FROM A GOODS-DOMINANT TO A SERVICE-DOMINANT BUSINESS MODEL: CASE SERVICE CONSTRUCTION. henri.hietala@tkk.fi, minni.sarkka@tkk.fi

FROM A GOODS-DOMINANT TO A SERVICE-DOMINANT BUSINESS MODEL: CASE SERVICE CONSTRUCTION Henri Hietala a, Minni Särkkä b, Anni Rouvinen c and Jussi Aho d ab Aalto University, School of Science and Technology, Finland henri.hietala@tkk.fi, minni.sarkka@tkk.fi cd Fira Oy, Finland, anni.rouvinen@fira.fi, jussi.aho@fira.fi ABSTRACT The purpose of this paper is to explore the concept of business model as a tool in translating a service-dominant mindset from theory to practice. The topic is approached through literature and an in-depth case study in order to narrate the evolution of the case company from a traditional goods-dominant construction company to a service construction company. Research findings suggest that the concept of business model has potential to facilitate translating a service-dominant mindset from theory into managerial practice and could therefore be a useful concept in the further development of service-dominant logic. INTRODUCTION Industrial manufacturers have recently begun to emphasize developing services in addition to their product offering as a way of securing longterm growth and competitiveness (Jacob and Ulaga 2008). This transition from products to services has also become a keen area of interest in research where the introduction of service-dominant (S-D) logic (Vargo and Lusch 2004) and the following debate has further increased this interest (Jacob and Ulaga 2008). According to S-D logic, there are two mindsets from which the transition from products to services, or service, can be considered and motivated (Vargo and Lusch 2008a). The first is referred to as goods-dominant (G-D) logic where services are viewed in terms of intangible goods and where making the goods to services transition would require modifying production and distribution practices to deal with the differences between tangible goods and intangible services (Vargo and Lusch 2008a). The second is referred to as S-D logic where service, a process of using ones resources for the benefit of another party, is considered as the fundamental purpose of economic exchange (Vargo and Lusch 2008a). Despite the vast interest S-D logic has accumulated, relatively little attention has been dedicated to the empirical examination or elaboration of S-D logic (Winklhofer, Palmer and Brodie 2007) even though its further growth, development, and implementation would benefit from it (Gummesson et al. 2010). A case in point is the transition from G-D logic to S-D logic. Although the issue has been

discussed with detail on a conceptual level (Vargo and Lusch 2008b), empirical evidence of how this transition is achieved and what its potential implications for businesses are is still scarce. The purpose of this paper is to explore the concept of business model as a tool in translating a service-dominant mindset from theory to practice. The paper approaches S-D logic as a strategic perspective (Mintzberg 1987) to value creation which is translated into the service processes of an organization through its business model. The paper is structured as follows. The first section of the paper builds the theoretical foundation by integrating S-D logic and business model research. The second and third sections present the methodology and case study. Finally, the fourth section discusses our research findings and implications for practice. BUSINESS MODELS IN OPERATIONALIZING S-D LOGIC S-D logic has achieved a considerable amount of interest in the international research community (Gummeson et al. 2010). It is presented as a mindset for a unified understanding of the purpose and nature of organizations, markets and society which provides a service-based foundation centered on service-driven principles (Vargo and Lusch 2008a). The foundation of S-D logic has been summarized into ten foundational premises (Vargo and Lusch 2008a) of which four have recently been highlighted as core premises in S-D logic presentations held by Vargo. These core premises state that service is the fundamental basis of exchange, the customer is always a co-creator of value, all economic and social actors are resource integrators and that value is always uniquely and phenomenological determined by the beneficiary (Vargo and Lusch 2008a). Central to S-D logic is seeing service as a process of resource integration between networked economic and social actors through which value propositions can be co-produced and value can be co-created. S-D logic can be contrasted against goods-dominant (G-D) logic where the purpose of economic activity is seen as making and distributing units of output (services or goods) which are embedded with value during manufacturing as opposed to S-D logic which views service as the primary focus of economic activity (Lusch et al. 2007; Vargo and Lusch 2008b). With this shift in how economic activity, or economic exchange, is viewed come commensurate shifts in how resources, value and value creation are perceived (Lusch et al. 2007; Vargo and Lusch 2008b). In other words, a transition from G-D logic to S-D logic changes the lens through which companies view themselves and the environment they operate in. Prahalad (2004) has argued that companies may be presented with new entrepreneurial opportunities as they abandon old dominant logics. This should apply to abandoning G-D logic and adopting

