14 Mar 2017

Service implementation in product firms: The role of new entrants

According to the last European Rental Association (ERA) market report the European Rental industry have had an average annual growth over the last few years of 2% despite the uncertain economic conditions. This growth is catching the attention of global investors, and rental fleets/inventories are rising fast. Why are we observing this preference in the use over the ownership of equipment, vehicles or machinery? 

This question is reflective of the broader interest for the growing field of study of service implementation in product firms. Product and service firms have been conventionally thought of as largely independent entities, but evidence seems to suggest that there are potential synergies between products and services, which ultimately can enhance firm performance and consumer satisfaction. The business strategy consisting in adding services to product offerings in product firms is known as servitization

In servitization, product firms broaden their focus from products to services. However, services themselves are not homogeneous. They differ substantially in their level of risk, level of competition, and potential to create competitive advantages. There are therefore various forms of servitization; some manufacturers create wealth through offering a wide range of ‘break-fix’ (intermediate) services, while others develop a few more sophisticated (advanced) outcome based contracts. Examples of the latter include Rolls-Royce TotalCare solution and Xerox delivering ‘pay-per-click’ scanning, copying and printing of documents.

From a globalization perspective, servitization fits well with the argument that exploitation of economies of scale has become obsolete at the turn of the century. With the rapid rise of Asia’s engagement in global production, firms in advanced economies (i.e. Europe or US) need to increase customization while maintaining high levels of scalability and efficiency to develop a competitive advantage. That is, new competitive conditions require a better understanding of what drivers and bottlenecks can enable manufacturing sectors to transit to more innovation-intensive and difficult-to-imitate business models based on services and digital upgrading of products that will sustain their competitiveness in the medium and long term. 

This transformation is widely adopted by European manufacturers. Recent study seems to indicate that around two thirds of European product firms are adopting services as mechanism to capture value from the entire product’s lifecycle. This means that when it comes to understanding customers, an important fraction of industrial product firms are aware that firms and households are increasingly demanding smart products with digitally enhanced capacities. Therefore, new technologies offer the possibility to extract more value from intermediate and final products. 

However, it is still unclear if incumbent product firms are able to capture this additional value; or alternatively, if new entrants can alter the traditional dominant position of manufacturers in the supply chain. In the recent years our work has been devoted to better understanding power interrelations dynamics after product firms trigger the service journey.

The implementation of services demand significant changes to the relationship between manufacturers and other relevant players in the supply chain as providers, partners and intermediaries. Advanced services are underpinned by the internet and a broad use of different digital technologies. The access to these technologies depends mostly on the expertise of individuals, and only residually on financial resources. The lack of dependency on capital reduces the cost of entry into the manufacturing business and new entrants can invade part of the territory normally thought for large manufacturing firms exploiting economies of scale. 

As said before the competitiveness of product firms implementing services depends mostly on the capabilities to develop a better understanding of customer requirements, customization, and not as much to the scalability in production. To gain consumer understanding and to implement processes of value co-production, product firms implementing services have principally moved downstream in their supply chain, pursuing implementation of advanced services in their offerings. Downstream strategies focus mainly on effective use of marketing, sales volume and turnover during the entire product lifecycle. 

New entrants are normally thought of as small, whereas there are examples of large corporations that were born as internet firms that move into the production business (i.e. Google) or at least influence the distribution channels of product firms (i.e. Amazon). In our recent work we show that Amazon has established downstream and is appropriating an important fraction of product firms’ value. Their expertise in the e-business sector has provided the capacity to better engage with customers, blocking the relationship between publishers and readers. This downstream movement has allowed Amazon to capture value from the digitization of the sector, something that incumbent firms seem to be unable to do. 

With the increase of the sharing (or zero-marginal-cost) economy, customers can also develop the role of new entrants capturing value. In an older piece of work we showed how a process of consumer empowerment has happened in the music industry. In essence peer-to-peer networks can be considered in this instance as a new entrant blocking the access of producers to final consumers, and therefore negatively affecting the revenues of music firms.

