The Role of Internet-of-Things for Service Transformation

Key Terms

Before going into more detail on service transformation, the terms product and service, which are closely related to service transformation, must be defined. In short, a product is understood to be a material artifact (e.g., car, machine). The term service is often used in different ways. In the production area, service is understood as an offer (e.g., maintenance, repair). In this work, the term service is defined as an economic activity that does not result in possession of a tangible asset (Pascual et al., 2019).

The term service transformation, called servitization, was introduced in 1988 by Vandermerwe and Rada, denoting the approach of companies to bundle services with products and to sell them (Vandermerwe & Rada, 1988). Adding services to products enables companies to get closer to customers and better meet their needs while still offering the same products. Service transformation is viewed as a strategy that uses a service-oriented approach to satisfy customer needs in order to gain competitive advantage and improve organizational performance (Paiola et al., 2021; Pascual et al., 2019; Zheng et al., 2021).

Service transformation is associated with activities that generate added value and unique competencies and skills, resulting in economic benefits (Baines et al., 2009). Companies that have successfully implemented service transformation create new, unprecedented opportunities for customers that result in a competitive advantage. The aim here is not “just” to sell products, but rather to create solutions for customers by creating a bundle by integrating services into products (Vandermerwe & Rada, 1988).

Service transformation processes can be supported by different key performance measurements, adapted or novel new operation models, and new network partnerships (Dimache & Roche, 2013). However, the shift to servitisation needs to be considered as a decision-making problem (cf. Dimache & Roche, 2013): “What is servitisation in the context of the business? How appropriate is the company’s offering for the move to a product-service system (PSS)? What are the changes necessary in the company to develop a new PSS model? Where is the business on the PSS continuum? What is the company’s end goal in the PSS continuum? What is the next step on the PSS continuum for the company?” (p. 1436).

Key Features

Although companies have long been providing services, they have been considered as a necessary evil in terms of marketing strategies for a long time. Most of the added value was related to physical products. Services were considered as add-on to products (Gebauer et al., 2005). This attitude has changed dramatically. Services are considered as a main factor in an integrated product and service offering (Baines et al., 2009). They are increasingly used as value proposition. Fundamental value creation activities have become part of holistic offerings (Gebauer et al., 2006). It enables companies to remain competitive (Zheng et al., 2021).

A key feature of service transformation is the focus on customer-specific needs. Customers are offered tailor-made solutions rather than products (Baines et al., 2009). According to (Oliva & Kallenberg, 2003) this customer orientation consists of two different elements. The first element describes the transition of the service offer from product-oriented services to user-process-oriented services, for example, from functioning of products to focusing on the efficiency and effectiveness of customer processes associated with the product. The second element describes a transition in customer interaction from transaction-based to relationship-based relations, for example, from product sales to customer knowledge management which is still considered a challenging task (cf. Zheng et al., 2019).

There are various forms of service transformation, along the so-called product-service continuum (Baines et al., 2009). This continuum ranges from traditional manufacturing companies, where services are sold as an add-on to the products, to pure service providers who see services as the main part of their value creation process. Such services have the capability to generate further key features for organizations in terms of resource optimization and operation innovations. Embedded sensing systems in Production-Service-Systems utilizing an ontology-based framework (cf. European ICP4Life project, Maleki et al., 2018) industrial machinery maintenance could be optimized. These developments show a strong relation to technical IoT components, bringing into play technology-oriented key features like crowd-sensing and self-adaptive components aside human-centric needs (cf. Zheng et al., 2019).

It is important for organizations to identify their own position in this continuum and to recognize the opportunities and challenges. This should take place as a dynamic process by finding your own position from time to time and taking a step forward toward service dominance (cf. Zheng et al., 2021). The integrated consideration of technology and user-generated data and features can lead to a data-driven circularity of IoT systems, including autonomous configuration with context-awareness as its manifestation, and user-oriented long-lasting evolving as its motivation, however its smartness depending on specific models and algorithms (cf. Li et al., 2020).

