Dynamic Capabilities for Developing Solutions

bThere appears to be a consensus about that manufacturers require dynamic capabil- ities to guide them towards the development of successful service-oriented business models that successfully generate revenues and profits (Cohen et al., 2006; den Hertog et al., 2010; Fischer et al., 2010; Kohtam¨aki & Helo, 2015). This service innovation pro- cess is based on a deliberate, evolutionary process of sensing, seizing, and reconfigur- ing routines, which are facilitated by management innovation (Gebauer et al., 2011). To synthesize relevant servitization literature on dynamic capabilities, I identify and ana- lyze articles that explicitly specify the dynamic capabilities and their microfoundations that manufacturers require to provide hybrid offerings. The insights of this systematic review are presented in the table below.

The findings suggest that several studies have ventured independently from each other to identify the dynamic capabilities required by manufacturers to pursue servitization successfully and hence show considerable overlaps. Even though the studies position themselves in applying the DCV to the phenomenon of servitization, they sometimes remain blurry regarding their definitions. Especially distinguishing dynamic from op- erational capabilities and dynamic capabilities from their microfoundations are the main issues. One example are Kindstr ¨om et al. (2013, p. 1078), who define the micro- foundation of reconfiguring ”Orchestrating the service system: Managing and transforming the service system, especially managing external actors central to performance of the service.”. While the transformation of the service network to co-create solutions is undoubtedly dynamic, the management of the service system is operational. In consequence, I have re-named some of the identified microfoundations to highlight the dynamic aspect and improve conceptual clarity.

Sensing Manufacturers develop capabilities to sense market and user needs, tech- nological developments, and opportunities within the firm and their service network. Since the value of new services and underlying customer needs may differ between product and service provisioning (Ulaga & Eggert, 2006), and service-oriented values are more difficult to measure (Gr ¨onroos, 2007), manufacturers need to develop new

Dynamic Capability Microfoundations Illustrative Quote

Sensing

Customer need sensing • Identification of service opportunities through observation of customer needs, their perceived _{risks, and competitors (Fischer et al. 2010)} Technology sensing • Signaling technological options: capability to see promising technological options for new_{service configuration (den Hertog et al. 2010)} Service System Sensing • Building up an understanding of the entire service system, including links to partners and_{suppliers, and creating network skills (Kindström et al. 2013)} Internal Service Sensing • Building up internal sensing: e.g. opportunities related to the integration of products and_{services and the detection of decentralized initiatives (Kindström et al. 2013)}

Seizing

Conceptualization and co- creating

• Conceptualizing, designing, prototyping or testing more fuzzy types of service innovations (den Hertog et al. 2010)

Structuring the service development process

• Routines of quick and timely decisions to create a dominant design of the total offering. • Formulate "planned strategies" for service business development including rigid scenario

planning. (Fischer et al. 2010) Restructuring the service

delivery process

• Having the ability to restructure internal and external resources swiftly, for the delivery of new or improved services, including roles dedicated to services at both operational and strategic levels (Kindström et al. 2013)

Bundling and unbundling

• Creating smart service combinations with a customized “one stop shopping” character • Unbundling services and stripping these down to their bare essentials creates highly

specialized services that are very similar and can therefore be standardized to a certain extent (den Hertog et al. 2010)

Reconfiguring

Orchestrating the transformation of the service network

• Managing the transformation of the service system, especially integrating external actors central to performance of the service. Extend the resource base into new markets and services and incorporate complementary resources and co-specialization. (den Hertog et al. 2010)

Scaling and Stretching • Scaling and stretching of service innovation so that services can be provided in a uniform _{way on a large scale (den Hertog et al. 2010)} Learning and adapting a

service-oriented mental model

• Creating service-oriented mental model: Often referred to as a service logic; implies a learning dimension (Kindström et al. 2013)

Balancing product and service-innovation related assets

• Capacity to overcome internal resistance and conflicts

• Capacity and resources to set up a separate strategic business unit for services with own profit-and-loss (Fischer et al. 2010)

Protection of spare parts business

• Routines to reconfigure assets and resources to protect the spare parts business from imitation (Fischer et al. 2010)

Table 2.3: Dynamic Capabilities of Manufacturers Required for Solution Development

customer-linked sensing capabilities (Kindstr ¨om et al., 2013). In doing so, they should use empathetic capabilities to sense unmet user needs and intensely interact with lead users and potential clients (den Hertog et al., 2010). These sensing activities can also include competitors and their competitive moves (Fischer et al., 2010).

Manufacturers need to sense the latest technological innovations that are directly re- lated to the services business, to identify promising options for new service configura- tions (den Hertog et al., 2010). Technology sensing for service innovation differs from tra- ditional product research in that it aims at tapping into possibilities that technological innovation offers not for product development but for service innovation (Kindstr ¨om et al., 2013).

