Castrol Industrial, N

Servicizing:

The Quiet Transition to

Extended Product Responsibility

Allen L. White, Ph.D

Mark Stoughton

Linda Feng

Submitted to:

U.S. Environmental Protection Agency

Office of Solid Waste

May 1999

Servicizing:

The Quiet Transition to Extended ProductResponsibility

Submitted to:

U.S. Environmental Protection AgencyOffice of Solid Waste

Submitted by:

Allen L. White, Ph.D.Mark Stoughton

Linda Feng

May 1999

Servicizing: The Quiet Transition to Extended Product Responsibility

Tellus Institute • iii

AcknowledgmentsWe gratefully acknowledge funding for this project by EPA’s Office of Solid Waste un-der Cooperative Agreement CX-826825-01-0. Special thanks are extended to Clare Lind-say for her guidance and critiques throughout the preparation of this study.

Our case studies would not have been possible without the generous donation of time andinsights of our industry colleagues, including: Jan Agri (AB Electrolux), Don Dorsey(Castrol Industrial North America, Inc.), Lee Eilers (Coro, Inc.), Fernand Kaufmann(Dow Chemical), Leigh Hayes (Radian, Inc.), and Dawn Rittenhouse and Jim Dentzer(DuPont, Inc.). Many thanks also to Janet Ranganathan (World Resources Institute) andBette Fishbein (INFORM) for their valuable comments on an earlier draft of the study.

An earlier version of portions of this report appeared as:

White, Allen and Linda Feng (1998). “Servicizing: The Quiet Transition to EPR,” paperpresented at the OECD Workshop on Extended and Shared Responsibility for Products:Economic Efficiency/Environmental Effectiveness. Washington, DC, 1–3 December.

Any remaining errors of fact or interpretation, of course, are the sole responsibility of theauthors.


Tellus Institute • v

Table of Contents

Executive summary ............................................................... 1

1. Services and the Environment ......................................... 9The growing importance of services 9

Challenges and opportunities for environmental policy 9

Product-Based Services 10

Product-Based Services and the “Functional Economy” 13

The Functional Economy as Green Economy 13

Focus and Approach of This Study 14

2. The Servicizing/EPR Linkage ..........................................19Extended Product Responsibility 19

Manufacturer Responsibility: US and Europe 19Environmental benefits of EPR 20

Servicizing and EPR 21Potential economic incentives from servicizing that drive environmental improvement 21Servicizing does not always generate these incentives 24Surmounting organizational barriers 25

3. Servicizing Drivers, Challenges and OrganizationalResponses.............................................................................27

Drivers and Approaches to Servicizing 27

Internal Challenges and Responses 29Internal challenges 29Firm responses 30

External Barriers and Challenges 32Gaining market acceptance 32Information requirements 32

Implications for EPR 33Transmission of incentives 34Does servicizing “break ground” for EPR? 34Environmental drivers in the market 34

4. Environmental Impacts of Servicizing...........................37Key Concepts of Lifecycle Analysis for Servicizing 37

Service units as a basis for comparison 37

Tellus Institute • vi

Use vs. non-use impacts 39Effects of reclamation activities 39

Reducing Use and Non-Use Impacts Under Servicizing 40Reducing in-use impacts 40Reducing non-use impacts 41Summary 44

Turnover, vintage and use impacts 46

5. Roles for Public Policy ....................................................51The Emergence of Servicized Products 51

Potential Environmental Gains. . . 51

Realizing Environmental Gains is Not Automatic 52

A Role for Government 53Explicit environmental policies 53Taxes 53Documentation 54Convenor 54Research 54

References ............................................................................57

Appendix A: Case Studies...................................................61

FiguresFigure 1: Structural change in the U.S. economy .................................................9

Figure 2: The Functional Economy.....................................................................12

Figure 3: Servicizing of a durable good: product take-back................................22

Figure 4: Servicized PC Product Offering ...........................................................22

Figure 5: Incentives in a traditional sales model versus a service model ...........22

Figure 6: Service and manufacturing: separation to integration .........................31

Figure 7: The product lifecycle............................................................................37

TablesTable 1: Possible reductions in environmental impacts derived from servicizing .4

Table 2: Examples of product-based services....................................................11

Table 3: Examples of Manufacturer Extended ProductResponsibility in the U.S.............................................................................20

Table 4: Summary matrix: Possible reductions in environmental impacts derivedfrom servicizing...........................................................................................45

Table 5: Rough lifecycle impact data for two durable goods ..............................46


Tellus Institute • 1

Executive summary

Services and theenvironmentOver the past generation, the economies ofthe U.S. and other wealthy industrializedstates have undergone significant structuralchanges. Services have attained new promi-nence, and the relative contribution of tradi-tional manufacturing to these economieshave diminished. These changes have cre-ated enormous opportunities for entrepre-neurs and new national wealth on the onehand — and huge social costs attendant tothe decline of traditional industries andchallenges for public policy on the other.

Because the human impact on the environ-ment is intimately linked to economic activ-ity, these changes present both challengeand opportunity for environmental policy.The structural changes producing a serviceand information-led economy is often pre-sented in environmental terms as graduallydivorcing economic growth from materialand energy throughput and environmentalburden. The idea of a functional economy— in which the focus of consumption is notgoods per se, but the services which thosegoods deliver — has been associated withthe idea of eco-efficiency. In a functionaleconomy, commercial and domestic con-sumers buy cleaning services instead ofwashing machines, document services ratherthan photocopiers, and mobility servicesrather than cars.

Systematic analysis of the environmentalimplications of a service and information-led economy is just beginning. It is clearthat the simplest and most optimistic view— a service economy is inherently cleaneconomy — is insufficient and incorrect.Instead, the service economy is better char-acterized as a value-added layer restingupon a material-intensive, industrial econ-omy. All else equal, economic growth inservices may be less environmentally prob-lematic than growth in manufacturing. But

that is not sufficient when society alreadyexceeds environmental limits in a number ofcrucial ways. If services are to produce agreener economy, it will be because theychange the ways in which products aremade, used and disposed of — or becauseservices, in some cases, supplant productsaltogether.

Our focus: product-basedservicesThe idea of services supplanting productshas received significant attention — for ex-ample, the “dematerialization” potential ofinformation technology in reduced traveland transport of physical goods. Clearly,however, all products cannot be demateri-alized— not only does the provision of ba-sic needs (e.g., food, shelter, clothing) re-quire the mobilization of an irreduciblephysical minimum of material and energy,but the information technology which maymake dematerialization possible rests uponan extensive, sophisticated manufacturingand maintenance infrastructure.

This study thus focuses on the environ-mental implications of an emerging class ofproduct-based services, with emphasis onthe business-to-business markets. Product-based services include the familiar — war-rantees, maintenance agreements — as wellas the less familiar — chemical management

If services are to produce a greenereconomy, it will be because they changethe ways in which products are made,used and disposed of — or becauseservices, in some cases, supplant productsaltogether.


services, mobility services, furnishingsmanagement.

What these services have in common is thatfor the consumer, consumption shifts frompurchase and use of a product to purchase ofa service. For manufacturers and serviceproviders responding to — or driving —

these market changes, involvement with theproduct is extended and/or deepened inphases of the product lifecycle. In somecases, formal property rights may change asa result — for example, a manufacturer mayretain ownership of its product through theuse phase, via a leasing arrangement. Evenif this does not happen, a service orientationnecessarily involves a greater involvementwith the product in its use phase than doesthe provision of “product in a box.”

Our term for the emergence of this growingclass of product-based services, which blursthe distinction between manufacturing and

traditional service sector activities, is“servicizing.” In a servicizing environment,the notion of straightforward buying andselling softens and diversifies into a spec-trum of property rights arrangements, in-cluding leasing, pooling, sharing and take-back. Value is increasingly created andmeasured by the function provided, and forthe manufacturer, the product increasinglybecomes a means of delivering this function,rather than an end in itself. To date, this“servicizing” phenomenon has been drivenlargely by business, not environmental, con-cerns. It can be seen as one aspect of a ma-jor shift in how firms think about and ap-proach competitiveness.

Servicizing and extendedproduct responsibilityWhat is the potential for environmentalgains from servicizing and, in particularwhat policy initiatives and governmentalrole might be helpful in realizing thesegains? Can servicizing be a driver towardsextended product responsibility (EPR)?

EPR is the principle that actors along theproduct chain or lifecycle share responsibil-ity for the lifecycle environmental impactsof the whole product system, including up-stream, production and downstream im-pacts. The greater the ability of the actor toinfluence particular environmental impactswithin the product lifecycle, the greater theshare of responsibility for addressing thoseimpacts should be.

Thus, EPR is a principle whose applicationsshould result in lower lifecycle environ-

mental impacts forproducts or productsystems. Servicizingdescribes a businessstrategy which definesand serves a market’sneeds for speed, con-venience, flexibility andother value-added at-tributes by changing theway in which the func-tion embodied in prod-ucts is delivered.

Servicizing:The emergence of product-based serviceswhich blur the distinction betweenmanufacturing and traditional servicesector activities.

Extended Product Responsibility:The principle that actors along the productchain share responsibility for the lifecycleenvironmental impacts of the wholeproduct system. The greater the ability ofan actor to affect the impact, the greaterthe responsibility.

EXTRACTIONPRIMARY

PRODUCTIONMANUFACTURING

WHOLESALE/RETAIL

USE COLLECTION

reuse

remanufacturing

recycling

Transportation

Transportation

Figure ES-1: The product lifecycle. EPR is a lifecycle-based concept.



The link between servicizing and EPR isthat both require manufacturers or serviceproviders to extend their involvement with,and responsibility for, the product to phasesof the lifecycle outside the traditional seller-buyer relationship. If servicizing containswithin it potential environmental benefits, itis because this altered relationship with theproduct drives superior environmental per-formance — in short, because servicizingdrives EPR.

Achieving EPR in a non-regulatory contextmeans that the market must act to align en-vironmental responsibility and incentives toimprove environmental performance withthose actors who have the ability to reducethe lifecycle impacts in question. There arethree means by which environmental re-sponsibility or incentives might be placedupon the manufacturer or service provider:

• when the business arrangement servesto internalize use or disposal costs;

• when the product in question has sig-nificant value at end-of-life;

• when provision of the product is viewedas a cost, rather than a profit, center.

Does servicizing lead toEPR?EPR is a lifecycle-based concept, and it isappropriate to employ a lifecycle frameworkexplicitly in assessing the linkages betweenservicizing and EPR. Further, a focus on theproduct lifecycle or the product system isappropriate because it highlights the abso-lute environmental impacts associated withthe manufacture, use and disposal of a par-ticular product in the economy. If serviciz-ing is to be meaningful as a route to eco-efficiency, it must reduce these absolute im-pacts — not simply create a larger value-added to spread across the same environ-mental burden.

Using a lifecycle framework, the potential,generic means by which use and non-use

environmental impact reductions may beachieved over any product’s lifecycle are setout. The potential for servicizing to achieveeach type of reduction is discussed in termsof the three categories of economic incen-tives. As depicted in Table ES-1 below,servicizing has the potential to create situa-tions in which these economic incentives toEPR arise.

An examination of the experiences of sevenfirms with servicizing, however, shows thatthe simple picture of “economic stimulusand firm response” which our theoretical,lifecycle-based analysis depicts is signifi-cantly more complicated in the real world.These complications are likely to have sig-nificant implications for the ability of servi-cizing to drive EPR:

• Among the case study firms, the rela-tionship between manufacturing andservice provision exists on a spectrumfrom near-total autonomy to near-totalintegration. Autonomous operationsavoid many potential conflicts betweentraditional sales and manufacturing unitson the one hand and service provisionon the other. These conflicts tend toarise when servicizing has the effect ofdecoupling product volume from prof-its. Autonomy is also, however, likely todiminish the possibility that servicizingwill drive environmental gains in prod-uct design and manufacturing methods.

Servicizing has the potential to createsituations in which. . .economic incentivesto EPR arise. . .{but this] simple picture of“economic stimulus and firm response” isconsiderably more complicated in the realworld.


Table 1: Possible reductions in environmental impacts derived from servicizing

Source of impactreductions Conditions to achieve reductions Examples (real and hypothetical)

Via product designUse related environmental costs are internalized, andthese costs may be reduced by better design ofproduct.

A manufacturer provides refrigeration services on a fixed fee basis. Aselectricity costs are a substantial portion of the costs of providing theservice, the manufacturer has incentive to produce a more efficient unit.

Via increased turnoverServicizing drives more rapid turnover of productstock in use combined with progressive efficiencyimprovements in consecutive model years.

A major appliance market becomes servicized under leasing arrange-ments, concurrent with mandated efficiency improvements. Resale ofolder, “post-lease” units is prohibited.

An energy services company (providing heating services at a fee in-dexed to outside temperature) replaces a heating system in a commer-cial building with more energy-efficient/cost-saving equipment.

Use

Im

pac

ts

Via more optimal opera-tion of existing product

(maintenance, training,process efficiency)

• Use-related environmental costs are internalized,and these costs may be reduced by more optimaloperation.

• Where the product is a cost rather than a profitcenter, and more optimal operation extends prod-uct life/reduces product consumed.

A cleaning services provider absorbs the costs of equipment breakdownand consumable supplies, providing incentive to train operators for moreoptimal operation of the machines.

A chemical management services provider is compensated on the basisof service delivered rather than the volume of chemicals sold. Chemicalsbecome a cost rather than a profit center; the provider has incentive toincrease process efficiency in the plant.

Via reductions in numberor volume of productmanufactured

(increased durability,larger service capacity,more efficient utilization)

The product is a cost rather than a profit center, pro-viding incentives for any of the following:

• more durable products

• products of a larger service capacity, via the re-alization of economies of scale

• more efficient utilization of products in use

A manufacturer of commercial laundry equipment offers “launderingservices” to large customers, guaranteeing machine availability and agiven service capacity. The manufacturer thus has an incentive to pro-vide large-capacity, durable machines which reduce maintenance costs.

Via reductions in the vol-ume of materials mobi-lized per unit

(reclamation activities)

The product has economic value at end-of-life, orwhere end-of-life costs are internalized — in eithercase stimulating reclamation activities.

No

n-

Use

Im

pac

ts

Via improved environ-mental performance ofnon-use processes. (esp.disposal impacts; recla-mation activities)


A manufacturer and provider of desktop computing services guaranteesa two-year upgrade cycle to its customers, taking back obsolete equip-ment and incurring responsibility for its disposal. The provider has an in-centive to treat this equipment as an asset, minimizing disposal costsand maximizing savings from recycling and reuse of viable components.This reduces virgin material employed in the manufacture of “new units.”It also reduces disposal impacts of end-of-life units and may improveenvironmental performance of primary and product manufacturing.



If service units have no linkage withmanufacturing units, there is no readymechanism whereby economic incen-tives arising from service activities canbe transmitted to design and manufac-turing activities

• The practice of lifecycle design is acomplex process requiring close inte-gration across business functions andspecialized decision-support tools. Ab-sent this capability within the firm, eventhe presence of an economic incentivemay not lead to effective practice oflifecycle design. This, in turn, will di-minish the prospects of realizing thepotential environmental gains associ-ated with servicing and, more generally,EPR.

Finally, not every servicizing situation givesrise to the three economic incentives — in-ternalized use or disposal costs, high eco-nomic value in the end-of-life good, or therendering of a product into a cost rather thana profit center.

Experience with servicizing also revealsthat, although servicized product offeringsmay be increasing, market barriers to itssuccessful practice can be significant. Fromthe buyer’s perspective, servicized productstypically demand closer coordination with,and trust in, suppliers, as well as a more so-phisticated understanding of costs than istypical of the conventional seller-buyer re-lationship. Where technological or regula-tory change is rapid, e.g., in telecommuni-cations and electronics, these barriers di-minish relative to the customers’ needs forspecialist services and knowledge whichthey lack or find increasingly difficult tomaintain in-house. Given a relatively stableproduct technology or business environ-ment, e.g., autos, white goods, servicizedproducts seem to have more difficulty gain-ing market acceptance

Roles for governmentThe emergence of product-based services —servicizing — is a phenomenon in whichpublic policy thus far has played little role.However, policy does have a number ofroles to maximize the prospects of the po-tential environmental gains implicit in theemergence of product-based services — andperhaps, in making the servicized productmore attractive in markets where acceptanceis most difficult.

Explicit environmental policiesRegulatory measures can focus the attentionof firms on achieving environmental im-provements under servicizing. If one com-pares Europe to the U.S. from a policystandpoint, it is clear that European initia-tives in the areas of EPR and product policyare both older and more aggressive. Thoughthese policies have received their share ofcriticism, they have undoubtedly focused theattention of firms on providing environ-mentally beneficial end-of-life services.

While the U.S. seems unlikely to pursue theEuropean approach, at least at the federallevel, policies which incorporate the socialcosts of materials extraction and disposalinto the purchase price of products are likelyto have two effects: (1) building furthermarket demand for decoupling ownershipfrom product use; and (2) building demandfor lifecycle management as an explicitcomponent of service offerings. Such poli-cies include, for example:

• Removing virgin material subsidies,explicit and inherent. Any policy thatsubsidizes virgin materials extractionand use to the disadvantage of reuse,remanufacture, and recycle of secon-dary materials tends to add net envi-ronmental burden. More materialthroughput means more extraction, andmore extraction means more emissions.Thus, as a general statement, govern-ment subsidies via below-market con-cessions on public lands for petroleum,minerals and forestry activities works to


the disadvantage of dematerialization.The converse is also true: policieswhich remove economic privilege fromsuch activities support materials recla-mation. In short, subsidies that reducethe cost of making new "stuff" are in-consistent with efforts to steer theeconomy away from goods and towardmore service-oriented modes of enter-prise.

• Remove disposal subsidies. At theother end of the product cycle are dis-posal subsidies. Government policy thatartificially reduces the cost of productdisposal runs counter to extracting envi-ronmental gains from servicizing. Inlessening the cost of outright productdisposal, end-of-life reclamation ac-tivities (recycling, remanufacturing, re-use) are placed at a competitive disad-vantage. End-of-life reclamation activi-ties are a key means by which environ-mental gains can be derived from servi-cizing.

• Driving efficiency improvements is anobvious role for environmental productpolicy when servicizing drives morerapid turnover of a durable good withhigh use-related impacts. If coupled

with tax schemes which encourage thisturnover and policies which incentivizereclamation activities, gains can bemaximized.

TaxesAs we have seen, decoupling ownershipfrom product use is a key driver of servi-cizing. Any tax policy — credit, deductions,accelerated depreciation, for example —that favors commercial or household equip-ment ownership to the disadvantage ofequipment leasing represents an impedimentto servicizing products. In contrast, tax poli-cies that favor retention of ownership of du-rable goods by producers or sellers is sup-portive of servicized arrangements. Thesepolicies give producers the incentive to en-gage in reclamation activities at the end ofproduct life.

DocumentationThis study represents only a start in under-standing the full scope of how servicizing isunfolding and what ramifications it holds forenvironmental benefits. Though rich in in-sights, the cases we evaluated here are fewin number. A valuable government role issupport for more documentation of the kindpresented here. Questions to be addressedinclude: Are there other sectors where theservice transition is observable? Do thegeneralizations that emerge from this analy-sis hold up in these sectors? What are thespecific seller -buyer arrangements — in-cluding the specific financial and contrac-tual arrangements — that will secure the en-vironmental gains achievable under certainforms of servicizing? How can environ-mental metrics, fixed management fees andpricing per unit of service (e.g., per paintedcar, per cleaned circuit board) be mobilizedto realize the potential environmental gainsof servicizing enterprises? Case studies,model contracts, and more quantitative envi-ronmental analyses will inform both policyand private sector decision-making.

ConvenorPotential service providers will benefit fromlearning and emulating other providers. This

Government and policy roles:

Explicit environmental policies(aside from mandated responsibility,these include removal of virgin materialand disposal subsidies, and drivingproduct efficiency improvements.)

Tax policy which favors producer, notcustomer, ownership of durable goods.

Convenor and facilitator

Documentation

Research



is amply demonstrated in the case of chemi-cal management service (CMS) whereworkshops organized by the ChemicalStrategies Partnership have provided valu-able fora for both sellers and buyers in ad-vancing chemical management services.One can envision government playing con-venor of such fora for a number of otherservicizing sectors. Of course, there arelimitations: “first movers” may be reluctantto share strategies aimed at building a strongfoothold among customers in an emergingmarket. Thus, timing and expectations ofsuch initiatives must be carefully managed.

Research“Functionality” is in the eyes of the cus-tomer. This means that the marketing offunctionality must occur with a clear senseof how product users perceive and measurefunctional value. Transforming productowners into non-owner product users isneither easy nor automatic, even when theeconomics are compelling. Even under thebottom-line mindset of most managers, evenequipment leasing may be stigmatized forcultural reasons. In the household sector, itmay be relatively easy to envision the be-havioral changes necessary to transitionfrom washing machine or refrigerator own-ership to washing and cooling services. Butwhat about autos, with their brand equityand prestige factors that accompany owner-ship? And internal to the enterprise, thechanges required to reorient traditionalproduct and sales-driven organizations to aservice-based mentality presents an array ofresearch questions. In this sense governmentcan play a valuable role in defining the op-portunities and limits for building buyer andbusiness acceptance for servicized offerings.

Finally, while we have focused almost ex-clusively in this study on the transformationof manufacturing firms to service-orientedorganizations, the role for new enterprisesformed from the outset as functionality-based businesses should not be overlooked.These are the new breed of car-sharing,computer equipment leasing, home tele-communications, and chemical services

firms which were never producers of mate-rial goods. Nonetheless, their role as aggre-gators, marketers, and middlemen merits theattention of researchers and policymakers.Creating favorable business conditions fortheir formation and success is another vehi-cle for fostering the product-to-service tran-sition already emergent in manufacturingindustries.



1. Services and the Environment

The growing importanceof servicesStructural economic changes in the U.S. andother advanced industrial economies in thepost-war era have been dramatic, particu-larly since 1970. In the U.S. and Europe,manufacturing’s relative position as an eco-nomic lead sector has declined and serviceshave risen to new prominence.

Once called the “tertiary sector,” after theprimary extractive sector and secondarymanufacturing sectors, the service sector isanything but tertiary in the U.S. economy(Figure 1). Narrowly defined, the sector’srelative contribution to U.S.GDP has in-creased by over 200% since 1950. Over thepast decade, manufacturing employment hasshrunk at an average annual rate of 0.3%while service employment has grown at anannual rate of 4.2%. These changes havecreated enormous opportunities for entre-preneurs and new national wealth on the onehand — and huge social costs attendant tothe decline of traditional industries andchallenges for public policy on the other.

Challenges and opportuni-ties for environmentalpolicySociety’s impact on the environment is, ofcourse, intimately linked to economic activ-ity; it is thus of little surprise that this mix-ture of opportunities and challenges is re-flected in the environmental implications ofthis structural transformation:

• From the standpoint of environmentalprotection, any structural change in theeconomy is of keen interest and con-cern. As certain economic activities be-come more prominent, so too do theirenvironmental impacts. The traditional

system of environmental protectionheavily focused on the manufacturingsector must be revisited to reflect thisgrowing dominance of the service sec-tor.

• The opportunities for environmentalgains seem impressive. In very generalterms, the service and information-based economy may be a means to di-vorce economic growth from growth inmaterial and energy throughput and en-vironmental degradation. Measuringand realizing these potential benefits isa major policy challenge.

Figure 1: Structural change in the U.S. economy

0

10

20

30

40

50

60

70

1950 1970 1997

con

trib

uti

on

to

GD

P (

pe

rce

nt)

manufacturing

services-narrow

services-broad

Source: U.S. Bureau of Economic Analysis

In this section, references to services follow the U.S. Bureau ofEconomic Analysis definitions. Services narrowly defined includeeconomic entities and activities such as hotels and lodging;entertainment; auto repair; membership organizations; and personal,business, legal, educational, and health services. Services broadlydefined also include transportation and utilities, wholesale and retailsales, financial services and real estate.


The environmental opportunities presentedby a service transition have been the sourceof much general discussion, but seriousanalysis is just beginning. At the least, it isfair to say that the simplest, most optimisticview — a service economy is a clean econ-omy — is incorrect. As it now stands, aservice economy is better thought of as avalue-added layer resting upon a material-based, industrial economy. All else equal,growth in services may be less environ-mentally problematic than growth in manu-

facturing. But that is not sufficient whensociety already exceeds environmental local,regional or global limits. If services are toproduce a greener economy, it will be be-cause they change the ways in which prod-ucts are made, used and disposed of — orbecause, in some cases, they supplant physi-cal products altogether.