Our previous research has focused on industries moving from products to digital services, but some evidence is needed to understand supply chain disruptions of service implementation in core manufacturing sectors. Our research in progress with colleagues at Aston University focuses in a key original equipment manufacturing industry in the United Kingdom, the road transport industry. This industry involves large tyre and truck manufacturers employing thousands of blue-collar workers. Our preliminary qualitative research seems to indicate that their market power is being diluted due to the entrance of knowledge intensive business services (KIBS) firms in the sector. Again, KIBS firms entered the industry with the aim to support manufacturers in their provision to digital services, but over time they started to grow and increase their market power, threating the dominant position of incumbent manufacturers.

Overall, the role of new entrants is definitely important in the provision of new digitally-enhanced services in product firms. However, the research trying to enlighten how these new organizations relate to incumbent firms falls short and therefore, besides our preliminary findings, there is not a clear-cut answer to the question of who benefit the most from servitization, incumbents or new entrants. Moving forward different market equilibriums might arise, and perhaps collaborative arrangements can open opportunities to share the increase of value capture. This is precisely our current aim of research and we hope to share our results with MAKERS community soon.

* Post co-authored with Oscar F. Bustinza. First published in MAKERS webpage (http://makers-rise.org/)

10 Mar 2016

Servinomics and the competitiveness of EU manufacturing firms

European manufacturers are competing in global and increasingly tough markets. The pressure for lowering costs has changed the geography of manufacturing, moving a high share of production overseas where labour costs are lower. In 2014, in the European Union (EU), the manufacturing industry had declined to around 15% of the total GDP, a share that the European Commission (EC) seek to increase above 20% by 2020.

The renaissance of European manufacturers is linked to the benefits they can derive from the use of services and the adoption of digital business models. Some iconic examples are Rolls-Royce Aerospace with the implementation Power-by-the-hour, Xerox with document management, and Alstom with Train-life services. These firms compete in different industries with specific lifecycles and supply chain structures, having in common an increased preference for use over ownership of equipment, vehicles, machinery, or any other asset. 

The increasing adoption of services by manufacturing firms and the necessity to create and sustain well-qualified jobs have thus picked the attention of European policy-makers upon servinomics, i.e. the economic impact of service implementation in manufacturing firms, and the potential benefits coming from it. 

The evidence on the relationship between service implementation and firm performance is nevertheless mixed. Empirical evidence tends to agree that the relation between service implementation and firm performance is not linear. The impact of service implementation on manufacturing firms’ performance also varies with time, i.e. firm performance and size increase significantly in the first year after implementation of services, while staying fairly constant after the second year.  

European manufacturing firms which tend to be reluctant to implement service business models, as their returns are difficult to predict. In this scenario Europe might be experiencing a misalignment of economic incentives between manufacturers and the rest of society. Whilst society wants to establish a knowledge economy, manufacturers are finding it difficult to obtain private profits. There is a role for policy-makers to realign incentives by implementing reforms in the service sector. Europe has two main challenges. 

Firm size. A primary concern for European manufacturers is the uncertainty entrenched in the implementation of new services given that the average size of firms is particularly small: according to the Eurostat’s structural business statistics, in 2015, 92.7% of EU-28’s non-financial firms are micro enterprises employing fewer than 10 employees, while roughly 20% of the manufacturing workers are employed in firms with less than 250 persons. Small manufacturers cannot easily internalize the uncertainty and investments related to service implementation. Their competitiveness is thus reduced unless there is a rich ecosystem of service firms with capacity to offer those services as external providers. 

Leadership in the digital economy. Another important aspect in the debate on servinomics is the impact of digitalization on European wealth and competitiveness. The difference between EU and US ecosystems is reflected in the fact that number of digital services producers was created in the US rather than in the EU. With the exception of firms like Skype or Spotify, companies like Google, Facebook, Twitter, Linkedin, Dropbox, Amazon, etc... were all born in the US. Reducing the digital gap with the US will be crucial to increase the competitiveness of European manufactures in the upcoming years. 

In sum two broad policy recommendations can be identified to overcome those challenges. 

