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Developing a Tool for Digital

Transformations: How to Improve Service

Quality in the Relocation Industry

ADAM IVARSSON

DAG LINDSTRAND

Master of Science Thesis Stockholm, Sweden 201 4

Developing a Tool for Digital

Transformations:

How to Improve Service Quality in the Relocation

Industry

Adam Ivarsson

Dag Lindstrand

Master of Science Thesis INDEK 2014: KTH Industrial Engineering and Management Industrial Management SE-100 44 STOCKHOLM

Master of Science Thesis INDEK 2014: Developing a Tool for Digital Transformations: How to Improve Service Quality in the Relocation Industry Adam Ivarsson Dag Lindstrand Approved 201X-month-day Examiner Mats Engwall Supervisor Matti Kaulio Commissioner Anonymous Contact person Anonymous Abstract The purpose of this study was to develop a tool that shows relocation companies how they should digitally transform their services. The purpose was satisfied by dividing the research into two studies. Study 1 conducted a qualitative literature review focusing on the fields of blue ocean strategy and service quality to develop an analytical tool that could provide relocation companies with a strategic direction of how to improve service quality through digital transformation. Study 2 tested the tool of study 1 in the empirical setting of a relocation company by collecting quantitative customer opinion data from customer-facing employees covering Europe, Asia and the Americas through structured interviews and an electronic survey. The findings of this research were twofold. Study 1 developed a generalizable tool, which helps companies to form service development strategies through quantitative analysis, called the Service Quality Canvas. Study 2 validated the use of this tool and formed a service development strategy for a relocation company that was focused around replacing human interaction with fast, easy and round the clock exchange of relocation information. Key-words: Service quality, Service quality scales, Digitization, Digital transformation, Disruptive innovation, Blue ocean strategy, Relocation

Acknowledgements First of all, we would like to thank our supervisor at the Royal Institute of Technology, Matti Kaulio, for the continuous guidance and insight he provided. Additionally, we would like to thank our peer students and examiner (Mats Engwall) for their feedback and support during the seminars. Further, we want to express our gratitude towards the employees at the studied company for the valuable information they have shared and insights they have provided us with throughout the process. A special thanks to our company supervisor for his devoted time and guidance, to the management team for their feedback and all interviewees for their positive participation and honesty. Thank you Stockholm, June 2014 Adam Ivarsson Dag Lindstrand

Wordlist Word/Term Definition E-service An electronic service Expected quality level The idea of what quality should be offered Digital disruption The process of being disrupted by digitization Digital transformation The integration of digital technologies into businesses Digitization The conversion of information and media into code readable by computers Importance weight The relative importance of a quality factor expressed in percentages P-service A physical service Perceived quality level The quality actually experienced Quality curve The plotted line in the SQC showing the quality levels of each quality factor Quality factor A component of quality that together with the rest of the components make up the service’s total quality Quality level The difference between perceived and expected quality Relo Inc. The relocation company under study Relocation The process of moving employees between offices within the same company Service Improvement Roadmap The strategic tool summarizing the quality factors of the SQC with high and low potential for service improvement Service Quality Canvas (SQC) The analytical tool developed by this study to provide companies with a strategic direction of service development in the face of digitization

Table of Contents

List of Figures Figure 1: The service development process (Assink , 2006) ............................................ 13 Figure 2: Illustration of the disruptive innovation concept (Christensen, 2003) .............. 17 Figure 3: Blue ocean strategy canvas comparing Southwest Airlines to competitors (Kim & Mauborgne, 2005a) ............................................................................................... 19 Figure 4: The three characteristics of effective strategy according to blue ocean strategy ................................................................................................................................... 20 Figure 5: The four actions framework of blue ocean strategy .......................................... 21 Figure 6: The Service Quality Canvas .............................................................................. 28 Figure 7: Illustration of the area of conceptualization - where the tool will be developed ................................................................................................................................... 29 Figure 8: Service Quality Canvas, an example of two hypothetical hotel booking services ................................................................................................................................... 30 Figure 9: Service Quality Canvas including new factors for hotel booking example ...... 32 Figure 10: Characteristics of effective strategy in the context of the Service Quality Canvas ....................................................................................................................... 33 Figure 11: SQC of the hotel booking including the expected quality and the perceived quality of both the existing and the new service ....................................................... 37 Figure 12: Five-step guide to maximizing service quality through digitization ............... 39 Figure 13: Main steps of the method for Study 1 and 2 .................................................... 42 Figure 14: Process of identifying relevant quality factors ................................................ 47 Figure 15: Typical set-up for a relocation company ......................................................... 55 Figure 16: Overview of Relo Inc.'s services ..................................................................... 56 Figure 17: Practical guide of how to use the SQC, including section reference............... 58 Figure 18: The Service Quality Canvas of Relo Inc. ........................................................ 59 Figure 19: Factors in descending order of importance weight.......................................... 62 Figure 20: The Service Quality Canvas of Relo Inc. ........................................................ 64 Figure 21: Weighted quality levels of the factors ............................................................. 66 Figure 22: Service Quality Canvas for Relo Inc. .............................................................. 67 Figure 23: Importance weight for Relo Inc.’s new quality factors. .................................. 69 Figure 24: Service Quality Canvas for Relo. Inc.’s new quality factors .......................... 69 Figure 25: The Service Improvement Roadmap for Relo Inc. .......................................... 71 Figure 26: Service Quality Canvas for Relo Inc.’s potential future service ..................... 72

