Elsevier

Journal of Cleaner Production

Volume 51, 15 July 2013, Pages 261-276
Journal of Cleaner Production

A refined typology of product–service systems based on functional hierarchy modeling

https://doi.org/10.1016/j.jclepro.2013.01.036Get rights and content

Abstract

The Product–Service System (PSS) concept has been proposed as a promising avenue to achieve sustainable consumption and production patterns and to improve the competitiveness of industrial manufacturers. The adoption of a PSS involves an orientation toward selling product functionality instead of selling products. Two aspects in the available PSS literature need to be refined. On the one hand it is crucial to achieve a systematic treatment of the notion of function, which is of central importance to the PSS concept. On the other hand the common PSS typology that distinguishes between product-oriented, use-oriented and result-oriented PSS needs to be revisited, as this categorization fails to capture the complexity of PSS examples found in practice. In this article a new functional decomposition technique, termed Functional Hierarchy Modeling (FHM), is proposed. This technique allows to analyze and represent the function(s) of an investment good within the customer's environment. It gives rise to a novel PSS typology based on the level of integration and the performance orientation of the dominant revenue mechanism within the PSS. Both FHM and the new PSS typology contribute to PSS theory by offering a framework instrumental in understanding the essential characteristics of a particular PSS and in designing a varied set of PSS options for a manufacturer of investment goods. Throughout the paper, this is illustrated with industrial examples.

Highlights

► We discuss the notions ‘function’ and ‘functional results’ within the context of PSS. ► We describe a new functional decomposition technique for PSS. ► We propose a new typology of PSS.

Introduction

The ‘Product–Service Systems’ concept, which implies that traditional product manufacturers evolve toward business models focused on service provision, has been put forward as a promising avenue to achieve sustainable production and consumption patterns (Mont, 2002; Tukker and Tischner, 2006a) as well as a strategy to improve the competitiveness of industrial manufacturers (Meier et al., 2010; Baines et al., 2007). Product–Service Systems (PSS), defined as ‘integrated offerings of products and services that deliver value in use’ (Baines et al., 2007), have gathered considerable research attention over the past decade, not only in the literature on PSS, but also under closely-related themes such as ‘servitization of manufacturing’ (Baines, 2009b), ‘functional sales’ (Sundin and Bras, 2005), ‘performance (based) contracting’ (Hypko, 2010; Kim et al., 2007), ‘eco-efficient producer services’ (Bartolomeo et al., 2003) and the ‘functional (service) economy’ (Stahel, 2010, Stahel, 1997).

The PSS concept implies that between pure product sales and pure service provision a spectrum of different PSS options exists in which products and services are combined to varying degrees. The more manufacturers move to the service side of this spectrum, the larger the share of services in their total revenue becomes. In case the offering is completely ‘servitized’, the manufacturer is no longer selling products but the ‘functional results’ of these products, as a service. The following categorization of PSS into three types is widely used within the academic literature (e.g. Baines et al., 2007; Mont, 2004; Hockerts, 2002):

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    In a product-oriented PSS ownership of the product remains with the customer, but the provider sells additional services (type 1).

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    In a use-oriented PSS ownership remains with the provider and usage rights are sold to the customer (type 2).

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    In a result-oriented PSS the product's functional results are sold, that directly fulfill customer needs (type 3).

This typology discerns PSS based on the following distinguishing features:

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    The allocation of property rights of a product, which discerns type 1 from types 2 and 3

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    The provider's role in the value production, which is restricted to offering usage rights in type 2 and expanded to offering functional results in type 3.

The main purpose of a typology is “to furnish a means by which concrete occurrences can be compared […] and comprehended within a system of general categories” (McKinney, 1966). Typologies should be parsimonious and simple (Bailey, 1994), but, on the other hand, they should not be too simple, and capable of capturing the richness of the empirical entities under study. “Typologies do not make assertions and therefore cannot be judged ‘right’ or ‘wrong’. […] Like tools they may be judged or found more or less useful for a particular purpose” (Marradi, 1990).

The usefulness of a PSS typology in particular depends on its ability to explain the essence of the PSS concept, as many academic papers on PSS use the classical trichotomy for this purpose (e.g. Tukker and Tischner, 2006a; Baines et al., 2007; Cook et al., 2006; Steinberger et al., 2009). Thus the impression has emerged that retaining property rights by the PSS provider is an essential characteristic of any advanced form of PSS (i.e. type 2 or 3). On the other hand, the PSS typology is often applied to describe a variety of PSS options within a particular industry or for a particular manufacturer (e.g. Williams, 2007; Yang et al., 2009; Tukker and Tischner, 2006b). Manufacturers interested in a PSS model might come to the conclusion that no PSS options within the use- and result-oriented type exist without retention of ownership. This impedes the advancement of the PSS concept, as several authors indicate that the financial risks associated with ownership retention and consumers' lack of enthusiasm about ownerless consumption are important barriers to its implementation (Baines et al., 2007; Besch, 2005; Wang et al., 2011).

