Developing integrated solutions: The importance of relationships within the network

Industrial Marketing Management 35 (2006) 806 – 818

Developing integrated solutions: The importance of relationships within the network Charlotta Windahl ⁎, Nicolette Lakemond 1 Linköping University, LiU School of Management, SE-581 83 Linköping, Sweden Received 11 November 2005; received in revised form 31 March 2006; accepted 2 May 2006 Available online 13 July 2006

Abstract Firms that have traditionally focused on selling products, spare parts and services face difficulties with increasing competition and declining margins. They are therefore turning to new strategies where products and services are integrated into so-called integrated solutions. Research on the challenges this presents is sparse, but there is evidence that internal factors as well as external relationships play an important role. In this paper we investigate the relationships within the business network in order to uncover some of the complex issues related to integrated solutions, including how and to what extent these relationships facilitate or impede the development of integrated solutions. Two case studies of one more and one less successful initiative within the same firm are used to illustrate challenges and possible success factors for the development of integrated solutions in the capital goods industry. The paper identifies the following six factors as important when developing integrated solutions: the strength of the relationships between the different actors involved, the firm's position in the network, the firm's network horizon, the solution's impact on existing internal activities, the solution's impact on customers' core processes, and external determinants. It shows that inter- and intra-firm relationships can both enable and obstruct the development of integrated solutions. For the firms involved in the development of integrated solutions, it becomes crucial to manage this duality. © 2006 Elsevier Inc. All rights reserved. Keywords: Integrated solutions; Relationships; Network theory; Capital goods

1. Introduction A growing number of firms are exploring opportunities to enhance their value propositions by integrating products and services in new business offerings. Such ‘integrated solutions’, as they are referred to in this paper, address specific customer needs implying a shift in focus from product functionality to the actual outcomes of their products and services for customers' operations and processes (Davies, 2003). Clearly, this new strategy challenges traditional business models for selling products, spare parts and support services. Despite recognizing the opportunities integrated solutions provide, many firms have only limited insight

⁎ Corresponding author. Tel.: +46 13 28 15 90; fax: +46 13 28 18 73. E-mail addresses: [email protected] (C. Windahl), [email protected] (N. Lakemond). 1 Tel.: +46 13 28 25 25. 0019-8501/$ - see front matter © 2006 Elsevier Inc. All rights reserved. doi:10.1016/j.indmarman.2006.05.010

into how integration of products and services could and should be carried out, the challenges integration poses, the extent of the service offering, and the factors to consider when deciding on the product–service mix (Oliva & Kallenberg, 2003). Similarly, the literature on this topic is sparse, but suggests that companies need to integrate an extended set of competencies (Davies, 2003; Windahl, Andersson, Berggren, & Nehler, 2004). One important challenge in developing integrated solutions relates to cooperation between internal business units and departments. When developing integrated solutions, the former service content must not be seen as ‘only’ a support service or stand-alone after-sales offering but as an integrated part of the total offering. Service and product development as well as the development of the business must be handled in an integrated manner. This puts high demands on cross-functional cooperation. A second major challenge relates to relationships between actors within the business network. As former “product providers” become “solution providers” a different degree of

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insight into the problems and applications of customers is necessary, implying a need for customer involvement and longterm relationships (Galbraith, 2002). In addition, partnerships are often formed with companies providing complementary products. The development of these integrated solutions necessarily involves high interaction and sometimes-blurred boundaries between the actors. Customers as well as suppliers have important latitude on the development of these integrated business offerings. It therefore becomes interesting to consider how and to what extent these actors influence the development of integrated solutions. This paper aims to contribute to the sparsely investigated area of developing integrated solutions. To our knowledge the concept of integrated solutions has not been approached by investigating the relationships within the network. We intend to show that this perspective can uncover some of the complex issues related to the development of integrated solutions. We focus on the challenges connected to the development of integrated products and services in the capital goods industry, and more specifically the implications related to the relationships within the business network. Important questions we address are how relationships in the business network both enable and prevent the development of integrated solutions. Two case studies of projects in the capital goods industry of varying success illustrate challenges and possible success factors connected to the development of integrated solutions. Our main focus is on the relationships within the business network. However, as external and internal aspects are intertwined the internal organization cannot be excluded. As Ritter (2000) remarks, the capability to capture and manage relations in the business network depends on how well the internal competencies and organization are adjusted to mirror the business network. The paper is organized as follows. The two sections following provide a review of the literature on integrated solutions and on business relationships and networks, where important aspects are abstracted for our analysis of the development of integrated solutions. Next, two case studies from the capital goods industry are presented, analyzed, and discussed using a relationship and network perspective. The paper concludes with a general discussion about the implications of our study and some conclusions. 2. Integrated solutions 2.1. Integrating product and service perspectives An increased emphasis on value creation and the necessity for firms to develop new business offerings in order to distinguish themselves from competitors have led to a growing interest in the area of integrating services and physical goods into ‘integrated-solution’ offerings. For example, a pump manufacturer selling x m3/s of pumped liquid instead of a pump would be a supplier of a fully fledged integrated solution, and would require the supplier to maintain and even operate the pump; another example would be the delivery of ‘availability’ instead of conventional after-sales services (Windahl et al., 2004). Hence, instead of supplying products, spare parts and support services to

