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Highlights
- Manufacturers today are moving toward advanced models of servitization. To ensure adequate return on investments, they must customize their servitization strategies based on the target segment needs in diverse geographies and markets.
- This paper explores the different models of servitization in manufacturing and the capability areas needed to execute those models in the Asia-Pacific region.
- Should the servitization journey and capability roadmap for Singapore, Japan, Malaysia, or South Korea be different from that for Indonesia or the Philippines? How should large markets such as China and India be approached? These are some of the key questions explored here.
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Abstract
How can manufacturers develop a capability roadmap?
Servitization represents a business model transformation, with global manufacturers moving beyond limited servitized offerings to more advanced service-based offerings. Manufacturers are adopting distinctive strategies based on their servitization business models in diverse regional markets in Asia-Pacific (APAC) and Europe, Middle East, and Africa (EMEA). This paper illustrates the distinct choices that manufacturers make regarding the direction and pace of servitization based on their offerings, customer characteristics, and geography-based drivers, along with their preparedness for business model innovation and sources of competitive advantage.
Introduction
With operating model transformation, servitization is often described as a multi-phased journey, as manufacturers move from basic to more advanced and servitized business models.
However, this is not a linear process, and the target states of servitization may not be similar for diverse companies pursuing successful servitization strategies in the same industry.
Just as servitization strategies and goals may be customized for competitive and geographical market contexts, the capabilities required for the success of the chosen servitization model may also vary between manufacturers. For example, companies offering bundles of customer experience-focused services along with their products need superior service integration platforms. On the other hand, manufacturers that offer uptime-based pay-as-you-go subscription options for equipment need robust asset reliability assurance.
Manufacturers also contextualize servitization roadmaps by target segment needs in diverse geographies and markets – based on higher or lower levels of sophistication. Hence, their process and technology capabilities must be customized to ensure the expected returns on such investments.
Generic models and trajectories of servitization
Manufacturers can take different routes in their servitization journeys and adopt various servitization models, based on numerous factors:
Model 1 – Basic servitization: Most manufacturing leaders now augment their core product revenue by offering basic services that are complementary to product use, including operator training, maintenance contracts, warranties, refurbishments, or insurance.
Model 2 – Service-rich offerings: Manufacturers offer integrated experiences related to product use to increase their services revenue portfolio. For example, when a customer buys a connected car, it comes with multiple service bouquets from different ecosystems, including extended warranties, predictive replacement alerts for tires, batteries, or other components. Auto original equipment manufacturers (OEMs) such as Geely’s ECARX and Fiat Uconnect offer infotainment, navigation, and communication services.
By using connected machines and internet of things (IoT) technologies, OEMs can offer a range of services, such as uptime warranties and predictive maintenance alerts, assured lead times for spares, and operations monitoring for performance or quality enhancements. Alstom provides extended maintenance services that prioritize performance for its customers, based on the principle of ‘lost customer hours’. Mechanical equipment manufacturer Shaan Gu offers subscription-based maintenance services that include real-time monitoring, monthly diagnosis, special failure analysis, emergency troubleshooting, and spare parts management.
To succeed in this model, manufacturers must:
- Be able to generate timely customer insights and personalize relevant, time-bound offering bundles
- Continuously co-innovate with customers and new services ecosystems
- Have orchestration capacity for seamless integration of new ecosystems and services
Toyo Tire has developed an automated tire information gathering system for trucks and buses, enabling new service-based business models.
Model 3 – Outcome-focused: Here, services sale replaces product sale, and payments are usually based on usage or desired outcomes, including equipment availability and performance. The success of this outcome-based model depends on a deep understanding of usage patterns to ensure reliability, availability, performance, and accurate cost estimates of providing the product-as-a-service.
Although all these factors make the servitized offering attractive to customers, several challenges restrict the widespread adoption of the outcome model by companies. These challenges include aligning the mindsets and interests of internal and external stakeholders to the servitized business model, building functional or technical skills and capabilities, and acquiring financial capabilities or risk-sharing partnerships needed by an outcome-based service sales organization vis-à-vis a product sales-centric organization.
