A Case Study of Servitization in Construction

A Case Study of Servitization in Construction

Finding New Ways of Appropriating Value

William Robinson, Paul Chan, and Thomas Lau

bios below

William Robinson is a PhD student in the School of Mechanical, Aerospace and Civil Engineering at the University of Manchester. He is collaborating with the construction company Laing O'Rourke to examine business transformations towards servitization in the construction industry. He has publications in the areas of technological innovation, business transformations, and servitization.

Paul Chan is a lecturer in project management in the School of Mechanical, Aerospace and Civil Engineering at the University of Manchester.He studies human relations in project-based contexts with a focus on understanding how people respond to sociotechnical change.He has written on a range of topics concerning organizational change and human resource development across organizational boundaries, and more recently on employee perspectives on business model transformation and open innovation.He is the editor of Construction Management and Economics, a leading journal on built environment matters.He has authored more than 70 peer-reviewed journal articles and conference papers.

Thomas Lau is a principal engineer in the Engineering Excellence Group at Laing O'Rourke. He is a chartered engineer responsible for delivering innovation for the construction industry through value creation and enterprise. His focus areas are in systems controls and facilities management; his goal is to bring new ideas and methods to deliver quality across the construction supply chain. He is also the industrial supervisor for four PhD students and one EngD student at universities across the United Kingdom. These research projects examine opportunities for greater innovation in the construction industry through the application of cutting-edge technology.

Overview: Using Activity Theory as a framework, this paper explores how organizational changes enabled a multinational construction company to transform its business model in pursuit of servitization. Following one firm’s journey toward servitization over a 33-month period, the study demonstrates how the mobilization of new resources across the supply chain, the development of new products, and the creation of new service offerings enabled the organization to create and capture value in new ways. Given the lack of research on systems integrators and servitization, the case offers some important insights. It suggests that systems integrators must carefully consider their position within their existing value chain as they shift toward servitized business models and then constantly coordinate internal and external activities as they move forward. For instance, Laing O’Rourke, developed new offerings by exploiting data from across the supply chain and integrating design and manufacturing processes, creating possibilities to capture value through long-term customer relationships. The use of Activity Theory as a frame for the analysis offers a new way of examining how these firms move toward servitization and what barriers they face.

Keywords: Servitization; Activity Theory; Construction industry

Traditionally product-oriented organizations are facing increasing pressure to integrate services into their core product offerings (Johnstone et.al 2009). A combination of changing customer expectations, oversaturated product markets, and the potential for high margins for service offerings have driven companies to reorganize their businesses to deliver product-service combinations (Lay 2014). These firms seek to sell outcomes and experiences, rather than products. For instance, Rolls-Royce’s well-known Power-by-the Hour model is aimed at providing flying hours—guaranteeing the availability and performance of their engines—rather than engines.

Servitization opportunities vary widely from firm to firm, largely according to the firm’s position in the value chain. Systems integrators, for instance, design and deliver complex systems that integrate multiple products and may underpin whole functions within their customers’ businesses (Brady, Davies, and Gann 2005). This puts them in a pivotal position in the value chanin, as they incorporate products from other companies and sell them to customers as part of their systems. This role gives them a unique opportunity to implement service-oriented offering because customers are more likely to be willing to outsource the risks and responsibilities associated with these complex systems, compared to a single component or standalone product. However, managing multiple product and service components across multiple suppliers and customers can be a difficult undertaking, bringing with it substantial costs and complex challenges.

Firms need a clearer understanding of how they can navigate this business transformation. More crucially, examining the transformation made by a systems integrator can allow us to probe the interplay between different organizations in the value chain and the role each plays in the servitization process. Unpacking this can elucidate the network activities required to drive servitization. It to this end that we examine the transformation made by the systems integrator Laing O’Rourke in the construction industry.

The Systems Integrators’ Path to Servitization

Academics and others refer to the transformation that firms undergo as they shift from delivering products to offering an integrated combination of products and services as servitization. A recent literature survey shows that a great deal of research has focused on the paths that equipment manufacturers take to servitization (Baines et al. 2009), but far less attention has been paid to how systems integrators make the transition. This is surprising given how the servitization of a systems integrator can act as a catalyst for new opportunities for the rest of the value chain to servitize.

There are some notable exceptions; these studies tend to suggest that systems integrators have different servitization pathways available to them than do equipment manufacturers. For instance, Davies, Brady, and Hobday (2007) differentiate between a systems-selling approach and a systems-integrator approaches. A systems seller takes responsibility for producing all of the product and service components in a system. In contrast, systems integrators focus all of their attention on coordinating the integration of product and service components supplied by external firms. Davies and colleagues suggest that a blend of both approaches is increasingly seen as the most effective way to integrate solutions around customer demands.

Kowalkowski et al. (2015) define three possible roles for systems integrators moving toward servitization: availability provider, performance provider, or industrializer. Availability providers bundle products and services previously sold separately into one value proposition. The services offered are predominantly product related (for instance, maintenance contracts or spare parts supply) and are designed to enhance the performance of the product. Performance providers build upon availability-based solutions to offer more advanced solutions that focus on solving strategic problems for customers, rather than purely operational ones. Crucially, performance-provider organizations develop revenue models that link compensation to customers’ value-in-use. Finally, industrializers focus on standardizing various elements of wider offerings so that they can offer them to more customers. These firms capitalize on emergent opportunities associated with standardization.

While these taxonomies offer a useful guide for understanding how systems integrators move toward servitization, they do not illuminate the activities that systems integrators must engage in as they pursue new ways of creating and capturing value through servitization. Furthermore, existing studies, whether they look at manufacturers or systems integrators, tend to offer snapshots of the conditions and consequences of servitization, focusing on outcomes rather than processes. However, servitization is a journey, taking place over months or years of progressive reshaping of the business model and of the organization itself. Thus, a more longitudinal approach is required to understand how organizations evolve toward servitization, and the various ways they work through this transition.