S-D logic as well which from the firm s perspective we perceive as knowingly adopting a new strategic perspective (Mintzberg 1987) to value creation, a service-dominant strategy. In this view S-D logic provides the lens for a renewed strategy and strategy itself is understood as the art of creating value (Normann and Ramirez 1993). In previous literature applying a service perspective has been acknowledged as a critical factor in staying competitive (Grönroos 2007), therefore, choosing to adopt an S-D strategy to compete through service (Lusch et al. 2007) may have potential benefits for firms. However, before these potential benefits can be realized the S-D strategy must be implemented or operationalized i.e. translated into practice. Sweeney (2007) has emphasized the importance of developing an operational definition and associated measures for understanding how and to what extent organizations practice S-D logic. However, if we adopt S-D logic as a paradigm for how economic activity is viewed then we argue all firm activities function based on S-D logic. These functions are in many cases merely viewed from a G-D logic perspective which as the old dominant logic may restrict being able to see some of the possibilities for value creation (Prahalad 2004). We argue, that what in this view becomes critical is to what extent the firm has acknowledged and knowingly adopted the possibilities of S-D logic as a strategic perspective and then implemented it into its service processes. We propose that facilitating this implementation process can be done by utilizing the concept of business model for translating a strategy into a business model blueprint which then can be implemented into the actual activities of the firm (Osterwalder 2004). Therefore, business models can be viewed as concepts positioned below strategy through which major strategic decisions made by the firm can be explicated (Storbacka and Nenonen 2010). Although the concept of business model has become one of the most commonly used concepts in managerial practice, mainstream academic journals rarely put the concept center stage (Baden-Fuller and Morgan 2010). Its theoretical undermining (Patelli and Giaglis 2004) can at least partially be attributed to the ambiguity of the concept s definition for which numerous scholars have proposed different variations but no commonly agreed definition or agreement on what the components of a business model are has been established (Storbacka and Nenonen 2010). However, despite these differences many similarities exist, which Storbacka and Nenonen (2010) have recently analyzed. Their findings showed that the majority of business model definitions explain how the firm creates value for its customers and how the firm captures a part of this so as to yield a profit from its operations. They found that a key component in many definitions concerning customer value creation was

the value proposition. Their review also showed that capturing value was often connected to components like profits or revenues, making revenue streams and the cost structure key elements of the business model which we refer to as finance. In addition the value network of the firm was also present in many business model definitions meaning the business model construct should also be externally oriented and illuminate the relationships that the firm has with the various actors in its value network or ecosystem. Finally Storbacka and Nenonen (2010) found that the various business model definitions also discuss the resources and capabilities of a firm with terms such as core competency, resources, assets, processes or activities. Therefore, the business model should also illustrate the resource and capability base of the firm. Figure 1 illustrates the theoretical framework of this paper in which we focus on the components within the business model layer (adapted from Osterwalder (2004)). Figure 1: Theoretical framework of the paper This paper approaches business models as conceptual tools that serve as recipes (Baden-Fuller and Morgan 2010) for value creation. These blueprints can be utilized for translating the strategic choices related to a service-dominant mindset, or strategy, into practice i.e. to the service processes of a firm. METHODOLOGY The research approach used in this study is case research (Yin 1994) which is used to provide a description (Eisenhardt 1989) of the case company s transition from G-D logic to S-D logic. We selected the case

