IoT powered servitization of manufacturing – an exploratory case study

Author’s Accepted Manuscript IoT powered servitization of manufacturing – an exploratory case study Anna Rymaszewska, Gunasekaran

Petri

Helo,

Angappa

www.elsevier.com/locate/ijpe

PII: DOI: Reference:

S0925-5273(17)30053-1 http://dx.doi.org/10.1016/j.ijpe.2017.02.016 PROECO6665

To appear in: Intern. Journal of Production Economics Received date: 30 October 2015 Revised date: 22 February 2017 Accepted date: 24 February 2017 Cite this article as: Anna Rymaszewska, Petri Helo and Angappa Gunasekaran, IoT powered servitization of manufacturing – an exploratory case study, Intern. Journal of Production Economics, http://dx.doi.org/10.1016/j.ijpe.2017.02.016 This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting galley proof before it is published in its final citable form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.

IoT powered servitization of manufacturing – an exploratory case study

Anna Rymaszewskaa, Petri Heloa, Angappa Gunasekaranb a

University of Vaasa

b

University of Massachusetts Dartmouth

[email protected] [email protected] [email protected]

Abstract More than ever companies are challenged to rethink their offerings while simultaneously being provided with a unique opportunity for creating or recreating their product-service systems. This paper seeks to address how servitisation can utilize the third wave of Internet development, referred to as the Internet of Things (IoT), which may unlock the potential for innovative product-service systems on an unprecedented scale. By providing an analysis of this technological breakthrough and the literature on servitisation, these concepts are combined to address the question of how organizations offering product-service systems can reap the benefits that the IoT. An analysis of three successful IoT implementation cases in manufacturing companies, representing different industry sectors such as metal processing, power generation and distribution, is provided. The results of the empirical research presented in the paper provide an insight into different ways of creating value in servitisation. The paper also proposes a framework that is aimed at proving a better understanding of how companies can create value, and add it to their servitisation processes with, the data obtained by the IoT based solutions. From the value chain perspective, IoT aided servitisation enables organizations to extend their value chains in order better serve their customers which, in turn,

might result in increased profitability. The article proposes further research avenues, and offers valuable insight for practitioners.

Keywords Internet of Things, IoT, servitization, manufacturing, value, creation

1. Introduction The nature of manufacturing and the limiting implication of offering a tangible product that has little potential to create opportunities for profit generation – rather than during the sales process itself – have led to a shift towards bundling a product and service together. Some scholars claim that manufacturing companies are simultaneously service companies, and therefore no particular shift in thinking and operation is needed (Bitner, 1997). However, creating a service strategy is a complex undertaking encompassing a wide range of actions (Mathieu, 2001). Moreover, with a service strategy being specific to itself it is often challenging for manufacturing companies to move towards servitisation. Technology is continuously transforming the ways in which companies operate by reshaping the nature of products, processes, strategies, business models, and competition (Porter, 1985; Porter & Heppelmann, 2014). Organisations are gradually realising that a long-term competitive advantage might no longer be attainable. Technological development is here to stay, and this implies that only flexible and fast-reacting players will have a real chance of reaping the benefits that this development brings. While this might allow organisations to gain a considerable competitive edge, such an advantage will not last for long as the barriers to adopting IoT solutions are low (Gubbi et al., 2013). The array of strategic choices and business models is vast enough to accommodate numerous new entrants, provided they are able to quickly and proactively grasp the opportunities brought about by this third wave of IT-driven development. The dynamic development of the IoT offers a unique opportunity for companies to gain knowledge about how customers are using their products. Thus, organisations are able to achieve closer and better proximity to their customers and reshape their value chains by expanding the scope of their product–service offerings. The subject of the IoT has been drawing research attention for some time, particularly in regard to the actual implementation of IoT solutions, not only for building servitisation

strategies but also for changing organizations’ position in value chains. Customers’ needs cannot be addressed without knowing exactly what kinds of services they want. Therefore, customer proximity is important for discovering the true preferences and needs of customers in regard to both products and services. Companies might chose to achieve customer proximity by acquiring organisations that base their operations on close contact with end users, thereby changing their position within the value chain. However, such a strategy is costly, time consuming, and frequently not viable for companies with modest budgets. Companies may rely on third-party agencies for gathering data, for example, on how customers are using their products. However, methods such as interviews only provide a fraction of the truth. Companies could attempt to observe their customers but this is only feasible for a given and often short period of time, which only provides a partial view of the real situation. Furthermore, this article aims at contributing to the discussion concerning the intersection between digitalization and servitization, as well as how organizations can improve their service offerings by making use of digitalization. Coreynen et al. (2016) claim that there is still need for research in this area, since even though the existing literature hints the important role of digitalization, being the necessary enabler of servitization, some authors signal that technology often remains unchanged while organizations transition from manufacturing to services (Kowalkowski et al., 2015). The shift from offering products to offering integrated product–service bundles has been widely discussed in the literature (Baines et al. 2007; Baines et al., 2009; Roy et al., 2009; Scholl, 2006; Zhen, 2012). However, the subject of IT-driven servitisation remains somewhat unexplored. This applies both to theoretical and empirical research, which is the initial motivation for the research presented in this paper. Therefore, this paper explores the various approaches to value creation through IoT-aided servitisation with the aim to present an up-todate perspective on servitisation that acknowledges the disruptions brought about by the advent of the IoT. The latest developments in the field of the IoT are explored from the perspective of reaping the benefits of servitisation while relieving the costs incurred by a shift in strategy. The research objective is to readdress the process of value creation in servitisation through the IoT lens. Value creation is approached from the perspective of the challenging process of redesigning the existing value proposition, so that it accommodates the benefits of the IoT while addressing the needs of customers as effectively as possible. This objective is achieved

with a focused literature review, empirical case study research, as well as by proposing a conceptual framework that combines the relevant literature with the empirical evidence from the three manufacturing companies. We argue that the application of IoT-based solutions is a cost-effective method for crafting a value proposition that will bring companies closer to their end customers. In turn, this will translate into improvements in fulfilling and even exceeding customer needs (relieving customer pains), and consequently, improved profitability. Having stated that it, is important to refer to the concept of link channels often discussed in the context of servitization defined in terms of companies “moving downstream” (Sanchez et al. 2015). Link channels are often established in order to enhance relationships with customers with an ultimate goal of engaging customers in the process of creating value, which is often referred to as value cocreation (Bustinza et al., 2013). Lin et al. (2010) claim that value chain positioning can be reinforced by channel integration. In this specific context, IoT-aided servitization can be seen as a form of link channel. Nevertheless, there are certain elements that set those two concepts apart. While link channels are aimed at actively engaging customers in the process of value co-creation, IoT-aided servitization is primarily focused on providing best possible level of service to end users. In the specific case of the studied companies, end users are not necessarily the customers. Moreover, the data gathered with the help of technology, analysis of thereof allows for drawing conclusions regarding how products are used on a daily basis and therefore, build an improved product-service systems, but more importantly value propositions. The research presented in this paper also contributes to the broader discussion on the role of digitalization in servitization that is often labelled as digital servtitization which, according to (Holmström and Partanen, 2014) can be defined in terms of providing digital services embedded in a physical product. Vendrell- Herrero et al. (2016) outline the three distinctive aspects of digital servitization, such as relatively low marginal costs of digital services, digital services are substituting traditional products while traditional services are usually complement the specific product offering. Furthermore, the disruptive aspect of digital servitization offers the possibilities for new business models, and welcomes new entrants. The paper is structured as follows. First, a focused literature review is presented, followed by the explorative multiple case study. Based on the theoretical and empirical findings, a conceptual framework is proposed. The paper closes with conclusions, limitations, and suggestions for further research.