Service Types

So far, the term service has been used in general and is not differentiated based on its characteristics. There exist various service types, with a focus on progressive services that have a high level of service transformation maturity and require special skills for implementation. Baines and Lightfoot examined various service offerings from service-transformed companies and divided them into three different types (Baines & Lightfoot, 2013): (i) Basic services product delivery, (ii) Intermediate services (product repair, monitoring, and customer service), (iii) Advanced services (Pay-Per-Use, Fleet Management, Availability Contract, Integrated Solutions).

Basic services focus on product provision, such as product and spare parts deliveries. Intermediate services focus on maintenance, such as customer service, monitoring or repairs. An advanced service is an outcome that focuses on the provision of a capability through the performance of the product and is provided through product service systems. With advanced services, a company takes on more risk and responsibility. The company focuses on the result of the product’s performance and is also responsible for achieving the performance targets. A range of advanced services enables long-term contracts, closer customer relationships, new business opportunities and income streams, and greater customer benefits. Advanced services typically include risk & revenue sharing agreements, revenue through usage agreements, rental agreements or regular revenue payments (cf. Baines & Lightfoot, 2013).

Advanced services are provided by companies that have a good understanding of the customer’s core objectives and difficulties. According to Raddats et al. (2014), eight service transformation skills are required to develop advanced services. These are technical expertise, customer-focused methodologies, service culture, network relationships, service innovation, customer familiarity, service infrastructure, and tailored and consistent service offerings. From an internal perspective, a manufacturer needs technical expertise, a service culture and tailored and consistent service offerings. Together with the company’s internal interfaces between service and product engineers, this facilitates the provision of product-oriented services such as maintenance or repairs. However, in order to be able to offer advanced services, the transition to a service-oriented corporate culture is necessary. This culture means that services play the central role of the offer and are no longer seen as just an addition to a product. All stakeholders should internalize this.

For advanced services tailored service offerings are required. They allow the customer to select the most suitable offer and adapt it if necessary. For understanding customer challenges and finding effective solutions, familiarity with the customer needs to become part of service processes and methods. Technical expertise of products needs to be combined with knowledge of the customer’s behavior to improve and innovate customer processes. Relations to service providers can help in addition to an effective infrastructure for service developments satisfying customer needs (Raddats et al., 2014), however, in a human-centric way (cf. Zheng et al., 2019).

Drivers

Several factors guide companies in pursuing a service transformation strategy: finance, strategy and marketing (Baines et al., 2009; Gebauer et al., 2006; Oliva & Kallenberg, 2003). Thereby, higher profit margins and stable income are main financial drivers (Gebauer et al., 2006), for example, as shown for automotive manufacturers generating once or twice more revenue with services than with new sales. Product-service bundles are also less sensitive to price-based competition, as these bundles cannot be compared as easily as products (cf. Baines et al., 2009; Aiello et al., 2021).

Strategic drivers of service transformation generate competitive advantage. Generating competitive advantages through services is considered more sustainable, as these need to be identified by competitors before copying (Gebauer et al., 2006; Oliva & Kallenberg, 2003).

The use of services with the aim of increasing product sales by influencing the purchase decision is a driving force in marketing (Gebauer et al., 2006). Services can generate customer loyalty through novel/repeated sales and expanded communication. The latter results in insight into customer needs, and this improved offers (cf. Baines et al., 2009; Zheng et al., 2019).

Product Service System (PSS)

A product service system (PSS) is a special case of service transformation and describes the specific offer that results from a service transformation process. It is understood as an integrated combination of product and services, which are offered as a bundle and deliver a value in use (Baines et al., 2007; Tukker, 2004). Based on a service-oriented strategy it helps differentiating from competitors beyond fighting for market shares by reducing prices (Pascual et al., 2019), including mass customization (Maleki et al., 2018).

PSS are systems of products, services and networks of different actors who strive to be competitive by satisfying customer needs and at the same time to generate low ecological impact (Goedkoop et al., 1999). PSS can be viewed as offers from manufacturers who pursue a service transformation process—PSS are service-transformed offers. As such they have some special characteristics. They not only integrate services with products, but can also follow the concept of selling the use of the product and not the product itself (Baines et al., 2007): The customer only pays for the period of use of the product or for a result of the use of a product and does not transfer ownership (see also PSS types).

