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The role of public policy in advancement of product service systems
Journal of Cleaner Production 11 (2003) 905–914 www.elsevier.com/locate/jclepro
The role of public policy in advancement of product service systems O. Mont ∗, T. Lindhqvist The International Institute for Industrial Environmental Economics at Lund University, PO Box 196, Tegnersplatsen 4, SE-221 00 Lund, Sweden Received 7 January 2002; accepted 27 October 2002
Abstract This article discusses developments in the area of product service systems (PSS) and the need to facilitate the proliferation of the PSS approach through public policies. The article argues that policies that establish the framework conditions for environmental improvement are preferable to detailed legislation as they favour environmentally superior PSS. However, there is also a need for more specifically targeted policy measures that stimulate knowledge creation and dissemination in the PSS area. This article suggests that informative policy measures should be used by authorities and reviews the results from the functional programme of the Swedish EPA as an example of this type of policy. 2003 Elsevier Science Ltd. All rights reserved. Keywords: Product service systems; Policy measures; Functional program
1. Introduction There is extensive evidence that the modern industrial economy is not sustainable. Its emphasis on efficient process technologies has led to significant increases in labour productivity—on average a factor of 20 in 150 years [1]. However, this was possible partly because energy, materials, and other natural resources were cheap in relation to other production factors, such as process management and automation technology. The consequence of this is relatively slow growth of resource productivity. Studies of the US Academy of National Engineering show that in the USA, 93% of exploited resources are never transformed into final products, 80% of all products are one-way products, and 99% of the material content of goods become waste within 6 weeks [2]. However, at the same time, many companies are working hard on improving environmental performance of their processes and products. For example, numbers from the USA show that the country is on its way to improving material productivity through material substi-
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Corrresponding author. Fax: +1-46-46-222-0230. E-mail address: [email protected] (O. Mont).
tution initiatives. Today the material weight per GDP is 30% less than it was in 1976 [3]. Most of the methods employed by companies are based on pollution prevention and eco-efficiency approaches. Many sources show that great efficiency improvements can be and are being made in product design, allowing factor 2–4 improvements [4–8]. Although, these methods can greatly improve environmental profiles of companies and their products, it is recognised that increasing consumption levels can significantly reduce or even negate ecoefficiency achievements [9–12]. Some authors project that for the long-term sustainability, we need a factor of 10 or even 20 in materials and energy efficiency use improvements [13–15]. As a way to address consumption levels and a potential solution to the factor 10/20 vision, some authors propose that function and system level improvements have to be made, contrary to just having products redesigned [5,16–21]. The PSS concept has been suggested as a way to address and contribute to this system level improvement [22,23]. It suggests that the environmental impacts of products and associated services should be addressed already at the product and process design stage, while special attention is given to the possibility of reducing environmental impact from the use phase by providing alternative system solutions to owning products. In this
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way, possibilities are provided for producers to treat products as capital assets by selling the function of a product, not the product itself. The area of PSS has been developing from the late 1980s. We found many examples in which traditional companies are providing service-oriented solutions to business customers through operational leasing, but they did not usually evaluate these services from environmental point of view and environmental improvement was never a goal of these services. These company actors obviously, did not perceive that they could use environmental claims in their marketing strategies to obtain competitive advantage. We have also seen rapid development and dissemination of the PSS ideas in the utility sector and among chemical industries, driven by deregulation or strict legislation respectively, where environmental improvements came as an additional benefit. The cases from other than chemical and utility sectors are still few and they do not provide sufficient amount and depth of data for a thorough analysis of environmental and economic features of PSSs. In the latter half of 1990s, a number of attempts were made to classify the documented examples of PSS [23– 26]. To broaden the scope of the examples and to contribute to the development of the PSS area, a number of projects were initiated in several European countries. There is a wide range of already finalised and on-going projects, supported by EU funding [27–30]. Based on the knowledge from these activities, some attempts were made to provide a theoretical grounding for the PSS concept [17,31] and to develop methodological approaches of ways more environmentally sound systems could be developed [16,27]. In spite of these studies, there is lack of environmental and economic data as well as clear-cut results from implementation of PSS that could be spread to other companies. Due to this, there is a general agreement that the research in the area of product service systems needs to be further facilitated [22,26,28,32–35]. One of the obvious means of fostering such expanded development is by governmental policy measures. This paper analyses the need for and potential role of legislation and other policy measures in stimulating the development and application of the PSS approach. The questions to be addressed in this article are: Do governments need to intervene to stimulate the development of the PSS concept, and if yes, how should they do that? The article is based on 22 interviews with representatives of Swedish authorities and on an e-mail survey of 20 PSS experts. The experiences from participating in three projects within the functional programme of the Swedish EPA also greatly contributed to this study. During these projects, we made an update of the state-of-theart of PSS development through an extensive literature review and telephone interviews with experts in the PSS area. Further, PSS related issues were discussed with
company representatives during a workshop in Stockholm on 25 March 2002. During internal seminars with colleagues at the IIIEE, ideas were discussed and further developed. The functional programme of the Swedish EPA is presented here as an example of how authorities can contribute to and stimulate the incorporation of the PSS concept into environmental management activities.
2. Policy measures as drivers of environmental improvement In some countries, environmental regulations play substantial roles in addressing many environmental problems. There are a number of reasons why environmental regulations are needed. Externalities are environmental impacts that are not normally accounted for in market prices, and thus company leaders do not usually consider them when they make decisions about product and system design. Therefore, society has a responsibility to design and implement policy measures, for instance, to introduce pollution charges or taxes, which can result in corporate internalisation of environmental externalities and can stimulate reduction of these costs and related negative environmental impacts through various measures. Policy measures can be appropriate to employ in efforts designed to stimulate environmental innovation. The demand for drastic reductions of environmental impacts will require completely new technologies. Regulations can be one way to stimulate ‘technological regime shift’ [36]. Environmental innovation is often not rewarded at the company level due to lack of internalisation of environmental impacts. Moreover, the positive societal spill-over effects are not the driver for companies to innovate [37]. Many companies, which are not at the forefront, lack information, knowledge, and expertise about how to improve their products and processes. They may perceive the risks involved in changing processes and practices as prohibitively high. There is thus, a role for society to improve the dissemination of information on approaches for improving products and processes to individual enterprises, and in this way stimulate environmental innovation and improvements. Further evidence is given by other authors who point to the need for governmental environmental regulations to create corporate drivers to improve environmental performance of their products [37–40]. The European project on evaluating dissemination of eco-design activities in European countries shows that eco-design is mainly employed in industries, in which end-of-life regulations are in force—electronics, packaging, and motor vehicle industries. The study suggested, ‘that (indirectly) regulations are the main driver for ecodesign activities’. A very important role for governmental environmental regulations is to ensure continuous
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improvement of environmental performance of products. This is underscored by the observation that many of the promising eco-design initiatives in Dutch SMEs ceased after governmental financial and technical support ended due to lack of a constant driver or a policy framework that would ensure continuation [41]. A number of factors complicate the shift from traditional eco-design approaches towards system design, such as the need for long-term investments, scale of organisational change, and involvement of many actors in providing system solutions (Fig. 1). Some authors stress that this complexity calls for an integrated response from governments to create conditions that stimulate environmental innovation [42]. Indeed, we found by analysing factors that stimulated companies to develop service-based system solutions, two major studies identified legislation or threat of coming regulations as an important driver fostering the development of system solutions in companies [26,34]. White and other authors show that the chemical sector have shown considerable progress towards PSS, driven by strict regulation, which led to the development of a wide range of servicised solutions, such as Chemical Management Services (CMS). CMSs have spread throughout 50–80% of the US auto industry, 35% of the US electronics industry, and 10% of the US aerospace industry [43]. These service-oriented solutions were a matter of reducing risks and liabilities, and sharing the savings from improved handling of chemical substances by specialists. Numerous examples from the chemical sector show that regulations were the primary source of this favourable development in companies [5,44]. Our analyses of drivers and barriers for companies in many sectors based on existing studies also identified legislation as the main external driver [45]. Experiences from existing product service systems show that in order to reduce life cycle environmental impacts, several stakeholders within and outside the traditional supply chain should be involved, because improvements should be made at different life cycle
Fig. 1. Key actors in the development and acceptance of product service systems.
