is important, because selling to individual consumers and businesses are very different situations. For example, the question of ownership is different for different purchasers — individuals or companies. For individual consumers, a car means much more than merely a vehicle for transportation; and they invest stronger feelings in the product than businesses generally do. A summary of the companies and their specific characteristics indicating why they were chosen to participate in the study (other than those already mentioned) has been presented in Table 8 below. Table 8 Companies included in this study along with their products, special characteristics and the number of respondents interviewed in each.
Companies
Characteristic differences between the companies Company size
Atlas Copco Tools AB (Industrial & electrical tools) Duroc Rail (Maintenance of railway wheels) ITT Flygt Pumpar (Submersible pumps)
Had FS offers.
Large
No. of resp. 3
Had developed a pure functional sales offers to customers. A maintenance company. Had functional thinking for a longer period of time. Had a capital intensive product were the environmental impact is mostly due to the use of the product. The product is part of a system. Were in the process of offering FS. Proton Caretec (Homecare beds, the E- Attended a special eco-design project. bed) Were in the process of further Scania (Trucks) developing FS. Had a capital intensive product were the environmental impact is mostly due to the use of the product. Were in the process of offering FS. Swepac (Soil compactors) Attended a special eco-design project.
Small
2
Large
6
Small
2
Large
8
Small
2
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5.2 Qualitative interviews Data collection was undertaken primarily through qualitative semi-structured interviews. Company-specific internal and official documents have also been used as sources for the research. As qualitative interviews have been used to obtain descriptions of the actual world of the respondents - with respect to interpretations of the meaning of the phenomena described (Kvale, 1996) - it was considered suitable for exploring how FS is managed in the companies. Guidelines for the interviews were developed in order to capture specific themes in each company. Space was also left for the respondents to develop any thoughts they considered important enough, so as to capture their perceptions of FS. Qualitative semistructured interviews were chosen because the respondents own views of conditions were being investigated, and thus the respondents had the freedom to specify what should be taken up at the interview (Westlander, 2000). The environmental representative, the product developer or R&D manager (or both), and the service developer or business developer (or both) were interviewed. These roles were chosen specifically to answer the questions in the interview guidelines. In some companies, especially the small and Atlas Copco Tools, one respondent had several roles and this is a reason why the number of respondents differs for the different companies. Some interviews were conducted on a one-to-one basis, while in others a co-worker was present. In most cases the interviews were conducted with one respondent at a time, but in some cases two respondents were interviewed at the same time. The interviews lasted between 45 minutes and 1½ hours, and were all performed at locations chosen by the respondents. All the interviews were taped and all interviews have been transcribed into written text. The structuring of the transcribed interviews was done by organizing the text into different categories. The transcribed interviews were coded according to categories. These categories were the result both of the themes in the interview guidelines and also the result of findings that became apparent at the time of structuring the interviews. A colleague has participated in the structuring of the interviews. According to Kvale (1996) this is one way to control the reliability of the analysis of the interviews. Several interviews have been also followed up by further telephone contact with the respondents, and one (from Swepack), was extended with input from a salesperson to clarify some unclear issues. Representatives from the participating companies have also read and confirmed the results concerning their respective companies. The results from the three large companies were presented at a seminar for Swedish industry and academia in Mars 2002 at Naturvårdsverket (the Swedish EPA) 1. 1
The study of the three larger companies was included in a research program funded by the Swedish EPA, looking at functional thinking in companies, and its environmental possibilities. The results from these three larger companies were therefore reported separately in, Funktionsförsäljning och produkters miljöaspekter – en studie i tre svenska tillverkningsföretag (The Environmental Aspects of Functional sales and products – a study of three Swedish manufacturing companies) by Ölundh and Ritzén, 2002.
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In the discussion of the results of the study theories stemming from the environmental research field and theory from product and service development are applied.
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PART III: RESULTS FROM THE EMPIRICAL RESEARCH In part III the results from the empirical research is presented. First a brief presentation of the companies included in the study is made. The results are divided into four sections; The companies sales alternatives, driving forces and obstacles for offering FS, development activities and environmental aspects of FS. The sections are related to specific core research questions and in the end of each section are main findings pointed out.
6 Brief presentation of the companies Atlas Copco Tools AB Atlas Copco is a global industrial Group, which was founded in 1873, with its head office in Stockholm, Sweden. In 2001, the Group had revenues of about to SEK 50 billion with 98% of revenues outside Sweden, and about 26,000 employees, about 2500 in Sweden. The Atlas Copco Group manufactures products on 53 production sites in 15 countries on five continents. The Group operates through a number of divisions within four business areas: Compressor Technique, Construction and Mining Technique, Industrial Technique, and Rental Service. Rental services are active in USA, Canada and Mexico.
The Industrial Technique business area, 6000 employees, develops, manufactures and markets pneumatic and electric power tools, as well as assembly systems. The business is to be the global market leader in pneumatic and electric industrial tools. Atlas Copco Tools AB, 1750 employees world wide, 700 in Sweden, is part of this business area. (www.atlascopco.com, Mars 2003 and Annual report, 2001) Duroc Rail Duroc Rail was founded in 1997 and is part of the Duroc group founded in 1987. The Duroc group consists of Duroc: Applications, Rail, Toling, Saw blades and Impact coatings. The turnover was amounted to SEK 214 m in 2001, number of employees are around 25.
Duroc Rail develops, manufactures and sells products that bring reduced operating costs per transport kilometre on the railways and lower levels of disturbing noise from railway traffic for traffic operators, vehicle owners and infrastructure administrators.
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Products mainly consist of servicing of railway wheels on a full-service assignment basis. Duroc Rail focuses on sales of performance-based agreements. The market of Duroc Rail is mainly Sweden but they also have Germany, the UK and the Netherlands as markets. (www.duroc.com, Mars 2003) ITT Flygt AB In 1922 Hilding Flygt, an engineer from Stockholm, starts a sales company marketing pumps and fans. In 1929 manufacturing of pumps starts and in 1930 the first pump was manufactured. In 1948 the first submersible pump were promoted. ITT Flygt has 37 sales companies, partly or fully owned, around the world and ITT Flygt is represented in about 100 additional markets. The turnover is about SEK 6 billion and they have about 4000 employees, 1500 in Sweden. The company is part of ITT Industries, Inc. with 35 000 employees around the world.
ITT Flygt states that they should be and also should be perceived as the leading provider of solutions and services for handling fluid, based on submersible products, all over the world. They should thereby contribute to a better environment. ITT Flygt Pumpar with sales and rental services and a maintenance organisation is the Swedish sales company for ITT Flygt AB. About 95 % of the products are exported. (www.flygt.com, mars 2003, including the document Through history with Flygt) Proton Caretec Proton Caretec was founded in 1954 and is a part of The Proton Group. The industrial group consists of 17 manufacturing and sales companies divided into four classes of business - Engineering, Finishing, Caretec and Lighting.
For Caretec the business idea is to develop, market and manufacture beds for modern care. They have 3 different product areas: hospital beds, nursery home beds and home care beds. The sale is approximately SEK 100 m a year and the number of employees about 45. They have own subsidiaries in Norway and Japan. The export share is about 40% and Proton Caretec has distributors in about 30 countries. (www.protongroup.com, Mars 2003) Scania Scania was founded in 1891. Scania has operations in Europe, Latin America, Asia, Africa and Australia. Scania is a manufacturer of heavy trucks and buses as well as industrial and marine engines. The company also markets and sells a broad range of service-related products and financing services. In 2002 sales of service-related products rose by 4 percent to SEK 10,600 m. The Scania Group’s total sales amounted to SEK 47,000 m.The total number of employees was 28,0000 at the close of 2002.
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At Scania home page it is stated that Scania continuously surpass customer expectations, its operations are based on an integrated product concept that combines vehicles, service-related products and financing. (www.scania.se, Mars 2003 including the document Annual report, 2002) Swepac International AB Swepac International AB (Swepac) is a manufacturer of soil compactors in Sweden. They have a wide range of products with various motor options and machine sizes to suit all areas of application. They have 12 employees.
Their ambition is to be one step ahead of the competitors when it comes to the development of better products. This applies not only to design, ergonomics, choice of materials and environmental issues, but also to personal service and support. (www.swepac.com, Mars 2003)
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7 Result presentation 7.1 The sale alternatives (RQ 1) The perception of what functional sales are differs among the respondents. For some respondents it was a commonly used term but for other respondents it was a new term. The activities in the companies were referred to with different terms according to their businesses and what was included in the offers to consumers, Table 9. Table 9 Terms used for activities in the different companies.
Term Functional sales
Activity ITT Flygt for example had a very specific function they provide their customer namely pump capacity. At ITT Flygt the focus on functions in development were widely spread. Duroc strongly link functional sales to functionality, the wheels should be reliable.
Integrate forward
At Scania the terms services and integrate forward were more common As they become more involved in the customers activities.
Outsource
Respondents at Atlas Copco viewed their pay-per-unit contracts as functional sales, but it was mainly referred to as outsourcing. Meaning that the customers outsource some of their activities to Atlas Copco.
Lease
Respondents at Swepack and Proton Care viewed their most far-reaching business as leasing.
Atlas Copco Tools AB developed, manufactured and sold Pneumatic and Electric Power tools to commercial customers. At the time of this study, Atlas Copco Tools AB was in the early stages of developing a range of new offers to customers, and only a small number of contracts had so far been signed. The company offers a number of services and divided these into different modules for the customer to choose from. The modules range from after-sales agreements to pay-per-unit agreements. The first module features after-sales contracts, including the maintenance and repair of existing products (industrial tools). The cost of these contracts were based on how much the specific tool is used by the customer. The customer paid a fixed price, including spare parts and the maintenance work. In their on-site agreement module, Atlas Copco Tools’ workshops and employees were located on-site at the customer plant. Atlas Copco Tools’ employees were responsible for the tools used on site, and solve difficulties related to the tools used in production as they arise. In the pay-per-unit contract module, Atlas Copco Tools were also responsible for other companies’ tools and services, providing for example process optimization and training. One such pay-per-unit contract has been
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entered into a plant in Brazil, where the tools, maintenance and also the employees performing the work using these tools have all been provided. In this case, quality control of but not the actual responsibility for the quality of the products is included. Payment for this arrangement is based on the number of units produced at the customer’s premises. The customer could lease tools from a separate leasing company and the fees were based on the number of units they produced. An Executive Director of a large car manufacturer in U.S.A. has been promoting the type of relationship where the provider takes greater responsibility, as in the pay-perunit contracts in which employees and tools are included. According to one of the respondents at Atlas Copco this effort has not really progressed far, if the car manufacturer were to decide to go ahead with these ideas, development would be very fast. Knowledge has been built up within Atlas Copco about how to handle this sort of development, so that the company would be well prepared for moving into that kind of work; though it would take 4-5 years before it happened, and then maybe 3-4 additional years before industries other than the automotive moved in that direction. Duroc Rail operated in the railway sector, focusing mainly on the maintenance of railway vehicle wheels. Duroc’s business concept was to develop, manufacture and sell products that reduce operating costs per rail-transport kilometer, and to lower the levels of disturbing noise generated by railway traffic. Duroc’s business operations include conventional maintenance as well as laser-cladding refinement of railway wheels and rails.
