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It is all about Services - Fundamentals, Drivers, and Business Models

Article · December 2013

DOI: 10.1007/s12927-013-0004-y

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Pre-print:
S. Kaczor, N. Kryvinska, “It is all about Services - Fundamentals, Drivers, and Business Models”, The Society of Service Science, Journal of
Service Science Research, Springer, Vol. 5, No. 2, 2013, pp. 125-154.
ISSN: 2093-0720 (print version), ISSN: 2093-0739 (electronic version), Journal no. 12927.

It is all about Services-Fundamentals, Drivers, and Business

Models

Sebastian Kaczor, Natalia Kryvinska

ABSTRACT
Service economy, service science, service-dominant logic and servitization are apparently
related terms. All of them emerged and are located in different disciplines, which do not ease
things at all. Accordingly, this paper provides on the one side a fundamental theoretical
background on these topics, and on the other side facilitates subsequent research by providing
some reference points.
At the beginning, the topic of service economy and its increasing share on total employment
are elaborated to show its current importance. Consequently, the notion and definition of the
term service is conducted, which is followed by the discussion about goods, their differences
to service and the drivers for the transition to a service-dominant economy. Furthermore, the
concept of business models and its' varying characteristics are reviewed, since they play a
major role in service economy. And, the last section leads finally over to the intrinsic topic
such as research approaches on the Services.

KEYWORDS
Service, Service Science, Service-Dominant Logic, Servitization, Service Economy, Business
Models.
1. EMERGENT SERVICE ECONOMY
Managers as well as researchers observed a distinct growth of services as the major trend
within economic sectors in recent years (Johnstone et al. 2009; Memedovic & Lapadre 2009;
Spohrer & Maglio 2008). This increase among service-related jobs affected both Europe and
the US, which therefore causes a reduction in industry- and agriculture-related jobs
(D’Agostino et al. 2006). The OECD computed a share of 70% accounting for the service sector
of total employments that still continues to grow (Wölfl 2005; OECD 2012). Spohrer &
Maglio (2005) derived a chart that illustrates the transition in economic sectors from
agriculture-dominant to service-dominant during the last 200 years in the US. This evolution
is shown in the Figure 1, where the Y-axis describes the relative amount of employments in
the US separated among the agriculture-, the manufacturing- and the service-sector (Spohrer
& Maglio 2005).

Figure 1. US Employment History and Trends

Source: Own illustration according to Spohrer & Maglio (2005).

D’Agostino et al. (2006) proposed an additional differentiation among four sub-sectors

within the service sector to enhance the understanding of this development. Consequently
they consist of:
1) wholesale and retail trade, restaurants and hotels;
 2) transport, storage and communication;
3) finance, insurance, real estate and business; and finally
4) community, social and personal services that consolidate 12 branches.

Figure 2 describes the current weighted shares among Europe and the US in 2001 and the
alteration since 1970. Thus, the community and social services sector remains very stable
over the last decades, whereupon wholesale and transportation lost a bit. Obviously the
finance and insurance sector gained the highest growth during the last 30 years (D’Agostino
et al. 2006).

Figure 2. Service Sub-Sector Share and Alteration since 1970 to 2001

Source: Own illustration according to D’Agostino et al. 2006.

Accordingly scientists and managers engaged on the discussion about preliminary drivers
and reasons to explain this progression. Regarding this we can summarize in general to three
main blocks (Wölfl 2005). By all means scientists found: (1) imbalances in productivity
growth between services and manufacturing aiming at the slower productivity growth of
services relative to manufacturing as one of these blocks (Baumol 1967). Furthermore, there
are some (2) factors related to final demand like the increase of per-capita income levels,
demographic shifts and the continuous trend of urbanization influencing structural change
(D’Agostino et al. 2006, Wölfl 2005). Finally, also (3) the role of intermediate demand aiming
at transport and communications services counts responsible for this development (Wölfl 2005).
Nevertheless, this does not implicate that we do not need manufacturing or agriculture at
all. In the case of the UK the manufacturing sector contributes a turnover of £150 billion each
year, therefore responsible for the half of UK exports, which finally employs three million
people (Benedettini et al. 2011). But, one has to be aware that still the value did not lie solely
in the manufactured product itself (Parry et al. 2011). Nowadays the complexity of some
high-technological products impedes the installation or maintenance on its own (Godlevskaja
et al. 2011, Neely 2007) or requires complementary services supporting its lifecycle, configu-
ration and its disposal (Benedettini et al. 2011). Therefore, the service sector will retain as
“lion share” in economy but always constituting a symbiotic interdependency with the manu-
facturing and agriculture sector (Andreoni & Gomez 2012).

