Paradoxes in Servitization: Understanding Challenges of Transitioning from Products to Solutions

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Paradoxes in Servitization
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DOI: 10.1007/978-3-319-76517-4_10
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Kohtamäki, M., Rabetino, R., & Einola, S. (2018). Paradoxes in servitization. In M. Kohtamäki,
T. S. Baines, R. Rabetino, & A. Z. Bigdeli (Eds.), Practices and tools for servitization:
Managing service transition (pp. 185–199). London: Springer International Publishing.
Paradoxes in Servitization
Marko Kohtamäki, Rodrigo Rabetino & Suvi Einola
Introduction
Alternatively referred to as servitization (Vandermerwe & Rada, 1988), service infusion (Brax,
2005; Forkmann, Henneberg, Witell, & Kindström, 2017), service transformation (Martinez,
Bastl, Kingston, & Evans, 2010), or service transition (Fang, Palmatier, & Steenkamp, 2008), the
transformation from selling standardized products (+ add-on services) to offering customized
solutions (+ advanced services) is far from easy. Therefore, also the outcomes of servitization
may be uncertain (Gebauer, Fleisch, & Friedli, 2005; Lee, Yoo, & Kim, 2016). Servitizing
manufacturers typically face a variety of significant challenges in the transition process that lead
to non-linear effect of servitization on company performance, such as on sales growth
(Kohtamäki, Partanen, Parida, & Wincent, 2013), profitability (Visnjic Kastalli & Van Looy,
2013), and firm value (Fang et al., 2008). As such, servitization process has been found
challenging – our work suggests that those challenges result from the paradoxical tensions
related co-existence of product manufacturing (+ add-on services) and customized solutions (+
advance services). Mere co-existence of these two strategic logics is the reason for organizational
paradoxes to emerge. Hence, the paradox theory is utmost relevant when trying to understand the
bottlenecks in service transition.
Whereas the service transition is by no means limited to offerings but often begins from
offerings expanding to all dimensions of the manufacturing firm’s business model, we concur
with Fischer, Gebauer, Gregory, Ren, and Fleisch (2010) who argue that manufacturing
companies should free themselves from the ‘straightjacket’ of seeing servitization mostly
through spare parts, repair or maintenance, and also consider the opportunities created by more
advanced lifecycle services (Rabetino, Kohtamäki, Lehtonen, & Kostama, 2015). However, poor
outcomes with servitization typically lead companies to stop the service transition or eventually
trigger a de-servitization process (Kowalkowski, Gebauer, & Oliva, 2017).
The tensions that manufacturers face when transitioning from manufacturing products towards
the provision of customized integrated solutions, are often paradoxical in nature (Einola,
Kohtamäki, & Rabetino, 2017). Paradoxical tensions refer to “contradictory yet interrelated
elements that exist simultaneously and persist over time” (Smith & Lewis, 2011: 386).
Reflecting the tensions that emerge in organizational change processes such as service transition,
the paradox approach provides an alternative to contingency theory suggesting that instead of
trying to solve the organizational tensions, an organization should accept, embrace and cope with
them (Jay, 2013). While the paradox theory has gained increasing attention in organization
studies, some have suggested it becoming almost the ‘new normal’ in organizations (Gaim,
2017), and perhaps in organization science.
The paradox approach has been utilized to a limited extent in servitization. While suggesting a
service paradox, resulting from the coexistence different strategic logics, such as services vs
products that vary substantially (Gebauer et al., 2005) and may create a “tension between a
service and a product/manufacturing culture” that “is likely to be a constant challenge”

