Business Model Development towards Service Management

Available online at www.sciencedirect.com
2212-8271 © 2016 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer-review under responsibility of the scientific committee of the 8th Product-Service Systems across Life Cycle
doi: 10.1016/j.procir.2016.03.228
ScienceDirect
Product-Service Systems across Life Cycle
Business Model Development towards Service Management 4.0
Mirka Kansa
*, Anders Ingwalda
a
Department of Mechanical Engineering, Linnaeus University, Luckligs plats 1, 35195 Växjö, Sweden
* Corresponding author. Tel.: +46-470-708488. E-mail address: mirka.kans@lnu.se
Abstract
There is an increasing interest to ensure operational and maintenance (O&M) operations from a strategic perspective, and there are
opportunities for both producing companies and service providers to gain benefits. Research shows that the combined business models
(products combined with services) have a positive effect on the business. Likewise, it is profitable to think strategically and in long term for
enterprises offering maintenance services, especially using performance-based models. But for achieving these benefits the view of the business
has to change. The focus should be on the values created and not in the offers in form of products or services. Moreover, the company needs to
position itself as an actor not only in the value chain, but in a wider context referred to as the business ecosystem. Making such a shift of focus
is hard though, and there is a need to understand both the current state of the business as well as the potential future directions.
The framework presented in this paper is an attempt to meet these needs. The framework describes business model development in four levels.
From maturity point of view, the four steps could be seen as the logical development of the business model from a narrow technical perspective
to a holistic product-service perspective. The four levels could also be connected to the industrial development where level four supports
Industry 4.0. Level four is referred to as Service Management 4.0. In particular, four key concepts reflect the concept of Service Management
4.0: the mix of products and services in customer offers, performance-based contracts, partnering and the business ecology concept.
© 2016 The Authors. Published by Elsevier B.V.
Peer-review under responsibility of the scientific committee of the 8th Product-Service Systems across Life Cycle.
Keywords: Service management 4.0; Business model development; Integrated product-service models
1. Introduction
The area of business modelling and innovation has gained
increased attention in the recent year due to success stories of
companies earning big money by adapting new business
models [1]. Business models describe the way a company
creates, delivers and assimilates value [2], and defines how
business should be conducted, for example in terms of
strategy, customer relations, market segments and value
creation mechanisms. It is also important to define the
company’s role in the value stream chain [3]. Business
models aimed at combined offerings, i.e. products combined
with services, have been proved to have a positive effect on
the operations, see for instance [4]. There are opportunities for
both producing companies and service providers to gain
benefits, but the view of the business must change in order to
achieve the benefits [5]. The change in focus from what to
offer to what value the offer brings for the customer is
required, and to adopt a holistic approach on the value
creation process [6, 7]. In [8] four main aspects are proposed
as being important for the successful development of
operations and maintenance (O&M) service models: the mix
of products and services in customer offers (bundling), the
need for a holistic view on the value creation process, relevant
setup and metrics for performance-based business models and
contracts, and Information and Communications Technology
(ICT) as an enabler and a prerequisite for business model
development. The latter connects the contemporary business
strategies with modern production strategies referred to as
Industry 4.0. Industry 4.0 implies that other revolutions have
taken place. The first revolution happened in the 1800-1900’s,
when production was mechanized. The production was moved
© 2016 The Authors. Published by Elsevier B.V This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer-review under responsibility of the scientifi c committee of the 8th Product-Service Systems across Life Cycle
490 Mirka Kans and Anders Ingwald / Procedia CIRP 47 ( 2016 ) 489 – 494
from decentralized units to large factories and a new social
class, the working class, was born. The second revolution
occurred in the last century when the production become
electrified and parts and processes were standardized. The
digitization of production is usually called the third
revolution. Industry 4.0 is referred to as the internet revolution
and is characterized by intelligent factories through cyberphysical
systems and the internet of things [9]. Cyber-physical
systems are physical devices with components that are
integrated in the devices for monitoring and control. These
cyber-physical systems are connected and communicate with
each other through internet technology for coordination
purposes, thus creating flexible, dynamic and smart factories.
Maintenance 4.0 is a subset of Industry 4.0 in the form of selflearning
and smart system that predicts failures, makes
diagnosis and triggers maintenance actions [10].