For instance, initially Rolls-Royce has sold turbines to airlines and the sales process ended with delivery. By developing through a service transformation process the product service system “Power-By-The-Hour” as a total care package including installation, maintenance, repairs and other services, Rolls-Royce remains the owner of the turbines and only provides the customer with the use of the turbine. It takes responsibility for effective use while collecting performance and usage data. In this case, the customer only pays for the effective use of the turbine (cf. Smith, 2013).

PSS Types

Various PSS types have been implemented, according to Tukker (2004), either being product-, benefit-, or result-oriented (see Figure 3). Their position in the service transformation continuum reveals PSS as special cases of service transformations (Baines et al., 2007).

Product-oriented PSS refer to offers that are represented by products and supplemented by services. These services are intended to improve functionality and performance, as well as to contribute to the management of the product’s life cycle. Any offer is focused on the product and less promoting services per se. Services that are part of this category include consulting activities for product application, maintenance, or repairs. All these services should help to increase the availability, performance and longevity of the product. (Baines et al., 2007; Tukker, 2004).

Benefit-oriented PSS are positioned product- and result-oriented services. Benefits for customers are delivered roughly equally by the product and the services. The aim of benefit-oriented PSS is to ensure the greatest possible availability of the product. The attempt is much more to sell an effective use of the product than to sell the product itself. This is why ownership of the product does not pass to the customer, as is the case with product-oriented PSS. Benefit-oriented PSS applications are, for example, leasing, lending, sharing or pooling of products (Baines et al., 2007; Tukker, 2004).

Result-oriented PSS are offers that provide solutions for customers that they would normally have to find themselves (Baines et al., 2007). A complete management solution is sold to the customer. The customer pays per service unit (e.g., car for a certain time) or for the resulting service result (e.g., transport from A to B) (Tukker, 2004). Ownership does not pass to the customer.

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Figure 3.

PSS types based on (Tukker, 2004).

Digital Service Transformation

Looking at the relation between digital technologies and service transformation in general frames studying the role of IoT for service transformation in the next section.

Digital technologies and service transformation are tightly coupled. Digital technologies facilitate developing service transformations toward new and complex service offerings (cf. Paschou et al., 2020). Technologies such as IoT or Artificial Intelligence (AI) can strengthen or even completely change the capabilities of services (Rymaszewska et al., 2017) and thus enable new service-oriented business models. The development or improvement of services using digital technologies is referred to as digital service transformation (Paiola & Gebauer, 2020).

Digital technologies can generate knowledge from data and thereby improve the performance of the company, which in turn leads to higher competitiveness. Benefits of digital service transformation include (cf. Paiola et al., 2021; Paschou et al., 2020):

By far the most widespread digital technology related to digital service transformation is the Internet of Things (IoT). IoT can be seen as a prerequisite for smart services, as this technology allows the collection and transmission of data from products and systems (Ardolino et al., 2018) and thus enables remote monitoring and control of products and systems (Porter & Heppelmann, 2014). Big data technology, including data analysis, is also important for digital service transformation, as knowledge can be extracted in order to exploit the full potential of advanced services. In particular, services can be based on predictions, adaptive control and optimization of a product. Other technologies that are receiving attention in the literature are cloud computing, as well as horizontal and vertical integration and traditional ICTs such as ERP and CRM systems (cf. Paschou et al., 2020).

Aiello et al. (2021) in their recent guide could identify several challenges to utilize IoT along digital service transformation processes. One of the major challenges is the interpretation of provided data by IoT devices. Termed as no-semantic cases, it requires to interpret delivered data in way meaningful information can be distilled and further processed and finally, collaboratively shared. First results from using OWL-T as an ontology have been presented by the authors. It enables defining IoT components or systems and services, thus, preparing a common ground for servitization. In that context, stakeholder roles and relations have been addressed in an interaction model addressing the roles provider, facilitator, and customer.

