Business Model Elements for Product-Service System

Business Model Elements for Product-Service System Ana Paula B Barquet 1, Vitor P. Cunha 1, Maicon G. Oliveira 1, Henrique Rozenfeld 1 1 Escola de Engenharia de São Carlos, Universidade de São Paulo, São Carlos, Brazil Abstract Companies are seeking for new ways to do business. The Product-Service System concept can be a potential option since it meets requirements regarding sustainability and also introduces a type of business in which the focus is placed on delivering function instead of providing value thought tangible products. However, the deployment of PSS involves a reassessment of companies business models. Therefore, this paper identifies and classifies the characteristics of the PSS business model that need to be addressed for its implementation, which was carried out using literature review and considering three types of PSS and nine elements of a business model. Keywords: Product-Service System; Business Model; Elements 1 INTRODUCTION Companies are looking for new ways to do business since the current market scenario is characterized by an increased competition. In this context, the Product-Service System (PSS) concept can be an alternative to companies that want to innovate because it allows selling not only products but also additional services that supplement customers needs [1]. It is important to consider that the implementation of PSS implies major changes in business operations and thinking, such as: how a company creates value for its customers? How to produce and distribute these values? How to interface with clients and supply chain? [1] Consequently, companies need to adjust the characteristics of their business models to take advantage of PSS benefits entirely [2-4]. Despite of its importance, the literature has little information about shifting toward a PSS business model [5] and one of the first steps required in this sense is the identification and classification of key PSS characteristics. Therefore, this work aims to analyze a PSS business model according to two criteria: the elements of business models [6] and the PSS types. The PSS business model indicates which characteristics of traditional business models would require modifications and gives a deep understanding about PSS characteristics. The next session describes the methodology adopted in this work. Following, the literature review section presents the theory concerning PSS and business model used to underpin this study. The subsequent section embraces the identification, analysis and classification of PSS characteristics. Finally, the conclusion section highlights the results achieve by the research, indicating contribution to practice and theory as well as listing future research opportunities. 2 METHODOLOGY This research applied a systematic literature review to collect and evaluate required information. Three steps adapted from Biolchini et al. [7] were performed: problem formulation, database definition and collection, and data analysis and evaluation. The topics PSS and business model comprised the focus of the review. Regarding to PSS subject, it was investigated its concepts, characteristcs and types. On the other hand, business model literature were analysed to identify which elements compose a business model. After identifying PSS characteristics and business model elements in literature, it was carried out a crossing analysis to classify the characteristics of each PSS type that should be considered in each element of a business model. 3 LITERATURE REVIEW 3.1 Product-Service System (PSS) The product-service system is the result of a strategy that shifts business focus from designing and selling only physical products to deliver a system of products and services that together are capable of meeting specific customers demands [8]. According to Baines et al. [9], the PSS integrates a product and service into a system which provides the same necessary functionally but reducing the environmental impact. Most of PSS definitions emphasizes the "sale of use" instead of "selling the product", indeed customer pays for using instead of buying the asset [9]. Furthermore, the focus is not only on the products and services but also in how needs and desires are identified and how organizations define their responsibilities and relationships [8]. In traditional business models, the customer acquires a product, becoming responsible for monitoring its performance, providing assistance and assuring its adequate disposal. On the other hand, in the PSS concept, the producer earns from customers use of a provided function. Thus the ownership of the product is not necessarily transferred to customer and the responsibility to maintain the product along its life cycle and to dispose it can remain with the producer [9]. The most common categorization available in literature divides the PSS into three types [1] [9] [10] [11] [12]: product-oriented services 3rd CIRP International Conference on Industrial Product Service Systems, Braunschweig, 2011

(POS), use-oriented services (UOS) and result-oriented services (ROS); as shown in Figure 1. These types diverge basically from the relationship between the producer and the customer. Value in product Pure Product Product-Service System Product (tangible) Product oriented Use oriented Service (intangible) Result oriented Figure 1: Types of PSS [10]. Value in service Pure Service Product-oriented services (POS): This involves the sale of a product in the traditional way, in which the customer retains the ownership of the product, although including some associated services. For instance: after-sales service to ensure functionality and durability of the product (maintenance, repair, reuse, recycling, training and consulting). In this case the company is motivated to introduce a PSS to minimize costs of use throughout product lifecycle; Use-oriented services (UOS): The product is owned by the