Industry 4.0 focuses on delivering advanced technical
solutions to manufacturing problems and support new
manufacturing philosophies such as lean production, but in
order to become successful these technical innovations in
manufacturing must be connected with the strategic business
models. Flexibility in manufacturing requires flexibility and
adaptiveness in the services such as maintenance and logistics
which can be achieved by applying new business models. In
this paper a framework for business model development is
proposed that connects technological development with
service needs and business modelling, transforming the O &
M services, especially maintenance, from being a technical
product into a concept of value creation and business creation:
Service Management 4.0.
2. New industrial maintenance demands and possibilities
The current technical development in industry regarding
information handling and digitalization leads to new ways of
producing goods. The industry demands flexible, safe,
environmental friendly and available production processes. At
the same time production processes becomes more automated,
complex and dynamic. A new environment for production is
described in [11], which includes automation and very few
human beings. Intelligence is built into the actual products
and all things can be identified by RFID-tags and every object
in the system is traceable. Through this the production
becomes more flexible and difficult to anticipate both
regarding when it takes place and where. This new situation
puts demands on flexibility and automation in the
maintenance management as well. At the same time, the ICT
development enables new way of managing maintenance.
Advancements in technologies such as data acquisition
technology, data technology, sensor technology, prognosis
technology gives possibilities to work in new ways with
maintenance and thereby increase the effectiveness and also
better adopt it to the needs of the customer. Data and
information at the right place
in the right time are crucial
factors for the techniques that give these new opportunities in
maintenance. Data intensive technology also enables the
development of smarter systems for prognostics to be built
into machines; see for example [12]. The system described in
[12] includes distributed diagnostic capability to assess the
probability of subsystem faults and system faults. The system
also includes capability to estimate remaining useful life. An
approach to predictive maintenance of a plant based on timed
hybrid automata of machines normal behavior is described in
[13]. This is an example of a learning system. Input from
sensors are used to let the system learn the machines normal
behavior, and then compare actual behavior with the expected
learnt behavior to identify anomalies in the monitored
equipment. This approach relies on technologies for data
acquisition and middleware technology.
Augmented reality (AR) is a way of using information and
maintenance expertise exactly when and where it is required
[14, 15]. AR is a way to better utilize human capabilities and
allows experts to guide and train maintenance technicians on
distance. This can increase the utility and flexibility of
maintenance. New technology also allows for combining
human capabilities with capabilities of intelligent
maintenance systems; see for example [16] where a human
machine interface is described. The purpose is to allow
inclusion of human and context factors in maintenance, and
thereby improve the planning capabilities of the system.
3. Value creation and business model development
Customer offerings are characterized by factors such as
scope, time and bundling [17]. The scope describes how many
different value promoting products or services an offer
includes. The dimension of time describes the length of the
relationship between customer and seller, which can be
anything from a one-time offer to long-term relationships.
Bundling describes in which way the offer has been put
together, and what the customer therefore must buy. An
example of bundled offer is a company producing fork lifts
offer the customer availability of fork lifts instead of just fork
lifts, then bundled together are the forklift and required
service. The density of the offering describes the number of
opportunities for activities and interaction within a given time
and / or spatial dimension [17]. One aspect is the number of
activities that have to be performed in order to take part of the
customer offering and another is how close the offering is in
time and space. Offerings are assessed by their ability to
satisfy the needs and expectations of the customer and
measured in terms of quality. Product quality dimensions are
for example durability, safety, appearance, accuracy,
environmental friendliness, maintainability, reliability and
performance [18]. Common to these dimensions is that they
are directly linked to the physical product and its
characteristics. For service the physical aspect is only one of
several other dimensions. Following service quality
dimensions are commonly used [19]: reliability (the ability to
deliver service dependably and accurately), assurance
(expertise knowledge), tangibles (the physical appearance),
empathy (consideration and individualization) and
responsiveness (willingness to help customers and to provide
prompt service).
One way to compete on the market is by focusing on the
company’s internal strengths in form of competencies and
resources [20]. The inside-out strategy is often technologydriven
assuming that a market need can be filled through
Mirka Kans and Anders Ingwald / Procedia CIRP 47 ( 2016 ) 489 – 494 491
technology innovation. The opposite of the inside-out
perspective is the outside-in perspective, which implies that
the company focuses on the environment in their development
of offerings and their actions. In reality, both perspectives are
interconnected. The relationship between internal efficiency
and external effectiveness can be explained in terms of
productivity and customer value [21]. In a customer-driven
business development strategy the company tries to analyze
customer needs and then find a solution or product that fits
this need. In a traditional production-oriented value chain the
value creation process is mostly linear, in which the operators
further up the chain refine the product further down the chain.