2. NOTION OF SERVICE
The subsequent section provides the fundamental definitions and notions on the topic of
service by discussing its origins as well as diverging viewpoints. This theoretical background
constitutes the basis for the evolution introduced above and enhances understanding of
further reading of this paper. Initially the challenges among the definition of services are
examined and consequently followed on the one hand by the IHIP characteristics (intangi-
bility, heterogeneity, inseparability and perishability) approach and on the other hand by service
actors and relationship concepts.

2.1 Approaches and Challenges on the Definition of Services

In the literature, the definition of service and the inherent distinction from goods and
products arises from a long discussion among researchers from several disciplines like mar-
keting, operations, general management, computer science, systems engineering, design and
psychology, and service science (Araujo & Spring 2006; Spohrer et al. 2011). Never-
theless,
there is no common notion about its definition, classification, and terminology (Araujo &
Spring 2006; Parry et al. 2011; Spohrer et al. 2011; Spring & Mason 2007; Wood 2010).
According to the Oxford English Dictionary, there are more than 38 definitions of the word
“service” as nouns, transitive verbs or adjectives (Jordan 2007). Opinions among the
advocators are diverging considerably, due to different views resulting from variable dis-
ciplines dealing with this topic. Actually, Spring & Mason (2007) summarized that ne-
vertheless two relevant, pervasive themes emerged out of this discussion, dealing on the one
hand with (1) treating this term as aberration, which means defining what services are (e.g.
intangible, non-storable, non-transportable and so on). The second approach deals with the
(2) involvement of services, which originates from its so called IHIP characteristics (intan-
gibility, heterogeneity, inseparability and perishability). Consequently, as things are now one
has to choose and align the appropriate definition matching to its economic discipline and
topic (Araujo & Spring 2006; Parry et al. 2011; Vargo & Lusch 2004).

2.2 Four IHIP Characteristics

The definition according to the four IHIP characteristics (intangibility, heterogeneity, inse-
parability and perishability) is actually the most popular one dealing with services (Araujo &
Spring 2006, Parry et al. 2011, Wood 2010), though it does not always provide a sufficient
description in any case (Parry et al. 2011, Spring & Mason 2007). In order to highlight this
occurrence, the widely spread IHIP approach is discussed in detail and some diverging cases,
which fail in applying this concept, are presented.
The first of the four characteristics is described by the (1) intangibility of services, which
seems quite obvious, because a service is finally not a physical object (Wood 2010). There-
fore, Harker (1995) stated a very humorous and vivid illustration describing services as
“something you cannot drop on your foot” (see in Parry et al. 2011, p. 21). This description
applies very well considering typical services like transportation, delivery, repair or customer
help desk to name but a few (Baines et al. 2009a; Lovelock 1983; Tether & Bascavusoglu-
Moreau 2011). Nevertheless ones may be confused trying to classify products like DVD,
books or CDs, which indeed on the one hand appear as tangible objects, but do not provide
any value to the customer by solely owning them. Accordingly on the other hand customer’s
value lies in the intangible service of consuming the content (film, music or thrilling story),
which is provided by the tangible good (Parry et al. 2011).
Furthermore, a service appears to be (2) heterogeneous, due to the relative inability of
standardizing its output in contrast to goods (Wood 2010). According to Parry et al. (2011),
one can vary a service according to four factors consisting of (a) customer perceptions like
the context, nature, or its individual requirements and (b) costs, which therefore count
responsible for the delivered quality standards. In addition, a service also may vary according
to (c) geographical characteristics like different regions or cultural backgrounds, or finally
among different (d) service providers. This classification likewise attracts a vast number of
typical services like a coiffeur, doctors or project management (Spohrer et al. 2011). Actually,
there are also some exceptions that do not support this approach perfectly. For example, the
case of the Mercedes E-Class describes a tangible product, which however provides hetero-
geneity by offering 10 variations of this car, claiming that there have never been two the
same. This as well underpins the lack of the apparently ubiquitous characteristic of hetero-
geneity (Parry et al. 2011).
Another characteristic is represented by the (3) inseparability of services considering the
production and consumption of a service. This obviously arises from the nature of services
and its simultaneous production and consumption of value (Wood 2010). Accordingly a
service provider could not provide his offering without participation of the customer. In the
case of physical products, activities happen in a sequential order independently of the end
customer (Spohrer et al. 2011). The literature also provides an exemplary exception manifested
by the automated service of an ATM, which operates due to predefined services without pre-
knowledge or assistance of banking personnel (Parry et al. 2011).
Finally, a service is typically characterized by its (4) perishable appearance, due to the fact
that you cannot store services in an inventory like a good (Wood 2010). Smith (1776) stated
therefore very evidently that “a service will perish in the very instant of its performance, and
seldom leave any trace or value behind them for which an equal quantity of services could
afterwards be procured” (see in Parry et al. 2011, p. 22). This approach is supported by
evidence like the case of the airline industry, where any empty seat in a current flight could
not be stored to be sold in a subsequent flight and therefore perishes (Wood 2010). Con-
sequently, the literature provides as expected also a particular case, where this definition does
not hold. A servant’s performance, whose service consists of cleaning and tiding several
rooms, does not expire after finishing his work (Parry et al. 2011).

