Service orientated product innovation for improved environmental performance: an exploratory case study of the air conditioning and cooling sector

Abstract

The need to improve the environmental performance of production and consumption practices within advanced industrialised nations is widely accepted. Finding ways to satisfy demand using far fewer resources is central to research in this field. For many, the trajectories of service orientated products are thought to provide an opportunity to address this need and anticipate futures in which economic growth is de-coupled from resource use. This paper presents the findings of exploratory research in the air-conditioning and cooling sector, which sought to understand how these benefits might be realised. It suggests that these benefits will not arise as a result of economic restructuring but rather that a deeper understanding of the process of service innovation, which underpins trajectories of service orientated products, is required to develop effective policy.

Keywords:

• Product service systems
• resource productivity
• eco-design
• product innovation
• air conditioning and cooling sector

1. Introduction

The service component of many economies has rapidly expanded in the post-war period, to the extent that it now accounts for between 50% and 75% of jobs and added value within most Organisation for Economic Co-operation and Development (OECD) countries (OECD 2000). This approach has brought about major changes in the economies of advanced nations (e.g. new divisions of labour), which have moved away from their industrial base and are now often classified as service economies. Research shows that there is a growing trend within manufacturing sectors to develop services (Stahel & Giarini 1993; White et al. 1999). This approach has resulted in a variety of new services that are substitutions for, and complements to, traditional products. Examples include document handling services, voicemail services, chemical management services (Meijkamp 2000). These have been found to be prolific in inter- and intra-business markets and increasing in popularity within those linking business and consumer.

A variety of factors have been found to drive the emergence of such services from manufacturing sectors. On the supply side, these include the need to secure additional economic value from production and competitive pressures arising from the globalisation of mass production (e.g. Gibbons et al. 1994). In this regard the development of services has formed part of company strategies to sustain a competitive advantage. This has directed the innovative activities of manufacturing firms away from technological innovatory designed to attain greater economies of scale and towards those that yield greater economies of scope. In these instances, service based transaction enables the re-configuration of knowledge and, the resources within the firm and supports a close relationship with customers to attain such economies. On the demand side, the trend to focus solely on a firm's core capabilities has led to burgeoning demand for a range of producer services in business to business markets (Bartolomeo et al. 2003) and post material life styles have, to some extent, driven demand in business to consumer markets (Tischner et al. 2002).

The potential of these new services to attain sustainable patterns of production and consumption has been the subject of a growing literature within which the trend to provide services has been conceptualised as the ‘shift from products to services’ (Cooper & Evans 2000; Mont 1999). Whilst there are some issues concerning nomenclature (service is embodied in the utility of material artefacts and services often need material artefacts to enable service delivery), research has shown that services produced by manufacturing sectors may be conceptualised as product service systems (PSS). These have formed the unit of analysis for much of the research in this area. PSS are understood to comprise tangible technological artefacts and intangible services that are conflated through design processes so that they are jointly capable of fulfilling specific customer needs (Manzini & Vezzoli 2003). A number of different types of PSS have been identified and include (Hockerts 1999; Roy 2000):

	Product Orientated PSS. Within this type of PSS, the ownership rights of the technological artefact are transferred to the customer and a service arrangement is provided to ‘ensure the utility’ of the artefact over a given period of time. Typical examples include warrantees and maintenance contracts. Improvements in resource productivity are thought to arise from the notion that these services increase the lifetime of the product to which they are attached, e.g. maintenance service for a washing machine.
	Use Orientated PSS. The ownership rights of the technological artefact are retained by the service provider in this configuration and the customer purchases use of a technological artefact over a given period of time. Typical examples include renting, leasing, sharing, pooling. Possible improvements in resource productivity are thought to arise from the high use intensity of material artefacts used to support these, e.g. car sharing schemes typically require fewer cars per kilometre travelled.
	Result Orientated PSS. Similar to use orientated PSS, ownership rights of technological artefacts are retained by the service provider. However, in this case the customer purchases an outcome rather than the use of a ‘product’ over a given period of time. For example, instead of leasing a washing machine for a given time period, the customer purchases a service to deliver clean clothes. Significant reductions in material and energy consumption per unit of service can be achieved alongside a financial incentive to increase durability.