It is easy to define who is responsible for which part of the
value promoting process. In a service-based economy actor
constellations are more complex and not necessarily linear.
The relationships between actors in a service economy are
characterized more by reciprocity [17]. A utility-driven
business development strategy goes beyond the customer
focus when understanding the true needs of the value offering,
for instance in form of the value for the customer’s customer.
It is not always easy to distinguish which player produces
what part of the service offering. The value chain includes all
actors that directly takes part in the linear value creation, but
the situation is often more complex than so, with outsourcing
and n-party collaborations which connect players to each
player in the value creation in a star-like or network pattern,
see for instance [17]. Companies often interact in complex
and geographically dispersed pattern changes and shifts over
time, players come and go, relationships are broken and new
ones created [22]. To enable looking outside traditional
frameworks [23] suggests positioning the company in a
business ecosystem, where development takes place together
with other actors. In the business ecology, other actors than
the direct ones representing the value chain are included, such
as competitors, government agencies, standardisation
organizations, politicians, and the public. The dynamics
described in the business ecology concept also includes
relationships in longer and shorter terms and a focus on the
full product life cycle. Applying an ecosystem perspective on
business processes include viewing consumers as co-creators
of value, focus on network value instead of product value, and
strategic focus on value networks where actors cooperate in
complex patterns rather than compete [24].
4. A framework for service business model development
Industrial business modelling has gained increased
attention due to the new industrial demands described above.
Especially research on customer offerings that combines
physical products and services is growing [1, 8]. Value can be
offered as a physical product, a real or virtual service, or as
the combination of products and services. The customer
offering is the result, or output, of a value-system, and can be
seen as an input for another party (the customer) or other
(value creation) system [17]. [25] claim that the offer always
is a combination of a physical product and service to different
degrees. While the terminology is not fully consistent, most
researchers agree that the product-service system (PSS) is a
business model based on the integration of products and
services applying a systems approach [26]. PSS is
characterized by customer and life cycle orientation, and long
term relationships between different parts in the value
creating process. The transition from the traditional business
model to the integrated PSS is in [27, 28] described in form of
three value propositions: product or function orientation, use
or availability orientation, and result orientation. The
transition is a journey towards higher complexity and life
cycle orientation that triggers a number of challenges
originating from economic, technical and organizational
unce
rtainties [28]. These uncertainties are huge barriers for
the effective transformation; see for instance [29]. A complete
change of the corporate mindset is needed in order to take
advantage of the PSS business model. The PSS model is
extended in [30] and a refined model is suggested which
distinguish between availability-oriented and use-oriented
PSS, and the result-oriented PSS is subdivided into the
categories solution-, effect- and demand-oriented.
The framework suggested in this paper (see table 1) could
be seen as the logical development of the service business
model from a narrow technical perspective to a holistic
product-service perspective. It addresses the core business
logic and the fundamentals of the value creating process.
Without a thorough understanding of the basics, the transition
to a more advanced business model is hard. Describing the
underlying business logic and expressing this in a number of
explicit factors to consider when making the shift will
increase the understanding of necessary changes and support
the transformation. In the framework, seven factors derived
from the description in section 3 have been included. The
factors quality dimensions, type and density of the offering
and the business development strategy reflect the company
view on the value proposition, how this is developed and
distributed. The other three factors (view on value creation
and profitability, and the strategic perspective) reflect the
company core business strategy, and are linked with the value
offering by the business development strategy.
The framework applies an eco-systems perspective on
value creation [22], which is consistent with and extends the
systems approach in PSS. The value creation process is
described in four levels, depicting the O&M service needs of
the industry according to the development stages of Industry
4.0. Level one and two are narrow inside-out strategies
representing the traditional product or function oriented
business model, level three represents a customer-driven and
use oriented business model, and level four represents a
utility-driven and result based model. The levels thus
correspond fairly well with the three value propositions in
PSS [28] with one distinction: the treatment of the product
oriented proposition in two separate steps. This extension has
been made in order to better support the transition of
traditional technology-driven companies towards PSS and to
better understand the value of O&M service. In level one, the
technical system is treated as a product, and aftersales
services are not viewed as an important business opportunity.
In level two, the O&M service is seen as a possibility to
generate revenue, but the service is offered using the
traditional product-oriented perspective, thus treated mainly
as a product.
492 Mirka Kans and Anders Ingwald / Procedia CIRP 47 ( 2016 ) 489 – 494
4.1. The service model development framework
In this section the four levels are presented and
exemplified using maintenance and its management as service
offering. Moreover, prerequisites necessary for achieving the
different levels are discussed.