methodology as it provides the opportunity to obtain deep understanding of a research topic that is indistinct in many respects (Eisenhardt 1989). Our case application is mainly descriptive, but it also includes explanatory analysis based on the case narrative. Since the phenomenon is multifaceted and distinct boundaries are difficult to establish, a qualitative approach is most appropriate (Hirsjärvi, Remes and Sajavaara 1997). As Hirsjärvi, Remes and Sajavaara (1997) mention, the aim of qualitative research is to study a subject as comprehensively as possible is spite of the fact that reality may be miscellaneous. Thus, the case approach is the best alternative despite its weaknesses in relation to generalizalibility (Eisenhardt and Graebner 2007). In the focal study, the validity or rightness (Miles and Hubermann 1994) of the research findings rest on the case narrative, and thus on how accurate it is in describing the reality of the case. Two of the authors have actively been a part of the everyday life of the case company since 2009 as the company s CEO and Business development manager. They are members of the development team and in addition to collecting, reporting and documenting existing research they also had a key role in implementing theory in practice. They also took a role in measuring the successfulness of the changes that were implemented in the company through semi-structured interviews with customers, partners and employees. The two other authors were introduced to the case in 2010 in order to take an outside role in reporting the case narrative. The two outside researchers reviewed existing documentation and reports as well as conducted open discussions and interviews with the CEO, business development manager and the CTO of the case company. The goal of the two outside researchers was to report the stories told by the informants within the company through the case narrative. In addition the role of the outside researchers was to describe and reflect on the iterative evolutionary relationship between literature and practice that took place in the case narrative. As a result the case narrative was formed through several phases of writing, commenting and discussions formulated by the two outside researchers. CASE SERVICE CONSTRUCTION Founded in 2002, Fira Oy is a middle-sized construction firm based in Finland. The construction services Fira initially offered were very similar to those offered by its competitors. Pricing and delivery were based on competitive bidding which meant price was the main source of competitive advantage. This price competition has been attributed as the main reason for the company s and the whole industry s nonexistent productivity improvements. Construction services were initially executed in a similar manner to competitors through competitive biddings which left little room for differentiation. The basis of competition forced companies to focus on offering services at the cheapest possible price. The

construction sector in general, including Fira, was also viewed to be an engineering-led field where investments in research and development were scarce. The notion of construction as a service was foreign and instead a G-D logic view to services prevailed with services like maintenance being viewed as enhancements to main product offerings. Fira s CEO, CTO and Business development manager were interviewed about the company s operations between the years 2002-2009 during which they described the company as having operated according to the norms of the construction industry which is traditionally based on project management. However, the different actors e.g. architects, designers, consultants, and construction contractor each work in specific phases of the project with little interaction with the customer or each other. Fira s CEO felt that in the traditional way of building there was often no one to assume enough responsibility in ensuring that the specific business needs of the customer were met, which often led to costly changes in the construction phase. Fira s CTO described that the changes in the customer s business environment or end users operative requirements during the design and construction phases were rarely integrated into the ongoing building process, because neither the customer nor the endusers were really a part of the development process. As a result usability was often disappointing and the construction itself caused unpredictable operational costs for the customer. The CEO summarized that the realizations of the problems within their business, the looming recession and decreasing volumes led to the decision that the way they conducted business had to change somehow. Fira s CEO described what kinds of phases the company went through after the realization of a need for change took place. In 2008 Fira s CEO spent six months as a visiting scholar in the USA researching service business. He had previously been the CEO of a service business oriented ICT company and wanted to study the service business further. In 2009 acting as the as the company s chairman of the board, he came back to Finland and due to the opportunities he recognized within the company and the industry as a whole, he decided to step in as the CEO. He had new ideas for Fira concerning opportunities in service business and in order to implement them, the CEO started to gather a development team within the company. Fira made a substantial effort to understand the reasons behind the challenges in the design and building processes. The company developed a communication method Fira workshops for interacting with customers in order to manage the customers project requirements and develop their solutions further. Fira conducted several workshops and executed a literature study that focused on service research. Within the discovered literature, service-dominant logic was focused on due to its emphasis on customer experience and how value is

co-created with the customer. The development team studied the premises of S-D logic and began to explore how the company s business should be changed in order to become more service oriented. They realized that if they wanted to become a service company they would have to change their strategy from one focusing on striving for cost leadership to one striving to differentiate through customer value creation. This was believed to affect the entire business model of Fira. As a result they broadened the scope of their research into business models as well. The CEO explains that in the end of 2009 the company started to implement S-D logic principles into their business by striving to change the configuration of their business model. This reconfiguration occurred in several iterative phases which are still taking place as the company is constantly learning. Some of the major changes included recruiting new employees with diverse backgrounds outside the construction sector as well as young professionals within the construction business who were open minded to novel ways of serving customers. As a consequence, the company s core capabilities and activity configuration changed with the new employees becoming transformation agents in executing the new strategy focused on providing service and value to customers. The Fira workshops enabled Fira to contribute resources to the customers construction project early in the planning phase. This ensured constructing with a value-in-use perspective that took into account the customer s and end-users needs was possible. Fira also took on a role as a service integrator enhancing the resource integration of the value network as a platform bringing professionals together while the company changed from a functional production organization to a multidimensional team and network-based organization. Organizational changes enabled moving from project-based to service process based operations. In addition Fira managed to win new customers with new distribution and marketing channels, a differentiated offering and value propositions focused on providing superior service as opposed to focusing on cheap price. Eventually changes also led to the development of long-term relationships with some customers. FINDINGS Since the transition to an S-D business model, Fira has increased its competitiveness and experienced significant growth of approx. 100 % annually outgrowing the rest of the market with a substantial margin. After the changes took place Fira has acquired new customers and its service construction concept has enabled it to differentiate from competitors leading to a new market position not addressable previously. According to Fira s CEO, the focus on service and customer value provided through a network of partnering actors has enabled offering value propositions with