Figure 1 details changes in property rights that arise when different types of PSS are developed. It shows how ownership of technological artefacts and responsibility for the operation of these are allocated in traditional products and vary for product service systems. For example, traditional products comprise a technological artefact which is sold via a one-off transaction to users. Ownership rights pertaining to the technological artefact are transferred to the user as is the responsibility for operation. Alternatively, in result orientated PSS, both the ownership of the technological artefact and the responsibility for its operation is retained by the producer.

Figure 1. Re-allocation of property rights and operation.

The PSS approach has been identified as an improvement strategy that may be deployed by firms to improve their environmental performance (Mont 2002). The results of research suggest that, in theory at least, the PSS approach may provide opportunities to improve resource productivity by a factor between 4 and 20. Halme et al. (2004) argue that the PSS approach contributes to eco-efficiency in a number of ways. If the material artefact remains in the ownership of the producer a financial incentive is gained to direct innovatory activities to produce more durable goods and thus avoid the costs associated with repair, maintenance and disposal. A smaller stock of products is also needed to satisfy demand and, if customers use these sequentially, the intensity of use increases as does the probability of a higher service yield before the product becomes outdated due to obsolescent technological characteristics, e.g. fashion; in result orientated services, producers use their competencies to ensure the correct use of material artefacts to provide service and guide consumers towards the appropriate artefact for this purpose.

The trend to supply and consume service orientated products in manufacturing sectors may also provide opportunities for transition to a dematerialised state. Stahel and Giarini (1993) articulate a vision of such a state as a ‘functional economy’ within which firms develop a stock of technological artefacts and constantly reconfigure these through service innovation to satisfy new customer demands as they arise. Material flows, which support economic activity, are de-coupled from monetary flows and a ‘lake’ of material resources will be used by firms to satisfy demand. In this scenario the role of consumer durables in satisfying demand will diminish. These will be replaced with trajectories of durable capital goods, which firms use to support service delivery and satisfy demand.

However, the literature is unclear as to whether the environmental benefits of the service approach will emerge as a result of economic restructuring or whether policy interventions will be required to realise these. For example, many of the environmental benefits of the service approach are contingent upon the actual emergence of more durable technological artefacts that would form the tangible component of PSS and support service delivery (Halme et al. 2004; Stahel & Giarini 1993). It is open to question whether technological development towards more durability will result automatically when firms develop result orientated PSS or whether interventions will be required to stimulate their emergence. Heiskanen and Jalas (2003) suggest that while the results of limited economic modelling provide some support for the argument that manufacturing firms that provide service orientated products gain an economic incentive to increase product durability, the link between technological innovation to increase durability and service innovation is not well understood. Further, case study research undertaken by White et al. (1999) shows that the service reorientation of both Xerox and IBM required a fundamental shift in corporate culture and market engagement – albeit a shift that is still ongoing and one whose ultimate outcome remains uncertain. The service approach presents firms on the supply side with significant challenges of organisational and cultural change. In this regard, research (Cook et al. 2006) has shown that manufacturing firms are generally unsuited to service delivery. The organisational structure and processes of manufacturing firms are typically linear in nature to enable the efficient manufacture of material products. Their products are typically sold through single one-off transactions with little post-sale interaction with final customers. Service delivery is a complex process requiring development and maintenance of ongoing customer relationships. Thus efficient service delivery requires very different structures and competencies to those required for efficient manufacturing. These are important findings as, for example, an incentive to increase the durability of the material component of PSS is only likely to arise when these products are delivered by manufacturing firms who wish to avoid the costs associated with use and disposal (Halme et al. 2004).

Given these findings, it is therefore necessary to identify and explore the nature of processes (both inter and intra firm) that enable delivery of product service systems. This enhanced understanding can help address a gap in the PSS literature and provide knowledge to assess the need for policy as well as highlight areas of further research that will inform the selection of policy instruments capable of realising the potential of these PSS for enhanced environmental performance.