2. Focused literature review The focused literature review presented in this section is aimed at providing a high-level view of the most important developments in the field of servitisation in the context of the recent research on the IoT combined with the process of value creation. This chapter is structured in a way that allows for gradual unfolding of the rich context of servitisation, which is crucial to the realisation of the research objective. The focused literature review begins with a brief explanation on how the idea of IoT is different from other related concepts such as Industry 4.0. As the idea of technology aiding the development of various industries is widely discussed in literature therefore, it is important to draw distinctions between IoT and related concepts. Secondly, background on technological development and then provides an overview of the architectural and technological aspects of the IoT. Next, servitisation and the IoT are discussed in a business to business (B2B) and value chain context. The focused literature review section concludes with a discussion of value creation logic, which goes beyond the value chain view, as well as the IoT and its implications for strategy and competitiveness. The rapid development of technology has reshaped and changed competition and the perception of value chains and value creation that existed long before the advent of the Internet. Porter and Millar (1985) address the issue of building a competitive advantage with the help of information technology and how it transforms the value chain. The authors state that every value activity is composed of a physical as well as an information-processing component. While the physical components include the physical tasks required to perform the activity, the information-processing components are the steps required to capture, manipulate, and channel the data necessary to perform the activity. The authors observe that with the falling costs and rapidly growing capacity of new technologies, industries are moving towards higher information content in both their products and processes. The authors also predict the further rapid improvement of technology, and therefore their research might be treated as an important introduction to the broader field of technological development reshaping the nature of competition. According to Porter and Heppelmann (2014), smart, connected products are currently transforming competition and reshaping the structure of industry. Moreover, Leminen et al. (2012) claim that the growing popularity of the IoT also suggests possibilities for redesigned business models, which relates to the co-creation of value and redesigning value propositions in the context of the IoT, as discussed by Mejtoft (2011).

As technological development has driven down costs, many industries have moved towards higher information content in both their products and processes (Porter & Millar, 1985; Porter & Heppelmann, 2015). This notion can be linked to the context of servitisation. The term was coined by Rada and Vandermerwe (1988), and it is defined as the process of creating value by adding services to products. Related concepts In order to provide a better overview of the different concepts supporting the development of various industries this subchapter presents several areas of knowledge that are often discussed jointly with IoT and sometimes confused. Therefore, it is essential not only to define the scope of this paper in terms of its main focus on the ways in which servitization can be aided by IoT, but also which concepts are not going to be addressed even though there are certain similarities that can be identified, and they are often considered jointly. The industrial and manufacturing-based context of the research presented in this paper calls for acknowledging the IoT applied in industry, led by Germany and often labelled the 4th Generation Industrial Revolution (Industry 4.0), where “software embedded intelligence is integrated in industrial products and systems” (Lee et al., 2014, p. 3). In general, the reason for the concept of IoT and Industry 4.0 often discussed jointly is that IoT can be defined as a subset of Industry 4.0 due to the fact that IoT-based solutions are often applied to industries (smart industry), and smart industries are often discussed in the context of Industry 4.0 (Wortman and Flüchter, 2015). Furthermore, the broader goals of Industry 4.0 can are achieved by integrating IoT and Cyber-Physical Systems (Pisching et al. 2015). Lee et al. (2014) state that the possibility of integrating machines with surrounding systems will allow for the transformation of machines into self-aware and self-learning entities. However, the self-awareness and self-learning of machines can only be attained in the Big Data environment supported by cloud computing, where the focus is on machine-generated or industrial- rather than human-related or human-generated data. In that sense, cloud computing should be treated as an enabler rather than as an alternative or competing solution (van Krauenburg & Bassi, 2012). In the research presented in this paper the main focus is on exploring the opportunities for improving servitization processes, as well as product-system offerings with the help of IoT. Explaining the idea of IoT is presented in the following subchapters but the general premises

upon which the reasoning is build can be summarized by stating that IoT, in simple words, can be defined as various devices being connected to the Internet and to each other. The consequences of such connections are discussed throughout the paper. Architecture and technological aspects of IoT Da Costa (2010) claims that traditional networking architectures are neither suitable nor sufficient for accommodating the massive scale of the IoT. In that sense, the similarity of IoT to Big Data can be observed. In the context of such an immense amount of data and autonomous units, there are certain characteristics that make networking and communication possible: -

Simplicity and autonomy of end devices, as it is unlikely that economic feasibility can be achieved if devices are equipped with vast computing power sensors since, once devices are connected, the sending and reception of data should be as seamless as possible

-

Zones and neighbourhoods of interest where data analysis is done systematically within those areas in order to avoid chaos

-

Receiver-oriented communication that is further supported by a publish and subscribe principle, which facilitates the extraction of information

-

Simplicity of signals: devices equipped with sensors communicating simple messages with single-purpose functions

In general terms, the architecture of the IoT can be explained by dividing the network into three functional classes; end devices, propagator codes (ensuring transport and gateways to the traditional Internet), and integrator functions (enabling analysis and control). Communication between a nearly countless and growing number of devices resembles that in natural ecosystems, so more insight into the IoT can be gained by exploring the subject through the lens of business ecosystems (Da Costa, 2010). The term ecosystems was initially coined to refer to a biological phenomenon and gradually expanded to the business context (Wiesner et al., 2013). Mazhelis et al. (2012) refer to IoT ecosystems in which the core is built around the interconnection of tangibles – things within the virtual world (the Internet). The authors define IoT ecosystems as a “special type of business ecosystem which comprises of a community of interacting companies and individuals along with their socio-economic environment, where the

companies are competing and collaborating by utilising a common set of core assets related to the interconnection of the physical world of things with the virtual world of Internet.” (p. 5) Leminen et al. (2012) approach the subject of the IoT from the perspective of business models, examining the way in which business models are shaped and created by the IoT. The authors analyse business models through the lens of ecosystems (closed private or open networked) and types of customers (business or consumers). The authors argue that the success of the IoT is dependent upon the combination of the right technology, business models, as well as acceptability to users. The configuration of this combination will ultimately define the actual business model. However, according to Leminen et al. (2012), configuration of the business models will become easier and faster with the further development of the IoT. Gubbi et al. (2013) indicate that there are three main components that enable the IoT: -

Hardware – a collection of sensors, actuators, and embedded communication hardware

-

Middleware – on-demand storage and computing tools for data analysis

-

Presentation – visualisation and interpretation tools, novel, easy to use, can be widely accessed

Figure 1 outlines the main components of the IoT, as proposed by Gubbi et al. (2013).

IoT

RFID

WSN

hardware

communication stack

middleware

secure data aggregation

Figure 1. Main components of the IoT. Adapted from Gubbi et al. (2013).

