SME TOTAL COST OF OWNERSHIP MODELS AND THEIR SLUGGISH ADOPTION AN EXPLANATION BASED ON THE SERVICE-DOMINANT LOGIC

Jörg Freiling Full Professor, LEMEX Chair in Small Business & Entrepreneurship, University of Bremen, Wilhelm-Herbst-Str. 5, D-28359 Bremen (Germany), Phone: +49 421 218-66870, e-mail: [email protected]

Kathrin Dressel Research Assistant, LEMEX Chair in Small Business & Entrepreneurship, University of Bremen, Wilhelm-Herbst-Str. 5, D-28359 Bremen (Germany), Phone: +49 421 218-66877, e-mail: [email protected]

ABSTRACT: Reducing lifecycle costs by developing so-called total cost of ownership (TCO) concepts was a reasonable idea in many business-to-business markets. Customers were attracted by cutting lifecycle costs and reducing risk when buying technical equipment. The predominantly small- and medium-sized enterprises (SMEs) providing these solutions expected building and sustaining customer relationships and increasing revenues (Oliva & Kallenberg, 2005). Much of the enthusiasm of TCO adoption has disappeared since customers simply did not adopt these TCO solutions. Many SMEs are still unaware of the reasons why their innovative business models did not work. We point out the service nature of innovative business models as well as potential (dis-)advantages for both the customer and supplier. While there may be important pros of this concept, a more fundamental perspective, rooted in the so-called ‘service-dominant logic’ sheds different light on this issue and allows for another explanation of the sluggish adoption of TCO models.

KEYWORDS: Small- and medium-sized enterprises (SME), Service Innovation, Total Cost of Ownership (TCO) Models, Co-Creation of Value, Service-Dominant Logic (SDL)

PRINCIPLE TOPIC AND RESEARCH QUESTION Customers and suppliers in B-to-B markets often collaborate within business relationships. Due to more or less strong ties and close interaction many solutions provided are highly customized and oftentimes co-developed. Insofar, suppliers are aware of many peculiarities of the demand and vice versa. The customers very often face competitive pressure of international markets and call for more effective and/or efficient solutions. Against this background, one concept attracted attention in more recent times: the so-called ‘total cost of ownership’ (TCO) model (Heilala et al., 2006). TCO models imply a considerable reduction of customer’s life cycle costs of, usually, a technical infrastructure. Thus, suppliers offer a comprehensive solution at a certain purchase price that might exceed the prices of competitors. However, they guarantee considerable cost savings in the usage period and make costs calculable by long-term contracts. Due to lower total life cycle costs the offerings are reasonable from a customer’s point of view. Gordon et al. (1993) claimed that new services should add considerable value to the customer for otherwise these services will not be bought. In case of TCO this, obviously, seems to apply. However, the adoption of TCO solutions is more than disappointing from the perspective of the supplier.

From a supplier’s point of view, TCO models are considered within the scope of innovative business models. By TCO offerings suppliers often extend their service range and blend technical infrastructure with industrial services inseparably in so-called ‘hybrid solutions’ (Johansson et al. 2003). Among the core reasons for offering service-based TCO business models, suppliers expect higher profit margins, remarkable growth opportunities, and more stable turnover by close relationship (Reinartz and Ulaga, 2006). Unlike new product development the development of new service offerings does not take so much time and is often triggered by concrete projects (de Jong et al., 2003; Gallouj and Weinstein, 1997).

All in all, there are many good reasons for both the customers and the suppliers to push this kind of industrial service models. Against this background, the question arises why the pace of adoption in B-to-B markets is so low. Especially for most SMEs, offering new services is terra incognita due to limited capacity and lacking high-skilled personnel to foster this 1

process. Moreover, the suppliers are often unfamiliar with a changed mode of cooperation with customers. Formerly, when selling technical infrastructure with some product-related services they sold according to the ‘always a share’ principle (Jackson, 1985). Negotiations were tough and often controversial. In many cases the suppliers are rather unfamiliar with long-term trustful relationships that are to some extent mandatory when collaborating in case of sophisticated TCO offerings (Susman et al., 2006). Roughly speaking, turning from selling technical infrastructure to marketing and managing hybrid solutions, such as TCO business models, requires a paradigm shift as for the governance mode: Hybrid governance replaces certain kinds of market governance (Noorderhaven, 1995). This change at the micro-level is by no means easy to handle and, thus, will be considered below.