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the customers, a combination of physical products or services, or both, and knowledge are used to provide a specific outcome fulfilling the customers' needs. This implies a shift in emphasis from production to use, from output (of the production process) to input (in the value-creating process of the customer system), and from past to future, that widens the scope of what an offering is, what characteristics a firm needs to build into its offerings, and what competencies are required of the firm (Normann, 2001). Manufacturing companies that have traditionally focused on products face major challenges when developing integrated solution offerings (Oliva & Kallenberg, 2003). New capabilities, metrics and incentives are needed, as the emphasis shifts from a single transaction to a more long-term relationship with the customer (Davies, 2003; Grönroos, 2000; Gummesson, 1994; Normann, 2001; Oliva & Kallenberg, 2003). Several capabilities have been identified to be crucial for developing and delivering integrated solutions. Systems integration is claimed to be a core capability (Davies, 2003; Shepherd & Ahmed, 2000). This capability rests on a broad systems engineering expertise and on organizational structures that facilitate integration of products and services. Davies (2003, 2004) argue that systems integration includes the design and integration of systems composed of internally or externally developed hardware, software and services. However, he claims that in order to be able to offer integrated solutions also an extended set of competencies must be adopted. These include operational services, business consulting and financial services. Davies (2003, 2004) derives his results from research across six different sectors; viz. railway, mobile communication systems, flight simulation, corporate networks, infrastructure and construction, and consultancy. 2.2. Increasing customer focus Besides the necessity to integrate service and product perspectives and the need for new capabilities, one of the biggest challenges connected to becoming an integrated solution provider concerns the adoption of a market orientation and increased customer focus (Ames, 1970; Brown, 2000; Mathieu, 2001; Oliva & Kallenberg, 2003). This implies a major shift in orientation for companies with a long tradition in manufacturing and a strong product focus. Galbraith (2002, 2005) argues that a customercentric orientation needs to be created. This includes focusing on the best solution for the customer in contrast to the best product for the customer, which means that the five organizational dimensions of strategy, structure, processes, people and rewards need to be customer-centric (Galbraith, 2002). Important elements of customer-centric management are customer relationship management, customer oriented measures, structuring around customer segments and convergent thinking (i.e., searching for the best combination of products for this customer in contrast to trying to achieve the most possible uses of a product). The importance of being customer-centric increases when companies adopt integrated solutions on a larger scale and when these solutions include combinations of many different products and services (Galbraith, 2002). The adoption of a focus on customers implies more than just creating a conventional after-sales service organization. Instead,

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a customer perspective must be balanced against and integrated with a focus on products and services. This need for integrating perspectives has some important consequences for the internal organization. 2.3. Organizing to deliver integrated solutions Integrating product, service and customer perspectives requires an organization to be capable of handling processes to develop new product features and deliver maintenance services along with the identification of new business opportunities (Lakemond & Magnusson, 2005). One important challenge is to manage the interplay between service development and product/ technology development effectively. This is necessary as new technology and product generations may provide opportunities for new types of solution offerings, such as products including control systems that enable enhanced ‘serviceability’ and optimized performance through continuous monitoring. At the same time, new integrated-solution offerings require the development of different types of products and features. Existing research findings indicate that isolating the service organization from product development and manufacturing operations may be a critical success factor for managing the transition from a product-centric company into a provider of integrated solutions (Oliva & Kallenberg, 2003). A dedicated sales-force and specialized service technicians make it possible to break with traditional “product-centric” cultures. Also Galbraith (2002) argues for a separation between front-end, customer-facing units and back-end technology- and product-oriented units. Frontend units need to gain a thorough understanding of the customers in order to deliver superior tailored outcomes. To achieve this, these units need greater scope, resources and discretion than they would get in product-oriented firms (Miller, Hope, Eisenstat, Foote, & Galbraith, 2002). At the back-end units of the company, experts need to develop core capabilities and platforms that form the basis for the integrated solutions offerings. This reflects a classic contingency theory proposition; companies that operate in diverse and dynamic environments should aim for a higher degree of differentiation between organizational units (Lawrence & Lorsch, 1967). However, following Lawrence and Lorsch's contingency theory proposition, in order to be effective, a greater organizational differentiation must be followed by a greater emphasis on organizational integration. Isolating the services from product development and manufacturing is likely to support the development of specific organizational routines and thus results in a more focused and effective service organization. But to what extent will it support the development of integrated solutions? Miller et al. (2002, p.9) argue in this context that “…the natural interdependencies between client and capability interests require judicious and constructive collaboration between front and back. This demands strong leadership and a vibrant collaborative infrastructure.” Both Davies (2004) and Galbraith (2002) emphasize the importance of the network for the development of integrated solutions, especially as the solution becomes more complex. Davies (2004, p. 753) even states that “for many firms, the biggest challenge will be developing the capabilities to integrate different pieces of a system provided increasingly by an external network

of specialized component suppliers, subcontractors and service providers”. Other authors have identified this as partnering competence, such as building alliances and partnerships with suppliers, partners and customers (Shepherd & Ahmed, 2000; Windahl et al., 2004). However, these studies do not focus specifically on how actors and their relationships in the business network influence the development of integrated solutions. In this paper we focus on the relationships within the network to uncover some of the challenges related to the development of integrated solutions. The next section provides an overview of some of the literature within this field. 2.4. Importance of relationships within the business network Creating integrated solutions is very much a question of combining value activities of multiple actors in order to form ‘value-creating’ end products (Anderson & Narus, 1999; Doz & Hamel, 1998). “Relationships enable companies to cope with their increasing technological dependence on others and the need to develop and tailor offerings to more specific requirements” (Håkansson & Ford, 2002, p. 133). Although one firm may be driving the development of integrated solutions, as we will illustrate in our empirical study, several other actors in the business network influence the development of integrated solutions. Ritter, Wilkinson, and Johnston (2004) make a distinction between five levels of relationship and network management, including the level of the individual actor, the single dyad, the portfolio of relationships, the connected relationships, and the complete set of relationships on the network level. On a portfolio level one single firm is involved in a number of relationships. The connected relationships concern the indirect connections to the focal firm, i.e., the focal firm is not directly involved in these relationships. The network level includes all relationships in the business network. These different levels focus the attention on different management aspects, from a dyadic perspective relationship management becomes important, while the portfolio perspective puts the attention to balancing and allocating resources to the different relationships. The management of the connected relationships involves dealing with the indirect effects of management actions in one relationship on other relationships. This paper focuses on the individual dyad but it also discusses some implications for the portfolio of relationships and the connected relationships. Anderson, Håkansson, and Johanson (1994) emphasize the importance of considering the dyadic business relationships and their embeddedness within the business networks. They argue that “if business networks are to possess advantages beyond the sum of the involved dyadic relations, this must be due to considerations that take place within dyadic business relationships about their connectedness to other relationships” (Anderson et al., 1994, p. 1). In addition, the authors emphasize that the business network boundary is arbitrary and dependent on how extended an actor's view of the network is, i.e., the network horizon. Thus, for managers wanting to improve their understanding of the network it becomes crucial to examine the assumptions on which they base their network pictures and create their network horizon (Ford & Redwood, 2005).

