J PROD INNOV MANAG 2020;37(2):158–183

© 2020 The Authors. Journal of Product Innovation Management published by Wiley Periodicals, Inc. on behalf of Product Development &
Management Association
DOI: 10.1111/jpim.12516

Value Creation and Value Capture Alignment in Business Model

Innovation: A Process View on Outcome-Based Business Models
David Sjödin , Vinit Parida, Marin Jovanovic , and Ivanka Visnjic

Industrial manufacturers are innovating their business models by shifting from selling products to selling outcome-
based services, where the provider (manufacturer) guarantees to deliver the performance outcomes of the products
and services. This form of business model innovation requires a profound yet little understood shift in how value is
created, delivered, and captured. To address this research gap, our study examines two successful and four unsuc-
cessful cases of this shift. We find that effectiveness in business model innovation hinges on the three process phases
that unfold in collaboration with the customers: value proposition definition, value provision design, and value-in-use
delivery. We also find that that success is determined by the alignment of specific value creation and value capture
activities in each phase: identifying value creation opportunities—agreeing on value distribution in value proposi-
tion definition, designing the value offering—deciding on the profit formula in the value provision design, and finally
refining value creation processes—regulating incentive structures in the value-in-use delivery. Our process model
contributes to the literature and practice on business model innovation by providing a thorough understanding of how
alignment of value creation and value capture processes is ensured, whilst paying special attention to their interde-
pendence and the interactions between provider and customer.

Introduction
B
usiness model innovation sits at the top of the
agenda for most industrial firms, and it has gar-
Selling an outcome is not the same as selling a product nered a strong interest in the management liter-
or service; it is a totally different offer, and the com- ature as well (Foss and Saebi, 2017; Massa, Tucci, and
position of the offering means that the whole business Afuah, 2017; Ritter and Lettl, 2018). A business model
model towards the customer needs to change. You are describes how an organization creates, delivers, and
changing the way value is created by guaranteeing radi- captures value (Osterwalder and Pigneur, 2010; Parida,
cally higher performance. The delivery process needs to Sjödin, and Reim, 2019; Teece, 2010). One of the most
change since you are now responsible [for the outcome] important forms of business model innovation today is
and profit is also more risky, uncertain and aligned to the shift from selling products to selling outcome-based
the customer. So, this [shift] is not something you can services (Baines et al., 2017; Foss and Saebi, 2017; Tuli,
do alone. —Portfolio manager, Connectcorp Kohli, and Bharadwaj, 2007; Visnjic, Jovanovic, Neely,
and Engwall, 2017). When selling outcome-based ser-
Address Correspondence to: David Sjödin, Entrepreneurship and vices, a provider assumes responsibility for the perfor-
Innovation, Luleå University of Technology, Luleå SE-97187, Sweden.
E-mail: [email protected]. Tel: +46 920 49 1819. mance outcomes of the products and services (e.g.,
*We are grateful for the excellent comments provided by the editors, engine functioning) and accepts a penalty for any
Gloria Barczak, Henry Chesbrough, Thomas Ritter, and Christopher Lettl
as well as three anonymous JPIM referees. Input from research seminar
shortcomings (e.g., engine breakdown; Grubic, 2018;
participants at Copenhagen Business School and workshops within the Visnjic et al., 2017). Thus, the shift to outcome-based
Digital Innovation of business models (DigIn) project are acknowledged service represents a high-gain as well as a high-risk busi-
as is the financial support provided by VINNOVA. Ivanka Visnjic and
Marin Jovanovic acknowledge financial support from the Spanish ness model innovation strategy (Fang, Palmatier, and
Ministry of Science, Innovation and Universities, Reference: PGC2018- Steenkamp, 2008; Jacob and Ulaga, 2008; Kohtamäki,
2010;101022-A-100 “SERSISTEMICS”. The authors are also very
grateful for the insightful and constructive comments from the anonymous Parida, Oghazi, Gebauer, and Baines, 2019).
reviewers. Finally, the authors would like to express their sincere gratitude This shift is often accompanied with an “opening
to the Guest Editors for the support throughout the review process.
This is an open access article under the terms of the Creative Commons up” of the business model where the steps that a pro-
Attribution License, which permits use, distribution and reproduction in vider and customer take to ensure they create (i.e.,
any medium, provided the original work is properly cited.
[Corrections added on 11 February 2020, after first online publication:
lower life-cycle costs) and capture (i.e., value distribu-
additional text added to the Acknowledgment section.] tion) value need to be carefully redefined (Chesbrough,
 15405885, 2020, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/jpim.12516 by Nat Prov Indonesia, Wiley Online Library on [05/04/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
VALUE CREATION AND VALUE CAPTURE ALIGNMENT IN BMI J PROD INNOV MANAG 159
2020;37(2):158–183

Lettl, and Ritter, 2018; Saebi and Foss, 2015; Visnjic, relationships (Sjödin, Parida, and Wincent, 2016).
Neely, and Jovanovic, 2018). Yet, navigating this pro- For instance, the provider, who used to make money
cess of redefining value creation and value capture on product, maintenance, and spare parts, will now
and shifting relational roles and responsibilities is a have to consider these items as costs with revenues de-
daunting task that is often at odds with the existing pending entirely on the delivered outcomes. The cus-
modus operandi of traditional business-to-business tomer, for its part, will have to accept a much higher
degree of dependence on the provider. Furthermore,
BIOGRAPHICAL SKETCHES
this redefinition rarely happens in one step. The chal-
Prof. David Sjödin is an associate professor of entrepreneurship and
lenges, needs, and requirements likely evolve through-
innovation at Luleå University of Technology, Sweden  and a pro- out the business model innovation process. Indeed,
fessor of entrepreneurship and innovation  at University of South prior literature has recognized the importance of un-
Eastern Norway. He conducts research on the topics of servitization,
derstanding these processual and temporal aspects of
digitalization, open innovation, and business model innovation in
collaboration with leading global firms and regularly consults indus- business model innovation and has called for further
try. He has published 25+ papers in distinguished international jour- research on this subject (Berends, Smits, Reymen, and
nals, including California Management Review, Long Range Planning, Podoynitsyna, 2016; Foss and Saebi, 2018).
Journal of Product Innovation Management, Journal of Business
Research, and others. He is the recipient of multiple awards for his The process of business model innovation leading
research, including the Entrepreneurship Forum Young Researcher to outcome-based services is pertinent to two ongo-
Award 2018 for his research on the servitization of industry. ing dialogues in the literature: servitization and busi-
Prof. Vinit Parida is a chaired professor of entrepreneurship and in- ness model innovation. The servitization literature
novation at Luleå University of Technology, Sweden and a professor has begun to recognize the challenges involved in
of entrepreneurship and innovation  at University of South Eastern
Norway. He is an associate editor for Journal of Business Research in
this form of business model innovation as it evolves
Business-to-Business (B2B) track. He conducts research on the topics from a simple to a more advanced service portfolio
of business model innovation, digitalization, circular economy, and or- (Parida, Sjödin, Lenka, and Wincent, 2015; Ulaga and
ganizational capabilities. He has published 80+ papers in distinguished
Reinartz, 2011; Visnjic Kastalli, Van Looy, and Neely,
international journals, including Strategic Management Journal, Journal
of Management Studies, Industrial Marketing Management, Production 2013). While this literature stream is steadily advanc-
and Operation Management, Strategic Entrepreneurship Journal, and ing, few servitization studies have gone as far as to
others. He is the recipient of multiple awards for his research work. investigate the business model innovation process for
Dr. Marin Jovanovic is an assistant professor at the department of outcome-based services (Grubic and Jennions, 2018),
operations management at Copenhagen Business School and a visit- the most advanced form of service provision (Baines
ing scholar at Luleå University of Technology. He received a Ph.D.
degree in industrial economics and management from the KTH et al., 2017; Visnjic et al., 2017). Furthermore, recent
Royal Institute of Technology and a Ph.D. degree (cum laude) in in- studies have called for further research on how provid-
dustrial management from the Universidad Politécnica de Madrid. ers engage in “collaborating with customers through-
His research has been published in academic journals, such as Journal
of Product Innovation Management, Technovation, International
out the innovation process” (Randhawa, Wilden, and
Journal of Production Economics, Journal of Business Research, Hohberger, 2016, p. 767). As the interactions between
and Research-Technology Management. His main research revolves the provider and customer are more complex in out-
around the servitization and digitalization of manufacturing as well
come-based services than any other, this context may
as platform-based digital ecosystems. Marin has held positions at the
ESADE Business School and University of Cambridge. help us grasp the relational dynamics better (Aarikka-
Stenroos and Jaakkola, 2012; Petri and Jacob, 2016;
Dr. Ivanka Visnjic is an associate professor of innovation at ESADE
Business School, where she also acts as a Director of the Institute for Sjödin et al., 2016).
Innovation and Knowledge Management. Her research, teaching, From the perspective of the business model lit-
and advisory activities focus on discontinuous technological shifts, erature, there is also an important knowledge gap
disruptive innovation, and business model innovation. In particular,
her work examines how established companies deal with uncertainty in concerning the design and implementation of value-
their environment by developing and bringing to market novel technol- creation and value-capture processes across orga-
ogies, shifting from product to service business models and delivering nizational boundaries (Chesbrough et al., 2018;
customer solutions and outcomes. Her research has been published in
well-established academic journals, including California Management
Saebi and Foss, 2015). For instance, the existing
Review, International Journal of Production Economics, Journal of research on open business models has mostly con-
Operations Management, Journal of Product Innovation Management, centrated on value-creating processes, directing
and Technovation. Ivanka has received a number of awards and grants
less attention to complementary value capture pro-
for her research, such as the Journal of Operations Management
Ambassador Award in 2018 and IBM Faculty Award in 2012. cesses (Chesbrough et al., 2018; Desyllas and Sako,
2013). Moreover, scholars have recently called for
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160 J PROD INNOV MANAG D. SJÖDIN ET AL.
2020;37(2):158–183

