Servitization - an Increasingly Critical Strategy for Manufacturing Firms

An academic and advisor to governments, universities and boards Göran Roos explains why.

Göran Roos, 13.06.2016

Technological development like IOT, production systems for high cost countries and additive manufacturing may contribute to a concentration of the value chain back to high cost countries. However, they also contribute to further lowering the value adding potential in the production part of the manufacturing firm´s value adding activities.

Servitization is a business model innovation. Why?

Because it changes the way in which the firm creates and appropriates value. The imperatives to servitize and to develop the activities accordingly are increasing and becoming more vital than ever.

In the manufacturing firm´s value chain, the value adding potential is moving from production activities to the intangible pre- and post-production activities. Therefore, the firm needs to extend these activities to keep the total value adding stable.

Technological development like IOT, production systems for high cost countries and additive manufacturing may contribute to a concentration of the value chain back to high cost countries.

However, they also contribute to further lowering the value adding potential in the production part of the manufacturing firm´s value adding activities.

As digitalization increases, also the services in pre- and post-production activities get commoditized.

The competitive pressure reduces margins and opens a disintermediation of the service delivery value chain parts similarly as has already happened to the production part of the value chain.

Thus, besides servitization to compensate for the continuous reduction in value adding potential relating to production activities, the manufacturing firm also needs to create service monopolies by product or service attributes that lock out competing service providers and ultimately, they must continually innovate also in the domain of services.

Reaching ever higher service content requires a change in the organization, culture, processes and customer interaction as well as the development of new competencies and capabilities.

A fundamental requirement is for the employees to gain deep insight in the customers and their issues and how they create value for and appropriate value for their customers.

It is vital to create support systems and organizational structures suitable for service innovations originating in the interaction with customers.

Servitizing firms can be seen to expand into different types of offerings. These types of offerings can be explained as different stages or categories of product-service-systems (PPS) depending on where the value for the customer is. This is considered on a scale from mainly in product through mainly in service content and extent of integration.

Equipment focussed product life-cycle offerings including maintenance services support products already sold. An ongoing support tends to become on-site maintenance.

Asset focused managed services create a higher level of complexity as they are made up of different but interlinked or interdependent pieces of equipment and several suppliers. This calls for a dedicated organizational function to manage the assets and coordinate the support activities. A servitizing manufacturing firm can find an opportunity to enter this area of managed services.

Process focused advisory or consulting services can offer technical and management advice, pro-active problem solving through co-innovation as well as reactive problem solving. Given sufficient understanding of their customer´s and user´s world the servitized manufacturing firm can offer and even implement solutions using their own monetary resources, their own equipment and other physical assets, their own relationships, their competence in people and processes, their own brands etc.

Many forces are driving manufacturing firms to servitizing.

The ones who have not yet servitized this means they need to embark upon a servitizing strategy in near future and for those who have already started their servitization need to increase the speed by which this strategy is implemented and likely broaden their offering scope. Both situations mean doing something not done before, so it is an innovation. As it changes the way in which the firm creates and appropriates value it is a business model innovation. This involves risk and in order to minimize this risk numerous challenges have to be recognized and overcome.

Göran Roos is an academic and advisor to governments, universities and boards. This text is based on his article “Why servitization is an increasingly critical strategy for manufacturing firms” (Estartegia Industrial) 2014

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