2 Methodology

Initial research was conducted to find a sector from which new service orientated products have emerged and that had a significant environmental impact. The industrial process cooling and air conditioning sector was selected using this criteria. The research showed that this sector had experienced significant growth in the early 1970s as supermarkets began to appear in, and expand across, the UK. The industry flourished in the 1980s as supermarkets rapidly expanded and the refrigeration industry struggled to keep pace with the volume of installation work. However, during the 1990s the market became significantly more competitive and consolidated around a few dominant firms. At this time the building of supermarkets slowed and installation work dwindled while service work remained. The finance available from supermarkets became more tightly regulated and controlled and profitability within the sector reduced. After the supermarket trend, the need for process cooling technologies as part of IT systems arose along with a boom in office block development. This market emerged in the mid 1990s and remains important to the industrial cooling and air conditioning sector that is disparate in nature from the building services industry.

Initial research showed that more recently, in the UK, the sector has begun to engage with, and provide, service orientated products and the research reported below sought to make sense of the process of service innovation through an exploration of potential drivers for it and barriers to it. Emphasis was given to the link between processes that support the delivery of new service orientated products and technological change. By concentrating on the supply of these product service systems (PSS) it is recognised that the study fails to provide a comprehensive view of stakeholders throughout the process but it does allow for a systemic interpretation of how system suppliers themselves perceive service delivery as a whole and the barriers to it.

The research sought both breadth and depth. Background data were collected from over 50 firms engaged in the provision of industrial chillers and air conditioning. Consideration was given to the nature of the firm (e.g. manufacturer, distributor), the nature of the products it produced, its end users and position within the supply chain. This involved analysis of web details, e-mail and telephone discussion as well as the development of brief synopses of the firms reviewed.

Three firms ( Table I) were selected for in-depth research. These firms fulfilled different roles in the supply chain (e.g. manufacturing and service delivery) and were interested in actively contributing to the study through the provision of documented data and access to premises, processes and a range of personnel including senior management with strategic roles and managers with financial, sales and marketing, and technical roles. A semi-structured approach was taken to interviewing these personnel. Lines of questioning included:

Table I. Product services offered by the case organisations.

Company	Services offered	Serviced product type
Company v	Service, maintenance and repairs; commissioning and decommissioning; operator training	Industrial water chillers
Small distributor and service provider
Company y	Service and maintenance; leasing; hire	Industrial water chillers and process cooling equipment
Large manufacturer and service provider
Company x	Service and maintenance; on-site refurbishment services; control and mechanical upgrades; refrigerant conversion; operational optimisation	Industrial air conditioning products
Small distributor service provider

Type of services offered?

How these services were offered and what drove that provision?

What were the barriers to that provision?

How were those barriers overcome?

Consistent with the semi-structured approach, supplementary questions were generated during the interview to explore interesting and relevant lines of enquiry as they arose. All interviews were tape recorded and a transcription fed back to the interviewee for agreement, clarification and, where necessary, modification.

3 Results

A number of service orientated products were found to have emerged from the UK industrial process cooling and air conditioning sectors. While the environmental performance of these services was unknown, their characteristics placed them varyingly within the Product, Use and Result Orientated Service System types as described in conventional PSS taxonomies. Such service orientated products included maintenance and repair, commissioning and decommissioning, operator training, on-site refurbishment and the leasing and hire of plants for the provision of air conditioning and cooling services. For example, company x product range includes result orientated air conditioning services for large commercial office blocks and product based service and maintenance contracts for a range of end users engaged in facilities management. The development of these product service systems had emerged from the interplay of many structures and processes including technological innovation, which involved the production of traditional products as tangible components of PSS.

A second group of innovatory activities was also observed. These made the development of the intangible service component of PSS possible. For example, in certain instances, the development of technological artefacts was found to have created new user demand and induced provision of PSS. The significance of each of these and the way in which they have influenced the development process of PSS within the sector studied are discussed below. Broad descriptions have been developed so as to provide a rich platform of knowledge for further research.