increased focus on the alignment between value cre- Theoretical Background

ation and value capture processes in interorganiza-
tional relationships (Chesbrough et al., 2018; Ritter Business Model Innovation and Alignment of Value
and Lettl, 2018; Sjödin, Parida, Kohtamäki, and Creation and Value Capture Processes
Wincent, 2020). Alignment essentially concerns the
Business model innovation is crucial for industrial
“appropriateness” of the various elements/processes
manufacturers (Adrodegari and Saccani, 2017; Foss
(i.e., creation and capture) in relation to each other
and Saebi, 2017; Raddats, Kowalkowski, Benedettini,
(Chorn, 1991), and while it is often mentioned, this
Burton, and Gebauer, 2019; Teece, 2010) and it has
concept is seldom studied in detail in the business
received considerable attention in the literature on
model innovation context (Kranich and Wald, 2018;
management. While a business model represents the
Ritter and Lettl, 2018). How to achieve this align-
“design or architecture of the value creation, delivery,
ment may well be a particularly fruitful theme to
and capture mechanisms” of a firm (Teece, 2010, p.
study in the complex and risky context of outcome
172), business model innovation represents “designed,
provision where the potential for value creation and
value capture is evolving over time, potentially cre- novel, non-trivial changes to the key elements of a
ating more opportunities for misalignment between firm’s business model and/or the architecture linking
the provider and the customer. these elements” (Foss and Saebi, 2017, p. 201). The ac-
This study seeks to address these research gaps ademic literature on business model innovation, whilst
by exploring how providers and customers ensure continuing to evolve, needs further development (Foss
the alignment of value creation and value capture and Saebi, 2017). There are a number of crucial the-
processes in business model innovation for out- oretical and empirical questions that remain unre-
come-based services. To fulfill this purpose, our solved, such as: How does business model innovation
study draws on the rich case-study data from two unfold? What are the processes, key activities, and cus-
successful and four unsuccessful cases of business tomer interactions that mark out the journey?
model innovation during the shift to outcome-based The customer is often put at the center of com-
services. As a result, this study contributes to the mon business model frameworks (e.g., the value
growing body of literature on business model in- proposition in the business model canvas), yet there
novation (e.g., Foss and Saebi, 2017; Massa et al., is little understanding of how customers and provid-
2017; Visnjic et al., 2018). ers agree to jointly create value and to apportion it
Our contribution can be summarized in four points. so that each party receives its fair share (i.e., value
First, we develop a process framework aimed at busi- capture). In particular, the dominant focus in busi-
ness model innovation for outcome-based services ness model innovation process research is still on the
that unfolds in three phases: value proposition defini- internal issues of the firm such as the core organiza-
tion, value provision design, and value-in-use delivery. tional characteristics that facilitate (e.g., experimen-
Thus, we complement existing studies by focusing spe- tation, top management support) or hinder (e.g.,
cifically on value creation and value capture activities resource inertia, cognitive frames) the process of
as they unfold throughout the business model innova- business model innovation (e.g., Berends et al., 2016;
tion process. Second, this study unpacks the mechan- Berglund and Sandström, 2013; Demil and Lecocq,
ics of the alignment between value creation and value 2010; Doz and Kosonen, 2010; Teece, 2010). In con-
capture throughout the business model innovation trast, this study follows the line of recent research
process (Appleyard and Chesbrough, 2017; Randhawa (Chesbrough et al., 2018; Foss and Saebi, 2017) that
et al., 2016; Sjödin et al., 2016). Third, the study ex- argues specifically for an increased focus on the ex-
plores the relational dynamics between the provider ternal perspective, with specific reference to under-
and customer as they realign their value creation and standing the nature of interactions with customers
value capture perspectives. Here, we underscore the in shaping business model innovation processes.
importance of an open business model innovation For example, Macdonald, Kleinaltenkamp, and
perspective, given that our findings strongly suggest Wilson (2016, p. 97) place the customer in a sharp
that the alignment of value creation and value cap- focus in defining value as “all customer-perceived
ture is not a provider-centric requirement but a joint consequences arising from a solution that facilitate
endeavor. or hinder the achievement of the customer’s goals.”
 15405885, 2020, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/jpim.12516 by Nat Prov Indonesia, Wiley Online Library on [05/04/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
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Thus, rather than viewing value creation and value value capture processes involve activities that enable
capture as provider-centric or customer-centric pro- providers and customers to determine how the addi-
cesses, there is considerable merit in taking a rela- tional value created should be distributed between
tional or a dyadic view (Chesbrough, Vanhaverbeke, provider and customer.
and West, 2006; Dyer, Singh, and Hesterly, 2018). Furthermore, arguably the critical point of business
In addition, prior literature on business model in- model innovation is not only designing the value cre-
novation has tended to focus on the antecedents and ation and value capture processes but ensuring they
preconditions rather than on how business model are adapted and aligned to each other (Foss and Saebi,
innovation in terms of its value-creation and val- 2018; Ritter and Lettl, 2018). Following the line of
ue-capture potential unfolds in practice. We build discussion developed in the literature, the alignment
on the recent literature in defining value creation as would ensure the “appropriateness” of the various el-
the processes aimed at increasing value generation ements of value creation and value capture in relation
(Chesbrough et al., 2018; Dyer et al., 2018; Visnjic to one another (Chorn, 1991; Ritter and Lettl, 2018).
et al., 2018). For example, shifting the business model In particular, recent literature suggests that business
to outcome provision means that both provider and models with a congruent design encapsulating value
customer are involved in customer-specific value- creation, delivery, and capture will ultimately lead to
creation activities where the provider’s expertise and better results in business model innovation (Kranich
customer’s operational knowledge are instrumental in and Wald, 2018). However, only a few studies have
delivering higher use value (e.g., optimized operations) actually presented concrete insights into how align-
to that customer over time (Chatain, 2011; Rabetino, ment is created and maintained. As conditions change
Kohtamäki, Lehtonen, and Kostama, 2015; Sjödin (Reim et al., 2018), achieving alignment is a continu-
et al., 2016). This value-in-use perspective (i.e., value ous practice. Thus, a discussion of the alignment pro-
created through customer use) is a critical distinction cess requires both identifying the state of alignment
from the traditional value-in-exchange perspective and monitoring the dynamics of misalignment and
(i.e., at the point of sale). It can be argued that pro- potential realignment. Consequently, developing a
viders focused on the value-in-use perspective possess greater understanding of how value-creation and val-
greater potential for long-term competitive advantage ue-capture activities can be aligned in the context of
as they are more aligned to customers (Chesbrough business model innovation is needed.
et al., 2018). Value creation refers to those sets of ac- Finally, prior literature has focused for the most
tivities that enable providers and customers to pro- part on business model innovation in the business-to-
gressively realize this higher value (Chesbrough et al., consumer (B2C) context, studying well-known ex-
2018). amples such as Tesla, Apple, and Southwest Airlines
We define value capture as the process of secur- (Foss and Saebi, 2017; Zott, Amit, and Massa, 2011).
ing profits from value creation and the distribution However, we assert the need for an increased empha-
of those profits among participating actors such as sis on business model innovation in a B2B setting.
providers, customers, and partners (Chesbrough et B2B is a very significant part of the economy and
al., 2018; Dyer et al., 2018). Thus, successful value highly relevant because value creation and value cap-
capture calls for the design of appropriate gover- ture in the provider–customer relationship is often
nance mechanisms to ensure that value creation is more interactive and interdependent. From this per-
greater than the cost of realizing that value and that spective, focusing on industrial manufacturing as one
the value surplus is distributed fairly among part- of the core B2B contexts may well provide additional
ners (Chesbrough et al., 2018). However, it is im- insights to augment the business model innovation
portant to note that value capture extends beyond literature (BMI).
contractual and legal agreements (Reim, Parida, and
Sjödin, 2016). For example, when partners are fo- Servitization and Outcome-Based Services as
cused on value-in-use as the basis for value capture, a Domain for Understanding Business Model
trust between partners becomes necessary support Innovation
for control-based relationships centered on con-
tracts and other legal agreements (Chesbrough et In their literature review, Foss and Saebi (2017)
al., 2018; Reim, Sjödin, and Parida, 2018). In short, identify servitization as a significant research stream
 15405885, 2020, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/jpim.12516 by Nat Prov Indonesia, Wiley Online Library on [05/04/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
162 J PROD INNOV MANAG D. SJÖDIN ET AL.
2020;37(2):158–183

in business model innovation where further investi- Admittedly, several authors have outlined the pro-
gation is needed. Our own review of business model cesses that explain how various forms of advanced
literature, servitization literature, and the literature services or solutions are developed, implemented,
streams related to servitization such as integrated and delivered, which may also provide important in-
solutions, hybrid offerings, PSS, and digital serviti- sights into business model innovation (e.g., Aarikka-
zation suggests a gap in knowledge concerning how Stenroos and Jaakkola, 2012; Sawhney, 2006; Sjödin
business model innovation processes unfold. More et al., 2016, 2020; Tuli et al., 2007). A synthesis of
specifically, only a few studies (e.g., Ng, Ding, and these prior studies reveals three overarching phases
Yip, 2013; Visnjic et al., 2018; Visnjic Kastalli et al., of the process as: (1) definition, (2) design, and (3)
2013; Witell and Löfgren, 2013) have explicitly fo- delivery. The definition phase involves articulating
cused on value creation and value capture, and not a customer problems (Petri and Jacob, 2016) and then
single study has done so from a process perspective. creating an understanding of the customer’s broader
Moreover, studies of the shift to outcome-based ser- operational needs (Aarikka-Stenroos and Jaakkola,
vices are rare. Table 1 describes the key indicative 2012; Sawhney, 2006; Tuli et al., 2007). The design
studies in the servitization and BMI with respect to phase entails design, modification, or selection of
value creation and value capture as well as the pro- products and service elements to ensure they fit into
cess perspective. the customer’s overall operating environment, as well

Table 1.  Key Indicative Studies in Servitization and Business Model Innovation (BMI) Literature with Respect to Value
Creation and Value Capture, as Well as the Process Perspective
Insights on Value Creation and Value Capture Process
Focus: Author(s) Type of Study Alignment Perspective

