The International Journal of Logistics Management

Emerald Article: Modularity in developing business services by platform approach Saara Pekkarinen, Pauliina Ulkuniemi

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To cite this document: Saara Pekkarinen, Pauliina Ulkuniemi, (2008),"Modularity in developing business services by platform approach", The International Journal of Logistics Management, Vol. 19 Iss: 1 pp. 84 - 103 Permanent link to this document: http://dx.doi.org/10.1108/09574090810872613 Downloaded on: 27-03-2012 References: This document contains references to 40 other documents To copy this document: permissions@emeraldinsight.com

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Modularity in developing business services by platform approach

Saara Pekkarinen
Department of Management and Entrepreneurship (Logistics), University of Oulu, Finland, and

84

Pauliina Ulkuniemi
Department of Marketing, University of Oulu, Finland
Abstract
Purpose This study aims to explore the literature related to modularity in developing and manufacturing physical products in order to employ the idea of modularity into the business services context. Design/methodology/approach In order to answer the dened research question, the authors construct an empirically grounded model for modular service platform. The research design follows an abductive logic beginning with the construction of a theoretical pre-understanding and elaborating upon it empirically. Streams of literature that are applied are service marketing and operations and product development and modularity research including product architecture design. In the empirical part of the study, the authors elaborate on these issues through a qualitative single case study. Findings The results show that the developed modular service platform including four modularity dimensions: service, process, organisational and customer interface dimensions can be used to create value in business services. Originality/value With a reviewing literature of modularisation of manufacturing products and processes, an empirically grounded model of this paper shows how the business service providers can use modularisation in platform approach to identify, develop and deliver new services cost efciently and more exibly. Keywords Services, Customer requirements, Supply and demand, Customization Paper type Research paper

Introduction The importance of business services has been increasing due to companies concentration on core businesses and, therefore, on outsourcing non-core activities. Service providers need to constantly develop new ways to create customer value. Customising products by using exible product processes in an integrated (Asan et al., 2004) or modular (Tu et al., 2004) production system have for long been seen as a good way for efcient development of products for heterogeneous demand (Jiao et al., 2006). In case of services, research of modularity is scarcer (Meyer and de Tore, 1999, 2000; Homann et al., 2004). Sundbo (1994) was one of the rst researchers to suggest that a modularisation model of services can be
The International Journal of Logistics Management Vol. 19 No. 1, 2008 pp. 84-103 q Emerald Group Publishing Limited 0957-4093 DOI 10.1108/09574090810872613

The authors wish to thank the Finnish Foundation of Economic Education for their nancial support. They would also like to express their gratitude to the case company and interviewees for their time and effort. Finally, two anonymous referees are appreciated for their constructive comments.

described as being in between the manufacturing model of standard products and the service organisation model introduced by Normann (1992). Other indications that modularity can offer a fruitful approach to service development can be found in the existing service operations literature. For instance, Fitzsimmons and Fitzsimmons (2004) emphasise the importance of the services exibility, but see that it is only related to location choices and to the ability to adapt to future changes in customer demand. Applying manufacturing logic to services pointed out by Bowen and Youngdahl (1998), means use of exible processes to produce customised services cost efciently in a standardised production system. In logistics services, modularity can be dened as integration of various functions within a company in order to decrease service complexity and achieve better responsiveness to service variety (van Hoek and Weken, 1998). In banking, disaggregating of the value chain into independent functional units, referred to as modules, ensures the benets of service orientation (Homann et al., 2004). Hence, modularity can be seen as a way to develop services and manage heterogeneity (variability) in demand, which is why it deserves further research attention. Platform thinking can be used to identify and use the shared, i.e. modular, structure and logic of activities and customer offerings in service production. Unlike product platforms that have become standard tools in operations management, service platforms have received limited attention in practical business management and academic service research (Sawhney, 1998; Meyer and de Tore, 1999, 2000). This study explores literature related to modularity in developing and manufacturing physical products and deploys the idea of modularity into services. The purpose is to nd out how we can apply modularity in developing business services. In order to answer this question, we will construct an empirically grounded model for a modular service platform. Based on the model, we will then present theoretical and, also, managerial implications for modular business service development. The research design of this study follows an abductive logic including a theoretical framework and elaborating on it empirically. On the basis of interdisciplinary research literature, we compose a pre-understanding of modular service development. Then, based on the product platform design literature, we construct our conceptual model of a modular service platform. Logistics service providers (LSPs) act as the link between the manufacturer and its customers and suppliers. This role creates many challenges for logistics rms, as they should understand, design and manage new customer-oriented services and logistics solutions for the total supply chain of their customers. Thus, the logistics industry provides a fruitful context for studying modular service development and production. We will use a case study strategy by concentrating on one LSP rm and studying and comparing its two business units. As a result, we will present an empirically elaborated model for a modular service platform. Characteristics of business services Service marketing literature includes studies on consumer services and recently also on business-to-business. Generally, services differ from physical products in terms of their more abstract nature, parallel production and consumption, as well as co-production of the service provider and customer (Normann, 1992). The current services literature views services as more than mere market offerings besides physical products (Edvardsson et al., 2005). Business services should be seen as objects of exchange,

