The Servitised Economy

226 Shares

The servitised economy is gathering pace and killing off many of our traditional manufacturing businesses.

Those that decide to embrace the servitised economy will survive to fight another day.

But those that decide to soldier on regardless, with their old strategies, will soon become obsolete.

Which path are you on?

Many of our “traditional” industries have already become obsolete as they transformed into servitised versions of their former selves.

The music industry and software industry come to mind here, as early examples.

Streaming services such as Apple Music, Spotify, etc. have killed off product-based music shops and online CD retailers.

Cloud-based software-as-a-service businesses such as Salesforce are now the dominant business model for software businesses.

Soon, traditional on-premise software, installed on your own company file/database server will be obsolete.

But the servitised economy doesn’t stop there.

Servitisation is affecting the manufacturing industry too – particularly those businesses manufacturing engineered products.

It’s taken a while to get a hold of this sector, longer than it has for some other industries.

But mark my words, we are already starting to see the end of manufacturing as we know it.

Any manufacturing leader who thinks their business can survive in the servitised economy just by selling better products is deluded.

The fact is, customers don’t want to own your products any more!

Changing Customer Behaviour

Thriving in the servitised economy requires more than just slapping a low monthly fee on your products and starting to call them services.

Your customer offerings and how you deliver them must be completely rethought.

Not just internally, by your directors.

And not just with your product-centric engineers, sales team, marketers and operations people.

Rethinking your manufacturing business has to be much more fundamental than that and across multiple dimensions, end to end.

Your offering and business model must be rethought from the perspective of your relationship with your customers.

Because the shift to the servitised economy is being driven by customers, not suppliers.

A New Type of Customer

Advances in technology over the last twenty years, such as the Internet, mobile devices, social media and so on have changed the nature of customer demand.

According to a 2014 report by The Economist Intelligence Unit, 80% of customers are demanding new consumption models such as subscribing, sharing and leasing.

Anything that doesn’t involve buying and owning a product outright, basically.

Customers today, not just B2C customers but B2B and B2G customers now want a through-life experience, which means four things:

They want guaranteed outcomes, without the high initial capex costs and ongoing obsolescence risks that come with ownership of your products.
They want availability of your products (fortunately) but they don’t want the downtime, maintenance burden and surprises when they break down at the worst possible time for them.
They want immediate fulfilment without the delays, broken promises and excuses when you don’t have the right part in stock or the engineer can’t come out until next week.
They want a personalised experience, individualised to match their exact needs, not the generic, transactional sales and support processes of the past.

Customers can switch service providers much easier than they can sell a high-value capital asset and buy an alternative.

Hence, manufacturers wanting to earn the loyalty of their customers must present ongoing value and memorable services that improve with time.

In other words, the benefit of staying loyal should far outweigh the benefit of switching.

Manufacturers must therefore be able to sell, market and deliver their offerings based on a clear understanding of their customer’s behaviour and they must nurture every individual customer relationship.

Unfortunately, what we usually see instead, is a fundamental mismatch between the way that manufacturers and parts distributors are trying to do business with their customers and the way that their customers want to do business with them.

New Capabilities for New Relationships

To operate in the servitised economy, companies need a new set of capabilities.

Over the last twenty years, manufacturing companies large and small have invested millions into lean manufacturing techniques, Sales and Operations Planning (S&OP) processes, Enterprise Resource Planning (ERP) systems and the like.

These strategies, methods and technologies have had the desired effect of improving the quality of their products and efficiency of their manufacturing capability.

But in most cases, that has not led to significant growth in their manufacturing business!

Why not?

The simple fact is, these technologies, methods and strategies were designed for the 1970s.

That is, a product-centric business environment where your customers all want to buy and own your products.

In that kind of economy, you grow your business by selling more products and making them more efficiently than your competitors.

Sales teams often give away high-value maintenance service contracts or spare parts just to get a product sale.

Or they discount spare parts prices or offer periodic sales quota bonuses just to increase volumes and earn more commission or bonus for themselves.

But in a world where a customer wants to be a user or subscriber instead of a product owner, manufacturers must do things differently.

Selling personalised service contracts requires greater customer knowledge to maximise value from the relationship and ongoing customer retention.

As well as the commercial model, the operating model changes too.

It goes without saying that a manufacturer still needs to develop its capability to make quality products as efficiently as possible.

But that is no longer sufficient on its own to ensure survival and growth in a servitised economy where 92% of value for a B2B or B2C business comes after the initial sale.

Additional aftermarket capabilities are now a critical must-have.

Making the Change

We’ve established that manufacturers must reinvent themselves and disrupt their own industries just to survive.

And that servitisation, otherwise known as service transformation, is the enabler.

But those manufacturers wanting to grow, must develop their aftermarket capabilities to such an extent that they provide greater aftersales value and a better through-life service experience than their competitors.

Manufacturing businesses today, even the ones that are well advanced in their servitisation journey, are still dominated by processes, systems and organisation structures that were designed and built to sell products.

But you can’t run a servitised economy company with systems, processes and organisations meant for widgets.

That’s like trying to hammer a nail into a plank of wood with a screwdriver.

[ctt title=”You can’t run a servitised economy company with systems, processes and organisations meant for widgets.” tweet=”You can’t run a servitised economy company with systems, processes and organisations meant for widgets! More here: http://bit.ly/2IeceTG #servitization #manufacturing #spareparts” coverup=”0E22S”]

Which begs the question – what kind of systems, processes and organisation structures do you need then?

New Capabilities for the Servitised Economy

The answer to this question depends on your starting point and the needs of your customers.

So ask yourself:

What capabilities does your business have today and how well do you perform them?
Are all your customers the same or can they be grouped into different needs segments?
What are the needs of those customer groups and how are those needs evolving?
What capabilities do you require to satisfy those needs better than your competition?
What is the gap between your required capabilities and what you have to start with?
What is the most cost-effective and least risk way of developing this new capability?

Every business is different so it is impossible to answer these questions for your business in this article.

But they are questions that you must have answers to if you want to avoid becoming obsolete in the servitised economy.

Additional Resources

Get our 10-Point Aftermarket Growth Checklist to maximimise aftermarket growth and profitability.
Learn more about servitisation and its benefits with our Rethinking Manufacturing White Paper.
View our presentation slides on this subject: Winning In The Servitised Economy.

How Servispart Consulting Can Help

Develop your aftermarket strategy to connect better with customers and prospects. Our core service is called Aftermarket 360™ and is specifically designed to analyse aftermarket capability gaps and drive strategic capability plans. If you’d like an informal conversation about how Aftermarket 360™ or any of our other services could help you, please get in touch.