Atzori et al. (2010) outline the following IoT-enabling technologies, which fall into the two main categories of identification, sensing, and communication (radio frequency identification systems, tags, and sensor networks), as well as middleware, which is a software layer between technological and application levels, usually following the Service Oriented Architecture Approach. Gubbi et al. (2013) state that the IoT is essentially composed of radio frequency identification (RFID) systems and wireless sensor networks (WSNs). RFID enables the design of microchips for wireless data communication, while WSNs are low-cost, low-power, miniature devices for use in remote sensing applications. According to Atzori et al. (2010), the central role of RFID is a result of its maturity, relatively low cost, as well as support from business communities. Nevertheless, the authors state that the development of the IoT will be subsequently supported by near field communications (NFC) as well as wireless sensor and actuator networks (WSANs). Gubbi et al. (2013) outline the following components of WSNs: -

Hardware (sensor interfaces, processing units, transceiver units, and power supply)

-

WSN communication stack (means of communication between the nodes)

-

Middleware (mechanism combining cyber infrastructure with a service-oriented architecture)

-

Secure data aggregation (securing data as an essential element of WSN function in the long term)

Table 1 presents a brief summary of the significant developments in the literature on IoT, the references are listed according to the components as well as different perspectives through which the topic has been addressed. Table 1. IoT components and references summarized.

IoT components

References

Functional classes (end devices, propagator codes, integrator Da Costa (2010) functions) Hardware, middleware, presentation

Gubbi et al. (2013)

Enabling technologies

Atzori et al. (2010)

Perspective on IoT Ecosystems

Wiesner

et

al.,

2013; Mazhelis et al. 2012 Business models

Leminen (2012)

et

al.

Rapidly developing technology is supporting the popularisation of the IoT and has resulted in the prevailing trend of praising its existing and future benefits. Nevertheless, certain challenges should also be outlined. Van Krauenburg and Bassi (2012) note the following major technological challenges: -

Energy harvesting, conservation, and usage in the context of avoiding wasting energy during operations

-

Organising the magnitude of connected devices (scalability)

-

Security and privacy, as it is possible to use the IoT for surveillance

-

Communication mechanism with an emphasis on the unification of communication systems

Resolving these challenges is one of the requirements for the further dynamic development of the IoT (Van Krauenburg & Bassi, 2012). In the context of challenges outlined by Van Krauenburg and Bassi (2012), it is important to acknowledge that the research in the field of IoT is currently evolving towards addressing them. Yan et al. (2014) study the issues of trust management, Skarmeta at al. (2014) and Ziegeldorf et al. (2014) study the challenges of security and privacy, while Dutton (2014) addresses the social and policy difficulties related to IoT. Moreover IoT has also been studied in the context of greening and sustainability of operations (Bol et al., 2013). Therefore, in this context, the claim made by Andersson and Mattsson (2015) on the inevitability of the wide adoption of IoT as soon as the major barriers have been surmounted, seems very true.

Servitisation and the B2B context According to de Senzi Zacul et al. (2016), the IoT market can be segmented into business to consumer (B2C), where people and devices are connected; B2B, where industries are connected; and business to business to customer (B2B2C), such as in smart cities and smart grids. The research presented in this paper focuses on the industrial Internet, and therefore the B2B context is discussed in more detail.

Baines et al. (2007), Baines et al. (2009), and Neely et al. (2007) refer to servitisation in terms of a shift from manufacturing towards offering services that are tightly coupled with products. The authors also state that the servitisation concept can be approached from the perspective of value creation for different customer needs. The authors outline three categories of services: base, intermediate, and advanced services. Such a classification simultaneously addresses the development of the servitisation concept and its important link to the creation of value to the customer. Mathieu (2001) provides an overview of the potential benefits and costs of servitisation. The author refers to financial gains that are ultimately shaped by a company’s pricing strategy, the potential in adding value in manufacturing, as well as the potential in reaching competitive equality in the case of many manufactured goods. The creation of a product–service bundle requires a better understanding of customer needs, which is best achieved by shortening the distance to customers and gaining an understanding of how the products are being used (Walters, 2008). It is common for companies operating in B2B environments to pursue the strategy of buying into companies that are naturally closer to the final customer in order to quickly tap into this new expertise and change their position in the value chain. While such a strategy is certainly fast and effective, it is not cost effective and therefore not universally applicable. IoT-aided servitisation in the value chain and value creation context Porter (1998, p. 36) defines a value chain as a “collection of activities that are performed to design, produce, market, deliver, and support its product.” Moreover, the author claims that a value chain of a firm is a reflection of its chosen business strategy and the approach to implementing it. Therefore, value chains will differ between organisations, and those differences are usually a source of competitive advantage. According to Michel et al. (2008), adding services to already well-established product offerings is usually utilised to create some desired differentiation, which serves as a basis for building a competitive advantage. Porter (1998) argues that value activities are the building blocks of competitive advantage, and the author outlines two types of value activities: primary and support activities. Primary activities are all those activities that are necessary for the physical creation and sale of products and the transfer to the buyer, while the role of support activities is to support all the primary activities by providing purchased inputs, technology, human resources, and various firm-wide functions (Porter, 1998).

Walters and Lancaster (2000) claim that value creation is achieved through the identification and understanding of customer benefits and costs as well as by combining organisational knowledge and learning with structures that facilitate response and delivery. Raddats and Easingwood (2010) highlight the importance of moving from service strategies that are based solely on a company’s products towards strategies that are closely aligned with the customers’ operational environments. Kowalkowski (2015) refers to a similar approach as “customer centricity.” In summary, in the context of value chains and value creation, two main challenges can be identified. First, it is necessary to offer services that are closely related to the actual needs of the customers. Second, the proposed service offering should allow for differentiation that, in turn, serves as a basis for building a competitive advantage. With the rapid development of technology and the advent of the IoT, companies have opportunities to effectively tackle those challenges.

Value creation logic methods and implications Porter’s (1998) well-established and acknowledged logic of value chains needs to be extended with a broader view of value creation logic that extends the commonly used notion of chains Stabell and Fjeldstadt (1998) claim that while value chains involve transforming inputs into products, value shops are focused on solving and resolving customer problems, and value networks connect customers. The authors also claim that in the case of value creation networks, value is derived from services, service capacity, and service opportunities. Value creation is the ultimate purpose as well as the central process of economic exchange (Vargo et al., 2008), and centring the value creation efforts on customers and even engaging customers in the creation process (Prahlad & Ramaswamy, 2004; Smith & Colgate, 2007; Vargo, 2008). The introduction of smart and connected products shed a new light on value creation. According to Lee and Lee (2015), IoT applications aimed at enhancing customer value are comprised of monitoring and control, big data and business analytics, as well as information sharing and collaboration.