Various techniques can be used for undertaking wheel maintenance. The traditional strategy for servicing wheels involves reprofiling, grinding and rewheeling. In addition to performing this, Duroc has developed a technique utilizing lasers and a special powder, for cladding superalloys onto the top of the steel core. This extends the lifetime of wheels and lowers the noise levels generated by wheels. The new strategy refills the surface material. Consequently the laser technique reduces the need for maintenance compared with using traditional techniques. Another effect was that the wheels last much longer due to the application of a layer to the wheels instead of the removal of material by grinding. According to one of Duroc’s respondents, a wheel weights about 300-400 kg and needs to be replaced after about four grindings. That means that more than 160 000 M tonne of steel were used in Europe each year for manufacturing new railway vehicle wheels. The same respondent claimed that the current consumption of steel could be more than halved using the laser technique. Traditionally, customers ordered, approved and received invoices for every operation that Duroc performed. The laser-cladding technique was more expensive per operation than the other techniques and was therefore more difficult to persuade customers to use it; even though seen over a longer period of time, the cost to the customer would be lower. An emerging service offered by Duroc were that Duroc takes full responsibility for the functionality of the wheels. This approach involved Duroc taking full responsibility for wheel maintenance, including deciding the scheduling and operations involved. The customer paid a monthly fee for these services based on how many
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kilometers the wheels were used. At the time of this study, the first functional sales contract had been signed. Price setting for these full-wheel-maintenance-responsibility arrangements were complicated, because the wear of the wheels depends on many factors, such as outdoor temperatures, the amount of rainfall and the hardness of the rails. Therefore customer reference wheels were used to follow up these costs. This means that a specific number of wheels are left out of the contract, and were charged per operation according to the traditional approach as a reference. The kilometer costs for the reference wheels were compared with the kilometer costs agreed to in the contract. A clause were included in the contract stating that the kilometer cost Duroc charges should be a certain percentage of the cost for the reference wheels. If there were a difference in the costs per kilometer, then the price was regulated subsequently within the agreed range. ITT Flygt developed, manufactured and sold submersible pumps. The pumps are part of larger technical systems used in for example wastewater treatment plants. Respondents from this company said that the business approach adopted by this company for quite a long time now has been providing customers with the ability to pump X m3/s; that is being a pumping capacity provider. ITT Flygt was involved in the operations of their customers to varying degrees. When constructing a new plant or replacing a product, ITT Flygt could be involved in the development and selection of a product at various levels. The issue of whether to buy or lease the product therefore needed to be solved, along with how much of the responsibility for the operation and maintenance of the same should be handled by ITT Flygt.
In the UK, standardized contracts referred to as flexicover schemes was used in maintenance offers, though customized contracts were also offered. Contracts range from planned maintenance agreements with inspections on a regular basis, to fully comprehensive service contracts where ITT Flygt looks after all maintenance activities. One ITT Flygt respondent pointed out that the most important phase with respect to reducing negative environmental effects was when the whole technical system—for example a wastewater treatment plant that includes a pump—was being optimized and developed. The largest environmental impact of a pump is its energy consumption. The opportunities available to ITT Flygt for affecting the environmental impact, the performance of the system, and the financial costs during the usage phase largely depend on the selling situation. One ITT Flygt respondent described the following four different selling situations: • • • •
replacement of an existing product for an end-user, new installation where the specifications are provided by the customer, new installation involving the provider in the design of the system, and new installation where only the performance and preconditions are provided by the customer, and where the solution is open and designed by the provider.
In the second two selling situations, ITT Flygt is involved in the development of the whole engineering solution. It is in these two cases that the company has the greatest
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opportunity to use its knowledge for optimizing the system. Therefore ITT Flygt not only takes responsibility for their own products but also for optimizing the system their products operate in. In some of the most far-reaching customized contracts, even the energy cost of using the pump was included in the fee paid to ITT Flygt. To further extend the concept of providing a function, ITT Flygt could move from providing pump capacity to running the wastewater plants themselves, according to one of their respondents. ITT Flygt had a refurbishment program wherein old pumping stations were upgraded, and provided with new operating plans that better met the demands placed on them. The company also provided a free computer-based pump selection program to everyone interested like customers. Proton Caretec developed, manufactured and sold home care products. The specific product for the purposes of this study was the E-bed, which was a bed designed for home care providers.
Proton Caretec saw itself as increasing their sales alternatives by offering service contracts and leasing the E-bed to the customer. The E-bed was a new product, and the possibility of leasing the product was included in its development. The E-bed was developed in an ecodesign project with IVF Industrial Research and Development Corporation (IVFC). Proton Caretec sold the E-bed in three different ways: • • •
directly to customers, to Medicano, who in turn leased the E-beds to its customers. These customers paid a monthly fee for 3, 5 or 7 years, depending on the agreement, and then the customer buys the bed by paying the remaining value. leasing from Proton Caretec, which was under development and had not started when this study was undertaken ; full service contracts were planned to be offered where the customer—usually a municipal authority—rented an E-bed and Proton Caretec would be responsible for everything relating to the use of the bed, such as deliveries, training nursing staff, maintenance and supplying the customer with statistics concerning the product.
The price was based on the length of time the customer had the product in their possession and on the particular service agreement.
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Scania developed, manufactured and sold trucks, and was shifting its sales-oriented focus towards selling a service-oriented one and thereby selling trucks and truckrelated-services.
One respondent from Scania described the change in the company in the following way: “In the past, our customers wanted to have very reliable trucks with large load capacities and low fuel consumption. That’s why we have developed a very good product with a very good network of services. That’s what was in demand. Today our customers are focusing more on their transport capacity needs, so they have shifted from looking specifically at truck performance into fleet performance, and they increasingly expect us to provide them with expertise and support relating to for example how much the truck should cost to operate, how it should be operated, what we can do to lower the cost of operation, and what can we do to increase possible uses of the truck. We call this uptime.”
Scania also provides driver training to achieve safer and more economical driving. Scania Infotronics, founded in 1999, developed and supplied customers with IT solutions such as the Fleet Analysis System, Fleet Management Portal, Vehicle Data Communicator and the Performance Analyser. A respondent from Scania pointed out that Scania now wanted to offer new services enabling it to really actively support its customer operations, and help them to lower operational costs. In order to do this, data and access to the truck, including access to increasingly complicated software located onboard the truck were required. According to the respondent, Scania was shifting from being a truck manufacturer to becoming a supplier of transport solutions and therefore a service provider. Scania offered a range of financing solutions and maintenance and repair contracts to its customers. These financial solutions included loan financing, financial leasing and operational leasing. Where the customer had an operational lease contract for a 3-5 year time period, it usually included a maintenance contract. Maintenance agreements included maintenance and repair plans structured for every single vehicle. In addition, repair and maintenance contracts also included all the costs of repairs during the agreement period. The customer paid a fixed monthly fee based partly on how many kilometers the truck was agreed to be driven. A truck financed via an operational leasing plan combined with a maintenance contract could, according to one Scania respondent, be worth up to 10% more on the secondhand market because it had been well serviced and in good condition. Swepac developed, manufactured and sold soil compactors. About 90% of its customers were rental companies. As one of Swepac’s respondents said, “…it is suitable to market the product that way because there is actually no one who wants to own this type of machine…”. Swepac sold its products in two main ways: •
the product was sold to rental companies, such as divisions within construction companies that rented out machines and who were also responsible for maintenance, and so no service agreements were then made with Swepac; or
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•
the product was rented to rental companies—accounting for about 30% of the sales to rental companies—and the rental companies in turn rented it out to their customers. This business approach started in 2001 with contracts running for 5-6 years, and which included service agreements and spare parts; though repairs could be performed by the customer who in turn got paid by Swepac for performing the operation.
They had a product strategy to have a product that were of good quality and last for a long period time and in need of little maintenance. Several other competitive companies had a strategy of developing cheaper products and make their profit on spare parts according to one respondent. Swepac’s products were scheduled to be refurbishing after three years of use, and will be returned to Swepac after 5-6 years of use, when they are planned to be fully reconditioned and sold. The old products would probably be sold traditionally to companies in Eastern Europe. Swepac had developed a new soil compactor in an ecodesign project with IVF Industrial Research and Development Corporation (IVFC).
7.1.1
Differences between products
Important differences between the companies’ products were the usage costs for the products. For submersible pumps and for trucks the use costs were a large part of the costs for the customers. The greatest environmental negative impact during their products lifetime stemmed from energy consumption for using the products. The products were also more capital intensive than the other products in the study. The Proton Caretec had no use costs, such as energy costs (though transportation have negative environmental impact) and also for compactors the use cost was low. For Tool the use cost were due to pneumatic, energy or battery consumption for operating the tools. Duroc was different from the other companies in the study as they were a maintenance company. They had developed a new laser-cladding technique that had several large environmental benefits, compared with previous solution, and in order to get their new technology out on the market they took full responsibility for the functionality of the railway wheels. The customer was charged by kilometer instead of per operation performed. Notable was also that the products from Proton Caretec and Swepac was mostly sold to companies that in turn leased out the products. Their products have been used for leasing by being leased out by their customers and therefore they had experience from developing products used for leasing. Proton Caretec and Swepac had also been involved in ecodesign projects, which greatly influenced the design of the products.
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7.1.2
Main findings RQ 1 •
The offers made to customers ranged from the traditional selling of products to selling FS. The most commonly added services to the offers of existing product were financial services and maintenance services. Financing of the products ranged from the sale of the product with leasing contracts, to charging for a fulfilled function. In some of the companies, leasing with service contracts was the most far-reaching contract type, and included responsibility for the functionality and status of the product.
•
The core business of the companies was expanded and the responsibilities and activities for fulfilling a customer need were increased through offering FS.
•
ITT Flygt had far reaching contracts with customers that also included the costs of using the product (energy costs) in a few contracts.
•
In some cases the provider also acted as a consultant, providing their knowledge and optimizing the customer solution. The labor costs for performing the customer activities were also included in one case.
•
Examples of some of the terms used by the companies covering far reaching business concepts for services and products included: FS, integrating forward, integrated product concept, outsourcing and leasing.
•
Pricing was linked to measurable parameters, for example: how many kilometers the product is used, the length of time the product is used, the length of validity (in years) of a contract, the number of times an activity— such as maintenance—is performed, or customer production rate.
7.2 Driving forces and obstacles for offering functional sales (RQ 2) The driving forces behind offering services and functions are divided into: (a) the forces driving the providers, and (b) the forces that the providers perceive to be driving their customers. Table 10 presents a brief overview of these driving forces.
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Table 10 Driving forces for selling functions according to the respondents in the provider companies in this study.
• • • •
Driving forces for the provider Getting new technology out into the marketplace. Customer demand. Creating closer and longer lasting relationships with customers. Increasing the share of maintenance and service provision and integrating forward in the value chain.
7.2.1
• • • • •
Driving forces for the customer Outsourcing non-core business activities. Lowering exposure to risk. Increasing flexibility. Having fixed costs. Avoiding investments in products in order to positively affect the balance sheet.
Driving forces for providers
Getting new technology out into marketplace
Two of the smaller companies stated that the main reason for shifting to a new range of offers for customers was to get new technology out into the marketplace. Duroc found it difficult to convince its customers to use their special laser-cladding technique for repairing wheels; so one way to get the new technology out into the marketplace has been to sell it as a function rather than a product, as this increased Duroc’s freedom to choose how they fulfilled the specific function. According to Duroc, the laser-cladding technique was more expensive per operation, and cheaper operations such as grinding were preferred by customers even though the laser-cladding technique reduces the customer’s costs in the long run. One of their respondents expressed it as follows, “We make sure that the wheels are turning”. This was considered a win-win concept, as the customer and Duroc had the same goal, which was to have the wheels in the best possible condition for the longest possible time. Previously, when Duroc was paid per operation, good business for them meant having many wheels as possible in current production. Proton Caretec have found that it was difficult to introduce a new product into their particular market sector. Renting products to the customers was then one way of reaching customers with a new product. Proton Caretec has also found that even though its customers have asked for a product like the E-bed, the behaviour of the market was conservative, accepting new solutions with some difficulty. Expanding into new markets provided a driving force for Proton Caretec, who intends to expand into Japan with its new concept. Scania and ITT Flygt have been working actively for a long time at lowering the usage costs of their products, and at creating a good “total economy” for their customers. Their product development aimed at low operational costs and easy maintenance. This has in some cases led to high development costs, and that the investment in the product was greater than for their competitors’ products. According to their respondents, one
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way to offset high investment costs was to offer innovative financing possibilities. Selling functions or use was a good method for those products with a good total economy, where the overall lifecycle cost of the product was better than its competitors. Customer demand
Another important force driving the selling of functions in some cases, was the new way of doing business desired by customers. For example Scania, Swepac and ITT Flygt (in the UK) have all experienced strong customer demand for their new market offers. For some companies the customer demand was great in some countries but very low in others. This was the case for all of the larger companies in the study. For ITT Flygt the customer demand was great in the UK but almost non-existing in Sweden. This was due to differences in the market structure between countries according to respondents. Submersible pumps were often purchased by several public authorities in Sweden but in the UK the market has been deregulated and the water treatment was run by just a few companies. At Scania the Netherlands and England was put forward as markets where service contracts and functional sales was most demanded. These markets were seen as being more competitive and the needs for rationalize and make the activities as effective as possible was greater in these markets. The Netherlands and England markets were also seen as leading in developing new business opportunities. For Atlas Copco the automobile industry was a driving force, especially in the U.S.A. The most far-reaching pay-per-unit contract was however signed with a plant in Brazil. Increase market share
According to the respondents in the study, obtaining repair and maintenance contracts enabled companies to ensure that their products were serviced by a workshop controlled by the provider or by the provider’s staff. This in turn ensured that spare parts supplied by the company itself were used in their products. According to the respondents, a service-type contract could also sometimes lead to the provider also obtaining the maintenance responsibility for products similar to its own but made by its competitors, and thereby also increase their service market share. The relationship with the customer was central and provides a driving force for the provider. One driving force that respondents pointed out was creating closer and more longer-lasting relationships with their customers. Respondents at ITT Flygt, Scania and Atlas Copco related that moving closer to the customer in the value chain by integrating forward, and thereby taking responsibility for some parts of the customers’ activities is ongoing in the manufacturing industry. This also compels the provider to engage in closer relationships with their customers. One respondent argued that a new perspective on the way business was conducted needed to be developed within the company in order to secure future economic growth. Traditionally, profit was based on the cost paid by the customer for the product, spare parts and maintenance. The cost to the customers cannot be adjusted to any great extent. However, instead of increasing costs, the provider was now able to offer services to reduce the customer’s operational costs. Expertise could be offered about the operation and use of products in order to increase customer turnover. The new concept was that 51
the profit could be based on and linked to the customer’s profit instead of cost. With the transition to becoming a service provider, the manufacturer contributes to the customer’s business through providing them with knowledge and helping them to build value and increase their profits. In turn, the provider was then able to generate profit.
