Patterns of servitization

1
Patterns of servitization Beyond products and
service
Why is it happening?
How is it happening?
What are the challenges?
Nigel Slack I f M
2
Why is it happening?
Suppliers
Customers
Volume of installed base Security of
demand Opportunity for new business Services more
profitable than products
Want to focus on core business Reduce
coordination problems They can do it better than
us Can cut a better deal
3
Why is it happening?
Installed base / New equipment ratios in selected
capital goods sectors
4
Why is it happening?

• Revenue from service activities
• Rolls Royce - 50 (2002)
• Kone - 57 (2002)
• ThyssenKrupp 50 (2003)
• Philips Medical Systems 45 (2002/2003)

GE Percentage profits
100
16.4
60
Service profits
80
84.6
Other profits
40
20
1980
2002
Projected
5
Why is it happening?
Value of post sale revenues
After sales parts and service vs. base product
value
5X
5X
20X
100
After sales
Base product
Personal computers
Automotive
Locomotives
6
How is it happening? - Defining the boundaries
of Servitization
Service provision
Equipment manufacture
Parts manufacture
Customer
Consumer
7
How is it happening? - Machine tool Company
(1995)
Service provision
Equipment manufacture
Parts manufacture
Customer
Lease resource capability
Provide resource capacity
Customization and design services
Design co- ordination
Funding the resource capability
Advice on resource capability
Original equipment design
Parts design
Use of resource capability
Original equipment manufacture
Supply resource capability
Sub assy manufacture
Consumer
Support resource capability
Maintain resource capability
Parts manufacture
Spare parts manufacture
Re- manufacture / upgrading
Manufact-uring co- ordination
Upgrade resource capability
Advice on processing
8
How is it happening? - Machine tool Company
(2004)
Service provision
Equipment manufacture
Parts manufacture
Customer
Lease resource capability
Provide resource capacity
Customization and design services
Design co- ordination
Advice on resource capability
Funding the resource capability
Original equipment design
Parts design
Use of resource capability
Original equipment manufacture
Supply resource capability
Sub assy manufacture
Consumer
Support resource capability
Maintain resource capability
Parts manufacture
Re- manufacture / upgrading
Manufact-uring co- ordination
Upgrade resource capability
Advice on processing
9
How is it happening? - Electronics co (1996)
Service provision
Product manufacture
Parts manufacture
Customer
Lease resource capability
Provide resource capacity
Customization and design services
Design co- ordination
Funding the resource capability
Advice on resource capability
Original product design
Parts design
Use of resource capability
Original product manufacture
Supply resource capability
Sub assy manufacture
Consumer
Support resource capability
Maintain resource capability
Parts manufacture
Spare parts manufacture
Re- manufacture / upgrading
Manufact-uring co- ordination
Upgrade resource capability
Advice on processing
10
How is it happening? - Electronics co (2003)
Service provision
Equipment manufacture
Parts manufacture
Customer
Lease resource capability
Provide resource capacity
Customization and design services
Design co- ordination
Advice on resource capability
Funding the resource capability
Original equipment design
Parts design
Use of resource capability
Original equipment manufacture
Supply resource capability
Sub assy manufacture
Consumer
Support resource capability
Maintain resource capability
Parts manufacture
Re- manufacture / upgrading
Manufact-uring co- ordination
Upgrade resource capability
Advice on processing
11
How is it happening?
Three stages of servitization?
Line of fit
Market expectations
Operations capabilities
12
How is it happening?
Three stages of servitization?
Risk failing to meet market expectations
Line of fit
Market expectations
Risk failing to leverage capabilities
Operations capabilities
13
Increasing the extent to which a business adopts
servitization may increase profit potential, but
it also increases risks
Profit potential
Risk (market, credit and operational)
Low
High
Extent of servitization
14
What are the challenges?

• Major cultural issues
• Services more fuzzy - difficult to define
• Services more slippery than products
• Organisational structure / revenue cost
  relationships
• Costing over life cycle
• Strategic span within supply chain
• Supply chain relationship management
• Risk management (steady state and transition)
• Technology development may need managing
  differently
• Service processes / systems need integrating
• Need to refine knowledge transfer mechanisms