Although not a new concept, service management is a powerful option for manufacturers seeking an alternative revenue channel in today’s highly competitive marketplace. At IMG we strongly recommend that companies should seriously consider adding services to their traditional manufacturing portfolio to diversify their income streams and increase repeat business with existing customers.
Customers are not only looking for quality products for the right price, but increasingly they need aftersales service and support for the entire lifetime of the product. Furthermore, they wish to minimize the risk of product failure and are willing to pay a premium for peace of mind in the event their equipment breaks down.
Manufacturers can certainly reap the rewards of offering service management to their customers. According to some estimates, leading service-led product makers derive more than 50% of their revenues and 60% of their margin from services as opposed to product sales. In addition, businesses employing the strategy can increase customer intimacy and gain a deeper understanding of consumers’ needs and demands.
But how do manufacturers shift their business models, strategies, and operations to be able to both sell products and manage services?
Let’s reveal some key findings from IMG’s work with customers:
1. THE SHIFT FROM MANUFACTURING TO SERVICES
Mainly five major factors are driving manufacturers’ transition to service management.
- The need to remain competitive and beat global competition.
- Increasing customer demands and financial restraints.
- The need to improve their positioning to generate greater revenue.
- The potential for higher profits associated with services compared to products.
- To bring cash streams into the final stages of the product’s lifecycle.
2. MANUFACTURERS EXPERIENCE SIMILAR PATTERNS IN THE SHIFT TO SERVICES
- Finding the right services: Considering product proliferation and commoditization and
the desire not to acquire new technologies, manufacturers are adding innovative service designs to their products such as one-stop services, embedded services and bundled product-service packages.
- Adjustments to the business model: For nearly all manufacturers studied the transformation requires business model adjustments at a strategic level. These include adapting internal processes and IT infrastructure focused on the installed-base concept; looking at the service business as a single consolidated unit with a separate P&L; creating funding mechanisms to help customers with capital- intensive products; and focusing on the product’s lifecycle, especially the stages of maturity and decline, to further stretch service revenue and profits.
3. THE BUSINESS MODEL ADJUSTMENTS AFFECT THE ORGANIZATION AND ITS OPERATIONAL STRUCTURE
- Rethink the organizational structure: Top management should put services at the center of attention by restructuring the hierarchy of the organization.
- Focus on developing customer alliances: The idea of customer alliance is particularly important in services as there is usually close and direct contact between the service provider and the customer.
- Understand the role of IT in a service-led organization: The right IT infrastructure is essential in order to manage a service-led organization. Implementing a robust, harmonized and flexible IT landscape supporting service businesses involves extensive customization, optimization, harmonization and data collection.
- Emphasize capabilities and development: Acquiring and developing new capabilities should be the highest priority considering the operational adjustments, to be followed by ongoing professional training. In addition to product and market knowledge, resources should possess commercial and financial acumen as well as business consulting and IT savvy.
- Change the mindset: Perhaps the most important lesson of all is that manufacturers need to embrace and master a service mentality – without this they risk failing regardless of their level of investment and capabilities.
The rules of the game are changing fast. Economic pressures and customer trends are pressing industrial manufacturers and high tech firms to create innovative solutions to gain or maintain their competitive edge. Today, service management is redefining services in such a way that they are no longer just an add-on to the product but a separate brand offering. However, the key question is whether service management is the right solution for all manufacturers. The answer is: “it depends, since one size does not fit all.”
Six criteria might be considered to address this question more deeply, and to help managers with their decision and increase their awareness about the inherent challenges, issues, and complications in shifting to service management:
- Managers need to review where their business makes its money, in product or service, and to what extent in each.
- Service management makes more business sense for companies in the automotive, industrial and high tech industries producing capital- intensive products. And here the shift also becomes much easier if the product is among the top three brands. But for firms producing commodities where for customers the price is the only priority the lower rate of return is not worth the switch.
- The stronger the product commoditization trend, the more attractive it becomes to shift to service management. In markets such as domestic electrical goods, companies can increase brand recognition by adding services.
- Based on the decisions above, managers need to identify their target market, understand customer needs, and define their unique selling proposition, and, if possible, differentiate their services.
- Moving to service management does require rethinking the organizational structure and operations because a service company does not operate like a traditional product-centric company.
- Completing the paradigm shift is a journey that takes an enormous amount of time, investment, energy, and commitment. It not only requires organizational readiness and maturity, but a new mindset.
Service management also requires new organizational principles, structures, and processes, all of which are often at first challenging to manufacturers. They can find many good reasons for staying as they are and continuing to focus on what they do best. Their decision should be based on rational judgment rather than to follow the pack. But, however difficult the transition, the rewards are worthwhile. Several best-in-class high tech and industrial manufacturers have already grasped the importance and value of offering innovative services. They have made the leap and are now shaping the market. For others, now is the time to take the first step into service management and gain a foothold in immature and potentially rewarding markets.
For more information on this topic don’t hesitate to contact IMG.