Value Creation and Value Capture Alignment in Business Model Innovation: A Process View on Outcome‐Based Business Models
David Sjödin, Vinit Parida , Marin Jovanovic and Ivanka Visnjic
Originally published: December 27, 2019 (PDMA JPIM • Vol 37, Issue 2 • March 2020)
Read time: 41 minutes
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Industrial manufacturers are innovating their business models by shifting from selling products to selling outcome‐based services, where the provider (manufacturer) guarantees to deliver the performance outcomes of the products and services. This form of business model innovation requires a profound yet little understood shift in how value is created, delivered, and captured. To address this research gap, our study examines two successful and four unsuccessful cases of this shift. We find that effectiveness in business model innovation hinges on the three process phases that unfold in collaboration with the customers: value proposition definition, value provision design, and value‐in‐use delivery. We also find that that success is determined by the alignment of specific value creation and value capture activities in each phase: identifying value creation opportunities—agreeing on value distribution in value proposition definition, designing the value offering—deciding on the profit formula in the value provision design, and finally refining value creation processes—regulating incentive structures in the value‐in‐use delivery. Our process model contributes to the literature and practice on business model innovation by providing a thorough understanding of how alignment of value creation and value capture processes is ensured, whilst paying special attention to their interdependence and the interactions between provider and customer.
Selling an outcome is not the same as selling a product or service; it is a totally different offer, and the composition of the offering means that the whole business model towards the customer needs to change. You are changing the way value is created by guaranteeing radically higher performance. The delivery process needs to change since you are now responsible [for the outcome] and profit is also more risky, uncertain and aligned to the customer. So, this [shift] is not something you can do alone. —Portfolio manager, Connectcorp
Business model innovation sits at the top of the agenda for most industrial firms, and it has garnered a strong interest in the management literature as well (Foss and Saebi, 2017; Massa, Tucci, and Afuah, 2017; Ritter and Lettl, 2018). A business model describes how an organization creates, delivers, and captures value (Osterwalder and Pigneur, 2010; Parida, Sjödin, and Reim, 2019; Teece, 2010). One of the most important forms of business model innovation today is the shift from selling products to selling outcome‐based services (Baines et al., 2017; Foss and Saebi, 2017; Tuli, Kohli, and Bharadwaj, 2007; Visnjic, Jovanovic, Neely, and Engwall, 2017). When selling outcome‐based services, a provider assumes responsibility for the performance outcomes of the products and services (e.g., engine functioning) and accepts a penalty for any shortcomings (e.g., engine breakdown; Grubic, 2018; Visnjic et al., 2017). Thus, the shift to outcome‐based service represents a high‐gain as well as a high‐risk business model innovation strategy (Fang, Palmatier, and Steenkamp, 2008; Jacob and Ulaga, 2008; Kohtamäki, Parida, Oghazi, Gebauer, and Baines, 2019).
This shift is often accompanied with an “opening up” of the business model where the steps that a provider and customer take to ensure they create (i.e., lower life‐cycle costs) and capture (i.e., value distribution) value need to be carefully redefined (Chesbrough, Lettl, and Ritter, 2018; Saebi and Foss, 2015; Visnjic, Neely, and Jovanovic, 2018). Yet, navigating this process of redefining value creation and value capture and shifting relational roles and responsibilities is a daunting task that is often at odds with the existing modus operandi of traditional business‐to‐business relationships (Sjödin, Parida, and Wincent, 2016). For instance, the provider, who used to make money on product, maintenance, and spare parts, will now have to consider these items as costs with revenues depending entirely on the delivered outcomes. The customer, for its part, will have to accept a much higher degree of dependence on the provider. Furthermore, this redefinition rarely happens in one step. The challenges, needs, and requirements likely evolve throughout the business model innovation process. Indeed, prior literature has recognized the importance of understanding these processual and temporal aspects of business model innovation and has called for further research on this subject (Berends, Smits, Reymen, and Podoynitsyna, 2016; Foss and Saebi, 2018).
The process of business model innovation leading to outcome‐based services is pertinent to two ongoing dialogues in the literature: servitization and business model innovation. The servitization literature has begun to recognize the challenges involved in this form of business model innovation as it evolves from a simple to a more advanced service portfolio (Parida, Sjödin, Lenka, and Wincent, 2015; Ulaga and Reinartz, 2011; Visnjic Kastalli, Van Looy, and Neely, 2013). While this literature stream is steadily advancing, few servitization studies have gone as far as to investigate the business model innovation process for outcome‐based services (Grubic and Jennions, 2018), the most advanced form of service provision (Baines et al., 2017; Visnjic et al., 2017). Furthermore, recent studies have called for further research on how providers engage in “collaborating with customers throughout the innovation process” (Randhawa, Wilden, and Hohberger, 2016, p. 767). As the interactions between the provider and customer are more complex in outcome‐based services than any other, this context may help us grasp the relational dynamics better (Aarikka‐Stenroos and Jaakkola, 2012; Petri and Jacob, 2016; Sjödin et al., 2016).
From the perspective of the business model literature, there is also an important knowledge gap concerning the design and implementation of value‐creation and value‐capture processes across organizational boundaries (Chesbrough et al., 2018; Saebi and Foss, 2015). For instance, the existing research on open business models has mostly concentrated on value‐creating processes, directing less attention to complementary value capture processes (Chesbrough et al., 2018; Desyllas and Sako, 2013). Moreover, scholars have recently called for increased focus on the alignment between value creation and value capture processes in interorganizational relationships (Chesbrough et al., 2018; Ritter and Lettl, 2018; Sjödin, Parida, Kohtamäki, and Wincent, 2020). Alignment essentially concerns the “appropriateness” of the various elements/processes (i.e., creation and capture) in relation to each other (Chorn, 1991), and while it is often mentioned, this concept is seldom studied in detail in the business model innovation context (Kranich and Wald, 2018; Ritter and Lettl, 2018). How to achieve this alignment may well be a particularly fruitful theme to study in the complex and risky context of outcome provision where the potential for value creation and value capture is evolving over time, potentially creating more opportunities for misalignment between the provider and the customer.
This study seeks to address these research gaps by exploring how providers and customers ensure the alignment of value creation and value capture processes in business model innovation for outcome‐based services. To fulfill this purpose, our study draws on the rich case‐study data from two successful and four unsuccessful cases of business model innovation during the shift to outcome‐based services. As a result, this study contributes to the growing body of literature on business model innovation (e.g., Foss and Saebi, 2017; Massa et al., 2017; Visnjic et al., 2018).
Our contribution can be summarized in four points. First, we develop a process framework aimed at business model innovation for outcome‐based services that unfolds in three phases: value proposition definition, value provision design, and value‐in‐use delivery. Thus, we complement existing studies by focusing specifically on value creation and value capture activities as they unfold throughout the business model innovation process. Second, this study unpacks the mechanics of the alignment between value creation and value capture throughout the business model innovation process (Appleyard and Chesbrough, 2017; Randhawa et al., 2016; Sjödin et al., 2016). Third, the study explores the relational dynamics between the provider and customer as they realign their value creation and value capture perspectives. Here, we underscore the importance of an open business model innovation perspective, given that our findings strongly suggest that the alignment of value creation and value capture is not a provider‐centric requirement but a joint endeavor.