(Kindström and Kowalkowski 2009, p. 157), previous studies highlight the importance of the
underlying tensions between product-oriented and services-oriented (or integrated solutions)
business models. These tensions stretch from financial factors to organizational structure and
culture, all the way to people working between different divisions (Visnjic Kastalli & Van Looy,
2013). At the centre of these tensions is the fact that when servitizing, firms need to maintain
product manufacturing, and hence, product development. This situation suggests that, after
servitization, a servitized firm has maintained both the old organizational culture of the
product/technology organization, but also created a new more customer-oriented culture of
integrated solutions and advanced services. Servitized organizations find it difficult to provide
integrated solutions while maintaing high capacity in product factories – hence, these
organizations face the original paradox emerging when maintaining standardized products (+
add-on services) and customized solutions (+ advanced services). This tension leads to persistent
organizational paradoxes that cannot be resolved, but should be accepted, embraced and coped
with. By accepting the organizational paradox and its persistency, managers can bring order in to
the chaos, tone down the messyness of an organizational situation, and move towards workable
certainty (Lüscher & Lewis, 2008).
This chapter extends the above discussion by considering servitization through the paradox
perspective. Based on forty interviews with professionals from five leading Finnish
manufacturing companies that have been involved in servitization processes, we discuss about
the paradox theory, create a model to analyze the paradoxical tensions in servitization, and
provide some managerial guidelines on how to cope with these paradoxes. Identifying the
paradoxical tensions will help companies and their management to accept them, and, then, to
cope with them in order to alleviate their negative impact and facilitate servitization (Vaara &
Whittington, 2012; Whittington et al., 2003). We build upon the model on organizational
paradoxes developed by Smith and Lewis (2011). Thus, the developed framework provides a
significant guidelines for managers responsible for manufacturing firm’s servitization efforts.
Paradox theory
Strategy and organization theories suggest a variety of either-or choices, such as differentiation
vs. the low-cost (Porter, 1980), market vs. hierarchy (Williamson, 1975), or exploration vs.
exploitation (March, 1991). Creating an alternative for the classic contingency theory, the
paradox theory challenges the environment-strategy-structure fit (Chandler, 1962), suggesting
that, to find the best fit, a firm should alternatively accept tensions between various strategies
implemented in parallel. Therefore, instead of choosing either-or, firms should accept and
implement both-and strategies, by selecting a hybrid strategy, hybrid governance mechanisms, or
ambidexterity. Hence, to some extent, studies accept that these paradoxical tensions cannot be
solved, but they persist, and firms should thus learn how to cope with them (Calton & Payne,
2003; Jay, 2013; Poole & van de Ven, 1989).
In their original model, Smith and Lewis (2011) scrutinize four organizational paradoxes: a)
learning, b) organizing, c) performing, and d) belonging. The paradox of learning underlines the
tension between single- and double-loop learning (Argyris, 1991; e.g. exploitative and
explorative learning) – different types of learning that are both central for short- and long-term
performance (March, 1991; Raisch & Birkinshaw, 2008). The paradox of organizing may
emerge in between routines and change, flexibility and adaptation, direction and empowerment.
Further, the paradox of organizational performance arise between the short- and long-term goals,
company-level and divisional targets, or between, the organizational and individual optimization
– all important tensions stretching to different directions. Finally, the paradox of belonging refers
to organizational identity, the paradoxical tensions between product and service identity,
between standardized and customized, or between the production and knowledge. While these do
not capture all the potential paradoxes, they provide important examples of persistent
organizational paradoxes, which may not be solved, but have to be accepted and coped with.
Paradoxes in servitization
Our main argument is that the organizational paradoxes in servitization are actually caused by
the tensions triggered by a manufacturer moving from standardized products (+ add-on services)
towards customized solutions (+ advanced services), which generate the root cause for the
organizational paradoxes to emerge. We suggest this in Figure 10.1, which draws from Smith
and Lewis (2011), but develops their original model to servitization context, depicting
organizational Paradoxes in servitization. In particular, we build on the existing research on
servitization, and the service paradox coined by Gebauer et al. (2005). In their study, Gebauer et
al. (2005) present the service paradox as a situation where a company invests in services, but is
incapable of capturing the value of investments as higher returns due to increased costs. The
current chapter extends the paradox approach in servitization, by developing concept and theory
on the paradoxes in servitization.

