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Technology cross-fertilization and the business model: The case of

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 Research Policy 38 (2009) 1468–1477

Contents lists available at ScienceDirect

Research Policy
journal homepage: www.elsevier.com/locate/respol

Technology cross-fertilization and the business model: The case of integrating

ICTs in mechanical engineering products
Joakim Björkdahl ∗
Department of Technology Management and Economics, Chalmers University of Technology, Vera Sandbergs Allé 8, 412 96 Göteborg, Sweden

a r t i c l e i n f o a b s t r a c t

Article history: This paper investigates the increasing interdependency among different bodies of knowledge in prod-
Received 5 May 2008 ucts, from the technology opportunities arising from ‘cross-fertilizing’, and how firms try to appropriate
Received in revised form 4 October 2008 economic value from their technical potential. The study is based on three multi-national corporations,
Accepted 16 July 2009
and their integration of information and communication technologies into established mechanical engi-
Available online 25 August 2009
neering products. The case studies show how technology cross-fertilization needs to be accompanied by
business model changes in order to achieve increased economic value. While much attention has been
Keywords:
given to the input dimension of multi-technology products, the economic and commercial domains have
Business model
Cross-fertilization
been rather ignored in previous literature. This work contributes to the management literature by link-
ICT ing the input resources with the market output for creating and appropriating value from technology
Value creation cross-fertilization.
Value appropriation © 2009 Elsevier B.V. All rights reserved.

1. Introduction
It has long been recognized that diversification is a key strategic
variable in firm growth1 (e.g. Ansoff, 1957; Penrose, 1959; Rumelt,
1974; Montgomery, 1994; Markides and Williamson, 1994). Within
this perspective, diversification of output markets, i.e., new product
lines, businesses and geographical markets (internationalization),
by utilizing economies of scope and resource sharing, has been the
main focus. More recently, a new stream of literature on diversifi-
cation has emphasized the importance of diversification of firms’
input technologies in their output markets, for the growth of the
firm (Kodama, 1986; Pavitt et al., 1989; Granstrand and Sjölander,
1990; Patel and Pavitt, 1994; Granstrand et al., 1997). This liter-
ature on technology diversification has made major advances in
showing that large firms make use of, and develop, competen-
cies in many different technological fields. The literature argues
that the major driving forces of technology diversification are the
opportunity to introduce new technologies into products by cross-
fertilizing technologies, and the pressure to support a given product
line to maintain its relevance (Granstrand et al., 1997). In so doing
the literature emphasizes that products have to incorporate an
increasing range of technologies (Pavitt, 2001). Much of the exist-
ing research on technology diversification focuses on the breadth
of firm’s technological competencies, often measured by the distri-
∗ Tel.: +46 31 772 1948; fax: +46 31 772 1237.
E-mail address: joakim.bjorkdahl@chalmers.se.
1
Another commonly held view is that (unrelated) diversification reduces risk.
bution of patents across technological classes (see e.g. Pavitt et al.,
1989; Granstrand et al., 1997; Patel and Pavitt, 1997; Gambardella
and Torrisi, 1998; Garcia-Vega, 2006), but downplaying the links
with integration of new technologies into products, to value cre-
ation and value appropriation.
Creating and appropriating value from diversification in the
technology base of products, i.e. technology cross-fertilization, is
not automatic; innovative management is needed for their real-
ization. Hence, from a managerial or firm perspective, a crucial
aspect is how firms create value for their customers and how firms
appropriate economic value. Technology cross-fertilization does
not inherently lead to improved customer or user value. Nor does
increased user value inherently lead to increased value appropri-
ated by the integrating firm. Thus, creating and appropriating value
from diversifying the technology base of products clearly needs to
be managed. The cross-fertilization may create a potential value for
some users, but to realize that value, and also to appropriate a part
of that value, are potential management problems, arguably closely
associated with the activities in the business model employed. This
paper focuses on these areas with the aim of adding to the current
limited empirical understanding.
This paper explores how the integration of Information and
Communication Technologies (ICTs) into the technology base of
a product can open up new sub-spaces in the existing techni-
cal performance and functionality space. The rapid and persistent
improvement in the performance and cost of ICTs provides abun-
dant opportunities for products to capture, control, process, store
and communicate information in a way that was not possi-
ble before. In other words, old mechanical engineering products

