Split design

Reason 1: Customers demand it

If we assume your company is focused on its clients, there can probably be no better reason to start moving forward in your service portfolio. Customers are starting to buy differently from you as a supplier. They are now starting to look for outputs instead of inputs. In other words, it no longer suffices to make your hardware product available to the client. The customer also wants you to make sure that it works properly and that it delivers at the expected output rates. Customers may demand a completely different payment model where they pay on output delivered instead of paying for ownership of the machine. Scary as it sounds, this is where your hardware product starts to become a service product.

Reason 2: Products commoditise

With rapidly developing technology and increased competition from a global market, your products may no longer be as unique as they once were. By adding services on top of your hardware products, you may differentiate your product offerings to the next level. Particularly in your local markets, you may have the advantage to be able to deliver specific value added services, that can not be matched by competitors from lower cost countries.

Reason 3: Revenue decline

As your engineering department works hard to make your products cheaper and more reliable, it becomes more and more difficult to keep your revenues at the required levels. Particularly maintenance services and spare parts business (typically highly profitable) are hit by your own engineering achievements. With new service products around your hardware products, you can start to counter the decline in mature markets.

Reason 4: Global competition

Not only do you suffer from global competition in your own industry, you may even experience competition from completely new players that use a disruptive model. Having a hardware portfolio that is complemented with a solid service product portfolio, makes it more difficult for outside players to come up with a better value proposition.

For more info on how we can help with your service business, visit here.

Manufacturing companies that are suffering from ongoing globalization and commoditization of their products will often revert to a services growth strategy. They claim that ‘servitization’ of their products is needed.

In my article ‘It’s time to follow the white rabbit’,    I describe 8 good reasons why manufacturing companies should take their service businesses more seriously.

Because typically the very first service they come up with is … financing! We’re moving from CAPEX to OPEX, servitization mission completed! And now all of a sudden they are running a ‘services business’.

For me, I never liked the term ‘Servitization’. It was too much ‘turning our product into a service’, while I think that the most essential element of any services approach, is that we come up with additional services around and on top of an existing product portfolio. And when we only ‘servitize’ the main product into a service, we miss out on a lot of opportunities.

Running a services business for a manufacturing company does have its challenges though. I would say that the biggest hurdle is cultural. Trying to break away from a product focused model into a services based model is like going to a different planet with a different language. When I was running a new services division, I was supposed to indicate the targeted ‘number of service units’ in our strategic plans. (Yes, it doesn’t make sense indeed). We didn’t have ‘Cost of Goods Sold’, so our financial model unfortunately distorted the available financial ratios. We did have a large R&D department for products, but how to do innovation for services?

And yet I believe that it is doable (and needed) for manufacturers to build strong service businesses. But it takes a different perspective than building hardware products.

For more info on how we can help with your service business, visit here.