Summing Up

Service transformation terms the transition from product-focused sales to so-called “bundles” of customer-focused combinations of products and services, which are referred to as product-service systems (Baines et al., 2007; Tukker, 2004) and should create added value for the customer (Paschou et al., 2020). Services can be basic targeting product delivery, intermediate focusing on maintaining the product condition, and advanced. The latter concentrate on the provision of a capability through the performance of the product, and are provided by product service systems (Baines & Lightfoot, 2013).

A product service system (PSS) is thus a special case of service transformation. It captures the specific offer that results from a service transformation process. PSS can be product-, benefit-, or result-oriented, with the latter focus on services, leading to more intense customer relations (Tukker, 2004).

Transformation processes are tightly coupled with digital technologies, leading to digital service transformation. Benefits for customers, providers, the environment and society can be achieved through core technology and enablers, in particular, IoT. In combination with other technologies such as big data innovative and complex service offerings can be developed (cf. Paschou et al., 2020).

IoT-Featured Transformations of Business Models

As the amount of connected things and corresponding semantic representations, for example, in OWL (Web Ontology Language), is still increasing, IoT-enabled service-transformed business models emerge. They can be categorized into four archetypes based on their main value creation offerings: add-on, sharing, usage-based and solution-oriented business models with a total of nine subcategories (Suppatvech et al., 2019). In the following, the business models are described using practical examples and the connection to the underlying product service systems (PSS).

Add-on business models use IoT to add additional functions to existing products or services. This model corresponds to product-oriented PSS, in which services are offered as add-ons to products in order to support their function (Tukker, 2004). The use of IoT enables companies to offer four types of services within this business model approach, all of them are based on the original product: innovative digital services, support for service delivery, use of customer data, and on-demand delivery (Suppatvech et al., 2019):

In summary, add-on business models focus on additional offers of digital services for existing products, which are expanded by IoT in order to generate additional benefits. These additional digital services are also often offered for sale as a premium version of the product.

Sharing business models make customers only pay for the use or access of a product for a limited time. It enables different users to also use the same product when it is available (Suppatvech et al., 2019). From a PSS perspective, this type of business model corresponds to usage-orientation, as it aims to sell the effective use of the product rather than the product itself (Tukker, 2004). Suppliers are challenged to provide products on customer demand (Suppatvech et al., 2019). This model is similar to traditional rentals, however causing a higher frequency of changes of ownership and shorter cycle times (Firnkorn & Müller, 2012). For example, comparing traditional car rental with the car-sharing concept, for example, Car2Go, cars are passed on between customers and not provided via the provider after each order (cf. Leminen et al., 2012).

Usage-based business models measure product usage through IoT technologies. Based on this data a payment model is set up. The user only pays according to the respective product usage (Suppatvech et al., 2019). In traditional PSS, this model is result-oriented—the service offered corresponds to a certain result (Tukker, 2004). Usage-based business models can have two flavors (Suppatvech et al., 2019):

The solution-oriented business model refers to the use IoT delivering solutions to customers (Suppatvech et al., 2019). It enables providers to offer integrated solutions according to customer needs, including increase of efficiency and exploration of business opportunities (Kralewski, 2016). This business model corresponds to the results-oriented PSS, whereby companies agree with customers on the delivery of a specific result (Tukker, 2004). Solutions can be framed in various ways (Suppatvech et al., 2019):

In Figure 4, the various IoT-featured, service-transformed business models are summarized and put into relation to the different PSS types.

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Figure 4.

IoT-based service-transformed business models in the context of PSS types.

Experienced Benefits

IoT service-transformed business models have several benefits for providers and producers: Additional income can be generated through additional services created by IoT—long-term contracts replace traditional product sales (Kralewski, 2016). The use of IoT helps companies to reduce resources in the provision of services, for example, saving wage costs through remote diagnosis. It can lead to lower operating costs (Herterich et al., 2015). In addition, the introduction of IoT-enabled services can intensify customer relationships, as IoT enables the customer to individualize a service, which in turn allows the provider to offer customized solutions. Long-term solutions that create significant value for the customer and sustain provider-customer relationships (Hagberg et al., 2016). Finally, using IoT, companies can expand their product portfolio and subsequently expand their business (Ardolino et al., 2016; Rymaszewska et al., 2017; Saarikko et al., 2017).

