Despite the fact that the majority of product companies offer services as part of their offering, and for many it makes up more than 30% of their revenues, many experience declining profits,weakening market positions and increasing susceptibility to risks.

A shift from product to customer-focused services denotes a shift in the competitive environment and requires upgrades in organizational capability and a change of the business model that many managements do not appreciate. While many companies focused on product related services have been successful, those companies targeting customer focused services have often failed. To often they fail to achieve a qualitative change in the services actually provided, and only achieve aresponsibility transfer (outsourcing) based on particular contractual arrangements

While some manufacturers’ search for service growth and margins has translated into expansion of product scope, many are concentrating their efforts on increasing services value add by focusing onhelping customers better exploit assets for productive use. This has led to many manufacturer service divisions developing into 3rd party service companies not only servicing competitor products, but using their skills to service products in unrelated areas.

Hence manufacturers should:

  • Acknowledge product and process/methods services are distinct businesses: one is driven by scale, the other by skills
  • To be successful with scale, companies need to strive for size and coverage and aim for maximum resource utilization and standardization of offerings to achieve cost and price levels that customers are willing to pay.
  • Companies that are successful through skills and know-how need to appreciate these are both scarce capabilities, which need to be developed and deployed effectively. Companies must invest accordingly and technology and customize their offerings while carefully selecting customers, areas of activity in which they can have an impact and problems that they can solve.Pricing must primarily be value based.
  • The choice of strategic intent must be compatible with a company’s ability to gain competitive advantage. A company with strong product positions in growing markets may do better bundling products and services into integrated offerings supported by technology and domain expertise than investing (always limited) resources in building scale in broad based (product) services. Conversely, a company in a declining industry might think of using existing technical skills togrow such a service business using its existing installed base as anchor. Wrong decisions, in these cases, not only have high opportunity costs, they also endanger a company’s primary business.

Written by Titos Anastassacos, Managing Partner at Si2

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