Path Dependence Approach to Servitization: A Case Study with Two Companies

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1 Path Dependence Approach to Servitization: A Case Study with Two Companies Max Finne 1, Mari Tanskanen 2, Saara Brax 3 1 Dept of Industrial Management, Aalto University, Otaniementie 17, FI Aalto, Finland max.finne@aalto.fi 2 OP-Pohjola Group, Finland mari.tanskanen@op.fi 3 Dept of Industrial Management, Aalto University, Otaniementie 17, FI Aalto, Finland saara.brax@aalto.fi Abstract The paper focuses on analyzing the causes of challenges companies find when trying to servitize. We present a comparative case study of an investment good manufacturer and a financial solutions provider aiming to broaden their technology-based offerings with value-adding services. The literature has described difficulties related to servitization, but their causes have remained without full explanation. Our empirical research on the companies historical paths revealed challenges that the current servitization literature could not explain. We utilize path dependence approach to identify the development patterns that led the companies to states of operational rigidities hindering the effective implementation of servitization strategy. Our findings show a clear resemblance between the development paths. In lock-in, however, different factors hinder adopting the alternatives. Our conclusion is that early success and little competitive pressures can impede service-oriented culture and hinder adding services to broaden the offering. Thus, we conclude that the ability of the case companies to undergo the transition depends on their historical paths. We argue that path dependence approach can provide crucial assistance in discovering the causes of operational rigidities impeding companies abilities to servitize. Our empirical research provides the structure and an example for the execution of this kind of analysis in studies on servitization. Keywords: Servitization, Path dependence, Case study. 1. Introduction Servitization literature discusses manufacturers transition towards increasing service dominance (Baines et al. 2009; Oliva and Kallenberg 2003; Wise and Baumgartner 1999). Adding services that increase the value of the offering is seen as a beneficial way to differentiate from competitors, to increase sales and margins, and to lower the environmental burden. Broadening of the offering is viewed as involving certain benefits, challenges, and risks; common to companies undergoing the transition. Research on the financial implications of servitization strategy has shown that manufacturers find it difficult to realize the potential financial benefits (Neely 2008; Gebauer and Friedli 2005). However, the factors causing this have remained without full explanation. Our research question is: How can studying the historical path of the servitizing manufacturer aid in explaining the challenges faced in servitization? We utilize path dependence as a novel approach (Arthur 1989; Sydow et al. 2009) in analyzing the causes of organizational rigidities hindering the effective implementation of servitization strategy. We study empirically the servitization process of two case companies by analyzing their historical development paths. Path dependence is the outcome of a dynamic process illustrating how initial events can lead into a long-term predominance (David 1985). The path becomes more inflexible over time, thus restricting future choices. Through this research, we expect to obtain better understanding of why some companies find challenges in transitioning towards increasing service dominance. In this empirical research we have discovered challenges in the servitization process that the current servitization literature cannot explain. Interviews and discussions with the two case

2 companies have emphasized that the prevalent organizational culture and the company s historical developments are key factors in explaining these challenges. Therefore we have chosen to apply path dependence approach in our analysis. Through the empirical analysis we aim to show how path dependence approach can be utilized in discovering factors related to company s historical developments causing challenges in its current servitization. We present a comparative case study of a manufacturer TechnoCo and a financial solutions provider FinanceCo (the names are pseudonyms) that both have had an offering relying heavily on technology, but due to increasing competitive pressures have decided to add more advanced services into their offerings. This is partly a novel approach to servitization, since the current literature discusses broadening of the offering mostly from a manufacturer s point of view. The case companies were chosen based on the fact that they both face challenges in servitization induced by their historical development paths. The companies are currently finding pressures to seek new ways to create value to their customers and hence are striving to introduce new value-adding services. TechnoCo s investment good industry is experiencing fierce price competition because of increasing number of competitors and maturing technology. FinanceCo s previous strong market position is endangered by new competitors entering the market in a result of deregulation and other changes in the regulation of the financial services industry. However, the both companies are finding broadening their offerings very difficult and the reasons behind are linked to the operational rigidities stemming from their previous development paths. The paper starts with a literature review on servitization of manufacturers. Second, literature on path dependence is reviewed. Third, research methodology of the empirical case study is described. Fourth, the empirical results are presented starting with case descriptions of both companies and ending with a cross-case analysis. Fifth, the paper is concluded by discussing the theoretical and managerial relevance of this empirical research and its limitations, as well as giving suggestions for further research. 