Value creation through monitoring and control Monitoring and control allow for data gathering and analysis, which allow operational patterns as well as areas of potential improvement to be identified, leading to decreased costs and improved productivity (Lee and Lee, 2015). Effective monitoring and control lead to better operational reliability, which Duran (2000) defines as a flexible process that optimises people, processes, and technology, enabling companies to become more profitable by maximising the availability and value addition of producing assets. Reliable operations are a crucial element of successful business, and this notion is particularly important in the case of complex, demanding operations, where the costs of non-conformity are tremendous (e.g. the oil and gas industry). The operational reliability of equipment is often (but not exclusively) realised through condition-based maintenance (CBM), which is a management philosophy that assumes that repair or replacement decisions are dependent on the current or future condition of assets. The main challenge of this approach is finding the optimal time to perform maintenance, and this is solved through systematic monitoring of an asset or a part thereof. The ultimate goal of CBM is to decrease the costs of total inspection and repairs, and the decision of when to react is made based on data collection and the interpretation of that data in regard to a machine’s performance (Ellis, 2008). CBM is comprised of three generic steps: data acquisition, data processing, and maintenance decision-making (Jardine et al., 2006). Compared with some popular maintenance strategies that do not involve the use of sensors and machine-to-machine communication, such as preventive maintenance (PM) or predictive maintenance (PdM), CBM allows for decreasing maintenance frequency, which leads to decreased maintenance costs. This is possible with IoT-enabled machine-to-machine communication, which uses sensors that are currently relatively low in price (Maintenance Assistant Website, 2016). Value creation through data analytics, information, and collaboration According to Lee and Lee (2015), when the IoT is involved, collaboration can occur on multiple levels, such as between people, between people and things, and between things, and this is the foundation for information sharing and collaboration. Value creation can be much more effective if real-time information is flowing seamlessly on the three aforementioned levels – and when it is shared between collaborating entities (people and things).

Smart and connected devices will generate immense amounts of data, which will be ultimately transmitted to humans through various business intelligence and analytic tools. The big data gathered can then be used to enhance customer value by providing the ability to identify customer behaviour patterns or patterns in market conditions, enabling the creation of value-added services (Lee & Lee, 2015). Opresnik et al. (2013) highlight that servitisation is a data-intensive process, and therefore certain procedures for exploiting data need to be developed and implemented which will result in new revenue streams for manufacturing companies. The authors state that organisations might analyse the gathered data in-house, using business intelligence techniques, or alternatively the raw data could be resold to other entity. Opresnik and Taisch (2015) also mention the important and rapidly growing phenomenon of organised collaboration in the process of servitisation. The authors claim that value creationrelated motives for collaboration frequently stem from the laws of synergy, that is, enterprises gain a competitive advantage as the value of resources, related skills, and competences exceeds the sum of the assets.

IoT-enabled servitisation and its implications for strategy and competitiveness A servitisation strategy might be utilised to build and maintain a competitive advantage, even in the long run. Adding service components to tangible goods also offers an ample opportunity to influence customers’ purchasing decisions, which translates into new marketing benefits and, in the long run, repeat sales and long-lasting customer relationships (Mathieu, 2001) This could be attained by offering the increasingly coveted complete solutions rather than simple after sales services (Johansson & Olhager, 2004). On a general level, Neely (2008) outlines several challenges to servitisation, such as shifting mindsets (of marketing, sales, and customers), timescale (multi-years partnerships, long-term risk and exposure), as well as business models and offerings (understanding what customers view as value and developing the service culture and capabilities to design and deliver services). Mathieu (2001) outlines certain challenges that stem from servitisation and should be taken into consideration when deciding whether servitisation is a viable option. The author refers to the two most important types of costs: competitive and political. From the perspective of this

paper, the analysis of competitive costs, especially in the context of IoT-powered servitisation, is important Mathieu (2001) claims that competitive costs usually reveal themselves as organisations enter previously unexplored fields (in this case the field of servitisation). As the amount of new competitors increases rapidly, organisations need to build their own competitive advantage, which naturally results in costs that might be difficult to estimate, especially in the very beginning of the “servitisation journey.” Mathieu (2001) makes an important reference to the fact that service providers are naturally more apt to master the two main drivers of competitive advantage – economies of scale and learning – while manufacturers shifting towards servitisation are forced to maintain and develop both manufacturing- and servicerelated competencies. Despite this seemingly disadvantageous position, manufacturing organisations might still build a competitive advantage based on the extent of linkages between goods and service activities (Mathieu, 2001). In other words, manufacturing companies are able to base their competitive advantage upon their experience as well as the lasting image that has been built through their goods offering. Moreover, the author states that since manufacturing organisations often control the design, development, and production of the offered goods, they are able to offer a unique selection of services that might be difficult for their competitors to copy. Moreover, the aforementioned processes might also serve as an ideal basis for crafting services that would truly bring value to customers. Changing the position or, more specifically, moving up in the value chain by innovating, that is, creating more sophisticated products or services, in order to avoid competing on cost, has also been addressed by Neely (2008), who explores the financial consequences of servitisation. After analysing the financial data, the author concludes that larger firms might find it harder to achieve the expected financial benefits of servitisation. Neely (2008) also observes that in the context of the economic impact of servitisation, firms that are servitising are also achieving higher revenues but lower profits (as a percentage of revenues) compared to pure manufacturing organisations. This is attributed to the fact that servitisation usually imposes higher labour costs, working capital, and net assets. This is also supported by Gebauer et al. (2005), who refers to the deterioration of service quality, which might lead to a closed loop with lower economic potential. We wish to extend the discussion on servitisation by adding the technological aspect: the IoT. As this paper aims to explore the opportunities for creating value to customers and changing a firm’s position within the value chain, it is important to contrast the challenges of

servitisation with the opportunities that the technological development brings. The potential exists to create value based on the availability of data regarding how products are being used, which has not been previously available on such a scale. By learning and understanding how customers really use products, the services related to those products can be crafted with greater attention to fulfilling and even exceeding customers’ needs. The IoT and its implications for strategy and competitiveness The IoT is defined as a world of physical objects that is seamlessly integrated into the information network, where physical objects can become active participants (Haller et al., 2009). The IoT thus refers to supplying devices with sensors through which they are given the ability to communicate. This implies the possibility of creating a network of things that are able to communicate with each other with little or no help from humans. Porter and Heppelmann (2014) call this the third wave of IT-driven competition. Before any actual reference to the IoT reshaping competition can be made, it is important to briefly mention the development of the Internet, which initially implied improved (and gradually) unlimited and extremely fast (almost real-time) communication between people. This stage was followed by the emergence of Web 2.0, which enabled further improvements to communication and dialogue through social media, as users were given the opportunity to create and share content rather than passively viewing it. The IoT followed the development of Web 2.0, and the term “IoT” was coined by Kevin Ashton in 1999. The term is used to refer to a general network of things linked together by IT components (sensors), which enable information exchange among them. Therefore, today we no longer refer exclusively to people communicating with the help of IT solutions; things also do this. Rather than using the term “things,” it makes sense to discuss the smart, connected products (Porter & Heppelmann, 2014) and reflect upon the far-reaching consequences implied by this novel type of connectivity. Porter and Heppelmann (2014) introduce the concept of a new technology stack comprised of multiple layers such as new product hardware, embedded software, connectivity, a product cloud consisting of software running on remote servers, an array of security tools, a gateway for external information sources, and integration with an enterprise business system. In other words, if companies wish to reap the benefits of the IoT in their product–service strategies, an appropriate technological stack must first be created. According to the authors, there are ten new strategic choices. In order to determine their new overall strategic positioning, organisations need to address the trade-offs between these

strategic choices. Naturally, these choices will be dependent upon the specific characteristics of the companies. Table 2 presents a summary of issues and their implications to building a strategy around the IoT. Clear choices in each of those dimensions will help companies to build their servitisation strategies based on the IoT.

Table 2. The IoT and its strategic implications. Adapted from Porter and Heppelmann (2014).

