THE INTERNET AS A SERVICE DELIVERY CHANNEL FOR INDUSTRIAL FIRMS: A CASE STUDY

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1 THE INTERNET AS A SERVICE DELIVERY CHANNEL FOR INDUSTRIAL FIRMS: A CASE STUDY Janneke von Wendt-Eccles Swedish School of Economics and Business Administration Track: Market Orientation and Relationship Marketing Keywords: Business-to-business, Internet, service orientation Abstract Manufacturers increasingly augment their product offering with services in order to differentiate their products, meet customer demands and benefit financially. Consequently, manufacturing firms are increasingly pursuing a service oriented business strategy. In recent years, Internet enabled information technology (IIT) has, fundamentally changed firms capabilities to create, develop, provide and distribute services to customers. Service-orientated strategy and in particular, the role of IIT in facilitating service-oriented strategy has however, received little attention in academic literature. This paper explores therefore, how IIT facilitates a service-orientated strategy and examines the effect of services based on IIT on customer relationships. To examine these important areas an exploratory study of a heavy machinery manufacturer was conducted. The study indicates that IIT is perceived as an important tool facilitating service oriented strategy enabling efficiency and effectives gains. Furthermore, services based on IIT contribute to increased transparency and integration between suppliers and customers, indicating a high level of service orientation. Nonetheless, traditional service delivery channels remain important in developing social bonds between individuals in the organisation. Introduction Manufacturers increasingly augment their product offering with services and in some cases, the major source of revenue actually derives from services (Mathieu 2001a). Serviceorientated strategy has been stimulated by manufacturers aim to differentiate themselves from competitors and thus, gain a competitive advantage (Homburg et al. 2002, Mathieu 2001a). In recent years, Internet enabled information technology (IIT) has however, fundamentally changed firms capabilities to create, develop, provide and distribute services to customers. Since industrial services are information and knowledge intensive IIT has the potential to be both an efficient and effective service delivery channel for manufacturing firms (Easton & Araujo 2001). Already in the U.K and US, knowledge intensive b-2-b services constitute 30% of the value addition in the service sector, adding up to a significant market share (Bettencourt et al. 2002). Nonetheless, there appears to be a gap in literature examining IIT role in facilitating service orientation from a strategic perspective. In particular, focusing on manufacturers augmenting products with services as opposed to, firms providing services as a core offering in business markets. The aim of this paper is thus; to explore how IIT facilitates a service orientated strategy in an industrial firm. In addition, insight will be gained on how services based on IIT affect customer relationships. This paper has four parts. First, literature on service orientated strategy and its effect on relationships is reviewed along with an overview of IIT as a service delivery channel. Then, the case study research approach is briefly discussed. Next, the findings are presented and Market Orientation and Relationship Marketing Track 1101