Activity Theory (Engeström 2000) offers a useful framework to holistically capture the dynamics that shape this evolution. Activity Theory is a descriptive framework that focuses on the whole work activity (referred to as an activity system), making it useful for tracking the process (rather than the outcome) of organizational transformation. In the Activity Theory framework, the activity system is broken down into seven interrelated analytical components (Figure 1):

·  The subjects—the individuals and groups engaged in the activities.

·  The tools—the artifacts that mediate social action in the activity system.

·  The object—the purpose of the activity system.

·  The outcome—the desired outcome of the activity. The outcome and object are linked because the outcome is a materialization of the object.

·  The division of labor—the relational and hierarchical structure governing the subjects within the system.

·  The community— whereas the subject refers specifically to those individuals and groups directly undertaking the activity, the community refers to all the individuals and groups involved in or affected by the activity system.

·  The rules—the processes, procedures, and contractual, legal, or regulatory rules governing the activity system.

---Figure 1 near here---

By laying open these components across the value chain of systems integrators, Activity Theory makes it possible to unpack what business model innovation really means in the everyday life of the organization.

One of the key propositions of Activity Theory is that changes within activity systems are triggered by contradictions—misfits within a given element of the activity system, between different elements within the system, or between different activity systems (Kutti 1996). The subjects must work to change the activity system to resolve the issues and problems that originate in these contradictions so that they do not interfere with the achievement of the desired outcome. Thus, we seek to capture the contradictions that emerge as an activity system unfolds, the actions taken to address them, and the outcomes of those actions. The Activity Theory analyses can be used to capture an organization’s journey toward servitization by envisioning each step in the journey as a series of alterations in various activity systems.

We sought to explore that journey in one systems integrator, the international construction firm Laing O’Rourke, in order to map the processes, tools and activities that drive the business model innovation towards servitization.

Laing O’Rourke’s Servitization Journey

Laing O’Rourke is a multinational construction company that delivers projects across a wide range of sectors. The firm is unique among its competitors, in the UK, in offering design, manufacture, and installation of mechanical and electrical systems, a business function in which the company acts as a system integrator.

The company was driven toward a servitization strategy by the need to cushion the blow from the global financial crisis. At the beginning of the study, in 2013, the construction industry in the United Kingdom had seen its output fall by 8 percent in just one year (see Construction News, 8 March 2013). These challenging conditions drove the company to look for avenues to diversify its revenue streams. One option was to offer servitized solutions within the mechanical and electrical (M&E) division, which had traditionally focused on the delivery of products (for instance, boiler systems). Thus, the company began to explore the viability of selling the functions these products deliver rather than the product itself—for instance, useable heat rather than the boiler itself.

The research team saw in this development an opportunity to define and analyze the activities required for the division to move toward more servitized solutions. In pursuit of this goal, the team followed various actors across the company, beginning in January 2013, gathering data through interviews and secondary data sources. Initial exploratory interviews (n=12) were conducted with Laing O’Rourke management and employees of its M&E business to identify different perspectives on the new ways the business was creating and appropriating value. Data from these interviews established the initial framework for the study and provided structure for the next round of work.

The next round of research entailed 41 in-depth interviews with individuals in the company’s value chain. These interviews included clients, internal and external design teams, assembly-line workers, maintenance engineers, suppliers, and employees of external maintenance organizations. We supplemented the interviews with data gathered from a range of secondary sources, including technical submissions, failure-modes effects and analysis (FMEA) reports, maintenance contracts, scheduled maintenance task sheets, and drawings and schematics.

Our analytical effort was guided by the Activity Theory, which allowed us to treat each of the major areas of change as separate but interdependent activity systems. The analysis was broken down into four main steps. First, we used interview data to trace a historical account of each activity system. Then, we used our interviewees’ perspectives to identify the desired outcomes and object of servitization in relation to each activity system. We then worked backwards to compare these new objects and outcomes to the historical account of the activity system to identify inherent or emerging contradictions. We identified the actions individuals and groups—the subjects—took to resolve these issues. Finally, we repeated this process for the subsequent iteration in the activity system; each activity system goes through two iterations

Creating New Value: Laing O’Rourke’s Journey to Servitization

The initial exploratory interviews identified three ways in which the company’s M&E division changed as it sought new ways to create value for customers and the company—by mobilizing new resources across the supply chain, by developing new products, and by creating new service offerings (Figure 2). We describe these three elements of transformation as the division’s three “turns.” Each “turn” is examined as a separate activity system. We used the second round of interviews to probe the interdependencies across these three areas and better understand how the company orchestrated more integrated processes that brought together design, manufacture, and maintenance. Thus, the second round of interviews was guided by questions that sought to identify what activities the company undertook with regard to each of the three turns, the contradictions they faced in implementing these changes, and the actions taken to work through these contradictions.

---Figure 2 near here---

Key to any systems integrator’s transformation is the organization of internal and external activities around the new value proposition. Therefore, we examined how each new way of creating and appropriating value—each turn—was underpinned by the firm looking both internally—to better mobilize and develop its own resources—and externally—to access the resources of clients, suppliers, and others within and outside the construction industry.

For each turn, we first identify which contradictions emerge when a “new object” and “new outcome” are created in the activity system because of the firm servitizing (see figures 3, 5 & 7). We then trace how the firm resolved these contradictions by looking externally. This then led us to uncover the iteration in the activity system for each turn and identify the new contradictions which have been brought about by these changes (see figures 4, 6 & 8).We then trace how the firm resolved these new contradictions by looking internally.Turn 1: Mobilizing new resources across the supply chain