Considering servitization? Look at these 4 important areas!
Updated: Jul 3, 2019
In recent years the push for the shift toward #servitization has increased noticeably within the manufacturing industry. Tighter competition and the need to find more differentiated business models to create and capture value from one side, and improvements in IT based solutions and #digitalization landscapes as an enabler of servitization from another side have speeded up this trend.
Recently Volvo Cars has unveiled its mobility service in Germany, under which Volvo delivers a certain car availability promise to its customers in return of a certain amount of monthly fee depending on the chosen schedule and model. Ten years ago, Rolls-Royce also introduced power-by-the-hour program, providing complete product and service solution, i.e. jet engine operation, to its customers.
While servitization seems a logical maturity growth path within traditional manufacturing companies, according to a recent survey by Luleå University, only 21% of companies, which have applied some sort of servitization, reported acceptable financial success consequent to their servitization strategy; most of them abandoned that after couple of years.
Looking at the complete value chain of traditional manufacturing company and interacting stakeholders, you need to focus at least on the following areas for a successful transformation:
1- Business model design
Shift to subscription or pay-by-use business model can create a steady income for service providers, while it can also reduce the risk for customers as they have better transparency of their future costs and expenses. However, lack of experience in modelling the whole business, managing the revenue, and understanding the right value perception of the customers can result in poor financial results.
2- Network management
Servitization is a lot about co-creation and capturing benefits through partner channels. It’s specially become important as manufacturing companies need to excel in IT capabilities, which is an area still many traditional companies are not comfortable with. Luleå University identified that sometimes lack of partner management capabilities are so sever that some companies had to create a dedicated relationship management unit for partner management.
3- Integrated development
A product-service offering needs to be developed in an integrated way from R&D stage. It is important that product can deliver the promise of the service. A shift to promising higher up-time can mean more robust or more expensive parts and designs. In fact, in such service offering a break-down, which in the past could have been a potential revenue generator for the after-sales, becomes a cost.
4- Service delivery network management
Shift in product-service offering can create a huge transformation impact on the traditional sales and service delivery network. Companies like Tesla attempted to totally take the purchase experience online and remove the dealerships in the value chain. Such dealerships, which were responsible for sales and in most cases car service, is replaced by online platform and remote software upgrades over a night. (Tesla still has service workshops which are mainly owned and controlled by Tesla.)
For other companies, however, service delivery and proximity to customers can become even more important in the sense of having expert personnel closer to the customer, enabling the service promise delivery.
All in all, to capture proper value, the whole scene needs to be shaped properly to delivery the right mix of product and service. Understanding the customer #valueperception and proper #servicepricing is of critical importance in this journey.
What is your approach regarding these focus areas and where do you think your company stands in the servitization journey?
This article is a summary and comprehension of the following reference:
Parida, V., Sjödin, D., Wincent, J. & Kotamäki, M. . (2014). Mastering the transition towards industrial product-service provision: Insights into business models, learning activities and capabilities. Research Technology Management, 57(3), 44-52.