However, these problems of change at the micro-level go hand in hand with problems located at the meso- and/or macro-level. Focusing on TCO business models and their long and uncertain path of market diffusion, we go beyond current explanations. In this vein, we employ the concept of the service-dominant logic (SDL) according to Vargo and Lusch, (2004, 2007). This concept focuses the long transition from a product-dominant to a servicedominant logic in markets and societies. In particular, the service-dominant logic is characterized by a close and long-term customer/supplier relationship with the customer as co-producer/co-developer. The collaboration is not restricted to the value-added process but comprises the usage process as well. As a consequence, the final solution is a joint product of interrelated customer and supplier activities. The core reasoning is that both suppliers and customers have not fully adopted the service-dominant logic. However, demanding innovative business models such as TCO can only be successfully implemented in case of an advanced transition process from the goods-dominant to the service-dominant logic.

Against this background, the research question of this paper is: What are the reasons for the sluggish adoption of innovative TCO business models of SMEs in B-to-B markets? By this research question we address the implementation of innovative business models and, in particular, the reasons for problems and failure. To focus our research, we pinpoint the diffusion of TCO business models - as one major representative of innovative business models - in mechanical engineering. We chose mechanical engineering due to the fact that in recent times TCO business models and their implementation play a considerable role in this 2

industry. Moreover, most of the suppliers are small- and medium-sized entities which matters insofar as this paper is devoted to SME research.

Since research has been comparatively silent in this realm, we employ a research design that rests on a conceptual part for a basic understanding of the subject matter and an overview of the state of the art in literature. Next, we develop a theoretical framework that guides and frames the following process of developing research propositions. Due to the early state of research we confront our propositions with reality to check whether and how far they pass this very first step and whether other factors are to be considered as well. The reality check rests on case study research according to Yin (2009). Within the case studies we collected data by in-depth interviews and additional secondary material from different sources. Insofar, we chose a rather exploratory research design as a starting-point for on-going empirical research of the explorative and exploitative kind.

We advance the state of research in at least three ways: First, we employ the debate on innovative business models to capture all relevant aspects when placing new solutions in Bto-B markets. Business models go far beyond typical marketing and sales issues, for they address value creation as well as the configuration of value-added architectures and sales models. Second, the few existing studies on business model innovations in the context of industrial services tend to approach this field either solely from a supplier or a customer perspective (e.g. Miles, 2005). We transcend this view by focusing on both perspectives and analyzing the interplay between supplier and customer when establishing the new serviceoriented business model. We adopt this perspective because it allows for addressing causes of the customer/supplier relationship as well. Third, we employ the concept of the servicedominant logic to introduce a completely new explanation that not only highlights factors of the customer/supplier dyad but aspects that refer to the industry, market, and societal level as well.

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BASICS ON TCO BUSINESS MODELS AND SDL What does TCO mean and imply? Total cost of ownership (TCO) means the estimation and calculation of all direct and indirect costs associated with the utilization of a technical infrastructure over its entire life cycle (Dahut, 2008). Heilala et al. (2006) specify that TCO considers all life-cycle costs, including purchasing, installation, operations and maintenance, and end-of-life management. This, however, does not perfectly reflect the meaning of TCO in B-to-B transactions in general and in mechanical engineering in particular. Customers are confronted by the TCO concept with a rather ‘objective’, cost-focused concept which can – depending on the risk preference of the decision maker – support different purchasing decisions (Roodhooft et al., 2003; Degraeve et al., 2005). According to Ellram (1994), TCO is a purchasing concept that aims at understanding the costs of buying a particular good or service from a special supplier. Furthermore, TCO intends to bring to the attention of a customer that a higher purchasing price can be (more than) compensated by lower costs in later phases of the life-cycle (in particular maintenance, employees, services, energy) (Ellram and Siferd, 1998).