While the latter case may have receivedmore attention — e.g., the “dematerializa-tion” potential of information technologyvia reduced travel and transport of physicalgoods — the case in which services alter theways products are made, employed, anddisposed of is our primary focus. Thus, ex-amine critically the environmental implica-tions of an emerging class of product-basedservices, the potential they may have forachieving environmental benefits, and thepolicy changes which may be required to re-alize these benefits.

Product-Based Services“Traditional” services include economic ac-tivities such as the provision of lodging andentertainment; personal services (e.g., haircare); and legal, business, financial andhealth care services. These services tend to

rest on the provision of labor and expertise,not physical goods. They are typically de-livered by enterprises created at the outsetas service firms and offered at the site of theservice provider. Thus, the infrastructureand goods that supports them typically re-mains in the hands of the service provider,and their purchase involves relatively littlematerial flow. And indeed, growth in theservice sector — and the sustained expan-sion in the economy at large — has been ledby huge growth in information and tele-communications services. These are serviceswhich largely fit the traditional model ofenterprises delivering value with relativelylow material intensity.

Yet, it is increasingly clear that if the tradi-tional model of services was ever an ade-quate approximation, it is certainly nolonger so. With the service sector’s growthhas come increasing complexity and diver-sity. An important category of services —and one that appears increasingly prominent— is quite different from the traditional“pure” form. Driven by efforts to define orserve a market’s need for speed, conven-ience, flexibility, or cost savings, manymanufacturing firms have begun a processof reinvention that shifts their focus awayfrom product manufacture toward servicedelivery; that is, their products function ei-ther as a vehicle or platform for the serviceprovided.

Some of these product-based services arefamiliar, e.g., warrantees, maintenanceagreements on appliances, autos, and officefurniture. Others, such as those depicted inTable 2, are less familiar, more recently ar-rived in the marketplace. Chemical man-agement services (CMS) — essentially,outsourcing of chemical management in anindustrial plant — is a growing example ofproduct-based services. CMS firms promiseuse reductions to their customers, invertingthe traditional supplier-customer relation-ship from one where profits are tied to salesto one where profits are tied to efficiency(Reiskin, White and Johnson, 1998). Xerox— a company built on copier manufacture— now promotes itself as a document serv-ices company, focused on the integration ofdocument reproduction and storage withbusiness systems. And IBM’s belated aban-

Servicizing: the emergence of product-based services which blur the traditionaldistinction between manufacturing andtraditional service sector enterprises.



donment of its “mainframe” culture and re-invention as an “e-business” and “informa-tion solutions” company is perhaps the mostvivid example of this product-to-servicetransformation. But there are many othersthat are less dramatic and still in process,but collectively no less significant (Box 1).

For these traditional manufacturers,reengineering as service providers, one ef-fect is to extend and/or deepen their in-volvement with their product in all phases ofthe product lifecycle, not just its manufac-ture. Formal property rights may change asa result — in product-based services, thetraditional buyer/seller relationship is sof-tening and diversifying into a spectrum ofproperty rights arrangements, includingleasing, pooling, sharing and take-back(James, 1998). For example, a manufacturermay retain ownership of its product throughthe use phase via a leasing arrangement. Buteven if this does not happen, a service ori-entation necessarily involves a greater in-volvement with the product in its use phasethan does provision of the traditional “prod-uct-in-a box.”.

In all of these examples, the seemingly sim-ple question of whether customers are pur-chasing a product or a service becomesblurred. A blend of services with products,and vice-versa, is increasingly commoncommerce and a distinct class of “productservices” is emerging, particularly in thebusiness-to-business markets (Box 2). It isthis transformation— a phenomenon we call“servicizing” — and particularly its envi-ronmental implications that is the focus ofthis report.

Table 2: Examples of product-based services

Service (Sample pro-vider)

Description

Chemical man-agement services

(Castrol IndustrialNorth America)

Manages chemical procurement, delivery, in-spection, inventory, storage, labeling anddisposal for industrial customers. Seeks pro-cess efficiency improvements. Compensationcan be based on cost savings delivered, notvolume sold.

Document serv-ices

(Xerox)

Integrates document storage and reproduc-tion technology — Xerox’s traditional manu-facturing strength — with customer’s busi-ness systems to produce automated, just-in-time, customized document production.

Mobility Services

(Call-a-Car ~Netherlands)

On-demand car rental. A fleet of cars isowned by a membership organization; sub-scribers pay fixed costs and per-kilometer/perhour fees. Cars are reserved “on demand” viaa central reservation point.

Furnishing serv-ices

(Interface;DuPont FlooringSystems)

Interface experimented with an “EvergreenLease” program. Customers leased installedmodular carpet, which Interface undertook tomaintain to a given appearance standard withselective rotation or replacement (with recy-cling) of worn tiles. DuPont, in addition toleasing carpets, also provides a series ofcarpet-related services throughout the car-pet’s lifecycle.

Source: Case studies, Appendix A; Meijkamp, 1994

Box 1: How extensive are the “new services?”

Quantifying the current value of, and growth in, “servicizedproduct offerings” is difficult. Economic accounting for servicesis problematic in any case, and the blurred line between prod-ucts and services which servicizing represents only adds tothe difficulty. Beyond the gross and very aggregate figures de-picting an increasingly service-oriented economy cited above,a growth trend in servicized product offerings does seem clearanecdotally:

• Our case studies (Appendix A) provide evidence that newvarieties of service offerings are available from many in-dustrial sectors whose firms traditionally focused on theprovision of “product in a box.” This is reinforced by thewritings and case-study accounts of a growing literature inthe area of “eco-efficient services” (Stahel, 1997; Axt et al.,1994; Hinterberger et al., 1994)

• Outsourcing in the U.S. economy is a decade-long trend;the fact that firms can and do outsource innumerable serv-ices formerly performed in-house points to the existence ofgrowing offerings among non-traditional service provides,including firms historically defined principally as componentand materials suppliers to manufacturing and service enter-prises.


Figure 2: The Functional Economy

TransactionalEconomy

Functional orService

Economy

Servicizing

Examples:

Buying washers

Buying chemicals

Buying copiers

Buying cars

Examples:

Buying cleaning services

Buying chemical management services

Buying document reproductionservices

Buying “mobility” services

Box 2: What is driving growth in the new services?

The growth in product-based services can be viewed as one manifestation of an economic tran-sition away from fordist (mass and standardized) modes of production towards flexibility andcustomization of product offerings. Attendant to this transformation are significant changes whichhave emerged since the 1970s in the ways U.S. business thinks about creating value and gain-ing competitive advantage (Sibbet, 1997). The fordist focus of management — how to makemore goods more efficiently — has gradually shifted in competitive global markets to includequality and value-added as well. These management models focus on the organization — onideas of continuous organizational learning and agility, along with reengineering, outsourcing,supply chain management, and “virtual” organizations. Knowledge, information, and core com-petencies, rather than physical assets, increasingly define leadership enterprises. Firms are in-creasingly comfortable looking outside themselves for skills and services that are not their stra-tegic focus — and indeed, may be compelled to do so.

Product-based service offerings fit well with this new competitive model in numerous, often inter-related ways: (Several of these are addressed in greater detail in Section 3):

• Cost control. Purchasing a product-based service (e.g., chemical management services)rather than only a product (e.g., chemicals) can be a means of strategic outsourcing, replac-ing services previously performed in house with those provided by a specialist to whom theyare a core competency. Similarly, product leasing rather than purchase can be a means toexternalize the costs of capital expenditures, thereby improving the balance sheet of the en-terprise.

• Need for specialist skills. Rapid change in the information technology underlying businesssystems, increased requirements for integration of these systems, and increasing complexityin the regulatory and business environment in general increasingly require specialist skillswhich most firms find difficult to maintain in-house.

• Product differentiation. Production is increasingly mobile, but effective service delivery re-quires local knowledge and infrastructure. Product-based services thus can be used toachieve successful product differentiation and market advantage, even for manufacturers whoare not the lowest-cost producer.

Finally, environmental regulation in Europe (but not yet in the US) is increasingly fixing responsi-bility for end-of life treatment of the product upon the manufacturer. In various EC countries,packaging, automobiles, white goods, and electronics are, or may soon be, subject to take-backrequirement. These regulations force manufacturers to add end-of-life services to their productofferings, typically implemented through PROs (Producer Responsibility Organizations). In theUS, however, environmental regulations have made firms concerned with the need to controlpotential liabilities, spurring demand for specialist, product-based services in certain areas, suchas chemicals



Product-Based Servicesand the “FunctionalEconomy”Clearly, the service economy is steadilystretching its boundaries. A useful way toview this growth in services is that ofchange from the sale of product to the saleof function or utility. (See Box 3 for onetaxonomy of different types of services.) Ithas been suggested that in today’s market,where mobility and flexibility are of highvalue, what the customer ultimately wants isnot ownership of products, but the utility orfunctions provided by the products. (Friend,1994 & 1996; Pantzar, 1994; Margetta,1997; Popov and DeSimone, 1997): AsHawken (1993) has observed:

“What we want from these products isnot ownership per se, but the servicethe products provide; transportationfrom our car, cold beer from the refrig-erator, news or entertainment from ourtelevision.”

One must be careful not to overstate thiscase. Consumer preference for ownership ofcertain products, especially those withstrong brand signals, is in fact deeply rootedin subjective needs for security, control,prestige and status (See AB Electrolux,Appendix A). But it is certainly true thatthe objective economic worth of products isbased upon the function they deliver. Thisfunctional. or utility-based view of productconsumption, is finding increasing expres-sion in the business-to-business marketswhere functionality and cost-effectiveness— not prestige or status— dominate. Forexample:

• Office equipment customers may wantmaintenance, repair, upgrade, and op-erations assistance along with the hard-ware itself, including computer andcomputer-related hardware and soft-ware.

• Commercial cleaning service firms maywant their equipment customized,maintained, upgraded, and removed as

their needs change week to week andmonth to month.

• Industrial firms may want to extract thevalue of chemicals as cleaners, de-greasers, and metal coaters withoutworry about the procurement, storage,labeling, permitting, and waste disposalassociated with chemical use.

This shift in the manufacturer’s role fromproduct provision to service provider hasbeen called by other authors “functionaliza-tion” or “functional economy” (Stahel 1997;Ayers, 1998) (Figure 2). In this study, wecall it “servicizing” in order to emphasizethat it is a dynamic state of change from apure product model toward a more service-oriented business model. By our definition,both enterprises and products may be in theprocess of servicizing.

The Functional Economyas Green EconomyA functional economy has been equatedwith the idea of a greener, more eco-efficient economy. Stahel (1997) states thisexplicitly. He notes that a functional econ-omy is not only one in which customers areusers of functions and services rather thanconsumers of products, but one that

“. . .optimizes the use (or function) ofgoods and services and thus the man-agement of existing wealth (goods,knowledge, and nature). The economicobjective of the functional economy isto create the highest possible use valuefor the longest possible time while con-suming as few material resources andenergy as possible.”

This idea that “eco-efficiency” — extractingmore value per unit of material input — canarise or be facilitated by a service transitionis increasingly popular. (Popov and DeSi-mone, 1997; Hinterberger et al., 1994). Thisview frequently cites the case of the “servi-cized product” in which the manufacturerretains ownership of the product throughout


its lifecycle, ensuring proper end-of-lifemanagement, and driving increased durabil-ity, remanufacturing, materials recycling,and more efficient utilization of the productstock.

More generally, the potential for eco-efficiency gains from servicizing lie in thecloser alliance between seller and buyer,producer and customer, that is one of the de-fining elements of the servicizing enterprise.This relationship is the vehicle throughwhich information and knowledge flowbetween the two parties, typically in two-way fashion. When a firm’s product be-comes a servant to the solution that its cus-tomer seek rather than an end in itself, thenchanges in the product — in its nature, its

design, its disposition — are far more likely.Where less of a product, or a different prod-uct altogether, is capable of delivering equalor greater value, the firm which has servi-cized will make the indicated changes. Inthis solution-based mindset lies the seeds ofdematerialization. As we see later, the ex-tent to which environmental gains areachieved through such dematerialization de-pend on the nature of the servicized productand the particular set of incentives faced bythe buyer and seller.

Analysis of the relation of product-basedservices to eco-efficiency improvements,however, has largely remained at this level

of generality, and policy discussions areequally general. (James, 1998)

Focus and Approach ofThis StudyAgainst this background of uncertainty,three points are clear:

• The service transition represents an im-portant and ongoing structural changein the U.S. economy. More than simplygrowth in traditional services, this tran-sition has increased the diversity andcomplexity of service offerings, and isbeginning to blur the line between“products” and “services.”

• The services transition presents impor-tant questions to policy-makers. A cru-cial question regarding the “greening”potential of an increasingly service-based economy is how services maybring about changes in the product en-vironmental lifecycle by affecting theirmanufacture, use and disposition.

• Precisely because they are product-based, an emerging class of servicesseems to have particular potential toachieve these changes in the productlifecycle. In “functionalizing” the econ-omy, product-based services have beenargued to promote eco-efficiency.

Thus far, this proposition has been subjectto little detailed analysis. There is a clearneed to examine the environmental implica-tions of these product-based services, thepotential they may have for achieving envi-ronmental benefits, and the policy effortswhich may be required to realize these bene-fits.

This study is an effort to begin such ananalysis, focusing on product-based servicesin the business-to-business markets. To thisend, our approach in this study is as follows:

• Section 2 examines at the linkage be-tween servicizing and extended productresponsibility (EPR), the emerging no-

“In “functionalizing” the economy,product-based services have been arguedto promote eco-efficiency.

Thus far, this proposition has been subjectto little detailed analysis. There is a clearneed to examine the environmentalimplications of these product-basedservices, the potential they may have forachieving environmental benefits, and thepolicy efforts which may be required torealize these benefits.

This study is an effort to begin such ananalysis.



tion that reducing product lifecycle im-pacts is a shared task for all who are in-volved over the product lifecycle. EPRis the principle that the greater the abil-ity of an actor to reduce environmentalimpacts within any phase of the life-cyle, the greater the responsibility to doso.

• Section 3 discusses the drivers, chal-lenges and organizational responses toservicizing, focusing on why firmschose this route and what obstaclesmust be overcome.

• Section 4 turns to a discussion of envi-ronmental impacts of servicizing, usinga simple conceptual lifecycle model toexplore under what circumstances, andby what means, servicized productsmay yield environmental gains.

• Finally, in Section 5, we conclude withsome thoughts on the policy implica-tions of our study: what options areavailable for tapping the potential ofservicizing to deliver environmentalbenefits?

All sections are informed by the set of sevencase studies of servicizing firms that appearin Appendix A.


Box 3: A Taxonomy of Services

ServicesServices

Non-materialServices (e.g., banks,

hair salons)

Material(Product-

Based) Services

DematerializedServices

(substantiallyeliminating the need

for physical product —e.g., centralized

voice mail)Product Function

Services (service provider ownsphysical good — e.g..,

traditional & non-traditional leasing)

Product ExtensionServices

(customer owns physicalgood — e.g., warranties,maintenance agreements,IT integration services)

Scope of thisstudy

At the most elementary level, it is useful to divide services into two major categories — material (i.e.,product-based) and non-material:

A. Non-material servicesNon-material services are delivered via a supporting infrastructure and goods that remain in the hands ofthe service provider. Their value to the customer is totally — or near totally — tied to the information ortechnology embodied in the transaction. Non-material services include health care, hair salons, insuranceand banking – essentially, the whole range of activities normally associated with the tertiary sector of theeconomy. Many, such health, lifestyle, and financial services, rely on relatively little material input. Oth-ers, such as transport and recreation, may be more material-dependent, but still well short of the materialinputs associated with product extension and product utility services described earlier.

Non-material services include as a sub-category dematerialized services. In these cases, technologyhas obviated or drastically reduced the need for products altogether. In other words, the function oncefulfilled by a product is now fulfilled essentially by information. One example is that of centralized voicemail supplanting answering machines (in which the messaging service once provided by a desktop ma-chine is now provided by a combination of remote hardware and information transmission over the phoneline. Compared to desktop answering machines, the hardware requirements are much reduced on a per-user basis.) Another example is the genetically-engineered pest-resistant seed. Here, instead of relianceon physical inputs (pesticides and fungicides) to deliver the desired service (crop protection), genetic in-formation is encoded in the seed itself to defend against insects or disease.

B. Material, or product-based, services,Material, or product-based, services by contrast, use an established, physical product as the vehicle, orplatform, for delivering services related to the product for customers. For example, chemical managementservices center around the use of chemicals in a plant. Network integration services center around com-puter and telecom hardware and software systems. Material services incorporate both product-extensionand product function services. These are the focus of our work, and are described in more detail on thefacing page.



Service taxonomy (cont’d)

B1. Product Extension Services. Product extension services are characterized by customer ownership ofthe physical good, and thus represent only a minimal departure from a traditional, pure sell-buy arrangementwhich places full responsibility for the product in the hands of the buyer. Product extension services enhancethe utility that ownership of the product delivers to the customer. The most familiar versions of these servicesinclude warranties and maintenance agreements.

In the case where the product must integrate into a complex environment, product extension services canmean managing the interface between the product and its work environment, hence maximizing the product’sefficiency as well as effectiveness. The case of Xerox’s document services, where document managementactivities beyond stand-alone copying are integrated within a networked and increasingly digital enterprise, issuch an example. Another is Herman Miller’s Coro commercial furnishings services business; Coro’s post-occupancy services manage moves and inventory in customer’s high-churn office environments. (See Ap-pendix for case studies)

Characteristics likely to make products particularly suited for this type of servicizing include:

• Material difficult to handle and/or requiring regular maintenance. Industrial cleaning and officeequipment are examples of items with frequent maintenance and repair requirements.

• Products requiring extensive networking and/or technological expertise. Information technologyand computer networks demand integration and maintenance that are often more time-consuming andmore costly than the initial purchase of the equipment. In such cases, product providers can often createcompetitive advantage by also providing the integration and maintenance service needs associated withthese products; customers can obtain “one-stop-shopping” solutions.

B2. Product Function Services. In this category of services, ownership of goods resides with the serviceprovider. Customers have the use of the product, but maintenance as well as end-of-life disposition are theresponsibility of the service provider. Thus, the customer gains the function of the product is provided withoutownership. Thus, traditional rental or leasing arrangements fall into this category. Product function servicescan be seen as a temporary flow or transfer of material goods from the provider to the customer (Graedel,1997).

Also in this category are non-traditional leasing arrangements. AB Electrolux, for example, is experimentingwith a “functional sales” concept, in which customers pay a monthly fee for the guaranteed “function” deliv-ered by a product — e.g., professional kitchen equipment. In contrast to a traditional product lease, the ar-rangement is monthly, and the fee is for a guaranteed function rather than a particular piece of equipment.

From the customer’s perspective, products particularly suited to this kind of servicizing include the following:

• Product with lifetime greater than average customer use period. Products such as elevators and of-fice furniture, which often outlive the business or organization that uses them. The Swiss companySchindler AG began to sell “vertical transport” services to take advantage of the longevity of elevators. Itsleasing contracts include maintenance and services, and in 1992 accounted for 70% of Schindler’s reve-nues. (Weizsacker, Lovins and Lovins, 1997)

• Products with low utilization rate and/or heavy infrastructure requirements. Automobiles, for exam-ple, are often inconvenient to own because of cost and/or outright absence of parking space. Traditionalcar rental is a well-known of example of auto servicizing, wherein the customer is a temporary user whoextracts the utility (mobility) value of the product on a temporary basis and is charged on a time and/ordistance basis. Leasing, of course, is a variant on this arrangement. Taking traditional arrangements onestep farther, the emerging “Mobility Services” enterprise provides the customer with the utility of a vehicle“on demand” without being encumbered with vehicle storage, insurance, maintenance, or repair. Serv-ices such as Call-a-Car in the Netherlands and Honda’s Intelligent Community Vehicle System are ex-amples of this newer service concept. Because easy accessibility of vehicles is crucial to customer sat-isfaction, mobility services enterprises require real-time information regarding demand.

• Products characterized by rapid obsolescence. Personal computers, for example, can become ob-solete so quickly that it often discourages consumer investment. For these and similar products, serviceswhere the product supplier will provide periodic upgrades may gain a market advantage. For example,IBM has created a service called SystemCare, which includes an option that allows buyers to upgradetheir computers after 24 months (Narisetti 1997).



2. The Servicizing/EPR Linkage

Extended ProductResponsibilityExtended product responsibility (EPR) isthe principle that actors along the productchain share responsibility for the lifecycleenvironmental impacts of the whole productsystem. The greater the ability of the actorto influence the environmental impacts ofthe product system, the greater the share ofresponsibility for addressing those impactsshould be (PCSD, 1996).

• Consumers, for example, can affect en-vironmental impacts of product systemsin a number of ways: via purchasechoices (i.e., choosing greener or moreefficient products); via maintenance andenvironmentally conscious operation ofdurable goods and appliances (e.g.,proper maintenance of automobiles im-proves fuel efficiency); and via disposal(e.g., recycling to the extent possible).

• Suppliers may have significant abilityto influence the environmental impactsembodied in the materials and compo-nents they provide to product manu-facturers. A supplier may have thechoice, for example, between obtaininghardwood from a sustainably managedforest, or one subject to destructive for-estry practices. Suppliers may applypollution prevention principles to theirown manufacturing operations.

• Product manufacturers are situated toreduce lifecycle environmental impactsof their products through their influenceon product design, material choices,manufacturing processes, and productdelivery (EPA, 1998a). Thus, for manu-facturers, EPR is pollution preventionapplied across the product lifecycle,extending well beyond the factory

gates. Further, it is pollution preventionapplied across business functions; ap-plication of lifecycle approaches inmanufacturing necessarily extends be-yond the EHS department to includeproduct designers and production engi-neers, supply and operations, and prod-uct distribution and support (Stoughtonet al., 1998).

Manufacturer Responsibility:US and EuropeMany of the most commonly cited examplesof manufacturer EPR involve take-back ac-tivities. As the matrix below (Table 3)makes clear, however, manufacturer respon-sibility is not limited to these end-of-life ortake-back activities. What these diverseEPR activities have in common is an exten-sion of responsibility for, and involvementwith, the product beyond historical practice,often into phases of the lifecycle in whichthe manufacturer has traditionally had littleor no involvement. This may involvechanges in formal property rights.

To date in the US, extensions of manufac-turer responsibility are, for the most part,voluntary — albeit often inspired by the les-sons learned in dealing with mandatesabroad or by the desire to forestall mandatesat home. In Europe and elsewhere, take-back and other regulations are assigning re-sponsibility for elements of lifecycle per-

Extended Product Responsibility:the principle that actors along the productchain share responsibility for productlifecycle environmental impacts. Thegreater the ability of an actor to affect theimpact, the greater the responsibility.


formance to actors in the product lifecycle.This mandating of “extended responsibility”has focused largely on end-of-life impactsand has assigned responsibility primarily tomanufacturers. This focus is reflected in theterminology employed — in Europe, EPRstands for “extended producer responsibil-ity.”

Table 3 summarizes categories of EPR ac-tivity by manufacturing firms and providesexamples of specific offerings and pro-grams.

Table 3: Examples of Manufacturer Extended ProductResponsibility in the U.S.

Corporate or Industry-wide Stewardship Programs

Voluntary measures ad-dressing environmentalmanagement systems anddownstream environmentaland safety aspects of prod-uct use (product steward-ship)

• Chemical Manufacturer’s Asso-ciation Responsible Care initia-tive

• User training programs (e.g.,Monsanto) and user site audits(e.g., DuPont)

Take-Back or Buy-Back Programs/Initiatives

Take-back of product, prod-uct components, or packag-ing for reuse, recycling orwaste management.

• Product take-back by Nortel,IBM, and Xerox

• (European auto and electronicsinitiatives)

Leasing Systems

Ownership of (usually dura-ble) materials and productsis retained by the manufac-turer or supplier

• Interface’s carpet leasing pro-gram

• Emergent leasing systems forPCs and other electronicequipment

Lifecycle Management

Approaches to product de-sign and development andmanagement which attemptto minimize lifecycle impactsof products, typically includ-ing working with suppliersand users, and working toincorporate reused or recy-cled materials

• IBM’s Environmentally Con-scious Products Program

• Nortel’s Design for Environ-ment Initiative

• Xerox’s Environmental Leader-ship Program

Partnerships for Recycling/Waste Management

Cooperation among compa-nies in the product chain tocreate common systems forrecycling and waste man-agement.

