The Value Chain in Product Service Systems

Table of Contents

List of Illustrations

1 Introduction

2 Value Chain
2.1 Corporate Value Chain
2.2 Global Value Chain

3 Product-service systems
3.1 Classification of Product-Service Systems
3.2 Servitization and Product-Service Systems
3.3 Value Creation of Product-Service Systems
3.4 The shift of the Value Chain – from a Product Driven to an Open Services Value Chain

4 Financial Impacts
4.1 General Cost Drivers in a Value Chain
4.2 Costs-Consideration on Value Chains of Product Service Systems

5 Conclusion

List of Illustrations

Figure 1: The Corporate Value Chain

Figure 2: The Global Value Chain

Figure 3: Classification of Product-Service Systems

Figure 4: Servitization influenced transition of value creation

Figure 5: The Corporate Value Chain

Figure 6: The Open Services Value Chain

1 Introduction

Nowadays, companies, especially product-grounded companies, face increasing competition. Companies underlay fundamental shifts in the value creation process. In the past, the focus was on the sale of a product or service, whereas today it is the customer with his needs and wishes. It gets more difficult to differentiate products from the products of ones competitors, as anyone can build products with comparably good quality. Therefore, the commodity trap appears, meaning that the customer’s perceive products as exchangeable. Moreover products these days have shorter life-cycles based on the losing interest of the customers. Hence, companies need to reconsider their business models and react to the inevitable competition. A possible solution is to rethink their business models and implement a more service-oriented perspective in their range of products. Product-service systems are business concepts, which are considered to be able to regain competitiveness in order to enhance the value of their products. Furthermore service-oriented business models involve the customer and thus gain information and knowledge, which is the key to a current successful business model, in order to create the best possible product and to keep up with customer wishes and needs.^{1 2}

Therefore, this assignment explains the general structure of a (global) value chain and sets it into the context of product-service systems. Furthermore it evaluates benefits and disadvantages of product-service systems and their impact on the value creation and on finances, identifying cost savings and inevitable occurring costs.

2 Value Chain

2.1 Corporate Value Chain

The value chain is a management concept developed by the American business economist Michael Porter and was first described in his 1985 best-seller „Competitive Advantage: Creating and Sustaining Superior Performance“.³

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: The Corporate Value Chain by Porter (Reference: Barnes D, (2001), p. 52)

In general the value chain considers a process view of an organization. An organization, either manufacturing or service organization is seen as a system, consisting of subsystems, in which inputs, transformation processes and outputs are included. Furthermore the inputs, transformation processes and outputs consist of acquisition and consumption of resources, money, labor, materials, equipment, buildings, land, administration and management. The costs and profits of the organization are influenced by the execution of the value chain.⁴

Moreover the value chain model can help a company to establish and enhance a successful product or service in a market. Besides, it is a useful tool to improve the company’s competitiveness and to maximize profits. This model allows companies to analyze all their activities with the aim to optimize each activity at its best and to create a competitive advantage for the company. In addition, the value chain analysis can be used to position a company’s product or service in the best strategically way on the market. Furthermore, the value chain has three main objectives, namely: improvement of services, cost reduction and value creation.⁵

2.2 Global Value Chain

With increasing importance of globalization, there are more value chains which have moved from an in-house and corporate model to a more holistic, global and cross-company value chain model.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: The Global Value Chain (Reference: Weiblen M. (2017), p. 29)

Therefore the global value chain offers a good analysis for value chains which consist of different companies and are spread across several locations in the world. In this case, value creation and its material and information flow is divided across several companies. Moreover, each activity of the value chain is to a company assigned which has specialized and has its core competence on this activity. In order to create transparency and accurate information about material flows across the whole value chain, an exchange platform is required to be able to take decisions. Besides, great importance to collaboration and trust is attached to the different companies.⁶

