Servitization Strategy and Managerial Control

Anna Pistoni, Lucrezia Songini

• Publisher: Emerald Publishing Limited
• Year: 2017
• ISBN:
  9781787432741
• Topic: Business
• Subtopic: Managerial Accounting
• Index: Business

Manufacturing firms are moving beyond manufacturing to offer services and solutions, often delivered through their products, or at least in association with them. This strategy is called "servitization" and these new business models are based on the Product-Service-System (PSS). This book, through both a theoretical and an empirical approach, intends to present and discuss the main challenges that companies interested in servitization strategies have to overcome, with a particular focus on the design of managerial control systems. This book can represent a useful tool for whose companies interested in the development of successful servitization strategies and for scholars involved in research on innovative business models. In particular, it may be of interest for top management and middle management in charge of strategic and organizational issues, as well organizational units, such as: supply chain, logistics, production, after sales and service, R&D, strategic planning and managerial control. Consultants and practitioners involved in strategy, organization, manufacturing, operations, supply chain and managerial control may be interested too.

CHAPTER 1

THE SERVITIZATION OF MANUFACTURING: WHY AND HOW

Anna Pistoni and Lucrezia Songini

1.1. INTRODUCTION

Traditionally, manufacturing companies have been considering services as a necessary evil in the context of marketing strategies. The main part of total value creation, in fact, stems from physical goods, and therefore services represent only an add-on to products.

In times of economic crisis, the manufacturer value chain is becoming less attractive as the demand for products becomes increasingly stagnating. Under such circumstances, companies are becoming aware of the value associated with the service offering at a greater level. Services provide a more constant income and higher profit margins and they also need less capital investments than goods (Davies, Brady, & Hobday, 2007).

Several scholars have argued that services are important sources of revenue for product firms especially when industries mature and the firms can no longer easily differentiate their products. Teece (1986, p. 251), for example, highlights that services ‘do not loom large’ for product or manufacturing firms until after a standard design emerges and industry dynamics shift towards cost-based competition.

Some large-scale surveys have confirmed this intuition that services become more important to product firms as their businesses mature (Fang, Palmatier, & Steenkamp, 2008; Neely, 2009; Suarez, Cusumano, & Kahl, 2012).

Firms operating in the information technology industry, for example, have all seen large relative increases in maintenance and other product-related services, as a percentage of their total revenues, as a consequence of the decline in their products sales or in the reduction of product prices.

Similarly, in the automotive industry, large manufacturers generate much of their revenue and profit from services, including loans and leasing as well as maintenance, repairs and extended warrantees (Cusumano, 2010a; Gadiesh & Gilbert, 1998).

Therefore, there is considerable evidence that product firms invest in services in order to diversify their revenue and profit streams when entering the mature phase of the industry evolution, characterized by declining prices due to intensive competition among a decreasing number of firms or a shrinking market.

However, several cases observed over the years and reported by the literature suggest that product firms might offer services also under different competitive circumstances and not only as a response to industry maturity or product commoditization.

IBM and the mainframe computer well exemplify this latter point. The first computers for business use, introduced during the 1950s and 1960s, were expensive machines based on a new and largely unknown technology, and this made buyers reluctant to purchase the products (Attewell, 1992; Fisher, McKie, & Mancke, 1983). Various services, such as leasing arrangements that bundled maintenance and pay for usage contracts, were, therefore, essential to entice customers to buy these devices. In this case, services preceded and, initially, substituted for product sales.

Xerox followed a similar services-based strategy when it introduced the plain-paper copier in the 1960s (Jacobson & Hillkirk, 1986). Leases of mainframe computers and office machinery involved broader service agreements. Responsibility for maintenance, repair and insurance stayed with the manufacturer, whilst users paid primarily for usage. Another highly cited example is Rolls-Royce with its offering of delivering power by the hour, rather than transferring ownership of the gas turbine engine to the airline (Neely, 2008). These contracts incorporate maintenance, repair and overhaul, and revenue generation is directly related to the asset availability, reliability and performance. These various examples reflect the wide range of opportunities for firms to shift their attention to services or service-like delivery and the pricing of their products. The research on this topic is flourishing and practical experience also abounds. If different comprehensive frameworks explain what types of services product firms could offer and when they should offer them, several open questions remain. More specifically, managers and researchers, for example, need to better understand what impact services might have on the firm’s performance as well as on industry competition and structure.