List of Tables

• 1 Introduction
  • 1.1. Background
    • 1.1.1. Problem Introduction
    • 1.1.2. Understanding Digitization & Digital Transformations
    • 1.1.3. Digitization in the Relocation Industry
  • 1.2. Research Relevance and Purpose
  • 1.3. Research questions
  • 1.4. Delimitations
  • 1.5. Disposition of Report
• 2. Theoretical Analysis
  • 2.1. A Review of the Existing Literature
    • 2.1.1. Disruptive Changes of Digitization
    • 2.1.2. Enhancing Service Value
    • 2.1.3. Research Gap
  • Developing the Tool 2.2. Conceptualizing the Interception of Blue Ocean Strategy and Service Quality –
    • 2.2.1. Developing the Service Quality Canvas
    • 2.2.2. Conducting Analysis with the Service Quality Canvas
    • 2.2.3. A Practical Guide to Using the Service Quality Canvas
    • 2.2.4. Predicted benefits and drawbacks with the Service Quality Canvas.....................
• 3. Method...............................................................................................................................
  • 3.1. Method Study
    • 3.1.1. Identification of Research Topics and Key Theories
  • 3.2. Method Study
    • 3.2.1. Identification of Quality Factors
    • 3.2.2. Determining Importance Weights
    • 3.2.3. Determining Perceived and Expected Quality.................................................................
• 4. Empirical Setting............................................................................................................
  • 4.1. Relocation Industry
  • 4.2. An Introduction to Relo Inc.
  • 4.3. Industries Similar to the Relocation Industry
• 5. Empirical Analysis
  • 5.1. Relo Inc.’s Service Quality Canvas
    • 5.1.1. Identified Quality Factors
    • 5.1.2. Importance Weight
    • 5.1.3. Quality Assessment
    • 5.1.4. Analysis of Service Quality Canvas Data
  • 5.2. Relo Inc.’s Strategic Direction of Service Development.........................................
    • 5.2.1. Analysis the Service Quality Canvas
    • 5.2.2. Creating a New Strategic Direction
  • 5.3. Potential Service Development Initiatives for Relo Inc.
  • 5.4. Validation of the Service Quality Canvas
• 6. Discussion
  • 6.1. Empirical contribution
    • 6.1.1. Managerial Implications
    • 6.1.2. Generalizability of Research
  • 6.2. Academic Contribution
    • 6.2.1. The Effect of the Methodological Limitations
    • 6.2.2. The Theoretical Limit of the Service Quality Canvas
  • 6.3. Future research
• 7. Conclusion
• 8. References
• Appendix A Data Table for Weighted Quality Level Score A-­‐
• Appendix B Correlation Analysis of Collected Data B-­‐
• Appendix C Importance Rating Interview Sheet.................................................... C-­‐
• Appendix D Perceived and Expected Quality Survey ...........................................D-­‐
• Appendix E Item List E-­‐
• Table 1: Disposition of report
• Table 2: Table describing the three groups of factors used for analysis of the SQC
• Table 3: Service Improvement Roadmap for the hotel-booking example
• Table 4: Predicted benefits and drawbacks of using the SQC
• Table 5: Articles with p-service quality factors
• Table 6: Articles with e-service quality factors
• Table 7: Quality factors for Relo Inc.’s service
• Table 8: Importance weight for Relo Inc.'s quality factors
• Table 9: Quality level, perceived and expected quality scores for Relo Inc.
• Table 10: Evaluation using the roadmap for four potential digital solutions....................
• Table 11: An evaluation of the predicted benefits and drawbacks with the SQC
• Table 12: Categorization of quality factors, with and without weight..............................