As mentioned above, TCO concepts are devoted to decrease customer’s costs over the lifecycle of using the technical infrastructure (machine). These concepts often imply a certain kind of customer/supplier cooperation to realize the cost savings. The tight coupling of customer and supplier in business relationships is framed by a ‘hybrid governance’ concept (Williamson, 1991) - be it formal or informal. The hybrid governance concept combines characteristics of hierarchical governance with characteristics of market governance (Noorderhaven, 1994). Within the scope of this hybrid governance, decisions are made as for duration, adjustment mechanisms, and the nature of commitments (Noorderhaven, 1994). Due to the nature of TCO and the implementations in business practice, TCO often goes along with a distribution of risks in a manner that suppliers make promises or grant guarantees to ensure an effective decrease of some ownership-related costs. From a supplier’s point of view and in the face of the liabilities of smallness of SMEs (Aldrich and Auster, 1986), this is a rather risky endeavour. Thus, we should regard the design of TCO-based business models with regard to this issue as well. To address TCO in the light of the debate on business models is useful for it allows a more systematic and structured view on the potential (dis-) advantages that go along with TCO. A business model consists of three 4

frame-giving elements: (1) the value proposition, (2) the value-added architecture, and (3) the sales model (Legge and Hindle, 2004).

Value Proposition. TCO provides customers with a clear perspective on decreasing costs in the realm of the utilization of the machine over time. Moreover, TCO allows for a more transparent and precise calculation of the costs of purchasing and driving this technical equipment. This perspective is accompanied by a high service level the supplier provides. However, this service level is not solely provided by the supplier but in close collaboration with the customer within the scope of long-term contracts. Insofar relationships develop that often become something like a ‘virtual organization’. Thus, the shift from a single transaction to a long-term and tight business relationship, framed by the negotiated contract, is evident at this stage (Susman et al., 2006). Besides that, in connection with the sales model TCO might reduce the uncertainty of the customer when buying a machine.

Value-added Architecture. TCO business models are novel in the way how the value-added process is organized. Typically, TCO implies more intensive couplings between the customer and the supplier and, thus, often a higher degree of customization. Different from the debate on customer integration (e.g. Johansson et al., 2003), i.e. a considerable integration of customer personnel, information, and objects, TCO goes along with a considerable integration of the supplier in the utilization activities if the industrial customer. This requires a thorough adaptation between the customer and the supplier in terms of the basic demand, the facilities, the expertise, and the personnel involved. Without these adaptations the processes would not run smoothly and the solution delivered would be badly designed (de Brentani, 1995). Insofar, TCO business models and offerings require a specific design of (business) processes of the supplier and, to some extent, of the customer as well (Meier and Massberg, 2004).

Sales Concept. TCO business models are full-service offerings. As blends of physical products and services, the components of the solution provided are inseparably linked. This implies that the customer only has to pay for the entire solution and cannot buy product and service separately. Such a linkage between product and service is different from many other sales models in B-to-B markets. This sales model is indispensable because the supplier ex 5

ante guarantees a stable long-term solution. In this sense, the entire transaction is framed by a long-term contract that finally reduces the risks of both partners considerably.

Above, we already addressed the concept of the service-dominant logic (SDL). What does the SDL imply in the context of the subject matter and the research question of this paper? The SDL concept of Vargo and Lusch (2004, 2007) was originally developed to highlight a paradigm shift in marketing. Transferred to most recent developments in the society and economy, the SDL concept explains the transition from a more goods-centered to a servicecentered economy. This transition is a long-lasting and discontinuous process with a rather indefinite end. Insofar, after decades of transition(s) many transactions are not typical service-oriented due to mindsets, procedures and resources but are still considerably influenced by elements of the goods-dominant logic. TCO, however, is a concept that is highly service-driven and, thus, a sound model for rather late steps of the transition. To better understand the SDL or the difference between a service- and a good-centered view, respectively, it is necessary to explain the most striking cornerstones of the SDL and the differences compared to the goods-dominant logic.