7.2.2
Driving forces for customers, according to the providers’ respondents
Outsourcing
According to the providers’ respondents, one of the reasons why their customers outsourced activities was that these were not their core business. Repair and maintenance falled into this category, and the manufacturing companies provided the customer with workshops and employees that were experts in the respective products. Lowering risks and increasing flexibility
Respondents at Scania claimed that customers wished to lower their exposure to risk and to avoid making investments that would not make them returns. Changes in business activity were also claimed to be a contributing factor, as well as changing demands in different market regions. One example given was the changing demand for Scania trucks. Regulations relating to trucks were shifting in for example England, and the haulage contractors wanted to avoid buying fleets of trucks because after a period of time their fleets may not satisfy legislative requirements. However by entering leasing contracts the customer’s risk of being stuck with trucks that do not meet legislative demands was reduced, as they could offload the whole fleet after the contract period is over. Another force that drives the customers raised by the providers’ respondents was that their customers can increase their flexibility and more easily adjust the number of products they possess to suit shifting market requirements, and better manage for example peaks in their orders. Fixed costs
Another important customer driving force raised by respondents from for example, Swepac, Scania, and Atlas Copco, was that the customers know their own costs. In these new service contracts, the customers had fixed costs and when maintenance was included, no unexpected costs would appear. This in turn makes it easier for customers to plan for costs, and eliminate a risk factor for unplanned costs. Balance sheets and taxation regulations
According to some of the providers’ respondents (for example Scania’s), customer interest in different financial solutions sprang from the customers’ desire to avoid having the monetary value of these products appear on the balance sheet. Different taxation regulations in different countries influenced to some extent which financing contracts were beneficial in which country.
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Specification lists
A respondent from Duroc stated that one advantage for the customer with the new type of contract was that there was no need for providing lists of detailed and technical requirements specifications. With requirements lists, everything was specified beforehand, though there may be better ways of fulfilling the desired function than stipulated in the specification list. This also implied easier administration for the customer.
7.2.3
Obstacles to offering functional sales for the providers
Financial obstacles
According to several respondents in the study, a financial obstacle for the providers was that they took over the financial risk that the customers were endeavoring to avoid, by not being able to capitalize on the products in a purchasing situation. When business activity is low, providers may not be able to achieve adequate turnover because their products are not in use. Proton Caretec, who was in an early phase of developing leasing and maintenance offers, needed to obtain financial support in order to be able to finance their product. Furthermore, several of the providers’ respondents claimed that internalizing costs such as those for servicing and spare parts, that used to be seen as income generators can now negatively affect the provider’s profits. Relationship to the customer
Getting the customer to understand and accept a new way of thinking and doing business is a slow process for some of the companies in the study. The low level of market maturity and lack of understanding of lifecycle perspectives were seen as the greatest barriers to functional sales by ITT Flygt. One way of overcoming this is for the sales organization to inform and educate the customers in order to encourage acceptance for changing customer buying behaviors. Scania, Duroc and ITT Flygt stated that it is important to get customers to understand the new role that the providers wish to play, as service or knowledge providers. They stated that the provider needs to teach the customer how they (the providers) are offering new types of services and can contribute to the relationship with knowledge in a new way. According to the respondents, one of the key points to teach the customer is the LCC concept. ITT Flygt have found that in its case, it has been easier to get customers in deregulated competitive markets in Europe to understand the LCC than it has been in the regulated market in Sweden, where municipal authorities run for example wastewater plants. One of the respondents saw the sub optimization that, in some cases, exists within the municipal authorities as an obstacle for accepting the LCC concept. The purchasing departments and those departments operating the infrastructure plants have different budgets and sub optimizations could be effects of that.
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The selling situation and approaching the buyer have become more delicate according to a respondent from Duroc. Problems arise when there is a lack of knowledge about what the costs to the buyers are, for example for wheel maintenance. Many companies have their own departments for wheel maintenance and are not always aware of what they actually spend on it. Duroc’s experience is that it is also sometimes difficult for the customers to reveal this information. This situation also means that the customer must rely on the knowledge of the supplier. The need for being able to price the new offers correctly is paramount and presents a difficulty that some respondents (for example Duroc) expressed concerns about. Product wear is dependent on many factors, such as outdoor temperature, dry or rainy weather conditions, and the hardness of the rails. Respondents at Scania and Atlas Copco mentioned the difficulty for the sales employees to be able to customize appropriately from the service alternatives possible. For example there is needs to understand what financial solution fits the customer and to what extent maintenance offers should be included. Some of the providers’ respondents also expressed concern that charging for functions will in the long run shift more pressure onto the providers, as the negotiation situations change and so too price-setting. Atlas Copco gave the example that if the customers pay-per-unit operation, then they are able to negotiate differently. As one of the customer’s goals in outsourcing is to improve business efficiency and to lower their costs, this then puts pressure on the providers. Another obstacle expressed by Proton Caretec was that they could only provide the Ebed. When a person is in need of home care, they often require other products such as a wheelchair and a Zimmer frame. Proton Caretec was therefore discussing with its partners in the business how to form business offers together, and in that way be able to satisfy a larger part of its customers’ needs. One obstacle experienced by Atlas Copco was that when customers outsource some of their activities and utilized the provider’s employees instead of their own employees, then significant local resistance can appear. This was witnessed by Atlas Copco in the car industry in the US. Discussions with the car industry regarding outsourcing parts of their activities to Atlas Copco met with strong resistance from for example employee unions who fear that it would negatively affect their members. A respondent from Atlas Copco also stated that a challenge facing forward integration was to maintaining a fruitful relationship with the distributors in the USA. As it uses distributors for 100% of its sales, it needs to cooperate and share the deals with them. Organizational changes
One obstacle for making the transition from offering products to product services was the large number of organizational changes needed to take place in some companies. For example Proton Caretec found that the need for changes, such as building up service
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and maintenance departments and finding financial solutions with partners, had slowed down the process of having its own leasing business. One challenge that several of the providers’ respondents put forward was trying to change corporate culture. The providers needed to achieve a shift in their corporate cultures to see themselves more as service providers instead of only product providers.
7.2.4
Main findings RQ 2
•
Offering FS were mainly driven by: o customer demand, o opportunity to extend business activities and increasing market share by differentiating products by adding services, o getting new technology into the market, o creating closer and more long lasting relationships with customers.
•
New solutions being more expensive than earlier or more expensive than competitors, having a lower life cycle cost, were suitable to be promoted with FS offers.
•
The driving forces for the customers, according to respondents, were to: o increase their flexibility in using products, o lower their economical risks by not investing in products, o have fixed costs and avoid large maintenance costs, o outsource non-core activities, o avoid investments in products in order to positively effect the balance sheet.
•
Obstacles for the provider for offering FS were several: o Financial obstacles: take over the financial risk for the products from customers, internalizing costs such as maintenance and spare parts for the product. o New relationship to the customer: low level of market maturity and lack of understanding of lifecycle perspectives is an obstacle for getting acceptance for new business solutions, difficulties in pricing the new offers correctly, customize service offers appropriately in sale situation, negotiate differently, be able to satisfy a larger part of its customers needs handle a new relationship to the distributors o Organizational changes: corporate culture may need to be adjusted to also include being a “service provider”, organizational changes in order to be able to provide the offers to customer needs to be handled.
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7.3 Development of products and services (RQ3) In the larger companies, what is referred to as stage-gate product development processes were used for developing products. In the three smaller companies, product development was not as formalized as in the larger companies, and structured stage-gate models were not used. Structured processes were not common in the development of services in any company. Different organizational units and competences perform the development of services and of products though the development of products was usually performed in integrated product development teams. In two of the smaller companies, Duroc and Swepac, the same personnel undertook development of both services and products and therefore the respondents from these companies naturally expressed a strong connection between the development of products and services.
7.3.1
Development of services
Origin of developing services
As mentioned earlier the development of products and services were separate activities and occur in different organizational units in the larger companies. The development of services had originated in sales companies around the world and after a period of time become more centralized. In regard to ITT Flygt for example, it was mainly affiliated sales companies around the world who developed services. Far reaching service contracts were for example rare in Sweden but much more common in the UK. Likewise with Atlas Copco AB, service development occured mainly in the sale companies around the world. Different services were also offered in different markets. The development of services to a large extent occured in the sale companies, as they were situated closer to the customers. There was also a lot of variation amongst the various sales organizations—some had just started off while others had considerable experience. Service development appeared to be quite decentralized at the time of this study but one respondent expressed the need for more standardized contracts in order to avoid mistakes and find profitable solutions. In the year 2000 a Business Line Service organization were introduced at Atlas Copco Tools AB working with business and service development. Product development projects with sales companies were performed in order to standardize service offers. One example given was where the sales companies agreed about a service module and then modified it to fit at least three large markets, before making it a standard service. There were activities for changing services at a few markets in order to focus on more profitable services. The retail organizations also had a tradition of learning from each other according to the respondent. In a similar way a respondent from Scania described the development of services in Scania. The retailer was the one having a relationship with the customer and it was in the dialog of the customer and the retailer that the services have been developed. It was not an initiative from Scania headquarter from the start. Service development was still much based around gathering information from different retail companies and then spreading the information to other retail companies. The service development was very
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market driven. Financial solutions as well as maintenance offers were developed as well as an organization for handling of financial services and maintenance. There was a difference between the handling of small customers, purchasing few trucks and large fleet customers. For the large fleet customers Scania centrally introduced a unit for managing key accounts across several countries in the mid 1990s. The customers asked to be offered deals based on costs per kilometer, where everything was included. Sound experience of selling for a fixed monthly fee already existed in for example England and the Netherlands, so employees from the four to five markets in Europe that were believed to be best suited to this were gathered in order to develop a best practice for handling these contracts. In 1998 Scania changed their business concept to also include services but according to one respondent the internal dialog and information about the new business concept were low. At the time of the study one respondent expressed the need for an organizational unit responsible for service development in order to get a holistic perspective on the services offered in the company and to be able to formalize the process of developing the services. In the smaller companies the development of services was more centralized meaning that top management in the companies was involved in developing the services from the start. Duroc establishes relationships with its customers and sold its services traditionally before suggesting a charge-per-kilometer arrangement. This was because Duroc claimed that it needed to be qualified as a supplier before moving on to conducting business in a new way. It was also difficult for Duroc to establish relevant price-setting with the charge-per-kilometer arrangement before knowing the specific situation of the customer. Duroc emphasized that functional sales were very much built on the consumer gaining trust in the provider, before willingly handing over more responsibility to them.