2 discussed examining a heavy machinery manufacturer s IIT based services. Finally, some implications are presented along with limitations and suggestions for further research. Conceptual Background According to Homburg et al (2002) service orientation can be conceptualised on two levels. Service orientation can thus, be examined on an individual level or on an organizational level, where the latter can further be examined from two perspectives, namely those of internal organisational parameters and external business strategy. This study is focused on the more externally directed business strategy. However, what is the rationale behind a service orientated strategy? A review of literature indicates that the underlying argument is threefold (Agnihothri et al. 2002, Boyt & Harvey 1997, Frambach et al. 1997, Mathieu 2001a and 2001b, Oliva & Kallenberg 2003). Firstly, a service strategy supporting the core activities of a manufacturing firm can be a source of competitive advantage, creating value to both customers and supplier (see for example Anderson & Narus 1997, Bolton et al. 2003, Boyt & Harvey 1997, Burger & Cann 1995, Mathieu 2001a). Secondly, an efficient service strategy is argued to provide financial benefits, in the form of increased revenues through enhanced customer loyalty (Berry 1995, Kumar 1999, Mathieu 2001a). Finally, manufacturing firms need to develop an effective service strategy to meet the growing service demands of customers (Mathieu 2001a, Oliva & Kallenberg 2003). Industrial firms must therefore, provide services in order to create, maintain and develop long lasting relationships with their customers (Mathieu 2001b, pp.452). Homburg et al. (2002) argue that a service oriented business strategy, in the retailing context, can be defined along three dimensions namely those of, the number of services, the broadness of the services and emphasis placed on the service offering. In business markets the number of services offered may be an oversimplified measure of service orientation. It offers an indication of orientation but it does not however, capture important information of the nature, content, scope and intensity of services provided. Mathieu (2001a & 2001b) has investigated service strategies in the manufacturing sector and in particular, transformation from a product to service orientated business strategy. The author argues that two dimensions, service specificity and organisational intensity can be used to describe manufacturing firms service strategies. Service specificity refers to the nature of the offering and the content of the service manoeuvre. Specifically, with increased service specificity, the quality of interaction between the stakeholders increases along a continuum. Organisational intensity on the other hand, refers to the scope and intensity (Mathieu 2001a, pp.453) of the effect of the service, on the manufacturing firm. Thus, the greater the service specificity and organisational intensity of a service, then the higher the financial, strategic and marketing benefits. Nonetheless, these benefits are to some extent offset with the increasing strategic and political costs of service developments (Mathieu 2001a). Organisational intensity and service specificity may therefore, be important dimensions describing service oriented business strategy in business markets, in addition to the number of services offered. The broadness of services offered has also been identified as a dimension of the service orientation of a business strategy (Homburg et al 2002). Again, however the measure of to whom and to how many customers the service is offered may be insufficient to measure service orientation in business markets. It is thus, proposed that broadness should include integration and interdependence between the service supplier and customer. Hence, the more ANZMAC 2003 Conference Proceedings Adelaide 1-3 December

3 extensive the integration of operations between the supplier and customer, the more service orientated the strategy becomes (Oliva & Kallenberg 2003). Finally, the emphasis placed on services can be used as a dimension of service orientated strategy. In Homburg et al s. (2002) framework emphasis is primarily concerned with how actively services are offered to customers. In the manufacturing sector, service orientation can also be gauged based on the perception of its importance in the firm, and the emphasis placed on it in the firm s business strategy. Consequently, it can be said that when all the dimensions are high, then the firms strategy is highly service-orientated. IIT solutions and markets are highly differentiated but may be categorised on the basis of whether they take a relational or competitive form in the market (Easton & Araujo 2002). The focus in this paper is on relational Internet technology, since the theoretical framework of this paper is based on the relationship marketing perspective. As previously mentioned, there are a number of services that are very information and knowledge intensive in manufacturing industries that have been primarily delivered to customers in person, through mail, phone and manuals to mention a few. IIT has however; created a very efficient and effective channel for development and delivery of services. Development opportunities can be found throughout organisations, as IIT cuts through all chains of activities in the exchange process between customers and suppliers, including information gathering, supplier/customer contacts, negotiation, fulfilment and post sales processes (Archer & Yuan 2000, Gebauer & Scharl 1999). Furthermore, IIT may produce significant benefits to industrial firms through cost reduction, efficiency and effectiveness gains. Hence, it is an effective channel for service delivery with the potential to improve the quality and range of services provided (Easton & Araujo 2002). Additionally, IIT may improve the effectiveness of the service through utilisation of resources in a new and enhanced manner. In particular, customisation and relationship specific tailoring is possible in a more systematic, replicable and cost-effective manner, than through traditional channels (Araujo & Easton 2002, pp. 16). Indeed, standardised service offerings often fail to meet complex customer needs in heterogeneous industrial markets necessitating that services should be customised for each relationship (Anderson & Narus 1997, Burger & Cann 1995). The Research Approach The study is exploratory in nature, as limited empirical research exits on IIT effect on relationships and its role in service development in business markets. Hence, to provide rich in depth data a qualitative case study approach was decided on. A global company in the heavy machinery manufacturing industry was selected for the case study, as it recently introduced an Internet enabled service channel for its customers. Several sources of data were used whilst the primary source was in depth interviews. All the decision-makers of the focal company pertaining to the Internet enabled solution were interviewed in three semi-structured in-depth interviews in June-July In the interviews the introduction of IIT was viewed as a critical incident that the respondents reflected back to. Further material was provided through seminars, s, brochures, internal company memos and web pages. This research focused on services provided over the Internet after the sale, in other words, the post sales process. Post sales services were selected because the post sales process is equated most closely to service and relationship development and maintenance (Ford 2002). Market Orientation and Relationship Marketing Track 1103