Insofar, ‘sense and respond’ as a principle replaces the logic of ‘make and sell’. Suppliers need screen the exact problems of the market and, particularly, single target customers. Once understood, suppliers are in a position to develop solutions, often in connection with customers, that exactly fit the specific demand (Gadrey et al., 1994). This principle is much more customized than manufacturing equipment for a market and selling it afterwards. Thus, according to the SDL the single customer and the single supplier interact and co-produce what the customer really wants. It takes a high level of empathy of the supplier to patiently analyze and finally understand what the customer’s problem really is. Moreover, the principle of supplier-dominated development and manufacturing of products is replaced by coproduction and co-development of solutions within a ‘virtual organization’ framed by the long-term contract. In this vein, resources of both parties interact and allow for synergies that cannot be raised within the scope of a good-centered logic. As Vargo and Lusch (2004) argue, it is not important what the final outcome of the value-added process really is. It is much more important how the process of co-development proceeds. The relevance of resources and processes of the two involved parties replaces the former relevance of the 6

product (good). Drivers in such settings are specialized skills and knowledge or, in terms of the SDL, the so-called ‘operant’ resources (Hand and Lev, 2003) - compared to the vital role ‘operand’ (materials, machines, etc.) resources play in the concept of the goods-dominant logic (Vargo and Lusch, 2004). Furthermore, the goal of increasing the transactional value for both sides shifts our attention from the performance delivered to the utilization process of the customer, (pro-) actively supported by the supplier. However, when analyzing the run of events in recent transactions and relationships these steps towards SDL are not completely taken by now. Insofar, the rather slow pace of TCO adoption is in no way surprising.

In this vein, we search for a framework that considers the customer/supplier interaction and its impact implications for the value-added processes of the supplier. Having responded to this question we introduce the competence-based theory of the firm (CbTF) according to Freiling et al. (2008) and the open system view (OSV), respectively (Sanchez and Heene, 1996).

THEORETICAL BASICS AND PROPOSITIONS The reason for choosing the competence-based theory of the firm (CbTF) is that CbTF is an evolutionary theory that considers knowledge, competences, mindsets, people, and culture as the most important forces of corporate competitiveness and change. Moreover, this theory is capable to address problems of adopting new solutions due to organizational inertia. To do so and to consider at the same time the customer/supplier collaboration, we introduce the open system view for modeling purposes. In their original model, Sanchez and Heene (1996) focus one firm, namely a supplier striving for sustaining competitive advantage. The entire system consists of six system elements: the strategic logic, the management processes, the intangible assets, the tangible assets, the activities, and the products. The open system is surrounded by external assets, the so-called ‘firm-addressable resources’, and the market. Employing the SDL perspective as outlined above, we need to modify this system considerably. Both supplier and customer form a temporary unit (‘virtual organization’) that comprises collaboration on a formerly agreed basis. As a hybrid governance design, this unit can be rather stable if the customer and the supplier feel committed within the scope of a business relationship that pools considerable parts of the value-added resources and processes.

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Figure 1: Modified Open System View Source: Own illustration

Figure 1 highlights the firm as an open system. The pale dotted lines symbolize the blurring boundaries of both the customer and the supplier. This openness allows considering the phenomena of customer integration in the supplier’s sphere for the purpose of co-production and co-development (value-added process) on the one hand and supplier integration in the customer’s sphere to support the utilization process of value co-creation on the other. In all instances, the customer and the supplier are able to integrate external advice, expertise, and similar resources by collaboration with third-parties. Insofar, they need an absorptive capacity (Cohen and Levinthal, 1990) to effectively support these processes. Moreover, the customer and the supplier as well learn in the market process by every step they make. Thus, they receive a feedback on every move. This feedback might have an impact on all elements of the open system.

Based on the embeddedness of the two firms in their business environment, we can identify first reasons for a slow pace of adopting novel concepts in industrial service markets. The more the two parties act separated and autonomously, the worse the adaptation will be (Mirza, 2008). Resources do not fit together well and prevent the partners from raising 8

economies of scope. It is undisputed that in most cases TCO business models are customized offerings (Schuh et al., 2007). The more suppliers are able to identify customer’s resistance to change, the better they are positioned to tailor their TCO concepts to the problems perceived by members of the buying team. Oppositely, the more customers are aware of the entire facets of TCO solutions, the better they are able to recognize advantages and to negotiate particular problems with the supplier. Moreover, we propose that TCO business models are too ambitious in terms of the de-facto transition path to a service-dominant logic, i.e. the enterprises are predominantly not prepared for this kind of business models and they did not recognize the importance of service entirely.

Another aspect to be considered in the first set of propositions are the mental models of decision-makers of both the customer and the supplier (Kim, 1993). This system element is in no way independent from external influence. In close relationships, as they are common in mechanical engineering, these mental models develop with the transactions in markets so that there is at least some impact of the organizational customer on the supplier and vice versa. More important, the mental models are in close interaction with standards in markets and societies and develop by taken external advice. If this holds true, the general shift in the economy and the society towards a more service-dominant logic is translated to some extent via this external linkage. Insofar, external forces and external advice fuel the transition from a goods-dominant to a service-dominant logic.