Servitization
Aarikka-Stenroos and Jaakkola (2012) Qualitative No Yes
Ng et al. (2013) Qualitative Limited focus on value creation and value capture No
processes
Petri and Jacob (2016) Qualitative Limited focus on value creation and value capture Yes
processes
Sawhney (2006) Conceptual Limited focus on value creation and value capture Yes
processes
Sjödin et al. (2016) Qualitative No Yes
Sjödin et al. (2020) Qualitative Limited focus on value creation and value capture Yes
processes
Töllner et al. (2011) Qualitative No Yes
Tuli et al. (2007) Qualitative Limited focus on value creation and value capture Yes
processes
Visnjic et al. (2018) Qualitative Limited focus on value creation and value capture Yes
processes
Visnjic Kastalli et al. (2013) Qualitative Limited focus on value creation and value capture No
processes
Visnjic et al. (2017) Qualitative Limited focus on value capture processes No
Witell and Löfgren (2013) Qualitative Limited focus on value creation and value capture No
processes
Business model innovation (BMI)
Appleyard and Chesbrough (2017) Conceptual Yes No
Berends et al. (2016) Qualitative No Yes
Chesbrough et al. (2018) Conceptual Yes No
Demil and Lecocq (2010) Conceptual No Yes
Desyllas and Sako (2013) Qualitative Yes No
Foss and Saebi (2018) Conceptual Yes No
Massa et al. (2017) Conceptual Yes No
Randhawa et al. (2016) Conceptual Yes No
Ritter and Lettl (2018) Conceptual Yes No
Saebi and Foss (2015) Conceptual Yes No
Teece (2010) Conceptual Yes No
Current study Qualitative Yes Yes
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as defining contractual agreements (Sjödin et al., enabling a deeper understanding of the interactive
2016; Tuli et al., 2007). Finally, the delivery phase relationships relevant to business model innovation
is related to delivering and installing the solutions, in the outcome-provision context (Yin, 2017). Our
participating in the set-up arrangements, and work- approach responds to the call of Chesbrough et al.
ing in the operational environment to ensure deliv- (2006, p. 294) to study “dyads of innovation part-
ery of the advanced service (Aarikka-Stenroos and ners” involving respondents from both sides of the
Jaakkola, 2012; Sjödin, Parida, and Lindström, 2017; relationship in order to provide validation for and
Tuli et al., 2007). The dominant focus in these studies contextual richness to the analysis, and to better un-
(e.g., Tuli et al., 2007) seems to be on understanding derstand “the search, negotiation, contractual and
how value is created rather than how it is captured. implementation phases.”
Although recent research points to the importance of
agile co-creation processes (Sjödin et al., 2020) and Case Selection and Sampling Strategy
relational governance for value capture in digital ser-
vitization (Sjödin, Parida, and Kohtamäki, 2019), we Our sample included dyads of Sweden-born, glob-
still lack knowledge concerning the activities of value ally active providers, and customers engaged in out-
creation and value capture, and the roles that the pro- come relationships. These firms represent diverse
vider and customer play in aligning these for business industries—namely manufacturing, telecom, and
model innovation (Appleyard and Chesbrough, 2017; process industries—which provide an opportunity
Randhawa et al., 2016; Sjödin et al., 2016). to contrast various industrial perspectives on the
To summarize our perspective on this theoretical business model innovation process. Building on rec-
background, we argue that the research communi- ommendations made by Glaser and Strauss (1967),
ty’s understanding of how business model innovation we opted for theoretical sampling in order to select
processes unfold is still limited and in need of further cases that would illuminate the business model inno-
insightful research. Specifically, there is a dearth of vation processes involved in outcome relationships
studies addressing the alignment between value cre- (Eisenhardt and Graebner, 2007; Suddaby, 2006).
ation and value capture in business model innovation In this theoretical sampling, we engaged in exten-
(Chesbrough et al., 2018; Saebi and Foss, 2015). We sive dialog with providers who had an experience of
argue that the context of outcome-based services is providing advanced services in order to develop an
particularly relevant to study such processes and may inventory of specific outcome-based service cases.
provide important insights into the literature on servi- As we sought to gain deeper insights into the busi-
tization and business model innovation. ness model innovation process and how it unfolds,
we searched for cases that were initiated by the pro-
Methods vider over the last 5 years and where access to key
informants was assured so that rich insights into
In order to understand how providers and custom- the experience of business model innovation could
ers align value creation and value capture for out- be shared. This generated a list of 20 potential out-
come-based business model innovation, we adopted come relationships.
an inductive case-study design. Case studies make it To justify the generalizability of our findings, we
possible to mobilize multiple observations on complex followed the guidelines of Eisenhardt (1989) in se-
relational dynamics (Eisenhardt and Graebner, 2007; lecting cases from different industries and product
Gioia, Corley, and Hamilton, 2013) and are partic- categories from our initial sample of 20 relation-
ularly useful in developing inductive theory and the ships. More specifically, three criteria guided our
development of fine-grained insights into a theoreti- selection of cases. First, we ensured the collection
cally novel phenomenon (Edmondson and Mcmanus, of dyadic data from both provider and customer to
2007). obtain an unbiased view of the process. Due to prac-
Unlike other studies that ignore the customer tical reasons and, in certain cases, because of limited
perspective, we adopt the suggestion of Tuli et al. interest from the customer organizations, we had to
(2007) and Gama, Sjödin, and Frishammar (2017) to eliminate some cases. Second, a key selection crite-
collect dyadic data (i.e., both the customer and the rion was the ability of the provider and customer
provider view) on the evolution of the relationship, to vividly describe the relationship trajectory and
 Table 2.  Background information on the customer (C)–provider (P) relationships (R) studied
164

Relationship R1 R2 R3

Firm Minecorp (C) Equipcorp (P) Ironcorp (C) Equipcorp (P) Minecorp (C) Solutioncorp (P)

Employees 4900 16,000 4100 16,000 4900 132,000

Main products/ services Metal materials Mineral process Iron pellets Mineral process Metal materials Control system and mechanical
equipment equipment equipment
Data collection Semi-structured Semi-structured Semi-structured Semi-structured inter- Semi-structured Semi-structured interviews, in-
interviews, interviews, interviews, site views, internal and interviews, inter- ternal and external documen-
2020;37(2):158–183

internal and ex- internal and ex- visits, work- external documen- nal and external tation, site visits, workshops,
ternal documen- ternal documen- shops, industry tation, site visits, documentation, industry presentations
J PROD INNOV MANAG

tation, site visits, tation, site visits, presentations workshops site visits, work-
workshops workshops shops, industry
presentations
Interviewee role(s) 4—Project 4—Sales manager, 3 - Operations 4—Sales manager, 3—Procurement 4—R&D manager (2), key ac-
manager, R&D project manager, engineer, R&D project manager, manager, IT count manager, development
manager, senior R&D manager, manager, project R&D manager, manager, head manager
project manager, senior project manager senior project of automation
procurement manager manager
manager
Outcome-based service Innovative pressure filter system providing Innovative slurry pump solution to provide Digitally enabled ventilation system solution building on
business model guaranteed performance for dewatering guaranteed performance by reducing a digital platform approach that captures the location
innovation of minerals or ore concentrates. This crit- maintenance costs and maximize uptime. of each person and asset in the mine, measures tem-
ical function represented a bottleneck in Objective of minimizing total cost of perature and air quality, and regulates fan and air flow
production and, through co-development ownership by reduction in energy consump- through analytics to optimize air quality. Introduction
efforts, product life was extended by 50%, tion, wear of the product, costs of services of new partnerships, agreeing on distribution of roles
production costs reduced, and annual and parts over the contracted period. New and responsibilities between partners and highly risky
processing capacity increased. Innovative service delivery process, risk and revenue outcome guarantees.
delivery process and new revenue model sharing engagement and high demands on
needed to be developed and agreed upon. availability guarantees were needed to be
developed and agreed upon.

Relationship R4 R5 R6

Firm Forestcorp (C) Machinecorp (P) Minecorp (C) Equipcorp (P) Telecorp (C) Connectcorp (P)
Employees 4000 600 4900 16,000 25,400 117,000
Main products/ services Pulp and paper Forest harvesting Metal materials Mineral process Network access Network equipment and
products machines equipment and telecom software
services
Data collection Semi-structured Semi-structured Semi-structured Semi-structured inter- Interviews, external Semi-structured interviews, in-
interviews, inter- interviews, inter- interviews, inter- views, internal and documenta- ternal and external documen-
nal and external nal and external nal and external external documen- tion, industry tation, site visits, workshops,
documentation, documentation, documentation, tation, site visits, presentations industry presentations
site visits, work- site visits, work- site visits, work- workshops, indus-
shops, industry shops, industry shops, industry try presentations
presentations presentations presentations
D. SJÖDIN ET AL.

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 15405885, 2020, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/jpim.12516 by Nat Prov Indonesia, Wiley Online Library on [05/04/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
VALUE CREATION AND VALUE CAPTURE ALIGNMENT IN BMI J PROD INNOV MANAG 165
2020;37(2):158–183

provide in-depth information about the relationship

development mode where it is paid by its ability to man-

the network as the customer base increases. Continuous

and superior product capabilities to organically develop
manager, sales manager, R&D
and its key activities, supported by essential docu-

age user traffic and optimizing the network operation.

Cost per data contract enables provider to engage in co-
manager, VP business devel-

Provider used its knowledge of network management

innovation and optimization are core to this cost and

opment, business operation
mentation and background information. Third, we
5—Business development
sought to select more innovative (i.e., new to the
firm) and complex examples of the outcome-based
services enabled by digitalization (e.g., the use of
Connectcorp (P)

digital technologies) in order to capture cases that

manager

exemplified more significant shifts to business mod-

els. In selecting more innovative cases, we were able
to study processes where both provider and customer

revenue sharing deal.

had to manage novel value-creation and value-cap-
eration manager,
business director

ture arrangements. Finally, we intentionally selected

2—Business op-

both successful and unsuccessful cases. Studying

Telecorp (C)

both successful and unsuccessful cases mitigates

some of the concerns relating to studies plagued by
“survivorship bias” and “halo effects” (Grönlund,
R6

Sjödin, and Frishammar, 2010).

Our selection procedure resulted in a final sample
production time. Focus on extending service
intervals and reducing time, while maximiz-
R&D, key account

Performance-based mill lining solution works

ways of how value is created, delivered and

ing the lifetime of the mill linings. Revised
manager, product
manager, head of

grinding circuit and to maximize valuable

support manager

of six relationships. This allowed us to compare and

on a revenue model of cost-per-ton. The
manager, sales

goal is to ensure the availability of the

5—Technology

contrast the experiences of business model innovation

Equipcorp (P)

and the evolving value-creation and value-capture

processes across relationships. In particular, our sam-
ple of six cases was large enough to extract theoretical
insights into the data (Eisenhardt, 1989; Glaser and
Strauss, 1967; Strauss and Corbin, 2015). Table 2 de-
head of procure-

manager, head
5 - Procurement

scribes the key characteristics of the six outcome rela-

manager (2),

ment, R&D

of sourcing
Minecorp (C)

tionships and the firms studied.

captured.

Data Collection
R5

Data for the present study were gathered primar-

manager, analyt-
5—Service innova-

improvements based on operational data.

Proactive service solution contract to make
the machine ownership simple by provid-

key innovation was to deliver continuous

spections, proactive services, customized
ing customers with lower costs based on

ily through individual, in-depth interviews with

tailor-made solution, which includes in-
manager, sales

guaranteed engine hours. In collabora-

tion, provider and customers develop a
Machinecorp (P)

tion manager,

regional sales

training, and on-demand follow-up. A

ics manager,

participants in the six outcome relationships. We

production

manager

developed a semi-structured interview tool for our

interviews. The unit of analysis was the business
model innovation process for the outcome relation-
ship between provider and customer. Therefore, we
business develop-

undertook interviews with numerous managers from

6—Head of tech-
nology, project

ment manager
(2), technician

both the customer and the provider sides of the rela-

manager (2),
Forestcorp (C)

tionship. Data on the relationship trajectories were

collected in a retrospective and inductive way, al-
lowing for focused data gathering (Leonard-Barton,
R4

