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You might have heard about Servitization as one of the upcoming trends in manufacturing. Together with Industrie 4.0/Smart Industry it is coined as a crucial element in a changing industry dynamic, and especially in a changing economy. The term servitization dates back to 1988 [i], but the term really started to get traction around 2006. In this blog, the first of two blogs, we will talk about what servitization is, provide some examples of companies that transformed into service oriented businesses, and show the importance of the process. We will elaborate more on the advantages and the challenges of servitization in the second blog.
What is Servitization?
The definition of servitization according to Andy Neely (University of Cambridge) is: ‘the tendency of manufacturing firms to sell services and solutions rather than just products’. Another definition is coined by Tim Baines (Aston Business School): ‘the term servitization is used to describe the transformation of a business to compete through a combination of services and products, rather than products alone. It doesn’t apply only to manufacturers, but it’s here where the term is used most frequently at the moment.’
In short, servitization is the term used to describe the transformation process of shifting from selling products to delivering services. The service-component becomes more and more important in business models. Services like maintenance and logistics are increasingly coupled to -and connected with- the manufactured products. The servitization process puts more and more emphasis on the relation with their clients than just selling products. In some countries servitization has already developed quite rapidly (e.g. UK), but in the Netherlands mainly big manufacturers are busy with the process, however SMEs are starting to gain traction as well.
In 1988, servitization was first used in an article by Vandermerwe & Rada, they coined servitization as; ‘the provision of client-oriented goods, services, support, self-service, and knowledge with the purpose of adding value to core product.’ This is quite a broad definition, and one that makes the combination of products and service distinctive for servitization. The end result of the servitization process is thus a product combined with a service, or as we know it better; a Product-as-a-Service (PaaS) or a Product-Service System (PSS).
Examples of Servitization
Desso-Tarkett is a flooring company that has a business model in which they remain ownership over the flooring and take care of it after usage. They do this mainly because they have noticed that a long lifetime is rarely reached, and customer get rid of their flooring before this period. It is a shame to make a product that last so long if it would be thrown out at half its lifetime. Flooring-as-a-Service, remaining ownership, and providing a second lifetime, can thus be an outcome. Signify -Philips lightning- is an example of Light-as-a-Service in which you pay for lux or light intensity. The data on provided light can also be used to find out where the light has burned most, this can then be used to determine when to clean certain rooms. This can in turn save costs.
These are good example of how you can add value to an relatively simple product by providing additional services. Companies can distinguish themselves by providing certain subscriptions on top of their products. For example; a printing company can proactively sent new toners to the client if it runs out. This way the customers will be unburdened, and a strong and loyal client relationship is being built.
Rollys-Royce provides power-by-the-hour (they sell ‘thrust’) to increase the service component. With the use of sensors they are able provide preventative maintenance and consequently increase up-time. Xerox started with the pay-per-print business model and Caterpillar also has some machinery as-a-service components in which they can monitor the use of their products to provide solid customer feedback, and provide maintenance services to lengthen the lifespan of the product and keep up the performance over time.
The last example is about a robotic automation company called Kuka. They sell robot-services to automotive companies (like automated welding). Kuka proactively delivers maintenance, which results in less malfunctions and overall downtime of the production facility. This is especially important in high volume, high cost production lines, in which one wrong weld can lead to rejected products. So, servitization can lead to high efficiency gains and cost saving. Another example in this field is Smart Robotics, which is an employment agency for robots; they deliver (temporary) automated robot services.
We can learn a lot from companies that have already started this servitization journey. We can learn to act proactively on maintenance, advanced services, and a well organized customer journey. However, this is all dependent on a well organized supply chain. All key actors in this supply chain should have access to the real-time data for optimal performance.
Manufacturing itself add little value
Strangely enough the manufacturing process itself is one of the least value adding activities a manufacturing company can perform. Stan Shih, founder of Acer, showed that most opportunity in value creation lies in the first and last phases of production. This is shown by the Smiling Curve:
This curve shows that most value is added in the beginning and the end of the production chain. On the one hand we have concept development and R&D, branding and design. On the other hand we have distribution, marketing and sales and after-sales services. Manufacturing itself adds little value since this is mostly a race to the bottom; producing the same thing cheaper and more efficiently than other companies. In European markets this is often not the part where companies will excel in. For manufacturing firms this can thus be an important reason to start with servitization.
Importance of Servitization
It becomes clear that within the manufacturing industry, servitization and thus Product-as-a-Service (PaaS) become more relevant than ever. One of the causes is that the added value of production activities decreases. One possible reason is that through copying of worldwide competing businesses, products and productions process are only distinctive for an increasingly shorter period of time. Price is unfortunately often still the main decisive factor, but most manufacturers and suppliers do not want to be part of this race to the bottom anymore. They are searching for other ways to create value, and service is the main distinguishing factor.
Servitization is one of the answers to the increasing demand that clients have from their suppliers and products. There is an increasing demand for (mass-)customization, support and after-sales services that safeguard the up-time of the products. The service element will increasingly be the defining characteristic. In case of malfunctions, unusual situations or specific customizations, service is the way to differentiate in the market.
On first glance servitization appears to be mainly interesting for big manufacturing firms; they have the resources, the (international) network, and the financial power to start the switch to a service-based business model. However, it doesn’t have to be; it is actually quite possible for SME companies. Thanks to the increasing development in software, platforms like Firmhouse, and connectivity of machines it becomes easy for SMEs to also launch and develop their Product-as-a-Service propositions.
SMEs furthermore have the additional benefit in comparison to bigger corporations, that they are more agile and can act upon changing environments more rapidly. The main challenge of the transition in servitization and to product-as-a-service, is not only big investments (or technology), but also in culture and flexibility in the organisation.
To conclude, servitization and product-as-a-service can have a couple of advantages. It is scalable in all sorts of companies (small, medium and large), it can strengthen customer relationship, and it can create and grow (recurring) revenue stream. Furthermore, it can help locking out competitors (on other basis than price), it can provide environmental benefits through promoting dematerialization, and in enables the adoption of more cleaner technologies.
In part two of the two part blog we will talk more about the advantages and challenges of servitization.
Starting your servitization trajectory
Got interested in launching a servitization trajectory or product-as-a-service proposition? At Firmhouse we can help you start your proposition on our platform. We can fully automate all back-end processes and help you launch in no-time. Check our website for more information, or contact us for scheduling a demo. Stay safe!
[i] = Vandermerwe, S., & Rada, J. (1988). Servitization of business: adding value by adding services. European management journal, 6(4), 314-324.