2.3 Definition and Rationales by Actors and Relationships

Actually the viewpoint concerning the notion of service varies a little bit among other
scientist. Accordingly Hill (1977) states that:

“[A service] may be defined as a change in the condition of a unit or a person, or of a

good belonging to some economic unit, which is brought about as a result of the activity
of some other economic unit, with the prior agreement of the former person or economic
unit” (see in Araujo & Spring 2006, p. 799; Spring & Mason 2007, p. 3).

Figure 3. The Service Triangle

Source: Own illustration according to Araujo & Spring (2006); Spring & Mason (2007).

Consequently this declaration implies a relationship among several actors, which therefore
reflects on the importance of institutional structure of production. Building on this insight,
Delaunay & Gadrey (1987) and Gadrey (2000) derived a triangular relationship among the
change in status of reality C, which therefore is owned by consumer B and finally affected by
the service provider A. Certainly, there has to be a prior request of consumer B to service
provider A, which sometimes even demands for a collaboration with consumer B and usually
results in a temporary transfer of property rights (Araujo & Spring 2006; Spring & Mason
2007). This relationship is finally illustrated in the following Figure 3.

Figure 4. Nature of the Service Act and its Recipients

Source: Own illustration according to Lovelock (1983).

Dealing with the goal to express the service definition with regard to its actors or recipients
and its nature, one has also to consider the concept of the nature of the service introduced by
Lovelock (1983). Basing on these two dimensions he derived a matrix with four quadrants
that finally contain services aimed at (1) people’s bodies like health care or restaurants (2)
physical items like transportation or repair (3) people’s mind like entertainment and finally
(4) information like banking or insurance. This matrix as shown in Figure 4 provides a
framework for defining service items as well as a classification for them (Lovelock 1983).
Although this section does not provide a comprehensive review of literature concerning the
development of service definition and notion, it nevertheless offered a fundamental theore-
tical background on this topic to enhance further reading. For deeper knowledge on the
former development of the research field of service, please refer to Johnston (1998) and Roth
& Menor (2003). Due to the fact that the definition and notion of service corresponds to the
anti-definition of goods, the subsequent section will deal with its definition, differences, and
drivers.

3. FROM GOODS TO SERVICES

Since a lot of approaches to define services are conducted by stating them as antipode of
goods, this section aspires to provide an appropriate theoretical background about the notion
of goods. Consequently, this part initially describes the definition of goods and proceeds by
elaborating key differences to services and finally discussing drivers and reasons for the shift
from goods to services.

3.1 Definition of Goods

In contrast to the challenging procedure of determining a common definition for services,
opinions and notions regarding the terminology of goods are mainly congruent. Adam Smith
(1776) accounts for the first definition of goods and since then hardly anything changes about
it. The subsequent Table 1 summarizes all the characteristics incorporated by the definition of
goods and therefore reflects the academic debate of the last 200 years (Parry et al. 2011).

Table 1. Set of Attributes for Defining Goods

Attributes:
Goods are Physical Objects for which a Demand exists
Physical Attributes of Goods are preserved over Time
Ownership Rights can be established
Goods exist independently of their Owner
Goods are exchangeable
Unit ownership Rights can be exchanged between Institutions
Goods can be traded on Markets
Goods embody specialized Knowledge in a Way that is highly advantageous for Promoting the
Division of Labor
Source: cf: Parry et al. (2011).
 Accordingly, the most distinct attributes in comparison to services are the characteristic of
physical objects and their persistency over time. Furthermore, the establishment of ownership
and the inherent independence of their owner designate the characteristics of goods (Spohrer
et al. 2011). This basic separation already induces the differences examined in the following
section.