• Rechargeable Battery Recy-cling Corporation (rechargeablebattery producers)

• Vehicle Recycling Partnership(VRP) (Ford, GM, and Chrys-ler)

Source: Adapted from Extended Product Responsibility: A NewPrinciple for Product-Oriented Pollution Prevention. (Davis andWitt, 1997). For more examples, see case studies, Appendix A.

Environmental benefits of EPRThe environmental benefits deriving fromwidespread application of EPR potentiallyinclude more efficient use of resources,cleaner products and technologies, more ef-ficient manufacturing, reduced environ-mental hazards associated with storage,shipping, handling and disposal, increasedrecycling and recovery, and greener con-sumption (PCSD, 1996).

These benefits arise from the assumption ofresponsibility for lifecycle impact reduc-tions by those in a position to effect suchreductions. The allocation — or internaliza-tion— of responsibility in the product chainshould lead to greater efficiency in the utili-zation of resources across the lifecycle, witha concomitant reduction in waste-relatedenvironmental impacts at any given level ofeconomic activity.

Often this responsibility was previously un-allocated — with manufacturers’ responsi-bility for goods ending at the point of sale,and consumers’ responsibility ending whenthe good is no longer useful. In this case,society bears the externalities representedby waste, pollution, and resource depletionarising across the product lifecycle.

With internalization, the environmental im-pacts associated with process wastes, prod-uct disposal, or in-use impacts will representreal economic costs to actors who have theability to reduce these costs. In this sense,EPR can be thought of as a means of opera-tionalizing the “polluter pays principle” — aconcept well established in Europe. By as-signing responsibility according to the abil-ity of the actor to bring about environmentalimprovements, however, EPR goes beyondthe polluter pays principle. For example,while consumers may be responsible,strictly speaking, for the use-related impactsof their automobiles, under EPR both con-sumers and manufacturers share the burdenfor reducing these impacts — consumers viapurchase decisions and driving habits,manufacturers via vehicle and engine de-sign.

Figure 3 depicts an EPR scheme in whichthe manufacturer accepts (or is assigned) re-sponsibility for (1) costs of breakdown andrepair during an extended warranty period,



and (2) disposal at end of life. Effectively,this means that the manufacturer assumesownership of the good at end of life, achange in typical property rights in whichthe manufacturer’s ownership ends at thepoint of sale. Because repair and disposalcosts are now internalized, the manufacturerhas incentives to reduce these costs by in-creasing product durability, reliability, recy-clability and remanufacturability. (This re-sembles European EPR schemes for durablegoods, where take-back obligations are as-signed. The scheme could apply to automo-biles, replacing the typical warrant associ-ated with auto purchase.

Servicizing and EPRWhat, then, is the relationship betweenservicizing and EPR? Servicizing is a busi-ness strategy which defines and serves amarket’s functional needs for speed, con-venience, flexibility, and other value-addedattributes. EPR is a principle whose appli-cation should result in lower lifecycle envi-ronmental impacts for products or productsystems. The intersection is that both re-quire manufacturers or service providers toextend their involvement with, and respon-sibility for, the product to phases in the life-cycle outside the traditional seller-buyer re-lationship.

If servicizing contains within it potential en-vironmental benefits, it is in large part be-cause this altered relationship with theproduct drives superior environmental per-formance — in short, because servicizingdrives EPR.

But does servicizing always lead to, or in-centivize, EPR? As the following discussionillustrates, there is no simple answer to thisquestion. Rather, the answer seems to bepotentially yes, in certain cases.

Potential economic incentives fromservicizing that drive environmentalimprovementAssuming that actors along the product life-cyle pursue voluntary EPR primarily for

economic reasons, then achieving EPR in anon-regulatory context means that the mar-ket must align responsibility and incentivesto improve environmental performance withthose actors who have the ability to reducethe lifecycle impacts in question.

Based on the discussion thus far, threesituations would appear to position servi-cizing as a vehicle which leads manufactur-ers (or service providers) to reduce lifecycle

environmental impacts. These are situationsin which the servicizing arrangement:

(1) results in internalizing use or disposalcosts;

(2) is driven by the economic value of theend-of-life good; or

(3) reconstitutes the product as a cost ratherthan a profit center.

Each of these scenarios is described below.All potentially lead to environmental impactreductions by providing economic incen-tives to increase the efficiency with whichresources are utilized in various phases ofthe lifecycle.1

1 Resource efficiency is a necessary attribute of a

more sustainable economy and underlies the“eco-efficiency” concept introduced by theWorld Business Council on Sustainable De-velopment (Schmidheiny, 1992). Eco-efficiency rests on the proposition that cur-rent industrial economies employ resourcesin extremely inefficient ways. It thus is possi-ble to decrease the environmental burden as-sociated with each unit of economic valuecreated by increasing the efficiency withwhich resources are utilized.

If servicizing contains within it potentialenvironmental benefits, it is in large partbecause this altered relationship with theproduct drives superior environmentalperformance — in short, becauseservicizing drives EPR.


Figure 3: Servicizing of a durable good: product take-back

Phase Design M anufacture Distribution Use M aintenance Disposal

CostBearer M anufacturer Custom er Society

Phase Design M anufacture Distribution Use M aintenance Disposal

CostBearer M anufacturer

Custom er — consum able supplies

M anufacturer — costs ofbreakdown & repair

M anufac-turer

Manufacturer’s incentives to increaserecyclability/remanufacturability

Manufacturer’s incentivesto increase durability/dependability

Outright purchase

Purchase with warranty &takeback

Source: Tellus Institute

Figure 4: Servicized PC Product Offering

Manufacture

Provide to different client

Product upgrade

Additional resources

Components,MaterialsSub-assemblies

PrimaryResources

Update/replace

recycle/remanufacture

Productprovision

Service/repair

Resell on used market

Disposal


Figure 5: Incentives in a traditional sales model versus a service model

Traditional RelationshipConflicting Incentives

SUPPLIER

Materialproducts

wants toincrease

BUYER

wants todecrease

Servicizing RelationshipAligned Incentives

SERVICEPROVIDER

value of servicesthrough products

wants toincrease

BUYER

wants toincrease

Source: Reiskin, White and Johnson, 1998.



Consistent with the focus of this work, thediscussions focus on servicizing as a busi-ness strategy with possible environmentalimplications, rather than a business strategypursued, or marketed with, an explicit envi-ronmental component.

Internalization of use or disposal costs

Some servicizing arrangements internalizeenvironmental costs associated with use ordisposal of the product. In such cases, themanufacturer has an incentive — in theory— to reduce these costs to improve thecompetitiveness of its product.

• An appliance manufacturer offers afixed-fee contract to provide commer-cial laundering services. Launderingconsumes significant amounts of waterand energy, both of which add to themanufacturer’s costs. In a competitivemarket for such services, the manu-facturer will have an incentive to pro-duce machines efficient in both waterand energy use. Reduced resource usewill lower costs and allow more com-petitive pricing or higher margins.

• A truck manufacturer leases vehicles ata fixed price per mile and includes allmaintenance and repair. Becausemaintenance and repair are now coststo the manufacturer, an incentive mayexist to build a more durable, lowermaintenance vehicle.

• If the truck manufacturer also incursdisposal costs, the manufacturer mayhave an incentive to design a more re-cyclable/remanufacturable vehicle.

Typically, the costs internalized will not bethe full social costs of resources consumedand wastes produced, but rather the directcosts of fuel, electricity or consumable sup-plies, and the economic costs of disposal.Cost internalization is thus partial, not full.The effectiveness of cost internalization as adriver to minimizing use and disposal im-pacts is likely to depend on: (1) the size ofthese costs relative to total costs and (2)

whether or not these costs can be passedthrough to the customer.

Economic value of end-of-life good

Some servicizing activities may be driven inpart by the economic value of the end-of-lifegood. The good may contain reusable com-ponents or valuable materials, embodyingenergy, labor and capital. In such cases, theservicizing activity may be motivated by theopportunity to recover this value by productreclamation activities — recycling, remanu-facturing, reuse. All have the effect of re-ducing end-of-life disposal impacts and re-

ducing the amount of virgin material andenergy mobilized to make the good.

This second scenario, of course, relates tothe previous one, in which a servicizing ar-rangement internalizes to the manufacturerthe disposal costs of a good. The firm mayin this case be driven to examine this end-of-life product as a potential asset, or tomake efforts to increase its value. Such ef-forts might include introducing design fordisassembly or upgradability. It should alsobe noted that the benefit of recovering em-bodied labor, material, or capital is likely todepend significantly on the costs of a recov-ery infrastructure. Where an existing infra-structure processes end-of-life goods or canbe adapted to this purpose, material or com-ponent recovery may be achievable at sig-nificantly lower cost than if a manufacturermust create such an infrastructure fromscratch.

Economic incentives to EPR which mayarise from servicizing:

internalization of use or disposal costs

recovery of economic value of an end-of-life good

transformation of the product into a costrather than a profit center


Figure 4 depicts a servicized product offer-ing for PCs, loosely modeled on IBM’sSystemXtra PC leasing program for com-mercial customers (see IBM case study,Appendix A). The manufacturer retainsownership of the machines throughout thelease period, and has in place a distributionand service system serving the customer on-site. Thus, the reverse logistics arrange-ments which permit product take-back andreclamation activities are already in place,and the manufacturer has incentive to re-cover value from post-lease machines —both because they are an owned asset, andbecause disposal incurs costs.

Product as cost, not profit center

Where the servicizing arrangement meansthat provision of the product is a cost, ratherthan a source of profit, the service providerwill have incentive to reduce the number ofunits employed to yield a given quantity ofservice.

• Consider, for example, a chemicalmanagement services (CMS) model inwhich the chemical supplier takes overaspects of chemical management fromthe chemical user (a manufacturer)(Figure 5). These activities range fromprocurement, delivery, and inventorycontrol to EH&S reporting and end-of-life management. In a typical supplier-customer relationship, the supplier’srevenues are driven by volume sold —an incentive perverse both to the manu-facturer’s best interests and those of theenvironment, which would be bestserved by chemical use reduction.

If the CMS provider’s compensation isbased on service provided and gain-sharing from provider-identified effi-ciency improvements in the manufac-turer’s processes, supplier and manu-facturer incentives become aligned. Thesupplier’s profitability is divorced fromvolume sold, and in fact increases whenchemical use decreases. And the cus-tomer enjoys the benefits of higher effi-ciencies and lower cost. In this model,the supplier-manufacturer relationshipbecomes an alliance in which eachpartner exploits their core competency.Such a relationship demands closer co-ordination and a greater degree of mu-tual trust than is typical of a standardsupplier-customer relationship.2

Servicizing does not always generatethese incentivesAgain, servicizing is a business strategywhich might move the firm into EPR activ-ity and yield environmental benefits. Thesebenefits derive from reallocation of propertyrights or responsibility across the productlifecycle and the consequent internalizationof environmental costs and benefits.

The existence in a servicizing situation ofone or more of the three incentives just dis-cussed would seem, a priori, to makeachieving these environmental benefits fromservicizing much more likely. These incen-tives define an alignment between economicincentives facing the firm and environmentalbenefits to society:

• when servicizing has the effect of inter-nalizing use or disposal costs;

• when the product concerned has sig-nificant end-of-life value;

• when servicizing renders product provi-sion into a cost rather than a profitcenter.

2 For a description of the CMS model, see John-

son, White and Hearne, 1997; Reiskin,White and Johnson, 1998; Votta, et al.,1998.

These incentives highlight possibilitiesfor, not assurances of, environmentalgains from servicizing. The situationsthemselves may not apply to any particularservicized product offering — and if theydo, the cause-and-effect relationships theydescribe (economic stimulus yields firmresponse) may be insufficiently strong toinfluence firm behavior.



These incentives highlight possibilities for,not assurances of, environmental gains fromservicizing. The three situations may notapply to a particular servicized product of-fering — and if they do, the cause and effectrelationships they describe (economicstimulus yields firm response) may be insuf-ficiently strong to influence firm behavior.

Section 4 looks at this question in detail.

Surmounting organizational barriersBeyond potentially giving rise to economicincentives which spur the manufacturer orservice provider to reduce product lifecycleenvironmental impacts, servicized productofferings may reduce organizational resis-tance to EPR.

Organizational resistance to extending in-volvement with a product beyond point-of-sale and historical practice has been identi-fied as a major barrier to increased manu-facturer responsibility in environmental im-pacts of products (Stoughton et al., 1998).This resistance is rooted in the changes im-plied by this extended involvement —changes in metrics of performance and hu-man capital requirements, the need for newforms of coordination across business func-tions, and the need for closer interactionwith other actors in the lifecycle chain.

If a firm voluntarily pursues servicizing ac-tivities, then this resistance has — prima fa-cie — been in some measure overcome bythe strength of the market and businessanalysis which led to the decision to “servi-cize” the product. A significant barrier toEPR practice — a reluctance to extend pro-ducer involvement with the product —in alllikelihood has been diminished.

•

As the case studies (Appendix A) andSection 3 make clear, these institutionalbarriers are surmountable. In certaincases, servicizing is driven by a discretemarket opportunity, or simply repre-sents a gradual evolution of existing of-ferings and engagement with the cus-tomer. In other cases (e.g., IBM,Xerox), servicizing is perceived as asurvival strategy in the market or, inthe case of DuPont, as part of a generalinnovation-seeking growth strategy in amature industry, chemical manufacture.

• It is clear, however, that integration ofEPR into servicizing activities is by nomeans automatic, even once the barrierto extended lifecycle involvement hasbeen overcome. Standard businessanalysis tools are not well-suited to al-low firms to assess the business case forEPR activity. Adding environmentalconsiderations to the product develop-ment cycle is often seen as lengtheningtime to market. Environmental and eco-nomic gains for the firm from EPR ac-tivities may not be reflected in the in-centives of individual departments orline businesses (Stoughton et al., 1998

Servicized product offerings may reduceorganizational resistance to EPR.



3. Servicizing Drivers, Challenges andOrganizational Responses

How does the market environment and na-ture of the product affect the drivers andchallenges of servicizing? How do firms re-spond and adapt organizationally? How domarket and product characteristics and or-ganizational response affect the possibilitythat servicizing will lead to EPR activity?These are critical questions whose answersmust inform any policy design process.

To explore these questions, we examinedseven companies spanning a diversity ofsectors, engaged in servicizing activity:

• AB Electrolux (Appliances and “func-tional sales”);

• Castrol Industrial North America (Lu-bricants and metal-working fluids andchemical management services);

• Coro (A Herman Miller business; post-occupancy furniture services);

• DuPont (diversified chemicals andchemical products; car-painting busi-ness and carpet services);

• IBM (computer hardware and softwareand “information solutions”);

• Radian International and Dow Chemi-cal (chemical management services andchemical manufacturing); and

• Xerox (document storage and repro-duction and “document services.”)

Case studies (Appendix A) of the first fivecompanies are based on interviews supple-mented with secondary material. The IBMand Xerox studies were based on publishedarticles and literature and company reports.

Drivers and Approachesto ServicizingWhat triggers the move toward a servicizingbusiness strategy or a servicized product of-fering? Our cases reveal several impetuses.In two cases — IBM and Xerox — a deci-sion was made at the CEO level to defineservice rather than product provision as thecenter of a new business strategy. The lead-ership of both companies felt that a serviceorientation was a survival strategy in theirrespective markets — and that it was betterto lead than to follow.

In IBM’s case, the company had accumu-lated spectacular losses in the early 1990s($18 billion by 1993), was widely perceivedas having lost touch with its customers, andhad clearly misjudged the significance ofthe personal computer and the consequencesof desktop computing of its traditionalmainframe hardware-and-software business.IBM had protected that business at hugeopportunity cost. In the case of Xerox, thecompany had successfully won back signifi-cant market share from competitors — butin defending its core light-lens copier busi-ness, the company had failed to capitalizeon a number of its own inventions and inno-vations.

Seven servicizing case studies: AB Electrolux Castrol Industrial North America Coro DuPont IBM Radian International/Dow Chemical Xerox


Both CEOs (Xerox’s Allaire and IBM’sGerstner) realized that technology was rap-idly redefining the markets their firmsserved — broadly, business managementsystems. A trend towards increasing inte-gration of previously distinct business sys-tems and hardware would progressively de-crease the utility of both firms’ stand-aloneproducts. This can been seen as a techno-logical deepening, that is, increased tech-nology infrastructure requirements, for thesebusiness functions. The specialist skills re-quired to acquire, integrate and service thisinfrastructure are increasingly difficult forcustomers to provide in-house. Thus, Xerox

began focusing on its document strategy,integrating document storage and reproduc-tion technology with customers’ businesssystems to produce automated, just-in-time,customized document production. IBM be-gan focusing on the hardware and softwareintegration underlying “e-business” (elec-tronic commerce).

This said, service provision did leveragetraditional product strengths in both cases.That is, both firms’ products were not aban-doned as much as redefined as vehicles tomeet customers’ functional needs. ForIBM, “e-business” exploits the company’straditional strengths in large-scale process-ing and storage. For Xerox, xerographic re-production is still a central part in its docu-ment strategy. Nonetheless, it is clear thatthe service reorientation of both firms re-quires a fundamental shift in corporate cul-

ture and market engagement — albeit a shiftstill ongoing, and one whose ultimate out-come remains uncertain.

In comparison to IBM and Xerox, techno-logical change is considerably slower in themarkets served by other firms in the casestudies — e.g., appliances, lubricants, proc-ess chemicals, diversified chemical-relatedproducts, office furnishings. While there issome willingness among customers in thesesectors to consider servicized product of-ferings as outsourcing options, their busi-ness environment is not changing so rapidlyas to demand specialist services from sup-pliers. In these markets, servicized productofferings replace services previously carriedout in-house. In such cases, the burdenseems to be much more on the service pro-vider to prove the economic benefits of theirofferings.

Thus, the servicizing approaches of fivefirms we studied — AB Electrolux, CastrolIndustrial, Coro, DuPont, Radian/Dow —may be characterized as more incremental.Their efforts may be viewed as (1) a moregradual evolution of existing lines of busi-ness and/or (2) a decision to pursue a spe-cific and relatively narrowly delineatedmarket opportunity as a new addition to ex-isting business.

• DuPont, as a car paint and carpet fibermanufacturer, is now implementing acar painting service and carpet leasingprogram.

• Coro identified post-occupancy fur-nishings as an untapped market; this isa stand-alone business pursued inde-pendent of manufacturing operations.

• Castrol initiated its chemical manage-ment service offerings to leverage thefocus of its industrial customers onoutsourcing — but this also representeda logical outgrowth of Castrol’s histori-cal engagement with the customer.

• Radian, too, is an incrementalist case.The firm entered chemical managementservices (CMS) as a growth strategyand pursues CMS as a discrete service

Firm approaches to servicizing range fromtop-down strategic reorientations togradualist approaches.

Rapidly changing business environmentsseem to facilitate market acceptance ofservicized product offerings.

Improving the environmentalperformance of the firm’s product was asignificant impetus to servicizing for only one of seven case study firms — AB Electrolux.



offering. CMS builds on Radian’sEH&S strengths. It does not, however,represent a radical change in the way inwhich Radian engages with its custom-ers or the market. Radian has alwaysbeen a consulting (services) organiza-tion, not a manufacturer — notwith-standing its brief alliance with Dow.

A number of the case study firms have areputation for environmental innovation(e.g., Herman Miller, Xerox) or have en-gaged in end-of-life, EPR activity in otheraspects of their business (e.g., product take-back by Xerox and IBM, Responsible Careat DuPont). However, improving the envi-ronmental performance of the firm’s productoffering has been a significant incentive toservicizing only for Electrolux. In this case,the original planning exercise which pro-duced the functional sales model was or-ganized by Electrolux’ corporate environ-mental affairs division. This, of course, doesnot mean that servicizing driven from thebusiness case cannot produce environmen-tally beneficial outcomes; Section 5 takes upthe question of how and when this mighthappen.

Internal Challenges andResponsesServicizing presents firms with challengesof organizational and cultural change.Transformation from a product-based to aservice-based enterprise often encountersinternal barriers which take time and re-sources to resolve. Traditional modes ofproduction and sales may present formida-ble hurdles.

Internal challengesFor a customer considering a servicizedproduct offering, the incentive is usually thespecialist expertise or economies of scalewhich the service provider can bring tobear. Effective application of this expertise,however, often requires the provider to ac-

quire a deeper (or broader) understanding ofcustomers’ business and production proc-esses relative to that required by traditionalproduct sales. This requirement brings withit not only new human resource require-ments — often in areas not previouslyhoused within the firm — but the addedchallenge of closer coordination with thecustomer. This coordination typicallycrosses a number of production departmentsor business functions. Thus, successfulservicizing requires the provider to act moreas ally and partner than as vendor. This, inturn, requires adjustments on the part ofboth parties..

Where one-time product sales (discrete,tangible transactions) are replaced by con-tracts operating over an extended period oftime, traditional incentives and metrics cancease to reflect the real drivers of profit forthe firm. This can be difficult for manage-ment as well as for line manufacturing busi-nesses to accept. These traditional incen-tives and metrics focus on the volume ofgoods sold or the number of contractssigned. When servicizing has the effect ofdecoupling product volume from profits —and particularly in situations where provi-sion of the product becomes a cost ratherthan a profit center — this disconnect maybecome particularly problematic.

Where service organizations coexist withtraditional sales and distribution organiza-tions and incentive and performance meas-ures are at odds, conflict can result. Varyingdegrees of such conflict were observed inthe case study firms:

Where service organizations coexist withtraditional sales and distributionorganizations and incentive andperformance measures are at odds,conflict can result.


• DuPont, with a highly diverse productline, found that its more traditionalproducts such as carpet fibers are rela-tively more difficult to adapt to servi-cizing than products such as electronicsparts, which are more accustomed todematerialization as key to remainingcompetitive.

• This service-product conflict seems tobe largely avoided, however, in the caseof Herman Miller. In this instance,service offering (Coro) and productmanufacturing and sales (other divi-sions) are separate and distinct. Servi-cizing affects product sales only indi-rectly and positively; the existence ofCoro services can be a value-added ar-gument for the furniture sales force.

• In contrast, chemical managementservices are typically associated withchemical use reduction. In this case, theservice provider may be perceived as(and may, indeed, be) harmful to theprofitability and performance of themanufacturing operation and its tradi-tional sales force. Radian believes, forexample, that Dow became concernedwith potential conflicts between Ra-dian’s vision of total chemical man-agement and its own chemical distribu-tion organization.

Firm responsesThe case study firms differed in their re-sponse to this set of challenges. The limitedinformation the companies were willing todisclose on the subject of incentives andmetrics suggests that they often are dealtwith post hoc, and on an ongoing basis.

By contrast, organizational arrangementswhich have evolved or been made to sup-port servicized product offerings are some-what more transparent in the case studies. Inthis area, the simplified framework in Figure6 provides a tool for distinguishing these ar-rangements.

Organizational arrangements underlyingproduct sales and service exist on a contin-uum, from complete separation betweenmanufacturing/product provision and serv-ice to full integration, as in Figure 6. In thissimplified scheme, most of the firms fellinto the middle two characterizations (B andC).

• Radian provides chemical managementservices as an intermediary between thechemical manufacturer and the chemi-cal customer (scheme B);

• Castrol provides similar services whilemanufacturing its own products, ap-pearing to fall somewhere betweenschemes C & D.

• Coro’s furniture services are suffi-ciently separated from Herman Miller’smanufacturing operations that interac-tion between the two businesses isfairly limited. The arrangement shareselements of schemes C and A. Coro isnot properly a service intermediary, asin scheme B, as the customer purchasesfurniture from Herman Miller or othermanufacturers’ retail networks.) This isalso the case for DuPont Flooring Sys-tems, a subsidiary of DuPont whichleases carpets and offers carpet-relatedservices.

Organizational arrangementsunderlying product sales and serviceexist on a continuum, from completeseparation betweenmanufacturing/product provision andservice to full integration.