0048-7333/$ – see front matter © 2009 Elsevier B.V. All rights reserved.
doi:10.1016/j.respol.2009.07.006
 J. Björkdahl / Research Policy 38 (2009) 1468–1477
increasingly have the potential to become more ‘intelligent’. We
investigate this technology cross-fertilization and look at how
firms try to appropriate economic value. We conduct in-depth
analyses of attempts to integrate ICT components into existing
mechanical engineering products, undertaken by three different
multi-national, multi-product and multi-technology corporations
(MNCs/MPCs/MTCs): (1) for decanters in the area of wastewater
treatment plants; (2) for industrial compressors; and (3) for ball
bearing housings.
The paper is structured as follows. The first part provides the
empirical and theoretical background. This is followed by a descrip-
tion of the methods and an investigation of three corporations that
diversified the technology bases of their products by integrating
ICTs. The paper investigates their attempts to create and appropri-
ate economic value from these efforts. The paper concludes with a
discussion of the findings and some managerial implications.
2. Theoretical and empirical background
2.1. Multi-technology firms and products
Today, a substantial number of products across all sectors incor-
porate several technologies, components and sub-systems. Both
products and firms are becoming increasingly multi-technology,
such that the technology bases of large firms are usually much
larger than their product bases (Patel and Pavitt, 1997). Given this
trend towards greater technological competition, firms’ resource
bases have had to become more comprehensive in order to sup-
port their product range. At the same time, firms have been
obliged to specialize in a narrower range of production, because
of the difficulties involved in sustaining the range of resources
required to support a wide range of basic production areas. Penrose
(1959) foresaw this situation, which was clearly demonstrated by
Gambardella and Torrisi (1998) in the electronics industry and by
von Tunzelmann (1998) in the food industry.
It has been argued, and amply demonstrated, that even the most
vertically integrated firms need to access external resources in
order to be able to exploit their inhouse resources when devel-
oping multi-technology products. It is not efficient for firms to
produce everything involved in the manufacturing and product
design of multi-technological products, when the production of
technologies and components is concentrated in dedicated produc-
ers. They are forced to rely on external suppliers, sometimes even
for the development of simple products. Thus, in many instances
firms could be termed ‘systems integrators’ (Davies, 2003, 2004;
Hobday et al., 2005). However, Granstrand et al. (1997) found that
large firms increasingly develop technological competencies in a
wide range of technological fields outside their ‘distinctive core’, i.e.
those technologies that are dominant within the firm, and beyond
those fields in which they have associated production activities.
In other words, even if a particular technology is not part of the
firm’s core field it might be necessary for the firm to develop some
in-house competencies in that area to enable it to coordinate its
production systems and the supply chain, and to evaluate and han-
dle technological opportunities. Brusoni et al. (2001) argued that it
is necessary for firms to develop technological competencies with-
out associated production, when the product encompasses highly
interdependent components or subsystem whose interaction can-
not be predicted, or when there are uneven rates of change in
components or sub-systems. This latter aspect explains why over
time firms acquire competencies in new technologies and why this
is necessary (Pavitt, 2001). For large firms in particular, there is a
tendency for them to broaden their competencies to encompass
new, fast-changing science and engineering based fields (Pavitt,
2001), in order that the technologies can be incorporated into
1469
existing products to improve their performance and functionality
(Granstrand et al., 1997).
2.2. Technology cross-fertilization
Adding new technologies to the technology base of a par-
ticular product is associated with a search process in which
new technologies are explored, and then integrated into the
technology base, resulting in enhanced technical performance
along the existing trajectory and/or new functionalities. This
process is sometimes referred to as product related technol-
ogy diversification2 (Granstrand, 2001). Here, the search for
new technologies is constrained by the need for them to cross-
fertilize within the product, opening up new sub-spaces in the
technical performance and functionality space. This is another
type of economies of scope that is different from cost-related
economies of scope resulting from resource sharing (Granstrand,
1999).
Advances and breakthroughs in science and technologies open
up opportunities for interdisciplinary combinations of different
technologies (Granstrand, 2001). Cross-fertilization occurs, in par-
ticular, with the use of so-called general purpose technologies
(GPTs) (Torrisi and Granstrand, 2004), which by definition are
highly pervasive and cross most industry boundaries, being in many
ways highly complementary to other technologies. GPTs act as
enabling technologies by opening up new opportunities rather than
offering complete product solutions (Bresnahan and Trajtenberg,
1995).3
ICTs are classified as GPTs since they can be combined with
a multitude of other technologies. It has been shown that firms
patenting outside their core technical domain increasingly do
so within the ICT field. In fact, this field attracts more patents
than any other, and therefore is increasingly dispersed across dif-
ferent sectors (Mendonça, 2002). Technology advancements in
this field have been continuous, especially in terms of improved
price/performance and new applications, and economic advan-
tages of speed, flexibility, networking and storage (Freeman, 1995).
As Freeman (1995, p. 55) states ‘it would be a mistake to think
of ICT simply as a set of new fast-growing industries. It is also
a potent source of transformation in older “traditional” indus-
tries, such as . . . mechanical engineering’. Studies on inter-industry
spillovers have focused on things such as productivity gains, the
use of ICT in manufacturing and product design, cross-border
knowledge flows, information exchange, workforce flexibility,
organizational practices, process improvements, and economic
growth (see e.g. Freeman, 1995; Helpman, 1998; Pavitt, 2001;
Fabiani et al., 2005). Despite the fact that ICTs facilitate and can
be utilized to improve established products, few studies, have
studied their impact on established products, building on differ-
ent engineering principles. This is somewhat surprising since ICTs
have wide-ranging applicability for many different products in
many different industries, resulting in both technical and busi-
ness opportunities for firms, from the combination of these often
2
The reverse of product related technology diversification is technology related
product diversification, meaning that for a given technology base, new products are
integrated into the product portfolio (Granstrand, 2001).
3
One aspect of this, which is more focused on the generic technologies themselves
and not the existing products, is discussed by Kodama (1992), which states that the
fusing of existing technologies (technology fusion) can create so-called “hybrid tech-
nologies”, e.g. fusion of mechanical and electronics technologies, which produced
the mechatronics revolution, and the fusion of optics and electronics which cre-
ated optoelectronics (the first would be characterized as production fusion and the