1990). During the interviews, the respondents were

instructed to reflect on the process of realizing the
Outcome-based service
Table 2. Continued

outcome-based service business model. For example,

Interviewee role(s)

respondents were asked to consider questions relat-

business model

ing to broad themes such as: How did the process

innovation
Relationship

of designing and implementing the outcome-based

service evolve? What happened in this phase? What
Firm

were the key challenges? How did you design the

 15405885, 2020, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/jpim.12516 by Nat Prov Indonesia, Wiley Online Library on [05/04/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
166 J PROD INNOV MANAG D. SJÖDIN ET AL.
2020;37(2):158–183

outcome to create the most value? (i.e., value cre- validate and provide context to our respondents’
ation) How did you agree on the contractual details views, thus enabling empirical triangulation. To in-
and profit sharing? (i.e., value capture). What were crease reliability and enhance transparency as well as
the key challenges and what did you learn? The the possibility of replication, a case-study protocol
interview was customized to each of the relation- was constructed along with a case-study database.
ships studied and continuously updated to capture The database included case-study notes, documents,
interesting themes as they emerged (Grönlund et and analysis.
al., 2010). Departures from specific questions were
permitted and were often encouraged; accordingly, Data Analysis
the format of the interviews was adapted to pursue
interesting and particularly relevant facets as they This study used a Gioia approach for its data analy-
emerged (Eisenhardt, 1989). In seeking answers to sis, which provides ways to identify patterns in a large
these overarching questions, we encouraged infor- and complex data set (Gioia et al., 2013; Strauss and
mants to base their answers not only on the relation- Corbin, 2015). Moreover, it offers a means to effectively
ships studied but also on their broader experience and accurately identify links within analytical themes.
from other relationships. Thus, empirical compari- Through a series of iterations and comparisons, it is
sons were facilitated. The interviews ranged from 1 possible to identify themes and overarching dimensions
to 3 hours, with an average duration of 80 minutes. so that an empirically grounded framework can be de-
In total, the results are based on 49 interviews with veloped. In doing so, we followed a three-step approach
both strategic- and operations-level personnel from similar to that described in the recent literature (e.g.,
provider and customer companies across the six rela- Ben-Menahem, Von Krogh, Erden, and Schneider,
tionships (22 from the customers and 27 from the pro- 2016; Sjödin, Frishammar, and Thorgren, 2019).
viders). The interviews were mainly conducted by the The first step in our data analysis centered on an
first and second authors of this study. Interviewees in-depth analysis of raw data (e.g., interview tran-
were identified by snowball sampling where key infor- scripts). This analysis focused on reading every in-
mants were asked to recommend people who had an terview several times, each time marking phrases
active role in the development of the business model and passages related to the overarching research
for the outcome-based service in different phases. To question. By coding the common words, phrases,
capture a multifaceted view of the process, we inter- terms, and labels mentioned by respondents, it was
viewed various functional roles from the providers possible to identify first-order categories of codes,
and customers (e.g., business developers, production which expressed the views of the respondents in
managers, and technical support staff) engaged in the their own words. For example, informant statements
discussions at various stages. Most of the informants such as: “We need to understand what can be the
had prior experience in many domains (e.g., R&D and gains from this, not only for them but for us. I think
marketing), were actively involved in ongoing projects, these discussions are critical in the early phases”
and had substantial experience from working together were coded under the label “Prioritizing win-win
with partners to create and define new advanced ser- opportunities”.
vice solutions or outcome-based services. They were The second step of the analysis sought to dis-
able, therefore, to present a much more diverse set of cover links and patterns within the first-order cate-
experiences than their current positions signaled. gories. This iterative approach led to the formation
In order to avoid respondent bias that could lead of second-order themes that represent theoretically
to confusion about cause and effect relationships distinct concepts created by combining first-order
(Leonard-Barton, 1990), we triangulated our data categories. Our analysis identified six second-order
by applying multiple data collection techniques, themes, which were on a higher level of abstraction
including multiple interviews, secondary data, and compared to the first-order categories. These themes
a review of documents (Jick, 1979). We performed relate to various approaches enabling value creation
document studies that entailed reviewing company and value capture in a business model innovation
reports, agreements, and project documents (e.g., process for outcome provision. In accordance with
evaluations of key customer problems, internal as- validity claims in the literature, the themes were fur-
sessments, PowerPoint presentations) in order to ther refined based on reviewer comments, insights
 15405885, 2020, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/jpim.12516 by Nat Prov Indonesia, Wiley Online Library on [05/04/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
VALUE CREATION AND VALUE CAPTURE ALIGNMENT IN BMI J PROD INNOV MANAG 167
2020;37(2):158–183

into prior literature, and data from interviews and gains would be shared (captured) among partners.
secondary sources such as internal documents, Similarly, a dissolved outcome-based service con-
presentations, and newspapers (Kumar, Stern, and tract agreement was often the result of a failure to
Anderson, 1993). Moreover, internal validity tests adjust the value-capture mechanisms and ensure
were conducted to ensure greater accuracy within fair returns as the relationship and the technology
the emergent themes. This was achieved through evolved. This practice of comparing successful and
correspondence and follow-up discussions with se- unsuccessful cases allowed further refinements and
lected respondents. helped us to generate the framework that explains
The next step involved the generation of aggregate how the business model innovation process unfolds
dimensions that represented a still-higher level of ab- (see Figure 2).
straction in the coding; here, we used insights into the
literature to guide the formation of theoretically rooted A Process for Business Model Innovation for
dimensions. Thus, the aggregate dimensions that were Outcome-Based Services
generated built on the first-order categories and sec-
ond-order themes to present a theoretically and prac- In this section, we present a process for business model
tically grounded categorization. Based on the data, we innovation for outcome-based services that emerged
constructed three aggregate dimensions corresponding inductively based on the analysis of the six cases stud-
to phases in business model innovation, creating an ied. We present our findings in three parts, each cor-
overall data structure (see Figure 1). Table 3 offers ad- responding to one of the three phases that emerged
ditional representative quotations to support the data from the analysis: value proposition definition, value
structure. provision design, and value-in-use delivery. Following
As a final step, we engaged in theorizing the logic the presentation of the findings, we offer the resulting
and linkages across aggregate dimensions, sec- framework and elaborate on it.
ond-order themes, and first-order categories. As we
sought to uncover how business model innovation Phase 1: Value Proposition Definition
unfolds and how firms manage value creation and
value capture in the shift to outcome provision, we During the initial phase, the provider and customer
assessed successful and unsuccessful instances for worked jointly to define the value proposition by pro-
each phase. For example, firms unable to secure gressively achieving alignment between identifying
commitment for the outcome-based service con- value creation opportunities and agreeing on value dis-
cept often failed to communicate the potential value tribution. A central goal was to identify a corroborated
to key stakeholders or failed to define how value concept (i.e., mutually agreed) for the outcome-based

• Exploring value-enhancement
Identifying value creation
opportunities
opportunities
• Creating value proposition concept
Phase 1:
Value proposition
definition
• Prioritizing win-win opportunities
Agreeing on value distribution
• Evaluating profit potential

• Customizing value architecture

Designing the value offering
• Designing delivery process
Phase 2:
Value provision
design
• Assessing delivery risks
Deciding on the profit formula
• Designing performance indicators

• Developing operational capabilities Refining value creation

• Exploring improvement opportunities processes
Phase 3:
Value-in-use
delivery
• Re-aligning incentives
Regulating incentive structures
• Ensuring fair value distribution

Figure 1.  Data Structure

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168 J PROD INNOV MANAG D. SJÖDIN ET AL.
2020;37(2):158–183

Table 3.  Representative Supportive Data for Each Second-Order Theme

Dimensions
and Themes First-Order Codes and Representative Quotations

Phase 1: Value proposition definition

Identifying I think a good start to any process is asking the customer ‘where are your bottlenecks?’ I think customers are always
value more receptive to performance-based services when they know they have a problem. Then we know that they are will-
creation ing to pay and that we would be creating value by solving their problems. Key account manager, Solutioncorp. R3
opportunities It is a balancing act during the early phases. You want to be concrete with the solution but also want to have openness
to revise the concept. This is necessary in case the concept is not financially viable or agreements are not supported by
top management during the implementation. Senior project manager from Equipcorp. R5
Quite often the problems we are trying to address are highly complex and multifaceted. This calls for jointly working
with the right people that have the correct positions in each side of the relationship to break down the problem into
subparts. Much effort is needed in this phase, otherwise we can end up missing critical details, and that can be a big
problem. R&D manager, Connectcorp. R6
Failure quotation: We were never really able to define the concept concretely enough so that the customer could sign off
on the new contract. Internally, there was also a lot of concern, if we are able to deliver on the value promised. After a
lot of front and back discussion, we finally agreed not to pursue this new service idea with our customer. Many feared
that we could lose face with the customer, in addition to financial loss. Sales, Equipcorp. R2
Agreeing We can have good initial research discussions, but it seems, as soon as we start speaking about how to collaborate and
on value commercialize, we need to talk business and revenue, and the discussions can be blocked. I think we have realized a
distribution need to have a broader perspective on how we can capture value. Business model researcher, Connectcorp. R6
I think a critical challenge here is that when they are looking for cost cuts and we are looking for value improvements,
and perhaps these are not always the same. I mean we are offering solutions and assuming risk from the customer and
that is a different value and more expensive than a standard offer. Service development manager, Machinecorp. R4
A successful outcome-based contact has to have a simple view on what measures to use for allocating payment. For
example, we used a pay-per-capacity contract, which enables us to optimize planning and forecasting, manage capac-
ity planning, coverage variation and data volume variation and provides a better way to calculate reward and penalty.
Business operation manager from Connectcorp. R6
Failure quotation: We were not involved in the discussion until the end. It felt that the operational function and supplier
teams have developed an idea without taking any consideration of the procurement process into account. When we
started to look into the ideas for collaboration, we quickly realized that there was not enough competence and sup-
port to change the product and service contract into an outcome-based service arrangement. Procurement manager,
Minecorp. R1
Phase 2: Value provision design
Designing the We must make our customers understand that it is about value co-creation. This sounds like it would be obvious and
value offering simple but it's not easy to sit down and look at the risks and the level of service to be on and explain the value to the
customer. Research manager, Solutioncorp. R3
Roles and responsibilities between different levels of provider and customer organizations need to be detailed. This is es-
pecially important in the context of delivery of solutions as we need to enter customer operations and make sure that
our agreed terms are met. Quite often relationships work well at top management level but, at operational level, there
are conflicts and disagreements. Senior project manager, Equipcorp. R5
There was a huge roadblock, from the operational level initially, to prove that this does not work, that we could not get
this new way of working to perform in delivery. … So, we had to do a careful analysis of how we should set up a con-
tract like this operationally what are the processes, service levels etc. Senior manager, Connectcorp. R6
Failure quotation: I think they feel it is an issue that you let things out and don’t have control of it. Of course, other
discussions will be about what level this service should be on. Who will be responsible for what? And what things need
to be solved then? Then we're back, technically it's no problem. It's probably more about daring and daring to do and
that’s the challenge. Research manager, Solutioncorp. R3
Deciding on Each mine is unique and suppliers need to adapt their solution to our needs. However, before we sign any contracts, we
the profit need to truly believe that cost-revenue analysis clearly shows that procuring outcome-based contacts will be superior
formula to just buying a machine and service contract. Procurement director, Minecorp. R5
The baseline for the operational risks needs to be re-evaluated. Now suddenly other risks need to be considered, which
were not relevant during the previous [product-based] setting. To address this new condition, we reworked with risks
analysis and also tried to spread the risks across contracts to promote quick learning about what works and what does
not work. Key account manager from Equipcorp. R5
Behavioral risks are very important to consider in this context. When we start to offer an outcome, the norms of the cus-
tomer and provider relationship changes and, at least during the first year, both sides need to reevaluate risks carefully
and make sure that they do not disrupt the new collaboration. Service innovation manager, Machinecorp. R4
I think what really enables us to form profitable relationships is that we need to have trust and a willingness to assess
the market situation and find an agreement that enables both parties to gain now and in the future. Procurement
manager, Minecorp. R5
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VALUE CREATION AND VALUE CAPTURE ALIGNMENT IN BMI J PROD INNOV MANAG 169
2020;37(2):158–183

