The role of services in the business of a project-based firm
KARLOS ARTTO, PROFESSOR
Helsinki University of Technology
KIM WIKSTRÖM, PROFESSOR
Åbo Akademi University & PBI – Research Institute for Project-Based Industry
BIT Research Centre
Helsinki University of Technology
Achieving sustainable competitive advantage through superior product deliveries in highly competitive global markets is difficult. When technological innovations are combined with service components they are more likely to succeed (Teece, 1986). There is an increasing trend for companies to move into service business by adding, combining or integrating service elements into their product deliveries (Normann, 1983; Grönroos, 2000). Among the benefits, continuous streams of revenue, higher profits, and new possibilities to differentiate are often mentioned (Quinn, Doorley, & Paquette, 1990; Wise & Baumgartner, 1999). These benefits are in many cases true and quite clear, especially in cases when standardised products are contrasted with services in the form of after-sales. However, in the case of project business (Artto & Wikström, 2005), where the products often can be described as complex products and systems (Hobday, 1998) the division between products, services, and projects deserves closer examination. One key issue is how to align service and project processes with the overall business processes in a project-based firm (Gann & Salter, 2000). During the past decade, systems integration—which can be located in the twilight between products and services (Pavitt, 2003)—has been articulated ever more clearly as a key organizational element in project business (Hobday, Davies, & Prencipe, 2005). Davies (2004) further describes what he calls “integrated solutions” as one innovative, state-of-the-art strategy where system products and services are combined into vast and long-lasting deliverables from a supplier to its customer. Other scholars have used terms like “service-enhanced” (Gann & Salter, 2000) and “service-led” (Alderman, Ivory, McLoughlin, & Vaughan, 2005) to denote business cases where big projects are combined with services, especially during the use phase of the delivered products.
From a project business point of view, the challenge is on how to integrate services into project business of a project supplier firm, which has a constant flow of simultaneous projects in its production line (Artto, Heinonen, Arenius, Kovanen, & Nyberg, 1998). In this paper we analyze the role of services in the business of a project-based firm that sells and delivers solutions to its customers by using projects, among other effective ways of organizing its deliveries. The research question addressed in this paper is “What is the impact of services on the performance of project-based firm?”
The perspective of this paper is to adopt a project business view as a point of departure, and to develop understanding of how services contribute to project business of a project-based firm, or what is the actual role of services in project business and how services complement the business of selling and delivering projects in a beneficial manner. The research question is addressed through a literature review and a case study with five companies that supply projects to their customers. The point of departure for our study is project business literature (Cova & Holstius, 1993; Artto et al., 1998; Brady & Davies, 2004; Artto & Wikström, 2005; Davies & Hobday, 2005; Whitley, 2006; Artto, Martinsuo, & Kujala, 2006), and systems integration literature (Prencipe, Hobday, & Davies, 2003; Hobday et al., 2005). However, for the actual theoretical and conceptual background in our literature analysis, we used literature on services, and especially literature on industrial services, for building an understanding on which type of roles services may have in the business of a project-based firm. Finally, empirical cases from five project supplier firms are used to describe and analyze which type of services different industrial system suppliers have integrated into their business models. This way, the study aims to reflect the impact of services on project-based firms’ business performance.
Theoretical and Conceptual Background
Service studies have sought to make a distinction between services and goods. Such distinctions are contained, for example, in several attempts to provide a definition of service (Rathmell, 1966; Gallouj & Weinstein, 1997; Edvardsson, Gustafsson, & Roos, 2005; Lillrank, 2007). Whereas products are defined as something concrete and tangible, often characterized with ownership, services are most often defined by using verbs. Services are seen as an “act” (Gallouj & Weinstein, 1997), or “performance”, “process,” or “deed” (Edvardsson, Gustafsson, & Roos, 2005). According to Vargo and Lusch (2004), service is the application of specialized competences (skills and knowledge) through deeds, processes, and performances for the benefit of another entity or the entity itself (selfservice). Service literature also emphasizes that services cannot be produced separate from the customer and that delivery of the service must be understood as the production of the service, even though service capacity can be kept in stand-by condition (Edvardsson & Olsson, 1996; Brax, 2007b). Project deliveries include both products and services that are used for unique solutions for the customer. This is emphasized, for example, by PMI's project management standard that defines a project as “a temporary endeavor undertaken to create a unique product, service, or result” (PMI, 2004). While a project may include only a delivery of a service component, in this paper we claim that most large system solutions delivered through projects also include some kinds of core technological products. Project-based firms are considered as solution providers that integrate a wide wealth of products, services, and systems into their offerings to customers.
The Role of Services in Business
Services are often seen as means to provide added value to the customer (Wilson & Jantrania, 1994; Ravald & Grönroos, 1996; Vaattovaara, 1999). Customer value is an important element from the supplier firm's point of view, because it closely relates to the business potential of the supplier firm in a given market. Services are an effective way to differentiate the supplier's product to meet customers’ varied needs and to create value for both parties. For example, Mathieu (2001) referred to Donaldson (1986) and to Mathe and Shapiro (1993), who all stated that commercialization of services around a tangible product can raise the revenues of a company. Superior service increases both first-time sales and repeat sales, and thus enhances market share (Cohen & Lee, 1990). Additionally, the level and quality of the services offered is an effective way to maintain ongoing relationships (Evans & Laskin, 1994). Furthermore, Meier and Massberg (2004) found that providing services will not only reduce the distance between the customer and the supplier, but will also offer a chance to recognize a change in customer requirements and technological development potentials as early as possible, thus increasing the competitiveness of the supplier.
Mathieu (2001) recognized three generic benefits for going into services: financial, strategic, and marketing. Financial benefits include increased revenues and more stable cash flow. To exploit the benefits, the supplier needs to get its service cost structure in control and to apply a consistent pricing strategy. Services can bring strategic benefits by providing competitive advantage in terms of quality, added value, and differentiation, and help in building industry barriers to entry. Marketing benefits include increased customer satisfaction, improved new-product adoption, and supplier's credibility.
Services as a part of a system delivery, or services related directly or indirectly to the business of delivering solutions or systems through projects, have different roles and functions (Artto, Wikstöm, Hellström, & Kujala, 2008). Services can be important as embedded to single-system solutions and related project deliveries. But separately delivered services can also have an impact on the overall business of the project-based firm. Based on the service literature, and especially on the literature focusing on industrial services, we have identified six types of impacts of how services may affect the business of a project-based firm. The six impact types, explained in Table 1, are:
- Customer entry
- Customer value
- Competitive advantage
- Delivery efficiency
- Service business
- Innovation and learning.
Table 1. Six Impact Types, Illustrating Different Types of Impacts of Services on Business Performance of a Project-Based Firm
|Impact type||Description of the impact||Examples from relevant literature|
|Customer entry||Customer entry refers to the desired effect of the service representing an entry point to a specific customer or other customers in the market segment, for additional services or projects in the future.||A way to maintain relationship (Evans & Laskin, 1994; Cova, Ghauri, & Salle, 2002) |
Access to customer during different phases of solutions lifetime (Frambach, Wels-Lips, & Gündlach, 1997)
Access to customers, also indirectly through other relevant actors (Walter, Ritter, & Gemünden, 2001)
Participation to a customer's investment planning process (Helander, 2004)
|Customer value||Customer value refers to the effect of creating additional value to the customer with the service, which obviously has a favorable impact on the supplier firm's margins and profitability in the delivery of a single solution or in the overall business.||Use of services to support customer business (Helander, 2004) |
Combining of service elements to physical products to increase profitability (Frambach et al., 1997).