List of Equations Equation 1: Calculation of service quality level ............................................................... 24 Equation 2: Calculation of overall service quality. ........................................................... 31 Equation 3: Calculation of overall service quality as the difference of perceived and expected quality ........................................................................................................ 31 Equation 4: Calculation of weighted quality level ............................................................ 65

1 Introduction On September 23rd^ in 2010 the video rental company Blockbuster filed for bankruptcy. The company went from a revenue of $5 billion in 2008 to going bankrupt just one and a half years later. The main reason to Blockbuster’s collapse was the emergence of a competing company, Netflix. Today, Netflix is an on-demand video company with over 40 million subscribers and a market capitalization of $20 billion. In 2005, prior to Netflix’s success, Blockbuster was offered to acquire the company for $50 million, but the offer was declined. Instead, Blockbuster chose the path of traditional video rentals, ultimately leading to its demise. So how could Blockbuster go from market leader to bankruptcy in just a few years? Could this have been prevented? This study considers the thought that it could. The reason why Blockbuster failed to see the potential that Netflix realized was that they lacked a strategy to identify the opportunities of the digital disruption that was sweeping over the video rental business. The goal of this study is to help companies develop such a strategy. The introduction chapter is divided into four parts. The first part, the background, describes the general problem this study aims to solve. The second part describes the research setting of this study: the relocation industry. In the third part the specific purpose of this study is presented. The fourth part describes the delimitations of the study. Finally, the disposition of the report will be presented.

1.1. Background

The background is divided into three sections. The first will describe the widespread problem this study addresses, the second will describe the underlying force that is causing this tension and the third will shortly describe the specific research setting within which the issue will be studied in depth. 1.1.1. Problem Introduction In the coming years, research indicates that the global economy will be subject to some very significant changes. In their recent book, “ The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies ”, Brynjolfsson and McAfee (2014) argue that today’s society is on the brink of a second machine age. In the second machine age, computerization^1 will unlock mankind’s ability to increase productivity through mental power in the same way the steam engine did for physical power during the industrial revolution in the 18th century (the first machine age). The major force driving the second machine age is digitization. Defined as the conversion of information and media into code readable by computers, digitization will be a major source of disruptive change in the global economy going forward. In the words of Brynjolfsson & McAfee: ”...the second machine age unfolding right now—an inflection point in the history of our economies and societies because of digitization. It’s an inflection point in the right direction — bounty instead of scarcity, freedom instead of constraint—but one that will bring with it some difficult challenges and choices.” (Brynjolfsson & McAfee, 2014, s. 25) (^1) The act of causing certain operations to be performed by a computer, especially as a replacement for human labour (Sinclair, 2007).

In order to tackle this force, companies must start integrating digital technologies into their businesses. This process is referred to as a digital transformation (Liu, Chen, & Chou, 2011). Companies across industries are experiencing great difficulty in digitally transforming their businesses (Hansen, Kraemmergaard, & Mathiassen, 2011; MIT Center for Digital Business & Capgemeni Consulting, 2011). Simultaneously digitization forces them to rapid action (McQuivey, 2013). “Leaders complain that they need to adapt faster, and they simply don’t know how. The digital disruption has caused a knowledge gap. For established executives, especially, navigating the incredible challenges and opportunities of the digital shift require more than a list of Facebook best practices and a copy of Twitter for Dummies. It requires new models of collaboration and strategy—an altogether new way of thinking.” (Frelin, 2013) Academia has not yet managed to supply companies with the necessary tools to fill this increasingly critical gap of knowledge (Liu, Chen, & Chou, 2011). It is evident that there is an urgent global need for tools that can guide companies through their digital transformation. 1.1.2. Understanding Digitization and Digital Transformations Digitization and digital transformation are two ambiguous concepts that are referred to differently in management discourse. In this study, they will be treated as different, but interlinked concepts. Digitization is referred to as the external force that unlocks the use of digital technologies in business society. In contrast, digital transformation is referred to as the process of implementing the digital technologies enabled by digitization. Below follows a more detailed description of these two concepts. First, it is important to understand that digitization, as it unfolds today, does not present itself as one major transition but rather as a continuous process of disruptive change (Brynjolfsson & McAfee, 2014). It is an era of change, similar to that of the industrial revolution. In some industries the digitization is already happening. Taking the music industry as an example, it has gone through a series of major changes starting with distributing music through physical products like CDs or LPs to downloading music through virtual stores (e.g. the iTunes Store) and finally to streaming music through software applications such as Spotify or Pandora. Nothing is to say that it will stop there. In other industries digitization is just arriving. In the education industry most education is still being given through traditional means (physical lectures, face to face evaluations etc.). However, digitization is starting to unlock entirely new business models of education. One example is the emergence of Massive Online Open Courses (MOOCs), offered by companies like Udacity and Bady, that because of their low operating costs can provide a large number of students with a free online curriculum leading to a degree from an accredited institution. The students only have to pay for the certification of their credentials (Lane & Kinser, 2012; Mazoue, 2013). The power of the MOOCs is well illustrated by the former Stanford research professor (and founder of Udacity) Sebastian Thrun who together with a college held a course on artificial intelligence in 2011 that attracted 160 000 students from all over the globe (Bennett, 2012). Digitization arrives in