Most firms adopt an intermediateapproach



Figure 6: Service and manufacturing: separation to integration

Customer

manufacturer

manufacturer

Customer

Customer

CustomerService

intermediary(e.g.: car rental

agency)

JointEntity

Servicedivision

Manufacturingdivision

Complete Service contract

Factory outlet sales

Provision w/maintenance/

repair

Purchase of products(e.g.: PCs)

Maintenance, repair, upgrade(may be part of purchase oradded service)

Retailer/distributor

Service provider(cutomer in-house or 3rd

party contract)

A

B

C

D



External Barriers andChallenges

Gaining market acceptanceServicized products must prove themselvesto be superior to traditional stand-aloneproducts and in-house services that they re-place. As noted above, where technologicalchange is rapid and demands specialistservices that customers lack in-house, mak-ing the case for the servicized product maybe easier. Given stable product technology,however, service providers offering tradi-tional products in untraditional packages areunder a significant burden to prove theworth of their offerings. This burden isrooted in a number of different factors:

• Coro notes that double burden posedby the servicizing model. On the onehand, service providers are outside or-ganizations which must coordinateclosely with their customer, oftenacross business divisions — an area inwhich an in-house organization wouldpresumably have a significant advan-tage. On the other, it is not sufficient todeliver cost savings alone — serviciz-ing for the customer must represent asignificant improvement in the level ofservice compared to the in-house orthird-party contract services being sup-planted.

• Electrolux notes the barrier to theseservices posed by customer psychology.To some European customers, bothcommercial and end-consumer, “leas-ing” implies both insufficient means tobuy the product and the prospect ofpaying a very high rate of effective in-terest on the product investment. When(1) the opportunity costs of up-frontcapital expenditure and (2) the value ofguaranteed access to the function pro-vided by the product are not consid-ered, outright purchase and ownership

appears to provide the lowest cost al-ternative.

• The specialized skills, time, and signifi-cant costs attached to chemicals man-agement might, a priori, seem to makechemical management services a read-ily embraced strategic outsourcing op-tion. While the CMS model now seemsto be gaining momentum, market ac-ceptance for providers such as PPG,Ashland, Olin and Henkel has comeonly after large, well-known clientcompanies such as General Motorsadopted the model. The barriers experi-enced by the CMS approach, despitethe economic arguments in its favor, aretestimony to at least two factors: (1) thedifficulties of trust — CMS replaces in-house services, engendering worriesabout loss of control, joint safety stan-dards (a concern for both the supplierand the customer), and excessive reli-ance on one supplier; and (2) poor un-derstanding of costs — just as deficientchemical cost accounting by industrialfirms means they have incomplete un-derstanding of their true chemical costs,much less what the cost savings mightbe by moving to CMS.

Information requirementsServices, by definition, are more nuancedand more differentiated according to indi-vidual customer preference than sales of“product in a box.” The coordination re-quirements of the servicizing model have al-ready been discussed. Both these pointshighlight the information-intensive nature ofservices. In a service model, quick responseto clients’ needs is essential. It is easy to seewhy: selling a pair of scissors is simple, butselling a haircut using the scissors requirestaking into account the customer’s stylepreferences as well as time and budget con-straints. These are information elementswhich reach well beyond the physical goodsused to deliver the service. In fact, so in-separable are service and information thatalmost 80% of information technology isbought and used by the service sector (Re-



jeski, 1997). Where the boundaries betweenproducts and services are no longer distinct,it has been suggested that the service con-tent of a product can be seen as the infor-mational content embodied in that product(Allenby, 1998).

Examples of this information-intensivity inthe case studies include:

• In the cases of Xerox and IBM, whichprovide information technology andtechnology-intensive document serv-ices, the goal of servicizing is to inte-grate increasingly complex hardwareand software products with each otherin such a way as to serve the individualbusiness needs of clients.

• DuPont, which found that it must findways to grow beyond the traditional,material- and capital-intensive means,seeks to increase the “knowledge inten-sity” of its products as a general multi-year growth strategy. This means incor-porating information of customers’needs into the products, so as to antici-pate customer needs at each stage of theproduct lifecycle, in effect preemptivelydesigning solutions into them.

• Coro’s post-occupancy furniture serv-ices include programs such as “movemanagement,” office population track-ing, and project management. Theseservices are dependent on the success-ful coordination between Coro, themanagement of the client firm, its af-fected employees and the HermanMiller dealers who provide the movingservices. Further, Coro is in large part adatabase manager, maintaining floor-plans, furniture inventories, and per-sonnel locations for its clients. Bothcoordination and the necessary trackingof space, furnishings and personnel aredecidedly information-intensive.

• Electrolux sees profitable servicizing inits market — which involves managing

an appliance “fleet” — as dependent ondetailed information regarding cus-tomer use patterns. It is the compila-tion, monitoring and analysis of suchinformation that is key to adding valueand reducing waste — in materials,time, and labor — throughout the ap-pliance system.

Implications for EPRWe have examined some of the drivers ofservicizing, as well as a number of the inter-nal and external challenges it presents tofirms and their responses. A picture emergeswhich points to several implications forEPR.

Recall that Section 3 offered three situationsin which, a priori, servicizing might be ex-pected to yield environmental benefits:

• when servicizing has the effect of inter-nalizing use or disposal costs;

• when the product concerned has sig-nificant end-of-life value; and

• when servicizing renders product provi-sion into a cost rather than a profitcenter.

Autonomy between service andmanufacturing units may avoid internalconflict, but is less likely to driveenvironmentally-based changes indesign and product manufacture.

Servicizing may help to make thebusiness case for EPR, but it is notsufficient.

Environmental drivers in the marketmay make environmental gains fromservicizing more likely.


All three situations define an alignmentbetween economic incentives experiencedby the firm under servicizing and an envi-ronmental benefit accruing to society atlarge. Though few in number, the cases al-low some insights into how the simple pic-ture of “economic stimulus and firm re-sponse” may be complicated in the realworld of managing the firm.

Transmission of incentivesThe organizational arrangements supportingservicized product offerings (Figure 6) il-lustrate that the relationship between manu-facturing and service provision can exist ona spectrum from near-total autonomy tonear-total integration. From an organiza-tional perspective, autonomy would seem toavoid many potential problems arising fromconflict between traditional sales and manu-facturing and service provision. These arise,recall, when service units and quality con-flict with traditional volume sales as the ba-sis for supplier compensation.

Autonomy, unfortunately, is an organiza-tional arrangement which seems less likelythan integration to drive environmentallybeneficial outcomes. This is because a ma-jor mechanism by which environmentalbenefits derive from EPR is changes toproduct design and manufacturing methods.In a voluntary EPR framework, thesechanges are driven by the incentives arisingfrom service activities. Thus, tight integra-tion between the service and manufacturingorganizations is more likely to permit clear“transmission” of these incentives, allowingservice activities to drive manufacturing ordesign changes. This indicates that the jointservice/production entity represented byscheme “D” in Figure 6 has the best poten-tial for a full-fledged EPR outcome.

Finally, it is clear from prior EPR researchthat incorporating lifecycle considerationsinto product design and manufacture is acomplex process requiring close coordina-tion across business functions and special-ized decision-support tools. In general, thepresence of an economic incentive to do sois not, by itself, sufficient (Stoughton et al.,1998; Shapiro and White, 1997).

Does servicizing “break ground” forEPR?We earlier suggested that servicizing couldreduce resistance to EPR by demonstratingbusiness benefits for extended involvementin the product lifecycle. Servicized productofferings can (1) drive the firm to considerways to recover the value embedded in theproduct and (2) support a reverse logisticsinfrastructure to support reclamation activi-ties.

The case studies deliver mixed messages re-garding these arguments. A reverse logisticsinfrastructure may ease the way for EPR ac-tivity, but a conscious decision to pursuereclamation activities is still required:

• Coro, for example currently acceptsfurniture trade-in and has many ele-ments of a reverse logistics infrastruc-ture in place. Trade-ins, however, aredisposed of on the second-hand market,with a significant amount probably stillgoing to landfills. The company, how-ever, hopes to leverage this reverse lo-gistics infrastructure to offer a “green”lifecycle management program to cus-tomers.

• Xerox has practiced product take-backfor many years — copiers were origi-nally leased rather than owned. But oldproduct was simply landfilled or ware-housed; the company did not pursue areclamation strategy until recently, wellafter pursuing reinvention as the“document company.”

Of course, the value of reclaimed photo-copier components far exceeds that of an of-fice chair or desk. From this perspective, theservicizing-EPR link seems more likely toyield environmental benefits through take-back when high-value materials and compo-nents are involved.

Environmental drivers in the marketClearly, a number of barriers stand betweenservicizing activities pursued for businessstrategy reasons and those pursued for envi-ronmental gains. Environmental preferencesin the market may make such gains more



likely by focusing the attention of firms onenvironmental outcomes.

Electrolux is the only case study companyfor which improving the environmental per-formance of a product was an explicit in-centive to a servicized product offering. TheEuropean markets which Electrolux serves,of course, are increasingly subject to man-dated producer responsibility for end-of-lifeproduct management. Further, NorthernEuropean markets are in particular widelyseen as placing a high premium on the envi-ronmental performance of products. Incontrast, U.S. markets are less strongly in-fluenced, either by end-of-life regulation orgreen consumer preferences; producers stillview the latter as constituting only small,niche markets.

It is therefore of little surprise that, amongthe limited sample of companies, indicationsare mixed regarding the use of environ-mental performance as a means to promoteservice offerings in the U.S. market. NeitherCastrol, Radian, nor DuPont, for example,stress their service offerings as a means ofachieving beyond-compliance environ-mental performance, though such servicemodels are well-suited to improving chemi-cal management and driving chemical usereductions. On the other hand, Coro be-lieves that tying its service model to a life-cycle management option may be an effec-tive means of differentiating its offering inthe future.



4. Environmental Impacts ofServicizing

EPR is a principle for spreading responsi-bility for product lifecycle impacts acrossmultiple participants. Three situations inwhich product servicizing can, in some cir-cumstances, drive efforts to reduce theselifecycle impacts by stimulating EPR activ-ity are: cost internalization; economic valueat end of life; and treating the product as acost, not a profit center. All may be charac-terized as economic drivers to resource effi-ciency.

In general, understanding the impacts ofservice activities is in its infancy relative tomanufacturing activities (Graedel, 1998).This section uses a lifecycle framework todescribe the general means by which envi-ronmental impacts may be reduced in theuse and non-use stages of the lifecycle. Thisincludes assessment of the conditions underwhich servicizing may achieve these reduc-tions. This discussion is exploratory. Thelinkages are complex and situation-specific.Nonetheless, scoping these linkages willhelp move beyond generalizations and in-tuition to begin establishing a firmer basisupon which to fashion policyrecommendations.

Key Concepts ofLifecycle Analy-sis for ServicizingFigure 7 depicts the familiarlifecycle of a product, fromraw materials extraction toend-of-life. In most product markets, the re-use, remanufacturing and recycling loopsdepicted are weak, capturing little of theproduct throughput.3 Each stage of the life-

3 Exceptions in which these reclamation loops

are strong in the U.S. include: automobiles

cycle generates a set of environmental im-pacts. The lifecycle environmental impactsof a product or product system, as opposedto a single use, are the aggregate of the im-pacts in each phase. This framework formsthe basis for a high-level assessment of thelifecycle impacts associated with a particu-lar product under a servicized businessmodel.

Service units as a basis forcomparisonIn broadest terms, servicizing describeschanges in the way that the services, or util-ity, provided by products are delivered tocustomers. Comparing lifecycle impacts ofalternative means of service provision re-quires a measure of service that is inde-pendent of the means by which the service isdelivered. For example, rather than “loadsof laundry” or “washer cycles” being themeasure of utility, “pounds of clothescleaned” would be preferable.

Figure 7: The product lifecycle


(75% recycling by weight, with substantialmarkets for used and remanufactured com-ponents) (Das et al., 1995), and aluminumcans (63.5% reclamation rate) (EPA,1998b).

EXTRACTIONPRIMARY

PRODUCTIONMANUFACTURING

WHOLESALE/RETAIL

USE COLLECTION

reuse

remanufacturing

recycling

Transportation

Transportation


Box 4: Environmental performance improvements associated with reclamation activitiesObviously, the environmental performance of reclamation activities varies by material and by product. However,environmental gains from recycling (the reclamation activity which salvages the least energy, labor and processingembedded in the end-of-life good) carries significant environmental gains across a wide range of materials. Thetable below gives reductions in production impacts for several common materials. Avoided disposal impacts arenot assessed; if included, environmental gains from recycling would be greater. While the study quoted did not as-sess plastics recycling, it does document that a significant portion of environmental impacts in plastics manufac-ture is due to petroleum extraction, refining and feedstock production. Environmental gains from recycling wouldtherefore be expected to be significant. Environmental gains would in general be expected to be higher for higher-level reclamation.

Impact reduction (increase) represented by recycled production compared to virgin production

Material Energy

(MMBTU/ton)

CO

(lbs/ton)

NOx

(lbs/ton)

Particulates

(lbs/ton)

Sox

(lbs/ton)

VOCs

(lbs/ton)

Toxics

(lbs/ton**)

Paper* 35% 96% (176%) 92% (75%) 56% 83%

Aluminum 96% 96% 98% 50% 99% 98% 99.6%

Glass 26% 54% 38% 68% 54% 1% 89.9%

Steel** 15% 6% 3% 7% (19%) 9% 6%

*average of linerboard and boxboard; **Basic oxygen furnace production only; electric arc production for recycled steel not as-sessed.** weighted by relative health Impacts

Source: Tellus , 1992

Expressing in-use environmental impactsIn-use impacts associated with a stock of products functioning in the economy (e.g., the use-related environmentalimpacts associated with U.S. refrigerators) can be expressed in simplest terms as:

∑ ×=i

i tuniserviceperimpactsunitsserviceuseinimpactstotal _______

Where

i is each product in the stock,

service_unitsi denote the amount of service delivered by each product in the stock in a given year, and

impacts_per_service_uniti denote the environmental impacts per unit of service. Environmental impacts may becharacterized by a single metric, or by several. If environmental impacts are characterized by several metrics — forexample, emissions of CO2 and criteria air pollutants — both impacts per service unit and total impacts in use be-come vectors. Further maintenance, repair and upgrade affect impacts per service unit.

Expressing non-use environmental impactsNon-use impacts are those that arise from all other elements of the product lifecycle: raw materials extraction, pri-mary production and production of components and intermediate goods, manufacturing, wholesale/retail, and end-of-life. In very simple terms, these can be expressed as:

∑ ×=p

pproductperimpactsnimpactsusenon ____

Where

• n identical products (or units of product, as in the case of chemicals) are manufactured

• p are non-use phases of the lifecycle

• impacts_per_productp are the impacts incurred by one product in a single phase of the lifecycle.



Defining service units can be difficult. Forexample, a subway and a private vehiclemay provide the same objective service —moving a person from point A to point B.But subjective factors such as convenience,flexibility and privacy must enter the com-parison. For this exploratory assessment, theproblem is simplified. By examining “prod-uct-based services,” we assume that servicesare delivered by the same products as undera conventional purchase arrangement. Whatis changed are the property rights and/or theadditional services provided by the manu-facturer or intermediary. This limited case isa starting point for further research of alter-native and/or more complex model.

Use vs. non-use impactsThe distinction between use and non-useimpacts is essential to assessing the lifecycleenvironmental issues associated with servi-cizing. The determinants of use and non-use impacts tend to be different — a keydistinction for effective policy design whichmust intervene at specific points in the life-cycle. Impact reductions in one categorymay increase impacts in the other. What,then, distinguishes use from non-use im-pacts? Generally, we can say that:

• All else equal, impacts in all categoriesexcept use scale with the number ofproducts produced. Non-use impactsalso depend on the environmental per-formance of the processes in each non-use stage.

• Impacts in use scale with the number ofservice units delivered and the effi-ciency of the product. Efficiency insome cases is strongly contingent notjust on product design, but on mainte-nance and operator training (this is, forexample, less true of home electronics,but more true of automobiles and in-dustrial equipment).

Most products produce few impactswhen not actively utilized. A washingmachine creates impacts when clothes

are washed, not when turned off. Anauto creates few impacts while parkedat the curb, with the notable exceptionof congestion if parked in a public

right-of-way4

Effects of reclamation activities

• Reclamation activities (recycling, re-manufacturing, and reuse) reduce end-of-life, extraction, primary productionand often manufacturing impacts. Thisoccurs because, in recapturing some ofthe material and energy embodied in theoriginal product, reclamation activitiesreduce the amount of material extractedand disposed of over the lifecycle of agiven number of products.

• Reclamation operations do generatetheir own environmental impacts, intransportation and in the processes usedto remanufacture or recycle products,components and materials. Typically,however, these impacts — especially inthe case of remanufacturing — arestrongly offset by impact reductions inextraction, primary production, manu-facturing and end-of-life. (See Box 4).

4 The consumption of “standby” electrical power

by many electronic goods, even when turned“off,” is an exception.

The service unit — a measure of utility— must be the means of comparinglifecycle impacts of alternative meansof delivering the same function or utility.

Reclamation activities (recycling,remanufacturing, reuse) do generateenvironmental impacts, but these aregenerally less than those generated bythe use of virgin materials.


Reducing Use and Non-Use Impacts UnderServicizing

Reducing in-use impactsReducing in-use impacts requires either re-ducing the number of service units deliv-ered, or reducing the impacts per serviceunit.

There is little reason to believe that thetypes of servicizing with which this study isconcerned will, in general, reduce the num-ber of service units consumed. Such reduc-tions are a function of broader trends inconsumer behavior and intentional policyinterventions aimed at altering consumptiontrends. Under this assumption, if servicizinghas an effect on in-use impacts, it must doso by reducing the environmental impactscreated per unit of service.

Impacts per unit of service, in turn, dependon the following factors: product design;age or cumulative service units delivered(where performance degrades over time);and, often, maintenance and operator train-ing. Each of these factors may, in theory, beleveraged to achieve in use-reductions. Noteagain that this simplified analysis assumesproduct-based servicizing — that is, thatservices continue to be delivered by essen-tially the same products.

Reduced use impacts through productdesign

Designing products to be more efficient orless polluting in use has been a strategywidely employed in legislation and volun-tary standards to reduce in-use impacts. Ex-amples in the U.S. include mandated fleetaverage fuel economy for automobiles(CAFÉ standards), as well as auto emissionlimits for CO, SOx and NOx; mandated en-ergy efficiency standards for major appli-ances (e.g., refrigerators); mandated waterefficiency standards for household fixtures;and voluntary energy efficiency standardssuch as the Energy Star label for officeequipment.

Servicizing is likely to provide an incentiveto manufacturers for more efficient productdesign only when the terms of service provi-sion internalize use-related environmentalcosts. For example, if a manufacturer pro-vides refrigeration services to an industrialor commercial establishment on a fixed-feebasis, the costs of energy used by the refrig-erators are borne by the manufacturer ratherthan the client. Where these costs are a sig-nificant fraction of the total costs of serviceprovision, and where the market is competi-tive for this type of service, reducing use-related environmental costs will allow themanufacturer to price its service more com-petitively in the marketplace.

Reduced impacts via increasedturnover

For durable or semi-durable goods, thestock of products in use is generally com-posed of a distribution of vintages, or prod-uct ages. Where consecutive product yearsare characterized by increasing efficiency,or where product performance degradeswith time or cumulative use cycles, the im-pacts associated with the use of the overallstock of products will decrease as oldervintages are retired and new models comeinto use, assuming that the number of prod-ucts in use remains constant.5

5 This may not be the case if servicizing itself in-

duces larger markets for a given service unit.For example, P.C. leasing could make PCs

Use impacts associated with a productmay be reduced by:

changes in product design;

increased turnover when consecutiveproduct years are characterized byincreased efficiency;

enhanced or more optimal operation,e.g., better maintenance, operatortraining, process optimization.



If the average age of products in use can bereduced, the impacts of the total productstock would decrease. Average age can bereduced by increasing the rate of turnover,or by selectively removing the oldest prod-ucts from use — as in the case of acceler-ated retirement of older and highly pollutingvehicles. (Note that this does not fall intoany of the three previously identified situa-tions in which servicizing may yield envi-ronmental benefits.)

Is servicizing likely to have this effect? Inleasing a durable or semi-durable good,consumers typically expect relatively newunits (e.g., cars, computers). Widespreadservicizing of a product market might re-duce the average product age. Most suchleasing markets, however, rely on the usedproduct market to absorb products whoseuseful leasing life has expired. Examples inthe U.S. include sales of used fleet cars bycar rental companies, absorption of used of-fice equipment by second-hand dealers, and,with the emergence of servicized PC mar-kets, perhaps significant resales of oldercomputer equipment.

Reduced impacts via enhanced operation

For many durable and semi-durable goods,maintenance, operator training, and/or proc-ess optimization has a significant effect onin-use environmental impacts. A prominentexample of this type is the automobile; but italso applies in general to complex mechani-cal equipment.6

Where more optimal operation can reducein-use environmental impacts, there are twosituations in which a servicized product of-fering might lead to such reduction:

• Where servicizing internalizes use-related environmental costs, service

available to lower income households forwhich current costs are prohibitive.

6 Operator training can significantly lower the in-use impacts associated with cleaning equip-ment, for example (Agri et al, 1999).

providers may be incentivized to im-prove operation and reduce these costs.A cleaning services supplier, for exam-ple, who absorbs the cost of consum-able supplies has an incentive to trainoperators in more optimal operation ofthe equipment.

• Where provision of the product istreated as a cost rather than a profitcenter, and improved operation andmaintenance extends product life and/orreduces the quantity of product requiredto deliver the service, environmentalbenefits are achievable. As in the casesof Castrol, Radian, and others, a CMSprovider might be compensated on thebasis of service delivered (e.g., coating,cleaning) rather than on the volume ofchemicals sold. In this case, the pro-vider has an incentive to increase proc-ess efficiency and reduce waste.

Reducing non-use impactsNon-use impacts are those that arise from allother elements of the product lifecycle: rawmaterials extraction, primary production andproduction of components and intermediategoods, manufacturing, wholesale/retail, andend-of-life.

Reducing non-use impacts requires either(1) reducing the number of units manufac-tured, or (2) reducing per-unit impacts in

Non-use impacts associated with aproduct may be reduced by:

reducing the number or volume ofproduct manufactured;

reducing material and energythroughput per unit;

improved environmental performance innon-use processes.


one or more phases of the lifecycle (see Box4 “expressing non-use environmental im-pact”).

Again for simplicity, assume that the num-ber of service units delivered is constant,i.e., demand does not change. Then thenumber of products manufactured dependson the lifetime/durability of the product, andthe number/volume of products required todeliver a given quantity of service.

Impacts per unit over each phase of the life-cycle, in turn, depend (1) on the environ-mental performance of the operations ineach phase, per product unit, and (2) on thenature and volume of materials mobilized ineach phase to produce one product unit (i.e.,material and energy throughput).

Each of these factors can in theory be lever-aged to achieve non-use impact reductions.The potential of servicizing to achieve thisleverage is discussed below.

Non-use reductions by reducing thenumber or volume of product manufac-tured:

The number (or volume) of products re-quired to deliver a given number of serviceunits depends on the durability of the prod-uct (or design lifetime) and, in some cases,on the efficiency with which the product isemployed or its service capacity (that is, thenumber of service units which one productcan deliver).

Durable or semi-durable goods typicallyhave a design lifetime which can be ex-pressed as a number of operating cycles(e.g., hours on a power plant or compressor,

cumulative pages on a copier, wash cyclesin a washing machine). In the long run,more intensive utilization of the product ofunchanged durability and service capacitywill not reduce the number of productsmanufactured. Rather, each individual prod-uct will simply have a shorter calendar life.

Reducing the number or volume of productsmanufactured thus depends on increasingone or more of the following: product dura-bility, service capacity, or efficiency of use:

• More durable products will last throughmore use cycles and fewer will need tobe manufactured7 — assuming that themore durable product is not technicallyobsolete before its design life ends.

• Products of a larger service capacitywill, in general, realize economies ofmaterial scale. That is, the goods andenergy employed to produce 10 largeindustrial washing machines are likelyless than those employed to produce 30smaller domestic units whose aggregatecapacity is the same.

• In some cases, the efficiency with whicha product is used determines the quan-tity needed to produce a given level ofservice. This is particularly true ofchemicals. E.g., the quantity of paint orsolvent used in a manufacturing proc-ess,can vary widely with the operatorand equipment configuration.

7 More durable products are in general heavierand more robustly built than less durable ones.Thus, all else equal, for each unit of a more du-rable good manufactured, more materials and en-ergy are mobilized, and non-use impacts arehigher than for less durable goods. In general,the reduction in products manufactured will off-set these increased per-unit impacts. Consider,for example, a small electric appliance such as atoaster oven, with an average life of four years.Making an oven which would last twice as longwould mean a heavier product — thicker metal,more robust hinges, heavier electrical connec-tions. But these impacts are likely to be far lessthan those incurred by manufacturing a second,less durable oven to replace the one disposedafter four years of operation..

