Servitization of manufacturing: A post-COVID eventuality
• Globally, there has been a shift in the value proposition, from production activities to the fulfillment of customer demand and the distinction between services and manufacturing is getting progressively blurred.
• At a time when the world is reaping benefits from the servitization of manufacturing, should India too, move towards this model to get the best of both worlds and reignite economic growth?
• This question becomes even more germane at a time when customers all over the country have become skeptical about making discretionary purchases and are losing confidence in brands, thanks to the fear of being infected by Covid-19.
• The servitization of manufacturing and consequently, forging of new bonds with customers, is the key to bridge this trust deficit and help manufacturers gain a perennial revenue stream.
In 1962, the world-renowned luxury automaker, Rolls Royce, pioneered an innovation – the idea of selling products as a service by offering power-by-the-hour for jet engine maintenance management. Over the years, the idea spread like a wildfire and there was a tectonic shift in the global manufacturing terrain, with decreasing product differentiation, escalating customer expectations, and evolving environmental and safety regulations.
As the distinction between services and manufacturing is becoming increasingly blurred, this paradigm change encompasses undertaking manufacturing operations in light of customer demands and the need to create competitive differentiation. In other words, there has been a transformation in the value proposition, from production activities to the fulfillment of customer demand and the world harnessing servitization of manufacturing to become increasingly consumer centric.
“Servitization of manufacturing, otherwise known as ‘manuservice,’ pertains to the increasing reliance of manufacturing firms on services”, according to the Asian Development Bank (2018). Typically, this economic model has been considered the driver of economic success in advantaged parts of the world. However, the institution debunks this school of thought as many developing countries are also transitioning to a service-led economy, even as manufacturing has yet to fully develop in these regions.
This makes for a fertile ground for manufacturers in India to emulate this business model, given the dominance of services sector in Indian economy in terms of its contribution to the GDP (about 60%). Moreover, India is a rare economy that leap-frogged the traditional model of economic evolution – from reliance on primary sector to one derived from reliance on the tertiary sector.
That being said, however, what makes the case for servitization of manufacturing even more compelling is the onset of Covid-19 in the country and the consequent change in consumer behaviour in the country. Customers all over the country have become skeptical about making discretionary purchases as they see their income shrinking and are losing confidence in brands. The only way to re-establish this dilapidating conviction is for organizations to adopt policies and processes that establish strong trust among employees, customers, partners and the community. Companies that can provide extremely high levels of service may win out over brands that cannot. This is where servitization can step in and help bridge this trust deficit, while capitalizing on India’s strength in services sector.
At a time when consumers have become prudent, manuservice assures that the item they are purchasing will be well maintained and run as expected, for as long as expected, even if that means paying an incremental amount for service. Not only is servitization of manufacturing beneficial for the consumer since it is built on the foundation of trust and forging client relationship, it is also beneficial for manufacturers since the customer will continue to buy from the manufacturer/distributor. This will create a sustainable revenue source with the potential for growth for the producers.
There are quite a few approaches that can be embedded in businesses to inculcate this shift. One approach, for example, is to trim the supply chain. A case in point is a European meal-kit company which sends pre-portioned ingredients to their customers’ doorsteps each week along with weekly-changing recipes designed by chefs and nutritionists. This subscription-based service with disaggregated pricing also engaged with customers through a mobile app that allows consumers to save, rank and share recipes with friends and features cooking videos and online meals. This company has grown to be one of the largest meal-kit delivery firms in the world with presence in many countries.
Another approach that could be employed is to unbundle a product or service into stand-alone offerings that were not previously viable to sell separately. This strategy has been employed by an American education-focused technology company offering online courses and degrees. Not only does the firm have piecemeal offerings of courses, specializations and degrees, it also enables learners to pick modules of their preference and learn at their own pace. Further, it allows users to adopt a variety of pricing strategies and supports peer-reviews and community discussions. The success of this model can be gauged from fact that it offered education to over 25 million learners in 2017 and raised significant funding of around US$1 billion from investors.
Companies could also act as a platform to connect fragmented buyers and sellers. This tactic proved successful for a leading Asian financial services group that created a direct seller-to-buyer car marketplace. Not only does the group provide finance enabled car selection with an on-site car budget calculator, it also delivers better targeting options and permits bundling opportunities for a variety of car related products and services. Consequently, the bank created one of the largest used car marketplaces in ASEAN.
FROM CONCEPT TO EXECUTION
The adoption of this innovative business approach might not be as easy as it seems. One major challenge to its adoption is converting products and capabilities into services and being customer-centric. This entails the need to go beyond the company’s core business model and even reimagining it, which becomes difficult for managers. They need to brainstorm as to what it is that they are offering new to their customers in order to gain competitive edge. These manufacturing executives need to convince their senior management that they indeed have something that will take away the pains of their customers since the senior management may see this as a risky endeavor.
This is closely entwined with the second hurdle – customer expectations. Most often, managers are reluctant to adopt this business model because they fear that customers will not pay for the service. This stems from the customer inertia towards these new offerings. They also opine that convincing their customers to consider a new offering, with associated new payment models, contracts and responsibilities is a big challenge
Thirdly, this mashup of digitization and servitization raises a crucial concern – the development of new technical capabilities needed to support the advanced service offering. They must also analyse if they have the required resources needed to harness this change. At the same time, manufacturers must avoid the trap of technology for technology’s sake.
Information asymmetry is another roadblock in the wide adoption of this model. Given the ambiguity surrounding data access and ownership rights and high-profile data breaches, equipment manufacturers should draft contracts that are consumer-friendly. Consumers must be sensitized towards the product being offered and the value-added services to bridge this gap.
Some of the strategies that businesses can employ to overcome these barriers are as follows:
Firstly, companies must begin the servitization journey with basic operating services such as activity monitoring, then move up through value-added services, financial services such as leasing, technical services and, finally, outcome-based models as markets mature. Secondly, companies must not eschew sound business principles in blind pursuit of servitization. Companies can unearth new possibilities for creating value through new business by conducting design thinking workshops that address issues like customer challenges from different viewpoints.
They must also rope in all stakeholders like sales, distribution, and service partners and make accommodations. Thirdly, a concerted effort at educating customers, on the value they would get and its price will also help create a demand for these services. Finally, the success of this model also depends on having a robust servitization infrastructure that enables equipment manufacturers and distributors to collect, share and understand data relevant to the everyday operation of their assets. Better connectivity and collaboration between teams can help expedite repairs and diminish downtime.
To sum up, servitization enables manufacturers to improve the trustworthiness of their products, help their customers to obtain superior value, and develop new revenue generating sources for businesses. This is the need of the hour not only for consumers who are looking at brands and products through a new lens, thanks to the spread in the country of Covid-19, but also for manufacturers who need to think afresh and go back to the drawing board to devise strategies to lure consumers.