different forms and in different pace across the economy, but very commonly leads to disruptive changes. Second, an example of a digital transformation that successfully tackled digitization is the case of online banking. Online banking moved focus from the traditional delivery channels of financial services, such as local branch offices or telephone operators, and started delivering these services over the Internet instead, using a range of software applications. This lowered operating costs through less staff and fewer local branch offices, and increased customer satisfaction through speed and round-the-clock availability of financial services (Yaghoubi & Bahmani, 2010). As a result the banking industry was transformed. 1.1.3. Digitization in the Relocation Industry Navigating through the era of digitization is an industry-wide problem. As described above, certain industries have dealt with it for some time, while others are encountering it first today. The companies with the most urgent need for a strategy are the ones that are currently on the brink of digital disruption. One example is the education industry as previously mentioned. A second example is the relocation industry , which is the chosen research setting of this study. Relocation is the process of moving employees between different offices within an organization. A company’s relocation program can be either managed internally or outsourced to an external relocation service provider. These providers make up the relocation industry. Companies in the relocation industry offer bundles of services covering the entire, or parts, of the relocation process. Examples of these services are home search, household goods moving, and language and cultural training. There is compelling evidence that the relocation industry is on the brink of digital disruption. One example is a study by Frey & Osborne (2013) that examined how susceptible jobs are to digitization. They examined 702 jobs in total and gave them a score between zero and one depending on how probable they were to be computerized (one being certain and zero being not probable) in the next decade or two. Cross- referencing this list with the type of jobs that employees of relocation companies perform show a strong correlation with the jobs that have high risk of disappearing because of digitization. Examples of these jobs are telephone operator (.97), real estate broker (.97), insurance sales agent (.92), and cargo and freight agent (.99). Another indication of that a digital disruption is arriving in the relocation industry is the disruptions of other closely related industries that has happened in recent years. One such industry is the travel industry (Wilson, 2013). Travel arrangements are made in both the travel and the relocation industry, validating a correlation. An example of a company that recently experienced disruption in the travel industry is American Express Travel (Wall Street Journal, 2012). In 2013 the company laid off 5 400 employees that had become redundant and stated that the business had been “fundamentally reinvented as a result of the digital revolution” (BBC, 2013). Their primary business of serving corporate

travelers through call-centers and agencies became obsolete in the face of digital disruption. Instead of using traditional channels, customers started making purchases online or via mobile (BBC, 2013; Forbes, 2013). The trends outlined above indicate that the relocation industry is next in line of being disrupted by digitization. In order to stay competitive in the eyes of the customer, companies in this industry need to find a way to digitally transform their service packages.

1.2. Research Relevance and Purpose

This study was produced in response to the complex challenges of the relocation industry described above. According to top executives in the industry, companies are lacking a structured method of how to digitally transform their services (Relocation Managers, 2014). Companies are currently developing strategies for digital transformation through unstructured methods such as customer advisory boards (groups of customer managers who provide requests on future service development) or focus groups. These methods are largely based on management’s subjective experience from the past rather than predictions of what customers will urge in the future. The absence of these strategies in the broader economy is highlighted in management literature. In a recent article on new service development (NSD), Edvardsson et al. (2011) found that the factor with the highest effect on NSD performance was the adoption of a service development strategy_._ They claim that a service development strategy is “the missing link in improving NSD performance” (Edvardsson, Meiren , Schäfer , & Witell , 2011, s. 25). Therefore, the need for knowledge on how to navigate in the coming digitization is widespread and urgent. The purpose of this study is to develop a tool that shows relocation companies how they should digitally transform their services.

1.3. Research Questions

This report is divided into two studies. Study 1 will develop a tool that shows relocation companies how they should digitally transform their services. Study 2 will assess if the tool functions in the desired way by testing it on a company in the relocation industry. The research questions of these two studies are presented below. Study 1: RQ1: What would a tool that shows relocation companies how to digitally transform their services look like? Study 2: RQ2: Does the tool function in the desired way?

• RQ2i: What results does it generate for a company in the relocation industry?
• RQ2ii: Do the results of the tool indicate that it is valid? The research questions of study 1 will be answered in chapter 2 , Theoretical Analysis, while the questions of study 2 will be answered in chapter 5 , Empirical Analysis. The methods for both studies will be described in chapter 3 , Method.

