Towards a service business model in the manufacturing industry

Dear colleagues,

I am very interested in the way a manufacturing company rethinks its business model and starts presenting itself to the customers as a service provider. In this context I wonder what are the main differences between a product business model and a service business model and how does a company make the transition from one to another? How can you start thinking at your business as a service, meaning taking a step further from encapsulation and surrounding the products with services?

 

Thank you 

Adela

 

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Have a look at the Hilti example in Mark Johnson's book "Seizing the White Space". It nicely describes Hilti's transition from a producer to a service-model. Servitization usually has pretty huge implications on business model and transforms the whole infrastructure (key resources, activities, and partners.

Dear Alex,

Thank you for your answer, I will read the case study on Hilti.

If I may, I have two questions for you. First, your canvas is debated a lot in business schools, and there are researchers that can see a real value in it and their are some critics as well. One of these critics is that the canvas is not very "service friendly", and when a manufacturer would like to move towards adapting a service business model, the canvas is not fully appropriate anymore. How would you answer to this?

And my second question: how would you bring together Servitization  and re-thinking of the business model with open innovation theory?

 

Thank you

Kind regards,

Adela

I have blogged a bit a bit about service-oriented business models, see:

http://fieltnotes.blogspot.com/2011/01/different-perspectives-on-se...

 

You can play around with the canvas to make is more 'service friendly', see for example:

http://fieltnotes.blogspot.com/2010/12/extended-business-model-canv...

 

In this context, they also refer to providing 'solutions,' see for example:

http://fieltnotes.blogspot.com/2010/02/business-models-for-integrat...

 

Dear Erwin,

 

Thank you for the links to your blog, very interesting information and useful references.

I have a question still, (and I hope to get other opinions as well): do you see a difference between a hybrid business model and a service oriented business model? if yes, in which direction?

Kind regards,

Adela 

Hi Adela, 

Very interesting topic you raise here... I will share my thoughts based on real client case studies. 

In our business model practice we work with quite some large manufacturing companies. We see them wanting to move away from production. Why? There are a couple of reasons. As a result of competition and power in e.g. retail channels prices and margins are going down. Lately increase of prices in raw materials (e.g. oil) can not be transferred to clients. 

In the beginning of such business model service innovation process companies mostly think of after-service in terms of return logistics or a friendly customer support center. This is logical. However, this is not what we mean with services business models. This thinking is actually logical. In the product business model there is hardly any direct contact with customers (e.g. this depends on B2B or B2C). So how do you know what customers want? 
In business model as a service you need to think from the customers' perspective. You need to be in contact with them. You need to be able to ask them questions. You need to entertain the dialogue. What problem are you solving. In the Hilti case study not the tool but tool management was a problem. It is hard to come up with business models on services from behind your desk. You need the customer for that. Techniques how to do that are the customer empathy map and service design techniques like the customer journey. True, the business model canvas is a starting point here but you need additional tools. 

If you found the new services model, the next question you are facing is the implementation. How to transform a manufacturing company into a service company. Crucial to understand here is the cultural mindset of the company based on the essential values. If this set of values is different in the new company (e.g. quality vs. customer centric) you are better of setting up a separate company. 

All the best and don't hesitate to ask if you would like to know more. 

Cheers, Patrick

 

 

Dear Patrick,

 

Thank you for your very interesting replay! The points listed in your message are indeed one of the most important when changing a business model into a service-oriented one. From the cases I am reading, I can see that manufacturing companies are using encapsulation for putting their products on the market. But what do you think is the next step in business model, after encapsulation?

Kind regards,

Adela

One example that comes to my mind is IBM, a company that classically made hardware devices and re-structured its main business lines around logics of a service provider. There is a theoretical discussion on the topic in the article: "Strategic repositioning by means of alliance networks: The case of IBM" by Dittrich et.al., 2007.

 

Another interesting case is the example of Xerox copy machines that were offered as products first, but then were wrapped into a business model of a copying "solution". This is described in detail by Chesbrough

The role of the business model in capturing value from innovation: ...

 

From personal experiences, I see differences in learning curves and standardization. A service is often highly customized to individual cases (and offered by specialists), whereas products often are standardized in order to use economies of scales (= control costs) and can be produced in low-cost countries.

 

However, standardization is a double-edged sword. Whereas costs are lowered, competitive advantage is diminuishing in the long term, as described in the Innovator's Dilemma by C. Christensen. Christensen's recent work also shows that the main problem of marketing is not anymore customer segmentation, but finding the right "category" for customer needs. There are some articles and podcasts by Christensen that discuss the example of the development of a milk shake product, he explains that customers buy the milk shake because of the "job" it does for them, not because of age or target group.

Dear Patrick,

 

Thank you very much for your message and the recommended references. IBM is indeed an interesting case, and Chesbrough is using it in its book, Open Business Model, as a reference for type 5 of business model. Very interesting discussion. I agree with you on customization vs standardization debate in service innovation, and I would like to ask you how would you depict this in a service oriented business model?

Kind regards,

Adela

Take 2 restaurants:  McDonalds (standardized) and your local top e.g. Italian or Sushi restaurant (highly customized food). Where are the differences?

McDonalds uses highly automized processes in all areas, from marketing, to interior design, prediction of demand for burgers at a given hour, up to packaging and waste disposal.The target group is mass-market.

In your local Italian restaurant, you will find the cook customizing the menu to ingredients of a given day, or in a top Sushi restaurant even to a given mood of the guests. Automatic processes are less important, but rather having highly developed skills of a cook or relationships with high-quality suppliers. The target group are business customers or special customer groups (family events, ... )

It is not Product v Service, but a question of a business model that is both product and service being the two VPs. Each builds on the other as it always has. Car makers rely on services to get customers to upgrade and ensure road worthiness and resale value of their cars, sell road side assitance, insurance and accessories.

 

The important thing is not to sell a lousy product and then rely on the service business for revenues through repairs and spare parts. This approach kills the product reputation in the market place.

 

So the two key VPs of product and service from the high level business model then has to be flushed out for both product and service, commonalities explored across the building blocks and synergies buiit to raise revenues, reduce cost and grow margins.

Dear Cheenu,

 

Thank you very much for your input, a very interesting point that I met as well, while researching service innovation.I have posted some follow-up questions to my main question and if you find them interesting, I would really appreciate if you could share your experience.

Kind regards,

Adela

Many manufacturing companies have product-service combinations (e.g. repair) as well as pure services (such as consulting) and move further in the servitization direction. Besides the many reasons to go for servitization, often the ROCE of services for these kind of companies is far more advantageous compared to the product related ROCE (this becomes visible in the BM when relating service cost structure to service revenues).

As far as the transition is concerned, I wouldn't start from business model as such or better said not from from a value proposition but from customer insights (including context mapping). Service design is most successful when it is based on customer insights (rather than being driven by other BM building blocks)

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