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stages. These considerations indicate why employing a mix of tools may be necessary for reducing the life cycle environmental impacts by PSS. While there are usually a great number of actors in the supply chain, some of them are more powerful and consequently, have better chances of initiating and facilitating the change in the chain. Several studies identified key actors that can hamper or impel the development of the PSS concept, shape its structure and environmental performance. Three main groups of actors identified in a recent study are producers, consumers, and financial organisations [46]. In order to speed up the development in the PSS area, we need to understand why these actors are not yet active in employing PSS ideas, why they may resist them or why they are not currently involved in the process. Subsequently, the issue will be how to make them interested in facilitating the development of the PSS concept and in incubating successful initiatives in their own companies. During discussions with various actors, we identified a number of barriers and opportunities [47]. Our study revealed that among the most significant factors that hamper the dissemination of PSS ideas in industries are: lack of knowledge among producers about the PSS concept in general, lack of case studies that would clearly convey the business opportunities based on economic and environmental viability of the PSSbased business models, and the lack of capital investments in the area [47]. In markets where environmental costs are not internalised, companies may have problems to capitalise on these strategies, as the example of Interface Inc. illustrates [34]. The Evergreen program of Interface Inc. on carpet leasing currently makes no profit on carpet reclamation, as reclamation fee is higher than the costs of disposal. The barriers for business customers to buy servicised solutions are first of all lack of understanding of the PSS concept and the life cycle costs of the products they buy. The latter may lead to a perception that prices for provision of services are excessively high. Another important barrier identified is fear of providers gaining access to customers’ facilities and to sensitive information. The barriers for private consumers to buy servicised solutions are difficulties with accepting consumption that is not based on owning material products, lack of understanding of the PSS concept, and in particular, life cycle costs of product ownership and, as a consequence, seemingly high prices on service-oriented offers. Financial institutions were identified as an important actor, able to influence the speed of PSS dissemination in society [46]. So far, we see a lack of involvement of these institutions in the PSS area. A reason for this may be their lack of knowledge about PSS opportunities. Lack of convincing data confirming environmental superiority and financial soundness of PSSs creates a problem if one seeks to involve financial organisations.
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For them, lack of understanding is associated with risks and liabilities. In order to bring in risk or venture capital, we need thoroughly substantiated cases that show the economic viability of the new business models.
3. The possible nature of governmental policies designed to stimulate progress in PSS There is a great variety of policy measures that we can use to target these actors. Policy instruments differ in their nature (administrative, economic, and informative), but also in how specific they are—whether they are designed to create generally favourable conditions for environmental improvements in society or are designed to focus upon specific outcomes. The range of policy measures can be classified in as presented in Fig. 2. General policy measures are usually developed to address the basic societal conditions that give rise to environmental problems. By changing these, we change the rationale in which the problem occurred and create incentives for finding more optimal solutions. What are then the general policy measures that can trigger the change process and establish favourable conditions for PSS? Internalisation of environmental externalities will stimulate more environmentally preferable alternatives and may spur, justify, and reward environmental work in companies. But this measure will not necessarily steer the development towards PSSs. Internalisation of environmental costs will sift out environmentally inferior products and solutions, including PSS that do not prove to be beneficial. The better environmental
Fig. 2.
alternatives will be favoured on the market. Under these circumstances, only products and systems with superior environmental qualities will turn out to be economically viable. However, introduction of proper environmental surcharges is often not feasible, due to inadequate knowledge of the external costs, and, frequently, due to insufficient political support. Nonetheless, there are other similar general approaches, among them extended producer responsibility (EPR) programmes, that may lead to similar results and, they may eventually, favour productservice solutions by stimulating comprehensive system design changes. Strategies and instruments should not necessarily be developed to specifically target PSS. In general, we should not use specific measures directed towards PSS, if we are not certain that PSSs are the environmentally preferable solutions. In fact, we know that the environmental profiles of PSSs depend on how the systems have been designed. What is needed is the formulation of strategies and instruments making PSSs with lower environmental impacts a viable alternative to traditional ways of satisfying consumer needs. For example, a policy or strategy could aim at the optimisation of life cycle environmental impacts (Fig. 3). Different instruments and tools, such as pricing mechanisms and information dissemination, can facilitate this. There are many ways of how a life cycle optimisation can be reached. This depends on the economic and environmental feasibility, which is evaluated by companies and other decision-makers. One of the ways life cycle environmental impact can be reduced is the closed-loop strategy, for which a number of instruments exist based on the EPR principle, such laws are
Categorisation of policy principles, strategies, instruments, and tools.1
1 This classification is based on the discussion about taxonomy held at the IIIEE with Naoko Tojo and Carl Dalhammar.
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Fig. 3. An example of a hierarchy of instruments and tools designed to facilitate the development of functional arrangements [56].
designed to close the material’s loops by ensuring the creation of recycling programmes for various product groups. None of these approaches specifically addresses or promotes PSS, but PSSs could be the outcome if PSSs prove to be environmentally and economically superior to other options. However, even if we are able to establish a globally or at least a regionally level playing field by applying general measures, it may be difficult to produce desirable results due to various barriers that give rise to transaction costs: lack of knowledge, awareness and information. When using hard policy instruments such as economic and administrative measures, society should reduce transaction costs for individual companies by combining these measures with targeted policy instruments such as support for research and pilot projects in this area, collection, and subsequent dissemination of information about successful case studies. Although, it is important to continue studying existing examples of PSSs in various industrial sectors through observations and interviews with corporate leaders, it is probably of higher significance to support information dissemination about these success stories. However, the desired and real changes in companies will demand thoroughly analysed examples of deliberately deigned PSSs. Therefore, it is even more important to support projects that focus upon designing economically viable systems with positive environmental improvements incorporated throughout the entire life cycle of the PSS. The importance of involving various actors in the entire process was demonstrated in a number of projects [27,28,48,49]. Actor involvement is of vital importance because different actors should be able to find business opportunities and possibilities to profit from participating in PSS provision. They should also be encouraged to help in evaluating the economic feasibility of the designed systems.
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When involving companies and other actors into the concept development work, it is important to think about who are the relevant people in the company/organisation, whom we should involve. As actor analysis from previous research has indicated, it is top management, but also individual catalysts, who are likely to initiate the change process and be capable of overcoming the organisational inertia. While it is easy to identify top management, individual catalysts come from different departments according to these studies [46] and it is therefore, difficult to develop targeted approaches that would reach and stimulate them. Instead, broad initiatives designed to facilitate awareness raising and knowledge transfer are essential. The company people we interviewed highlight the need for nurturing service-oriented business ideas through the establishment of new business units or new companies. There are also many examples showing that the development of PSSs for companies often results in new companies being formed or in new lines of businesses within the established companies [50]. In connection to this, the interviewees stress the importance of venture capital in supporting start up companies or spinoff activities within the companies [51]. However, the current limited knowledge of the real costs and benefits translate into uncertainty about the risks that may discourage venture capitalists. Consequently, mechanisms for quantifying, understanding and sharing these risks among actors and with society at large should be developed. As we have shown above, even if we reach a level playing field, high transaction costs related to missing information can deter companies from looking for opportunities in the PSS area [51]. Therefore, authorities have a role in supporting the development of information and helping to facilitate its dissemination. An example of how authorities can aid the development in the PSS area is provided by the functional programme of the Swedish EPA.