Modularity in developing business services 85

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where value is created for the customer through an interactive, processual and experimental relationship between the service provider and the customer. Business services are a group of diverse objects of exchange (Axelsson and Wynstra, 2002). A service offering exchanged in the business market is often more or less a combination of both physical and abstract elements, and the knowledge intensiveness of the services may vary from complex consulting services to cleaning or catering. The level of standardisation (Lampel and Mintzberg, 1996) may vary according to service providers strategies. Certain services need to be highly customised to meet the specic needs of the customer, whereas other services can be offered as standard. The business-to-business context brings forth specic features. Purchase decision making is often considered a complex process involving a group effort (Webster and Wind, 1972). A derived demand is an essential characteristic of B2B services, and the demand generated by customers cannot be understood, unless also the demand facing business customer is acknowledged (Hutt and Speh, 1994). Another distinguishing feature is the complexity of exchange mechanisms (Dwyer and Tanner, 1999). Inter-organisational exchanges can take place in highly competitive markets or in a close, long-term co-operative partnership between the seller and the buyer (Webster, 1992). Nature of the exchange mechanism between the actors is closely related to the degree of standardisation of the service offering, and business services, thus, represent an important, yet multifaceted, phenomenon from the service providers perspective. With increasing expectations and highly specied needs of customers, business services providers inevitably face challenges in their service development. Besides, exibility, cost efciency is essential in service production and it can be expected to improve along with standardised service production. Modularity can be seen as a means to standardise service production and, thus, achieve better customer value and protability. Dimensions of modularity There is no one universal denition of modularity (Gershenson et al., 2003), and one reason is the difculty to separate the denition of a module from the benets sought from modularity (Holtta-Otto, 2005). In operation management, modularity means that parts or components of a product are subdivisible into modules that can be easily interchanged and replaced (Heizer and Render, 2004). A general theory of modularity can be dened as the degree to which the components of a system can be separated and recombined to create a variety of congurations without losing in functionality (Schilling, 2000). Modularity in product design means that a nal product is assembled from separate, independent modules (Sanchez and Mahoney, 1996). For example, Mukhopadhyay and Setoputro (2005) formulate a supply chain of build-to-order online products, where modularity improves a rms ability to meet customer requirements and build an optimal return policy. In case of heterogeneous input and demand, the modular system is superior, while in the case of heterogeneous input and homogenous demand, the non-modular system is more cost efcient. In the third case, if there is variety in the needs of customers, but input is homogenous, modularity can produce scale exibility but may not increase the scope of possible service congurations (Schilling, 2000). The modules of a product should remain rather unchanged so that they can be easily recombined. Then, designing a new product only requires that standardised

 interface specications can be dened for all the modules (Holtta-Otto, 2005). An example of a modular architecture with standardised interfaces is the system of Electronic Data Interchange (EDI) in logistics (Sanchez and Mahoney, 1996). The design within each module is free, i.e. the changes can be made separately from other modules. However, common design rules apply to all modules, and are, therefore, only related to the interface between modules. When dening modularity in the service context, the limited physical presence of a service means that there are also soft modules of non-manufactured activities. This is in line with the view of B2B services as a combination of physical and abstract elements. A nal, modular service will be combined from one or several service modules (Figure 1). The modules can be service elements or processes. In this study, a service module is understood as one or several service elements offering one service characteristic. We use the term service element as an equivalent for product component. Thus, service elements are considered here as the smallest units into which services are divided. As an example from logistics services, warehousing could be regarded as the service module and the needed space in the warehouse could be regarded as the service element. A process module is a standardised, indivisible process step. For example, an ordering process includes two process modules: sending and receiving of orders, for example by phone, fax or EDI (Hoogeweegen et al., 1999). Modularity in service production also requires some modularity in organisation design to enable the use of core capabilities of a service producer. Modular organisation is a system of modular processes with low coordination (Sanchez and Mahoney, 1996), which means that it is formed by groups of weakly connected subsystems. For example, outsourcing, contract manufacturing, alternative work arrangements and the formation of alliances are methods of creating modularity in an organisation. Furthermore, the availability of standards, technological change and a competitive industry environment drive towards modular organisational forms, because they enable the recombination of heterogeneous inputs and the production of multiple services (Schilling, 2000; Schilling and Steensma, 2001). By using subcontracting as organisational modularity, the rm can scale its production according to external variability related to current demand without increasing its own labour input or capital investment. Hence, subcontracting forms a source of both scale and scope exibility for a rm. The rm can specialise in core processes creating high-customer value, while subcontractors using other resources provide standard processes. Upton (1994, in Harvey et al., 1997) suggests that exibility is:

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Interface

Module 1

Module 2

Figure 1. A modular service with two service elements and one interface

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[. . .] the ability to change and react with few penalties in time, effort, cost or performance and the use of modularity for products, processes, and organizational forms can offer a tool to handle these pressures better.

