Service Transformation - Is your organisation creating differentiation?

1.0 Introduction

Legacy manufacturers have traditionally captured their market-share and brand positioning through product innovation, providing access to highly experienced engineering/sales teams and through the execution of industry leading product ranges. Now, with the industry in a state of transformation brought on by globalisation (Burnham, 2000), advancing technologies and integrated services, well-known homogeneous competitors who are striving for differentiation and commercial gains are stretching their core offering to gain market-share and capture new types/levels of revenue through advanced services and digital solutions whilst new entrants, who have access to high levels of financial backing and capable resources, are developing a complete product and service offering that spans the full value-chain of the customer. The result is the beginning of the transformational shift towards servitization (service transformation) which Baines, Lightfoot, Benedettini and Kay (2009) said “is the innovation of an organisations capabilities and processes to shift from selling products only to selling integrated products and services that deliver value in use.

Where once legacy based manufacturers dominated the industrial product lifecycle through “first mover advantages” (Lieberman and Montgomery, 1988) that provided high revenues and profitability, the limited innovation and lack of product mix dominance in recent years from any stand-out supplier, a result of value-chain piracy from other manufacturers and  distributors that produce or sell similar products with fair quality at much lower prices, and through the recognition that the once loyal customer is more difficult to win and retain from being spoilt by the wider value-added efficiency offered by competitors, is pushing legacy based product manufacturers to rethink their current standing and recognise that a shift towards a “services-led strategy” (Baines and Lightfoot, 2013) is vital to remain competitive in the future. 

2.0 Slow-down of Product Related Advantage

Unexpectedly, the demand for products grew during 2017/2018 because of the world economy “swinging back on track towards a moderate recovery” (Ifo World Economic Survey (WES) IV/2016) and during this phase manufacturers saw growth in their business with some organisations registering double digit results. Other, smaller, and previously non-threatening suppliers, were also posting much higher results than expected. Even though the impact of the unexpected demands were positive no one organisation stood out as leading the way in gaining market-share advancement, this gave a clear indication to many manufacturing business’ that dominance through products alone was no longer valid to maintain competitiveness in the market place. 

3.0 Servitization - A New Type of Competitive Advantage

The concept of “Servitization is the term given to a transformation where manufacturers increasingly offer services that are tightly coupled to their products” (Baines et al, 2007) to create higher levels of differentiation and competitive advantage. The transition from product manufacturer to service provider (Olivia and Kallenberg, 2003) is immensely challenging but also rewarding for those manufacturers that successful transform into service driven organisations and in return capitalise on a combined product and service offering to deliver new types, and higher levels, of commercial revenues, profitability and market-share development. 

Utilising their internal resources, manufacturing firms believe that they can leverage their existing capabilities and infrastructures to develop and launch advanced services which (Baines and Lightfoot, 2014) said was “a “capability delivered through product performance and often featuring; relationship over extended life-cycle, extended responsibilities and regular reoccurring revenue payments”. However, the paradox of servitization (Gerauer 2005) often creates a major dissatisfaction for firms who realise lower EBIT levels post the early phase of transformation to a service-led business, whilst increasing their product and service sales revenues overall. This is because they have under estimated the value of new investments that will be required across key areas such as new technologies to “provide real-time visual information to customers” (Cenamor, Sj?din, and Parida, 2017), recruitment of new types of resource knowledge, retraining of existing staff, new levels of business IT platforms & processes, globalised marketing and other cost requirements for servitization to be successful. 

4.0 Examples of Transformation Successes

A practical example of service transformation success is SKF, a leading global technology provider since 1907 that has transformed its business by moving away from the product only strategy to now include a service led-business that operates independently. The CEO, wanting to step away from the pure commodity product-driven market, has driven the service operation to be the biggest growing brand within SKF in recent years. Facing inner-cultural barriers from existing organisational members who truly favour products and from the financial burden of setting up a new PA the transformation could easily have been stopped, however, strong leadership, vision and by driving the transformation program top down, the CEO and his management team have strengthened and regenerated the capabilities of SKF by introducing new service business models, recruiting new competence and by launching new service portfolios with after-market maintenance included. The SKF brand is significantly ahead of similar companies in the industry and shows the successes that can be created from a well-led and followed up servitization change program. 