Reducing the number or volume ofproducts manufactured thus depends onincreasing one or more of the following:product durability, service capacity, orefficiency of use. . .

In certain situations, servicizing couldprovide incentives for manufacturers totake these actions.



In certain situations, servicizing could pro-vide incentives for manufacturers to takethese actions and reduce the number (orvolume) of products manufactured. Thiswould occur when provision of the productis a cost rather than a profit center; that is,the product becomes a cost of doing busi-ness (like labor and capital), not a profitmaker. Incentives are provided to reducecost of this provision by:

• Increasing product durability or ex-tending product life, through designchanges or better maintenance and op-eration;

• Producing products of a larger servicecapacity to realize economies of scale;

• Utilizing products more efficiently, toreduce the number or volume of prod-uct required.

A service provider who bears the costs ofbreakdown and unscheduled downtime, forexample, has an incentive to practice bettermaintenance. Examples might include anenergy service provider responsible for aboiler in an apartment building or a carsharing or leasing company for which regu-lar and preventive maintenance means fewercar purchases over time.

Non-use reductions by reducing mate-rial and energy throughput per unit

The materials and energy mobilized to pro-duce a product are a significant source ofenvironmental impacts. Each pound of plas-tic or metals employed has a large ecologi-cal footprint — energy used and pollutiongenerated in extraction and refining, eco-system degradation in extraction operations,and so forth. Turning these materials intocomponents and intermediate goods requiresfurther resources and generates additionalwastes. Thus, reducing the material and en-ergy throughput per product necessarily re-duces per-unit, non-use impacts across thelifecycle.

The various reclamation paths depicted inthe product lifecycle (Figure 7) — recy-cling, remanufacturing, reuse — all have theeffect of reducing material and energythroughput per product produced. Recyclingextracts basic materials — metals, plastics,fibers — for reuse. Remanufacturing refur-bishes used components or assemblies forincorporation into new units — or refur-bishes whole products for resale.

• By reducing the amount of virgin mate-rials required to make one product unit,all reclamation activities reduce extrac-tion impacts. By diverting materialfrom landfill or other end-of-life dispo-sition (e.g., incineration), reclamationactivities also reduce disposal impacts.8

• Remanufacturing and reuse additionallyreduce the energy and resources re-quired to transform raw materials (orcomponents) into finished product.Thus, these types of reclamation reducemanufacturing impacts.

Recycling, remanufacturing and reuse docreate environmental impacts not present ina linear product life ending in disposal. Re-cycling and remanufacturing processes canbe pollution-intensive. All require reverselogistics systems more elaborate than send-

8 In some cases, embodied energy, for example,

may be partially recovered in incineration,thereby reducing net impacts associated withnew product creation. Of course, incinerationcan have other undesirable environmentalimpacts, such as metals emissions to air andsolid residuals.

The materials and energy mobilized toproduce a product are a significant sourceof environmental impacts. . . reducing thematerial and energy throughput perproduct necessarily reduces per-unit, non-use impacts across the lifecycle.


ing material to the landfill, with consequenttransport-related impacts. However, thesereclamation-associated impacts are in gen-eral significantly less than those incurred bythe use of virgin materials. This is especiallytrue when remanufacturing is compared tothe impacts of new product manufacture.

While the use of reclaimed materials andcomponents forces a number of changes inmanufacturing processes, there is no par-ticular reason to believe that servicizing inand of itself creates a commitment to pollu-tion prevention (which generally requiresmore efficient use of materials) on the partof the manufacturer. This issue is addressedbelow. Nor is there reason to suspect thatservicizing automatically leads to “light-weighting” of products (reducing weight perunit), another potential source of throughputreduction. In fact, servicizing may drive in-creases in durability and product life, asproduct manufacturers seek to stretch thelongevity of product to avoid the cost ofearly replacement.

Non-use reductions by improved environmental performance in non-useprocesses

As discussed above, the volume of materialsand energy mobilized to produce one prod-uct unit affect non-use environmental im-pacts of processes employed in manufac-turing, distribution and retailing, and end-of-life. These impacts also depend, how-ever, on the choices made in these processesand the manner in which they are carried out— that is, on the extent to which pollutionprevention principles (or at least pollutioncontrol) are applied in each phase. E.g., amanufacturer may choose between two sol-vents, one environmentally preferable to theother. A supplier may have the choice ofhardwood from sustainably managed for-ests, or those subject to destructive forestrypractices. Such decisions have direct reper-cussions for non-use lifecycle impacts.

In general, there is no particular reason toanticipate that servicizing will cause productmanufacturers or their upstream suppliers tomore rigorously apply pollution preventionprinciples to their operations — unless theservicized product offering was marketedspecifically on the basis of environmental

characteristics. This said, servicizing might,in certain circumstances, stimulate reclama-tion activities (see above). In addition to re-ducing per-unit material and energythroughput, reclamation activities would beexpected to improve the environmental per-formance of non-use processes in two ways:

• The use of recycled materials orremanufactured components wouldgenerally be expected to reduce the en-vironmental impacts of manufacturingoperations. In a reinforcing mechanism,servicizing which gives the manufac-turer end-of-life ownership may promptchanges in manufacturing operations(e.g., encouraging design for disassem-bly and the use of recyclable materials).

• Reclamation activities reduce the vol-ume of end-of-life material and, in gen-eral, increase the likelihood that thesematerials will be more properly dis-posed of. Both effects improve the en-vironmental performance of end-of-lifeprocesses.

As above, reclamation activities are likely toarise from servicizing when (1) the producthas economic value at end of life, or (2) theeffect of servicizing is to internalize for themanufacturer the cost of disposal.

SummaryTable 4 summarizes the means by whichservicizing may achieve lifecycle impact re-ductions. The picture that emerges is one ofcomplexity and nuance, not easy wins. Firstfor use stage impacts and then for non—useimpacts, Table 4 depicts the possible sourceof impact reductions, the conditions neces-sary to realize reductions, and examples,both real and hypothetical, of cases wheresuch reductions occur. It is clear that whileopportunities for achieving environmentalgains exist, they will not occur either auto-matically or for all servicized products.Shaping effective policy strategies mush fo-cus on creating and for accelerating thoseconditions in which servicizing does, in fact,drive such social benefits. Section 5 out-lines a number of approaches aimed at theseobjectives.



Table 4: Summary matrix: Possible reductions in environmental impacts derived from servicizing

Source of impactreductions Conditions to achieve reductions Examples (real and hypothetical)

Via product designUse-related environmental costs are internalized, andthese costs may be reduced by better design ofproducts.

A manufacturer provides refrigeration services on a fixed fee basis. Aselectricity costs are a substantial portion of the costs of providing theservice, the manufacturer has incentive to produce a more efficient unit.

Via increased turnoverServicizing drives more rapid turnover of productstock in use combined with progressive efficiencyimprovements in consecutive model years.

A major appliance market becomes servicized under leasing arrange-ments, concurrent with mandated efficiency improvements. Resale ofolder, “post-lease” units is prohibited.

An energy services company (providing heating services at a fee in-dexed to outside temperature) replaces a heating system in a commer-cial building with more energy-efficient/cost-saving equipment.

Use

Im

pac

ts

Via more optimal opera-tion of existing product

(maintenance, training,process efficiency)

• Use-related environmental costs are internalized,and these costs may be reduced by more optimaloperation.

• Where the product is a cost rather than a profitcenter, and more optimal operation extends prod-uct life/reduces product consumed.

A cleaning services provider absorbs the costs of equipment breakdownand consumable supplies, providing incentive to train operators for moreoptimal operation of the machines.

A chemical management services provider is compensated on the basisof service delivered rather than the volume of chemicals sold. Chemicalsbecome a cost rather than a profit center; the provider has incentive toincrease process efficiency in the plant.

Via reductions in numberor volume of productmanufactured

(increased durability,larger service capacity,more efficient utilization)

The product is a cost rather than a profit center, pro-viding incentives for any of the following:

• More durable products

• Products of a larger service capacity, via the re-alization of economies of scale

• More efficient utilization of products in use

A manufacturer of commercial laundry equipment offers “launderingservices” to large customers, guaranteeing machine availability and agiven service capacity. The manufacturer thus has an incentive to pro-vide large-capacity, durable machines which reduce maintenance costs.

Via reductions in the vol-ume of materials mobi-lized per unit

(reclamation activities)


No

n-

Use

Im

pac

ts

Via improved environ-mental performance ofnon-use processes. (esp.disposal impacts; recla-mation activities)


A manufacturer and provider of desktop computing services guaranteesa two-year upgrade cycle to its customers, taking back obsolete equip-ment and incurring responsibility for its disposal. The provider has an in-centive to treat this equipment as an asset, minimizing disposal costsand maximizing savings from recycling and reuse of viable components.This reduces virgin material employed in the manufacture of “new units.”It also reduces disposal impacts of end-of-life units and may improveenvironmental performance of primary and product manufacturing.


Turnover, vintage and useimpactsOne tension which arises from the variousenvironmental impact reduction summarizedin Table 4 deserves further scrutiny:

• Potentially, reduction in use-related en-vironmental impacts associated with aproduct can result from increased turn-over of the product stock, accompaniedby progressive efficiency improvementsin new product over time.

• Increased turnover, however, meansthat a greater number of products aremanufactured, with a commensurate in-crease in non-use related impacts.

Table 5: Rough lifecycle impact data for two durable goods

AUTO (a) REFRIGERATOR

impact (Unit)Manfr. &upstreamimpacts

Use phaseimpacts (b)

Manfr. &upstreamimpacts

Use phaseimpacts(c)

Energy (MMBTU) 113.6 984 7.6 (i) 78

TRI (lbs) 85.0 69.74 (d) 2.75 (e)

CO (lbs) 5436.2 3.9

HC (lbs) 710.82 1.33

NOx (lbs) 545.6 4.60

Sox (lbs) 28.6 39.78

PM10 (lbs) 70.4 2.34 (f)

CO2 (tons) ap 23 (h) 182.6 ap 1.5 (h) 16.4 (g)

Auto assumptions: 1990 Taurus, lifetime = 13.74 yrs/143K miles, 21.8 mpg overlifetime, 3000 lbs

Refrigerator assumptions: 200 lb refrigerator, of which 70% steel, 30% plastic,12 year lifetime, 650 kwh/yr TABLE SOURCES: SEE ENDNOTE

To date, EPR discussions focus heavily onend-of-life issues — reducing wastestreams, increasing recycling, and ensuringproper disposal. Attention to in-use impactshas been minimal. Further, where these dis-cussions have moved beyond the solid wastestream, they typically have focused on is-sues of reduced throughput in the productsystem — thus, product life extension andincreased durability are both assumed to beenvironmentally beneficial.

The tradeoff between use and non-use im-pacts discussed above, however, suggeststhat this is not necessarily so. In cases whereuse impacts are a large portion of lifecycleimpacts, servicizing which increases theturnover of the product stock may be bene-ficial in reducing aggregate lifecycle im-pacts. Analysis showing such a result is de-picted in Box 5.

A strategy to accelerate turnover only makesenvironmental sense for products whoseuse-related impacts are large compared totheir manufacturing impacts.

Products meeting this description will likelyshare the following general characteristics:

• Goods that are relatively durable andlong-lived;

• Goods with high impacts in use (in-cludes goods which are large consum-ers of energy and/or process chemicals,and goods requiring material-intensivemaintenance).

Rough lifecycle data for two productsmeeting these criteria — automobiles andrefrigerators — are presented in Table 5.(Note that end-of-life impacts are not in-cluded.) In both cases, energy-associatedimpacts are far greater in the use phase thanin the manufacturing phase. In the case oftoxic emissions for autos, manufacturingimpacts are greater than use impacts, unlessall auto hydrocarbon emissions are consid-ered toxic.

IF product efficiency improvements canbe continuously achieved:

increased turnover (shorter use life)may reduce use-related impacts;

but non-use impacts increase as moreproducts are manufactured.



Box 5: How does increased turnover relate to reductions in use-related environmental impacts?

For any durable or semi-durable good in wide usein the economy, the stock of products in use willbe characterized by a distribution of vintages —some products will be new, others a few yearsold, others five years old, and so forth. Consider,for example, the vintage distribution of refrigera-tors in use in the U.S. depicted in the plot at right:

For a number of durable or semi-durable goods,significant efficiency improvements have oc-curred historically, with further reductions be-lieved to be technologically attainable. In manycases (e.g., cars, appliances, lighting), these im-provements have been driven by regulation. Con-sider the energy efficiency of refrigerators in usein the U.S. by vintage (B):

Efficiency improvements in consecutive modelyears mean more efficient models gradually sup-plant older, less efficient ones. Assuming a con-stant number of products in use, the total use-related environmental burden of these productswill decline. If, via increased turnover, the vintagedistribution can be biased towards younger prod-ucts, this process will be accelerated. Simplifiedcalculations demonstrate this point:

First, the discrete vintage and efficiency distribu-tions depicted in A and B are given idealizedforms (C):

These distributions allow calculation of the aver-age per-unit energy consumption of all refrigera-tors in the economy, both for the original vintagedistribution and one biased towards youngerproducts (D, facing page). The average con-sumption decreases over time as more efficientproducts are introduced into the product stock and less efficient ones are retired. Because the rate of efficiencyimprovement is assumed to slow over time, efficiency gains of the entire product stock also become smaller overtime. A younger vintage distribution introduces these gains more quickly. This vintaging effect has been widelydiscussed, for example, in assessments of automobile emissions, in which it is clear that a small group of oldervehicles on the road contributes disproportionately to air pollution.

A: Vintages of U.S. Refrigerators

0

10

20

30

40

<2 2-4yrs 5-9yrs 10-19 yrs 20+

per

cen

t o

f to

tal s

tock

Source: Energy Information Administration (1997Residential Energy Consumption Survey)

B: Energy use of an average refrigerator

0200400600800

10001200

<2 2-4yrs 5-9yrs 10-19yrs

20+

years old

kwh

/yr

Source: Energy Information Administration (1997Residential Energy Consumption Survey)

C: Idealized vintage and efficiency distributions

0

0.02

0.04

0.06

0.08

0.1

0.12

1 3 5 7 9 11 13 15 17 19 21

eco

no

my

product age (years)

fra

ctio

n o

f sto

ck

0

0.5

1

1.5

2

2.5

1975 1985 1995 2005

year builtenerg

y co

nsu

mptio

n in

dex


Lifecycle data for a small electronic device(e.g., a cellular phone) would reveal a dif-ferent balance between impacts over use andnon-use phases of the lifecycle. Power con-sumption for such a product is lower andlifetime is typically less, driving down use-related impacts. At the same time, theirmanufacture is chemical-intensive per unitof product weight, as they are composedlargely of plastic and electronic compo-nents. In the case of such a product, the en-vironmental problem it poses is preciselythe combination of toxics-intensive manu-facturing, short lifetime, and disposability.Increased product durability, upgradability,and reclamation are indicated from an envi-ronmental gain perspective.

For the durable products in Table 5, how-ever, an increased turnover approach maywell have beneficial environmental effects— if continuous efficiency improvementscan be introduced. Increased toxics emis-sions in the manufacturing stage which

would accompany such a strategy could beoffset if turnover was accompanied by in-creased remanufacturing and recycling.9

Ideally, increased turnover with continuousefficiency improvements represents a quid-pro-quo arrangement beneficial to bothmanufacturers and the environment. Manu-facturers are presumably forced to investmore in R&D, retooling, reverse logistics,and reclamation-oriented design and manu-facturing practices. In return, productthroughput increases in the often saturatedmarkets which characterize durable goods.Environmental benefits arise from a cleanerstock of product. Consumer costs whichwould normally arise from more frequentcapital purchases (e.g., buying a car every 5years rather than every 8 or 10) are offset bya leasing arrangement which effectively ex-ternalizes the up-front costs of capital in-vestment.

In the context of this scenario, several pointsmust be raised:

• Driving continuous improvement is of-ten politically difficult, even wheretechnologically possible.

• Policies which shorten lifetime tend toshunt products to a second-hand mar-ket, whether inside or outside nationalborders (e.g., in Japan, ownership of acar becomes progressively more expen-sive after several years, providing anincentive to consumers to purchase newvehicles. The large number of used but

9 The majority of toxic emissions associated with

automobile manufacture are in fact attribut-able to upstream activities — extraction,primary processing, and part production. Forthe LCA cited in Table 5 (Maclean andLave), 75 pounds of TRI emissions/auto aregenerated by suppliers and upstream activity,and 11.4 pounds are generated by vehiclemanufacturers. Reclamation operations, byeliminating pollution-intensive extraction,primary processing and first-stage manufac-ture operations would be expected to signifi-cantly reduce toxics loading associated withthe manufacture and upstream stages.

Box 5: (Continued)

D: 2 vintage distributions and average energyconsumption of all refrigerators in use

2 vintage distributions

0

0.02

0.040.06

0.08

0.1

0.12

0 5 10 15 20 25

years old

frac

tio

n o

f p

rod

uct

s in

u

se

energy consumption of average product for 2 vintage distributions (kwh/yr)

0

100

200

300

400

500

600

0 2 4 6 8 10 12

years in the future

A

B



functional cars which result from thispolicy are largely sold in developingcountry markets in Asia.

ENDNOTE: SOURCES FOR TABLE 5

(a) Auto data is from Maclean and Lave,1998.

(b) Includes maintenance and upstreamimpacts of fuel extraction, refining anddistribution.

(c) For average coal power plant emis-sions only. Does not include fuel ex-traction and other impacts.

(d) Acetaldehyde, benzene, formalde-hyde, 1,3-butadiene.

(e) Based on 1996 TRI emissions for re-frigerator/freezer manufacturing facili-ties (2.8 mn pounds, EPA), 1996 U.S.refrigerators shipped (11 mn, U.S. Bu-reau of Census) & raw steel and plas-tics production lifecycle data (TRIemissions in lb/net ton produced =0.5 for steel, ap. 80 for generalizedplastic, Tellus Packaging Study).

(f) Figure for total suspended particu-lates.

(g) Average coal CO2 emission factor ofap. 210 lbs CO2/MBTU (US EIA,Hong and Slatick).

(h) CO2 emissions only from energy use;assumes emission factor betweencoal and oil.

(i) Scaled by weight from auto manu-facture figure.



5. Roles for Public Policy

The Emergence ofServicized ProductsOur research highlights the emergence ofservicized products in a number of sectors, of-fered by firms historically defined as productand materials suppliers. Particularly in the US,virtually all of these industrial transformationshave occurred with little or no explicit policyintervention, much less interventions of an en-vironmental nature. The changes witnessed atIBM, Xerox, and other firms had little to dowith either government mandates or incen-tives. Instead, they reflected fundamental andrapid changes in technology and markets thatspurred both companies to reinvent themselveswith new business strategy and product/serviceofferings.

The many other examples we have referred to,and some we have not, tell a similar story.Monsanto’s transformation into a life sciencesorganization, Dow’s experiment with chemicalmanagement services, and Coro, HermanMiller’s furnishings services unit, all exem-plify the creation of information-based enter-prise and the subordination of product toservice delivery. Dupont is a telling case ofthis trend. The company has repositioned itscorporate strategy from essentially a materialproducer (chemicals, fibers, electronic materi-als) to an enterprise whose strategy is to de-liver shareholder value through knowledgeand information-based services: automotivepainting services (versus paints), carpet serv-ices (in addition to carpet fibers).

None of these transitions are quick, completeor easy. Old ways of doing business die hard.Weaning managers from the notion that moreis better while rebuilding corporate culturearound an information/knowledge-based en-terprise is a formidable challenge. But it ishappening, and not only in the technologybusinesses such as computers and electronics,but in mature manufacturing sectors such aschemicals and automotive.

Potential EnvironmentalGains. . .Product-to-service transitions are part of alarger service transition in the economy. Inso-far as a service-dominated economy generallyis characterized by less environmental loadingper unit of output than a manufacturing econ-omy, this could bode well for the environment.However, the real question — and the one thatmotivated this study — is how services mightaffect the manufacture, use and disposal ofproducts in environmentally beneficial ways.If a servicized product simply adds economicvalue to a traditional product, but does nothingto reduce its lifecycle environmental impacts,then the service cannot truly be called “eco-efficient.”

Our analysis shows that lifecycle environ-mental gains can derive from servicizing inmany, but not all, circumstances:

• Servicizing helps to overcome a major in-stitutional barrier to EPR activity by ex-tending or deepening manufacturers’ in-volvement with a product to phases of thelifecycle in which involvement was previ-ously peripheral or non-existent.

In the US, servicizing has beendriven by business, notenvironmental considerations.

Servicizing does hold potentialenvironmental gains, BUT…

Realizing these gains is notautomatic.


• Servicizing can bring about the develop-ment of reverse logistics infrastructures,which may be employed in reclamationactivities (recycling, remanufacturing, re-use).

• Servicizing can create economic incen-tives that, in theory, drive reductions inenvironmental impacts in the use and non-use stages of the lifecycle. These eco-nomic incentives are created when (1)servicizing internalizes use or disposalcosts to the manufacturer/service pro-vider; (2) servicizing is driven by the eco-nomic value of the end-of-life good; and(3) servicizing renders provision of theproduct into a cost, not a profit center.

Servicizing may, for example, reduce materialand energy throughput via more durable mate-rials and designs and thus extended productlife. It may reduce use impacts by optimizingproduct utilization via improved maintenanceor operation, or by driving more efficient de-sign. It may reduce end-of-life, extraction andmanufacturing impacts via take-back and rec-lamation activities.

Realizing EnvironmentalGains is Not AutomaticHowever, our analysis also shows thatachieving environmental gains is not auto-matic:

• The economic incentives described abovedo not characterize every servicizingsituation.

• Where clear economic incentives toachieve lifecycle impact reductions doexist, their ability to influence product de-sign and production depends in substan-tial degree on the degree of integrationbetween the service unit and the manu-facturing entity.

• Even when integration is close, the prac-tice of lifecycle design is a complex proc-ess requiring close coordination acrossbusiness functions and specialized deci-sion-support tools; the presence of aneconomic incentive itself is not necessar-ily sufficient.

• Likewise, the existence of a reverse logis-tics infrastructure may ease the way forproducer reclamation activities, but a con-scious decision to pursue reclamation ac-tivities is still required.

Further, the mechanisms by which gains canbe derived under servicizing vary by productcharacteristics. Until now, EPR has been dis-cussed largely in terms of its potential for re-ducing end-of-life impacts. Likewise, the ideaof eco-efficient services has been discussedlargely in terms of reducing material and en-ergy embodied in a product per unit of eco-nomic value. Our lifecycle framework foranalysis indicates, however, that for durablegoods whose use impacts are large comparedto manufacturing impacts (e.g., automobiles,heavy appliances), servicizing which achievesgreater turnover of the product stock and in-troduces newer, more efficient/cleaner prod-ucts more quickly can be environmentallybeneficial. While servicizing — particularlyleasing arrangements — does seem intrinsi-cally suited to achieving greater turnover of

Sources of potential environmentalgains from servicizing:

Servicizing may create economicincentives that encouragemanufacturers or service providers toreduce use and non-use impacts.

Servicizing may help to overcomeorganizational or institutional barriers toEPR by deepening or extending firminvolvement with a product beyond thetraditional manufacture-and-salesmodel.

Servicizing may create reverse logisticsinfrastructures which can be employedin reclamation activities (recycling,remanufacturing, reuse).



the product stock, product efficiency gainshave historically not been achieved withoutpolicy intervention.

A Role for GovernmentServicizing to date is a phenomenon in whichpublic policy has played little role. However,policy does have a number of roles to play inachieving the potential environmental gainsassociated with product-based services — andperhaps, in making the servicized productmore attractive in markets where acceptanceseems most difficult.10

Explicit environmental policiesOur case studies indicate that green productmarkets and certain regulatory measures canfocus the attention of firms on achieving envi-ronmental improvements under servicizing. Ifone compares Europe to the U.S. from a pol-icy standpoint, it is clear that European initia-tives in the areas of EPR and product policyare both older and more aggressive. Thoughthese policies have received their share ofcriticism, they have undoubtedly focused theattention of firms on providing environmen-tally beneficial end-of-life services.

