'Green Servicizing Businesses': Recent Developments in Japan

JFS Newsletter No.60 (August 2007)

In their book, "Natural Capitalism: Creating the Next Industrial Revolution," Paul Hawken and Amory and Hunter Lovins suggest that one of four principles of natural capitalism is shifting to an economy where value is consumed in the form of service. The JFS Newsletters of June 2003 and April 2006 ran stories of Japanese companies that were shifting from selling products to providing the services or functions that would otherwise be provided by products.

In March 2007, the Environmental Industries Office (under Japan's Ministry of Economy, Trade and Industry, Japan) published a report titled "Green Servicizing Businesses -- A New Society Being Created by Businesses Focusing on Function." The report describes the findings of studies and performance of model projects conducted by the ministry since fiscal 2005, as well as actual conditions and problem faced by green servicizing businesses that are emerging in Japan. The following is a summary of the report.

What is "green servicizing"? As used in Japan, "servicizing" refers to a shift from the sale of products to the provision of services, that is, focusing on the functions of products and providing these functions as services. In Europe, this kind of approach is also called a "product service system" or PSS. The term "green servicizing" incorporates the aim of reducing environmental impacts by reducing the amounts of resources and energy required during production, delivery and consumption, and by reducing the number of products that end up being discarded after use.

Since green servicizing is still a new concept, a variety of definitions and classifications are being proposed for the term. The scope of the term may also expand in the future as new types of business emerge. Below we describe five different models of green servicizing businesses. The first three models are material services that provide mainly material products. The last two are non-material services that provide mainly services.

(1) Service Providers Own and Maintain Products Service providers are responsible for maintenance of products during their useful life, under modified contracts. Examples include the rental or lease of products, pay-per-use for copying or laundry machines, and waste treatment or recycling under contract.

(2) Users Enjoy Advanced Maintenance and Effective Use Users own and maintain their products, but service providers offer enhanced maintenance services, new designs or technologies to prolong the life of the products. Examples include repairing, reforming, upgrading, inspection and maintenance services, and trade-ins and sales of used products and parts.

(3) Joint Ownership of Products Joint ownership decreases the number of products needed in society, thus reducing resource consumption and environmental burden. Examples include car sharing and joint use of farm machinery.

(4) Substitution of Products with Services Services are used as substitutes for resources. The use of information, knowledge and labor leads to a reduction in environmental impacts otherwise caused by the consumption of resources. Examples include music distribution services, and management of digital images.

(5) Enhanced Services and Value-Added Strategies to enhance the efficiency of services and value-added help reduce environmental impacts of the services. Examples include better coordination of waste treatment, and energy service companies (ESCOs).

For green servicizing businesses to succeed they must clarify the differences between conventional and new business models, and enhance value for service users, service providers and the environment.

For service users, advantages of the green servicizing businesses include labor-saving and convenience, usefulness of integrated services, economic efficiencies due to cost reductions and so on, plus a sense of security and reliability due to proper guarantees. Advantages for service providers include the potential to reach growing markets and to boost profitability. In terms of the environment, examples of benefits from this kind of business include energy conservation, reductions of carbon dioxide emissions, resource conservation, and risk reduction due to proper management of hazardous chemicals.

There are already many green servicizing cases in Japan, and the numbers continue to grow every year. The ministry's report lists more than 70 cases. Here we introduce some of them.

Starway Co., based in Tokyo, offers environmentally friendly packing and delivery services. Using recyclable and reusable packing boxes, the company provides integrated services including delivery, packing, monitoring, and supply of environmental data. http://www.japanfs.org/db/1722-e (English)

Conventionally, most logistics companies have been responsible only for delivery operations, and customers have packed their parcels and managed delivery data by themselves. Starway has developed a box dubbed "E-Star Pack" and started offering overall comprehensive services including delivery, packaging and data management, using these boxes repeatedly instead of selling them outright.

As a result of this integrated service system, owners of packaging materials are transformed from customers to providers. Starway has succeeded in expanding its business both to the upstream processes of "materials management" and "packing," and to the downstream process of "data management."

This service also allows customers to reduce the number of man-hours needed for packaging and material management, the cost of packing materials, and expenses for disposing of used materials. Furthermore, customers do not need storage spaces for packing materials and can cut the cost of data management. In environmental aspects, the service contributes to resource conservation and the reduction of waste, since packing materials can be used repeatedly and cushioning materials are no longer needed thanks to the unique structure of the "E-Star Pack" box.

Other examples include a distributor of work uniforms that leases the uniforms to companies for employees to use, and then collects, reuses, and recycles the material after they are worn out. Meanwhile, an electrical goods manufacturer offers a fluorescent lamp leasing service, called "Light and Trust Service," in which it sells the "function" of comfortable lighting to factories and office buildings rather than fluorescent lamps themselves. An air-conditioning service incorporates a leasing scheme for air-conditioning systems, and payments are calculated based on the amount of air controlled by the air conditioning system. A rental service provides reusable eating utensils, mainly at public events. A supplier of pure water supply services installs its ultra-pure water production system at the site of client companies, when then pay for expenses calculated based on the amount of water used.

There is also a unique distribution method for over-the-counter medicines in Japan. This practice, initiated by drug producers in Toyama Prefecture long ago, is a "use first, pay later" service, in which a box filled with the medicines are placed to the customer's home free of charge, and later the customer pays for actual consumption. Following this practice, some companies have launched similar services. A company provides over-the-counter medicines and other daily necessities to customers on consignment; sales personnel visit their homes and receive payment only for what has actually been consumed. For a confectionery manufacturer, service personnel periodically visit a contracting company's office where a container for sweets and a freezer for ice cream snacks has been placed, in order to restock the products and collect payment for what has been consumed.

As for a service to provide added value, Zojirushi Corp. leases special electric kettles equipped with a built-in wireless communication device, dubbed "i Pot." This service is the combination of a monitoring service and a household appliance leasing service, by which a family can receive information through the Internet about when the "i Pot" is used by an elderly family member living alone. In effect, the service is providing the peace of mind of knowing that the relative is active.

One example of "substituting services for materials" is a musical score printing service by Yamaha Music Media Corp. Using their own computers, customers can purchase and print any musical score they like and pay for it by credit card. This practice enables Yamaha to eliminate its stock of musical scores and minimize the consumption of paper. The company can also reduce the use of energy resources needed to print and ship its musical scores in paper form.

According to the ministry's report, "incorporation of new fields based on supply chain management" and "expansion of the share of existing businesses by tightening relationships with them" are the factors in the success of the green servicizing businesses. The report also points out that, in order to expand such businesses, it is crucial to (1) collaborate with client organizations, (2) cooperate and coordinate with existing businesses, (3) emphasize the benefits of reducing environmental impacts, and (4) try to change customers' preconceived ideas, including the desire to own possessions.

Backed by efforts to pursue new business models, an increasing awareness of the importance of reducing environmental impacts, and tougher environmental regulation, new green servicizing businesses will continue to emerge and evolve through trial and error. Japan is likely to see the approach of "selling a function and a service rather than a product" ever more often in the future.

(Written by Junko Edahiro)