producer, which sells the use or functions of a product (e.g., leasing, sharing, etc.). In this case, the company is motivated to create a PSS to maximize the use of the product, to meet demand, extend product life and reuse materials; Result-oriented services (ROS): This involves the sale of a result or competence rather than a product. Companies offer a mix of personal service and, when the result is delivered in a product, the PSS provider maintains its ownership and the customer only pays for the results. The PSS concept has potential to benefit both companies and customers. According to Baines et al. [9], the main advantages for each one are: Customers: More customized offers and higher quality; New functionalities and combinations of products and services to better suit customers needs; Responsibility for monitoring and end-of-life tasks transferred to producer; Companies: New market opportunities and competitive advantages; Alternative to standardization and mass production; Improvement in the total value delivered for the customer through increasing service elements; Access to data about product performance during the use phase; The PSS may also result in a number of environmental benefits. As companies become responsible for the whole life-cycle of their products, they are encouraged to take them back in their end of life, remanufacture them, and later make them available to the market again. Therefore, less waste is discarded or deposited, thereby reducing the consumption of raw materials and energy. Additionally, the inputs required for remanufacturing are often smaller than the inputs used for manufacturing a new product [13]. Despite of the cited benefits, the adoption of a PSS brings great challenges for companies since it requires the development of new relationships with stakeholders [8]. Such requirements should be considered in a company business model. In this sense, the next section presents information about business models. 3.2 Business Model Regarding its concept, Shafer; Smith and Linder [14] define business model as a representation of a firm s underlying core logic. According to Elbers [15], business models are the way a company creates, delivers and captures value, resulting from strategic choices and in accordance with their network value. The main contribution of developing a business model is the creation of practices that help companies to capture, understand, design, analyze, and change their business logic [6]. Thus, it has being considered a powerful tool to communicate strategic choices [14]. A structured business model can help decrease the business logic complexity since it represents the company strategy in an understandable form, makes possible to visualize the way a company can make value from its offer, and explain how to implement. Therefore, it allows organization to have a holistic view of the business, clarifying important issues and relationships. The business model can be also considered an abstract representation of the business strategy [16]. Although the term business model is widely used for many authors, there is no common sense for the concept [17] [18] [19]. Osterwalder [16] made an intensive literature review about business model concepts, attributes and their relationships. He, in a posterior research, defined business model as a conceptual tool composed of objects, concepts and their relationships that enable to express simplified description and representation of the business logic of a firm [3]. Another definition comes from Osterwalder and Pigneur [6]. These authors mentioned that a business model describes the rationale of how a company creates, delivers and captures values. They also developed the Canvas business model, which is a tool created for describing, analyzing and designing business models. 3.3 Business Model Canvas The Canvas business model was applied and tested in many organizations (e.g. IBM and Ericsson), being successfully used to easily describe and manipulate business models to create new strategic alternatives. Moreover, this model presents a clear description of the elements comprising a business model. This approach is used as reference in this paper since the elements that compose the model are described in detail. Defining the elements (also referred as building blocks) which compose a business model is the first step to plan the business and help companies understand and describe the business logic of their firm [16]. The Canvas model comprises nine elements, which cover the four main areas of a business: customers, offer, infrastructure and financial viability. These elements, depicted in Figure 2, are following described. key partners key activities cost structure key resources value proposition customer relationship distribution channels customer segments revenue streams Figure 2: Elements of the canvas business model [6].

I. Customer Segments (distinct segments with common needs, common behaviors, or other attributes): defines the different groups of people or organizations an enterprise aims to reach and serve. Once this decision is made, a business model can be carefully designed around a strong understanding of specific customer needs. II. Value Propositions: It seeks to solve customer problems, satisfy customer needs and describes the bundle of products and services that create value for a specific Customer Segment. III. Channels: describes how a company communicates with and reaches its Customer Segments to deliver a Value Proposition, comprising a company's interface with customers. IV. Customer Relationships: describes the types of relationships a company establishes and maintain with specific Customer Segments. V. Revenue Streams: result from value propositions successfully offered to customers, this element represents the cash a company generates from each Customer Segment. VI. Key Resources: are the assets required to offer and deliver the previously described elements. VII. Key Activities: are performed though the Key Resources to offer and deliver the previously described elements. VIII. Key Partnerships: describes the network of suppliers and partners that make the business model work. Some activities are outsourced and some resources are acquired outside the enterprise. Companies create alliances to optimize their business models, reduce risk, or acquire resources. IX. Cost Structure: describes all costs incurred to operate a business model. Costs can be calculated relatively easily after defining Key Resources, Key Activities, and Key Partnerships. After summarizing the elements that compose the Canvas business model, in the next session it is identified the PSS characteristics related to each of these elements. 