1.4. Delimitations

This study is subject to a set of delimitations. First, this study does not consider the full process of developing or improving a service (henceforth referred to as the service development process). Hence, the tool developed in this study will only address parts of this process. The service development process can be divided into four steps: identify , develop , plan , and implement (Assink , 2006). As highlighted in Figure 1 , this study will focus on the first step (“identify”), but also touch upon the second step (“develop”) in section 5.3. The first step, “identify”, covers the identification of a possible service development opportunity, which can be done through identifying a problem (e.g. an unrealized customer need) and the data supporting that problem. The second step, “develop”, focus on the idea development for the problem from the first step (i.e. finding a solution that can solve the problem). The last two steps, “plan” and “implement”, focus on the execution of the service development through planning, testing and implementing the new service (Assink , 2006). Figure 1 : The service development process (Assink , 2006) The last three steps include the cost and feasibility of the potential solutions, and therefore this study will not consider these aspects. The reason this study mainly focuses on the first step of the process is because the identification of the problem and possible solutions are vital for the service development process. The first step determines the direction of the other steps (Alam & Perry , 2002; Kumar, Jones, Venkatesan, & Leone, 2011; Matthing, Sandén, & Edvardsson , 2004). A second delimitation is that this study only considers the relocation industry. Within this industry, only one company will be studied. As previously mentioned, the need for a service development strategy to tackle digitization is a problem affecting multiple companies and industries. Consequently, the generalizability of this study’s research will be discussed in section 6.1.1. Finally, this study only considers the end-consumer of relocation services. In reality, relocation services are purchased by a corporate client and then used by the employees of that client, the end-consumers of the service. In most cases the client and the consumer have similar views of what makes a relocation service valuable, which motivates only focusing on the end-consumer. From here on, the end-consumer will be referred to simply as the customer. No other customers will be considered.

Identify Develop Plan Implement

1.5. Disposition of Report

Before moving on to the next chapter, this section will provide an overview of how the report is laid out. The report contains seven chapters within which two studies are conducted. Study 1 develops a tool that shows relocation companies how to digitally transform their services and thereby answers research question one. The results of study 1 are presented in chapter 2, Theoretical Analysis. Study 2 validates the developed tool and answers research question two. The results of study 2 are presented in chapter 5, Empirical Analysis. After the results are presented they are considered in a broader context in chapter 6 , Discussion. The report is then finished by a summary of the findings in chapter 7 , Conclusion. Table 1 : Disposition of report Chapter Contents RQs Answered 1 Introduction (^) • Descriptions of problem setting, purpose, research questions, research relevance and report disposition

-

2 Theoretical Analysis (^) • Study 1: Development of a tool that shows relocation companies how to digitally transform their services

3 Method • The methods of study 1 & 2 are described

-

4 Empirical Setting (^) • The empirical setting in which study 2 was conducted is presented

-

5 Empirical Analysis (^) • Study 2: The tool from study 1 is tested on a relocation company and the results are analyzed in order to asses if the tool functions in the desired way

2 & 3

6 Discussion (^) • Managerial implications, generalizability, methodological limitations, theoretical limits, and future research are discussed

-

7 Conclusion (^) • The research is summarized -

2. Theoretical Analysis This chapter will answer the research question of study 1: “What would a tool that shows relocation companies how to digitally transform their services look like?” In answering this question, the first step was to conduct a review of previous literature in the relevant fields with the aim of finding a theoretical foundation for the tool. The main findings from this review were the two theories blue ocean strategy and service quality. These theories along with the research fields holding them are presented in section 2.1. Second, the relevant theories identified in the literature review were used to develop the new tool. This process is described in section 2.2.

2.1. A Review of the Existing Literature

This chapter presents the literature review, which aimed to create a theoretical foundation from which the tool of research question one could be developed. In order produce the theoretical foundation two distinct areas of investigation were identified. The first area (section 2.1.1) provides an understanding of the disruptive changes that digitization causes and how companies should transform their service in response to these changes. The second area (section 2.1.2) theorizes how companies can enhance and measure the value of a service. These two areas were chosen since they were both closely related to the knowledge needed for the first research question of this study, i.e. how to digitally transform services. The first area, concerning disruptive changes, is relevant since it provides strategies of how to achieve major transformations to a service. The second area, concerning the enhancement of service value, is relevant since it provides concrete methods of how to measure improvements of service offerings. Without such methods, there is no way to assure that digital transformations actually increase the value of a service. After the presentation of the abovementioned areas of investigation, the research gap this study addresses is highlighted in section 2 .1.3. 2.1.1. Disruptive Changes of Digitization In order to understand the disruptive changes digitization leads to, several research fields were examined (please refer to the method chapter for details on these). However, the focus of the literature review was around the concept of innovation of services. Innovation could be described as “ a means of changing an organization, either as a response to changes in the external environment, or as a pre-emptive action to influence the environment ” (Damanpour, 1996, s. 694). Following this definition, innovation must be a key concept when adapting to digitization, which in this case is the change in the external environment referenced in the citation above. Within the concept of innovation, the fields most closely related to the disruptive changes of digitization is disruptive innovation. The next section will describe this field of research.