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Ehret (2004, p. 468) argues that a narrow approach to relationships, buyer–seller relationships in particular, can “lead to a dead end if the context of the value network is not taken into account”, especially since customers are often not aware of their future needs. In addition, “as companies are unbundling and rebundling activities in search of a competitive advantage in the network context, companies may be bought, sold, or cease to exist. Such dynamics may pose severe problems for a company exclusively devoted to a dyadic approach to customer relationships. Profitable customers simply disappear, established buying centers are redefined, and new relational norms are established” (Ehret, 2004, p. 471). Managing networks therefore involves initiating and responding, acting and reacting, leading and following, influencing and being influenced, planning and coping, strategizing and improvising, forcing and adapting (Ritter et al., 2004). Therefore, instead of focusing on the firm itself or even the industry, it becomes important to focus on the value-creating system where different actors (suppliers, business partners, allies, customers) work together to co-produce value; roles and relationships need to be reconfigured in order to create value in new forms, and a dynamic fit between competencies and customers becomes crucial (Normann & Ramirez, 1993). Ahuja (2000) uses the dimensions of direct ties, indirect ties and connections between partners when discussing how the firm's network can influence the firm's innovation performance. Direct ties are the firms' dyadic relationships with other firms and may serve as sources of resources and information. Indirect ties can be compared to the firm's connected relationships (cf. Ritter et al., 2004) and serve as sources of information. The structural holes concern the degree to which a firm's partners (the direct ties) are connected to each other. These structural holes expand access to information but they also increase exposure to potential malfeasance. Ahuja's (2000) findings, based on a longitudinal archival research on patent data in the chemical and material sector, indicate that the number of direct and indirect ties correlates positively with innovation performance (measured in number of patents). The impact of the indirect ties, however, seems to be moderated by the number of direct ties. The existence of structural holes seems to impact negatively on innovation performance. Parolini (1999) emphasizes the importance of focusing on the activities before focusing on the actors, and defines the network or value-creating system as a set of activities involved in the creation of value for purchasers. Furthermore, she argues that this approach of focusing on the activities on different levels within the system has the advantage of concentrating on the value creation process without being dependent on the changes taking place in individual firms. As suppliers increasingly rely on partners when developing and delivering integrated solutions, and, to a certain extent, become part of the customer's ongoing operations, it is unavoidable that the creation of integrated solutions has a major impact on relationships in the business network and vice versa. Taking into account a firm's embeddedness in the network and its indirect and direct connections and dependencies on other organizations is therefore likely to provide a more complete picture of the challenges connected to developing integrated

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solutions. The question remains therefore, how and to what extent the relationships and actors within the business network facilitate or impede the development of integrated solutions. In order to gain more insight into this, in the next sections we analyze the relationships in two cases. 3. Developing integrated solutions: a case study of the Dairy and Sludge projects 3.1. Methodology A comparative case study of two initiatives at a large international firm with a long history in manufacturing serves to illustrate the inter-firm challenges connected to the development of integrated solutions. The firm, to be referred to as Alpha, is an international specialist in centrifugal separation, heat exchange and fluid handling, operating in the capital goods industry. The firm manufactures a range of products such as high-speed separators, decanters (centrifuges) and filters, plate and spiral heat exchangers, and pumps. The customer base includes the gas, petroleum, energy-generation, marine, processing, food and beverage, biotech, pharmaceutical, water and wastewater industries. The two initiatives presented in this paper concern the wastewater treatment and dairy industry, and illustrate two different ways for a manufacturing firm to approach the development of new solutionbased strategies. Several external actors played a prominent role in both initiatives. The wastewater project concerns the development of an intelligent decanter control system for optimizing the sludge dewatering process. The development of this project started out as skunk work, but was turned into a legitimized venture within the organization. So far this venture is seen as very promising for developing future business. This initiative will be referred to as the Sludge project. In contrast, the Dairy project which concerns the development of ‘intelligent separators’ for milk separation and control of the cream concentration was terminated before the machine was released on the market. A case study method was chosen to study the factors enabling and preventing the development of integrated solutions stemming from relationships in the business network. This gave us the possibility to study the development of integrated solutions in its real-life context and in this way grasp the complexity of this difficult to demarcate phenomenon (Yin, 1994). The cases were selected to contrast two different initiatives to develop integrated solutions within the same organizational context, which makes it possible to analyze a number of interdependent variables (Dubois & Gadde, 2002). The analysis can be characterized as going back and forth between the data and the literature. Dubois and Gadde (2002) refer to this process as ‘systematic combining’, a process to expand our understanding of theory as well as of the empirical phenomena. The studies of the Sludge and Dairy projects form part of an ongoing research project that since January 2002 has followed different initiatives within the capital goods industry, all aiming at supplying integrated solutions. In connection to Alpha and its industry, 65 people have so far been interviewed at Alpha and other firms within the same industry, such as customers, partners and suppliers of complementing products. These interviews