3.1 Technological innovation and user requirements as drivers of PSS

This section describes the development of the technological artefacts that were found to form the basis of conventional products but also PSS within the sector studied. Significant growth in the UK air-conditioning and cooling market has been driven by technological development over the last 30 years. Those developments that arose during the late 1970s have allowed users in a large number of different markets to deploy these technologies to achieve progressively greater levels of productivity and efficiency in their industrial processes. Concomitantly, the increasing complexity and scale of many industrial cooling and climate control systems had also facilitated the development of markets for a number of product, use and result orientated PSS, different types of which were delivered throughout the life of the product, from commissioning to decommissioning. For example, in both industrial and retail sectors while the development of more powerful refrigeration systems had brought about significant financial benefits for retailers, such as increased turnover and profit, the complexity and size of this new technology led to increased demand for service orientated products to support these. In this instance commissioning and decommissioning services were often required as most users do not have the technical competencies to replace the product units, and services are sought such as refrigerant gas conversions and replacements that require qualified service professionals. These can be viewed as a ‘base set’ of the product orientated PSS required to allow companies to set up equipment for use, and to do so within statutory environmental and health and safety requirements.

Also a number of result orientated PSS were provided when customisation was required. For example, a range of process cooling and climate control technologies were available and were offered in varying sizes and complexity. The need for customised products was often observed in both process cooling and air conditioning products so that they match the requirements of the existing layout and facilities. This customisation had induced the provision of result orientated services where outcomes rather than technical requirements were demanded by users. Supply firms met these demands by using their competencies to select appropriate combinations of highly complex technologies to provide requisite customised functionality. The findings indicated that a lack of financial capital within small firms from the demand side, to cover investment expenditure, also induced demand for result oriented PSS services as sufficient finance was often not available to meet the fixed costs of capital equipment. Further research is required to determine the extent to which this induces demand for PSS offerings.

Each of the cases suggested that the technological changes in the original material based products (e.g. air conditioning units, chillers), which subsequently formed the tangible component of PSS, has been a key driver of PSS development. Technological developments have increasingly allowed for more effective climate control and process cooling systems to be designed and marketed. This development has brought with it increasing sophistication in the design and application of these products and the need for a core set of services for the set-up of products for operation. The development of complex customised technologies had also often induced result orientated services and utilised the technical competencies of supplier companies in the selection of the complex technologies needed to develop bespoke solutions. This has to be undertaken within statutory environmental and health and safety law which is often met by service providers acting as distributors of the product rather than the manufacturers themselves. These findings suggest that service provision has therefore been driven by both technological development and a lack of the technical competencies among firms from the demand side required to operate more sophisticated products within more stringent regulatory frameworks.

For a number of PSS, the delivery varies depending on the customers' size and the market the firm operates in. There are many industrial and retail processes that use process and climate control products. This means that service providers deliver to end-users who are active across many markets and who are driven by an array of different financial and market contexts, which in turn govern demand for services. Profit margins vary between end-user markets; where they are low, investment expenditure regimes are often tight. Further, while many small and medium sized enterprises (SMEs) lack the necessary financial resources to pay for capital equipment, case study companies stated that some SME end users did not have sufficient finance to purchase services. As a result, different services are sought in different industries and demand for services will depend on the specific circumstances of the customer.

Commonly, service customers (e.g. small scale manufacturers or retailers) will require a number of process cooling or air-conditioning units and try to acquire these with low financial outlay on equipment purchase and services. While these companies like any other, face the risk of downtime if equipment fails, resources may be limited and therefore additional services at additional cost are not sought. Smaller customers of the type described rarely look to service providers for regular preventive maintenance. Rather, maintenance services are reactive and demanded when equipment has reached the point of failure, instead of being employed in anticipation of it. The customer may consider the cost of regular service and maintenance to be greater than the likely cost of downtime and associated costs of reactive maintenance.

