TUOMAS HUIKKOLA Escaping the commoditization trap by going downstream How does a manufacturer manage its capabilities to create wealth from solutions? ACTA WASAENSIA 382 BUSINESS ADMINISTRATION ACADEMIC DISSERTATION To be presented, with the permission of the Board of the Faculty of Business Studies of the University of Vaasa, for public dissertation in Auditorium Nissi (K218) on the 15th of September, 2017, at noon. Reviewers Professor Heiko Gebauer Group Leader Business Innovation for Sustainable Infrastructure Services EAWAG Überlandstrasse 133 8600 DÜBENDORF SWITZERLAND Professor Daniel Kindström Linköping University IEI (Institutionen för ekonomisk och industriell utveckling) Department of Management and Engineering S-581 83 LINKÖPING SWEDEN III Julkaisija Julkaisupäivämäärä Vaasan yliopisto Syyskuu 2017 Tekijä(t) Julkaisun tyyppi Tuomas Huikkola Artikkeliväitöskirja Orcid ID Julkaisusarjan nimi, osan numero Acta Wasaensia, 382 Yhteystiedot ISBN Vaasan yliopisto Kauppatieteellinen tiedekunta Johtamisen yksikkö PL 700 FI-65101 VAASA 978-952-476-762-0 (painettu) 978-952-476-763-7 (verkkoaineisto) ISSN 0355-2667 (Acta Wasaensia 382, painettu) 2323-9123 (Acta Wasaensia 382, verkkoaineisto) Sivumäärä Kieli 178 englanti Julkaisun nimike Hyödykkeistymisloukkua pakoon palveluiden avulla: Kuinka teknologiayritys johtaa kyvykkyyksiään luodakseen arvoa asiakaskohtaisista ratkaisuista? Tiivistelmä Teknologiayritykset tarjoavat aikaisempaa enemmän palveluita asiakkailleen. Syinä tähän ovat taloudellinen epävarmuus, globalisaatio sekä valmistus- ja tuoteliiketoiminnan hyödyk- keistyminen. Palveluiden avulla teknologiayritykset ovat pyrkineet saavuttamaan tasaisem- man tulovirran, joka auttaa suhdannevaihteluiden yli. Teknologiayritykset ovat siten alka- neet muistuttaa palveluyrityksiä palveluiden muodostaessa merkittävän osan niiden koko- naisliikevaihdosta ja -tuloksesta. Tätä strategista siirtymää kuvataan palvelullistumisilmiöksi, jonka on nähty tuottavan erilaisia strategisia, taloudellisia ja markkinoinnillisia hyötyjä. Väitöskirja rakentuu resurssiperustaisen strategianäkemyksen ja palvelullistamiskirjallisuu- den perustalle vastaten seuraavaan tutkimuskysymykseen: Miten teknologiayritys johtaa resursseja ja kyvykkyyksiään luodakseen arvoa asiakaskohtaisista palveluista ja ratkaisuista? Väitöskirja pyrkii vastaamaan tähän tutkimuskysymykseen neljän toisiinsa kytkeytyneen tut- kimusartikkelin avulla. Väitöskirjan tutkimustapana on laadullinen vertaileva monitapaus- tutkimus. Sen kohteena ovat olleet palvelu- ja ratkaisuliiketoiminnan avulla kansainvälisesti menestyneet suomalaiset teknologiayritykset. Väitöskirja pyrkii lisäämään ymmärrystä resurssien johtamisen käytännöistä palvelullistamisen kontekstissa. Tutkimuksen tulosten mukaan menestyneet palvelullistuneet teknologiayritykset kehittävät järjestelmällisesti kyvykkyyksiä, jotka mahdollistavat tiiviimmän yhteistyön heidän asiakkai- densa kanssa. Se on tapahtunut esimerkiksi kehittämällä konsultatiivista myyntikyvykkyyttä tai operoimalla asennettua laitekantaa älykkäämmin. Toiseksi, tutkimuksen tulokset osoitta- vat, että menestyneet yritykset hyödyntävät aktiivisesti olemassa olevia kyvykkyyksiä uusilla toimialoilla ja tuote-palveluyhdistelmissä. Se on tapahtunut esimerkiksi laajentamalla palveluporftolion kehittämiseen liittyviä kyvykkyyksiä nykyisten asiakkaiden kanssa. Kolmanneksi, menestyneet valmistavat teknologiayritykset luopuivat järjestelmällisesti ydinliiketoimintaan kuulumattomista tai valmistustoimintaan liittyvistä kyvykkyyksistä keskittyäkseen uuden strategian mukaisten kyvykkyyksien kehittämiseen. Tutkimuksen mukaan siirtymä tuotteista palveluihin ei tapahdu hetkessä, eikä se ole toimiva strategia kaikille valmistaville yrityksille. Tutkimusten tulosten valossa tämä strateginen siirtymä vaatii aikaa, näkemystä ja sitoutumista teknologiayrityksen ylimmältä johdolta sisäisten ja ulkoisten voimavarojen kehittämiseen ja uudelleensuuntaamiseen. Asiasanat Palvelullistuminen, ratkaisuliiketoiminta, dynaaminen kyvykkyys, strategiset kyvykkyydet V Publisher Date of publication Vaasan yliopisto September 2017 Author(s) Type of publication Tuomas Huikkola Doctoral thesis by publication Orcid ID Name and number of series Acta Wasaensia, 382 Contact information ISBN University of Vaasa Faculty of Business Studies Department of Management P.O. Box 700 FI-65101 Vaasa Finland 978-952-476-762-0 (print) 978-952-476-763-7 (online) ISSN 0355-2667 (Acta Wasaensia 382, print) 2323-9123 (Acta Wasaensia 382, online) Number of pages Language 178 English Title of publication Escaping the commoditization trap by going downstream: How does a manufacturer manage its capabilities to create wealth from solutions? Abstract Economic turmoil, globalization, and increased price pressure in product businesses, have prompted leading manufacturers to provide services/solutions to their customers to avoid the commoditization trap and generate more stable income. Manufacturers have thus started to resemble service companies as services account for a considerable share of their total revenues and profits. This strategic transition has been termed servitization and has been said to generate various strategic, financial, and marketing advantages for those exploiting successful service strategies. This dissertation builds on the intersection of the resource-based perspective and servitization literature to answer the following research question: How does a manufacturer manage its capabilities to create wealth from customer solutions? To address this question, four empirical research articles have been formulated to advance knowledge of resource management practices in servitization. By using a qualitative comparative multiple case study method, this dissertation scrutinizes those internationally operating Finnish manufacturers that have outperformed their rivals by establishing service strategies and capabilities. This dissertation attempts to advance both theoretical and managerial understanding of the resource management practices in servitization The results of the study indicate that highly performing manufacturers systematically build new capabilities required to manage better their customer relationships (e.g., consultative selling, or fleet management capabilities). Second, the results indicate that the solution providers leverage their extant capabilities to enter new industries and product-service markets (e.g., nurturing capabilities to expand their service portfolio with existing customers). Third, solution providers released their non-core and upstream resources to focus on developing downstream resources. This research highlights that entering the solution business may not be a viable strategy for every manufacturer. The strategic transitioning from goods to services does not happen overnight but requires managerial time, vision, attention, and commitment to develop and redirect internal and external resources. Keywords Servitization, solution business, dynamic capabilities, strategic capabilities VII ACKNOWLEDGEMENT As with almost any research, there have been ups and downs during the project. However, when looking in the rear-view mirror, the positive things during the process come to mind first. Many individuals and institutions have enabled me to finalize this dissertation. This process would have not been the same without them and I am grateful to many people and organizations who have supported me during this process. I will try to mention those who have contributed to the progress of this dissertation. First, I want to thank my supervisor, Professor Marko Kohtamäki, who has motived, encouraged, coached, and supported me during this lengthy learning process. I could not imagine any better person as my supervisor and mentor. Marko has always selected the right words when I have needed guidance, motivation, and feedback. Every time after talking with Marko, I have felt that he has been able to get me back on track. Thank you, Marko, in addition to your work, your personality, and kindness have truly inspired me. I also want to thank my second supervisor, Vinit Parida, for your insightful comments on my manuscript. I am grateful to two official pre-examiners of my manuscript. Heiko Gebauer from EAWAG, Switzerland, and Daniel Kindström from Linköping University, Sweden, for their valuable, insightful and constructive comments. Your work regarding servitization has inspired me for a long time. I want to thank my employer, the University of Vaasa, for giving me the opportunity to do my dissertation in a flexible manner. I owe my gratitude to two heads of department during my research work, Professors Riitta Viitala and Adam Smale. Thank you for your work with bureaucracy, which is often invisible but important. In the same breath, I want to thank Professor Jukka Vesalainen for being a paternal figure to the whole university. I have had a privilege to work with many great people. Henri, Iivari, Jesse, Juho, Karita, Mathias, Rodrigo, Suvi, and Tero, deserve special thanks. It has been my pleasure to have wonderful discussions related to academic and non-academic issues with you. I also want to thank all the personnel at the department of management for the support. Furthermore, I would like to thank Andrew Mulley and the Academic Editing team for the copy-editing of the dissertation and the articles. This work has been funded by the Funding Agency of Technology and Innovation (TEKES) through two DIMECC research programs, Future Industrial Services (FutIS) and Services for Fleet Management (S4Fleet). I gratefully acknowledge VIII this funding. I would also like to thank certain foundations for funding this research. I gratefully acknowledge the financial support from the Evald and Hilda Nissi foundation, the foundation for Economic Education (Liikesivistysrahasto), and the Vaasa University Foundation (Vaasan yliopistosäätiö). Thank you for allowing researchers to focus on doing research. Moreover, I would like to thank the many broad-minded Finnish companies and executives that have opened their doors for research purposes. This help should not be taken for granted, and I hope that my observations and suggestions have been useful for the practitioners. Collaboration with the industries’ leading companies has increased the practical understanding of the advantages and challenges regarding servitization. I am grateful to my parents, Paula and Markku. I believe that my mother’s prior work as a director has led me to my current path because her work initially got me interested in management issues in my teens. I want to thank my father for the encouragement to do sport and exercise. Paula and Markku, you have always been supportive and interested in my studies and work-life. Most of all, I am grateful that I have always had the opportunity to adopt my own viewpoint on a subject. I want to thank my big brother, Miika, for good conversations, but also for taking me out of the office to do some leisure activities such as mountain biking. I want to thank my mother-in-law, Seija, for your support, and help as well as good discussions related to societal issues. I am also grateful to my dear friends. Trips abroad, conversations, parties, holidays, and hobbies have facilitated me doing better research, believe it or not. My greatest gratitude goes to my beloved wife, Maarit. You have always loved, supported, and listened to me in my life. This has been a great journey with you. You are my everything. With you, we have the most beautiful and lovable baby girl. I dedicate this dissertation to our miracle, Emma, who is the pride, and joy of our lives. IX Contents ACKNOWLEDGEMENT ............................................................................ VII 1 INTRODUCTION ................................................................................. 1 1.1 Background to the study .......................................................... 1 1.2 Research objectives ................................................................. 3 1.3 Research questions and gap .................................................... 