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have contributed to our general understanding of the two projects, and their internal and external context. Eleven of the interviews include key informants involved in the Sludge project. The Dairy project was smaller in size and four key informants were interviewed. Appendix A provides a list of the interviewees. The interviews of 1.5 to 2 h each were conducted in a semi-structured manner with open-ended questions; they were recorded and later transcribed. On average, each interview resulted in 15–20 pages of transcribed material that were coded and categorized based on the initial questionnaire. Findings and results of the studies were checked and discussed with the interviewees on several occasions. To a large extent our findings are based on interviews with key informants from Alpha. However, some of the other actors involved in the two projects have also been interviewed. When this was not possible we have used reports written by these actors as well as internal project documents and memos from meetings with these actors to include their perspectives as well. Despite this, a limitation of our study is the predominant focus on the focal actor Alpha. Some of the implications with this limitation will be discussed in the Conclusions and suggestions for further research section. 3.2. Optimizing the sludge treatment process — the Sludge project Sludge is generated from different steps of the wastewater treatment process and needs to be dewatered in a sludge treatment process. The ‘sludge system’ developed in the Sludge project is a decanter control- and adjust-system optimizing this sludge dewatering process. The system consists of software, a computer, sensors with a control box, a centrate tank and cables. The system makes it possible to increase process performance and provides the customer with considerable cost savings. Alpha started the development of the sludge system in the early 1990s. Coincidentally, at the same time Dutch legislation was implemented encouraging incineration of sludge. This in turn resulted in a search for optimal dewatering solutions, an activity taken on by a Dutch research organization. Together with this research organization, Alpha continued the development of the sludge system in the late 1990s. This resulted, in the end of 2001, in a pilot installation at a customer's site in The Netherlands, where Alpha was able to follow, analyze and improve the system and its benefits. It took about a year to make the system successful at the pilot site and achieve a cost benefit for the customer. Nowadays, the system is licensed to the customers' installed base. This license includes a fixed installation cost per decanter and an annual fee for the use of the computer and the software. The annual license fee varies depending on capacity (dry solids/hour) and cost savings made. Results until now show that the use of the system provides customers with a substantial cost reduction. The development of the system up until the successful pilot installation was not a smooth ride for the people involved from Alpha. In the early stages of the project, internal support was lacking and necessary resources to carry out the project were missing. In fact, the project was basically carried out as a skunk work. One highly motivated employee, supported by his closest boss put much effort into the project. Also some people that had

been involved earlier in the development of the control system performed some tasks. When the project in The Netherlands started no financial resources were available. Consultants involved for software development had to agree to postpone the bill one year. At one stage a decision was even taken to stop the project but this did not prevent the people involved to continue. In parallel to the development activities, there were ongoing discussions on the future strategy of Alpha. An important focus of these discussions was how Alpha could ‘climb the value chain’. For this reason it was attempted to coordinate similar developments of other ‘integrated solutions’ e.g. the dairy system, but without any success. In January 2002, these internal discussions reached top management and business consultants were appointed to investigate potential growth opportunities approaching “functional sales” (defined in the consultant report as selling products, services and parts but take responsibility and base additional revenues on process efficiency gains from smart applications and process expertise). Finally, top management decided to give priority to the sludge treatment and the Sludge project. A pre-launch took place in The Netherlands in 2002, and in January 2003 the Sludge project became a venture separated from the traditional organization and with a General Manager of its own. 3.3. Controlling the cream concentration — the Dairy project The Dairy project developed a ‘broad’ separator providing variable capacity and thereby replacing a range of separators with different capacity. The separator was also a physical platform for enabling ‘intelligent’ functions. The development of the intelligent features for controlling and adjusting the separators was initiated in the middle of the 1990s. The initial project included the development of the separator as well as these ‘intelligent’ control functions. Although discussions on features and business possibilities were intense and consultants were involved to analyze and explore the possibility to take on responsibility for the customers' processes by offering an integrated solution rather than a product, it was decided to exclude the controlling and adjusting features from the project and instead focus on the development of the separator. A main reason was that it was felt that the project had become too complex to handle. Therefore, although the potential was recognized, the project brief was adjusted and the development of control and adjust functions was postponed until later. Simultaneously the competence center for the dairy application, involved in the early discussions about new business offerings, became part of another firm, referred to as Beta, after reorganization in 2000. Therefore, when the Dairy project officially started in January 2001, the project team was staffed with employees from Alpha as well as Beta. One consequence of the new organization was that Beta became the channel to the end customers (dairy plants) actually using the separators. The project was driven within Alpha by people from a central research department and from the division with the technical responsibility for the separators. This division however, does not have the commercial responsibility for customer Beta.

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Table 1 Summary of the Sludge and Dairy projects

Business offering

Actors involved

Development process

Sludge project

Dairy project

Develop a new system that will optimize the end customers' (wastewater treatment plants) sludge dewatering process and decrease the cost significantly. The possible cost cut is due to new requirements for sludge handling. The sludge treatment process is a sub-process to the wastewater treatment process. Alpha, one end customer, a software partner and a research organization were involved in the development and testing of the system. Business consultants encouraged support for the Sludge project internally at Alpha. Parallel development of physical product and business approach. Both technological and commercial aspects were discussed at an early stage. Dedicated individuals from the beginning of the process and a highly supportive top management towards the end were crucial for the launch of the sludge system — i.e., creating the venture.

Develop a ‘broad’ separator that will replace a range of separators with different capacity and eventually offer customers (dairy plants) ‘intelligent’ control over the process.

Although people from the division holding this responsibility were informed about the ongoing development in the project and invited to meetings, little interest was shown and meetings were not attended. The main objective with the project for Alpha was to supply Beta with a machine with flexible capacity. In this way Alpha would be able to decrease the number of products in its product portfolio. A second objective was to prepare the machine for including control systems in the future. These systems would make it possible to improve maintenance strategies, decrease power and water consumption as well as improve availability and reliability. This increased functionality was packaged into a business offering and Beta was to approach the end customers, i.e., the dairy plants. Therefore, as one of the project members from Alpha explained, “the money for us would not have been in the dairy industry where we sit in the backseat with Beta driving the car, producing value for customers and finding out what they want. Instead we could have learned and used that knowledge when approaching our own applications.” These possible future customers included breweries, wineries and olive oil producers. By August 2001 the development of the machine was finalized. Beta launched it at an exhibition, the stand saying, “Do not buy a separator — buy separation!” Nine potential orders were identified. Beta initiated two orders for a customer in Germany. In 2002, however, these orders were cancelled due to the end customer's financial problems. For reasons not completely clear to Alpha, other potential customers also turned the separator down and ended up buying conventional machines. However, possible explanations could be found in the fact that Alpha had included features in the separator that previously had been under the responsibility of Beta, and Beta started questioning Alpha's ability to support and service the machine. At the end of 2002 the project was put on hold. The project leader's contract ended and the motivation to continue the project was low. Table 1 summarizes the projects.