7.3.2
Complexity in development of offers
Respondents from all the companies studied made the point that the importance of understanding customer needs was even greater when selling functions. Knowledge about how the customer handles and uses the product was of great importance to the product developer. One respondent from Scania stated that new market offers in the longer-term facilitate product development as the company was getting closer and closer to the customer, and not only from a marketing perspective. From a product-development perspective, this respondent sees possibilities for further adapting the company’s products to what they are actually being used for. This same respondent claimed that in the past, the doors between marketing and technicians were more or less locked, and the engineers invented new solutions and then informed the marketing department when they were ready. One respondent at Scania state that this has effect on the physical product that Scania sells the trucks in a new way because they are responsible for the truck. The customer needs to experience that the truck is reliable, has low fuel consumption, and is cost 57
effective and that the customer can use the truck as much as possible without experiencing problems. The respondent also states that there has been little connection between engineers, marketing, sales staff and service staff. A seminary series called Design for Life were to be held in year 2001 for about 2000 employees at Scania in order increase the understanding about the connection between different activities. When developing products they also work in integrated development teams. The challenge for the truck designer in this shift of focus from products to function and service was to look beyond just performance and really understand how the truck was being used, plus maintenance issues during its lifetime. These services in many cases also required both hardware and software to be located in the truck, and therefore good communication between respective departments was considered essential. One problem raised was the difference in development time for various services, the software and the hardware. As all the services customers were expected to demand in the future could not be foreseen, this affected how product development was handled. Usually the design was freest at an early stage of design, but now a Scania respondent saw the need for leaving some applications open, so that possibilities would exist for example for extracting and displaying data if desired. The development and handling of services was also linked to shorter lead times to respective markets, and needs to be handled in another way than the product hardware. The organizational structure of companies needs to be able to handle this. At Atlas Copco one respondent mentioned that he as product developer discussed service rates with the service developer. They have had the demand that the products should last for a period of use before service was needed so that was not new demands for the product developers. However he put forward that the demands for longer lasting products probably will increase the more service contracts that will be signed. In the smaller companies, the connection between developing the product and services was more interwoven. In two of the companies, tight links were present between those working with service development and those working with technical development. In Proton Caretec The Marketing Director put forward the need for a strong connection between sales and marketing and the development of products. Though Proton Caretec had not really started to sell services, the respondents claimed there was a need for the product and the service developers to communicate and understand the business concept. In the development of the E-bed the possibility of leasing the bed was a prerequisite according to the product developer but the Marketing Director put forward that an even more interwoven contact between marketing and product development would have been beneficial in the E-bed development. An integrated team was formed to support the development of the product but marketing representatives were only slightly engaged and sales representatives were involved by listing their standpoints. The respondent also mentioned the need for the product developers to understand the service and selling concept, and by that to be able to understand the marketing department’s aims for the product. The respondent stated that because older people used their products, and that these were handled by a number of nurses and relatives, then the products need to be easy to understand so that the users need little or no prior training in
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order to use them. The Marketing Director at the company also said that an even lighter bed would be good for leasing, so as to make it easier to handle and carry. One product developer at Duroc involved in developing both services and products, thought that the company shows a new way of thinking by now also offering services. When conceptualizing around a new product, the developer also considers how it could be used and how services could be offered linked to the product. There was now a greater need for understanding the market and how the operators in that market act and react. There was also a need for changing the current mindset and thinking along the lines of function and services instead of just products. ITT Flygt had a special project in the U.S.A that involved securing that salmons could pass the establishments with submersible pumps. This lead to that a new solution, a salmon ladder, was developed. Proton Caretec saw a disadvantage in only being able to provide some of the technical needs associated with caring for a patient at home. In order to develop new offers for the market that satisfy all the needs of the home-care patient, it needed to build up a network of partners. Scania established a new IT company called Infotronics for developing service communication solutions. One Scania respondent related experiencing the culture in Infotronics as having different characteristics than Scania, stating that the Infotronics employees were younger and worked with different technology and had faster productdevelopment times. The services and technology developed by Infotronics were used in Scania trucks.
7.3.3
Changes of the product design
Two of the smaller companies, Swepac and Proton Caretec, utilized ecodesign projects when developing the products in the range of services they offer. The products they developed had also become more environmentally sound than their previous products. Being able to use the product in their service offers was a prerequisite for the design, which included considerations such as maintenance issues and weight. For Proton Caretec keeping the number of components used in the product down and facilitate for recycling were focused in the product development as well as designing for a low need for maintenance and also a product that was easy to maintenance. Another prerequisite was to have low weight in order to reducing transportation costs and make it easier for the employees to handle. Proton Caretec made a thorough marketing research and the result from that greatly influenced the design specification of the new HomeCare bed and one of the results was the demand for a lighter bed. The E-bed was possible for one person to handle compared to other homecare beds where two persons are needed to handle because it was to heavy for one person. The decision to shift from selling products to selling product services have however not been based on environmental reasons and the environmental effects and the services were not analyzed for environmental impact. One of the respondents at Swepac claimed to think a little bit differently in the product development process now when they leased products. Developing machines that are 59
easy to maintain was seen as highly warranted. Another Swepac respondent claimed that on the other hand leasing had not changed the way products were developed, as these ideas existed before a new marketing concept was developed, for examples modularization. The respondent though points out that the driving forces for facilitating maintenance was increased when they were responsible for maintenance. This respondent claimed that the company achieved a greater profit when leasing due to their construction policy. Swepac’s production process featured a one-year preparation phase for take-back of and refurbishment of products and representatives mentioned that this had been beneficial as they learned more about their products this way than from statistics. One lesson learned relates to the varnishing of the machine, where using a material that did not need to be varnished was now perceived as beneficial. One respondent at Atlas Copco speculated that the priority given to product development could change if the proportion of service contracts sold increased, from for example the current focus on performance and weight to also include low maintenance costs and the longevity of products. Today’s customers focus mostly on performance but the cost of maintenance could become more important resulting in a demand for more robust products. This however presents a delicate balancing act, as the potential exists to negatively affect other characteristics, such as for example reducing user friendliness and performance. Some respondents, for example at Proton Caretec and ITT Flygt, claimed that developing leasing products it was not as price sensitive as developing traditional sales products, as it was more important that the product be long lasting and easier to maintain. The experience of the product developer at Proton Caretec was that the possibility of renting the E-bed affected how the product had been developed. This product was not as price sensitive as those products destined exclusively for traditional selling, which permitted greater development costs and more refinement in detail. Efforts were also made to keep it as maintenance free as possible. The R&D manager at ITT Flygt also describe that when developing new products functional thinking was much more systematic at present than earlier. This means that customer requirements are coupled to the functions needed for the product instead of to the solutions. The functions needed are considered more or less permanent whereas the solutions for the functions vary with time. An example was that the need for the product to avoid getting clogged. After defining the functions needed the solutions were developed. A Scania respondent claimed that the same effects were achieved in product development when internalizing costs for repairment and by strongly focusing on the total economy of the customer: “…total economy is important regardless of who the customer is - us or someone else…”. IT information about products facilitates services
For Scania to integrate services beyond leasing and become service providers, requires a lot of information from the truck, such as information about driver behaviour, truck usage and information about the truck “hardware” such as component wear and tear.
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One respondent from Atlas Copco thought that in order to facilitate better service and maintenance of products, it would be beneficial for the service organization to have more technical details about the products. One example of doing this was by incorporating a chip that collects data about the tool enabling fault-detection by simply connecting the tool to a computer. One Atlas Copco respondent said, “The plant and the tools may be located in another country but we would still be able to analyze the tool from Sweden”. The service organizations felt it would also be advantageous to be able to reprogram the tools’ operational characteristics. The respondent thinks that this could be possible within a few years, and was already used by other Atlas Copco Group companies. Role for maintenance staff
When increasing service and maintenance responsibility, maintenance staff became more involved in product development than previously, according to some of the respondents in the study. One respondent at Scania emphasized that for Scania’s new series of trucks, service employees had been involved in the development process, design for lifetime, in order to ensure that the products were easier to maintain. According to the respondent, this was seen as important regardless of the way the truck was sold—via contract or traditionally. Short maintenance times were an important factor for guaranteeing satisfied customers, as the customer was without the product for a shorter duration of time. One respondent at ITT Flygt mentioned that information from the provider’s own service employees was seen as more trustworthy and complete than information gathered from external employees. This information was mostly used for achieving improvements in quality. In order to make unexpected solutions to increase value for customers the feedback from users of the pumps were more important. At Atlas Copco, one respondent pointed out that information about competitors’ tools will be available in a new way because competitors tools were often also included in maintenance contracts. This could provide valuable input for their product development. Service contracts were a valuable source for finding weaknesses and then improving the quality of the products. Service and quality engineers were already involved in this way when developing new products.
7.3.4
Organizational aspects
The organizational effects were not central in the interviewees, though several respondents did mention and discuss organizational aspects of making the transition from selling products to also selling services and functions. Therefore there could be more organizational effects involved than those covered by this empirical material. New functions
New functions were needed in order to develop and deliver new services. Offering innovative financing solutions to customers was new to for example Proton Caretec and Swepac. When not selling the products in the traditional way, the financing of these
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needs to be handled in a new way. Often a finance company can be used, which can either be another company in the same group of companies (as for example at Scania), or by an outside financier like a bank. The financier owns the products during the life of the leasing agreement, which were bought back by the supplier or the customer at the end of the leasing contract. The responsibility for the products remained with the supplier. Maintenance and repair agreements require a maintenance system. For companies that had not previously had a service department or unit, this needed to be developed. Swepac stated that for every product that will come in for repair or refurbishment, there has to be a department or unit to quickly assess how much work is needed for each machine. Swepac has had a one-year test period were it has taken back products and refurbished them. This gave it valuable experience before building up its full-scale operation. Culture changes
Several of the respondents pointed out that when the company is undergoing the shift towards selling services like financing, maintenance, running customer operations through outsourcing, or providing expert knowledge to increase customer profit, then this represents a new way of thinking for the company. It was important that everybody in the company understood that the company has become a service provider or a provider of a function and not just the sales organizations. One respondent at Scania felt that when it comes to services, it is much more important to have good internal marketing than it is with physical products. The service concepts are not as easy to understand as products, being more abstract. Therefore there is a greater need to explain them to their own employees to make sure that they understand the concept. One respondent at Atlas Copco mentioned that it was important to get the entire sales organization to understand the services, as well as to convince the customers. The local Sales Managers were very important in this work. The internal service structures needed to be expanded and this could be done by purchasing service companies. With respect to the purchasing of service companies, policies were needed for how to manage the purchase. One respondent at Duroc claimed that the new market offers also influenced production planning. When Duroc was in control of the products, it could plan maintenance and thereby the workload in its production. There was a new mindset needed in production, because while it was good with traditional sales and payment per operation to have a high production workload and wheels waiting in stock, when charging per kilometer it was preferable to have as few wheels in operation as possible and to keep all these wheels running for the longest possible time.
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Shift in expertise
According to respondents from Duroc, the new skills and expertise needed for the selling offers included mainly financial skills such as price setting and new ways of performing financial calculations. Having greater knowledge about the customers’ processes and activities, and a greater understanding of the customers’ business were mentioned as important factors by respondents from several companies including Scania, ITT Flygt and Duroc. One respondent from Duroc stated that in the long run, functional sales could lead to knowledge about the product being lost to the customer. In other words, by focusing on the end functioning and use of the product, but leaving how all the functional requirements were solved totally up to the provider means that some knowledge might be lost to the customer. On the other hand, the customer becomes freer to focus on their own business and only those functions they were interested in.
7.3.5
Main findings RQ 3
•
Development of products was more formalized than development of services.
•
For the large companies the development of services have mainly originated in different sales companies. Centralization of the development and standardization of offers was one way of increasing knowledge about the profitability of different services. It could also be beneficial for getting a holistic perspective of the services provided in different countries and for formalizing the development of services.
•
In order to be able to satisfy the customer it is important to understand customer need and to understand how the customers use the product. It is perceived as even more important when offering FS than when offering a product. In order to fulfill customer need it was sometimes crucial to build partnerships with other providers. There was need for close connection between product developers and service developers in order for the products and the services to match. One problem was that service development was shorter than product development and that services were upgraded faster than the products. Changes in the product that were favorable when offering FS were: o the product should be easy to maintenance, o the product is in need of little maintenance, o keeping the number of components down to facilitate recycling, o more long lasting products.
•
When offering FS the product becomes less price sensitive.
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•
To lower the lifecycle cost for the products was a driving force in product development in several companies. This was perceived to have the same effect on the product design as internalizing costs have.
•
The competence of service staff was valuable in the design process when designing for easy maintenance.
•
Information about technical details, status and use of the product is beneficial when being responsible for maintenance and functionality of products. IT facilitates such possibilities and was used by some companies.