STRATEGIC ISSUE

STRATEGIC IMPLICATIONS

Selecting smart capabilities

Race for constantly adding capabilities might lead to blurred strategic differences and the creation of zero-sum competition

Embedding functionalities: product and cloud Functionalities embedded in the product will drive the costs of every product; however, in some cases this cannot be avoided (e.g. if a product is required to shut itself down in case of emergency). Open vs. closed system

Development of capabilities performed inhouse or externally

Closed systems create a competitive advantage by allowing a company to control and optimise the design of all parts of the system relative to one another. On the other hand, open systems enable a faster rate of application development and system innovation as multiple entities contribute. Organisations should find a balance between developing certain layers of technology inhouse while simultaneously outsourcing certain capabilities.

Data to be captured, secured, and analysed

Maximising the value of an offering will be dependent on the decisions regarding product data. The balance between the investment in, for example, sensors and the amount of data collected, is crucial to successful implementation of the IoT powered servitisation.

Ownership and access rights to product data

Certain restrictions shall apply as data becomes a valuable commodity.

Full or partial disintermediation of distribution channels/service networks

Better knowledge of customers reduces the need for intermediaries and service partners. Companies must decide how to address the newly attained customer proximity.

Business model change

The obvious changes in value propositions might lead to the existing business models becoming obsolete and uncompetitive.

Entering new markets by monetising product data through selling it to outside parties

Capturing product data might open new opportunities for profit generation. The dilemma is whether the data should be available to entities that have no connection to the products.

Expanding company’s scope

Connected products become part of a bigger system, and therefore an opportunity for expanding the scope of the business will need to be addressed at some point.

The strategic decisions summarised in Table 1 serve as a basis for presenting and exploring the IoT-powered servitisation strategies of the studied companies, which are operating in B2B environments. The following chapters of this paper are devoted to presenting the methodology and research design as well as exploring the IoT-powered strategies, especially in the context of the important challenge of strategic shifts and changes in the value chain, which can be explained by the fact that manufacturing organisations moving towards services must reimagine their value chains with regard to differentiation and “customer centrism.”

3. Methodology The study is based on the three case companies operating within the B2B environment. The case study was selected as the research method since its characteristics were deemed to be particularly suited to the purpose of the research presented in this paper. Yin (1981) states that case studies allow for studying a certain phenomenon in a real-life context, especially when the boundaries between a phenomenon and its context are not clearly evident. In the research presented in this paper, multiple cases are analysed. Stake (2005) claims that the multiple case study method is also directed by the fundamental question of what helps us understand the studied phenomenon. Therefore, even though the cases are presented one by one, as each case should be understood in more depth in the context of the studied phenomenon, the aim is to analyse them holistically in order to satisfy the research objective. Stake (2005) also claims that the multiple case study method is useful when addressing more than one research question. Data collection was primarily based on the analysis of historical data and semi-structured interviews with the managers responsible for conducting the shift towards servitisation, with a focus on qualitative data. The interviews were conducted separately in each case company. Open-ended questions were used and notes were taken, with an emphasis on patterns and themes. The selected interviewees were responsible for the successful implementation of the IoT-aided servitization processes. The respondents have engineering background with several years of experience in managing the product-service systems. Their knowledgeability of technical aspects was ensured by the fact that the interviewees were in close contact with software developers during the process of crafting the IoT-based solutions. Based on the aforementioned criteria therefore, the selected interviewees were deemed as suitable informants for the study. Furthermore, additional clarification regarding the technical aspects of the IoT-aided servitization was obtained from the software company who was responsible for designing the complete software solution as well as consulting and after- sales assistance if needed. Interview questions can be found in the appendix and its formulation was dictated by the relevance to the research question, as well as the drive towards the motives for IoTaided servitisation, the process itself, and the potential for providing improved value proposition to customers. Due to the nature of the inquiry and the relatively small number of cases (in total, three managers were interviewed), the data were analysed manually, without utilising any specific

software package. The evidence from the case companies was then integrated around the research objective, as suggested by Yin (1980), and coded into themes. Coding into themes was a three step process achieved by formatting data into three columns. The first one consisting of the raw data, the second one filled in with preliminary code notes, and the third one with final code (Saldaña, 2015). Table 3 presents a sample coding done according to the three step process. Other final codes that were identified comprise of challenges, customer feedback, internal communication, etc. Table 3. Sample coding.

Raw data

Preliminary codes

“we have long considered improving our Service service systems since it we were not quite improvement

Final code

offering MOTIVATION FOR SERVITIZATION

happy with the levels of profit we were Profit level getting (…)IoT implementation came as a Pilot project pilot project done jointly with the university”

Due to the nature of the study- relatively small scale which implies manageable amount of interviews, the coding has been performed manually on hard-copy printouts according to the recommendations by Saldaña (2015). The manual coding process was guided by the research objective, with the special attention to the following aspects: peoples’ responsibilities and motivations, specific means and strategies being used, as well as understanding of processes (Saldaña, 2015). Qualitative research as such, is often criticised for its tendency to become biased as well as lacking scientific rigor (Mays and Pope, 1995). In order to ensure integrity of the research process, the aspects of: -

Sampling (interviewees chosen on the basis of their ability to provide reliable contribution)

-

Reliability of an analysis (interview transcripts, coding, data collected directly rather than reliance upon secondary data)

-

Validity (testimonies from interviewees combined with written records)

Furthermore, to avoid researcher bias to the best possible extent, the presented research has been designed and executed with the special attention given to the aspects of the context as well as the selection of participants, data collection and analysis (Rajendran, 2001). Since the purpose of the study is to explore the possibilities for the improved servitization with the help of IoT. The context of the research can be described in terms of purposefully choosing the case companies that have been transitioning from manufacturing operations, and implemented IoT solutions to aid the process. The selected participants were responsible for the process of IoT-aided servitization from the very beginning. Data collected and analysed according to a planned procedure. Furthermore, the nature of investigation as well as the nature of the studied phenomenon moderates the potential risk of not being able to decode people’s emotions or hidden meanings. Description of cases The selected case companies have all undergone a shift towards servitisation. The transition was initiated by adding services to products. Due to the spread of the IoT, the case companies have redesigned their service propositions based on creating value to their customers by offering services that are best suited to the actual customer needs considering how the products are actually used. Furthermore, all the studied companies are operating in the B2B sector and offering complex products for industrial applications. While all the companies are based in Finland, they also have a global presence. The companies initially established themselves as manufacturers of physical, tangible products. Over time, however, their focus shifted towards enriching their offerings with complementary services that, with the help of technological advancement, are gradually evolving into IoT-aided services. Another important factor that determined the selection of the particular companies was the success of their IoT-aided servitisation, expressed in terms of increased profitability, positive customer feedback, and decreased maintenance costs. The case companies have been implementing the IoT-based servitization over the course of about 3 years, and the transition was quite similar with companies developing the solutions jointly with external software provider, and the project being initiated with the local high education institute to prepare the theoretical and conceptual foundations.

Table 4 presents an overview of the studied companies. Table 4. Overview of the studied companies.