Controlling the cream concentration is part of the dairy plants' core process. Consultants investigated feasibility of the project at an early stage. Alpha developed the product together with its customer Beta; end customers were not involved in the project. Lack of internal coordination at Alpha between the commercial, technical and production aspects. More focus on getting the machine ready than on business approach. Dedicated individuals never had support from the top management.

4. Critical factors in the case study related to relationships within the network 4.1. Critical factors in the Sludge project Several important actors featured in the Sludge project. Company Alpha, our focal company, took the initiative to develop an optimized sludge treatment process. However, this initiative was supported and facilitated by several other actors. These actors and their connections are depicted in Fig. 1. Besides Alpha, one specific customer, the wastewater treatment plant in The Netherlands, had specific latitude on the project. The relationship between Alpha and this customer was strong and intense throughout the whole project. The close ties with the wastewater treatment plant were crucial for achieving a match between the customer needs and the offering. The wastewater treatment plant needed dry sludge to decrease the costs associated with sludge handling and Alpha was able to match this need by offering optimization of the dewatering

Fig. 1. The Sludge project and its relationships within the network.

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Table 2 Critical factors in the Sludge project Management level

Critical factor

Actor (Alpha)

Dedicated individuals and strong relationships between team members continued the project despite internal resistance A highly supportive top management towards the end was crucial for the launch of the sludge system — i.e., creating the venture Dyadic Close cooperation and strong relationships between Alpha relationships and the end customer throughout the project increased Alpha's knowledge about the customer's need and facilitated the outline of new business agreements for the system The software was developed in close interaction with the partner and combined process and software knowledge, and resources made value creation possible Portfolio of Alpha was the integrator between the different actors and the relationships end customer, hence, the value creation process concerned managing and utilizing external resources from the different actors involved Connected set of The relationship between the consultants and top management relationships gave priority and focus to the Sludge project in the overall Alpha organization New legislation encouraged the interest of the research organization and the customer for optimal dewatering solutions The relationship between the research institute and the wastewater treatment plant, where the research institute advocated dry sludge gave credibility to the project and Alpha at the customer

process. This match between the offering and a specific customer's needs may be considered as crucial for delivering successful integrated solutions (cf. Miller et al., 2002; Shepherd & Ahmed, 2000). In order to achieve this match, Alpha was highly dependent on the relationship with the software partner; Alpha did not posses software competence in-house and these software features were core to the integrated solution. The relationship with the software partner was strong and consistent throughout the whole project. Another critical factor in the Sludge project was related to the role of the research organization. The research organization became interested in optimal dewatering solutions as a consequence of new Dutch legislation encouraging incineration of sludge. The research organization spurred Alpha's development of the sludge treatment optimizing system and provided credibility to the project, not only internally at Alpha, but also towards the customer and perhaps also other potential customers. The strong ties with the research organization were especially important during the early stages of the project, at an initiating phase, but not as important (and strong) at the later stages of the project. Also the business consultants, advising Alpha to take a ‘value-climbing’ position by offering integrated solutions, have strengthened the credibility of the project. However, these business consultants did not have a direct relation to the project and were mainly important to influence top management towards giving priority and focus to the project. Although the close cooperation with the customer was central in the project, also the software partner and research organization directly contributed to achieving the match bet-

ween the customer needs and Alpha's dewatering solution system. The new legislation and the business consultants influenced the project more indirectly (i.e., via the research institute and Alpha's top management). All these actors made it possible for Alpha to develop detailed knowledge about the dewatering process and increased general knowledge about the connections to other processes at the wastewater treatment plant. The close relationships and cooperation between the actors in the business network enabled the demonstration of important cost savings. Based on this a commercial approach could be outlined. Alpha managed the relationship portfolio, the tasks of allocating resources to different relationships, and the interaction within each relationship (cf. Ritter et al., 2004) and thereby created increased value for customers. In addition to these inter-firm relationships and activities, there were some internal actors and activities at Alpha that seem to have been important for the development of the sludge system. A few dedicated individuals enthusiastically pushed the Sludge project forward from the beginning of the process. These persons succeeded in including not only technological but also commercial aspects at an early stage. Towards the end, a highly supportive top management turned the project into a legitimate venture within the Alpha organization. Besides top management support, the project needed little support from other internal functions. The new system did not affect the existing production processes and products as the new features consisting of sensors and computer mainly were supplied by external parties in the business network. Therefore, to some extent, it could be claimed that the development of the sludge system was more dependent on the external relationships than on internal support and coordination between the business units. Table 2 summarizes the critical factors for the development of the sludge system. 4.2. Critical factors in the Dairy project The Dairy project was to a great extent influenced by the relationship between Alpha and Beta (see Fig. 2). The project was staffed with employees from both companies but seemed to have suffered from a lacking support at Beta as well as Alpha. Although the ties between the individuals directly involved may have been sufficient, the ties between Alpha and Beta were not strong enough and the responsibilities between them were not clearly outlined. Beta even started questioning Alpha's ability to support and service the machine as several of the included features previously had been under the responsibility of Beta. Another important factor influencing the Dairy project was the relationship with the end customer. As Alpha did not have a direct relationship with the potential end customers, the Dairy plants, Beta became the channel towards the end customer. This made it difficult for Alpha to develop a thorough understanding of the customer process and specific customer needs, which was crucial to the project as the integrated solution affected the end customer's core process directly. In addition, the activities between Beta and the end customers were not very strong at any stage of the project. This probably led to the Dairy project only taking the first step towards a match between the customer needs and the offering, i.e., excluding the ‘intelligent’ features. This