4 Discussion The case firm aims to the set the standard in the industry for delivering services using IIT in terms of standardising technology, information and service blueprints. The firm has the opportunity to improve its position in the network and use its first mover advantage to develop a unique service offering and develop a new source of competitive advantage (Mathieu 2001a). The IIT service solution at the case firm consists of a spare part and service portal. The spare part portal provides customers with a mediated access to the focal companies suppliers. The service platform on the other hand, has a modular architecture where the customer specifies which modules to include in the service package. The services range from basic services such as, spare parts and consumables services and, document hotels to highly sophisticated services such as remote diagnostics and repair. The number of services offered is extensive and, the majority of services could not be offered in such an effective manner without IIT. These services include, remote diagnostics and project management. All customers are offered access to the portals but the firm maintains a multi channel approach allowing customers to choose the preferred channel. The primary barrier to using the channel is lacking technology readiness or willingness from the customer side. Nonetheless, all the largest customers use the channel and the case firms aims to actively move customers to the IIT channel indicating a high broadness of services. At the case firm Internet enabled services are perceived from a processual rather than product oriented perspective thus, indicating a high service orientation (Oliva & Kallenberg 2003). This perception is highlighted by the following statement: after sale service is more case based. We look at the whole process together and think a little bit further, what s going to happen after, a 5 year period, a 10 year period. we take care of the whole process lifetime. Notwithstanding, this service-orientated perspective cannot be attributed to the new service channel alone, but reflects a change in overall strategic orientation of the firm. The change to service orientation is perceived as a strategic decision implemented across all channels but where the Internet is seen as the most efficient tool for operationalising the strategy. IIT is thus, seen as a facilitator of this process. A comment representative of this view: we are getting more service contracts which means that our service activity is growing proportionally more than our capital and project sales, which is our intention. We get more contact with the customer organisation because we have these new electronic tools. Strategically, we get closer to the customer in the service phase. It is thus, the perception at the case firm that by becoming more service orientated, the firm also deepens its relationships with its customer, lending further support to the relationship and process focus of service orientated firms (Oliva & Kallenberg 2003). Mathieu (2001b) argues the importance of top management support for service oriented strategy implementation. One respondent implicitly states this perspective: The initiative for the e-business solution came from the top management of the firm. We also underline heavily the life cycle support of our customers now on a corporate level and the different e-tools are the key vehicles of providing the service. The development of the IIT-services is seen as a corporate strategy, indicating that the aim is to serve customers better which is an antecedent to succeeding in electronic markets (Grewal et al. 2001). Furthermore, top management support reflects on the emphasis on service strategy orientation indicating that it is high at the case company. ANZMAC 2003 Conference Proceedings Adelaide 1-3 December