Despite this variability in the nature of demand, case study firms stated that the growth of service orientated products in this industry has been significant. Firms providing air conditioning and cooling equipment to large, market leading manufacturers and retailers experience a frequent demand for services. Customers may have very high turnover and significant financial resources. In such circumstances customer success relies on maintaining a high turnover and balancing profit favourably against the significant overheads that can be associated with large-scale manufacturing and retail activities. Companies have to consider the trade-off between economies of scale relating to the purchase of capital equipment and the potential costs associated with ownership. Since the continual operation of these customer activities relies on cooling and climate control, faults to process cooling or air-conditioning products may lead to system downtime and a significant loss of revenue. Services additional to those required at the ‘base level’ are likely to be demanded by large end-users. This has led to the development of a market for service providers offering regular product based services and maintenance checks to prevent the risk of equipment failure.

Besides costs associated with system downtime, operational running costs resulting from the almost constant use of process and climate control equipment by large end-users have been very significant in the development of services. A demand for operational efficiency can be met by a range of service types offering control and mechanical upgrading or operational optimisation.

3.2 Policy influences on PSS

While a number of factors such as technological development and the availability of capital were found to give rise to certain changes in customer demands and provide opportunities for PSS development in the sector, changes in policy were also found to exert considerable influence. In general, legislation has driven service development within this sector through requirements for quality, environmental protection and resource efficiency. Changes in legislation (e.g. to extend producer responsibility such as the so called WEEE Directive) govern product design both from the supply and demand side. End-users may come under increasing pressure, or are provided with increasing incentive, to improve the efficiency with which they use resources such as electricity. The trade press has indicated, and the research reported in this paper has shown, that some end-users increasingly take into account the market based tax relief incentive, based around product efficiency, when considering product purchases (e.g. of air conditioning and cooling products). This has driven the development of increasingly efficient designs from manufacturers to meet the demands of their customers. From a service point of view this has helped to develop a market for operational optimisation services and mechanical and controls upgrading. On the supply side, manufacturers of process cooling and air-conditioning equipment are also coming under increasing pressure, directly from the regulator, to develop more efficient products. It is worth noting that increasingly efficient product designs are sought to lower operational running costs and as such raise questions for companies about the potential value of PSS.

A clearer example of how legislation has increased the need for services by end-users, relates to requirements for the handling of refrigerant gases such as CFCs, and their large scale replacement with more environmentally benign refrigerants. Legal requirements specify that specialist technicians are employed to handle the replacement or conversion of refrigerant gas systems, and the case study service providers offered services based around these activities. End-users are unlikely to invest in specialist staff internally since replacement or conversion services are required relatively infrequently. Thus, service providers who do have specialised staff can respond to this demand through product based service in particular.

Our case studies also showed that waste management policies have driven service innovation within this sector. At the end-of-life of large products, such as air-conditioning units, a duty of care exists that places a liability on the end-user to ensure the proper disposal of obsolete equipment. Service providers, who may or may not have provided the product in the first place, will frequently offer a decommissioning service that includes the disposal of the product or its resale to a registered re-manufacturer. The service provider will supply the end-user with a single point of contact in disposal, providing all the duty of care records relevant to waste management or re-manufacturing further down the waste chain.

The above observations serve as examples of how policy can drive the need for specific services in the sector throughout the lifecycle of the product. Products that use large amounts of energy, which require significant material input and which contain gases with a significant global warming potential are rightly controlled by a number of regulations. These controls in turn are perceived within the case companies as being most economically sourced through specialist service providers and this has contributed to service development. Despite this the effect of policy on service development is not simple. Many indirect influences may affect the ability of service providers to improve efficiency or maintain equipment. An example of this is the increasing requirement on manufacturers to produce lightweight products. Distributors suggested that these products were frequently less durable than older designs, and as such may be more prone to failure. Such pressures were found to arise from eco-design strategies, which aimed to reduce the overall quantity of material used in these products. This has increased the critical demand for services from service providers within this sector, and doubtless many others. However, companies v and x suggested that ‘light-weighting’ of products has also led to them being more difficult to service. These companies suggested that failures in lightweight products are frequently catastrophic, ending the life of the product and that more antiquated designs may be larger and more materially intensive to produce, but are less complicated and easier to repair and service. While it is true that legislation has favourably affected the development of services, subtle and indirect impacts, such as those arising from eco-design strategies, may in fact make the servicing of products more complex and potentially less effective.