second as scientific fusion, Freeman, 1995). These technology fusions gave rise to
new products that revolutionized markets. Kodama (1986) ascribed much of Japan’s
success in the 1980s to its achievement in fusing science based and mechanical
engineering technologies.
1470 J. Björkdahl / Research Policy 38 (2009) 1468–1477
new technologies and the technology bases of their principal
products.
For mechanical engineering corporations that adhere to
Rumelt’s so-called related-constrained diversification pattern, i.e.
sticking to the original business area (Torrisi and Granstrand, 2004),
this type of cross-fertilization of interdisciplinary bodies of knowl-
edge seems offer extensive technological opportunities in terms
of product performance and functionality. The ICT field appears
to offer a wide range of possibilities for adding e.g. sensors, com-
munication capability, and real-time information systems into
mechanical engineering products, allowing new product function-
alities. This has created fundamental changes to the boundaries of
this ‘traditional’ industry and has provided options for businesses
in terms of how, if and when to seize opportunities.
2.3. Value creation and appropriation
The literature on technology diversification acknowledges that
a major driving force of technology diversification lies in the oppor-
tunity to create value through the introduction of new technologies
in existing products (Oskarsson, 1993; Granstrand et al., 1997;
Torrisi and Granstrand, 2004). This literature especially recognizes
the role of new emerging technologies in creating value. However,
it does not explicitly study how this value from the introduction
of new technologies into products, is created for users or cap-
tured by the manufacturing firm. In order to understand how firms
can create value and profit from technology cross-fertilization it is
necessary to widen the focus to include not only technologies as
input resources, but also economic output, and the link between
them.
The business model has been proposed to examine this intricate
inter-relationship. This notion has received much attention since
the mid 1990s (see e.g. Slywotzky, 1996; Slywotzky and Morrison,
1998; Amit and Zott, 2001; Chesbrough and Rosenbloom, 2002;
Magretta, 2002; Markides and Charitou, 2004; Morris et al., 2005).
Large parts of this literature stream have focused on different and
sometimes contradictory aspects of the firm’s business (Morris
et al., 2005). Clearly the concept is a bit muddled, although the
proposed conceptualizations do have a common denominator—to
create and capture value. The literature on the business model,
unlike the conventional strategy literature, has tried to include the
creation of value for the user rather than merely addressing the
appropriation of value. Therefore, the literature on business mod-
els goes beyond Teece’s (1986) framework on how to appropriate
value from innovation, which focuses on protecting an innovation
in order to appropriate economic value, and not on value creation
and value sharing (Moran and Ghoshal, 1999; Jacobides et al., 2006),
which to a large extent arise from its focus on competitive threats.
It is often stressed that a key role of the business model is to create
value for the customer, and that the role of appropriation of value
is stronger in traditional notions of strategy (see e.g. Chesbrough
and Rosenbloom, 2002).4 However, both are necessary and cannot
be treated in isolation. In order to appropriate some value, value
has to be created, and in creating value the firm’s managers must
envisage how the firm can appropriate it.
In this paper the business model is defined as the logic and the
activities that create and appropriate economic value, and the link
between them. The business model describes how a firm takes
4
There is a distinction between the two literature domains in terms of how firms
appropriate value. While the appropriation issue in strategy is competition-centric,
the business model perspective is based on internal activities associated with the
customer. Hence, it is distinct from the tradition in strategy research, since the busi-
ness model literature does not explicitly include the relationship with competitors,
but emphasizes more the in-house activities necessary to create and capture value.
resources, often in the form of technology, as inputs and con-
verts them through customers and markets into economic outputs,
thereby connecting resource potential with the realization of eco-
nomic value (Chesbrough and Rosenbloom, 2002). In so doing, the
business model refers to the customer segments that are being
served, and the customer offering, which activities should be per-
formed in-house and which should be outsourced, how the firm
configures its resources, and how the firm sells and distributes its
offering and creates value for the customer and profits from these
activities through its value-capture mechanism5 (Slywotzky, 1996;
Magretta, 2002).
The inherent value of a technology is latent until it is commer-
cialized. In order to capture value from a technology investment the
business design around the technology has to fit the circumstances
of the technological or market opportunity. Sometimes a technol-
ogy can successfully employ a business model already familiar to a
firm; however, sometimes it is necessary for the firm to find a new
business model. Failure to identify an appropriate business model
will result in the technology yielding less than it has a potential to
do, or even the withdrawal of the firm from commitment to a poten-
tial technology or from the market (Chesbrough and Rosenbloom,
2002).
To analyze the integration of ICT into established products, and
how it manifests itself in terms of the firm’s attempts to appro-
priate economic value, three business development projects, their
commercialization processes and outcomes within three different
mechanical engineering firms were studied.
3. Methods
3.1. Methodological approach
Following Eisenhardt (1989) and Yin (1994), this paper adopts a
multiple case study approach to analyze the specific pattern of inte-
grating ICTs in established mechanical engineering products. The
aim is to uncover how this technology cross-fertilization results in
challenges to the firms’ business models and to answer “how” ques-
tions. In-depth case study research analysis is especially suited to
these objectives, but does not accommodate “what” questions as
its generalizability is limited. The paper does not intend to extrap-
olate from the findings, but rather addresses the under-researched
phenomenon of use and integration of ICTs in products, and how
firms try to appropriate economic value from their technical poten-
tial. The inherently limited generalizability of case studies is to
some extent mitigated by the use of multiple cases that are not
focused on a specific sector or technology, and which are linked to
the established literature on multi-technology firms and business
models.
In choosing the case studies for this study, I was particularly con-
cerned about their relevance to the subject of integration of ICTs in
established mechanical engineering products. This required obser-
vation of mechanical engineering products that were enhanced
through increased performance or new functionalities through the
integration of ICT components. Hence, the improvement in the
established product should lie in the addition of new technologies
and their complementarity with the existing technologies. There
were two other reasons for the choice of case studies. First, they
reflect substantial ICT investment in mechanical engineering prod-
ucts for new and improved customer value. Second, the firms are
all MNCs/MTCs/MPCs, which dominate their industries in terms of
5
There is no strict definition in the literature of a business model change. In this