•
New organization units and new skills were needed, in order to provide FS offers, such as financing and service
•
Cultural change in the organisation are perceived important in order to understand the nature of being a service provider
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7.4 7.4.1
Environmental aspects (RQ 4 & 5) Environmental activities within the companies
The environmental activities undertaken within the companies in the study can play a role in how environmental issues were handled when they shift toward selling services and functions. Therefore this has been presented briefly for each company in Table 11. There are two general factors that often affect the level of environmental activity within companies being: (1) the level of customer demand placed on them for undertaking environmental work, and (2) the amount of environmental legislation that the company was required to follow. In addition to these two, the company owner’s attitude towards environmental issues also played an important role. In the companies, specific environmental methods were used to varying degrees in the development of the physical product (see Table 11), but specific methods were not used in the development of services and new business offers. In order to control if selling the function gives environmental benefits, measurement of the differences in the environmental impacts of selling products and the environmental impact when having service agreements or functional sales could be one option to undertake. The companies in the study do not make the comparison. In this chapter only parts of the environmental work in product development that were put forward by the respondents, is mentioned and several of the companies could have more activities for lowering environmental than stated here. Proton Caretec and Swepac, two of the smaller companies, were involved in ecodesign projects with IVFC for the development of new products. In these projects, emphasis was placed on environmental product-development. IVFC provided training and help with analysis methods, and this had greatly effected how Proton Caretec and Swepac had developed their products. Proton Caretec wanted to be in the forefront of having environmentally sounds solutions. Swepac saw themselves as having a mindset focusing on environmental principals and they worked actively with finding sound environmental solutions. Except for the ecodesign project with IVFC they also involved an industrial designer with an environmental profile when developing products. Both these companies experienced low customer demands for environmental issues. Duroc also considered the environmental demands from customers to be low but very strongly put forward the environmental benefits from their new laser cladding technique in marketing. They work according to ISO 14001 and had a consultant helping them with environmental issues. At Duroc no specific environmental tools were used but they saw great environmental potential with their product and the product developer claim that environmental concern was a factor considered when developing new products.
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Environ. demands of customer
Environ. legislation relating to a product
ISO 14001
Environ- Comments mental tools in PD
Yes - for batteries
Low mainly ergonomic
Was under implementation
Checklists, EEA being introduced
No
Low
Work according to ISO 14001
No
No
Low
Implemented
LCA for all products
No
Low
Implemented
Simplified LCA for the E-bed
Yes exhaust,
High customers are dependent on legislation Customer demands on working environment and environment
Implemented
Checklists, occasional LCA
Implemented at the time of print.
No
Swepac
Scania
Proton Caretec
ITT Flygt
Duroc Rail
Atlas Copco Tools AB
Table 11 Environmental activities undertaken within the companies in the study.
length & weight requirement Yes working environment requirements .
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One respondent concluded that it is not a strategically important business issue because they have low customer demands for it, and that the environmental impact of their production and products is low. No guidelines are given in PD but the developer said: “…it is in my head…” Respondents see great environmental benefits from the technology promoted by FS offers. Respondent claimed that the company has a long and strong tradition of environmental consciousness. The owners are strongly committed to environmental issues partly because the products are used in wastewater treatment plants. Environmental concern has been a strategic approach for Proton Caretec who wants to be positioned at the forefront of environmentally sound solutions according to the respondent. An ecodesign project has been performed with IVFC. Greatly affected by legislation. They state to have a strong commitment to environmental ssues in the company and that this is given high priority, and seen as a strategic issue. They see themselves as having a mindset focusing on environmental principals. Ecodesign project done with IVFC. Were in the process of implementing ISO 14 001.
Respondents at ITT Flygt consider the company to have a strong environmental commitment. One example was that LCA were used for all new products. It was interesting to note that interviewees at ITT Flygt stated that Lifecycle Costing (LCC) was a stronger driving force in product development than using LCA. Their internal LCC showed that almost 90% of the lifecycle costs of their products were due to operation, mostly in the form of energy costs. If the company could lower the consumer’s costs this could make it a more attractive alternative. An LCC was not performed for every product, but an LCC view was used in the development process. The R&D manager however experience that finding the best engineering solution for the customer from a holistic perspective has been a strategy for a long time and working especially with LCC has not radically influenced the product development of new products as the mindset had existed in the company for a long time. Modularization of products had been performed in order to lower costs by keeping the number of articles down, increase the development for new products when using the same base for construction, and to facilitate disassembly for recycling of materials. Modularization was also considered to facilitate exchange of parts and maintenance of products. One strongly perceived benefit with LCC, according to the sales director, was that it was easy for the customer to relate to the impacts of the product generated by their company. It was more difficult for the customers to relate to the result of an LCA. The environmental impact did not have the same direct importance for the buyer as the economic costs. Scania had a high degree of environmental legislation and environmental customer demands on their products. Scania prioritized environmental activities high and had a strong focus in product development to lower the environmental impact in several ways. A few examples of activities are choosing material, increasing load capacity and of course lowering the environmental impact from the use of the truck. They set goals when developing a new product that included lowering the environmental impact. Scania had environmental tools as checklists for material choices and checkpoints along the product development process that included environmental issues. Technical improvements and innovations for the trucks were important for improving the products environmental performance. Scania, as ITT Flygt, also focused on the total economy of the customer. At Scania, lowering the costs to the customer was given high priority in product development, and was influential within the product development process. One respondent from Scania stated that having the total cost to the customer as a goal in the development work has affected the product greatly. The company incorporated modularization, and doing this has among other things, led to better possibilities for upgrading and maintenance. To lower the fuel consumption, the cost for fuel consumption and the environmental impact, was highly prioritized at Scania. Modularization has been performed also at Scania. Atlas Copco had very few environmental demands on their product from customers. They had implemented ISO 14001 and were introducing environmental tools as EEA in product development. Material checklists in product development were already in use.
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7.4.2
Environmental effects due to offering functional sales
Several respondents from all the companies in the study had the opinion that environmental benefits could be achieved through selling functions, though environmental factors were not seen by them as a driving force in the process. Several respondents were of the opinion that the activities made in the companies that are economically beneficial when selling functions, like facilitating maintenance and lowering costs during use of products, are in many cases performed regardless of the way the company are selling the product. Other respondents were uncertain if positive environmental effects could be reached by selling functions. For example some of the respondents from Scania expressed uncertainty about how the environmental impact of its products would change when shifting from selling products to functions. They however, expected that if their company made the decision to further develop the selling of functions, then environmental effects were one issue that would have to be examined. Maintenance and service
When it comes to the environmental effects of maintenance and service contracts, the opinion amongst the respondents varies. One environmental benefit mentioned, by for example Scania, Proton Caretec, Swepac and ITT Flygt, was that when maintenance and repairs were controlled and performed by the provider, then the product was maintained in good working condition. The workshops run by the providers conducted controlled management of any material and processes that could be potentially harmful for the environment. Other respondents in the study on the other hand had difficulties linking environmental benefits to service and maintenance contracts, though recognized that their company’s responsibility for the product increases, and higher demands were placed on lowering the costs of product operation. A respondent at Swepac put forward that from an environmental perspective it was important how the compactors were designed in order to facilitate maintenance, one example given were that in the larger compactors oil was used for hydraulics and they had designed the products so that the hydraulic system didn’t need to be opened during its lifetime, unless its needed to be repaired. When performing maintenance oil was avoided to leak. Another design change was to have materials that keept the product looking fresh as studies had shown that users were more considerate when handling products that look fresh instead of old. The material in the cover was changed and varnishing was no longer performed because it usually weared off. The possibility to recycle materials was also considered in design when it came to choosing materials. The respondent put forward that the concept of leasing products had not been driven by environmental reasons. They do consider that setting high goals for environmental performance gives advantages in the sales situation and they wanted to be ahead of expected future demands on environmental performance.
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Internalizing costs for use
Several respondents in the study saw that environmental benefits could be achieved when costs for the use of the product were internalized. Using ITT Flygt as an example, in some cases the energy cost was included in its contracts, thereby increasing its incentive to lower the energy consumed by its product. As energy consumption was often seen as the greatest environmental aspect by several respondents from for example ITT Flygt, Scania and Duroc, these companies considered lowering the operating costs to go hand in hand with lowering the environmental impacts of the products. One effect mentioned was the extended LCC for Scania. The LCC usually ended when the warranty time was ended or when the service contracts ended, but increasing the responsibility time of the truck for Scania could have the consequence that the whole lifecycle of the product becomes important, i.e.Total Lifecycle Management. This was under investigation during the time of the study. Another respondent pointed out that recycling and good possibilities for disassembly could be of importance with retained ownership of the truck. Yet another respondent mentioned that Scania had activities in order to increase load capacity by lowering the truck weight, which could lead to a need for fewer trucks while having the same accumulated transported weight. One respondent at Atlas Copco speculated that if the costs for the pneumatics used for its tools where to be included in the contracts, then the demand for lowering the costs would increase and thereby the energy consumption would be lowered. Currently, there was less focus on the energy costs than in the 1970s when the energy crises raised the cost of energy. For Proton Caretec one way of lowering costs for the products lifetime was to lower the transportation costs. This in combination with customer demands on a light HomeCare bed led to that the new E-bed had a low weight. This was also considered to lower the environmental from transportations because the fuel consumption got lower. Choosing the product used
Some respondents at Scania also discussed that in the scenario with functional sales where Scania owns the products and offers transportation services to the customer based on tonne/km Scania could specify the truck used for specific transportation needs. That could have environmental implications as Scania would be more in control of the performance and design of the trucks used. Also respondents at ITT Flygt have the opinion that environmental benefits could be reached when they can optimize the system and choose the pumps used. One example was given that a new developed pump, with lower energy consumption and easier maintenance but also higher investment cost than previous pumps, was beneficial to choose when ITT Flygt had higher responsibility for the use phase. The product is used
One respondent at Proton Caretec saw environmental advantage in that several persons can use the product when it was leased.
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At Scania, respondents predicted the need for transportation and for trucks to increase. The effect on how many trucks that will be used seem to be increasing and uncertainty were expressed if functional sales could affect the number of trucks used. Respondents pointed out that the reliability and the load capacity was always in focus to be increased and when having trucks that were reliable with little maintenance time fewer trucks would be needed. High load capacity and good planning for the transportation was put forward as important. Optimising business
Respondents claim that haulage customers to Scania have environmental demands from their customers but the main demand was to lower costs. Map systems and providing tools for the haulers to plan their transports could help them to lower costs. One example was to avoid traffic jams and finding effective driving routes. Scania had driver training courses that had proven to lower the fuel consumption in some cases up to 18-20 %. At Scania one respondent also put forward that when supporting the haulage companies in their business and helping them plan their transportation activities it made the transportations more effective. New technology out on the market
Duroc saw large environmental potential in its laser-cladding technique, and functional selling was one way for Duroc to get its product into the market. When having functional sales contracts Duroc was responsible for choosing the appropriate maintenance operation. The laser cladding technology had been used in other applications and in the beginning of 1990s the application for wheels were developed. The environmental potential the highlighted included reduced steel consumption and lower drive propulsion requirements. In more traditional maintenance, wheels need to be replaced after about four grindings; however using the laser-cladding technique the rate of replacing the wheels was greatly reduced. Optimizing the engineering solution
Several respondents at ITT Flygt put forward that the most important aspect from an environmental point of view was to design the engineering solution properly in order to keep the energy consumption low. A couple of respondents from ITT Flygt presented examples of new solutions that had been developed where specific environmental requirements had been set. By optimizing the installations where their products were used, the environmental impact was minimized. One special case was the salmon case in the US, where cooperation between several companies led to the creation of new solutions in order to fulfill customer requirements.
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Ecodesign projects
Two of the smaller companies, Swepac and Proton Caretec, utilized ecodesign projects when developing their products in their service offers. These products were also more environmentally sound then their previous products. Using the product in leasing offers was a prerequisite in design, considerations included designing for low need for maintenance and also a product that was easy to maintenance. Another prerequisite was to have low weight in order to reducing transportation costs and make it easier for the employees to handle. The E-bed was possible for one person to handle compared to other homecare beds where two persons were needed to handle because it was to heavy for one person. Respondents at Swepac and Proton Caretec did not consider the prerequisite of using the product for leasing as a driving force for the environmental benefits reached in changed design but rather an effect of product development strategy and involvement in ecodesign project.
7.4.3
Public procurement and environmental requirements
Proton Caretec and ITT Flygt both had public authorities as their main customers (in Sweden), and both these companies exhibit strong environmental commitment. Respondents from these companies pointed out that they did not experienced benefits in public procurement due to their having robust environmental programs. In the case of Proton Caretec, one respondent raised concerns about a possible backlash against the company’s environmental commitment, as the environmental efforts did not provide the business advantages in public procurement arena that was expected. Respondents from both ITT Flygt and Proton Caretec were of the opinion that public procurement could be used as a powerful tool to create driving forces to improve environmental performance and increase the environmental efforts for companies with public authorities as their customers.