3 1.4 Dissertation scope, position, and contribution ......................... 5 1.5 Dissertation structure .............................................................. 6 2 THEORETICAL BACKGROUND ............................................................. 9 2.1 Service business development in manufacturing companies ..... 9 2.1.1 Definition of solution(s)........................................... 14 2.1.2 Drivers of servitization ............................................ 17 2.1.3 Managing the transition from products to solutions 19 2.1.4 Reflections on the examples of servitization in Finland .................................................................... 21 2.2 The resource-based perspective on strategy .......................... 23 2.2.1 Dynamic capabilities (DC) ........................................ 27 2.2.2 The relational view of strategy ................................ 30 2.2.3 Critique of the resource-based view ........................ 31 2.3 Prior studies investigating servitization capabilities ............... 32 3 METHODOLOGY ............................................................................... 34 3.1 The study’s philosophical assumptions .................................. 34 3.1.1 The study’s ontological choices ............................... 35 3.1.2 The study’s epistemological choices........................ 36 3.1.3 The study’s methodological choices ........................ 37 3.1.4 Research design ...................................................... 38 3.1.5 Data collection ........................................................ 39 3.1.6 Validity and reliability of the research ..................... 39 4 ARTICLE SUMMARIES........................................................................ 42 4.1 Solution providers’ strategic capabilities ................................ 42 4.2 Resource realignment in servitization .................................... 44 4.3 How manufacturer’s organizational routines are transformed to facilitate a transition from goods to services? .................... 46 4.4 Joint learning in R&D collaborations and the facilitating relational practices ................................................................ 47 5 DISCUSSION AND CONCLUSIONS...................................................... 49 5.1 Theoretical contributions ....................................................... 49 5.2 Managerial contributions ....................................................... 52 5.3 Limitations and future research avenues ................................ 56 5.4 Conclusions ........................................................................... 59 REFERENCES .......................................................................................... 63 ARTICLES .............................................................................................. 78 X Figures Figure 1. The dissertation’s framework .................................... 4 Figure 2. Structure of the dissertation (part 1) ......................... 7 Figure 3. The continuum of products-services. (Adapted from Oliva & Kallenberg, 2003: 162) ............................... 20 Figure 4. Materialization of industrial solution providers’ strategic capabilities ............................................... 43 Figure 5. Routine changes to develop the solution business .. 47 Figure 6. Joint learning and relational practices in dyadic R&D collaboration ........................................................... 48 Tables Table 1. Article summaries ............................................................ 8 Table 2. Selected terms adopted to describe service business development in manufacturing companies ..................... 13 Table 3. Types of solutions ......................................................... 16 Table 4. Drivers of servitization ................................................... 19 Table 5. Reliability and validity of the research ............................ 41 Table 6. Alteration modes and associated practices in servitization ................................................................... 45 XI Abbreviations B2B Business-to-business marketing CAPEX Capital expenditure (benefit continues over a long period) DC Dynamic capabilities DIMECC Digital, Internet, Materials & Engineering Co-Creation Group ERBV Extended resource-based view IB Installed-base of products IoT Internet of Things IMP Industrial Marketing and Purchasing Group KBV Knowledge-based view MNE Multinational enterprise M&A Mergers and acquisitions OPEX Operating expense (ongoing cost of running a business) PSS Product-service systems RBV Resource-based view RSI Relationship-specific investment R&D Research and development SCA Sustainable competitive advantage SIC Standard Industrial Classification SME Small and medium sized enterprise TCO Total cost of ownership Tekes The Finnish Funding Agency for Innovation XII Articles This dissertation consists of four enclosed research articles: [1] Huikkola, T. & Kohtamäki, M. (2017). Solution provider’s strategic capabilities. Journal of Business and Industrial Marketing 32(5): 752- 770.1 [2] Huikkola, T., Kohtamäki, M. & Rabetino, R. (2016). Resource Realignment in Servitization. Research-Technology Management 59(4): 30-39.2 [3] Huikkola, T. (2016). How manufacturer’s organizational routines are transformed to facilitate a transition from goods to services? The paper was presented and published as a conference proceeding at the Industrial Marketing and Purchasing Conference [4] Huikkola, T., Ylimäki, J. & Kohtamäki, M. (2013). Joint learning in R&D collaborations and the facilitating relational practices. Industrial Marketing Management 42(7): 1167-1180.3 1 Reprinted with kind permission from Emerald 2 Reprinted with kind permission from Taylor & Francis 3 Reprinted with kind permission from Elsevier 1 INTRODUCTION 1.1 Background to the study “Everybody is in service” stated Theodore Levitt in 1972 and elaborated that there are no such things as service industries because there are only industries where the service components are greater or less than those of other industries. Even traditional manufacturing companies are in the service business, they just offer fewer service components than pure service firms. However, even though products and services have recently become intertwined, services as such have been estimated to account for 60–80 percent of the world’s advanced economies’ gross domestic product (GDP) today. For instance, the relative share of services has grown rapidly in Finland since the 1950s and miscellaneous services represented 70.7% of Finland’s GDP by 2014 (Statistics Finland, 2016). The importance of advanced services such as knowledge-intensive and ICT-services have been particularly highlighted recently (Cook, Bhamra & Lemon, 2006; Heineke & Davis, 2007; Kohtamäki & Partanen, 2016; Watanabe, 2005). The we are a service economy phrase has been used particularly in developed countries to describe the phenomenon whereby the dominance of the service sector has increased and the economic importance of traditional manufacturing sectors and agriculture has diminished respectively. In addition to the macroeconomic perspective, the importance of services has also been stressed at the micro-level. The we consider ourselves a service company utterance has been heard from traditional manufacturers’ representatives to illustrate the phenomenon that products contain service components and services account for a remarkable share of the company’s total turnover. Specifically, western manufacturers have focused on servitizing their businesses to escape the commoditization trap, to acquire greater revenues and profits, and to reduce their dependence on business cyclicity, which is often considered more of an issue in product and manufacturing businesses than in service businesses (Jacob & Ulaga, 2008). Moving toward more value-added services has been a successful strategy for several traditional global manufacturers such as GE, Ericsson, KONE, Nokia, Rolls-Royce, and SKF because they have all been able to profit from services by delivering various life- cycle solutions to their customers during the product life-cycle (Rabetino et al., 2015). Previous studies have found that total customer expenditure can range from 10 to thirty times pure product costs (Davies, 2004; Wise & Baumgartner, 1999), hereby making the after-sales market an interesting business opportunity 2 Acta Wasaensia for manufacturers (Cohen, Agrawal & Agrawal, 2006). Manufacturers have thus attempted to generate numerous strategic, economic, and marketing benefits (Gebauer & Fleisch, 2007; Mathieu, 2001) in their industries through sensing and seizing business opportunities in their customers’ value chains (Davies, 2004; Wise & Baumgartner, 1999). However, prior studies have indicated that despite promising business opportunities laying downstream, most manufacturers fail to profit from providing services and solutions to their customers (Reinartz & Ulaga, 2008; Ulaga & Reinartz, 2011). Extant literature has found that manufacturers typically fail at scaling and pricing solutions and assessing the service markets (Shankar, Berry & Dotzel, 2009). One explanation for this failure is that the organizational capabilities required to develop, sell, and deliver solutions differ remarkably from those capabilities required in a traditional product/manufacturing business (Oliva & Kallenberg, 2003; Reinartz & Ulaga, 2008; Storbacka, 2011). For instance, selling life-cycle services differs considerably from traditional product sales as the party responsible for sourcing solutions from the customer side may not be interested in product features or small process improvements (Reinartz & Ulaga, 2008). Instead, the purchaser may be interested in how well the solution enables the customer to increase revenues or profits during the product life-cycle, or how the supplier could support the customer in reducing fixed costs. As one CEO of the studied company stated: “Customers are not interested in product features, customers buy outcomes.” Such manufacturer capability gaps can be narrowed through creating and developing new capabilities that support downstream transition (Fischer et al., 2010; Gebauer, 2011; Kindström, Kowalkowski & Sandberg, 2013). In addition, this transition may require shedding resources and/or organizational unlearning from the old organizational practices and routines (Danneels, 2011; Eisenhardt & Martin, 2000; Tsang & Zahra, 2008). Developing these types of new capabilities is particularly important in the era of intense global competition, the accelerated speed of change, and economic turmoil (Eisenhard & Sull, 2001; Teece, Pisano & Shuen, 1997). These external factors strongly affect product manufacturers as the monolithic organization structures are disappearing (Doz & Kosonen, 2007), manufacturers’ value chains are changing (Porter & Heppelmann, 2015), business models are transformed (Kindström, 2010; Storbacka et al., 2013), vertical disintegration increases (Jacobides, 2005), and manufacturers are presumed to become more like software companies, as their products become smarter and more connected to other systems (Kowalkowski et al., 2017; Porter & Heppelmann, 2014; 2015). Hence, both exogeneous (external) and endogenous (internal) factors are forcing manufacturers to change. To respond to these challenges, manufacturers are increasingly considering how they should manage and alter their organizational Acta Wasaensia 3 capabilities and routines to rethink their strategy work and address future business opportunities and requirements residing in downstream activities. To address to the concerns of product commoditization, price erosion, global competition, and differentiation through products, this dissertation attempts to disentangle how manufacturers manage, develop, and alter their organizational capabilities and routines to create wealth from providing customer solutions. 