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Many product-based companies are seeking to increase their competiveness by moving towards a service-based business model. This research is based on a multiple case study of seven manufacturing companies and by using the business model concept it links managerial activities to a service innovation framework to emphasise how companies can best take advantage of a new service-based business model. Findings indicate that companies need to focus on all areas of their business models in a holistic fashion, and not just change isolated elements. Among other challenges, companies must develop their abilities to build relationships with customers, to visualize the intangible value of their service offerings, and to advance a dynamic service offering portfolio that is adaptive to changing customer needs.

Driven both by competition and by new customer demands, many product-based companies find themselves moving – willingly or unwillingly – from their traditional business models based on product sales towards models based on services, and thus needing to increase their focus on services, and on solutions that encompass both service and product areas (see e.g. Gebauer et al., 2005 and Oliva and Kallenberg, 2003). This article discusses how managers can approach and understand this change to their business models, and also how their organization can become more service oriented in order to take advantage of the emergent opportunities inherent in this shift. Competition in their traditional product sectors, including from low-cost actors, together with decreased sales margins due to commoditisation, are driving companies to extend their businesses with new offerings that include a relatively high degree of service content (see e.g. Matthyssens and Vandenbempt, 2008 and Reinartz and Ulaga, 2008). With traditional product markets fast becoming saturated, moving into service offerings also offers them the possibility of extending their market scope. This so-called ‘servitization’ (Vandermerwe and Rada, 1988) of many industries means that companies are not only augmenting their product offering with services, but also developing new offerings where products are no longer necessarily at the centre of the company’s value proposition, or even of its business model. For example, instead of concentrating on selling warehouse trucks, truck manufacturers such as Toyota Materials Handling are turning to new revenue models based on various forms of rental agreements, which require them to invest in both service and maintenance activities and in financing. While companies are acknowledging this shift, top managers still struggle to understand how they should best address and manage it, as it often involves a new strategic direction, which requires the development of new, service-based, business models. Business success in this setting depends as much on such organizational rearrangements (including business model redesign) as it does on the creation of particular services and increased focus on new service development (NSD) and service innovation1 (see e.g. Gebauer et al., 2008). Main challenges involved in changing from being product-centric to being customer-centric – which often is seen as vital to offering more advanced services and combined product/service solutions – relate to internal organisational issues (Shah et al., 2006). Furthermore, shifting the mindset to that of providing services is also forwarded as a challenge for product-based companies (see e.g. Neely, 2008). The implications of this shift are that services – and an increased focus on NSD – should not be limited to just those processes by which the firm’s value proposition is ‘created’: the transition will also modify other areas of the business model. Although previous studies have addressed certain areas of the product-to-services shift, few have focused on what constitutes a successful business model in this new context. Some delve into specific aspects to identify various issues – such as the needs for a clear service development process (Gebauer, 2008), the formation of a separate in-house service organization (Oliva and Kallenberg, 2003), and the reshaping of certain organizational arrangements (Neu and Brown, 2008) – but few look at the problems from the inherently holistic perspective a business model approach offers. This article aims to identify the key aspects of a service-based business model as companies address the challenge of shifting towards an increased focus on service offerings. More specifically, it begins by adopting a general business model framework. By linking NSD and service innovation literature with the business model concept this research seeks to synthesize key concepts to form a logic to underpin the design of a successful service-based business model, and offer managers a more holistic perspective from which to approach NSD and service innovation. The methodology is presented first, and then the research data is considered and analysed (based on this synthesised framework) to identify key service-based business model aspects and their links to NSD. Finally, implications for managers and researchers are presented and discussed. The empirical context comes from in-depth case studies of seven market-leading manufacturing companies. This study should be of particular interest to top managers, since the constant erosion of their traditional product-based competitive advantage is very real in many industries, and many managers find it difficult to know how to innovate services systematically (Malleret, 2006). Its findings offer guidance as to how they can succeed in increasing their businesses’ service orientation, which has often been associated with higher levels of financial performance (Lytle and Timmerman, 2006).

This paper has identified and discussed key aspects of moving towards a service-based business model, and the connections with service innovation and new service development. The conceptual frameworks and research findings articulated here provide insights into which key aspects need to be addressed in moving towards a service-based business model, regardless of how fast this change is carried out and what service offerings are involved. The research also highlights where in the business model the changes are most pronounced, and therefore require the most focused managerial attention. The parallels between service innovation and service development and managerial responses in service innovation dimensions offer further guidance on where and how managerial activities should be focused. Several interesting and important avenues for further research can be identified. First, identifying the most successful change patterns should yield interesting theoretical results and also provide concrete guidelines for managers. Secondly, how to industrialize service offerings to a larger scale is an issue that will become evident in many companies in the near future, and is another area that deserves closer attention. Thirdly, generalizing the results to a broader population that could link a transition to service-based business models to, for instance, profitability and growth, also offers interesting research possibilities. Finally, the shift facing incumbent companies is not primarily revolutionary, but is rather incremental and emergent in character, which will make it interesting to study in which order parameters in a business model will change over time.