Table 3. Continued
Dimensions
and Themes First-Order Codes and Representative Quotations
Phase 3: Value-in-use delivery
Refining value I think it is easy to see the relationship value here, when we increase output, they make more money and we make more
creation money. Trust is important, but I think key to success is that we also need to continue looking for valuable improve-
processes ments. Key account manager, Equipcorp. R5
“[Minecorp] constantly keeps us on our toes and challenges us to reach new records, but it's a challenge we welcome
with open arms.” Excerpt from internal report stated by Regional service manager, Equipcorp. R5
Failure quotation: The main issue with the new contract was that the supplier could not deliver the value that they
promised. Basically, we have a much more expensive contract, but we could not see how we gained any additional value
compared to the cheaper old service contract. It was evident that the supplier delivery organization was not ready to
manage the improvements and support enhancement in productivity of our machine operators. So, we cancelled all new
service contracts within the first six months. Head of technology, Forestcorp. R4
In a mine, nothing is constant, the conditions around the equipment are changing and suppliers need to work jointly with
operation staff to ensure that promised outcomes are delivered. The room for error is quite low, if the machine comes
to a standstill, we can lose millions each day. So, we jointly define and redefine responsibilities among staff to ensure
that performance outcomes are achieved day in, day out. Plant manager, Minecorp. R5
Regulating Failure quotation: We worked together with [Forestcorp] when we developed the solution and, in the end, they started
incentive to compare our solution to traditional service contracts and we didn’t get any more business from them. Because they
structures couldn’t understand the added value, even when we showed it and everything, but they didn’t get it. Service manager,
Machinecorp. R4
Failure quotation: I think it is clear that an unbalanced agreement where only one party profits will not survive for long.
Technical director, Forestcorp. R4
Everyone thinks it is obvious that you should sell the value, but the value is only interesting for six months and, after
that, it is taken for granted, and then it's not easy to pay or get paid for it anymore. Research manager, Solutioncorp.
R3
A key dimension during an on-going contract period has to do with changing internal and external conditions. We
found that our cooperation with customers was very positive because we were promoting flexibility in delivering the
outcomes. For example, three years into the contract, we introduced a technological upgrade to the equipment, which
was necessary to meet increasing productivity. So, more than half way into the contract, we revised the indicators and
increased productivity by another five percent with only marginally increased costs over the life of the equipment. Key
account manager, Equipcorp. R5
  I think a key to the success of this contract was that we focused our attention on selling and delivering the outcomes
which enables [Telecorp] to make more money … This means that the contract was always based on the utilized ca-
pacity, not the installed capacity, and this required constant monitoring. VP business development, Connectcorp. R6

service, which can create significant value and ensure (R3), explained how they had engaged in a series of
that the value thus created can be profitably captured dialogues focused on pinpointing problem areas that
by both provider and customer. their digital solutions could address. Moreover, iden-
Identifying value creation opportunities means that tification of improvement opportunities could be fa-
both provider and customer were required to focus cilitated by locating bottlenecks—critical functions
on clearly explaining the potential for increased value that constrain operational throughput—through an
creation that an outcome-based service makes possi- analysis of operational data. Identifying such bottle-
ble. First, informants reported that working jointly in necks was often a good starting point in seeking to
exploring value-enhancement opportunities provided a align incentives in this early phase. A sales manager
good starting point for this step. The key was discov- from Equipcorp (P) elaborated:
ering how the transformation to outcome provision
can create new opportunities for value creation by let- We know the ability of our machine and, based on
ting the provider assume greater responsibility for the production data, we could see that the filter solu-
customer’s operation through the design of innovative tion was working at 40% output. This would mean
solutions. This involved conducting a holistic mapping that something was wrong with the process and how
of the customer’s operational processes and provid- the equipment was operated.  … We explored this
er´s potential technological solutions in order to iden- business opportunity with the customer and offered
tify potential areas of improvement. For example, one them a guarantee of output in a performance-based
respondent at the provider organization, Solutioncorp contract.
 15405885, 2020, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/jpim.12516 by Nat Prov Indonesia, Wiley Online Library on [05/04/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
170 J PROD INNOV MANAG D. SJÖDIN ET AL.
2020;37(2):158–183

Legend:

Value creation
Dissolved OBS Extended OBS
contract agreement partnership

Value capture
Ensuring fair value Developing operational
distribution capabilities

Refining value
Unable to structure Signed OBS
creation processes
OBS agreement contractual agreement

Designing Regulating
performance Customizing value
architecture incentive
indicators structures
Exploring
improvement Re-aligning incentives
Designing the opportunities
Unable to secure Alignment of OBS value offering
commitment for OBS objectives

Phase 3: Value-in-use delivery

Deciding on the
Exploring value
Evaluating profit enhancement profit formula
potential opportunities
Designing delivery Assessing delivery risks
process
Identifying value
creation
opportunities
Phase 2: Value provision design

Agreeing on value
distribution

Creating value Prioritizing win-win

proposition concept opportunities

Phase 1: Value proposition definition

Figure 2.  A Process Framework of Value Creation and Value Capture Alignment in Business Model Innovation Relationships