Superior service increases both first-time and repeat sales (Cohen & Lee, 1990).
Direct financial benefits and longer-term strategic benefits (Mathieu, 2001).
|Competitive advantage||Competitive advantage refers to increase of an offering's competitiveness with a specific customer or in the market segment by making the offering more attractive than competitors’ offerings for the customer, or by making the offering more difficult to imitate: this leads to sustainable competitive advantage.||A chance to recognize a change in the customer requirements as early as possible to increase the competitiveness of the supplier (Meier & Massberg, 2007) |
Services are difficult to imitate (Heskett, Sasser, & Schlesinger, 1997)
Competitive advantage through differentiation opportunities (Davidow & Uttal, 1989; Frambach et al., 1997).
|Delivery efficiency||Delivery efficiency refers to the service's impact of making delivery activities more lean and cost-effective.||Training and education increase the customer's understanding of system operations (Helander, 2004) |
Fine-tuning of exchange processes to increase efficiency (Möller & Törrönen, 2003)
Supplementary services to improve efficiency during the product life-cycle (Meier & Massberg, 2007)
|Service business||Service business refers to the fact that the delivered service itself is justified as part of profitable business through creating itself a steady and predictable revenue stream.||Increase in revenues and profit (Mathieu 2001; Donaldson, 1986; Mathe & Shapiro, 1993) |
Predictable revenue stream from installed base of products (Oliva & Kallenberg, 2003; Tikkanen, Kujala, & Artto, 2007)
|Innovation and learning||Innovation and learning refers to service deliveries’ impact on creating new knowledge, or creating new solutions and capabilities, which improves either the specific project or service delivery at hand, or future deliveries and the overall business of the project-based firm.||A chance to recognize technological development potentials as early as possible (Meier & Massberg 2007) |
Marketing benefits (Mathieu 2001)
New profitable innovations between the parties (Gallouj & Weistein, 1997)
The Relation of Services to Single Core Project Delivery: Before, During, and After
From the point of view of a project supplier firm participating in projects for its business purposes, we adopt the project business definition from Artto and Wikström (2005): “Project business is the part of business that relates directly or indirectly to projects, with a purpose to achieve objectives of a firm or several firms.” These firms may engage in several sequential or parallel projects through different delivery scopes (Cova et al., 2002): part deliveries, subproject deliveries, packaged complete subsystem deliveries, and turnkey deliveries of complete final products with their tested and assured functionalities for required performance. Services can be integrated into a project delivery before the delivery, during actual delivery, and after the delivery.
Service offerings cover the whole life-cycle of the product (or solution), and they are often classified based on whether services are offered before, during, or after the sale (Mathieu, 2001). In industrial marketing, Frambach et al. (1997) referred to Samli, Jacobs, and Wills (1992), who found that services are generally classified into three different categories, representing subsequent stages of the industrial purchasing process:
- Product services prior to the purchase decision (presale): Pre-sale product services are those that will aid the buyer in the purchase decision and will stimulate adoption of an industrial product; for example, demonstrating the product and offering trial use of the product.
- Product services directly relevant to the purchase decision (sale): Sale product services are those that will aid the customer in taking the product into use; for example, installation and training.
- Product services following the purchase decision (postsale): Post-sale product services are designed to keep the customer satisfied with the purchase; for example, failure handling and regular maintenance inspections.
Similarly, Helander (2004), in his study in system business context, grouped services activities according to their delivery in relation to the core product delivery: pre-sales activities, implementation activities, and long-term activities.
A complex system solution is mostly delivered to the customer as a project, which includes core product and related services to provide the required functionality for the solution. A project supplier firm has to carefully analyze which services it wants to include in the delivery scopes during the different time frames of the solution lifecycle. Figure 1 illustrates the formation of a supplier firm's delivery scope before, during, and after the core project delivery. Furthermore, the purpose of Figure 1 is also to show that these service deliveries and system/solution deliveries contribute to the business performance of the project supplier firm, often in a complex, interrelated manner. The impacts on business performance may be both direct or indirect, and short-term or long-term. Also, the core project delivery includes several service contents. The impact of such services (depicted in Figure 1) on the business performance of a project-based firm can be analyzed through the six impact types presented in Table 1.
Figure 1. The relation of services to single core project delivery: before, during, and after (modified from Artto et al., 2008).
The project supplier may provide many of the services related to solutions delivery, either as included in the project delivery or to be delivered separately before or after the project. This way, the owner may use the project supplier firm or its competitors, or even a selected group of specialized project/service suppliers, for service deliveries during the total solution's lifetime (before, during, and after). However, it can also be the case that the owner does not always use external suppliers to help with specific parts of the solution, but conducts many service activities itself during the lifetime of the system/solution. This may be due to the owner's view that certain services related to the overall solution, such as operation of a production facility, are part of the owner's core competence that contributes to its distinctive competitive advantage.
Empirical Case Study
For the empirical part of the study we selected five project-based firms. These firms are system solution supplier firms that provide complex systems/solutions and services to their customers. Core delivery contents—delivered through core projects—in these case companies are electric power and propulsion systems; elevators; ship machinery, propulsion and manoeuvring systems; telecom networks; and flow control systems. The choice of case companies was mainly based on three criteria. First, the companies needed to qualify as industrial project and service suppliers. Second, we preferred to look at international and industry-leading companies. Third, we wanted to use such firms for our empirical study that would see the relevance of this research and therefore guarantee us sufficient access in their businesses for providing us as rich empirical data as possible.
The Interview Process
The main data was gathered through semi-structured interviews of 15 informants in the five case companies, and it was complemented with other material provided by the informants. The informants’ titles included President, Senior Vice President, Vice President, Director, and Director of Business Development. Most of the interviews lasted for the scheduled two hours. In a couple of cases, the interviews were shorter, such as one-and-a-half hours. A minimum of two interviewers were always present in all interviews, and different combinations of two authors in each interview were varied between companies and interviews. These principles were to ensure that understanding, insight, and sharing of observations concerning each case company was widely spread among the authors.
In the semi-structured interviews, we asked about different prevalent project types and service types that the interviewees recognized in the company's business. Furthermore, we asked the interviewee to describe the company's business model (for the concept of business model and its contents, see, e.g., Chesbrough & Rosenbloom, 2002; Chesbrough, 2003; Hedman & Kalling, 2003; Pateli & Giaglis, 2004; Morris, Schindehutte, &
Allen, 2005; Osterwalder, Pigneur, & Tucci, 2005; Shafer, Smith, & Linder, 2005; Tikkanen et al., 2005). The business model was described to include/address/take into account, among others, the following issues: offerings, value proposition to customers, value creation logic (customers’ value), revenue generation logic, customer behaviour, competition, distinctive competencies and resources that contribute to competitive advantage, and use of external resources (suppliers). The interviewee was asked to separately describe the typical business model used in the industry that the company belongs to, and separately, the specific business model of the company itself. We also asked about the relationship of the project and service types to the business model, and the company strategy. Finally, we asked about which services the company provides before, during, and after the project, and why such services are provided.