A deep analysis of this topic drives a firm involved in this process to answer, among others, the following questions: Are services primarily complements to a product or something more? What is the relationship between services and the evolutionary patterns we see in many manufacturing industries? What are the main impacts of the shift towards services from an internal and organizational perspective?

A systematic analysis of the phenomenon must start with some introductory concepts and definitions, since clear definitions are the starting point for all research.

1.2. SERVITIZATION: DEFINITION AND KEY FEATURES

The attention paid by a manufacturing company to an enlargement of its offering through services is, in broad terms, called servitization.

If the concept of servitization refers mainly to product-related services, it has to be highlighted that it is sometimes used with different meanings and with more or less extension: from a bundling of product and services launched occasionally on the market to a new business model¹ or a completely different value proposition. The literature identifies potential applications of servitization along the so-called ‘product-service continuum’, from the traditional manufacturers where companies merely offer services as add-on to their products, through to service providers where companies have services as the main part of their value creation process (Baines, Lighfoot, Benedettini, & Kay, 2009).

The numerous and different meanings of servitization will be analysed in the next section, but the common feature of the various options is that servitization introduces a significant change in how manufacturing companies produce and deliver services: services have now turned into an explicit strategy and they have become a main differentiating factor inside the integrated firm’s offering.

This does not mean that products cease to exist, rather that the focus of the manufacturing company should shift on better supporting the fulfilment of the customer needs by means of a complex offering. Traditional manufacturing companies should have to change their strategy from pure products to delivering product-services packages where the product is just one part of the whole offering.

Table 1.1. TA Relevant Selection of Servitization Definitions.

Author	Definition of Servitization
Vandermerwe and Rada (1988)	‘Market packages or “bundles” of customer-focussed combinations of good, services, support, self-service and knowledge’
Verstrepen and van Den Berg (1999)	‘Adding extra service components to core products’
Robinson et al. (2002)	‘An integrated bundle of both goods and services’
Lewis et al. (2004)	‘Any strategy that seeks to change the way in which a product functionality is delivered to its markets’
Ward and Graves (2005)	‘Increasing the range of services offered by a manufacturer’
Ren and Gregory (2007)	‘A change process wherein manufacturing companies embrace service orientation and/or develop more and better services, with the aim to satisfy customer’s needs, achieve competitive advantages and enhance firm performance’

The servitization of manufacturing is not a new phenomenon. In 1972, Levitt found that ‘there are only industries whose service components are greater or less than other industries. Everybody is in service business’, and the trend to servitize manufacturing was first discussed by Vandermerwe and Rada in 1988. The authors defined servitization as ‘the increased offering of fuller market packages or bundles of customer-focused combinations of goods, services, support, self-service and knowledge in order to add value to core product offerings’ (Vandermerwe & Rada, 1988).

Notwithstanding the relevance of the one cited above, there are many other definitions of servitization in the wider literature. The most known are summarized in Table 1.1.

All of these definitions recognize that the delivery of product-based services is central. They are generally and broadly in agreement with the definition provided by Vandermerwe and Rada (1988) with the exception of Lewis et al. (2004) who refer to the idea of a functional product. This is a specific type of servitization, commonly called the product-service system (PSS; Tukker, 2004). According to Baines (2006), PSS is an integrated combination of products and services that deliver value in use. Servitization and PSS present many similarities, but the two concepts have fed different research communities.² Notwithstanding, it seems appropriate to encompass the PSS concept into the servitization definition. Baines et al. (2009) provide the following concepts for servitization: ‘there are various forms of servitization. They can be positioned on a product-service continuum ranging from products with services as an “add-on”, to services with tangible goods as an “add-on” and provided through a customer centric strategy to deliver desired outcomes for the customer’ (Baines et al., 2009).

Authors such as Neely (2008) highlight that the process of servitization can be seen as the development of an organization’s innovation capabilities. Rather than merely offering products, in fact, it can provide customers with complete PSSs (Visnjic & Van Looy, 2013). Therefore, servitization is usually perceived as an innovation process concerning the firm...

Table of contents

• Contents
• Introduction
• Chapter 1. The Servitization of Manufacturing: Why and How
• Chapter 2. Servitization Strategy: Key Features and Implementation Issues
• Chapter 3. Strategic Managerial Control for the Servitization Strategy
• Chapter 4. Case Studies
• Conclusions