4 PSS BUSINESS MODEL 4.1 Identification of PSS characteristics related to the business model elements It is important to note that Goedkoop et al. [20] have already considered business issues when they defined the PSS. According to them, the PSS concept was defined as a system of products, services, infrastructure and network support that continually strives to be competitive, satisfy customer needs and result in less environmental impact than traditional business models. Baines et al. [9] have also included business issues when they suggested some features for a development of the PSS, for instance: Mind change of product to system; Increased involvement between the customer and the organization since the beginning of development; Design, production and delivery case-by-case, from the perspective of the customer; Increase the involvement and responsibility of the company in other phases of the product life-cycle; Higher involvement of all stakeholders; Therefore, one of the main challenges faced by companies which adopt the PSS is to identify specific requirements in the business model. Thus, using results from literature review, the characteristics of the PSS are sorted out across each element of Canvas model. Concerning to Value Propositions, the value offered in a PSS is based on an integration of a product and service. Then, it can differ basically on the relationship between the producer and the customer, such as: product-oriented service, use-oriented services and result-oriented services [1] [11] [10] [12] [9]. With regards to Customer Segments, it is important to take into account what kind of ownership ideas this specific target group has [11], cultural and regional differences and consumer habits, and also behavior and values [1]. For Channels, sales and retail departments should define how the PSS should be offered and priced to be more attractive than buying a product based option [11]. Training of retail and sales personnel is often necessary as well as changes to pull PSS adoption [5]. It is also important to make careful argumentation in marketing campaigns [11], clarifying customers about the PSS usage [5]. Another key aspect of a PSS is the use of new approaches for Customer Relationship [21]. Therefore, it is necessary to create added value and delivery it through direct relations and intensified contacts with customers [5], which enables the development of long-term relationships instead of short-term and transaction-based relationship found in the traditional selling products context [5] [21]. The PSS also gives opportunity to raise revenue through improving the function offered by the PSS provider [22]. However, when it involves more than one company, the revenue distribution needs to be well managed among partners to avoid misunderstandings [13]. Regarding to Key Resources, particularly human resources, PSS providers have to make considerable investments into human asset [23]. New competences about customers need to be developed, people trained and sometimes additional personnel recruited [5] [24]. It is also required a fundamental shift in corporate culture and market engagement, which requires time and resources [23] [24]. Instead of focusing on the activities related to a physical product, PSS providers should focus on the Key Activities related to their customers. Even when the product provides a core function, more essential activities are involved, which may happen before, during and after the product use [23] [24]. Due to the complex nature of the value proposition and the mix of competencies needed to implement a PSS, a Partnership network is essential. To structure a PSS network, it is necessary to identify what are the required core competences and which actors have the whished competences [13]. In the PSS business model, the relationship between producer and stakeholder is recognized with a wide scope and has a considerable impact on the supply chain structure [25] [5]. A challenge concerning to PSS is how to manage the Cost Structure and how to set a suitable price for the PSS [26]. The financial and accounting functions may need to adapt their practices to new profit centers. The time scale of financial flows changes considerably from an almost immediate return of the capital to an extended use period [5]. That means the PSS provider needs to hold the necessary financial resources or to have the financing partners support to bridge this period [13]. Payments might be based on the availability of the PSS, frequency of use or final result [23]. When the function of products is sold, cost structures may need to be restructured to support different cash-flow requirements. So, in a PSS, the payback period for the value delivered can be longer than in a pure product-selling context. The identification of PSS characteristics according to business models elements enable to observe some distinctions comparing to the characteristics of traditional business model. Afterwards, the three types of PSS (product-oriented services, use-oriented services and result-oriented services) are also classified based on elements of Canvas business model in order to understand its differences.