The Process of Analysis and Abstraction
The interviews were recorded and transcribed. With an average of approximately 20 pages per interview transcription, the total number of transcribed pages from interviews was some 300 pages in total. Five-page summaries on the important data content were then written for each interview, by having a principle in place where the two authors in the specific interview jointly created the interview summary document. After creating the interview-specific documents, company-specific analyses about the data and observations were made. After the company-specific analyses, the overall analysis with cross-case comparisons was made among all authors. The process, which has been iterative in seeking an appropriate methodological approach and in filtering appropriate content and observations, has included several joint meetings and workshops among the authors of this paper. We also organized a seminar in which our findings were presented and validated by representatives from all five case companies.
Discussion by Six Impact Types: The Impact of Services on Project Business
We identified multiple types of services that were provided before, during, and after a core project delivery. Furthermore, we identified a number of ways that services were related to each other and to the core delivery in the case companies’ businesses. The different types of services observed are consulting, consultative selling, conceptual design and feasibility studies, joint development and innovation activities, configuration tools and methods for creating specifications, engineering design, systems integration, project/product configurator, delivery process planning, training, project management, supply chain management, procurement, commissioning and handing over, Build-Operate-Transfer (BOT), maintenance, operations support, diagnostics for customers’ systems, optimization, upgrades, modernizations, extensions, localized operations support/service centers, centralized operations service centers, open Web-based and real-time information sharing, outsourcing, asset sharing, and financing.
There are several opportunities for a project supplier firm to enlarge its scope of supply. First, it can extend the scope of the product system under provision, such as by moving from the role of a component supplier to a system supplier. The added service in this regard is that of procurement, systems engineering, and integration. Second, it can extend the scope of services provided during the project, such as by offering to carry a combined engineering and construction responsibility (so called “design-build projects”). Third, it can move into the customer's decision process by providing business and technical consulting services and financing services. Fourth, it can provide operations-related services to support the use of the project outcome.
We further analyzed the impact of these services on project business performance based on the six impact types presented in Table 1. In the following sections, empirical findings related to each of the six impact types are discussed in more detail.
Our empirical analysis shows that there are several entry points to do business with the customer. The customer's point of entry does not necessarily have to be directly related to the core project, although the core project often provides a significant advantage to the supplier firm for several types of service deliveries in the future. Various services were related to the forming of the customer's specification. These services had an impact on the point of entry, customer value, and the supplier's competitive advantage. Traditionally, the initial specification has been produced by the customer, but if a supplier is able, through various consulting types of services, to impact the content of the specification, this was seen to provide many kinds of advantages to the supplier's business. Consulting types of services were above reported to serve as significant engines that help with engaging in more significant business activities in all phases of the solution's lifetime. Consulting may also lead to maintenance types of services, and vice versa, maintenance types of services may foster the possibility to provide additional consulting services. Furthermore, maintenance types of services may lead to upgrades, modernizations, or extensions, which are delivered through new core projects. Furthermore, modernizations and extensions may serve as entry points that lead to long-term maintenance contracts. As a consequence of the close relationship, the suppliers have been able to build extended service provisions with some of their customers. This way, suppliers have leveraged their competence base and thus become able to offer the “new” services also to other customers. The “customer entry” type of impact on project business is described in Table 2.
Table 2. Impact of Services on Project Business: Customer Entry
|Impact type||Time frame||Service's impact on project business||Service offering|
|Customer entry||(1) Before the project||Consulting is a growth engine that leads to bigger and bigger projects or service deliveries. For this reason, consulting is often delivered free (consultative selling). Conceptual design and feasibility studies help the customer design the solution and the supplier firm to simultaneously develop its project offering to match customer's needs. Joint development and innovation activities support on-going discussion, mutual target definition, and enhances trust. |
Configuration tools and methods for creating specifications can help the customer plan, visualise and consider many alternatives at an early stage, and to match the supplier firm's offering to these alternatives.
|Consulting, consultative selling, conceptual design and feasibility studies, joint development and innovation activities, configuration tools and methods for creating specifications|
|(2) During the project||The core project delivery itself often serves as a major point of entry to engaging the customer's business. By delivery process planning and continuously adapting delivery logic, the supplier can influence when such entries are made. However, when the major delivery project is being executed, there are few possibilities to build additional add-on service deliveries that would be delivered during the project in addition to the actual project delivery. This occurs because the customer's interest is often to concentrate on the execution of the major investment and not to buy additional optimization or related services until the major delivery project is completed.||Delivery process planning|
|(3) After the project||Consulting, optimization of the system, and even simple field maintenance services often lead to larger delivery scopes. Training in an early operations phase can support extending the collaboration.||Consulting, optimization, maintenance, training|
Our findings related to the customer entry impact type are aligned with Frambach et al. (1997), who proposed that product services are a means to create sustainable relationships with customers. By offering different product services during the various stages of the system/solution lifecycle, the supplier can accommodate the needs of the customer. This may lead to a more intensive relationship between the supplier and the customer, allowing for more transactions over time. In addition, Helander (2004) argued that all the system elements, products, services, and know-how are not necessarily delivered simultaneously. This means that a customer can purchase a system in several phases, such as starting from consultancy services and then continuing to the actual hardware investment with related services. Although the general view seems to be that core projects are the main entry point to the customer's business, Helander (2004) also found that a relationship might start in some other points of the solution lifecycle. For instance, an aggressive system supplier could provide care services for the customer who uses a competitor's equipment to get an entry point for a customer's business. In other words, the excellence in maintenance services could also drive system sales. Our observation on free services is also recognized in existing service literature, but with the argument that this is due to the provider lacking the capability to recognize the service's value and to put an appropriate price on it (Mathieu, 2001). However, our empirical analysis shows that there is a clear and sound business rationale with consultative selling. The rationale is in a supplier firm's access to the customer with free services that help to justify and structure a solution that would apparently provide a significant benefit to the customer's business. Accordingly, this would prepare the willingness of the customer to place an order with the supplier for this solution which, due to the significant value proposition, is a profitable delivery for the supplier.
A system solution provider can create value during the different phases of the solution life-cycle by advising the customer with potential additional solutions that are available to solve its business problems, or even to point out inefficiencies they have in their current way of doing business. This requires a lot of knowledge of the customer's business from the supplier side, which was seen as a challenge. By integrating services with core project delivery, the supplier can provide an integrated solution that fits the customer's business requirements and is cost-effective for the customer to operate and maintain. The “customer value” type of impact on project business is described in Table 3.
