Exploring Service Innovation and the Servitization of the Manufacturing Firm

Tim Baines, Professor, Aston Business School, Burmingham, UK
Tim Baines, Professor, Aston Business School, Burmingham, UK

By Tim Baines, Professor, Aston Business School; Director, Aston Centre for Servitization Research and Practice; and, guest editor of RTM special issue on Service Innovation

Manufacturing and service industries are often seen as largely independent. Whether in national economies, business classifications, education, training, or employment, they tend to be thought of as separate. Indeed, the growing role of services in developed economies has been the topic of much discussion over the past decade or so. Yet manufacturers can offer services; in fact, they can, and increasingly do, base entire competitive strategies on service innovation—finding ways to rethink their offerings and replace one-time product sales with ongoing, value-creating relationships. This is the process of servitization; icons in this mode are companies such as Rolls-Royce Aerospace, with its Power-by-the-Hour model; Xerox, with its document management solutions; and Alstom, with its Train-Life services.

Internationally, there is a growing recognition that manufacturers serving developed economies are moving away from concentrating their efforts on products and production and toward a services focus. The terminology for this development, however, has varied. In Germany, researchers, policy makers, and industry leaders are engaged in a debate around Industry 4.0; in Scandinavia, the term of choice is product-service systems. UK companies focus on servitization and the circular economy, while in the US, industry talks about servitization and service innovation, much of it powered by the Internet of Things (IoT). While the terminology might vary across these countries, the underlying message is very clear: innovation of services is becoming more and more important to manufacturing firms worldwide.

The process of servitization (or service innovation or creating product-service systems) invariably implies not simply the development of a service offering for the customer but also the adoption of new technology and a widespread organizational transformation. The kinds of advanced services offered by Rolls-Royce, Xerox, and the like, incorporate maintenance, repair, and overhaul contracts that link revenue generation directly to asset availability, reliability, and performance. Providing this kind of cradle-to-grave service requires dedication, flexibility, and a will to collaborate across the entire organization.

A key element underpinning the transformation, and servitization more broadly, is heightened customer intimacy. In the traditional manufacturing world, products were designed and produced, then sent to a showroom in anticipation of a sales transaction. Designs were informed by analysis of customer trends, innovation was centered around product features, and satisfaction was recorded by after-sale surveys. To manufacturers in this world, service meant order fulfillment, on time and on budget, and an associated warranty program. Customers were relatively remote.

servitization

Servitization, in contrast, promotes intense customer relationships. With advanced services in particular, the focus is on the customers’ internal business processes; the manufacturer goes beyond simply offering a product to provide offerings that target efficient and effective operations. The manufacturer bundles together products and services to deliver a capability that provides a defined outcome for the customer. Typically these offerings manifest as 10-year service contracts under which the manufacturer takes some responsibility (or risk) for fulfillment and the customer pays as the capability is consumed. A practical example of such an advanced service is the use by Hoyer, a German logistics company based in the United Kingdom, of trucks provided by MAN on a pay-as-you-go basis. Costs are based on miles driven, so Hoyer only incurs expense when it is generating revenue.

Service innovation is demanding for manufacturers. Yet, the successful development and delivery of advanced services offers significant rewards, including:

  • Improved commercial resilience. Services position manufacturers to respond more effectively and efficiently to the needs of their customers, helping to lock in customers and preventing competitors from gaining a foothold in their markets.
  • Opportunities for sustained growth. Heightened customer intimacy leads to opportunities for new service offerings that grow revenue streams and expand business.

Customers also reap rewards when manufacturers shift to a service orientation, garnering benefits that can improve their own competitive position, such as:

  • Reduced financial risk and improved asset management. In working with Hoyer, MAN has innovated its services to offer driver training that helps to improve the fuel efficiency of its trucks. MAN reports that these services have enabled many of its customers to reduce fuel consumption by at least 10 percent and CO2 emissions by 10–15 percent.
  • Improved focus and investment. By taking over ancillary functions, advanced services companies can help customers focus on their core business. Xerox’s document management services, for example, enable British Airways (BA) to focus on running airplanes, which helps BA to improve its own competitiveness by improving service quality to its customers.

Clearly, the commercial benefits of servitization are convincing, the environmental arguments compelling, and the opportunities immense.