3.3 Distributors as the link between manufacturer and the market

Background and case study research showed that within the UK PSS are predominantly delivered to market via large numbers of product distributors. These companies often deliver the material artefacts of European and global air-conditioning and process cooling manufacturers to customers throughout the UK. A variety of contractual agreements or institutional arrangements for service delivery between manufacturers and distributors were observed to support the joint delivery of products to market, e.g. service level agreements. Distributors exist on a range of scales and many small and medium sized enterprises (SMEs) are active within the market as a whole and all play a significant part in the delivery of product related services. These distributors deliver a range of services required to commission, optimise, maintain and finally decommission the equipment for the end user. Both the proximity of distributors to the customer and their specialist knowledge of the products they sell have allowed them to dominate the service market.

Services reducing the risk of downtime through regular maintenance or reactive amendment to faults are frequently sought by end users. The case study companies suggested that SME distributors studied can mobilise their human resources and deliver services quickly thereby reducing the downtime costs to the customer. This has been observed as a significant driver for services that specifically stem from SME distributors. One key characteristic of the broader construction and facilities management sector (within which many of the services associated with cooling and air conditioning occur) is a tendency for large numbers of actors to be present within the supply chain. Such market fragmentation has meant that a lack of communication between manufacturers and the ultimate end user of the products is prevalent. So the wider context of the construction and facilities management market, and specifically its fragmented nature, has meant that distributors frequently act as the link to end-users.

3.4 Manufacturers and PSS

The absence of the direct involvement of the manufacturer in the service delivery process is not clear from the case studies. Given that manufacturers develop production technologies associated with these systems and products, their importance in service delivery cannot be underestimated. Material artefacts provide opportunities for and underpin service delivery. Process cooling and air-conditioning manufacturers have a critical influence over the design and manufacture of these and this affords them a key role in the development of services within the sector, even if they themselves tend not to deliver these services.

Manufacturers can be seen to have facilitated the process of service development, to a large degree as the result of the advances in technology (driven by their research and development activities). The research indicated that the processing of cooling and air conditioning products is now too complex and too important to the profitability of the end-user to be serviced and maintained by customers directly. The technological breakthroughs of the late 1970s in the air conditioning and cooling sector produced a market in which services could develop. However, in turn this development began to have an effect on manufacturers since the growth of smaller service providers prevented products reaching end-of-life and reduced the number of new sales being achieved by manufacturers. This dynamic relationship between service development and equipment demand occurred at the same time as a spare parts market of un-branded replacement components began to grow. The outcome of this has been that service providers can now access new components, which are competitive in price and allow them to offer very competitive upgrade or replacement services to the end-user.

Significant developments in digital technologies have affected services in the process cooling and climate control sector. Digital remote control units have changed markedly the way in which products are controlled and serviced, since any fault occurring in the control system will render the product dysfunctional. More significantly, this has required service providers to develop their understanding of digital control technologies and their servicing. Distributors have had to constantly adapt to keep up with these technologies in order to be able to provide their services effectively.

While it is clear that the bulk of services provided in the UK to end-users within this sector emanate from distributors, the case studies suggest an emerging trend for large end-users to look to product manufacturers for the direct provision of services. One of the case firms is a large UK manufacturer that produces a number of highly efficient air-conditioning designs specifically tailored to meet the needs of large end-users who require climate control systems that do not generate excessive running costs. The manufacturer in the case study has recently developed the services discussed above and those that are aimed specifically at improving product efficiency and durability. The firm states that this has been driven by an increasing demand from its customers for services to emanate directly from them, rather than through a distributor. This suggests that the current level of technological development of products and services, a background of environmental policies emphasising product efficiency, and crucially the emphasis on cutting costs have begun to encourage some end-users to seek services and the manufacturer studied has attempted to respond to this need. Distributors may find it increasingly difficult to persuade customers that they can offer the level of performance required from products and services.