Other well-known brands have transformed their business through a definite change in their value-proposition and by moving away from selling products only to selling repeatable after-sales maintenance, subscription based services, invoicing customers based on usage and more. These companies are true examples of transformational success where new levels of competitiveness, revenue and profitability have been gained from the development and launch of service business modelling/contracts.

5.0 Strategic Change – Aiming for Success 

Before the strategic agenda is considered a full ‘Point of Departure’ review should be carried out to fully assess the organisations ability to develop / launch services to the market-place in a sustainable manner. Examples of specific considerations to be considered shown. The need for further extensive consideration should be taken. 

5.1 Point of Departure Review

On the commencement of transformational practises focus on the collection and analysis of data across internal and external sources is paramount. Internally, primary data obtained through semi-structured (Baars and Kemper, 2008) colleague discussions as well as quantitative and qualitative mixed-method approach analysis of past KPI results and other variables provides a good understanding of the organisations current limitations around the existing strategy, the current services/ portfolios, governance and more. External data gained from practical business sources, including semi-structured customer interviews, competitor analysis, consultative partnership workshops and benchmarking of similar minded organisations will further provide  insights on the types of services customers want or are prepared to pay for and will show how far the organisation is behind it’s competitors across the industry. 

5.2 Strategic Capabilities 

The strategic capabilities of the firms key resources and competencies should be analysed to fully assess the strategic ability of the business to change whilst remaining sustainably competitive. The analysis should consider the existing competencies of the business to determine how valuable, rare, imitable and organised (VRIO) they are, as well as assess the capability type of the same areas to distinguish if they are (a) threshold capabilities that are required to be successful in the market place, (b) if they are distinctive capabilities that are unique to business, or (c) determine if they are dynamic capabilities which is the company’s ability to address and react to rapidly changing environments.

5.3 Service Business Modelling

The success of transformation may be led from the development and implementation of service-oriented business models over the actual services that organisations offer to customers. The nature of services, type and the method for promoting and selling them may be unique – even in the vastly competitive landscape, however, the traditional approach of selling a service once will not deliver the sustainable revenue or profitability that companies require to invest in resources, competence and new technology. Instead, recurring revenues that can be delivered through warranty, subscription and after-sale agreements (examples) should be a major consideration for manufacturers starting their service-led transformation since they all deliver repeatable revenues and offer higher levels of profitability. 

5.4 Partnerships

Rather than maintaining the full value-chain of product/service led offerings (Datta and Roy, 2011) themselves, organisations should be more willing to adapt through the forming of strategic / collaborative partnerships that can bring expertise in service development, high-levels of resource competence and solid value-chains thus reducing cost pressure and enhancing the organisations ability to leverage the partnerships to gain market insights, industry knowledge, build on service experience to develop relevant and new offerings and penetrate target markets/industry sectors. During the first period of transition the availability of strategic partnerships could be a key factor of success or failure. 

5.5 Competitive Landscape

Conducting an extensive review of the market-place directly, or via partnerships, will show the speed at competitors are transforming. Existing, and well-known homogenous manufacturing companies are stretching their core offering with advanced levels and digital applications spanning key areas of the customers value chain. In striking contrast, new start-ups who are ready to scale, and huge companies such as Siemens and GE, normally associated with other industries are bringing their advancements in technology and high levels of resource capabilities to address the complete value-chain of customers and deliver added-value efficiency. Other service providers driving the new trend across the industry include major players such as Amazon and Alibaba who are creating the one-stop shopping experience to create speed and efficiency for B2C customers and B2B purchasing teams.  

6.0 Strategic SWOT Analysis

Using the point of departure (POD) findings a SWOT assessment of the strengths, weakness, opportunities and threats should be considered to fully understand business better, identify and address weaknesses areas, overcome or defer threats and capitalise on opportunities. The business should take into consideration the full findings of the review when preparing it’s point of arrival strategic plan and should develop business goals accordingly to maximise the impact of it’s ability to be competitive.  

7.0 Possible Barriers Against Transformation Success

7.1 Internal Barriers

Whilst business’ recognise that change is required to improve their competitiveness a service-led strategy brings uncertainty and real concerns for many who have built their business and/or careers around a product only mentality. The inner-culture of the existing workforce, the lack of service minded knowledge, the need for new technologies and the high levels of investment are just some of the high-level considerations that can be toxic barriers that negatively influence the success and outcome of the transformation practise. This makes it clearer to understand why some executive management teams may delay or avoid change, instead choosing to continue their focus on the easier option of a product led-strategy over a product and service-led strategy of the future.  