1.2 Research objectives The main objective of this dissertation is to advance knowledge of resource management in servitized manufacturing companies. This dissertation has four specific objectives. First, it aims to investigate what resource combinations enable manufacturers to create wealth from the solutions business. Thereafter, the first article identifies those strategic capabilities that allow a manufacturer to outperform its rivals in the market, thus creating economic rents for the company from the provision of solutions. Second, this dissertation attempts to answer the question of how manufacturers can alter and realign their resources to support servitization (Article 2). Accordingly, the second article studies the nature of dynamic capabilities, particularly resource reconfiguration practices in servitization. Third, this study seeks to increase understanding of how manufacturers change organizational routines to boost the performance of their solution businesses (Article 3). Finally, the fourth article reviews how a manufacturer and its customer jointly develop solutions and facilitate their mutual learning in deep, complex, and dyadic B2B relationships, in the context of the provision of R&D services. 1.3 Research questions and gap The research question is prompted by the burgeoning discourse on servitization, manufacturers’ strategic renewal, and the capabilities required to manage corporate change through resource reconfiguration. The overall aim of this dissertation is to answer the following research question: RQ: How does a manufacturer manage its capabilities to create wealth from customer solutions? The sub-questions guide the dissertation’s focus toward specific research gaps related to a manufacturer’s capability development activities. Four sub-questions are formulated to address this main research question: 4 Acta Wasaensia SQ1. What determines the solution provider’s strategic capabilities? (Article 1) SQ2. How manufacturer realigns its resource base when becoming a solution provider? (Article 2) SQ3. How manufacturer’s organizational routines evolve when becoming a solution provider? (Article 3) SQ4. How do manufacturers and their customers facilitate joint learning in dyadic business relationships?(Article 4) To address the dissertation’s overall objective, the framework presented below describes the key fields of the dissertation (see Figure 1). Figure 1. The dissertation’s framework Strategic capabilities, that is, those capabilities that enable a manufacturer to create wealth from solutions, are defined in Article 1, whereas the remainder of the articles contribute to the discussion of a firm’s dynamic capabilities, that is, how organizational capabilities and routines evolve and are revamped. The articles building on the dynamic capability perspective are marked in boldface in Figure 1. Article 4 contributes specifically to the discussion of relational dynamic capabilities. The dissertation is built on the grounds of the resource- based view of the firm. The study looks beyond the firm’s directly-owned resources to suggest that effectively managing a firm’s external interests, such as supplier resources, can be a major source of competitive advantage. Hence, the Acta Wasaensia 5 study contributes to the relational view of strategy or the extended resource- based view (ERBV). Overall, the dissertation contributes at the intersection of the resource-based perspective and servitization literature. 1.4 Dissertation scope, position, and contribution Establishing the reasons behind the firm’s (sustainable) competitive advantage has been a core issue for strategy scholars during strategic management’s relatively brief history as an academic subject. It has been stated that successes and failures can be explained in several ways because the managers, owners, employees, researchers, media, and other stakeholders have somewhat biased perspectives on the potential sources of a firm’s competitive advantage. For instance, Laamanen, Lamberg, and Vaara (2016) found 625 narrative attributions to explain Finnish telecom giant Nokia’s rise and fall. These attributions included both firm-endogenous (e.g., capabilities, strategic leadership, organizational design) and firm-exogenous (e.g., business environment, public policy) factors. Paradoxically, the same factors that were used to explain Nokia’s tremendous success in the 1990s, were also often presented to explain Nokia’s later downfall (particularly between the years 2008–2013). Hence, scholars studying the firm’s competitive advantage should be aware of respondents’ cognitive biases, as well as their political agendas when interpreting the data and explaining causalities. Managers have typically emphasized internal factors such as their firm’s capabilities, management team competencies, or decision-making abilities when explaining their firm’s sources of success. However, when looking for reasons for their firm’s failures managers tend to stress environmental factors such as economic turmoil or harmful political decisions (Laamanen, Lamberg & Vaara, 2016). This is understandable because of human nature, but researchers should understand these potential biases when analyzing and interpreting the data. Particularly in qualitative studies, these cognitive biases should be identified, controlled, and managed. Qualitative study scholars (e.g., Beverland & Lindgreen, 2010; Eisenhardt, 1989b; Huberman & Miles, 1994) have suggested that researchers can avoid misinterpreting data for instance by applying an appropriate case selection process alongside data triangulation and auditing techniques. The dissertation contributes to the discussion of servitization through the theoretical lenses of the resource-based view and the dynamic capability perspective. The dissertation advances understanding of the sources of 6 Acta Wasaensia competitive advantage of the industrial solution providers by studying the resource combinations and strategic business processes of the leading manufacturers. Second, the dissertation builds a conceptual model of the dynamic capability of certain firms. This model contributes specifically to the dynamic capability perspective by studying how successful solution providers alter their resources to become service-led companies. Third, the dissertation contributes to the discussion of organizational routines in the context of organizational renewal. The third article investigates how manufacturers revamp their ostensive, and performative routines to become customer-focused solution providers. Finally, the dissertation contributes to the relational view of strategy by investigating how solution providers and their customers jointly develop solutions and increase their mutual learning in business relationships marked by high information asymmetry between the parties. 1.5 Dissertation structure This dissertation is divided into two parts. The first part of the dissertation consists of the introduction, theoretical background, methodology, article summaries, and the discussion and conclusions chapters. The purpose of the first part is to present the background to the study, introduce the main concepts, and position the articles. Figure 2 presents the structure of the first part of the dissertation. Acta Wasaensia 7 Figure 2. Structure of the dissertation (part 1) The second part consists of four articles. Article 1 is co-authored by Huikkola and Kohtamäki. Article 2 is co-authored by Huikkola, Kohtamäki, and Rabetino. Article 3 is sole authored by Huikkola. Article 4 is co-authored by Huikkola, Ylimäki, and Kohtamäki. Huikkola is the leading author in all of the articles and has had the main responsibility for designing, writing, and formulating the articles, collecting, and analyzing the data, and managing the review processes. Table 1 summarizes the articles’ detailed research questions, theoretical grounds, research methods, research contexts, case selection processes, and samples. 8 Acta Wasaensia A rt ic le 4 H ow d o m an uf ac tu re rs an d th ei r cu st om er s fa ci lit at e jo in t l ea rn in g in (d ya di c) b us in es s re la ti on sh ip s? D yn am ic c ap ab ili ty pe rs pe ct iv e R el at io na l v ie w Q ua lit at iv e co m pa ra ti ve ca se s tu dy D ya di c R & D co lla bo ra ti on s (c om pl ex s er vi ce s) B us in es s re la ti on sh ip C as es s el ec te d ba se d on re su lt s de ri ve d fr om th e cl us te r an al ys is o f qu an ti ta ti ve d at as et 7 dy ad ic r el at io ns hi ps 26 in te rv ie w s + se co nd ar y da ta A rt ic le 3 H ow m an uf ac tu re r’ s or ga ni za ti on al r ou ti ne s ch an ge a nd e vo lv e w he n be co m in g a so lu ti on pr ov id er ? D yn am ic c ap ab ili ty pe rs pe ct iv e Q ua lit at iv e co m pa ra ti ve ca se s tu dy Se rv it iz at io n Fo ca l c om pa ny Pu rp os iv e sa m pl in g (d ev ia nt c as e sa m pl in g) 5 gl ob al m an uf ac tu re rs 19 e xe cu ti ve in te rv ie w s + ex te ns iv e se co nd ar y da ta A rt ic le 2 H ow m an uf ac tu re r re al ig ns it s re so ur ce s w he n be co m in g a so lu ti on pr ov id er ? D yn am ic c ap ab ili ty pe rs pe ct iv e Q ua lit at iv e co m pa ra ti ve ca se s tu dy Se rv it iz at io n Fo ca l c om pa ny C as es w er e se le ct ed b as ed on th e re su lt s of a ge ne ra liz ab le q ua nt it at iv e da ta se t c ol le ct ed 9 se rv it iz ed m an uf ac tu re rs 35 s em i- st ru ct ur ed in te rv ie w s + e xt en si ve se co nd ar y da ta T ab le 1 . A rt ic le s um m ar ie s A rt ic le 1 W ha t d et er m in es th e so lu ti on p ro vi de r’ s st ra te gi c ca pa bi lit ie s? [E xt en de d] r es ou rc e- ba se d pe rs pe ct iv e Q ua lit at iv e co m pa ra ti ve ca se s tu dy Se rv it iz at io n Fo ca l c om pa ny C as es w er e se le ct ed fo r fu rt he r an al ys is b as ed o n th e re su lt s of a ge ne ra liz ab le q ua nt it at iv e da ta se t c ol le ct ed 9 se rv it iz ed m an uf ac tu re rs 35 s em i- st ru ct ur ed in te rv ie w s + e xt en si ve s ec on da ry d at a R es ea rc h q u es ti on T h eo re ti ca l ba ck gr ou n d R es ea rc h m et h od R es ea rc h co n te xt U n it o f an al ys is C as e se le ct io n S am p le K ey d at a so u rc es Acta Wasaensia 9 2 THEORETICAL BACKGROUND 2.1 Service business development in manufacturing companies The public discussion has been almost unanimous in emphasizing the benefits of services and solutions to manufacturers (Neu & Brown, 2005; Oliva & Kallenberg, 2003; Ulaga & Reinartz, 2011). Depending on the viewpoint, services and the solution business have been described either as lifesavers or goldmines for western manufacturers in the era of product commoditization, price erosion, and global competition (Cohen, Agrawal & Agrawal, 2006; Luoto, Brax & Kohtamäki, 2016; Oliva & Kallenberg, 2003). Scholars have described how manufacturers can achieve economic, strategic and marketing advantages through providing services (Gebauer & Fleisch, 2007). It has been stated that compared to pure products, services have potentially higher margins (Cohen, Agrawal & Agrawal, 2006; Kowalkowski, Gebauer & Oliva, 2017), guarantee more stable sources of revenues (Brax, 2005; Mathe & Shapiro, 1993), require fewer assets (Davies, 2004), and increase customer loyalty throughout the product life- cycle (Palmatier, Scheer & Steenkamp, 2007). While these appealing statements may be reality for some manufacturers, the extant studies have found that only a minority (20–25%) of manufacturers are able to profit from providing services/solutions to their customers (Reinartz & Ulaga, 2008; Ulaga & Reinartz, 2011). It has been acknowledged that manufacturers typically fail to price and scale the solutions, or assess the service markets appropriately (Shankar, Berry & Dotzel, 2009). Manufacturers may also be trapped with their histories of operating as providers of products and thus, they fail to create and develop the new types of capabilities and mindset required to operate downstream (Cook, Bhamra & Lemon, 2006; Luoto, Brax & Kohtamäki, 2016; Rothenberg, 2007). Servitization may also change the manufacturer’s competitive landscape, and the manufacturer may need to