4. The functional programme of the Swedish EPA In 2001, the Swedish EPA developed a functional programme with the goal of investigating how customer needs for special product functions can be satisfied through a more sustainable combination of products and services. In the series of short projects, this programme: 1. Analysed the international developments in the product-service system area. 2. Provided an overview of environmental impacts created by service industries and the level of environmental management in service companies. 3. Analysed environmental regulatory approaches used to foster environmentally sound products.
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4. Evaluated functional sales from economic, environmental, and technical point of view in three manufacturing companies in Sweden. 5. Sponsored a workshop entitled, ‘Functional thinking—a strategy for dematerialisation or ‘just’ for good business?’ 6. Developed a framework project that compiled experiences from the aforementioned projects and concluded the functional program.
These projects were initiated and financed by the Swedish EPA and were conducted by the International Institute for Industrial Environmental Economics at Lund University (IIIEE) [1–3,6] and by the Royal Institute of Technology [4,5]. The different projects had various starting points and approaches, which contributed to a more comprehensive picture of functional thinking and of PSS in the society and in companies. After the first four projects were conducted, the Royal Institute of Technology and the Swedish EPA arranged a workshop, at which the findings were presented and discussed with representatives of businesses, authorities, and academia. The final project brought together the experiences and the results of the four projects and the workshop. A brief description of the various projects and their results are presented below.
4.1. Analysis of the international developments in the product-service system area
The main goal of this study was to investigate the contribution of functional sales and PSS to functional thinking and to the development of a function-based society, and to foresee the role of IPP in stimulating the incorporation of functional thinking in future policy developments. An extensive literature review of the PSS area was conducted during this study. The literature review was substantiated by an e-mail survey of experts working in the area. Based on these data, the researchers analysed the circumstances under which the transition to a function-based society may be feasible and discussed the contribution of functional arrangements and product service systems in this shift. It discussed the conditions under which product service systems may stimulate competitiveness of enterprises. It also provided an overview of policy principles, strategies, instruments, and tools that can indirectly stimulate adaptation and dissemination of environmentally sound product service systems and functional arrangements. The study devoted particular attention to discussing the potential role of functional thinking and PSS in IPP [52].
4.2. Overview of environmental impacts created by service industries and the level of environmental management in service companies The goal of this study was to clarify the concept of service, to provide an overview of service industries and to ascertain the environmental impacts related to them, and to identify approaches to environmental management used by service companies to improve their environmental performance. The study identified the most important environmental impacts of service industries, which typically originate from use of infrastructure and buildings, personal and goods transport, land use and from the use of material products and product flows. The study also identified 52 different approaches currently used by service companies to reduce environmental impacts, ranging from environmental management systems to ethical investments. The most often used approaches were found to be: environmental education, waste minimisation, EMS, green purchasing, and environmental reporting. The study further identified driving forces that stimulate service industries to address environmental impacts. It found that many service companies did not perceive the environmental impacts from the use of infrastructure and land use as worth addressing. The study concluded that service companies have a great potential and many possibilities for improving their environmental performance [53]. It should be mentioned that the study focussed on services from a broader perspective than PSS, and only a minor part addressed PSSspecific questions. 4.3. Analysis of environmental regulatory approaches used to foster environmentally sound products The goal of this study was to evaluate how legislation can be used to improve environmental performance of products from a life cycle perspective and how it can work together with other instruments and tools of environmental management and policy. The study identified a number of studies that showed the need for more stringent legislation that can have a stimulating role on continuous improvement of environmental performance of products, can compensate for lack of environmental demands from consumers and may balance the difficulties with introducing a wider use of economic instruments. However, the study also showed some limitations of the current legislative approach, for instance lack of life cycle thinking. It was recommended that legislation might facilitate improvements of some life cycle stages through specific requirements for product-related information and even for service-related performance. The study highlighted that product-related environmental information might improve environmental awareness of many actors in society, not only awareness of producers [54]. Similar to the previous study, this study only discussed PSS-specific issues to a very limited extent.
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4.4. Evaluation of functional sales from economic, environmental, and technical point of view in three manufacturing companies in Sweden This project investigated whether functional sales are employed in business-to-business relations as a strategy to reduce environmental performance of companies and their products by analysing three Swedish companies. The study results revealed that functional sales are driven primarily by economic reasons and environmental benefits are considered only as a bonus. An important driving force for companies to employ functional sales was the possibility to establish closer and long-lasting relationships with business customers, for whom functional sales mean risk reduction and increase of flexibility. The study also identified economic, organisational, and customer-related barriers to functional sales. The study suggested that functional sales had little effect on product design, because the design of products and services (sales, after-sale services, etc.) is performed by different departments in companies. Besides, it was shown that functional sales rarely stimulated reuse and recycling because the producer seldom continued to ‘own’ products after a leasing or renting period, but instead sold products to customers in a traditional way. The project showed that companies employ a range of methods for designing more environmentally appropriate products and for evaluating their environmental profiles, but very few methods were used for service development [55]. 4.5. Workshop ‘Functional thinking—a strategy for dematerialisation or ‘just’ for good business?’ The workshop was organised as a part of the functional programme in order to present the findings of the aforementioned studies and to discuss them with more than 70 representatives of businesses, authorities, academia, and consultancies. During the discussions, participants stressed that financial and informational incentives to consider functional solutions should exist for private and business customers and for governmental purchasers. It was emphasised that life cycle costs of products and solutions need to be carefully calculated and presented to customers in a transparent manner, so that the purchasing decision can be based on product life cycle cost, and not only on the initial investment. In this respect, SMEs pointed out that they often lack adequate information about life cycle costs. Business representatives stated that it is an overwhelming task for many companies to devise a PSS and therefore, partnerships and alliances were vital. Moreover, it was pointed out that detailed examples of PSSs must be available and information about them should be disseminated. Besides, companies would prefer to have some guidance for PSS develop-
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ment, based on existing successful cases. It was emphasised that different prerequisites exist for business-tobusiness (B2B) and business-to-customer (B2C) arrangements and consequently different systems have to be developed for different types of customers, so that their values and needs can be satisfied in the best way possible. 4.6. A framework project that compiled experiences from the aforementioned projects and concluded the functional program The goal of the final project was to bring together the experiences and the results of the four projects and the workshop into a proposal for how consumer needs for specific functions can be met through a more sustainable combination of goods and services. The study discussed the situation in business-to-business and business-to-customer areas and showed that there is an extensive lack of detailed case studies that provide enough data for rigorous environmental and economic evaluation. The study of three Swedish companies confirmed barriers and drivers that were identified in previous projects and in the literature. The study also analysed the main players in functional sales and PSS: producers, consumers, and the financial sector. Besides these stakeholders, it discussed the role of authorities in stimulating development in PSS area and the role of various tools that can be employed for that task. It emphasised that a great variety of soft and legislative measures that are used to stimulate environmental action were identified in the studies of the functional programme and stressed the need to study and to promote combinations of and interplay among these measures.