88

Based (1) (2) (3)

on our literature review, 3D of modularity can be identied: modularity in services; modularity in processes; and modularity in organisation (Figure 2).

In order to use modularity in service development, each of these dimensions need to be considered. A service, which is visible to a customer, can be combined by one or several service modules. In case of processes, we see that a service production process is combined from one or several process modules that can, furthermore, either be related to information processing or physical operations. Finally, we see modularity in organisation as a way to use the rms own and other rms resources in a exible way. A modular organisation is composed of organisation modules, which are dened as functional units in this study. Modularity in organisation can also be accomplished through various supplier network congurations and internal organisational structures (see, e.g. van Liere et al., 2004 for an embedded coordination of organisation, where standards, rules and agreements are coordination activities of managers and employees). We have illustrated the way the dimensions are employed, in order to create a service offering that is produced through modularity. The modular service offering represents the element visible to the customer, whereas the other two dimensions are the means to create the modular services and are, thus, intra-organisational. The service provider selects the process and organisational modules that are needed in order to produce the requested service elements for the customer (Hoogeweegen et al., 1999). Conceptual modular service platform When a rm wants to develop modular services, it must build an architecture that combines the 3D of modularity. Within such architecture, different customer service applications can be easily developed by re-integrating the service modules (Crawford et al., 2005). Creating this kind of architecture is a challenge to a company providing
Modular services Service module 1 Service module 2 Service module 3 Service module 4

Visible to the customer

Intra-organisational

Modular Organisation

Modular processes Process module 1 Process module 2 Process module 3 Process module 4

Figure 2. 3D of modularity in services

Organi- Organi- Organi- Organisation sation sation sation module 1 module 2 module 3 module 4

business services, since the implementation of a modular service platform must also include customer interaction and marketing issues (Jiao et al., 2006). One way to make the architecture operational is to use the concept of platform (Asan et al., 2004). A platform consists of independent subsystems and interfaces between them (Meyer and Lehnerd, 1997), and each subsystem includes process modules and modular organisational composition. The processes and interfaces between them can be related to technical innovations and rm specic assets (Meyer and de Tore, 1999). The platform approach can create customer value by sharing service modules. However, a platform with subsystems needs to be seamless for the customers and produce a ow of services for their needs with competitive prices. Platform thinking has been argued to increase a rms exibility and responsiveness and assist in gaining market share from the competitors (Sawhney, 1998). Another benet of platform planning is a rms greater ability to customise products to different market segments and customers with less cost. The cost and time of service development may be lower because some tested elements of a new service already exist. The production and delivery of services via a platform costs less due to the higher volume of parts used in several services, e.g. the modular unit loads or vehicles suitable for transportation of several type of goods. Investments are lower for modular than dedicated equipment and facilities. Platform planning decreases the complexity of a production system and less parts and processes decrease costs in operation management, delivery and sales. Moreover, platform planning allows companies to improve service quality, because it is easier to improve and monitor fewer service elements and processes (Robertson and Ulrich, 1998). When creating a platform strategy, a rm should, rst, analyse the markets and competitors and decide which markets and customer needs and segments offer the most promising growth opportunities. In terms of customer needs, the rm should carefully identify and determine the service modules enable providing the customer with the desired new services. The service providers core customer knowledge and technology related to services and processes are also needed. The organisations functional groups, i.e. teams, share common knowledge, competencies and resources in service development (Meyer and Lehnerd, 1997; Sawhney, 1998; Meyer and de Tore, 2000). Our conceptual model for modular service platform is shown in Figure 3. The model consists of three subsystems of modularity elements: modular service offering, modular processes and modular organisation. However, in order to understand the platform thinking for services context, it is important to integrate the markets and rms competencies with the platform (Meyer and de Tore, 1999). As Verma et al. (1999) present, the identication of the service providers customer needs includes four steps: (1) identifying target market segments; (2) developing a service concept to address the target markets needs; (3) creating an operation strategy to support the service concept; and (4) designing a service delivery system to support the operation strategy. Therefore, we have added the market segments and service providers competencies into our theoretical framework of a modular service platform.

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Market segments

90
Derivate service offerings Modular service platform

Modular service offering Service module 1 Interfaces Service module 2 Service module . Service module n Interfaces

Modular organisation OrganiOrganiOrganiOrganisation sation sation sation module 1 module 2 module . module n

Interfaces

Modular processes Process module 1 Process module 2 Process module . Process module n

Figure 3. Conceptual model for modular service platform

Service providers competencies

Empirical study of modular service production Research strategy The object of study, modularity in creating business services, cannot be easily separated from its context. We adopt the case study strategy, so that we can carefully examine the research phenomenon by using multiple levels of analysis of modularity, i.e. service, process and organisation. Logistics services industry is a suitable context for a study of modular service development as it includes both physical and service elements in central roles. According to Harvey et al. (1997, p. 30), services have the following features: they always involve at least one customer contact and there is increasing demand to have them bundled and delivered at the right time, and at the right place, in the customers supply chain. Logistics services are produced according to the demand, and they involve less physical aspects and delivery than manufactured goods. In addition, the existence of both physical and service elements can make logistics service processes more visible than, for example, professional services. After selecting the industry context, we chose the actual case for our research. We needed to nd a logistics company whose service production employs the idea of modularity.