start to compete with its existing customers, or with completely different players. As they go downstream, their positions in the industries’ value systems change (Salonen & Jaakkola, 2015; Wise & Baumgartner, 1999). This may mean that a manufacturer needs to rethink and develop an understanding of what the customer’s customer does and values. The term servitization was coined by Vandermerwe and Rada in 1988 to describe the phenomenon of bundling products, services, software, and expertise into sold and productized packages. The study highlighted that the distribution of work between suppliers and customers will be different in the future and that a firm’s 10 Acta Wasaensia top management team responsible for strategy creation and execution needs to be aware of the business opportunities in services. Their original idea was that services are not just added to the offerings but that firms should understand that products, services, software, and expertise must be amalgamated in an intelligent way. Understanding this would enable firms to achieve strategic benefits compared to their rivals. Vandermerwe and Rada (1988) used multiple types of examples from different industries (from banking and consumer markets to investment goods) to support their arguments and illustrate the servitization phenomenon in general. The term service infusion differs notably from servitization as it assumes that services are added to the offerings incrementally. Accordingly, it takes a viewpoint that products and services are to some extent separate and services are added individually to the offerings. While the term servitization is reminiscent of the logic of LEGO pieces, in that they can be integrated in almost any way, the service infusion resembles domino tiles that must be placed down in a row. Brax (2005) was the first to use the term service infusion, but the term did not become popular until the 2010s, particularly after the contributions of Kowalkowski, Witell, and Gustafsson (2013) and others. Service infusion has been applied particularly in studies investigating the phenomenon of the growth of services in manufacturing companies. Some scholars (e.g., Fang, Palmatier & Steenkamp, 2008; Josephson et al., 2016) have discussed service transition. This term is typically used to describe the evolution of the service business in the manufacturing sector. Authors applying this term typically examine how the relative share of services in total revenues is evolving. The empirical quantitative studies (Eggert et al., 2014; Fang, Palmatier & Steenkamp, 2008; Kohtamäki, Partanen, Parida & Wincent, 2013; Raddats & Burton, 2011) have investigated the performance effects of services and found that manufacturers need a critical mass of services to profit from them through scale advantages and learning benefits. The empirical studies have also found mixed performance effects of services for manufacturing companies. For instance, early studies on servitization (e.g., Davies, 2004; Rothenberg, 2007) identified positive effects of adding services while the more recent studies (e.g., Neely, 2008) found negative effects at some levels. Fang et al., (2008) and Kohtamäki et al., (2013), on the other hand, suggest services are associated with non-linear performance effects, indicating that adding services may not be profitable initially or when the share of services becomes too dominant. Overall, according to the prior empirical studies, the relationship between provided services and performance in the manufacturing context is not clear or without gaps. In practice, listed manufacturing companies in particular have started to Acta Wasaensia 11 report the extent to which services contribute to their total revenues. Some of the manufacturers have even reported their service and product business profits separately. Unfortunately, managers can be tempted to prioritize the performance outcomes of their own units, even if that comes at the cost of the suboptimization of cashflows of the other units in the firm. In many listed manufacturing companies today, executive compensation is heavily based on service business development, making service business growth the key incentive for the top management team. Furthermore, currently, sales of spare parts account for most (60–80%) of the listed Finnish manufacturers’ service business revenues, thus making the service offerings’ sales skewed and unevenly distributed. The term service transition is in line with the service infusion as it implies services do not completely replace the product sales but are instead complementary. Wise and Baumgartner (1999) used the term going downstream to show that the product costs typically represent only a small proportion of the customer’s total cost of equipment ownership (TCO). That is because the customer generates costs for instance when acquiring, financing, using, and disposing of the product. Wise and Baumgartner therefore suggest that manufacturers should focus on serving their customers throughout the product life-cycle, because the value lies in the usage of the equipment, not in the short phase of new equipment sales (Davies, 2004). Service scholars suggest that manufacturers should focus on identifying, quantifying, communicating, and verifying the equipment’s life-cycle value and costs to their customers to justify potentially higher product prices (Töytäri & Rajala, 2015). It needs to be specified that going downstream is not limited only to after-sales services such as spare parts but the term covers all the equipment-related costs and returns to the customer. Therefore, instead of calculating the traditional repayment period of equipment (the shorter the better), scholars and practitioners suggest that customers should pay more attention to assessing the equipment’s return on investment (ROI) during the product lifespan (the higher the better). Oliva and Kallenberg (2003) use the term moving from products to services to emphasize the strategic importance of services to manufacturers. Although the term refers to strategic transformation (revolutionary change), the examples applied in their article show that the authors contribute to the term strategic transition, which is incremental, and evolutionary in nature. While strategic transformation refers to a firm’s complete renewal (e.g., the manufacturer no longer produces goods any longer/ the firm changes its Standard Industrial Classification, SIC), strategic transition accords with strategic extension (e.g., the manufacturer provides services in addition to products). This term implies that 12 Acta Wasaensia services should not be viewed as add-ons, but manufacturers should consider if their products should in fact be considered the add-ons. Servicizing is a term coined by Rothenberg (2007). This term has been adopted to illustrate a phenomenon that firms can make more profits even if selling less volume of product in the same time. This term has proved useful in the discussion of a firm’s social responsibility and particularly, environmental sustainability (Pereira et al., 2016), and it can be applied in both consumer and B2B-markets. The term dematerialization has also been used to illustrate the phenomenon of doing more with less. Léo and Philippe (2001) apply the term tertiarisation to describe how services enable manufacturing firms to expand to other sectors through diversification. For instance, IBM has been able to successfully expand into the consultancy and software sectors through services. Apple has been able to leverage its software and service competencies to cover sectors other than computers (e.g., mobile phones and tablets). KONE has also expanded its operations to include maintaining automatic doors, in addition to servicing elevators and escalators. Service business development in manufacturing companies has pushed them to develop new breakthrough service-related technologies such as the IoT. This development may lead some manufacturers to operate in unheard of sectors in the future, to disrupt other markets, or to find their own markets being disrupted by up and coming companies. Value migration refers to the process of value creation evolving through services. This term suggests that manufacturers should evaluate how much profit they could capture throughout the product life-cycle. Martin and Horne (1992) apply the term service orientation to describe the same phenomenon. Value migration is reminiscent of the term going downstream, as it emphasizes the value captured after the sales of equipment. For instance, it has been estimated that more than 80% of an operator’s costs arise from operation, maintenance, and administration (Davies, 2004). Table 2 presents some widely-adopted terms to describe service business development in product manufacturing companies. The applied terms have their similarities and differences, and also to some extent overlap each other. In this dissertation, the general term servitization will be used from now on to describe service business development and services strategic role in product manufacturing companies because the term is established, widely used, and it permits of a viewpoint that products, services, and software are intertwined, albeit in rather complex ways. Acta Wasaensia 13 Table 2. Selected terms adopted to describe service business development in manufacturing companies Term Extract Source(s) Servitization "Modern corporations are increasingly offering fuller market packages or ‘bundles’ of customer-focused combinations of goods, services, support, self-service, and knowledge" Vandermerwe & Rada, 1988: 314 Service infusion "To test the ground in the service business and avoid substantial risk, manufacturers add services to their total offering one-by-one" Brax, 2005: 143; Kowalkowski, Witell, & Gustafsson, 2013 Service transition "A firm initiating a service transition strategy typically begins with a low service ratio and, over time, attains progressively higher levels of service content" Böhm, Eggert & Thiesbrummel, 2016; Fang et al., 2008: 1 Going downstream "The combination of stagnant product demand and an expanding installed base has pushed economic value downstream, away from manufacturing and toward providing services required to operate and maintain products" Wise & Baumgartner, 1999: 134 Moving from products to services "Transitioning from product manufacturer into service provider constitutes a major managerial challenge. Services require organizational principles, structures and processes new to the manufacturer. Not only are new capabilities, metrics and incentives needed, but also the emphasis of the business model changes from transaction- to relationship-based" Oliva & Kallenberg, 2003: 161 Servicizing "By ‘servicizing’, suppliers may change the focus of their business models from selling products to providing services, thereby turning demand for reduced material use into a strategic opportunity" Rothenberg, 2007: 83; Pereira et al., 2016 Tertiarisation “The services which are the most closely linked to the product (after-sales services, technical assistance, transportation, machine setting or maintenance services) are the more commonly provided by exporters” Léo and Philippe, 2001: 91; Malleret, 2006 Value migration "By expanding the scope of the product offering to include services, firms can capture life-cycle profits associated with servicing an installed base" Davies, 2004: 731 14 Acta Wasaensia 2.1.1 Definition of solution(s) The Oxford English Dictionary defines a solution as “a means of solving a problem or dealing with a difficult situation.” Solutions (plural) have been described as “products or services designed to meet a particular need.” In the servitization literature, the term solution has been applied in various ways, and scholars have prefixed the term solution with customer, integrated, or total to highlight the different types of existing solutions (Nordin & Kowalkowski, 2010). Tuli et al. (2007) use the term customer solution to emphasize that a solution should meet a customer’s particular need. The term integrated