2. Servitization of Manufacturing Companies Service provision of manufacturing companies was recognized as important already in 1988 by Vandermerwe and Rada. More recently, three main drivers behind the transition to services have been identified: economic rationales, customer needs, and differentiation from competitors (Baines et al. 2009; Neely 2008; Oliva and Kallenberg 2003). Services are argued to have higher margins than product sales (Anderson et al. 1997), and to provide resilience against economic cycles due to stable revenue streams (Cohen et al. 2006). Services are also viewed as increasing possibilities for differentiation, because they are difficult to imitate, they are less capital intensive, and they enable manufacturers to escape the burden of commoditized product markets (Davies et al. 2006; Davies 2004; Wise and Baumgartner 1999). Oliva and Kallenberg (2003) stress the manufacturers unique competitive advantages in offering installed base (IB) services: lower customer acquisition costs, lower knowledge acquisition costs, and lower capital requirements. These are respectively due to the manufacturers existing customer relationships, acquired knowledge of their own products, and existing equipment and resources needed in servicing the IB of their products. Servitization literature generally views broadening the manufacturer s offering by adding services as a reasonable competitive strategy, but related challenges are also identified. In particular, larger manufacturers have realized higher revenues but lower profits when applying this strategy (Neely 2008; Gebauer and Friedli 2005). Gebauer, Fleisch, and Friedli 2

3 (2005: 15) term this phenomenon service paradox in manufacturing companies. The reasons given for the challenges in the transition are, among others, differing opinions within the company on the economic potential of services and the lack of qualified resources for service provision. In addition, weaknesses in strategic decision-making may lead manufacturers to hesitate in broadening the offering. However, the reasons have remained without full explanation and we argue that further research into this topic is needed. The challenges in practical execution of servitization have been analyzed in recent literature (e.g. Kurata and Nam 2010; He and Lai 2012). The manufacturer needs to be able to motivate its customers for service co-production, manage information effectively and in new ways, change management thinking, understand customers business context, motivate customers to the relationship, and alter organizational culture (Brax 2005). As servitization increases the complexity of the offering, manufacturers have to be able to manage complex networks of product and service suppliers (Johnson and Mena 2008; Saccani et al 2007). Neely (2008) sees that manufacturers increasing the proportion of services in their offerings should also focus on shifting the mindset, transforming relationships from transactional to relational, and developing service offerings meeting customer needs. Oliva and Kallenberg (2003) explain the relative slowness and cautiousness in executing the transition by manufacturers not believing in the economic potential services can provide, or manufacturers viewing service business as beyond the scope of their competencies. Servitization research is in need of more consideration of the context of the servitizing manufacturer. Due to the managerial focus of prevalent servitization literature, the transition to services is presented as involving certain benefits, challenges, and risks, common to manufacturers undergoing the transition. Some recent studies have moved the focus towards analyzing the influence of organizational environment on servitization (cf. Gebauer 2008; Neu and Brown 2005; Finne and Soinio 2010; Finne and Turunen 2011). Nevertheless, there is a dearth of research describing the influence of the company s historical development paths on its servitization process. Heikkilä and Brax (2010) concluded that when studying the phenomenon within a service provider, the concept of path dependence may be useful in understanding the barriers companies face in this process. While, they focused on exploring Mathieu s (2001) service maneuvers, the emphasis of this paper is on exploring the effects of the historical development paths on servitization. 