5. The value of the functional programme Some important lessons can be learned from the functional programme. The first ones relate to the conclusions of the programme. The PSS concept has proven to be interesting for many companies and is especially promising for companies in mature industries. There are, however, important obstacles that need to be taken into consideration by companies that wish to engage in developing and providing service-oriented solutions. One of the problems is that services can also be environmentally problematic, and therefore, special attention should be given to design less environmentally damaging services. Although, having certain business and environmental potential, current examples and cases of PSSs often lack sufficient evidence about their environmental superiority as compared to traditional business models. There is also a lack of design guidance on how to develop systems that are environmentally sound. A clear need for support from authorities in pursuing the
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development of PSS was identified and the role of regulatory measures was stressed as one of the main triggers for companies to initiate activities for reducing environmental impacts from products and services. The functional programme of the Swedish EPA can be used to learn how a government can support PSS development by increasing knowledge, and disseminating experiences. The programme deepened the knowledge about PSS and related issues, and brought the PSS concept to a broader audience within Swedish society. The first goal of the functional programme was to obtain a more comprehensive perspective on functional thinking and PSS, and to further develop it in relation to the political goals of the Swedish Government in its IPP work. All studies of the programme directly contributed to fulfilling this goal. The first one provided insights into the state of the art of functional thinking at the international arena and a brief analysis of existing policy instruments that can implicitly support functional sales and PSS, including comments on IPP. The second one discussed functional thinking in relation to service industries. The third study discussed the role of legislation in improving the environmental performance of products from a life cycle perspective. The fourth study identified drivers, barriers, and benefits for companies to involve in functional sales. The second goal of the functional programme was to investigate how needs for special functions can be satisfied through a more sustainable combination of products and services. This question was discussed from a more theoretical perspective in the first study [52], and from a more business-oriented perspective in the fourth study [55] as well as during the workshop. The functional programme was also designed to investigate the environmental potential of the functional sales and PSSs. However, due to budget and time limitations, none of the studies was able to collect and provide convincing primary data. In order to conduct a comprehensive analysis of the environmental and economic potential of functional arrangements or of PSSs, sufficient financial and technical support should be given to longterm projects with clear goals. The functional programme clearly proved to be an important contribution to the awareness and knowledge level in the Swedish society. Important experiences were collected and analysed, and subsequently provided to a broad Swedish audience through the workshop and publications. However, the Programme was a limited effort and important tasks remain for the Swedish society and the Swedish authorities.
We identified insufficient dissemination of information about successful PSS cases to other companies, with the exception of chemical and utility companies, as a major concern. Based upon this, it was concluded that there is an urgent need for sound information and for it to be widely and effectively disseminated. It was also concluded that governments have an important role to help ensure that these facets are accomplished. This may be partially accomplished through policy support, since regulatory policies were found to be primary drivers of environmental innovations in many studies. We have analysed what types of measures would be beneficial for stimulating true progress in this area and have concluded that policy measures such as economic and administrative instruments should be employed for addressing overall deficiencies of present market system, but must be combined with targeted informative policy measures. The more general measures, such as for example, internalisation of externalities, taxes, and EPR programmes will help to sift out environmentally inferior solutions, leaving economically viable and environmentally sound PSSs on the market. More directly targeted measures will include governmental support to research and dissemination of knowledge about the PSS approach, as well as facilitation of demonstration and pilot projects in new areas through direct R&D support and risk sharing with financial institutions. In order to further utilise and build on the results of the Swedish EPA functional programme, a long-term integrated research programme on PSS should be developed. It could strive to further develop the PSS approach theoretically, methodologically, and, in particular, operationally. This research programme should be sufficiently long-term and extensive to support the development of new business models based on PSS. It could be required to devise actual support programmes for studies designed to collect and analyse data and to provide clear answers about the conditions or with what designs PSS can be more environmentally preferable than traditional business models. Within the framework of a functional programme, the Swedish Government can establish various subsidy schemes to encourage companies to participate in research projects that are needed to create the extensive knowledge base. Feasibility studies require support as well. An important area for authorities to explore and influence would also be to find strategies that can help in identifying and overcoming barriers for attracting venture capital investors, to support promising, but currently difficult to appreciate PSS innovations.
Acknowledgements 6. Concluding remarks In this article, we provided a brief overview of the ‘state-of-the-art’ in the area of product service systems.
The paper builds on experiences and knowledge gained during a number of studies, which were technically and financially supported by the Swedish EPA, the
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Swedish National Board for Industrial and Technical Development (NUTEK), and Nordic Council of Ministers. We are grateful to these organisations for provided support, for publishing reports and for dissemination of results of these studies to a broader audience. We would like to thank all people who provided valuable information and insights to this paper. We would specifically like to thank our colleagues Andrius Plepys and Carl Dalhammar for reading the drafts of this paper, and for providing useful comments and recommendations. The studies this paper is based on were discussed with colleagues at the IIIEE: Naoko Tojo, Ma˚ rten Karlsson, Carl Dalhammar, Andrius Plepys, and Nicholas Jackobsson, and we would like to thank them for very stimulating brainstorming sessions, which greatly contributed to these studies.
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challenge to technology development. Rijswijk, The Netherlands: RMNO (Advisory Council for Research on Nature and Environment), 1992. Vergragt P, Jansen L. Sustainable technological development: the making of a long-term oriented technology programme. Project Appraisal 1993;8(3):134–40. Ryan C. Designing for Factor 20 improvement. Journal of Industrial Ecology 1998;2(1):3–5. Manzini E. Sustainable solutions 2020—Systems. In: Centre Borschette Conference Centre. Towards sustainable product design 4th international conference. Brussels, Belgium: The Centre for Sustainable Design; 1999. Goedkoop MJ, et al. Product service systems, ecological and economic basis. PricewaterhouseCoopers N.V./PiMC, Storrm C.S., Pre-consultants, 1999. Mont O. Product-service systems. Swedish EPA, AFR-report 288: Stockholm. 2000:83. Hockerts K et al. Kreislaufwirtschaft Statt Abfallwirtschaft. Opti¨ ko-Leasmierte Nutzung und Einsparung von Ressourcen durch O ing und Servicekonzepte. In: Schriften der Bayreuther Initiative fu¨ r Wirtschaftso¨ kologie e.V., Band 1, 2nd ed. Ulm: Universita¨ tsverlag; 1995. Stoughton M et al. The business case for EPR: A feasibility study for developing a decision-support tool. Boston: Tellus Institute, 1998. White AL, Stoughton M, Feng L. Servicizing: the quiet transition to extended product responsibility. Boston: Tellus Institute, 1999 p. 97. Vergragt PJ. Strategies towards the sustainable household. Final Report, SusHouse Project. 2000. European Commission. Eco-services for sustainable development in the European Community. Brussels. 2001:180. Zaring O. Creating eco-efficient producer services. CORDIS 1999;:7. European Commission. Benchmarking sustainable services for the housing sector in the city of tomorrow. Brussels, 2002. Hockerts K, Weaver N. Towards a theory of sustainable product service systems—what are the dependent and independent variables of S-PSS? In INSEAD-CMER Research Workshop ‘Sustainable Product Service Systems—Key Definitions and Concepts’. 2002. Littig B. Eco-efficient services for private households. Looking at the consumer’s side. In: Nature, society and history’. Longterm dynamics of social metabolism. Vienna, Austria: Kursalon im Stadtpark; 1999. Brown HS, Vergragt P, Green K. Learning processes in bounded social experiments: the case of Mitka. In: GIN Conference, Gotherburg. 2002. Fishbein B. McGarry LS, Dillon PS. Leasing: a step toward producer responsibility. INFORM, Duke University, Nicholas School of the Environment, Tufts University, The Gordon Institute. 2000:75. Heiskanen E et al. Dematerialization: the potential of ICT and services. Helsinki: Ministry of the Environment, 2001 p. 240. Rennings K. Redefining innovation—eco-innovation research and the contribution from ecological economics. Ecological Economics 2000;32(2):319–32. Cleff T, Rennings K. Determinants of environmental product and process innovation. European Environment, Special Issue: Integrated Product Policy and the Environment 1999;9(5):191–201. Wallace D. Environmental policy and industrial innovation. Strategies in Europe, the USA and Japan. London: Earthscan Publications Ltd, 1995 p. 282. Tukker A, Haag E, Eder P. Eco-design: European state of the art. Part I: Comparative analysis and conclusions. Seville: European Commission—Joint Research Centre Institute for Prospective Technological Studies, 2000 p. 73.