3.2 Differences
With regard to the declaration “service is a non-tangible opposite of a tangible product”
(Wood 2010, p. 6), it indicates that the definition of services is mainly hooked on the
comparison to goods, which is also reflected in some IHIP characteristics described above.
Accordingly Spohrer et al. (2011) approached the topic of service definition by mainly
comparing it to goods. Therefore, they discussed its differences by exploring three factors
consisting inter alia of a comparison between (1) tangible versus intangible, which appears in
the style of IHIP and derives similar findings (cf: Parry et al. 2011). Additionally, Spohrer et
al. (2011) examined the disparities considering (2) ownership versus access, which somehow
relies on the concept of perishability already mentioned above. This disparity could be
illustrated vividly by the case of music, thus without owning it, one is still provided with
access to it. Therefore, one can say that “a service-producing entity is one that by definition
provides access to resources it owns, but does not transfer ownership” (Spohrer et al. 2011,
p. 331). Finally, there is a difference between goods and service due to the (3) production
versus coproduction/transformation separation. In comparison to producing goods, consuming
a service demands cooperation of the customer and even some little effort. For example, the
case of listening to music requires at least some attention or cognitive resources (Spohrer et
al. 2011).
Consequently, there are differences not only in terms of definition and notion among goods
and service, but also in their management approaches. Thus, the Harvard Business School
introduced in 1972 a separate course dealing with the thought called “Management of Service
Operations” (Spring & Mason 2007). This is affirmed by the diverging ideas: goods manu-
facturer and service provider. Hence manufacturer tries to benefit from economies of scale,
which therefore demands for standardization of production. Service provider in contrast have
to customize their products to meet customer needs entirely to maximize their satisfaction
(Mellet 2008). Accordingly, the manufacturer and service provider are striving for different
goals, which therefore refer to diverging drivers as discussed in the following section.

3.3 Reasons and Drivers

A really vast increase of the service sector took place in recent years, which obviously
arises from some powerful reasons and drivers. Spohrer et al. (2011) conducted a comprehen-
sive literature review and derived finally ten interrelated drivers for the growth of the service
phenomena. In fact, they have identified (1) global economic change as one driver enhancing
the penetration of the service sector. This is based on the one hand on the enlarging scientific
research body among several disciplines that originates from economics, marketing, and
operations and proceeds nowadays with engineering, computing, design, and law (Araujo &
Spring 2006, Spohrer et al. 2011). Consequently also (2) the ICT-enablement or technology
change accounts for a distinct push, which relies on the enhanced communication capabi-
lities. These enable new types of service offerings and therefore increase the share of the
service sector (Belvedere et al. 2012; Prahalad & Ramaswamy 2004). Another driver, which is
also related very closely to the enablement by ICT is manifested by (3) outsourcing.
Accordingly, the increase in outsourcing among firms accounts for the inherent growth of
B2B services (Spohrer et al. 2011). The fact that customers demand more products with a
corresponding service plan, due to the increasing complexity of products, builds an additional
driver consisting of a (4) business model change. As a consequence, many customers prefer
nowadays solely access (leasing) instead of ownership (Godlevskaja et al. 2011; Spohrer et
al. 2011). The fifth driver is represented by (5) where people live, which refers to the shift
towards urban areas. Thus, the convenience through services attracts more and more of the
world population. This in fact corresponds to another demographic change represented by (6)
how long people live. Evolution in society and the emerging importance of women in
workforce causes a driver with regard to (7) the nature of family life. As a consequence,
personal services like childcare, hospitality, or entertainment gained rising importance. Finally,
there also arises impetus by (8) higher education level, the corresponding (9) dependence on
universities, and (10) dependence on non-profit organizations (Spohrer et al. 2011).

4. BUSINESS MODELS
Concerning the business of a service company, one is inherently concerned with different
business models to transfer generated value into revenues. The subsequent section provides
the necessary theoretical background to deal with this topic by providing the definition and
notion of business models as well as the underlying research streams and the resulting
characteristics and patterns.