Service offerings can be continuously improved (Suppatvech et al., 2019), for example, offering them in a customer-centered way. When giving providers insight into product usage behavior, resource consumption and management can be improved (Bressanelli et al., 2018). Such IoT-enabled service-transformed business models can lead to competitive advantages, as integrated product-services are highly context-sensitive and hard to copy (Kaňovská & Tomášková, 2018). Finally, with the help of IoT technologies, companies can evaluate the risk of the product and service offerings (Suppatvech et al., 2019)—service provision is continuously monitored and evaluated to identify possible risks, in particular with respective to sustainability (cf. Li et al., 2021).

Digital business-model innovation can impact sustainability, as shown in manufacturing servitization (cf. Paiola et al., 2021). Services become gradually use-oriented offerings as a result of digital product and service transformation. Advanced forms of market relations enable co-creations in collaborative network settings respecting customer processes in a result-oriented PSS. Transitions do not only require active participation of IoT providers, but rather informed decision making (cf. Dimache & Roche, 2013) featuring incremental and stakeholder-compatible transformation steps (cf. Xing & Ness, 2016). As their empirical findings show, each step needs to be identified upfront and negotiated, for both, the product-service provider, and customers, since “this change is from the traditional sell/buy model (high cost, low service, high carbon footprint) to the PSS model (low cost, high service, low carbon footprint)” (Xing & Ness, 2016, p. 528). In each incremental step expected and already achieved service benefits should be captured, in order to check whether “the total benefits of a combined PSS solution are greater once all the component areas are aligned into a single solution” (Xing & Ness, 2016)

In Figure 5, the benefits of the various IoT service-transformed business models are shown based on Suppatvech et al. (2019). The benefit of lower operating costs applies to all business models. The most potential benefits have been found for add-on and solution-oriented business models, since IoT is closely integrated.

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Figure 5.

Experienced benefits of IoT-enabled service-transformed business models.

Strategic and Operational Roles of IoT in Service-Transformed Business Models

In the previous section, the service-transformed business models enabled by IoT and their benefits have been explained. In this section the roles IoT can play in transforming business models are addressed on the strategic and operational level of an organization. Strategic roles are grouped according to the strategic use of IoT to enable services, whereas operational roles are grouped according to the functional use of IoT in the provision of services (cf. Suppatvech et al., 2019).

Strategic Roles

In order to understand the influence of IoT technologies on the service transformation of business models from a strategic point of view, Gerpott and May (2016) have defined three roles of IoT that can be assumed in a portfolio of services. In Figure 6, these IoT roles are shown and grouped into two categories, depending on the type of use in an offer. In the first category, IoT components only complement the product portfolio, that is, IoT is not considered the main driver of transformation. IoT can smooth (smoothing) or change (adaptation) the portfolio. Utilizing IoT technology, however, can lead to a complete replacement of existing products (innovation), namely by creating capabilities that do not yet exist (Gerpott & May, 2016).

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Figure 6.

Strategic roles of IoT in service transformation, based on (Gerpott & May, 2016).

Smoothing and adaptation complement a portfolio, whereas innovation aims to completely replace a company’s current product (Gerpott & May, 2016):

The smoothing role is also known as an enabler. Thereby, the IoT component is not part of the core product or service (Suppatvech et al., 2019). Rather, the basic functionality of the product is supported by sensors and actuators. An example of IoT as a smoothing role is the Amazon Dash button. In this case, the main service is still the sale and delivery of various goods. However, the process of ordering the products is “smoothed” through the use of an IoT-capable device with individual functions, which significantly simplifies the purchase process for the customer. Another example is the car-sharing service Car2Go, a subsidiary of the German car manufacturer Daimler. In short, Car2Go is a car rental service that enables its customers to rent cars on an hourly pay-per-use basis. The integration of IoT facilitates the process of procuring and returning a car by introducing a smartphone application and ensuring the connectivity of the cars with the rental company’s booking platform. IoT integration enables renting without the need to pick up the vehicle at a specific rental point and bring it back again. Customers can also rent a vehicle on site without making a reservation. In essence, it is still the original rental car service, but IoT reduces the scope of necessary interactions in the reservation and purchase phase (e.g., vehicle pick-up and return). This reduces the overall costs (Gerpott & May, 2016; Suppatvech et al., 2019).

