26.09.2018 | Branchenyt
Servitization: Extended Business Model for more Revenue and Profit
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Artikel fra Effektivitet nr. 2, 2018
Extending the business model to include offering not only the product and basic services but also the performance of the product, or even operating that product or service within your customer’s organization is growing. It is called Servitization and offers many opportunities of increased revenue and profit but also stronger customer relations. Many firms are on their servitization journey but too many have not explored the opportunities. This article gives you many insights on what Servitization is and how to do it.
Established manufacturing firms see the opportunities to extend their businesses following the value chain in direction ‘downstream’ to the customer and consumer. This is a response to the opportunity to extend the businesses, when customers buying products increasingly ask for more services. Customer needs are changing and so are their buying practices and processes. Hence, manufacturers of capital goods develop their competences and capabilities to offer and deliver services and integrated solutions, combining physical products and services.
The article describes the strategy of business model extension by manufacturers, first adding offerings of services, then product performance, and in the most extended form solutions for the customer. Potentials and challenges in developing a servitization strategy are discussed in relation to the effect on the business model. Potentials include creating stable revenue, higher margins, and closer relationships with customers. These are challenged by changing the value proposition to service and solutions and they require a drastic change in organizational culture, competence, organizational structures, financial instruments and objectives.
Servitization – What and what not
Servitization can both be a strategy and a strategic transformation. As a strategy, it is the development of the business by adding services to the manufactured product (the goods) offering. It can also be the strategic transformation journey developing the capabilities needed to provide services and solutions that supplement the traditional product offerings.
The company is changing to offering more complete market packages or “bundles” of customer focussed combinations of goods, services, support, self-service, and knowledge. When the process continues and involves more and more service offerings, services can begin to dominate (Vandermerwe & Rada, 1988, p. 314). This means that the company innovates by creating more value for the customers. So servitization is also a business model innovation made by a shift from selling products to selling Product Service Systems (PSS). A PSS is then a whole set of products and services designed to fulfil a customer need or to offer a solution to fulfil that need.
There are many potential advantages in developing a traditional manufacturing business model by adding services through a servitization process. There are reasons related to building own strengths but also in building obstacles for competition from other companies. Own strengths can be built by growth in revenue and profit, improved responses to customer needs, improved product innovation, building new revenue streams, and increasing customer loyalty (Gaiardelli et al., 2014). Higher barriers to competition can for example be built by cost reductions for customers and competitor lockouts for providers (Baines et al, 2017).
Extending a business model
The business model concept should entail three consecutive parts: Value proposition, value creation, and value capturing. In other words, how to make money by creating an offer that can be of value for the customer, how to create that value in our products through our processes, and how to offer this to customers and be paid for it. The business model in servitization is extended by adding to the manufacturing more offerings of not only services, but also the product performance and may be even solutions for the customer.
This extension of the business model gives certain opportunities for more revenue and profit. However here are also new risks.
Steps from manufacturer to solution provider
The development of servitization can be carried through to different extensions. The very first and common addition of offerings to a physical product is of course services such as maintenance and repair. Let us follow the different ambition levels and implications for what is offered. The product can be different kinds of equipment, here exemplified by construction equipment. (To the right).
Effects on your business model and business
When servitization moves the company from the manufacturing business model and maybe all the way to becoming a solution provider there are major effects on the business and the financials that have to be considered. In table 2, we summarise some of the most important effects.
- Our profit used to come from selling the equipment plus spare parts and maybe repair services. Now equipment, spare parts and services are costs for us.
- Risks used to be small or moderate when selling the equipment. Now we are responsible for a part of our customer’s operations.
- Development activities followed a plan, now we have to be adaptive to varying customer contracts. Human resources could be planned, now they need to swing following contracts.
- Our competence was in hardware, now it is mainly in doing services.
- Our business was planned and optimized on sales revenue minus production and distribution costs, now it is about subscriptions, optimizing productivity, paid by outcomes, offering financial solutions, and adapting capacity.
Opportunities and Challenges
The servitization strategy offers opportunities but also challenges in the business model, in the efforts needed, and in difficulties in getting there. There are several hurdles to consider if the strategic journey is decided to start or to plan. These issues include 1) changes in the company’s value stream positions; 2) changes in the types and scope of company’s market offerings; 3) the shifting orientation from product-focused towards service dominant or customer-focused business models; and 4) observed or required changes in structures, capabilities and relationships in the organizational and network level.
In table 3, we have gathered the considerations and observations a major equipment manufacturer has experienced from the start and through the servitization journey. They may be considerations for your own roadmap, which you should do before you start. Add and remove to fit your situation.
Should I do it?
Servitization is a strategy and a strategy is a way to compete. There is never a best strategy, a strategy is a choice. The choice, you make, depends on your capabilities, on the demand for the implemented strategy, and on your willingness to take the risk and try it. So before you start on the servitization journey: Ask yourself:
- Do I want to?
- Can I?
- Is it wanted?
- If all answers are ‘Yes’, then
- Should I?
If you don’t do it
Servitization is not a panacea for every organization, but the opportunities and risks have to be thought through in the company strategic planning process, because if you don’t do it, there can be a new entry firm that takes over the customers by offering the services. What is happening more frequently is that Solution providers and Shared Economy Platforms (SEP) come in on top of your business model and hire or just connect resources with your customers.