3. Path Dependent Processes Literature on path dependence (David 1985; Arthur 1989; Sydow et al. 2009) discusses dynamic historical development processes and the events occurred and decisions made that shape the outcomes of these processes. Usually the focus lies within the competition between different technologies, but some authors (e.g. Li et al. 2010) analyze organizational development paths that are the area of interest in this paper. Firm s future directions depend on its current position and possibilities ahead. The current position in turn depends on the paths the company has travelled previously (Teece et al. 1997). Path dependence concept and the notion that history matters refer to dynamic evolutionary processes that are contingent and non-reversible (David 2001). A path dependent sequence of events is one in which the outcome or major parts of it can be explained by early temporally separate changes shaped by chance (David 1985; Arthur 1989; Arthur et al. 1987). Furthermore, the equilibrium of the process may be driven to a state with inferior long run potential (Arthur 1989). That kind of dynamic processes are called non-ergodic and do not converge simultaneously to a fixed point distribution of outcomes (David 1985). They are historical by nature. Arthur et al. (1987) studied self-reinforcing path dependent systems with 3

4 multiple asymptotic outcomes and showed that these kinds of systems do settle down. Noteworthy is that the equilibrium of these systems will be non-flexible: other states of equilibrium are locked out (Arthur 1989). Path dependent processes have four key characteristics: they are non-predictable, non-flexible, non-ergodic, and the path is inefficient. A process is predictable, if the outcome can be predetermined and flexible if influencing the incentives always affects future choices (Arthur 1989). According to Arthur (1989) if different sequences of historical events always lead to same outcome, a process is ergodic; i.e. history does not matter. Path efficiency means that equal amount of development efforts directed alternatively would not have led to a better outcome (Arthur 1989). As an example of path dependency, a management initiative decision may have been based on just an intuition at first place, but its implementation might lead the company to become locked-in, which further encourages investments directed enforcing the initiative (Sarkis et al. 2011). These kinds of developments are typical of technologies with increasing returns (Arthur 1989; Teece et al. 1997), because they tend to lead to selfreinforcing market dominance. Under what kinds of circumstances are organizations path dependent? David (1994) argues that historical events limit the future choices of institutions, because together experienced history gives rise to common expectations of the future, efficiency requirements cause information channels and codes in multi- person organizations resemble highly durable capital assets, and pressures to maintain consistency within large and complex human organizations result in constraints of choices. Path dependent processes require for example technological interrelatedness, scale economics, or irreversibilities caused by learning and habituation (David, 1985). Growth and profitability will lead to augmented resources in an organization and success to a path dependent evolvement path. Routines are developed to sustain continuity of the success (Teece et al. 1997). In addition, organizations are more rigid and less able to adapt to changing conditions than technologies (David 1994). On the other hand, Sydow et al. (2009) suggest that it is more characteristics of the industry than the organization that bring about path dependence and lock-in (cf. also Teece et al. 1997). Path dependence develops gradually. According to Sydow et al. (2009) the development of an organizational path has three phases: In phase I, Pre-formation phase, possible choices are abundant and actions cover a broad scope. The outcomes of actions are unpredictable and they may lead to a self-reinforcing process. Starting of this process after a critical event ends the first phase. In phase II, Formation phase, the dynamics of the self-reinforcing process likely bring up a dominant action pattern and the whole process becomes more and more irreversible. The range of choices narrows down, but decision processes do not yet fully converge into a fixed point distribution. When the dominant decision patterns become fixed and deterministic, the process becomes bound to a path. The process is now transitioned to phase III, Lock-in. The flexibility is lost, which makes adopting better alternatives practically impossible. This is due to high switching costs, sunk costs, escalating commitment, structural inertia, etc. Noteworthy is that historical developments shape possible directions also in the Pre-formation phase (Sydow et al. 2009). In this research we utilize the division of path dependence by Sydow et al. (2009) to present how the path dependencies came about in cases of TechnoCo and FinanceCo. Accordingly, the developments in the cases are structured into Pre-formation, Formation, and Lock-in phases. Next, we will present the methodology of the empirical case study. 4