In addition, parties focused on creating a value service. One of our interviewees, a product special-
proposition concept. This meant clarifying how a ist manager at the provider organization, Equipcorp
new outcome-based service would create additional (R5), explained:
value and earmarking the subtasks that enable this.
For example, informants described how they dis- After several iterations and open dialogs, we finally
sected an overarching problem into subproblems reached some common ground for moving forward
in collaboration with the provider’s key account with the business opportunity. In practice, we had
manager, development team, end users, and other created a rough concept of how the new business re-
stakeholders in the customer’s operation. Greater lationship would work and perform. The concept en-
emphasis was placed on identifying the underlying abled improved communication about the solution,
technologies, products, and service activities that and we could now start agreeing on the benefits.
can constitute the outcome-based service, and on
clarifying what value the proposed concept can gen- As part of the activities related to agreeing on
erate (e.g., which pain points or problem areas need value distribution, both provider and customer fo-
to be resolved). Many informants underlined the cused on the terms under which the value created
importance of keeping these discussions reasonably would be distributed between them. It was interest-
open by focusing on the value-creation potential of ing to note that these activities were already evident
the concept in this early phase. The challenge often in the first phase of discussions in successful cases
centered on defining the outcomes in a way that was only. However, specifying exactly how the value
specific enough to meet diverse requirements but is to be captured (i.e., in financial terms) did not
broad enough to allow the provider to propose inno- dominate during this phase either. Too much em-
vative solutions that lower the total cost of outcome phasis on contractual details can run the risk that
provision over its life cycle. A key logic was to avoid partners will become mired in negotiations before
specifications that do not directly influence the tar- a clear idea of the value that can be generated has
get outcome since too many restrictions can hinder materialized. Moreover, some discussion of how to
creativity and innovation. In any event, the outcome share value-capture benefits proved to be essential.
should deliver a concrete concept for the outcome For instance, a key step entailed prioritizing win-win
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VALUE CREATION AND VALUE CAPTURE ALIGNMENT IN BMI J PROD INNOV MANAG 171
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opportunities. This involved analysis of how differ- question was under which conditions and at what
ent outcome-based service ideas play out in terms cost. Can we reduce our requirement for air quality
of benefits and costs for the parties. Ideas were pri- in certain areas of the mines to lower total costs?
oritized, selecting the most feasible and potentially In this discussion, it was also evident that having
profitable ones. Naturally, these evaluations were staff from Solutioncorp on-site would be a “nice to
plagued by great uncertainty given the lack of infor- have” condition, but this was later excluded from
mation on how the outcome provision would actu- the contract due to the high cost and low profit po-
ally function. Nevertheless, informants highlighted tential, with priority given instead to rather remote
the ways of making initial estimates so that a basis monitoring and control functions. Thus, evaluating
for discussion was provided. For example, an R&D profit potential is usually quite an interactive prac-
manager at the provider organization, Equipcorp tice in order to understand the underlying reasoning
(R5), described how its simulation software was and the gains emphasized by both parties. However,
able to predict how the mill solution would play formulating these requirements was a challenge as
out in terms of life-cycle costs under different ser- described by the R&D manager of the provider or-
vice configurations. The key was finding a solution ganization, Connectcorp (R6):
that builds on the strengths of both partners and
provides the potential for mutual profits. The chief We find that customers are typically totally un-
technology officer at the customer organization, aware of how to formulate the KPIs that are needed
Telecorp (R6), explained: for outcome service-level agreements such as avail-
ability levels and functions.  … This needs to be a
We recognized that through outsourcing we joint work and a more relational approach in defin-
could capitalize on the strengths of our partners. ing the KPIs and sharing of risks since no-one has
Connectcorp’s in-depth domain knowledge, econ- really done it before and no-one knows how it will
omies of scale and ability to attract talent are all really play out.
areas which can really benefit our business. Our
overall objective [with this relationship] is to com-
bine cutting-edge technology with capital and op- Phase 2: Value Provision Design
erational expenditures optimization and grow our
market share profitably. The second phase focused on designing the value pro-
vision and included activities related to designing the
The other activity involved evaluating the profit value offering and deciding the profit formula to agree
potential. Here, the gains arising from the selected on a mutually beneficial business model. This phase
outcome-based service concept were assessed (e.g., involved the concrete design of equipment and ser-
reduced life-cycle costs, increased operational vice activities in terms of scope and allocation, and
throughput) to formulate a view on what profits the formulation of delivery-process descriptions and
could be shared. The key challenge here was to iden- expected roles so that the defined outcome-based ser-
tify performance gains that are aligned with the key vice was translated into a signed contract. This phase
stakeholders on the customer side so that their com- placed higher demands on the ability of partners to
mitment is strengthened and their input on value negotiate so that the benefits and the alignment of
capture potential is secured. For example, when an value-creation and value-capture activities could be
outcome was central to customer operations, diverse realized.
interest groups or stakeholders from the customer In this second phase, designing the value offering
side such as senior management—from operations, was a key theme that respondents emphasized. A
R&D, and procurement—and end users were in- more detailed specification of how value is to be
volved. Quite often the value of potential gains var- created and delivered to customers and the role that
ied widely, with some categorized as “must have” each party should play was considered obligatory
and others as “nice to have”. For example, infor- for the successful outcome of this phase. As one of
mants from Minecorp disclosed that, when procur- the core activities, we identified the need for custom-
ing smart ventilation systems, the focus was placed izing the value architecture. This entailed much more
on achieving a certain level of “air quality,” but the detailed discussion on how value is to be created,
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172 J PROD INNOV MANAG D. SJÖDIN ET AL.
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the specific functions required, the duration, and the standard outcome contract to include softer as-
how the performance should be measured. More pects such as trust and norms to be embedded in
specifically, it concerned jointly selecting the opti- the relationship. A service manager at Connectcorp,
mal configuration of product, service, and digital the provider organization, described the importance
components (e.g., sensors and operational analytics) of having a good relational approach to the design
to ensure that the final offering is customized and activities:
addresses the unique demands of the customer. For
example, a key account manager at Solutioncorp de- As roles and responsibilities change in the outcome
scribed how increasing the reliability of a piece of relationships, the likelihood of conflicts increases. It
equipment by 10% could be achieved by installing helps if the relationship between customer and sup-
sturdier physical components or by increasing the plier is not about pointing fingers but rather about
number of service intervals to evaluate the condition achieving common goals. … The customer was very
of the product. The first option would simultane- open to us and gave us the design freedom to develop
ously increase energy consumption and component the most effective solution that we could deliver.
costs, whereas the second option would increase
the service cost and require extensive and ongoing Another key task for value capture in this phase was
maintenance work, which could disrupt production. deciding on the profit formula. This meant taking the ini-
Thus, this step often required a degree of creative tial estimates from the first phase further by clearly de-
problem solving to jointly find configurations that fining how and under what conditions each party would
best met the requirements of both sides. For exam- profit from the agreement. Specifically, agreements
ple, the key account manager at the provider organi- must be formulated on how costs and revenues will flow
zation, Equipcorp (R5), explained: under defined operating conditions and in various sce-
narios. In essence, such a mechanism defined the gover-
A central issue with construction of the outcome nance structure that will facilitate a smoothly operating
contract is the different options that need to be iden- outcome-based service. During this phase, value-cap-
tified, evaluated and selected. The room for custom- ture activities became more quantifiable and concrete as
ization is high but with every choice comes certain operational routines were fleshed out. Thus, issues such
benefits and trade-offs. as risk assessment, revenue flow and cost structure, and
the development of appropriate outcome indicators be-
Second, we found that a vital task in this phase came central subtasks.
involved designing delivery processes. A key part of A vital task in this phase was assessing the deliv-
this task was articulating and specifying the value ery risk. This means evaluating a variety of poten-
creation activities intrinsic to the business model tial risks that can cause the outcome-based service
in an outcome agreement with a clear view of the to fail during operation and mitigating them when
underlying technological solutions and operational necessary. As the relationship between provider and
roles. This demanded careful analysis of how the customer changes from product to outcome provi-
outcome-based service solution would be delivered sion, many risks were transferred to the provider
in practice. Mapping out the responsibilities that (e.g., equipment downtime, high maintenance costs)
both provider and customer will have during the de- and new risks had to be considered (e.g., opportu-
livery phase was one of the key factors in a success- nistic customer behavior). Yet, customers also faced
ful outcome. This involved defining the overall logic significant risks since they were now dependent on
and goals of the outcome-based service, translating the performance of their provider. Informants de-
the logic and goals into the full scope of activities scribed how different tools such as scenario plan-
needed to deliver them, allocating responsibilities to ning were deployed to identify critical risks and the
the operators, and specifying new delivery routines. means to mitigate them. For example, Connectcorp
For example, Connectcorp found that many of its in- had a three-phase model for evaluating the risk of
ternal routines had to be updated to fit the required new business models for outcome-based services,
work stipulated in its outcome-based service agree- which they described as critical given the size and
ment with Telecorp (R6). Interestingly, this joint complexity of this type of agreement. Our infor-
work extended beyond the clauses and measures of mants intimated that the raised risk perspective
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VALUE CREATION AND VALUE CAPTURE ALIGNMENT IN BMI J PROD INNOV MANAG 173
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posed a considerable challenge in reaching an agree- under an outcome-based service, sharing an accurate
ment, thus making this activity a critical one. For understanding of this tacit knowledge is vital. For ex-
example, a senior project manager at the customer ample, issues such as the scheduling of maintenance
organization, Ironcorp (R2), said: stoppages were critical elements to agree on in this
phase. Nevertheless, focusing on the simplest types of
I think, from the customer perspective, one of the indicators that generate value for the customer (and
key things that needs to be considered is the risk often the customer’s customer) was often a matter of
perspective. What are the risks if we invite a sup- great debate and iteration. Simulating the cost and
plier to take over some of our processes? What if revenue flows under various operational conditions
they fail? How can this be managed? I think these (i.e., scenario analysis) could be a way of ensuring that
issues are critical to resolve, if we are going to suc- the contract contains an appropriate profit formula.
ceed with co-creation over a longer time period. The key account manager at Connectcorp (R6), the
provider organization, explains:
Another key value-capture activity in this phase
was designing performance indicators. At its core, this A lot of effort is placed on measures and indicators,
activity was very much about aligning the financial but we know from previous experience that indica-
incentives of the contract so that both parties were tors can be manipulated. So, working jointly, we
positioned to profit. Therefore, the contract and in- identified a simple operational indicator, i.e., qual-
dicators needed to be specified in a way that holds out ity minute, which captures a price parameter closer
the prospect of a win-win outcome for both parties to what the operator delivers to the end user. So, we
rather than putting the emphasis solely on payment basically understood what customer values are re-
conditions. Specifically, several respondents from ally important to capture.
the successful organizations noted that formulating
complex contracts can undermine trust and the nat-
ural inclination of provider and customer to coop- Phase 3: Value-In-Use Delivery
erate. However, it is critical to delineate the criteria
for delivery performance. For example, during the In the final phase of value-in-use delivery, activities
interaction between Forestcorp and Machinecorp, are centered on refining value-creation processes and
a few performance indicators were discussed and regulating incentive structures between the provider
agreed on—such as availability of equipment, up- and the customer. At this stage, the official deal has
time guarantees, cubic tons harvested, and response already been signed but now much depends on how
time on services—yet the operational rules con- the two parties collaborate in delivering their promises
cerning performance (e.g., responsibility for opera- and how they respond to evolving customer require-
tional processes) were not clearly defined. Thus, the ments. The informants from successful companies
contractual incentives were not properly aligned cautioned us that a key logic to consider is that no real
in the detail required to meet the overarching goals value has been created until the outcome-based ser-
of partners (which was later a cause of failure in vice is in full operation and delivering value-in-use as
phase 3). intended. Thus, the partners needed to work together
The practice of designing performance indicators over time to ensure that the value is realized; they had
can thus require quite complex and iterative interac- to set in motion an operation that runs smoothly and
tions. For example, several respondents asserted that is capable of resolving any teething problems with
interaction to develop a more intimate understanding implementing the solution. Furthermore, as out-
of partner operations was critical in order to clar- come-based service contracts can last several years or
ify what performance indicators should be included even decades, it was vital that the partners focus on
in the contract. To give an example, informants at achieving new value improvements over time by en-
Minecorp intimated to us how essential it was to en- gaging in continuous fine-tuning, upgrading, and op-
sure that very specific material properties (e.g., granu- timizing the performance of the solution.
larity, moisture content) were achieved. Traditionally, During this phase, we found that efforts directed to
this would not have been an issue as the customer refining value-creation processes were important not
would have been responsible for the operation but, only for the purposes of implementation but also to
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174 J PROD INNOV MANAG D. SJÖDIN ET AL.
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improve and extend the scope of value creation over several years or sometimes decades, it was import-
time. Informants confirmed that this was a key phase ant to engage in continuous fine tuning, upgrading,
where the provider and customer worked together and optimizing the delivery routines to improve
“almost as a married couple,” as they called it, to en- the performance of the solution over time. In ad-
sure optimal outcomes of the “open” business model. dition, ongoing technological developments within
Informants were convinced that a key to success was the industry generated the potential for introduc-
developing operational capabilities from the very start ing innovative solutions that promote value cre-
of the contract. The need to develop operational capa- ation. In particular, the increased use of digital
bilities fell on both provider and customer and was a systems and platforms allowed for more frequent
vital but, in unsuccessful cases, an underestimated ac- updates and improvements to the software, which
tivity. For providers, this activity often entailed hiring enabled higher performance. However, it is no less
and/or training new staff and developing routines for important to identify and select where improvement
servicing and operating the solution. It often included activities should be directed. Several informants de-
training and skills in the use of digital technologies scribed how they initiated different routines, such
to monitor, predict, and optimize performance. From as meetings and joint problem sessions, in a system-
the customer perspective, a key requirement was that atic effort to detect problem areas and identify op-
end users in the customer organization interact with portunities to improve solutions during operation.
the solution in the prescribed manner. Improvements were also necessary to cope with
For example, many informants asserted that value changing market conditions. For example, increased
could only be realized if operators/production man- taxation on emissions or energy costs as well as com-
agement learned to use the equipment in the “right petitor actions triggered improvement initiatives.
way.” They would often need to unlearn old routines Several informants underscored the importance of
and become proficient in using innovative practices making these discussions quite open and focused on
aligned with the new contractual arrangement. For solving problems, leaving financial discussions and
example, Equipcorp ran an extensive training pro- agreements to another forum. A procurement man-
gram, based on simulators, lectures, and online tools, ager at Minecorp (R5), the customer organization,
that was designed to ensure the best use of their equip- described their approach:
ment. Indeed, training end users could well be a key
means of ensuring a win-win outcome, since better We have joint technical meetings every quarter to
handling of the equipment tends to improve operator discuss how our equipment is performing and what
efficiency and reduce the need for maintenance, thus we can do to improve it. Typically, these are quite
saving money for both parties. A technical operations open discussions, and we are open about sharing
manager at Forestcorp (R4), the customer organiza- ideas and information to enable both parties to
tion, emphasized the importance of focusing on the contribute.
end users:
In this phase, another key success factor in value cap-
[The provider] does not have the data to compare; ture consisted of activities related to regulating incentive
we have better knowledge of production data, so we structures. These activities were aimed at protecting the
know the key issues. Normally, it’s not the machines fairness of the current agreement by identifying any po-
but the operators we want the manufacturers to un- tential problem areas where one or both parties could
derstand that, don’t just sell the machines, but get become disadvantaged. This suggested that any busi-
the operators to make the best use of the machine. ness arrangement needed to evolve in step with ongoing
I think the big issue is how can we lower the logging developments within the market, the partners’ internal
cost but still get more money, so we may need to add organizations, and growing technological development
value. to ensure fair and profitable relationships over time.
First, informants stated that re-aligning incen-
Furthermore, to secure the creation of value, in- tives continuously was of the outmost importance.
formants argued that a key to success was explor- Identifying and sanctioning opportunistic behav-
ing improvement opportunities over the duration ior within both organizations was the primary ob-
of the contract. As the delivery phase can last for jective. Realigning incentives were also viewed as
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VALUE CREATION AND VALUE CAPTURE ALIGNMENT IN BMI J PROD INNOV MANAG 175
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important; informants disclosed that the goals profit. In particular, informants reiterated the need
and interests of the parties commonly diverge over to make adjustments for technology or market shifts
time, which may lead to value co-destruction and a over an extended contractual period. For example,
failed business model. For example, informants at changes in the underlying technology could constitute
Connectcorp referred to deals they had entered into a significant change in the previously agreed profit
where it became clear over time that the incentives formula. Thus, such shifts required totally new nego-
were not aligned. In this case, the customer began to tiations on how the business model should be set up
prioritize delivery to remote areas, thereby increas- to create and capture value fairly between partners.
ing the delivery costs but not the corresponding rev- Informants stated that, in a good relationship, the
enues. The result was an unprofitable relationship parties would try to be flexible and adapt to current
for the provider. Indeed, it was very hard to predict realities to ensure fair mechanisms for value capture
all contingencies when formulating contracts and, over time. A procurement manager from the customer
therefore, parties had to revise contractual details organization, Minecorp (R5), exemplified how they
to ensure that goals were aligned. Fortunately, the ensured a fair value distribution:
trust that existed between the two parties facilitated
this process. A business development manager from When we signed the contract, we had projections on
Connectcorp, the provider organization, described how much we expected the productively to be on a
how aligned incentives contributed to a profitable yearly basis but we expanded the mine, and we could
relationship: see an opportunity to increase the productivity by
10%. In collaboration [with Equipcorp], we intro-
The contract entailed payment based on deliver- duced some technological changes, which meant
ing a certain capacity. This meant that rewards or we could reach the new output requirement. It was
penalties were closely linked to achievement of the quite easy to agree on terms with the supplier as we
agreed KPIs. These kinds of risk and revenue shar- have a partnering approach in our collaboration so
ing agreements provide incentives for good behavior these profits will be shared with them.
and over time partners don’t only behave well be-
cause of the contract but because a closer relation-
ship has been developed. This is true for our long, A Process Framework of Value-Creation and Value-
successful relationships [with Telecorp]. Capture Alignment in Business Model Innovation
To enable value capture, informants underlined Based on the analysis, we propose a process frame-
the necessity for ensuring fair value distribution. A work for how business model innovation unfolds in
key aspect here was to monitor the performance of provider–customer outcome-based service relation-
the contract to ensure that both parties are prof- ships (see Figure 2). The framework illustrates how
iting. Informants explained that such discussions providers and customers go through a three-phase
were often organized on a regular basis between se- process: value proposition definition, value provision
nior management, operational managers, and even design, and value-in-use delivery. In each phase, iter-
shop floor staff from both providers and customers. ative cycles of value creation and value capture activ-
Since fairness was not achieved automatically, it was ities ensure successful alignment and progression to
critical for firms to evaluate the contract throughout the next phase. Moreover, failure to fulfill the align-
the designated period to ensure that both parties ob- ment, either because of the lack of relevant activities
tained a fair distribution of profits over time. This or because there is insufficient iteration, results in fail-
was assured, for example, by contracting practices ure in the phase. In this sense, our model has an as-
where early profits and losses are shared (e.g., gain/ pect of agile methodology in that both value creation
pain sharing agreements) in order to mitigate any and value capture are reiterated between the provider
uncertainty concerning operational outcomes over and customer. Table 4 presents the cross-case compar-
time. ison of the six outcome relationships that support this
The use of such arrangements was also viewed as framework.
part of a trust-building exercise, since both parties In the following sections, we discuss these findings
needed to fulfill the operational goals in order to further and illustrate how firms manage alignment
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176 J PROD INNOV MANAG D. SJÖDIN ET AL.
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Table 4.  Illustrative Cross-Case Comparison of the Business Model Innovation Process—Activities and Outcomes
Relationship R1 R2 R3 R4 R5 R6