Company A Headcount 2015) Turnover year 2015) Industry

Company B

Company C

(year 350

3000

7500

(MEur, 100

2000

2900

Power plants

Electrical engineering Operation-services on own products

Machinery

Type of servitisation Operation-services strategy, as proposed on own products by Raddats and Easingwood (2010)

Operation-services on own products

Company A is a large company manufacturing sheet metal machines that is currently undergoing a transformation towards servitisation based on the development of its fleet management system. Company B is a large multinational company providing complete lifecycle power solutions for energy markets. Company C is a large multinational company offering power and automation technologies. The research presented in this paper is focused on the Transformers business unit. The general overview of the technical aspects of machine-to-machine communication is presented in Figure 2. The most important aspects of communication are devices connected with sensors, cloud-based communication via the Internet, as well as centralised services based on data storage, access, and analysis.

Figure 2. Communication in a remotely managed IoT asset.

4. Case analysis and results The servitisation strategies implemented by the case companies are classified on the basis of the findings of Raddats and Easingwood (2010), who outline the four main types of servitisation strategies: -

Product-attached services on own products (e.g. installation, training, support)

-

Operation services on own products (e.g. managed services, asset availability)

-

Product-attached services on own and third-party products (e.g. installation, training support)

-

Vendor-diagnostic operation services (e.g. systems integration, technical consultancy)

Furthermore, the cases of servitisation in the studied companies were analysed from the perspective of the criteria outlined in Table 2. The criteria were drawn from the research of Porter and Heppelmann (2014), who provide an wide-encompassing overview of the criteria for analysing and describing the servitisation process, which is the reason why it was chosen as a reference. However, it is important to acknowledge that even though that the evidence in literature regarding IoT and strategic issues is rather sparse, there exists an evidence of those topics being discussed (Aitken et al., 2014; Li et al., 2012; Ward and Peppard, 2016)

Furthermore, the recent evidence in the literature shows examples of the challenges stemming from the shift towards servitisation (Martinez et al., 2010; Martin & Home, 1992) and its requirements (Wiesner et al., 2013); however, evidence regarding the criteria with which IoTaided servitisation could be analysed is rather sparse. The case analysis, which is performed through the lens proposed by Porter and Heppelmann (2014), is further supplemented with an explanation of the value creation logic, which stems from the specifics of the IoT-aided servitisation implemented by each case company. Company A Company A is a multinational provider of machinery for sheet metal processing. The origin of the company is based in mechanical engineering and manufacturing knowledge. The focal areas have been designing and building high quality machines for cutting, punching, shearing, and bending sheet metal. During the past few decades, the focus of the company has changed from individual machines to larger systems, consisting of several machines in a production line. The customers of Company A are operating in various sectors, including the automotive, aerospace, and HVAC sectors as well as smaller sub-contractors. The service business of the company has been based on maintenance contracts and spare part sales. As the complexity of its products has increased and the scope of supply has been extended, the need for technical support, training, and advisory services has increased. The product – machinery or product line – is an example of an investment good in a B2B setting. The machinery is highly automated and includes computers and sensors. Previously, an Internet connection to the machines was a standard feature, but it was mainly used to support internal work and not as media to improve the product. Company A has now introduced a strategy to build a product–service system around the Internet connection of the machinery. The life cycle of a typical system is long, and contact with the customer is not very frequent after a successful commissioning. The initial system configuration may change due to customer product portfolio changes, and thus what has been optimised in the commissioning phase may no longer be optimal. The developed IoT solution provides an opportunity to see actual production and daily key performance indicators. This information is collected to a centralised cloud system, which provides a view of both the end customers as well as Company A’s service organisation. As the solution is focusing on the hierarchy of machines at different locations, it is called a fleet management system.

Table 5. Case analysis: Company A.

STRATEGIC ISSUE

STRATEGIC IMPLICATIONS

Selecting smart capabilities

Remote view on customers’ production line performance.

Embedding functionalities: product and cloud

Open vs. closed system

Fleet view based on collecting operational data in a centralised cloud.

Limited to end customers as a portal view, limited within Company A, no external solution providers.

Development of capabilities performed inhouse or externally

Internal development, as product is automated and connected for other needs as well. Supporting commissioning and training phase as part of investment. Part of service level and maintenance agreements.

Data to be captured, secured, and analysed

Factory operations information: production orders, materials, processing times, setup times, alerts, performance data. Part information: bill of materials.

Ownership and access rights to product data

Full

or

partial

disintermediation

of

distribution channels/service networks Business model change

Entering new markets through monetisation of product data by selling it to outside parties Expanding the company’s scope

Service contracts giving access to Company A to use data in remote support and advisory. No available data.

Focus on solutions and operational performance of the fleet using software. Continuous connection with customers. No available data.

Toward service and maintenance of the physical product.

Value creation logic and the role of the IoT component

Within value chains. Value is created through increased operational reliability as well as through big data and business analytics. Increased performance of the equipment in combination with optimised maintenance ensures lower OPEX.

The main value creation logic change for Company A is changing its position in the value chain to be closer to customer operations. The ability to monitor and understand daily situations on the end customer shop floor allows performance-based contracts and remote support to customers to optimise production. Performance-based contracting is frequently utilised by machinery or equipment manufacturers that are unable to achieve revenues from conventional services such as spare parts. Performance-based contracting implies that companies are developing their competitive advantage by managing a complete installed base of machinery or equipment (Hypko et al., 2010). Remote customer support allows a company to reap the benefits of making the best use of the resources that are available at the customer’s location. In this way, services are no longer limited to locations, and new ways of creating competitive advantage are possible (Fano & Gershman, 2002). In the case of Company A, the value creation of the product has shifted toward intangible product–service. From a long-term perspective, the value for the customer can be measured as reduced operating costs.

Company B Company B is a provider of power generators. Depending on the delivery project, the scope of the supply may vary from individual power generators to complete gas-operated power plants. Power generators are critical equipment required for ramping up a specific, guaranteed amount of electricity in a reasonably short time. For this reason, both scheduled and preventive maintenance are important to ensure performance and reliability. Outage situations may be costly and involve risk. Company B acts as a manufacturer of products and also as a provider of solutions (power system design and installation) as well as operations and services (maintenance and repair). The company has redeveloped its CBM, replacing the scheduled maintenance activities with maintenance that is based on the actual performance of the product rather than predictions. It

has become possible to implement CBM due to the development of the IoT. The CBM system collects data from the machinery and compares the sensor values to upper and lower control limits and more complicated trends and patterns. Daily data values are transmitted to the central CBM team at Company B. An analysis is conducted for each machine, and periodic reports are sent to customers to demonstrate the performance of the system. In the event of problems, a remote advisory service can be provided proactively with alerts sent to customers and responsible service people. CBM is offered as an option for larger projects. Typically, CBM is part of larger contracts, which may include spare parts, scheduled maintenance, and support personnel both remotely and locally. CBM may be needed to support the performance levels guaranteed in sales contracts.

Table 6. Case analysis: Company B.

STRATEGIC ISSUE

STRATEGIC IMPLICATIONS

Selecting smart capabilities

Remote view on assets for maintenance purposes.

Embedding functionalities: product and cloud

View on machinery, advisory services from centralised support team.

Open vs. closed system

Closed system, based on contract.

Development of capabilities performed inhouse or externally

Internal development.

Data to be captured, secured, and analysed

Daily statistics of operations: energy produced, fuel consumed, efficiency. Machine parameters and sensor values. Ambient environment.

Ownership and access rights to product data

Data owned by the end customer.