4.1 Definition and Notion

The concept of business models is a relatively new one, which was mentioned the first time
by Bellman et al. (1957) in an academic article (Hirvonen 2011; Lindemann 2009; Niemi &
Buren 2012; Spring & Mason 2007). Afterwards, an interest declined and recently it gained
back higher attention, thanks to the current emergence of Internet-based businesses (Hirvonen
2011; Niemi & Buren, 2012). Zott et al. (2011) stated therefore that “the concept has virtually
exploded in the 15-year period between 1995 and 2010” (see in Lindemann 2009, p. 7).
Nevertheless, the scientists have not found yet a common definition or language to deal with
this topic, which therefore avoids drawing on each other’s work. Combining the both
extensive literature reviews conducted by Hirvonen (2011) and Palo (2009), they finally
provide a very comprehensive compilation on the current research status. This condition is
accordingly illustrated in the subsequent Table 2 (Hirvonen 2011; Palo 2009).
Going through the Table 2, one will immediately realize the two trends already discussed
in advance. First, all the definitions and elaborations start in the year 1998 and later on
confirm the correlation to the emergence of internet-based businesses in recent years (Hirvonen
2011, Niemi & Buren 2012). The second trend is probably not that obvious, which is
represented by the huge amount of different definitions on this topic and therefore approves
the broad research field. Actually both authors reviewed a lot of literature but shared only one
definition provided by Amit & Zott (2001). No other definition was found and displayed by
both authors (cf: Hirvonen 2011; Palo, 2009) (Osterwalder et al. 2005).
 Table 2. Business Model Definitions
Author (s) Year Definition
The method of doing business by which a company can sustain
Yunus et al. 2010
itself i.e. to generate revenue
Companies commercialize new ideas and technologies through
Chesbrough 2010
their business models
The essence of a business model is in defining the manner in
Teece 2010 which the enterprise delivers value to customers, entices customers
to pay for value, and converts those payments to profit
In the simplest form, business models can be defined as the
Yunus et al. 2010 method of doing business by which a company can sustain itself
i.e. to generate revenue
Gambardella &
2010,
McGahan, Every company has a business model
2006
Chesbrough
A business model is the method of doing business, by which a
Chen 2009
company can sustain itself-that is, generate revenue
Kamuriwo 2009 The business model has a link to value capture
Zott & Amit, 2007,
Business model design affects firm performance
Bornemann 2009
There can be identified three core elements of a network business
Komulainen et al. 2006 model; the product/service, the business actors and their roles, and
value-creating exchanges among the actors
Helander & Business models of the companies must be linked to the business
2005
Rissanen models of the other companies involved in the network
A business model describes the rationale of how an organization
Osterwalder et al. 2005
creates, delivers, and captures value
Business model is defined “as a representation of a firm’s under-
Shafer et al. 2005 lying core logic and strategic choices for creating and capturing
value within a value network”
Business models are about making money and most firms are in
Afuah 2004
business to make money
The concept of business model generally describes the key com-
ponents of a given business: 1) customers, 2) competitors, 3) offe-
Hedman & ring, 4) activities and organization, 5) resources, 6) supply of factor
2003
Kalling and production inputs and 7) a longitudinal process component to
cover the dynamics of the business model as well as the cognitive
and cultural constraints that management has to take into account.
Companies must find the right business model in order to create
value from new technology. Business model provides a framework
Chesbrough &
2002 which considers the technological characteristics and potentials as
Rosenbloom
inputs and converts them through customers and markets into eco-
nomic outputs.
A firm’s business model is an important locus of innovation and a
Amit & Zott 2001 crucial source of value creation for the firm and its suppliers,
partners and customers
 Business model represents the roles and relations among the firm’s
Weill & Vitale 2001 customers, allies and suppliers identifying the major flows of pro-
duct, information and money and the major benefits for the actors.
An architecture for the product, service and information flows,
including a description of the various business actors and their
Timmers 1998
roles; a description of the potential benefits for the various business
actors; and a description of the sources of revenues
Source: cf: Hirvonen (2011), Palo (2009).

The definitions shown in Table 2 also reveal certain patterns, which can be expressed by
diverging notions among this topic. Hirvonen (2011) consolidated these patterns to finally
three different notions implying revenue logic, technological inputs, and finally the separa-
tion from strategy. (1) The revenue logic embraces all definitions with regard to the main
ambition of generating revenue out of the business (Hirvonen 2011). Therefore, the enterprise
initially delivers value to customers, attract customers to pay for value, and finally transform
this value into revenues (Lindemann 2009). Actually it’s all about value that consequently
cannot be defined by the company but has to be both defined and co-created by the customer
(Vargo & Lusch 2004). The second notion is based on (2) technological inputs representing a
useful framework by Chesborough (2003) to tie technical decision to economic outcomes
(Hirvonen 2011). Finally, it is necessary to be aware of the (3) separation of business model
from strategy, because the business model represents the architectural implementation of a
strategy (Hirvonen 2011). In fact, the business model describes how the specific parts within
a business fit and interact together, while strategy puts more emphasis on competition and
market behavior (Spring & Mason 2007).