Despite this trend, low levels of service competency were found to present a barrier to manufacturers moving into service provision. The requisite capabilities to enable service delivery include those required in operation, maintenance and repair as well as the additional back office financial competencies needed for carrying out revenue based transactions. These skills are quite different from those required for manufacturing activities in which a firm typically encompasses a linear activity where raw materials of intermediate products are received, processed and sold through one transaction to other firms or consumers. Development of PSS requires use of the service type of transaction and had required the manufacturer studied to maximise the value of product/service provision. This led to fundamental changes in the composition of their outputs and required a broader expertise than for the previous focus on manufacturing. These changes to the ways of doing business posed many challenges to the manufacturing firms and required significant organisational and cultural transformation. Firms that had developed these capabilities had very different organisational characteristics and dynamics from those pursuing the traditional manufacturing model of business. New human resource requirements and new departments had been created to facilitate the development of a customer responsive service requiring significant investment in both management time and financial resources. This is to be expected given the deeper understanding of customer needs that is necessary under a service model and the costs attached to its provision.

4 Discussion

There is a growing body of literature which suggests that the development of service economies and the trend to develop service orientated products in manufacturing sectors provide opportunities to improve resource productivity and also for transition to dematerialised states. It is recognised that these benefits are somewhat contingent upon the emergence of durable technological artefacts, which will form the tangible element of PSS. However, the literature is unclear as to whether the trajectories of environmentally friendly PSS will emerge as a result of economic restructuring or whether policy will be required to induce them.

This paper identifies changes in the UK industrial cooling, refrigeration and heating sector that led to and supported the emergence of product, use and result orientated PSS from this sector. The case study shows that while there is considerable variability in demand for PSS within the air conditioning and cooling sector, in many instances technological innovation undertaken by the supply side gives rise to new user needs and induces provision of service orientated products. However, in none of the cases reviewed was technological innovation to develop significantly more durable artefacts induced by service provision. It therefore seems that service innovation within the sector studied will not lead directly to the development of more durable artefacts. Further research is required to confirm and explain this phenomenon.

The research provides some support for the argument put forth in the services and sustainability literature which suggests that the financial incentive to increase durability will only accrue when manufacturers of technological artefacts supply PSS. In our case, it is the distributors who provide such PSS in the sector studied and a financial incentive for the manufacturer to increase the durability of technological artefacts to support services did not accrue.

As shown in Figure 2, distributors often take on the role of service providers. This is because such firms have the requisite service competencies to recognise the opportunities of providing service orientated products that arise from new user demands and ultimately from the technological innovation undertaken by manufacturers. Research further suggests that manufacturers are facing increased demand for services but also that in many instances manufacturing firms are currently unable to pursue this option as they do not have the necessary service capabilities to develop service orientated products.

Figure 2. Institutional arrangements between firms providing services.

4.1 Core capabilities and service provision

While distributors of industrial refrigeration, air conditioning and cooling products have the capabilities to offer services that can prolong product life and (to a degree) improve the efficiency of products, they do not manufacture the products themselves. This is significant as under the institutional arrangement for the delivery of ‘Use’ and ‘Result’ orientated PSS ownership of the product remains with the provider and it is in this arrangement that any economic interest in increasing product durability may be realised. In order to operate at a profit in such a commercial context and to provide for significant improvements in resource productivity of the service system through increased product durability, the provider must be able to lower the costs associated with the use of the product. This is frequently cited as the key tenet around which successful ‘Use’ and ‘Result’ orientated PSS hinge. Achieving this lowering of costs may be realised through product re-design, operator training, or a variety of reclamation activities aimed at lowering running and manufacturing costs relative to revenue gained through delivery of services. It is critical to observe that distributors do not have control over the design of products, and would incur costs roughly in proportion to the level of product durability and efficiency resulting from the design itself.