study any radical change in some of the components of the business model or a
change in the relation of the components in the business model is understood as
business model change.
 J. Björkdahl / Research Policy 38 (2009) 1468–1477
both technology and market share. These companies have grown
with the constantly changing opportunities in technologies and
markets and intend to maintain this growth through the creat-
ing of more tailor-made solutions, which the integration of ICTs
in products should facilitate.
3.2. Data collection and data analysis
The business development processes within the companies
studied were followed for three years. For two of the companies
the data collection process covered the period before and after var-
ious product launches and changes in their business models, which
increased the possibility to identify the business challenges faced
by these companies.
Several data sources were used. The data are based on
internal presentations, workshops and seminars for identify-
ing viable business models from technology cross-fertilization.
Archival analysis of business plans, annual reports, brochures,
internal documentations and trade literature was also made.
This was complemented with 13 in-depth semi-structured inter-
views with managers at several hierarchical levels and functional
positions, to get both retrospective and prospective views.
The managers were asked to describe the firms’ motives for
integrating ICT and the perceived business opportunity and
challenges from doing so, from a technical, strategic, commer-
cial and organizational perspective. Interviews lasted 1.5–3 h
and were recorded and subsequently transcribed. These inter-
views were followed up with a number of supplementary
telephone interviews and email exchanges, to clarify particular
issues.
The data collection process was followed by case write-up
and analysis. The different data sources were triangulated (Jick,
1979) during case write-up and analysis to increase the robustness
of the results. Following Eisenhardt’s (1989) recommendations
for analyzing data, a within-case analysis was applied followed
by cross-case analysis. In the within-case analysis, I examined
how the companies created business models for their technology
cross-fertilization. This process produced unique patterns for
each case (Eisenhardt, 1989). Following the within-case analysis, I
undertook cross-case analysis in which case pairs were compared
for similarities and differences in the strategies for business model
constructs. I looked for within-group similarities coupled with
intergroup differences, based on dimensions suggested by the
literature on business models. The idea behind this cross-case
analysis was to go beyond initial impressions and enhance the
probability of capturing novel findings from the data (Eisenhardt,
1989). Therefore, although my initial inquiry was based on existing
theory, the ultimate focus was on the development of new insights
through iterations of theory and data. In order to validate my
analyses, the empirical parts of the paper were made available for
comment by the interviewees.
4. Cases
4.1. Alfa Laval—the integration of ICTs in decanters
The first case study investigates and explores how Alfa Laval
integrated ICTs into decanter centrifuges, allowing customers to
run more efficient processes for sludge dewatering in wastewater
treatment plants.
Wastewater treatment plants treat effluent water and recycle
safe water to watercourses. Alfa Laval’s business activity is related
to the last step in the wastewater plant; they manufacture decanter
centrifuges designed to dewater the sludge, removing as much
water as possible. This is the most cost-intensive process in the
1471
wastewater plant, representing some 35 per cent of the total oper-
ating costs.
Sludge dewatering is a continuously changing process involv-
ing a high degree of uncertainty, since the quality and density
of feed also constantly vary. As the input to the process cannot
be predicted it requires a high degree of attention if it is to run
efficiently. During the process the sludge needs to be dosed with
polymers before being fed to the decanter. Continuous attention
is required for the polymer dosing to be correctly adjusted to the
sludge in the decanter operation, which gives rise to fluctuating
performance, high polymer consumption, lower dewatered sludge
in the cake, and dirtier centrate. During ‘normal’ working hours,
when an experienced operator is in control of the dewatering
process, the decanter runs at relatively high performance, 70–80
per cent of its potential, but this reduces quite dramatically when
there is no one in charge of the process. Outside of normal working
hours, the operation has to be switched to safe mode to ensure
that the process will not cause problems, or break downs, which
results in low performance.
In 1991, an individual engineer at Alfa Laval began to work, on
his own initiative, on a system to automate decanter operations.
After some problems related to ability to measure the quality of
the sludge, the project was shelved. The project was revived in
1999 when improvements in the technology enabled sludge mea-
surement. In 2002, Alfa Laval had a pre-launch of a self-optimizing
system, Octopus, for sludge dewatering, which would operate at
peak performance and optimize the dewatering process based
on overall costs, solids recovery or cake dryness, independent
of feed conditions. Octopus, in real-time, monitors, analyzes and
adjusts the process parameters (torque and differential from
decanter, polymer dosing, concentration and quality of sludge)
in the dewatering process in order to optimize the process in
the absence of human supervision (see Fig. 1). Octopus is able to
produce savings in the operating costs of the dewatering process
of up to 20 per cent, which corresponds to a saving of about 7 per
cent in the plant’s total operating costs.
The new technologies that the product incorporates consist
of a computer, sensors with control box, and cables that connect
the sensors and the computer to the feed pump, polymer pump
and decanter. The sensors collect the data in real-time from the
dewatering process and transmit them to the computer, allow-
ing a feedback mechanism to adjust modifiable inputs (torque
and differential from decanter, and polymer dosing) in order to
optimize outputs. Octopus is based on the computer’s unique
software that contains over four decades of Alfa Laval experience
in decanter performance in dewatering applications, and which
determines the new control settings. While the hardware for
Octopus was sourced externally, the software development was
based on algorithms from the flow charts of the decanter process.
This development is specific to Alfa Laval and was produced by
in-house process experts, although the actual coding was done by
external software engineers.
Octopus produced for Alfa Laval the opportunity to sell process
knowledge and decanter control knowledge, rather than manufac-
turing capability. Alfa Laval saw Octopus as a genuine opportunity
to earn money from its knowledge, and was seen as providing dif-
ferentiation from competitors. Although the new technology would
produce economic value for customers in the form of reduced costs,
Alfa Laval found it difficult to see how it could profit from the latent
value in the technology without fundamental changes to its current
business model (see Table 1).
Alfa Laval traditionally sold its products via capital sales (i.e., a
one-off expense for the customer), and could not see how it could
get paid for the customer value the new technology would pro-
duce. The market unit responsible for selling decanters wanted to
sell Octopus with the decanters, following the established business
1472 J. Björkdahl / Research Policy 38 (2009) 1468–1477