Hence, to successfully execute this model, the following capabilities are needed:
Digital product innovation, with IoT-based connectivity and intelligence to generate relevant insights
Flexible partnerships between customers and onsite service providers for sharing benefits and risks of asset operations emerging from field insights
Transformation of the company’s operating processes, including:
Customer-facing metrics, processes, and capabilities
Finance, human resources, and quality systems
The outcome-focused business model also requires legacy product sales and new services sales models to co-exist, with no adverse impact on customer satisfaction or financial outcomes. This is because all customers will not transition to outcome-based models for all products at once.
Model 4 – Integrated services: This model combines the characteristics of both the service-rich offerings and the outcome-based model. Examples include connected electric vehicles sold as mobility solutions with periodic or usage-based payments and vehicle subscription services like Kia Flex, which offers a new car, including maintenance, repairs, insurance, and car tax, for a monthly fee.
Trucks and construction equipment manufacturers enable service richness for operators, drivers, or asset managers by managing equipment health, uptime, and safety while simultaneously offering owners a usage-based payment model.
Summary of capability directions
Manufacturers should also decide their target technology and functional capability levels while selecting the servitization model.
Those aiming for service-rich business models require the highest levels of customer experience management capabilities, while others offering product-as-a-service models require in-depth knowledge of the customer’s product use on the field. In practice, organizations may progress towards both models of servitization at different speeds, and the required capabilities must be designed for this mixed model.
Table 1 outlines the different capability levels required for various target models of servitization.
Table 1: Capability matrix: target states of servitization
Region-specific capabilities in diverse markets
Several drivers and inhibitors of servitization have regional variations, leading to differential diffusion speeds across geographies.
Thus, capability requirements also vary between country markets within a diverse region due to the following:
Level of adoption of digital technologies across a diverse region like APAC or EMEA
Cost of manpower or manual processes, and consequent benefits of service automation
Transaction costs of a customer’s own independent service bundling vis-à-vis the automated, intelligent bundling of integrated solutions offered by the OEM. This depends partly on the opportunity costs of the time to search, transact, and enforce multiple service contracts
Level of sophistication of the business environment, regarding regulations about digital commerce, automated transactions, or contract enforcements
With more than 4,077 million people, the APAC market has the largest production base for discrete and process manufacturing globally. It could potentially be a huge servitization market for personal or household equipment and equipment used in manufacturing, construction, healthcare, or transport. However, there are significant variations in the drivers of servitization between the high-income or sophisticated markets, large middle-income markets, and regions that are technologically less sophisticated.
Approach to APAC markets: Planning the servitization capability roadmap
Should the servitization journey and capability roadmap for Singapore, Japan, Malaysia, or South Korea be different from that for Indonesia or the Philippines?
How should large markets like China and India be approached? These are important questions that can be answered by evaluating technologically less sophisticated markets vis-à-vis more sophisticated markets with higher income. As illustrated in Table 2, the servitization journey for manufacturers in certain medium-maturity markets in APAC may first migrate from basic servitization to service-rich models and then towards outcome-based or integrated models. On the other hand, certain large B2B equipment vendors operating in sophisticated markets with high labor costs may find that customers are more attracted to the efficiency benefits of the outcome-based servitization model, where data-rich environments and sophisticated service networks exist.
Table 2: APAC region-specific roadmap for servitization
In conclusion
Servitization business models are maturing rapidly across industries from basic to more advanced states, which may encompass service-rich configurations, outcome-based models, or both.
Several global companies are creating competitive differentiators through their ability to offer such purpose-led service experiences in lieu of, or in tandem with, their product sales. While advanced economies are leading the way, successful models, and hence process and technological capabilities, will be distinct for less advanced markets in the medium term. We believe that CEOs and CIOs operating in diverse regions such as APAC or EMEA, which contain both types of markets, will need to develop market-specific business models for their servitized offerings, and, in tandem, build differentiated internal capabilities to succeed in both types of markets.
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