The selection was based on the study related to roles of logistics companies in networks (Pekkarinen et al., 2004), data of which included in-depth interviews of 17 LSPs. An initial analysis resulted in the identication of one LSP company that was clearly applying modularity to its service production. The LSP company was a good candidate for this study also in the light of our second criterion: serving customer needs based on standardised services that can also be combined to full more demanding, heterogeneous needs. The identied LSPs customer base included a variety of different types of customer organisations with varying needs. The study is limited to two business units of the LSP, since out of all three business units, only two were employing modularity in their service production (the third unit offered tailored solutions). The chosen units provide almost the entire range of logistics services; only the heavy, bulk domestic transport is excluded. Another criterion for choosing these units was that one of them concentrated on offering smaller shipments, whereas the other offered larger shipment services. This enabled us to also take into account the possible impacts the size of shipment might have on the use of modularity in the services. In the study, we have treated these two business units as subcases. The data included two in-depth interviews with the managing directors of the two business units. The interviewers represented the Finnish branch of the business units and, thus, the perspective into the LSP is a Finnish one. The interviews were tape-recorded and transcribed. The service offerings produced were studied through documents, including service descriptions and brochures. As a secondary data, we also used a research report on the modular logistics service platform of LSPs e-Business customer. The data were analysed by categorising it with NVivo software based on the theoretical pre-understanding about modularisation of services. Next, we will introduce the LSP company and its service offerings and then analyse the modularity of the two business units by using the developed theoretical conceptual model. Analysis of the subcases The LSP studied is one of the largest global logistics companies. The companys turnover in 2004 was over 40 billion euros. The characteristics of two units of the LSP, subcases A and B, are presented in Table I. Both A and B think that global companies are ideal customer segments and they follow global trade changes in business developing. Besides, the USA and Europe, the most important markets are Asia (China, India) and Latin America. Bs main market segments are manufacturing while As important customer segments are fashion and health-care industries.
Characteristics Personnel Global presence Main market segments Subcase A 30 000 160 countries Fashion and healthcare industries Subcase B 100 000 200 countries Manufacturing industries, e.g. paper and metal industry and retailing business Using own eet and facilities Small shipments

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Physical movement of goods Using outsourcing and partnerships Main type of service Large shipments

Table I. Characteristics of the two subcases

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Standard services of both units include air export freight, ocean freight and time sensitive, i.e. express, services. Unit A does not offer physical movement of goods by its own eet, but, instead, by using different forms of outsourcing and partnership, whereas unit B produces services by using its own eet and facilities. In both business units, modularity is considered as one of the key aspects of service development and both have recently invested in developing modular service platforms. Next, we will analyse the 3D of modularity from the both subcases. We will rst discuss the subcases separately and then present a cross-case analysis. Subcase A. Subcase A offers a wide range of value-added services to global, strategic and contract customers. Services may need to be customised for different industries, because the logistics needs in, e.g. pharmaceutical, telecommunication or steel industry are different. In two important customer segments, fashion and health-care industries, service modules and modular processes enable the subcase A to build cost efcient solutions by utilising the similarities in customer needs. For example, offerings in relation to order management (OM) and supply chain management (SCM) services, as well as vendor-inventory management (VMI), are developed for all global and strategic customers, irrespective of their industries. However, information services, e.g. order as well as track and trace, are standardised by customer segments, as far as possible. In regard to service modularity, we found that A has offered highly standardised core services, such as air and ocean freight services. Additional service modules include different value-added services designed to full more heterogeneous customer needs, especially for VMI, OM and SCM services, which are mass-customised. Business unit A, however, also uses tailoring for some unique customer solutions. Process modules of A include three important areas: information, physical movement of goods and operational management, each of which can be divided into several subprocesses. For instance, electronic services can include ordering, booking and tracking processes. Documentation and billing, e.g. customs clearance, billing charges and duties can be produced more traditionally (for road and rail) or completely electronically (for air, express). Information is essential and A is even participating in and utilising the customers unique information systems, e.g. in OM. Interviewee of A described these processes in the following way:
[. . .] In the process management we get involved at the shipment level, or even at the level of order sheet and its lines, and handle everything for the customer. This can include the instructions of goods, or in campaigns there is a need for managing huge amount of small shipments delivered globally to, e.g. fashion retailers or pharmacies. This solution also consists of order sizes and quantity by different suppliers, checking, pricing and laying out goods in the store.