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Fig. 2. The Dairy project and its relationships within the network.

exclusion created confusion at the end customers and probably made it difficult for them to distinguish the advantages with having a new separator. The dairy industry saw potential in being able to regulate the cream concentration and an ‘intelligent’ machine would have increased the control of the process. Even though Alpha was the initiating and driving actor, it was Beta that was the integrating actor and channel toward the market and it was difficult for Alpha to gain a complete understanding of the needs of the dairy plants. The consultants were another actor in the project. The role of the consultants was prevalent in the very early stages of the initiative and provided credibility to the project, but the consultants did not have an important role during the later stages. Internally at Alpha the project seemed to suffer from a lack of internal coordination and support. The dairy system changed the existing product which had important consequences for the factory and the manufacturing process. This created internal resistance to the project. Furthermore, the division of commercial and technical product responsibility also complicated matters. Arguably, the internal organization was not able to meet the challenges in dealing and gaining insight into the demands of the customer and its end customers since the commercial responsibilities were not included in the development of the separator. In that sense, Alpha was not able to mirror the external business network internally (cf. Ritter, 2000). The technical department ‘owned’ the product and did not succeed in persuading the commercial unit to participate. Instead they were focused on getting the machine ready. There was hence a lack of internal coordination and integration of technical, commercial and production aspects which affected the external relationships with Beta. Table 3 summarizes the critical factors for the development of the dairy system. 5. Important factors and managerial implications for developing integrated solutions The analysis of the relationships within the network provides new insights into the challenges related to the development of integrated solutions. It identifies a more complex picture of the factors related to the internal organization than previous research, such as the importance of considering the impact on existing intra-firm activities; and it shows inter-organizational challenges and factors that are hardly mentioned in the existing literature, such as connected relationships and their influence on the development of integrated solutions (cf. Davies, 2003, 2004;

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Galbraith, 2002). Below, these important factors for developing integrated solutions will be discussed in more detail. When comparing the two projects, it is evident that the Sludge project had a broader network horizon than the Dairy project: more external actors and relationships were included in the project and the links between them were stronger, and both external and internal resources were balanced and utilized. In the Dairy project, Alpha underestimated the importance of a close relationship with end customers. In both projects, Alpha's direct relationships were affected by the broader context of connected relationships. Close direct as well as indirect ties seem to have influenced the development of the sludge system positively, in line with Ahuja's (2000) findings. In contrast, the absence of close ties in the Dairy project influenced the development of the separator negatively. Alpha's ability to influence the projects is linked to the company's position in the network. In the Sludge project, Alpha was an integrator between the different actors and the end customer, as such the firm had a stronger and more powerful position within the network than it had in the Dairy project where Alpha's role was more as a supplier to Beta. The lack of relationship between the dairy plants and Alpha seems to have had a large impact on the outcome, and impeded the Dairy project from creating new value for the customers. In the Sludge project, through cooperation and involvement, the actors in the network had a picture of the intended direction and outcome of the project. Being positioned as an integrator in the network seems to enable the development of integrated solutions. It increases the control over resources and the power over network coordination. Table 3 Critical factors in the Dairy project Management level

Critical factor

Actor (Alpha)

Weak internal relationships between the commercial, technical and production aspects resulted in more focus on getting the machine ready than on the business approach The new product had important consequences for the existing production process which created internal resistance to the project The division of responsibilities between Alpha and Beta was not clearly outlined and the relationship was complicated which made it difficult to decide on the scope of the offering Alpha did not have much internal support for the project and could not convince Beta that it would be able to support and service the machine once in place The project was not well embedded within Beta's organization and internal support at Beta was lacking which affected the relationship with Alpha negatively N/A

Dyadic relationships

Portfolio of relationships Connected set of Beta was the integrator even though Alpha was the initiator. relationships Alpha only had an indirect tie with the end customers and a match was not achieved between customer need and the value created in the project Beta had a weak relationship with end customers which impeded knowledge creation about the customers need and hence value creation As Beta was not confident about Alpha's capabilities its motivation to continue the project and approach new customers with the new offering was low

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In addition to Alpha's position in the network, the development of solutions was approached differently. In the Sludge project, the focus was on process performance and optimization, and a new product was developed together with the customer and a software supplier with crucial competence for the project. In the Dairy project however, the existing product was changed and prepared for improved process performance and eventually a change in business model. The change of the existing product required new routines for Alpha's manufacturing process and included the development of a new specification system. The integrated solution and its success were dependent on both the strength of the relationships between the actors and the impact on the existing internal activities and processes. Furthermore, the impact on the customer's process and activities also differed between the projects. The dairy machine was to become part of the end customers' core process whereas the sludge system only affected the sludge treatment process (which is a sub-process, the core process being wastewater treatment). It might be easier to develop integrated solutions for activities that are not directly part of the customers' core processes. Finally, in the Sludge project, external factors explain some of the success of the project; new legislation encouraged the development of new solutions for obtaining a dryer sludge, enhancing the customer need and making several parties in the market interested. In addition, the involvement of the research institute supported the importance and credibility of the project, which was possibly facilitated by close network ties between the research organization, the wastewater treatment plant and Alpha. Our cases highlight six important factors influencing the development of integrated solutions: the strength of the relationships between the different actors involved in the project, the firm's position in the network, the firm's network horizon, the solution's impact on existing internal activities, such as products, services and production structures, its impact on the customers' core processes and external determinants. These and their managerial implications are discussed below. 6. The strength of relationships and the solution's impact on internal activities One dimension, that can explain success or failure of the development of integrated solutions, is related to the relationships between the different actors involved in the creation of the product/service content, the integrated solution. In the Sludge case for example, the decision to make sensors and software core to the offering resulted in the important relationship with the software-development actor as this competence was not available in-house. Although literature about value creation recognizes that developing value-creating end products, such as integrated solutions, is a matter of combining different value activities of multiple actors (Anderson & Narus, 1999; Doz & Hamel, 1998), it does not discuss the implications for managing the relationships in the business network. Galbraith (2002) claims that an increased scope in offering, i.e. an offering consisting of a large number of product/service components with complex interfaces, puts high demands on the degree of customer-centricity. He fails however to include the consequences for the direct and connected set of