Table 3. Impact of Services on Project Business: Customer Value
|Impact type||Time frame||Service's impact on project business||Service offering|
|Customer value||(1) Before the project||Engineering design and systems integration is used for novel ideas and support of customer's investment by creating technology advances.||Engineering design, systems integration|
|(2) During the project||With some companies, core project is only sold with training included; this guarantees customer's appropriate use of the systems, and customer's value accordingly. Project management and systems integration are often seen as essential parts of the core project delivery, that add value to the customer. Engineering and design are typical contents included in many project deliveries to design the delivery to match customer's needs.||Training, project management, systems integration, engineering and design|
|(3) After the project||Maintenance or operations support relationships with the customer often enable technical systems integration and optimization services that lead to larger projects, like upgrades, modernizations, or extensions. Maintenance is provided with simple service availability guarantees or spare parts inventory management schemes. Also, fixed-price operations support with system operability and system uptime/downtime (availability/reliability) guarantees are provided. In such cases, the supplier carries at least part of the customer's production-loss risk. The supplier can reduce its risk by independently optimizing the operations by adding preventive maintenance activities and/or by using equipment and systems of higher quality assuring the availability/reliability. Outsourcing services represent the supplier firm's long-term investment (with financing) and the supplier's substantial responsibility of customer's operations. Asset sharing with the customer with new investment projects and their operation is conducted with revenue sharing types of contracts; this means the supplier's definitive investments and financing. Arranged bank loans represent some minor financing arrangements with small customers. Localized operations support/service centers and open Web-based and real-time information sharing about the status of customer's system are used to enhance the customer's value. In some cases, local self-governed service centers with close and even sometimes personalized and intimate customer contact are considered major value-increasing vehicles.||Systems integration, optimization, upgrades, modernizations, extensions, maintenance, operations support, outsourcing, asset sharing, financing, localized operations support/service centers, open web-based and real-time information sharing|
Our customer value-related empirical findings relate to extensive discussion of customer value in the service literature, but our findings emphasize the mechanisms for the supplier's profitable business gained through customer value, which, indeed, is not discussed extensively in existing literature (Walter et al., 2001; Möller & Törrönen, 2003). In general, the service literature emphasizes the requirement that services must create additional value for the customer. For example, Frambach et al. (1997) believed that product differentiation and competitive advantage can be gained by adding service elements to the tangible product. These product service elements enhance the value of the product to the users. A company that offers added-value services for its customers must become increasingly customer-driven in its operations. However, Walter et al. (2001) pointed out that value that is simultaneously created for suppliers is often neglected in the literature. They emphasized that the supplier needs to offer value to the customer but also needs to gain benefits from the customer at the same time. Without careful planning and too much focus on customer value, companies may end up offering too many free value-adding services for its customer (Mathieu, 2001). This does not reflect a healthy design of the supplier's business. Anderson and Narus (1995) argued that a company should form basic “naked solutions” consisting of only the core product (good and/or service) for each segment, and sell and price all the additional services separately. This kind of unbundling of services would help the supplier match their offerings with the needs of each customer and also provide services that the customers are willing to pay for.
A solution supplier may gain competitive advantage by including services that would ensure a better match between the supplier's offering and the customer's requirements for a solution. This way, the supplier may provide the customer consulting services that make the customer's requirements to fit with a supplier's product and service offering better than those of the competitors. Also, during the project a supplier can provide the customer with possibilities to flexibly modify the solution for increased customer benefits, when there is more information available about customer preferences. A close relationship with the customer, which can be created and maintained, such as in the form of outsourcing and asset sharing services, may create a customer lock-in effect, with a consequence that it is very difficult for the customer to switch to another supplier. In after-delivery services, suppliers seem to be willing to provide the customer with services that would cannibalize their even-more-profitable services to the same customer. This is due to the highly competitive market situation: a supplier often prefers to make a long-term contract (e.g., outsourcing) with the customer, rather than delivering more profitable maintenance services on the short term, with a risk that any of the competitors would offer a more attractive solution (e.g., outsourcing) to the customer that would lead to lost supplier-customer relationship with the original supplier. The “competitive advantage” type of impact on project business is described in Table 4.
Our empirical findings relate to differentiation of services, which has been identified as a good strategy to gain competitive advantage (Davidow & Uttal, 1989; Frambach et al., 1997). In this context, differentiation can be seen as modifying the total offering to match the customer's requirements better than the competitors. However, this may require significant modifications to both core products and related services. The services offered for creating competitive advantage are actually a vehicle for gaining a deeper understanding and a foothold on the customer's business to beat the competitors. In this respect, services are less visible and more difficult to imitate, which may provide sustainable competitive advantage (Oliva & Kallenberg, 2003; Heskett et al., 1997). The constructive sales approach, which includes consulting type of services offered during the pre-project phases and co-construction of the project together with customer, leads to project definitions that are easier for the project supplier to implement compared to its competitors (Cova et al., 2002).
Table 4. Impact of Services on Project Business: Competitive Advantage
|Impact type||Time frame||Service's impact on project business||Service offering|
|Competitive advantage||(1) Before the project||Consulting, conceptual design, and systems integration services are used to participate in the customer's request for bid preparation directly or indirectly, and to simultaneously ensure the fit between customer's request and the supplier's offering.||Consulting, conceptual design, systems integration|
|(2) During the project||In many companies, the core project itself is a service that serves as a means to sell related equipment. In this respect, the capability to flexibly adapt the product structure is seen as important competitive factor.||Core project and inherent service offering|
|(3) After the project||Outsourcing and asset sharing require considerable investments and responsibilities for the supplier firm, which means that the supplier shifts its business toward specializing in the customer's operations (this may even require that the supplier acquires assets that traditionally belong to the customer's side); this is not always desirable to the supplier, but the supplier's primary motivation for such services often is based on maintaining the competitive advantage and long-term customer relationship. This way, outsourcing may even cannibalize ongoing more profitable maintenance/operations support with the customer, but despite this, supplier is willing to take larger responsibilities with even lower margins in the interest of creating a closer and more stable customer relationship, because of the highly competitive situation in the market.||Outsourcing, asset sharing|
Delivery efficiency in a supplier's business is sought through providing the customer with information about the supplier's products and offerings, and even tools or free consulting services to enable the customer to ask for easily implementable offerings from the supplier. The aim is to affect the customer's request for bid to make the customer ask for delivery scopes that can be manufactured and delivered efficiently. Project/product configurators, consulting, and training are examples of services used for this purpose. Supply chain management services are used to enhance efficiency in deliveries during the project, and good procurement services are used to ensure efficient use of the global resource network. Centralized operations service centers are used to achieve economies of scale when providing maintenance types of services to several customers from a centralized center. Shaping the customer base by acquiring more customers locally or acquiring more installed base with high local density enables efficiency through economies of scale. Advanced information systems are used for monitoring, analyzing, and distant care activities. Automated IT tools are used for delivering services efficiently and reducing the use of expensive labor hours. The “delivery efficiency” type of impact on project business is described in Table 5.