4.2 Research Streams

Due to the different approaches to the notion of business model mentioned above, there
have also been developed several diverging research streams dealing with this topic. Litera-
ture provides therefore on the one hand the separation among the three disciplines of e-
Business, technology and innovation management, and strategy (Zott et al. 2011), and on the
other hand the separation between components and dynamics of business models (Hirvonen
2011), which finally forms five research streams. According to Zott et al. (2011), business
models are linked very tightly with (1) e-Business due to the emergence of improved com-
munication and information technologies. Consequently operating costs decreased considerably
and therefore new possibilities of doing business increased (Spring & Mason 2007).
Emerging businesses were usually based on unconventional information exchange methods
(e.g. eBay’s auction, Groupon’s voucher) which explain this value and its monetization. In
turn, business model evolved as the best way in doing this (Amit & Zott 2001). Further-more,
another application of business models evolved within (2) the technology and innova-tion
management, where they were meant to commercialize pioneering ideas and technolo-gies or
to be the new subject of innovation (Zott et al. 2011). Therefore, one can say that “business
models … can translate technical success into commercial success” (see in Teece 2010, p.
184), which perfectly corresponds with the fact that “technology is seen as an enabler of the
business model rather than as a part of the concept per se” (see in Zott et al. 2011, p. 22).
The third research stream considers the topic of (3) strategy. Although a business model does
not equal a business strategy (as discussed in section 4.1), there are still interplays and
relationships among them (Lindemann 2009). The nature of firm’s network of value creation
anyhow affects firm’s performance (Amit & Zott 2001). According to the separation
suggested by Hirvonen (2011), there is also another research stream based on (4) components
of an e-Business model. A business model consists of customer value, scope, price, revenue
sources, connected activities, implementation, capabilities and sustainability (cf: Afuah &
Tucci 2001; in Hirvonen 2011). These components can be summarized to build architecture
for product, service, and information flows (Amit & Zott 2001; Niemi & Buren 2012).
Finally, there is a research stream concerning (5) dynamics of business models, which deals
with the way of interactions and the inherent value creation. For further insights on this area,
please refer to publications of Applegate (2001) and Weill & Vitale (2001) (see in Hirvonen
2011).

4.3 Characteristics and Business Model Patterns

Based on the former section and the introduced research stream of components of a bu-
siness model, the subsequent section discusses these components more in detail and offers an
encircling architecture of it. Furthermore, dominant business model types will be elaborated
and broken down into certain patterns. According to the large number of diverging definitions
among business models, several items are mentioned as components (Amit & Zott 2001;
Hirvonen 2011; Spring & Mason 2007). The extended research of Morris et al. (2005) found
finally 24 components, where only a few of them gained recurring mentions. Hence, the most
frequented are value proposition, economic model, customer interface, partner network and
roles, internal infrastructure, and target segments (Lindemann 2009). This finding perfectly
matches the elaboration of Osterwalder et al. (2005) that introduces a business model
architecture that is based on exactly these components. The particular com-ponents were
consolidated to finally four pillars as they are shown in Figure 5 below.

Figure 5. Business Model Architecture

Source: Own illustration according to Osterwalder et al. 2005.

Obviously the most elementary matter of each business is its (1) offer, which manifests the
first pillar. Accordingly, this part describes the products and services offered by the business
and consolidates it to the value proposition (Morris et al. 2005; Osterwalder et al. 2005). The
next step is to clarify the (2) customer interface, which describes all elements visible by the
customer. This pillar actually consists of customer segments that are attracted, the channels
used to reach them, and after all the customer relationships (Lindemann 2009). In fact, the
business offer and the corresponding customer interface have to be established upon an
underlying (3) infrastructure management enabling all these things. Consequently, it is neces-
sary to be aware of the necessary key activities, which are carried out with the corresponding
key resources that in the end require appropriate key partners (Osterwalder et al. 2005).
Finally, each business model consists of several (4) financial aspects dealing with the
precedent cost structure to enable the business and the corresponding revenue streams to
sustain the business (Lindemann 2009; Morris et al. 2005; Osterwalder et al. 2005).
In fact, the execution and success of a business model does not relies on the solely
consolidation of its components. The power of a business model actually stems from the
interrelation of its components (see in Lindemann 2009). Finally a business model describes
how to create, deliver and capture value, which arises from a dominant design theme
(Osterwalder et al. 2005; Bauer et al. 2011). The work of Lindemann (2009) exactly focuses
on this topic by elaborating a framework of these dominant design themes, which in the end
introduces four types, displayed in Table 3.

Table 3. Dominant Business Model Design Themes

Theme Approach
Cheap and Quick Relies on the transaction costs theory
Intangible Barter Includes network effects
Customer Lock-In Based on switching costs
Team-Up Usage of power of complements
Source: cf: Lindemann (2009).

Companies, aiming to operate via (1) cheap and quick business models, focus on efficiency
and strive for being cheap or quick or both. Basic elements of this approach are described by
no frills, agora, aggregation or integration to achieve competitive advantage. Typical examples
are Wal-Mart, eBay, Amazon or Dell. Another possibility is to establish an (2) intangible
barter business model that caters to achieve a maximum market acceptance by providing
products or services for free. Consequently, customers pay with intangible assets like traffic,
publicity, or his consumer behavior, which finally is sold to third parties. One can find such
business models in companies like Google, Facebook, or Skype. Companies also may operate
via (3) customer lock-in business models by establishing psychological or transactional
switching costs. Typical applications are premium bait and hook, servitization of products,
and competitor lock-out. Finally (4) team-up business models describe the case of bundling
activities among product levels, development, production or delivery. In general this approach
results in strategic alliances, joint ventures, or merger and acquisitions (Lindemann 2009).