Some effort for standardisation exists in subcase A, but the IT systems and information ows of the customers currently create barriers for increasing modularity of information processes. Each customers own IT system always requires tailoring and modications to the As own system. Physical movement of goods is based on outsourced freight service, and only for VMI solutions the equipments are owned by A. Subcase A regards operational management as a core activity in successful customer relationship management. However, CRM activities vary according to the type of customers and for the occasional customers, only minimal amount of customer-specic services are provided. Organisational modules are emerged into four main themes: management, subcontracting, work arrangements and alliance or partnership formation.

In management, the most critical issues are the customer interfaces on which the customers are segmented as global strategic customers with their own organisation, key customers with their own in-house management, regular or occasional customers. The rst segment is strategic for the LSP, which is why the company has developed global customer teams that form an organisational module. Subcontracting is widely used in different transport functions in the subcase A. This means that As role actually becomes more like an intermediary between the customers and the subcontractors processes. This, again, creates a new organisational module for A. Modularity in work arrangements can take place in different levels depending on the customer segments. In the parent company, one organisational module available for all units are the global implementation managers, who participate in strategic, large development projects. Alliance and partnership formation did not follow any pre-described procedure, but were, instead, more based on the prevailing strategic needs of A. However, highly modularised organisational units were found in agent-based cooperation that was directed for small, uncertain market areas. Subcase B. Subcase B offers all the same value-added services as A, but its nancial services are focused on smaller shipments. Most of Bs relationships are contract based and its role in each clients supply chain depends on the nature of the customer relationship. Global customer partnerships have been built and B sees itself as a leading logistics provider of these customers. Information technology is an important tool of developing and managing customer relationships and customers SCM. IT is also used for training global customers and implementing services. B offers highly standardised services including over fty different, carefully dened service modules. Mass-customised services, e.g. VMI solutions, are provided by combining standard services with value-added services. Standardisation is a key strategic priority, and less attention is given to tailoring. However, tailored customer projects are also carried out, especially for large, global customers, but they are not considered as key areas of service development. Process modularity is based on the principle that modularity is something that takes place within the service provider and is not visible to customers. In other words, customers think they are being treated uniquely, when they are actually served using the modular service processes:
[. . .] Modularity effects on everything and shows everywhere. On the other hand, we think that we have to try hard to give an image that the customer receives customised service. Therefore, modularity should not be visible to the customer (Interviewee of subcase B).

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B sees that modularity in processes results in faster sales, shorter time-to-market, less errors, better efciency and higher quality. Information technology is in Bs focus in service development, and it is also used intensively in service production and delivery. Standard IT processes enable the creation of various types of e-services to all customers through the internet. For customised solutions, standard e-service processes, including interactive options, are also employed. In interfaces between the IT processes, different information channels, such as paper, phone, fax, EDI, SMS, e-mail, internet and MMS, are used, which means that the IT service and process modules differ by the interfaces, based on the channel used for deployment. Physical movement of goods is based on Bs own transport systems; only rail services are subcontracted. Other processes related to physical handling of goods are

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partitioned to separate processes for delivering services as standard, modular or integrated to customers processes. Extensive IT for operation management is used, e.g. for daily customer feedback and daily reports of operation managers. Concerning organisational modularity, modules, such as development meetings, key account management, and specialisation of staff, are organised according to market segments. Subcontracting is not a key aspect for B. Instead, B sees its own work force as a strategic capability and expertise within organisation is guaranteed by training and development projects. Number of personnel varies according to the customer base, e.g. in case of a new, big customer, new personnel is usually recruited. Strategic alliances are formed with sea liners for global freight services and for new, better services and new markets. Cross-analysis of the subcases In this chapter, we compare the two subcases with respect to the 3D of modularity (Table II). In regard to service modularity, we noticed that the subcase A represented a case where existing services were developed towards modularity, whereas in the subcase B the services were created as modular from the start. Clear service modules were found from both of the cases and could further be divided into service elements. Furthermore, modularity in processes was heavily concentrated on the use of information technology. In the subcase B, also the modularisation of transport processes was an essential issue, as the physical movement of goods was handled using the companys own eet, whereas in the subcase A subcontracting was used. Modular processes were seen as essential prerequisites for providing modular services. Organisational modularity was also identied in both cases. In the subcase A, subcontracting was an important organisational module, whereas in B the internal work arrangements formed the most evident organisational modules. A fourth dimension of modularity emerged very clearly from the empirical data related to the customer interface. By this we mean the ways the customer interface is managed, e.g. in terms of customer need identication and customer relationship management. Subcase A had an active marketing and sales personnel that identied the customer needs on the basis of the customers order, whereas B relied more on the customer in dening which service modules are needed. Both strategies included modular elements. Subcase A starts from customer needs, and then uses, if possible, standard services utilising modularity. The main co-ordination needs in A are how to manage information ows and interfaces between different IT systems. In B, the aim is to maintain high-quality globally and to ensure transparency in service production inside
Dimensions of modularity Service modularity Process modularity Organisational modularity Subcase A: large shipments Developing existing services Standardisation of IT processes Used in several ways, focus on subcontracting Active marketing and sales Subcase B: smaller deliveries Developing new services Standardisation of IT and transport processes Focus on internal work arrangements Collaboration with customers