Agglomeration effects. European manufacturers acknowledge the importance of service implementation. They also pointed out though that whether services will play a bigger role in the European manufacturing sector will also depend on the ability of policymakers to push for a change in the European management culture. The adoption of services is likely to be facilitated by an environment in which innovation and internationalization policies are better coordinated. Since European manufacturing firms, especially SMEs, are often present in international markets and networks with a mix of relatively simple international and innovation activities, e.g. via the outsourcing of (knowledge) service activities. A better coordination would allow firms to enjoy the benefits of service implementation without having to fully internalize the costs associated to it. This seems to be particularly the case when Knowledge Intensive Business Services (KIBS) companies, i.e. firms which are both sources and carriers of knowledge, provide high value-adding services to other organizations lacking internal capabilities. This process of firm collaboration ultimately impacts job creation in the area where they gather. Finally, the implementation of soft policies could also help, e.g. through the explicit inclusion of KIBS in industrial clusters, even if the nature of the businesses seems to be unrelated. 

Building a digital ecosystem. The leadership of US firms in digital services have been traditionally based on building a critical mass and establishing firm networks. This leadership was sustained on network mechanisms for gaining early feedback on designs. Feedback from the network of clients and customers allowed making early adjustments that increased efficiency and reliability. Firms networks are collaborative models of innovation that, even when is difficult to measure (i.e. software developed for internal use vs. software for retail sale), have a positive effect on economic performance. These collaborative networks have an essential role on the creation and evolution of a digital ecosystem. Territorial models based on firms networks (i.e. Silicon Valley) have outperformed the high investments of European and Japanese manufacturers. Additionally, the access of capital is another essential element of a digital ecosystem. European and Japanese firms have been losing global share in major consumer products, in part explained by institutional practices that “inhibit the development of a market for venture capital backed startup products and services”. Then, a long list of technological start-ups has moved to the US for achieving commercial success. This is the example of Ludei, a firm that develops apps and games for smartphones that decided to move from Bilbao (Spain) to Silicon Valley. European policy makers need to retain those companies and, if possible, attract leaders in the industry to localize partly or fully in Europe. In doing that, they will grow a critical mass that will attract technological developers, entrepreneurs and financial backers all over the world, and therefore building a virtuous circle and an enhancement of the global competitiveness of digital start-ups.

* This post is a an old version of the post “Servicein European manufacturing: servinomics explained” published in Bruegel blog on March 1st 2016. I co-authored this post with Tommaso Aquilante and Oscar Bustinza.

23 Oct 2015

Call for papers for Strategic Change - Digital Business Models: implementation, internationalization and impact

The journal Strategic Change (2* ABS 2015) will publish a special issue on Digital Business Models. I am part of the editorial team of this issue, which is also composed by Oscar F. Bustinza, Glenn Parry and Emanuel Gomes. Below you have the academic rationale of the call for papers.

Business models provide the rationale for how an organisation creates, delivers, and captures value, and as such, are seen as the route to competitiveness, growth and profitability (Vendrell-Herrero et al., 2014). The possibilities for bundling resources into capabilities through its underlying business models have been fuelled with the appearance of the new internet and digital technology led economy (Amit and Zott, 2001). The nature of those technologies has changed the way economic agents produce, interact and commercialize their offerings (Teece, 2010), leading to novel digitalized product-services business models (Myrthianos et al., 2014). The impact of digitization on businesses and society is broad, but challenging to assess empirically.

Digital business models have been implemented in a wide variety of industries including manufacturing, hardware, retailing, publishing or broadcasting. Some companies have achieved tremendous success developing, implementing and internationalizing these technology-enabled business models affecting local and global value chains (Pogrebnyakov and Kristensen, 2011). An example of this transformation is the case of Uber who developed a novel taxi booking system. The Uber application can be used by both licensed and unlicensed cabs, dramatically increasing the competition in the industry and considerably affecting the ability of incumbents to appropriate value (Sharman, 2015). Another example is the eruption of big data which is impacting global production processes and the relationships between businesses and consumers (Opresnik and Taisch, 2015).

The essence of this Special Issue is to explore, develop and disseminate for exploitation a multi-level and dynamic approach to understanding digital business model implementation, internationalization and impact. This special issue of Strategic Change calls for papers that illuminate the digital business models that are deployed and implemented by firms and provide assessment of their impact. To date, the literature has analysed these processes separately and there is a need for more integrative frameworks, which may include theoretical and empirical approaches. Moreover, the special issue seeks to capture work on the impact of digital business model implementation on overall performance, prospects of internationalization, supply chain readjustment, value network dominance, and global production processes.