4.2 Classification of PSS characteristics Table 1 sorts the three types of PSS according to each business model element. Product-oriented services (POS) Use-oriented services (UOS) Result-oriented services (ROS) Customer segments Clients who wants or need to have the ownership of the product [1]. Clients who wants to make low initial investments [10] [27] and can accept not to be the owner of the product [1]. Clients who prefer to not own physical products (means assets on their balance sheet) [28]. Clients who need flexibility to change [28]. Value Propositions Sales of products with extra services added. More tangible value [10]. Product is the core to the system [29] and clients have their ownership [9]. Product's ownership with the provider [10]. The user buys access to a product [11]. Deliver of functional capability to the customer [29] [9]. Deliver of functional result [27] [29] [9], maybe with no product involved. High level of abstraction [10]. Channels Indirect interface with end client [1]. Marketing has Superior product specifications/qualities [1]. Transitions can occur quickly and are easier to manage, e.g., within a lease contract rather than having to buy and sell a complex and expensive product each time [1]. Direct interface with end client [1]. Marketing need to develop trustworthiness, reliability, knowledge/experience [1]. Customer Relationships Transactional based [9] [30].There are no major changes in the client base [11]. Blend of transitional and relationship [30]. Enables long term business relation [27]. Relationship based [9]. Longer terms contracts and strong interaction with customers [10] [27] [28] [9]. Revenue Streams Payment in the form of the sales price [31]. Move from the commoditization of the product [1], e.g., provision of additional services may lead to a more efficient use of products [11]. Payment is based on availability [10]. The same artefact may be shared or used by different users, leading to a lower capital needed in the system [11]. Payment is based on per unit time or unit use [10] and is distributed along the use phase [28]. Need a different cash-flow patterns, since there is different time-scales and amounts [1]. Key Resources Key resources are material, information and energy. More efficient use of materials and human resources [10] [27] [9]. Technology/machinery and employees viewed as company's critical capital [1]. More use of human resources [10], workers with high level of product knowledge are required [9]. Need of information and kwon how intensive exchange [32]. Workers with high level of communication skills [9] and persuasion are required [1]. Employees as critical capital, unlike equipment [1]. Key Activities Large production department/machinery [1]. Importance of product and process development [1]. More centralized decision-making [1]. Need for new provider activities [10] since responsibility shifted to him [27]. Need to manage services: which services have to be available at which point and to what extent [27]. New activities related to how to design product and service according to the function required, and how extract customer requirements [29]. Key Partnerships Outsourcing of services. Incentives and effective control systems are required [30]. Basic information exchange with the partners [30]. Long-term collaboration with service suppliers [30]. Information exchange with the partners includes: demand forecasts; technical training and feedback, complaints and satisfaction of customers [30]. Need to organize outsourced tasks efficiently [10], to reach cooperation [32] and strategic integration between the partners [30]. Information exchange with the partners includes: knowledge, training, integration of capabilities [30]. Cost Structure Traditional production costs, with additional material and human resource costs [10]. The need for capital is high [10] since various costs are shifted to the provider [11]. Risk premium (responsibility of total cost risks) [28] and/or uncertainty related to the system costs [10] [1]. There is a need to determine of all lifecycle costs [27]. Table 1: Characteristics of business model elements according to the type of PSS.

The PSS business model differs clearly from the traditional model in the way to propose value. In the PSS, the value is no longer based on a tangible product, but in the relationship between producer and customer and how to provide a set of products and services that meet the needs required. From Table 1 is possible to identify differences between the elements related to each PSS type. In case of Value Propositions, the variations focus on the level of the offer tangibility and for Customer Segments, on the aspects of ownership. Concerning to Channels, the interface with the client can vary between direct and indirect, which influences the marketing behavior. Customer Relationship mainly varies between transitional and relationship base. In Revenue Streams, the variations of payments (based on product sale, availability, per unit or use) lead to new ways to structure it. It is also true for Cost structure, since PSS provider responsibility for cost and risks alter according to PSS type. Key Resources differs basically in terms of material and capabilities. It can be observed that Key Activities has the majority of variations between the three types since it encompasses several topics, e.g. product development, management of services, design of the function required. Finally, Key Partnership focuses on the exchange of information and degree of cooperation between partners, which can vary between basic outsourcing and strategic integration. In this sense, it can be observed that the results show that the elements of PSS business models vary with the type of relationship between producer and consumer. In addition, the classification proposed can be a good practice to help companies do decide which type of PSS fits to their business. 5 CONCLUSION The analysis of PSS business model characteristics is an important step for companies which want to shift the offer of only product to a combination of product and services. This paper presents the primary characteristics of three types of PSS (product-oriented services, use-oriented services and result-oriented services) classified according to the nine elements that comprises Canvas business model. This result support companies that aim to implement a PSS to better understand its constraints and to define a business model which fits to its purposes. Furthermore it can also support those which already offer a PSS to make required changes or to improve its current performance. Considering the characteristics of a PSS and the results of this work, it was noted the necessity to consider two new elements in a PSS business model: the environmental element and the innovation element. The environmental element is addressed in the PSS concept, since this concept has the potential for impact environmental reduction. Also, the ability to innovate is a PSS benefit due to better client contacts and higher network cooperation. These are going to be addressed in next steps of a research project focused on support PSS implementation, in which empirical studies about each PSS type are also in development. 6 ACKNOWLEDGMENTS The authors would like to thank the following institutions for their financial support: CAPES (www.capes.gov.br), CNPq (www.cnpq.br). 7 REFERENCES [1] Tischner, U.; Verkuijl, M. (2002): Suspronet Report: First Draft Report Of Pss Review. Suspronet. [2] Kuo, T. C.; Ma, H.; Huang, S. H.; Hu, H. A.; Huang, C. S. 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