7.4.4
Handling products at the end of their lifecycles
At Scania, contracts covered only a short period of the overall lifecycle of the product. When the contract was over and trucks returned to Scania, they were sold in the traditional sense and Scania lost control of the truck. Scania had offers such as the Scania Exchange Service, where an old part could be replaced with a factory-renovated unit; for example engines, cooling systems and fuel systems can all be reconditioned and fitted into older Scania trucks. ITT Flygt’s products were usually used by one owner during their product lifetime. Product lifetimes could last up to 30 years. ITT Flygt’s products consist only of recyclable materials. For upgrading of its products, ITT Flygt had a modularized system, where for example the driving unit could be upgraded as a module. One respondent from the company said that various ideas have been explored relating to take-back schemes and sending the material off for recycling. ITT Flygt was aware that one way of forming a closer relationship to the customer was by making a deal where ITT Flygt takes back the product and replaces it with a new one. Difficulties in for example logistics and gaining profitable volumes need to be solved.
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The customers of Scania and ITT Flygt had the option of trading in old products when buying new ones. Products manufactured by Atlas Copco Tools AB also have long lifecycles, and were expected to be sold when the customer contracts run out. Recycling of batteries in these products was undertaken as required by legislation. Duroc was not responsible for any waste as the wheels were owned by the railway operators. Duroc could however influence how many wheels that were needed to be replaced. With its new technique, a layer was added to the wheel, and the wheel core does not wear down in the same way as with grinding of the wheel surface in conventional maintenance. Proton Caretec has developed its product with recycling and maintenance as a prerequisite in design, and the E-bed is now 96% recyclable. No products were used in its contracts at the time of the study. Swepac did not receive any of its worn out products back at this time, and had no recycling of its own. In the future, this will depend on the status of the machines. If they are worn out and are not able to be resold, then Swepac’s goal was to deal with them in the best possible way. Most of its products used in contracts were predicted to be sold to Eastern European countries after their contract times run out.
7.4.5
Main findings RQ 4 & 5
•
FS offers were not evaluated from an environmental point of view. The environmental evaluations made were performed for the products.
•
For companies with high usage cost for their products, LCC acted as a driving force in the product development. This driving force was perceived to have the same effect as internalizing costs for use.
•
Connecting environmental benefits to offering FS were for some respondents a new way of thinking.
•
Actions that lead to environmental benefits, according to respondents, by offering FS were due to the use phase of the products: o o o o o o o
•
internalizing maintenance and service, internalizing costs for use, choosing the product used, the product is used, optimizing business, new technology, optimizing engineering solution, and getting new technology out on the market.
Public procurement lacked environmental requirements which was viewed negatively by the companies that had a strong environmental commitment. 72
•
Most products were sold, often to eastern European countries, after ended contract period, therefore end-of –life handling was not performed in-house.
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Part IV: DISCUSSION AND CONCLUSIONS In part IV the result from the empirical study is discussed and related to the theoretical foundation. Conclusions from the research are presented. Generalization of the conclusions is briefly discussed and suggestions are given for further research to be conducted in this research area.
8 Discussion 8.1
Sales alternatives
The companies in this study had all increased the number of options they could use for doing business. The traditional selling of products was an option in all of these companies except Duroc. All the companies had developed a number of selling alternatives responsive to customer needs. The solutions for different customers were customized in the sale situation, and developed in interaction with the customer according to customer needs. The companies utilized a set of basic sales alternatives from which the provider and customer could create a suitable solution. Different financing options could be added to the product in steps, such as capital or operational leasing. Various levels of service contracts could also be added to the product, and were preferred by some respondents when operational leasing was adopted—as the provider company retained control of the status or condition of the product used. Extending the offers further, total responsibility for the functionality of the product was offered, and the function rather than the product was offered for sale. Other ways of expanding business alternatives included being a consultant to the customer, and assisting them in the performance of their business activities. The provider could also provide the labor required to perform activities within the customer’s operations; though this was only done by Atlas Copco Tools through one customized contract in a plant in Brazil. The way the respondents perceived the new ways their companies approached their business varied. The main responses included concepts and terms such as FS, integrating forward, integrated offers, leasing, and customer outsourcing activities. The offers of interest in this study, regardless of what they were called by the companies, are those that fulfill the aspects described in section 3.2.1. The types of offers made by the companies studied have been summarized in Table 12, according to the categorization used by Fishbein et al. (2000). This categorization has been used as it describes a range of different sales situations and business transactions, and fits the offers made by the provider companies—from the sale of a product to the 75
sale of an end result (see Figure 10). Sales of functions means more for the companies in the study than just guaranteeing the intended function of the equipment. What is included in the offer to deliver the function is determined by the relationship between the provider and the purchaser. The pricing of a function is highly dependent on measurable parameters such as kilometers used, time of contract, and payment-per-unit of activity performed. The sale-of-services category is a somewhat confusing category, as services are also added to the products. Here services means providing an end result but the provider also performs the activities. Atlas Copco is one example of a provider fitting into this category, as they also perform the actual work on site by using the tools and performing the operations required. Sale of Functions
Operating Lease/Rental Sale of Products w/Service Contract Purchaser owns equipment through endof-life. Seller is paid to provide service for a specified period (often a“warranty”)
Lessee/renter pays lessor for the use of a particular piece of equipment over a specified period At lease end, lessor retains ownership of equipment (or lessee may purchase at fair market value)
Seller guarantees intended function of equipment but contract not tied to particular piece of equipment Purchaser provides labor to operate equipment Seller retains ownership at end of contract
selling
Sale of Products Purchaser owns equipment Seller has no responsibility for service or end-of-life
servicising
Capital Lease Lessee pays lessor for the use of a particular piece of equipment over a specified period At lease end, lessee can assume ownership of equipment for a nominal price
Lease w/Service Contract Any capital/operating lease during which lessor is responsible for product maintenance
Sale of Services Purchaser pays seller based on the delivery of the desired end result of the service, e.g., clean floors Seller retains control/ownership of equipment, supplies, etc., and provides labor to perform the service
Figure 10 Business transactions in the product-service continuum (after Fishbein et al, 2000).
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Table 12 Categorization of the sales alternatives the companies in the study.
Atlas Copco Tools
Duroc
ITT Flygt
Proton Caretec
Scania
Swepac
Sale of product
X
X
X
X
X
Sale of product with service contract
X
X
X
X
X
X
Capital lease Operational lease
X
X
X
X
X
Operational lease with service contract
X
X
X
X
X
Sale of functions
X
Sale of services
X
X
X
X
X
X
* The categories within the graylined box - operational lease with service contracts, sale of functions and sale of services fits the definition of FS used in this thesis.
Categorizing the sales activities in these companies according to the sale situations mentioned above are somewhat problematic. These categorizations do not fully describe the situations in the various companies. For the providers to act as consultants, or become more of a business partner than a supplier is not included in the categorization. At for example Scania, business is expanding through offering services for actively supporting its customer operations, and thereby helping customers to lower operational costs through the provision of advice and technical equipment - in other words helping their customers conduct their business. A similar situation occurs at ITT Flygt, who also act as consultants, and are involved in the development of the engineering solutions that their pump is used in. The role of a consultant can be undertaken in more than one of the categories described above. This is why the gray marks appear in the sale of services categories. ITT Flygt was the only company that included the costs for the use of the product, and for the consumption of energy - though only in a few of their contracts. Duroc differs from the other companies in the study, as maintenance is the company’s main business, and the wheels it maintains are not owned by it. All the other companies in the study develop and sell products. As Duroc does not sell a product, it consequently does not have the option of offering financial or leasing services. The major change made by them is that instead of charging the customer per operation, they take full responsibility for the entire maintenance program, and charge the customer per kilometer that the wheels run.
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8.1.1
Eco-efficient services or product service systems?
The offers made to customers can be compared with categories of EES (see Section 3.2.2). The companies in this study conduct activities that fit these categories. All the companies have service agreements that include product-life-extension services, and a number of the companies have refurbishment or exchange programs for parts used in their products. Product-use services are provided by the companies in the study, mainly as operational leasing contracts. Result services are also offered by some of the companies in the study, such as the pay-per-unit contracts offered by Atlas Copco, and the services performed by Duroc, who charges per kilometer. Mont (2002) described that PSS contained 5 elements (see section 3.2.3). Scania and ITT Flygt can be said, to some extent, to have a product service systems according to these elements. They have a well-developed system for upgrading and refurbishing products, reusing and recycling materials. They have trade-in systems, customer can return old products when buying new. The take back of product does not cover all the products. Proton Caretec and Swepac also intend to take back products and reuse or recycle them. This is however not made for all of the products that are manufactured in the companies.
8.2
Development of functional sales
The FS offers made to customers seem to have been developed stepwise. Service contracts and financial services were the first steps taken before moving into adopting increased responsibility for total solutions and offering FS. Amongst the larger companies, development of services has originated in the sales companies. The different customer demands in different markets has affected sales companies, pushing them to develop service offers. Services that have been added to products or technologies include financial solutions, service offers, and training in product use. The offers available to customers have been customized in the selling process between the sales people and the purchasers. Centralization of service development has occurred in order to assemble knowledge about services, and to be able to spread that knowledge to the sales companies. The issue about how far to centralize the development of services seemed to be an important issue in the larger companies. On the one hand, sales companies in different countries were closest to their customers and had the best knowledge of their customers’ needs; but on the other hand, standardized offers were needed and used in a number of countries, and were evaluated and proved to be economically successful. Centralization is also perceived as being important for formalizing the process of service development and to form a holistic view of the services offered in different countries. In smaller companies, the development of services was undertaken centrally within the organization. In two of the smaller companies, the same people that developed the product also developed the services.
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8.2.1
Complexity in development process increases
In line with the experiences of Brännström (2001) and Brezet (2000), the development of services and products in the larger companies was carried out by employees with different skills and expertise, and from different organizational areas. In the larger companies, the interaction in the development of the products involved integrated teams incorporating skills and expertise from several business functions in those companies. The development of products and services were separate activities. In the smaller companies, the development of services and products were much closer, and in some cases even performed by the same people. The development of services was more ad hoc than the development of products. In the larger companies, structured product development models were used for the development of the products. The more ad hoc and decentralized way of the developing services, and the more centralized development of products in R&D departments agrees with the findings of Boden and Miles (2000), Edvardsson et al. (2000) and Brännström (2001). Edvardsson et al. (2000) proposed a structured development model for developing services. It is interesting that even the companies with structured processes for developing products do not apply a structured model for developing services. As mentioned already, partially centralizing the development of services is one way of making the development process more formalized. It is most important though, to not loose contact with the customers. The number of key parties involved and the need for integration increases when designing FS solutions compared with developing products. As mentioned already, interaction between a number of key parties within product development is considered important by several researchers, when developing products (Andreasen & Hein, 1987; Norell, 1999; Ulrich and Eppinger, 1996), services (Edvardsson et al., 2000) and combined solutions (Brännstöm and Elfström, 2002). The differences lie in which particular parties are required to work in an integrated way while developing the different solutions. In this study, respondents drew attention to the need for service developers and product developers to integrate. One example of a problem in product development stemming from offering services cited by one respondent, was that services have a shorter development time than products, and that the services affect how some special features are designed in the product. These time differences are difficult to manage. This example illustrates the design paradox where the degree of design freedom becomes lessened the closer to production the products are, yet the knowledge about how to design increases. The expertise of the maintenance performers was also considered to be valuable in the design process for facilitating service and maintenance activities. This is in line with the statements of Mont (2001) that designing a PSS requires the integration of all the parties across the whole lifecycle of a product. Integration between service and remanufacturing organizations is seen as being especially important to 79
achieving economic incentives from service activities for driving manufacturing or design changes. For closing product flows and reducing transport distances, it is important to recruit business partners and develop a system for taking back products. Respondents raised the need for increasing the knowledge about customer needs and how customers use the products. This is perceived to be better undertaken in service companies than in manufacturing companies (Boden and Miles, 2000), and it seems that manufacturing companies need to increase their knowledge about customer requirements and how customers use the products. Getting the customer more involved in the development of services and products was seen as important for being able to satisfy customer needs. In order to be successful at creating value for customers, Kim and Mauborne (1997) stated that companies needed to take advantage of the innovation potential in the product to use, in the services, and in the delivery. All three of these components need to be considered when seeking new value for customers, and it was concluded that value innovators think of the total solution needed for the customer. This also increases the need for integration between service and product developers, and in the development of the organization. Some companies found creating partnerships was crucial for being able to satisfy customer needs. The companies in this study required major organisational changes when shifting from selling products to functions, which is in agreement with the findings of Ehrenfelt and Brezet (2001). The organisational changes needed included for example, finding a solution for financing the products, servicing them and refurbishing them. Brännström et al. (2001) for example proposed a development model covering the product lifecycle. Pulling this together then, the following would be beneficial when developing FS offers: •
• • •
having sufficient input of expertise into product development from all the parties involved throughout the product lifecycle; the customer needs to be involved in the development of offers; business developers and service developers as well as product developers could benefit from integrating or having a high degree of transparency between activities; service staff would also be useful in product development; developing partnerships in order to be able to provide the desired functions— such as finance institutions, IT companies and other companies providing crucial knowledge and products to be able satisfy customer needs; developing the organization for handling financing, maintenance and system for taking back products; and formalizing the service development process.
