Florence management-presentation

From Service Busyness to Service Business - A management perspective

Heiko Gebauer

Associate Professor Department Innovation Research in Utility Sectors - Eawag: Swiss Federal Institute of Aquatic Science and Technology

University of St.Gallen (Switzerland)

Karlstad University (Sweden)

Increasing the service orientation in manufacturing companies

Investments into the service business

Service paradox

Ad-hoc service support

Dominated by products

Value contribution

Maintenance contracts

Performance-based

Business consulting

Integration services

Dominated by services

Arguments for extending the service business

Marketing benefits– Augmenting the product offering– Intensity of customer relationship– Lock-in effect for customers– Long-term customer relationship (strategic partnerships)

Strategic benefits– Differentiation opportunities– Comparison of offerings is more complex– Collaborative innovation between customer and supplier– Services as entry barrier for competitors– Service competencies more difficult to imitate

Financial benefits– Higher margins (product: -1% to 3%; services: 5% to 20%) – Stable source of revenue– High installed base– Size of the service market (service market 2 to 10x bigger than product market)

Example – IBM‘s move from products toward services

Milestones

In 2001, Global Services (40.7%), Hardware (38.9%), Software (15.1%), Global financing (4.0%), Enterprise

Investments/Other

• Management commitment

• Management and financial system

• Recruiting new and intensive training of existing employees

• Incentive system for services

• Formulation & implementation of a service strategy

• Creation of IBM Global Services as strategic Business Unit

• Continuous service innovations (Network, data storage, e-Business)

Revenues

in billion US dollar

Extension of the service business at Bosch Packaging

Products to services Revenue shares

Spare and wear parts, field services and modernizations

Service level agreements, extended warranty, and spare parts packages

Services for competitor products, operational and outsourcing services

Services

Revenue Market share for services

Customers

Third-party service providers

45%

30%

25%

Machines and systems

66%

34%

Hänggi, 2006

Complexity of the service business

Cognition can limit the extension of the service business

Parameter Product business Service business

Nature of demand More predictable, can better forecast

Always unpredictable, sporadic

Required response Standard, can be scheduled

As soon as possible

Number of product generations

Limited 10 to 15 times higher

Offerings Homogenous Heterogeneous

Network Multiple networksSingle network for all

services

Cohen et al. 2006

Identifying strategic paths through visualizing service opportunities

Adapted from Sawhney, 2004

Recon-figuration

Extension

How do service opportunities

appear?)

Primary customer activities

Where do service opportunities appear?

Supplementary customer activities

SalesPre-Sales After-sales

Identifying strategic paths through visualizing service opportunities

Adapted from Sawhney, 2004

Recon-figuration

Extension

How do service opportunities

appear?)

Primary customer activities

Where do service opportunities appear?

Supplementary customer activities

SalesPre-Sales After-sales

Exploitation or exploration: How to approach the service opportunities?

Adapted from Sawhney, 2004, Fischer, Gebauer, Guanjie, Gregory and Fleisch(2010)

Reconfiguration

Extension

How do service opportunities

appear?)

Primary customer activities

Where do service opportunities appear?

Supplementary customer activities

SalesPre-Sales After-sales

Exploration

•Radical improvement

•New value constellation

•Dynamic capabilities

Exploitation

•Incremental improvements

•Value-adding to existing value constellation

•Development of operational capabilities

Parameter Exploration

Example

Organisational adaptation

Radical

Antecedents Dynamic capabilities

Value constellationCreation of a new value

constellation

Value contributionShort-term, significant

increase in service revenue

Exploration of uncontested service marketsExample - Hilti

Exploration

Fischer, Gebauer, Ren, Gregory & Fleisch, 2010

Exploitation of existing service marketsExample – Bosch Packaging

Fischer, Gebauer, Ren, Gregory & Fleisch, 2010

Exploitation

Parameter Exploitation

Example

Organisational change

Incremental

Antecedents Operational capabilities

Value constellationImproving existing value

constellation

Value contributionLong-term, continuous

increase in service revenue (15 to 30% in 10 years)

Service strategies1) After-sales service provider

Value proposition• Fast reactions to product failures• Reasonable product prices

Business logic• Reasonable product prices combined with high

margins for spare parts and repair• Unscheduled service activities require fluctuation

in service demand, maximizing time at the customer

Operational capabilities• Planning and forecasting of spare parts demand• Spare parts and repair center close to customers• Service technicians act as reliable trouble-

shooters• Technical competencies• Cost or product center in product division

Services• Spare parts• Repair services and inspection• Trouble-shooting & diagnose

services

Value proposition• Prevention of product failures

Business logic• High-quality products combined with fixed prices for

service contracts• Schedules service activities (capacity utilization),

minimizing time at the customer (e.g. exchange of modules instead of repair of components)

Operational capabilities• Condition monitoring• Risk estimation and pricing• Regional spare parts and service centers• Services as an independent strategic business unit

for services• Service technicians act as performance enablers• Communication & behavioral competencies

Services• Service contracts• Preventive maintenance• Process-optimization• Modernization

Service strategies2) Customer-support service provider

Service strategies3) Development partner

Value proposition• Development competencies provide strategic

competitive advantages (strategic partnerships)

Business logic• High-quality products combined with technical

construction and design• Development of customer processes, in which

products are used

Operational capabilities• Integrating R&D-teams (internal & external)• Technical adviser and collaborative learning• Communication and behavioral competencies• Recruiting and training of employees

Services• Design and construction

services• Technical advice• Feasibility studies

Service strategies4) Outsourcing partner

Value proposition• Continuous improvement of customer processes

Business logic• Taking over of customer processes (e.g.,

maintenance or production)• Pay-per-use or performance-based pricing

Operational capabilities• Service-center at the customer• Recruiting employees from the customer• Balancing standardization and customization• Risk estimation and pricing of risks• Separate company providing outsourcing

services Services• Operational & outsourcing

services• Taking-over maintenance

activities

Service strategies5) Solution provider

Value proposition• Collaborative development of innovative

solutions for customers

Business logic• Combining different service strategies• Learning curve by providing solutions

(economies of repetition)

Operational capabilities• Operational excellence in each service

strategy (balancing and integrating)• Flexibility in combining services, business

logic’s and value propositions• Customer proximity to understand the

customer requirements Customer-specific solutions

• Combination of products and services

• Integration services

China as an important aspect of service orientation

• China today / future most important single market

• Contribution of services is very little

• Challenges

– Chinese culture (Guanxi, Mianzi, Renqin) hinders service orientation

– Customers consider services as „free“ and add-ons

– Insufficient quality in the basics for earned a living through services (spare parts logistics)

• Solutions:

– Adaptation of human resource management to cultural characteristics

– State-of-the art logistics solution (bonded / non-bonded warehouse) and logistic processes (temporary borrowing, post-custom clearance)

Gebauer, Kuzca & Wang, 2011

Conclusion and management questions

• Marketing, financial, & strategic benefits motivate manufacturing companies to extend the service business

• Managing the service business entails high degree of complexity

• Management questions:

• Managers should define the most attractive service opportunities? (which products, which customer activities should be supported through services)

• Managers should decide on the strategic approach for services (exploration or exploitation)

• Managers should align the business logic, value proposition, and operational capabilities with the service strategies?

More information can be found in following book

Thank you very much for your attention

If you have any further questions, please contact me:

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