Full or partial disintermediation of distribution channels/service networks

Service contracts and localised service network.

Business model change

Focus on operations and maintenance

Entering new markets through monetisation of product data by selling it to outside parties

Possibility to utilise real operational data for R&D purposes within Company B.

Expanding company’s scope

High-performing reliable power plant justifies higher investment costs.

Value creation logic and the role of the IoT component

Within value chains. Value is created through the increased operational reliability. CBM reduces the risk of expensive nonplanned interruptions. Improved asset utilisation for customer.

In the case of Company B, value creation is provided by improving the reliability of the machinery. While this may increase the company’s maintenance business to a certain extent, the main value proposition is for the end customer in the form of an improved total cost of ownership.

Company C Company C is a business unit in a large company providing technology for power generation and distribution. Company C produces large power transformers that are used in electricity distribution networks. Power transformers are an expensive component with a long expected life cycle, approaching 30 to 40 years. The correct use of the product, in terms of transmitted power, ambient temperature, quality of electricity, and proper maintenance guarantees reliable operations. Traditionally, the automation level of power transformers has been low. As sensor technology – related to currents, voltages and frequencies, temperatures, and oil quality – are based on electronics, data logging devices have been introduced to track conditions. Power transformers could be part of larger infrastructural development projects or simply used to replace components in existing networks. Typically, the product is purchased by a local utility company based on defined technical specifications and tendering processes. The scope of supply is often limited to the physical product, and service is conducted locally by the customer or local service providers. Actual operational data is difficult to gather and may require manual operations. Company C built an automated logging device with an Internet connection. The transformer is connected to the utility’s local intranet and provides a real-time view for the end user to monitor each power transformer operation. Proper use and avoiding operational faults (e.g. boiling cooling oil by transmitting too much power) can significantly increase the expected life cycle of the product. Information can be shared with the local external maintenance personnel of the utility. Company C could ask for data access from the end user and provide insights on usage metrics.

Table 7. Case analysis: Company C.

STRATEGIC ISSUE

STRATEGIC IMPLICATIONS

Selecting smart capabilities

Remote view on asset condition for end user operations and maintenance.

Embedding functionalities: product and cloud Ensuring proper use of transformer. Maintenance support. Open vs. closed system

Closed system between asset owner and the physical product.

Development of capabilities performed inhouse or externally

Solution developed using external provider.

Data to be captured, secured, and analysed

Each phase voltage, current, frequency. Ambient temperature Oil temperature. Cooling fan operations.

Ownership and access rights to product data

Data stored in local product memory.

Full or partial disintermediation of distribution channels/service networks

Utility as end user.

Business model change

Additional feature for product to support better use of the utility.

Entering new markets through monetisation of the product data by through selling it to outside parties

No available data.

Expanding company’s scope

Understanding of actual operations in different locations and uses.

Value creation logic and the role of the IoT component

Value creation through monitoring and control, which ultimately leads to the increased life cycle of the product, yielding lower OPEX per kWh.

Local external maintenance companies.

The value creation of Company C is currently related to better control of the physical product and helping end users to manage both operations and maintenance. Increasing the life cycle of the asset should improve the investment cost divided over the years.

Based on the analysis of the three cases, a graphical summary for extending the value chain with the help of the IoT was proposed (Figure 3). Figure 3 shows how IoT-powered servitisation enabled the studied companies to expand the scope of their value creation beyond traditional design and manufacturing. With the advent of the IoT, companies are now able to expand their scope of value creation as they have the ability to operate within the field

Case companie s

in house

suppliers

IoT enabled

Operations Services

Use Solutions

Manufacturin g

Design

Components

of product use, providing solutions as well as operations and services.

IoT enabled

Figure 3. Summary of case analysis: value chain perspective.

Table 6 provides a summary of the studied companies in terms of the main service functionality, means of measuring value proposition, IoT functionality, and the monetisation of service (means of profit generation). Table 8 highlights that by adding a technological component and enabling IoT-powered servitisation, companies are no longer offering a tangible product but rather a complete solution in which software plays an important role and adds significant value.

Table 8. Summary of case companies.

Company A –

Main service Value functionality proposition measured Operations Reduced

IoT functionality

Monetisation of service

Production/opera

Product sold as

Sheet metal machinery

Company B – Power generators Company C – Transformers

support and manufacturing optimisation costs of a unit, possibility of offer a competitive price Maintenance Reduced risks of support outage, penalty costs Local Increased maintenance product life cycle support

tions captured OEM

data investment for Monthly fee

Detailed Part of larger machine-level service contract sensor data Connecting Option in a transformer to product, no intranet access subscription fee

The servitisation strategies are also summarised from the perspective of the business performance indicators that are enabled by the remote view of assets. Table 9 presents a summary of these indicators. With the introduction of IoT solutions, performance indicators are affected at the levels of solution providers, customer companies, local operators, and local service personnel.

Table 9. IoT-enabled performance aspects and indicators.

Performance aspects

Company A

Solution provider- Sales of related performance business

Company B

Company C

service Sales of service Product sales Customer satisfaction product feature

–

Customer satisfaction Customer-related enterprise performance

On-time KPI view of Total cost capacity utilisation ownership and operational throughput

Local operator Benchmark on other Maintenance related performance machines within the prognosis enterprise scheduling Local personnel

service Increased task completion due to support from centralised expert team

of Total cost of ownership over the life cycle Operational KPIs – for support for correct use

Improved quality in Visibility for actual service delivery due and correct use of the to visibility before product maintenance visit

5. Towards the conceptual framework Figure 4 summarises the theoretical and empirical considerations presented in this paper in the form of a conceptual framework. The aim behind the proposed conceptual framework is to bring together the conclusions from the focused literature review and the results from the empirical part of the study. In that sense the framework is an attempt to contribute to both the theoretical and empirical research into the broader stream of digital servitisation, with the particular focus on the potential of IoT-based solutions. The framework encompasses the essential progress in the development of the Internet (from human-to-human communication, through smart, connected devices exchanging information) as well as the possibilities for creating value through data. With the help of the IoT technology, data can be gathered and analysed to facilitate both the development of the organisation (opportunities for creating profit) and the customer’s success (a satisfied or delighted customer is more likely to become loyal). The framework is divided into three parts, with each representing a phase in the technological development and its influence upon the creation of new opportunities for adding value to the customer. These opportunities, in turn, call for a redesign of value chains by adding stages where value creation occurs while acknowledging the extension of value chains with the new opportunities that are only possible thanks to the IoT development. In that vein, IoT- based solutions differ from the well-established concept of link channels by reaching the proximity of reaching the final customer without the need of establishing special procedures or even having the final customers consciously involved, as data gathered and analysed might be powerful enough. The initial stage of servitisation is presented in the context of the Internet of Services and the Internet of People, where data are essentially exchanged between people, and the exchange is facilitated by the information technology. All the studied companies have been following a common path of supplementing their well-established product offerings with services crafted based on their unique expertise as manufacturers. Even though such an approach is justified and evolves with the development of an organisation, it has a certain drawbacks due to the limited availability of data on how products are used. In other words, manufacturers are limited in their ability to plan and develop services based on the actual usage of products by end customers. With the rapid development of technology, which enables communication between devices, the collection of