The other way round, the question arises how far mental models cause rigidities. In this respect, strategic mental models are equipped with a phenomenon we can call a ‘built-in inflexibility’. Mental models rest on previously learned patterns and are in use by decisionmakers in a rather automatic manner. Since people are oftentimes not able to unlearn rapidly, one force of rigidity is already obvious. The lacking willingness and/or ability to unlearn closely corresponds to the capacity to absorb external knowledge. To this end, Cohen and Levinthal (1990) introduced the concept of the ‘absorptive capacity’ in a different context. The absorptive capacity applies in our context for decision-makers that have to be able to identify, assimilate, and integrate external knowledge in this respect as well. A second source of inertia refers to the interrelationships of the mental models of both customer and supplier. If the mental models do not fit, unproductive modes of conflict work and make adaptations 9

unlikely. In case of TCO models, the customer very often focuses the attention on the price when it comes to decision-making in transactions (Cambra-Fierro et al., 2008). Cost savings in later periods oftentimes get out of sight. This is not surprising in the face of this fact that many decision-makers do not reap the benefits of their decisions anymore due to earlier retirement. Since organizational incentive schemes often do not consider this the concentration on near-future savings is rather plausible. Insofar, it is not easy to re-educate customers in their way of thinking (Wind and Thomas, 1980). Moreover, organizational procedures and decision rules need to be changed to prepare the ground for a TCO adoption. Thus, mental models and management processes of the customer are not open for TCO adoption and represent an obstacle to innovation. Against this background, we propose: Proposition 1a. With a lower degree of firm’s embeddedness in markets and society the pressure of moving towards a service-dominant logic on the firm level decreases, and so the openness for TCO business models. Proposition 1b. A low level of absorbing external knowledge on steering the management and value-added processes leads to a lower awareness of innovative service solutions and, thus, a lower penetration of the market. Proposition 1c. With more rigid goods-centred mental models the adoption of TCO solutions decreases.

We already pointed out that TCO business models are hybrid solutions that need a sound alignment of processes and elements of the solution provided. If the whole bundle of product elements is not well aligned and only to a small extent customized, we cannot expect that the solutions will penetrate the market. More, the structures of both customer and supplier need to go hand in hand if the two parties form a real temporary unit as suggested by SDL thinking (Vargo and Lusch, 2004). Taking the interplay of the system elements according to figure 1 into account, at least three aspects come to an issue: customer integration in the value-added process, supplier integration in the utilization process, and combinative capabilities in use. First, it is rather important to note explicitly that participation of the customer matters in case of providing TCO solutions because the customer is, in fact, a co-producer and co-developer. Without exact specifications no supplier will be able to provide a fitting solution. The same holds true for customer participation in the value-added process. Thanks to often intense customer integration, the quality depends to a large extent not only on the supplier but on the 10

customer as well. If the customer is not aware of this role, unable to integrate or insufficiently supported by the supplier, a poor quality will slow down the pace of TCO adoption. Second and inversely, the same holds true for the usage processes of the customer. We can learn from SDL thinking that the full potential of service and hybrid solutions can only be raised in case of customers accompanied by the supplier in the utilization process thanks to their superior know-how and expertise. The customer adopts TCO with the expectation of cutting costs of driving and maintaining the machine. This, however, depends to a large extent on supplier integration. If this does not take place on a regular as well as effective and efficient basis, a wider TCO adoption will be rather unlikely. Third, since supplier and customer collaborate in a tight relationship and form a virtual organization, problems arise without a minimum adaptation between the customer and the supplier. However, the more supplier and customer act independently, the worse the adaptation will be (Mirza, 2008). In case of TCO, many customers behave in a too autonomous manner. They do not adapt to the supplier, restrict the contact and the interaction processes and do not involve themselves in a way that they fully understand all the details of a successful cooperation. The loose way of coupling prevents the customer from raising a relational benefit. To connect structures, processes, and output elements of both the customer and the supplier, so-called ‘combinative capabilities’ (Kogut and Zander, 1992) are vital. Without available and developed combinative capabilities, the synergetic potential is rather low. Again, we propose: Proposition 2a. Insufficient customer integration in the value-added process of the supplier will negatively affect the overall product quality, life-cycle costs, and TCO adoption. Proposition 2b. Insufficient supplier integration in the utilization process of the customer will negatively affect the overall product quality, life-cycle costs, and TCO adoption. Proposition 2c. Insufficient combinative capabilities will lead to disconnected and/or mismatched structures and solutions and to a slow pace of TCO adoption.