While the U.S. seems unlikely to pursue theEuropean approach, at least at the federallevel, policies which incorporate the socialcosts of materials extraction and disposal intothe purchase price of products are likely tohave two effects: (1) building further marketdemand for decoupling ownership from prod-uct use; and (2) building demand for lifecyclemanagement as an explicit component ofservice offerings. Such policies include, forexample:

10 As noted in Section 3, servicized products may

have more difficulty finding market acceptancein markets where product technology is stable,and customers are not required to continuouslyacquire new skills and competencies to utilizethe product efficiently or in compliance withregulations.

• Removing virgin material subsidies,explicit and inherent. Any policy thatsubsidizes virgin materials extraction anduse to the disadvantage of reuse,remanufacture, and recycle of secondarymaterials tends to add net environmentalburden. More material throughput meansmore extraction, and more extractionmeans more emissions. Thus, as a generalstatement, government subsidies via be-low-market concessions on public landsfor petroleum, minerals and forestry ac-tivities work to the disadvantage of de-materialization. The converse is also true:policies which remove economic privilegefrom such activities support materialsreclamation. In short, subsidies that re-duce the cost of making new "stuff" areinconsistent with efforts to steer the econ-omy away from goods toward more serv-ice-oriented modes of enterprise.

• Remove disposal subsidies. At the otherend of product cycle are disposal subsi-dies. Government policy that artificiallyreduces the cost of product disposal runscounter to extracting environmental gainsfrom servicizing. In lessening the cost ofoutright product disposal, reclamationactvitities are placed at a competitive dis-advantage. Product and material reclama-tion are a key means by which servicizingmay deliver environmental benefits.

• Driving efficiency improvements is anobvious role for environmental productpolicy when servicizing drives more rapidturnover of a durable good with high use-related impacts. If coupled with taxschemes which encourage this turnoverand policies which incentivize reclama-tion activities, gains can be maximized.

TaxesAs we have seen, decoupling ownership fromproduct use is a key driver of servicizing. Anytax policy — credits, deductions, accelerated


depreciation, for example — that favors com-mercial or household equipment ownership tothe disadvantage of equipment leasing repre-sents an impediment to servicizing products.In contrast, tax policies that favor retention ofownership of durable goods by producers orsellers is supportive of servicized arrange-ments. These policies give producers the in-centive to engage in reclamation activities atthe end of product life.

DocumentationThis study represents only a start in under-standing the full scope of how servicizing isunfolding and what ramifications it holds forenvironmental benefits. Though rich in in-sights, the cases we evaluated here are few innumber. A valuable government role is sup-port for more documentation. Questions to beaddressed include: Are there other sectors, be-yond those identified here, where the servicetransition is observable? Do the generaliza-tions we offer here hold up in these sectors?What are the specific seller-buyer arrange-ments — including the specific financial andcontractual arrangements — that will securethe environmental gains achievable undercertain forms of servicizing? How can envi-ronmental metrics, fixed management fees andpricing per unit of service (e.g., per paintedcar, per cleaned circuit board) be mobilized toachieve the potential environmental gains of

servicizing enterprises? Case studies, modelcontracts, and more quantitative environ-mental analyses will inform both policy andthe private sector.

ConvenorPotential service providers will benefit fromlearning and emulating other providers. This isamply demonstrated in the case of chemicalmanagement service (CMS) where workshopsorganized by the Chemical Strategies Partner-ship (www.chemicalstrategies.org) have pro-vided valuable fora for both sellers and buyersin advancing chemical management services.One can envision government playing conve-nor of such fora for a number of other servi-cizing sectors. Of course, there are limitations:“first movers” may be reluctant to sharestrategies aimed at building a strong footholdamong customers in an emerging market.Thus, timing and expectations of such initia-tives must be carefully managed.

Research“Functionality” is in the eyes of the customer.This means that the marketing of functionalitymust occur with a clear sense of how productusers perceive and measure functional value.Transforming product owners into non-ownerproduct users (or leasees) is neither easy norautomatic, even when the economics are com-pelling. Even under the bottom-line mindset ofmost managers, even equipment leasing maybe stigmatized for cultural reasons. In thehousehold sector, it may be relatively easy toenvision the behavioral changes necessary toachieve a transition from washing machine orrefrigerator ownership to washing and coolingservices. But what about autos, with the brandequity and prestige factors that accompanyownership? And internal to the enterprise, thechanges required to reorient traditional prod-uct and sales-driven organizations to a service-based mentality presents an array of researchquestions. In this sense government can play avaluable role in defining the opportunities andlimits for building buyer and business accep-tance for servicized offerings based on be-havioral research findings.

Government and policy roles:

Explicit environmental policies(aside from mandated responsibility,these include removal of virgin materialand disposal subsidies, and drivingproduct efficiency improvements).

Tax policy which favors producer, notcustomer, ownership of durable goods.

Convenor and facilitator

Documentation

Research



Finally, while we have focused almost exclu-sively in this study on the transformation ofmanufacturing firms to service-oriented or-ganizations, the role for new enterprisesformed from the outset as functionality-basedbusinesses should not be overlooked. Theseare the new breed of car-sharing, computerequipment leasing, home telecommunications,and chemical services firms which were neverproducers of material goods. Nonetheless,their role as aggregators, marketers, and mid-dlemen merits the attention of researchers andpolicymakers. Creating favorable businessconditions for their formation and success isanother vehicle for fostering the product-to-service transition emergent in manufacturingindustries.



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Appendix A:Case Studies

AB Electrolux

Castrol Industrial NorthAmerica

Coro

DuPont

IBM

Radian/Dow

Xerox



AB Electrolux

Company ProfileElectrolux, based in Stockholm, Sweden,manufactures and sells 55 million productsannually. It is the world's largest producer ofwhite goods, with sales in over 100 countries.Its major product lines include:

• Household appliances, 72% of 1997 netsales (White goods such as refrigerators,freezers, cookers, washing machines anddishwashers, floor care products, leisureproducts).

• Professional appliances, 10% of 1997 netsales (mainly for restaurants and institu-tions and professional laundries, includingfood service products and laundry, refrig-eration and cleaning equipment).

• Outdoor Products, 16% of 1997 net sales(includes garden equipment and forestryproducts such as chainsaws).

Electrolux has 110,000 employees worldwide,and its net sales in 1997 were SEK 113 bil-lion.

In North America, which accounted for 31.6%of 1997 sales and 24,000 employees, Frigi-daire Home Products is the Electrolux Group'smajor appliance company. Frigidaire sellsproducts under eight of its own brands (as wellas manufacturing products for other name-plates) and it has 13 manufacturing facilities inNorth America.

The evolution of “servicized” productsofferings“Servicizing,” or the provision of products asservices, at Electrolux grew out of a strategic,environment-oriented planning exercise atElectrolux Euroclean11, then Electrolux’s pro-

11 The business manufactured and sold vacuum

cleaners, wet and dry vacuums, carpet extrac-tors, burnishers, polishers, scrubber driers, andsweepers. The business is no longer part of

fessional cleaning equipment division. Devel-oped by Electrolux’s corporate environmentalaffairs division, the exercise was intended toidentify strategic business opportunities andissues arising from emergent end-of-life andproduct stewardship regulation and marketpreferences for environmentally superiorproducts. The exercise identified a potential,service-oriented business model which couldoffer competitive advantages and reduced en-vironmental impacts in the use phase of theproduct. The idea was to sell product function,not the product itself, while guaranteeing re-sponsible end-of-life management, includingreuse and recycling.

The business model was inspired in part by theexperience of Electrolux’s former subsidiary,Jonsereds Godsskydd. This business rentedtarpaulins and other protective products toconstruction companies. The tarpaulins weremade of PVC. In investigating the environ-mental concerns surrounding PVCs, the com-pany found that maintaining control (owner-ship) of the product throughout its use phasewas important in resolving those concerns.Ownership made possible the extension of tar-paulin life through improved maintenance andrepair, and gave the subsidiary control overdisposal. The Xerox copier leasing model —in which copiers were leased, with serviceprovision, on a per-copy pricing system —alsocontributed to this function-selling model.

Today, the Electrolux Professional Appli-ances divisions have started to adopt thisservice concept under the title of “FunctionalSales.” The functional sales concept combinesthe sale of a function or solution with thetake-back and reuse of end-of-life hardware.Customers do not purchase hardware, but paya monthly fee for the “function” provided —which usually means rental of equipment,training of staff, supplies, and maintenance. Inthis vision of a servicized product offering, thecustomer pays for a process (e.g., the functionof cleaning) rather than for the tangible resultof that process (e.g., clean floors).

Electrolux after sale to Nilfisk Corporation(Denmark) in October, 1998.


In concept, functional sales can reduce theuser’s cost of obtaining the service by elimi-nating the need for capital investment, andthrough better maintenance and operatortraining, while giving Electrolux control ofproduct at the end of life, when it still retainsconsiderable economic value.

AB Electrolux Euroclean promoted a func-tional sales service for some of its professionalcleaning equipment, which included consulta-tion on selecting appropriate equipment andmethods and training programs on using ma-chines optimally, as well as maintenance andrepair services. The professional cleaningcompanies paid a monthly fee for the service(Rocchi, 1997).

The Euroclean subsidiary was divested in1998; Electrolux is now experimenting withfood-related “functional sales” endeavors inrefrigeration and cooking. In particular, a pro-gram exists for restaurants which falls betweenoperational lease and functional sales of pro-fessional food service equipment. Jan Agri,business developer in Electrolux’s environ-mental affairs office, believes that top man-agement interest in this servicizing model isstrong, particularly in the Professional Appli-ances and European White Goods divisions.At this time, however, Electrolux has no fullyimplemented functional sales programs.

As Electrolux sells most of its productsthrough trade and does not interact with prod-uct end-users12, it is commercial users, ratherthan households, that are likely to be targetedas its primary market for “servicized” prod-ucts.

Regulatory and market driversThe strategic planning exercise which led tothe functional sales concept was motivated inpart by environmental regulatory trends in theEuropean market. Particularly, the exercisewas motivated by the growing tendency to re-quire producers to assume responsibility forend-of-life management of their products. Forexample, the Swedish government has dis-

12 Electrolux divested its direct-selling subsidiary

in 1998.

cussed, though has not yet implemented, aplan to ban landfilling of electronics. Underthis plan, producers would bear responsibilityfor equipment at end-of-life. In Italy, a wastemanagement decree has been in force since1996 which mandates take-back for refrig-erators, washing machines, TVs, and comput-ers free of charge to end user upon purchase ofnew products.(Cutter, 1998). A much moreambitions EU draft on electronic equipmentwas circulated in April 1998 and includedproducts from white goods to communicationsequipment as well as clocks, toys, and othergoods. In this draft, take-back would be free tohouseholds, but with the costs built into theprice of new products.

In the U.S., by contrast, no federal mandatesexist or are in serious discussion. There are,however, landfill disposal bans on white goodsin 16 states.

In its European markets, Electrolux believesthat green product characteristics can be animportant means to achieve brand differentia-tion and improve market share — not simplyamong domestic consumers, but among com-mercial customers as well. Further, the serv-ice-fee model fits well with the current andemergent focus of European firms on costcontrol — echoing the focus of U.S. firms inthe 1980s. Paying a monthly fee for guaran-teed function in effect externalizes the capitalcost of equipment for the customer of theservicized product.

Barriers and ChallengesCompared to straightforward product sales,servicizing adds another dimension of chal-lenge to understanding the market and assess-ing the business case. It requires assessingwhether and how people might become inter-ested in a servicized product offering, and de-termining under what conditions servicizingcan offer economic savings, to both the com-pany and customers.

In some European consumer, small business,public and large corporate markets, negativeperceptions of leasing can also be a significantbarrier to the success of servicized product of-ferings. To some customers, “leasing” impliesboth insufficient means to buy the product and



the prospect of paying a very high rate of ef-fective interest on the product investment.Agri notes that when the opportunity costs ofup-front capital expenditure are not consid-ered, and the value of guaranteed access to thefunction provided by the product are not con-sidered, outright purchase and ownership ap-pears to provide the lowest cost alternative.13

Additionally, internal incentives must bealigned correctly and based on proper metricsif services are to be successful profit centers.Under traditional incentive structures, for ex-ample, salespeople are driven to maximize thenumber of contracts signed. Under servicizedproduct offerings, the number of contractsmay not be the sole determinant of profits forthe firm. Instead, factors such as cost of repair,refurbishment, idle time and total machine lifeenter into the profit equation. Thus, issues ofincentives and metrics include a range of fac-tors from proper measurement of productivity(for purposes of strategic planning and per-formance assessment) to the question of com-missions for sales staff.14 Servicized productsalso require a continuing commitment of ad-ministrative resources and tracking not re-quired for provision of “product in a box.” In

13 In part for these reasons, Electrolux employs

terms such as “functional purchase” or “func-tional hire” in place of “leasing.” This alsoserves to underscore the distinction between“functional offers” and traditional financial oroperational leasing: A supplier offering a func-tional sale provides a combination of physicalproducts, consumables and services in order toensure that a customer can benefit from thefunction of the physical product without havingto own, maintain, repair or dispose of the prod-uct. The customer pays according to the so-phistication of the function as long as his needremains, as a running expense. In contrast tooperational leasing, the supplier may use anycombination of old or new products to providethe agreed-upon function.

14 For example, in making a “functional sale” to acleaning company, Electrolux encounteredquestions regarding sales commission for itssales force, since profits as well as the propercommission from a 5-year customer contractare not immediately obvious as compared toconventional product sales.

the case of Electrolux, functional sales are attoo early a stage to discern what organiza-tional and human resource changes may be-come necessary.

Environmental Dimensions of Servi-cizingElectrolux’s servicized product offerings havebeen driven in part by explicit environmentalconsiderations. The company conducted alifecycle analysis of a servicized floor cleaningmachine, and found that servicizing had goodpotential to reduce in-use impacts (via bettermaintenance and optimal utilization), as wellas material and energy throughput in the prod-uct system — via life extension, part reuse,and recycling.

Use stage reduction is particularly important,as the use stage of the lifecycle incurs thelargest environmental impact in cleaning,laundering and kitchen equipment. This isparticularly true for Electrolux’s professionalappliances. The lifecycle economic cost forresource inputs, principally energy and water,during the use of an appliance often exceedsthe initial product price. For domestic whitegoods appliances, Electrolux estimates that80% of a product’s environmental impact oc-curs during the in-use phase and the remaining20% is from the manufacturing phase. Be-cause newer appliances are on average 50%more energy efficient, if all of the approxi-mately 150 million EU households replacedtheir appliances with newer comparable prod-ucts, the resulting electricity and CO2 savingswould represent 25% of the greenhouse emis-sions savings proposed by the Kyoto Protocolfor the years 2008 and 2012. (1997 CER)

While environmental gains are not the domi-nant business driver, Electrolux views “func-tional sales” as a business strategy which canserve to reduce lifecycle environmental im-pacts.

Future DirectionsThe pace and success of servicizing will de-pend on a number of regulatory and techno-logical trends. Agri believes, for example, thatderegulation of electricity will in large meas-


ure determine whether refrigeration serviceswill be viable or not as a servicized productoffering. Deregulation would force electricitysuppliers to innovate, looking more to serviceselectricity provides rather than simply provi-sion of electricity as a commodity.

In Europe, customers, not appliance vendors,are generally expected to bear the cost of in-creasingly limited resources such as water.(1997 CER) The awareness of the cost of re-sources to operate appliances is driving thedesigns of more efficient models. Servicizingmay benefit from this trend if it provides ameans for consumers to minimize the costs-in-use of appliances without the repeated capitalinvestments required to purchase ever-moreefficient models.

Another regulatory determinant of the futuremarketability of servicized products is therelative tax treatment of leased versus ownedequipment. Because appliances are taxableproperty, leasing will reduce net propertyvalue and thus tax burden. In the U.S., for ex-ample, leasing is a well-known tool for com-panies to strengthen their balance sheets byremoving debt.

Lastly, Agri notes, information technology canbe another potential impetus for servicizing.Profitable servicizing depends on detailed in-formation about user patterns and require-ments. Evolving IT will permit remote moni-toring and mapping, allowing functional serv-ice providers to construct appropriate pricingstructures and more effectively match productsto user needs.

References:Agri, Jan (AB Electrolux), Elisabeth Anders-son (Volvo Technological Development Cor-poration), Alena Ashkin (ABB Corporate Re-search), and John Söderström (StockholmSchool of Economics), 1999. Selling Func-tions, A study of environmental and economiceffects of selling functions. CPM report No. 6,January.

Interview with Jan Agri, , Business Developer,Corporate Environmental Affairs , ElectroluxCorporation.

Davis, G. et al., 1997. Chapter 4 in ExtendedProduct Responsibility: A New Principle forProduct-Oriented Pollution Prevention.

Electrolux Annual Report, various years.

Electrolux Corporate Environmental Report,1997; Corporate Environmental Report, 1996.

Electrolux Group. Website:http://www.electrolux.se/corporate/group/

Cutter Information Corp., 1998. “The Progressof Takeback Legislation for ElectronicEquipment Around the World.” The ProductStewardship Advisor.

Rocchi, Simona, 1997. Towards a New Prod-uct-Services Mix. Master thesis, InternationalInstitute for Industrial Environmental Eco-nomics at Lund University. September.



Castrol Industrial NorthAmerica, Inc.

Company ProfileFounded in 1899, Castrol International is aleading provider of specialty lubricants andrelated services. A $4.5 billion company,Castrol employs 20,000 people in manufac-turing, distribution, research and developmentfacilities in more than 50 countries. CastrolInternational is the principal company in thelubricants division of Burmah Castrol PLC, aUK-based international manufacturer andmarketer of specialized lubricants and chemi-cals. 1997 lubricant division pre-tax profitswere £216.3 million on sales of £1.927 billion.

Located in Downers Grove, IL, Castrol Indus-trial North America is the industrial productand services division of Castrol International.It manufactures and markets a broad line ofindustrial products, organized into four busi-nesses — Metalworking, Performance Lubri-cants, Specialty Products and International:

• Metalworking manufactures cutting andgrinding fluids, industrial cleaners, corro-sion preventives, hydraulic fluids, indus-trial lubricants, heat treatment chemicals,and metalforming and forging products.This division offers a number of servicesand includes the Castrol+Plus® businessunit, the company’s chemical manage-ment service

• Performance Lubricants markets high per-formance industrial lubricants, and asso-ciated services.

• Specialty Products are used for lubrica-tion in the automotive, aerospace, nuclearpower, robotics or refrigeration industries.

• International sells the products and serv-ices of the Metalworking, PerformanceLubricants and

Specialty Products divisions worldwide (in-cluding sales to Castrol affiliates).

These products are marketed to a variety ofindustries including automotive, aerospace,cement, glass, mining, printing, pulp and pa-per, refrigeration, textile and wood products.

Service orientation and offeringsCastrol Industrial North America markets it-self as a lubrication service and expertise pro-vider, rather than simply a vendor of product-in-a-drum:

“Most lubricant companies sell oil. Whatarrives in the drum is essentially theiroffering. Castrol Industrial North Amer-ica Inc.’s offering goes beyond the lubri-cant. Our proposition to industry is per-formance lubricants expertise that goesbeyond the lubricant. Our proposition toindustry is performance lubricants exper-tise that results in quantifiable cost re-ductions and improved productivity.”15

(Castrol Industrial North America, Per-formance lubricants)

“Castrol’s goal is to establish successful,long-term partnerships with customers.Our sales engineers thoroughly analyzeequipment, materials and processes tomake the best product recommendations.We then provide on-site monitoring andperformance analysis” (Castrol Indus-trial North America, Metalworking)16

As described by Castrol Industrial NorthAmerica, the formulation and implementationof a typical lubrication services package fromthe Performance Lubricants Division wouldhave the following elements (normal customerservice would also incorporate many of theseelements):

15 Castrol Industrial North America website “Our

lubrication approach.”

16 Castrol Industrial, NA Website, “Metalworkingdivision.”


• Preliminary information exchange (lubri-cation needs assessment and identificationof performance metrics);

• Site survey (benchmarking costs and pro-ductivity);

• Proposal (recommended package ofproducts and services);

• Implementation (procedures training andequipment changeover, managed by aCastrol field representative);

• Documentation (regular performance as-sessments);

• Continuous Improvement (opportunitiesidentification).

Castrol+Plus® is the Metalworking Divi-sion’s chemical management program, a serv-ice offering which manages manufacturers’ in-plant chemical systems. Extending beyond lu-bricants, the program partners with customersto monitor and control their in-plant chemicalsystems and the costs associated with the pur-chase, handling, use and disposal of chemi-cals. The goal is to achieve reductions in thecustomer’s net total operating costs.

Services include precise product selection,procurement, materials and maintenance man-agement, process engineering, waste minimi-zation, environmental compliance assistance,health and safety education, laboratory serv-ices and continuous improvement. Aimed atreducing customers’ net total operating costs,more than half of the documented cost savingfor customers comes from improvements inprocesses. Castrol’s profits come both fromfees and, in some cases, gain sharing derivedfrom cost reductions.

Castrol+Plus® programs range in size fromseveral hundred thousand to millions of dol-lars per year and operate in a number of in-dustries. A long-standing Castrol+Plus® pro-gram is with the Navistar International engineplant in Illinois, which combines a fixed-feecontract with gain sharing. Over the course ofthe program, coolant use has been reduced by50+% and coolant waste reduced by 90+%.

Additional service offerings include CastrolCare™ (also in the metalworking division)and Castrol Reprocessing Services™ (a serv-ice offering of Castrol Industrial North Amer-ica). Castrol Care™ provides services for themanagement of spent, water-diluted, metal-working fluid wastes —including on-site re-processing, waste minimization and cleaningservices. The program is designed for smallermanufacturing operations. Castrol Reprocess-ing Services™ reprocesses used oils onsiteinto regenerated lubricants via mobile andfixed-site units.

Servicizing: history, drivers and chal-lenges.Castrol+Plus®’s chemical management serv-ice offerings have evolved over the last 14years. In principle, the service provisionmodel fit well with a widespread manufacturerfocus on outsourcing and cost-control whichemerged in the late 1980s. During this period,many heavy manufacturing facilities, for ex-ample, cut back on internal chemical engineersand technicians and looked to suppliers forservices. Castrol initiated service offeringswith the intent of leveraging this trend, re-ceiving wide recognition and credibility afterthe service model was implemented by a fewlarge companies such as General Motors.Since then, the evolution of service offeringshas been both customer-driven and proactivelypursued by Castrol.

In principle, the service model was not only agood fit with an emerging management model— outsourcing — but also with the nature ofCastrol’s product. Chemicals (including lubri-cants and metalworking fluids) are particularlyamenable to servicizing for two key reasons(Reiskin, White and Johnson, 1998):

• Manufacturer’s in-plant tooling, wastehandling, and other chemical managementcosts may exceed their chemical purchasecosts by a factor of 5–10; these costs areoften not appreciated by the manufacturerand provide opportunities for cost savingsand efficiency improvements when ad-dressed by a specialist chemical servicesprovider.



• The specialized nature of chemicals andthe regulatory requirements attendant totheir use and disposal demand attentionand expertise throughout their lifecycle— including procurement, delivery, in-spection, inventory, storage, labeling, andsafety precautions, not to mention themany required resources for training,tracking, legal liabilities and disposal.These are in many cases more efficientlyaddressed by a specialist provider

The market potential of the service model andthe servicizable nature of the product aside,however, servicizing did present challenges tothe Castrol organization.

• For Castrol, nearly a century of operationshad built a strong culture/identity centeredaround manufacture and marketing ofspecialty lubricants. Chemical manage-ment demanded a different view — andredefinition — of core capabilities.

• The very different nature of a servicebusiness — with profits derived from feesrather than product sales, for example —was initially a new concept for top man-agement to understand.

• Further, “servicizing” demands changes inhuman resources (skills) and in the meas-urement of performance. Under serviciz-ing, profitability is decoupled from vol-ume of products sold, and discrete, tangi-ble transactions (sales) are replaced byservice contracts operating over an ex-tended period of time.

In response to new human resource require-ments and to provide a stronger, dedicated re-source and point of contact for the customer,Castrol created a dedicated business unit in theearly 1990s (now Castrol+Plus™) to consoli-date and house skills and human resourcesneeded for service offerings. These particu-larly included engineering and technical ex-pertise in customer manufacturing operations.

Future developmentsThe future for chemical management involvescustomers’ continuing drive for yearly costsavings, along with expansion in the scope ofservices. Additional services can includeitems such as maintenance, procurement, lo-gistics, environmental reporting, and recy-cling. For new operations, chemical manage-ment may involve coolant and lubricant sys-tem design, storage design, and initial productspecification, as well as chemical handlingtraining.