Table II. Cross-analysis of subcases A and B

Customer interface: identication of customer needs

the company. An extreme example in B was that if the service a customer wants is cheap and not urgent, B offers a standard surface transport, no value-added services and only basic information and security. However, if the service a customer wants is urgent and valuable, B offers a combination of standard time sensitive air freight with additional modules, e.g. information, security and other value-added services. Empirical modular service platform As a result of the empirical study, we have elaborated our conceptual framework for modular service platform. There are still three elements of modular services at the centre of the model: modular service offering, modular organisation and modular processes. These are built on the basis of a service providers core knowledge and technology. By combining service modules the service provider can offer services to meet different customer needs. Moreover, by renewing the platform by developing new, or improving the existing modules of services, processes or organisation, the service provider can address new needs of existing customers or totally new markets. The modied model is shown in Figure 4. Service customisation includes the continuum of services from standard- to mass-customised services and further to tailored solutions (Figure 4). We discovered
Customers goals and concerns

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Customer interface Service co-creation Customer Customer Customer Customer interface interface interface interface module 1 module 2 module . module n

Service offering Service module 1 Service module 2 Service module . Service module n

Service customization: standard, mass-customized, tailored solution Tailoring -Org. module(s) -Proc. module(s) Organisation module n Process module 1

Modular organisation OrganiOrganisation sation module 1 module 2 Organisation module .

Modular processes Process module 2 Process module . Process module n

Service providers core knowledge and technology

Figure 4. Empirically grounded modular service platform

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that by using the same modular service platform it is possible to full varying customer needs, even tailored ones, by developing a specic module into the platform. This tailoring module represents the organisation and processes needed to produce services with unique features with non-standardised interfaces, but, at the same time, most of the tailored solutions can also be offered by using service modules with standardised interfaces. Modular processes in logistics can include, for example, physical movement of goods (pick-up, loading, transporting, unloading and delivery), information processes (sending, receiving orders, documentation, storing and transferring information, tracking shipments, informing the deviations to the customer) and management processes. An operation management system includes control and monitoring processes, performance measurement of operations and customer service quality. These can be performed manually but nowadays most of them are done automatically with operation management system software. Modular organisation of the service platform in Figure 4 contains standardised ways to organise service providers internal and external resources, so that the processes implemented and services offered are as efcient as possible. An internal resource module can include, e.g. teams for each customer segment (country, service, industry) or for each competence area (customs clearing, supply chain solutions, VMI). External organisational modules include subcontracting, the use of hired labour, and different partnership arrangements with other service providers. We concluded from the empirical study that it was necessary to further open up the customer interface in the model. Therefore, we included a fourth dimension of modularity into our model, customer interface that consists of modules, either organisational or process, through which the customer interface can be managed effectively. In addition, we incorporated the customers goals and concerns into the model. Customer needs or customer segments may not be easy to identify, especially in B2B services. Furthermore, the needs may be difcult to identify not only for the service provider but also for the customer. Thus, it is important to understand the goals and challenges the customer has in its own business processes. On the basis of this understanding, the service provider can identify a service offering that can either help the customer to achieve the goals or overcome the challenges. The idea of service co-creation, drawn from the services marketing literature, is essential for understanding the customers role in the service process. Customers are not merely receiving offerings provided by the provider. Instead, they need to be actively involved in the service process. Business services should be seen as objects of exchange, where value is created for the customer through an interactive, processual and experimental relationship between the service provider and the customer. Hence, in platform design, special attention needs to be given to identifying the needs of each customer. Platform architecture is not always successful; the main problem is that the organisational force creates an obstacle for nding a balance between commonality and distinctiveness of modules. Moreover, as Robertson and Ulrich (1998, p. 21) present, a functional organisation, i.e. separate production and marketing functions (management), can be a reason for failure. Therefore, modular platform planning in service design requires that organisational structures are adapted. There are, also, challenges in using a platform for introducing modularity in service production.