The SDL concept operates with two resource categories, namely operant and operand resources (Vargo and Lusch, 2004, 2007, 2008; Constantin and Lusch, 1994). Constantin and Lusch (1994) define operand resources as those on which operations are performed to produce an effect. Typical production factors belong to this kind. Instead, operant resources are employed to act on operand resources. CbTF tells us that operand resources are typically finite, whereas operant resources are generative, i.e. their value increases in use (Moldaschl 11

and Fischer, 2004). Capabilities, knowledge, and technologies are examples of this kind. Vargo and Lusch (2004) argue that operand resources were considered primary in the goodsdominant logic. Oppositely, operant resources stand at the forefront in the SDL. Analyzing the complex, demanding and long-lasting solutions provided in case of TCO business models in mechanical engineering, the pivotal relevance of operant resources turns out. However, the question arises how far operant resources are available the way it should be and whether the ratio of operant and operand resources employed in TCO settings is reasonable. In case of more or less evident bottlenecks (Coviello and McAuley, 1999; Hollenstein, 2005; Perrini et al., 2007) we additionally ask for an absorptive capability to integrate ‘firm-addressable resources’, according to figure 1. We conceptualize the absorptive capability similarly to the absorptive capacity (Cohen and Levinthal, 1990; Zahra and George, 2002) with the decisive difference that the absorptive capability is not bound to the integration of external knowledge but refers to any kind of firm-addressable resources as well. This leads us to our next set of propositions: Proposition 3a. Insufficiently developed operant resources of both the supplier and the customer side prevent from a faster transition to the SDL and have a negative impact on the adoption of TCO business models. Proposition 3b. A disproportion of operant and operand resources with over-emphasized operand resources prevents from a faster transition to the SDL and has a negative impact on the adoption of TCO business models. Proposition 3c. Lacking absorptive capabilities to integrate firm-addressable resources weaken the entire value-added system and have a negative impact on the adoption of TCO business models.

Facing our line of reasoning, we finally propose: Proposition 4. A still fragmented state of SDL implementation in firms, markets, and in the society causes insufficient hybrid solutions and market resistance as for launching TCO business models.

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EMPIRICAL APPROACH AND RESULTS As mentioned above, the overall research design is explorative for research on this issue is still in its beginnings and explorative work needed to better understand the causal structures underlying the sluggish adoption of TCO models. With a theoretical lens we analyze the causalities we check by qualitative research. Qualitative research, conducted within the scope of a case study (Yin, 2009) is chosen in order to penetrate the entire problem and to stimulate interview partners voicing their own thoughts on the problem by more narrative parts of the interviews. The results are useful to specify and eventually modify research propositions derived from theory. Insofar, the procedure follows Maxwell’s (2005) approach of iterative research designs with feedback between conceptual considerations, theory in use, and empirical results. Due to newness and complexity of our research topic we employ qualitative research and conduct case studies in different mechanical engineering enterprises to better understand the reasons of sluggish TCO adoption and the background.

We started with our empirical fieldwork in the end of 2011 in six enterprises, some of the mechanical engineering firms, some of them customers. We carried out an in-depth case study according to Yin (2009) to gain a deeper understanding of factors in the realm of offering full service solutions, in particular TCO concepts. We conducted ten interviews within the companies (e.g. purchase, sales and services manager, CEO, head of construction). We used an interview guideline to frame the semi-structured interviews. The design of this interview guideline follows typical principles in literature (Lindlof and Taylor, 2002). Most of the interviews were conducted face-to-face with the firms’ employees and customers to go in detail whenever necessary. With two of the companies we only had telephone interviews due to reasons of physical distance. Each of the interviews lasted more than one hour. For quality purposes assurance we recorded each interview and made transcriptions that were analyzed afterwards. In the face of the results we carefully reviewed the interview guideline and made adaptations whenever things seemed to be not totally clear. Due to a first empirical analysis we can determine the importance of collaboration, cooperation and value co-creation and try to explain these first insights in the following part of paper. If both the supplier and the customer are not willing to work together, if there is no exchange of knowledge, and if people are not aware of thinking in terms of service, the TCO model could not diffuse or is not be adapted from the customer, respectively (Vargo und Lusch, 2004, 2007). 13