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[40] Tojo N. Effectiveness of EPR programme in design change. In: Study of the factors that affect the Swedish and Japanese EEE and automobile manufacturers. Lund: IIIEE; 2001. p. 6-3. [41] Tukker A, Eder P. Eco-design: Strategies for dissemination to SMEs. Seville: European Commission — Joint Research Centre Institute for Prospective Technological Studies, 2000 p. 256. [42] Nuij R. Eco-innovation: Helped or hindered by integrated product policy. Journal of Sustainable Product Design 2001;1:49–51. [43] Reiskin E et al. Servicizing the chemical supply chain. Journal of Industrial Ecology 1999;3(2/3):19–31. [44] SafeChem, Corporate homepage. 2002. [45] Mont O. Drivers and barriers for shifting towards more serviceoriented businesses: analysis of the PSS field and contributions from Sweden. Journal of Sustainable Product Design 2002; forthcoming. [46] Emtairah T et al. Av vem skapas marknaden fo¨ r miljo¨ anpassade produkter? En analys av olika akto¨ rers roll i relation till utbud och efterfra˚ gan fo¨ r miljo¨ anpassade produkter. Lund: IIIEELund, 2002 p. 160. [47] Mont O. Introducing and developing a product-service system (PSS) concept in Sweden. Lund: IIIEE at Lund University and NUTEK, 2001 p. 124. [48] Bode M, Pfeiffer C, Schrader U. Strategies towards the sustainable household in Germany. Findings of an EU-research project on clothing care and shelter. Hannover: Universita¨ t Hannover, Institut fu¨ r Betriebsforschung, 2000 p. 199.
[49] Dudda C, Thomas S, Schuster K. Selling a function instead of a product: renting white goods via functional service contracts (FUNSERVE). Wuppertal: Wuppertal Institut fu¨ r Klima, 2001 p. 108. [50] Brezet H. Product-service substitution: Examples and cases from the Netherlands. In: ‘Funktionsfo¨ rsa¨ ljning’—product-service systems, AFR-report 299. Stockholm: Swish EPA; 2000. [51] Swedish EPA. Funktionsfo¨ rsa¨ ljning—en strategi fo¨ r dematerialisering eller ‘bara’ fo¨ r goda affa¨ rer? in Seminar. Stockholm, 2002. [52] Mont O. Functional thinking. The role of functional sales and product service systems for a function-based society, Naturva˚ rdsverket Rapport 5223. Stockholm: Swedish EPA, 2002 p. 55. [53] Kisch P, Mont O, Plepys A. Tja¨ nstesektorn och miljo¨ n. Naturva˚ rdsverket 2002;35:p Stockholm. [54] Dalhammar C. Lagstiftningens roll i den integrerade produktpolitiken. Stockholm: Swedish EPA, 2002 p. 116. ¨ lundh G, Ritze´ n S. Funktionsfo¨ rsa¨ ljning och produkters miljo¨ as[55] O pekter - en studie i tre svenska tillverkningsfo¨ retag. Stockholm: Swedish EPA, 2002 p. 39. [56] Mont O, Lindhqvist T. Funktionsperspektiv pa˚ varor och tja¨ nster (Functional perspective of products and services), Naturva˚ rdsverket Rapport 5230. Stockholm: Swedish EPA, 2002 p. 48.
The role of public policy in advancement of product service systems O. Mont ∗, T. Lindhqvist The International Institute for Industrial Environmental Economics at Lund University, PO Box 196, Tegnersplatsen 4, SE-221 00 Lund, Sweden Received 7 January 2002; accepted 27 October 2002
Abstract This article discusses developments in the area of product service systems (PSS) and the need to facilitate the proliferation of the PSS approach through public policies. The article argues that policies that establish the framework conditions for environmental improvement are preferable to detailed legislation as they favour environmentally superior PSS. However, there is also a need for more specifically targeted policy measures that stimulate knowledge creation and dissemination in the PSS area. This article suggests that informative policy measures should be used by authorities and reviews the results from the functional programme of the Swedish EPA as an example of this type of policy. 2003 Elsevier Science Ltd. All rights reserved. Keywords: Product service systems; Policy measures; Functional program
1. Introduction There is extensive evidence that the modern industrial economy is not sustainable. Its emphasis on efficient process technologies has led to significant increases in labour productivity—on average a factor of 20 in 150 years [1]. However, this was possible partly because energy, materials, and other natural resources were cheap in relation to other production factors, such as process management and automation technology. The consequence of this is relatively slow growth of resource productivity. Studies of the US Academy of National Engineering show that in the USA, 93% of exploited resources are never transformed into final products, 80% of all products are one-way products, and 99% of the material content of goods become waste within 6 weeks [2]. However, at the same time, many companies are working hard on improving environmental performance of their processes and products. For example, numbers from the USA show that the country is on its way to improving material productivity through material substi-
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Corrresponding author. Fax: +1-46-46-222-0230. E-mail address: [email protected] (O. Mont).
tution initiatives. Today the material weight per GDP is 30% less than it was in 1976 [3]. Most of the methods employed by companies are based on pollution prevention and eco-efficiency approaches. Many sources show that great efficiency improvements can be and are being made in product design, allowing factor 2–4 improvements [4–8]. Although, these methods can greatly improve environmental profiles of companies and their products, it is recognised that increasing consumption levels can significantly reduce or even negate ecoefficiency achievements [9–12]. Some authors project that for the long-term sustainability, we need a factor of 10 or even 20 in materials and energy efficiency use improvements [13–15]. As a way to address consumption levels and a potential solution to the factor 10/20 vision, some authors propose that function and system level improvements have to be made, contrary to just having products redesigned [5,16–21]. The PSS concept has been suggested as a way to address and contribute to this system level improvement [22,23]. It suggests that the environmental impacts of products and associated services should be addressed already at the product and process design stage, while special attention is given to the possibility of reducing environmental impact from the use phase by providing alternative system solutions to owning products. In this
0959-6526/03/$ - see front matter 2003 Elsevier Science Ltd. All rights reserved. doi:10.1016/S0959-6526(02)00152-X
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way, possibilities are provided for producers to treat products as capital assets by selling the function of a product, not the product itself. The area of PSS has been developing from the late 1980s. We found many examples in which traditional companies are providing service-oriented solutions to business customers through operational leasing, but they did not usually evaluate these services from environmental point of view and environmental improvement was never a goal of these services. These company actors obviously, did not perceive that they could use environmental claims in their marketing strategies to obtain competitive advantage. We have also seen rapid development and dissemination of the PSS ideas in the utility sector and among chemical industries, driven by deregulation or strict legislation respectively, where environmental improvements came as an additional benefit. The cases from other than chemical and utility sectors are still few and they do not provide sufficient amount and depth of data for a thorough analysis of environmental and economic features of PSSs. In the latter half of 1990s, a number of attempts were made to classify the documented examples of PSS [23– 26]. To broaden the scope of the examples and to contribute to the development of the PSS area, a number of projects were initiated in several European countries. There is a wide range of already finalised and on-going projects, supported by EU funding [27–30]. Based on the knowledge from these activities, some attempts were made to provide a theoretical grounding for the PSS concept [17,31] and to develop methodological approaches of ways more environmentally sound systems could be developed [16,27]. In spite of these studies, there is lack of environmental and economic data as well as clear-cut results from implementation of PSS that could be spread to other companies. Due to this, there is a general agreement that the research in the area of product service systems needs to be further facilitated [22,26,28,32–35]. One of the obvious means of fostering such expanded development is by governmental policy measures. This paper analyses the need for and potential role of legislation and other policy measures in stimulating the development and application of the PSS approach. The questions to be addressed in this article are: Do governments need to intervene to stimulate the development of the PSS concept, and if yes, how should they do that? The article is based on 22 interviews with representatives of Swedish authorities and on an e-mail survey of 20 PSS experts. The experiences from participating in three projects within the functional programme of the Swedish EPA also greatly contributed to this study. During these projects, we made an update of the state-of-theart of PSS development through an extensive literature review and telephone interviews with experts in the PSS area. Further, PSS related issues were discussed with
company representatives during a workshop in Stockholm on 25 March 2002. During internal seminars with colleagues at the IIIEE, ideas were discussed and further developed. The functional programme of the Swedish EPA is presented here as an example of how authorities can contribute to and stimulate the incorporation of the PSS concept into environmental management activities.