This makes it very important for companies to have sufficient skills and expertise for handling the increased integration and information flow needed for those involved. Product development is in itself seen as a complex process involving large numbers of
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different parties with their different requirements. When developing FS, the complexity of developing sales offers to customers increases. Having structured processes for supporting service development could be helpful here. According to Brännström and Elfström (2002), having a well-structured business development process as well as high degree of transparency between different development activities is a key factor for successfully developing FS offers.
8.2.2
Obstacles to become functional sales providers
Besides having to manage a more complex development process, there are other obstacles that the provider companies have to overcome. For instance, financial obstacles, having to adapt to a new relationship with the customers, and organisational changes were all perceived to be obstacles by the respondents. The providers take a financial risk when opting not to sell their products. This financial risk needs to be overcome, and Mont and Lindhqvist (2002) claimed that this was one major issue to resolve before provider companies could accept retaining ownership of their products, and that the financial sector had an important role to play in facilitating overcoming this obstacle. The sales situation becomes more complicated when the seller is required to have a sufficient amount of knowledge for combining the appropriate total solution for the customer. The new relationship with the customers includes a new way of price setting. In order to set the right price when offering FS, the provider needs to form a deeper understanding of the customer’s activities, and an understanding of how the product is to be used. To be able to satisfy a greater portion of customers sometimes requires the formation of partnerships. One respondent perceived differences in the negotiation situation. The customer can negotiate the price for the function provided, and lowering this is perceived to have a larger economic effect than it would when negotiating the price of specific products. Some companies perceived a low level of market maturity, and a lack of understanding of lifecycle perspectives to be an obstacle for gaining acceptance for new business solutions. To make it even more complicated for the companies, several respondents claimed that the corporate culture needs to support the handling of services. The companies need to move from being product providers to becoming service providers. Some respondents perceived this to be a slow process. In the literature on services (for example Edwardsson et al., 2000) company culture is an important aspect of being a good service provider.
8.3
Environmental aspects of functional sales
The motivation for companies in this study to develop and offer functions consisted mainly of one or more of the following: customer demand, increasing market share by differentiating products through adding services, and getting new technology out into 81
the marketplace. No respondent in the study claimed that achieving environmental benefits was a strong driving force for developing the new business concepts. Environmental benefits were however highly regarded. The finding that environmental benefits were not seen as a strong motivator is in line with the work done by other researchers (for example Mont, 2001; Fishbein et al., 2000; White et al., 1999). The lack of environmental driving forces here appears to partly depend on a lack of customer demand. Public procurement was for two of the companies in the study, expected to determine the demands on their environmental work. The companies in the study had however not experienced any benefits in public procurement from having wellorganized environmental programs. One way of increasing the environmental driving forces is to tighten the demands for environmental concerns in the public procurement process.
8.3.1
Business strategies that create incentives for lowering environmental impact
As previously discussed, there is some confusion surrounding the use of terms in this research area. In academia, different terms are used for the same or similar activities. In industry, the terms are closely connected to sales situations, and how they perceive their business development. Confusion and differences in the usage of terms could lead to difficulties in understanding between academia and industry. From an environmental point of view though, it is important to focus on what the different business concepts lead to. Interesting business concepts from an environmental perspective are those that create incentives and shift the mindset within a company toward addressing the profits that can come from performing activities that reduce negative environmental impacts during the lifecycle of the product and those stimulating innovative solutions (with less environmental impact) for fulfilling customer needs. One respondent described an example of a shift in the mindset of one of the companies. This respondent explained that company profits had traditionally been based mainly on the cost to the customer for material; for example investment cost for the product, and later on costs for spare parts and maintenance. The problem with this type of business concept is that the opportunities for increasing the profit from these products are limited. In order to secure profit and therefore company growth, services become an alternative. By using services and integrating forward, the provider can lower the customer’s operational costs and also create value for the customer by acting as a consultant and developing the customer’s business. The profit for the provider is then coupled to the value the provider creates for the customer, instead of having a profit based purely on the income generated from the sale of products and spare parts. The provider company then profits from lowering the costs for the products used and incentives are created for the provider to profit by being more careful with materials and natural resources.
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The following three situations were outlined by White et al. (1999) where incentives were created for a provider to potentially lower negative environmental impacts during the lifecycle of the product: • • •
when internalizing use or disposal costs, when the product has economic value at the end of its life, or when the product provision is a cost rather than a profit center.
Table 13 presents a number of situations that can create incentives for lowering environmental impacts (from leasing to the sale of services) for the companies in the study: Table 13 An overview of situations that create incentives for lowering lifecycle costs and the situations for the companies in the study.
Company*
Internalizing use cost
Internalizing disposal cost
No
Product has economic value at the end of its life No
Product is a cost center rather than a profit center Yes
Atlas Copco Tools ITT Flygt Scania Swepack Proton Caretec
Yes Yes Yes Yes Yes
In some cases In some cases No No
In some cases In some cases No No
Yes Yes Yes Yes
* Duroc is not included here as it is exclusively a maintenance company.
Customers of Scania as well as ITT Flygt have the possibility to trade-in products when buying a new product, so they are in some cases responsible for the product at end of life. The products then have a trade in value reducing the cost for the new product. The providers have the responsibility for the products during the lease or FS period. However only a portion of the total amount of products that the respondent’s company manufactures are used in leasing or FS. Several of the products are still sold traditionally, meaning that the incentives are still partly linked to the total number of products produced. The possibility for the companies to reduce number of products needed for providing a service or a function are for manufacturing companies providing limited in some cases. It is for example difficult to reduce the number of home care beds needed. However what bed that is used can be affected.
8.3.2
Environmental considerations in developing functional sales
It is worth noting that all the companies in this study either used environmental tools, or took environmental considerations into account (or both), when developing their products, but when developing FS offers, these environmental considerations and evaluations were less structured or even non-existent.
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Several of the companies in the study claimed to have a strong environmental commitment, and this could affect how their services were developed. It is however very difficult to state the extent to which environmental awareness and commitment affected the development of services. McAloone (2000) and Johansson (2001) noted that the level of experience in conducting eco-design impacted on the practice of environmentally conscious design. McAloone (2000) stated that shifting toward selling services could be an effect of adopting a whole-life-perspective in design. Motivating a company to prioritize environmental issues and see these as being strategically important could depend on environmental-market and legislative demands. The degree of legislation and customer demand varied greatly amongst the companies included in this study. ITT Flygt and Scania seemed to have a high level of eco-design experience. They also faced some or all of environmental-market, owner, and legislative demands. Swepack and Proton Caretec seemed to have placed a high priority on environmental issues and participated in special eco-design projects when developing their new products, which resulted in innovative design outcomes of these products. Duroc Rail saw considerable environmental potential in their innovative solution for servicing railway wheels. Altas Copco Tools faced low environmental demands from both their customers and legislation. They had some experience in using environmental checklists in design, and were about to introduce EEA to their product developers. The above mentioned actions were however focused on product development. Duroc however had little experience of eco-design, but focused on solving a technical problem (see Johansson, 2001). By applying a new technology and creating value for the customer, Duroc Rail has been able to radically change the negative environmental impacts associated with railway wheels, through increasing their durability with new technology. FS was used for getting this new technology into the market. In this case, an innovative technology provided the driving force for FS. For the other companies in the study the FS offers were developed by combining their products sold traditionally with services. Technical innovations have in some cases been developed for parts of the products but not to the degree of finding an alternative innovative solution used to fulfill customer need. As the environmental effects from offering FS have not been measured in this study, it was difficult to state what the environmental effects really were. It was also sometimes difficult to discern whether activities undertaken in the organizations were due to offering FS or due to other activities. One example of this is that Swepac and Proton Caretec attended eco-design projects that had a great impact on the design of their products.
8.3.3
Environmental benefits of offering functional sales
For a number of respondents, relating environmental benefits to offering FS presented a new way of thinking. The awareness of linking environmental considerations to offering FS also varied amongst the respondents. A number of the respondents spoke about actions leading to positive environmental effects from offering FS, but there were also other respondents who did not consider that environmental benefits could be achieved by offering FS. Services such as leasing and other financing services were seen by some 84
respondents as “paper products” that had no effect on the environmental impacts of their company’s products. To a large extent, respondents perceived that the actions linked to FS which led onto environmental benefits occurred mainly during the usage phase of the products by optimizing the operation of products (White et al., 1999) but also by optimizing the customer solution (see Table 14). Optimizing an engineering or business solution was seen as environmentally beneficial, mostly because energy consumption could be controlled. Choosing the optimal product for different situations for the customers was also seen as environmentally beneficial, as over sizing could be avoided. Respondents also saw benefits in the use of the product, where for example several customers could use the same product according to their needs; leading in turn to the generation of fewer products. Internalizing service and usage costs were seen as strengthening the motivation for lowering the LCC of the products. According to the respondents, another benefit in this context was that the provider performs the maintenance of the products, and consequently the products are maintained in good condition. Because new technology is often more expensive than older technology, getting new technology that leads to reduced environmental impact out into the market is seen as one action that leads to environmental benefits. This is especially evident in the case of Duroc but also for ITT Flygt. Table 14 Actions that lead to environmental benefits, and how these benefits are achieved through offering FS.
Actions that lead to environmental benefits through offering FS Internalizing maintenance and service.
How environmental benefits are achieved by offering FS
Affecting product development, leading to good “housekeeping” of products.
Internalizing costs for use.
Affecting product development to lower the usage costs and thereby lowering energy consumption.
Choosing the product used.
Being able to choose the most suitable product for different situations.
The product is used.
Enabling the product to be used by several consumers instead of just one.
Optimizing an engineering solution.
Optimizing the customer’s engineering solution and lowering environmental impact, mainly energy consumption.
Optimizing a business solution.
Optimizing the customer’s business operations and lowering environmental impact, mainly energy consumption.
Getting new technology out to the market.
Being able to get new technology - with higher investment cost, lower lifecycle cost, and less environmental impact - out to customers. 85
In a number of the companies studied, environmental benefits have been achieved by human-scale effects (Zaring, 2001); through providing smart solutions to customers. These include for example, knowledge how to develop optimized engineering or business solutions, and providing good product housekeeping.
8.3.4
Does offering functional sales change product design?