Papers are invited from academics and business professionals that contribute to our increased understanding of digital business models. The Guest Editors seek submissions with an original perspective, showing advanced thinking on the topics proposed above and related issues. All works submitted must be relevant to practitioners and should contain a separate section on managerial implications. Novel and original papers with novel theoretical frameworks and with empirical grounding should include, but not be limited to, the following:

  • Comprehensive state-of-the-art reviews that present an integrated view of digital business models. Manuscripts should specifically identify potential research avenues.
  • Proposals of novel theoretical frameworks for assessing and monitoring the development and implementation of digital business models.
  • Analysis on how digital technologies enable internationalization processes.
  • Analysis of the role of strategic alliances and joint ventures in transforming existing business models.
  • Economic assessment of the impact of digital business model implementation in firm performance.
  • Real-world studies analysing cases in which social networks or big data is used to enhance firm competitiveness.
  • Analysis of how digital technologies transform manufacturing and global value chains.
  • The effect new entrants implementing digital business models have on supply chain structures and their value network dominance.

The last submission date for papers to the call will be the 30th November 2016

2 Sep 2015

My academic identity: A self-reflective exercise

I have recently finished the second course of the postgraduate of teaching in higher education. One of the required exercises in this course is to write a short self-reflective essay on academic identity. I have decided to publish a summary of this exercise below.

Academic identity is a complex concept and differs from every individual academic’s experience. The reason for this is that it constantly evolves as a continual reflective journey, as does one’s perception of what an academic life means. As it has been acknowledged, academic identity can be influenced by relations and experiences with peers, students, and family. Thus, the rapid development of the higher education sector has further highlighted the interrelationship between teaching and research and has encouraged further enquiry by universities and its faculty members.

From a personal perspective, I was attracted to academia because of its core values of scholar inquiry, intellectual challenge, and professional autonomy. However, my academic identity has been highly influenced and shaped by the opinions of peers, senior academic faculty advice, including my PhD supervisor, during my early years when I was conducting pre-doctoral research ten years ago. As with most PhD students, I was encouraged to explore current debates within my discipline from a theoretical and empirical viewpoint and based on my research training, I am able to contribute to debates in relation to my own, or other people’s research, and to provide comments on existing knowledge to a future generation of professionals and academics. Moreover, what became apparent during this process, was how the organisational culture in the faculty influenced me, as an emerging academic, to prioritize research activities over teaching commitments. During my doctoral studies I was required to teach thirty hours per term, mostly in the form of small group seminars. During this early period of my academic career, I was very motivated and committed to develop a balanced academic career, both in terms of research and teaching. I was truly committed to further develop, not only my research but also my teaching skills in order to be able to effectively transmit knowledge on to students. However, during the initial stages of my academic career in 2005, my supervisor as well as other senior faculty members strongly advised me to put all my efforts into research activities. They repeatedly said “…to develop a successful and sustainable academic career you need to devote all your efforts into research; teaching is irrelevant”. After the completion of my doctorate studies in November 2008, I did a two year postdoctoral research programme. During this period, and as a result of my focus on research, I increasingly began to disengage with teaching activities, realising over time that reengaging with teaching would not be an easy step. Some scholars have suggested that this as a common occurrence among young academics, especially during their pre (or early post) doctoral years, because their teaching responsibilities do not always match their requirements for a full academic career.

Upon reflection, and ten years after joining academia, I am now beginning to realise that the advice that I received during the early stages of my career had generated a highly biased research orientation in me, and this idea that teaching was a marginal value adding activity to my academic development. In line with the view of several scholars, I can now understand the detrimental effects that such a dichotomic view can have on academics.

Despite such preconceptions and limiting experience, my appreciation for the teaching practice started to change when I was appointed to a relevant teaching position in Spain in February 2011. Without any formal training, I started to teach mid to large student groups and supervise Master’s and PhD dissertations. During that period, I started to construct a broader academic identity by combining teaching with my research. Through this experience, I was able to recognise the benefits of combining my research and teaching activities, and as a result, I was able to integrate some of my research findings into my teaching. This synthesis, in turn, influenced my research approach in the sense that it started to take a more applied research perspective, inclusively working in close collaboration with industry partners. This has been an important pillar for the development of my current academic profile, and this link to industry has influenced my teaching pedagogy, which visibly has a grounded theoretical research-led focus. This has allowed me the opportunity to bring world-renowned research into seminars and lectures and explore such studies in the context of strategic and economic thinking. Moreover, in 2012 I also invited practitioners to run guest lectures and bring to the classroom a ‘real-word’ perspective and entrepreneurial spirit.