2. Policy measures as drivers of environmental improvement In some countries, environmental regulations play substantial roles in addressing many environmental problems. There are a number of reasons why environmental regulations are needed. Externalities are environmental impacts that are not normally accounted for in market prices, and thus company leaders do not usually consider them when they make decisions about product and system design. Therefore, society has a responsibility to design and implement policy measures, for instance, to introduce pollution charges or taxes, which can result in corporate internalisation of environmental externalities and can stimulate reduction of these costs and related negative environmental impacts through various measures. Policy measures can be appropriate to employ in efforts designed to stimulate environmental innovation. The demand for drastic reductions of environmental impacts will require completely new technologies. Regulations can be one way to stimulate ‘technological regime shift’ [36]. Environmental innovation is often not rewarded at the company level due to lack of internalisation of environmental impacts. Moreover, the positive societal spill-over effects are not the driver for companies to innovate [37]. Many companies, which are not at the forefront, lack information, knowledge, and expertise about how to improve their products and processes. They may perceive the risks involved in changing processes and practices as prohibitively high. There is thus, a role for society to improve the dissemination of information on approaches for improving products and processes to individual enterprises, and in this way stimulate environmental innovation and improvements. Further evidence is given by other authors who point to the need for governmental environmental regulations to create corporate drivers to improve environmental performance of their products [37–40]. The European project on evaluating dissemination of eco-design activities in European countries shows that eco-design is mainly employed in industries, in which end-of-life regulations are in force—electronics, packaging, and motor vehicle industries. The study suggested, ‘that (indirectly) regulations are the main driver for ecodesign activities’. A very important role for governmental environmental regulations is to ensure continuous
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improvement of environmental performance of products. This is underscored by the observation that many of the promising eco-design initiatives in Dutch SMEs ceased after governmental financial and technical support ended due to lack of a constant driver or a policy framework that would ensure continuation [41]. A number of factors complicate the shift from traditional eco-design approaches towards system design, such as the need for long-term investments, scale of organisational change, and involvement of many actors in providing system solutions (Fig. 1). Some authors stress that this complexity calls for an integrated response from governments to create conditions that stimulate environmental innovation [42]. Indeed, we found by analysing factors that stimulated companies to develop service-based system solutions, two major studies identified legislation or threat of coming regulations as an important driver fostering the development of system solutions in companies [26,34]. White and other authors show that the chemical sector have shown considerable progress towards PSS, driven by strict regulation, which led to the development of a wide range of servicised solutions, such as Chemical Management Services (CMS). CMSs have spread throughout 50–80% of the US auto industry, 35% of the US electronics industry, and 10% of the US aerospace industry [43]. These service-oriented solutions were a matter of reducing risks and liabilities, and sharing the savings from improved handling of chemical substances by specialists. Numerous examples from the chemical sector show that regulations were the primary source of this favourable development in companies [5,44]. Our analyses of drivers and barriers for companies in many sectors based on existing studies also identified legislation as the main external driver [45]. Experiences from existing product service systems show that in order to reduce life cycle environmental impacts, several stakeholders within and outside the traditional supply chain should be involved, because improvements should be made at different life cycle
Fig. 1. Key actors in the development and acceptance of product service systems.
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stages. These considerations indicate why employing a mix of tools may be necessary for reducing the life cycle environmental impacts by PSS. While there are usually a great number of actors in the supply chain, some of them are more powerful and consequently, have better chances of initiating and facilitating the change in the chain. Several studies identified key actors that can hamper or impel the development of the PSS concept, shape its structure and environmental performance. Three main groups of actors identified in a recent study are producers, consumers, and financial organisations [46]. In order to speed up the development in the PSS area, we need to understand why these actors are not yet active in employing PSS ideas, why they may resist them or why they are not currently involved in the process. Subsequently, the issue will be how to make them interested in facilitating the development of the PSS concept and in incubating successful initiatives in their own companies. During discussions with various actors, we identified a number of barriers and opportunities [47]. Our study revealed that among the most significant factors that hamper the dissemination of PSS ideas in industries are: lack of knowledge among producers about the PSS concept in general, lack of case studies that would clearly convey the business opportunities based on economic and environmental viability of the PSSbased business models, and the lack of capital investments in the area [47]. In markets where environmental costs are not internalised, companies may have problems to capitalise on these strategies, as the example of Interface Inc. illustrates [34]. The Evergreen program of Interface Inc. on carpet leasing currently makes no profit on carpet reclamation, as reclamation fee is higher than the costs of disposal. The barriers for business customers to buy servicised solutions are first of all lack of understanding of the PSS concept and the life cycle costs of the products they buy. The latter may lead to a perception that prices for provision of services are excessively high. Another important barrier identified is fear of providers gaining access to customers’ facilities and to sensitive information. The barriers for private consumers to buy servicised solutions are difficulties with accepting consumption that is not based on owning material products, lack of understanding of the PSS concept, and in particular, life cycle costs of product ownership and, as a consequence, seemingly high prices on service-oriented offers. Financial institutions were identified as an important actor, able to influence the speed of PSS dissemination in society [46]. So far, we see a lack of involvement of these institutions in the PSS area. A reason for this may be their lack of knowledge about PSS opportunities. Lack of convincing data confirming environmental superiority and financial soundness of PSSs creates a problem if one seeks to involve financial organisations.
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For them, lack of understanding is associated with risks and liabilities. In order to bring in risk or venture capital, we need thoroughly substantiated cases that show the economic viability of the new business models.
3. The possible nature of governmental policies designed to stimulate progress in PSS There is a great variety of policy measures that we can use to target these actors. Policy instruments differ in their nature (administrative, economic, and informative), but also in how specific they are—whether they are designed to create generally favourable conditions for environmental improvements in society or are designed to focus upon specific outcomes. The range of policy measures can be classified in as presented in Fig. 2. General policy measures are usually developed to address the basic societal conditions that give rise to environmental problems. By changing these, we change the rationale in which the problem occurred and create incentives for finding more optimal solutions. What are then the general policy measures that can trigger the change process and establish favourable conditions for PSS? Internalisation of environmental externalities will stimulate more environmentally preferable alternatives and may spur, justify, and reward environmental work in companies. But this measure will not necessarily steer the development towards PSSs. Internalisation of environmental costs will sift out environmentally inferior products and solutions, including PSS that do not prove to be beneficial. The better environmental
Fig. 2.