relationships in the business network. We argue that when the development of integrated solutions involves a large number of actors, it calls for the creation of strong external ties with these actors. In addition, in order to identify these important actors, a broad network horizon is necessary. Our study shows that not only the relationships with external actors impact the development process. Also the solution's impact on existing products, services and production structures has important consequences for developing integrated solutions. When this impact is high, as was the case in our Dairy project, input from the existing organization becomes crucial and a focus on the internal organization is necessary to achieve success. The lack of involvement and coordination between different internal units can hinder a joint technical and market approach. As also Ritter (2000) argues, capturing, coping with and managing interconnected relationships require information to flow inside the firm. In our study, it proved to be more complicated to alter the existing production structure than to add new products. The impact on existing products and the production processes seems to have important consequences for the internal coordination of the development of integrated solutions. In the Sludge project, the system had very little impact on Alpha's traditional organization and the team could continue the development of it more or less independently. Combining these two dimensions highlights further managerial challenges, see Fig. 3. Firstly, when the impact on existing products, services and production processes is low, it might still be of utmost importance to create a focus on the project by committing necessary resources. When relationships with external actors are strong, a favorable condition exists as was the case in the Sludge project. In this situation the new offering might be better off in a separate venture, away from the existing organization. The separate venture provides the possibility to focus on the solution and match external and internal competencies crucial for the integrated solution; this is in line with Oliva and Kallenberg's (2003) recommendation. Secondly, with strong external relations and a high impact on existing structures, it becomes important to create processes to handle the dependencies stemming from both internal and external relations and activities. For a supplier of integrated solutions, systems integration constitutes a core capability (Davies, 2003; Shepherd & Ahmed, 2000). This capability rests both on a broad systems engineering expertise and on organizational structures that support interaction between different disciplines and departments. Thus, the recommendation to create a separate organization to handle the service offering is in this case incomplete. Instead, a high impact on existing internal activities creates a need to complement with additional structures to achieve a sufficient level of integration. Increased organizational differentiation may serve a purpose to strengthen the service business, but also creates a necessity to take additional measures to coordinate the activities of different organizational units (Lakemond & Magnusson, 2005). Structurally our two projects provide a far more complex picture than the simplified recommendation of Galbraith (2002) to add customer-centric solution units. Thirdly, if the impact on existing processes is low and the relations with external actors are weak, it becomes important to secure the match to the end customers' needs in order

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Fig. 3. Managerial implications related to external relationships and the solution's impact on existing internal activities.

to avoid the risk of developing an integrated solution that no one would like to buy or use. Ways of securing this match could for example include finding ways of involving customers in the development process, moving towards a stronger relationship, or looking into ways of educating and training the customers. Fourthly, this is true also for the final square in Fig. 3, where in addition to securing the match, it becomes necessary to involve and commit internal actors, perhaps by even creating separate ‘integrated solutions’ business units. The need to involve internal actors was prevalent in our Dairy project but the project members failed to involve, commit and convince important internal units at Alpha as well as external units at Beta and end customers. This indicates the necessity to have processes in place to handle the interaction between the different units, and it may also call for different intra- as well as inter-organizational structures that are better capable of handling and suited for these complex processes.

6.1. The firm's position in the network and its network horizon The analysis of the relationships within the network focuses the attention to the importance of the focal company's position in the network. This is a factor not discussed in previous research about integrated solutions. In one of our cases, the focal company Alpha had an integrating position in the network, in the other case Alpha was a supplier to the integrating actor, Beta. This integrating position seems to be an important predictor of the degree of control a firm has over the other actors in the network, i.e., the latitude of a firm to achieve change through the network (cf. Håkansson & Ford, 2002). As we know that thorough knowledge about the customer's processes is crucial for developing and delivering integrated solutions (Davies, 2003) the absence of a direct relationship to this end customer is an important impeding factor for the development of integrated solutions. However, the

Fig. 4. Managerial implications related to the firm's position in the business network and its network horizon.

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development of integrated solutions might still be successful if the relationship with the integrating actor is strong and the integrating actor in turn has a strong relationship with the end customer. In the case of the Diary project, it might have been possible for Alpha to influence the outcome of the project if the company had had an extended view of its network (i.e., a larger network horizon) and identified the implications of having only an indirect tie to the end customers. The managerial implications of a company's network position and its network horizon are summarized in Fig. 4. Having an integrating position and a broad network horizon may be considered as the most favorable position for ‘controlling’ the network and developing integrated solutions. A limited horizon combined with an integrating position results in a need to establish the dependencies on external actors for developing and delivering the solution. In case of a low dependence the limited network horizon might not be a problem, however a high dependence implies a need to broaden the network horizon in order to be able to deal with this dependence. Not being an integrator in the business network makes development of integrated solutions more difficult. In combination with a limited network horizon, development of integrated solutions may only be feasible when the integrating actor is strongly committed and has a broad network horizon. It may be questioned however, why our focal firm would want to take an initiative in this case. Having a broad network horizon however, may create possibilities to identify implications of the indirect ties to the end customer in this project. In another context the firm may have a direct relationship to the end customer and this relationship may be exploited in the project. 6.2. External determinants and the solution's impact on the end customers' core processes The importance of having a broad network horizon and an integrating position in the business network is further emphasized when examining the external factors and the solution's impact on customers' core processes. In the case under study,