Fig. 1. Performances of dewatering processes.

pattern of the company in this field. Decanters were mainly sold
through public tender, and rarely directly to the end user, which
basically inhibited other forms of revenue models than capital sales.
Alfa Laval was obliged to comply with certain specifications in these
public tenders; the problem with Octopus was that if customers
were unaware of its advantages, they would be unlikely to specify
its features. To sell Octopus with the decanters would have meant
selling it through capital sales, which would probably have resulted
in the company not being sufficiently rewarded for the customer
value deriving from the new technology.
The economic value to the customer in the form of annual cost
savings, was worth substantially more than the cost of a decanter
during its life span. In the first year alone, some customers would
be able to save more than the cost of the equipment. Thereafter,
savings would still accrue from the new technology, an economic
value that Alfa Laval would not be able to share. In order to obtain
some of the value of the reduced costs to the customer, Alfa Laval
would have had to substantially increase the cost of its decanters if
it had sold Octopus under its capital sales model. Given that there
was already pressure in the wastewater industry for lower prices,
and that the decanter market was price focused, the management
was afraid that increasing the prices of its decanters would result in
lower sales of them and the new technology. Purchase of decanters
and the new technology would be a heavy investment for cus-
tomers. Alfa Laval had in the past lost out on sales of decanters
when customers applied capital cost evaluations, even when using
a total life-cycle cost would have given a different result. In addi-
tion, Octopus was considered not to be appropriate for all users,
since customer savings were dependent on plant size. It was con-
sidered that the new technology needed a new method of delivery;
a dedicated and trained sales force was needed, dedicated to selling
Octopus to Alfa Laval’s installed base, and pointing out the substan-
tial savings that the new technology would enable, by making these
savings more tangible for customers. The Alfa Laval management
team therefore thought that the current business model did not
fit with market opportunity and would not allow commercializa-
tion of the new technology in a way that would allow the firm to
appropriate economic value.
In 2002 Alfa Laval embarked on a new business model that took
account of the opportunity presented by it’s the new technology,
and its differences from earlier ways of doing. Instead of selling
the technology Alfa Laval saw that it could profit from offering the
technology to customers based on an annual licence fee related
to the cost savings (about 35 per cent) of using the technology,
in order to appropriate a portion of the value created. This model
was new both for Alfa Laval and the wastewater industry. It was
considered to surmounting the obstacles of as a way of overcom-
ing the need for high investment from customers, creating lower
entry barriers by making it easier for customers to relate to the
savings it would produce. The licence fee model would also enable
free updates of the software to be provided, since customers would
pay for uptime (thus maintenance and support were included in
the licence fee). The profits for Alfa Laval would come from how
much customers saved; at the same time, customers would also
be free to cancel their licence agreements. This was an attractive
proposition for customers as entering into an agreement with Alfa
Laval did not represent any risk on their part. Although Alfa Laval
initially had to work hard with customers, this change to the estab-