Internal service sensing relates to the capability of the manufacturer to identify the op- portunities associated with the integration of products and services to differentiate the total offering (Fischer et al., 2010). Internal service sensing is especially challenging

for firms, since service innovation may be little structured and transparent (Gebauer & Friedli, 2005) compared to product innovation but nonetheless critical as it may have a direct influence on turnover, profitability, and sales (Kindstr ¨om et al., 2013).

Service network sensing refers to sensing service innovation opportunities, not from the customer, but other actors in the service network. This sensing capability is especially relevant in solution provisioning since it commonly involves other actors, such as third- party service providers or system partners that are organized in such a network (Kind- str ¨om et al., 2013).

Seizing To seize opportunities from service innovation, the more intangible and fuzzy combinations of existing ideas compared to product innovation need to be conceptual- ized. Conceptualizing includes designing, prototyping or testing these fuzzy innova- tions types as a service-innovation-specific capability that is expected to be less tangible and codified (den Hertog et al., 2010). Firms that co-create advanced services through repeated cycles of interactive co-creation with their customers can create and seize op- portunities for innovation and competitive advantage (Kindstr ¨om et al., 2013). This service design process needs to be structured: since service development involves more disciplines than product development, firms need to organize senior management sup- port (den Hertog et al., 2010; Kindstr ¨om et al., 2013). These authors highlight that firms should separate service from product development to mitigate unplanned and ad-hoc service development due to lower prioritization. The separation ensures quick and timely decisions to create a dominant design of the total offering (Fischer et al., 2010). Firms that add advanced services to their portfolio require the capacity to restructure internal and external resources swiftly, for the delivery of new or improved services, which is a capability that I call ”restructuring the service delivery process” (Kindstr ¨om et al., 2013).24 This capability includes striking a balance between service quality and cost efficiency (Gr ¨onroos & Ojasalo, 2004) and a continuous balancing of the compar- ative strengths and weaknesses of their internal service functions and their external service partners. This balancing act includes determining where in-house service units are located (typically at headquarters versus locally) and which services should be out- sourced to external parties (Kowalkowski et al., 2011b).

Bundling also known as integration capabilities enable manufacturers to create seamless but customizable combinations of products and services with a “one-stop-shop” char- acter. De-bundling capabilities, on the other hand, allow for standardization of services by stripping them down to their bare essentials (den Hertog et al., 2010). The latter capacity enables the manufacturer to achieve minimum operational costs and achieve

24_{Kindstr ¨om et al. (2013, p. 1068) call this capability ”managing the service delivery process”. Since this}

service profits (Fischer et al., 2010).25 _{De-bundling, closely resembles the operational} concept of optimizing service productivity (Gr ¨onroos & Ojasalo, 2004). As both the in- tegration capability and product optimization rather represent operational capabilities, they are treated as such and not conceptualized as a dynamic capability of pure service providers.

Manufacturers that aim at providing output-based Value Propositions often struggle with developing the appropriate revenue mechanisms (Kindstr ¨om et al., 2013). When the value is determined in-use by the customer (Vargo & Lusch, 2004), revenue streams are defined through gain-sharing mechanisms and service outcomes, such as availabil- ity and performance. Thus, the capacity to develop and adopt new revenue mechanisms needs to be developed by the manufacturers. This also includes charging the customer for services that were formerly offered for free or were incorporated in the product price (Fischer et al., 2010).

Reconfiguring Short-term competitive advantage can often be reached by focusing on sensing and seizing of opportunities. Efforts to reconfigure the resource base are required, however, to convert this short-term advantage into a sustainable one (Zahra et al., 2006; Helfat et al., 2007).

Cooperating across firm boundaries and managing and engaging in networks is a cru- cial dynamic capability for being able to provide solutions (den Hertog et al., 2010; Gebauer et al., 2013). The reason is that many value propositions are combinations of product and service elements of different providers that fulfill a service need together (Ramirez, 1999). Solution providers need to orchestrate the service system, actively man- aging the external actors that are central to the performance of the service system. To effectively do so, solution providers have to develop a common language with suppli- ers and customers (Gebauer et al., 2013). This reconfiguration capability also included the extension of the resource base into new markets and shifting roles, resources and the locus of control in the service system (Kindstr ¨om et al., 2013).