7.2 External Barriers

7.2.1 Brand Reputation

The importance of services is growing rapidly with purchasing managers seeking fresh opportunities across the entire value-chain to deliver higher levels of efficiency that compensates for the product only savings that occurs during the in-machining process. Whilst in high-demand, the barriers preventing organisations from buying bespoke service solutions, or service projects, rests firmly on brand reputation and the chosen firm’s ability to deliver what they say they can. Many factors prevent organisations from transacting with suppliers including financial considerations, i.e. the cost of the offer presented, the impact of using alternative providers who may not fully understanding the customers business value-chain, switching costs, interest or disinterest of those working on the project from inside the business, relationships, service recovery (Yanamandram and White, 2006) and more. Collectively, brand reputation is significant and companies that are clearly engaged and promoting a service driven business are likely to be positively looked on where they can demonstrate previous success, and demonstrate that their combined product and service mix portfolios creates value and overcome business pains, over those suppliers that cannot.

7.2.2 Perception of Risk

The perception of risk involved in the newly demanded service transaction, i.e. knowledge gap, trust, firm size, and organizational readiness, can be additional factors that must be considered (Johnson, 2010). If the risk is perceived too high, the buyer may cancel or delay the transaction with short notice to protect their business and sustain their brand image in front of the customer/s they are serving. Giving up small amounts of control over operations is a significant risk for managers of organisations and the overall validity and reliability of the exchange relies on the mutual trust and the perception of competence of the supplying parties involved (Johnson, 2010). 

8.0 Summary 

As the rivalry amongst legacy based manufacturers, who strive for business growth through product innovation, market development and market penetration across existing markets - locally and internationally – continues, the need to transform and move away from a product only offering, that has reached maturity (Gebauer, 2008) and lacks differentiation, is ever increasing. Here, the determination and passion of top level management that want to maximise revenues and profitability will be seen. With the market-place in a destined path for digitalisation, industrial services and the future smart factory, legacy manufacturers must adapt and consider more seriously the long-term move towards servitization if they want to continue to have high brand recognition and be recognised as market leaders of the future.

?9.0 Bibliography

Baars, H. and Kemper, H.G., 2008. Management support with structured and unstructured data—an integrated business intelligence framework. Information Systems Management, 25(2), pp.132-148.

Baines, T. and Lightfoot, H., 2013. Made to Serve: How manufacturers can compete through servitization and product service systems. John Wiley & Sons.

Baines, T.S., Lightfoot, H.W., Benedettini, O. and Kay, J.M., 2009. The servitization of manufacturing: A review of literature and reflection on future challenges. Journal of manufacturing technology management, 20(5), pp.547-567.

Burnham, P., 2000. Globalization, depoliticization and ‘modern’economic management. In The Politics of Change (pp. 9-30). Palgrave Macmillan, London.

CESifo, “CESifo World Economic Survey”, November 2016, Available at https://www.cesifo-group.de/DocDL/WES_4_16_online.pdf; [Accessed on 4th May, 2018]

Davies, A., Brady, T. and Hobday, M., 2006. Charting a path toward integrated solutions. MIT Sloan management review,47(3), p.39.

Eisenhardt, K.M. and Martin, J.A., 2000. Dynamic capabilities: what are they?. Strategic management journal, pp.1105-1121.

Gebauer, H., 2008. Identifying service strategies in product manufacturing companies by exploring environment–strategy configurations. Industrial marketing management, 37(3), pp.278-291.

Johnson, M., 2010. Barriers to innovation adoption: a study of e-markets. Industrial Management & Data Systems,110(2), pp.157-174.

Priya Datta, P. and Roy, R., 2011. Operations strategy for the effective delivery of integrated industrial product-service offerings: Two exploratory defence industry case studies. International Journal of Operations & Production Management, 31(5), pp.579-603.

Yanamandram, V. and White, L., 2006. Switching barriers in business-to-business services: a qualitative study. International Journal of Service Industry Management, 17(2), pp.158-192.