Table 1
Business model changes.

Business model I Business model II Cause of change

Customer value Dewatering of sludge Optimization of dewatering of sludge (cost savings); Integration of ICTs
process surveillance and piece of mind
Customer segment Wastewater plants Installed base of large customers that can save a Upgrade and an optimization for
substantial amount of money existing decanters
Offering Product Service contract and maintenance Payment based on savings; free
software upgrades
Revenue model Capital sales License Contracyclical revenues
Sourcing In-house development Sourcing of ICT components and sub-systems, hiring No ICT competence; standard
of software programmers equipment
Distribution/selling Through the line organization Through an own venture Protection from the line organization;
need for dedicated sellers
 J. Björkdahl / Research Policy 38 (2009) 1468–1477
Fig. 2. Local control vs. centralized control.
lished business model proved very successful, and resulted in the
company achieving a gross margin of over 80 per cent on the new
technology.
4.2. Beta—the integration of ICTs in compressors
This second case study explores how Beta6 introduced new tech-
nologies to its compressed air installations, leading to reductions
in energy costs through improved utilization of installed capacity.
Compressed air plays a vital role in most industries.7 A sub-
stantial part, around 30 per cent,8 of all energy used in industry is
consumed by compressors (Source Newsletter, 2003). Compressors
are used for a wide range of applications that use compressed air
as a source of power or as active air, in industrial processes. With
substantially increasing energy costs as well as pressure to limit
carbon dioxide emissions, electricity consumption has become an
increasingly important issue in many industries. For compressed air
users, energy costs are by the far largest expense during the com-
pressor’s life-cycle (Office of Industrial Technologies, 1998). Energy
consumption represents around 70 per cent of the overall com-
pressed air system life cycle cost, whereas the capital investment
typically only represents 20 per cent and maintenance 10 per cent.
Compressors typically have on board their own control (local
compressor control). This control ensures that the compressor
operates within a fixed pressure range to deliver a volume of air
that varies with demand (Office of Industrial Technologies, 1998).
When the pressure reaches a predetermined level the compres-
sor unloads (and the pressure decreases) and when the pressure
drops to a lower predetermined level the compressor loads (and
the pressure increases). The range between these two pressure
levels is the compressor’s set-point, which determines when the
compressor should load and unload. Local control works well in
situations where a company has a single compressor and steady
demand. However, most companies have a multiple compressor
installation and add compressors as demand increases. When there
is a series of compressors running, the load/unload of pressure of
the individual compressors needs to be offset in order to prevent
compressors from starting simultaneously and to ensure stability
in the net. Thus, each compressor has its own set-point such that all
compressors can run throughout their range, significantly increas-
ing the pressure band. This method of connecting compressors is
known as cascading, and is the traditional way of handling increases
in air demand, resulting in a lot of energy going to waste.
Beta considered that if it could lower the customer’s energy
costs this would represent a substantial amount of money over a
6
The name of the corporation has been disguised for reasons of confidentiality.
7
About 70 per cent of all firms in industry use compressed air.
8
It is estimated that it takes about eight horsepower of electricity to generate one
horsepower of compressed air.
1473
compressor’s life cycle. Beta acted upon this business opportunity
in 1999 by working on development of a centralized control sys-
tem operating in real-time. The idea was to optimize the running
of compressors so that the customer could match demand with
compressor output, as close as possible to what was required. The
control system therefore had to be able to select what compressors
need to be run, and stabilize and lower the pressure to the lowest
possible point (see Fig. 2).
In 2002 the company had achieved a centralized control system
that allowed customers to automatically select the optimum mix of
compressors, either by installed power or by technology, allowing a
reduction in the required working pressure, through a signal (pres-
sure sensing) and control at one centralized point rather than at
every individual compressor. Basically the control takes over oper-
ation from the local compressor controllers and works with one
communal set-point rather than one set-point for every compres-
sor. In real-time the control selects the most energy efficient and
optimal compressor mix, and their operating points. This enables
users to save around 10 per cent on their energy costs, which Beta
considers great value for the customer.
This centralized control was enabled through the incorporation
of ICT into the compressed air installation. The control system is
comprised of hardware and software. The control system hardware
consists of an industrial computer, a monitor and a controller area
network which links all local compressor controllers to the cen-
tralized controller unit – the computer – and takes the form of a
closed box. It is the software inside the computer that is key to
the control system. The software consists of algorithms of the com-
pressor’s operation, including reaction times, and flow and energy
characteristics, and control logic for starting, stopping, unloading
and loading the compressors to maintain the user-defined pressure
level, which involves decisions about which compressors should be
run. These algorithms represent Beta’s core competencies and are
highly specific to the company. While the algorithms were devel-
oped in-house, everything related to the coding and manufacture
of the hardware was contracted out to external suppliers.
Beta launched its centralized control system in 2002, having
given no thought to an economic model, beyond that both the
installed base and new customers should be targeted, and that
the new technology would become a new revenue source for the
compressor business. Although Beta’s target market was large and
the new technology had an attractive value proposition, and Beta
was successful in initially selling many of its systems, the company
soon realized that it was not increasing its profits in relation to the
investment it had made. As managers stated, the firm could not
appropriate a decent share of the savings that customers received.
The problem, in the view of management, was that Beta had a tech-
nology that had much inherent value, but no business model to
enable them to appropriate economic value from it (see Table 2).
In 2003 Beta started to offer the control system under a service
contract (licence) to enable it to extract contracyclical revenues
1474 J. Björkdahl / Research Policy 38 (2009) 1468–1477