solution has been used to emphasize that products and services are combined into a productized package sold to the customer. Authors typically use the term integrated solution to describe a phenomenon where a manufacturer designs a solution for the customer based on key parameters set by the customer. For instance, an airport management company may request a supplier design a solution to move 20,000 passengers inside one terminal as fast as possible each day. Suppliers then design a solution to address their customer’s specific needs, and such a solution might include a range of products, a service contract, or performance guarantees (Davies, Brady & Hobday, 2006; Windahl & Lakemond, 2010). A total solution usually refers to a so-called turnkey solution provided to the customer. This is an attempt to offer customers a one-stop-shopping experience, meaning that a customer can source all the services required from one supplier to reduce its transaction costs. The supplier decides which tasks it will undertake in-house and which it will outsource. For instance, ABB offers total solutions to its customers operating in the oil and gas sectors, which involves taking full responsibility for a plant’s functionality. A total customer solution in contrast refers to a tailored solution provided to a firm’s existing customers. In addition, the terms customized (see Kohtamäki & Partanen, 2016) or tailored solutions have been applied to underline the importance of the knowledge-related work required to modify solutions on a case-by-case basis. Product-service systems (PSS) are a Scandinavian concept (Baines et al., 2008) and have been used particularly in the manufacturing sector and technical studies to describe the integration of products and services that deliver value in use. For instance, Rolls-Royce’s power-by-the-hour concept or Michelin’s fleet management solution could be illustrations of PSS because the customer pays for the value (flight hours or kilometers driven) and outcomes rather than for pure products or services. On the other hand, these types of examples could be described also as performance-based services, operations, and maintenance (O&M) solutions, or total solutions. Key to the PSS concept is that the supplier is responsible for providing the outcome to the customer. Hence, the supplier takes Acta Wasaensia 15 the risk (and the possible profits based on the risk-level) of guaranteeing the solution’s functionality. Other authors use the simple term offerings to refer to value derived from the product/service usage (Gummesson, 2002; Grönroos, 2008). Hybrid offerings (Ulaga & Reinartz, 2011) accords with the integration of products and services into the offerings provided. This term is used to indicate that the value of products and services is greater when bundled than if they were purchased separately. Accordingly, it assumes that one plus one is greater than two. Table 2 presents the most commonly used terms to describe solutions; however, the contents do not form an exhaustive list but cover only the terms that often appear in the servitization literature. In this dissertation, the purest form, solution, is preferred but in the research articles specific terms may have been applied for technical reasons. To wrap up, a solution in this dissertation is defined as a combination of products, services, software, and knowledge provided by the manufacturer that solves customer-specific problems or meets customer- specific needs. 16 Acta Wasaensia Table 3. Types of solutions Term Extract Source(s) Integrated solutions "The new model is about systems integration and the provision of services" "[integrated solutions] combine products and services into a seamless offering that addresses a pressing customer need Davies, Brady & Hobday, 2006: 40; Wise & Baumgartner, 1999: 138 Product-service systems (PSS) "A Product-Service System (PSS) is an integrated combination of products and services that deliver value in use" Baines et al., 2008: 554 Customer solutions "A solution is a customized and integrated combination of goods and services for meeting a customer’s business needs" Tuli et al., 2007: 1 Total solutions (also turnkey solutions, plug & play solutions) "Industrial service providers should offer one-stop-shopping to their clients. This implies a high degree of customization and a “proactive” sensing of hardly explicit client specifications" Antioco et al., 2008; Matthyssens & Vandenbempt, 1998: 346 Solutions offerings "There is no unanimous and rigorous definition of solutions, but rather a number of often broad and generic descriptions that could be applied to a wide array of different offerings, if not generically" Nordin & Kowalkowski, 2010: 441 Total customer solution "An intimate and deep customer understanding and relationship that allows us to develop value propositions that bond to each individual customer" Hax & Wilde, 2001: 382 Offerings "They [offerings] are bought by customers in order to assist them with a service that should create value for them" Gummesson, 2002; Grönroos, 2008: 301 Hybrid offerings/solutions “[hybrid offerings are] one or more goods and one or more services, creating more customer benefits than if the good and service were available separately" “hybrid solutions are products and services combined into innovative offerings” Shankar, Berry & Dotzel, 2009: 95; Ulaga & Reinartz, 2011: 5 Acta Wasaensia 17 2.1.2 Drivers of servitization The extant literature has suggested a number of reasons why manufacturing companies pursue servitization strategies (Luoto, Brax & Kohtamäki, 2016). Typically, servitization has been assumed to generate greater financial benefits for the company (Wise & Baumgartner, 1999) because of higher profit margins (Cohen, Agrawal & Agrawal, 2006) and a more stable source of income (Gebauer & Friedli, 2005; Mathe & Shapiro, 1993). A service business typically requires fewer assets than the traditional manufacturing business model (Davies, 2004) and thus offers the manufacturer a better return on equity (ROE). In addition to the financial benefits, scholars have identified that servitization offers a manufacturer strategic and marketing advantages in the industrial markets (Gebauer, Fleisch & Friedli, 2005; Neu & Brown, 2005; Rabetino, Kohtamäki & Gebauer, 2016). Manufacturers are able to generate a competitive advantage in the markets through services because product-service components seem to be less sensitive to the customer’s usage of a market mechanism (Baines et al., 2008), which further allows the manufacturer to achieve greater profitability (Lele, 1986; Oliva & Kallenberg, 2003; Ulaga & Reinartz, 2011). It has been stated that product-service combinations are more difficult for competitors to duplicate because they cannot be touched, smelled, or easily compared before making a buying decision (Gebauer & Friedli, 2005; Oliva & Kallenberg, 2003). Servitization typically contains a pronounced human factor, thus potentially making the outcome more variable and insecure (Di Mascio, 2010; Neu & Brown, 2005). Scholars have also acknowledged that manufacturers’ customers have increasingly started to ask for services (Auramo & Ala-Risku, 2005). One factor that has increased the service demand is an increased outsourcing/subcontracting trend (Levery, 1998; Reinartz & Ulaga, 2008). Generally, companies have outsourced 1) their non-core activities to release capital and to focus on developing their core businesses and 2) part of their core activities to add flexibility (Eurostat, 2016). Consequently, vertical disintegration and increased networking and collaboration between firms have facilitated the increased demand for services (Slack, 2005). Moreover, developing deep and intimate customer relationships has facilitated learning between manufacturers and their customers, thus providing new service ideas and boosting new service development (NSD) processes (Kindström, Kowalkowski & Sandberg, 2013; Penttinen & Palmer, 2007; Tuli et al., 2007; Vargo & Lusch, 2008). While the above-mentioned factors could be called pull factors, some push factors can also be identified that impel manufacturers to consider servitization 18 Acta Wasaensia strategies. One of the most common is the commoditization of the product business (Oliva & Kallenberg, 2003; Reinartz & Ulaga, 2008). Commoditization causes price erosion because it is more difficult for the firm to differentiate itself in the markets through its products. Increasing the features or the intelligence of the product may be one way to protect a product business; however, product features are typically copied more easily and faster than service components because a product is tangible. Competition in the product business has intensified during the last 10 years because of the accelerated speed of globalization. Specifically, increased competition from the East-Asian economies (e.g., China and India) has driven western manufacturers to sense business opportunities downstream. In addition, increased environmental concerns and the dematerialization trend have pushed value downstream (see Rothenberg, 2007) as the business model based on traditional production logic has been seen as a polluting, unecological, unsustainable, or even unattractive one. Furthermore, the manufacturer’s installed base of products can become stagnant in certain markets, and thus new equipment sales do not provide attractive business opportunities (Reinartz & Ulaga, 2008). This pushes the manufacturer to seek business opportunities from other product markets or customers’ value chains by leveraging its existing resources (Barney & Clifford, 2010; Danneels, 2011; Léo & Philippe, 2001). Moreover, longer product life-spans have forced manufacturers to serve their customers by offering life-cycle services (Rabetino et al., 2015; Wise & Baumgartner, 1999). Manufacturers have also noticed that the product business does not provide opportunities to develop sufficiently deep relationships with their customers (Baines et al., 2008; Boyt & Harvey, 1997). This is pushing manufacturers to provide services to their customers because services encourage the manufacturer to develop long-lasting and deep customer relationships (Tuli et al., 2007; Vargo & Lusch, 2004). Complex R&D services typically provide opportunities to collaborate closely with customers as the information asymmetry in R&D services is typically high and their development requires resources, time, and relationship-specific investments from the dyads. Based on the extant servitization literature, Table 4 lists the recognized push and pull factors that cause manufacturers to strive to implement servitization strategies. Acta Wasaensia 19 Table 4. Drivers of servitization Push factors Pull factors Product commoditization (Reinartz & Ulaga 2008) Differentiation through servitization (Gebauer & Fleisch, 2007; Gebauer, Gustafsson & Witell, 2011) Price and profit erosion in product business and fear of being a laggard without services (Cohen, Agrawal & Agrawal, 2006; Wise & Baumgartner, 1999) Profit opportunities during the product life-cycle (Davies, 2004; Wise & Baumgartner, 1999) Customer insistence (Maxwell & van der Vorst, 2003; Davies, Brady & Hobday, 2007 ) Increased customer understanding and demand (Auramo & Ala-Risku, 2005; Oliva & Kallenberg, 2003) East-Asian competition and globalization trend (Davies, 2004; Luoto, Brax & Kohtamäki, 2016) Economic, strategic and marketing benefits (Baines et al., 2008; Gebauer, 2005; Mathieu, 2001) Environmental concerns and dematerialization trend (Maxwell & van der Vorst, 2003; Rothenberg, 2007) Dematerialization trend (Pereira et al., 2016; Rothenberg, 2007) Saturation of installed base (Reinartz & Ulaga, 2008) Stability of income (Gebauer & Fleisch, 2007; Mathe & Shapiro, 2003) Superficial customer relationships in product business (Baines et al., 2008) Less sensitivity to price-based competition (Malleret, 2006) Longer product life-spans (Wise & Baumgartner, 1999) Developing long-lasting customer relationships (Mathieu, 2001; Penttinen & Palmer, 2007; Tuli