The IoT role adaptation in a service-transformed business model describes IoT as additional functionality or adaptation of a product or service (Suppatvech et al., 2019). Similar to the enabler, the use of IoT components in this category does not change the core functionality of the respective product or service. Instead, the functionality of existing offers is expanded. One example of an additional service that has been enhanced by IoT functionality is the tracking of shipments within the logistics industry. The key functionality that remains unchanged despite IoT integration is the movement of physical goods. At the same time, the ability of the sender or recipient to track the current location of the shipment increases the value of the shipping service provider (S.-L. Chen et al., 2014; Gerpott & May, 2016)

The role of IoT as an innovator characterizes product or service innovations that have IoT as a driving force and create new, not yet available offers. These innovations are only possible through IoT components. The newly offered products or services can replace a non-IoT-capable product or create a completely new offer (Suppatvech et al., 2019). Examples in which the IoT functionality is the main driver of benefits are home automation systems that take on tasks such as automatic control of the room temperature or remote monitoring and adjustments to the energy consumption of household appliances. Without the IoT components, these tasks could not be performed or would have to be carried out by manual activities (Gerpott & May, 2016).

Figure 7 shows that all IoT-enabled service-transformed business models have the strategic role of adaptation (Suppatvech et al., 2019). This means that every business model basically uses IoT to add additional functions to a product or service. Furthermore, all business models, except the solution-oriented, use IoT in the smoothing role, which can be attributed to the reduction of transaction costs through easier communication between customer and provider (Suppatvech et al., 2019).

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Figure 7.

Strategic roles of IoT-enabled service-transformed business models.

Operational Roles

At the operational level, according to Suppatvech et al. (2019) seven roles representing functionalities of IoT in the provision of services can be identified:

Responsive maintenance refers to maintenance and repairs after a machine has already failed. The condition of the customer’s machine or product can be monitored by IoT technology in real time and an immediate response to a failure can be made in order to ensure that a return to a normal state can be achieved and the downtime is minimized (Suppatvech et al., 2019; Zancul et al., 2016).

Proactive maintenance involves using IoT to monitor and gain detailed product insights that help companies deal with product problems before they even occur (Suppatvech et al., 2019).

Operational optimization means that IoT-embedded products collect the operating data, algorithms and data analysis tools are used for product operation, capacity utilization, and performance are improved (Ardolino et al., 2016; Suppatvech et al., 2019).

Remote control means that the product equipped with IoT enables companies to monitor the product condition in order to diagnose errors and, if necessary, to correct them. In this case, not only the service provider is able to control the product remotely, but the customer also has the option to operate components of the product remotely, which is perceived as an additional service of the provider (Lee et al., 2015).

Autonomous management can be seen as a high capability of the IoT-embedded product. In this role, IoT is used to enable autonomous operation, automated decision-making, and self-diagnosis (Porter & Heppelmann, 2014). This means that IoT-embedded products have their own capabilities to decide whether certain functions, such as self-maintenance, should be performed or not (Ardolino et al., 2016).

In remote monitoring IoT is used to monitor aspects of the product, such as current location or usage data, and report relevant information to the customer (Ardolino et al., 2016).

Monitoring of customer usage behavior means that customer usage patterns are observed through IoT in order to develop personalized services (Ardolino et al., 2016).

Figure 8 shows that each business models uses IoT for remote monitoring of products and customer usage behavior. In addition, solution-oriented business models use the full spectrum of operational roles, as these provide for highly integrated offers and require a high level of sensor capability. (Suppatvech et al., 2019)

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Figure 8.