alternatives will be favoured on the market. Under these circumstances, only products and systems with superior environmental qualities will turn out to be economically viable. However, introduction of proper environmental surcharges is often not feasible, due to inadequate knowledge of the external costs, and, frequently, due to insufficient political support. Nonetheless, there are other similar general approaches, among them extended producer responsibility (EPR) programmes, that may lead to similar results and, they may eventually, favour productservice solutions by stimulating comprehensive system design changes. Strategies and instruments should not necessarily be developed to specifically target PSS. In general, we should not use specific measures directed towards PSS, if we are not certain that PSSs are the environmentally preferable solutions. In fact, we know that the environmental profiles of PSSs depend on how the systems have been designed. What is needed is the formulation of strategies and instruments making PSSs with lower environmental impacts a viable alternative to traditional ways of satisfying consumer needs. For example, a policy or strategy could aim at the optimisation of life cycle environmental impacts (Fig. 3). Different instruments and tools, such as pricing mechanisms and information dissemination, can facilitate this. There are many ways of how a life cycle optimisation can be reached. This depends on the economic and environmental feasibility, which is evaluated by companies and other decision-makers. One of the ways life cycle environmental impact can be reduced is the closed-loop strategy, for which a number of instruments exist based on the EPR principle, such laws are
Categorisation of policy principles, strategies, instruments, and tools.1
1 This classification is based on the discussion about taxonomy held at the IIIEE with Naoko Tojo and Carl Dalhammar.
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Fig. 3. An example of a hierarchy of instruments and tools designed to facilitate the development of functional arrangements [56].
designed to close the material’s loops by ensuring the creation of recycling programmes for various product groups. None of these approaches specifically addresses or promotes PSS, but PSSs could be the outcome if PSSs prove to be environmentally and economically superior to other options. However, even if we are able to establish a globally or at least a regionally level playing field by applying general measures, it may be difficult to produce desirable results due to various barriers that give rise to transaction costs: lack of knowledge, awareness and information. When using hard policy instruments such as economic and administrative measures, society should reduce transaction costs for individual companies by combining these measures with targeted policy instruments such as support for research and pilot projects in this area, collection, and subsequent dissemination of information about successful case studies. Although, it is important to continue studying existing examples of PSSs in various industrial sectors through observations and interviews with corporate leaders, it is probably of higher significance to support information dissemination about these success stories. However, the desired and real changes in companies will demand thoroughly analysed examples of deliberately deigned PSSs. Therefore, it is even more important to support projects that focus upon designing economically viable systems with positive environmental improvements incorporated throughout the entire life cycle of the PSS. The importance of involving various actors in the entire process was demonstrated in a number of projects [27,28,48,49]. Actor involvement is of vital importance because different actors should be able to find business opportunities and possibilities to profit from participating in PSS provision. They should also be encouraged to help in evaluating the economic feasibility of the designed systems.
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When involving companies and other actors into the concept development work, it is important to think about who are the relevant people in the company/organisation, whom we should involve. As actor analysis from previous research has indicated, it is top management, but also individual catalysts, who are likely to initiate the change process and be capable of overcoming the organisational inertia. While it is easy to identify top management, individual catalysts come from different departments according to these studies [46] and it is therefore, difficult to develop targeted approaches that would reach and stimulate them. Instead, broad initiatives designed to facilitate awareness raising and knowledge transfer are essential. The company people we interviewed highlight the need for nurturing service-oriented business ideas through the establishment of new business units or new companies. There are also many examples showing that the development of PSSs for companies often results in new companies being formed or in new lines of businesses within the established companies [50]. In connection to this, the interviewees stress the importance of venture capital in supporting start up companies or spinoff activities within the companies [51]. However, the current limited knowledge of the real costs and benefits translate into uncertainty about the risks that may discourage venture capitalists. Consequently, mechanisms for quantifying, understanding and sharing these risks among actors and with society at large should be developed. As we have shown above, even if we reach a level playing field, high transaction costs related to missing information can deter companies from looking for opportunities in the PSS area [51]. Therefore, authorities have a role in supporting the development of information and helping to facilitate its dissemination. An example of how authorities can aid the development in the PSS area is provided by the functional programme of the Swedish EPA.
4. The functional programme of the Swedish EPA In 2001, the Swedish EPA developed a functional programme with the goal of investigating how customer needs for special product functions can be satisfied through a more sustainable combination of products and services. In the series of short projects, this programme: 1. Analysed the international developments in the product-service system area. 2. Provided an overview of environmental impacts created by service industries and the level of environmental management in service companies. 3. Analysed environmental regulatory approaches used to foster environmentally sound products.
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4. Evaluated functional sales from economic, environmental, and technical point of view in three manufacturing companies in Sweden. 5. Sponsored a workshop entitled, ‘Functional thinking—a strategy for dematerialisation or ‘just’ for good business?’ 6. Developed a framework project that compiled experiences from the aforementioned projects and concluded the functional program.
These projects were initiated and financed by the Swedish EPA and were conducted by the International Institute for Industrial Environmental Economics at Lund University (IIIEE) [1–3,6] and by the Royal Institute of Technology [4,5]. The different projects had various starting points and approaches, which contributed to a more comprehensive picture of functional thinking and of PSS in the society and in companies. After the first four projects were conducted, the Royal Institute of Technology and the Swedish EPA arranged a workshop, at which the findings were presented and discussed with representatives of businesses, authorities, and academia. The final project brought together the experiences and the results of the four projects and the workshop. A brief description of the various projects and their results are presented below.
4.1. Analysis of the international developments in the product-service system area
The main goal of this study was to investigate the contribution of functional sales and PSS to functional thinking and to the development of a function-based society, and to foresee the role of IPP in stimulating the incorporation of functional thinking in future policy developments. An extensive literature review of the PSS area was conducted during this study. The literature review was substantiated by an e-mail survey of experts working in the area. Based on these data, the researchers analysed the circumstances under which the transition to a function-based society may be feasible and discussed the contribution of functional arrangements and product service systems in this shift. It discussed the conditions under which product service systems may stimulate competitiveness of enterprises. It also provided an overview of policy principles, strategies, instruments, and tools that can indirectly stimulate adaptation and dissemination of environmentally sound product service systems and functional arrangements. The study devoted particular attention to discussing the potential role of functional thinking and PSS in IPP [52].
4.2. Overview of environmental impacts created by service industries and the level of environmental management in service companies The goal of this study was to clarify the concept of service, to provide an overview of service industries and to ascertain the environmental impacts related to them, and to identify approaches to environmental management used by service companies to improve their environmental performance. The study identified the most important environmental impacts of service industries, which typically originate from use of infrastructure and buildings, personal and goods transport, land use and from the use of material products and product flows. The study also identified 52 different approaches currently used by service companies to reduce environmental impacts, ranging from environmental management systems to ethical investments. The most often used approaches were found to be: environmental education, waste minimisation, EMS, green purchasing, and environmental reporting. The study further identified driving forces that stimulate service industries to address environmental impacts. It found that many service companies did not perceive the environmental impacts from the use of infrastructure and land use as worth addressing. The study concluded that service companies have a great potential and many possibilities for improving their environmental performance [53]. It should be mentioned that the study focussed on services from a broader perspective than PSS, and only a minor part addressed PSSspecific questions. 4.3. Analysis of environmental regulatory approaches used to foster environmentally sound products The goal of this study was to evaluate how legislation can be used to improve environmental performance of products from a life cycle perspective and how it can work together with other instruments and tools of environmental management and policy. The study identified a number of studies that showed the need for more stringent legislation that can have a stimulating role on continuous improvement of environmental performance of products, can compensate for lack of environmental demands from consumers and may balance the difficulties with introducing a wider use of economic instruments. However, the study also showed some limitations of the current legislative approach, for instance lack of life cycle thinking. It was recommended that legislation might facilitate improvements of some life cycle stages through specific requirements for product-related information and even for service-related performance. The study highlighted that product-related environmental information might improve environmental awareness of many actors in society, not only awareness of producers [54]. Similar to the previous study, this study only discussed PSS-specific issues to a very limited extent.