The classical PSS typology is subject to three main problems that prevent it to capture the complexity of PSS examples found in practice:

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    A first problem is caused by the fact that the allocation of property rights is chosen as the distinguishing feature between PSS types. Although this choice easily allows to discern classical use-oriented PSS examples (such as leasing, rental or sharing models) from product-oriented PSS types, in reality it is often too strict. A number of PSS examples exist that certainly have a use-oriented logic but do not involve ownership retention by the provider. For example, under the Power-by-the-hour® model of Rolls-Royce plc, a famous, highly ‘servitized’ industrial PSS, maintenance and repairs of aircraft engines are agreed at a fixed cost per flying hour, to be paid by the customer (the airline operator) to the PSS provider (Rolls Royce). This example is often presented as a use-oriented PSS (Baines et al., 2007; Tetlay, 2011), although in reality the ownership of the engine does not remain with the provider, i.e. Rolls-Royce. Either it is transferred to the customer or to a lessor (Baines, 2009a). Thus, if the classical PSS typology is to be applied strictly, this example should in principle be regarded as a PSS type 1 and not as a type 2, although a substantial part of the revenues for the provider are generated on a usage defined basis. In fact for many products, and investment goods in particular, due to the capital requirements and risks involved, it is not feasible that manufacturers would retain the property rights of all their products, but this does not prohibit the existence of a strong use- or result-oriented logic in their offerings. But if the current PSS typology would be applied strictly, these cases would never be considered type 2 or 3. This suggests that many PSS examples would remain ‘stuck’ in the first type, which is confirmed in the study of (Lim et al., 2012) who have analyzed 181 published PSS cases and have found that a large majority (123) belongs to the product-oriented type, which is far more prevalent than the use- or result-oriented type.

  • 2)

    A second problem with the prevailing typology is that it does not distinguish between two different subtypes within the use-oriented PSS: a PSS in which a customer pays for the hours that the product is being used (a fee per operational hour) and a PSS in which a customer pays a fixed fee per elapsed time period that the product is available (a fee per available hour), although both models are essentially different in terms of the incentives for the provider to optimize the availability of the product and in terms of the risks involved. For example a machine supplier that is being paid per hour that his machine is operating at the customer's site, will have to consider and control all factors that could lead to downtime (e.g. material shortages, technical failures of peripheral equipment), while, if the supplier is paid per hour that the machine is available at the customer's site, these factors will be of lesser importance. Not only is the distinction between these two models not made, the terms ‘use-oriented’ and ‘availability-oriented’ PSS are often treated as synonyms (Meier et al., 2010; Baines et al., 2007).

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    A third problem is that the prevailing typology is not sufficiently refined to distinguish between different types of result-oriented PSS. The result-oriented PSS type is claimed to ‘directly fulfill customer needs’ or to ‘provide functional results’ although both concepts (needs and functions) are quite problematic to express unambiguously in concrete terms (Tukker, 2004). Functions, for example, can be expressed on different levels of abstraction, in an objective or a subjective manner and either in terms of the effect that a product has on its environment or in terms of device-specific parameters (Erden et al., 2008; Chandrasekaran and Josephson, 2000). Consider as an example possible PSS models under which a radiator could be sold. On the lowest level of abstraction, a radiator's function is to ‘transfer heat between water and the air through a conducting surface’ and its functional result could be expressed in terms of the heat transfer efficiency, e.g. as the Equivalence of Direct Radiation (EDR), a standardized metric for quantifying the output ability of space-heating radiators. On a higher level of abstraction, a radiator's function is to ‘keep the room temperature in a specific building compartment near a set point’ and the functional results on this level can be expressed in terms of its ability to keep the room temperature within specified bounds (e.g. 20 ± 2 °C). On an even higher level of abstraction, a radiator's function is to ‘provide thermal comfort to building occupants’, which is a direct fulfillment of a human demand. One example of a result-oriented PSS would imply that a space heating solution is sold based on promising a certain heat transfer efficiency during a period of ten years, whereby the supplier can choose the types of radiators used (e.g. size, material, shape) and will provide the cleaning, maintenance and repair services necessary to maintain the promised EDR. Another result-oriented PSS type could mean that the supplier promises to provide a certain level of thermal comfort for the building occupants during a period of ten years, taking into account the diverse factors that contribute to the attainment of these functional results (e.g. the building insulation, ventilation, humidity, …). In the classical PSS trichotomy, both examples would end up in the same category of ‘result-oriented PSS’, although the huge difference between these PSS-models is evident.