The capacity to protect the spare parts business is vital for manufacturers using the ex- ploitation servitization strategy. Spare parts are an essential foundation for the devel- opment of the service business because they remain relatively free from imitation and hamper independent service providers that wish to provide services for the installed base. Tactics for protecting spare parts include maximizing the ratio between man- ufactured and purchased parts, controlling the parts supply chains, optimizing parts

25_{Bundling and de-bundling of product and service elements has been discussed as both a dynamic and}

operational capability, the latter mostly under the term integration capability (den Hertog et al., 2010; Wilson, 1995) as a dynamic capability. In my conceptualization, the dynamic capability of bundling aims at the reconfiguration from previously separated to jointly sold and priced offerings. The opera- tional integration capability refers to the actual practices that firms perform to integrate product and service components during daily operations, e.g., through a Key Account Manager.

logistics and the use of condition monitoring to detect non-authorized service activities or the use of alternative parts (Fischer et al., 2010).

Scaling and stretching service innovation is a critical dynamic capability to provide ser- vices in a uniform way on a large scale (den Hertog et al., 2010). The authors base the dynamic capability on the replication strategy, which is sometimes called the “McDon- alds approach” and was first described extensively by Winter & Szulanski (2001). Scal- ing and stretching is especially important in service markets since communication and branding are essential for creating a recognizable service offering (Krishnan & Hart- line, 2001). As such, building a valuable service brand requires serious investment and a consistent strategy (den Hertog et al., 2010).

Learning and adapting is defined as “capability to deliberately learn from the way service innovation is managed currently and subsequently adapt the overall service innovation process” (den Hertog et al., 2010, p. 504). This involves creating a service-oriented mental model, which is one of the most time-consuming and challenging elements of reconfiguration for manufacturers. Learning and adapting also implies unlearning and objecting obsolete routines, which should then lead to the adoption of more effective behaviors (Sinkula, 2002; Matthyssens et al., 2006). Deliberate learning and adapting is vital for long-term success and continuous service innovation (Gebauer & Friedli, 2005; den Hertog et al., 2010).

Firms coming from a base in manufacturing need to balance product and service-innovation related assets. This includes overcoming the frequent tensions between product and service units and creating of roles across all organizational levels (Gebauer & Friedli, 2005; Kindstr ¨om et al., 2013). Often, profit and loss accountability for services is built by establishing a separate services business unit to overcome tensions and improve the profitability of the service business (Fischer et al., 2010).

In conclusion, servitization literature has identified a well-defined set of dynamic capabilities that manufacturers require to move downstream into hybrid value provisioning. Approxi- mately two-thirds of the identified dynamic capabilities have been described in more than one article. While this improves the empirical underpinning of manufacturers DCs to guide them to product-service business models, it also shows the isolation and overlaps of still present in the servitization research field. In contrast, the specific dynamic capabilities and their microfoun- dations required by pure service firms to venture into the hybrid offering space from a base into services have not been researched.

Pure service firms’ dynamic capabilities differ from manufacturers’ DCs, for both solu- tion development and alliancing due to a variety of reasons: First, pure service firms come from a base in services and commonly have already established dynamic and op- erational routines that enable successful service provisioning. For example, routines should be set that allow sensing customer needs in the more intangible and value- oriented (Gr ¨onroos, 2007) service domain. Hence, most of the service-specific DCs that

manufacturers have to develop are not new to pure service firms.

Second, pure service firms lack the internal competencies of the product-manufacturing business, as they do not possess any significant product-related production units. In ef- fect, they are likely to require specific technology-sensing capabilities that enable them to provide services on the manufacturer’s equipment. These capabilities will need to be even more pronounced if solution offers require pure service providers to assume responsibility for performance outcomes of a bundle of the manufacturer’s equipment and the internal services.

Third, manufacturers develop dynamic relational capabilities to build, manage, and reconfigure their service networks from a central integrator position (Gebauer et al., 2013; Salonen & Jaakkola, 2015). The dynamic relational capabilities required by pure service are likely to differ from manufacturers for two reasons. First, they occupy a decentral network position, which requires different dynamic capabilities, which have been mostly overlooked by extant literature (Story et al., 2017).

Fourth, manufacturers are known to require dynamic relational capabilities to form and manage their solution network (Gebauer et al., 2013). These considerably differ, however, from the relational capacities required by pure service providers, as manu- facturers merely search for providers to complement their resources and capabilities to provide solutions, whereas manufacturers represent an entrant competitor to estab- lished pure service providers. Hence, a specific set of relational capabilities, supporting both cooperative and competitive aspects of the evolving relationship will be required. In this study, I take this service firm perspective, i.e., the perspective of service firms that use BMI to seize opportunities and mitigate threats resulting from the manufacturers’ hybrid value creation efforts. Further research in this field is required due to the limited explanatory power of manufacturer-specific dynamic capabilities for explaining both, solution provisioning of pure service firms, and becoming a partner in OEM solution networks.

2.3.7 Literature Review: the Role of Pure Service Firms in Servitization