Table 5. Impact of Services on Project Business: Delivery Efficiency
|Impact type||Time frame||Service's impact on project business||Service offering|
|Delivery efficiency||(1) Before the project||Supported—even Web-based and free— project/product configurators set for customer's use ensure project scope definitions that enable smooth and efficient delivery. Customer's training about projects and their potential product choices are used for same purpose. Consulting, conceptual design, and systems integration services are used to participate in the customer's request for bid preparation directly or indirectly, to ensure that customer's requirements are formulated in such a way that they can be fulfilled with smooth, lean, and efficient delivery processes.||Project/product configurator, training, consulting, conceptual design, systems integration|
|(2) During the project||Experience in demanding supply chains and supply chain management, including handling customs, permit, and classification society issues, guarantees smooth delivery, capabilities to handle uncertainty, and improve the delivery logic continuously. Procurement, global network of available resources, and commissioning and handing over services are important.||Supply chain management, procurement, commissioning and handing over|
|(3) After the project||Centralized (but to some extent localized) operations service centers are used to achieve favorable economies of scale while providing maintenance and operations support services to several customers. Centralization of maintenance and operations support, and advanced information systems are used for monitoring, analyzing, and distant care activities. The centralization helps to achieve economies of scale, and the information technology helps to avoid using too many labor hours. Therefore, automated IT tools are used for services efficiently while simultaneously reducing the use of manual service components and expensive labor hours accordingly. Also shaping the customer base by acquiring an installed base with high local density enables combining the field maintenance of several sets of field equipment in the same technician's travel routes.||Centralized operations service centers, maintenance, operations support|
Our findings relate to the argument of Möller and Törrönen (2003), who stated that efficiency is one of the three dimensions that determine a supplier's value-creation potential for the customer. Increased efficiency means getting more out of the resources used, and can be achieved by fine-tuning the business processes of the supplier and the customer, and the exchange processes linking them. Services that enable the supplier to deliver the core project smoothly or help the customer to operate and maintain the delivered system wisely would belong in this category. Also, modularity in services that are not client interface-dependent could help deliver increased productivity in service delivery (Brax, 2007a). Hanan, Cribbin, and Donis (1978) argued that system suppliers should adopt as their motto “the smarter the customer the better for us.” Training and education could increase the customer's understanding of system operations and maximize the benefits for the customer (Helander, 2004). Therefore, it can be argued that a knowledgeable customer that has the skills to deal with small problems in the system itself in many cases would also increase the supplier's efficiency, when the supplier could avoid the need of fixing unnecessary but time-consuming problems with labor-intensive efforts that often cannot even be priced up to high enough extra premiums. This increases the productivity of both parties.
Johansson and Olhager (2006) referred to Cohen, Cull, Lee, and Willen (2000), who divided services into critical and non-critical. They proposed that critical services require distributed service delivery centers situated close to the system serviced, whereas non-critical services can use centralized service departments. Non-critical services could therefore reach economies of scale more easily and consequently lead to better productivity in operations. On the other hand, critical services require higher service density to benefit from economies of scale. One example of this found from the literature is the elevator maker Otis, which markets its newest elevator for buildings that are in close proximity with one another, to lower the unit service cost (Shankar, Berry, & Dotzel, 2007).
The “service business” impact type was explained by the fact that the delivered service itself is justified as part of profitable business by creating a steady and predictable revenue stream. Indeed, a delivered service often generates revenues and contributes to profitable business directly, and there may also be indirect effects from a delivered service leading also to additional service or core project deliveries for the supplier firm. For example, maintenance types of services and consulting types of services, especially in the after-the-project-delivery phase, are often profitable businesses that lead to long-term maintenance or operations support relationships with the customer. This again leads to many different kinds of additional services and to inside-out generated growth of the profitable service business. Such service relationships may well lead also to new core project deliveries for modernizing or extending the current system/solution. Also, it is often possible for a supplier to sell maintenance types of services integrated with a core project delivery. This way, core project deliveries may serve as important stepping stones to profitable maintenance or operations support service business. The “service business” type of impact on project business is described in Table 6.
Service business is a profitable option for many companies. In a product context, manufacturers realized long ago that it is difficult to compete only on the technical characteristics of their products. Services are offered because they generate the margin that the supplier can no longer gain from selling its core product. Frambach et al. (1997) noted that
higher levels of profitability can be achieved on offering service elements in addition to the physical product than on the offering of the physical product alone. For example, value-added resellers of computers compensate their decreasing margins on hardware with providing customized product services that have relatively high margins (e.g., training and network control).
Johansson and Olhager (2004) had a similar view: they stated that education, spare parts, and maintenance are just some examples of after-sales services required by customers. “These services make up a large part of many industrial companies’ purchase budget, but, even more importantly, for the supplier these services often make up a substantial proportion of the company's profit” (Johansson & Olhager, 2004).
Table 6. Impact of Services on Project Business: Service Business
|Impact type||Time frame||Service's impact on project business||Service offering|
|Service business||(1) Before the project||Maintenance contracts often lead to other kinds of service and project deliveries; for example, a long-term maintenance or operations support relationship with the customer provides a good opportunity for the supplier to bid for or deliver another “core project” (modernization, extension, or even a new green field system/solution).||Maintenance, operations support|
|(2) During the project||The core project is a means to build the installed base, which even may include proprietary components or software that guarantee the supplier's maintenance/update activities after the project. The installed base is then a platform for other kinds of services, like maintenance. Therefore, a core project is an entry point to the customer for selling other services in the future. Build-Operate-Transfer (BOT) represents a service package with the supplier's substantial responsibility for customer's operations.||Core project and inherent service offering, Build-Operate-Transfer (BOT)|
|(3) After the project||Consulting is a profitable business itself; technical consulting often relates to systems optimization and systems integration, which often leads to larger deliveries. Training may be a profitable business itself. Maintenance, operations support, outsourcing, and asset sharing are profitable service businesses themselves.||Consulting, systems optimization, systems integration, training, maintenance, operations support, outsourcing, asset sharing|
Innovation and Learning
Innovation and learning occurs at two levels: at the level of a specific project, and at the level of the business of selling and delivering solutions and services continuously. At the level of a specific delivery project, consulting, conceptual design, and systems integration services are used not only to establish a creative offering that can be considered as an innovative solution, but also to learn about how to accomplish it and to seek also innovation in the methods of implementing the project successfully. In the actual project execution phase, the customer's interest is often to concentrate on the execution of the major investment. This means that the customer often adopts a low-innovation mode. However, the execution project itself can be considered as an innovation that uses internally several service components that enhance innovative solutions. At the level of the business of selling and delivering solutions and services continuously, learning with the supplier occurs mainly through maintenance and operations support services that help the supplier to learn about the customer's business. Such closeness to the customer's operations helps the supplier create continuously better offerings for its customers in the future. The “innovation and learning” type of impact on project business is described in Table 7.