Operational roles of IoT-enabled service-transformed business models.

IoT Interfacing Service Transformation and Industry 4.0

IoT has not only be recognized as the most prominent technology related to digital service transformation, but also as the most important technology of Industry 4.0 (Rymaszewska et al., 2017). Service transformation and Industry 4.0 converges on the basis of IoT, as Industry 4.0 is focusing on intelligent cyber-physical systems to create added value for industrial activities (Frank et al., 2019). The Industry 4.0 trend is mainly based on a technology push (Lasi et al., 2014). This technology push implies a radical business model innovation by manufacturing companies, which requires a strong investment in new technologies (Müller et al., 2018). At the same time, companies have to respond to the trend toward service transformation. Industry 4.0 and service transformation come from different research areas and were therefore considered as separate topics for a long time. However, since both strategic orientations have profound effects on competition, relating the two topics has moved to the center of development (Weking et al., 2020).

In order to explain the connection between Industry 4.0 and service transformation, on the one hand, the intensity of the digital technologies embedded in a service offer, or in short, the digitization level (Frank et al., 2019) is of interest, and on the other hand, the strategic roles of IoT in a service-transformed business model needs to be clarified. These strategic roles of IoT have already been described above. There are the roles of smoothing, adaptation and innovation. Smoothing services use IoT to support the functionalities of a product or service, adapted services (adapting) to adapt the functionalities, and innovative services create a completely new offer (Gerpott & May, 2016).

Digitization Levels of Service Offerings

Digitization is defined as the transition process that companies are faced with when they start to introduce digital technologies, in order to implement a networked, intelligent company, as proposed in the concept of Industry 4.0. Frank et al. (2019) suggest three intensity levels of digitization, based on its purpose in service offers. The first stage is called manual services and refers to the low use of digital technologies in a service offering. At this stage, digital technologies are only seen as a supporting component, for example, for customers to manage relationships. IoT does not yet play a role at this stage. The second stage of the digitization of offers is that of digital services. Digital technologies are used with moderate intensity at this stage and enable companies to offer their customers services on the basis of digital technologies such as IoT or cloud computing. They provide the service itself, whereby the service brings added value for the customer. The two digitization stages presented so far, manual and digital services, focus only on added value for the customer from a business model perspective. The last stage of digitizing service offers, namely Industry 4.0-related services, relates to high-tech services that create added value not only for the customer but also for the internal processes of the provider. This is the (only) level of digitization of service offers that is in line with the concept of Industry 4.0. In this stage only services are developed, that return benefits and create new types of interactions between customers and the manufacturing processes of companies through IoT (Coreynen et al., 2017; Frank et al., 2019; Figure 9).

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Figure 9.

IoT-enabled service transformation for Industry 4.0 based on (Frank et al., 2019).

IoT in Service Transformation Processes—Opportunities and Dependencies

So far, various results or business models have been discussed that can result from a service transformation supported by IoT, without, however, addressing the processes that companies have to implement in order to achieve these results. This section therefore explains the implementation possibilities of IoT in a service transformation process.

Opportunities

The result of a service transformation process is not only dependent on the use of technologies such as IoT, but is viewed as the result of perceived opportunities from the relationship between technological features and business goals (Strong et al., 2014). That means, depending on the corporate goal, different possibilities are perceived that can be implemented through IoT (Figure 10). In their multiple case study, Naik et al. (2020) categorize the opportunities of IoT based on their contributions to a service offer in first-, second- and third-order opportunity and the results of the implementation into basic, internal and external results (Naik et al., 2020; Figure 11). The key features of IoT that emerged from this study are remote monitoring, data analysis and data exchange. Company goals can, for example, improve service efficiency, product performance, reactive service delivery, customer satisfaction, the product, the service portfolio or the product availability (Naik et al., 2020).

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Figure 10.

Implementation mechanism based on (Naik et al., 2020).

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Figure 11.

Service transformation process framework based on (Naik et al., 2020).