Phase 1: Value proposition definition

Identifying value creation opportunities (value creation)
Exploring value-enhancement opportunities Y Y Y Y Y Y
Creating value proposition concept Y N Y Y Y Y
Agreeing on value distribution (value capture)
Prioritizing win-win opportunities N N Y Y Y Y
Evaluating profit potential N Y Y N Y Y
Phase 2: Value provision design
Designing the value offering (value creation)
Customizing value architecture – – Y Y Y Y
Designing delivery process – – N N Y Y
Deciding on the profit formula (value capture)
Assessing delivery risks – – N N Y N
Designing performance indicators – – Y Y Y Y
Phase 3: Value-in-use delivery
Refining value creation processes (value creation)
Developing operational capabilities – – – N Y Y
Exploring improvement opportunities – – – N Y Y
Regulating incentive structures (value capture)
Realigning incentives – – – N Y Y
Ensuring fair value distribution – – – N Y Y
Outcome F1 F1 F2 F3 S3 S3
Note: Legend: Y = activity sufficiently achieved, N = activity not sufficiently achieved. F1–3 = Failure in phases 1, 2, and 3, outcome-based service
relationship cancelled. S3 = Success in phase 3, ongoing outcome-based service relationship.

between value creation and value capture over the three so that both parties are positioned to profit. Thus, in
phases of business model innovation. Specifically, at- practice, both providers and customers go through
tention is devoted to the activities conducted by the cycles of creation and capture activity. For example,
parties to facilitate progression from one phase to the the technical manager at Forestcorp (C) suggested
next (or not). that both value creation and value capture need
to be considered in parallel from an early stage: “I
Phase 1—Value Proposition Definition to Ensure think there always needs to be a balance between the
Alignment of Objectives scope of the solutions and how much value we can
actually get from it. If there is not improvement on
The business model innovation process of shifting the bottom line what have you really gained?”
to outcome-based service provision starts by defin- Provider–customer dyads that are able to find novel
ing the value proposition. In this phase, the provider ways of creating value and to simultaneously agree on
and customer need to ensure alignment by simul- the potential for capturing value are in a position to
taneously identifying value creation opportunities move from the definition phase to the design phase.
and agreeing on value potential in order to achieve For example, during the early business model defi-
clarity in their outcome objectives. Reaching jointly nition activities between Connectcorp and Telecorp
defined objectives necessitates uncovering the value (R6), we found that both sides worked toward estab-
creation potential through an open and creative lishing common objectives for the contract. However,
problem definition and solution-seeking practice. only when the profit potential and commitment of
For example, informants outlined how they, at an key stakeholders was assured were the firms able to
early stage, attempted to identify the “sweet spot” progress to the next phase and into more formal con-
for collaboration by exploring value-enhancement tractual discussions. Furthermore, our informants
opportunities with the customer (e.g., eliminating identified common sources of failure to properly define
bottlenecks in operations). At the same time, it is the value-capture dimensions (e.g., concrete estimates
equally important to begin with defining the val- of potential gains in revenues/costs). For example,
ue-capture potential and prioritizing opportunities Minecorp and Equipcorp (R2) had been discussing a
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totally new outcome-based business model building there is the inability to translate value creation oppor-
on innovative technology, but they failed to ensure tunities into a jointly agreed outcome agreement, and
value capture by neglecting such measures as evalu- the failure to agree on performance indicators, roles,
ating profit potential and ensuring top management and responsibilities for solution delivery. Second, firms
support from Minecorp. As a result, their progress to fail to ensure that the outcome-based service captures
the design phase was halted when senior management benefits for both parties, and that the revenue potential
at Minecorp perceived the contract to be highly risky exceeds costs and risks. For example, Solutioncorp and
and opted instead for traditional procurement of Minecorp (R3) had been working on an intelligent solu-
products and supporting services. Thus, we propose: tion for mine ventilation. However, discussion stalled in
this phase because they were not able to agree on the
P1. Successful completion of Value proposition cost structure and the revenue stream (i.e., profit for-
definition (Phase 1) and progress to Value provi- mula). Basically, Solutioncorp’s entire service organiza-
sion design (Phase 2) requires alignment between tion was constructed to capture value by charging for
activities to identify value-creation opportunities service by the hour. Consequently, changing this profit-
and activities to agree on value distribution. able model was perceived as a risk rather than an oppor-
tunity. Thus, we propose:

Phase 2—Value Provision Design to Achieve an P2. The success of value provision design (Phase 2)
Aligned Agreement and the progress to value-in-use delivery (Phase 3)
reside in the alignment between activities to design
The key to this phase is the alignment of activities re- the value offering and activities to decide the profit
lated to designing the value offering and deciding on the formula.
profit formula to achieve a signed outcome-based service
contract. The goal is to translate a novel outcome busi-
ness model concept into a signed outcome contract that Phase 3—Value-In-Use Delivery to Ensure an
benefits both parties. A common set of activities in this Aligned Outcome Partnership
phase would involve translating the initial (high-level)
concept into a customized value architecture that di- Successful business model innovation does not stop
rectly meets the customer’s outcome requirements. With with commercialization; it requires significant effort in
a more detailed understanding of what the delivery of delivering value-in-use to make the business relation-
the value proposition would entail, parties here under- ship sustainable for both parties over time. In this phase,
take a more in-depth evaluation and risk assessment of it is crucial that the actors ensure alignment by simulta-
the agreement. This also facilitates further discussions neously refining value creation processes and regulating
on designing the delivery process (e.g., roles and re- incentive structures. As we ascertained, outcome-based
sponsibilities), which serves as an input to negotiating service agreements require parties to show commitment
the agreement’s profit formula (i.e., how revenues and to the continuous improvement of their joint operations
costs are assigned). Therefore, there is a clear need for and outcome performance. To achieve this, success-
continuous iteration in aligning value-creation and val- ful relationships focus on the relationship itself rather
ue-capture activities. For example, a procurement man- than the contract, further ensuring that any imbalances
ager at Minecorp suggested: “It always goes back and in value capture are treated as a problem in need of a
forth between co-developing and negotiating with the joint solution. Throughout this phase, firms tend to go
suppliers. As long as you can keep discussions positive, through cycles, oscillating between creation and capture
I think there is benefit to this way of working as you activities to ensure that the agreement is updated and
ensure that agreements are formulated to the interests aligned for the benefit of both parties. For example,
of both parties.” Minecorp and Equipcorp (R5) had regular joint meet-
Firms that manage to design feasible value offerings ings to evaluate key performance indicators and search
and decide on the profit formula for joint-value cap- for improvements, enabling them to continuously refine
ture are able then to arrive at a signed outcome-based the outcome. Expenditure incurred from implementing
service contract to commercialize the business model. such improvements would simply be added to the cost-
Failure in this phase occurs for two main reasons. First, per-ton agreement already in place, thus ensuring fair
 15405885, 2020, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/jpim.12516 by Nat Prov Indonesia, Wiley Online Library on [05/04/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
178 J PROD INNOV MANAG D. SJÖDIN ET AL.
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value capture mechanisms. On an overall level, captur- creation first and value capture second. In doing
ing and creating value coevolved. As one respondent at so, the framework developed here extends business
Minecorp put it: “I think it is easy to see the relationship model innovation and servitization research in sev-
value here; when we increase output, they make more eral ways.
money and we make more money. Trust is important, First, we contribute by developing a process frame-
but I think the key to success is that we also need to work for business model innovation for outcome-based
continue looking for valuable improvements.” services. Prior literature has tended to view business
Firms capable of ensuring continuous refinement model innovation as an outcome (Richter, 2013;
in value creation as well as regulating the incentive Visnjic Kastalli et al., 2013) or has investigated its
structures over time are able to extend and renew performance implications (Zott and Amit, 2007). But
the outcome-based service beyond the time frame of only a few studies have investigated the actual pro-
the initial contract. Moreover, failure to renew the cesses of business model innovation (Frankenberger,
contract is linked to an inability to achieve the value Weiblen, Csik, and Gassmann, 2013; Mezger, 2014).
creation potential that was expected at the design We offer an in-depth perspective on business model
phase or to a failure to adjust value capture mech- innovation and show that the phases (value prop-
anisms to changing circumstances where one party osition definition, value provision design, and val-
was exposed to an unfair proportion of risk or cost. ue-in-use delivery) play a critical role in determining
For example, the contract between Machinecorp appropriate value creation and value capture activities
and Forestcorp (R4) was cancelled when Forestcorp throughout the process.
realized that they were not deriving any benefits Second, this study shows that both value creation
from the agreement. Although some discussion on and value capture need to be considered simultaneously
possible changes to the agreement was undertaken, throughout the entire innovation process. Historically,
the parties were unable to agree on a satisfactory literature has tended to view value creation and value
solution, and the agreement was dissolved. Thus, we capture in a sequential manner as separate processes
propose: or as a one-time activity for business model inno-
vation (Lepak, Smith, and Taylor, 2007; Saebi and
P3. The success of the value-in-use delivery (Phase Foss, 2015). Our research extends the contributions
3) and, therefore, the successful continuation of the made by several studies in the literature on serviti-
outcome-based service resides in the alignment be- zation, which have outlined processes that describe
tween activities to refine value-creation processes how various forms of advanced services are devel-
and activities to regulate incentive structures leads oped and implemented within provider–customer
to renewal of the outcome-based service. relationships (e.g., Aarikka-Stenroos and Jaakkola,
2012; Sawhney, 2006; Sjödin et al., 2016, 2020; Tuli
et al., 2007). For example, Tuli et al. (2007) have
identified key phases and factors in solution effec-
Discussion tiveness but do not relate these factors to the phases
Theoretical Contributions of business model innovation. Indeed, none of the
above-mentioned studies has done so from the per-
We developed a process framework of business spective of business model innovation, underplay-
model innovation in the context of outcome-based ing important dynamics between value creation
service relationships. While previous models offered and value capture—vital components that undergo
the provider perspective on business model innova- significant revision in the shift to outcome-based
tion, we offer a dyadic perspective that encompasses service provision. In particular, the dominant focus
both provider and customer (e.g., Chesbrough in these prior studies seems to be on understanding
et al., 2006; Saebi and Foss, 2015; Visnjic et al., 2017). how to create value rather than how to capture it
Building on the existing research on value creation (Chesbrough et al., 2018). By applying the business
and value capture, this article argues that successful model innovation perspective, this study extends
business model innovation is based on the continu- the servitization literature by emphasizing the value
ous alignment of value creation and value capture capture perspective and developing novel insights
across phases instead of sequential steps of value into the key activities, phases, and requirements for
 15405885, 2020, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/jpim.12516 by Nat Prov Indonesia, Wiley Online Library on [05/04/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
VALUE CREATION AND VALUE CAPTURE ALIGNMENT IN BMI J PROD INNOV MANAG 179
2020;37(2):158–183