data and the analysis thereof have become not only possible but also affordable. Therefore, with the help of the IoT, the studied companies were able to address the needs of their customers, which implies that they were able to offer services that might lead to a competitive advantage. The value of the data exchanged by machines lies in the information they carry, the potential use thereof, as well as the fact that they are inaccessible to competitors. This is illustrated as a consecutive part of the presented framework (second row of Figure 4). With the advent of the IoT – and by improving their service offerings – the companies were able to enrich the existing value chain with innovative value-adding activities by gathering and analysing data exchanged between machines and devices. The essence of the applicability of the proposed framework can be distilled into the previously unattainable opportunities for creating value to customers. It is suggested that managers and decision-makers should analyse the potential for quicker product introductions (as well as the possibility of adding a service component), crafting new business models based on a unique value proposition, more effective support of customer processes, as well as discovering the potential of data analytics. The framework also addresses the question of how value is created with the help of the IoT. The framework incorporates the latest findings by Porter and Heppelmann (2015), who suggest the following means of value creation, which translate into unique profit creation opportunities: (1) Shortening the product development cycles – Companies can bypass the pressure for frequent product introductions by releasing smaller scale upgrades and enhancements. In this way, customer needs can be fulfilled more quickly and with better precision. (2) New business models – The expanded opportunities for value creation directly translate into revisited opportunities for crafting a company’s value proposition. The advent of the IoT has led to new opportunities for designing and redesigning business models, for example, cloud-based models (Wen & Zhou, 2013). Gaining access to a large amount of data provides an immediate opportunity to create new value while generating profit, as companies might decide to sell the access to data to third parties. (3) Supporting customer success – The IoT not only enables tailored service offerings but also creates a significant opportunity to advise customers in a variety of matters that are essentially rooted in how products are used. By gathering data on product usage, solutions for better utilisation or changes of equipment can be made, and this will ultimately translate to supporting the customer’s success.

(4) Product as a part of a broader system – Products equipped with sensors require suitable software, and therefore they gradually cease to exist as a sole tangible entity. (5) Data analytics – Data analytics is a powerful tool for creating value as well as generating profit. Moreover, the need for data analytics creates a need for a skilled workforce in that particular field.

Figure 4. The proposed conceptual framework.

6. Conclusions, limitations, and further research The research presented in this paper explores the powerful potential behind IoT-aided servitisation achieved via connected devices.

Connected devices and the rapid interchange of information will ultimately lead to increased manufacturing productivity, a shift in economics, and a modified workforce profile, which will ultimately result in a profound change in the competitiveness of companies and regions (Rüßmann et al., 2015). The aim of this paper is to explore IoT-enabled servitisation from the perspective of new opportunities for value creation. This is achieved by reviewing literature, an empirical study of the three manufacturing companies, and a conceptual framework that brings together the theoretical and empirical considerations. Managerial implications This paper proposes that IoT-based solutions can serve as remarkable tools for building the product–service systems of the future. With a well-planned IoT-aided servitisation strategy, companies are able to create a solid value proposition based on reliable data on product usage and performance. Moreover, services can be created or tailored towards increased profitability and improved customer satisfaction. In the research presented in this paper, different pathways to IoT-aided servitisation are explored, with a particular focus on the process of value creation. In the broader context of the theoretical and managerial debates concerning servitisation, the research presented in the research presented in this paper is contribution to the stream of research into how digitalization can benefit servitisation (Coreynen et al., 2016; Helo et al., 2017; Tongur and Engwall, 2014). Furthermore, this study adds to the discussion on the role of value creation as a potential for creating firm’s competitive advantage (Bustinza et al., 2015). Practical applicability of the researched topic is further explained as a reference for managers who are faced with a challenge of introducing the IoT-based solutions in their companies, with the goal of either improving servitization processes or just simply making use of the vast amounts of data gathered from devices while they are being used by end customers. Companies are frequently pushed towards finding new ways of competing globally, delivering a unique value propositions while driving down costs. In this paper, managerial implications are presented by explaining how the well-established concept of servitization can be developed further, towards better value propositions and increased profitability, with the help of IoT.

Limitations

Certain limitations of the study should also be acknowledged. First, due to the relatively small number of case companies (only three), it is difficult to address the possibility of generalisation. Moreover, the use of case studies as a research method has been criticised for its false promise of allowing in-depth analysis of a given phenomenon. Generally, such an analysis can only be achieved with a considerable amount of time and other resources, and this is often impossible to realise. The reliance upon qualitative data can also be perceived as a limiting factor. It has been argued that qualitative case studies may be overly influenced by the researcher (Stake, 2013). Second, the companies chosen are of similar size, and their roads toward servitisation were relatively similar. As a rather narrow perspective is presented, comparative research in the field would be beneficial. Implications for the theory and future research avenues This paper combines a study of theoretical developments and empirical evidence from companies whose servitisation processes and product–service systems were based on IoT solutions. Thus, the conceptual framework provides a comprehensive overview of how the technological advancements of the IoT can be utilised for creating value as well as establishing and maintaining a competitive advantage. Future research should be aimed at exploring the applicability of the proposed framework to other manufacturing companies that have implemented servitisation strategies. With the advancement of the IoT, unique possibilities for value creation, and the ability to support customer success, the opportunities for new business models are growing rapidly. This will have far reaching consequences on the global economic landscape. Further research on the IoT and servitisation should be focused on uncovering the unique business models and their impacts on the economy, technology, and the environment.

Appendix The interview protocol The following protocol was established in order to facilitate the process of qualitative data collection on the topic of IoT-aided servitization process. INSTRUCTIONS

My name is … and I am a researcher at … the purpose of this interview is to get a comprehensive overview of the servitization. The interview comprises of … questions, and there is no right or wrong answer. I would like to that you could answer to the best of your knowledge and please feel free to refrain from answering if you feel like there would be any risk of revealing information that is strictly confidential. I wish to thank you for agreeing to take part in the interview. No information on your name or the company name will be revealed. The interview will be recorded so that I am able to extract the most from your valuable feedback. While I focus on asking questions, my colleague will take care of recording and taking notes. Company name: Interviewee’s name and position in the company: Interview questions: 1. What was the main motivation for implementing the IoT solutions? 2. How was the process initiated? Did you have a separate implementation project with project management in place? 3. What were the most important steps (milestones)? 4. How many people were responsible for the implementation of IoT aided servitization? 5. Did you use the help of external consultants in the process? 6. How would you define the initial level of knowledge in the field of IoT? 7. What were the main obstacles in the process? 8. What type of data are being collected and analyzed? What is being measured? 9. How has you’re your business model been affected? 10. What were the main benefits of the process observed so far? What kind of improvements have you been able to observe (e.g. in the supply chain context) 11. Do you have any procedures in place that would allow for systematic tracking of the benefits of the IoT-aided servitization? (e.g. financial impact) 12. Please explain the technicalities of the IoT-aided servitization (any additional documents can be provided at this stage, which devices are connected, what kind of information is gathered? How is the analysis performed?) 13. What kind of technical difficulties were observed? How did you overcome them?

14. How has the IoT-based solutions affected customer satisfaction? Were you able to establish a better connection with customers?

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Highlights 

Internet of Things can enable possibilities of servitization for manufacturing companies



Three case examples are analyzed from value chain perspective



IoT provides opportunity to access end-user operations and build service-products on data analytics



A desired value chain positioning shift is toward downstream