First-order opportunities use IoT features to establish basic remote connectivity and collect operational data. For instance, remote detection of problems is an opportunity, which results from the corporate goal of improving service efficiency and the IoT feature remote monitoring. To realize this opportunity, the action “Establishing a remote connection and collecting data” needs to be carried out, resulting in access to live data (as “basic result”) (Naik et al., 2020).

When companies can improve their internal business processes, resulting in higher quality results (as second-order opportunity according to Naik et al., 2020), they use first-order (basic) results, such as usage data, to perceive second-order opportunity, for example, “improving maintenance efficiency.” When realizing this opportunity, the result is “effective planning of maintenance visits and resource allocation” is generated. Since the results of the realization of these opportunities directly affect internal company processes, these are referred to as internal results (Naik et al., 2020).

Opportunities that allow companies to support their customers’ businesses are called third-order opportunities (Naik et al., 2020). For instance, the implementation of the option of “improving customer business processes,” leads to more intense use of the product in the entire customer portfolio, and can have an influence on the customer’s business processes. Therefore, these are referred to as external results (Naik et al., 2020).

Dependencies

First-, second-, and third-order options are linked in a sequential manner. More precisely, the result of the first-order opportunities (basic results) is linked to the perception of the second-order opportunities. The result of the second-order opportunities (internal results) is in turn linked to the perception of the third-order opportunities. The realization of the third-order opportunities is dependent on the realization of the second-order opportunities and this in turn depends on the realization of the first-order opportunities. Recognizing these dependencies is important in order to understand the contribution of IoT in a service transformation process, according to Naik et al.′s case study (Naik et al., 2020). A company has developed a new income channel based on performance consulting services as a high-quality service offering for its customers—implementing the third-order opportunity “Improvement of customer business processes.” Before this could be implemented, however, it had to be ensured that the customer business processes and products have been optimized. This was achieved through the internal results “Customer notification and maintenance planning” and “Improved product design and reduced errors” by implementing the second-order options “Reduction of shutdowns” and “Reduction of error repetitions.” In order to take advantage of these second-order opportunities, which allow the company to analyze data to improve product performance, remote connections and data collections have been implemented (as basic results). Corresponding requirements were met results through the implementation of the first-order options “Identification of common errors,” “Understanding product usage” and “Detecting problems from a distance.”

In figure 12, the opportunities of IoT identified by Naik et al. (2020) from six multinational companies in a service transformation process and their implementation results are summarized.

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Figure 12.

Occurrences of IoT in service transformation processes based on (Naik et al., 2020).

Summarizing, from a business model perspective, four archetypes of IoT-enabled service-transformed business models have been identified so far: add-on, sharing, usage-based, and solution-oriented business model (cf. Suppatvech et al., 2019). They correspond to the PSS types, and thus differ in the degree of maturity of the service transformation. Their largest benefit are the reduced operating costs.

The roles of IoT in the business models can be strategic or operational. The strategic roles are smoothing, adaptation and innovation, with smoothing and adaptation complementing a portfolio and the innovation role completely replacing an existing product or service (Gerpott & May, 2016). An important finding from the operational roles of IoT is that each of the business models uses IoT for remote monitoring of the product or customer usage behavior. Remote monitoring can therefore be viewed as the basic role of IoT-enabled service-transformed business models.

Furthermore, the dimension of digitization in the context of Industry 4.0 was compared to the strategic roles of IoT, in order to describe the convergence between service transformation and Industry 4.0 utilizing IoT. This analysis resulted in three configurations that fully correspond to the concept of Industry 4.0. They offer added value for the customer as well as for internal production processes.

When looking at the service transformation process and realizing opportunities enabled by IoT technologies, service transformation options do not only arise from IoT features per se, but mainly from recognizing the relationship between IoT features and corporate goals (cf. Strong et al., 2014). However, the various opportunities to realize a service transformation process build upon each other. For instance, before a reduction in product defects can be achieved through IoT, a remote connection for data collection must be established. To illustrate these dependencies, opportunity management of IoT can be structured according to three stages in a waterfall-like process.