5. SERVICE-RELATED RESEARCH APPROACHES

The last section analyses service-related research approaches. It starts with the general
topic of service science, further proceeds with outcome-focused concepts like service-domi-
nant logic, and concludes with the value-adding concepts like servitization.

5.1 Service Science

The research conducted within the field of service science comprises fairly the same topics
as discussed and elaborated in the previous sections. Consequently, it is still a big deal in
service science to find a common definition on the term “service,” which lasts for a long time
(Araujo & Spring 2006; Spohrer & Maglio 2005; Spring & Mason 2007). Another research
approach deals with a phenomenon of the continual increase in the service sector in all
economies (D’Agostino et al. 2006; Johnstone et al. 2008; Memedovic & Lapadre 2009;
Spohrer & Maglio 2005) and likewise with the reasons and drivers for this evolution (Araujo
& Spring 2006; Belvedere et al. 2012; Spohrer et al. 2011). Besides, some new service-
oriented sub-disciplines have been developed to cover topics regarding service-oriented
architectures in computer science, service system engineering in industrial engineering, and
knowledge-intensive business services in economics (Spohrer et al. 2011). Finally, contem-
porary topic of innovation finds its way into service science. In this connection, the terms of
innovation in service and service innovation appear, while the former deals with both product
and process innovation in service firms and the latter with the creation of new services (Miles
2012).

5.2 Service-Dominant Logic and Other Outcome-Focused Concepts

Actually, the research field of service-dominant logic (SD logic) evolves out of general

service science and provides a certain framework that allows for refining existing

theoretical
foundation. First introduced by Vargo & Lush (2004), the SD logic approach assumes that all
firms are delivering services regardless of their product offering. This arises from the aspect
of collaborative co-creation among the involved parties using goods as mechanism for service
provision (Vargo & Lusch 2008). According to this focal point, customers are not after the
property of a good, but after the generated value by using or operating it, which is manifested
in a service (Castaldi et al. 2007). Accordingly, there occur some implications on marketing
activities, which have to be adjusted to the merchandising of services instead of goods (Vargo
& Lusch 2004). The basis of SD logic is built by ten foundational premises (FP) which are
displayed in Table 4.

Table 4. Foundational Premises of SD Logic

# Premise
FP 1 Service is the fundamental basis of exchange
FP 2 Indirect exchange masks the fundamental basis of exchange
FP 3 Goods are a distribution mechanism for service provision
FP 4 Operant resources are the fundamental source of competitive advantage
FP 5 All economies are service economies
FP 6 The customer is always a co-creator of value
FP 7 The enterprise cannot deliver value, but only offer value propositions
FP 8 A service-centered view is inherently customer oriented and relational
FP 9 All social and economic actors are resource integrators
FP 10 Value is always uniquely and phenomenologically determined by the beneficiary
Source: cf: Vargo & Lusch (2008).

Consequently one has to consider these premises when applying the SD logic framework
and trying to understand its origin. As discussed before, the SD logic perspective derives
from general service science and can be separated into three episodes starting with (1) the
emergence of services marketing in the late 70s-early 90s. Subsequently, (2) the attention to
services and its new subtopics increased drastically starting in the early 90s-2003. Obviously
the final episode is the most recent one, which started by 2004 and was affected by (3) the
domination of the SD logic perspective (Dohmen et al. 2012).
Another research field pointing in a related direction like SD logic is depicted by outcome-
based contracting, where companies are asked to deliver outcomes instead of activities (Ng
& Ding 2010, Zhang et al. 2009). This relies somehow on the focal point of SD logic where
also the outcome, manifested as service during usage of a good, constitutes the main thinking.
A traditional application is the maintenance, repair and overhauls (MRO) activities and
supply chain management, where also the term performance-based logistics is common in
this relation (Kim et al. 2006). The most prominent case therefore is the business model
introduced by Rolls Royce in the aero-plane industry called “Power-by-the-hour®,” where
the customer does not buy an engine but guaranteed flying hours (Ng et al. 2010). In this
case, value is finally delivered through transformation of material, information, and customer
behavior in terms of co-production (Ng & Ding 2010).