increased customer value. This in turn has been the key factor in attaining long-term customers and expanding both the customer base of the firm. Although the change process from G-D logic to S-D is still ongoing, it has already had major implications on Fira s business model brought on by the decision to proactively adopt and implement a new strategic approach inspired by S-D logic. These major changes in Fira s business model s configuration are presented in Table 1. Table 1: Summary of key changes in Fira s business model. G-D logic Completed building in given time, cost and quality frame (value-in-exchange focus). Increasing value to firm through additional services. Project based one-time customers, no relationships. Distribution indirect and intermediate. Traditional public and private customers. Customers seen as passive actors in value creation. Key activities limited to cost calculation and construction. Resources and core capabilities focus on construction project management and complex structural engineering. Partnerships and resource integration in value networks rare or non-existent. Little or no co-production of serviceofferings. Construction and administration accumulate the majority of costs. Revenue streams based on a value in exchange perspective. Increasing profits based on S-D logic Offer & Value proposition Emphasizing customer value by providing best solutions to a customer s business needs (valuein-use focus). Customer Long term relationships that create customer lifetime value. Distribution from push to pull. Also new and innovative customers in selected industries. Customers seen as active co-creators in value creation. Resource infrastructure Also new resources with broad multidisciplinary skills. Broader range of activities provided with network partners. Emphasizing resource integration through interorganizational processes to utilize value network s resources with Fira as a platform. Coproduction of service offerings with network partners including customers. Finance Costs accumulated from a wider variety of activities (sales, marketing, administrative, development and customer project costs). Some costs and revenues shifted to partners in the value

high-profit extra- and alteration work that are not included in the contract. network. Profit is based on customer s lifetime value and added value in the project. Furthermore Fira is now striving to change its revenue model by developing a value based control and pricing model in order to streamline value creation and prevent value slippage through iterative sprints in the construction process. As a whole, the CEO sees that the decision to adopt a service-dominant mindset has enabled them to offer their customers solutions and value as opposed to only constructing buildings. This transition to what Fira now refers to as service construction was enabled by reconfiguring their business model. CONCLUSIONS The originality and value of this paper lies in its analysis and discussion of business models as conceptual tools; we demonstrate that they can be used to translate a service-dominant mindset from theory to practice. The exploratory nature of our research and empirical data is limited to a single case company and thus does not enable making generalizations from our data. We also do not state that Fira has thus far implemented all the S-D logic premises or implemented them in their purest nature. The logic and mindset has been adapted to suite the purposes of the company. Our research findings do suggest that the concept of business model has the potential to facilitate translating a service-dominant mindset from theory into managerial practice and could therefore be a useful concept in the further development of service-dominant logic. Practical implications based on empirical evidence from the case company indicate that adopting a service-dominant mindset leads to changes in the business model s configuration. In Fira s cases these changes have led to increased competitiveness and profitable growth. REFERENCES Baden-Fuller C. and Morgan, M. S., (2010), Business Models as Models, Long Range Planning, 43 156-171 Eisenhardt, K. M., (1989), Building theories from case study research, Academy of Management Review, 14 (4) 532-550 Eisenhardt, K. and Graebner, M., (2007), Theory Building from Cases: Opportunities and Challenges, Academy of Management Journal, 50 (1) 25-32 Grönroos, C., (2007), Service management and marketing: customer management in service competition, 3 rd ed., Chichester, John Wiley & Sons Ltd

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