As the scientific evidence for environmental degradation becomes harder to discount, enlightened companies have begun embracing the vision of “sustainable development,” defined by the World Commission on Environment and Development as “the ability of current generations to meet their needs without compromising the ability of future generations to meet theirs.”1 But while sustainable development is a desirable goal for society, critics suggest that significant, if not radical, changes in the basic assumptions behind current business models are needed to achieve it.
Contemporary management scholars suggest that sustainability can be addressed by focusing on increased operational efficiency or more environmentally benign products and processes.2 Some argue, however, that while these changes are necessary, they are not sufficient because they do not address consumption levels. Gains in operational efficiency and environment-friendlier technology may even eventually be counteracted by increases in consumption.3 Thus, in order to be a truly sustainable society, developed nations must consume less.4
This is no small challenge to industrial societies, where consumption has traditionally been an end in itself. Yet companies are often in the best position to help customers reduce consumption — even of their own products. By “servicizing,” suppliers may change the focus of their business models from selling products to providing services, thereby turning demand for reduced material use into a strategic opportunity.
This new approach is part of the larger move throughout industry to the provision of services, which, evidence has shown, is linked to higher and more stable profits.5 In addition, some argue that because services are more difficult to imitate than products, they are a source of competitive advantage.6 Thus many traditional manufacturing companies, especially those faced with shrinking markets and increased commoditization of their products, are adopting service provision as a new path toward profits, growth and increased market share.7
Hewlett-Packard Co., for example, has defined “tomorrow’s sustainable business” as one in which it shifts from selling disposable products to selling a range of services around fewer products.8 Another company embracing this approach is Interface Inc., a commercial carpeting company based in Atlanta, Georgia, whose seven-point model of sustainability includes providing “the services their products provide, in lieu of the products themselves.” A study by the Tellus Institute found that in business-to-business markets, companies such as Coro, DuPont, IBM and Xerox have turned to replacing products with services as an integral part of their environmental strategy.9
While some researchers have identified companies that are taking this servicizing approach, little has been documented about the process of executing the strategic change.10 Shifting business models so profoundly is not easy, as it challenges the traditional organizational assumption that selling more of a product is good and selling less of it is bad. But for those companies willing to accept the challenge, the result can be even greater financial success.
Case Studies in Servicizing
Drawing from the experiences of three companies — Gage Products, PPG Industries and Xerox — whose present business models help customers purchase less of their traditional products, I discuss a few of the obstacles these companies faced and the ways in which they were able to overcome them. (See “About the Research.”) Each company offers a different set of products, yet they all profitably shifted to providing services that help customers meet their goals while using less of these products. Moreover, in all three cases, environmental benefits resulted as well. (See “Three Cases in Servicizing,” p. 86.)
Gage
Based in Ferndale, Michigan, Gage Products Co. started out as a distributor of specialty chemicals for Shell Oil Co., but over time it shifted to making combination chemical blends for automotive paint applications. Because of the specialized nature of its products, Gage has long needed to take a more active role in the management of customers’ paint shop operations. Its employees would routinely work at assembly plants to consult on color changes, adoption of new application equipment or the use of specialty paint blends. Eventually, Gage was looked at by most customers not just as a supplier of solvents but also as a color change expert.
A turning point in Gage’s business model came when it introduced a new product called Cobra, which cleaned paint circulation systems in an environmentally friendlier manner than did its predecessor. Gage quickly learned that it could not sell this new material, which had some unique characteristics, as it had sold its traditional products; the company needed to be even more active in managing product use at the customer’s site.
This new service role was evolving just as one of Gage’s customers, Chrysler Corp., was facing more stringent environmental regulations. To help Chrysler meet these regulatory demands, Gage started to take greater responsibility not only for introducing new materials but also for ensuring their proper use, which included more efficient use, and that meant an ultimate reduction in the volume of cleaning solvents that Gage supplied to Chrysler paint shops.
For example, early in 1996, one assembly plant was concerned that it was going to exceed the Environmental Protection Agency emission limits on volatile organic compounds by the end of the year. With Gage’s help, it was able to cut VOC emissions by approximately one-half, thereby avoiding the installation of costly abatement equipment.
PPG Industries
In the late 1990s, PPG Industries Inc. of Pittsburgh, Pennsylvania, a coatings manufacturer, was also faced with Chrysler’s demand for reductions in product use as a result of two main drivers: high costs and environmental regulations. The strategic response for PPG was to help its customer reduce paint use.
As one PPG manager explained: “The automotive companies were going to move down a path of trying to decrease usage, whether we participated in that relationship or not. So what PPG decided pretty early in the game was that participating in that transition and helping to manage it was more beneficial than waiting for it to be thrust upon us. We tried to structure a program that created a win-win scenario.”
With this new arrangement, PPG on-site representatives started to take over new management tasks at the plant, including material ordering, inventory tracking, inventory maintenance and even some regulatory-response duties. Through this increased service role, the company has helped Chrysler reduce material use. Interestingly, the new business model developed by PPG and Chrysler has started to become the norm for the industry. Chrysler even asked PPG to teach the model to its competitors, such as DuPont Coatings & Color Technologies and BASF Corp., and PPG agreed. First, it did not want to lose Chrysler as a customer in the relatively small automotive paint market, and second, PPG considered such teaching a part of its service offerings.
Xerox Corp.
Xerox’s move toward servicizing was part of a larger move that developed during the 1990s as its core products were becoming commoditized. In 1994, Xerox started calling itself “the Document Company,” marking a change in strategy that focused less on devices that create printed materials and more on the information that flows within a business. To drive this strategy forward, the company launched Xerox Global Services, its Paris-based consulting division, in late 2001 to help customers improve efficiencies in their document-intensive business processes.