et al., 2007; Vandermerwe & Rada, 1988) Growth and profitability requirements and pressures from owners, sponsors and other stakeholders (Fang et al., 2008; Neely, 2008) Outsourcing trend (Reinartz & Ulaga, 2008; Slack, 2005) 2.1.3 Managing the transition from products to solutions The early studies on servitization (e.g., Kalliokoski et al., 2003; Neu & Brown, 2005; Oliva & Kallenberg, 2003; Reinartz & Ulaga, 2008; Wise & Baumgartner, 1999) described the transition process from products to services/solutions very well. The transition has typically been described in a continuum starting from product-logic (services seen as add-ons) and ending with the adoption of a 20 Acta Wasaensia service-logic (tangible products seen as add-ons). Figure 3 presents the product- service continuum in manufacturing companies. Figure 3. The continuum of products-services. (Adapted from Oliva & Kallenberg, 2003: 162) Scholars have usually described the transition from products to solutions as a systematic process (Baines et al., 2017). For instance, Oliva and Kallenberg (2003) suggest that a manufacturer should start its servitization process by consolidating product-related services under one roof. After that, the manufacturer should enter the installed base (IB) service markets by creating a separate service organization to market, sell, and deliver services effectively. Third, the manufacturer should decide whether it will expand to offer either relationship-based services or process-centered services. Finally, the manufacturer takes over the end-user’s business operation. Oliva and Kallenberg (2003) thus propose that the change process is incremental rather than radical. Reinartz and Ulaga (2008) support this observation, in that they found the most successful companies progressed rather slowly from a product-based logic toward a service-based logic. Reinartz and Ulaga (2008) recognize a certain path from products to services. They suggest that the firm cannot move to another level before it has achieved certain goals at the previous level. They suggest that the industrial company should recognize that it is already providing services to its clients (whether for a fee or free of charge). Second, they suggest that a manufacturer should industrialize its back-office by standardizing its service processes in a comparable way to its equipment production. Third, a manufacturer should create a service-aware sales force that is able to sell services to its clients. Finally, a manufacturer should focus on developing its customers’ business processes. However, the transition process is not always that straightforward. Gebauer, Fleisch and Friedli (2005) developed the term service paradox to describe a phenomenon where a manufacturer adds services to its offerings but fails to profit from them in relation to investments made because of increased costs accruing from adding those services. The difficulty of making services scalable has been identified as one of the key reasons why manufacturers fail to profit from the solutions they provide (see Shankar, Berry & Dotzel, 2009). The extant literature presents the multiple challenges related to servitization (see Acta Wasaensia 21 Brax, 2005). It is difficult to identify the optimal scale of services the manufacturer should provide to its customers. At some point, this expansion can lead to a new situation regarding the competitive environment and raises questions of whether manufacturers will start to compete with their existing customers, and of whether doing so is a good idea. 2.1.4 Reflections on the examples of servitization in Finland Finland can be considered to have a small, highly industrialized, and open economy. The role of export is vital for such an economy as the value of Finnish export in 2015 was EUR 58.8 billion (the value of imports was EUR 54.3 billion). Investment goods and services each accounted for 29 percent (a total of 58 percent) of the export value. The main export products for Finland are petroleum products (e.g., Neste Oil Oyj), stainless steel (e.g., Outokumpu Oyj), sawn wood, and wood pulp. Machinery products accounted for 13.5 percent of the total exports, thus generating almost EUR 8 billion in export value. Finland has become famous for designing, manufacturing, and exporting investment goods such as paper machines, elevators, and escalators, forestry equipment, agricultural machinery, power plants, industrial cranes, mining equipment, and marine propulsion systems. As Tauno Matomäki, who holds the Finnish honorary title of vuorineuvos, stated some time ago: “Finland should not export anything that is smaller than a horse.” These investment goods typically contain also service components because they need regular maintenance, customer training, software updates, spare parts, and modernization during the product life-cycle. Increasingly, these products have become more intelligent through embedded software, sensors, and automation. This fourth industrial revolution (or industrial internet, internet of things/IoT, industry 4.0) has been forecast to change traditional manufacturers’ strategies, the competition landscape, value chains, and business models (Allmendinger & Lombreglia, 2005; Porter & Heppelmann, 2014; 2015). For manufacturers, this can mean that they become like software companies in the future (Porter & Heppelmann, 2015) as the data collected through sensors will be their key asset. Most of the Finnish listed product manufacturers have been developing these types of intelligent solutions, and for instance, listed manufacturers such as Konecranes, KONE, Cargotec, Wärtsilä, Valmet, Ponsse, Raute, Metso, and Outotec have been investing heavily in the IoT. All of these manufacturers have previously developed automation competencies and sold life-cycle services to their customers. Accordingly, data- oriented business logic can be basis for their future business model, after established product-, and service-oriented business logics. 22 Acta Wasaensia Servitization has recently attracted considerable attention from Finnish scholars as the Finnish government has supported this research topic through the SHOK programs (Strategic Centres for Science, Technology, and Innovation) overseen by Tekes (The Finnish Funding Agency for Innovation). Such research projects have focused on studying topics related to servitization including projects such as Serve, System1, FutIS, and S4Fleet, to name but a few. Topics related to the IoT subsequently attracted the attention of Finnish scholars from different sectors (technology, business strategy, marketing, operations management, etc.) as digitization has been seen as a key driver or a potential success factor for the Finnish exporters. In addition, most of the listed Finnish machinery manufacturers have been successful in adopting servitization strategies, as evidenced by services accounting for a considerable share (20–60%) of the listed manufacturers’ revenues and total profits. In addition to the relatively large manufacturers, Finnish SMEs have also adopted servitization strategies. For instance, Kohtamäki and Partanen (2016) reported how SMEs can profit from knowledge-intensive business services (KIBS) if they are able to build deep relationships with their customers and facilitate learning in the relationships. Kowalkowski, Witell, and Gustafsson (2013) found that SMEs should focus on building different value constellations (altogether nine different value constellations) with their customers to create wealth from services and solutions. Leading Finnish business-to-business researchers have published many servitization-related articles and business books. To name a few, Kaj Storbacka, and Suvi Nenonen, have been investigating servitization business models and organizational capabilities, Marko Kohtamäki, Jukka Vesalainen, and Kristian Möller have been studying the network capabilities required in servitization. Petri Parvinen and Pekka Töytäri have been studying the anatomy of solution sales, Christian Grönroos has conceptualized the value co-creation models in the B2B-context, and Risto Rajala has been studying industrial companies’ service systems and innovations. In addition, Hannu Makkonen, Elina Jaakkola, and Anna Salonen have been studying value creation processes in the servitization context. Moreover, there have been a few Finnish doctoral dissertations focusing on the servitization phenomenon published recently. Esko Penttinen studied the transition process from goods to services in his dissertation published in 2007. He presented findings on the relevance of developing information systems and deep relationships for the manufacturer to master the transition process. Saara Brax’s doctoral dissertation published in 2013 reviewed extant service definitions and contributed to the process-based nature of services in manufacturing companies. Taija Turunen’s doctorial dissertation published in 2013 examined how organization structure characteristics and the operational premises enable a manufacturer to move from a product to a service orientation. Max Finne’s Acta Wasaensia 23 doctoral dissertation published in 2014 studied the external situational factors that determine if broadening the offering to cover services is a feasible strategy for manufacturers. In 2015, Pekka Töytäri studied the anatomy of value-based exchanges between B2B-companies, thus contributing to the value-based selling and pricing literature. Recently (in 2016), Ville Eloranta’s dissertation examined the nature of platform-based business models and how service platforms affect manufacturers’ business strategies. This doctoral dissertation differs from previous dissertations in that it concentrates purely on identifying the organizational capabilities required to boost servitization in manufacturing companies. The dissertation’s theoretical grounding is strictly based on the resource-based perspective on strategy. That resource-based perspective has established its position in the sphere of strategic management, fits within the organizational economics paradigm, and complements industrial organization research (Lafley & Martin, 2013; Mahoney & Pandian, 1990). The resource-based perspective is one paradigm that explains why some firms are able to gain a competitive edge (economic rents) in the markets while others are not. 2.2 The resource-based perspective on strategy The resource-based perspective (the resource-based view; the RBV) proposes that a firm’s sustainable competitive advantage (SCA) is primarily based on the firm’s unique, idiosyncratic, endogenous, and immobile resources. If a firm’s resources are valuable, rare, inimitable, and un-substitutable (Barney, 1991), and if they are effectively organized (Barney, 1995), they can sustain above-average returns (economic rents) for the firm. These resource characteristics are given the acronym VRIN (valuable, rare, inimitable, non-substitutable) or VRIO (value, rarity, inimitability, organization). The fundamental logic of the VRIO model is that the more constituent characteristics a firm’s resources have, the better the firm will perform against its peers. The roots of the resource-based perspective lie in Edith Penrose’s (1959) work related to the growth of the firm. She reasoned that a firm’s growth was initially based on the firm’s scarce human resources—how they were managed and how new ones were recruited. She rationalized that the expansion process was dynamic in nature as the new recruits required time to be fully developed. Penrose described resources as the firm’s physical things it buys, leases, or produces for its own use, and the people recruited to make them effectively part of the firm. Penrose (1959) highlighted that services are the contributions of 24 Acta Wasaensia these resources that can make a difference to the firm’s productive operations, and that a resource can be seen as a bundle of services. Birger Wernerfelt (1984) coined term the resource-based view of the firm and suggested that resources are only half of the issue; products and services comprising the