In conclusion of the previous arguments, it can be stated that the prevailing PSS typology does not allow to capture the multiplicity and nuanced differences that exist between different PSS options in practice. The main reasons for these shortcomings are to be found in the choice of the distinguishing features between PSS types, that emphasize on the allocation of property rights, and in the fact that the notion of ‘function’ is not systematically treated in the available PSS literature, although orientation toward the provision of ‘function’ is an essential characteristic of a PSS (Mont, 2002; Tukker and Tischner, 2006a).

In this paper, a theoretical framework termed ‘Functional Hierarchy Modeling (FHM)’ is presented that allows to analyze and represent the function(s) of a system on different levels of abstraction. FHM is specifically aimed at manufacturers that are interested in shifting toward offering a PSS. The ‘system’ consists of the product they manufacture in their current business model, possibly supplemented with some basic services, such as a two year warranty. In principle FHM can be applied to any type of product, but for reasons of clarity it was decided to limit the scope of this article to one type in particular: investment goods, which is an important application area of the PSS concept (Meier et al., 2010; Aurich et al., 2006). Given the fact that this restriction of the scope still allows for a broad range of applications, it was considered as not too limitative. This does not imply that FHM and the new PSS typology are only valid for this application area, but the validity for other types of products and services is not explored in this paper. Based on the FHM framework, a refined PSS typology is proposed, better suited to explain the essential characteristics of the PSS concept and to distinguish a comprehensive set of PSS options for the manufacturer. Both the FHM framework and the refined PSS typology are illustrated with several examples, all drawn from case studies carried out by the authors for manufacturers of investment goods that are currently not offering a PSS but are interested in developing one.

This article is organized as follows: Section 2 presents the theoretical background necessary to position FHM within the existing literature. It starts from a systematic treatment of the notion ‘function’ within the engineering sciences and translates the main insights of diverse streams of research to the context of PSS. In Section 3 an outline of FHM is presented, a new modeling technique for analyzing a system's function(s) within the customer's environment. Section 4 introduces a new PSS representation scheme and typology based on FHM. Section 5 discusses the relevance and contribution of FHM and the refined PSS typology for the advancement of the PSS concept and the environmental goals of the PSS literature in particular. Section 6 summarizes the main conclusions of this article.

Section snippets

Theoretical background on functions, functional hierarchies, performance and results

This section presents theoretical background on the concept ‘function’, in Section 2.1, on the representation of functions within hierarchical models, in Section 2.2, and on the notions ‘functional performance’ and ‘functional results’, in Section 2.3. All of these topics are well documented within vast and diverse fields of research and it is not the purpose of this article to review them comprehensively. Rather, the main insights are extracted that indicate how to reason with functions and

Functional Hierarchy Modeling

In this section a method is presented to create an FHM of a system, that expresses the system's functions and clarifies their means-end interdependence with functions of other products, services or processes that are operational in the same customer environment. Once this FHM is constructed, it can serve as a framework for the expression of ‘functional results’ on different levels of abstraction, that allow to distinguish between different types of PSS, as is demonstrated in Section 4. As

A new representation scheme and a refined typology of product–service systems

Based on the FHM developed within Section 3, a new representation scheme for Product–Service Systems is introduced in Section 4.1 that allows to specify one particular PSS option for a manufacturer. In this representation scheme, the product and service elements of a PSS, their integration and their revenue mechanisms are represented. These characteristics, introduced in Section 4.1, form the basis of the refined PSS typology presented in Section 4.2. In Section 4.3 the usefulness of the new

The role of the refined PSS typology and FHM for the environmental goals of PSS research

In this section, the relevancy of FHM and the refined PSS typology for the environmental goals of PSS research are discussed. PSS are an important strategy to achieve improved consumption and production patterns and to realize a dematerialization of the economy (Mont, 2004; Tukker, 2004; Kang and Wimmer, 2008; Barrett and Scott, 2012), mainly by breaking the link between the amount of value delivered to a customer and the amount of physical materials needed to deliver that value (Baines et al.,

Conclusions

The prevailing categorization of Product–Service Systems into the product-oriented, use-oriented and result-oriented type fails to capture the complexity of PSS examples found in practice, because it (1) confuses a use-oriented logic of a PSS with ownership transfer, (2) does not distinguish between availability and usage, and (3) does not allow to differentiate between types of functional results on different levels of abstraction. This last problem is related to the fact that the notion of

Acknowledgments

The authors wish to thank the Flemish Agency for Innovation by Science and Technology (IWT) for its financial support (Project CO-BOSS IWT 095063).

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