5 4. Methodology The research design of this comparative case study includes two case companies. TechnoCo s core product is an investment good used in various industrial applications from transportation to pumps and paper mills, to improve the efficiency of the operations. FinanceCo offers integrated payment solutions based on IT systems as a core source of value to its institutional clients. The two companies have been facing increasing competitive pressures and try to respond by offering more services that assist customers in increasing the benefits that the core offering provides. The companies were first studied as part of different research projects concerning servitization and compared after the primary analyses. Therefore there are some differences in the data gathering protocols between the cases. The comparative analysis presented in this paper is based on an in-depth analysis of the rich data sets and thus these differences are not likely to influence the conclusions. Moreover, the data in both cases was collected without prior assumptions of path dependence, in TechnoCo by the first author and in FinanceCo by the second author. Both authors conducted single-case analyses of the companies for the projects concerned (these are not reported in this paper). The idea to utilize path dependence as theoretical framework for secondary analysis was introduced after data collection by the third author. In this comparative analysis round, the first author analyzed the TechnoCo data and the other two authors the FinanceCo data. This paper focuses on the secondary analysis round only, as first single-case analyses have been reported elsewhere. The research design is a cross study, i.e. paths were analyzed in retrospective based on the information provided in interviews by the current company staff and the attained documents and materials. Both cases focused on the main offering of the companies. TechnoCo s main product and related services were studied from their introduction in the 1970 s until the present. FinanceCo developed the first versions of its offering in the 1960 s. Altogether 27 thematic interviews that lasted 30 to 120 minutes were conducted at TechnoCo and its four customers, of which 16 were recorded. At FinanceCo, 22 interviews lasting 60 to 120 min were done; all recorded, all business units represented, no customers interviewed. Management, experts and other key persons were chosen as informants with the help of the companies in both cases. After each interview, the researcher wrote a summarizing report which was used as material for further analyses. Overviews of the TechnoCo interviews were sent to the interviewees to validate the contents. While interviewing, the researcher at TechnoCo also spent four months observing the business unit on-site. Both companies provided internal documents and presentation materials. These and public information such as annual reports, press and the company websites were utilized to triangulate data whenever possible. The analysis of organizational paths within both cases was carried out as suggested by Sydow et al. (2009): The analysis involves three parts that cover the path dependent process in a reversed order. First, a strategic persistence or operational rigidity within the organization is identified. This has to affect negatively the organization in the long run, which must be proved. Second, the self-reinforcing mechanism is identified and reconstructed. Third, the triggering event that started the process is identified, as well as the point (critical juncture) in which the self-reinforcing developments started (Sydow et al., 2009). For the sake of clarity and readability, the findings are not reported in the same reversed order as the analysis, but in chronological order. To compare the cases we use a cross-case analysis to search for similarities and differences in the case companies historical paths (cf. Eisenhardt, 1989). By contrasting the cases with process-tracing (George and Bennet, 2005) we identify the significant steps and the prevailing conditions in the historical development 5

6 processes. In the next section, the development paths are reconstructed using the three phases by Sydow et al. (1999), the Pre-formation, Formation and Lock-in, first for each case company separately and then comparing the cases. To see the formation of path dependence in the cases is crucial to understand the current challenges the companies are facing in servitization. 5. Case TechnoCo: Investment Good Manufacturer Trying to Servitize 5.1 Pre-formation Phase. In the early 1970s TechnoCo started manufacturing of investment goods used in various industrial processes to control the processes and improve their efficiency. The products were based on new innovative technology. At that time the competition was very limited; there were only two or three manufacturers, globally, who could deliver products of similar technology. TechnoCo manufactured the products for each project separately instead of mass production. The project deliveries contained various kinds of services to enable the proper functioning of the devices as well as optimizing end user s production efficiency. The biggest customer segments in the beginning were the transportation sector and paper and pulp industry. There existed a vast gap in understanding the new technology between TechnoCo and its possible customers in the early years. Accordingly, the company soon developed advanced service operations to enable its customers to integrate the products into their processes, to utilize fully the potential of the new technology and to maximize the uptime. The company started giving end user service engineers training lasting several days on how to service the products. There were no external service providers in the market, simply because no other company had enough expertise and knowledge on the technology the products were based on. At this phase possible choices for