Exploring Service Innovation and the Servitization of the Manufacturing Firm

Manufacturing and service industries are often seen as largely independent. Whether in national economies, business classifications, education, training, or employment, they tend to be thought of as separate. Indeed, the growing role of services in developed economies has been the topic of much discussion over the past decade or so. Yet manufacturers can offer services; in fact, they can, and increasingly do, base entire competitive strategies on service innovation-finding ways to rethink their offerings and replace one-time product sales with ongoing, value-creating relationships. This is the process of servitization; icons in this mode are companies such as Rolls-Royce Aerospace, with its Powerby-the-Hour model; Xerox, with its document management solutions; and Alstom, with its Train-Life services. Internationally, there is a growing recognition that manufacturers serving developed economies are moving away from concentrating their efforts on products and production and toward a services focus. The terminology for this development, however, has varied. In Germany, researchers, policy makers, and industry leaders are engaged in a debate around Industry 4.0; in Scandinavia, the term of choice is product-service systems. UK companies focus on servitization and the circular economy, while in the US, industry talks about servitization and service innovation, much of it powered by the Internet of Things (IoT). While the terminology might vary across these countries, the underlying message is very clear: innovation of services is becoming more and more important to manufacturing firms worldwide. The process of servitization (or service innovation or creating product-service systems) invariably implies not simply the development of a service offering for the customer but also the adoption of new technology and a widespread organizational transformation. The kinds of advanced services offered by Rolls-Royce, Xerox, and the like incorporate maintenance, repair, and overhaul contracts that link revenue generation directly to asset availability, reliability, and performance. Providing this kind of cradle-to-grave service requires dedication, flexibility, and a will to collaborate across the entire organization. A key element underpinning the transformation, and servitization more broadly, is heightened customer intimacy. In the traditional manufacturing world, products were designed and produced, then sent to a showroom in anticipation of a sales transaction. Designs were informed by analysis of customer trends, innovation was centered around product features, and satisfaction was recorded by after-sale surveys. To manufacturers in this world, service meant order fulfillment, on time and on budget, and an associated warranty program. Customers were relatively remote. Servitization, in contrast, promotes intense customer relationships. With advanced services in particular, the focus is on the customers' internal business processes; the manufacturer goes beyond simply offering a product to provide offerings that target efficient and effective operations. The manufacturer bundles together products and services to deliver a capability that provides a defined outcome for the customer. Typically these offerings manifest as 10-year service contracts under which the manufacturer takes some responsibility (or risk) for fulfillment and the customer pays as the capability is consumed. A practical example of such an advanced service is the use by Hoyer, a German logistics company based in the United Kingdom, of trucks provided by MAN on a pay-as-you-go basis. Costs are based on miles driven, so Hoyer only incurs expense when it is generating revenue. Service innovation is demanding for manufacturers. Yet, the successful development and delivery of advanced services offers significant rewards, including: * Improved commercial resilience. Services position manufacturers to respond more effectively and efficiently to the needs of their customers, helping to lock in customers and preventing competitors from gaining a foothold in their markets. …