In a competitive and increasingly global marketplace, companies are continually striving to sharpen their competitive advantage. Faced with challengers from developing countries with significantly lower production costs, along with evolving customer needs, a number of manufacturing businesses are moving into value-added services.
This ‘servitization’ is essentially the move from organisations selling products to instead selling the solutions or outcomes provided by the products. One of the most well-known examples is Rolls-Royce Aerospace’s performance-based ‘power by the hour’ model - the company is charging for the capability provided by their products, rather than the products themselves. By broadening the company’s scope to selling engine power instead of the jet engines themselves, Rolls-Royce has taken on the downtime risk related to engine failure for its customers, at the same time differentiating its offering from competitors and seeing the bottom-line benefits of creating an entry barrier to its market.
At the core of servitization is a win-win situation where the interests of the provider are aligned with those of its customers, meaning it is in everyone’s interests to ensure the products work as well as possible for as long as possible.
Get ahead globally
In the international race to build a competitive business model, servitization offers excellent opportunities to enhance existing customer relationships, as it involves more frequent interactions. The added value from such a customer relationship flows both ways, with the provider benefitting from quicker entry to market alongside direct access to information which can be used to inform product design. Crucially, comprehensive services are not easily replicated by overseas competitors, allowing a company to differentiate itself without the pressure of competing solely on product price.
So far, the opportunities offered by servitization are mainly being seen by Western manufacturers, with the concept particularly popular in Germany, as Mittelstand firms (Germany’s powerful mid-market businesses) embrace it as a way to protect their renowned stability. Countries such as China and India, which are catching up technologically and in production processes, are for the moment lagging behind in added-value services. However, this is a gap which will most likely begin to close in the future.
Issues to overcome
Businesses considering servitization should begin by asking what customers value the most and how to better configure the business to deliver this. This will often mean a change in the scope of your company, learning to value services and how to sell, deliver and bill them. Often, organisations which have built up wealth through production activity can feel protective of their industrial roots, and have difficulties in adapting. Training is crucial to build in-depth awareness of the economic value of servitization.
There may also be resource issues, as rarely does a single organisation have the skills in-house to deliver the full range of services required. This aspect of the servitization business model is of particular interest to SMEs, enabling them to provide more complex services by ‘piggy-backing’ on larger prospects looking for full service packages.
As with any whole-scale business change, however, servitization should be implemented with caution, ensuring you manage risk exposure at all stages. Do it properly, and it could mean you are one-step ahead of your competitors for some years to come.
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