future actions were abundant for TechnoCo, which was to be changed due to management s decision to transform the operational model. During the first few years the demand for the new products grew strongly and the production volumes increased exponentially. Thereby TechnoCo changed its manufacturing operations from project-based into mass production by the end of 1970s. 5.2 Formation Phase. The production volumes and revenues of TechnoCo grew rapidly: from 1986 to 1996 the production volumes quadrupled and the sales were in times the number in Efficient production was emphasized and development efforts were concentrated on product features. Accordingly, the personnel assumed a product-centric culture. Service provision was viewed as ancillary to the product sales and manufacturing. In 1985 product family Generation3 (the name is a pseudonym) was introduced, which represented a major shift in product design. Generation3 included a shift from analog to digital technology and it involved a processor that took care of all of the control functions. Regarding TechnoCo s future developments the most significant change was the product s modular structure. The modularity made it possible to move many of the service tasks from onsite to back-office, which later became an enabler of supply chain structure change. Further development of the product technology enabled TechnoCo s products to become smaller in size and significantly less expensive. At the same time end users and other downstream parties in the market gained greater understanding of the technology, its potential benefits and possibilities to utilize it in their own processes. Some end users started to view TechnoCo s products more as commodities and required the products to become integrated into more strategic equipment provided by other companies acting as systems integrators. In these situations the delivery channel of TechnoCo was changed from direct to indirect. 6

7 TechnoCo was at this phase firmly on a track, in which success on certain business areas was affecting the company s future decisions and hence the firm s possible choices started to become limited. The systems integrators and other customers in indirect delivery channel provided TechnoCo with more constant orders and predictable business, since the customers were themselves manufacturing in mass production mode. After designing carefully which subassemblies to use, the systems integrators usually made long contracts with their suppliers including TechnoCo. This made systems integrator customers attractive for the company. The increasing importance of the indirect channel also contributed to the growth of TechnoCo s development efforts directed to the indirect channel. Market dynamics together with TechnoCo s development efforts lead to the further increase in importance of the indirect delivery channel. 5.3 Lock-in. The importance of indirect delivery channel for TechnoCo has increased significantly. Currently approximately 80% of its product sales go through indirect channels. In indirect channels TechnoCo is transitioned up-stream in supply chain causing it to lose direct contact to end users and visibility to the IB of its products. This has posed significant challenges for TechnoCo in trying to manage effectively the services related to its products and has forced the service operations from proactive mode to mostly reacting to service orders. Some integrators in indirect channel are reluctant to share IB information with TechnoCo, which makes it practically impossible for the company to proactively service its IB. This is because they usually see the firm as a competitor in service operations, as the company is renowned for its advanced service operations in end user segment. Because of the aforementioned reasons, the company has experienced servitizing extremely challenging at the current situation. 6. Case FinanceCo: Financial Solution Provider Trying to Servitize 6.1 Pre-formation Phase. FinanceCo started its business in the 1960s, when there surged a need to centralize the payment operations. Shared payment methods were a valuable step forward in the financial services market as customers begun to ask for more efficient payment services. In certain market areas the newborn organization could establish a good market position. This helped FinanceCo to develop its first payment solution, a payment instrument utilizing new technology and developed for its institutional clients and their end customers. Services were then added to support the core, the payment instrument. Most of the services were system-intensive by nature, and required continuous development of the information systems. The owners of the organization were significant players in the financial industry and had an important role in defining the company s offering. The decision to integrate services tightly to the core offering started to push FinanceCo on to a course, on which its possibilities to decide on future actions were slowly starting to decline. 6.2 Formation Phase. Other payment instruments were added to the company s portfolio in the 1970s and 1980s. During these decades, the market remained particularly favorable to FinanceCo with only a few competitors in payment solutions. Therefore FinanceCo concentrated on this business area and started to offer its clients full service. This further reinforced the developments limiting possibilities of the company to decide otherwise, for instance to unbundle the offering. The stable situation with moderate competitive pressures favored designing comprehensive service packages fulfilling different aspects of customer needs. With its innovative solutions 7