Table 7. Impact of Services on Project Business: Innovation and Learning
|Impact type||Time frame||Service's impact on project business||Service offering|
|Innovation and learning||(1) Before the project||Exercising consulting, conceptual design, and systems integration services helps the supplier to understand the customer's business better, and to fit the solution currently being offered to suit the customer's business. Furthermore, consulting type of services helps to understand and create capabilities required to deliver the solution..||Consulting, conceptual design, systems integration|
|(2) During the project||In the actual project execution phase, the customer's interest is often to concentrate on the execution of the major investment and not to buy additional optimization or related services until the major delivery project is completed. However, despite the explicit low-innovation mode, the project itself can be considered as an adopting and internally learning entity: engineering and design and systems integration are included in many project deliveries to design and optimize the actual project outcome. Project management and delivery process planning, on the other hand, are used for efficient project execution.||Engineering and design, systems integration, project management, delivery process planning|
|(3) After the project||Maintenance and operations support services often include diagnostics for customers’ systems, as well as monitoring and analyzing customers’ operations. This is complemented often by consulting and optimization of the system. This helps not only to suggest to the customer instant improvements in a specific system, but this helps the supplier to learn from the customers’ businesses and operations. This kind of feedback enhances the supplier's learning and the supplier's capability for even more value-adding offerings and deliveries of more intelligent solutions for customers in the future.||Maintenance, operations support, diagnostics for customers’ systems, consulting, optimization|
At the level of a specific delivery project, the learning in the early phases can be considered as analogous project-led learning that is first led by an exploratory “vanguard project” (Brady & Davies, 2004). The vanguard project represents an early learning phase of a larger project that contributes to later phases by increasing the parent organization's capabilities to deliver. Considering the project delivery as a whole as an innovation with necessary service components, enhancing innovation is emphasized by Davies and Hobday (2005), who relied on an innovation paradigm to explain the business inherent in a large delivery project. Geyer and Davies (2000) and Davies (2004) discussed how in-service maintenance and operational activities create feedback loops between systems integration and service activities, which can initiate a virtuous cycle of innovative improvements, leading to the design of more reliable and efficient systems being built in the future.
Shankar et al. (2007) defined a hybrid innovation as the commercial exploitation of a new idea through an offering where both goods and services are combined in a way that a greater customer benefit is created than would be if the components were provided separately. The good and service components may also be sold separately, but the utility of one part increases with a purchase of the other. The good and service components may not be new to the world as such, but the combination makes them innovative. Services provided for a customer could also lead to more successful business in the future due to, for example, increased market knowledge, reference value, or innovation.
Gallouj and Weinstein (1997) divided service innovations into radical, improvement, incremental, and ad hoc innovations. Whereas the first three are often pursued systematically, ad hoc innovations often take place during the service delivery and are formalized afterwards. Authors also noted that the customer's qualities affect the innovation possibilities—a large customer can provide better opportunities for innovation. Although in a project environment, innovations made with one customer cannot always be rolled out to projects with another customer as such, techniques, experience, and methods can be reproduced and codified. Gallouj And Weinstein argued that the new trend is about project firms providing re-combinative services, which are a “fundamental mode of creating innovations.” Business project is a fruitful environment for service innovations. As Gann and Salter (2000) pointed out, innovation activities in project-based firms are typically not executed in separate R&D departments, but performed within or closely related to business projects. According to Koskela (2002) and Burgeson (1998), customers can be particularly valuable resources for incremental product improvements. Developing new technology in coordination with satisfied customers, a supplier can improve its products and help keep competitors away from the supplier's customer base. Outside the scope of one project, customers can create competitive advantage for their suppliers by providing product ideas, technologies, and/or market access (Walter et al., 2001).
Further Discussion About the Impact of Services on Project Business
The previous sections discussed the impact of services on the performance of a project-based firm by the six impact types: customer entry, customer value, competitive advantage, delivery efficiency, service business, and innovation and learning. In this section we discuss findings that are obvious while looking at our analysis across several impact types. Furthermore, in this section we provide additional observations from the case companies that relate to approaches of how services are seen in the firms’ businesses, and accordingly, how such approaches serve as enablers or barriers to favorable impacts on business performance.
Versatile Role of Consulting Types of Services in Solution Providing
In this section, for consulting types of services, we rather widely refer to consulting, technical services, conceptual design and feasibility studies, optimization, and systems integration. The generic solution-orientation and growth engine type of role with consulting types of services can be recognized from our analyses: consulting types of services played an important role with all six impact types, and we also recognized their frequent occurrence through all three phases (before, during, and after the core project) of the solution lifetime.
Our empirical study indicated that consulting types of services are highly value-adding, and margins are often high. Indeed, consulting types of services form a profitable part of the business. Also, the innovation and learning impact from consulting is obvious: most of the consulting services were seen as close complements often integrated with existing offerings, and thereby impacting the activity system of the company by giving new advantages. Increasing design and engineering to cover a much wider part than the company's technology basis were mentioned as a possibility to create a new strong dimension in the business model.
However, mostly these consulting services were seen as part of the marketing and sales activities, giving an opportunity for continuous dialog and early entry with the customer. Therefore, many consulting types of services are often delivered to the customer free-of-charge. We used the term “consultative selling” to indicate such free services. The business logic for free consulting services is that consultative selling leads to bigger and bigger deliveries to the customer. For this reason, some companies have their consultants work with their customers, free of charge, in the customer's location, for their presence itself guarantees effectively catching hidden or latent needs and opportunities for business.Therefore, consulting serves as a growth engine that truly represents the core of providing solutions to customers rather than just products or separate services packages. Consulting activities were often also related to enhance the relationship and create a trust base for larger and more profitable activities.
Regarding our empirical observations and the existing literature, Helander (2004) found that the main goal of process or business consulting is the creation of a deeper customer relationship, and therefore every consulting hour is not necessarily invoiced. The logic is that consulting could enable the suppliers to participate in the customer's long-term planning of the next generation of systems. It was also discovered that it is more common for suppliers to consult their customers in matters relating to the technology that they sell than to provide general business advice. This is due to the fact that customers do not usually find the suppliers knowledgeable enough and are therefore reluctant to pay for general business consulting.
Emphasis on Maintenance Types of Services
By maintenance types of services, we widely refer not only to maintenance, but also to operations support, outsourcing, and other types of services that relate to operating or developing the existing installed base. In our empirical study we observed that these types of services were extensive, both in number and volume. These kinds of services have developed into whole businesses with rather complex interrelatedness to the services in the supplier's business models. It is even the case with some companies that the core project deliveries may no longer play so important a role in terms of volume or profitability, but the role of the core projects and core product technology may be to indirectly support the firm's technological advancement that enables even more worthwhile business that relates to the installed base and maintenance types of services.
The existing literature on industrial services recognizes that after-sales services are often one of the main profit generators for the supplier. However, the change in the way of doing business can also cause problems. The supplier may have previously preferred to establish traditional maintenance contracts but is now increasingly involved in the customer's operations through long-term outsourcing responsibilities. Johansson and Olhager (2004) speculated on how deep an involvement in the management of a customer's operations a supplier can take. They also pointed out that in an extreme case, a supplier's different field organizations may end up competing with each other. However, some other authors saw the close cooperation as an advantage. Gallouj and Weinstein (1997) saw an extensive and balanced co-production in the operational level as a fundamental service characteristic. It could be argued that this close involvement can enhance the development of new profitable innovations between the parties. Also, Meier and Massberg (2004) pointed out various advantages in service contracting types of operations. As the production systems are not owned by the customer, such advantages include—in addition to economic advantages—a possibility to establish technological innovations or a chance to re-use components in new configurations in production systems. Furthermore, a possibility to install supplementary equipment to improve the efficiency during the after-delivery lifetime is an advantage: sensor technology for maintenance, and repair or remote service functions under the management of the supplier, are examples of such advantages, as provided by Meier and Massberg (2004).