other half. He rationalized in a similar way to Penrose that the firm is able to extend its extant resources to produce multiple products/services, thus enabling that firm to expand into new product areas and markets (tertiarisation/resource leverage). Resources are thus the important antecedents to products, and ultimately to firm performance (Gruber et al., 2010; Priem & Butler, 2001). Some research holds that the external perspective was always present in Penrose’s work as the productive opportunity refers to the dynamic interaction between internal and external business environments (see Spring & Araujo, 2013). To sense this opportunity, managers need to understand their customers’ technologies, processes, and challenges. In order to seize this opportunity, a firm’s managers need to identify, build, and utilize interfirm resources effectively (Spring & Araujo, 2013). Researchers and practitioners have acknowledged that intangible resources such as staff expertise, organizational culture, and a brand are more likely to be the origins of a firm’s sustainable competitive advantage than tangible resources such as production lines or other physical assets because tangible resources are easier for a firm’s rivals to identify, duplicate, and transfer (Barney, 1986: Hatch & Dyer, 2004). Prahalad and Krishnan (2008) stress that in today’s dynamic environment, the old sources of competitive advantage such as possessing labor, technology, and financial capital are no longer relevant. Instead, access to those resources through partners will become essential because the resources should be considered global and scalable. The knowledge-based view (KBV) considers knowledge the most strategic resource a firm possesses (Grant, 1996; Kogut & Zander, 1992). The KBV thus considers tangible and intangible assets hierarchically constructed and treated. Sometimes identifying the firm’s most valuable assets is difficult even for the firms’ managers. Causal ambiguity refers to how well managers are aware of the linkage between the firm’s resources and outputs (Peteraf, 1993). Causal ambiguity is more likely to occur if the resource is knowledge-based or otherwise complex. As services and solutions are typically complex constructions, it might be difficult for the managers to identify the mechanism by which they are created or delivered in practice in a valuable way. For instance, it can be difficult to analyze the performance impact of organizational culture because of its intangible nature. It can be difficult for managers even to shape the understanding of the key factors behind an extraordinary organizational culture. Acta Wasaensia 25 In short, the origins of the resource-based view suggest that the firm’s growth and competitive advantage are based primarily on resource bundles the firm possesses and controls, including its external assets. These capabilities that contribute to competitiveness are scarce, relatively immobile, and take time to evolve. In addition, these resources must be well organized and properly managed to create wealth, and they can be leveraged to cover new product/service markets (tertiarisation). Even though the RBV’s roots lay back in the 1950s, the paradigm did not become popular until the 1990s, particularly after the contributions of Wernerfelt (1984; 1995), Barney (1991; 1995), Grant (1991), Prahalad and Hamel (1990), Amit and Schoemaker (1993), Peteraf (1993) and Rumelt (1984). The RBV is in essence introspective and centered on the firm itself (Porter, 1991). This inside-out view of strategy suggests that the firm’s sustainable competitive advantage cannot be based on the special characteristics of an industry, the firm’s positioning within the industry, the industry structure, or temporary disruption in the markets (Hansen & Wernerfelt, 1989). Instead, the RBV suggests that those firms outperforming their peers in the long term possess heterogeneous resources that are valuable to the firm and its customers, scarce in the industry, durable, difficult for their rivals to duplicate, and offer core products/services that are not easily substitutable. Moreover, the extant RBV literature stresses the importance of an organization’s ability to deploy resources (Barney, 1995; Eisenhardt & Sull, 2001; Long & Vickers-Koch, 1995; Ray, Barney & Ruhanna, 2004). Accordingly, managers’ ability to develop strategic business processes to steer how resources are reallocated and organized has been studied recently (Bingham, Eisenhardt & Furr, 2007). Configuring strategic business processes has long been a black-box for strategy researchers, because observing how resources are managed and deployed in real-life requires a remarkable volume of research resources, typically involving an ethnographic research method, or extensive observation within the organization because management practices and systems, and organizational procedures differ considerably between firms. These management processes and practices have been extensively studied mainly in large American blue-chip companies such as Google, Apple, or IBM (see Gerstner, 2003; Isaacson, 2011; Lashinsky, 2012; Levy, 2011). Strategic or core capabilities are the most critical and distinctive resources a firm possesses. Strategic capability consists of a firm’s core competencies and strategic business processes (Long & Vickers-Koch, 1995). For instance, Honda’s core competencies consist of the skills and knowledge to design and build small engines and powertrains (Long & Vickers-Koch, 1995; Prahalad & Hamel, 1990) whereas Canon has core competencies in optics, imaging, and microprocessor 26 Acta Wasaensia controls. These core competencies are utilized to produce core products and services in different domains such as Canon’s image scanners, copiers, desktop printers and cameras (Prahalad & Hamel, 1990). Strategic business processes refer to those business processes that firms use to deliver a firm’s special expertise in the form of the products and services that are valuable to their customers and other stakeholders (Long & Vickers-Koch, 1995). Strategic/core capabilities are therefore those capabilities that enable a firm to achieve a competitive edge in a particular industry. One of the world’s most admired investors, Warren Buffet, has stated that he looks for economic castles protected by unbroachable moats. These moats are built by the firm’s valuable, rare, and inimitable sets of resources such as the firm’s brand or the top management team’s competencies to run the dedicated businesses. The wider the moat, the more likely it is that the company can secure long-term economic rents. Coyne (1985) emphasizes that not only must a firm have a resource or a skill that its rivals do not have, but this capability gap must make a difference to the customer. On the other hand, Itami (1987) notes that some of a firms’ intangible assets are not under the control of its employees but are basically dependent on the perception of its customer base. Hence, in order for a competitive advantage to be sustainable, key buying criteria and the existing capability gap must be enduring (Bharadwaj, Varadarajan, & Fahy 1993). Day (1994) describes these strategic capabilities as strategic orientations. A firm’s strategic orientation is its philosophy of how to conduct business, as manifested through its beliefs and values. These beliefs and values are considered intangible, interaction based, and difficult to trade, and imitate resources. Amit and Schoemaker (1993) state that as a result of deploying and bundling resources for instance in functional areas such as in brand marketing, firms can build corporate capabilities such as a highly reliable service, a dublicable process, product innovations, or responsiveness to market trends. The RBV as such is also static in nature and also assumes that sustainable competitive advantage can be attained. Therefore, existing capabilities are just a snapshot of a firm’s current situation but do not guarantee the firm’s future success. This is paradoxical because, for instance, Nokia achieved its best profitability level in 2007 even though the iPhone had already been launched and Nokia had the same key resources as during the period of its later downfall. In today’s high-velocity business markets, particularly in the software industry, a firm’s existing resources can even hinder its growth. This has been termed core rigidity (see Leonard-Barton, 1992), meaning that a firm’s core competencies or capabilities can become obsolete as the business conditions change, and can even lead to competitive disadvantage (Atuahene-Gima, 2005). For instance, Kodak Acta Wasaensia 27 Eastman had core competencies related to traditional photography, but these competencies did not help Kodak to succeed in the era of digital photography, thus making Kodak’s existing core competencies obsolete. As a result, the company was declared bankrupt in 2012. Kodak’s old rival, Fujifilm, has on the other hand made different choices after struggling in the traditional photography industry. Fujifilm succeeded by reinventing itself by leveraging its resources into new market areas (e.g., expanding into the healthcare and pharmaceutical markets) and developing new organizational capabilities (e.g., through the acquisition of new technologies such as digital imaging) to support a new business orientation. Path dependency is a key element in neoclassical economics (see Nelson & Winter, 1982) and it means that a firm’s actions undertaken in its past affect its current and future outcomes negatively or positively (Vergne & Durand, 2010). For instance, a manufacturer’s equipment sold in the past provides opportunities to service that same equipment in the future. In contrast, a manufacturer’s processes and incentives might have been built based on assumptions derived from the product business and can hinder the adoption of service-oriented processes and incentives. Therefore, the RBV does not strictly address how firms transform and reinvent themselves to meet new business requirements, as it focuses on explaining a firm’s current advantage in the market. The dynamic capability approach attempts to explain how firms recreate themselves by sensing and seizing new business opportunities and modifying their organizational resources and routines (patterns to deploy resources). The RBV typically takes a focal company as its unit of analysis and suggests that the origin of a firm’s competitiveness lies primarily in its deployment of internal resources. However, as vertical disintegration and outsourcing have increased, the importance of interfirm cooperation to a firm’s competitive advantage has increased. This has been termed the relational view of strategy (Dyer & Singh, 1998) or the extended resource-based view (or ERBV; see Mathews, 2003; Spring & Araujo, 2013). Overall, the RBV has many extensions. In this dissertation, in addition to strategic capabilities, the focus is particularly on dynamic capabilities and the relational view, both of which are examined in some detail in the following sections. 