Although service innovation and servitization are arguably in their infancy, the ambition to adopt servitization within industry is clearly evident. The most reliable intelligence available is a study by Oxford Economics, which conducted an international survey of almost 400 senior executives from industrial sectors ranging from aerospace to medical devices, all from firms with more than $1 billion in sales (PTC 2013). The analysis showed that the proportion of companies competing through services contracts or products-as-a-service is expected to increase by over 150 percent in the next three years.

. . .

Perhaps the most significant challenge facing both researchers and practitioners interested in service innovation is how to efficiently and effectively transform a manufacturing organization to exploit this enormous opportunity. As the work continues, I believe five areas in particular need urgent attention from the research and practice communities:

  • Identifying the effect of servitization on the performance of firms. In particular, it would be useful to model the relationship between variables such as product maturity, regulatory and fiscal environments, a company’s installed base, the size of the organization, and competitors on the path to servitization.
  • Defining unified and foundational concept of advanced services. Different forms of service offering exist, but it is the advanced services, like Power-by-the-Hour, that are responsible for much of the interest in servitization. These demand that manufacturers move beyond a production mind-set and adopt a different business paradigm. Yet, this paradigm is rarely articulated holistically and consistently, and so a major opportunity exists to form a foundational conceptualization of advanced services.
  • Mapping the processes of servitization. The processes of servitization are at the research frontier; there are few studies that describe how change has taken place or prescribe how to go about servitization. Key to this is mapping organizational transformation pathways to understand how manufacturers innovate service strategies. What barriers do they encounter, and how do they navigate them? What lessons do they ultimately learn that can be applied generically?
  • Exploring the mechanisms of reverse servitization. The underlying premise of almost all studies on servitization is that manufacturers transition from a focus on products and production to a state where substantial revenues are earned through services. There is, however, an alternative strategy in which a service-oriented firm builds technology innovation competencies to deliver advanced services. This not simply a case of productization of service or increasing objectivity of service; rather, it is an alternate route to becoming a servitized manufacturer. This kind of reverse servitization may represent a huge opportunity for research, businesses, and economies.
  • Understanding the threats associated with servitization. It is commonly accepted that servitization is always a good thing, especially for developed economies, as it locks out competitors and helps to assure some localization of value capture. But what happens if the service provider is not an indigenous manufacturer? What if those suppliers who are now locked out are from the host economy? Clearly, there are trade-offs with servitization and advanced services in particular that need to be properly explored to develop a balanced view of the phenomena.

Fundamentally, however, the biggest challenge for researchers in this area is not what topics to explore but which organizations it will be most productive to study. With Lean, Toyota was firmly identified as the organization to study, but as yet no equivalent appears to exist for service innovation within manufacturing firms. In this world, we have to pick over the practices and technologies of many companies to piece together a picture of success. Organizations such as Rolls-Royce, which are exemplars in a specific sector, need to be studied alongside similar organizations from different business contexts. This will lead to a platform of knowledge that will truly enable a revolution across industry sectors.

In this special issue of RTM:

How to Thrive in the Era of Collaborative Services Entrepreneurship
Invited. Timothy Ogilvie describes how firms can cooperate to develop win-win business models for digitally enabled service innovation.

Developing Global Service Innovation Capabilities: How Global Manufacturers Address the Challenges of Market Heterogeneity
Vinit Parida, David Rönnberg Sjödin, Sambit Lenka, and Joakim Wincent report on a study of how 13 multinational companies developed global service innovation capabilities.

Digitalized Product-Service Systems in Manufacturing Firms: A Case Study Analysis
Christian Lerch and Matthias Gotsch describe how progressively more sophisticated digitalization can enable advanced services and generate growth.

Servitization and Competitive Advantage: The Importance of Organizational Structure and Value Chain Position
Oscar F. Bustinza, Ali Ziaee Bigdeli, Tim Baines, and Cindy Elliot report on a survey of multinational companies that explores the sources of competitive advantage in service innovation.

Also…

Haluk Demirkan and Jim Spohrer define the importance of T-Shaped Innovators: Identifying the Right Talent to Support Service Innovation;

Matt Prindible and Irene Petrick describe their experience Learning the Building Blocks of Service Innovation from SMEs; and,

Neil Gershenfeld talks with Jim Euchner about Atoms and Bits – Rethinking Manufacturing.

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