Based on a previous research conducted in fields of servitization and organizational paradoxes,
and significant empirical work we have conducted in the last 7 years in 4 manufacturing
companies, we developed the model of organizational paradoxes to servitization.
Figure 10.1. Organizational paradoxes in servitization: balancing product and solution logics.
(Developed for the context of servitization based on Smith and Lewis, 2011.)
According to our findings, the main paradoxes in servitization could be coined as:
1. Paradox of Belonging: Having a product engineering vs. a customer-centric solutions
mindset. From the servitizing firm’s perspective, this means that the organization should
be able to facilitate the emergence of a new, more customer-centric solutions mindset
(Gebauer, Edvardsson, & Bjurklo, 2010; Gebauer & Kowalkowski, 2012; Kohtamäki,
Hakala, Partanen, Parida, & Wincent, 2015) and organizational culture, while trying to
preserve and cherish the product engineering mindset.
2. Paradox of Learning: Continuously developing the product business vs. explorative
learning towards a new solutions business. From the servitizing firm’s perspective, this
paradox suggests that while exploratively learning towards integrated solutions, the
organization should also continue developing the product business. This paradox
emphasizes the radical innovation needed when moving towards integrated solutions – in
many ways questioning the traditional product-oriented processes, while still maintaining
the incremental development of product development and delivery processes.
Understandably, a very challenging balancing act to take. Studies suggest that firms need
dynamic capabilities to succeed in servitization efforts (Fischer et al., 2010; Huikkola,
Kohtamäki, & Rabetino, 2016; Kindström, Kowalkowski, & Sandberg, 2013).
3. Paradox of Organizing: Separating product and service business units (or
departments) vs. simultaneously co-operating for design and delivery of solutions.
For practitioners in servitization, and servitizing firms, this paradox suggests a need for
setting different practices to support product-service bundling to facilitate solutions
integration, while the product and service units remain separated. Studies suggest the
importance of capabilities related to product-service bundling (Huikkola & Kohtamäki,
2017; Ulaga & Reinartz, 2011).
4. Paradox of Performing: Emphasizing short-term goals in separate product and
service businesses vs. adopting long-term financial goals for solutions. As integrated
solutions and outcome-based contracts are new innovations for the servitizing firm, it is
likely that their performance targets are set for long-term, while the product and add-on
service targets are set for short-term. Hence, the servitizing firm has to be able to set,
meet, and follow-up targets in both short-and long-terms. In practice, this is a difficult
challenge, even if, in theory, this might seem easy. Studies demonstrate that setting and
following-up targets is difficult also for servitizing firms (Rabetino, Kohtamäki, &
Gebauer, 2017).
Then again, according to our findings, the emerging paradoxes could be coined as:
5. Emerging Paradox of Learning::Belonging: Explorative learning towards solutions
while preserving product engineering mindset. This emerging paradox refers to a
situation where a servitizing firm struggles when trying to develop a radically new
business in integrated solutions while the mindset and culture of the organization still
cherishes the product, technology, or manufacturing.
6. Emerging Paradox of Learning::Organizing: Explorative learning towards solutions
while maintaining the separated product and service organizations. This paradox
implies the difficulties of bundling services and products into integrated solutions when
products and services are delivered by separate units. Thus, the sub-optimizing
organizational structure may provide significant obstacles to servitization – yet, the
separated product and service organizations are important for effective order-delivery of
products and services. Easily, the sub-optimizing, separated and exploitative
organizational unit turn into core rigidities (Leonard-Barton, 1992), exploitation (Sirén,
Kohtamäki, & Kuckertz, 2012) or competence (Fischer et al., 2010) traps in servitization.
7. Emerging Paradox of Performing::Organizing: Setting long-term goals to support
customized solutions while maintaining separate product and service organizations.
This paradox references to situation, where the servitizing firm needs to set long-term
targets for simultaneously quite much sub-optimizing product and service organizations.
In many ways, setting and receiving long-term targets may feel frustrating in the
organization, and as already Oliva and Kallenberg (2003) noted, it is possible that
product-centric cultures thwart service development.
8. Emerging Paradox of Belonging::Performing: Maintaining a product engineering
mindset while developing long-term goals to support customized solutions. Setting
long-term goals clash with the product engineering mindset and culture – the
organizational discourse at the micro-level continues emphasizing technology and
products while the top-management intends to influence on the organizational orientation
by setting long-term targets.
9. Emerging Paradox of Belonging::Organizing: Developing a customer-oriented
solutions mind-set while preserving the separate product and service organizations.
In this paradox, it is the separated product-service organization that clashes with the
intention to customer-oriented solutions mindset. In prior research, for instance, Gebauer