2.2.1 Dynamic capabilities (DC) The RBV has rightly been criticized for its static nature (Priem & Butler, 2000). Even though resources can meet VRIN criteria today, the same resources can be useless tomorrow, as the examples of Kodak and Nokia indicate. The DC approach addresses this fundamental problem and suggests that resources and 28 Acta Wasaensia capabilities must be developed, changed, and revamped as the market conditions change (Augier & Teece, 2009). Long and Vickers-Koch (1995) distinguished between the core capabilities that provide today’s competitive advantage (critical core capabilities) and the core capabilities that will provide tomorrow’s competitive advantage (cutting edge core capabilities). Cutting edge core capabilities are not the source of today’s competitive advantage but can become valuable as markets and business conditions change. Some scholars have stated that there is no such thing as a sustainable competitive advantage anymore because of the turbulence and turmoil in many industries (D’Aveni, 1994). The DC approach became popular in the late 1990s. Scholars were first interested in understanding how some firms were able to succeed in high-velocity markets (Eisenhardt, 1989a), particularly during the dot-com boom (Eisenhardt & Sull, 2001). Accordingly, the original idea behind DC was outside-in as the approach stressed the importance of developing capabilities to address rapidly changing business conditions. However, later on, the dynamic capability concept has been used to explain how firms redirect themselves by changing their resource bases. The DC approach views strategy as something created both inside-out and outside-in and thus borrows elements from both the Industrial Organization (IO) and the resource-based perspectives. In the era of Web 2.0 (including social media companies and platform-based business models), the term New Dynamic Capabilities has been used to highlight that the pace of change is ten times faster in a globally networked business environment, which poses several challenges for the development and deployment of organizational capabilities (Shuen & Sieber, 2009). Hence, the discussion of new dynamic capabilities traces the discussion of DC back to its roots. IBM has been used as an example in both the academic literature and managerial books to illustrate how firms can recreate themselves through reorganizing structures, renewing strategy work, revamping procedures, and modifying resources (see Gerstner, 2003; Hamel, 2000; Harreld, O’Reilly & Tushman, 2007; Lloyd & Phillips, 1994; O’Reilly & Tushman, 2009; Tushman & O’Reilly, 1996). IBM, also known as the Big Blue, has become a textbook example of how a large corporation can undertake a total makeover from a product-based firm toward a pure service company. A corporation capable of accomplishing such a strategic renewal is labeled an ambidextrous organization (see Birkinshaw & Gibson, 2004; Cyert & March, 1963; March, 1991; O’Reilly & Tushman, 2009) meaning that the firm is able to apply both exploration (radical innovation) and exploitation (taking advantage of current resources) strategies simultaneously. Tushman and O’Reilly (1996) call this an ability to manage both evolutionary and revolutionary change, meaning that the firm is able to pursue both incremental improvement and discontinuous innovation at the same time. Acta Wasaensia 29 Teece (2007) has conceptualized dynamic capability as a firm’s capability to sense and seize new business opportunities in the markets and reconfigure its intangible and tangible resources to address rapidly changing environments. Therefore, the DC approach holds that a firm can be successful by changing the market conditions proactively or by adapting to changed circumstances reactively. Wang and Ahmed (2007) found in their literature review that the dynamic capabilities include three main component factors: 1) adaptive capability, 2) absorptive capability and 3) innovative capability. Having adaptive capability means a firm has the ability to identify and take advantage of emerging market opportunities (Chakrawarthy, 1982), while having absorptive capability refers to the firm’s ability to recognize the value of new, external information, and to absorb and commercialize it (Cohen & Levinthal, 1990). The roots of innovative capability lie in Joseph Schumpeter’s (1970) concept of creative destruction and it addresses a firm’s ability to shake up and destroy existing market structures by developing new products, services, organizational processes, or technologies. The main idea is that entrepreneurs and new technologies can create disequilibrium in the market, thus providing opportunities to gain economic rents through new market shaping innovations. Researchers view the relation between the firm’s sustainable competitive advantage and dynamic capabilities differently. For instance, Eisenhardt and Martin (2000) do not consider dynamic capabilities as the source of a firm’s SCA. Some scholars compare DC to a firm’s threshold capabilities (see Long & Vickers-Koch, 1995), thus suggesting that dynamic capabilities only allow a firm to achieve the minimum requirements in the markets, not necessarily to exceed them. On the other hand, some scholars (see Teece, 2007) stress that DC is the key source of a firm’s SCA. Eventually, these firm’s regenerative capabilities (see Ambrosini, Bowman & Collier, 2009) facilitate a firm’s learning capability (learning to learn) to adopt to new circumstances. Strategic learning refers to a firm’s competence building and leveraging processes (Sirén, Kohtamäki & Kuckertz, 2012), including the creation, assimilation, and internalization of strategic knowledge in a way that improves the firm’s competitiveness (Kuwada, 1998; Thomas, Sussman & Henderson, 2001). Strategic learning resembles the concept of traditional organizational learning, which refers to a process of creating, retaining, and transferring knowledge within a firm (Easterby-Smith, Crossan & Niccolini, 2000; Huber, 1991; Levinthal & March, 1981). Learning orientation (see Calantone, Cavusgil & Zhao, 2002) refers to the components of commitment to learning, shared vision, open-mindedness, and intraorganizational knowledge sharing. Strategic learning is thus close to, yet somewhat distinct from, the concept of dynamic capabilities. Typically studies that have adopted the strategic learning concept use quantitative research 30 Acta Wasaensia methods whereas studies applying the dynamic capabilities concept utilize qualitative research methods. Because the articles in this dissertation are mainly based on the qualitative research method, the term dynamic capabilities is used throughout the dissertation. Organizational routines refer to the patterns of activities that enable a firm to find a solution to specific problems (Teece, Pisano & Shuen, 1997) and advance the dynamic capability theory. These routines enable a firm to get things done and are established in both group and individual behavior (Teece, 2012). Extant literature on organizational change considers dynamic capabilities “as the organizational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve, and die” (Eisenhardt & Martin, 2000: 1107). These new strategic assets are increasingly formulated through developing routines to execute successful acquisitions and alliances (Dyer, Kale & Singh, 2004; Eisenhardt & Martin, 2000), suggesting the importance of external assets to the firm’s success (Möller & Svahn, 2003). Organizational routines need to be revamped to address changes in the business environment. In sum, organizational routines are described as repeatable working methods and practices that organization members have adapted to get things done now and in the future. 2.2.2 The relational view of strategy The relational view of strategy (Dyer & Singh, 1998) or the extended resource- based view (ERBV) (Mathews, 2003; Spring & Araujo, 2013) proposes that a firm’s competitive advantage can be based on its idiosyncratic interfirm linkages (Lavie, 2006; Madhok & Tallman, 1998). Through different collaboration practices, firms can access their partners’ resources (Danneels, 2011; Gulati, 1999; Prahalad & Krishnan, 2008) and utilize their own external resources more effectively. According to this theoretical perspective, this access to external resources is more valuable to the firm than the acquisition of the equivalent resources. The key idea of the collaboration is that cooperation creates mutual benefits for both parties. These advantages have been termed relational rents or collaborative advantage (Dyer & Singh, 1998). From the relational view, providing solutions to the firm’s customers by utilizing its network, network management capability can be a key source of manufacturer’s rents as this network enables the solution provider to develop, sell, and deliver more complex solutions than the firm would be able to develop alone (Davies, Brady & Hobday, 2007; Ferreira et al., 2013). This capability can also fulfill the VRIN Acta Wasaensia 31 characteristics, indicating that the management of external resources can be a key source of a solution provider’s sustainable competitive advantage. Extant studies suggest that to successfully exploit its external resources and generate mutual benefits, a firm should create long-term relationships (Dyer, 1997), build trust among the parties (Dyer, 1997; Dyer & Chu, 2003; Kohtamäki, Partanen, & Möller, 2013), and improve knowledge-sharing routines (Dyer & Singh, 1998). The existing studies have also emphasized the importance of partner fit, indicating that the partners should be compatible with each other and possess complementary capabilities (Dyer & Singh, 1998). Scholars have suggested that firms should be careful in partner selection and that they should pay special attention to evaluating potential candidates before starting to cooperate (Eisenhardt & Schoonhoven, 1996). Researchers have also warned managers about using the so-called arm’s length mechanism (the price-based governance mechanism) in strategic relationships and the threat of opportunism (Dyer, 1997) as they can hinder a partner’s motivation to innovate, seek cost- benefits, and develop the relationship. However, as not all business relationships are strategic, the price-based mechanism can be useful in less-strategic business relationships or sourcing categories with less information asymmetry or strategic relevance and fit. 2.2.3 Critique of the resource-based view As the resource-based view has become more influential, questions about the value of the view have been raised (e.g., Porter, 1991; Priem & Butler, 2001). Priem and Butler (2001) observe that the resource-based view might not constitute a theory as it carries the risk of tautology and lacks specificity. The risk of tautology arises because resource characteristics such as being valuable and rare capabilities are offered to explain competitive advantage, while at the same time value and rarity also define the competitive advantage (Priem & Butler, 2001). Accordingly, at its worst, the resource-based view is circular, and there is a question mark over the chain of causality. To demonstrate this, successful firms outperform their rivals because they have unique resources and they should nurture those resources to be successful. Researchers are interested in what a unique resource is and what makes it valuable; how can a firm create or acquire a unique resource; why the current owner of the resource did not bid the value away, and what allows a resource to retain its value in the future? (Porter, 1991). The criticism of a lack of specificity in the resource-based view refers to the literature not being very specific about the activities and processes that comprise capabilities. The resource-based view has also been criticized for not providing 32 Acta Wasaensia practical assistance for managers (Lockett, Thompson & Morgenstern, 2010; Priem & Butler 2001; Vesalainen 2010). To address that criticism, Barney (2001) asserts that the resource-based view helps managers to identify and develop the most critical capabilities of the firm. Nonetheless, he concedes that there is a certain need to gather more information about how the resources are deployed or how people act when a firm is in the process of gaining competitive advantage. 2.3 Prior studies investigating servitization capabilities As the RBV has become the predominant theoretical paradigm among strategy, management, and marketing scholars, servitization researchers have adopted this theoretical background to study the capabilities required in the industrial service business. Researchers have studied the servitization phenomenon through the lenses of the RBV, the KBV, DC, and the relational view. The prior literature has found that manufacturers that have benefited from services have developed deeper relationships with their dedicated customers (Kohtamäki & Partanen, 2016; Penttinen, 2007; Tuli et al., 2007), suppliers and intermediaries (Gebauer, Paiola & Edvardsson, 2012; Johansson & Olhager, 2