the external factors stemmed from the set of connected relationships in the business network; the focal firm and the people involved in the projects were not in control over these external factors, which emphasizes the importance of having a broad network horizon. These external factors may drive the customer need and strengthen the value proposition of the integrated solution for the customer. Early identification of important driving factors for integrated solutions might open up opportunities to develop new successful business offerings. Customer interest in integrated solutions may not only be enhanced by external determinants but may also be related to the degree to which the integrated solution impacts the core processes of the end customer. As the outsourcing of activities not critical in achieving a competitive advantage has been in focus much the last two decades, its underlying rationale being to create a focus on core activities in which the firm can excel (Prahalad & Hamel, 1990; Quinn & Hilmer, 1994; Venkatesan, 1992), firms may be more inclined to buy integrated solutions not core to their own business. Also our study suggests that the customers' interest in these new offerings might depend on their impact on the customers' core processes, and that it would be easier to approach customers with a solution for a non-core process. The implications of this are summarized in Fig. 5. 7. Conclusions and suggestions for further research Our study shows that the challenges associated with the development of integrated solutions are not only connected to the internal organization but also to the relationships and interactions between the actors in the network. In both of the cases studied, actors in the business environment influenced the development of integrated solutions to a great extent. In order to develop integrated solutions, it appears to be important for organizations to focus not only on relationships with the end customers, but also on relationships within the wider business network; not only end customers but also partners, research

Fig. 5. Managerial implications related to external determinants and the solution's impact on customers' core processes.

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institutes and governmental agencies influence the development of integrated solutions. Firms should consider opportunities and challenges related to the relationships in the business network. We find, as have Ritter and Gemünden (2003), that the ability to manage, use and exploit inter-organizational relationships is likely to increase the success of the development of integrated solutions. We have identified and discussed six important factors related to the relationships within the business network: (a) the strength of the relationships between the different actors involved in the project, (b) the firm's position in the network, (c) the firm's network horizon, (d) the solution's impact on existing internal activities, (e) its impact on the customers' core processes, and (f) external determinants. With these factors we have broadened the existing insight into the development of integrated solutions. Compared to Galbraith's (2002) recommendation to focus on five key linking internal processes and developing a customer-centric organization, and Davies' (2003) identification of important internal capabilities, we have extended the set of critical factors for developing integrated solutions. Our study shows that factors related to inter-firm relationships in the business network may be as important as intra-firm factors; and it also shows that there are several implications linked to managing these factors and the opportunities and constraints, ‘the dualities’, they provide. Dependence on inter-firm relationships increases when complementary competence is necessary within areas new to the firm, and this, in turn, implies a need to create stronger links and even organizational integration between certain actors. Thus, strong direct inter-firm relationships are important for innovation and value creation. These direct relationships also need to be managed in order to get access to information from the indirect relationships, since this information can be crucial for the project's survival. Thus, a closed network is better for value creation and innovation than an open one, with many structural holes; it becomes important to facilitate direct links between partners. In addition to these inter-firm relationships in the business network, the paper shows that it is important to address intrafirm relationships, and develop an organization in which technical research and development, service development, and marketing are addressed integrally. This requires not only commitment but also active involvement from top management. This internal coordination is important for the credibility towards external partners. In one of the projects, the lack of interest of those with commercial responsibility impeded the project. However, in some situations it might be necessary to weaken the internal ties and dependencies. In our other project, when a corporate venture was created, people and business units were purposely left out as they were considered likely to jeopardize the project. Weaker intra-firm links were considered necessary in order to achieve focus and commitment. We conclude that it is important to be able to integrate as well as release resources and perhaps even create a separate organization for the actors/people involved in the development of integrated solutions. It is clear that further research is needed that addresses both inter- and intra-firm relationships. Firstly, a limitation of our study is the predominant focus on the focal actor Alpha. Un-

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fortunately we were not able to interview all the actors in the business network. Therefore, to a large extent the findings are based and focused on Alpha's perspective. It may be possible that a more extensive investigation including all actors in the business network would add additional insights. Furthermore, this would make it possible to include findings, conclusions and recommendations more focused on these other actors, for instance on how customers could act when confronted with the possibility to buy integrated solutions. Secondly, another issue for further investigation is related to the necessity of a close collaboration and involvement of customers and end customers for successful development of integrated solutions. Customer involvement is also proposed as a success factor in other studies of industrial service development (e.g. Matthyssens & Vandenbempt, 1998; Oliva & Kallenberg, 2003). In addition, resistance to change and poor information sharing across the network actors have been identified as critical problem areas (Coles, Harris, & Dickson, 2003). In our case, the close cooperation with one lead customer proved successful. It is questionable, however, whether the involvement of only one customer is advantageous in the long term. Involving the customer may have convinced this specific customer of the value of the integrated solution; however other customers that were not involved and that operate in different contexts and geographical markets may not necessarily be equally easy to persuade. Also, it would be too costly and time consuming to involve every customer to the same extent. Thirdly, although the creation of a separate organization could be a way to initially overcome internal resistance and increase focus (Oliva & Kallenberg, 2003), it is likely that in the long term this separate unit will need to become integrated with the firm's other activities. The resulting need for internal coordination might jeopardize the integrated solution. In our case, it remains to be seen how and if the Sludge venture will survive in, or influence, or even change, the more traditional product-focused organization. Therefore, long-term implications for actually delivering integrated solutions cannot be outlined based on our study. Appendix A Interviews with people directly involved in the Dairy project • Manager, Advanced Controls, Alpha, May 2003 • Project Manager, Business Development, later Manager, Strategy and Analysis, Alpha, January 2002, August 2003, August 2005, and informal updates and discussions in between these dates • Project Manager, R&D Separators, Alpha, May 2003 • Product Manager, Centrifugal Separation, Beta, June 2003 Interviews with people directly involved in the Sludge project • Project Manager, Business Development, later Manager, Strategy and Analysis, Alpha, January 2002, August 2003, August 2005, and informal updates and discussions in between these dates

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Nicolette Lakemond is an Assistant Professor at LiU School of Management, Linköping University. Her current research interests include integrated solutions and interfaces in industrial innovation processes. She has previously published in R&D Management, Technovation and Journal of Supply Chain Management.