5 In order to develop and implement an effective service offering manufacturing firms needs to have an understanding of the customers client base, business processes and operating procedures (Bettencourt et al. 2002). Through the facilitation of IIT the supply chain becomes a tightly integrated network consisting of suppliers and customers competing against other networks of suppliers and customers (Youngdahl & Loomba 2000). This implies that firms must increasingly divulge information about their operations, procedures and processes (Easton & Araujo 2002). It could thus, be argued that the relationship deepens as trust increases with greater information and knowledge exchange (Ford 2002). At the same time, there is a greater degree of integration between the firms, as the supplier assumes some of the responsibility of the production facilitating a service strategy orientation (Oliva & Kallenberg 2003). At the case firm this transformation is described as follows: our service identifies a problem before it happens and reacts before it eventuated. The customer has the dilemma of how much of their information they want to show us. This increased transparency between the firms and integration of operations also implies that firms are more dependent on each other. Furthermore, the manufacturing firm may lock in the client and thereby, enhance their own power position. A key strength of IIT is the ability to effectively customise service offerings to individual customers. In business markets customisation can be even more targeted as relationships are longer and customers are fewer. Indeed, since the actual products are highly customised so are the service requirements of the customers. Rarely do two customers have the same requirements in the market. This requires flexibility and customisation or modularisation of the service offering (Anderson & Naurus 1995). The Internet has provided such a tool for the case firm it is a flexible tool where you can scale it from 1 or 2 services to 30 service modules. Although flexibility is of importance in managing the quality of the service, it has also been argued that industrial service providers need to systemise the quality of the service in order to develop a relationship based on trust (Gounaris & Venetis 2002). At the case company, it was perceived that systemisation using IIT was possible to a greater extent than through other channels. One comment in particular highlights this view: we had many-many channels before. Now we have one channel and every service looks the same, with one corporate look. Consequently, rather than providing truly customised service over the Internet, it provides modularised service where the customer can specify their needs. Instead, true customisation is conducted over traditional channels. Services provided using IIT can provide a number of benefits to suppliers and customers in the form of reach, ease, accuracy, timeliness, efficiency and effectiveness to mention a few (Easton and Araujo 2001). Nonetheless, social bonds are important in developing relationships, which may diminish as a result of automation of service process and the impersonal nature of the channel compared with face-to-face meetings. There is contradicting evidence on the impact of moving communication and interaction on the Internet on social bonds and thus, relationships (Bolton et al. 2003, Leek et al. 2002). The case study however, lent support to Bolton et al. s (2002) findings that automation and Internet enabled services did not reduce the amount of communication and interaction but instead increased the total. A comment representative of this view: it s very important that we still meet the customer face to face. But if you are using the e-channel in the right way, relationships with customers are getting easier and better and you don t have to be worried all the time about technical details and other details. Thus, the quality of relationships appears to improve with enhanced and improved social interaction as the service is provided electronically, while resources in face-to-face meetings are reserved for building social bonds between individuals in the organisation. IIT is inherently rigid and cannot therefore, replace social interaction (Araujo & Easton in press). Instead, it may be perceived as a tool supplementing personal interaction. Market Orientation and Relationship Marketing Track 1105

6 Consequently, IIT has the potential to both increase service specificity in an organisation through customisation, and organisational intensity, through new uses of existing resources. In essence, IIT not only allows firms to streamline processes, but it also facilitates innovativeness in developing services with new forms and functions. Implications, Limitations and Further Research Industrial firms increasingly need to develop a service-oriented strategy to support their core product. The case study provided some insight into how the Internet may contribute to service oriented strategy and its implementation. The decision to transform from a product to service orientation is strategic in nature, where technology is perceived as an important tool for facilitating this process enabling efficiency and effectives gains. Thus, in order for a transformation to eventuate, the decision has to be made at the top management level both with regard to service orientated strategy and IIT. IIT contributes to increased transparency and integration between suppliers and customers whereby a supplier can assume some of the risk and responsibility of the customer s production. However, from a strategic point of view firms need to evaluate to what extent a supplier should have insight into the operations, processes and procedures of the firm. Thus, it is of importance to reach a balance between the extent of transparency, integration and integrity. Moreover, electronically enabled services provide ample opportunities for customisation. Nonetheless, in order to meet the needs for systemisation, modularisation may be a more efficient option. In summary, IIT facilitates service-oriented strategy by increasing service specificity, organisational intensity, broadness and emphasis. In conclusion, in this case study Internet based services facilitated the transformation of the firm from a product to service orientated firm. Nonetheless, the actual decision is a strategic one where electronic services play a facilitating role. Traditional service delivery channels remain important but may be serving a different function in particular, in developing social bonds between individuals in the organisations. Due to the small sample, caution should be exercised when making generalisations about the implications drawn. Furthermore, each individual Internet enabled service initiative should be evaluated in the context of its business environment. Further research should be conducted across industries and from a dyadic perspective on how the Internet facilitates the transformation from product to service orientation and its impact on business relationships. Notably, the study is restricted to services provided over extranets while auction type marketplaces are excluded from the analysis. In addition, the study is limited to a business-tobusiness environment. ANZMAC 2003 Conference Proceedings Adelaide 1-3 December

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