The ongoing relationships are often guaranteed in the form of after-sales (Evans & Laskin, 1994; Frambach et al., 1997). After-sales types of services are well recognized in the literature that handles product services associated with durable goods and also capital-intensive goods. The production of capital goods often takes place in project form. Also, Johansson and Olhager (2006) saw that “new and improved ways to strategically manage industrial after-sales services are in demand.” In the field of industrial services, Kotler (1994) has categorized two main groups: maintenance and repair services, and business advisory services. Similarly, Johansson and Olhager (2004) found that “education, spare parts and maintenance are just some examples of services required by many industrial customers.” In addition, Helander (2004) referred to Andersson (1998), who stated, based on his empirical studies, that “the importance of after-sales services for the system suppliers’ value proposition has grown.” According to Helander (2004), one of Andersson's (1998) key points was the long-term view of services, including the services after the project delivery and guarantee period. The reasons for increased demand for after-sales services included higher complexity, longer system lifecycles and the need for emergence support. The customers were also increasingly aware of real maintenance costs. Helander (2004) argued further that the suppliers have recognized an increasing future orientation among their customers and that it seems that the customers’ time perspective is a key factor, because the customers already evaluate the supplier's long-term commitment to the promises given in the sales phase. Such long-term commitment affects the whole business dynamic.
The Complexity of Mechanisms of How Services Affect Business Performance: Several Levels and Dimensions in Business Models
Our empirical study suggests complex interrelatedness between services and projects, and various complex mechanisms of how services affect business performance. The impacts on business performance are direct and indirect, and both short-term and long-term. A good example about valuable indirect mechanisms is the rationale to provide the customer with free consulting in order to gain access to more worthwhile and highly profitable business or business relationship. Furthermore, concerning the maintenance types of services delivered after the project, such services are not only characterized by the facts that one service often leads to another or that services may be interwoven with each other. Instead, the complexity is considerably increased by potential controversial or even cannibalization-like relationships that the services may have. For example, in consulting, the customer must often be provided the best solution independently, and this may sometimes require that the suggestions do not rely on the supplier's own equipment deliveries but rather those of a competitor. Also, outsourcing contracts may even cannibalize an ongoing more profitable maintenance/operations support contract with the customer, but despite this, the supplier is willing to take larger outsourcing responsibilities with even lower margins in the interest of creating a closer and more stable customer relationship in the highly competitive situation in the market. In our case companies, the organizational arrangements of having different services in different units may enable independence between certain service offerings, but on the other hand, effective integration is needed to interweave the firm's offerings into a consistent whole solution for the customer.
From the results of the empirical study we can conclude that there is a wealth of different service offerings that are implemented for various business purposes in various phases of a solution lifetime. Our empirical study suggests that project-based firms do not have only one grand business model at the level of the whole company, but there are several business models at different levels of business activities, functions, or offerings: each service or service type can be considered to have a service-specific business model, and, additionally, customer-specific or customer segment-specific business are examples of business models that emphasize more customer activities than specific services.
Customer Value Versus the Project Supplier Firm's Profitable Growth
There is an extensive discussion in the existing service literature that suggests that a supplier should aim to generate ever-increased customer value. However, the potential deficiencies in this discussion are recognized by some researchers (Walter et al., 2001; Möller & Törrönen, 2003), as emphasizing customer value creation as the one major aim tends to neglect the supplier firm's aim to run a wealthy and profitable business on a sustainable basis. Indeed, our empirical study adopted a supplier firm's business perspective, and accordingly, we analyzed the mechanisms of how the supplier's creation of customer value may support or hinder the supplier firm's business performance. These observations relate also to selling and pricing of services: although there is a sound rationale observed with providing the customer with free consulting services, many of the case companies struggled with the problem of how to price the services at a reasonable level by simultaneously avoiding offering of too cheap or too much free value-adding services for customers. This problem related to the productification of services and to the marketing and selling of services that often are strongly constrained by industry standards and industry-specific operating practices.
Role of Product Technology Basis: The Fallacy of Being a Product Company
All of the case companies have a history in equipment manufacturing. Therefore, each firm has a significant know-how and technological capability concerning a technical system. Each company has a strong product base. Most of the case companies consider themselves as being in project business. However, a large share of their current business comes from services. A strong technological competence and product brand has obviously provided them opportunities to move into services. Spare parts sales, engineered system supplies, and more extensive operation and maintenance agreements are enabled in particular by the experience that the companies gather from their installed base. The more knowledgeable the companies become of the operational needs of their customers (i.e., operational environment of their customers’ industries), the better equipped they are to provide consulting for their customers in their business planning (e.g., in planning new investments). Although this may not always be as straightforward a process as described here, it well reflects the following fact: what originally was the core business of the companies now only plays a partial role in their project business.
These observations are not to say that the product business would have become less important. For example, the ability to use the latest technological advances in product technology might be the only way to gain enough comparative advantage to keep the business profitable. However, the product technology focus may still be a burden for many companies in their business models and organizational settings: their product technology base may even capture too much of their attention. This may imply that some firms may even concentrate too much on the underlying interest of advancing the sale of their own equipment and technical solutions, instead of selling solutions more independently, or some companies may be too much locked into providing services that relate to their own equipment, instead of providing services for an installed base delivered originally by their competitors.
Gallouj and Weinstein (1997) suggested that a service delivery is a system of technical characteristics (knowledge, tangible, or intangible systems embodied in the competencies of the company) and direct mobilization of competencies (without any technological medium). A successful service product is therefore based on the resources and capabilities of a firm. Drawing from this, the strong technological capabilities and competencies acquired from the supplier's product technology base would enable the case companies to gain comparative advantage.
Achieving sustainable competitive advantage through superior products and reasonable prices is difficult. Koskela (2002), Rothschild (1984), and Parasuraman and Grewal (2000) argued that services can be used to distinguish the product and that they are much more difficult for competitors to imitate. The cost of supplying high quality service is likely to continue rising. Therefore, service must use technical developments (Koskela, 2002). Preventive maintenance or automatic continuous monitoring of a customer's equipment are examples of services that a company with a large installed base could successfully use to benefit of both parties.
Role of Installed Base: Attitudes Toward Own Versus Competitors’ Installations
Our empirical observations concerning the installed base relate to the observations of the customer entry impact type and observations about product technology basis discussed above. Our empirical analysis showed that there are several entry points to do business with the customer. As the product technology basis in all companies is strong, we recognized that there is a strong tendency in the companies to be sometimes more interested in selling more equipment than merely selling services. In many companies, the core project and many services were seen as partial vehicles for indirectly selling more equipment. This seemed to be a built-in perspective to a firm's business, which sometimes may make the viewpoints to customers’ businesses and potential entry points too narrow.