For example, which kind of service platform has to be used for services sharing common assets? Challenges for managers are to decide which market segments to enter, to analyse what the customers in each segment want and to nd out what services create value to those customers. Conclusions Theoretical contribution The purpose of this study was to nd out how we can apply modularity in developing business services. We reviewed the existing literature related to product modularisation (Mikkola and Gassmann, 2003; Gershenson et al., 2003; Asan et al., 2004), product platforms (Meyer and Lehnerd, 1997; Robertson and Ulrich, 1998; Holtta-Otto, 2005; Jiao et al., 2006) and service platforms and architectures (Meyer and de Tore, 2000; Homann et al., 2004; Crawford et al., 2005). Based on the literature, we then developed a conceptual model for modular services. The model was empirically elaborated with a qualitative case study of the LSP and its business units represented two subcases in our research strategy. As a result of the empirical study, we presented an empirically grounded model for modular service platforms. The nal model in Figure 4 shows a holistic view on how modularity can be used in service industries. There are quite few previous studies that illustrate the ideas behind the service platform (Sawhney, 1998; Meyer and de Tore, 2000), modularisation of services (Sundbo, 1994; Bowen and Youngdahl, 1998; Homann et al., 2004) or processes and organisation (Sanchez and Mahoney, 1996; Hoogeweegen et al., 1999; Schilling and Steensma, 2001). The rst contribution of our model is that it extends the existing conceptualisations of service modularity by using the four dimensions of modularity service, process, organisational and customer interface. The most difcult challenge in the development stage of modular platform is coordination, because the modules and the interfaces between them, as well as the interfaces within each module, should have as low coordination needs as possible. However, the common core knowledge and competencies within a service provider, as well as technology, should be shared with all service offerings and market segments, which require well-organised and standardised coordination methods, i.e. organisational modules. The second theoretical contribution of our model is the role of the customer interface, which became evident from the empirical case study. The way the customer interface, i.e. the customer need recognition and service co-creation, is handled in the service platform has not received much attention in the previous studies of modularity and platform approach (Verma et al., 1999; Meyer and de Tore, 1999, 2000; Tu et al., 2004). The model presented in Figure 4 shows clearly that the customer interface should be integrated into the modular service platform. In addition, the idea of co-creation (Edvardsson et al., 2005) of the service and value needs to be included in the service platform. Empirical conclusions Based on our empirical study, four important empirical conclusions related to logistics services development can be highlighted. First, we emphasise the importance of standardisation of services and processes due to efciency gains and segmentation of both service offerings and customer relationships by markets (geographic or industry based)

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for enhancing the values wanted by the customers. Second, we want to highlight the value of technology, especially IT innovations, in ensuring the exibility and efciency of the whole system, a modular service platform with interfaces. Third, we found that higher exibility in managing the variability of customer demand and the changes in volume, time and place is a highly signicant challenge in logistics service industry, where the customers logistics needs are continuously changing and, thus, new, innovative service elements are demanded. Finally, in regard to modularised logistics services, both standard and tailored services can be offered to different customer markets without losing either the exibility advantage of service differentiation or the cost advantage of standardisation. The study brings forth an interesting issue in relation to the role of LSPs. As it was concluded in our empirical study, outsourcing and partnering were important elements of the modular service platform. Similar development can be identied, e.g. within the PC industry, where computer manufacturers are system integrators who have outsourced and subcontracted the actual manufacturing of the components and merely take care of the assembling of the computers themselves. Ideally, modular service rms could be integrators, who only assemble the needed modular processes actually produced by other companies. However, this makes service an object of exchange, which creates many challenges. More generally, it is interesting to compare the leaders in the use of modularity in manufacturing industries such as car, computer, consumer electronics and software industries with business services rms. Firstly, with respect to product modularity, one can argue that the modular services of the business services rms are build on existing, standard service elements by including customer-specic value-added elements, whereas manufacturing rms design the mass-customised nal product families with common standard, modular components (Sanchez and Mahoney, 1996). Secondly, in process modularity, the main difference is that manufacturing leaders rely heavily on platform planning with modular assemblies (Asan et al., 2004; Fredriksson, 2006), whereas in business services the use of platform thinking is yet only emerging. Service processes are more closely integrated to service elements that make modularisation of processes more challenging. One important aspect in manufacturing industries is the role of industry standards that determine the interfaces and technologies (Mikkola and Gassmann, 2003), whereas in business service industries standards which increase modularity are scarcer. Finally, concerning customer interface modularity, business services often segment their customers by industry, whereas leading manufacturers develop mass-customised products through renewal of the modular platform for each customer market, which also requires that the suppliers develop module offerings (Meyer, 1997; Doran, 2005). Managerial implications Although our empirical context represented the logistics services industry, the results from our study are also applicable to other similar industry contexts. The use of modularity in terms of the four dimensions can also help service providers in other industries to create value for their customers, as well as for themselves. Besides, as a means for creating value, modularity can be seen as a way of making the services more visible. This may help the service providers to better communicate the customer value that their services can generate in the negotiation phase, when the customer is