3 Product-service systems

Due to a decline of the importance of primary and secondary sectors, product-service systems strategies become crucial in order to align to the changing society, which gets more service-based.⁷ “A product service-system is a system of products, services, networks of ‘players’ and supporting infrastructure that continuously strives to be competitive, satisfy customer needs and have a lower environmental impact than traditional business models.“⁸

3.1 Classification of Product-Service Systems

To have a more differentiated view on product-service systems, the following figure illustrates the three main categories of Product-Service Systems:

Abbildung in dieser Leseprobe nicht enthalten

Figure 3: Classification of Product-Service Systems (Reference: Tukker (2004) p. 248)

The first main category is product-oriented services. The product itself has a dominant role here and furthermore some additional services are offered.

Use-oriented services represent the second main category. Again, the product has an important role and its ownership remains with the provider. Therefore the provider can offer the product in different variations to several customers.

Finally, the last main category is result-oriented services. There is no predetermined product involved. Furthermore the provider and customer agree on a specific result.⁹

3.2 Servitization and Product-Service Systems

“Servitization is the innovation of an organizations capabilities and processes to better create mutual value through a shift from selling product to selling PSS.’’¹⁰

Referring to this definition, servitization is the shift of business models. Product-service systems need to be offered and sold, in order to keep up with this shift and the increasing competition. Thus value-in-use can be generated.¹¹

3.3 Value Creation of Product-Service Systems

As in the section above discussed, servitization plays a crucial role in product-service systems. The service-logical change implies a realignment of value creation. Owing to an intense individuality of services, the customer participates in the creation of the value proposition. Furthermore, the customer determines how the communication between him and the provider is executed.¹²

In the following figure the servitization influenced transition of value creation is depicted.

Abbildung in dieser Leseprobe nicht enthalten

Figure 4: Servitization influenced transition of value-creation (Reference: Weiß P. (2017))

It can be clearly derived, that with an increase in servitization the value creation merges from value-in-exchange to value-in-use. Value-in-exchange is created and controlled by the companies. Furthermore the value is embedded in the products. Whereas value-in-use is created and controlled by the customer through experiences and during the usage. Moreover value-in-use is perceived by the feeling of the customer, if he feels better or worse off. In between, value-co-creation emerges. Here the company is in charge of the value creation and the customer can join the process as a co-creator.¹³

3.4 The shift of the Value Chain – from a Product Driven to an Open Services Value Chain

In order to follow and understand better the change from a product driven to an Open Services Value Chain, again, the classical product driven value chain by Porter will be analyzed.

Abbildung in dieser Leseprobe nicht enthalten

Figure 5: The Corporate Value Chain by Porter (Reference: Barnes D, (2001), p. 52)

As previously explained in chapter 2.1, in this particular model, inputs are transformed by the primary and supporting activities from the left to the right towards the arrow in order to create a product for the customers or rather market. In this model, the focus is set on the product. Just before selling the product to the customer, service appears. Service is more seen as a “finishing” activity. The core of this model is more the product, therefore this is a product-focused approach. Service here is offered to customers rather like an after-sales service. Consequently, the competitive advantage here evolves by differentiating the product or offering it at low cost. In this conception service is more seen as an “after-thought”. It is not something to differentiate with or to create success with, rather like a cost center. Many companies source also the service sector out, e.g. car companies sell their service functions to car dealers.

[...]

¹ Böhmann (2013), p. 9

² Chessbrough (2011), p.1 ff.

³ Porter M. (1985)

⁴ URL [3]

⁵ 50MINUTES.COM (2015)

⁶ Gereffi G. (2016), p. 6 ff.

⁷ Van Halen C. (2005), p. 1

⁸ Goedkoop (1999)

⁹ Tukker H. (2004), p. 248

¹⁰ Baines T.S. (2008), p. 555

¹¹ Baines T.S. (2008), p. 547

¹² Böhmann T. (2013) p. 13

¹³ Grönroos C. (2012) p. 135 ff.