Servitization - Key Takeaways From Copperberg Aftermarket 2019

Updated: May 2


Three days at Aftermarket Business Platform 2019 talking about Aftermarket and Servitization

Three great days here at the Copperberg's Business Platform 2019 in Nykoping - Sweden talking and listening to leading companies moving quickly steps toward Digitization and Servitization business model. In this short post i want to highlight the key Takeaways from these thre days.

It is inevitable: sooner or later, leaders or laggards, all manufacturers are forced to rethink their strategy moving towards Servitization business models, enabled by the digitization of processes and the availability of an amount of data offered by IoT technologies, unimaginable until a few years ago. I am almost tempted to coin a neologism like "Servidigization" - if it weren't so terrible - with the aim of grasping how digitization and servitization are almost indispensable to obtain a consistent competitive advantage

'Smart connected products have the potential to shift rivalry, opening up numerous new avenues for for differentiation and value-added services. These products also enable firms to tailor offerings to more-specific segments of the market, and even customize products for individual customers, further enhancing differentiation and price realization.' [1]

In short, M.E. Porter states that, in addition to service-driven opportunities to create new competitive advantages, smart connected products are introducing a new paradigm shift with impacts on all five forces competitive models, warning companies to re-evaluate their competitive strategy.

Without being strategy's guru like Mr. Porter, it is not difficult to realize that failing understanding this trend and its implications would be a deadly mistake, while of course those companies that are already adapting their strategies to this new era will enjoy an important competitive advantage.

Let's find out some of the megatrends that are pushing and favouring at the same time Servitization.

  1. 402: this number represents the global average of minutes per day we spend online, equivalent to 6 hours and 42 minutes with peaks of up to 10 hours per day in the Philippines; 50% of our online presence is on mobile devices. 39% of Google's search is by voice search, with peaks of up to 51% in India: an indication of how natural interfaces are growing rapidly. The annual growth rate of consumer spending on mobile applications has reached 23%[2].

  2. Customers are looking for experience and are demanding an increasing level of services around the product. The demand for services is evident in the new trend such as pay-per-use mobility, pay-per streaming TV, etc. These trends in the consumer experience can be easily transferred to the B2B experience: pay per use of capacity, pay per uptime; agreements based on outcomes.

  3. With the Internet of Things and smart connected products, the amount of data and information available on customer and product behavior is increasing at a rate that until a few years ago was unimaginable. Mastery of the use of this data gives the company a sustainable competitive advantage. The connected products allow a growing level of autonomous capabilities: self-monitor, self-control, self-optimization, autonomous products.

  4. Virtual and augmented reality. Among its many applications, it allows remote control and guidance that can be used to deliver services remotely with higher productivity and positive impacts on cost to serve.

What manufacturers shall do to catch in time this running train? Crafting a new business strategy and then be diligent in executing it as alwasys.

Let's focus on the first step.

Crafting the Servitization Strategy

Companies that are lagging behind on these megatrends must review their entire strategy: Business strategy, competitive strategy, operational strategy.

1) Update the Business Strategy to take in consideration Servitization

  • Analyze the situation with the 5C's framework: Context, Customer, Collaboration, Competition and Company. In other words an external and internal analysis whose objective is to identify the customers' value drivers and to assess how the service offering should be designed to provide the customers with the expected value, taking into account the competition, internal readiness and capabilities and the network of suppliers. For this type of assessment it is necessary to perform a PESTEL analysis and a SWOT evaluation to assess risks, opportunities, strengths and weaknesses around these technologies and assess competition with the 5-forces model to assess how competitors are positioned, the threat of newcomers, how the bargaining power of customer and supplier has shifted due to the technologies.

  • Develop the STP strategy: Segmentation, Targeting and Positioning. The objective is to understand how to create value for each segment, identify the targets and how to position the value offering for each target segment.

  • Develop Strategic Pricing: start thinking around Total Economic Value pricing strategy against cost-plus method.

In short the Business and Competitive strategy must identify how to redefine the Product-Service-System value offering to stay ahead of the competition answering those questions:

  • what is the value expected by the target segments of customer from the Product-Service-System?

  • how are my competitors satisfying such Product-Service-System value expectations?

  • how can I differentiate my value proposition to be more attractive or how can I provide the same level of value more efficiently?

2) Redefine the Operations Strategy to align operations (process technology, supplier network, innovation strategy) with the new competitive priorities that the service business model imposes in terms of Speed, Reliability, Quality, Flexibility and Costs. It is necessary to design a value oriented organization able to provide responses to the followin questions:

  • how to create and deliver the value my Product-Service-System is expected?

  • how to "sell" such value to the target segments of customers?

  • how to consistently deliver such value?

  • how to maintain and restore the value my Product-Service-System offers?

  • how to improve it?

In other words the Operations strategy must set the conditions to create the operational environment to create, deliver and sustain the value. The key choices are:

  • identify and fill the gaps in the process technology needed to deliver the value: availability and usage of data, digitization of processes, improvement strategy, elimination of waste, etc

  • implement the organizational changes to enable the achievement of the target competitive priorities

  • implement the new performance measurement system focused on the new Product-Service-System requirements

3) Update your infrastructure strategy: management approaches, organization, capabilities. human resources management model around the service model and the concept of value management. This may imply for instance:

  • hire and create in the organization new type of skills (service oriented skills)

  • redefine management processes around the service value creation

  • rethink the career track

  • create ad hoc knowledge management system around the service experience

All these phases must be carried out in depth to guide the operational phases of the implementation of the strategy.

Tips:

  • Understand how to take advantage of the Service Recovery Paradox [3]: using aftermarket services to make your customer's experience aware and positive, increasing customer loyalty. The Service Recovery Paradox (SRP) is a situation in which a customer gets more satisfaction with a company who has corrected a problem with their service, compared to the satisfaction he would have get if a non-faulty service had been provided.

  • Pay attention to pricing and cost structures to avoid the Service Paradox [4], which is the unexpected outcome that has been observed by Andy Neely analysing a sample of about 10.000 compaines. He observed that, contrary to logical expectations, manufacturers offering services on top of products, despite higher revenues suffered of lower levels of profitability copared to traditional pure manufacturers.

Next blog we will provide some tips how to successfully implement the Servitization Strategy

If you think is it worth to implement Throughput Accounting for your management accounting At WeeonD we help manufacturers setting their strategies for the Servitization Journey: if you are in the middle of launching hour next move for servitization and you want to learn more, please contact us via our website (www.weeond.com/contacts) or by email at info@weeond.com

Notes and Links

[1] Gobal Digital Report 2019

[2] Michael E. Porter and James E. Heppelmann - How Smart, Connected Products Are Transforming Competition - Harvard Business Review - November 2014.

[3] McCollough, Michael A., and Sundar G. Bharadwaj. "The Recovery Paradox: An Examination of Customer Satisfaction in Relation to Disconfirmation, Service Quality, and Attribution Based Theories." In Marketing Theory and Applications, edited by Chris T. Allen, 119. Chicago: American Marketing Association, 1992.^ [4] The Paradox has been first identified and discussed by Andy Neely "EXPLORING THE FINANCIAL CONSEQUENCES OF THE SERVITIZATION OF MANUFACTURING" - In Operations Management Research, Volume 1, Number 2, December, 2008 - University of Cambridge and Cranfield School of Management - Institute for Manufacturing

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