evaluating the service providers value creation abilities. This is relevant in the business services context, since it is difcult to demonstrate services in advance to the customer. Based on the case study, we claim that essential competencies for LSPs include deep industry-oriented skills, modular processes for standard service elements and customer-oriented service delivery with the strategic use of IT for managing customer segmentation. Modular organisational forms, such as subcontracting, different work arrangements and partnerships within the supply network, are applied by the business units of the LSP to ensure higher exibility and cost efciency in service production. Knowledge of customer markets is required for using modular platform planning in service development and production. In addition, service and production technology, personnel, equipment and information technology have to be designed to support modularity. Organisational arrangements that increase the overall strategic exibility within an organisation are also needed to face all the challenges of the business services industry. In many ways, modularity has already become a part of strategic management and operations in the logistics industry. The industry uses leased staff, subcontracting in production (transport, IT) and alliance or network formation to gain more exibility to meet the ever-changing needs of todays customers. As a result, the new services can be developed faster and more cost efciently. However, the managers need to know, for which services modular design and production is appropriate. If it is not possible to share or separate the independent elements of a service without losing some of its functionality, modular services are not the right answer. For example, in the case of full load road transportation from origin A to destination B, it is difcult to see any benets arising from the use of modular platform planning. For a rm with several service portfolios, however, such as our LSP, full load direct shipments are just one of the service offerings within a modular service platform. Managers of service organisations should pay more attention to the coordination of different dimensions of modularity service, process and organisation. Moreover, they should see IT as the way to manage several customer markets with different needs without losing the functionality of a more traditional production model. Modularisation and the platform approach give managers a better tool of developing and delivering new services or solutions without increasing resource needs. However, modularising, i.e. combined use of standard, mass customised and tailored services, is always a challenge and will not succeed without thorough analysis of the required processes and organisational aspects. It seems that service co-creation is an essential factor for a successful modular platform. Both the previous literature and our empirical subcases show that it is essential to identify the potential of different markets and to nd out the customers service needs, the ones that are expressed but also needs that are still unconscious. More empirical knowledge is required, however, to answer some questions that were raised during this study. For example, it would be interesting to examine how small rms can manage a customer interface, when the owner and/or the manager is directly involved in daily operations and has, thus, less time for customer relationship management or for systematic identication of new needs of current customers or new markets. Moreover, the standardisation of services, processes and organisational functions is more demanding for small companies due to a narrower range of skills and scarcer resources.

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Evaluation of the study We have evaluated our research through tests suggested by Lincoln and Cuba (1985): credibility, transferability, dependability and conrmability. Credibility refers to which extent the results can be said to the acceptable representations of the data. In order to increase the credibility of this study, we used researcher triangulation (Eisenhardt, 1989). This meant that the two researchers independently absorbed in the empirical data and classied it into the 3D of modularity. The classications were then jointly discussed and a common classication of the data was created. Credibility was also strengthened through careful analysis of the explanations derived from the data. Transferability is related to the theoretical choices made in the research process. We thoroughly evaluated the theoretical constructs of modularity in the literature review. Concerning the dependability of the study, a great deal of attention was given to careful selection of the empirical case setting. Owing to this and the fact that we tried to describe the empirical context as carefully as possible, we argue, that the presented model also has value in other, similar contexts, which also increases the dependability of the study. In order to increase the conrmability of the study, we presented the chain of evidence as visible as possible in the empirical analysis. In addition, the use of NVivo software enabled a critical evaluation of the analysis in order to avoid researcher related biases. Future research interests An important area for future research of modularity in service development is the co-creation aspect (Edvardsson et al., 2005). In modular service offerings, the role of the customer may, in fact, become more important in the value co-production if certain actions are transferred to the customer, e.g. self-service regarding the information about the offerings. In this case, the customers understanding of the available solutions and their own needs becomes essential in modular services. However, in case of business services, the co-creation aspect may be difcult to the customers (Axelsson and Wynstra, 2002) and the service providers expertise may be needed to solve the problem. Another area that needs further research is the identied new dimension of modularity in services, i.e. the customer interface. An interesting question is, for example, what are the main functions, i.e. modules and interfaces between them, of the service co-creation phase in the logistics service industry, and also more generally, in other service industries. Furthermore, due to close and continuous co-operation with the customer, processes and organisational factors in the customer interface may differ from those identied as parts of modular service platform. However, we claim that it is in line with the current development in customer relationship management that managing and developing customer relationships must be closely coordinated with the production and delivery systems of products and services. Finally, it is important to clarify the prerequisites and ways of developing modularity in small and medium size service rms. In this study, empirical data was derived from a large, global LSP, and further research is, therefore, needed to nd out what are the challenges of using modularity in smaller companies and how do these challenges differ from those of larger rms discussed in this study.

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About the authors Saara Pekkarinen is a Postdoctoral Research Fellow in Transportation and Logistics, at the Faculty of Economics and Business Administration, University of Oulu, Finland, where she also received her PhD in 2005. Her interests in logistics and service operations management lie in the research on modularity in business services, especially logistics services industry. Saara Pekkarinen is the corresponding author and can be contacted at: saara.pekkarinen@oulu.. Pauliina Ulkuniemi is an Assistant Professor at the Department of Marketing, University of Oulu, Finland, where she also received her PhD in 2003. Her thesis deals with industrial purchasing in the software industry. In addition to these, her research interests include value creation in business relationships in different industry contexts, especially in business services.

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