Further to this, on many occasions the research presented to students has come directly from my own research findings. On such occasions, I have noted more interest and engagement from the students, perhaps resulting from the fact that such sessions have had a first person narrative. For example, I have been doing research on how Amazon influences the entire publishing industry, and one of my lectures discuss on the economic assumption that companies are profit maximisers. Based on the findings of my research I demonstrate that Amazon maximises revenues instead. In the last twenty years the company hardly has achieved profits, whilst its revenues have increased exponentially. I can perceive and enhanced interest of the students when I explain this example. Interestingly, I have shared such research/teaching resources with other colleagues in the Business School, who have used them in their own classroom activities.

On other occasions, I have also presented related research from other authors, which I usually complement with current affairs in the media or from case studies. Economics has sophisticated processes and methods, and undergraduate students cannot be expected to know (all of) them. This combined with the fact that I also teach large groups makes it more challenging to develop interactive teaching resources based on research-based or research-oriented contexts that cater for individual learning needs.

My research has also benefited from teaching. Through revising the basics of Economic theories, I reinforced the fundamental principles of Economics which strengthens my academic writing. In a recent project, the construction of estimated demand functions was informed and enhanced through the revision of materials that I used when preparing my lectures. One of my senior colleagues who has extensive experience teaching and researching in economics, was impressed by the analysis and said “your analysis is one of the most elegant economic models I have seen in the last decade”. The article that contains this analysis has recently revised and resubmitted to Industrial Marketing Management.

Another important aspect of the teaching activity is the engagement in academic debate with students. My approach follows positivist pedagogy and hence my comfort zone resides in absolution as opposed to grey areas of interpretation. I have noticed that I have a preference for more mathematical discussions as opposed to dialogue on qualitative and theoretical debate. In that respect, coming to teach in a UK HE institution in 2013 signified a paradigm shift in my teaching approach, since the UK system is traditionally more based on the understanding of qualitative concepts, with further reinforcement with diagrams and case studies when necessary. In addition, the learning environment in the UK is different as group sizes are larger in comparison to Spain, with cohorts between 100 and 200 sat in large lecture theatres. For me, it has been difficult to engage students in large groups. One of the reasons may be the fact that students start losing their attention after 20 minutes, unless I can continuously surprise and engage them with the content.

My academic identity is highly influenced by the transition from research to teaching. As a learner in the college I was a pragmatic student, whereas participating in research during the last ten years allowed me to develop a more reflector side and have revelled in the fact that I could diversify as a learner and adapt to different learning contexts. This stance should be helpful in supporting students become adaptive in their own learning journeys, and move from being dependent and less confident learners to become more independent autonomous learners. This process has enriched my pastoral and academic support to students, increasing my respect to individual learners. Whilst it is true that these higher faculty expectations increase my level of stress, it is also a motivation and an opportunity to continuously improve as an academic. Consequently, my academic identity is in constant evolution, and is influenced and nurtured by students, colleagues and other external and internal factors.

3 Sep 2014

Growth Vs Profitability: How can different business orientation distort a supply chain?

The construction of total revenues function is relatively easy. Revenues are the multiplication of price and quantity; and total revenues will depend on the consumer’s sensibility or elasticity to changes on price, what is generally described as demand function. Depending on the degree of market power firms ‘make’ or ‘take’ the price, which determines the quantity. Total revenues have an inverse U-shaped, and they are maximized when the demand is unit elastic. The level of complexity increases when we bring the cost function into the analysis; which is the missing ingredient to profit determination. The optimal price that maximizes profits is more challenging to find, but a standard rule says that price that maximizes profits are (significantly) larger than prices that maximize revenues.

Standard economic theory assumes that all firms are profit maximizers. With the exception of governmental and not for profit organizations, this assumption is probably true in the long run. At some point all companies pursue to produce profits, and ultimately remunerate shareholders. But, what happen when firms participating in the same industry have different business orientation? 

