Why Servitization is an increasingly critical strategy for manufacturing firms

Why Servitization is an increasingly critical strategy for manufacturing firms
Servitization is increasing rapidly and is likely to continue to do so since both the defen¬sive and offensive drivers of servitization are increasing in strength. The increasing im¬portance of servitization as a business model innovation strategy for manufacturing firms is unfortunately made difficult by the both complicated and complex journey that is in¬volved in successfully implementing this servitization strategy resulting in a not insig¬nificant failure rate. On the positive side the opportunities are extensive and increasing as relates to offering services throughout the value chain but care has to be taken to ensure that the manufacturing firms’ business model is modified to ensure profitability with the implemented service activities.
 

Servitization can be understood as all service concepts, systems service, processes and related service activities offered and carried out by, or behalf of, a manufacturing firm linked to the products produced by this firm. This means that without the manufactured product there exist no services i.e. servitization is an integral part of manufacturing.

 

What are the drivers of servitization?

The principle driver can be outlined using the figure below:

 

This figure illustrates the change in the potential to add value to the different parts of the manufacturing firm’s value chain. As can be seen from the above figure the value adding potential is migrating from the production activities to the pre- and post-pro¬duction activities of the manufacturing firm. As a consequence the manufacturing firm needs to increase/extend its pre- and post-production activities to keep the total value adding stable. This is the fundamental reason for the increasing importance of servitiza¬tion as a strategy for manufacturing firms.

 

The reduction of the potential value adding in the production part of the manufacturing firm’s value adding activities is further reduced by the disintermediation of the value chain enabled by the reduction of coordination cost made possible by the development of ICT technology which is making it possible to benefit from migrating production activities to lower cost jurisdiction. This development can clearly be seen by the fact that the majority of world trade is made up of intermediate goods. Although the continuous technological development in domains like internet-of-things, production systems for high cost countries and additive manufacturing may contribute to a concentration of the value chain back to high cost countries they will also contribute to further lowering of the value adding potential in the production part of the manufacturing firm’s value add¬ing activities.

 

This will increase the pressure even further on manufacturing firms to enter the pre- and post-production activities which is the domain of service delivery. It is worth noting that as the knowledge underpinning services in these areas become commoditised and as the digitalisation of these services increase and as the underpinning manufactured products and digital communication protocols get increasingly standardised, and as the interaction becomes increasingly machine-to-machine rather than person-to-person – the competi¬tive pressures on the associated services will increase thereby both reducing margins and opening for a disintermediation of the service delivery value chain parts analogous to what has already happened to the production part of the value chain.

 

This means that not only does the manufacturing firm have to servitize to compensate for the continuous reduction in value adding potential relating to production activities, they will also have to create service monopolies generated by product attributes that lock com¬peting service providers out as well as by continuously innovating also in the domain of services. This will enable temporary competitive advantages for the manufacturing firm with the resulting high economic rent. In summary the manufacturing firm will compete on value for money in a market where it ideally is the only service provider able to provide services associated with a given product manufactured by the manufacturing firm as well as the highest value-for-money provider of integrated product-service-systems or solutions in competition with other providers of competing product-service-systems or solutions.

 

Oliva &. Kallenberg. (2003) described the servitization journey as a sequence of phases with increasing service content (see the figure below)

 

Every step to the right in the figure above requires a change in the organisation, culture, processes and customer interaction as well as the development of new competencies and capabilities. One of the fundamental requirements is for employees in the servitized manufacturing organisation to gain a deep insight in the customers, their issues and how they create value for and appropriate value from their customers. This in order for the servitized manufacturing firms to be able to develop services that enhances the customers’ business by leveraging this insight and close customer relationships with a guiding phi¬losophy of enhancing the customers’ business.

Servitizing manufacturing organisations have to create support systems and organisa¬tional structures suitable for service innovations originating in the interaction with customers. Normally this involves a simple process supporting the solving of a specific customer problem followed by a clear development process encompassing methods and ways of working focussing on modifying existing resource deployment systems, cus¬tomer experiences and business models that supports the transformation of this cus¬tomer specific service into a generic service that can be offered to many customers.

 

Ren (2009) concluded that products that are cheap and that are of a stand-alone nature (in either their nature or in how they are deployed) provide few opportunities for service offerings whereas expensive or complex to operate products that are part of a larger in¬tegrated system that is critical to the customer’s business provide substantial opportuni¬ties for service provision. He also said that when firms servitize they expand their offerings into (Ren, 2009):

 

  • Equipment focussed product life cycle offerings including maintenance services. The activities that the user or customer typically execute that forms the basis for service opportunities are need recognition, product specification, supplier selection, purchase transaction, delivery, installation, training and ongoing support. Given the long lifecycle of B2B capital goods and the critical nature of this good to the user’s or customer’s activities there are considerable opportunities for service offerings in the ongoing support domain. When the customer procures and uses more than one piece of a given equipment offering, the ongoing support tends change characteristics and becomes on-site maintenance.
  • Asset focussed managed services. Assets are a system made up of different pieces of equipment, purchased from different suppliers at different points in time but inter¬linked and/or interdependent in their use. This creates a higher level of complexity than dealing with a given piece of equipment and when the complexity level becomes sufficiently high users normally establish a dedicated organisational function to man¬age the assets and to coordinate any support activities. This provides an opportunity for servitizing manufacturing firms to enter the area of managed services where they would take over this function and offer maintenance, equipment replacement, op¬eration and asset optimisation, etc.
  • Process focussed advisory or consulting services. When putting the equipment to use with a specific intent the user may need technical advice, management advice as well as both proactive problem solving (i.e. co-innovation) as well as reactive problem solving. This provides opportunities for servitizing manufacturing firms to offer chargeable advisory or consulting services or to migrate all the way, given sufficient understanding of their customer’s/user’s world, to offering solutions and even to implement these solutions using their own monetary resources, their own equipment and other physical assets, their own relationships, their own competence embodies in their own people and processes, their own brands and any other resources that the servitized manufacturing firm can bring to bear.

This author built on the work by Tukker (2004) who identified eight types of product-service-systems, which he divided into categories and presented on a product-servico continuuem as shown in the figure below:

 

 As well as on the work by Neely (2008) who added two new categories to the Tukker classification:

 

  • Integration-oriented product-service-systems, which result when firms seek to add services by going up- or down-stream and vertically integrating (e.g. consulting ser¬vices, financial services, retail and distribution, transportation and trucking services and property and real estate services)
  • Service-oriented product-service-systems, result when firms incorporate services into the product itself (e.g. systems and solutions)

As a conclusion, we can say that the forces that drive manufacturing firms to servitize are many and they are as a group becoming stronger. This means that the imperatives to servitize are becoming stronger. For those manufacturing firms that have not yet ser¬vitized it means that they have to embark upon a servitization strategy within the not too distant future and for those that have already started their servitization it means that they are likely to have to increase the speed by witch this strategy is implemented as well as likely broaden its offering scope.

 

Since in both situations this means doing something not done before, servitization is an innovation and since it changes the way in which the firm creates and appropriates value it is a business model innovation.

Like all innovations servitization involves risk and in order to minimise this risk numer¬ous challenges have to be recognized and overcome.

 

*Publicado en Estrategia #0000003

* Göran Roos es Chairman, Advanced Manufacturing Council and Professor

 

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