Table 1. Framework for service business model development
Dimension Level 1 Level 2 Level 3 Level 4
Type of
offering
Technology Mainly
product
Product and
service
Bundled
offerings
Density Low High Dynamic
Quality
dimensions
Mainly product Combination of product and
service
Business
development
strategy
Technologydriven
Customerdriven
Utilitydriven
Dynamic
Strategic
perspective
Inside-out Outside-in
View on
profitability
Productivity Customer
satisfaction
Customer
satisfaction /
relationships
Relationships
(more or less
formal)
View on
value
creation
The own
business in
focus
Value
chain
Value
star/network
Ecology
Level 1: At level one the manufacturer’s main business
model is to provide physical products to the market, while the
responsibility for service, maintenance and disposal is handed
over to the customer. The business is driven by technical
competence manifested in the physical product which is sold
using traditional, low density, channels. The offering is
promoted and validated using product-based quality
dimensions, assuming that the product fulfils a market need
without involving customers in the value creation. Instead,
value creation is tightly connected to the company’s own
manufacturing process, and therefore internal efficiency and
productivity is seen as drivers for reaching profitability.
Manufacturers who provide aftersales service mainly treat the
service as a product offering derived from the technical
competence. From a maintenance point of view, maintenance
is not in any focus at all. Consequently, the main management
form considered is run to failure, and the product might not be
designed considering its maintenance at all. Aftersales
services are manifested as products necessary for carrying out
maintenance tasks, such as high quality and robust spare parts,
or specialized technical competence. The manufacturer could
earn revenues by supplying original manufacturer spare parts,
but competes with low cost countries and additive production.
The product could be designed so it is impossible to change
spare parts without contacting the original manufacturer.
Apple for instance uses such a strategy for the Iphone battery.
Level 2: Another strategy is to include the aftersales
activities in the business as a way to meet customer
expectations and needs. The offering is packaged depending
on the formulated needs of the customer. The density is
typically high, but still allowing or even requiring the
customer to participate in the value creation. The value
creation is seen as a linear process where each part has a
specific and well delimited role in the total value chain. The
value chain model is well suited for traditional products, and
the offering is also characterized by a “hands-on” appearance;
it is easy to describe the scope and content, and the business is
regulated in measurable terms such as amount, size or
frequency. A manufacturer on level 2 could for instance sell a
product together with a fixed maintenance plan that specifies
preventive maintenance activities to be done in fixed time
intervals under a predefined time period. The service is thus
treated mainly as a separate product, and not as an integrated
part of the system. Even if the customer satisfaction is a
driving force for reaching profitability the company mainly
makes savings by focusing on the internal effectiveness and
efficiency in the planning and execution. Thus the strategic
perspective is inside-out. The strategy that is adapted is
mainly preventive, but the service provider has no true
incentives for optimizing the planned maintenance, because
there is money to be earned also by selling additional
maintenance when failures occur. For this purpose, condition
monitoring can be used as a technique for finding faults when
on place, as a means to reach efficiency and cost reduction.
This type of service offer is often referred to as the traditional
maintenance contract.
Level 3: The use-oriented model combines products and
services, and the product is sold together with services in
order to assure the performance of the physical product. The
performance can be expressed in different ways depending on
the type of product: for example, the number of lifts per year,
certain availability or a certain number of kilometers [26].
This type of offering is utility-driven, i.e. focuses on the
explicit as well a
s the implicit needs of the customer. The
offering is no longer characterized in first hand by its physical
appearance, but by the function it provides, so the quality
dimensions could cover both product and service quality
dimensions. The density is typically high but the mode differs
depending on the customer. The number of actors that are
active in the value creation is also typically high, and the
relationships are of n-type rather than a linear chain with 1-1-
relationships between each sub-process. A company that
offers the product as a function might for instance contract a
third party service provider for parts of the maintenance work,
while the customer takes care of daily cleaning and
lubrication. In this scenario, there are at least three actors that
together ensure the performance of the product; the producer,
the service provider, and the customer. Relationships with the
customer and other key partners become important, and the
strategic outside-in perspective assures profit through
satisfying the needs of the customer. At level 3, maintenance
and is integrated as a part of the function that is offered to the
customer. Predictive power in form of monitoring and
diagnosing the condition of the system as well as possibility
to predict failures becomes important for the manufacturer for
ensuring the functionality. Systems for condition monitoring
and analysis can be used for monitoring and control
functionality and for planning and optimizing maintenance
actions. Parts of the service, such as fault detection,
monitoring and diagnosis, could be performed from distance,
see for example [10].