References:Interview with Don Dorsey, Senior VicePresident and General Manager, Castrol In-dustrial N.A., Metalworking Division.

Burmah Castrol Group, 1997 Annual Report.

Castrol Industrial N.A. Website:http://www.castrolindustrial.com.

Castrol International website:http://www.castrol.com.

Johnson, J.K., White, A., and Hearne, S, 1997.From Solvents to Services: RestructuringChemical Supplier Relationships to AchieveEnvironmental Excellence. 1997 IEEE Inter-national Symposium on Electronics and theEnvironment. pp. 322-325.

Reiskin, E., White, A. and Johnson, J.K..“Servicizing the Chemical Supply Chain,”forthcoming in Journal of Industrial Ecology.



Coro, Inc. (Herman Miller)

Company profileCoro is a fully owned subsidiary of HermanMiller, a Michigan-based manufacturer offurniture systems and furniture products foroffices, health-care facilities, and residentialenvironments. Established in 1994, Coroprovides post-occupancy (post-sale) furni-ture services for large customers — princi-pally planning, managing and carrying outinternal moves. Coro accounts for 3–5% oftotal Herman Miller revenues; its growthtarget is a minimum of 15% a year for thenext several years.

Herman Miller operates seven U.S.-basedsubsidiaries, including Coro. Including li-censees, sales operations are based in ap-proximately 60 countries, with manufactur-ing operations in the U.S., Mexico, and theU.K.. 1997 net income was $74.4 million onsales of $1.5 billion. The company is pub-licly held, with approximately 16% of stockunder employee ownership.

Service OfferingsAs a service business, Coro manufactures noproducts. Rather, it services customers whohave purchased furniture products fromHerman Miller and other manufacturers. Itsmission is to “ensure that the customer. . .receives the highest value from [their furni-ture purchases] throughout their economiclife” (Eilers, 1999). Coro’s service offeringsare focused on large organizations (Fortune1000 or 2000 firms) which typically have alarge amount of internal movement, reloca-tion and reorganization of individuals, staffand offices over the course of any year.These internal rearrangements necessitate acommensurate rearrangement of physicalspace and movement of furniture and officecontents between locations, and in and outof warehoused inventory. Coro’s servicesare targeted at managing this movement forcustomers, and have five components:

• Move management. Planning, coordi-nation and scheduling of internal

moves, working with management andaffected employees.

• Churn management. The actual work ofmoving furniture and office contents,reconfiguring furniture, and movingitems in and out of warehoused inven-tory.

• Inventory management. Coro storessurplus furniture on behalf of customersand tracks this inventory, drawing firston this resource to satisfy needs of thenew office arrangement.

• Population Tracking. Ongoing CAD-based documentation of the dispositionof space, individuals, and furniture.Provides the information necessary forplanning and costing moves.

• Project Management. Provides a singlepoint of contact for large new (HermanMiller) product installations, which of-ten occur at multiple sites for largecommercial customers.

Coro manages the engagement with thecustomer; Herman Miller’s national dealernetwork carries out the actual movements offurniture and office contents.

Servicizing history: drivers, barriersand challengesCoro was founded to fill a recognized gap inHerman Miller’s offerings which market re-search had shown to have significant poten-tial. The industry of which Herman Miller isa part — business and institutional furnituremanufacturing — is focused on selling andinstalling product, but far less on providingpost-occupancy services related to moveplanning and execution, and inventory man-agement. The company estimates that busi-ness spending on these services in any yearequals spending on new furniture (about $11billion/year in each category). Thus, whileall manufacturers in the industry have aservice organization handling delivery andinstallation, Herman Miller currently is the


only one focused on post-occupancy supportas an integrated part of its customer en-gagement strategy.

“We believe that [point of sale] iswhere the long-term relationshipshould begin. We have a wonderful op-portunity to maximize the long-run re-lationship by providing this service onthe customer’s site.” (Lee Eilers, CoroPresident)

Coro’s founder, Michael Volkema, is nowCEO of Herman Miller. Thus, there hasbeen strong support for Coro’s service con-cept from the top. The business model hasstill encountered some challenges fromwithin the Herman Miller organization,however — notably from the distributionnetwork, who can see Coro’s activities as in-fringing on their own. (Herman Miller em-ploys a network of owned and contracteddealers and distributors.)

Conflict with the traditional sales force,however, has not been a significant issue, asis sometimes the case in a servicizing unit ofa larger manufacturing company. Coro doesnot lease furniture currently, but rather man-ages furniture owned by customers. (Corodoes have a relationship with a third- partyfurniture leasing firm.) Thus, Coro’s exis-tence can be a value-added argument for thesales force, who can use the services offer-ings to differentiate Herman Miller fromcompetitors. Educating the sales force aboutCoro’s offerings has been an area of focus.Establishing credibility with the dealer net-work has also been essential. Dealers do de-rive revenue from the provision of themoving services; however, if a customer hasa negative experience with Coro, the dealerwho promoted the service is unlikely to winrepeat business.

The business model itself also presents sig-nificant challenges — relocation is a stress-ful event for most workers, which sets ahigh standard for satisfactory service. Thisservice, in turn, depends on successful exe-cution of a complex coordination functionbetween Coro, the firm, the workers af-fected, and Herman Miller’s dealers who

provide much of the moving and productservices.

Environmental dimensionsLee Eilers, Coro’s president, believes thatCoro’s service model has the potential tosupport lifecycle management efforts of itscustomers, and that this can be turned into asignificant market strength. Most often,companies dispose of used/end-of-life fur-niture through a used furniture broker, andits disposition is highly uncertain — withlarge amounts of recyclable materials in allprobability simply being landfilled.

According to Eilers, Coro is hoping to posi-tion itself to offer environmentally responsi-ble end-of-life options to its customers. Thecompany already has nearly all the neces-sary elements of a reverse-logistics systemin place, including furniture take-backs andtrade-ins. (Most trade-in furniture whichCoro or Herman Miller accepts is currentlybrokered to the second-hand market.) Mar-keting a lifecycle management service tocustomers would require adding reclamationand recycling to this reverse logistics sys-tem. If feasible, the desirable model is a“closed loop” manufacturing system —manufacture, sell (or lease), take-back,remanufacture.

ReferencesAylsworth, K., 1997. “Herman Miller Goal:Zero Landfill.” Grand Rapids BusinessJournal, 15(8). April 7.

Chandler, Susan., 1995. “An Empty Chairat Herman Miller,” Business Week, 24 July.

Annual Report, 1997. Herman Miller.

Eilers, Lee (President, Coro, Inc.) PersonalInterview. 19 January 1999.

Herman Miller corporate website.www.hermanmiller.com



DuPont Case Study

Company ProfileIn 1998, DuPont was the 15th largest U.S.industrial/service corporation, with productsconcentrated in chemicals, fibers and plas-tics. Net income in 1998 was $1.6 billionon revenues of $24.8 billion. With 101,000employees worldwide, DuPont has about165 manufacturing and processing facilitiesin approximately 65 countries, including140 chemicals and specialties plants. It alsohas more than 40 research and developmentand customer service labs in the U.S., andmore than 35 labs in 11 other countries.48% of its 1998 sales were outside the US,and the company was one of the largest USexporters, selling $4 billion in domesticallyproduced products overseas.

DuPont’s products serve various applica-tions in the aerospace, agriculture, apparel,automotive, construction, packaging, phar-maceuticals, and safety industries. Some ofDuPont’s best-known brand names include:Teflon® resins, Lycra® brand spandex fi-ber, Stainmaster® carpet, Mylar® polyesterfilms, and Coolmax® and Cordura® textilefibers. DuPont is divided into the followingbusiness segments:

• Agriculture and Nutrition: CropProtection Products and the Nutritionand Health segments

• Nylon Enterprise: Industrial and Fi-bers

• Performance Coatings: EngineeringPolymers, Performance Coatings, andDuPont Dow Elastomers

• Pharmaceuticals:

• Pigments and Chemicals: White Pig-ments and Mineral Products which in-clude titanium dioxide products, Spe-cialty Chemicals (a range of chemicalintermediates) and Fluorochemicals (re-frigerants)

• Polyester Enterprise: DuPont Dac-ron®, Polyester Films, and PolyesterResins and Intermediates

• Specialty Fibers: DuPont Lycra®,Nonwovens, and Advanced Fiber sys-tems

• Specialty Polymers: Photopolymerand Electronic Materials, Packagingand Industrial Polymers, Fluoro-polymers (Teflon®), and Corian®

Servicized Product OfferingsDuPont principally produces intermediategoods employed by other manufacturers. Inservicizing its products, DuPont is currentlyoffering several functional services builtupon, or extended from, their existing prod-uct lines.

• Car Painting Program With Ford.DuPont is working with Ford UK in itspainting operations. Compensationwould be on a per-car basis instead ofon the basis of per gallon of paint sold.Effectively, this transforms DuPontfrom a paint supplier to a provider ofcar painting services. This program ispart of DuPont’s growth strategy to in-crease the information intensity of itsproducts -- that is, adding value throughcomplementing products with expertiseon their handling, application, reclama-tion and disposal. The program in the-ory would benefit both partners, sinceDuPont, with more product expertise,can perform the painting operationmore efficiently and cost-effectivelythan Ford.

• Comprehensive Carpet Services. As amanufacturer of carpet and fibers suchas the Antron fiber and StainmasterCarpet, DuPont introduced DuPontFlooring Systems. This program offersdesign consultants to assist in productselection, as well as a menu of post-purchase services which range from in-


stallation to maintenance and carpetreclamation. These offerings providecustomers with single-source account-ability for varying needs and solutions.Offered as stand-alone carpet-relatedservices, they are also offered in servicepackages such as the DuPont AnswersSM Assurance program which covers in-stallation and maintenance-related is-sues, product performance, and appear-ance retention for the life of the carpet.

DuPont’s installation services include aTacFast system using a simple hook-and-loop technology to attach carpet toany sub-floor and the Liftman® Furni-ture lift system aimed to reduce busi-ness disruption by lifting furniture toinstall carpet instead of disassemblingand rebuilding an entire modular officesetup. Its maintenance service includesspill and stain removal, professionalcarpet cleaning, and consultation andrecommendations for cleaning productsand techniques.

A first in the carpet industry, DuPontCarpet Reclamation Program is a recy-cling initiative that includes a completeworking infrastructure. By providingreclamation sites in most major U.S.cities, it guarantees that wheneverDuPont Flooring Systems removes andreplaces commercial carpet, the oldcarpet—regardless of manufacturer, fi-ber type or construction—does not endup in a landfill provided that this oldcarpet was designed with DuPont’sReclamation Specification. The fibersfrom reclaimed carpet are then used tomake products such as new auto partsand sound insulation. As part of thisservice, for which a fee is charged tothe clients equivalent to a would-belandfill fee for the same material,DuPont provides the client companieswith certification demonstrating envi-ronmental consciousness of the clientcompanies.

• Carpet Leasing Options. Urging pro-spective customers to gain flexibilityfor their changing business needs, to

“match long-term assets with long-termliabilities,” and to help customers con-serve cash for other investments,DuPont Flooring Systems offer two- tofive-year flooring leasing options na-tionwide. The lease gives customersthe option of partial leasing, the abilityto upgrade to higher-quality flooring,and either a 10% or $1.00 buyout at theend of the contract.

Other Service Offerings

• Engineered Consulting Services.DuPont’s Engineered Services beganwith the Maintenance Painting Con-sulting System, which assesses custom-ers’ painting needs to design a multi-year plan to help minimize costs forbudgeting, scheduling, applying, andmaintaining protective coatings on in-frastructures. The program was thenexpanded to include the Thermal Insu-lation System, which helps commercialcustomers identify and repair damagedthermal insulation, and maintains it toprevent future damage, even thoughDuPont is not a direct manufacturer ofplastics. Features of both EngineeredServices include Annual OperationalPlans, Quality Assurance and Produc-tivity Programs, Environmental Com-pliance Programs to minimize any po-tential environmental exposure, SafetyPrograms tailored for painting and in-sulation activities, and Project Man-agement Training to prepare customersfor coatings and insulation project man-agement. As a manufacturer of paint,DuPont, by offering this service, is ex-tending its product with product know-how and hence offering a value-addedto products which are otherwise soldunaccompanied.

• Safety and Emergency ResponseServices. DuPont also provides Safetyand Environmental Management Serv-ices, which helps customers improve



their safety performance via consulta-tions, on-site seminars and training, andsafety meeting materials. This servicebuilds on DuPont’s longstanding “cul-ture” and leadership, transforming in-ternal systems and standards into amarketable, value-adding business linefor both traditional and new customers.In addition, Integrated Emergency Re-sponse helps industries and communi-ties handle hazardous materials anddangerous goods and prepare for effec-tive early response to chemical inci-dents. This service provides a frame-work for using the closest corporate re-gional resources for responses tochemical emergencies, and by facilitat-ing the sharing of resources to satisfylocal and regional chemical emergencyresponse obligations. A comparableprogram, Farmcare® is available in theagricultural business. Customers ofDuPont can also contract for Farmcarewhich helps farmers become more suc-cessful through access to farm safetyprograms, business management pro-grams, and assistance in working withlocal communities.

Growth Strategy In A ChangingIndustryWhile Dupont considers itself a science-based manufacturing company, it remainssensitive to the dynamic restructuring andrecombination of businesses in the chemicalindustry worldwide, faced with increasingcompetition from burgeoning chemicalsproduction in Asia and the Middle East. Inthis changing industry, growth cannot con-tinue via the traditional, capital- and energy-intensive means. New means of growth areneeded. Spearheaded by top-level manage-ment and supported by shareholders, com-pany-wide transformations targeted atadapting to market changes has been of highpriority for DuPont in order to secure mar-ket leadership.

To remain competitive and nimble, DuPontdownsized by over 50,000 employees overthe past 10 years. In order to focus on newscience-based businesses while reducingvulnerability to industry cycles, DuPont ex-ited the energy business this year by sellingConoco, its energy unit. The sale ofConoco, which in 1997 was DuPont’s larg-est sales segment, positioned the companyfor new acquisitions. An $1.89 billion ac-quisition of Germany’s Herberts auto paintmaker, was completed in March of this year,made DuPont the world’s largest automotivepaint business. DuPont plans to continueexpanding its life sciences division, whichits CEO Charles Holliday hopes to see ac-count for 30% of DuPont’s business by2002. The focus of this segment is to usebiotechnology to strengthen pharmaceuticaland agricultural products with better “outputtraits,” e.g., crop nutrition value. Pharma-ceuticals have been expanded by the $2.6billion acquisition of the joint pharmaceuti-cal venture with Merck Co., and the Foodand Nutrition business will be expanded bythe $7.7 billion acquisition of Pioneer Seedwhich will focus on improved output traits.

DuPont has three growth strategies of vary-ing scope and time horizons:

1) The first category, with time horizonsof 0-2 years, focuses on profitability,and narrowly-defined eco-efficiencyand productivity.

2) The second category, of time horizonsbetween 2-6 years, focuses on increas-ing the "knowledge intensity" of prod-ucts. Knowledge intensity meansknowing what customers need, antici-pating any problems a product mightcreate for customers and preemptivelyresolving those problems. In carpet fi-ber products, for example, dying is of-ten an additional step in the carpet pro-duction process which adds both costand environmental impacts at the carpetmill. DuPont offers pre-dyed fibers,which, when dyed by DuPont through adifferent process than that of the carpetproducers, creates less environmentalimpact. In DuPont's electronics (parts)


business, knowledge intensity meansunderstanding all costs/wastes for cus-tomers, and then figuring out how tointegrate those costs into product de-sign and manufacture.

3) The third category, with time horizonsof more than six years, includes "mas-sive projects" aimed at transforming theindustry itself. Its components includeFood and Nutrition, and safety man-agement businesses. In the former,DuPont is striving to improve the qual-ity and quantity of nutrition per acre(e.g., corn with phosphorous in a formdigestible to chickens or with a higheroil content) through biotechnology,while still maintaining DuPont's tradi-tional agricultural businesses. In thelatter, DuPont is aiming to manage haz-ards around the world and create a $2billion safety services business.

The last two categories of growth strategiesare consistent with moving toward “servi-cized” product offerings, in two ways: (1)they involve appending more value-added toexisting products; (2) they build additionalvalue into new products from the designphase. In the latter case, designing knowl-edge-intensive product offerings requires ahigh level of understanding of customer op-erations and the operation of the customers’suppliers. Such knowledge can be obtainedthrough Life Cycle Assessment work, andby examining endusers, markets and loca-tions. Increasing products' knowledge in-tensity is achieved through an internal, on-going, Continuing Business Improvementprogram aimed to cull best practices withinthe category.

Servicizing Drivers:Servicizing products, or increasing the valueofferings of products, is a change drivenboth by business strategy and environmentalgoals. In the Ford UK painting operationspartnership, environmental benefit is part of- although not the primary - customer ex-pectation, although no specific environ-mental metrics are actively involved. Suchprograms are driven from the business case,but with an understanding of achieving envi-

ronment benefits, as well. Where businessand environment co-benefits do not exist,the decision to proceed is then handled on acase-by-case basis.

Servicizing Challenges and BarriersDuPont's experience in the auto paintingwith Ford demonstrates one recurrenttheme: to achieve business and environ-mental gains through servicizing transfor-mations, partnerships with customers arefundamental. Coordination becomes im-portant when sharing the factory floor, forexample, because both companies mustagree on standards of practice such as per-sonnel safety. An additional challenge forthe car painting program is costing andcompensation. Agreeing on a service fee re-quires acquiring an understanding of all theoperational costs; this is a challenge becausecost data on painting single cars is lacking.

In making products more knowledge-intensive, DuPont, like other firms, has ex-perienced some internal tensions betweenservice and product provision. It is, how-ever, trying to improve internal receptivityto focus on generating more value, not morepounds of products. It is a challenging pro-cess to overcome institutional inertia, asDuPont businesses have traditionally beenjudged by the amount of product made andsold. Reconciliation of the product-servicemindsets can occur in a variety of ways. Incar painting, for example, a thinner paintcapable of delivering at an equal or highergrade may lead to reduced product volumein the short term but larger market share inthe longer term. Similarly, thinner PolyesterFilms may meet new higher performingstandards in electronics and thinner denierfibers may add value to new fabrics.

One other difference -- and source of poten-tial tension -- between servicized productsand traditional products is that service busi-nesses tend to invest more in R&D, whiletraditional business invests more on capital,and consequently focuses on using thecapital to its full capacity. This may pose afuture challenge to the company in makingdifficult resource allocation decisions.



From an organizational change standpoint,adding service to products is more difficultof a transformation for "traditional" busi-ness products, such as fibers. In contrast,servicizing of products such as electronicsparts is likely to proceed more quickly be-cause of historical trends toward downsizingand dematerializing. The idea that “less isbetter” already has currency. Another suchcase is DuPont's agricultural business,which as early as the 1980’s had been trans-formed from a volume- to value-based en-terprise.

ConclusionsFacing growing competition and rapid tech-nological changes, DuPont is re-examiningits core business while building toward in-formation and knowledge-based enterprises.It, like most other manufacturers, sees a fu-ture less in its traditional products than inproduct-linked services. DuPont’s longer-term growth strategies, in embracing prod-uct knowledge-intensity and large-scaletransformations, exemplify a servicizingstrategy common to many specialty chemi-cal operations. In DuPont’s case, however,the potential for concurrently achievingbusiness and environmental gains can beparticularly compelling in view of the scaleand diversity of its operations.

ReferencesInterview with Dawn Rittenhouse, DuPontBusiness Sustainability and Product Stew-ardship Leader, February 1999.

DuPont Flooring Systems website.www.dupontflooring.com/

DuPont News Release: “DuPont IntroducesNew Carpet Reclamation Specification Toolfor Architects and Interior Designers.”www.Dupont.com/antron/r-recsp.html

“The Chemicals Industry: In Search of Al-chemy.” The Economist. Feb 15, 1997.

Alatzas, T. “DuPont Sees Life Sciences AsIts Future.” The Wall Street Journal,1/25/99

"Interview with Dr. Patrick J. Foley."www.dupont.com/corp/science/foleyint.html.

DuPont Direction Statement.www.dupont.com/corp/gbl-company/statement.html

DuPont Annual Report, 1997.

Marcial, G. “DuPont and AmGen: LabPartners?” Business Week, 6/1/98.

Barrett, A. “At DuPont, Time to Both Sowand Reap.” Business Week, 9/29/97.



IBM

Company ProfileIBM (International Business Machines Cor-poration) develops and sells advanced in-formation processing products, includingcomputers, microelectronic technology, datastorage devices, software, networking, andrelated services. Headquartered in Armonk,NY, IBM employs nearly 270,000 world-wide and operates 33 manufacturing, hard-ware development and research sites in 14countries. 1997 net earnings were $6.09 bil-lion on revenue of $78.5 billion. Over the1990s, distributions of revenues and profitshave evolved as shown below17:

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1992 Revenue distribution

Hardware53%

Services11%

Software17%

Maintenance12%

Leases & Financing

7%

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��

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1997 Revenue distribution

Hardware46%

Services25%

Software16%

Maintenance8%

Leases & Financing

5%

17 From Annual Reports.

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1992 Sources of gross profits

Hardware49%

Services4%

Software24%

Maintenance14%

Leases & Financing

9%

��

��

��

��

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1997 Sources of gross profits

Hardware41%

Services13%

Software30%

Maintenance10%

Leases & Financing

6%

The dominant mainframe providerflounders as the PC comes of ageUp through the 1970s, IBM dominatedcomputer hardware and software sales tosuch an extent that it was a nearly unremit-ting target for anti-trust actions. This domi-nance was based in the provision of largemainframe computers and software systems,serving the large-scale data processingneeds of government, corporations, and fi-nancial institutions.

By the early 1990s, however, IBM was seenas a company in collapse. The company had


recorded $18 billion in losses in the firstthree years of the decade; the CEO at thetime (John Akers) had set upon the extremeremedy of splitting IBM into autonomousoperating divisions — a prelude to whole-sale dismantling and sale of individual busi-ness units. Analysts attributed these prob-lems to several, related factors:

• The company was widely perceived ashaving lost touch with its customers(traditionally a strength), shifting to astrategy that emphasized pushing hard-ware rather than addressing a client’sbusiness problems (Sager, 1996).

• IBM also had clearly misjudged thesignificance of the personal computerand the consequences of desktop com-puting for IBM’s traditional mainframehardware-and-software business, and ofprotecting that business at a huge op-portunity cost. In general, IBM wasseen as uninterested in the innovationsproduced by its own R&D apparatus,which were then exploited by competi-tors.

• The company was “a byword for sti-fling bureaucracy and convoluted sign-off procedures,” with more than400,000 employees, and a bloated coststructure. (Economist, 1998).

A service-driven recoveryIBM’s recovery over the past several yearsunder CEO Louis Gerstner (hired in 1993)is widely attributed — both by the companyand by analysts — to the success ofGerstner’s service-oriented vision for IBM.

Gerstner has emphasized a close focus oncustomers and on providing integrated solu-tions to business’ information technology(IT) needs. He reasons that these IT needsare being driven increasingly by the expan-sion of networked computing and (particu-larly internet-based) transactions. Thistransformation of the business environmentpresents a number of challenges to the firm,of which hardware purchasing decisions are

only the beginning. Firms must achievebroad and transparent integration of a num-ber of different platforms and companysystems, and manage a virtual “front door”while preserving internal and transaction se-curity. Systems integration and operationrequires a combination of hardware andsoftware expertise both difficult and expen-sive to maintain internally. Thus, the de-mands of the networked business environ-ment are at once a source of tremendousconfusion for many firms, and a necessarilycritical area for strategic focus.

This “e-business” environment (IBM’sterm) creates soaring demand for “big serv-ers with five-nines reliability (IBM-speakfor being available 99.999% of the time),huge storage capability, bullet-proof data-bases, massive processing power, expertsystems integration and strategic planning”(Economist, 1998) — all traditionalstrengths for IBM. Gerstner’s belief thatIBM’s diversity and size would enable it tobe a one-stop service provider in all theseareas — and that having such status wouldconfer a considerable competitive advantage— led him to keep the company togetherand aggressively expand its service offer-ings: Doing so, however, required severalcritical changes from past practice, notableamong them embracing open software andcommunications standards (e.g., Java andLotusNotes )— in essence, a willingness tosupport non-IBM platforms.