et al. (2010: 238) suggest that “Value, meanings, beliefs and goals related to services
may create conflicts with product-oriented organizational units leading an internal
resistance”.
10. Emerging Paradox of Learning::Performing: Explorative learning towards solutions
while maintaining short-term goals to support also product and service
performance. Short-term goals in separate product and service organizations maintain
exploitative product focus, while simultaneously the organization intends to learn
towards solutions. Thus, short-term performance interests clash with explorative learning.
Conclusions
When moving towards servitized business model, manufacturing companies face major
challenges – These challenges are significant as they may be creating the straightjacket to see
servitization through spare parts (Fischer et al., 2010). The present chapter argued that these
challenges are paradoxical and emerge as a result of the underlying tension between
manufacturing products, and the new business models required for configuring, delivering, and
servitizing innovative solutions. As the companies cannot stop from manufacturing when
servitizing, they face tensions between the juxtapose demands to standardize products while
simultaneously developing more advanced and customized product-service systems. This set up
creates the original servitization paradox, which may be the main cause for many organizational
paradoxes.
We utilized and developed the model from Smith and Lewis (2011) for the analysis of paradoxes
in servitization. While paradox theory seem to almost emerge as the ‘new normal’ science in the
organization theory, very limited number of works have so far utilized the concept in
servitization research (Brax, 2005; Gebauer et al., 2005; Visnjic Kastalli & Van Looy, 2013).
This chapter intends to address the gap, and develop the original model from Smith and Lewis to
the context of servitization. We developed the model to address the unique challenges
manufacturing companies face when servitizing their business models.
As the paradoxes are in definition tensions that persist, manufacturing companies need to learn
how to live with them. Organizations need to learn how to accept, appreciate, make sense of, and
cope with paradoxes (Beech, Burns, Caestecker, MacIntosh, & MacLean, 2004; Lewis, 2000). In
servitizing manufacturers, acceptance begins from the tension between effective manufacturing
of products, and developing integrated solutions. As this tension persists, it continues spurring
organizational tensions, as highlighted by Smith and Lewis.
For managers in servitizing manufacturing companies in charge of managing the transition
process towards a servitized business model, we provided a contextualized version of the Smith
and Lewis (2011) framework to understand the paradoxes in servitization. As said, the
paradoxical tensions persist, cannot be resolved, but companies should cope with them. The
created model intends to support managers in developing understanding on how to cope with the
paradox between products and integrated solutions. Accepting the tensions is central for
managers in servitization, to bring order into chaos. While the role of senior leaders and top-
managers is of importance, the role of middle managers should be emphasized in servitization, as
they are often the ones that actually face the tensions, and experience the dilemmas, where any
either-or decision would feel irrational. Hence, the paradox model may particularly help the
middle managers to make sense on the paradoxes encountered in servitization. In search of
alignment between different divisions and units, the management system play a central role. The
management system to support both-and, and hence, instead of enforcing one way over another,
should balance dynamically when needed, as both, the products and integrated solutions are
important.
A servitizing firm may try to cope with the paradoxes by using different tactics and coping
practices, such as accepting, accommodating, differentiating and integrating (Smith, 2014).
Accepting and embracing implies that both strategies are embraced, products and integrated
solutions. Accommodation would mean that the organization juxtaposes the contradictory
elements, and accommodates them – e.g. mass customizes hardware, software and advanced
services to integrate, customize and deliver as efficiently as possible. Differentiating and
integrating would provide other options too. Use differentiating for separating and appreciating
products and integrated solutions. Integrating suggests finding and arguing synergies between
products and integrated solutions. The paradox approach encourages managers to ask, how we
can develop servitization and value-based business model without sacrificing effective product
manufacturing – How to implement both-and (Smith, Binns, & Tushman, 2010).