Disruptive innovation In order to study disruptive innovation, the concept of disruptive technology , which makes up the base of the disruptive innovation concept, needs to be studied first. The term disruptive technology was introduced by Clayton Christensen in his seminal book “The Innovator’s Dilemma” (1997). The original definition of disruptive technology presented by Christensen was: "Disruptive technologies bring to a market a very different value proposition than had been available previously. Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value." (Christensen, The Innovator's Dilemma, 1997, s. xv) Although the term disruptive technology is extensively used in both academia and business, there is a lack of an agreed definition of the term (Damanpour, 1996; Leifer, O'Connor, & Rice, 2001; Thomond, Herzberg, & Lettice, 2003; Yu & Chieh, 2008). Today, the term disruptive technology has largely been replaced by the term disruptive innovation. This is because Christensen (2003) recognized that it was not only technologies that could disrupt industries, but also new business models. Therefore, this study will from now on use the term disruptive innovation. For this study the definition that will be used is: “[Disruptive innovations] allow organizations to significantly change conventional competitive rules, thus transforming the demands and needs of existing markets.” (Thomond, Herzberg, & Lettice, 2003, s. 6) With the introduction of the term disruptive innovation the concept of disruptive technology was widened and disruptions were classified into lower-end and new-market disruptions (Christensen, 2003). Before, the concept only referred to how dimensions of competition of the existing offerings (e.g. price, functionality and design) could be tampered with in order to produce a disruption. With Christensen’s new broadened view, the idea of disrupting markets by adding new dimension was introduced. This new concept of disruptive innovation is illustrated by the following framework developed by Christensen (see Figure 2 ).

Figure 2 : Illustration of the disruptive innovation concept (Christensen, 2003) In the framework, two value networks 2 are pictured. The two networks are plotted on an axis (going in the direction towards the reader) labeled “Non-consumers or Non- consuming occasions”. Companies in the new value network (along the horizontal axis closest to the reader) do not compete over the old customers or the old occasions of consumption but taps into a completely new market, with no competition. Meanwhile, companies in the old value network are stuck in the old market, with fierce competition. Here, companies compete against each other on the same dimensions, but since different customers value different dimensions the companies create different market segments within the same value network (MacMillan & McGrath, 2000). The horizontal axis indicates time and the vertical axis indicates the level of performance companies in the industry offer on the industry’s dimensions of competition (MacMillan & McGrath, 2000). As previously mentioned, disruption can happen in the old value network (low- end disruption) as well as in a new one (new-market disruption). A new-market disruption initially competes against non-competition (new market space and new customers) in the new value network, but as the performance of the disruptor improves it starts to pull customers from the existing value network as well. Blue ocean strategy The previous section outlined the theory of disruptive innovation. The knowledge uncovered by studying disruptive innovation clarified the type theories needed to develop the tool of research question one. It clearly shows that a tool that shows relocation companies how to digitally transform their services needs to guide companies both in (^2) A value network is the context within which a firm identifies and responds to customers' needs, solves problems, procures input, reacts to competitors and strives for profit (Christensen, The Innovator's Dilemma, 1997)

how to change the performance of the existing dimensions of competition as well as identify new dimensions that would open up new markets (or value networks) with new customers. Tools with the attributes described above were not found in the literature review on disruptive innovation. However, most of the companies exemplified in the disruptive innovation literature as having successfully disrupted their industry; low-price point-to- point airlines, online travel agents and online education (Christensen, 2003), are also brought up in a separate set of literature: the literature on blue ocean strategy. blue ocean strategy is developed by Kim and Mauborgne (2005a) and is not part of Christensen’s original research field of disruptive innovation. Blue ocean strategy essentially shares Christensen’s view on disruptive innovation, but complements it with a set of concrete framework and models. The main framework is called the blue ocean strategy canvas, a framework providing large parts of the theoretical foundation needed to develop the tool of this study. The following section will provide a description of blue ocean strategy and the blue ocean strategy canvas. An introduction to blue ocean strategy The name blue ocean strategy refers to a new market space (without competition) as a blue ocean , and an existing marketplace (fierce competition) is referred to as a red ocean^3. The theory suggests that companies should search after the blue oceans and move away from red oceans (Kim & Mauborgne, 2005b; Raith, Staak, & Wilker, 2008). In the case of digital disruption companies have the opportunity to find many new blue oceans with the help of new technologies, and they should avoid just transferring the same service to a digital service; which would indicate that they are staying in the same red ocean as before. Blue ocean strategy should be adopted when a company face a crisis or major problem and need to search for innovative ideas (Koo, Koo, & Luk, 2008). The blue ocean strategy provides a set of tools and frameworks that can assist companies in finding new uncontested market space and thereby help with a major transition of a service, which in this case is the adaption to digital disruption. The most used concept in the blue ocean strategy concept is the blue ocean strategy canvas. The strategy canvas can be used to illustrate a company’s relative performance across its industry’s factors of competition (see Figure 3 ). On the horizontal axis the range of the factors the industry competes and invests in are displayed, and the vertical axis captures the offering level that customers receive across these factors. To get an understanding of a company’s strategic profile the current offering can be illustrated by plotting the offering level across all factors, this is called a value curve (Kim & Mauborgne, 2005a; Kim & Mauborgne, 1997). (^3) These oceans represent what Christensen refers to as new- and old value networks in his framework of disruptive innovation. A link illustrating how blue ocean strategy is grounded in disruptive innovation theory.