In endeavoring to gain environmental benefits through offering FS, it would be interesting to see whether FS gave rise to incentives for changing product design. For example Mont (2001) state that product design facilitating reuse, remanufacturing, upgrading and recycling is important in order to gain environmental benefits and closing material loops. Many factors affect product design, and it is difficult to state clearly whether the design of any products has been changed due to the fact that these companies offered FS. Even though only a portion of the total number of products produced by the companies is included in leasing or FS offers, some factors promoting change were found and also a lack of promoting factors was found. Several factors promoting lowered usage costs and facilitating maintenance were perceived to be strengthened by offering FS. The new situation that could have an effect on product design is that the products become less price-sensitive when the ownership of the product is retained. Some companies were responsible for the products for several years, and that seemed to have had the same effect on product design as focusing on lowering customer LCC. Functional thinking
Having a mindset involving functional thinking in product development rather than solution thinking, could open the way for innovative solutions. A functional thinking mindset is also valuable when selling products, not involved in FS. The R&D manager at ITT Flygt related that when developing new products, functional thinking was much more systematic than before. This means that the customer requirements were coupled to the functions needed for the product instead of to the solutions. Functional thinking should also be applied when developing the total solution for the customer, including products and services, and thereby opening the way for innovative solutions. New situations—motivation for changing product design
A new situation for product development was how to deal with products that became less price-sensitive. This had the effect that more effort could be put into the development of the product and even into innovative ways of solving customer needs. One company that had not providing services previously, mentioned that having a test period for taking back products for refurbishment was considered valuable by the product developer. New knowledge about the product was gained during this period concerning the wear on parts and the overall fatigue of products, that were both useful in the design of new products. Being responsible for the product could therefore act as a new motivator for changes in product design. A number of the companies in the study
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already had refurbishment and exchange programs for certain parts used in their products. These programs were not necessarily an effect of offering leasing or FS. Strengthened motivation for changing product design
In FS, it is according to respondents beneficial when the products are easy to maintain, need little maintenance, and have as few components as possible. This facilitates recycling. Keeping the lifecycle cost for the products down is also considered important. Motivation for this was perceived to be strengthened. One motivational driving force for changing product design stemmed from internalizing environmental use costs (White et al., 1999). For the companies in the study, facilitating maintenance was given high priority when these costs were internalized, so too was lowering the lifecycle cost of the product. Having a low LCC was perceived as more important than having a low initial investment cost for the product. The pre-existing mindset in product development within a number of the companies, always strove toward a low LCC, or low total economy for the customer. The respondents claimed that internalizing costs only increased this driving force, and supported the existing product development strategy. At Scania and ITT Flygt, the LCC was of special importance, as the products had relatively high usage costs, mainly due to their energy consumption, and these companies had been focusing on lowering LCC for years. For these companies, this also means lowering the environmental impacts. The largest environmental impacts during the lifecycle of these products occurred during the usage phase, and mainly involved energy consumption during product use. In two of the smaller companies - Swepac and Proton Caretec - respondents claimed that leasing (operational) the product to customers was a factor that affected the design of their newly developed products. Serviceability and weight are examples of product attributes that were affected by having leasing as a sales prerequisite. One respondent at Swepac also stated that actions taken due to that prerequisite would have been conducted regardless of the way the products would have been sold. These two companies were also involved in specific eco-design projects with a consultancy firm, and much attention was focused on environmental issues in the development process. ITT Flygt included the energy costs incurred using their products, though this has only been done in a few customized contracts so far, and were also considered to strengthen an already existing driving force for product design. The use of IT in products makes it easier for the provider to monitor the products, and thereby keep track of the status of the products. This is important for lowering the cost of maintenance, and for securing the functionality of the products. Weak motivation for changing product design
In a study performed by Fishbein et al. (2000), leasing was shown to act as a motivator for closing material loops and changing product design, even though leasing was not developed for environmental reasons. According to the same study, the volume of products taken back by the companies was large, and the companies were also well experienced in taking back products. However, the motivation for closing material loops 87
seem to be weaker by comparison in the companies investigated in this study, because: (1) leasing or functional sales accounted for just a small part of the business, and the volumes of products used in leasing or FS contracts in several companies was low; (2) some companies were only just starting to develop leasing or FS and therefore had little experience in taking back products; (3) several of the companies in the study sold or stated that they intended to sell the products to for example Eastern European countries after the lease or contract period ended. This last point meant that they would loose control of the products after the contract period ended, and therefore would also loose the motivation for changing product design stemming from internalizing the end-of-life handling of their products. As Fishbein et al. (2000) pointed out, there can be leakage of the responsibility for the product. The precondition for achieving environmental benefits stemming from the product having economic value at the end of its life or internalizing disposal costs (White et al., 1999) are therefore fairly weak for these companies. Even though the end of the product’s life is often not handled by these companies, they have nonetheless increased the number of years that they are responsible for the product. For example one respondent from Scania pointed out that the sales value of the product after operational leasing is greater when Scania has serviced it. Therefore it is in Scania’s interests to keep the product status (condition) good, and to refurbish the product before selling it on. As mentioned previously, the economic value of the product is not at the end of the product’s life, but at the end of the leasing period, which to some extent, has the same effect on driving changes in product design as having the responsibility for the products at the end of the product’s life. At Scania and ITT Flygt trade-in of products is possible meaning that they take back a number of products when selling new products. A number of the companies had refurbishment programs.
8.4
Developing FS taking environmental considerations
It is important to consider each business case in its own context. The environmental impact from the products in the study varies greatly. For products that require energy to function, a larger part of the environmental impact during the product lifecycle is linked to the usage phase of the product. Some examples of these are submersible pumps and trucks. Reducing the environmental impacts of these products during their usage phase is relatively speaking more important for reducing their total environmental impact than recycling them. By offering FS, environmental impacts stemming from the usage phase can be lowered. However this only covers the period for which the providers are responsible for the products. In several cases, the responsibility for the usage phase of the products was only adopted for a part of the product lifetime - before it is sold. In products that are less energy demanding - such as homecare beds - the usage phase gives rise to a relatively small part of their total environmental impact, transportation of the product is however important to consider. All the companies in the study showed eco-efficiency gains during the whole lifecycle of the product by optimizing the use phase and having a product design facilitating reuse refurbishment and recycling activities. Duroc also utilized dematerialization and developed an alternative way of solving customer need. The companies had all been in 88
existence for a relatively long time, and they provide more or less mature products that had been refined and developed continuously over the years. Environmental tools were used when developing the products however the environmental evaluation made in companies when developing services and FS offers could be increased. Literature contains several proposals for how to take environmental considerations into account when developing FS. The importance of performing business and environmental evaluations in an early phase has been raised by for example Hockerts (1998), Goedkoop et al. (1999) and Brezet (2000). Hockerts and Goedkoop et al. for example, have developed models that could be used at a business development level for developing FS solutions that would take economic and environmental considerations into account. Hockerts advocated having an ecointegrated innovation team at a business strategy level when developing FS offers. In line with the Kim and Maubourgne (1997) perspective - creating value for the customer by focusing on the service, the product used and the delivery - focus should be placed on finding the innovation potential for the product used, the infrastructure and the user behaviour, in order to ascertain the environmental benefits from innovations (Brezet et al., 2001). How to integrate environmental considerations into the development of FS is an important question requiring further investigation. The products included in this study are more or less mature products and several of the companies have upgrading and refurbishment programs. The companies mainly provide FS by adding services to a predefined technology or product (se figure 11). The companies in the study integrate forward by taking larger responsibility for the product and the function to be fulfilled by applying services such as financial services, maintenance services to their main product (product life extension services and use services). They become closer to the customer and become responsible for larger part of the value creation for an end customer (horisontal integration).
The company uses a predefined technology, adding services, for fulfilling the function and the customer need
Customer need
The function to fulfill
Figure 11 Fulfilling customer need by using a predefined technology.
There is a theoretical potential that FS, especially result oriented services, could lead to innovative solutions with less environmental impact or dematerialized solution for fulfilling customer need. The idea is to fulfill the customer need in a new way by 89
focusing on how the function the customer needs can be provided not having specified the solution. However, Hekkert et al. (2001) only expected incremental environmental improvements for companies adopting result services as innovation is focused on organizational and legal aspects rather than technical innovations. The companies in this study have developed and refined their technology for decades and several of them even have the main product they use for solving customer need in their company name. In order for manufacturing companies to provide result services being open to use new technologies for fulfilling customer need it might be beneficial to create partnerships (vertical integration). For example Proton Caretec expressed that partnerships were an option for them for being able to provide result services and fulfilling customer need not only using there own predefined technology. ITT Flygt also showed an example of finding new solutions for solving a specific problem. In their case concerns for salmons in an establishment in the U.S.A lead to new partnerships and new innovative solutions. In Figure 12 this is illustrated by having partnerships with other companies in order to be able to provide different technologies for fulfilling customer need. Duroc is however an example of a company that independently has developed and provides different technologies and solutions for fulfilling customer need.
The company can, with or without partners, provide different technologies for fulfilling the function and the customer need. Customer need
The function to fulfill
Figure 12 Fulfilling customer need by choosing from different technologies or develop a new solution.
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9 Conclusions The companies in the study have increased the number of options they could use for doing business. The manufacturing companies have added services; such as financial services and maintenance services to their product and created value for the customer by integrating forward. In most cases the technology to be used to fulfill customer need is predefined. In order for academia and industry to fully understand one another, it is important that both groups focus on what is actually performed in companies and avoid the confusion that may arise from using different names for similar concepts in academia and industry. From an environmental point of view, it is important to focus on what the different business concepts lead to. Business concepts that are interesting from an environmental perspective are those that create incentives and shift the mindset in the company toward generating profit from performing activities that lower environmental impacts. FS development is not usually driven by adopting a new business concept as an environmental strategy. However to some extent, FS does act as an environmental strategy. Within the companies in this study, the awareness of environmental benefits linked to offering FS varied greatly, and more emphasis could be put on increasing environmental awareness in order to fully realize the environmental benefits that can arise from offering FS. It is interesting though that the environmental benefits mentioned by the respondents mainly concerned the usage phase of the product, such as optimizing solutions, choosing the product to be used, and that the product is actually used. The usage phase for several products involved the need for an energy source, which is often the phase of a product’s lifecycle that has the greatest environmental impact. Therefore if the usage phase can be positively affected, this is environmentally beneficial. Getting new technology - often more expensive and with lower LCC and environmental impact than older technology - out into the marketplace was also considered important from an environmental perspective. Offering FS mainly strengthens the motivation for changing product design. A new situation that arose was that these products became less price-sensitive. Focusing on lowering the LCC was a strong motivator for product development in a number of companies. To some extent, this had the same effect on product development as internalizing usage costs. To facilitate maintenance and refurbishing were also perceived valuable. When developing FS offers, the complexity in the development process increases. FS development could benefit from the following points. •
Incorporating skills and expertise from all the parties involved throughout the product’s lifecycle into product development. Importantly, the customer needs to be involved in the development of offers. Business, service and product developers could benefit from integrating or having a high level of transparency
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• • •
between activities. Service staff would also be useful in the product development process. Developing partnerships for providing the desired functions—partners such as financing institutions, IT and other companies would provide crucial knowledge and products to assist satisfying customer need. Developing the organization further to handle for example financing, service and end-of-life considerations, and incorporating a service culture into the company. Formalizing the service development process.
There are still several obstacles hindering business or slowing the FS development process down in companies. These obstacles relate to for example financial issues, dealing with a new type of customer relationship, and organizational change. When developing FS, being environmentally conscious, creating value and achieving environmental benefits need to be kept in focus. The knowledge about possible environmental benefits could be increased in the companies and environmental evaluation of services and FS offers could be implemented. In order for companies to develop innovative solutions, not being depended on a certain technology, for fulfilling customer need partnerships could be one option.
9.1 Generalisation As Meijkamp (2001) conclude EES, and FS, is very context specific and that is important to recognize when applying the results of this study. The result description in the thesis is therefore rich, giving readers a possibility to learn from the result and compare with their own experiences. Factors to be considered when applying the results are that the companies included in the performed study are all in the manufacturing sector, having product development in Sweden, and they conducted business-tobusiness activities. Both large and small companies were included in the study and they develop, manufacture and sell products with different characteristics. The intention with the research has not been to statistically be able to make generalizations for a specific sector or company size but rather to explore a number of specific cases. There is however some results that are specific to for example small and large companies as specified in the result description.
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10 Future research The research presented in this thesis had an exploratory approach covering several areas. In future research the scope of the study could be narrower focusing, more indepth, on special aspects of FS. Areas suggested for future research are: •
In this study the environmental awareness of FS varied much among respondents. The use of methods for lowering products environmental impact is becoming fairly spread in companies. The use of environmental evaluation and development tools when developing services and business concepts seem to be much lower or non-existing. For companies to fully environmentally gain from FS environmental considerations should be evaluated in the development phase. Researchers propose some models for how to environmentally and economically evaluate FS and PSS. Both what evaluations models to use and how to implement these models in companies are proposed as areas for future research.
•
The complexity in product development increases when manufacturing companies also develops services and FS offers. How to organize and manage development of FS is also an important area for future research.
•
How to stimulate companies to develop innovative solutions used when offering result services that lead to dematerialized solutions, also having impact on consumer behavior is also an area that could be further studied. Studies for how to organize development activities in companies that support innovations are also suggested.
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Web pages (pdf. documents not listed above are specified) www.atlascopco.com Årsredovisning (annual report) 2001 www.duroc.com www.environ.se www.flygt.com Through history with Flygt. www.protongroup.com www.scania.se Årsredovisning (annual report) 2001 www.Swepac.com www.oekoeffizienz.de/english/content/oekoeffizienz/index.html www.miljorapporten.se www.4sight.org.uk
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