IBM has, in fact, built the world’s largestcomputer-services business (Economist,1998). In 1995, the company formed itsGlobal Services (GS) division, consolidat-ing service units which had previously beenautonomously managed in different geo-graphic regions.(Gerber, 1996). This movebrought the IBM brand name to its Inte-grated Systems Solution Corporation(ISSC), previously barred from using theIBM name in its business under the terms ofa 1956 consent decree (CRN, 1997). GS hasbeen the vehicle for strategic implementa-tion of aggressive services growth. Servicesrevenue is larger by nearly an order of mag-nitude than in 1990, and service revenuegrowth has been largely driving earnings



growth, with per annum increases greaterthan 20 percent.18

The success of Gerstner’s vision to daterests both on successful implementation andon the vision’s successful “bet” regardingtechnology and market trends in the 1990s.Embrace of open standards and double-digitservice growth aside, however, the degree towhich IBM’s core business has changedfrom selling “big iron” (mainframe comput-ers) to IT “solutions” is a source of debate.IBM argues that the processing power, sta-bility, security and storage of its mid andupper-range servers are a good fit with so-phisticated, large-scale e-commerce, andkey to its ability to provide “total solutions.”Whether mainframes will in the long run bethe technology underpinning “e-business,”however, is an open question. If servicestruly drive mainframe sales (rather thanvice-versa), IBM would presumably bewilling to move away from this traditionalcore business. IBM’s continued dependenceon mainframe sales (see charts) and its ac-tions to defend this market during the 1980s,however, call into question the firm’s will-ingness to take this action, if needed.

Environmental implicationsIn its vision and strategy statements, IBMrepresents its drive towards service provi-sion and business “solutions” as market-,

18 Service offerings include Business Intelligence

Services; Business Management Serv-ices/ERP (SAP, PeopleSoft, etc.); BusinessRecovery Services; Consulting; e-businessServices; Education and Training Services;EMU Transition Services; Global Transfor-mation 2000 Services; Hardware and Soft-ware Support Services; Industry Solutions;Managed Data Network Services; ManagedElectronic Transaction Services; ManagedInternet and Intranet Services; ManagedMessaging and Collaborative Services; Net-work Outsourcing Services; Site and Con-nectivity Services; Small and Medium Busi-ness Leadership Solutions; StrategicOutsourcing Services; Systems IntegrationServices; Systems Management and Net-working Services

not environmentally, driven. Several “servi-cized” product offerings, however, havemoved IBM into the practice of extendedproduct responsibility. For example, IBMoffers two configurable service packages forcommercial PC customers — “System-Care™” (available through IBM PC resel-lers) and “SystemXtra™.” Both programsoffer services such as network support andmanagement in addition to hardware. Theyare marketed as outsourcing options whichallows customers to maintain up-to-date andwell-functioning PC and e-business net-works without recurring, major capital ex-penditures.

Both programs feature PC leasing ratherthan ownership, and permit flat-fee upgrad-ing 24 months into a 36-month lease. Thetrend toward leasing necessarily increasesproduct take-back (PTB), facilitating (ordriving) in turn a higher degree of reuse andmaterials recycling. PTB programs began inEurope in 1989, and were extended to U.S.commercial customers in 1997 with the an-nouncement of the IBM Credit Corporation(ICC) PELM Service Offering. Currently,IBM has thirteen PTB programs operatingworld wide to take-back end-of-life com-puter equipment from external customers.Most of these programs are supported in thelocal country by an IBM Materials Recov-ery/Recycling Center (MRC) for the collec-tion and processing of EOL equipment. Inaddition to these PTB programs, IBM has anetwork of approximately thirty MRCsworld wide for the processing and/or col-lection of IBM owned EOL equipment. Inaddition to end-of-lease returns, this equip-ment is generated from field returns, localmanufacturing plant obsolete and surplus,and replacement of IBM personnel equip-ment. Higher PTB levels will, though IBM’snetwork of materials recovery/recyclingcenters, enable the company to meet its re-cycled content standards for new products..

References:“IBM sports a new attitude.” Computer-world, 28 July 1997.


“IBM To Let Firms Lease Replace PCs fora Flat Fee.” The Wall street Journal. April14, 1997. Section B, pg. 5.

“The Rebirth of IBM: Blue is the Colour.”The Economist, 6 June (1998): 65-68.

“The Year in review: January 1997.” Com-puter Reseller News (CRN), 17 November1997, pp. 350-361.

“Technopolist IBM: humbled, not hobbled.”Economist, 14 December 1996.

“The Turnaround Artist: Louis Gerstner iscreating a hard-driving new corporate cul-ture at IBM.” U.S. News and World Report,17 June 1996.

Banaghan, Margaret, 1998. “Big Blue ridesthe Asian IT services tsunami.” BusinessReview Weekly, 16 November.

International Business Machines Corpora-tion. “Annual Report.” Armonk, NY, vari-ous years.

International Business Machines Corpora-tion. "History," "IBM SystemXtra," "IBMGlobal Services.” www.ibm.com: IBM Cor-porate Website.

Kirkpatrick, David, 1999. “Why the Internetis Boosting IBM's Mainframe Sales.” For-tune, 11 January.

Narisetti, R., 1997. “IBM Plan Aims to CutDealers’ PC Costs, Boost Services to Com-bat Dell, Compaq.” The Wall Street Jour-nal. September 15, Section B, p. 8.

Sager, Ira, 1996. “How IBM Became aGrowth Company Again: It's raking in busi-ness, its stock is roaring, and it's regainingthe respect of corporate America. What'sGerstner's secret?” Business Week, 9 De-cember, pp. 154-162.

Sager, Ira, 1995. “The View from IBM.”Business Week, 30 October.

Sager, Ira, Gary McWilliams, and AnyReinhardt, 1998. “IBM: Back to Double-Digit Growth? Even a worldwide servicespush and cutting-edge components may notbe enough.” Business Week, 1 June, pp.116-121.

Stoughton, Mark, Karen Shapiro, LindaFeng, and Edward Reiskin, 1998. “TheBusiness Case for EPR: A Feasibility Studyfor Developing a Decision-Support Tool.” .Boston, MA: Tellus Institute.



Radian & Dow

Company ProfilesDow Chemical is a diversified multi-national supplier and manufacturer ofchemicals, plastics and agricultural prod-ucts. The fifth largest chemical company inthe world, Dow operates in 164 countrieswith 114 manufacturing sites and 43,000employees. 1997 operating income was$2.73 billion on sales of $20.02 billion. Thecompany is divided into six business seg-ments Performance Plastics, PerformanceChemicals, Plastics, Chemicals and Metals,Hydrocarbons and Energy, and DiversifiedBusinesses.

Radian International, LLC is an environ-mentally focused science and engineeringfirm with approximately 2000 employees.Headquartered in Austin, Radian has 36 of-fices in the U.S. and 12 offices abroad. Itsservices include Engineering, InformationTechnology, Regulatory Compliance, Envi-ronmental Health & Safety, Remedial Con-struction, Technology Development andApplication, as well as related services forair pollution, remediation, waste watertreatment, hazardous and solid waste man-agement, and total chemical management.

Dow acquired a majority share in Radian in1997, and complete ownership in early199819 — in substantial part to develop achemical services business. By August1998, however, Dow had completed sale ofRadian to the Dames and Moore Group, adiversified engineering, science and techni-cal consulting and services firm based inLos Angeles.20

19 (In January 1998, the Hartford Steam Boiler

Inspection and Insurance Company exerciseda put option to sell its 40% stake in Radianto Dow.)

20 1997 net earnings for the group were $19.3million on revenues of $700 million. The

The sale of Radian to Dames & Mooreended this association between a chemicalservices business and a chemical manufac-turer — an association of intrinsic interest tothis study of product “servicizing.”

Evolution of Radian’s chemical man-agement service offeringsIn the early 1990s, Radian saw its traditionalenvironmental consulting business peaking.This business focused on compliance assis-tance for the private sector and scientificconsulting work for the EPA; the latter wasseen to be particularly problematic for fu-ture growth. An extended strategic assess-ment process resulted from this realization— a process of identifying the company’scompetencies and options for diversifica-tion. In the private market, Radian believedthat it had a reputation for and a core com-petency in compliance assistance across theenvironment, health and safety areas.

Two issues emerging at that time sharpenedRadian’s choice between pursuing familiargovernment work on the one hand andservice-oriented private sector business de-velopment on the other. The first was en-actment of Title V of the Clean Air ActAmendments, which presented the prospectof growth in government contracting work.The second were conflict of interest issuesarising out of Radian’s work for both gov-ernment and private firms under CERCLAand RCRA.

By the mid-1990s, Radian was developingchemical management services for the pri-vate sector based on a new business model.In this model, the company would assumeall or some elements of chemical manage-ment operations for client manufacturingfirms or facilities — from sourcing, and in-ventory management to delivery in use,waste management, and EH&S training andreporting compliance. The model drew oncustomer interactions; many of Radian’slong-term clients had expressed an interest

Radian acquisition is expected to increase1998 revenues above $1 billion.


in more complete management of chemicals— in some cases wishing to rent all chemi-cals rather than purchasing them. To the cli-ent, this chemical services model could bemarketed as an outsourcing option, permit-ting the client to concentrate resources onthe core business while realizing significantcost savings.

These savings would derive from two keycharacteristics of chemical management ac-tivities:

• Chemical management costs may ex-ceed purchase costs by a factor of 5 –10; these costs are often not appreciatedby the firm and provide opportunitiesfor cost savings and efficiency im-provements when addressed by a spe-cialist chemical services provider.

• The specialized nature of chemicals andthe regulatory requirements attendant totheir use and disposal demand attentionand expertise throughout their lifecycle— including procurement, delivery, in-spection, inventory, storage, labeling,and safety precautions, not to mentionthe many required resources for train-ing, tracking, legal liabilities and dis-posal. These are in many cases more ef-ficiently addressed by a specialist pro-vider

Radian’s revenues, in turn, would be basedon a combination of fees and gain-sharingresulting from cost savings delivered to theclient.

Acquisition by Dow: a brief affiliationUnlike Radian, which exists to provide pro-fessional services to clients in a number offields, Dow has historically been and con-tinues to market itself primarily as a prod-ucts company, one whose competitiveness isrooted in product innovation and manufac-turing expertise.

For a number of years, Dow has providedservices related to its products — thoughnot as a strategic, corporate-wide focus:

• Dow Europe, for example, offers achlorinated solvents service which de-livers, recovers, and reclaims used sol-vents from the company’s customers.Available in Germany, the UK, France,and Scandinavia, the service involvescollection of spent solvent from usesites and its regeneration at recondi-tioning/recycling centers. Dow devel-oped specialized safe containers forcollection of solvent on site and itstransport, as well as the reverse logis-tics infrastructure.

• Through a joint venture, Dow had pre-viously been significantly involved inoilfield (drilling) support services (thebusiness was sold in the late 1980s).

• Dow provides windshield mountingservices to “big three” auto manufac-turers.

Dow management in the mid-90s, however,saw services as the next business wave. Thecompany faced a number of obstacles to be-coming a services or “solutions” provider.These included

• the fragmented nature of Dow’s serviceofferings,

• the difficulty encountered by marketersin Dow’s Environmental Services busi-ness in successfully pitching Dow in themarket as a “solutions provider.”

• The high cost — in money, time, andmanpower — of making the case forchemical management services to cus-tomers. This typically required exten-sive prospective studies for which cus-tomers were unwilling to pay.

Dow saw Radian as a vehicle to consoli-date/accelerate its chemical management of-ferings, as a reputable brand name in EH&Smanagement, and as possessing expertise toreduce the high costs of landing chemicalmanagement services contracts. Dow’s En-vironmental Services business would befolded into the strategic chemical manage-



ment unit, and Radian’s emergent “TotalChemical Management” business would bedeveloped. From Radian’s perspective, be-ing a Dow business had a number of poten-tial benefits — Radian had access to Dow’sstrong product lines and chemical manu-facturing expertise.

Soon after the acquisition, however, Dowbegan to have a number of second thoughts.Dow perceived the Total Chemical Man-agement (TCM) program as slow to developand slow in becoming profitable, raising in-creasingly serious questions about Radianmanagement. Too much of Radian’s busi-ness — such as government consultingservices — had little or no connection toDow’s chemical-manufacturing business.While questions were raised internally bysome of Dow’s senior management aboutinherent conflict between a chemical serviceprovider and a chemical manufacturer,Dow’s bottom line assessment was that Ra-dian was simply not performing acceptably.

On Radian’s part, its business model forchemical management services (CMS) wassignificantly broader than the “StrategicChemical Management” business whichDow had first envisioned. The Dow visionfocused on chemical use optimization, wastereduction and EHS improvements, leverag-ing Dow competencies in process engineer-ing and EHS knowledge. Radian’s vision ofCMS included in addition the “supply” cy-cle of sourcing, procurement, gatekeeping,logistics, and inventory management. Ra-dian’s assessment was that the more limitedDow vision would not constitute a sustain-able business, and that the Dow-contributedasset to the chemical services business waslosing significant money. Radian believesthat while Dow was interested in Radian’slarger CMS vision, Dow eventually becameconcerned with potential, future conflictswith their distributors.

Radian’s affiliation with Dow was thus ashort one, with sale completed in August,1998, to the Dames and Moore Group.

Radian: future directions in servicesAs a services firm, Radian has an easily un-derstood commitment to the services model.It has continued to develop its Total Chemi-cal Management program, based on thechemical management services model. Fromthe company’s perspective, growth and lev-erage opportunities in the market include:

• Companies experiencing significantstructural changes such as acquisitionsand mergers typically undergo reor-ganization, systematic assessments ofcost reduction possibilities, and effortsto standardize systems and operationscompany-wide. This dynamic environ-ment provides opportunities for intro-ducing Chemical Management Systemprograms.

• Providing chemical management serv-ices to a facility requires a distributionand support infrastructure whose costsmust be distributed over a minimumvolume of business. The TCM modelcan nonetheless be extended to smallclient firms, where these firms are geo-graphically close, share similar chemi-cal needs and can consolidate theirwaste streams. Coordination issues inthis context are non-trivial.

• Adoption of chemical managementsystems can in some cases reduce po-tential environmental liabilities, whichcan be a strong incentive for its adop-tion. In at least one case, chemicalmanagement systems have been pro-moted by a state agency as a shieldagainst Superfund liability on a rede-veloped brownfield site — because theCMS tracks chemical purchase, use anddisposal very closely, it can be clearlyestablished that a company did not


contribute to a preexisting environ-mental problem.21

Dow: future directions in servicesDow states that it remains very focused on“solutions” businesses for future growth,which may or may not have a strong serv-ices component, as need indicates. It is cur-rently, for example, investigating U.S. mar-kets for chlorinated solvents services, pat-terned after its European offerings.

From Dow’s perspective, servicizing as abusiness strategy was not invalidated by theRadian experience. The experience did,however, demonstrate the importance oftiming, fit, and management effectiveness indeveloping a chemical services business.Further, Dow in general believes that serv-ice provision and product manufacturingcan, and should be, kept separate as distinctbusinesses, as there are indeed certain po-tential cultural conflicts in meshing tradi-tional product sales with service-based of-ferings.

In general, the company has had experiencesillustrating the value of extending businessactivities to new sections of the value chainthrough service. One example involveswindshields for Chrysler. Dow is a longtime supplier to Chrysler, with supply prod-ucts including windshield components.Through a subsidiary, it has moved from acomponents supplier to a full windshieldsupplier. Dow now delivers a fully assem-bled unit requiring a simple four-step as-sembly, in contrast to the 100 step-assemblypreviously undertaken by Chrysler in its as-sembly lines. This innovation resulted fromneither a Dow or Chrysler-only initiative,but from interactions between supplier andcustomer seeking value–added improvementalong the product chain.

21 The example cited involves the California De-partment of Toxic Substance Control, which haspromoted CMS as an effective liability shield toprospective tenants for a brownfield redevelop-ment project on a former Air Force base.

References:Claussen, John, 1998. California Environ-mental Associates, written communications,December.

Dames and Moore Group Annual Reports,various years.

Dames and Moore Group corporate website,http://www.dames.com.

Dow Annual Reports, various years

Dow corporate website:http://www.dow.com.

Interview with Leigh Hayes, Sr. Vice Presi-dent, Radian International, LLC., 24 August1998.

Interview with Fernand Kaufmann, VicePresident, New Businesses and StrategicDevelopment, Dow Chemical.

Johnson, J.K., White, A., and Herne, S,1997. From Solvents to Services: Restruc-turing Chemical Supplier Relationships toAchieve Environmental Excellence. 1997IEEE International Symposium on Elec-tronics and the Environment. pp. 322-325.

Radian International LLC website,http://www.radian.com

Reiskin, E., White, A. and Johnson, J.K.,1998. Chemical Management Services as aVehicle to Improved Environmental and Fi-nancial Performance.



Xerox

Company ProfileXerox Corporation produces copiers, print-ers, fax machines, scanners, desktop soft-ware, digital printing and publishing sys-tems, and supplies. Marketing itself since1994 as “The Document Company™,”Xerox offers comprehensive document-management services, including on and off-site outsourcing, publications system designand process consulting. With 91,000 em-ployees, Xerox operates 29 manufacturingsites in 14 countries. 1997 net income was$1.45 billion on revenues of $18.2 billion.

A pioneering technology companyfaces competition and technologicalchangeXerox marketed the first xerographic printerin 1949, and — like IBM — was the subjectof considerable anti-trust attention in the1960s. But by 1985, its copier market sharehad slipped to 10%. Share had been cededto a pool of largely Japanese competitors —notable among them the then and currentmarket leader, Canon.

The company turned to “total quality man-agement” (TQM) in the mid 1980s in an ef-fort to produce more competitive productsand regain lost market share. The companydid win a series of quality awards and suc-ceeded in regaining a 17% share from itsJapanese competitors by the early 1990s —the first major U.S. corporation to do so. Indefending its core light-lens copier business,however, Xerox failed to capitalize on anumber of internal inventions and innova-tions, particularly those generated by itsPalo Alto Research Center (PARC). Anumber of these “Xerox firsts” were ex-ploited with great success by others in whatbecame the personal computer revolution:graphical user interfaces, mice, windows, la-ser printing, distributed computing, and theEthernet.

Against this backdrop of missed opportuni-ties, CEO Paul Allaire — a Xerox veterannamed to the position in 1990 — realizedthat the market Xerox served was being re-defined by technological change. In hiswords, as the worlds of paper-informationand information began to merge (Howard,1992), the relevance and utility of the stand-alone, light-lens copier would inevitablydiminish. Digital reproduction and printingtechnology offered clear advantages overthe traditional light-lens copier. A digitalcopier — essentially, a scanner integratedwith a laser printer — could integrate withoffice information systems, becoming net-work printer and just-in-time press. The re-quired tight integration with office systems,however, meant that Xerox would no longerbe able to offer the copier as a stand-aloneoffice appliance.

Beyond total quality. . . an ongoingdrive towards serviceIn response to these competitive pressures,Allaire engineered a sweeping reorganiza-tion of the company in the early 1990s.Xerox relabeled itself “the document com-pany™” in 1994 and began a strategic effortto market its in-depth capabilities across theentirety of the document process. Companystrategic statements focus on documents asmission-critical business elements —as boththe end, value-added product (for some en-terprises), and the vehicle by which businessis conducted for all enterprises:

“Documents are. . . the vehicles withinwhich information is created, struc-tured, communicated and preserved.Without the document, business as weknow it today wouldn't exist.”22

The strategy envisions increasing integra-tion of document management activitieswithin a networked enterprise. In thismodel, data and text required for documentsare assembled electronically from diversebusiness functions, and from supplier andcustomer transactions. Documents are digi-

22 Xerox web site, “The document cycle”


tally printed on a just-in-time, highly cus-tomized basis. The copier as a stand-aloneunit is replaced by digital printing stationswhich reproduce paper originals, but alsoserve as network printers or, at the higherend, as digital presses replacing an entireinventory-heavy printing infrastructure ofphotocopiers, offset presses, binders, anddocument assembly operations. (Xerox callsthis method of document delivery “Auto-mated Fulfillment.”)

Allaire believed that “the document com-pany™” strategy would, in theory, benefitthe company in a number of ways. First andforemost, it would provide direction and fo-cus for a proactive response to technologicalchanges which were diminishing the role ofthe company’s core product. Under its aegis,Xerox could structure its attempts to pene-trate and establish a brand presence within awide range of document-related activities.Because of the complex, networked envi-ronment it envisioned, this would create op-portunities to develop and market integratedsuites of equipment. Moreover, the “tech-nological intensification” of the documentproduction would create markets for spe-cialist integration services and products tomarry corporate information systems todocument generation and reproduction.

All of these business opportunities implicitin the strategy, however, would requireXerox to move increasingly toward serviceprovision. As Allaire noted in 1992:

“As we move into this systems world,we aren’t just making and selling boxesanymore. Increasingly we are workingwith customers to design and redesigntheir basic business processes. In thefuture, Xerox won’t just sell copiers. Itwill sell innovative approaches forperforming work and for enhancingproductivity. . .it’s a partnership [withthe customer] in which we take a moreconsultative approach” (Howard,1992).

The service provision concept was not newto Xerox. The company had provided tradi-tional document outsourcing services for anumber of years — essentially running

copy, document assembly, and distributionservices for firms, either in dedicated on-sitefacilities or at off-site reproduction centersserving firms in a geographical area. Untilthe advent of serious competition, Xeroxcopiers were always leased rather than sold,and on-site copier service has always been asignificant focus for the company.

The focus on integrated services offeringsacross the document cycle, however, wasnew, as was the integration of the documentcycle made possible by a networked officeenvironment. In the 1990s, Xerox has, in theview of those who track the industry, largelysucceeded in its reorientation to “docu-ments” rather than copiers. Services is thefastest-growing area of the company, andXerox’s current investor presentations high-light document services as ultimately be-coming the company’s “lead offering tomajor customers.” Xerox’ service offeringstoday include:

• Traditional document outsourcing

• Document production process assess-ment and redesign,

• Network, software and hardware inte-gration

• Training

Environmental implicationsXerox has a reputation for environmentalinnovation, and has actively pursued a num-ber of EPR activities, including cross-cutting DfE standards, and consumable anddurable product take-back and remanufac-turing. It does not, however, tie its “docu-ment” strategy to environmental perform-ance. Indeed, while conscious efforts havebeen made to improve product energy effi-ciency and to reduce manufacturing anddisposal impacts or products, Xerox be-lieves that each of the technological trans-formations affecting its market (analog todigital products, black and white to color,non-networked to networked) will actuallyincrease page volume and/or the average



percentage of page covered with toner.23

Both trends are positive business indicators,signaling increased revenues — but havenegative environmental implications.

References:Various documents. www.xerox.com: XeroxCorporate Website.

“Xerox Announces Worldwide Restructur-ing to Enhance Competitiveness in theDigital World.” Xerox Press Release, 7April 1998.

“Xerox Corporation Completes Purchase ofXLConnect.” Xerox Press Release, 20 May1998.

Allaire, Paul, 1998. “Strategic Direction.”Presentation at the Xerox Investor's Confer-ence, 13 July.

Driscoll, Lisa, 1992. “The New, NewThinking at Xerox.” Business Week, 22June.

Garvin, David A., 1995. “Leveraging Proc-ess for Strategic Advantage: A Roundtablewith Xerox's Allaire, USAA's Herres,SmithKline Beecham's Leschly, and Pepsi'sWeatherup.” Harvard Business Review,September/October: pp. 77-90.

Howard, Robert, 1992. “The CEO as Or-ganizational Architect: An Interview withXerox's Paul Allaire.” Harvard BusinessReview, September/October : pp. 106-120.

23 1998 Investors conference, presentation by

Richard Thoman, COO.

Port, Otis, 1997. “Xerox Won't DuplicatePast Errors.” Business Week, 29 September.

Smart, Tim, 1993. “Can Xerox Duplicate itsGlory Days?” Business Week, 4 October.

Smart, Tim, and Peter Burrows, 1997. “Outto Make Xerox Print More Money: Newpresident and ex-IBM CFO Richard Tho-man has a mission: Put the copier giant backin the fast lane.” Business Week, 11 August,p. 81.

Stoughton, Mark, Karen Shapiro, LindaFeng, and Edward Reiskin, 1998. “TheBusiness Case for EPR: A Feasibility Studyfor Developing a Decision-Support Tool.” .Boston, MA: Tellus Institute.

Thoman, Richard. 1998. “Strategy and Im-plementation.” Presentation at the Xerox In-vestor's Conference, 13 July.

Xerox Corporation. 1998. “1997 AnnualReport.” Stamford, CT.

Castrol Industrial, N

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