Despite this, an important observation regarding core capabilities is supported throughout the cases studied. SME distributors who are active in offering service orientated products find the organisational barriers associated with the development of services less challenging than larger manufacturers of similar products. A number of changes in working culture and revenue and cost structure are found to represent significant limitations to the development of services within the manufacturing firms studied. However, these changes are not identified as barriers to distributors who, due to their size, are capable of rapid change, and alignment of their outputs with new market trends. Furthermore, as many of these companies are set up as service providers, revenue and cost structures are designed to operate within a service context, with the development of services being viewed as a key growth area (an activity identified as a significant issue for manufacturers embarking on similar notions of service provision in this sector). Given that ‘Use’ and ‘Result’ PSS both require a significant change in revenue and cost structuring within the firm, with the subsequent incentives being relayed to employees, it seems that distributors and service providers may be better positioned to offer these service innovations than larger manufacturers. Although from a product design and production perspective, manufacturers may have the core capabilities to lower manufacturing and operational costs, smaller specialist distributors and service providers have organisational structures that are better aligned with the ability to develop new service strategies.

Limits to corporate capability present a significant barrier to the development of more durable artefacts and the subsequent realisation of wider environmental benefits such as improved resource productivity and the opportunity for transition to a dematerialised state. This is not recognised or explored in any great detail within the services and sustainability literature. Rather, this literature suggests that ‘consumption without ownership’ is a key barrier and this was not confirmed in the sector studied. This may however have been because this work focused on business to business transactions rather than those between business and consumer in which the ownership of material artefacts may be more emotive.

4.2 Forging partnerships for PSS

We observe that while changes in user needs create a demand for manufacturers to supply a range of services, in many instances these were provided by distributors that had service capabilities. Even though the demand for manufacturers to directly supply services may arise, the cases studied suggest that the limited corporate capability, and in particular, service capability (e.g. relating to the organisational design for service delivery) will constrain manufacturers' ability to realise this opportunity. This is significant as it raises questions about relationships within the supply chain and the opportunities for a re-configuration of the sector where distributors take a lead role and manufacturers are subordinate.

However, none of these futures may lead to the pervasive trajectories of more durable products. For ‘Use’ and ‘Result’ PSS to stimulate technological innovation to produce more durable technological artefacts, in this particular industrial context, novel and challenging partnerships may need to be forged between manufacturers and service providers in order to facilitate a system based solution that extends beyond the boundaries of one commercial entity or involves the wholesale merging of manufacturing and distribution companies. This would provide a service delivered by small innovative service providers whose strategic alignment with larger manufacturers ensures the profitable delivery of services to the end-user, through product redesign, operating competence and the reclamation of products back into the manufacturing process. Research policy needs to be developed to support such partnerships and the establishment of effective institutional arrangements that allow manufacturers to reduce knowledge leakage and maintain a degree of product control will be essential. Also, further development of functional eco-design strategies to enable development of durable technological artefacts is required.

5 Conclusions

This paper questions whether the trend within manufacturing sectors to develop service orientated products gives rise to certain environmental benefits, such as significant improvements in resource productivity and the transition to dematerialised states. It shows that while the manufacturing sector as a whole may have the capabilities to develop such products, individual manufacturing firms within it may not. Thus maintenance costs or disposal costs do not accrue within these organisations and innovatory activities to develop more durable technological artefacts do not arise. However, as this research has identified, service provision may, in future, not only emanate from the distributor as end users are increasingly looking to manufacturers to provide services directly. This has been attributed to the improved level of service that is achievable when the service provider also manufactures the product. Presumably, a single source agreement makes the process of climate control or process control simpler for the customer to manage and finance although more research is required to investigate this. In a role of service provider, manufacturers may gain an economic interest in increasing the durability of technological artefacts leading to other wider environmental benefits such as improved resource productivity and transition to a dematerialised state. However, this research shows that a lack of corporate competence within manufacturing firms to deliver services may inhibit this process. Further research is required to support the development of novel partnership arrangements and alliances between firms in manufacturing sectors with service competencies and manufacturing enterprises.

Acknowledgements

The authors acknowledge the considerable contribution made to the clarity of this paper by two anonymous reviewers. Any remaining weaknesses are of course our responsibility.