Overall, to cope with the paradoxical tensions of servitization, manufacturers need tools and
practices. While some of our previous studies (Huikkola et al., 2016; Rabetino et al., 2017) and,
in particular, other chapters in this book provide good illustrations of tools and practices, here we
will only mention a few concrete examples. For instance, the paradox of organizing call for
appropriate service-oriented structures to support the delivery of solutions, while keeping up the
effective operations in product and service units. Manufacturers can set a separate unit for
solutions (either formal or an ad-hoc project-base team), which can develop its own
organizational capabilities, processes and resources, and be run separately. In addition, solutions
unit facilitates coping with the paradox of performing – Performance management system to
support integrated solutions performance, while keeping up the short-term performance of
product and service businesses.
The paradox of belonging highlighted a tension between the product-engineering mindset and the
customer-oriented solutions culture. Thus, the organization would need a capacity to balance
between these different types of identities. Again, accepting the paradox, and separating the
solutions activities into a separate unit might provide an answer – However, it is important to
acknowledge, that having a separate unit for solutions will not remove the paradoxical tension,
but it persists, and should be accepted by the practitioners. This is important also for the tension
between exploitative and explorative learning (Paradox of learning).
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Chapter · June 2018

Marko Kohtamäki Rodrigo Rabetino

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Strategy-As-Practice View project

Strategizing in Public Sector View project

The user has requested enhancement of the downloaded file.

Marko Kohtamäki, Rodrigo Rabetino & Suvi Einola

transformation from selling standardized products (+ add-on services) to offering customized

to non-linear effect of servitization on company performance, such as on sales growth

related co-existence of product manufacturing (+ add-on services) and customized solutions (+

bottlenecks in service transition.

trigger a de-servitization process (Kowalkowski, Gebauer, & Oliva, 2017).

2017), and perhaps in organization science.

service and a product/manufacturing culture” that “is likely to be a constant challenge”

underlying tensions between product-oriented and services-oriented (or integrated solutions)

product/technology organization, but also created a new more customer-oriented culture of

certainty (Lüscher & Lewis, 2008).

paradox theory challenges the environment-strategy-structure fit (Chandler, 1962), suggesting

implement both-and strategies, by selecting a hybrid strategy, hybrid governance mechanisms, or

2003; Jay, 2013; Poole & van de Ven, 1989).

organizational Paradoxes in servitization. In particular, we build on the existing research on

on the paradoxes in servitization.

Based on a previous research conducted in fields of servitization and organizational paradoxes,

companies, we developed the model of organizational paradoxes to servitization.

1. Paradox of Belonging: Having a product engineering vs. a customer-centric solutions

be able to facilitate the emergence of a new, more customer-centric solutions mindset

preserve and cherish the product engineering mindset.

2. Paradox of Learning: Continuously developing the product business vs. explorative

the incremental development of product development and delivery processes.

dynamic capabilities to succeed in servitization efforts (Fischer et al., 2010; Huikkola,

Kohtamäki, & Rabetino, 2016; Kindström, Kowalkowski, & Sandberg, 2013).

3. Paradox of Organizing: Separating product and service business units (or

departments) vs. simultaneously co-operating for design and delivery of solutions.

setting different practices to support product-service bundling to facilitate solutions

importance of capabilities related to product-service bundling (Huikkola & Kohtamäki,

2017; Ulaga & Reinartz, 2011).

4. Paradox of Performing: Emphasizing short-term goals in separate product and

5. Emerging Paradox of Learning::Belonging: Explorative learning towards solutions

while preserving product engineering mindset. This emerging paradox refers to a

cherishes the product, technology, or manufacturing.

6. Emerging Paradox of Learning::Organizing: Explorative learning towards solutions

organizational structure may provide significant obstacles to servitization – yet, the

products and services. Easily, the sub-optimizing, separated and exploitative

7. Emerging Paradox of Performing::Organizing: Setting long-term goals to support

customized solutions while maintaining separate product and service organizations.

product-centric cultures thwart service development.

8. Emerging Paradox of Belonging::Performing: Maintaining a product engineering

mindset while developing long-term goals to support customized solutions. Setting

organizational discourse at the micro-level continues emphasizing technology and

products while the top-management intends to influence on the organizational orientation

by setting long-term targets.

9. Emerging Paradox of Belonging::Organizing: Developing a customer-oriented

intention to customer-oriented solutions mindset. In prior research, for instance, Gebauer

may create conflicts with product-oriented organizational units leading an internal

10. Emerging Paradox of Learning::Performing: Explorative learning towards solutions

while maintaining short-term goals to support also product and service

performance. Short-term goals in separate product and service organizations maintain

exploitative product focus, while simultaneously the organization intends to learn

manufacturing companies face when servitizing their business models.

organizational tensions, as highlighted by Smith and Lewis.

For managers in servitizing manufacturing companies in charge of managing the transition