value creation and value capture along the business be a challenging undertaking and why it is, there-
model innovation process (Sjödin et al., 2016). fore, a key construct worthy of further study. Thus,
Third, this study contributes by demonstrating the alignment of value creation and value capture
the importance of alignment between value creation may provide a particularly illuminating lens through
and value capture throughout the business model in- which to study success and failure in innovation gen-
novation process. Essentially, we claim that business erally and in business model innovation in particular.
model innovation is not only about designing supe- Fourth, this study contributes by demonstrating
rior value-creation and value-capture processes but the importance of continuous business model re-align-
making sure that they are adapted and aligned to ment over time in the outcome-based service con-
each other from initial conceptualization to ongo- text. Indeed, much of the discussion in the BMI
ing commercialization. The importance of aligning focuses on the design and development phases (e.g.,
value creation and value capture has been men- Kranich and Wald, 2018) and under-emphasizes
tioned in recent business model literature (Foss and the need for continuous evaluation, innovation, and
Saebi, 2018; Kranich and Wald, 2018; Ritter and alignment in the actual operation of the business
Lettl, 2018). For example, Ritter and Lettl (2018) model. However, building on servitization literature
have suggested that aligning these elements can lead authors such as Tuli et al. (2007) and, more recently,
to business model optimization, and Kranich and Reim et al. (2018), this study helps to recognize the
Wald (2018) argue that firms need to focus on ensur- importance of the post-deployment phase in ensur-
ing alignment of the business model elements during ing profitable delivery of value-in-use. For example,
both design and implementation phases. However, Tuli et al. (2007) underscored the importance of
none of the previous studies has presented any con- viewing this phase as a continuous relationship, and
crete insights into how alignment is achieved. We be- Reim et al. (2018) showed that it is crucial to mon-
lieve that our empirically grounded framework in the itor and mitigate adverse customer behavior over
context of outcome-based service makes an import- the life of the contract. Nevertheless, a cohesive ap-
ant contribution, extending further the prior work proach that untangles the key activities involved in
that argues that the business model succeeds when managing the value creation/value capture dynam-
its elements cohere and are suitably aligned (Foss ics of the provider–customer relationship over time
and Saebi, 2018; Kranich and Wald, 2018; Ritter has been lacking in prior research. This is of critical
and Lettl, 2018). Results show that value creation importance because many problems such as adverse
and value capture are interdependent and should be behavior, operational problems, and unfair profit
considered in parallel to ensure alignment through- distribution can surface during the delivery phase
out the process. Specifically, this study shows that (Reim et al., 2018; Sjödin et al., 2016). Accordingly,
alignment needs to be assured in each phase of busi- a key contribution of this study is showing how con-
ness model innovation. Moreover, achieving align- tinuous adjustment and innovation is necessary for
ment within the phases requires iterative interplay business model innovation if the goals of the pro-
in simultaneously aligning value creation and value vider–customer relationship are to be aligned over
capture processes. We provide a detailed processual time. At its core, achieving business model alignment
description of how value creation and value capture is a continuous practice and not a one-time activity.
objectives are (iteratively) aligned over the phases Thus, a cohesive approach to business model align-
and the roles that the provider and the customer ment requires both identifying the degree of align-
play in this (Appleyard and Chesbrough, 2017; ment and monitoring the dynamics of misalignment
Randhawa et al., 2016; Sjödin et al., 2016). over the life of the business model.
A related insight concerns misalignment as a Fifth, we contribute by recognizing the need for an
cause of failure in different phases of business open business model innovation perspective where the
model innovation. As our results demonstrate, mis- alignment of value creation and value capture is not
alignment often occurs when firms miss key activi- solely a provider-centric requirement but a joint one.
ties relevant to the specific phase of business model While existing BMI emphasizes customer insights
innovation. We argue that misalignment in the value as triggers for business model innovation (e.g.,
creation and value capture processes may be the key Frankenberg et al., 2013), their role in directing busi-
reason why business model innovation continues to ness model innovation (e.g., by determining value
 15405885, 2020, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/jpim.12516 by Nat Prov Indonesia, Wiley Online Library on [05/04/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
180 J PROD INNOV MANAG D. SJÖDIN ET AL.
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and appropriate payment conditions) is still un- value creation and value capture should be dealt
derplayed. In contrast, the findings from this study with simultaneously.
demonstrate that continuous customer involvement • Make conscious efforts to align value creation and
is a baseline against which business model decisions value capture. Thus, it is not enough to merely con-
should be tested and a point of reference to ensure sider these elements throughout the process—man-
alignment in how value is created, delivered, and agers must actively ensure that the various elements
captured. Admittedly, the importance of customer are aligned at each phase of business model innova-
interaction has been emphasized in the servitization tion. For example, in R4 the provider and customer
and B2B marketing literature (Aarikka-Stenroos managed to sign a contract without fully consider-
and Jaakkola, 2012; Sawhney, 2006; Sjödin et al., ing the alignment of vital value-creation and val-
2016; Tuli et al., 2007). For example, Sjödin et al. ue-capture activities in the design phase. The result
(2016) focused specifically on investigating role am- was a contract that failed to deliver value-in-use
biguities in customer–provider relationships and from the start and was quickly discontinued. It was
Tuli et al. (2007) explored critical activities from clear that the business model was misaligned and
the customer perspective but did not investigate the the customer was vocal in expressing discontent.
interactive processes and how these activities are Thus, alignment of value creation and value capture
jointly managed. However, our study shows that is not a checkbox of activities for each phase; it is a
customer involvement in business model innovation vital foundation for building a profitable customer–
for outcome-based services is more interactive and provider relationship.
open than in the traditional product-centric setting • Re-align and continuously innovate the business
because the customer actively participates with the model with ongoing changes in the environment. It is
provider in the co-production of the service offering. important to underline this point since profitable
This form of open operation (Sjödin et al., 2017) relationships can quickly turn unprofitable as cir-
calls for an open business model (Chesbrough et al., cumstances change (Reim et al., 2018). Outcome-
2006; Saebi and Foss, 2015) and a relational view based services is not a tool by which customers can
(Dyer et al., 2018) built on agile co-creation (Sjödin shift responsibility to the provider and seek to avoid
et al., 2020) between partners and the development the effort and time associated with good gover-
of mutual trust to ease the transfer of tacit knowl- nance and performance delivery. It is an operational
edge across organizational boundaries. model that requires a strong customer and provider
relationship, trust, and a genuine sharing of risk
Managerial Contribution and reward. Managers should regularly evaluate the
business model to ensure that the greatest value is
Our findings offer several important insights into for created and captured over the life of the relation-
managers involved in business model innovation pro- ship. It is not only about what is in the contract but
cesses for outcome-based services within a B2B indus- how far the collaboration can be taken. How can we
trial setting. improve the relationships? What can create greater
value? How can we ensure a fairer distribution of
• Consider both value creation and value capture simul-
profits is a question that should be asked and dis-
taneously throughout the business model innovation
cussed in regular meetings between the senior man-
process. For example, a common practice is to focus
agement and operational staff of both providers
on what value can be generated (i.e., value creation)
and customers.
before any discussion of contractual details takes
place (i.e., value capture). While our findings con-
firm the general principle of not getting mired in Limitations and Future Research
detailed negotiations at an early phase, we also find
that considering the value distribution (i.e., win- This study relies on in-depth case studies of business
win) from the start is a key requirement for success- model innovation in six outcome-based service rela-
ful business model innovation for outcome-based tionships operating in complex B2B settings in the
services. Thus, while the scope and level of detail manufacturing, telecommunications, and process in-
involved may change as the process progresses, both dustries. While our results are garnered in the specific
 15405885, 2020, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/jpim.12516 by Nat Prov Indonesia, Wiley Online Library on [05/04/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
VALUE CREATION AND VALUE CAPTURE ALIGNMENT IN BMI J PROD INNOV MANAG 181
2020;37(2):158–183

context of B2B outcome-based service provision, we different network actors (e.g., providers, service deliv-
posit that these findings are still highly relevant to ery partners, and customers) could provide interesting
inspire other forms of business model innovation. multiactor perspectives for future business model re-
Nevertheless, it is important to stress that the findings search. These types of networked perspective seem to
should be considered applicable primarily to B2B con- be especially prevalent given the ongoing digital trans-
texts characterized by similar conditions. For exam- formation of the industry.
ple, business model innovation for an outcome-based
service for consumers (B2C) would probably use a References
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