8 FinanceCo was able to offer a wide range of competitive payment services, corresponding customers service requirements. 6.3 Lock-in. Offering services as an integrated solution type of bundle directed FinanceCo s investments to develop the offering as a whole. From the 1990s onwards, the business environment changed: new specialist competitors entered the market with offerings targeted to narrower customer needs compared to the broader offering of FinanceCo. In addition, the customers realized the potential of taking care of the core service themselves: they got more visibility to end customer information but also responsibility. FinanceCo experienced challenges in productization of services and its strategy did not entirely support the intensification of the service culture. In particular, the integrated nature of the company s offering hindered significantly the possibilities to offer additional services as value-added elements to the core offering. As a result of the challenges, proactive service operations were difficult to manage in this changing market situation. This undermined FinanceCo s attempt to react to the changed competitive situation through introducing new services and thereby servitizing. 7. Cross-case Analysis The development paths that led TechnoCo and FinanceCo to Lock-in resemble each other with minor differences. However, the factors hindering the adoption of better alternatives in Lock-in are clearly different. Our results show that both companies were forced to start with an integrated offering built around an innovative core. At the Pre-formation phase, very little competitive pressures were present and there were high demand for the companies offerings (see Table 1). This was because TechnoCo offered products with very advanced technology in an oligopoly market, whereas FinanceCo had a particularly favorable situation in important market areas with its innovative payment solution. TechnoCo s production volumes grew rapidly and the company moved into mass production, which ended the Pre-formation phase. Respectively FinanceCo s decision to focus on payment instrument as the core offering acted as the critical event ending the Pre-formation. In the Formation phase the companies concentrated on developing their core offerings, which eventually led the companies to paths of self-reinforcing processes. FinanceCo s customers required integrated service bundles and the company began developing a service portfolio around the payment instrument. It focused on developing the service package as a whole to become more cost-effective. TechnoCo s developments were concentrated on the investment good and as a result the personnel started to view the company s offering from a productcentric viewpoint. The development of product technology and the change in customer requirements gave birth to the indirect delivery channel. Both companies experienced success with their offerings. The self-reinforcing processes TechnoCo and FinanceCo went through lead them to situations where future choices were limited. As TechnoCo s sales volumes going through indirect delivery channel grew, the channel gained importance and the company invested more resources to develop this channel, which led to further increase of the indirect sales. Similar pattern took place in product sales. Selling products became more attractive in respect to offering services, when sales grew rapidly. Development efforts were concentrated more on products and the personnel assumed a product-centric view, hence product sales was seen as even more attractive. FinanceCo offered services as a bundle and developed the offering as a whole. The focus was more on internal operations, while customer centricity was undeveloped. Accordingly, the company experienced challenges in trying to offer customers 8

9 separate services according to their needs, which further strengthened the orientation to offer services bundled. TechnoCo FinanceCo Core offering Investment good Financial solution Phase I: Integrated project deliveries Need for centralized Pre-formation Very little competition payment solutions The company superior in product Very little competition technology Company able to offer High demand for the innovative products innovative services Rapid growth of production volumes Increasing demand of payment services Critical event Move into mass production Focusing on payment instrument as core offering Phase II: Success in product sales Customers require integrated Formation Development efforts concentrated on service bundles products Aim for full service portfolio Personnel assume product-centric view designed around the Products become modular, smaller, and less expensive payment instrument Success in innovative Customers require products to be payment methods and integrated into more strategic equipment operations Indirect delivery channel formed Cost-effective service package Self-reinforcing process Phase III: Lock-in Adopting better alternatives hindered by a) Sales through indirect delivery channel grow the channel becomes more attractive more investments to develop the channel b) Product sales grow product sales