This is what is happening currently in the book industry, with the conflict between e-retailer and publishers. Stakeholders and investors in those companies are completely different and hence they pursue different objectives. While publishers are by nature profit-maximizers and need to remunerate authors and investors in the short run; e-retailers are revenue maximizers, and pursue to increase their installed based of customers and to increase their share value. 

Let’s analyze more in depth the e-retailers strategy with the case of Amazon. Data can be obtained from its annual reports and Nasdaq. Figures attached show:
  1. Amazon has had an exponential growth in revenues from 2000. The average annual growth rate in the period 2000-2006 was 23%, which increased to 28% in the subsequent period, 2007-2013.
  2. There is a huge correlation between revenues and share price. After 2000 the correlation between those figures is almost 95%. 
  3. Amazon is a company that hasn’t had significant profitability from their outset in 1997. From 2003 to 2013 its profit margin rate has been close to 0%, just avoiding losses. 
  4. There is not significant correlation between profit margin rate and market share. 
But, what is the impact of e-retailers’ business orientation on revenues growth in the supply chain? As theory predicts revenue maximizers want to set a smaller price than profit maximizers. This goes against to their providers - the publishers - who have preference for profits. This dispute is distorting all the book industry; and we can see the evidence in press. For instance, the ‘famous’ dispute between Hachette and Amazon, who are currently in negotiation of new agreements on how to price Hachette’s books. 

The dynamic nature of the book industry (i.e. introduction of digital formats) make it very difficult to make predictions about how is going to evolve the power and structure in the supply chain. Some constructs like consumer value, operations, costing, or managerial perceptions, are in clear evolution and change. All these topics will be explored in the following years from different angles, and I expect to add relevant insights within the umbrella of QVaDiS research group and our industry partners.

18 May 2014

Implementation of the streaming business model: add-supported or subscription?

In recent informal meetings with IFPI, the music industry federation, I received a hard copy of their last report on the global industry (Link). This contains valuable information for those interested in producing research about creative industries and new digital business models. The aim of this post is not to present a detailed summary of the report. Instead, I only pretend to highlight an interesting finding, which reflects the idiosyncrasies and differences of European consumers.

The music industry needs to explore further the economic exploitation of digital business models (Link and Link). In this regard, the streaming seems one of the main solutions in terms of revenues. The streaming payment model is radically different from download sales in the way it generates revenues. A download is paid just once, regardless of how times it is listened to. With streamed services, a track may be listened to by an individual hundreds of times, each generating a micropayment. Streamed services can be commercialized with add-supported or premium subscriptions – monthly fee. Let’s see how streaming business models have been implemented in Spain and Germany. 

Spain is one of the countries with the highest piracy rates in Europe (in our previous work estimated in 44%) and the industry needed to offer “free” and “legitimate” alternatives to seduce the Spanish consumers to stop downloading files from not-licensed sites. This fact can explain why the add-supported revenues grew from 19% to 39% of total digital sales from 2009 to 2011. During that period subscriptions grew from 13% to 22%. But the main change was produced after 2011 when huge proportion of music consumers engaged with streamed music. The add-supported sales in 2013 decreased to 24%, while subscriptions increased and generated up to 43% of digital sales. 

Germany is quite a different case. It is one of the countries in Europe with the lowest piracy (in our previous work estimated in 14%, three times less than the Spanish one). Consumers has been significantly more engaged with legitimate digital formats, and that is probably the reason why that add-supported business model had a marginal presence in digital sales, and subscriptions have moved from 39% of digital sales in 2009 to 48% in 2013. 

Subscriptions are the main source of digital revenue in the music industry in Spain and Germany (43% vs. 48%) but the cost of the implementation has been significantly different. It is interesting to see how the pattern is quite consistent in those countries with high (Netherlands or Italy) or low (United Kingdom or Switzerland) piracy rates. The fact that in all those European countries subscriptions-pay monthly is the dominant digital format is also relevant, as it gives a clear indication about the transition of the sector towards a service dominant logic. 

Final note for those interested in piracy rates provided above. Details on the methodology and piracy rates for ten different countries were published in Industrial Management and Data Systems and can be downloaded for free at the webpage of the journal (Link). The article has been downloaded 1691 times in 2013 and awarded as the outstanding paper of the journal that year.