Level 4: The fourth level represents a value proposition
that goes beyond the physical product and the requirements on
functionality. Instead, the needs of the customer, or even the
customer’s customer, are in focus. The offering is an
integrated solution that could be manifested as a “black box”
Mirka Kans and Anders Ingwald / Procedia CIRP 47 ( 2016 ) 489 – 494 493
solution, and the outcome is measured in terms of utility, for
instance productivity of the customer in produced amount per
hour. The offering requires trust, openness and long term
relationships between seller and buyer, as both parts take a
business related risk when entering this kind of contract. The
process is typically data driven and knowledge intensive. The
manufacturer has extended opportunities to modify the
product to fit the aftersales services for increasing its
knowledge capabilities. A product can for instance be sold
with built-in intelligence enabling that all aftermarket
activities will be planned and carried out based on real
conditions, i.e., based on field data [31]. The density of the
offering could vary depending on customer needs and
technological solution, but in general the density could be
kept high through remote intelligence such as monitoring,
diagnosis and decision support. While the density in the actual
value creation is higher other activities require lower density.
Face-to-face meetings, on-site appearance and personalized
support are important activities for building up and
strengthening the relationship between seller and buyer. At
level 4, maintenance is a fully integrated part of the offering
and the value it could provide for the customer is in focus.
The value for the customer is related to how well the supplied
bundled offer support the customers productivity,
profitability, etc. and that is what the customer pay for, as
well as for the additional business related risk the service
provider takes when assuring the performance. It is therefore
of highest interest that maintenance is optimized for lowest
disturbance of the production by applying a proactive
maintenance strategy. This is enabled by intelligent systems,
which predicts failures, makes diagnosis and triggers
maintenance actions, and self-adapting systems, which adjust
themselves according to true conditions of the system and its
environment.
5. Service Management 4.0
The necessity of new business models for the successful
implementation of predictive and proactive maintenance is
pointed out in [32], especially for reducing problems related
to high investment costs and risks connected with the new
technology. For being able to monitor the systems health
investment in condition monitoring technology is required,
but the customer might not be willing to share this investment
cost with the service provider. To overcome the problem
holistic service packages against a fixed, time-based fee is
suggested [32]. Service Management 4.0 moves beyond this
kind of problems. By providing integrated and holistic
product-service offerings the manufacturer takes large
business related risks but has also the possibility to take full
advantage of their technical competence when designing the
system for optimal operational and maintenance performance.
The required data capture and intelligence is an integrated part
of the offering, which reflects a technology-driven business
development strategy.
New kind of problems occurs though: being able to deliver
utility or value for the customer data not only regarding the
system itself, but also from its surroundings, such as
environmental data and performance data is required. The
service provider has to interact with other actors in the
ecosystem, and especially trust between the provider and the
customer becomes crucial. Therefore, three key factors, in
addition to the mix of products and services in customer
offers, reflect the concept of Service Management 4.0:
performance-based contracts, partnering and the business
ecology concept. The offering could be regulated using
performance-based contracting forms, see for instance [7],
where alignment of information and social interactions such
as training and relationship building, are key value drivers
[33]. This reflects a utility-based business development
strategy. A common understanding of expectations is also
important. To be able to actually monitor the delivered service
impact on the profitability or productivity, openness and
access to data at the customer company is required, and that in
its turn is enabled by trust in the supplier-customer relation.
This implies a cooperative form of collaboration such as
partnering where all involved actors must gain from this close
collaboration, see for example [8] and [34].
The cooperation is not limited to the manufacturer and the
customer. The manufacturer might need to cooperate with
suppliers of surrounding systems for reaching the necessary
information. The condition of a train is for example affected
by environmental conditions as well as the conditions of the
rail. Assuring utility for the train owner, the train
manufacturer thus requires data not only regarding the
operations and health of the train, but of the rail as well, and
the weather conditions. The complexity increases if the train
owner and the operator are separate actors. Moreover, the
behavior of the business ecology is the driving force in
creating value offerings, taking into consideration actors
outside of the traditional customer-seller dyad, see for
example [35]. This requires good understanding of the
different actors, and their relative power, comprising the
ecosystem.
6. Conclusions
Service management 4.0 refers to delivering value to the
customer, where the physical product and maintenance
management are fully integrated and followed up based on its
ability to deliver value for customer. The performance of the
delivered physical product or the delivered maintenance is, in
a sense, not important.

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