An example of blue ocean strategy To illustrate the usefulness of the strategy canvas a real-world example will be studied. Southwest Airlines is one of the most successful airlines in recent times (Gittell, 2003). Much of Southwest Airlines’ success came from the fact that they decided to not compete with companies in the struggling and highly competitive airline industry by offering a bit more for a bit less. Instead, they decided to break the trade-offs customers had to make between the flexibility and price of cars and the speed of airlines. To accomplish this, Southwest Airlines had to offer flights with frequent and flexible departures at a price that was attractive to the majority of customers. By reducing, eliminating or raising some of the factors of competition in the traditional airline industry, as well as creating new factors imported from similar industries such as the car industry (competing with domestic flights), Southwest Airlines made their competition irrelevant (Kim & Mauborgne, 2002). Figure 3 : Blue ocean strategy canvas comparing Southwest Airlines to competitors (Kim & Mauborgne, 2005a) In Figure 3 the value curve for Southwest Airlines is compared to the value curve of traditional airlines (i.e. the new service compared to the existing service) and the competing car industry. By studying the value curves it is clear that the strategic profile of Southwest Airlines clearly differs from its competitors and they were thereby able to reach uncontested market space. This is a typical example of a successful blue ocean strategy where a company makes the competition irrelevant by transforming their service and providing the customers with something new. For a company to achieve profitable growth they cannot always focus on offering a little bit more for a little bit less, but sometimes need to change the rules of the game instead (Kim & Mauborgne, 1999). Offering Level Blue Ocean Strategy Canvas - Southwest Airlines Average Airlines Southwest Car Transport Low High

Three characteristics of effective blue ocean strategy An effective blue ocean strategy should have three complementary qualities: focus , divergence and a compelling tagline (Kim & Mauborgne, 2002). A strategy without these qualities is likely to be undifferentiated and hard to communicate to customers, which ultimately would mean that the company would be stuck in the red ocean and have a hard time to compete and gain market share from competitors (Kim & Mauborgne, 2005a). Figure 4 : The three characteristics of effective strategy according to blue ocean strategy Focus means that a company’s strategic profile, or value curve, should focus on a selected number of factors. In the case of Southwest Airlines, they focused on hub connectivity, friendly service, speed, and frequent point-to-point departures (Kim & Mauborgne, 2002). By having a focused strategy, Southwest Airlines has been able to offer low prices, and thereby compete with car transport. Focus is required to keep prices low. If a company tires to maximize the offering level across all factors at ones, the price of the service would be very high (Kim & Mauborgne, 2005a). Divergence is important for an effective strategy because otherwise companies loose their uniqueness. Most companies share the same strategic profile since they only reactively try to keep up with the competition. One of the reasons for Southwest Airline’s success is that their quality curve diverged from their competitors (who’s value curves were more or less identical) (Kim & Mauborgne, 2002). A compelling tagline is the third quality of an effective strategy. This tagline should summarize what the company offers and how that differs from the competition. Therefore Focus Divergence Compelling Tagline Blue Ocean Strategy’s Three Characteristics of Effective Strategy

the strategy must be both focused and divergent. One way of testing the effectiveness of a strategy is to check if a compelling tagline could be written based on the company’s strategic profile (Kim & Mauborgne, 2005a). The four actions framework To create the new value curve, that matches the three characteristics described above, the blue ocean strategy provides the four actions framework. This framework contains four key questions to challenge an industry’s traditional strategic logic and business model (Kim & Mauborgne, 2005a):

1. Which of the factors that the industry take for granted should be eliminated?
2. Which factors should be reduced well below the industry’s standard?
3. Which factors should be raised well above the industry’s standard?
4. Which factors should be created that the industry has never offered? Figure 5 : The four actions framework of blue ocean strategy The first question should make companies consider what factors the industry have competed on for a long time, and which of those that could be eliminated. These factors are often taken for granted by customers and no longer add value to the service. Factors taken for granted can even detract value if the company does not live up to the expectations from customers. There are sometimes fundamental changes to what customers’ value, but companies that are purely focused on benchmarking with the competition neither act on nor perceive those changes (Kim & Mauborgne, 1999). A New Value Curve Reduce Which factors should be reduced well below the industry’s standard? Create Which factors should be created that the industry has never offered? Eliminate Which of the factors that the industry takes for granted should be eliminated? Raise Which factors should be raised well above the industry’s standard?