A key component of Xerox Global Services is its focus on the office. To help improve the productivity of the office environment, Xerox introduced the Office Document Assessment tool, which analyzes the total costs associated with alternative document-making processes. A typical ODA report offers a range of suggestions for increasing office efficiency, improving worker productivity and reducing costs. Often central to such suggestions is reducing the number of devices through consolidation, which leads to reductions in the use of toner, paper and other consumables, all of which Xerox sells. The reduction in total devices can be substantial, moving from a ratio of more than one device per employee to a ratio of one device per 10 or more employees.
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Acknowledgments
The author would like to thank the participants in this research study for their time and knowledge, as well as the Alfred P. Sloan Foundation, the International Motor Vehicle Program at MIT, and the RIT Printing Industry Center for their financial support. The author would also like to acknowledge those who have provided feedback on this and earlier versions of this article.
REFERENCES
1. The World Commission on Environment and Development, “Our Common Future” (New York: Oxford University Press, 1987).
2. See, for example, R.S. Marshall and D. Brown, “The Strategy of Sustainability: A Systems Perspective on Environmental Initiatives,” California Management Review 46, no. 1 (fall 2003): 101–126; J. Hall and H. Vredenburg, “The Challenges of Innovating for Sustainable Development,” MIT Sloan Management Review 45, no. 1 (fall 2003): 61–68; F.L. Reinhardt, “Environmental Product Differentiation: Implications for Corporate Strategy,” California Management Review 40, no. 4 (summer 1998): 43–73; and S.L. Hart, “Beyond Greening: Strategies for a Sustainable World,” Harvard Business Review 75 (January/February 1997): 67–76.
3. C. Sanne, “Are We Chasing Our Tail in the Pursuit of Sustainability?” International Journal of Sustainable Development 4, no. 1 (2001): 120–133.
4. Ibid.; P. Dobers and L. Strannegard, “Design, Lifestyles and Sustainability: Aesthetic Consumption in a World of Abundance,” Business Strategy and the Environment 14 (2005): 324–336; A. Schaefer and A. Crane, “Addressing Sustainability and Consumption,” Journal of Macromarketing 25, no. 1 (2005): 76–92; and E.F. Schumacher, “Small Is Beautiful: Economics as If People Mattered” (Vancouver, British Columbia: Hartley & Marks, 1999).
5. M. Sawhney, S. Balasubramanian and V. Krishnan, “Creating Growth with Services,” MIT Sloan Management Review 45, no. 2 (winter 2004): 34–43.
6. R. Oliva and R. Kallenberg, “Managing the Transition from Products to Services,” International Journal of Service Industry Management 14, no. 2, (2003): 160–172.
7. Ibid.; K. Bates, H. Bates and R. Johnston, “Linking Service to Profit: The Business Case for Service Excellence,” International Journal of Service Industry Management 14, no. 2 (2003): 173–183; and G. Allmendinger and R. Lombreglia, “Four Strategies for the Age of Smart Services,” Harvard Business Review 83 (October 2005): 131–145. Interface, for example, claims that replacing products with services has increased market share at the expense of competitors. The Interface model can be found at www.interfacesustainability.com/model.html.
8. See L. Preston, “Sustainability at Hewlett-Packard: From Theory to Practice,” California Management Review 43, no. 3 (spring 2001): 26–37.
9. A. White, M. Stoughton and L. Feng, “Servicizing: The Quiet Transition to Extended Product Responsibility,” report by Tellus Institute (1999).
10. As noted by Oliva,“Managing the Transition” and Sawhney, “Creating Growth,” very little has been published on the actual transition process for companies moving from selling products to services. The same holds for transitions that involve reducing material consumption on the part of the consumer. The environmental benefits of servicizing are discussed by White, “Servicizing.” Other articles that mention the environmental benefits of servicizing include: I. Ropke, “Is Consumption Becoming Less Material: The Case of Services,” International Journal of Sustainable Development 4, no. 1 (2001): 33–47; Preston, “Sustainability and Hewlett-Packard”; M.W. Toffel, “Contracting for Servicizing,” working paper, Haas School of Business, Berkeley, California, May 15, 2002; E.D. Reiskin, A.L. White, J.K. Johnson and T.J. Votta, “Servicizing the Chemical Supply Chain,” Journal of Industrial Ecology 3, no. 2 and 3 (2000):19–31; K. Hockerts, “Eco-efficient Services Innovation, Increasing Business-Ecological Efficiency of Products and Services,” in “Greener Marketing” 2nd. ed. M. Charter and M.J. Polonsky (Sheffield, United Kingdom: Greenleaf Publishing, 1999), 95–108 and other articles focusing on “product service systems” and “chemical management. Some additional references can be found at the Web site of the Chemical Strategies Partnership, www.chemicalstrategies.org. Some articles that mention this type of strategic approach, although not all focusing on the environmental benefits, include K. Funk, “Sustainability and Performance,” MIT Sloan Management Review 44, no. 2 (winter 2003): 65–70; and Sawhney, “Creating Growth.”
11. More information can be found at J. Firestone, “Growth Opportunities: Services,” http://a1851.g.akamaitech.net/f/1851/2996/24h/cacheB.xerox.com/downloads/usa/en/i/ir_2005InvestorConference_JFirestone.pdf.
12. The Gage Web site is www.gageproducts.com.
13. D.H. Meadows, D.L. Meadows and J. Randers, “Beyond the Limits: Confronting Global Collapse, Envisioning a Sustainable Future” (Post Mills, Vermont: Chelsea Green Publishing, 1992).