Next, we introduce our core findings as for the propositions we developed above. Whereas the first set of propositions touches on the embeddedness in markets and society, on absorbing external knowledge, and on goods-centered mental models, the second set refers to the level of customer/supplier integration and the combinative capabilities. Besides that, we consider SDL implementation (P4) from the very beginning.

Based on the interviews conducted, we realized that a lot of customers are still influenced by thinking in terms of the goods-dominant view and do not adopt the basic logic of total cost of ownership models in the light of SDL. In more detail, trust in the exchange partner is lacking and people involved fear the changes connected with TCO models. In fact, the adoption of TCO models changes internal responsibilities and duties. Not in every case, the people involved felt prepared for this kind of organizational change. Moreover, decisions on TCO adoption were predominantly made based on purchasing costs. One interviewed customers stated: The price of the machine stands at the bottom line when decisions are made.

Another customer agreed on that. Although both companies compare different offers from suppliers in terms of technology, quality etc., the deciders of the company primarily take the price into consideration. In retrospective, one customer who favoured a more traditional solution instead of the TCO model admitted that this was a mistake they made, for later on they realized that the costs of the traditional solution exceeded TCO by far. Also in case of TCO adoption, thinking in terms of the goods-dominant logic prevents customers from raising the benefits of close inter-firm collaboration (Proposition P1c, P4). Based on several interviews, it turned out that there was no real cooperation of supplier and customer and, thus, only limited integration in this case. From the customer’s point of view, the behaviour and the attitudes of the supplier were perceived as problematic, for the customer wanted to have more information, more adaptation, and individual support for the products and the services from the supplier. The lacking supplier integration in the usage phase created a lot of disconfirmation of the customer (P2b). The CEO of one customer remarked that the supplier should rethink a lot of processes and structures. In particular, the behaviour, the attitudes, the way of thinking, and the entire project management did not well suit to the supplier’s ambition to deliver an innovative and customized solution.

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As for P2a, we learn from the interviews that customer integration, by far, does not only depend on the customer’s willingness and readiness for integration but the supplier’s willingness as well. Obviously, not all interviewed suppliers are aware of the positive effects of customer integration and collaboration in the value-added process. Instead, they fear losing control and expect conflicts in cooperation. Oppositely, one company seems to be aware of the necessity of customer integration. A manager of this company stated: For us, it is not more than just selling a product. To retain the customer we have to ask the customers for their wishes and, more important, we have to integrate the customer to create the services that fit the product.

Nevertheless, integrating the customer in a useful manner is not taken for granted. The sales manager stated: It is very difficult to convince the customer to give input during the development of the machinery so that we could match the wishes with our product or services, respectively.

Obviously, the customer is afraid of telling the supplier too many details. These insights are useful to specify P2a. Moreover, the sales manager of one company was told by a big customer that they simply do not want to buy machineries in the future without an ex ante cost calculation. The manager added that it is very difficult to calculate lifecycle costs of machinery only by the supplier. Furthermore, in his eyes it is completely impossible to do this with reliable data before the contract is almost fixed. He sees the supplier in charge of such calculations, but in close interaction with the customer. This stresses the basic need of close cooperation and co-production (P2a, P2b) This, however, is also relevant to P4. Another sales manager pointed to the relational background of customer/supplier collaboration and the way how the supplier is embedded in the market (P1a) and stated as for TCO partnerships: Suddenly we realized the win/win situation for both, the customer and ourselves. In former times we had to ‘fight’ for the relationship; now it comes without any additional effort - and lasts for a long time.

Simultaneously he pointed out the necessity to renew the TCO business model in a customer oriented direction almost permanently. In this sense, he considered useful to be open-minded in order to identify upcoming issues as early as possible (P1b). Otherwise, customers would perceive this, become sceptical and finally drop the relationships - sometimes before tightly established.