Question number two push companies to think about if their services (or products) are overdesigned, i.e. if the company over-serves its customers, in the race to beat the competition. This question is important since companies over-serving their customers increase the cost structure for no actual value. The third question force companies to identify and remove compromises the customers have to make in the industry. This is done by raising selected factors above the industry average and thereby offering the customers more than all competitors for those factors. These factors should be the factors that are the most important to the customers. For question number four companies should discover entirely new sources of value for the customers. These factors could both create new demand, i.e. attract new customers that do not use the service today, and shift the strategic pricing of the industry. Asking the first two questions (eliminate and reduce) will provide companies with insights into how they can lower their cost structure compared to the competitors, while not affecting the offered value delivered to customers. According to the research of Kim & Mauborgne (2005a), managers rarely put in systematic effort to eliminate or reduce their investments in factors the industry competes on, which result in rising costs and increasingly complex business models. On the contrary, the second two questions (raise and create), help companies gain insight into how to increase the customer value and create new demand. These actions allow companies to systematically explore how to increase customer value across factors from alternative industries and offer customers an entirely new experience. To summarize, the most important actions are eliminate and create, since they force companies to go beyond the existing factors and thereby move from the red ocean to the blue ocean. Companies that have an systematic approach to asses these new factors will be able to make the competition irrelevant and thereby increase the customer value and demand, while not increasing the cost structure. Criticism of blue ocean strategy As stated above, blue ocean strategy can help companies to unlock new market space by reinventing their offering. Although the theory has many positive features, as described previously, there exists criticism of the theory. The main critique from other researches is that the theory can mainly be used for post diagnosis and explanation of companies using the blue ocean strategy (Raith, Staak, & Wilker, 2008). This suggests that companies wanting to create a blue ocean will have a hard time doing so with the help of the frameworks presented in the blue ocean strategy. The reason for this criticism is the method used by Kim & Mauborgne (2005a), which applied the blue ocean strategy theory to historic changes by companies (companies that had created blue oceans) by describing the changes through the lens of blue ocean strategy (Raith, Staak, & Wilker, 2008). However, this criticism is not specific to blue ocean strategy. Most management theories try to provide prescriptive theories for innovation or strategy, but scholars are not able fully test these in the real world. This is because there are too many other factors (e.g.

competition, economic climate, geopolitics) affecting the sample (i.e. the case company) and studies are usually not conducted over sufficiently long time periods. Evaluating the use of blue ocean strategy The above sections have presented blue ocean strategy by describing the frameworks and critique connected to the concept. The framework that was identified as the most suitable for this study was the blue ocean strategy canvas. This tool allows companies to get an understanding of how they should change their services to handle disruptive change. It is successful in showing them that this can be done both by adapting their service along the exiting factors the industry currently competes on as well as introducing new factors that make the competition irrelevant. As such, this framework provides part of the theoretical foundation needed for the tool developed by this study. It provides theory on how companies should handle major transformations, which includes digital transformations. However, blue ocean strategy does not provide any theory on how make sure that service value increases through such a transformation. In order to do this it would have to study service value instead of offering level and it would have to allow precise measurements on these metrics. Originally, the framework provides no guidance into how the offering levels of the factors (on the vertical axis in the strategy canvas) could be obtained. Consequently the blue ocean strategy canvas, while partly helpful, does not provide all theory needed to develop the tool of this study. Thus, an additional area of investigation was studied to obtain a complete theoretical foundation. This area is presented in the next section. 2.1.2. Enhancing Service Value The second area of investigation considered in developing the tool of this study deals with how companies enhance and measure the value of their services. Customer orientation in service development In order to measure the value of a service the perspective from which it is assessed must be decided. Theoretically many perspectives could be considered, but according to the discourse on service development the value of a service should be assessed using a customer-orientated approach (Alam & Perry , 2002; Lundkvist & Yakhlef, 2004; Matthing, Sandén, & Edvardsson , 2004). Previous research claims that the most critical factor for success in developing a service is to understand customer needs and to incorporate these insights into the new service (Cooper & Klienschmidt, 1987; Zirger & Modesto, 1990). These customer insights can be gathered through interviews, focus groups, or surveys. However, asking customers directly what they want, and only focusing on the literal voice of the customer, has proven to not produce the desired results for service development (Ulwick, 2005). This is because customers sometimes lack the ability to express their needs and what they want from a future service (Christensen, 1997). In order to gain the needed insights from customers, without the drawbacks from asking the customers directly what they want, the concept that is most widely used is service quality. This is because service quality conceptualizes the value of a service by breaking it down into components. These can then be assessed individually without asking customers