An interesting observation concerned especially the installed base delivered by competitors: some of the companies seemed not that interested in competitors’ installed equipment, but they rather concentrated on delivering their own equipment to the market and on providing maintenance types of services only for their own installations/equipment. This behavior is justified due to the risk of guaranteeing availability/reliability of a competitor's installation, due to potentially higher repair costs, or even due to proprietary rights that the competitor may have with the installation. However, concerning the origins of the installation for which the service is provided, there are obviously two major reasons for also servicing a competitor's installation. First, relating to the service business impact type, such services may under certain some circumstances be profitable business as such. This can be the case when some type of economies of scale or scope can be achieved, for instance when investing in a new logistics center or when establishing a new office to service customers in a certain geographical area. Second, relating to the customer entry impact type, such a service relationship might provide an entry point to the customer and consequently an opportunity to generate more business, either through more service sales or through new core project deliveries.
In the interviews the impact of services before the project delivery was mostly related to benefits during the project and benefits for the customer. Surprisingly few commented on the impact of services before the project giving the potential for after-delivery services, even though the obvious benefits from increasing the installed base were recognized. However, the importance of the installed base was mostly seen rather narrowly: the installed base was seen as creating a basis for regular spare parts and maintenance sales, more than for giving advantages in taking extensive responsibility over the life-cycle through operating, maintaining, revitalizing, and optimizing the delivered scope. Such more extensive responsibilities would offer the supplier an interesting and important form to develop its offerings and strategy.
Concerning the existing literature relating to our empirical findings, Knecht, Leszinski, and Weber (1993), Potts (1988), and Oliva and Kallenberg (2003) argued that substantial revenue can be generated from an installed base of products with a long life-cycle. Similarly, Johansson and Olhager (2006) found that qualities of the product to be serviced determine the service opportunities for the service provider. If the system that requires services consists of many parts, or it needs frequent servicing, or the service provider also services competitors’ equipment, the total number of service opportunities increase. However, if there are strong third-party providers in the market, such opportunities decrease. Concerning the use of a competitor's installation as a vehicle for customer entry, Helander (2004) argued that an aggressive system supplier could provide care services for the customer who uses a competitor's equipment, in order to get an entry point for a customer's business. Neu and Brown (2005) pointed out that existing technological capabilities and resources can help a company form new strategies, such as for services, but the same capabilities may be a cause for inherent rigidities (discussed in Leonard-Barton, 1992) that inhibit it from doing so. In this context, a rigid mindset focusing on increasing product sales could restrain the company from moving to also service a competitor's installed base. However, adhering to the firm's own installed base can also be a wise decision. Oliva and Kallenberg (2003) suggested three unique advantages that a company has when serving its own installed base:
- Lower customer acquisition costs: since manufacturers are involved in the sales of new products, they have information on new equipment joining the installed base.
- Lower knowledge acquisition cost: many of the services provided to an installed base require special knowledge about the product and its technology. The product manufacturer has an additional advantage as it has knowledge of the product service requirements over its life-cycle.
- Lower capital requirements: manufacturers possess many of the specialized production technologies required to fabricate spare parts or to upgrade existing equipment.
Concerning organizational constraints, most of the case companies are still organized in divisions or functions for certain parts of the life-cycle, often with different priorities and mainly focusing on their own part of the life-cycle. This was mentioned as a challenge for taking large responsibility and taking full benefit of the services provided. An example from one of our case firms is training in operations activities, which was mandatory for all customers delivered a core project. The reason for including training was the supplier's attempt to minimize spare parts consumption and down-time for the system. In another case firm, the supplier strived to continuously focus on growth in spare parts sales and maintenance, and therefore—among other reasons—the operations training was not given strategic importance: the training was offered only as an option. These messages are controversial from the value-increasing whole solution perspective. In a similar vein, we observed that services related to different phases of the solution lifetime may be too separated through organizational arrangements. Such organizational arrangements do not always lead in an ideal way to customers’ value increase, or to the supplier's profitability and wealth.
Existing research recognizes challenges in managing the service and equipment sales markets, which often have their origins in organizational constraints (Oliva & Kallenberg, 2003). Trade-offs must be made between the increased service quality that would increase the product's life-cycle by making the goods more durable, and service volume that would simultaneously diminish due to the decreasing need for maintenance services and replacement sales. Oliva and Kallenberg (2003) also recognized the typical organizational difficulties in managing a geographically distributed installed base.
Conclusion and Further Research
In this paper we have presented results from a case study with five project supplier firms. With these firms, we analyzed the impact of services on the performance of a project-based firm. The research question was “What is the impact of services on the performance of project-based firm?” We carried out the case studies through semi-structured interviews. In the empirical study, we focused on the companies’ business models, and the relationship of the project and service types to the business model and to the company strategy.
Project supplier firms consider themselves to be solution providers. Their solutions include systems with product and service contents, and separately delivered services. In our analysis of the industrial service literature, we identified six different types of impacts of how services may affect business of a project-based firm. These six impact types served as one dimension of a framework for our empirical analysis. Customer deliveries are often conducted in project form, at least as far as the core product technology-related deliveries are concerned. Therefore, from a wide perspective, a solution includes a core project delivery, often including services, and separate services deliveries. We complemented our framework for the empirical study by another dimension that addressed a solution lifetime view. This lifetime view included distinction between services that are delivered before, during, and after a core project delivery. We used the framework of the six impact types and the solution lifetime view in our empirical data gathering and in structuring our observations and findings.
Our empirical study provided a wealth of service offerings and their complex interrelatedness with the business model and the revenue generation logic of a project supplier firm. We compared our findings extensively with the existing knowledge in the service literature. We analyzed the impact of different service types on project business in detail by each of the six impact types: customer entry, customer value, competitive advantage, delivery efficiency, service business, and innovation and learning. We found several distinctive results related to the six impact types.
Furthermore, we provided distinctive findings from looking at the results across all impact types. We also raised additional findings from the case companies that relate to approaches of how services are seen in the firms’ businesses, with the impact of such approaches obviously serving as enablers or barriers to good business performance. Such findings related to the following areas:
- Versatile role of consulting types of services in solution providing
- Emphasis on maintenance types of services
- The complexity of mechanisms of how services affect business performance: several levels and dimensions in business models
- Customer value versus the project supplier firm's profitable growth.
- Role of product technology basis: the fallacy of being a product company
- Role of installed base: attitudes toward the supplier firm's own versus competitors’ installations
- Organizational constraints
Further research is needed on different context-specific business models used by project and service firms. The different levels of business models should be addressed to provide an understanding of the interrelatedness between the company level, customer segment level, customer level, and service-specific business models. Further research should also address the successfulness of such models by involving a contingency view that addresses the context specificity of project and service businesses. We also need research that would clarify the various important roles of product technology basis and self-delivered and competitor's installed base for a project and service supplier firm's successful business. Furthermore, in order to understand a supplier firm's business logics better, more detailed empirical research should address different alternative entry points to customers’ businesses and their implications to the supplier firm's business.
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Organizations must invest in building a culture - and project teams - that can turn cutting-edge ideas into reality, according to new PMI research.