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4.4. Evaluation of functional sales from economic, environmental, and technical point of view in three manufacturing companies in Sweden This project investigated whether functional sales are employed in business-to-business relations as a strategy to reduce environmental performance of companies and their products by analysing three Swedish companies. The study results revealed that functional sales are driven primarily by economic reasons and environmental benefits are considered only as a bonus. An important driving force for companies to employ functional sales was the possibility to establish closer and long-lasting relationships with business customers, for whom functional sales mean risk reduction and increase of flexibility. The study also identified economic, organisational, and customer-related barriers to functional sales. The study suggested that functional sales had little effect on product design, because the design of products and services (sales, after-sale services, etc.) is performed by different departments in companies. Besides, it was shown that functional sales rarely stimulated reuse and recycling because the producer seldom continued to ‘own’ products after a leasing or renting period, but instead sold products to customers in a traditional way. The project showed that companies employ a range of methods for designing more environmentally appropriate products and for evaluating their environmental profiles, but very few methods were used for service development [55]. 4.5. Workshop ‘Functional thinking—a strategy for dematerialisation or ‘just’ for good business?’ The workshop was organised as a part of the functional programme in order to present the findings of the aforementioned studies and to discuss them with more than 70 representatives of businesses, authorities, academia, and consultancies. During the discussions, participants stressed that financial and informational incentives to consider functional solutions should exist for private and business customers and for governmental purchasers. It was emphasised that life cycle costs of products and solutions need to be carefully calculated and presented to customers in a transparent manner, so that the purchasing decision can be based on product life cycle cost, and not only on the initial investment. In this respect, SMEs pointed out that they often lack adequate information about life cycle costs. Business representatives stated that it is an overwhelming task for many companies to devise a PSS and therefore, partnerships and alliances were vital. Moreover, it was pointed out that detailed examples of PSSs must be available and information about them should be disseminated. Besides, companies would prefer to have some guidance for PSS develop-
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ment, based on existing successful cases. It was emphasised that different prerequisites exist for business-tobusiness (B2B) and business-to-customer (B2C) arrangements and consequently different systems have to be developed for different types of customers, so that their values and needs can be satisfied in the best way possible. 4.6. A framework project that compiled experiences from the aforementioned projects and concluded the functional program The goal of the final project was to bring together the experiences and the results of the four projects and the workshop into a proposal for how consumer needs for specific functions can be met through a more sustainable combination of goods and services. The study discussed the situation in business-to-business and business-to-customer areas and showed that there is an extensive lack of detailed case studies that provide enough data for rigorous environmental and economic evaluation. The study of three Swedish companies confirmed barriers and drivers that were identified in previous projects and in the literature. The study also analysed the main players in functional sales and PSS: producers, consumers, and the financial sector. Besides these stakeholders, it discussed the role of authorities in stimulating development in PSS area and the role of various tools that can be employed for that task. It emphasised that a great variety of soft and legislative measures that are used to stimulate environmental action were identified in the studies of the functional programme and stressed the need to study and to promote combinations of and interplay among these measures.
5. The value of the functional programme Some important lessons can be learned from the functional programme. The first ones relate to the conclusions of the programme. The PSS concept has proven to be interesting for many companies and is especially promising for companies in mature industries. There are, however, important obstacles that need to be taken into consideration by companies that wish to engage in developing and providing service-oriented solutions. One of the problems is that services can also be environmentally problematic, and therefore, special attention should be given to design less environmentally damaging services. Although, having certain business and environmental potential, current examples and cases of PSSs often lack sufficient evidence about their environmental superiority as compared to traditional business models. There is also a lack of design guidance on how to develop systems that are environmentally sound. A clear need for support from authorities in pursuing the
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development of PSS was identified and the role of regulatory measures was stressed as one of the main triggers for companies to initiate activities for reducing environmental impacts from products and services. The functional programme of the Swedish EPA can be used to learn how a government can support PSS development by increasing knowledge, and disseminating experiences. The programme deepened the knowledge about PSS and related issues, and brought the PSS concept to a broader audience within Swedish society. The first goal of the functional programme was to obtain a more comprehensive perspective on functional thinking and PSS, and to further develop it in relation to the political goals of the Swedish Government in its IPP work. All studies of the programme directly contributed to fulfilling this goal. The first one provided insights into the state of the art of functional thinking at the international arena and a brief analysis of existing policy instruments that can implicitly support functional sales and PSS, including comments on IPP. The second one discussed functional thinking in relation to service industries. The third study discussed the role of legislation in improving the environmental performance of products from a life cycle perspective. The fourth study identified drivers, barriers, and benefits for companies to involve in functional sales. The second goal of the functional programme was to investigate how needs for special functions can be satisfied through a more sustainable combination of products and services. This question was discussed from a more theoretical perspective in the first study [52], and from a more business-oriented perspective in the fourth study [55] as well as during the workshop. The functional programme was also designed to investigate the environmental potential of the functional sales and PSSs. However, due to budget and time limitations, none of the studies was able to collect and provide convincing primary data. In order to conduct a comprehensive analysis of the environmental and economic potential of functional arrangements or of PSSs, sufficient financial and technical support should be given to longterm projects with clear goals. The functional programme clearly proved to be an important contribution to the awareness and knowledge level in the Swedish society. Important experiences were collected and analysed, and subsequently provided to a broad Swedish audience through the workshop and publications. However, the Programme was a limited effort and important tasks remain for the Swedish society and the Swedish authorities.
We identified insufficient dissemination of information about successful PSS cases to other companies, with the exception of chemical and utility companies, as a major concern. Based upon this, it was concluded that there is an urgent need for sound information and for it to be widely and effectively disseminated. It was also concluded that governments have an important role to help ensure that these facets are accomplished. This may be partially accomplished through policy support, since regulatory policies were found to be primary drivers of environmental innovations in many studies. We have analysed what types of measures would be beneficial for stimulating true progress in this area and have concluded that policy measures such as economic and administrative instruments should be employed for addressing overall deficiencies of present market system, but must be combined with targeted informative policy measures. The more general measures, such as for example, internalisation of externalities, taxes, and EPR programmes will help to sift out environmentally inferior solutions, leaving economically viable and environmentally sound PSSs on the market. More directly targeted measures will include governmental support to research and dissemination of knowledge about the PSS approach, as well as facilitation of demonstration and pilot projects in new areas through direct R&D support and risk sharing with financial institutions. In order to further utilise and build on the results of the Swedish EPA functional programme, a long-term integrated research programme on PSS should be developed. It could strive to further develop the PSS approach theoretically, methodologically, and, in particular, operationally. This research programme should be sufficiently long-term and extensive to support the development of new business models based on PSS. It could be required to devise actual support programmes for studies designed to collect and analyse data and to provide clear answers about the conditions or with what designs PSS can be more environmentally preferable than traditional business models. Within the framework of a functional programme, the Swedish Government can establish various subsidy schemes to encourage companies to participate in research projects that are needed to create the extensive knowledge base. Feasibility studies require support as well. An important area for authorities to explore and influence would also be to find strategies that can help in identifying and overcoming barriers for attracting venture capital investors, to support promising, but currently difficult to appreciate PSS innovations.
Acknowledgements 6. Concluding remarks In this article, we provided a brief overview of the ‘state-of-the-art’ in the area of product service systems.
The paper builds on experiences and knowledge gained during a number of studies, which were technically and financially supported by the Swedish EPA, the
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Swedish National Board for Industrial and Technical Development (NUTEK), and Nordic Council of Ministers. We are grateful to these organisations for provided support, for publishing reports and for dissemination of results of these studies to a broader audience. We would like to thank all people who provided valuable information and insights to this paper. We would specifically like to thank our colleagues Andrius Plepys and Carl Dalhammar for reading the drafts of this paper, and for providing useful comments and recommendations. The studies this paper is based on were discussed with colleagues at the IIIEE: Naoko Tojo, Ma˚ rten Karlsson, Carl Dalhammar, Andrius Plepys, and Nicholas Jackobsson, and we would like to thank them for very stimulating brainstorming sessions, which greatly contributed to these studies.
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