Table 2
Business model changes.

Business model I Business model II Cause of change

Customer value Compressed air Optimization of compressed air (cost savings) Integration of ICTs
and monitoring of installed compressors
Customer segment Manufacturing companies. New sales. Manufacturing companies. New sales and for Optimization for both existing and new
the installed base compressor installations
Offering Product Product or as a service contract including Charging based on savings; free software
maintenance upgrades
Revenue model Capital sales Capital sales or as a license Contracyclical revenues
Sourcing In-house development Sourcing of ICT components and sub-systems; No ICT competence; standard equipment
hiring of software programmers
Distribution/selling Through the line organization Through the line organization but with trained Need to articulate the value and calculate
sellers cost saving

that were in proportion to what users saved9 and, over time, The inability to appropriate economic value had led to a situa-
would allow the company to appropriate a larger proportion of the tion where Beta recognized that it needed a new business model
customer’s savings. By their including of software upgrades and that would allow it to reap the full profit potential from its new
maintenance in the service contract, the control system became an increased offering.
operational rather than a capital expenditure for customers. This
service contract was introduced alongside traditional marketing of
4.3. SKF—the integration of ICTs in ball bearing housings
the control system. This was because some companies had control
systems based on sequencing that they sold,10 thus Beta’s manage-
The third case analyses how SKF tried to provide monitoring
ment decided it should continue to sell its more advanced control
of customer application processes around its process point, the
system through capital sales as well. The problem that then arose
bearing, to create new value for users.
was that customers regarded it as cheaper to buy the system than
Ball bearing housings, which are an important part of SKF’s prod-
to enter into a contract agreement; also there were very few sellers
uct portfolio, are used to protect bearings from break downs. In
with the competence to calculate the savings to be derived from
many applications, it is sufficient just to have a bearing housing
service contracts and that promoted the service contracts. How-
for the bearing, which runs until it breaks down; in others bearing
ever, the biggest single reason customers preferring to buy systems
housings are not needed. However, some applications are very crit-
was that it allowed the customer to see what it was paying for;
ical and it is important for processes to function continuously with
customers found it difficult to envisage how Beta’s system would
no unplanned stops or stand stills of production, which in some
produce more energy savings than other systems on the market.
industries would prove extremely costly.
Customers showed Beta that it was necessary to give them proof of
By measuring various parameters around the bearing SKF is able
these potential savings.
to extract information about how a given machine, or the actual
Hence, even after they changed their business model, the com-
process, is performing, which brings benefits such as production
pany continued to find it difficult to appropriate economic value.
reliability, increased safety and increased application knowledge.
By the time management realized that its current business model
Since the mid 1980s SKF had measured these various parameters
was not effective for appropriating economic value, a great deal of
using decoupled sensors, through point measurements in large
money had been spent on the new developments. Managers saw
production and process plants. It believed that it could increase
that if they wanted their new control system to become a highly
functionality for its customers by incorporating an integrated sen-
profitable business, it would be necessary to receive monthly rev-
sor solution into its ball bearing housings.
enues from customers, based on what they saved, through a fixed
The project began in 1999, and involved someone from the Ser-
fee or variable fee, and that it would have to stop selling systems.
vice Division working with a development unit within SKF. The
However, because of the company’s inability to make the savings
initial idea was to equip all ball bearing housings with shaft diame-
tangible for the customer, Beta was finding it difficult to differ-
ters of 50–120 mm, annual sales of which were some 500,000, with
entiate its new control system from other systems in the market.
pre-installed sensors that could measure speed and temperature.
It was decided that to discriminate its system from those being
SKF considered that to prepare the housings with these sensors
offered by competitors, and to adjust its business model, it would
would not cost much and could become the standard in bearing
be necessary to make some further developments. These would
housings. A vibration sensor, on the other hand, was more expen-
allow it to demonstrate to the customer the savings that they could
sive and the intention was that users would have the option for this
make. It also realized that it needed a specially trained and regional
sensor to be installed at a later stage, if it was decided that it needed
sales force. This, it considered, would enable repeat revenue from
to measure vibration. This way of pre-installing sensors was seen as
licences, allowing the company to take a larger part of the customer
capturing user’s attention as it would provide them with important
savings and establish a profitable business. In 2005 Beta began
information about their applications. The ability to measure tem-
development of a new generation control system, which would
perature and speed would become the new selling point, which it
enable it to change its business model. They developed an off-line
was hoped would increase the chances that customer would want
simulation of compressors working at certain pressures, and ran a
the functionality that the new technology would provide. It was
simulation of the air net under local control. This compared the sim-
also seen as providing an efficient distribution channel. If customers
ulation with the actual process and displayed the savings on screen.
wanted the monitoring functionality they would be able to pur-
chase a box that could be connected to the housing and that would
show the data on a display, or even charge the customer, depend-
9
The compressed air market includes a wide diversity of users. Beta had many ing on how much the customer exploited the functionality of the
small customers with small kilo Watts of installed power as well as customers with
several mega Watts of installed power.
new technology for controlling machines. By this means, SKF would
10
Sequencers, which Beta also sold, could only drive a limited number of compres- be rewarded for the added value provided by the new technology,
sors, provide limited savings and were restricted to certain types of compressors. and it was under these premises that the technology was devel-
 J. Björkdahl / Research Policy 38 (2009) 1468–1477
Table 3
Business model changes.
Business model I
Customer value Bearing protection
Customer segment Users that need to protect bearings and
that have critical applications. Mostly
industrial applications.
Offering Product
Revenue model Capital sales
Sourcing In-house development
Distribution/selling Through the service division
oped. However, these changes to the existing business model were
strongly resisted by the Industrial Division, which was the product
owner of the bearing housings. In 2001 the Industrial Division was
given responsibility for the entire project, which went on to develop
a business around the new technology based on SKF’s traditional
business model (see Table 3).
In 2003 SKF launched what it called Smart Housing, which was
a bearing housing equipped with sensors and electronics for moni-
toring the customer application process in which it was being used.
With Smart Housing allowed vibrations (axial and radial), tem-
perature and rotational speed to be measured within the bearing
housing, giving a status report on the customer’s application. The
sensors and electronics in Smart Housing reside in the base cavi-
ties of the bearing housing. Signals from the sensors are transferred
by two connectors on the front of the housing. One connector is
connected to an assembly of two directional accelerometers in the
sensor holder, which deliver axial and radial vibration. The other
connector delivers rotational speed and bearing seat temperature,
which are protected and adjusted by a printed circuit board. Tem-
perature is measured by an integrated circuit sensor with linear
relation to temperature, while speed is measured by a Hall Effect
sensor sensing a magnet mounted on the shaft.
Signals are transferred to data collectors or analysis equip-
ment via the output connectors. The user can either employ a
portable device for periodic monitoring or a local monitoring unit
for continuous monitoring. The connectors and sensors are stan-
dard equipment and can be incorporated into any third party
systems, but can also be bought from SKF. The signals can also be
incorporated into process control and decision support systems.
However, these additions are not included in SKF’s Smart Housing
offering.
In equipping bearing housings with sensors and electronics SKF
perceived that there was a business opportunity based on deliver-
ing added value to users in the form of new functionalities, and to
charge for that value. However, although SKF saw high value for
users from the information to be obtained from monitoring appli-
cations and processes, this value was latent and SKF did not manage
to sell a single Smart Housing. According to SKF managers, this was
because the business model it used was the same one used for its
traditional bearing housings and other products. The company was
more focused on the technology than its economic output.
There are three aspects that are worth noting here. First, the
development was driven by SKF and was not something that cus-
tomers had asked for, despite the fact that some customers had
devised their own solutions. SKF saw that it could integrate sensors
and electronics in its bearing housings, but had no real idea of how
customers would perceive this added value. The advantages that
the new technology would provide could not be specified for par-
ticular applications and were dependent on the situations of each
bearing housing. SKF believed the product would benefit almost all
customers using bearing housings, and as such perceived it to be a
generic solution. This made it difficult for SKF to articulate a clear
value proposition, which was further exacerbated by the fact that
1475
Business model II Cause of change
Bearing protection and measurement of Integration of ICTs
temperature, vibration and speed.
Users that need to protect bearings and that No change
have critical applications
Product No change
Capital sales No change
Sourcing of ICT components and sub-systems No ICT competence; standard equipment
Through the service division No change
SKF did not design the whole system. Even if a customer bought
Smart Housing to exploit its new functionalities required purchase
of complementary equipment to process and display the output
signals. In addition, the user had to be able to correctly interpret
the data, and what was critical information, differed among various
applications.
Second, SKF’s way of doing business is based on that the Indus-