become more attractive more development concentrated on products product-centric culture Majority of product sales through indirect channels Visibility to installed base lost Reactive service operations Product-centric culture End user contacts controlled by integrators Integrators reluctant to share information Personnel s assumed product-centric view Services offered as a service bundle investments to develop the offering as a whole internal operations fostered while customercentric culture undeveloped difficulty to sell or add separate services to the offering according to customer needs Services sold mainly as integrated offerings Reactive service operations Organizational culture not particularly service-oriented Undeveloped internal structures to support service productization and unbundling the offering More competitors offering parts of the service offering Customers able to carry out core services themselves Table 1 The development phases of the organizational paths of TechnoCo and FinanceCo. In the Lock-in phase most of TechnoCo s sales went through indirect channels, which meant that the visibility to installed base was lost and the company was in reactive service operations. FinanceCo for its part was delivering mainly integrated offerings and its service operations were reactive as well. In addition, the prevailing culture of both companies was not particularly service-oriented. Both companies experienced broadening the offering with more advanced services as extremely challenging. For TechnoCo this is due to the integrators 9

10 controlling end user contacts and unwilling to share information with the company, as well as the personnel s product-centric view. For FinanceCo the main hindrances were internal structures not supporting optimally new service development or productization and increasing competition by competitors offering parts of the total offering and customers carrying out services by themselves. As a result of the situation TechnoCo and FinanceCo were in in the Lock-in phase, the companies found servitization as costly and almost impossible strategy. 8. Conclusions Our research shows that when analyzing servitization of companies, utilizing the path dependence approach (David 1985; Sydow et al. 2009) can increase our understanding on the possible challenges stemming from the historical developments the companies have gone through. The analysis of organizational paths can be carried out according to the three-phased process suggested by Sydow et al. (2009). These three phases, Pre-formation, Formation, and Lock-in, reveal the critical event in the past starting a self-reinforcing process, the mechanisms of this process, and the factors hindering the adoption of better alternatives and thus escaping the lock-in. This comparative case study demonstrates that the ability of companies to add services to broaden their offerings (cf. Baines et al. 2009; Oliva and Kallenberg 2003; Wise and Baumgartner 1999) can be very dependent on their historical paths. The early success and relative lack of competition were critically shaping the prevailing culture in both of our case companies. This together with developing product technology in case of TechnoCo and specific customer requirements in case of FinanceCo caused the companies to go through a self-reinforcing process that ended up in a lock-in situation (cf. Arthur 1989; Sydow et al. 2009), where possible future choices regarding servitization were very limited. Accordingly, the apparent challenges of the companies to broaden their offerings with more advanced services can be explained by their historical development paths and the associated lock-in, which is novel to the servitization literature. Path dependencies (David 1985; Teece et al. 1997) may cause additional challenges in the servitization process. As these two cases show, servitization can be particularly challenging for companies with a history characterized by relative lack of competition and successful developments concentrated on the core offering. When broadening the offering by adding more services, we foresee that the cultural effects and prevailing mindset induced by the historical development paths need to be considered. However, we encourage further empirical research to explicitly understand these effects. Our results are of value to managers of companies aiming for broadening their offerings with services. Understanding the role of operational rigidities is crucial when considering the possible hindrances of pursuing a servitization strategy. Managers need to evaluate whether it is possible and profitable to aim for removing these kinds of barriers in order to servitize, or if it would be better for the company to choose a different kind of strategy. Also, it is essential to understand the origins and development mechanisms of the operational rigidities to avoid leading their companies into such situations. As this research is based on two company cases with one manufacturer and one financial service provider, generalizations to other industries and operational environments should be avoided. Accordingly, we encourage further research on how path dependencies affect servitization of companies in different countries and industries. Despite this limitation, we see that this in-depth research gives new understanding of how companies historical 10

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