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The third set of propositions refers to the ability of both the supplier and the customer to develop operant resources, the disproportion of operant and operand resources, and the lacking absorptive capabilities. We found out that both were not fully aware of the importance of the operant resources. It was only the product which was focused because in their minds primarily goods can deliver value to the customer – and profit to the supplier. Although the companies were rather self-aware of their own expertise and technical capabilities they were not really aware of the experience and know-how of their customers that could help them improving their solutions. Insofar, P3a as well as P3b passed this very first reality test. However, SDL thinking implies to understand value as a product of joint activities of customer and supplier (value co-creation) (Vargo and Lusch, 2004). The purchaser of a big company added in this context: When a lot of information and knowledge has to be exchanged and explained, understood and used, it is important that both partners have a clear understanding of the situation and common goals. Otherwise problems arise and the relationship might get out of control what is not desirable for further business.

This statement supports P3a and P3b as well. Besides the considerable disproportion of operant and operand resources, a lack of absorptive capabilities turned out as well (P3c). Obviously, the problem is rooted in the lack of identifying the usefulness of integrating some firm-addressable resource. We already considered the final proposition (P4). Probably, the attitudes of decision-makers of the supplier as well as the customer will change over time. Being familiar with the basic debate on the transition towards the SDL, the purchaser of one customer stated: It was and still it is a very complex process to change the logic in a company because there are fundamental differences in the way of thinking if I compare our company and the supplier. In my opinion we were neither well prepared nor aware of TCO thinking. Now the mindsets already changed and we look forward to cost reductions, quality improvements and well developed resources.

OUTLOOK Vargo and Lusch (2004) argue that the transition from a goods-dominant to a servicedominant logic implies remarkable changes, such as (1) offering hybrid and customized solutions rather than products, (2) value-added processes based on customer integration in manufacturing and supplier integration in the usage process instead of autonomous production modes of the supplier, (3) ‘sense and respond’ instead of ‘make and sell’ as valueadded principles, (4) ‘operant resources’ (e.g. knowledge, capabilities, technological know16

how) as dominant drivers of value-added processes instead of ‘operand resources’ (e.g. technical infrastructure, materials), and (5) a relational rather than transactional focus. The SDL in this sense goes far beyond adding services to the products and implies inseparable relations of goods and services as for the outcome, a rather collaborative, comprehensive and serving way of providing solutions to the customer as for the throughput, and pooling operant resources of both the customer and supplier for the sake of raising synergies as for the input. Our research suggests that TCO offerings deviate from the goods-dominant logic, indeed. However, these integrated and innovative business models require routines, resources, and mindsets of the exchange partners that keep up with a rather complete implementation of the SDL in the sense outlined above. In this vein, our research propositions are derived from the elements of the SDL concept and formulated in CbTF terms with the overall suggestion that an incomplete implementation of the single elements of SDL of both the customer and the supplier hinders the adoption of TCO models in the market. Our case study in German mechanical engineering gives rise to this impression in almost all points.

Our paper gives first insights into this complex research topic. Nevertheless, we believe that future – conceptual as well as empirical – research on this topic is necessary to understand the mechanisms that play a role in detail. Our findings suggest that skepticism on the customer side as for TCO business models is caused by a value-added logic that is not close enough to the model of the service-dominant logic. In this sense, customers still optimize their activities in an intra-firm setting and reject considerations in the realm of ‘open innovation’ and ‘open production’. Rather, they separate value-added processes with clear responsibilities for the supplier or the customer, respectively. Moreover, they make decisions, favoring earlier cost savings much more than later ones that are in their view rather uncertain.

We relate the debate on the service-dominant logic to innovation processes in the realm of service business models. This allows for shedding light not only on the sphere of the customer and the supplier but on the relational level as well. Connecting these perspectives allows for specifying obstacles to innovation. More, we develop the open system view in the sense of the service-dominant logic to better understand the system elements of the customer’s and the supplier’s sphere that prevent a smooth running process of TCO adoption. Finally, our research suggests analyzing the transition process from the goods-dominant to 17

the service-dominant logic more intensively. Our findings enable suppliers to discover and better understand the customers’ behavior and the maturity of their business models. The research results point to the need of analyzing buying behavior in cases of launching innovative business models more carefully.

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