trial Division is manufacturing products, which it sells to the Service
Division. The Service Division is responsible for creating a business
out of a given product and selling the product, since it controls the
customer relationship. Sales are usually achieved by offering well
recognized and mature products, which does not require a special-
ist sales force. The role of the Industrial Division in the case of Smart
Housing, was to provide the Service Division with a new technol-
ogy. There was no sales effort or personnel devoted specifically to
Smart Housing, which became just another item in SKF’s product
catalogue. As a result, potential customers were generally unaware
of the existence of this new product and its functionalities.
Third, the company tried to appropriate economic value using its
established business model to sell the product. Because the objec-
tive was to be rewarded for the added value it provided to the
customer, SKF set the price of the Smart Housing at ten times higher
than the cost of a traditional bearing housing. For equipment that
enabled the customer to pick up signals using an instrument, the
price was some 50 times more than the standard product, which
imposed a risk on the customer. As a result of its inability to design
a viable business model, Smart Housing was a failure for SKF.
5. Discussion and conclusion
This paper examined how manufacturing companies integrate
ICTs into mechanical engineering products and how they went on
to appropriate economic value from their technology investments.
The cases showed that in order to create and appropriate economic
value from technology cross-fertilization firms were required to
accompany it with changes to their business models. Although it is
common knowledge that products go through changes as a result
of new technologies, much less research has focused on how firms
change the business models their products.
Several studies have shown the importance of the busi-
ness model for creating and appropriating value (e.g. Amit and
Zott, 2001; Chesbrough and Rosenbloom, 2002; Magretta, 2002;
Markides and Charitou, 2004; Morris et al., 2005). However, these
studies have focused on early stage technologies, firms’ business
concepts and have most often been based at firm level. The cases
in this study focus on diversifying the technology base of prod-
ucts through technology cross-fertilization, rather than the firm as
a whole or on a completely new product. The purpose with this
technology cross-fertilization is to open up new sub-spaces in the
technical performance and functionality space and, by so doing,
to create value for users from the technical potential. However,
it is a huge leap from firms’ creation of value for their users to
appropriation of economic value.
1476 J. Björkdahl / Research Policy 38 (2009) 1468–1477
The three cases in the study have provided some findings
regarding the importance of changing the business model in order
to appropriate economic value from the technology investments.
Although the incorporation of ICTs into established products may
provide benefits, it appears that it is difficult to both create and
appropriate economic value from the cross-fertilization, using
existing business models. All three companies experienced diffi-
culty in appropriating economic value based on their established
business models, and whether they were able to obtain any eco-
nomic value was dependent on the changes made (or not) to their
business models. Alfa Laval and Beta, which both changed their
business models substantially, were able to create economic value;
SKF, which did not change its business model, failed to do so.
However, it was shown that creating value for customers was not
enough to ensure success for the firm.
Firms recognized the difficulties involved in appropriating eco-
nomic value at different stages in their developments, and their
search processes for a viable business model differed substantially.
In Alfa Laval the search for a new business model had begun before
commercialization of the new product as the firm recognized that
it would not be possible to appropriate economic value based on its
established business model. This led to changes in the distribution,
organization, selling, and revenue models and in the target seg-
ment. Moreover, in order to have the freedom to make changes to its
business model, the firm established an autonomous venture orga-
nization because senior management envisaged difficulties if the
business remained within the line organization. Beta, on the other
hand, did not initially consider using anything other than its cur-
rent business model. However, the search for a new model became
important following commercialization when it was recognized
that the current business model was only going to provide small
returns for the company despite creating substantial economic
value for its customers. The business model needed to provide the
user with an attractive value proposition and appropriate economic
rents for the firm. Finally, SKF reverted to using the same business
model it used for other products, which thwarted its aims to cre-
ate and appropriate value. And, despite it was becoming clear that
the existing business model did not lead to satisfying economic
performance, the company continued to pursue it.
Initially, two of the companies in the study did not realize that
it would be necessary to change their business models. This shows
that there is inertia in corporations in terms of making changes
to their business models. The companies did not link the poten-
tial of the technology with economic output, which, for this type
Table 4
Summary of changes in activities.
Technology Potential customer value
Alfa Laval
Sensors Higher capacity utilization
Software Warning signals
Computer Cost savings
Signal sensing Increased reliability
No need of surveillance
Data storage
Beta
Computer Higher capacity utilization
Software Warning signals and automatically shutdowns
Control bus Cost savings
Signal sensing Increased productivity
CAN network Process surveillance (increased reliability)
Data storage
SKF
Sensors Vibration: detect bearing failures, imbalance and misalignment
Electronics Temperature: overheating and overload
Speed: Effective speed control
Less susceptibility to external abuse than decoupled sensors
of technology cross-fertilization, would seem crucial. Instead, SKF
and Beta were focused on the technological potential rather than
its potential to produce a viable business, which seems something
of a mismatch in the successful realization of economic value. It is
clear that even if a technology is of value to some users the value
for the innovating company will remain latent if it cannot find the
right business model. It can be inferred that if Alfa Laval and Beta
had not have changed their business models, they would not have
been able to profit from their technology cross-fertilization. Impor-
tantly, this is a view shared by the managers of these firms. SKF’s
management believed that the company could have created a more
attractive value proposition and higher return on its investments
if it had changed its business model. This corroborates Chesbrough
and Rosenbloom’s (2002) argument that companies need not only
to experiment around technology, but also to experiment with in
alternative business models, when technological change requires
this. The three companies in the study acknowledged that the main
challenge was not to make their offering work from a technolog-
ical point of view, but to find an appropriate business model in
order to profit from the cross-fertilization. This raises the issue that
management may need to increasingly focus on the business model.
These cases show that creating value from technology cross-
fertilization is not simply related to the inherent value of the
technology. I would argue, therefore, that the rates of success
of, and the unlocking of the value inherent in a new technology,
are highly dependent on the business model. In fact, the cases
show that diversifying the technology bases of products lead to
improvements in technical performance and functionality, which
lead to improvements in utility and/or costs to the customer pro-
viding increased economic value for customers. However, to create
value and appropriate a portion of the customer value the tech-
nology cross-fertilization development needs to be accompanied
by changes in the business model (see Table 4). This study there-
fore reinforces the importance of the business model to create and
appropriate value.
Clearly, the external environment sets limits to what extent dif-
ferent firms can change their business models. This study showed
that Alfa Laval and Beta were the first companies integrating ICT
components into decanters and compressors, something which
enabled these companies to decide how they best could use their
solutions to create and appropriate value. Management in these
companies argues that there are first mover advantages in chang-
ing the business models. In fact, the whole license structure was
made possible by the fact that there was no similar solution on
Business model change (value delivering)
Distribution channel
Revenue model
Target segment
Free maintenance and upgrades
Demonstration of customer savings
Sales channel
Target segment
Revenue model
Tangible savings
Free maintenance and upgrades
No changes
 J. Björkdahl / Research Policy 38 (2009) 1468–1477
the market—otherwise it would have been much more difficult
for the companies to introduce new value-capture mechanisms.
At the same time, if other firms will provide similar offerings using
the traditional business model adopted within their industries and
perhaps even ‘give away’ the increased value to the customer for
free, it might be difficult to stick to the new business model and
at the same time appropriate a higher value from the customer.
However, the situation can also be that competitors adopt a similar
business model as Alfa Laval and Beta. Hence, the sustainability of
the new business models for the firms and the competitive advan-
tages they give Alfa Laval and Beta might be temporary, and are
highly dependent on external factors, in particular competition.
Given that a new business model in the beginning is not tested
and involves uncertainty about customers’ reaction, there is a
large risk with abandoning the old business model. The two com-
panies that introduced a new business model retained the old
one for their older offerings. Hence, this specific type of tech-
nology cross-fertilization where firms add new technologies to
the technology base in order to provide the user with new and
added value, resulted in a business model diversification (i.e. an
extension of the different activities for creating, delivering and
appropriating value). The technology cross-fertilization therefore
increased the complexity in both the technology and the economic
domains.
Given the case study based research design, the extent to which
the findings are generally applicable is not known. Further research
is needed to examine how common it is for firms to appropriate
value if they continue with their existing business models in sell-
ing capital goods that integrate ICTs. Moreover, there are limits to
what can be said about the relation between product innovations,
new business models and the boundaries of the firm. Thus, more
work is needed to clarify this aspect, in particular in relation to how
changes in the technology base of products can result in down-
stream movements into services, where the firms may take over
customer activities.
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