5.3 Servitization and other Value-adding Concepts

Actually servitization is a related research field of service science, but initially originates
from manufacturing and operations management (Baines et al. 2009a). The term servitization
was primarily coined by Vandermerwe & Rada (1988) and is seen as manufacturing strategy
that creates value by adding services to products. This idea stems from providing competitive
advantage for manufacturing firms to handle decreasing margins and other sources of
competition (Baines et al. 2009a, Gebauer et al. 2005, Neely 2008). Servitization describes
the transition from a pure product manufacturer to a finally service offering company striving
for increasing revenues with higher margins. This is conducted through offering product-
service bundles via varying integration possibilities (Bascavusoglu-Moreau & Tether 2011;
Godlevskaja et al. 2011; Kinnunen 2011; Mellet 2008; Neely 2007; Vandermerwe & Rada
1988).
Consequently, there occur some considerable challenges and drawbacks whilst applying
and transferring from a pure manufacturer to a service company (Baines et al. 2009a; Morgan
et al. 2008; Weeks & Plessis 2011). Although the terminology “servitization” by Vander-
merwe & Rada (1988) has already existed for a long time, nevertheless several other terms
like “servicisation” (Jordan 2007; Lee 2010), “hybridisation” or “tertiarisation” (Mellet 2008)
have occurred. Some differently named concepts emerged in literature but still deal with the
same task (Baines et al. 2009a, Johnstone et al. 2009). Finally, the Table 5 provides an
extensive overview about current research fields dealing with value-adding product-service
concepts.
 Table 5. Value-adding Products-Service Concepts
Concept/Authors Central Elements and Characteristics
After-sales Service
Generating revenues with services at long life cycle products;
Borchardt et al. (2010)
complex technological products that require specialized services
Cohen et al. (2006)
High cost, engineering and information technology intensive,
Complex Product Systems
customized products; consisting of large number of tailored
Hansen & Rush (1998)
subsystems and components
Functional Products
Total care products; comprise “hard” and “soft” elements
Alonso-Rasgado et al. (2004)
Integrated Solution Competitive advantage for manufacturing firms; solution is com-
Brax & Jonsson (2009) plex and customized offering beyond mere bundles of services
Davies (2004) and products; create value by improving operating efficiency;
Oliva & Kallenberg (2003) increasing asset effectiveness
New Service Model/
New Manufacturing Propounds the integration of products and services; approach to
Antonacopoulou & building relationships to customers and long-term partnerships;
Konstantinou (2008) customer focus
Marceau & Martinez (2002)
Market proposition that extends the traditional functionality of a
Product-Service-System
product by incorporating additional services; “sale of use” rather
Baines (2007)
than “sale of product”; restructuring risks, responsibilities and
Davies et al. (2006)
costs associated with ownership; sustainability
Servitization
Creating value by adding services to products; increasing revenue
Baines (2009a, 2009b)
streams; competitive manufacturing strategy; extending product-
Neely (2007)
life-cycle
Vandermerwe & Rada (1998)
Servicisation
Jordan (2007), Lee (2010)
Dematerialization
creating value by adding services to products; increasing revenue
Dobers & Wolff (1999)
streams; competitive manufacturing strategy; extending product-
Hybridisation
life-cycle
Mellet (2008)
Tertiarization
Leo & Phillippe (2001)
Solution Business
Linking manufacturing and services, product/service integration,
Marceau & Martinez (2002)
product/service packaging, product/service bundling at POS
Pekkarinen et al. (2011)
Set of corresponding production and service actions have to be
Symbiotic Interdependencies
performed across a number of functional areas to produce given
Andreoni & Gomez (2012)
commodities
Winning in the Aftermarket
Deliver the value which customers get out of using those products
Cohen et al. (2006)
Source: own illustration.
6. SUMMARY
Actually the service sector contributes to approximately 70% of employments and still
remains growing, which relies on certain trends like the imbalances in productivity growth
between services and manufacturing or increasing complexity of manufactured goods deman-
ding complementary services. The definition of service persists to be a challenging task, but
one can consider the IHIP characteristics consisting of intangibility, heterogeneity, insepara-
bility, and perishability.
Dealing with services, one also has to bear in mind the concepts of business models, which
are still a lot due to the development out of several economic disciplines. Table 2 displays a
vast amount of definitions that all together emerged mainly during the late 90’s based on the
appearance of the Internet. Nevertheless, in relation to the topic of servitization, the definition
that “a business model describes the rationale of how an organization creates, delivers and
captures value” (Osterwalder et al. 2005) fits most appropriate, since it meets the concept of
adding value to a product best.
Finally, there are several related research fields all concerned with service, but still
emerging from different motivations and disciplines. Accordingly, service science focuses on
definitions and innovation of service, whereas service-dominant logic strives to provide a
framework for a new focal point on merchandising products. In the end, servitization emerged
from manufacturing industry to supply competitive advantage in selling goods by adding
value through services.

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